SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2005
|_| Transition Report under Section 13 of 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________ to __________
Commission file number: 000-29245
GALES INDUSTRIES INCORPORATED
(Name of small business issuer in its charter)
Delaware 20-4458244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1479 North Clinton Avenue, Bay Shore, New York 11706
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (631) 968-5000
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock,
$.001 par value per share
-------------------------
(Title of class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No|_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The issuer's revenues for its most recent fiscal year were $2,777,409.
As of April 6, 2006, the aggregate market value of the issuer's common
equity held by non-affiliates was $6,761,482, based on the closing price of
$1.60 for its common stock on the OTC Bulletin Board on April 6, 2006.
Approximately 14,723,421 shares of the issuer's common stock were outstanding as
of April 6, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
Transitional Small Business Disclosure Formats (check one): Yes |_| No |X|
2
Cautionary Notice Regarding Forward Looking Statements
Gales Industries Incorporated (referred to herein as "we" or the
"Company") desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This report contains a number
of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, future results and events
and financial performance. All statements made in this Report other than
statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, adequacy of funds from
operations, statements expressing general optimism about future operating
results and non-historical information, are forward looking statements. In
particular, the words "believe," "expect," "intend," " anticipate," "estimate,"
"may," "will," variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as
well as those expressed in, anticipated or implied by these forward-looking
statements. We do not undertake any obligation to revise these forward-looking
statements to reflect any future events or circumstances.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below in "Risk
Factors" as well as those discussed elsewhere in this report, and the risks
discussed in our press releases and other communications to shareholders issued
by us from time to time which attempt to advise interested parties of the risks
and factors that may affect our business. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
Item 1. Description of Business.
Transactions of November 30, 2005
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We, then known as Ashlin Development Corporation, and our newly formed
wholly-owned subsidiary ("Merger Sub") entered into a Merger Agreement (the
"Merger Agreement") on November 14, 2005 with Gales Industries Incorporated, a
privately-held Delaware corporation ("Original Gales"). On November 30, 2005
(the "Closing Date"), Original Gales merged (the "Merger") into Merger Sub.
Pursuant to the Merger Agreement, we issued 10,673,107 shares of our common
stock ("Common Stock") (representing 74% of our outstanding shares as of the
date of the Merger) and 900 shares of our Series A Convertible Preferred Stock
("Preferred Stock"), which in the aggregate are convertible into 40,909,500
shares of our Common Stock, for all the issued and outstanding common shares and
preferred shares of Original Gales. As a result of the transaction, the former
stockholders of Original Gales became the controlling stockholders of our
Company. Additionally, since we had no substantial assets immediately prior to
the Merger, the transaction was treated for accounting purposes as a reverse
acquisition and the transaction has been accounted for as a recapitalization of
Original Gales rather than a business combination. Consequently, the historical
financial statements of Original Gales are now our financial statements.
Immediately prior to the closing of the Merger, Original Gales acquired
(the "Acquisition") all of the outstanding capital stock of Air Industries
Machining Corporation ("AIM"), a New York corporation, pursuant to a Purchase
Agreement entered into on July 25, 2005 (the "Purchase Agreement"). Because of
the change in ownership, management and control that occurred in connection with
the Acquisition, for financial reporting purposes the Acquisition was accounted
for as a purchase. Simultaneously with the Acquisition, AIM entered into a bank
facility (the "New Loan Facility") with an institutional lender and used a
portion of the proceeds from the facility to acquire the real estate comprising
AIM's corporate campus (the "Real Estate Acquisition").
As a consequence of the transactions described above, 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 8.5% of our revenues. Parts manufactured by us are
installed onboard Sikorky's VH-3D, otherwise known as Marine One, the primary
Presidential helicopter, and onboard Air Force One, Boeing's 747-2000B
customized for use by the President.
On February 15, 2006, we changed our name from Ashlin Development
Corporation to Gales Industries Incorporated and changed our state of
incorporation from Florida to Delaware.
Our offices are at 1479 North Clinton Avenue, Bay Shore, New York 11706
and our telephone number is (631) 968-5000.
About AIM
Founded in 1969, AIM manufactures aircraft structural parts and assemblies
principally for prime defense contractors in the defense/aerospace industry
including, Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. 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 8.5% 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,
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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 have enabled it to receive various international
certifications that distinguish it from less qualified manufacturers, as well as
several highly technical, customer-based proprietary quality approvals,
including supplier of the year awards from notable customers such as United
Technologies and Northrop Grumman.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky accounted for approximately 51% of AIM's
revenues during 2005, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2010.
The parts and subassemblies produced by AIM are built to customer
specifications and are not protected by patents, trademarks or other rights
owned or licensed by AIM. As a result, AIM is not required to procure product
liability insurance for such parts and subassemblies because such insurance is
provided for by the customer. Historically, AIM has spent little or no money on
the development of new proprietary products. AIM did not spend any money on
research and development during 2004 and 2005. In the past AIM has spent capital
to acquire and retool machinery and equipment to enable it to qualify to bid on
contracts to produce parts and subassemblies needed by its customers or, once
such a contract was obtained, to improve its manufacturing efficiencies to
increase its profits from a contractor or ensure that the contract would be
retained as future quantities of the product were required.
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 large prime contractors and equipment manufacturers. We seek to
position ourselves within the supply chain of these contractors and
manufacturers to be selected for subcontracted projects as they develop.
Successful positioning requires that a company qualify to be a preferred
supplier by achieving and maintaining independent third party quality approval
certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts.
In addition to maintaining our status as a preferred supplier, we work
closely with customers to assure that our investments are concentrated in
production capabilities that are aligned with customer sourcing and
subcontracting strategies. Also, we constantly work to support our customers in
their political, industrial and international initiatives.
Initial contracts are usually obtained through competitive bidding against
other qualified subcontractors, while follow-on contracts are usually obtained
by successfully performing initial contracts. Our long-term business base
generally benefits from barriers to entry resulting from investments,
certifications and manufacturing techniques developed during the initial
manufacturing phase.
As our business base grows with targeted customers and significant market
share is obtained, we endeavor to develop our relationship to one of a
partnership where initial contracts are also obtained as single source awards
and follow-on pricing is negotiated on a cost plus basis.
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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 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. These agreements do not obligate a customer to buy required
product from us. Nevertheless, generally, before a customer will award such an
agreement we or any other supplier must demonstrate the ability to produce
product meeting the customer's specifications at an acceptable price. It is a
time consuming process for a customer to qualify us or any other supplier for a
particular part or subassembly, so most customers tend to limit the number of
contracts awarded and, so long as performance is acceptable, will only seek to
re-bid a contract at lengthy intervals. Customers issue release orders against
these contracts periodically to satisfy their needs. In addition to our long
term agreements, we regularly enter into agreements with customers calling for a
specified quantity of a product at a fixed price on firm delivery dates. Our
reported backlog 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 April 10, 2006, our continuing operations had outstanding purchase
orders representing an aggregate invoice price of approximately $39 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 ongoing working 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.
4
Raw Materials and Replacement Parts
As a product integrator our manufacturing processes require substantial
purchases 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.
We have approximately 14 key sole-source suppliers of various parts that
are important for one or more of our products. These suppliers are our only
source for such parts and, therefore, in the event any of them were to go out of
business or be unable to provide us parts for any reason, our business could be
materially adversely affected.
Future Expansion and Acquisition Strategy
Since the 1990's, the aerospace and defense industry 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 Northrop Grumman, which fused together Northrop, Grumman,
Westinghouse and Litton Industries into one entity.
This trend has permeated through the industry eliminating many companies
as the prime contractors streamlined their supply chains. To survive, companies
must invest in systems and infrastructures that align their capabilities with
the needs of the prime contractors. At a minimum, Tier III and IV suppliers must
be fully capable to interactively work within a computer aided three dimensional
automated engineering environment and must have third party quality system
certifications attesting to their abilities.
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
5
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 future acquisitions will be
facilitated by using either the Company's stock, cash or debt financing, or some
combination thereof. Given our limited available cash, it is likely that we will
have to rely upon seller financing or debt financing provided by third parties
to complete acquisitions for the foreseeable future. There can be no assurance
that such financing will be made available to us and, our need to rely upon such
sources may make it difficult for us to complete any transaction in competition
with larger better capitalized competitors.
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.
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.
6
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations ("FAR"). Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed thereto. These audits may result in adjustments to our
contract costs. Additionally, we may be subject to U.S. government inquiries and
investigations because of our participation in government procurement. Any
inquiry or investigation can result in fines or limitations on our ability to
continue to bid for government contracts and fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
Employees
AIM employs approximately 160 principally union employees and maintains
what it believes are, and what historically have been, good relationships with
its union. AIM is a party to two collective bargaining agreements with the
United Services Workers, IUJAT, Local 355 (the "Union"), one is dated September
1, 2004, and covers all of AIM's full time employees (the "2004 Collective
Bargaining Agreement") and the other is dated January 1, 2005, and covers all of
AIM's administrative employees (the "2005 Collective Bargaining Agreement",
together with the 2004 Collective Bargaining Agreement, the "Collective
Bargaining Agreements"). The terms and provisions of each of the Collective
Bargaining Agreements are substantially the same. Each of the Collective
Bargaining Agreements terminates on December 31, 2007; however, the 2005
Collective Bargaining Agreement automatically renews from year to year
thereafter unless written notice is given by either party not less than sixty
(60) days prior to the termination date of its intention to terminate or modify
the 2005 Collective Bargaining Agreement. AIM is required to make a monthly
contribution to each of the Union's United Welfare Fund and the United Service
Worker's Security Fund. Each of the Collective Bargaining Agreements contains a
"no strike" clause, whereby, during the terms of each of the Collective
Bargaining Agreements, the Union will not strike and AIM will not lockout its
employees. Employees of AIM covered by the 2004 Collective Bargaining Agreement
have a sixty (60) day probationary period where they can be discharged by AIM
for any reason whatsoever; however, employees of AIM covered by the 2005
Collective Bargaining Agreement have a thirty (30) day probationary period. Any
discharge that occurs after the expiration of the probationary period may be
challenged by the Union through the grievance procedure set forth in the
Collective Bargaining Agreements.
Risk Factors
The reader should carefully consider each of the risks described below. If
any of the following risks develop into actual events, our business, financial
condition or results of operations could be materially adversely affected and
the trading price of the Common Stock could decline significantly.
7
Risks of the Acquisition
There can be no assurance that any benefits to AIM's business will be
achieved from its acquisition by Original Gales and the merger of Original Gales
into a public company, the Real Estate Acquisition or the New Loan Facility (the
"Transactions") or that the results of operations of AIM prior to the Merger
will not be adversely impacted by the Transactions. As of November 30, 2005,
Luis Peragallo and Jorge Peragallo, formerly the principal shareholders of AIM,
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 continue to serve as officers of AIM and will serve as
officers of our Company, there can be no assurance that the management of our
company will have the necessary experience to operate AIM's business. The
process of combining the organizations of Original Gales, AIM and our Company
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 operations. The past results of AIM's operations are not necessarily
indicative of the future results of our operations. In addition, AIM's results
of operations will be affected by the significant increase in expenses relating
to financial statements preparation and other requirements applicable to
publicly traded companies.
Limited Recourse Against AIM Shareholders
Pursuant to the Stock Purchase Agreement relating to the acquisition of
AIM by Original Gales, 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 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.
8
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, AIM has derived a material portion of its 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 approximately 51% 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.
9
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
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
of 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
10
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.
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.
We may issue shares of our capital stock or debt securities to complete an
acquisition, which would reduce the equity interest of our stockholders.
Although we have no commitments as of the date of this report to issue our
securities, we will, in all likelihood, issue additional shares of our Common
Stock or preferred stock, or a combination of common and preferred stock, to
complete an acquisition. The issuance of additional shares of our Common Stock
or any number of shares of our preferred stock may significantly reduce the
equity interest of our current stockholders, may subordinate the rights of
holders of our Common Stock if preferred stock is issued with rights senior to
the Common Stock and may adversely affect prevailing market prices for our
Common Stock.
11
Similarly, if we issue debt securities, it could result in default and
foreclosure on our assets if our operating revenues after an acquisition were
insufficient to pay our debt obligations, acceleration of our obligations to
repay the indebtedness even if we have made all principal and interest payments
when due if the debt security contains covenants that require the maintenance of
certain financial ratios or reserves and any such covenant is breached without a
waiver or renegotiation of that covenant and our inability to obtain additional
financing, if necessary, if the debt security contains covenants restricting our
ability to obtain additional financing while such security is outstanding.
Because of our limited resources and the significant competition for
acquisitions, we may not be able to consummate an acquisition with growth
potential, if at all.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions. Many of these
entities are well established and have extensive experience in identifying and
effecting business combinations directly or through affiliates. Many of these
competitors possess greater technical, human and other resources than we do and
our financial resources will be relatively limited when contrasted with those of
many of these competitors. While we believe that there are numerous potential
target businesses that we could acquire, our ability to compete in acquiring
certain target businesses will be limited by our available financial resources.
This inherent competitive limitation gives others an advantage in pursuing the
acquisition of certain target businesses.
We may be unable to obtain additional financing, if required, to complete
an acquisition or to fund the operations and growth of any business acquired,
which could compel us to abandon a particular prospective acquisition.
If we require additional financing to complete an acquisition, we cannot
assure you that such financing would be available on acceptable terms, if at
all. To the extent that additional financing proves to be unavailable when
needed to consummate a particular acquisition, we would be compelled to
restructure the transaction or abandon that particular acquisition. In addition,
if we consummate an acquisition, we may require additional financing to fund the
operations or growth of the business acquired. The failure to secure additional
financing could have a material adverse effect on the continued development or
growth of our business.
There is only a limited public market for our securities.
The trading market for our Common Stock is limited and conducted on the
OTC Bulletin Board. Our Common Stock is very thinly traded. 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.
If our Common Stock becomes subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,000 or less and our
Common Stock has a market price per share of less than $5.00, transactions in
our Common Stock may be subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. If 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).
12
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. We have
filed a Registration Statement on form SB-2 covering the resale by selling
security holders of more than 60,000,000 shares of Common Stock. This
Registration Statement (No. 333-131709) has not yet been declared effective.
Relative to the number of shares of our freely-trading Common Stock outstanding,
which we estimate to be approximately 2.52 million shares, the number of shares
which will be sold into the marketplace pursuant to our current Registration
Statement 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 Original 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.
13
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.
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 portions of Sarbanes Oxley and currently
estimate that the costs of complying with Sarbanes Oxley and other requirements
associated with being a public company will be $750,000 during calendar year
2006, and such cost will likely increase at such time as we are required to
comply with Section 404 of Sarbanes Oxley.
Item 2. Description of 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 expired on March 31, 2006 and provided 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.
Item 3. 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 for this claim in the amount of $4,000,000.
The carrier has assumed the defense of this action and at a settlement
mediation, the plaintiff made a demand of $2,000,000, which was rejected by the
carrier. The Company believes that any judgement or settlement in this matter
will be paid by the carrier.
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.
14
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted
our motion to dismiss the appeal by KMS-Thin Tab 100 Inc.
Item 4. Submission of Matters to a Vote of Security Holders.
In January 2006, shareholders holding 7,717,603 shares (approximately
52.5%) of the shares of our Common Stock outstanding at such time consented in
writing, without a meeting, to change our Company's name from Ashlin Development
Corporation to Gales Industries Incorporated, to change our domicile from
Florida to Delaware and to adopt our 2005 Stock Incentive Plan. On or about
January 26, 2006, we mailed to our shareholders an information statement on
Schedule 14C with respect to such matters and, on February 15, 2006, we changed
our name and domicile as described above and the shareholder approval of our
2005 Stock Incentive Plan was completed.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities.
Our Common Stock is quoted on the OTC Bulletin Board under the trading
symbol "GLDS" ("ASHN" prior to our name change on February 15, 2006). Prior to
the effectiveness of our Plan of Reorganization, our symbol was "HNNS". The
prices set forth below reflect the quarterly high and low sale price information
for shares of our Common Stock 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
15
As of March 31, 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.
As of February 28, 2006, approximately 52,652,244 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) 8,988,678 $.22 5,150,000
- ------------------------------- -------------------------- ---------------------- -------------------------
Total (1)(2) 8,988,678 $.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) Shareholder approval of our 2005 Stock Incentive Plan was completed as of
February 15, 2006. In connection with the Merger, our Board adopted our 2005
Stock Incentive Plan, and issued stock options to purchase 4,850,000 shares to
our new executive officers. The vesting and exercise prices of the 4,850,000
options which we granted to executive officers in 2005 are described below in
the footnotes under "Executive Compensation - Option Grants In Last Fiscal
Period". 5,150,000 shares remain available for grant under our 2005 Stock
Incentive Plan. Of the 8,988,678 shares issuable upon exercise of outstanding
options, warrants, and other rights, 4,090,950 shares underlie a warrant issued
to GunnAllen Financial, Inc. in connection with our offering of our Series A
Convertible Preferred Stock and 47,728 shares underlie a warrant issued to
GunnAllen Financial, Inc. in connection with our $105,000 Bridge Financing. Both
warrants are exercisable at $0.22 per share.
16
Recent Sales of Unregistered Securities
Our recent sales of unregistered securities during the fourth quarter of
2005 were disclosed in our Current Report on Form 8-K filed with the Commission
on December 6, 2005 and in our Current Report on Form 8-K filed with the
Commission on December 21, 2005. Certain of our disclosures with respect to
recent sales of unregistered securities, previously set forth in our Form 8-K
filed on December 6, 2005, are set forth again below with certain modifications
and clarifications from the original disclosure:
In February 2005, Original Gales, in consideration for an investment of
$22,500, issued to the investor a 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 the closing of the Merger, the investor converted this
$22,500 note, plus interest accrued thereon, into 226,334 shares of our Common
Stock.
In September 2005, Original Gales received $105,000 in financing from two
investors (the "$105,000 Financing") and, in connection therewith, issued to
such investors warrants to purchase an aggregate of 477,273 shares of Common
Stock at a price of $0.22 per share, exercisable until September 30, 2010.
GunnAllen Financial, Inc. served as our placement agent in the $105,000
Financing and received cash compensation equal to $10,500 and a non-accountable
expense allowance equal to $2,100. GunnAllen Financial also received a warrant
to purchase 47,728 shares of Common Stock, exercisable at $0.22 per share until
September 30, 2010. Such warrant provided for cashless exercise.
As of November 30, 2005, pursuant to the Merger Agreement, we issued an
aggregate of 10,673,107 shares of our Common Stock. In addition, as a condition
to the Merger Agreement, we agreed to nominate James Brown to serve on our Board
and issued 100,000 shares of our Common Stock to him in November 2005.
We believe that all of the issuances of securities described above were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended.
Item 6. Management's Discussion and Analysis or Plan of Operations.
Introduction
Michael Gales and Louis Giusto formed Original Gales as a private company
in October 2004 to acquire a company operating in the defense sector. Mr. Gales
had been introduced to AIM in 1996 and initiated discussions about the
possibility of acquiring AIM even prior to the formation of Original Gales. As a
result of these discussions, in July 2005, Original Gales, AIM and the
shareholders of AIM entered into the Purchase Agreement.
While it was negotiating with the shareholders of AIM, Original Gales
determined that it would be more likely to raise the funds necessary to acquire
AIM if Original Gales were a public company or were to be acquired by a public
company. In August 2005, after the execution of the Purchase Agreement and after
it had entered into a Letter of Intent with GunnAllen Financial, Inc., Original
Gales was introduced to James Brown, then our President. At such time, we had no
operating business. Original Gales proposed that we enter into a transaction
whereby we would be acquired by Original Gales in a "reverse merger." Given that
17
Original Gales had already entered into the Purchase Agreement with AIM's
shareholders and the Placement Agreement with GunnAllen, we determined that it
was in the interests of our shareholders to do so, provided that prior to the
consummation of the reverse merger Original Gales received the necessary
financing through the private placement with GunnAllen and acquired AIM. To that
end, we entered into negotiations with Original Gales that resulted in the
execution of the Merger Agreement on November 14, 2005. The terms of the Merger
Agreement were the result of arms' length negotiations between our management
and the management of Original Gales and were unanimously approved by our board
of directors. In determining to enter into the Merger Agreement, we sought to
ensure that our shareholders would retain shares valued, in the aggregate, at
approximately $800,000 based upon the price at which Original Gales was offering
its shares in its private placement.
Pursuant to the Merger Agreement, on November 30, 2005 (the "Closing
Date") Original Gales merged (the "Merger") into our wholly-owned subsidiary,
Merger Sub. Pursuant to the Merger Agreement, we issued 10,673,107 shares of our
common stock (representing 74% of our outstanding shares as of the date of the
Merger) and 900 shares of our Series A Convertible Preferred Stock convertible
into an aggregate of 40,909,500 shares of our common stock for all the issued
and outstanding shares of Gales. Our shareholders prior to the Merger continued
to own 3,823,980 shares of our common stock which, based upon a value of
approximately $.22 per share (the price at which the common shares of Original
Gales were effectively sold in the private placement of preferred stock) were
worth approximately $800,000.
Immediately prior to the closing of the Merger, Gales acquired (the
"Acquisition") all of the outstanding capital stock of Air Industries Machining,
Corp. ("AIM"), a New York corporation, pursuant to the Purchase Agreement. 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, Original Gales paid an aggregate of
$1,053,862 in connection with the Acquisition, which included legal and
accounting expenses ($300,000) incurred by AIM and its shareholders and $270,403
to enable AIM's shareholders to pay income taxes accrued prior to closing. The
purchase price paid to AIM's shareholders was the result of arms' length
negotiation between Original Gales and the AIM shareholders.
The funds used by Original Gales to acquire AIM were obtained through a $9
million private placement of its preferred stock (the "Private Placement"), the
initial closing of which occurred on November 30, 2005. In its Private
Placement, Original Gales sold 90 Units, each Unit consisting of 10 shares of
convertible preferred stock, each such share convertible into 45,455 shares of
Original Gales' 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 Original Gales' Private Placement were
used to pay expenses relating to the Private Placement, the Acquisition of AIM,
the Merger with us and related transactions, and to repay $150,000 in promissory
note obligations which Original Gales incurred in bridge financings, and for
working capital. Pursuant to the Merger each share of convertible preferred
stock of Original Gales was converted into one share of our Series A Convertible
Preferred Stock. Each share of our Series A Preferred Stock is convertible into
45,455 shares of our Common Stock, or 40,909,500 shares in the aggregate. The
price at which the preferred shares of Original Gales was offered in the Private
Placement and the terms of such shares were determined by negotiation with
GunnAllen based, in part, upon the parties' estimations of the value of AIM and
the ability of the management of Original Gales to execute their business
strategy.
18
Contemporaneously with the Acquisition, 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"). The purchase price for the real property was determined by arms'
length negotiations between Original Gales and the owners of the real estate and
approximated the value thereof as determined by an independent appraisal
obtained by the sellers of the real estate. In connection with such real estate
purchase, AIM entered into a loan facility (the "New Loan Facility") with PNC
Bank, secured by all of AIM's 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.
Currently, the operations of AIM are our only business. As a result of the
Merger, the former stockholders of Original Gales became the controlling
stockholders of our company. Additionally, since we had no substantial assets
immediately prior to the Merger, the transaction was treated for accounting
purposes as a reverse acquisition and accounted for as a recapitalization of
Gales rather than a business combination. Consequently, the historical financial
statements of Original Gales are now the historical financial statements of our
Company and the historical stockholders' equity of Original Gales has been
restated to reflect the recapitalization.
Prior to the acquisition of AIM, Original Gales had no operating assets.
Because of the change in ownership, management and control that occurred in
connection with the Acquisition of AIM, for financial reporting purposes the
Acquisition was accounted for as a purchase by Original Gales. Accordingly, the
purchase price was allocated among AIM's assets and liabilities based upon their
fair values as of the completion of the Acquisition. Because the purchase price,
net of the liabilities assumed, exceeded the fair value of the assets acquired,
Original Gales recorded goodwill of $1,265,963. Because the real estate
acquisition was completed subsequent to the Acquisition of AIM, the shareholders
of the entities which owned the real estate were not affiliates of AIM as of the
completion of such transaction. Therefore, the acquisition of the real estate
was treated as a purchase by AIM and the purchase price and related acquisition
costs, which approximated the fair market value of the property, were reflected
on Original Gales' financial statements (which now form the basis of our
financial statements) as the basis of the real estate.
The financial statements presented are those of Original Gales for the
year ended December 31, 2005, inclusive of the activity of AIM from the date of
Acquisition. The Management's Discussion and Analysis below includes the
combined results of operations of Original Gales and AIM (unaudited) for the
2005 year as if these entities were combined for that period. To provide a basis
for comparison, there are also included below the historical financial
information of AIM for the 11 months ended November 30, 2005, and the years
ended December 31, 2004 and 2003. AIM is currently our only operating business.
AIM historically operated as a private company. There can be no assurance that
our future operating results will be comparable to those achieved by AIM in the
past. It should also be noted that prior to the Acquisition, AIM operated as a
Subchapter S company and incurred no income taxes. For purposes of the following
discussion, we have assumed that AIM incurred income taxes during years 2003,
2004 and 2005 at an effective rate of 40.02%.
Overview
AIM manufactures aircraft structural parts and assemblies principally for
prime defense contractors in the defense/aerospace industry. 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 8.5% of AIM's revenues. The remaining 15% of revenues
represent sales in the airframe manufacturing sector to major aviation
manufacturers.
19
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, rotorhub components, rocket launching systems,
arresting gear, vibration absorbing assemblies, landing gear components and many
other subassembly packages.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky account for approximately 51% of AIM's
revenue, and are subject to General Ordering Agreements which were recently
renegotiated and extended through 2010.
The, following discussion and analysis should be read in conjunction with
the financial statements and notes, included with this report.
Results of Operations
The following table sets forth, for the periods indicated, certain components of
our statements of operations:
Year Ended Year Ended Year Ended
December 31, 2005(1)(3) December 31, 2004(2)(3) December 31, 2003(2)(3)
Net Sales $30,735,103 $24,818,333 $22,334,926
Cost of Sales 26,426,553 21,400,878 19,531,292
Gross Profit 4,308,550 3,417,455 2,803,604
Selling Expenses 357,854 321,727 309,479
G&A Expense 2,440,194 1,356,809 1,249,184
Interest Expense 759,552 505,425 441,867
Minority Interest 74,904 131,552 83,363
Income before Provision
for taxes 676,046 1,104,515 719,841
Pro-Forma Provision for
Taxes(3) 271,770 444,015 289,376
Pro-Forma Net Income 404,276 660,500 430,465
1) The information for December 31, 2005, combines the operating results of
Original Gales and AIM, operating as a Subchapter S corporation for the
period January 1, 2005 through November 30, 2005.
2) The information for December 31, 2004 and 2003 are from the audited
operating statements of AIM.
3) Prior to November 30, 2005, AIM elected to be treated under Subchapter "S"
of the Internal Revenue Code and incurred no income taxes For purposes of
the above presentation taxes were calculated using an effective 40.02% tax
rate in accordance with FAS 109. The information above does not give
pro-forma effect to the acquisition of AIM. Unaudited pro-forma financial
statements giving effect to the acquisition of AIM are included in Note 14
to the financial statements.
20
Year ended December 31, 2005 compared to year ended December 31, 2004
Net Sales. Net sales were $30,735,103 in the year ended December 31, 2005
("Fiscal 2005") an increase of $5,916,770 (23.8%) from net sales of $24,818,333
in Fiscal 2004. The increase in net sales was attributable to continued
significant growth in sales in the military aerospace sector resulting from
increased military activity, together with price increases that took effect in
late 2005 under a number of our long term agreements with a significant
customer.
Gross Profit. Gross profit was $4,308,550 in Fiscal 2005 (14.0% of net
sales), compared to gross profit of $3,417,455 in Fiscal 2004 (13.8% of net
sales). The increase in gross profit reflects the increase in revenues. The
increase in gross profits as a percentage of sales represents a continuation of
the shift in production to higher margin military products.
Selling Expenses. Selling expenses were $357,854 in Fiscal 2005, an
increase of $36,127(11.2%) from selling expenses of $321,727 in Fiscal 2004. The
increase in selling expenses reflects an increase in shipping supplies,
transportation expenses and depreciation of transportation equipment partially
offset by decreases in field engineering expenses and out bound freight
expenses.
General and Administrative Expenses. General and administrative expenses
were $2,440,194 in Fiscal 2005, an increase of $1,083,385 (79.8%) from general
and administrative expenses of $1,356,809 in Fiscal 2004. The increase was
primarily due to an increase in officers' salaries, an increase in office
personnel to support the increased sales, an increase in professional fees
attributable to legal, accounting and audit fees as well as consulting costs
incurred in connection with modifications to AIM's information technology
network. In addition, Fiscal 2005 reflects non-cash compensation resulting from
the inclusion of expenses calculated pursuant to FAS 123R dealing with the
post-Merger Company's stock option plan. In addition, a provision for bad debt
was booked based upon management's assessment of the collectibility of
outstanding receivables.
Interest Expense. Interest expense was $759,552 in Fiscal 2005 an increase
of $254,127 (50.3%) from interest expense of $505,425 in Fiscal 2004. The
increase in interest expense resulted from an increase in borrowing rates as
well as additional interest expense as a result of the financing of the
Acquisition of AIM and purchase of the real estate.
Minority Interest. Minority interest represents the income attributable to
AIM's real estate realized by the affiliates of AIM that owned the real estate
prior to its acquisition by AIM in 2005. Minority interest income was $74,904 in
Fiscal 2005 a decrease $56,648 from $131,552 in Fiscal 2004. The decrease
reflects the elimination of the interest of AIM's affiliates as a result of the
acquisition of the real estate by AIM on November 30, 2005.
Income before provision for income taxes was $676,046 in Fiscal 2005 a
decrease of $428,469 (38.8%) from income before taxes of $1,104,515 in Fiscal
2004. The income before taxes in 2005 combines the income earned by AIM during
the eleven month period ended November 30, 2005 of $1,425,750, with a $749,704
loss incurred during December 2005. The loss resulted primarily from the impact
on AIM's business of the Acquisition, together with expenses relating to the
Company as a new public entity.
21
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Sales. Net sales were $24,818,333 in the year ended December 31, 2004
("Fiscal 2004") an increase of $2,483,407 (11.1%) from net sales of $22,334,926
in the year ended December 31, 2003 ("Fiscal 2003"). The increase in net sales
was attributable to significant growth in sales in the military aerospace sector
resulting from increased military activity, partially offset by a decrease in
sales to the commercial sector as a result of a shift by certain customers to
overseas suppliers and the expiration of multi-year contracts to support
machined components and assemblies on a number of Boeing's aircraft.
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 in gross profit reflects the increase in revenues. The
increase in gross profits as a percentage of sales represents a shift in
production to higher margin military products.
Selling Expenses. Selling expenses were $321,727 in Fiscal 2004 an
increase of $12,248(4%) from selling expenses of $309,479 in Fiscal 2003. The
increase in selling expenses reflects an increase in freight expenses,
transportation expenses and depreciation of transportation equipment.
General and Administrative Expenses. General and administrative expenses
were $1,356,809 in Fiscal 2004, an increase of $107,625 (8.62%) from general and
administrative expenses of $1,249,184 in Fiscal 2003. The increase was primarily
due to an increase in officers' salaries, an increase in office personnel as a
result of the increased sales, an increase in professional fees attributable
primarily to legal costs related to shareholder matters, and consulting costs
incurred in connection with modifications to AIM's IT network.
Interest Expense. Interest expense was $505,425 in Fiscal 2004 an increase
of $63,558 (14.4%) from interest expense of $441,867 in Fiscal 2003. The
increase in interest expense resulted primarily from an increase in AIM's
borrowings and increases in amounts due to AIM's shareholders, principal
commercial lender and under capital lease obligations more than offset decreases
in the mortgages on AIM's real estate and long term capital lease obligations.
Minority Interest. Minority interest income was $131,552 in Fiscal 2004 an
increase of $48,189 (57.8%) from $83,363 in Fiscal 2003. The increase in
minority interest income reflects the impact of the acquisition of portions of
the real estate by AIM's affiliates in the fourth quarter of Fiscal 2003.
Income before provision for income taxes was $1,104,515 in Fiscal 2004 an
increase of $384,674 (53.4%) from income before taxes of $719,841 in Fiscal
2003.
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 $1.058
million as of December 31, 2005, together with amounts available under our
Credit Agreement.
22
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 $750,000 in 2006, subject to a substantial
increase if we become obligated to comply with Section 404 of Sarbanes-Oxley.
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 on Form SB-2 which we have filed under the Securities Act. 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 $5,943,000 in debt under the revolving credit facility and
$3,500,000 under a term loan. We have borrowed approximately $528,000 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 47 equal
monthly payments of $31,667 plus interest with the balance due at the time of
the 48th 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 $850,316 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 December 31, 2005, we had equipment leases which required us to make
monthly payments of approximately $37,100.
On November 30, 2005, we completed (through Original Gales) 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 Original Gales paid to the placement agent in such first closing amounted
to an aggregate of $815,194. 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 Original Gales 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.
23
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our financial results.
Inventory Valuation
We value inventory at the lower of cost or market on a first-in-first-out
basis.
We purchase inventory only when we have signed non-cancellable contracts
with our customers for orders of finished goods. We occasionally produce
finished goods in excess of purchase order quantities in anticipation of future
purchase order demands but historically this excess has been used in fulfilling
future purchase orders. We occasionally evaluate inventory items that are not
secured by a purchase order and reserve for obsolescence accordingly. We also
reserve an allowance for excess quantities, slow-moving goods, and obsolete
items.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." We generally recognize revenue when products are shipped
and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. Payments received in advance from
customers for products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or all of the deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123 (R)). SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized as compensation expense based on their fair
value. Effective December 31, 2005, we adopted, earlier than required, the fair
value recognition provisions of SFAS No. 123(R).
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. The Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets and accordingly do not amortize
goodwill but test it for impairment. Impairment testing for goodwill will be
performed annually, unless indicators of impairment exist, using a two-step
approach. Step one compares the fair value of the net assets (calculated using a
discounted cash flow method) to its carrying value, a second step is performed
to compute the amount of the impairment. In this process, a fair value for
goodwill is estimated, based in part on the fair value of the operations, and is
compared to its carrying value. The shortfall of the fair value below carrying
value represents the amount of goodwill impairment.
24
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 rate 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.
Item 7. Financial Statements.
The financial information required by this item is set forth beginning on
page F-1.
25
GALES INDUSTRIES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
F-1
GALES INDUSTRIES INCORPORATED
Table of Contents
Financial Information Page No.
Independent Auditor's Report........................................ F-3
Gales Industries Incorporated - Consolidated Balance Sheet......... F-4
Gales Industries Incorporated - Consolidated Statement of Operations F-5
Gales Industries Incorporated - Consolidated Statement of
Stockholders' Equity.............................................. F-6
Gales Industries Incorporated - Consolidated Statement of Cash Flow. F-7 - F-8
Gales Industries Incorporated - Notes to Consolidated Financial
Statements........................................................ F-9 - F-27
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Gales Industries Incorporated
We have audited the accompanying consolidated balance sheet of Gales Industries
Incorporated and Subsidiaries as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period October 28, 2004 (inception) to December 31, 2004 and the year ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gales
Industries Incorporated and Subsidiaries as of December 31, 2005, and the
results of their operations and their cash flows for the period October 28, 2004
(inception) to December 31, 2004 and the year ended December 31, 2005, in
conformity with United States generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 28, 2006
F-3
GALES INDUSTRIES INCORPORATED
Consolidated Balance Sheet At December 31, 2005
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,058,416
Accounts Receivable, Net of Allowance for Doubtful Accounts of $45,000 2,623,612
Inventory 12,603,810
Prepaid Expenses and Other Current Assets 210,124
Deposits 65,595
------------
Total Current Assets 16,561,557
Property, Plant, and Equipment, net 7,716,469
Cash Surrender Value - Officer's Life 66,216
Deferred Financing Costs 486,207
Other Assets 41,306
Goodwill 1,265,963
------------
TOTAL ASSETS $ 26,137,718
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 5,294,629
Advance Payment - Customers 188,199
Notes Payable - Current Portion 6,322,665
Notes Payable - Sellers - Current Portion 192,400
Capital Lease Obligations - Current Portion 359,197
Due to Sellers 91,232
------------
Total current liabilities 12,448,322
Long term liabilities
Notes Payable - Net of Current Portion 3,648,131
Notes Payable - Sellers - Net of Current Portion 1,434,862
Capital Lease Obligations - Net of Current Portion 820,375
Deferred Tax Liability 676,394
------------
Total liabilities 19,028,084
------------
Commitments and contingencies
Stockholders' Equity
Series A Convertible Preferred - $.001 Par value, 8,003,716 Shares Authorized 1
900 Shares Issued and Outstanding as of December 31, 2005
Liquidation Value, $ 18,060,000
Common Stock - $.001 Par, 120,055,746 Shares Authorized
14,723,421 Shares Issued and Outstanding as of December 31, 2005 14,723
Additional Paid-In Capital 7,844,614
Accumulated Deficit (749,704)
------------
Total Stockholders' Equity 7,109,634
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,137,718
============
See notes to financial statements
F-4
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Operations for the Year Ended December 31, 2005(1)
Net sales $ 2,777,409
Cost of Sales 2,539,433
------------
Gross profit 237,976
Operating costs and expenses
Selling and marketing 34,987
General and administrative 774,401
------------
Loss from operations (571,412)
Interest and financing costs 178,292
------------
Net Loss (749,704)
Less: Dividend attributable to preferred stockholders 60,000
------------
Net Loss attributable to common stockholders $ (809,704)
============
Loss per share (basic and diluted) $ (0.06)
============
Weighted average shares outstanding (basic and diluted) 12,722,060
============
(1) For the period from October 28, 2004 (date of inception) through
December 31, 2004 the Company had no business activity and accordingly a
statement of operations is not presented.
See notes to financial statements
F-5
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Stockholders' Equity For the Period October 28, 2004
(inception) to December 31, 2004 and the Year Ended December 31, 2005
Series A
Common Stock Preferred Stock Additional Total
---------------------- --------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------------ -------- ------ ------ ------------ ------------ ------------
Issuance of common stock effected for
100,000 for 1 stock split 8,705,757 $ 8,706 $ (8,706) $ --
Retroactive restatement of common stock
issued in recapitalization 3,823,980 3,824 (128,158) (124,334)
------------------------------------------------------------------------------------
Balance, December 31, 2004 12,529,737 12,530 (136,864) (124,334)
Issuance of common stock to merger
and acquisition intermediary on
recapitalization 1,477,290 1,477 (1,477) --
Contribution of common stock from
shareholder in connection with
bank financing 71,500 71,500
Value of warrants issued in connection
with bridge financing 43,861 43,861
Beneficial conversion feature on shares
issued in connection with bridge financing 24,897 24,897
Non-cash stock option compensation 121,297 121,297
Issuance of shares in connection with
convertible note 226,334 226 24,671 24,897
Issuance of common stock to Sellers 490,060 490 489,570 490,060
Private placement issued at $10,000 per share 900 1 8,999,999 9,000,000
Expenses of private placement (1,792,840) (1,792,840)
Net loss (749,704) (749,704)
----------------------- --------------- ------------ ------------ ------------
Balance, December 31, 2005 $ 14,723,421 $ 14,723 900 $ 1 $ 7,844,614 $ (749,704) $ 7,109,634
======================= =============== ============ ============ ============
See notes to financial statements
F-6
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31, 2005(1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (749,704)
------------
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation and Amortization 78,659
Write-off of building improvements 256,632
Non-Cash Interest Expense 93,655
Bad debt expense 45,000
Non-Cash Compensation Expense 121,297
Changes in Assets and Liabilities, net of effects of Acquisition
and recapitalization:
(Increase) Decrease In Assets -
Accounts Receivable 534,378
Inventory (434,362)
Prepaid Expenses and Other Current Assets (31,058)
Deposits 168,499
Cash Surrender Value - Officer's Life (3,455)
Other Assets (41,306)
Increase (Decrease) In Liabilities -
Accounts Payable and Accrued Expenses (1,389,406)
Advance Payment-Customers 188,199
------------
Total adjustments (413,268)
NET CASH USED IN OPERATING
ACTIVITIES (Forward) (1,162,972)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in acquisition, including transaction costs of $1,053,862,
net of cash received of $47,538 (4,120,620)
Cash received on recapitalization 1,684
Purchase of property and equipment (4,322,975)
------------
NET CASH USED IN INVESTING ACTIVITIES (Forward) (8,441,911)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Principal - Capital Lease Obligations (29,277)
Repayment of notes payable to Officers and Sellers (884,815)
Proceeds from Short-Term Financing, Net 9,970,796
Payment of Notes Payable - Bank (5,180,000)
Proceeds from Private Placement 9,000,000
Payment of issuance costs on private placement (1,792,840)
Payment of Deferred Financing Costs (420,565)
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (Forward) 10,663,299
------------
Net increase in cash and cash equivalents
and cash and cash equivalents at end of the year $ 1,058,416
============
(1) For the period from October 28, 2004 (date of inception) through December
31, 2004 the Company had no business activity and accordingly a statement of
cash flows is not presented.
See notes to financial statements
F-7
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31, 2005(1)
NET CASH USED IN OPERATING
ACTIVITIES (Brought Forward) $ (1,162,972)
------------
NET CASH USED IN INVESTING ACTIVITIES (Brought Forward) (8,441,911)
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (Brought Forward) 10,663,299
------------
Net increase in cash and cash equivalents
and cash and cash equivalents at end of the year $ 1,058,416
============
Supplemental cash flow information
Cash paid during the year for interest $ 64,078
============
Supplemental schedule of non cash investing and financing activities
Shares issued in connection with deferred financing costs $ 71,500
============
Beneficial conversion feature charged as interest on bridge financing $ 24,897
============
Common stock issued on conversion of bridge note $ 24,897
============
Issuance of warrants in bridge financing $ 43,861
============
Common stock issued to Sellers in acquisition $ 490,060
============
Net liabilities assumed on recapitalization restated to 2004 $ 124,334
============
Notes payable issued for acquisition $ 1,627,262
============
The Company purchased all of the outstanding stock of AIM for an
aggregate purchase price of $6,285,480,including transaction costs, and in
conjunction with this acquisition, liabilities assumed were as follows:
Fair value of assets acquired $ 20,884,787
Consideration given for acquisition 6,285,480
------------
Liabilities assumed $ 14,599,307
============
(1) For the period from October 28, 2004 (date of inception) through December
31, 2004 the Company had no business activity and accordingly a statement of
cash flows is not presented.
See notes to financial statements
F-8
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp (the "Company" or "Ashlin"), a Florida corporation
and its newly-formed subsidiary, Merger Sub, entered into a Merger
Agreement (the "Merger Agreement") on November 14, 2005 with Gales
Industries Inc., a privately-held Delaware corporation ("Gales"). On
November 30, 2005 (the "Closing Date") Gales merged (the "Merger") into
Merger Sub. Pursuant to the Merger Agreement, the Company issued
10,673,107 shares of common stock (representing 73.6% of Ashlin's
outstanding shares) and 900 shares of Series A Convertible Preferred Stock
which is convertible into 40,909,500 shares of common stock of the Company
for all the issued and outstanding shares of Gales. As a result of the
transaction, the former stockholders of Gales became the controlling
stockholders of Ashlin. Additionally, since Ashlin had no substantial
assets prior to the merger, the transaction was treated for accounting
purposes as a reverse acquisition of a public shell and the transaction
has been accounted for as a recapitalization of Gales rather than a
business combination. The historical financial statements of Gales are now
the historical statements of the Company. The historical stockholders'
equity of Gales have been restated to reflect the capitalization.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated and its state of domicile from Florida to Delaware.
Prior to the closing of the Merger, Gales, which did not have any business
operations other than those in connection with the Merger Agreement (the
"Acquisition"), acquired all of the outstanding capital stock of Air
Industries Machining Corp ("AIM"). Because of the change in ownership,
management and control that occurred in connection with the Acquisition,
in accordance with Statement of Financial Accounting Standards ("SFAS")
141, Business Combinations, the transaction was accounted for as a
purchase (See Note 13 Acquisition). Accordingly, the purchase price was
allocated to assets acquired and liabilities assumed based on SFAS No.141.
Simultaneous with the Acquisition, AIM entered into a bank facility and
used proceeds from the facility to acquire real estate (See Note 13 Real
Estate Acquisition and Credit Facility).
Prior to the Acquisition, Gales raised bridge financing. In connection
with the Acquisition, Gales procured a private placement of Series A
Preferred Stock, the proceeds of which were used to acquire AIM (See Note
13 Bridge Financing, and Private Placement). Immediately prior to the
Merger, Gales had outstanding certain bridge notes convertible into shares
of Gales' common stock and certain bridge warrants to purchase shares of
Gales' common stock.
F-9
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The financial statements presented are those of Gales and its wholly owed
subsidiary AIM from the date of acquisition, November 30, 2005, to
December 31, 2005. Gales was formed in October 2004 and prior to the
Acquisition did not have any business operations or other activity. For
presentation purposes, see Note 14 for the results of pro forma operations
if the acquisition occurred on January 1, 2005 and 2004.
Reverse stock split
Pursuant to the terms of the Merger Agreement, prior to the Merger, Ashlin
effected a 1-for-1.249419586 reverse split of its Common Stock (the
"Reverse Split"). The Reverse Split became effective November 21, 2005.
The Reverse Split reduced the number of shares of Common Stock which the
Company had outstanding on a fully diluted basis to 3,868,000. As a result
of the Reverse Split, the conversion of the outstanding shares of Gales
pursuant to the Merger for new shares of the Company's Common Stock was on
a one-for-one basis. Any of the Company's shareholders who, as a result of
the Reverse Split, held a fractional share of Common Stock received a
whole share of Common Stock in lieu of such fractional share. After giving
effect to the Reverse Split, prior to the Merger, the Company had
outstanding 3,823,980 shares of Common Stock which continued to be
outstanding after the Merger.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural
parts and assemblies principally for prime defense contractors in the
aerospace industry in the United States. The Company's customer base
consists mainly of publicly traded companies in the aerospace industry.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of the
Company and Merger Sub and Merger Sub's wholly owned subsidiary, AIM.
Significant inter company accounts and transactions have been eliminated
in consolidation. The operations of the Company are conducted principally
through AIM.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid 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 net of allowances for bad debt. The Company provides for
allowances for uncollectible receivables based on management's estimate of
uncollectible amounts at year-end, considering age, collection history,
and any other factors considered appropriate.
F-10
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Inventory Valuation
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property and Equipment
Property and equipment are carried at cost net of accumulated depreciation
and amortization. Repair and maintenance charges are expensed as incurred.
Property, equipment, and improvements are depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in earnings.
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. The carrying amount
of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. If impairment is recognized, the carrying value
of the impaired asset is reduced to its fair value, based on discounted
estimated future cash flows.
Deferred Financing Cost
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition." The Company generally recognizes
revenue when products are shipped and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists, and the sales price is fixed
or determinable. Payments received in advance from customers for products
delivered are recorded as customer advance payments until earned, at which
time revenue is recognized.
F-11
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and various
contingencies. Actual results could differ from those estimates. Changes
in facts and circumstances may result in revised estimates, which are
recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of December
31, 2005 approximately 23% and 10% are attributable to two respective
customers.
One customer accounted for approximately 51% of the total revenues for the
year ended December 31, 2005.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." Management of the Company believes that the fair value of
financial instruments, consisting of cash, accounts receivable, accounts
payable and accrued liabilities, approximates carrying value due to the
immediate or short-term maturity associated with these instruments and
that the notes payable approximate fair value in that they carry
market-based interest rates.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and
deferred taxes, due to temporary differences between financial statement
and tax bases of assets and liabilities. In addition, future tax benefits
are recognized to the extent that realization of such benefits is more
likely than not. Valuation allowances are established when management
determines that it is more likely than not that some portion or all of the
deferred asset will not be realized. The effect of a change in tax rates
is recognized as income or expense in the period of change.
F-12
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Earnings per share
Basic earnings per share is computed by dividing the net income applicable
to common stockholders by the weighted-average number of shares of common
stock outstanding for the period. Potentially dilutive shares, using the
treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.
The Company did not include 5,229,589 warrants and 4,850,000 options to
purchase the Company's common stock in the calculation of diluted earnings
per share for the year ended December 31, 2005 because the effects of
their inclusion are anti-dilutive.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123 (R)). SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense based on
their fair value. Effective December 31, 2005, the Company adopted,
earlier than required, the fair value recognition provisions of SFAS No.
123(R).
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. The Company
applies SFAS No. 142, Goodwill and Other Intangible Assets and accordingly
does not amortize goodwill but tests it for impairment. Impairment testing
for goodwill will be performed annually, and more frequently when
indicators of impairment exist, using a two-step approach. Step one
compares the fair value of the net assets of the relevant reporting unit
(calculated using a discounted cash flow method) to its carrying value, a
second step is performed to compute the amount of the impairment. In this
process, a fair value for goodwill is estimated, based in part on the fair
value of the operations, and is compared to its carrying value. The
shortfall of the fair value below carrying value represents the amount of
goodwill impairment.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS
No. 123 and supersedes Accounting Principles Board Opinion No. 25. SFAS
No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values at the date of grant. Pro forma disclosure is
no longer an alternative reporting method under SFAS No. 123(R). The
Company recorded an expense of $121,297 in the accompanying statement of
operations for the year ended December 31, 2005 in accordance with the
measurement requirements under SFAS No. 123 (R) (see Note 12).
F-13
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which
clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company believes that SFAS No. 151 will not have a material
effect on its consolidated financial statements for the year ended
December 31, 2006.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, which eliminates the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance.
SFAS No. 153 is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company believes that
SFAS No. 153 will not have a material effect on its consolidated financial
statements for the year ended December 31, 2006.
Note 3. INVENTORY
The components of inventory consisted of the following as of December 31,
2005:
December 31, 2005
-----------------
Raw Materials $ 2,319,523
Work in Progress 4,905,535
Finished Goods 5,378,752
-----------------
Total Inventory $ 12,603,810
=================
F-14
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 4. PROPERTY AND EQUIPMENT
The components of property and equipment, at cost, as of December 31,
2005:
December 31, 2005 Useful Lives
----------------- ---------------
Land $ 1,075,589 --
Building 3,226,767 25 - 31.5 years
Machinery and Equipment 1,766,829 5 - 8 years
Capital Lease Machinery and Equipment 1,145,171 5 - 8 years
Tools and Instrument 253,994 7 years
Building Improvements 17,700 25 years
Automotive Equipment 26,827 5 years
Furniture and fixtures 248,998 5- 8 years
-----------------
Total property, plant, and equipment 7,761,875
Less: Accumulated Depreciation (including
$27,434 attributable to capital leases) (45,406)
-----------------
Property, plant, and equipment, net $ 7,716,469
=================
Depreciation and amortization expense for the year ended December 31, 2005
amounted to $45,406.
Note 5. NOTES PAYABLE - BANKS AND CREDIT FACILITY
On November 30, 2005 the Company executed a credit facility with PNC Bank
N.A. (the "New Loan Facility"), secured by all of its assets and the real
property acquired in the Real Estate Acquisition (see Note 13).
The New Loan Facility provides for a maximum loan amount of $14,000,000
consisting of (i) a $9,000,000 revolving loan, (ii) a $3,500,000 term
loan, and (iii) a $1,500,000 equipment financing loan. Upon completion of
the New Loan Facility, the Company paid to a third party a finder's fee
aggregating $196,500 which amount is included in deferred financing costs.
The finder's fee consisted of $125,000 in cash and 325,000 shares of the
Company's Common Stock. Such shares, which were valued at $0.22 per share,
were contributed by one of the Company's senior executives and accordingly
were accounted for as a capital contribution.
F-15
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The revolving loans bear interest, based at the option of the Company,
that is based on (i) the higher of (A) PNC's base commercial lending rate
as published from time to time ("PNC Rate") plus 0.25% or (B) the Federal
Funds rate plus 0.5%, or (ii) the Eurodollar Rate for the Interest Period
selected by the Company plus 2.5%. The revolving loans had an interest
rate of at 6.94% per annum on December 31, 2005. The revolving loans,
equipment loans and the term loan are due and payable in full on November
30, 2009 ("Termination Date") unless PNC agrees to extend the Termination
Date. At December 31, 2005, the revolving loan had a balance of
$5,942,661.
The term loan is for a period of 4 years and bears interest, at the option
of the Company at the end of an interest period, at the (i) PNC Rate plus
0.50% per annum or (ii) the Eurodollar Rate for the interest period
selected by the Company plus 2.75 %. The term loan requires forty eight
consecutive payments of $31,667 commencing in January 2006, provided that
all unpaid amounts on November 30, 2009 must then be paid in full unless
the Termination Date is extended by PNC. At December 31, 2005, the term
loan had balance of $3,500,000. The term loan has an interest rate of
7.19% per annum on $3,468,333 of the balance and 7.75% per annum on the
remaining $31,667.
The equipment loans bear interest, at the option of the Company, that is
based on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate
for the interest period selected plus 2.75% per annum. The equipment loan
had an interest rate of 7.50% per annum at December 31, 2005. Such
equipment financing is limited to an aggregate of $750,000 in any fiscal
year of the Company and amortized in equal installments of sixty months
following the close of each "borrowing period", the first of which ends
December 31, 2006 and each subsequent "borrowing period" ends on each
December 31 thereafter. All equipment loans are due and payable on
November 30, 2009, unless the Termination Date is extended by PNC. As of
December 31, 2005, the equipment financing loan had a balance of $528,135.
To the extent that the Company may dispose of collateral used to secure
any of the New Loan Facility, other than inventory, the Company must
promptly repay the draws on the credit facility in amount equal to the net
proceeds of such sale.
The terms of the New Loan Facility require that, among other things, the
Company maintain certain financial ratios and levels of working capital
and triggers for pre-maturing the due dates of the loans. As of December
31, 2005 the Company has met these terms. The New Loan Facility is also
secured by all assets of the Company and the Company's receivables are
payable directly into a lockbox controlled by PNC (subject to the terms of
the New Loan Facility). Also one of those triggers provides that PNC may
use some elements of subjective business judgment in determining whether a
material adverse change has occurred in the Company's condition, results
of operations, assets, business, properties or prospects. As such, the
revolving loan has been classified as a current liability.
F-16
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Interest expense related to these credit facilities amounted to $51,392
for the year ended December 31, 2005.
The Company incurred an aggregate of $492,065 in finders' fees and legal
costs in connection with the New Loan Facility which is being amortized
over the 48 month term of the New Loan Facility. For the period ended
December 31, 2005, the Company amortized $5,858 of these costs.
As of December 31, 2005, future minimum principal payments are as follows:
Year Amount
------- -----------
2006 $ 6,322,665
2007 485,631
2008 485,631
2009 2,676,869
-----------
9,970,796
Less: Current portion (6,322,665)
-----------
Long-term portion $ 3,648,131
===========
Note 6. CASH SURRENDER VALUE - LIFE INSURANCE
The Company is the owner and beneficiary of key-man life insurance
policies carried on the lives of certain key and former executives with
cash surrender values. The aggregate face amounts of the policies were
$3,250,000 for the year ended December 31, 2005. There are loans in place
against these policies. As of December 31, 2005 the cash surrender value
was $66,216, net of $226,632 in loans. As the Company has the right to
offset the loans against the cash surrender value of the policies, the
Company presents the net asset in its consolidated financial statements.
Note 7. CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
and computer equipment. All leases have bargain purchase options that
gives the Company the right to exercise at the termination of each lease.
Capital lease obligations totaled $1,179,572 as of December 31, 2005.
F-17
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
As of December 31, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ---------
2006 $ 440,140
2007 427,586
2008 422,878
2009 37,735
---------
Total future minimum lease payments 1,328,339
Less: imputed interest (148,767)
Less: current portion (359,197)
---------
Total long-term capital lease obligation $ 820,375
=========
Note 8. EMPLOYEE BENEFITS PLANS
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code ("the Plan"). Pursuant to the Plan qualified
employees may contribute a percentage of their pretax eligible
compensation to the Plan. The Company does not match any contributions
that employees may make to the Plan.
The employees of the Company are members of the United Service Workers
Union IUJAT Local 355 (the "Union"), which provides medical benefit plans
at defined rates which are contributed in their entirety by the Company.
Note 9. NOTES PAYABLE - SELLERS
On November 30, 2005, as part of the stock purchase between Gales and AIM
(See Note 13), Gales issued notes payable for an aggregate of $1,627,262
to three former AIM shareholders, two of whom have become part of the
Company's senior management and are also stockholders in the Company.
The notes payable to the two senior management members aggregate $665,262
and mature on November 30, 2010, along with accrued interest which bear an
interest rate equal to Prime Rate plus 0.5% per annum, (7.75% at December
31, 2005). Interest shall accrue on any portion of the principal amount of
these notes outstanding after November 30, 2010 until payment thereof in
full, at a floating rate equal to the Prime Rate plus 7% per annum.
Subsequent to January 1, 2006, all of the outstanding principal amounts of
these notes together with accrued interest are convertible, at the option
of the Company, into shares of the Company's common stock at $0.40 per
F-18
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
share. From and after the earlier of (i) January 1, 2007, and (ii) the
first date on which the Company intends to effect any capital
reorganization of the Company, any reclassification or recapitalization of
the capital stock of the Company, any merger, or consolidation or other
combination of the Company with or into any other Company, or any sale or
transfer of all or substantially all of the assets of the Company, the
outstanding principal amount of these notes together with interest accrued
thereon is convertible, at the option of the holder, into the Company's
Common Stock at $0.40 per share.
The remaining note of $962,000 matures on September 30, 2010 is
subordinated to all of Gale's senior debt and is payable in twenty
consecutive calendar quarters of equal installments of principal plus
accrued interest commencing on December 31, 2005. The interest rate on
this note is equal to Prime Rate plus 0.5% per annum (7.75% at December
31, 2005). Interest on outstanding balances at September 30, 2010, in the
event of nonpayment, shall accrue at a floating rate equal to the Prime
Rate plus 7% per annum.
As of December 31, 2005, future minimum principal payments on these notes
to the three former shareholders are as follows:
Year Amount
---- -----------
2006 $ 192,400
2007 192,400
2008 192,400
2009 192,400
2010 857,662
-----------
1,627,262
Less: Current portion (192,400)
-----------
Long-term portion $ 1,434,862
===========
Interest expense on these notes amounted to $10,711 for the year ended
December 31, 2005.
Note 10. COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
Customer Audits
The Company's government contracts and those of many of its customers are
subject to the procurement rules and regulations of the United States
government, including the Federal Acquisition Regulations ("FAR"). Many of
the contract terms are dictated by these rules and regulations. During and
after the fulfillment of a government contract, the Company may be audited
in respect of the direct and allocated indirect costs attributed thereto.
These audits may result in adjustments to its contract costs.
Additionally, the Company may be subject to U.S. government inquiries and
investigations because of its participation in government procurement. Any
inquiry or investigation can result in fines or limitations on the
Company's ability to continue to bid for government contracts and fulfill
existing contracts.
F-19
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The Company believes that it is in substantial compliance with all
federal, state and local laws and regulations governing its operations and
has obtained all material licenses and permits required for the operation
of its business.
Employment Contracts
In September 2005, the Company entered into employment agreements (the
"Agreements") with four senior executives that became effective November
30, 2005. The Agreements are for a period of approximately eight years.
Additionally, the Agreements provide for annual base compensation
aggregating $940,000. The Board, at its sole discretion, determines
whether a bonus is issued. To the extent that the Board authorizes
issuances of bonuses, two senior executives will receive at least 50% of
their annual base compensation. Each senior executive's agreement also
call for grants of stock options to purchase the Company's common stock
aggregating 4,850,000 shares of which 1,580,000 have been granted as of
December 31, 2005.
Note 11. INCOME TAXES:
The components of deferred income tax assets as of December 31, 2005, are
as follows:
Federal loss after temporary differences carryforward
(expires in 2025) $ 75,198
Bad debts 36,014
Contributions 400
Inventory - 263A Adjustment 137,897
Non-cash compensation 65,962
---------
Total deferred tax asset 312,471
Valuation allowance (312,471)
---------
Net deferred tax asset $ --
=========
The component of the deferred tax liability as of December 31, 2005 is as
follows:
Property and equipment $ 676,394
---------
Total deferred tax liability $ 676,394
=========
The difference between income taxes computed at the statutory federal rate
and the provison for income taxes for the year ended December 31, 2005
relates to the following:
Tax benefit at federal statutory rate 34.00%
State income taxes, net of federal income tax benefit 6.02%
---------
40.02%
Valuation allowance -40.02%
---------
Total effective tax rate --
=========
F-20
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory rate to the loss before
income taxes. This difference, as shown in the above table, is due to a
full reserve of our benefit for the utilization for net operation losses
since utilization cannot be determined to be more likely than not per SFAS
109.
Note 12. STOCK-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option and
reserved 10,000,000 shares of its Common Stock for issuance under the
plan. The stock option plan permits the Company to grant non-qualified and
incentive stock options to employees, directors, and consultants. Awards
granted under the Company's plans vest over four and seven years.
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment ("SFAS 123(R)"). The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 2005: risk-free
interest rates ranged from 4.095% to 4.375%; expected dividend yields of
0%; expected terms to exercise of 10 years after vesting; and expected
volatility of 35%. The weighted average fair values of options granted are
$0.17.
The Company's stock options contain features which include variability in
grant prices. A portion of the currently issued stock options will be
issued based on average trading prices of the Company's Common Stock at
the end of a given future period. Due to this variable feature, these
stock options are not deemed to be granted for purposes of applying SFAS
123(R) and accordingly, their fair value will be calculated and expensed
in future periods.
At December 31, 2005, 790,000 options are vested and exercisable. The
weighted average exercise price of exercisable options at December 31,
2005 was $0.22 per share.
A summary of the status of the Company's stock options as of December 31,
2005, and changes during the year then ended is presented below:
F-21
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Weighted
Number Average
of Exercise
Shares Price
--------- ---------
Outstanding at beginning of year -- --
Granted and reserved for grants 4,850,000 $ 0.32
Cancelled -- --
Exercised -- --
--------- ---------
Outstanding at end of year 4,850,000 $ 0.32
========= =========
The Company recorded an expense of $121,297 in its consolidated statement of
operations, which reflects the value of granted stock options over the vesting
period in accordance with SFAS No. 123R, for the year ended December 31, 2005.
The following table summarizes information about stock options at December 31,
2005:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted-
Average Weighted-
Remaining average Weighted-
Number Contractual Exercise Number average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price
- ---------------------------- ----------- ------------ ---------- ----------- --------------
$0.220 790,000 10 $ 0.220 790,000 $ 0.220
$0.428 790,000 10 0.428 -- --
based on future market price 3,270,000 10 N/A -- --
----------- ------------ ---------- ----------- --------------
4,850,000 10 $ 0.32 790,000 $ 0.220
=========== ============ ========== =========== ==============
The Company recorded $43,861 as additional interest expense with respect to
1,138,639 warrants issued in connection with Bridge Financing (see Note 13) and
$201,402 as an increase to additional paid in capital and a reduction of
preferred stock with respect to 4,090,950 warrant issued in connection with the
Private Placement (see Note 13) for the year ended December 31, 2005.
The following table summarizes the Company's outstanding warrants as of December
31, 2005 and changes during the year then ended:
F-22
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Weighted
Number Average
of Exercise
Shares Price
--------- ---------
Outstanding at beginning of year -- --
Granted 5,229,589 $ 0.21
Cancelled -- --
Exercised -- --
--------- ---------
Outstanding at end of year 5,229,589 $ 0.21
========= =========
Note 13. EQUITY TRANSACTONS AND ASSET ACQUISITION
Background
The Company is authorized to have two classes of shares, designated as
Common Stock and Preferred Stock. The Series A Convertible Preferred Stock
("Preferred Stock") votes together with the Common Stock as a single class
on all actions to be taken by the stockholders of the Company. Each share
of the Company's common and preferred stock is entitled to one vote.
The total authorized shares of Common Stock and Preferred Stock is
120,055,746 and 8,003,716, respectively.
Bridge Financing
Prior to the Merger and in various stages, Gales issued an aggregate of
$172,500 in convertible bridge notes that accrued 12% interest to meet
interim financing needs. The convertible bridge notes had warrants
attached that are exercisable for an aggregate of 1,138,639 shares of the
Company's Common Stock (at the exercise price of $0.22 per share with
respect to 729,548 of the warrants and $.055 per share with respect to
409,091 of the warrants). Accordingly, the Company allocated a portion of
the proceeds to the warrants, which were valued at $43,861 and recorded as
additional paid in capital. The Company accreted additional interest
expense of $43,861 for the value of the warrants. Contemporaneous with the
Merger Agreement, Gales repaid $150,000 of the principal of the
convertible bridge notes plus accrued interest of $4,253 and recorded the
value of the warrants as additional interest expense. The remaining
principal plus accrued interest were converted to 226,334 shares of the
Company's Common Stock at a conversion rate of $0.11 per share.
Additionally, in accordance with EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, the Company recorded $24,897 of interest expense in
connection with the beneficial conversion of these notes at the time of
issuance.
F-23
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Private Placement
Immediately prior to, and shortly after the completion of the Merger,
Gales received gross proceeds of $9,000,000 from the closing of a private
placement ("Private Placement") to accredited investors of 900 shares of
convertible preferred stock at $10,000 per share which, pursuant to the
Merger, were exchanged for shares of the Company's Preferred Stock, $.001
par value per share. The shares of Preferred Stock issued in connection
with such private placement are convertible into 40,909,500 shares of the
Company's Common Stock.
The proceeds of the Private Placement, in general, were used for paying
the cash portion of the purchase price of the Acquisition, for paying
expenses relating to the Private Placements, Acquisition, Merger, and
related transactions, for the repayment of $150,000 in promissory note
obligations which Gales incurred in bridge financings, and for working
capital for the Company.
The Placement Agent received 4,090,950 warrants, exercisable during a five
year term, to purchase 4,090,950 shares of the Company's Common Stock.
Such warrants have a "cashless exercise" feature and are exercisable at
$0.22 per share. These warrants were valued at $201,402 using the
Black-Scholes model.
Acquisition
Pursuant to a stock purchase agreement between Gales and AIM dated
November 2005, Gales acquired 100% of the capital stock of AIM. The total
aggregate price Gales paid to acquire AIM was $5,231,618 as follows: (i)
$3,114,296 in cash, (ii) $1,627,262 in principal amount of promissory
notes, and (iii) 490,060 shares of Common Stock valued at a negotiated
rate of $1.00 per share (concluded prior to the merger with the public
company). The results of AIM's operations have been included in the
consolidated financial statements since that date. A portion of the
proceeds from Gales' Private Placement was used to pay such purchase price
(See "Private Placement"), including transaction costs of $1,053,862. This
stock acquisition was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, Business Combinations. Under
the purchase method of accounting, the total purchase price was allocated
to the assets acquired and liabilities assumed based upon the fair values
as of the completion of the acquisitions. As a result of the stock
purchase, the Company recorded $1,265,963 in goodwill which represents the
excess of the fair market value over book value of the assets acquired and
liabilities assumed from AIM. The liabilities assumed also included
$676,394 of a deferred tax liability representing book to tax differences
on assets acquired.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of stock acquisition.
F-24
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Current assets $15,640,164
Other assets 283,128
Property and equipment 3,695,532
-----------
Total assets acquired 19,618,824
-----------
Current liabilities 8,277,921
Long-term debt 5,644,992
Deferred tax liability 676,394
-----------
Total liabilities assumed 14,599,307
-----------
Net assets acquired 5,019,517
Consideration given 6,285,480
-----------
Goodwill $ 1,265,963
===========
Real estate acquisition
Contemporaneously with the close of the Merger and the Acquisition: (i)
AIM completed the acquisition from affiliates of AIM, for an aggregate
purchase price of $4,190,000, of three buildings and land which was being
leased prior to the Close Date by AIM (the "Real Estate Acquisition"). The
purchase price and related acquisition costs approximated the appraised
value of both the buildings and land (ii) AIM entered into a credit
facility with PNC Bank for a New Loan Facility (See Note 5).
Preferred Stock
The holders of the Preferred Stock have the option at any time to convert
their shares into shares of Common Stock as follows: (i) by multiplying
the number of shares of Preferred Stock so as to be converted by $10,000
(the stated value of each share of Preferred Stock) and (ii) dividing the
result by the conversion price of $.22 per share. Each outstanding share
of Preferred Stock shall automatically be converted into Common Shares, at
the Conversion Price at the time in effect for such share, immediately as
of the date that a Registration Statement is declared effective by the SEC
under the Securities Act.
The holders of the Preferred Stock shall be entitled to receive quarterly
dividends, payable in kind shares, at a rate of 8% per annum. If a
registration statement for the resale by the holders of the common stock
issuable upon conversion of the Preferred Stock is not (i) filed with the
SEC under the Securities Act of 1933 within 45 days after the earlier of
the final closing or the Private Placement, or (ii) declared effective
within 180 days of such earlier date, the dividend of the Preferred Stock
will be payable in cash at a rate of $80.00 per year on each share of
Preferred Stock. Such cash dividends will be paid until the Preferred
Stock is converted into shares of Common Shares or on the effective date
of a mandatory conversion. At December 31, 2005, the cumulative undeclared
dividend is $60,000.
F-25
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Liquidation Preference for Preferred Stock
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.
Note 14. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed statement of operations
gives effect to the Merger Agreement, Acquisition, and Real Estate
Acquisition as if they occurred on January 1, 2004. The Acquisition was
accounted for under the purchase method of accounting in accordance with
SFAS No. 141. Under the purchase method of accounting, the total purchase
price was allocated to the assets acquired and liabilities assumed based
upon the fair values at the completion of the acquisitions.
The unaudited pro forma condensed combined statement of operations has
been prepared for illustrative purposes and are not necessarily indicative
of the condensed consolidated results of operations in future periods or
the results that are actually would have been realized had the acquisition
actually occurred on January 1, 2005 or January 1, 2004. The pro forma
adjustments are based on the information available at the time of the
preparation of this document.
The unaudited pro forma condensed combined statement of operations should
be read in conjunction with the audited consolidated financial statements
of Gales Industries Inc. as of December 31, 2005.
F-26
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Year Ended
December 31,
-----------------------------
(Unaudited) (Unaudited)
2005 2004
----------- -----------
Net sales $30,735,103 $24,818,333
Cost of Sales 26,361,387 21,305,071
----------- -----------
Gross profit 4,373,716 3,513,262
Operating costs and expenses
Selling and marketing 357,854 321,727
General and Administrative 2,583,375 1,519,008
----------- -----------
Income from operations 1,432,487 1,672,527
Other expenses
Interest and financing costs 1,056,317 862,729
----------- -----------
Income before income taxes 376,170 809,798
Provision for income taxes 151,031 325,539
----------- -----------
Net Income $ 225,139 $ 484,259
=========== ===========
Earnings per share
Basic $ 0.02 $ 0.03
=========== ===========
Diluted $ 0.01 $ 0.01
=========== ===========
Weighted average shares outstanding
Basic 14,723,421 14,723,721
=========== ===========
Diluted 40,282,810 40,282,810
=========== ===========
Note 15. SUBSEQUENT EVENTS
On February 15, 2006, the Company changed its name to Gales Industries
Incorporated and changed its jurisdiction of incorporation from Florida to
Delaware.
In February 2006, the Company sold a life insurance policy (see Note 6) to
a former officer of the Company and received proceeds of $86,000.
In February 2006, the Company filed Form SB-2 with the Securities and
Exchange Commission (the "SEC") and is currently in the process of
responding to comments received from the SEC.
F-27
AIR INDUSTRIES MACHINING CORPORATION
FINANCIAL STATEMENTS
(PRIOR TO MERGER)
NOVEMBER 30, 2005
F-28
AIR INDUSTRIES MACHINING CORPORATION
Table of Contents
November 30, 2005
PAGES
Accountants' Report F-30
Balance Sheet F-31 - F-32
Statement of Income and Retained Earnings F-33
Statement of Cash Flows F-34
Notes to Financial Statements F-35 - F-42
F-29
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have audited the accompanying Consolidated Balance Sheets of Air
Industries Machining Corporation as of November 30, 2005 and December 31, 2004,
and the related Consolidated Statement of Income and Retained Earnings and Cash
Flows for the eleven months ended November 30, 2005. These consolidated
financial statements are the responsibility of the Air Industries Machining
Corporation management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of Air
Industries Machining Corporation as of November 30, 2005, and the results of its
operations and its cash flows for the eleven months then ended in conformity
with accounting principles generally accepted in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
February 28, 2006
F-30
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets
November 30, 2005 December 31, 2004
----------------- -----------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 71,197 $ 49,275
Accounts Receivable 3,202,991 2,643,536
Inventory 11,588,521 10,858,456
Prepaid Expenses 174,850 132,268
Other Current Assets 4,215 5,479
Deposits 192,972 37,160
--------------- ---------------
Total Current Assets $ 15,234,746 $ 13,726,174
Property, plant, and equipment, net 3,919,599 3,646,814
Security Deposits 34,522 18,522
Cash Surrender Value - Officer's Life 62,761 263,636
Unamortized Finance Costs 102,187 146,661
--------------- ---------------
TOTAL ASSETS $ 19,353,815 $ 17,801,807
=============== ===============
The accompanying audit report and notes are an integral
part of these statements.
F-31
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets (continued)
November 30, 2005 December 31, 2004
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable $ 4,429,016 $ 3,692,060
Advance Payment - Customer 293,226 1,354,266
Mortgage Payable - Current 96,000 96,000
Divdends Payable 390,599 --
Obligations Under Capital Lease - Current 511,055 384,943
Notes payable - banks 5,180,000 5,280,000
Accrued Expenses 1,074,025 503,678
--------------- ---------------
Total current liabilities 11,942,519 11,310,947
Long term liabilities
Advances From Shareholders 464,992 267,557
Mortgage Payable 1,145,813 1,227,786
Obligations Under Capital Lease - Long term 849,652 334,353
--------------- ---------------
Total long term liabilities 2,460,457 1,829,696
--------------- ---------------
Total liabilities $ 14,402,976 $ 13,140,643
=============== ===============
Commitments and contingencies
Minority Interest 446,805 407,601
Stockholders' Equity
Capital Stock - 200 Shares Authorized 32,223 32,223
No Par Value, 95 Shares Issued and
Outstanding as of November 30, 2005
Additional Paid-In Capital 182,628 182,628
Retained Earnings 4,385,183 4,134,712
Less: Treasury Stock at Cost (96,000) (96,000)
--------------- ---------------
Total Stockholders' Equity $ 4,950,839 $ 4,661,164
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,353,815 $ 17,801,807
=============== ===============
The accompanying audit report and notes are an integral
part of these statements.
F-32
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Income and Retained Earnings
Eleven Months Ended
November 30, 2005
-----------------
Net sales $ 27,957,694
Cost of Sales 23,887,120
---------------
Gross profit 4,070,574
Operating expenses
Selling 322,867
General and Administrative 1,665,793
Interest expense 581,260
---------------
Total operating expenses 2,569,920
---------------
Income before Minority interest 1,500,654
Less: Minority interest 74,904
---------------
Net income $ 1,425,750
---------------
Retained Earnings, Beginning of Year 4,134,710
Deduct: Distribution to Shareholders (1,175,277)
---------------
Retained Earnings, End of the Period $ 4,385,183
===============
The accompanying audit report and notes are an integral
part of these statements.
F-33
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Cash Flows
Eleven Months Ended
November 30, 2005
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,425,750
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 522,299
Minority Interest in Net Income 74,904
Changes in Assets and Liabilities:
(Increase) Decrease In Assets -
Accounts Receivable (559,455)
Inventory (730,065)
Prepaid Expenses (42,582)
Other Current Assets 1,264
Deposits (171,812)
Cash Surrender Value - Officer's Life 200,875
Increase (Decrease) In Liabilities -
Accounts Payable 736,956
Dividends Payable 390,599
Advance Payment-Customer (1,061,040)
Accrued Expenses 570,347
Advances from Shareholders 197,435
---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,555,475
---------------
CASH FLOWS (USED) IN INVESTING ACTIVITIES
Purchase of Equipment (301,051)
---------------
NET CASH (USED) IN INVESTING ACTIVITIES (301,051)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit line facility 304,388
Principal Payments of capital lease obligations (264,396)
Repayment of Notes Payable (100,000)
Distribution to Shareholders (1,090,521)
---------------
NET CASH (USED) IN FINANCING ACTIVITIES (1,232,502)
---------------
Net increase in cash and cash equivalents 21,922
---------------
Cash and cash equivalents, beginning of period 49,275
---------------
Cash and cash equiavlents, end of the period $ 71,197
===============
Supplementary disclosure of cash flow information
Cash paid during the year for interest $ 566,467
Supplementary noncash disclosure of financing activities
Equipment acquisition through capital lease funding $ 449,559
The accompanying audit report and notes are an
integral part of these statements
F-34
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"), founded in
1969, was incorporated in the State of New York and maintains its
principal place of business in Bay Shore, New York. The Corporation is
primarily engaged in manufacturing aircraft structural parts and
assemblies principally for prime defense contractors in the aerospace
industry machining parts for the aerospace industry predominantly located
in the United States. The Company's customer base consists mainly of
publicly traded companies in the aerospace industry.
Principles of Consolidation
The Company's consolidated financial statements include those of variable
interest entities. (See Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an original maturity of three months or less. Cash consists of aggregate
cash balances in the Company's bank accounts and cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances. The Company writes off accounts when they are deemed to be
uncollectible. The Company has experienced insignificant amounts of bad
debts in such accounts.
Inventories
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Repair and maintenance charges are expensed as incurred.
Property under a capital lease is capitalized and amortized over the lease
terms. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is reflected in
earnings. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
F-35
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. If impairment is
recognized, the carrying value of the impaired asset is reduced to its
fair value, based on discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. Payments received in
advance from customers for products delivered are recorded as customer
advance payments until earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
F-36
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are taxed
on their proportionate share of the company's net income. Accordingly, no
provision for federal income taxes has been made in the accompanying
financial statements.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, unamortized finance costs, accrued
expenses and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of November
30, 2005, approximately 54% is attributed to two customers.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." Management of the
Company believes that the fair value of financial instruments, consisting
of cash, accounts receivable, accounts payable and accrued liabilities,
approximates carrying value due to the immediate or short-term maturity
associated with these instruments and that the notes payable is carried at
fair value in that it carries interest rates that are comparable to
similar instruments with similar maturities.
Reclassifications
Certain reclassifications have been made to prior year's financial
statement information to conform to the current year presentation.
F-37
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
2- INVENTORY
The components of inventory consisted of the following as of November 30,
2005:
November 30, 2005
-----------------
Raw Materials $ 2,294,020
Work in Progress 2,639,006
Finished Goods 6,655,495
-------------
Total Inventory $ 11,588,521
=============
3- PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment as of November 30, 2005 include:
November 30, 2005
-----------------
Land $ 134,922
Building 3,173,071
Machinery and Equipment 8,541,083
Tools and Instrument 279,803
Leasehold Improvements 515,211
Automotive Equipment 290,083
Furniture and fixtures 872,112
------------
Total property, plant, and equipment 13,806,285
------------
------------
Less: Accumulated Depreciation (9,886,686)
------------
------------
Property, plant, and equipment, net $ 3,919,599
============
Depreciation and amortization expense for the eleven months ended November
30, 2005 was $477,827.
F-38
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a
major lending institution with a termination date of March of 2006. The
facility is secured by a first priority interest in all accounts
receivable, inventory and equipment presently owned or hereafter acquired
by the Company. The indebtedness bears interest at the rate of 1/2 percent
above the prime rate of interest or a libor margin of 3%.
The terms of the facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of
November 30, 2005, the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the
Company, as well as the affiliated companies KPK Realty Corporation and
DPPR Realty Corp. (See Note 9)
Interest expense related to the notes payable - bank amounted to $337,447
for the eleven months ended November 30, 2005.
5- ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to
cover the Company's working capital needs.
6- MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable
interest entities (see Note 11) it has two mortgages covering buildings
and land. These mortgages carry interest rates of 6.15% and 7.18% per
annum.
F-39
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Future mortgage payments are as follows for the period ended November 30,
2005:
Year Amount
---- ----------
2006 $ 126,000
2007 128,000
2008 139,000
2009 133,000
2010 142,000
Thereafter 573,813
----------
1,241,813
Less: current maturities: 96,000
----------
Long term $1,145,813
==========
7- CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options
that the Company expects to exercise at the termination of each lease.
Capital lease obligations totaled $1,208,849 as of November 30, 2005.
As of November 30, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ----------
2006 $ 404,000
2007 428,000
2008 427,000
2009 106,000
----------
Total future minimum lease payments 1,365,000
Less: imputed interest (156,151)
Less: current maturities (359,197)
----------
Total long-term capital lease obligation $ 849,652
==========
F-40
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
8- EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant
to the Plan qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan. The Company does not match any
contributions that employees may make to the Plan.
9- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. a corporation in which 49% is owned by the majority
stockholder of the Company.
Additionally, the Company leases manufacturing space from DPPR Realty
Corp. which is 100% owned by two of the shareholders of the Corporation
who in the aggregate own 36.84% of the Company.
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 11) and accordingly, their assets,
liabilities and results of operations have been consolidated into the
Company's financial statement.
10- COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
F-41
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
11- VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. Under FIN 46, we are required to consolidate variable interest
entities for which we are deemed to be the primary beneficiary by the
third quarter of 2003, and disclose information about those in which we
have significant variable interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable
Interest Entities and the Company is the primary beneficiary. Therefore,
the Company has consolidated the respective lessors' assets and debt into
these consolidated statements. At November 30, 2005, these entities had
gross assets of $1,900,000 and gross liabilities of $985,000. These
facilities were subsequently purchased in connection with a merger
transaction in November 2005. The minority interest on the Company's
financial statements consists of the non-controlling portion of these
respective entities (See Note 9).
12- SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the
Company and an Acquisition Entity and between the Acquisition Entity and a
Public Entity whose stock is traded in Over the Counter Market.
Contemporaneously with the merger agreements, the Company secured
$14,000,000 in debt facilities from a major lending institution and used
funds from the facility to purchase real property that it had subsequently
leased and paid off debts to its prior lender. As part of the merger
agreements, the Acquisition Entity completed the first of two closings of
private placement stock offerings which grossed $9,000,000 in the
aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-42
AIR INDUSTRIES MACHINING CORPORATION
FINANCIAL STATEMENTS
(PRIOR TO MERGER)
DECEMBER 31, 2004 AND DECEMBER 31, 2003
F-43
AIR INDUSTRIES MACHINING CORPORATION
Table of Contents
December 31, 2004 and 2003
PAGES
Accountants' Report F-45
Balance Sheet F-46 - F-47
Statement of Income and Retained Earnings F-48
Statement of Cash Flows F-49
Notes to Financial Statements F-50 - F-56
F-44
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-45
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-46
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets (continued)
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-47
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 1,236,067 803,204
-------------- --------------
Less: Minority interest 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-48
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 325,499 (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 equivalents, 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-49
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Repair and maintenance charges are expensed as incurred.
Property under a capital lease is capitalized and amortized over the lease
terms. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is reflected in
earnings. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
F-50
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. If impairment is
recognized, the carrying value of the impaired asset is reduced to its
fair value, based on discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. Payments received in
advance from customers for products delivered are recorded as customer
advance payments until earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
F-51
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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 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.
F-52
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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
============== ==============
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.
F-53
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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.
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
=============
F-54
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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:
Year 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.
F-55
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 11) and accordingly, their assets,
liabilities and results of operations have been consolidated into the
Company's financial statement.
10- COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
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-56
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 8A. Controls and Procedures.
Our management is responsible for establishing and maintaining adequate
internal controls over financial reporting. Such controls are intended to
provide reasonable assurance regarding the reliability of our financial reports
for external reporting purposes and for purposes of monitoring operations.
On November 30, 2005, we acquired Original Gales, then a privately held
company, which immediately prior to such acquisition had acquired Air Industries
Machining Corporation, also a privately held company, At such time significant
changes were made in our management personnel. Further, as we had no operations
prior to such acquisitions, upon the acquisition of AIM, its system of financial
controls and procedures were adopted as those of our Company. Immediately
following the acquisitions of Original Gales and AIM, our management, including
our Executive Chairman and our Chief Financial Officer, commenced an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31,
2005. Based upon that evaluation, our Executive Chairman and our Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective as of such date for timely gathering, analyzing and disclosing the
information we are required to disclose in our reports filed under the Exchange
Act.
Because AIM was subject to stringent performance criteria imposed by its
customers and as a consequence of its government contracts, in our management's
estimation, its disclosure controls and procedures were superior to those of
most privately held companies of comparable size. Nevertheless, its controls and
procedures were not designed to facilitate the external financial reporting
required of a publicly held company. Although no material weaknesses were found
in our disclosure controls and procedures as of December 31, 2005, to ensure the
reliability of future financial reports, our management has determined to
complete the implementation of a total financial and operating control system
that AIM installed during 2005. In addition, management has determined to hire
support personnel experienced with the reporting requirements imposed upon
public companies to facilitate the timely preparation of accurate financial
reports. Except for these planned changes and those resulting from the
acquisition of AIM and the substitution of its accounting procedures for those
of ours in effect prior to November 30, 2005, there have been no significant
changes made in our internal controls or in other factors that could
significantly affect our internal controls subsequent to December 31, 2005 or
during the fourth quarter of 2005.
26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
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
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 his 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 Original
Gales, the Acquisition, and the development of Original Gales' 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
27
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 Management Committees of
the Board and reports to the Executive Chairman of the Board. Since 2003 in
addition to his activities on behalf of Original Gales, 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",
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 continued to serve as President of AIM and assumed the positions
of CEO and President of the Company, reporting to the Executive Chairman. He is
a member of the Executive and Management Committees of the Board.
Mr. Peragallo, who since November 30, 2005 has been our Executive Vice
President and 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 Dario Peragallo, and Jorge
Peragallo is the uncle of Dario Peragallo. Mr. Peragallo reports to the
Company's and AIM's CEO and President, Mr. Rettaliata.
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 Original Gales and will be serving as counsel to the Company.
28
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 Siegel Rich,
which became a division of Rothstein, Kass in April 2000. Mr. Siegel has been a
director, trustee and officer of numerous businesses, philanthropic and civic
organizations. He serves as a director and audit committee chairman of Hauppauge
Digital Inc., 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
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.
29
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and beneficial owners of more than 10% of our
Common Stock to file with the SEC reports of their holdings of, and transactions
in, our Common Stock. Based solely upon our review of copies of such reports and
written representations from reporting persons that were provided to us, we
believe that our officers, directors and 10% stockholders complied with these
reporting requirements with respect to 2005.
The Audit Committee
Our Audit Committee consists of Messrs. Siegel and Brown. Mr. Siegel is
our audit committee financial expert and is "independent" as defined in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
Code of Ethics
We have adopted a written code of ethics that applies to our principal
executive officer, senior financial officers and persons performing similar
functions. Upon written request to our corporate secretary by U.S. mail, we will
provide, at no charge, a copy of such code of ethics to any person requesting a
copy.
Item 10. 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 Louis A. Giusto, our Vice Chairman, Chief Financial Officer and Treasurer
since November 30, 2005;
o Peter D. Rettaliata, our Chief Executive Officer and President since
November 30, 2005 and 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.
30
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 $100,000 in salary and bonus for the 2005 fiscal year.
Unless otherwise indicated, we did not grant stock options or restricted stock
to them during the periods indicated.
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------------
Awards Payouts
--------------------------------------------------------
Restricted Securities LTIP All Other
Name and Stock Underlying Payouts Compensation
Principal Bonus Other Annual Award(s) Options/SARs
Position Year Salary ($) ($) Compensation ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------
Michael A. 2005 $ 21,233(1) -- -- -- 1,250,000 (3) -- --
Gales, --------------------------------------------------------------------------------------------------------
Executive 2004 -- -- -- -- -- -- --
Chairman of --------------------------------------------------------------------------------------------------------
the Company 2003 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Louis A. 2005 $ 19,534(2) -- -- -- 1,200,000 (3) -- --
Giusto, --------------------------------------------------------------------------------------------------------
Vice 2004 -- -- -- -- -- -- --
Chairman, --------------------------------------------------------------------------------------------------------
Chief 2003 -- -- -- -- -- -- --
Financial
Officer and
Treasurer
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Peter D. 2005 $241,510 -- -- -- 1,200,000 (3) -- --
Rettaliata, --------------------------------------------------------------------------------------------------------
Chief 2004 217,724 -- -- -- -- -- --
Executive --------------------------------------------------------------------------------------------------------
Officer of 2003 219,182 -- -- -- -- -- --
the Company
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Dario A. 2005 $242,344 -- -- -- 1,200,000 (3) -- --
Peragallo, --------------------------------------------------------------------------------------------------------
Executive 2004 197,211 -- -- -- -- -- --
Vice --------------------------------------------------------------------------------------------------------
President of 2003 151,666 -- -- -- -- -- --
the Company
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Luis 2005 $297,063 -- -- -- -- -- --
Peragallo, --------------------------------------------------------------------------------------------------------
Former 2004 322,536 -- -- -- -- -- --
officer --------------------------------------------------------------------------------------------------------
of AIM 2003 255,375 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
31
- ------------------------------------------------------------------------------------------------------------------------
Jorge 2005 $226,563 -- -- -- -- -- --
Peragallo, --------------------------------------------------------------------------------------------------------
Former 2004 219,449 -- -- -- -- -- --
officer --------------------------------------------------------------------------------------------------------
of AIM 2003 230,301 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
James A. 2005 $95,646 -- -- $51,000(5) -- -- --
Brown, --------------------------------------------------------------------------------------------------------
Former Chief 2004 27,817(4) -- -- -- -- -- --
Executive --------------------------------------------------------------------------------------------------------
Officer 2003 -- -- -- 10,000(5) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
- ----------
(1) This amount represents pay for only part of December 2005. Mr. Gales did
not receive a salary from us prior to November 30, 2005. Mr. Gales'
employment agreement provides that, for 2006, he is to receive a salary of
at least $250,000 and a bonus of at least $125,000.
(2) This amount represents pay for only December 2005. Mr. Giusto did not
receive a salary from us prior to November 30, 2005. Mr. Giusto's
employment agreement provides that, for 2006, he is to receive a salary of
at least $230,000 and a bonus of at least $115,000.
(3) 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)".
(4) Prior to becoming Chief Executive Officer, Mr. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services.
(5) 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, with a fair value of $7,000,
were issued to him as of November 2005 in connection with 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.
32
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.
(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.
33
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
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.
34
The employment agreement of Peter D, 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 A. 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.
The Company has agreed with GunnAllen Financial, Inc. (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.
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.
Director Compensation
As a result of the Merger, our new compensation policy for each of our
non-employee directors calls for: $10,000 per year, $1,250 per Board meeting and
stock options to purchase a number of shares of Common Stock to be determined.
We reimburse each director for expenses related to attending Board meetings. We
pay an additional $3,000 per year to each independent director serving as the
chairman of a committee of the Board.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
35
The following table sets forth information known to us regarding
beneficial ownership of our Common Stock as of April 6, 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, above, 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.
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%
(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", above.
(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", above.
(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",
above. 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.
36
(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", above.
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, an affiliate of Atlas
Capital Services, LLC, Atlas Private Equity, 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. The address of
ACS Holdings, LLC is 135 East 57th Street, New York, New York, 10022.
Item 12. Certain Relationships and Related 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 from us 80,003 shares
of Common Stock, valued at $10,000. He also received 100,000 shares, with a fair
value of $7,000, as of November 2005 in connection with the Merger.
Transactions Relating to Original Gales Prior to the Merger:
In August 2005, Mr. Stephen Nagler, one of our directors and our
Secretary, loaned $10,000 to Original Gales. Co-investors of Mr. Nagler loaned
an additional $35,000 to Original Gales in the same financing (the "$45,000
Financing"). In connection with the $45,000 Financing, Original Gales 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, Original Gales 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.
Stephen Nagler is a partner of the law firm of Eaton & Van Winkle LLP,
which was counsel to Original Gales 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 Original
Gales' 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.
37
In October 2004, Original Gales 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 Original Gales common stock. The subscription price for the shares
described in this paragraph was $.00001 per share.
Transactions Relating to Air Industries Machining Corporation Prior to the
Merger:
Prior to its Acquisition by Original Gales, AIM leased manufacturing and
office space from KPK Realty Corp. which, since October, 1974, has been owned
49% by Luis Peragallo, an officer, a director and the largest shareholder of AIM
prior to its Acquisition by Original Gales. The annual rent 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 Original Gales, AIM leased manufacturing space
at an annual rental of approximately $82,800, plus annual real estate taxes on
such property, from DPPR Realty Corp. which, since January, 2003 has been 100%
owned by Peter Rettaliata and Dario Peragallo. Prior to the Acquisition, Messrs.
Rettaliata and D. Peragallo owned an aggregate of 36.84% of AIM's outstanding
capital stock. Messrs. Rettaliata and D. Peragallo were officers of AIM and are
officers and directors of our Company. From February 2003 to November 30, 2005,
AIM was also a guarantor of the mortgage (with a balance of approximately
$567,000 as of September 30, 2005) on such leased property. This guaranty was
terminated in connection with the Real Estate Acquisition.
In 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.
Peter Rettaliata, who was an officer of AIM, advanced $5,000 to AIM during
2003 and $42,678 to AIM during 2004. Dario Peragallo, who was an officer of AIM,
advanced $5,000 to AIM during 2003 and $39,334 to AIM during 2004. Luis
Peragallo, who was an officer of AIM, advanced $5,000 to AIM during 2003 and
$18,179 to AIM during 2004. Jorge Peragallo, who was an officer of AIM, advanced
$5,000 to AIM during 2003 and $38,344 to AIM during 2004. As of September 30,
2005, AIM had received an aggregate of $363,323 in loans from its officers and
was obligated to repay such amount to its officers. Such amount was repaid in
connection with our Acquisition of AIM. In October, 2005, AIM agreed to pay an
aggregate of $225,000 to its officers to enable them to pay income taxes accrued
while operating AIM as a Subchapter S corporation. Such amount was paid in
connection with our Acquisition of AIM.
38
Transactions Relating to the Merger, Acquisition and Other Closing Transactions:
On November 30, 2005, Original Gales 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. Original Gales 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 the purchase price,
Original Gales paid an aggregate of $1,053,862 in connection with the
Acquisition, a portion of which represented legal and accounting expenses
($300,000) incurred by AIM and its shareholders and $270,403 to enable AIM's
shareholders to pay income taxes accrued prior to closing. The purchase price
paid to AIM's shareholders was the result of arms' length negotiation between
Original Gales and the AIM shareholders.
Our employment agreements with Messrs. Gales, Giusto, Rettaliata and D.
Peragallo became effective on November 30, 2005 and we issued stock options to
them as of 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.
Item 13. 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 Original Gales,
two of its stockholders, Gales Industries Merger Sub, Inc., and Ashlin
Development Corporation (incorporated herein by reference to Exhibit
10.1 of Registrant's Form 8-K report filed November 21, 2005).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Form 8-K report, filed
February 15, 2006).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Form 8-K report, filed February 15, 2006).
4.1 Convertible Promissory Note, dated November 30, 2005, in the amount of
$332,631, from Original Gales (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 Original Gales (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).
39
Exhibit Nos.
- ------------
4.3 Form of Warrant issued by the Registrant to GunnAllen Financial, Inc.
(incorporated by reference to Exhibit 4.3 of the Registrant's Form 8-K
report, filed December 6, 2005).
4.4* Form of Warrant issued by Original Gales to Atlas Private Equity, LLC
(and assumed by the Registrant).
4.5 Form of Warrant issued by Original Gales (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 Original Gales (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).
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
Original Gales, 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 Original Gales (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
Original Gales (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 Original Gales 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 Original Gales 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
Original Gales (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 Original Gales (and assumed by the Registrant)
(incorporated by reference to Exhibit 10.8 of the Registrant's Form
8-K report, filed December 6, 2005).
40
Exhibit Nos.
- ------------
10.9 Employment Agreement, dated as of September 26, 2005, by and among
Original Gales (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
Original Gales (and assumed by the Registrant), Air Industries
Machining, Corp. and Dario Peragallo (incorporated by reference to
Exhibit 10.10 of the Registrant's Form 8-K report, filed December 6,
2005).
10.11 Form of Placement Agency Agreement, dated as of September 26, 2005,
between GunnAllen Financial Inc. and Original Gales, including
Amendments No.1 and No.2 thereto, dated October 25, 2005 and November
10, 2005, respectively (incorporated by reference to Exhibit 10.11 of
the Registrant's Registration Statement on Form SB-2 (Reg. No.
333-131709) filed February 9, 2006).
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 Original
Gales (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 Original
Gales (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 Original
Gales (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 Original
Gales (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).
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 of
Registrant's Report on Form 10-KSB, filed on April 14, 2004;
Registrant was then known as Health & Nutrition Systems
International).
21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 of the
Registrant's Form 8-K report, filed December 6, 2005).
41
Exhibit Nos.
- ------------
31.1* Certification of Chief Executive Officer required by Rule 13a-14(a)
under the Exchange Act.
31.2* Certification of Chief Financial Officer required by Rule 13a-14(a)
under the Exchange Act.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
Numbers with (*) indicate Exhibits that are filed herewith.
Item 14. Principal Accountant Fees and Services.
Fees Paid to Principal Accountant
Daszkal Bolton LLP was our principal accounting firm in 2004 and from
January 1, 2005 to December 15, 2005. Goldstein Golub Kessler LLP ("GGK") has
been our principal accounting firm since December 15, 2005 and also worked for
Original Gales prior to November 30, 2005. During fiscal year 2005 and fiscal
year 2004, the aggregate fees which we paid to Daszkal Bolton LLP for
professional services were as follows:
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
December 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Audit Fees (1) $38,539 $61,430
- --------------------------------------------------------------------------------
Audit-Related Fees $-0- $-0-
- --------------------------------------------------------------------------------
Tax Fees (2) $5,568 $5,000
- --------------------------------------------------------------------------------
All Other Fees (3) $720.00 $-0-
- --------------------------------------------------------------------------------
(1) Fees for audit services include fees associated with the annual audit and
the review of the Company's quarterly reports on Form 10-QSB.
(2) Tax services consisted primarily of filing tax returns.
(3) The $720 paid to our principal accounting firm in 2005 was for its review
of our bankruptcy filing and related sale of assets to determine potential
tax consequences.
During fiscal year 2004, we did not pay any fees to GGK. The table below
shows GGK's fees for professional services rendered to us and/or Original Gales
(1) accrued by GGK in 2005 and (2) actually paid by us in 2005. All of the fees
were audit fees.
42
------------------------------------------------
In Fiscal Year Ended December 31, 2005
------------------------------------------------
Total Accrued Paid by Company
by GGK to GGK
------------------------------------------------
Audit Fees $209,745 $10,273
Audit-Related Fees 0 0
Tax Fees 0 0
All Other Fees 0 0
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm.
As required by the Audit Committee charter, the Audit Committee
pre-approved the engagement of Daszkal Bolton LLP and GGK for all audit and
permissible non-audit services. The Audit Committee annually reviews the audit
and permissible non-audit services performed by our principal accounting firm
and reviews and approves the fees charged by our principal accounting firm. The
Audit Committee has considered the role of Daszkal Bolton LLP and GGK in
providing tax and audit services and other permissible non-audit services to the
Company and has concluded that the provision of such services, if any, was
compatible with the maintenance of such firm's independence in the conduct of
its auditing functions.
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GALES INDUSTRIES INCORPORATED
Date: April 13, 2006 By /s/ Michael A. Gales
--------------------------
Michael A. Gales
Executive Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Date
/s/ Michael A. Gales April 13, 2006
- --------------------------
Michael A. Gales
Executive Chairman
/s/ Louis A. Giusto April 13, 2006
- --------------------------
Louis A. Giusto
Vice Chairman, Chief Financial Officer and Treasurer
/s/ Peter D. Rettaliata April 13, 2006
- --------------------------
Peter D. Rettaliata
Director, President and Chief Executive Officer
/s/ Dario Peragallo April 13, 2006
- --------------------------
Dario Peragallo
Director, Executive Vice President
/s/ Seymour G. Siegel April 13, 2006
- --------------------------
Seymour G. Siegel
Director
/s/ Rounsevelle W. Schaum April 13, 2006
- --------------------------
Rounsevelle W. Schaum
Director
/s/ Ira A. Hunt Jr. April 13, 2006
- --------------------------
Ira A. Hunt Jr.
Director
/s/ Stephen M. Nagler April 13, 2006
- --------------------------
Stephen M. Nagler
Director, Secretary
/s/ James A. Brown April 13, 2006
- --------------------------
James A. Brown
Director
44
Exhibit 4.4
THE WARRANT AND THE SECURITIES ISSUABLE HEREUNDER HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAW. THE WARRANT AND THE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER SAID ACT AND ANY APPLICABLE SECURITIES LAWS OR AN EXEMPTION
THEREFROM UNDER SAID ACT OR LAWS. THE COMPANY MAY REQUEST, AS A CONDITION TO ANY
TRANSFER, AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SAID ACT.
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THE REGISTRATION RIGHTS PROVISIONS ATTACHED HERETO AS EXHIBIT A.
Warrant No. BW-1 409,091 Shares
FORM OF
WARRANT
To Purchase Common Stock of
GALES INDUSTRIES INCORPORATED
GALES INDUSTRIES INCORPORATED, a Delaware corporation ("Gales"), intends
to seek equity or debt financing of at least $5,500,000 and, contemporaneously
with the closing of such financing, Gales contemplates entering into a "reverse
merger" transaction (the "Reverse Merger") with a publicly-held company (the
"Public Company"). Gales and/or the Public Company are referred to herein as the
"Company". After completion of the Reverse Merger, references herein to "Gales"
or the "Company" shall be deemed to refer collectively to Gales and the Public
Company. "Financing" means equity or debt financing resulting in gross proceeds
to the Company of at least $5,500,000.
This certifies that, commencing on the earlier of (i) January 1, 2006 or
(ii) the date as of which the Reverse Merger is completed, and from time to time
after such earlier date until the Expiration Date, Atlas Private Equity, LLC or
its registered assigns (the "Holder") is entitled to purchase from Gales, or the
Public Company with which Gales enters into a Reverse Merger, the number of
shares of Common Stock (as defined below) set forth above, in whole or in part,
including fractional parts, at a purchase price (the "Purchase Price") equal to
the lower of (1) $0.055 per share of Common Stock or (2), if the Company has
completed the Financing, the effective price per share of the Public Company's
Common Stock (or Common Stock equivalents) sold in the Financing. The effective
price per share referred to in the preceding sentence means the gross proceeds
1
of the Financing divided by the number of shares of Common Stock (or Common
Stock equivalents, but not warrants or securities issued to the placement agent
or other non-investors) issued to the investors in the Financing.
Notwithstanding anything else herein to the contrary, if, as of the date this
Warrant is exercised, the Reverse Merger has already been completed, only shares
of the Public Company's Common Stock will be issuable upon exercise of this
Warrant, and if, as of the date this Warrant is exercised, the Reverse Merger
has not been completed, only shares of the Company's Common Stock will be
issuable upon exercise of this Warrant, and, in such later case, the shares of
the Company's Common Stock issued upon exercise of this Warrant shall not have
any voting rights until the Financing is completed or terminated and the Company
shall have the right to dilute the Holder's percentage ownership of the
outstanding capital stock by issuing to other parties the shares of Common Stock
contemplated by the Company's proposed pro forma fully-diluted capitalization
table, a copy of which has been provided to the Holder, which takes into account
as of the date of the closing of the Reverse Merger, among other issuances, the
founder's shares, shares to officers, directors and employees, stock option
shares, shares to the Public Company's pre-existing shareholders, and shares to
the former shareholders of Air Industries Machining, Corp., a New York
corporation, which the Company contemplates acquiring simultaneously with the
closing of the Financing and the Reverse Merger. The number of Warrant Shares
(as defined below) and the Purchase Price therefor are subject to adjustment as
hereinafter set forth in Section 6. This is one of a series of warrants in
substantially the same form that were originally issued on the Issue Date.
The number of shares into which this Warrant is convertible, set forth
above, is derived by dividing the principal amount of the 12% Bridge Note
("Note"), purchased by the Holder from the Company, by $0.055.
SECTION 1. Certain Definitions. For all purposes of this Warrant, the
following terms shall have the meanings indicated:
"Additional Shares of Common Stock" means all shares of Common Stock
issued after the date hereof, other than Warrant Shares, whether now authorized
or not, other than Excluded Shares.
"Commission" means the Securities and Exchange Commission, or any
other Federal agency then administering the Securities Act.
"Common Stock" means and includes the Company's authorized common
stock, par value $0.001 per share, and includes any Common Stock of any class or
classes resulting from any successive changes or reclassifications thereof;
provided, however, that, in the event that the Company has completed the Reverse
Merger, "Common Stock" means the common stock of the Public Company.
"Company" means Gales Industries Incorporated; provided, however,
that after completion of the Reverse Merger, references herein to the "Company"
will also be deemed to include the Public Company.
"Convertible Securities" means evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
2
"Current Market Price" means the 10-day average closing bid prices
of a share of Common Stock as reported on NASDAQ for the period of 10
consecutive Trading Days ending on the date of determination; provided, however,
if the Common Stock is not listed or admitted to trading on NASDAQ, as reported
on the principal national security exchange or quotation system on which the
Common Stock is quoted or listed or admitted to trading; or, if not quoted or
listed or admitted to trading on any national securities exchange or quotation
system, the closing bid price of such security on the over-the-counter market on
the day in question as reported by Bloomberg LP, or a similar generally accepted
reporting service, as the case may be, or if not listed or admitted for trading
on any national securities exchange or quoted in the over-the-counter market,
the Current Market Price shall be the Fair Value on such date.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Excluded Shares" means:
(a) (i) shares of Common Stock issuable upon the exercise of options
and warrants (including this Warrant) and that are outstanding on the Issue Date
and (ii) such number of additional shares of Common Stock as may become issuable
upon the exercise of such options, warrants and convertible preferred stock by
reason of adjustments required pursuant to the anti-dilution provisions
applicable to such securities as in effect on the Issue Date;
(b) (i) shares of Common Stock issuable upon the exercise of options
and warrants granted or issued by the Company to its employees, officers,
directors, consultants and advisors, up to a maximum number of such shares
issuable at any point in time while this Warrant is exercisable that does not
exceed 20% of the then issued and outstanding shares of Common Stock; provided,
in each such case, that the exercise price for any such share shall not be less
than 85% of the Fair Value of the Common Stock on the date of grant or issuance
of the option or warrant (the "Minimum Price"), and (ii) such additional number
of shares of Common Stock as may become issuable pursuant to the terms of any
such options or warrants by reason of adjustments required pursuant to
anti-dilution provisions applicable to such securities in order to reflect any
subdivision or combination of Common Stock, by reclassification or otherwise, or
any dividend on Common Stock payable in Common Stock and anti-dilution
adjustments that do not adjust the exercise price below the Minimum Price;
(c) shares of Common Stock issuable upon exercise of warrants issued
to equipment lessors, banks or other institutional credit financing sources of
the Company in connection with the provision of financing or the rendering of
other services to the Company up to a maximum number of shares of Common Stock
issuable at any point in time while this Warrant is exercisable that does not
exceed 20% of the then issued and outstanding shares of Common Stock; provided,
in each such case, that the exercise or purchase price for any such share shall
not be less than the Minimum Price, and (ii) such additional number of shares of
Common Stock as may become issuable pursuant to the terms of any such warrants
by reason of adjustments required pursuant to anti-dilution provisions
applicable to such securities in order to reflect any subdivision or combination
of Common Stock, by reclassification or otherwise, or any dividend on Common
Stock payable in Common Stock and anti-dilution adjustments that do not adjust
the exercise price below the Minimum Price.
3
"Expiration Date" means 5:00 p.m. New York City time on the fifth
anniversary of the Issue Date.
"Fair Value" means, on any date specified herein (i) in the case of
cash, the dollar amount thereof, (ii) in the case of a security admitted for
trading on any national securities exchange or quoted in the over-the-counter
market, the Current Market Price, and (iii) in all other cases as determined in
good faith jointly by the Company and the Holder; provided, however, that if
such parties are unable to reach agreement within 30 days, the Fair Value shall
be determined in good faith by an independent investment banking firm selected
jointly by the Company and the Holder or, if that selection cannot be made
within ten days, by an independent investment banking firm selected by the
American Arbitration Association in accordance with its rules.
"Issue Date" means February 15, 2005.
"Options" means any rights, options or warrants to subscribe for,
purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
"Other Securities" means any stock (other than Common Stock) and
other securities of the Company or any other Person (corporate or otherwise)
which the holder of this Warrant at any time shall be entitled to receive, or
shall have received, upon the exercise of this Warrant, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 7 or otherwise.
"Outstanding" or "outstanding" means, when used with reference to
Common Stock, at any date as of which the number of shares thereof is to be
determined, all issued shares of Common Stock, except shares then owned or held
by or for the account of the Company or any subsidiary of the Company, and shall
include all shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in shares of Common Stock.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Purchase Price" means the purchase price set forth in the initial
paragraph hereof, as adjusted from time to time pursuant to the provisions of
Section 6 hereof.
"Securities Act" or the "1933 Act" means the Securities Act of 1933,
as amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
4
"Trading Day" means a day on which the Nasdaq Stock Market is open
for the transaction of business.
"Warrant" means this warrant and any warrant issued in exchange,
division, substitution, transfer or replacement hereof.
"Warrant Shares" means the shares of Common Stock purchased or
purchasable by the Holder of this Warrant upon the exercise hereof pursuant to
Section 2 hereof.
SECTION 2. Exercise of Warrant.
(a) This Warrant may be exercised at any time, in whole or in part,
for all or any part of the number of shares of Common Stock purchasable
hereunder, prior to the Expiration Date. To exercise this Warrant, in whole or
in part, the Holder shall complete the notice of exercise attached hereto (the
"Notice of Exercise"), and deliver this Warrant and, except as otherwise
provided in this Section 2, cash in an amount equal to the aggregate Purchase
Price of the shares of Common Stock being purchased, together with the Notice of
Exercise, to the Company at its office referred to in Section 9. Upon receipt
thereof, the Company shall, as promptly as practicable and in any event within
ten (10) business days thereafter, execute or cause to be executed and deliver
or cause to be delivered to the Holder a certificate or certificates
representing the aggregate number of full shares of Common Stock specified in
the Notice of Exercise, together with cash in lieu of any fraction of a share,
as hereinafter provided. The stock certificate or certificates so delivered
shall be, to the extent possible, in such denomination or denominations as the
Holder shall request in the Notice of Exercise and shall be registered in the
name of the Holder or such other name as shall be designated in the Notice of
Exercise, subject to compliance with applicable securities laws. This Warrant
shall be deemed to have been exercised and such certificate or certificates
shall be deemed to have been issued, and the Holder or any other person or
entity so designated to be named therein shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the Notice of
Exercise, together with the cash, if any, and this Warrant, are received by the
Company as described above. If this Warrant shall have been exercised in part,
the Company shall, at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to the Holder a new Warrant evidencing the
rights of the Holder to purchase the unpurchased shares of Common Stock called
for by this Warrant, which new Warrant shall in all other respects be identical
with this Warrant. All shares of Common Stock issuable upon the exercise of this
Warrant pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable and without any preemptive rights. The Company shall pay all
expenses, taxes and other charges payable in connection with the preparation,
execution and delivery of stock certificates pursuant to this Section, unless
such tax or charge is imposed by law upon the Holder, in which case such taxes
or charges shall be paid by the Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Common Stock issuable
upon exercise of this Warrant in any name other than that of the Holder, and in
such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
5
(b) In lieu of payment of the Purchase Price in cash, the Holder may
make such payment, by way of cashless exercise, as follows:
(i) by delivery of shares of Common Stock with an aggregate
Current Market Price on the date of exercise equal to the Purchase Price,
subject, however, to the provisions of Section 16(b) of the Exchange Act; or
(ii) through the written election of the Holder to have
withheld by the Company from the shares of Common Stock otherwise deliverable
upon exercise, Common Stock having an aggregate Current Market Price on the date
of exercise equal to the Purchase Price.
SECTION 3. Fractional Shares. The Company shall not be required to issue a
fractional share of Common Stock upon exercise of this Warrant. As to any
fraction of a share which the Holder of this Warrant would otherwise be entitled
to purchase upon exercise, the Company shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the Fair Value per
share of Common Stock on the date of exercise.
SECTION 4. Ownership of this Warrant.
(a) The Company shall deem and treat the Holder as the holder and
owner of this Warrant (notwithstanding any notations of ownership or writing
hereon made by anyone other than the Company) for all purposes and shall not be
required to give effect to any notice to the contrary, until presentation of
this Warrant for registration of transfer as provided in this Section 4.
(b) Subject to Section 5, this Warrant is exchangeable, upon the
surrender hereof by the Holder to the Company at its office referred to in
Section 9, for new Warrants of like tenor and date representing in the aggregate
the right to purchase the number of shares of Common Stock purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of shares of Common Stock as shall be designated by the Holder at the
time of such surrender. Subject to compliance with applicable securities laws,
this Warrant and all rights hereunder are transferable in whole or in part upon
the books of the Company by the Holder hereof in person or by a duly authorized
attorney, and a new Warrant shall be executed and delivered by the Company of
the like tenor and date as this Warrant but registered in the name of the
transferee, upon surrender of this Warrant duly endorsed, at said office or
agency of the Company. Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and, in case of loss, theft or destruction, of an agreement of
unsecured indemnity and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new Warrant of like tenor and
date, in lieu of this Warrant. This Warrant shall be promptly cancelled by the
Company upon the surrender hereof in connection with any exchange, transfer or
replacement. The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 4.
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SECTION 5. Restrictions. This Warrant and the Warrant Shares may not be
sold, transferred, or otherwise disposed of without registration under the
Securities Act or pursuant to an exemption therefrom.
SECTION 6. Anti-Dilution Provisions; Adjustments.
6.1 Adjustment of Number of Shares -- Issuance of Additional Shares
of Common Stock. Upon each adjustment of the Purchase Price as a result of the
calculations made in Section 6.2, this Warrant shall thereafter evidence the
right to receive, at the adjusted Purchase Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth of a share) obtained by
dividing (i) the product of the aggregate number of shares covered by this
Warrant immediately prior to such adjustment and the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price by (ii) the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
6.2 Issuance of Additional Shares of Common Stock. In case the
Company at any time or from time to time after the date hereof shall issue or
sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 6.4 or Section 6.5 but excluding
Additional Shares of Common Stock purchasable upon exercise of Rights referred
to in Section 6.9), without consideration or for a consideration per share less
than the Current Market Price, immediately prior to such issue or sale, then,
and in each such case, subject to Section 6.7, the Purchase Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent), determined by multiplying such Purchase Price by a
fraction
(a) the numerator of which shall be the sum of (i) the number of
shares of Common Stock outstanding immediately prior to such issue or sale and
(ii) the number of shares of Common Stock which the gross consideration received
by the Company for the total number of such Additional Shares of Common Stock so
issued or sold would purchase at the Current Market Price, and
(b) the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such issue or sale, provided that, for the
purposes of this Section 6.2, (x) immediately after any Additional Shares of
Common Stock are deemed to have been issued pursuant to Section 6.4 or Section
6.5, such Additional Shares of Common Stock shall be deemed to be outstanding,
and (y) treasury shares shall not be deemed to be outstanding.
6.3 Dividends and Distributions. In case the Company at any time or
from time to time after the date hereof shall declare, order, pay or make a
dividend or other distribution on the Common Stock of (i) cash, (ii) any
evidences of its indebtedness, any shares of its stock or any other securities
or property of any nature whatsoever (including, without limitation, any
distribution of other or additional stock or Convertible Securities, Options or
other securities or property, by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement) or (iii) any warrants or
other rights to subscribe for or purchase any evidences of its indebtedness, any
shares of its stock or any other securities or property of any nature
whatsoever, then
7
(a) the number of shares of Common Stock for which this Warrant is
exercisable shall be adjusted to equal the product obtained by multiplying the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such adjustment by a fraction (1) the numerator of which
shall be the Current Market Price at the date of taking such record and (2) the
denominator of which shall be such Current Market Price minus the amount
allocable to one share of Common Stock of (x) any such cash so distributable and
(y) the Fair Value of any and all such evidences of indebtedness, shares of
stock, other securities or property or warrants or other subscription or
purchase rights so distributable, and
(b) the Purchase Price shall be adjusted to equal (1) the Purchase
Price immediately prior to the adjustment multiplied by the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to the
adjustment divided by (2) the number of shares for which this Warrant is
exercisable immediately after such adjustment.
A reclassification of the Common Stock (other than a change in par
value, or from par value to no par value or from no par value to par value) into
shares of Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this Section 6.3 and, if the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 6.5.
6.4 Treatment of Options and Convertible Securities. In case the
Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities of the Company entitled to receive, any
Options or Convertible Securities (whether or not the rights thereunder are
immediately exercisable), then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue, sale, grant or assumption or, in case such a record date
shall have been fixed, as of the close of business on such record date (or, if
the Common Stock trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading), provided that such Additional Shares of
Common Stock shall not be deemed to have been issued unless (i) the
consideration per share (determined pursuant to Section 6.6) of such shares
would be less than their Fair Value on the date of and immediately prior to such
issue, sale, grant or assumption or immediately prior to the close of business
on such record date (or, if the Common Stock trades on an ex-dividend basis, on
the date prior to the commencement of ex-dividend trading), as the case may be,
and (ii) such Additional Shares of Common Stock are not purchasable pursuant to
Rights referred to in Section 6.9, and provided, further, that
(a) whether or not the Additional Shares of Common Stock underlying
such Options or Convertible Securities are deemed to be issued, no further
adjustment of the Purchase Price shall be made upon the subsequent issue or sale
of Convertible Securities or shares of Common Stock upon the exercise of such
Options or the conversion or exchange of such Convertible Securities;
8
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Company, or for any decrease or increase in the
number of Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the Purchase
Price computed upon the original issue, sale, grant or assumption thereof (or
upon the occurrence of the record date, or date prior to the commencement of
ex-dividend trading, as the case may be, with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options, or the rights of conversion or exchange under such
Convertible Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and cancellation
or retirement) of any such Options which shall not have been exercised or the
expiration of any rights of conversion or exchange under any such Convertible
Securities which (or purchase by the Company and cancellation or retirement of
any such Convertible Securities the rights of conversion or exchange under
which) shall not have been exercised, the Purchase Price computed upon the
original issue, sale, grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend trading, as the
case may be, with respect thereto), and any subsequent adjustments based
thereon, shall, upon such expiration (or such cancellation or retirement, as the
case may be), be recomputed as if:
(i) in the case of Options for Common Stock or Convertible
Securities, the only Additional Shares of Common Stock issued or
sold were the Additional Shares of Common Stock, if any, actually
issued or sold upon the exercise of such Options or the conversion
or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the
Company for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus the consideration actually
received by the Company upon such exercise, or for the issue or sale
of all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually
received by the Company upon such conversion or exchange, and
(ii) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon the
exercise of such Options were issued at the time of the issue or
sale, grant or assumption of such Options, and the consideration
received by the Company for the Additional Shares of Common Stock
deemed to have then been issued was the consideration actually
received by the Company for the issue, sale, grant or assumption of
all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Company (pursuant to Section
6.6) upon the issue or sale of such Convertible Securities with
respect to which such Options were actually exercised;
9
(d) no readjustment pursuant to subdivision (b) or (c) above shall
have the effect of increasing the Purchase Price by an amount in excess of the
amount of the adjustment thereof originally made in respect of the issue, sale,
grant or assumption of such Options or Convertible Securities; and
(e) in the case of any such Options which expire by their terms not
more than 30 days after the date of issue, sale, grant or assumption thereof, no
adjustment of the Purchase Price shall be made until the expiration or exercise
of all such Options, whereupon such adjustment shall be made in the manner
provided in subdivision (c) above.
6.5 Treatment of Stock Dividends, Stock Splits, etc. If at any time
the Company shall:
(a) take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend payable in, or other distribution of,
Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, by a reverse stock split or otherwise,
then (i) the number of shares of Common Stock for which this Warrant
is exercisable immediately after the occurrence of any such event shall be
adjusted to equal the number of shares of Common Stock which a record holder of
the same number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Purchase Price shall be
adjusted to equal (A) the Purchase Price multiplied by the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to the
adjustment divided by (B) the number of shares for which this Warrant is
exercisable immediately after such adjustment.
6.6 Computation of Consideration. For the purposes of this Section
6,
(a) the consideration for the issue or sale of any Additional Shares
of Common Stock shall, irrespective of the accounting treatment of such
consideration,
(i) insofar as it consists of cash, be computed at the amount
of cash received by the Company, without deducting any expenses paid
or incurred by the Company or any commissions or compensations paid
or concessions or discounts allowed to underwriters, dealers or
others performing similar services in connection with such issue or
sale,
(ii) insofar as it consists of property (including securities)
other than cash, be computed at the Fair Value thereof at the time
of such issue or sale, and
10
(iii) in the case where Additional Shares of Common Stock are
issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be the
portion of such consideration so received, computed as provided in
clauses (i) and (ii) above, allocable to such Additional Shares of
Common Stock, such allocation to be determined in the same manner
that the Fair Value of property not consisting of cash or securities
is to be determined as provided in the definition of "Fair Value"
herein;
(b) Additional Shares of Common Stock deemed to have been issued
pursuant to Section 6.4, relating to Options and Convertible Securities, shall
be deemed to have been issued for a consideration per share determined by
dividing
(i) the total amount, if any, received and receivable by the
Company as consideration for the issue, sale, grant or assumption of
the Options or Convertible Securities in question, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration
to protect against dilution) payable to the Company upon the
exercise in full of such Options or the conversion or exchange of
such Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, in each case computing such consideration as provided in
the foregoing subdivision (a),
by
(ii) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number to protect against dilution) issuable upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities; and
(c) Additional Shares of Common Stock deemed to have been issued
pursuant to Section 6.5, relating to stock dividends, stock splits, etc., shall
be deemed to have been issued for no consideration.
6.7 De Minimis Adjustments. If the amount of any adjustment of the
Purchase Price per share required pursuant to this Section 6 would be less than
$.01, such amount shall be carried forward and the adjustment with respect
thereto made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate a change in the Purchase Price of at least $.01 per share. All
calculations under this Warrant shall be made to the nearest .001 of a cent or
to the nearest one-hundredth of a share, as the case may be.
6.8 Abandoned Dividend or Distribution. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution (which results in an adjustment to the
Purchase Price under the terms of this Warrant) and shall, thereafter, and
11
before such dividend or distribution is paid or delivered to shareholders
entitled thereto, legally abandon its plan to pay or deliver such dividend or
distribution, then any adjustment made to the Purchase Price and number of
shares of Common Stock purchasable upon Warrant exercise by reason of the taking
of such record shall be reversed, and any subsequent adjustments, based thereon,
shall be recomputed.
6.9 Shareholder Rights Plan. Notwithstanding the foregoing, in the
event that the Company shall distribute "poison pill" rights pursuant to a
"poison pill" shareholder rights plan (the "Rights"), the Company shall, in lieu
of making any adjustment pursuant to Section 6.2 or Section 6.3 hereof, make
proper provision so that each Holder who exercises a Warrant after the record
date for such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such exercise, in addition to the
shares of Common Stock issuable upon such exercise, a number of Rights to be
determined as follows: (i) if such exercise occurs on or prior to the date for
the distribution to the holders of Rights of separate certificates evidencing
such Rights (the "Distribution Date"), the same number of Rights to which a
holder of a number of shares of Common Stock equal to the number of shares of
Common Stock issuable upon such exercise at the time of such exercise would be
entitled in accordance with the terms and provisions of and applicable to the
Rights; and (ii) if such exercise occurs after the Distribution Date, the same
number of Rights to which a holder of the number of shares into which the
Warrant so exercised was exercisable immediately prior to the Distribution Date
would have been entitled on the Distribution Date in accordance with the terms
and provisions of and applicable to the Rights, and in each case subject to the
terms and conditions of the Rights.
SECTION 7. Consolidation, Merger, Etc.
7.1 Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, etc. In case the Company after the date hereof shall (a)
consolidate with or merge into any other Person and shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) permit any
other Person to consolidate with or merge into the Company and the Company shall
be the continuing or surviving Person but, in connection with such consolidation
or merger, the Common Stock or Other Securities shall be changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (c) transfer all or substantially all of its properties or assets
to any other Person in one or more related transactions, or (d) effect a capital
reorganization or reclassification of the Common Stock or Other Securities
(other than a capital reorganization or reclassification resulting in the issue
of Additional Shares of Common Stock for which adjustment in the Purchase Price
is provided in Section 6.2 or Section 6.3), then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder of this Warrant,
upon the exercise hereof at any time after the consummation of such transaction,
shall be entitled to receive (at the aggregate Purchase Price in effect at the
time of such consummation for all Common Stock or Other Securities issuable upon
such exercise immediately prior to such consummation), in lieu of the Common
Stock or Other Securities issuable upon such exercise prior to such
consummation, the amount of securities, cash or other property to which such
Holder would actually have been entitled as a shareholder upon such consummation
if such Holder had exercised this Warrant immediately prior thereto, subject to
adjustments (subsequent to such consummation) as nearly equivalent as possible
to the adjustments provided for in Section 6.
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7.2 Assumption of Obligations. Notwithstanding anything contained in
this Warrant, the Company shall not effect any of the transactions described in
clauses (a) through (d) of Section 7.1 unless, prior to the consummation
thereof, each Person (other than the Company) which may be required to deliver
any stock, securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (a) the obligations of the Company
under this Warrant (and if the Company shall survive the consummation of such
transaction, such assumption shall be in addition to, and shall not release the
Company from, any continuing obligations of the Company under this Warrant,
including Exhibit A hereto), (b) the obligation to deliver to the Holder such
shares of stock, securities, cash or property as, in accordance with the
foregoing provisions of this Section 7, the Holder may be entitled to receive.
SECTION 8. Covenants of the Company. The Company covenants and agrees that
it shall reserve and set apart and have at all times, free from preemptive
rights, the number of authorized but unissued shares of Common Stock deliverable
upon the exercise in full of this Warrant, and it shall have at all times any
other rights or privileges provided for therein sufficient to enable it at any
time to fulfill all of its obligations hereunder. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to permit
the exercise in full of this Warrant, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including, without limitation, taking
appropriate board action, recommending such an increase to the holders of Common
Stock, holding shareholders meetings, soliciting votes and proxies in favor of
such increase to obtain the requisite shareholder approval and upon such
approval, the Company shall reserve and keep available such additional shares
solely for the purpose of permitting the exercise of this Warrant. The Company
covenants and agrees that all shares of Common Stock which shall be so issuable
will, upon issuance, be duly and validly authorized and issued, fully paid and
nonassessable, free and clear of any liens, claims and restrictions (other than
as provided herein).
SECTION 9. Notification by the Company.
9.1 Notice of Adjustments. Whenever the number of shares of Common Stock
or the class or type of stock or other property for which this Warrant is
exercisable, or whenever the price at which a share of such Common Stock may be
purchased upon exercise of this Warrant, shall be adjusted pursuant to Section
6, the Company shall forthwith prepare a certificate to be executed by the chief
financial officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which the Board of Directors of the
Company determined the Fair Value of any evidences of indebtedness, shares of
stock, other securities or property or warrants or other subscription or
purchase rights referred to in Section 6.2), specifying the number of shares of
Common Stock for which this Warrant is exercisable and describing the number and
kind of any other shares of stock or other property for which this Warrant is
exercisable, if any, and any change in the purchase price or prices thereof,
after giving effect to such adjustment or change. The Company shall promptly
cause a signed copy of such certificate to be delivered to the Holder in
accordance with Section 10. The Company shall keep at its office or agency
designated pursuant to Section 10 copies of all such certificates and cause the
same to be available for inspection at said office during normal business hours
by the Holder or any prospective purchaser of a Warrant designated by the
Holder.
13
9.2 Notice of Certain Corporate Action. The Holder shall be entitled
to the same rights to receive notice of corporate action as any holder of Common
Stock.
SECTION 10. Notices. Any notice or other document required or permitted to
be given or delivered to the Holder shall be hand delivered or delivered by
nationally recognized overnight courier at, or sent by certified or registered
mail postage prepaid and return receipt requested to the Holder at the last
address shown on the books of the Company. Any notice or other document required
or permitted to be given or delivered to the Company shall be delivered at, or
sent by certified or registered mail to, the principal office of the Company, at
333 East 66th Street, 9th Floor, New York, NY 10021, Attn: Executive Chairman,
or such other address as shall have been furnished to the Holder by the Company.
All such communications shall be deemed to have been given or made when so
delivered by hand, or one business day after being sent by overnight delivery or
five business days after being so mailed.
SECTION 11. No Rights as Shareholders; Limitation of Liability. This
Warrant shall not entitle the Holder to any of the rights of a shareholder of
the Company except as expressly set forth herein. No provision hereof, in the
absence of affirmative action by the Holder to exercise this Warrant or purchase
shares of Common Stock, and no mere enumeration herein of the rights or
privileges of the Holder, shall give rise to any liability upon the Holder for
the Purchase Price or as a shareholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
SECTION 12. Law Governing. This Warrant shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without giving effect to the conflict of law provisions thereof.
SECTION 13. Miscellaneous. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought. The headings in this Warrant are for purposes
of reference only and shall not affect the meaning or construction of any of the
provisions hereof.
SECTION 14. Registration Rights. This Warrant is subject to the
Registration Rights provisions contained in Exhibit A hereto. By accepting this
Warrant or receiving any benefits hereunder, the Holder, and each successor
Holder, hereby agrees to the provisions set forth in Exhibit A hereto.
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by its duly authorized officer as of the 15th day of February, 2005.
GALES INDUSTRIES INCORPORATED
By: /s/ Michael A. Gales
------------------------------
Name: Michael A. Gales
Title: Executive Chairman
15
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
_________________ of the Company's Warrant Shares provided for therein and
requests that certificates for such Warrant Shares be issued in the name of*:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(please print name, address, and social security number or employer
identification number)
and, if said number of Warrant Shares shall not be all the shares of Common
Stock purchasable thereunder, that a new Warrant certificate for the balance
remaining of the shares of Common Stock purchasable under the within Warrant be
registered in the name of the undersigned Warrantholder or his assignee as below
indicated and delivered to the address stated below.
In order to induce the Company to give instructions to its transfer agent
to issue the shares of Common Stock being purchased upon exercise of the
Warrant, the undersigned hereby represents and warrants that undersigned is an
"accredited investor" as that term is defined in Regulation D under the
Securities Act of 1933, as amended.
Dated: ________________, 20___
Name of Warrant holder or Assignee:
___________________________________
(please print)
Address:
___________________________________
___________________________________
___________________________________
Signature: _______________________________________
Signature Guaranteed: NOTE: THE ABOVE SIGNATURE MUST CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER, UNLESS THE WITHIN WARRANT HAS BEEN
ASSIGNED.
- ----------
* If other than the Holder specified on the within Warrant delivered with this
Notice of Exercise, the transfer is subject to compliance with applicable
securities laws and the payment by the Holder of any applicable transfer or
similar taxes.
16
IF WARRANT SHARES ARE TO BE ISSUED IN ANY NAME OTHER
THAN THAT OF THE REGISTERED HOLDER OF THE WITHIN
WARRANT, THE REGISTERED HOLDER'S SIGNATURE SHALL BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR BY A
MEMBER FIRM OF THE NEW YORK STOCK EXCHANGE.
17
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
(name and address of assignee must be printed or typewritten)
the within Warrant, hereby irrevocably constituting and appointing attorney to
transfer said Warrant on the books of the Company with full power of
substitution in the premises.
Dated: _________________________
Name of Warrantholder or Assignee:
_________________________________
(please print)
Address:
_________________________________
_________________________________
_________________________________
Signature: _________________________________
SIGNATURE OF REGISTERED HOLDER
Signature Guaranteed: NOTE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS IT APPEARS UPON THE FACE OF THE WITHIN
WARRANT IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. SUCH SIGNATURE SHALL
BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR
BY A MEMBER FIRM OF THE NEW YORK STOCK EXCHANGE.
18
Exhibit A to Warrant
REGISTRATION RIGHTS
The following provisions are a part of the Warrant (the "Warrant")
to purchase shares of Common Stock that was initially issued to ______________
in _________ 2005, and any warrant, in substantially the same form as the
Warrant, that is issued to any Person who or which becomes a Holder as permitted
by the Warrant. References to the "Warrant" include each such subsequently
issued Warrant. As used below, the "Issuer" means Gales Industries Incorporated
or the public company with which it enters into a "reverse merger" transaction,
"Registered Holder" means the Holder and "Registered Holders" refers to the
holders of the Warrants and the Notes (as defined below). This Warrant is one of
a series of Warrants (together, the "Warrants") issued in connection with the
Company's sale of its 12.0% Bridge Notes (the "Notes"), limited in aggregate
principal amount to $105,000. All capitalized terms below shall have the same
meanings as in the Warrant, unless otherwise defined. Paragraph references below
are to the paragraphs of this Exhibit A.
Registration Rights.
(a) Registered Holders shall have certain registration rights as
follows:
A. If, after the date of the this Warrant, Issuer shall file
with the Securities and Exchange Commission ("SEC") a registration statement
("Registration Statement") under the Securities Act, registering any shares of
Common Stock owned by any person or entity, Issuer shall include in such
Registration Statement all of the shares into which the Warrants are
exercisable, subject to the remaining terms of this Section 8(a). After such
initial Registration Statement, if the Issuer shall file a second Registration
Statement with the SEC, the Issuer the shall give written notice to each
Registered Holder thereof prior to such filing.
B. Within fifteen (15) days after such notice from Issuer,
each Registered Holder shall give written notice to Issuer whether or not the
Registered Holder desires to have included in the Registration Statement all of
the shares into which the Warrants are exercisable (the "Registrable
Securities"). If a Registered Holder fails to give such notice within such
period, such Registered Holder shall not have the right to have such Registered
Holder's Registrable Securities registered pursuant to such registration
statement. If a Registered Holder gives such notice, then Issuer shall include
such Registered Holder's Registrable Securities in the registration statement,
at Issuer's sole cost and expense, subject to the remaining terms of this
Section 8(a).
C. If the registration statement relates to an underwritten
offering, and the underwriter shall determine in writing that the total number
of shares of Common Stock to be included in the offering, including the
Registrable Securities, shall exceed the amount which the underwriter deems to
be appropriate for the offering, the number of shares of the Registrable
Securities shall be reduced in the same proportion as the remainder of the
shares in the offering and each Registered Holder's Registrable Securities
included in such registration statement will be reduced proportionately. For
this purpose, if other securities in the registration statement are derivative
securities, their underlying shares shall be included in the computation. The
Registered Holders shall enter into such agreements as may be reasonably
required by the underwriters and the Registered Holders shall pay to the
underwriters commissions relating to the sale of their respective Registrable
Securities.
D. Other than their right to have their Registrable Securities
included in the Issuer's initial Registration Statement after the date hereof,
the Registered Holders shall have one other opportunity to have the Registrable
Securities registered under this Section 8(a).
E. The Registered Holder shall furnish in writing to Issuer
such information as Issuer shall reasonably require in connection with a
registration statement.
(b) In the event Issuer effects any registration under the 1933 Act
of any Registrable Securities pursuant to Section 8(a), the Issuer shall
indemnify, to the extent permitted by law, and hold harmless any Registered
Holder whose Registrable Securities are included in such Registration Statement
(each, a "Seller"), any underwriter, any officer, director, employee or agent of
any Seller or underwriter, and each other person, if any, who controls any
Seller or underwriter within the meaning of Section 15 of the 1933 Act, against
any losses, claims, damages or liabilities, judgment, fines, penalties, costs
and expenses, joint or several, or actions in respect thereof (collectively, the
"Claims"), to which each such indemnified party becomes subject, under the 1933
Act or otherwise, insofar as such Claims arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement or prospectus or any amendment or supplement thereto
or any document filed under a state securities or blue sky law (collectively,
the "Registration Documents") or insofar as such Claims arise out of or are
based upon the omission or alleged omission to state in any Registration
Document a material fact required to be stated therein or necessary to make the
statements made therein not misleading, and will reimburse any such indemnified
party for any legal or other expenses reasonably incurred by such indemnified
party in investigating or defending any such Claim; provided that the Issuer
shall not be liable in any such case to the extent such Claim is based upon an
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission of a material fact made in any Registration Document in
reliance upon and in conformity with written information furnished to Issuer by
or on behalf of any indemnified party specifically for use in the preparation of
such Registration Document.
(c) In connection with any registration statement in which any
Seller is participating, each Seller, severally and not jointly, shall
indemnify, to the extent permitted by law, and hold harmless Issuer, each of its
directors, each of its officers who have signed the registration statement, each
other person, if any, who controls Issuer within the meaning of Section 15 of
the 1933 Act, each other Seller and each underwriter, any officer, director,
employee or agent of any such other Seller or underwriter and each other person,
if any, who controls such other Seller or underwriter within the meaning of
Section 15 of the 1933 Act against any Claims to which each such indemnified
party may become subject under the 1933 Act or otherwise, insofar as such Claims
(or actions in respect thereof) are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Document, or
insofar as any Claims are based upon the omission or alleged omission to state
in any Registration Document a material fact required to be stated therein or
necessary to make the statements made therein not misleading, and will reimburse
any such indemnified party for any legal or other expenses reasonably incurred
by such indemnified party in investigating or defending any such claim;
provided, however, that such indemnification or reimbursement shall be payable
only if, and to the extent that, any such Claim arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in any Registration Document in reliance upon and in conformity with
written information furnished to Issuer by the Seller specifically for use in
the preparation thereof.
(d) Any person entitled to indemnification under Sections 8(b) or
8(c) above shall notify promptly the indemnifying party in writing of the
commencement of any Claim if a claim for indemnification in respect thereof is
to be made against an indemnifying party under this Section 8(d), but the
omission of such notice shall not relieve the indemnifying party from any
liability which it may have to any indemnified party otherwise than under
Section 8(b) or 8(c) above, except to the extent that such failure shall
materially adversely affect any indemnifying party or its rights hereunder. In
case any action is brought against the indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it chooses, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party;
and, after notice from the indemnifying party to the indemnified party that it
so chooses, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that (i) if the indemnifying party fails to take reasonable steps necessary to
defend diligently the Claim within twenty (20) days after receiving notice from
the indemnified party that the indemnified party believes it has failed to do
so; (ii) if the indemnified party who is a defendant in any action or proceeding
which is also brought against the indemnifying party reasonably shall have
concluded that there are legal defenses available to the indemnified party which
are not available to the indemnifying party; or (iii) if representation of both
parties by the same counsel is otherwise inappropriate under applicable
standards of professional conduct, the indemnified party shall have the right to
assume or continue its own defense as set forth above (but with no more than one
firm of counsel for all indemnified parties in each jurisdiction, except to the
extent any indemnified party or parties reasonably shall have concluded that
there are legal defenses available to such party or parties which are not
available to the other indemnified parties or to the extent representation of
all indemnified parties by the same counsel is otherwise inappropriate under
applicable standards of professional conduct) and the indemnifying party shall
be liable for any reasonable expenses therefor; provided, that no indemnifying
party shall be subject to any liability for any settlement of a Claim made
without its consent (which may not be unreasonably withheld, delayed or
conditioned). If the indemnifying party assumes the defense of any Claim
hereunder, such indemnifying party shall not enter into any settlement without
the consent of the indemnified party if such settlement attributes liability to
the indemnified party (which consent may not be unreasonably withheld, delayed
or conditioned).
(e) If for any reason the indemnity provided in Section 8(b) or 8(c)
above is unavailable, or is insufficient to hold harmless, an indemnified party,
then the indemnifying party shall contribute to the amount paid or payable by
the indemnified party as a result of any Claim in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying party
on the one hand and the indemnified party on the other from the transactions
contemplated by this Security. If, however, the allocation provided in the
immediately preceding sentence is not permitted by applicable law, or if the
indemnified party failed to give the notice required by Section 8(d) above, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable in respect of any Claim shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such Claim.
Notwithstanding the foregoing, no underwriter or controlling person thereof, if
any, shall be required to contribute, in respect of such underwriter's
participation as an underwriter in the offering, any amount in excess of the
amount by which the total price at which the Registrable Securities underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The obligation
of any underwriters to contribute pursuant to this subsection (e) shall be
several in proportion to their respective underwriting commitments and not
joint.
(f) The provisions of Sections 8(b) through 8(e) hereof shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract and shall remain
operative and in full force and effect regardless of any investigation made or
omitted by or on behalf of any indemnified party and shall survive the transfer
of the Registrable Securities by any such party.
(g) If and whenever Issuer is required by the provisions of this
Section 8 to register any Registrable Securities under the 1933 Act, Issuer
shall, as expeditiously as possible under the circumstances:
A. Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective as soon as possible and remain
effective.
B. Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement current and to
comply with the provisions of the 1933 Act, and any regulations promulgated
thereunder, with respect to the sale or disposition of all Registrable
Securities covered by the registration statement required to effect the
distribution of the securities, but in no event shall Issuer be required to do
so for a period of more than three (3) years following the effective date of the
registration statement.
C. Furnish to the Sellers participating in the offering,
copies (in reasonable quantities) of summary, preliminary, final, amended or
supplemented prospectuses, in conformity with the requirements of the 1933 Act
and any regulations promulgated thereunder, and other documents as reasonably
may be required in order to facilitate the disposition of the securities, but
only while Issuer is required under the provisions hereof to keep the
registration statement current.
D. Use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions of the United States as the Sellers
participating in the offering shall reasonably request, and do any and all other
acts and things which may be reasonably necessary to enable each participating
Seller to consummate the disposition of the Registrable Securities in such
jurisdictions.
E. Notify each Seller selling Registrable Securities, at any
time when a prospectus relating to any such Registrable Securities covered by
such registration statement is required to be delivered under the 1933 Act, of
Issuer's becoming aware that the prospectus included in such registration
statement, as then in effect, includes an 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 in the light of the circumstances
then existing, and promptly prepare and furnish to each such Seller selling
Registrable Securities a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
F. As soon as practicable after the effective date of the
registration statement, and in any event within eighteen (18) months thereafter,
make generally available to Sellers participating in the offering an earnings
statement (which need not be audited) covering a period of at least twelve (12)
consecutive months beginning after the effective date of the registration
statement which earnings statement shall satisfy the provisions of Section 11(a)
of the 1933 Act, including, at Issuer's option, Rule 158 thereunder. To the
extent that Issuer files such information with the SEC in satisfaction of the
foregoing, Issuer need not deliver the above referenced earnings statement to
Seller.
G. Upon request, deliver promptly to counsel of each Seller
participating in the offering copies of all correspondence between the SEC and
Issuer, its counsel or auditors and all memoranda relating to discussions with
the SEC or its staff with respect to the registration statement and permit each
such Seller to do such investigation at such Seller's sole cost and expense,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary. Each
Seller agrees that it will use its best efforts not to interfere unreasonably
with Issuer's business when conducting any such investigation and each Seller
shall keep any such information received pursuant to this Subsection G
confidential.
H. Provide a transfer agent and registrar located in the
United States for all such Registrable Securities covered by such registration
statement not later than the effective date of such registration statement.
I. List the Registrable Securities covered by such
registration statement on such exchanges or the NASDAQ as the Common Stock may
then be listed.
J. Pay all Registration Expenses (as hereinafter defined)
incurred in connection with a registration of Registrable Securities, whether or
not such registration statement shall become effective; provided that each
Seller shall pay all underwriting discounts, commissions and transfer taxes, if
any, relating to the sale or disposition of such Seller's Registrable Securities
pursuant to a registration statement. As used herein, "Registration Expenses"
means any and all reasonable and customary expenses incident to performance of
or compliance with the registration rights set forth herein, including, without
limitation, (i) all SEC, stock exchange and National Association of Securities
Dealers, Inc. registration and filing fees, (ii) all fees and expenses of
complying with state securities or blue sky laws (including reasonable fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities but no other expenses of the
underwriters or their counsel), (iii) all printing, messenger and delivery
expenses, and (iv) the fees and expenses of counsel for Issuer and Issuer's
independent public accountants.
(h) Following the effectiveness of the Registration Statement, the
Issuer may, at any time, suspend the effectiveness of the Registration Statement
for up to thirty (30) days on each of two occasions during any twelve (12) month
period, as appropriate (the "Maximum Suspension Period"), by giving notice
("Suspension Notice") to the Register Holders to the effect that the Issuer has
determined that it may be required to disclose a material corporate development
in the prospectus which forms a part of the Registration Statement. In the event
that the Issuer issues a Suspension Notice, the Issuer shall, prior to the
expiration of the Maximum Suspension Period, file such amendments to the
Registration Statement as may be necessary to allow for the Registrable
Securities to be sold in compliance with applicable law, advise the holders of
the Registrable Securities in writing that the use of the applicable prospectus
may be resumed, deliver to such holders copies of any additional or supplemental
or amended prospectus, if applicable, and deliver to such holders copies of any
additional or supplemental filings which are incorporated or deemed to be
incorporated by reference in such prospectus.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Michael A. Gales, Executive Chairman of Gales Industries Incorporated
(the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) [intentionally omitted per SEC Release 33-8238];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially effect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 13, 2006 /s/ Michael A. Gales
----------------------------------
Name: Michael A. Gales
Title: Executive Chairman
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Louis A. Giusto, Chief Financial Officer of Gales Industries
Incorporated (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) [intentionally omitted as per SEC Release 33-8238];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially effect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 13, 2006 /s/ Louis A. Giusto
---------------------------------
Name: Louis A. Giusto
Title: Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the Executive Chairman of Gales Industries Incorporated (the
"Company"), does hereby certify under the standards set forth and solely for the
purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-KSB of the Company
for the fiscal year ended December 31, 2005 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in that Form 10-KSB fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: April 13, 2006 /s/ Michael A. Gales
-----------------------------
Michael A. Gales,
Executive Chairman
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the Chief Financial Officer of Gales Industries Incorporated
(the "Company"), does hereby certify under the standards set forth and solely
for the purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-KSB of the Company
for the fiscal year ended December 31, 2005 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in that Form 10-KSB fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: April 13, 2006 /s/ Louis A. Giusto
----------------------------
Louis A. Giusto
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.