UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________
Commission file number 000-29245
AIR INDUSTRIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-4458244
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1479 North Clinton Avenue Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code-(631) 968-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes | | No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes | | No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. As of June 30, 2008, the aggregate market value of the
common stock of the registrant held by non-affiliates (excluding shares held by
directors, officers and others holding more than 5% of the outstanding shares of
the class) was $5,837,356, based upon a closing sale price of $0.11.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of October 16,
2009, the registrant had outstanding 71,698,174 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Contents
Cautionary Note Regarding Forward-Looking Statements.............................................................................4
PART I...........................................................................................................................5
Item 1. Business.............................................................................................................5
Item 1A. Risk Factors.......................................................................................................11
Item 2. Properties..........................................................................................................17
Item 3. Legal Proceedings...................................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................................................................17
PART II.........................................................................................................................18
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........18
Item 6. Selected Financial Data.............................................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................................30
Item 8. Financial Statements and Supplementary Data.........................................................................30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................................30
Item 9A. Controls and Procedures............................................................................................32
Item 9B. Other Information..................................................................................................34
PART III........................................................................................................................35
Item 10. Directors and Executive Officers of the Registrant.................................................................35
Item 11. Executive Compensation.............................................................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....................41
Item 13. Certain Relationships and Related Transactions, and Director Independence..........................................43
Item 14. Principal Accountant Fees and Services.............................................................................44
PART IV.........................................................................................................................45
Item 15. Exhibits, Financial Statement Schedules............................................................................45
CONSOLIDATED FINANCIAL STATEMENTS...............................................................................................52
Cautionary Note Regarding Forward-Looking Statements
Our disclosure and analysis in this report contains some forward-looking
statements. Certain of the matters discussed concerning our operations, cash
flows, financial position and economic performance including, in particular,
future sales, product demand, competition and the effect of economic conditions
include forward-looking statements within the meaning of section 27A of the
Securities Act and Section 21E of the Securities Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as may be required under applicable securities laws. You are advised,
however, to consult any additional disclosures we make in our Form 10-K, Form
10-Q and Form 8-K reports to the SEC. Also note that we provide a cautionary
discussion of risk and uncertainties under the caption "Risk Factors" in this
report. These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed here could
also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
PART I
Item 1. Business
Introduction
As used in this report, unless otherwise stated or the context requires
otherwise, the "Company" and terms such as "we," "us" "our," and "AIRI" refer to
(i) Air Industries Group, Inc, a Delaware corporation (f/k/a Gales Industries
Incorporated), (ii) our 100% owned Delaware subsidiary, Gales Acquisition Group,
Inc. ("Merger Sub"), (iii) Air Industries Machining, Corp., a New York
corporation ("AIM") which is wholly-owned by Merger Sub, and (iv) our
wholly-owned subsidiaries, Sigma Metals, Inc. ("Sigma Metals" or "Sigma") and
Welding Metallurgy, Inc. ("Welding Metallurgy" or "Welding").
Our Business
Air Industries Group, Inc. ("AIRI") is a publicly traded aerospace and
defense company. AIRI designs and manufactures structural parts and assemblies
that focus on flight safety, including landing gear, arresting gear, engine
mounts, flight controls and throttle quadrants. The Company also provides sheet
metal fabrication, tube bending and welding services, as well as distributing
specialty metals that are a critical component in the aerospace supply chain.
AIRI's products are currently deployed on a wide range of high profile
military and commercial aerospace platforms including Sikorsky's UH-60 Blackhawk
helicopter, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D
Hawkeye, Boeing's 777 and Airbus' 380 commercial airliners. We are the largest
supplier, in terms of number of components, of flight safety components to
Sikorsky for its Blackhawk helicopters.
Our AIM subsidiary has manufactured components and subassemblies for the
defense and commercial aerospace industry for over 35 years and has established
long term relationships with leading defense and aerospace manufacturers such as
Boeing, Goodrich Landing Gear, Lockheed Martin, Northrop Grumman, Latecoere
Group, and United Technologies.
5
Air Industries Group, Inc. was formed in 2005 through the merger of its
platform company AIM, into Gales Industries Incorporated (a publicly traded
company). On June 26, 2007, we changed our name from Gales Industries
Incorporated to Air Industries Group, Inc.
Since the merger in 2005, we made two acquisitions in 2007. During 2008,
we discontinued the operations of one of the acquired companies and disposed of
certain of its assets in January 2009. We currently operate two independent
companies which serve the aerospace industry and work cooperatively with each
other. These companies are AIM and Welding Metallurgy.
AIM formed the initial platform of AIRI in 2005. AIM manufactures machined
aircraft parts and subassemblies and other flight critical parts/assemblies for
many of the major aircraft platforms in the industry. AIM's customers include
original equipment manufacturers, or OEMs, and members of the supply chain
including Sikorsky, Lockheed Martin, Boeing, Northrop Grumman, Latecoere
(France) and Goodrich Landing Gear. AIM was founded in 1969 and is based in Bay
Shore, New York.
Welding Metallurgy is a provider of specialty welding services and metal
fabrications to the aerospace industry. Its customers include Sikorsky, Lockheed
Martin, Boeing and Northrop Grumman.
We acquired Sigma in April 2007, and determined to discontinue its
operations during the period ended September 30, 2008. We reached an agreement
to sell certain assets of the business to the former stockholders of Sigma in
October 2008 and discontinued operations of Sigma on October 31, 2008. In
January 2009, we concluded the sale of certain assets of the business to the
former stockholders.
Our principal offices are located at 1479 North Clinton Avenue, Bay Shore,
New York 11706 and our telephone number is (631) 968-5000.
About Air Industries Machining
Founded in 1969, AIM manufactures aircraft structural parts and assemblies
principally for prime defense contractors in the defense/aerospace industry
including, Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. During 2008,
approximately 74% of AIM's revenues were derived from sales of parts and
assemblies for military applications, although direct sales to the military
(U.S. and NATO) constituted a small fraction of those sales. The remaining 26 %
of revenues for 2008 represented sales in the airframe manufacturing sector to
major commercial aviation manufacturers. AIM is a provider of flight critical,
technically complex structures: AIM's parts are installed onboard Sikorsky's
U/MH - 60M/S Helicopters; known as The BlackHawk, Lockheed's F35 Joint Strike
Fighter (JSF) and Northrop Grumman's E2C/D Hawkeye
AIM has evolved from an individual parts manufacturer to a manufacturer of
subassemblies (i.e. Mechanical Assemblies) and as an engineering integrator.
This evolution continues. 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 for Blackhawk helicopters,
arresting gear for the E2C/D Hawkeye, C2A Greyhound and US Navy Fighters,
vibration absorbing assemblies for Sikorsky helicopters, landing gear components
for the F-35 Joint Strike Fighter (JSF), and many other subassembly packages.
AIM believes it is the largest supplier of flight critical components to
Sikorsky, our largest customer and is considered the single or sole source for
much of this work share. Sales of parts and services to Sikorsky accounted for
approximately 53 % of AIM's revenues during 2008, and 53% of revenues for the
first six months of 2009, and are subject to General Ordering Agreements which
were recently renegotiated and extended through 2012. Sales to Goodrich Landing
Gear accounted for approximately 9% of sales for the calendar year 2008 and 20%
of sales for the first six months of 2009.
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. AIM has also been recognized with the supplier of
the year awards from notable customers such as United Technologies (Sikorsky)
and Northrop Grumman.
6
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. AIM's investments have been for manufacturing
engineering, process engineering and tooling to achieve manufacturing efficiency
certifications and approvals that provide entry barrier to competitors for
follow-on procurements.
About Welding Metallurgy
Welding Metallurgy, founded in 1979, is a provider of specialty welding
services and metal products. Our welding services and products are provided to
prime contractors in the defense and commercial aerospace industries, aerospace
engine manufacturers and subcontractors to aerospace manufacturers throughout
the United States.
Welding Metallurgy is an important supplier on the Northrop Grumman E2C/D
Hawkeye Program producing approximately 300 different parts annually. They also
produce the Inlet Housing for the Sikorsky BlackHawk and various welded door and
panel Assemblies for the Boeing CH47 Chinook Helicopter.
Sales and Marketing
AIM's approach to sales and marketing can be best understood through the
concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. We seek to
position ourselves within the supply chain of these contractors and
manufacturers to be selected for subcontracted projects as they develop.
Successful positioning requires that a company qualify to be a preferred
supplier by achieving and maintaining independent third party quality approval
certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts.
In addition to maintaining our status as a preferred supplier, we work
closely with customers to assure that our investments are concentrated in
production capabilities that are aligned with customer sourcing and
subcontracting strategies. Also, we constantly work to support our customers in
their political, industrial and international initiatives.
Initial contracts are usually obtained through competitive bidding against
other qualified subcontractors, while follow-on contracts are usually obtained
by successfully performing initial contracts. AIM's long-term business base
generally benefits from barriers to entry resulting from investments,
certifications and manufacturing techniques developed during the initial
manufacturing phase.
As our business base grows with targeted customers and significant market
share is obtained, we endeavor to develop our relationship to one of a
partnership where initial contracts are also obtained as single source awards
and follow-on pricing is negotiated on a cost plus basis. This includes our new
ability to participate as an initial design partner. Most recently we partnered
with Goodrich Landing Gear on a proposal for the Embraer business jet landing
gear.
Welding Metallurgy has historically enjoyed loyal and ongoing
relationships with some of the world's leading aerospace companies, including
Northrop Grumman, Boeing and Middle River Aircraft Systems. These relationships
were based on the company's ability to provide precision welding services, which
are sought after in the aerospace industry. Since we acquired Welding
Metallurgy, we have initiated a marketing effort that is aimed at growth, with a
focus on the following strategic objectives:
o Favorable differentiation of Welding Metallurgy from the
competition, and the securing of long-term customer commitment
o Diversification of customer base
o Evolution from supplier of welding services to preferred supplier of
Welded Assemblies
o Develop as a Product Integrator, focused on providing Structural
Assemblies to the Industry.
7
Favorable differentiation
Since we acquired Welding Metallurgy, our focus has been on providing
world class customer service, and we have restructured Welding Metallurgy's
pricing to improve its competitive position in the industry. Welding Metallurgy
has received positive feed-back from its key customers. Welding Metallurgy also
has embarked on a face-to-face marketing campaign with established customers,
using members of the top management team. We believe that this personal
approach, combined with improved pricing and performance, has increased customer
loyalty and resulted in new opportunities for Welding Metallurgy with existing
customers.
Diversification
In conjunction with the marketing efforts aimed at existing customers,
Welding Metallurgy also has aggressively marketed new customers to mitigate the
vulnerability associated with being a near "captive" shop to Northrop Grumman,
which historically represented 70-75% of its annual revenues. Through direct
marketing efforts by executive management, Welding Metallurgy has secured the
approval of Sikorsky Aircraft, Piper Aircraft, GKN Aerospace, M7 Aerospace,
Vought Aerospace and Ametek/Hughes-Treitler. Welding Metallurgy also has
executed a licensing agreement with Davis Aircraft for its proprietary
"Wolfbend" pre-insulated tubing, which is being incorporated into many of the
new regional aircraft currently in development. The net effect has been a more
diverse customer base, comprised of major commercial and military aerospace
customers.
Target customers have been identified through trade shows, publications
and news subscriptions, pre-existing relationships between Welding Metallurgy's
executive management and key procurement personnel, and the selective use of
independent sales representatives, when warranted.
Evolution from Welder to Turnkey Solution Provider:
Through direct marketing efforts and the creation of new marketing
materials, the company has made existing customers more aware of the full scope
of Welding Metallurgy's capabilities. As a result, customers that considered
Welding Metallurgy only as a supplier of welding services have now turned to
Welding Metallurgy for complete, fully-assembled products. This has increased
the market share for Welding Metallurgy with these customers, and has resulted
in more firmly embedded relationships.
Our long term marketing goal for Welding Metallurgy is to develop the
company into a product integrator providing structural assemblies to the
Industry. We have employees with the talent and experience to manage and
manufacture sections of aircraft structure to be delivered to the final assembly
phase of the aircraft manufacturing cycle. This capability is very much in line
with current prime contractor supply chain strategy. WMI supported by AIM offer
as cost competitive, low risk approach to customers for the outsourcing of
subassembly manufacturing. In the fourth quarter of 2008 we provided a proposal
to Pratt & Whitney of Canada for the manufacture of the thrust reverser for new
the PW-810 jet engine which is being developed for the Cessna "Columbus"
business aircraft. Current economic conditions have delayed this entire project,
but we believe we presented a competitive proposal that will serve as a model
for future programs and proposals.
Our Market
Air Industries and subsidiaries operate in both defense related and
commercial aviation, with defense related revenues equaling approximately 80% of
total revenues. Current defense spending remains at an all time high and we
anticipate that it will remain so. Commercial aviation spending has deteriorated
due to the recessionary economic environment both in the United States and
abroad.
Our products are incorporated into many aircraft platforms, the majority
of which remain in production. In particular we are the largest supplier of
flight critical parts to Sikorsky's Black Hawk helicopter. 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. Beyond the Blackhawk, we make
products that are used in the Boeing 777, Northrop Grumman E2C, and E2D, Airbus
380, and Boeing (formerly McDonnell Douglas) C17 Globemaster, and Lockheed F-22
and Joint Strike Fighter.
Many of our products are flight critical requiring advanced certification
and where we are the sole or single source. Many of these parts are subject to
wear and tear or fatigue and are routinely replaced on aircraft on a time of
service or cycle basis. Replacement demand for these products will continue,
albeit at perhaps a lower rate, so long as an aircraft remains in service, which
can be many years after production has stopped.
8
Our Backlog
AIM has a number of long-term multi-year general purchase agreements with
several customers. These agreements specify the part number, specifications and
price of the covered products for a specified period, but do not authorize
immediate shipment. Nevertheless, generally, before a customer will award such
an agreement, we or any other potential supplier must demonstrate the ability to
produce products meeting the customer's specifications; maintaining a strong
quality performance rating; and a consistent on-time delivery record all at an
acceptable price. It is a time consuming and risky 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, are reluctant to switch suppliers. Customers issue
release orders against these contracts periodically to satisfy their needs. In
addition to our long term agreements, we regularly enter into agreements with
customers calling for a specified quantity of a product at a fixed price on firm
delivery dates.
AIM's "firm backlog" includes all fully authorized orders received for
products to be delivered within the forward 18-month period. The "projected
backlog" includes the firm backlog and forecasted demand from our base of
leading prime aerospace/defense contractors for product releases against general
purchase agreements, or GPAs. Although the forecasted releases against GPAs
within the forward 18-month period are included in the "projected backlog", we
may actually receive additional "follow-on" awards through the balance of a GPA
period, some of which currently extend through 2012.
As of June 15, 2009, AIM's 18-month "firm backlog" was approximately $49
million and our "projected backlog" as of that date for the same 18-month period
which includes both the firm backlog as well as anticipated order releases
against long term agreements with our prime aerospace contractors is
approximately $60 million. Because of the nature of the products and services
provided, Welding Metallurgy does not have a significant backlog and its backlog
is not included in the numbers reported herein.
Competition
Winning a new contract is highly competitive. For the most part AIM
manufactures items to customer design and competes against companies that have
similar manufacturing capabilities in a global marketplace. Consequently, its
ability to obtain contracts is tied to its ability to provide quality products
at competitive prices. This requires continuous improvements in capabilities to
assure competitiveness and value to our customers. AIM's marketing strategy
involves developing long-term ongoing working relationships with customers based
on long multi-year agreements. These agreements foster mutually advantageous
relationships and develop entry barriers to would-be competitors by establishing
advanced quality approvals, certifications and tooling investments that are
difficult and expensive to duplicate.
Welding Metallurgy operates in an environment similar to AIM, where once
it is established as a source the entry barrier for competitors can be difficult
to overcome.
Despite these barriers to entry, many of AIM's competitors are
well-established subcontractors engaged in the supply of aircraft parts and
components to prime military contractors and commercial aviation manufacturers.
Among these are Sterling Machine, 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 larger enterprises or divisions of even larger companies having
greater financial and physical resources and the capabilities to respond to much
larger contracts.
Raw Materials and Replacement Parts
As a product integrator, our manufacturing processes require substantial
purchase of raw materials, hardware and subcontracted details. As a result, much
of our success in meeting customer demand involves effective subcontract
management. Price and availability of many raw materials utilized in the
aerospace industry are subject to volatile global markets. Most suppliers are
unwilling to commit to long-term contracts, which can represent a substantial
risk as our strategy often involves long term fixed pricing with our customers.
We believe that the availability of raw materials to us is adequate to support
our operations.
As a specialty welding and manufacturing service provider, Welding
Metallurgy does not require significant amounts of materials to produce finished
products. Supplies required for its operations are readily available and do not
require significant inventories to be held on hand.
9
Discontinued Operation
During the quarter ended September 30, 2008, the Company's Board of
Directors decided to discontinue the operations at Sigma. (See Note 15 to the
consolidated financial statements included elsewhere in this report.)
Accordingly, Sigma's results of operations have been reported as discontinued
operations for all periods presented. Sigma's assets and liabilities have been
classified as held for sale on the Company's consolidated balance sheet for all
periods presented.
Future Expansion Strategy
Since the 1990s, the aerospace and defense industries have undergone a
radical restructuring and consolidation. The largest prime contractors have
consolidated resulting in fewer, and much larger, entities. Some examples are
Boeing which acquired McDonnell Douglas; Lockheed Martin, the result of
Lockheed's acquisition of Martin Marietta, together with the aerospace divisions
of General Dynamics; and Northrop Grumman, which fused together Northrop,
Grumman, Westinghouse and Litton Industries into one entity. Out of these nine
companies there are now just three
The consolidation of the prime contractors has caused a similar
consolidation of suppliers. The desire to streamline supply chains, i.e. buying
more from fewer has been a primary driver pressuring many smaller firms. To
survive companies must invest in systems and infrastructures that align their
capabilities with the needs of the prime contractors. At a minimum, those with
$15-$100 million in annual sales, referred to as "Tier III and IV Manufacturing
Sector" must be fully capable to interactively work within a computer aided
three dimensional automated engineering environment and must have third party
quality system certification.
We believe the industry's drive to efficiency will create enhanced
pressures on many aerospace/defense critical component manufacturers, the Tier
III and IV ", and these manufacturers will have no choice but upgrade to their
systems and processes or leave the industry.
We intend to expand our operations through internal growth. We will seek
to attract new customers through proactive industry marketing efforts, including
direct sales programs, participation at trade shows, technical society meetings
and similar activities.
If we are unsuccessful in expanding our operations through internal
growth, our ability to compete may be compromised by our small size relative to
other suppliers.
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.
10
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration
("FAA") under the provisions of the Federal Aviation Act of 1958, as amended.
The FAA prescribes standards and licensing requirements for aircraft and
aircraft components. We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production)
for noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations ("FAR"). Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed to the project. These audits may result in adjustments
to our contract costs. Additionally, we may be subject to U.S. government
inquiries and investigations because of our participation in government
procurement. Any inquiry or investigation can result in fines or limitations on
our ability to continue to bid for government contracts and fulfill existing
contracts.
We believe that we are in compliance with all federal, state and local
laws and regulations governing our operations and have obtained all material
licenses and permits required for the operation of our business.
Employees
As of September 30, 2009, we employed approximately 180 people.
AIM is a party to a collective bargaining agreement with the United
Service Workers, IUJAT, Local 355 (the "Union") with which we believe we
maintain good relations. Our collective bargaining agreement is dated January
1st, 2008 and covers all of AIM's production personnel. The terms and provisions
of the Collective Bargaining Agreement are effective for three (3) years and
will terminate December 31, 2011. AIM is required to make a monthly contribution
to each of the Union's United Welfare Fund and the United Services Worker's
Security Fund. The Collective Bargaining Agreements contains a "no-strike"
clause, whereby, during the terms of the Collective Bargaining Agreements the
Union will not strike and AIM will not lockout its employees.
All other employees including management, all Welding Metallurgy
employees, and AIM employees are covered under a co-employment agreement with
Administaff.
Item 1A. Risk Factors
The purchase of our common stock involves a very high degree of risk.
The Purchase of our Series B Preferred Stock ("Series B Preferred") and
our common stock involves a very high degree of risk.
Before you invest, you should carefully consider the risks and
uncertainties described below and other information and our consolidated
financial statements and related notes included elsewhere in this report. If any
of the following events actually occurs, our financial condition or operating
results may be materially and adversely affected, our business may be severely
impaired, and the price of our common stock may decline, perhaps significantly.
This means you could lose all or a part of your investment.
Our indebtedness may materially adversely affect our operations.
As is more fully described under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources", we have significant indebtedness. We are highly 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. In addition, our loan facilities are secured by substantially all
of our assets. In the case of a continuing default under either of our loan
facilities, the lender will have the right to foreclose on our assets, which
would have a material adverse effect on our business. Payment of principal and
interest may limit our ability to pay cash dividends to our stockholders and the
documents governing our loans prohibit the payment of cash dividends in certain
situations. Our leverage may also adversely affect our ability to finance future
operations and capital needs, may limit our ability to pursue business
opportunities and may make our results of operations more susceptible to adverse
economic conditions.
11
Our indebtedness could materially adversely affect our ability to generate
sufficient cash to fulfill our obligations under our existing indebtedness, our
ability to react to changes in our business and our ability to incur additional
indebtedness to fund future needs.
We are highly leveraged. As of December 31, 2008, we had total liabilities
of approximately $33.7 million, including $15.8 million payable to our bank
lenders secured by substantially all our assets. Our interest expense for the
year ended December 31, 2008 was $ 2.6 million, including amortization of debt
discount costs of approximately $579,000.
The Company's senior bank debt matures in April 2010, and its subordinated
bank debt in August 2010. There can be no assurance that the Company's lenders
will agree to extend their loans and, in the absence of significant improvement
in the Company's results of operations it is not likely that the Company will be
able to refinance its bank indebtedness with another lender.
Our substantial level of indebtedness increases the possibility that we
may be unable to generate cash sufficient to pay, when due, the principal of,
interest on or other amounts due in respect of our indebtedness. Our substantial
indebtedness, combined with our other financial obligations and contractual
commitments, could have important consequences for our creditors, For example,
it could:
o make it more difficult for us to satisfy our obligations with
respect to our indebtedness and any failure to comply with the
obligations under any of our debt instruments, including restrictive
covenants, could result in an event of default under the agreements
governing such other indebtedness;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing funds
available for working capital, capital expenditures, acquisitions
and other purposes;
o increase our vulnerability to adverse economic and industry
conditions, which could place us at a competitive disadvantage
compared to our competitors that have relatively less indebtedness;
o limit our flexibility in planning for, or reacting to, changes in
our business and the aerospace industry; operate;
o limit our junior subordinated note holders' rights to receive
payments under the notes if secured creditors have not been paid;
or;
o limit our ability to borrow additional funds, or to dispose of
assets to raise funds, if needed, for working capital, capital
expenditures, acquisitions, and other corporate purposes.
Risks Related to Our Issuance of Series B Preferred in Lieu of Payment of Cash
Dividends on Series B Preferred
Dividends on our Series B Preferred Stock are payable either in cash or "in
kind"; that is by issuing additional shares of Series B Preferred. Payment of
dividends by issuing additional shares of Series B Preferred Stock will reduce
the equity interest and voting power of our common stockholders and reduce the
amount available for distribution to holders of our common stock, if any, upon
our liquidation and dissolution.
Due to liquidity constraints and restrictions on paying dividends in our
bank loan covenants, we have issued and expect to continue to issue additional
shares of our Series B Preferred in lieu of payment of cash dividends. The
issuance of the shares of Series B Preferred in lieu of payment of cash
dividends will dilute the equity interest of our common stockholders upon
conversion of the Series B Preferred. Since holders of Series B Preferred vote
together with holders of our common stock on matters presented to stockholders
for approval not requiring a class vote, with holders of Series B Preferred
having a number of votes equal to the number of whole shares of common stock
they may acquire upon conversion of the Series B Preferred as of the record date
for determining stockholders entitled to vote on those matters, the number and
percentage of total votes which may be cast by holders of Series B Preferred
with respect to those matters will increase and thereby dilute the voting power
of the holders of our common stock. In addition, the issuance of shares of
Series B Preferred Stock in lieu of cash dividends on the Series B Preferred
will increase the total liquidation preference of the holders of the Series B
Preferred, thereby decreasing amounts available for distribution to common
stockholders, if any, upon a liquidation and dissolution of our company.
Our high level of debt may make it more difficult to retain existing or to
attract new customers:
Our existing customers and potential new customers for our products may be
concerned that our high level of debt may impair our ability to satisfactorily
perform on long-term contracts.
12
Our inability to successfully manage the growth of our business may have a
material adverse effect on our business, results of operations and financial
condition.
We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth. This could result in increased
responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. We may not succeed in our efforts to identify, attract and retain
experienced personnel.
Our future success also depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected. We have disclosed the existence of a material weakness in
internal control and this is more fully described in paragraph (b) of Item 9A
"Policies & Procedures" below.
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 for
whatever reason. 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, and may have a
materially adverse effect on our operating results and financial condition.
Terrorist acts and acts of war may seriously harm our business, results of
operations and financial condition.
United States and global responses to the Middle East conflict, terrorism,
perceived nuclear, biological and chemical threats and other global crises
increase uncertainties with respect to U.S. and other business and financial
markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats,
and other global crises and responses thereto, may adversely affect the Company.
While some of our products may experience greater demand as a result of
increased U.S. Government defense spending, various responses could realign U.S.
Government programs and affect the composition, funding or timing of our
government programs and those of our customers. U.S. Government spending could
shift to defense programs in which we and our customers do not participate.
Increased defense spending does not necessarily correlate to increased business,
because not all the programs in which we participate or have current
capabilities may be earmarked for increased funding.
Terrorist acts of war (wherever located around the world) may cause damage
or disruption to us, our employees, facilities, partners, suppliers,
distributors and resellers, and customers, which could significantly impact our
revenues, expenses and financial condition. The potential for future terrorist
attacks, the national and international responses to terrorist attacks, and
other acts of war or hostility have created many economic and political
uncertainties, which could adversely affect our business and results of
operations in ways that cannot presently be predicted. In addition, as a company
with headquarters and significant operations located in the United States, we
may be impacted by actions against the United States.
We depend on revenues from a few significant relationships, in particular
with Sikorsky Aircraft, and any loss, cancellation, reduction, or interruption
in these relationships could harm our business.
We derive most of our revenues from a small number of customers. In 2008,
our top three customers accounted for 71% of revenue. It is likely that this
concentration of customers will continue. If such contracts were terminated, our
revenues and net income could significantly decline. Our success will depend on
our continued ability to develop and manage relationships with significant
customers. One customer accounted for approximately 49% of sales for the year
ended December 31, 2008 and 47% for the first six months of 2009.
13
Any adverse change in our relationship with Sikorsky could have a material
adverse effect on our business. Although we are attempting to expand our
customer base, we expect that our customer concentration will not change
significantly in the near future. The markets in which we sell our products are
dominated by a relatively small number of customers who have contracts with
United States governmental agencies, thereby limiting the number of potential
customers. We cannot be sure that we will be able to retain our largest
customers or that we will be able to attract additional customers, or that our
customers will continue to buy our products in the same amounts as in prior
years. The loss of one or more of our largest customers, any reduction or
interruption in sales to these customers, our inability to successfully develop
relationships with additional customers or future price concessions that we may
have to make, could significantly harm our business.
Continued competition in our markets may lead to a reduction in our revenues and
market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will increase. Many competitors have
significantly greater technical, manufacturing, financial and marketing
resources than we do. We expect that more companies will enter the defense and
aerospace component manufacturing market. We may not be able to compete
successfully against either current or future competitors. Increased competition
could result in reduced revenue, lower margins or loss of market share, any of
which could significantly harm our business.
Our future revenues are inherently unpredictable; our operating results
are likely to fluctuate from period to period and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly due to a variety of factors, some of which are outside our
control. Accordingly, we believe that period-to-period comparisons of our
results of operations are not meaningful and should not be relied upon as
indications of performance. Some of the factors that could cause quarterly or
annual operating results to fluctuate include conditions inherent in government
contracting and our business such as the timing of cost and expense recognition
for contracts, the United States Government contracting and budget cycles,
introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic
conditions and economic conditions specific to the defense market. Because we
base our operating expenses on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term, any delay in generating or
recognizing forecasted revenues could significantly harm our business.
Fluctuations in quarterly results, competition or announcements of
extraordinary events such as acquisitions or litigation may cause earnings to
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock could significantly decline. In addition,
we cannot assure you that an active trading market will develop or be sustained
for our common stock. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of our common stock, as
well as our overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
or sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
Attracting and retaining key personnel is an essential element of our future
success.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
14
Other Risks Related to Our Indebtedness
Repayment of our debt is dependent on cash flow generated by our
subsidiaries.
Our subsidiaries own substantially all of our assets and conduct all of
our operations. Accordingly, repayment of our indebtedness is dependent on the
generation of cash flow by our subsidiaries and their ability to make such cash
available to us, by dividend, debt repayment or otherwise. Our subsidiaries may
not be able to, or may not be permitted to, make distributions to enable us to
make payments in respect of our indebtedness. Each subsidiary is a distinct
legal entity and, under certain circumstances, legal and contractual
restrictions may limit our ability to obtain cash from our subsidiaries. In the
event that we do not receive distributions from our subsidiaries, we may be
unable to make required principal and interest payments on our indebtedness
Restrictions imposed by our senior secured credit facilities and our other
outstanding indebtedness may limit our ability to operate our business and to
finance our future operations or capital needs or to engage in other business
activities.
The terms of our senior secured credit facilities restrict us and our
subsidiaries from engaging in specified types of transactions. These covenants
restrict our and our subsidiaries' ability to:
o incur additional indebtedness;
o pay dividends on our capital stock or redeem, repurchase or retire
our capital stock or indebtedness;
o make investments, loans, advances and acquisitions;
o create restrictions on the payment of dividends or other amounts to
us from our subsidiaries;
o sell assets, including capital stock of our subsidiaries;
o consolidate or merge;
o create liens; or;
o enter into sale and lease-back transactions.
In the event of a default under any of our senior secured credit
facilities, the lenders could elect to declare all amounts outstanding under the
agreements governing our senior secured credit facilities to be immediately due
and payable. If the indebtedness under our senior secured credit facilities were
to be accelerated, our assets may not be sufficient to repay such indebtedness
in full.
Our lender maintains a lock box whereby our receipts are deposited
directly into an account controlled by the lender. Consequently, our ability to
direct our funds to parties other than our lender is compromised.
We may not be able to generate sufficient cash to service all of our
indebtedness and may be forced to take other actions to satisfy our obligations
under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt
obligations depends on our financial condition and operating performance, which
is subject to prevailing economic and competitive conditions and to certain
financial, business and other factors beyond our control. We may not be able to
maintain a level of cash flows from operating activities sufficient to permit us
to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay investments and capital
expenditures or to sell assets, seek additional capital or restructure or
refinance our indebtedness. Our ability to restructure or refinance our debt
will depend on the condition of the capital markets and our financial condition
at such time. Any refinancing of our debt could be at higher interest rates and
may require us to comply with more onerous covenants, which could further
restrict our business operations. The terms of existing or future debt
instruments may restrict us from adopting some of these alternatives.
15
In addition, any failure to make payments of interest and principal on our
outstanding indebtedness on a timely basis would likely result in a reduction of
our credit rating, which could harm our ability to incur additional
indebtedness. In the absence of such operating results and resources, we could
face substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. Our senior
secured credit facilities restrict our ability to dispose of assets and use the
proceeds from the disposition. We may not be able to consummate those
dispositions or to obtain the proceeds that we could realize from them and these
proceeds may not be adequate to meet any debt service obligations then due.
These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations.
There is only a very limited public market for our securities.
The trading market for our common stock is limited and conducted on the
Pink Sheets. It is unlikely that we will be able to have our common stock will
ever become eligible for listing on NASDAQ or another stock exchange. We cannot
assure you that a more active trading market in our common stock will ever
develop or if one does develop, that it will be sustained.
Our common stock may be subject to the SEC's penny stock rules, if so,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
Our common stock may be subject to the SEC's "penny stock" rules under the
Securities Exchange Act, and subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell our common stock in the secondary market. These
rules also may cause fewer broker-dealers to be willing to make a market in our
common stock, and it may affect the level of news coverage we receive.
Future sales of our common stock, or the perception that such sales could
occur, could have an adverse effect on the market price of our common stock.
Future sales of our common stock pursuant Rule 144 under the Securities
Act, or the perception that such sales could occur, could have an adverse effect
on the market price of our common stock. Under Rule 144, shares of common stock
issued or issuable upon conversion of securities sold in private offerings are
eligible for resale by non-affiliates after six months, assuming we file reports
under the Exchange Act containing current information about us, and after one
year regardless of whether current information about us is available. The number
of shares eligible for resale pursuant to Rule 144 is enormous relative to the
trading volume of our common stock. However, it is unlikely that shares of our
Series B Preferred Stock will be converted, or our outstanding warrants and
options will be exercised, unless and until the market price of our common stock
increases significantly.
Any attempt to sell a substantial number of our shares will severely
depress the market price of our common stock. In addition, we may use our
capital stock in the future to finance acquisitions and to compensate employees
and management, which will further dilute the interests of our existing
shareholders and could eventually significantly depress the trading price of our
common stock.
The issuance of shares of our common stock, or the possible issuance of
shares, under our stock option plan may limit the price that investors are
willing to pay in the future for shares of our common stock and have the effect
of delaying or preventing a change in control of our company, and the issuance
of shares under the plan will decrease the amount of earnings and assets
available for distribution to existing holders of our common stock and dilute
their voting power.
16
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 December 31, 2008, we
had outstanding under the Plan options to purchase 6,522,764 shares. The
committee administering the Plan, which has sole authority and discretion to
grant options under the Plan, may grant options which become immediately
exercisable in the event of a change in control of our company and in the event
of certain mergers and reorganizations. The issuance of shares of our common
stock, or the possible issuance of shares, under our stock option plan may limit
the price that investors are willing to pay in the future for shares of our
common stock and have the effect of delaying or preventing a change in control
of our company, and the issuance of shares under the plan will decrease the
amount of earnings and assets available for distribution to existing holders of
our common stock and dilute their voting power.
Item 2. Properties
Our headquarters are situated on a 5.4-acre corporate campus in Bay Shore,
New York. We occupy three buildings on the campus, consisting of 76,000 square
feet.
On October 24, 2006, we entered into a "sale & leaseback" transaction
whereby we sold the buildings and real property located at the corporate campus
for a purchase price of $6,200,000 and entered into a 20-year triple-net lease
for the property. Base annual rent is approximately $540,000 for the first five
years of the lease, increases to $626,000 for the sixth year of the term, and
increases by 3% for each subsequent year. The lease grants AIM an option to
renew the lease for an additional five years. Under the terms of the lease, we
are required to pay all of the costs associated with the operation of the
facilities, including, without limitation, insurance, taxes and maintenance.
The operations of Welding Metallurgy are conducted in an 81,035 square
foot facility located in Hauppauge, New York. This space is occupied under a
sublease which provides for an annual base rent of approximately $530,000 for
2009, with increases of 3% per year through December 31, 2015.
Item 3. Legal Proceedings
Blair - HSM Companies: On November 3, 2008, we were served with an
Information Request and Restraining Notice by the HSM Blair Companies as part of
their efforts to collect on the $350,000 Confession of Judgment issued by us to
secure our agreement to reimburse the shareholders of Blair - HSM for certain
expenses incurred in connection with the abandoned acquisition.
On November 28, 2008, we entered into a settlement agreement with the
former shareholders of the Blair Companies under which we agreed to pay the HSM-
Blair Companies $350,000 in full and complete satisfaction of amounts payable
under the stock purchase agreement as follows: $50,000 on each of February 12,
2009, March 12, 2009 and April 12, 2009, $100,000 on May 12, 2009, with the
balance payable by delivery of 10,000 shares of our Series B Preferred having a
face value of $100,000. These payments have been made and the shares were issued
in June 2009.
In connection with the settlement, the former shareholders of HSM Blair
Companies and the HSM Blair Companies agreed to file a Satisfaction of Judgment
with the Supreme Court of the State of New York, Suffolk County.
Sigma Metals, Inc: Several former vendors to Sigma have commenced legal
action against Sigma seeking to recover amounts owed to them totaling
approximately $400,000. While Sigma has no significant assets remaining, we have
been attempting to negotiate settlements of these claims. One former vendor has
been awarded a judgment against Sigma in the amount of approximately $107,000.
Another former vendor has commenced litigation under various legal theories
against AIRI and others in addition to Sigma, attempting to establish liability.
In March 2009, the Company signed settlement agreements with two vendors for
payables totaling approximately $75,000. The Company will pay cash and issued
shares of its common stock.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matter to a vote of our stockholders during the 4th
quarter of 2008.
17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market for Our Common Stock
In May 2009, our common stock was dropped from the OTC Bulletin Board as a
result of our failure to file our Report on Form 10-K for 2008. Our common stock
is no longer quoted on the OTC Bulletin Board and is currently quoted only on
the Pink Sheets. During all of calendar 2008 our common stock was quoted on the
OTC Bulletin Board under the trading symbol "AIRI.OB" ("GLDS" prior to July 16,
2007 and "ASHN" prior to February 15, 2006). The prices set forth below reflect
the quarterly high and low sale price information for shares of our common stock
for the periods indicated, as reported by Yahoo Finance.
2007 Quarter Ended High Low
- ------------------ ------ ------
December 31, 2007 $ 0.33 $ 0.23
September 30, 2007 0.58 0.25
June 30, 2007 0.40 0.25
March 31, 2007 0.33 0.22
2008 Quarter Ended High Low
- ------------------ ------ ------
December 31, 2008 $ 0.13 $ 0.03
September 30, 2008 0.17 0.09
June 30, 2008 0.24 0.17
March 31, 2008 0.27 0.20
As of December 31, 2008, there were 208 active holders of record of our
common stock.
We have not declared or paid any cash dividends on our common stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
Prior to the merger, AIM was a Subchapter S corporation and made distributions
to its shareholders to enable them to pay income taxes on their allocable
portion of our income.
Payment of dividends on our common stock is currently restricted by the
terms of our bank debt and Series B Preferred Stock. Our ability to pay the
dividend on our Series B Preferred Stock is restricted by the terms of our
Series B Preferred Stock.
Recent Sales of Unregistered Securities
We have reported all sales of our unregistered equity securities that
occurred during 2008 in our Reports on Form 10-QSB or Form 8-K, as applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of our fiscal year ended December 31, 2008,
neither we nor any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under
the Exchange Act) purchased any shares of our common stock, the only class of
our equity securities registered pursuant to section 12 of the Exchange Act.
Item 6. Selected Financial Data.
Not applicable.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion of our results of operations constitutes
management's review of the factors that affected our financial and operating
performance for the years ended December 31, 2008 and 2007. This discussion
should be read in conjunction with the financial statements and notes thereto
contained elsewhere in this report.
General
AIM has evolved from an individual parts manufacturer to a manufacturer of
subassemblies (i.e. being an assembly constructor) and an engineering integrator
of products that are assembled by a skilled labor force.
Welding Metallurgy is a supplier of welded assemblies and performs tube
bending, sheet metal fabrication and precision assembly. Welding Metallurgy also
manufactures components for various subsectors of the commercial and military
aerospace industry. Its customers include Sikorsky, Lockheed Martin, Boeing and
Northrop Grumman.
Sales of parts and services to one customer accounted for 49% of revenue
in 2008, and are subject to General Ordering Agreements which were recently
renegotiated and extended through 2012. A second customer accounted for 12% of
revenue for 2008 and a third customer accounted for 11% of revenue for 2008.
Results of Operations
We completed the acquisition of Sigma on April 16, 2007 and the
acquisition of Welding Metallurgy on August 26, 2007.
Management made the decision to discontinue the operations of Sigma during
the period ended September 30, 2008. We reached an agreement to sell certain
assets of the business to the former owners of Sigma in October 2008 and
discontinued operations of Sigma on October 31, 2008. In January 2009, we
concluded the sale of certain assets of the business. The results of operations
of Sigma are shown separately as discontinued operations. (See Note 15 to the
Consolidated Financial Statements.)
The results of Welding Metallurgy since August 27, 2007 are included in
our financial statements for the year ended December 31, 2007 and reflected in
the discussion below.
Segment Data
We follow SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which establishes standards for reporting
information about operating segments in annual and interim financial statements,
and requires that companies report financial and descriptive information about
their reportable segments based on a management approach. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
As a result of the acquisition of Sigma in April 2007 and Welding
Metallurgy in August 2007, we had three reportable segments: AIM, Sigma and
Welding Metallurgy. With the disposition of Sigma, we now have two reportable
segments; AIM and Welding Metallurgy.
AIM is primarily engaged in processing, cutting, milling, machining and
hardening metals into assemblies that are widely used in the aerospace industry.
Welding Metallurgy is a fabricator of parts primarily used in the defense
industry. Welding specializes in complex welding applications and in tubular
structures.
The accounting policies of each of the segments are the same as those
described in the Summary of Significant Accounting Policies. We evaluate
performance based on revenue, gross profit contribution and assets employed.
Operating costs that are not directly attributable to a segment are included in
the Air Industries Machining segment. These costs include corporate costs such
as legal, audit, tax and other professional fees related to being a public
company.
We are in the process of integrating Welding Metallurgy into our fully
integrated Enterprise Resource Program (ERP) for operational and financial
control.
AIM manufactures aircraft structural parts and assemblies principally for
prime defense contractors in the aerospace industry. During 2008, approximately
74% of our revenues were derived from sales of parts and assemblies for military
applications. The majority of our sales are to other military contractors and
direct sales to the military (U.S. and NATO) are only a minor portion of our
business.
19
We have evolved from being a manufacturer of individual parts to being a
manufacturer of subassemblies (i.e. being an assembly constructor). We currently
produce over 2,400 individual products or Stock Keeping Units, (or "SKU's").
These products are produced and assembled by a skilled labor force into
electromechanical devices, mixer assemblies, rotor-hub components, flight
controls, arresting gears, vibration absorbing assemblies, landing gear
components and many other subassembly packages.
During the first half of 2008, and continuing into the third quarter, we
attempted to acquire Blair Industries, Inc. and certain of its affiliated
companies ("Blair-HSM"). During the third quarter of 2008, management determined
to cease its efforts to acquire Blair-HSM. As a result, we expensed
approximately $838,000 in previously capitalized costs relating to the
acquisition and $350,000 for possible expenses payable to Blair-HSM arising out
of the termination of the purchase and sale agreement. This obligation was
secured by a confession of judgment we delivered to the shareholders of
Blair-HSM.
As part of our ongoing effort to position ourselves to win large,
long-term and higher margin contracts. During 2007, and continuing in 2008, we
devoted substantial funds (approximately $1.5 million in 2007 and $1.061 million
for 2008 for new projects, including the production of subassemblies for the
Joint Strike Fighter ("JSF") landing gear and the A380 drag strut assemblies.
We began delivering the first articles for the Joint Strike Fighter
("JSF") program during December 2006, and made our first deliveries for the CV
(Navy) version in late 2008. We delivered our first articles for A380 assemblies
in June 2008. We also have submitted proposals for gear housing assemblies and
throttle quadrants as part of the BlackHawk helicopter program but we do not, as
yet, have firm orders for these parts.
Liquidity Concerns
The Company continues to experience liquidity difficulties. The Company is
highly leveraged and will need to generate substantial cash flow from operations
to satisfy its debt service obligations.
To supplement our working capital, in June 2008, we sold $2,950,000
principal amount of our junior subordinated notes (the "Old Notes"), together
with 983,324 shares of our common stock, to accredited investors for total cash
consideration of $2,950,000 in a private placement. In September 2008, to
address our liquidity concerns and to provide additional working capital, we
sold an additional $1,955,000 principal amount of junior subordinated notes,
(the "New Notes") together with 156,400 shares of our Series B Preferred, in a
private placement for a total purchase price of $1,955,000. The New Notes, which
are payable on May 31, 2010, or earlier upon completion of one or a series of
financings resulting in aggregate gross proceeds of at least $10 million, bear
interest at the rate of 1% per month (or 12% per annum).
Subsequent to September 30, 2008, we sold an additional $630,000 principal
amount of New Notes, together with 50,400 shares of Series B Preferred for a
total purchase price of $630,000. An aggregate of $2,585,000 principal amount of
our junior subordinated notes due May 2010 and 206,800 shares of our Series B
Preferred were issued in the offering. In addition, in October 2008, holders of
an aggregate of $2,950,000 principal amount of our outstanding Old Notes
exchanged their Old Notes for an equal principal amount of New Notes and 236,000
shares of Series B Preferred. In 2009, we sold in a private placement to
accredited investors, an additional $445,000 principal amount of New Notes
together with 35,600 shares of our Series B Preferred for a total purchase price
of $445,000.
The terms of the New Notes and the Old Notes are identical, except that
the rate of interest on the Old Notes was adjusted to 1% per month (12% per
year).
Nevertheless, we remain highly leveraged and are continuing to experience
liquidity constraints arising from:
o Costs associated with our acquired businesses which have not yet
attained anticipated operating results, including Sigma which has
now been discontinued;
o Costs associated with an inventory build-up in anticipation of
sales,
o Costs incurred in connection with the efforts to acquire Blair-HSM.
These liquidity constraints became very acute during the third quarter
ended September 2008, and negatively affected our revenues and gross margin. Our
liquidity difficulties affected all of our operations. Because we were unable to
purchase parts and raw materials on a timely basis, our production of products
was interrupted and shipments to customers delayed. This reduced revenues and
gross margin also was affected as our production lines were frequently stalled
awaiting delivery of raw materials or parts causing labor cost inefficiencies.
20
While management is working towards and expects a return to more timely
delivery of product to customers and the restoration of our gross margins in
line with historical results, we continue to experience liquidity constraints.
While these constraints have eased somewhat of late, there can be no assurance
that we will be able to generate sufficient cash flow from operations or obtain
additional financing to the extent required for our working capital needs.
Discontinued Operations:
During the quarter ended September 30, 2008, the Company's Board of
Directors decided to discontinue the operations at Sigma. (See Note 15 to the
consolidated financial statements included elsewhere in this report.)
Accordingly, Sigma's results of operations have been reported as discontinued
operations for all periods presented. Sigma's assets and liabilities have been
classified as held for sale on the Company's consolidated balance sheet for all
periods presented.
The table below indicates the results of operations for Sigma Metals for the
period January 1, 2008 through October 31, 2008, and for the period April 16,
2007 (the date of acquisition) to December 31, 2007.
2008 2007
------------ ------------
Net sales $ 10,206,000 $ 9,891,000
Cost of sales 10,555,000 7,109,000
------------ ------------
Gross (loss) profit (349,000) 2,782,000
Operating costs and expenses 3,791,000 2,370,000
------------ ------------
(Loss) income from operations (4,140,000) 412,000
Interest and financing costs 57,000 108,000
Write-off of goodwill 1,550,000 --
Write-off of intangibles 3,329,000 --
------------ ------------
Net (loss) income $ (9,076,000) $ 304,000
============ ============
Continuing Operations:
Consolidated operations reflect the operations of AIM and Welding
Metallurgy since the date of its acquisition in 2007. Consolidated net sales
from continuing operations for the year ended December 31, 2008 were
$38,694,000, an increase of approximately $2.5 million or 7 % compared with
$36,178,000 for the prior year. Revenues at AIM increased slightly by $658,000
or 2% to $34,746,000 for the year ended December 2008 from $34,088,000 for the
year ended December 31, 2007. Revenues at Welding were $3,948,000 for the year
ended December 31, 2008 as compared to $2,090,000 for the year ended December
31, 2007, which included only the four month period August 26, 2007 to December
31, 2007.
21
Year Ended December 31,
-----------------------
2008 2007 Increase/(Decrease) %
------------- ------------- ------------------- ---------
Air Industries Machining
Net Sales $ 34,746,000 $ 34,088,000 $ 658,000 1.93%
Gross Profit 6,917,000 7,688,000 (771,000) -10.03%
Pre Tax Income 887,000 2,740,000 (1,853,000) -67.63%
Assets 31,568,000 31,304,000 264,000 0.84%
Sigma Metals
Net (Loss) Income From Discontinued
Operations (9,076,000) 304,000 9,380,000 -3,085.53%
Assets Held for Sale 1,556,000 11,365,000 (9,809,000) -86.31%
Welding Metallurgy
Net Sales 3,948,000 2,090,000 1,858,000 88.90%
Gross Profit 2,144,000 1,588,000 556,000 35.01%
Pre Tax Income (2,776,000) 1,026,000 (3,802,000) -370.57%
Assets 5,773,000 8,426,000 (2,653,000) -31.49%
Corporate
Net Sales -- -- -- --
Gross Profit -- -- -- --
Pre Tax Income (6,322,000) (3,504,000) (2,818,000) 80.42%
Assets 14,953,000 22,962,000 (8,009,000) -34.88%
Consolidated
Net Sales 38,694,000 36,178,000 2,516,000 696%
Gross Profit 9,061,000 9,276,000 (215,000) -2.32%
Net Income (Loss) from Discontinued Ops (9,076,000) 304,000 (9,380,000) -3,085.53%
Pre Tax Income (Loss) (8,211,000) 262,000 (8,473,000) -3,233.97%
Provision (Benefit) for Taxes (744,000) 365,000 (1,109,000) -303.84%
Net Income (Loss) (16,543,000) 201,000 (16,744,000) -8,330.35%
Elimination of Assets (12,945,000) (23,767,000) 10,822,000 -45.53%
Assets 39,349,000 50,290,000 (10,941,000) -21.76%
There were three customers that represented $27,899,000 or 71.3% of the
total sales for the year ended December 31, 2008 and $28,752,000 or 80.6% for
the year ended December 31, 2007. One customer accounted for approximately 49%
and 59% of net sales for the year ended December 31, 2008 and 2007,
respectively. Sales to that customer are subject to General Ordering Agreements
which extend through 2013. Amounts receivable from this customer at December 31,
2008 and 2007 were approximately $525,000 or 9.6% and $1,666,000 or 32.0% of net
accounts receivable, respectively. The second customer accounted for 10.7% and
10.7% of sales for 2008 and 2007, respectively, and $1,275,000 or 23.2% and
$1,221,000 or 23.0% of net accounts receivable at December 31, 2008 and 2007,
respectively. The third customer represented 11.9% and 10.4% of sales at
December 31, 2008 and 2007, respectively, and $1,296,000 or 23.7% and $541,000
or 12.8% of the net accounts receivable at December 31, 2008 and 2007
respectively.
Consolidated gross profit from continuing operations for the year ended
December 31, 2008 decreased slightly by approximately $(215,000) or 2.32% to
approximately $9,061,000 for the year ended December 2008, as compared to gross
profit of $ 9,276,000 for the prior year. Gross profit at AIM declined by
approximately $(771,000) or (10%) to $6,917,000 for the year ended December
2008, as compared to $7,688,000 for the prior year. For the year ended December
2008, gross margin declined by 2.25 percentage points, or nearly (10%) from
22.5% percent of sales in 2007 to 20.3% of sales for the 2008. Gross profit at
Welding increased by $556,000 (35%) for the year ended December 2008 from the
four month period August 27, 2007 to December 31, 2007.
22
Operating costs increased by $7,025,000 or 93% to $14,550,000 for the year
ended December 31, 2008 compared to for the year ended December 31, 2007. The
principal components of the increase were:
o General and administrative at Welding Metallurgy increased by $3,974,000
to $4,311,000. Welding was acquired in August 2007 and only four months of
operating costs included in 2007 as compared to a full year in 2008. In
addition, we incurred a charge of $3,265,000 for the impairment of
goodwill.
o General and administrative at AIM increased by approximately $957,000 to
$4,422,000 for the year ended December 31, 2008. The increase was mainly
attributable to the impairment of goodwill in the amount of $1,265,000.
o General and administrative at AIRI increased by $1,920,000 or 80 % to
$5,131,000 from $3,211,000 for the year ended December 31, 2008 and 2007,
respectively. The major components of this increase is attributable to
approximately $1,100,000 of pre-acquisition costs that were expensed
during the quarter based on the Company's decision to cease its efforts to
acquire Blair-HSM, $268,000 for the expensing of severance to the former
Chairman of the Board, $275,000 for consultants required by our lenders in
the review and development of new covenants and the disposal of Sigma
assets, and additional professional fees of approximately $300,000 for
legal and accounting services.
o Selling and marketing expenses were $686,000 in Fiscal 2008, an increase
of $174,000 or 33% from selling and marketing expenses of $512,000 in
Fiscal 2007. This increase was attributable to increases in expense at AIM
together with inclusion of a full year of costs at Welding Metallurgy
Interest and financing costs consist of interest paid and accrued as well
as amortization of debt discounts resulting from recording debt obligations at
fair value and the issuances of the Company's Preferred Series B in connection
with the Old Notes and New Notes. Interest and financing costs were
approximately $2,780,000 for year ended December 31, 2008, an increase of
approximately $1,309,000 or (89%) as compared to the year ended December 31,
2007.
The increase in interest expense results from our higher level of debt
(approximately $25,400,000) resulting from:
o Debt issued for the acquisitions of Sigma and Welding during 2007, plus,
o the junior subordinated notes we issued in June 2008, September 2008 and
October 2008;
o Offset to a minor degree by generally lower interest rates on our bank
revolving and term debt.
The benefit for income taxes was approximately $744,000 in the year ended
December 2008 compared to a provision of approximately $365,000 in the year
ended December 2007. The Company computes its income tax provision or benefit
according to SFAS No. 109, "Accounting for Income taxes" which uses the asset
and liability approach to financial reporting for income taxes. The substantial
difference from income taxes expected at the statutory rate and actual income
tax provisions and benefits results primarily from state income tax and
valuation allowance, and expenses which will never be deductable due to basis
differences at the acquired company (Sigma) and stock compensation and other
charges that are not deductible.
As a result of the above factors, our loss from continuing operations was
$(7,467,000) for the year ended December 31, 2008, an increase of approximately
$(7,364,000) compared to a loss of $(103,000) for 2007.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Liquidity and Capital Resources
The Company continues to suffer from a lack of liquidity. The Company is
highly leveraged and will need to generate substantial cash flow from operations
to satisfy its debt service obligations.
As of December 31, 2008, the Company's total liabilities were
approximately $33.7 million, including approximately $15.8 million payable to
its bank lenders and secured by substantially all its assets. Because the
Company is required to maintain a "lock box" account with PNC Bank, into which
substantially all of the Company's cash receipts are paid, if its bank lenders
were to cease lending, the Company would lack the funds to continue its
operations.
23
The Company received gross proceeds from the sale of its junior
subordinated notes and equity securities of $5.5 million during 2008. The
receipt of these gross proceeds did ameliorate, to some degree, the Company's
liquidity crisis but this was partially offset by the Company's bank lenders
imposing a reduction in availability of $900,000. The Company's senior bank debt
matures in April 2010 and its subordinated bank debt in August 2010. There can
be no assurance that the Company's lenders will agree to extend their loans.
Absent significant improvement in results of operations; it is not likely that
the Company will be able to refinance its bank indebtedness with another lender.
To alleviate its liquidity difficulties, during 2008, the Company sold
certain assets of its Sigma business, renegotiated and extended the payment
terms of its indebtedness to the former owners of Welding, and also has ceased
its efforts to acquire Blair-HSM. To further address liquidity difficulties, the
Company has issued, and will likely continue to issue, additional shares of its
Series B Preferred in lieu of payment of cash dividends on its Series B
Preferred. This will dilute the equity ownership and voting power of holders of
its Common Stock.
The ability of the Company to maintain its current level of operations is
subject to the cooperation of its bank lenders and other parties which hold its
notes. If the Company's bank lenders were to reduce the amounts loaned to the
Company, the Company would have no choice other than to reduce it operations and
perhaps seek to liquidate certain assets. Any forced liquidation of assets would
likely yield less than the amounts at which such assets are valued by the
Company. See the discussion of "Risk Factors" under Item 1A of Part of this
report.
Our measures of liquidity include the following:
December 31,
2008 2007 Change
----------- ----------- -----------
Cash $ 164,000 $ -- $ 164,000
Working Capital 3,045,000 10,561,000 (7,516,000)
Revolving Loan Balance 10,779,000 11,332,000 (553,000)
We continue to experience liquidity constraints due to:
o Costs associated with our acquired businesses which have not yet
attained anticipated operating results, including Sigma which has
been discontinued,
o Costs incurred in connection with our efforts to acquire Blair-HSM,
which ceased in September 2008,
o Losses incurred resulting from decreases in gross margin arising
partially from failure to efficiently and timely produce and ship
products at AIM as a result of disruptions due to delays in
receiving inventory.
With the cessation of efforts to acquire Blair-HSM as well as the
disposition of Sigma, we have now refocused our efforts on managing our core
business at AIM and at Welding. We have begun initiatives to:
o Reduce General and Administrative costs - beginning in June 2008, we
implemented a cost reduction program designed to reduce and provide
enhanced control of general and administrative expenses. These
initiatives have included layoffs of personnel and elimination of
management positions and a reduction in management compensation.
o Accelerate production - our liquidity issues have in part resulted
in delays in our receiving raw materials and component parts, thus
delaying our shipments to customers. With the recent increase in
available funds we are accelerating the completion and shipment of
product to customers.
Our credit facility with PNC Bank N.A. ("PNC") requires that all cash
receipts (except those at Welding) be swept on a daily basis to our loan
accounts reducing the loan balance. Therefore, at any point in time our book
cash balances are negligible.
The revolving loan portion of the credit facility with PNC is for a
maximum of $14,000,000 subject to periodic, usually monthly, calculations of
borrowing availability under a borrowing base calculation. Daily cash
collections of accounts receivable reduce the loan balance by 15% of the amount
collected - the difference between the cash actually collected and the 85%
previously billed and against which the bank advanced funds - and daily
shipments to customers increase availability by 85% of the amount billed.
24
We have incurred debt financing and issued the preferred stock in part to
support our acquisitions of Sigma and Welding. The remaining outstanding
balances are indicated below
December 31,
2008 2007
----------- -----------
Note payable to former AIM shareholder $ 433,000 $ 625,000
Notes payable to former Sigma shareholders (a) 638,000 1,216,000
Note payable to former Welding shareholders 2,000,000 2,000,000
Additional purchase price payable to Welding shareholders -- 190,000
----------- -----------
Total 3,071,000 4,031,000
Less: discount for imputed interest on Welding notes -- (92,000)
----------- -----------
Total: $ 3,071,000 $ 3,939,000
=========== ===========
(a) The notes payable to former Sigma stockholders was converted to Series B
Preferred in January 2009.
To supplement our working capital, in June 2008 we sold $2,950,000
principal amount of our junior subordinated notes (the "Old Notes"), together
with 983,324 shares of our common stock, to accredited investors for total cash
consideration of $2,950,000 in a private placement. When the junior subordinated
notes were issued, Steel City Capital Funding LLC ("SCCF") requested and PNC
acquiesced and blocked our ability to utilize certain collateral in the amount
of $900,000. Because of the nature of the line of credit, it is classified with
current liabilities. This blocking had the effect of reducing the availability
of cash resulting from the issuance of the junior subordinated notes.
In September 2008, to further address our liquidity concerns and to
provide additional working capital, we sold an additional $1,955,000 of
principal amount of junior subordinated notes, (the "New Notes") together with
156,400 shares of our Series B Preferred, in a private placement for a total
purchase price of $1,955,000. The New Notes, which are payable on May 31, 2010,
or earlier upon completion of one or a series of financings resulting in
aggregate gross proceeds of at least $10 million, bear interest at the rate of
1% per month (or 12% per annum).
Subsequent to September 30, 2008, we sold an additional $630,000 principal
amount of New Notes, together with 50,400 shares of Series B Preferred for a
total purchase price of $ 630,000. An aggregate of $2,585,000 principal amount
of our junior subordinated notes due 2010 and 206,800 shares of our Series B
Preferred were issued in the offering. In addition, in October 2008, holders of
an aggregate of $2,950,000 principal amount of our outstanding Old Notes
exchanged their Old Notes for an equal principal amount of New Notes, plus
236,000 shares of Series B Preferred. The terms of the New Notes and the Old
Notes are identical, except that the rate of interest on the Old Notes was
adjusted to 1% per month (12% per year). In 2009, we sold in a private placement
to accredited investors, an additional $445,000 principal amount of New Notes
together with 35,600 shares of our Series B Preferred for a total purchase price
of $445,000.
A summary of our contractual obligations as of December 31, 2008 is
included in the table below:
Payments Due By Period
Less than More than
Contractual Obligations Total 1 Year* 1-3 Years 3-5 Years 5 Years
----------- ----------- ----------- ----------- -----------
Long-term debt and capitalized lease obligations $27,243,000 $17,061,000 $ 8,528,000 $ 1,126,000 $ 528,000
Operating lease obligations 17,096,000 1,070,000 2,208,000 2,446,000 11,372,000
----------- ----------- ----------- ----------- -----------
TOTAL $44,339,000 $18,131,000 $10,736,000 $ 3,572,000 $11,900,000
=========== =========== =========== =========== ===========
* Includes revolving and term loans that are due in 2010 but the loan
agreements permit the lenders to demand payment at any time (see Note 8 to
consolidated financial statements).
In April 2008, we prepaid approximately $250,000 of the Sigma seller
notes. In January 2009, we concluded the sale of certain assets of Sigma to the
previous owners, and the holders of the Sigma seller notes. As part of this
transaction, the remaining balance payable to the note holders was converted to
Series B Preferred.
As a result of our increased debt described above, interest expense has
risen to approximately $2,657,000 from approximately $1,699,000 for the years
ended December 2008 and 2007.
25
During 2007 and continuing in 2008, we devoted substantial funds
(approximately $1,500,000 in 2007 and $1,061,000 in 2008) to engineering costs
and manpower as part of an ongoing effort to participate in several significant
long-term, higher margin projects, including the production of subassemblies for
the Joint Strike Fighter ("JSF") landing gear and the A380 drag strut assemblies
in the future.
During the year ended December 2008, inventories increased for the Company
by approximately $2,859,000 or approximately 16%. This increase resulted in part
from the use of our production capacity at AIM to manufacture products whose
delivery dates have been pushed back and a shift in the nature of production at
Welding.
The components of inventory consisted of the following:
December 31, Net Change
2008 2007 In dollars %
------------ ------------ ------------ --
Raw Materials $ 6,809,000 $ 5,470,000 $ 1,339,000 24%
Work In Progress 9,633,000 7,755,000 1,878,000 24%
Finished Goods 5,224,000 5,015,000 209,000 4%
Inventory Reserve (567,000) -- (567,000) --
------------ ------------ ------------ --
Total Inventory $ 21,099,000 $ 18,240,000 $ 2,859,000 16%
============ ============ ============ ==
Inventory owned by Sigma is classified in assets held for sale on the
accompanying consolidated balance sheet. At December 31, 2008 and December 31,
2007 the value of the inventory owned by Sigma was $954,000 and $3,580,000,
respectively.
The increase in our inventory levels, coupled with our decision to fund
engineering and other costs to secure future higher margin projects and the
costs associated with our efforts to acquire Blair-HSM, have strained our
working capital negatively impacting our liquidity and consequently our ability
to work on all of the projects in-house.
The debt service associated with the junior subordinated notes and our
other debt obligations is substantial and may impair our ability to operate our
business. Further, until our liquidity improves significantly we will continue
to pay the 7% dividend on the outstanding shares of Series B Preferred in
additional shares of Series B Preferred rather than cash. Issuing additional
shares of Series B Preferred will dilute the equity and voting interests of
holders of our common stock.
Since the PNC Loan Facility requires that all cash at our operating
subsidiaries be swept on a daily basis to our loan accounts, at December 31,
2008 and December 31, 2007, our subsidiaries had negligible cash and cash
equivalents. At December 31, 2008, we had working capital of $3,045,000 as
compared to working capital of $10,561,000 as of December 31, 2007. This
decrease reflects the proceeds of the placement of our Series B Preferred,
offset by the costs relating to the Blair-HSM acquisition attempt, costs
incurred in the discontinuance of Sigma and by the our negative cash flows from
continuing operations during the year ended December 31, 2008.
It should be noted that current liabilities includes $15,797,000 payable
to our bank lenders. Under the terms of our loan agreements, these amounts are
not payable until April 30, 2010 and August 24, 2010, respectively, but
$15,386,000 has been included in current liabilities due to the right of the
banks to demand immediate repayment which management believes are not likely to
occur, combined with the existence of a lockbox arrangement. We believe that our
cash requirements for operations in the next twelve months will be met by
revenues from operations, cash reserves, and amounts available under the PNC
Loan Facility.
As of December 31, 2008, our outstanding debt consisted of $15,797,000
under our loan facility made up of $15,386,000 classified as short-term and
$411,000 classified as long-term. Notes payable to the former shareholders of
our subsidiaries AIM, Sigma and Welding of $3,071,000 are classified as
$1,053,000 short-term and $1,968,000 as long-term. Capital lease obligations of
$1,960,000 are classified as $465,000 short-term with the remaining balance of
$1,494,000 classified as long-term. Additionally, at December 31, 2007, there
was a standby letter of credit outstanding in the amount of $127,500. In
addition, reflecting the sale leaseback of AIM's corporate campus, we now pay
approximately $45,000 per month as rent, plus $15,662 to fund real estate tax
escrow accounts and other reserves held by the landlord.
26
We used $140,000 of cash in operations during the year ended December 31,
2008. The principal components were: The use of cash in operations reflects an
increase in inventory of $2,859,000, a decrease in our deposits with vendors of
$805,000, a decrease in prepaid expenses of $77,000, and a decrease in our
accounts payable and accrued expenses of $260,000.
In 2005, in connection with the acquisition of AIM, we paid the sellers
$2,040,103 in cash and incurred notes payable obligations to the sellers in the
aggregate principal amount of $1,627,000, of which $665,000 plus accrued
interest of $54,511 were in the form of convertible promissory notes which were
converted by the holders into 1,799,432 shares of common stock at a conversion
price of $0.40 per share on January 26, 2007. The remaining principal amount,
$433,000, is payable in equal quarterly installments of $48,100 of principal,
plus interest through March 2011.
In April 2007 connection with the acquisition of Sigma, we paid the
sellers $4,060,796 in cash and incurred notes payable obligations to the former
shareholders of Sigma Metals in the aggregate principal amount of $1,497,411.
The operations of Sigma Metals were discontinued in October 2008 and in January
2009, we concluded the sale of certain assets of Sigma to the previous owners,
and the holder of the Sigma seller notes. As part of this transaction, the
remaining balance payable to the note holders was converted to Series B
Preferred.
In connection with the acquisition of Welding Metallurgy, we paid the
sellers $3,500,000 in cash and incurred a notes payable obligation to the former
stockholders of Welding Metallurgy in the aggregate principal amount of
$2,000,000, which bore no interest until August 24, 2008, and then at 7% per
annum thereafter ("Old Note"). To reflect the fact that this note did not bear
interest for the first year, we discounted the value of the note and expensed
the imputed interest monthly accreting up the value of the note to its face
value of $2,000,000 in August 2008.
In August 2008, the Company and the former owners reached an agreement
restructuring the Company's obligation under this note by executing an Amended
and Restated Subordinated Promissory Note, the "New Note". The principal balance
of this New Note is $ 2,050,000 (consisting of $2,000,000 principal amount of
the promissory note dated August 25, 2007, plus an unpaid working capital
adjustment in the amount of $50,000), Payments due under the New Note are:
$25,000 on each of October 31, 2008 and December 31, 2008, an additional $50,000
on March 31, 2009, followed by 19 equal consecutive quarterly installments of
$100,000, commencing on June 30, 2009 and continuing through December 31, 2013,
payable on the last business day of each March, June, September and December,
commencing June 30, 2009, and continuing through and including December 31,
2013, with one final payment of $50,000 on March 31, 2014, plus accrued interest
thereon at the rate of 7% per annum from August 24, 2008. As additional
consideration the former owners were granted a warrant exercisable for 5 years
to purchase 100,000 shares of common stock at $0.109 per share. The warrant
expires on August 24, 2014.
The Company has made the payments due on September 30 and December 31,
2008, leaving a principal balance due of $2,000,000 at December 31, 2008.
Our obligation under both the Old Note and New Note are subordinate to our
indebtedness to PNC and SCCF. In March 2009, the Company received a notice from
SCCF, exercising their right to block payments under the New Note. Accordingly,
the payment due on March 31 was not made. In April 2009, the Company received a
notice from the holders of the New Note that an event of default had occurred,
and accordingly, interest under the New Note would now accrue at 11% per annum.
Per the terms of the fourth amendment to the SCCF Loan, all payments have been
blocked until April 30, 2010. As a result of this, the Company has entered into
a modification agreement with the holder of the New Note to amend the payment
terms. The Company has paid a fee to the holder of $50,000 to modify the loan
agreement to block the payments until April 30, 2010 and accrue interest at a
rate of 9% per annum.
To finance the acquisition of Sigma and to provide us with additional
working capital and funds for future acquisitions, we completed a private
placement of our Series B Preferred in which we raised gross proceeds of
$8,023,000. A first closing, in which we received gross proceeds of $4,955,000,
occurred simultaneously with the acquisition of Sigma and was entirely devoted
to the acquisition. A second closing occurred on May 3, 2007, in which we
received additional gross proceeds of $3,068,000.
27
In connection with the 2007 acquisition of Welding Metallurgy, the terms
of the PNC Loan Facility were amended and modified to include Welding Metallurgy
as a borrower and AIRI and Welding Metallurgy as guarantors of amounts due under
the PNC Loan Facility. In connection with that amendment, Welding Metallurgy
pledged all of its assets and properties to PNC to secure its obligations under
the PNC Loan Facility. The maximum revolving advance amount was increased by an
additional $3,000,000 to $14,000,000.
Additionally, in connection with the Welding Metallurgy acquisition, SCCF
provided a Term Loan of $4,500,000. The Term Loan is payable on August 24, 2010.
Borrowings under the SCCF Loan Agreement bear interest, payable monthly,
generally at a rate of 6% over the base commercial lending rate of PNC as
publicly announced to be in effect from time to time. Under the terms of our
loan agreement, these amounts are not payable until August 24, 2010, but have
been included in current liabilities due to the right of the banks to demand
immediate repayment which management believes are not likely to occur, combined
with the existence of a lockbox arrangement. In addition, to secure the
obligations due SCCF, we pledged to SCCF the capital stock of AIM, Sigma, and
Welding Metallurgy, and each of those entities granted to SCCF a security
interest on all of their assets.
Termination of Agreement for the Acquisition of the Blair Companies
On November 15, 2007, we entered into a Stock Purchase Agreement with the
shareholders of Blair Industries, Inc., a New York corporation, Blair
Accumulators, Inc., a New York corporation, H.S.M.Machine Works, Inc., a New
York corporation, and H.S.M. Machine Works, Inc., a North Carolina corporation
(collectively, the "Blair Companies") to acquire all of outstanding capital
stock of the Blair Companies.
The purchase price for the Blair Companies was $16,358,000, subject to
adjustment based upon the Net Asset Value (as defined in the Blair Purchase
Agreement) of the Blair Companies as of the date of closing. The purchase price
was payable in a combination of cash, promissory notes and shares of our
preferred stock having a liquidation value of $1,000,000.
Under the Stock Purchase Agreement, as amended July 18, 2008, the cash
portion of the purchase price was increased from $11 million to $14 million and
the closing was subject to certain conditions including, but limited to, our
ability to secure not less than $15 million in debt or equity financing. We
agreed to pay the stockholders of the Blair Companies a break-up fee of $350,000
under certain circumstances. This agreement was secured by a confession of
judgment given to the shareholders of the Blair Companies.
On November 28, 2008, we entered into a settlement agreement with the
principals of the Blair Companies and agreed to pay HSM Blair $350,000 in
reimbursement of certain expenses incurred in connection with the aborted
acquisition of which $250,000 was payable in cash over a four month period
commencing in February 2009 with the balance payable through the issuance of
10,000 shares of our Series B Preferred having a face value of $100,000. These
payments have been made and the shares were issued in June 2009.
Restatement of Operating Results
The 2007 financial statements were restated for the following:
During the preparation of the Company's December 31, 2008 consolidated
financial statements, the Company discovered that certain expenses which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses and therefore both cost of goods sold and
accounts payable and accrued expenses has been understated by a like amount, The
aggregate effect was to reduce the net income of the Company for the year ended
December 31, 2007 and to reduce stockholders' equity at December 31, 2007 by
approximately $426,000.
The Company received a letter from the Staff of the Securities and
Exchange Commission requesting information regarding, among other items, the
accounting treatment of the Series B Preferred issued in the second quarter of
2007. Upon reviewing the issue, the Company determined that it had to record a
beneficial conversion feature upon the issuance of the Series B Preferred of
$1,589,000.
As a result of the restatement, net loss attributable to common
stockholders for the year ended December 31, 2007 increased by $2,015,000 ($0.03
per share). Stockholders' equity at December 31, 2007 decreased by a like
amount. For a more detailed explanation of the restatement, see our amended Form
10-K for the year ended December 31, 2007 filed by the Company on or about
October 15, 2009.
28
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our financial results.
Inventory Valuation
We value inventory at the lower of cost on a first-in-first-out basis or
market.
AIM purchases inventory only when it has signed non-cancellable contracts
with its customers for orders of its finished goods. Welding Metallurgy
generally produces pursuant to customer orders and maintains relatively low
inventory levels. AIM occasionally produces finished goods in excess of purchase
order quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase orders. We
periodically evaluate inventory items that are not secured by purchase orders
and establish reserves for obsolescence accordingly. We also reserve an
allowance for excess quantities, slow-moving goods, and obsolete items.
Capitalized Engineering Costs
We have contractual agreements with certain customers to produce parts
which the customers design. The production of these parts requires
pre-production engineering and programming of our machines. We account for these
pre-production costs pursuant to Emerging Issues Task Force Issue No. 99-5,
"Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements"
("EITF 99-5"). The pre-production costs associated with a particular contract
are capitalized and beginning with the first shipment of product pursuant to
such contract, amortized over a period determined as follows: (i) if
deliverables are scheduled for a period of three years or less, on a straight
line basis over the anticipated length of the contract and (ii) if deliverables
are scheduled for more than three years, on a straight line basis over three
years. If we were to be reimbursed for a portion of the pre-production expenses
associated with a particular contract only the unreimbursed portion would be
capitalized under EITF 99-5. We also may progress bill on certain engineering
being expended. These billings are recorded as progress billings (a reduction of
the associated inventory) until the appropriate revenue recognition criteria
have been met. The Terms and Conditions contained in our customer purchase
orders often provide for liquidated damages in the event that a stop-work order
is issued prior to the final delivery of the product.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." We generally recognize revenue when products are shipped
at which point the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. Payments received in
advance from customers for products delivered are recorded as customer advance
payments until earned, at which time revenue is recognized. Air Industries
utilizes a return merchandise authorization procedure for determining whether to
accept returned products. Customer requests to return products are reviewed by
the contracts department and if the request is approved credit is issued upon
receipt of the product. Revenues are recorded net of returns and allowances.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or the entire deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
29
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"). SFAS No.
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
reward--known as the requisite service period. No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. The grant-date fair value of employee share options and
similar instruments are estimated using option-pricing models adjusted for the
unique characteristics of those instruments.
Equity instruments issued to non-employees are recorded at their fair
values as determined in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods and
Services", and are periodically revalued as the stock options vest and are
recognized as expense over the related service period.
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. We apply SFAS No. 142,
Goodwill and Other Intangible Assets and accordingly do not amortize goodwill
but test it for impairment. The Company performs impairment testing for goodwill
annually, or more frequently when indicators of impairment exist, using a
two-step approach. Step one compares the fair value of the net assets of the
relevant reporting unit (calculated using a discounted cash flow method) to its
carrying value, a second step is performed to compute the amount of the
impairment. In this process, a fair value for goodwill is estimated, based in
part on the fair value of the operations, and is compared to its carrying value.
The shortfall of the fair value below carrying value represents the amount of
goodwill impairment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risk consists of changes in interest rates
on borrowings under the loan facility. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rate fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the loan facility, we do not have debts or hold instruments
that are sensitive to changes in interest rates, foreign currency exchange rates
or commodity prices.
Item 8. Financial Statements and Supplementary Data.
The financial information required by this item is set forth beginning on
page F-1 and is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Resignation of Goldstein Golub Kessler LLP and Appointment of McGladrey &
Pullen, LLP as Principal Accountant
On December 3, 2007, we were notified that effective October 3, 2007,
certain of the partners of Goldstein Golub Kessler LLP ("GGK") became partners
of McGladrey & Pullen, LLP ("McGladrey") in a limited asset purchase agreement
and that GGK resigned as our independent registered public accounting firm.
McGladrey was appointed as our new independent registered public accounting
firm. We engaged GGK as our independent registered public accounting firm on
December 15, 2005.
The audit reports of GGK on our consolidated financial statements as of
and for the years ended December 31, 2006 and 2005 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
30
During our two most recent fiscal years ended December 31, 2006 and 2005
and through December 3, 2007, we did not consult with McGladrey on (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that may be rendered on our
financial statements, and McGladrey did not provide either a written report or
oral advice to us that McGladrey concluded was an important factor considered by
us in reaching a decision as to any accounting, auditing, or financial reporting
issue; or (ii) the subject of any disagreement, as defined in Item 304
(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event
within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
In connection with the audits of our consolidated financial statements for
each of the fiscal years ended December 31, 2006 and 2005 and through the date
of our Current Report on Form 8-K reporting this event, there were: (i) no
disagreements between us and GGK on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of GGK, would have
caused GGK to make reference to the subject matter of the disagreement in their
reports on our financial statements for such years, and (ii) no reportable
events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
The resignation of GGK and the appointment of McGladrey as our independent
registered public accounting firm were reported in our Current Report on Form
8-K filed with the Securities and Exchange Commission ("SEC") on December 3,
2007.
Dismissal of McGladrey & Pullen, LLP as Principal Accountant
On December 10, 2008, we dismissed McGladrey as our independent registered
public accounting firm. As stated above, McGladrey was appointed as our
independent registered public accounting firm on December 3, 2007, when GGK
resigned as our independent registered public accounting firm after notifying us
that certain of the partners of GGK who were primarily responsible for
overseeing the audit by GGK of our financial statements had become partners of
McGladrey pursuant to a limited asset purchase agreement.
The audit report of McGladrey on our consolidated financial statements as
of and for the year ended December 31, 2007 did not contain an adverse opinion
or a disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
The decision to dismiss McGladrey was jointly approved by the Audit
Committee of the Board of Directors and the Board of Directors.
In connection with the audit of our consolidated financial statements for
the fiscal year ended December 31, 2007 and through the date of our Current
Report on Form 8-K reporting the termination, there were: (i) no disagreements
between us and McGladrey on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of McGladrey, would have
caused McGladrey to make reference to the subject matter of the disagreement in
their report on our financial statements for such year or during the interim
period through the date of that Current Report and (ii) except as discussed
below, no reportable events within the meaning set forth in Item 304(a)(1)(v) of
Regulation S-K.
On August 29, 2008, we received a comment letter from the SEC (the
"Comment Letter") regarding certain items in our Annual Report on Form 10-K for
the year ended December 31, 2007 ("2007 Form 10-K"). One of the items in the
Comment Letter was a question relating to a beneficial conversion feature in our
Series B Convertible Preferred Stock issued in April and May 2007 which was not
reflected in our 2007 Form 10-K or our Reports on Form 10-Q for the quarters
ended June 30, 2007 and September 30, 2007. On November 1, 2008, we filed a
Current Report on Form 8-K under item 4.02 which discussed a restatement matter
related to this beneficial conversion feature. In addition, although we have
filed a response to the Comment Letter, we had not yet amended these previous
filings as of the date of McGladrey's dismissal and the effects, if any, of the
comments in the Comment Letter on previously issued filings was uncertain as of
the date of McGladrey's dismissal.
On or about October 15, 2009, we filed amendments to the 2007 Form 10-K and
Quarterly Reports on Form 10-Q for the first and second quarters of 2008
containing restatements of our consolidated financial statements included
therein for the periods covered thereby.
As of December 31, 2007, our internal control over financial reporting was
not effective due to the existence of a material weaknesses as more fully
described in paragraph (b) of Item 9A of the 2007 Form 10-K. In its 2007 Form
10-K, the Company concluded that it had not yet sufficiently integrated and
upgraded the reporting systems at its operating subsidiaries and that it had
insufficient staffing in its accounting department and consequently, its
internal controls over financial reporting were not effective. This resulted in
McGladrey detecting errors in the Company's consolidated financial statements,
which errors have been corrected.
31
As of December 31, 2008 the material weakness noted above continued to
exist and this resulted in our newly appointed independent public accountants
Rotenberg Meril Solomon Bertiger & Guttilla, P.C. ("RMSBG" - see below),
detecting errors in the Company's consolidated financial statements, which
errors have been corrected.
The Company has authorized McGladrey to respond fully to inquiries of its
new independent registered public accounting firm concerning the material
weaknesses.
We provided McGladrey with a copy of the disclosures in our Form 8-K/A
reporting the dismissal of McGladrey and McGladrey furnished the SEC with a
letter stating its agreement with our statements in this Item 4.01(a) of that
Current report on Form 8-K/A, which letter was filed as Exhibit 16.1 to that
Form 8-K/A.
Engagement of Rotenberg Meril Solomon Bertiger & Guttilla P.C. as
Principal Accountant
On December 9, 2008, we engaged RMSBG as our registered independent public
accountants for the fiscal year ending December 31, 2008. The decision to engage
RMSBG was jointly approved by the Audit Committee of the Board of Directors and
the Board of Directors of our company.
During our two most recent fiscal years ended December 31, 2007 and 2006
and through the date of our Current Report, on Form 8-K reporting such
appointment, we did not consult with RMSBG on (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that may be rendered on our financial statements, and RMSBG did
not provide us with either a written report or oral advice that RMSBG concluded
was an important factor considered by us in reaching a decision as to any
accounting, auditing, or financial reporting issue; or (ii) the subject of any
disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the
related instructions, or a reportable event within the meaning set forth in Item
304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our senior
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act") designed to
ensure that the information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Our then Chief Financial Officer's employment was terminated in September
2008.
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and our Chief
Accounting Officer who has been performing the functions of a chief financial
officer until a successor is named. Based on that evaluation, our Chief
Executive Officer and our Chief Accounting Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures were not effective.
Certain of the deficiencies that exist in our disclosure controls and
procedures as of December 31, 2008, are those that were initially noted in our
Annual Report on Form 10-K for the year ended December 31, 2007. Specifically,
as of December 31, 2008, there remained certain weaknesses in our staffing and
our internal controls over financial reporting that have prevented us from
accurately processing our accounts so as to be able to report our results on a
timely basis. Moreover, management believes that as a result of our weaknesses,
there exist deficiencies at AIM in measuring labor costs and properly allocating
such costs between work-in-progress (inventory) and current cost of sales.
Management is in the process of developing and implementing a plan to resolve
these issues in the most expedient manner possible.
32
These improvements are intended to ensure that information required to be
disclosed in our periodic filings under the Exchange Act is accumulated and
communicated to our management, to allow timely decisions regarding required
disclosure and that all transactions are recorded, accumulated and processed to
permit the preparation of financial statements in accordance with generally
accepted accounting principles on a timely basis to allow compliance with our
reporting obligations under the Exchange Act
(b) Management's Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that are intended to:
1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
our assets;
2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and,
3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on our financial
statements.
Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In 2005, we, then a public shell company, acquired AIM. At such time we
adopted the system of financial controls and procedures of AIM as ours. Such
financial controls and procedures were not adequate for a public reporting
company and our management began the process of upgrading our financial controls
and procedures. During 2007 we acquired Sigma Metals and Welding Metallurgy.
Neither Sigma Metals nor Welding Metallurgy had financial controls and
procedures sufficient for an operating subsidiary of a reporting company.
Moreover, neither Sigma nor Welding Metallurgy had sufficient staffing in its
accounting department to perform the types and quantities of procedures required
of a reporting company. Immediately upon completing each acquisition we began
the procedure of incorporating the operations of the acquired company into our
financial systems and evaluating its personnel to determine what additional
staffing is required in anticipation of taking remedial action.
We initially determined that we had material weaknesses in our internal
controls over financial reporting as of December 31, 2007 in that we had not yet
sufficiently integrated and upgraded the reporting systems at our operating
subsidiaries and that we had insufficient staffing in our accounting department.
These weaknesses have continued to manifest themselves in deficiencies in our
reporting systems. To remediate these weaknesses, during the three months ended
December 31, 2008 we dismissed our Chief Financial Officer and have increased
our attention to tightening the controls on our financial reporting. These
improvements are intended to ensure that information required to be disclosed in
our periodic filings under the Exchange Act is accumulated and communicated to
our management, to allow timely decisions regarding required disclosure and that
all transactions are recorded, accumulated and processed to permit the
preparation of financial statements in accordance with generally accepted
accounting principles on a timely basis to allow compliance with our reporting
obligations under the Exchange Act
In connection with the closing of our accounts and the preparation of our
consolidated financial statements contained in this Report, our Chief Executive
Officer and our Chief Accounting Officer, who has been performing the functions
of a Chief Financial Officer until a successor is named, determined that as of
December 31, 2008 our internal controls over financial reporting were not
effective due to certain weaknesses that have continued to manifest themselves
in deficiencies in our reporting systems. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
The foregoing report shall not be deemed to be filed for purposes of
Section 18 of the Exchange Act or otherwise subject to the liabilities of that
section.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting.
33
(c) Changes in Internal Control Over Financial Reporting. We initially
determined that we had material weaknesses in our internal controls over
financial reporting as of December 31, 2008 in that we had not yet sufficiently
integrated and upgraded the reporting systems at our operating subsidiaries and
that we had insufficient staffing in our accounting department. These weaknesses
have continued to manifest themselves in deficiencies in our reporting systems.
There are inherent limitations in any system of internal control. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that its objectives are met. Further, the
design of a control system must consider that resources are not unlimited and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgment in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls.
Item 9B. Other Information.
None.
34
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our directors and executive officers are:
Name Age Position
- ---- --- --------
Peter D. Rettaliata 58 Chief Executive Officer, President and a Director
Dario A. Peragallo 46 Executive Vice President, Manufacturing and a Director
Seymour G. Siegel 67 Director
David J. Buonanno 54 Director
Michael N. Taglich 44 Chairman
Robert F. Taglich 42 Director
Robert Schroeder 42 Director
Scott A. Glassman 32 Chief Accounting Officer
Peter D. Rettaliata has been our President and Chief Executive Officer
since November 30, 2005. He also has been the President of our wholly-owned
subsidiary, AIM, since 1994. Prior to his involvement at AIM, Mr. Rettaliata was
employed by Grumman Aerospace Corporation for twenty two years. Professionally,
Mr. Rettaliata is the Chairman of "ADAPT", an organization of regional aerospace
companies, a past member of the Board of Governors of the Aerospace Industries
Association, and a member of the Executive Committee of the AIA Supplier
Council. He is a graduate of Niagara University where he received a B.A. in
History and the Harvard Business School where he completed the PMD Program.
Dario Peragallo has been our Executive Vice President since November 30,
2005 and President of AIM since December 8, 2008. Prior to becoming President of
AIM, he was Executive Vice President of Manufacturing for AIM. Mr. Peragallo has
been associated with AIM for over 25 years. He became AIM's Director of
Manufacturing in 2000. In addition, he has helped develop and maintain AIM's
current business systems. Mr. Peragallo has been the company "Lean Advocate"
since the inception of the program at AIM to decrease its inventory and increase
productivity. Mr. Peragallo became Executive Vice President with overall
responsibility for engineering, manufacturing and customer-critical technical
matters in 2003. He has been an active member of Diversity Business since 2000,
an organization specializing in the promotion of small and minority owned
businesses. He is a graduate of SUNY Farmingdale where he received a B.A. in
Manufacturing Engineering. Mr. Peragallo oversees all engineering and production
matters relating to AIM.
Scott Glassman has been our Chief Accounting Officer and Treasurer since
December 8, 2008. Mr. Glassman has served as Controller of the Company since
February 2007. Prior to joining the Company, Mr. Glassman was employed by First
Data Corporation as Accounting Manager from June 2005 to January 2007, by Veeco
Instruments Inc. as an SEC Reporting Specialist from January 2004 to May 2005,
and by Grant Thornton LLP in a variety of positions from June 1999 to December
2003, most recently as an audit manager.
Michael N. Taglich has been Chairman of our Board of Directors and a
Director since September 22, 2008. He is Chairman and President of Taglich
Brothers, Inc. ("Taglich"), a New York City based securities firm.
Seymour G. Siegel has been a principal in the Business Consulting Group of
Rothstein, Kass & Company, P.C., a national firm of accountants and consultants
since April 2000. He specializes in providing strategic advice to business
owners including mergers and acquisitions; succession planning; capital
introductions and long range planning. In 1974, Mr. Siegel founded, and from
1974 to 1990, was managing partner of, Siegel Rich and Co, P.C., CPAs. In 1990,
Siegel Rich merged into Weiser LLP, then known as M.R.Weiser & Co., LLC, a large
regional firm where he had been a senior partner. In 1995, Mr. Siegel founded
another firm called Siegel Rich, which became a division of Rothstein, Kass in
April 2000. Mr. Siegel has been a director, trustee and officer of numerous
businesses, philanthropic and civic organizations. He serves as a director and
audit committee chairman of Hauppauge Digital Inc. and Emerging Vision
Incorporated and has served in a similar capacity at Oak Hall Capital Fund,
Prime Motor Inns Limited Partnership, Noise Cancellation Technologies and
Barpoint.com and serves as the chairman of the audit committee and as a member
of the compensation committee for Global Aircraft Solutions Incorporated. Mr.
Siegel is the Chairman of the Audit Committee of the Board.
35
Robert F. Taglich has been a Director since October 3, 2008. He is a
managing director of Taglich.
David J. Buonanno has been a Director since June 26, 2007. He is a
consultant to Dresser-Rand Corporation as well as other companies in the
aerospace and defense industries. Mr. Buonanno has extensive experience in
manufacturing, supply management and operations. He was employed by Sikorsky
Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice
President, Supply Management (from January 1997 to July 2006) and as Director,
Systems Subcontracts (from November 1992 to January 1997). From May 1987 to
November 1992, he was employed by General Electric Company and GE Astro Space,
serving as Operations Manager for GE in 1992 and Manager, Program Materials
Management of GE Astro Space from December 1989 to January 1992. From June 1977
to May 1987, he was employed by RCA and affiliated companies, including RCA
Astro Space. Mr. Buonanno attended Lehigh University College of Electrical
Engineering and holds a B.S. in Business Administration from Rutgers University.
He completed the Program for Management Development at Harvard Business School
in 1996.
Robert Schroeder has been a Director since October 3, 2008. He is Vice
President - Investment Banking of Taglich.
Michael N. Taglich and Robert F. Taglich are brothers.
Taglich has the right to designate three members of our Board of Directors
under the placement agent agreement for the sale of our junior subordinated
notes. Michael N. Taglich, Robert F. Taglich and Robert Schroeder are the
designees of Taglich.
Director Compensation
For their services, we pay each non-management director a base fee of
$18,000 per year and $1,500 for each Board meeting attended. In addition, we
will pay the Chairman of the Audit Committee $12,000 for serving in that
capacity, and members of the Audit Committee $1,000 for each meeting attended.
The following table sets forth information concerning the compensation we
paid to our directors (other than Messrs. Rettaliata, Giusto and Peragallo)
during the fiscal year ended December 31, 2008.
36
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
Change in pension
value and
Fees earned Non-equity nonqualified
or paid in Stock incentive plan deferred All other
Name cash awards Option awards compensation compensation compensation Total
($) ($) ($) ($) earnings ($) ($)
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
Michael N . Taglich(1) - - - - -
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
Robert F. Taglich(2) - - - - -
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
Robert Schroeder(2) - - - -
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
James A. Brown(3) 156,346(6) - 25,680(5) - - 182,026
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
Seymour G. Siegel 34,500 25,680(5) - 60,180
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
M.Gen. Ira A. Hunt, 23,500 25,680(5) 49,180
Jr. (USA Ret.)(4)
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
David J. Buonanno 29,500 25,680(5) 55,180
- ------------------------ --------------- ---------- -------------- ----------------- ------------------- -------------- -----------
- ----------
(1) Michael N. Taglich became Chairman of the Board on September 22, 2008.
(2) Robert F. Taglich and Robert Schroeder became directors on October 3, 2008.
(3) Mr. Brown resigned as a director on November 21, 2008.
(4) General Hunt resigned as a director on August 25, 2008.
(5) Reflects the following: (a) the vesting in 2008 of options to purchase
100,000 shares of common stock that were previously awarded in March 2007 and
(b) the granting in 2008 of options to purchase 100,000 shares of common stock.
All options granted in 2008 vested in 2008. The value of the options reflects
the expense recognized by us for accounting purposes calculated in accordance
with FASB 123 (R).
(6) Salary paid for services performed by Mr. James A. Brown.
Committees of the Board
Our Board of Directors has established an Audit Committee and a
Compensation Committee.
Audit Committee. Messrs. Siegel and Buonanno are members of the Audit
Committee. Mr. Siegel serves as Chairman of the Audit Committee and also
qualifies as an "audit committee financial expert," as that term is defined in
Item 407(d)(5)(ii) of Regulation S-K. The Board has determined that each member
of our Audit Committee meets the financial literacy requirements under the
Sarbanes-Oxley Act and SEC rules and that Messrs. Siegel and Buonanno meet the
independence requirements under Rule 10A-3 under the Exchange Act.
Compensation Committee. Our Compensation Committee is composed of Messrs.
Siegel and Buonanno.
We do not have a nominating committee and have not adopted a written
policy for considering recommendations from stockholders for candidates to serve
as directors or with respect to communications from stockholders.
37
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 2008, except that that the initial
reports of beneficial ownership on Form 3 filed by Michael N. Taglich, Robert F.
Taglich and Robert C. Schroeder were filed 14 days, three days and one day late,
respectively.
Code of Ethics
We have adopted a written code of ethics that applies to our principal
executive officers, senior financial officers and persons performing similar
functions. Upon written request to our corporate secretary, we will provide you
with a copy of our code of ethics, without cost.
Item 11. Executive Compensation.
The following table shows compensation which we awarded or paid to, or
which was earned from us, in all capacities for fiscal years ended December 31,
2008 and 2007, by (i) each individual who served as our chief executive officer
for all, or a portion of, 2008 and (ii) each other individual who served as an
executive officer of our company (including AIM) and received total compensation
in excess of $100,000 for 2008.
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Name and Year Salary Bonus Stock Option Non-equity Nonqualified All other Total
principal awards awards deferred compensation
position Incentive compensation
Plan earnings
Information
($) ($) ($) ($) ($) ($) ($) ($)
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Peter D. 2008 227,217(3) - - 29,322(4) - - - 256,5397
Rettaliata
---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
CEO 2007 230,000(3) - - 40,112(5) - - - 270,112
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Louis A. Giusto 2008 167,854(3) - - - (6) - - - 167,854
---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
CFO (1) 2007 230,000(3) - - 64,176(7) - - - 294,176
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Dario A. 2008 222,816(3) - - - - 252,138
Peragallo 29,322(4) -
---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Executive VP 2007 230,000(3) -- -- 40,112(5) -- -- 270,112
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Scott A. Glassman 2008 119,308 - 1,250(8) - - - - 120,558
---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
Chief Accounting 2007 - - - - - - -
Officer (2)
- ------------------ ---- -------------- ----- ---------- ----------- --------------- -------------- ------------- ----------
(1) Mr. Giusto resigned as a director and terminated his employment as Vice
Chairman, Chief Executive Officer and Treasurer with us and his employment
agreement effective September 22, 2008. Under the terms of his separation
agreement, options to purchase 960,000 shares exercisable through September 26,
2015, expired unexercised.
38
(2) Mr. Glassman was elected Chief Accounting Officer on December 8, 2008. He
did not serve as an executive officer prior to that date. Information for 2008
includes compensation received as Controller.
(3) Represents salary payments under the individual's employment agreement with
us. See "Employment Agreements," below.
(4) Reflects the following: (a) the vesting in 2008 of options to purchase
150,000 shares of common stock that were previously awarded and (b) the
modification of the vesting terms of options previously granted. The value of
the options reflects the expense recognized by us for accounting purposes
calculated in accordance with FASB 123 (R).
(5) Reflects the vesting in 2007 of options to purchase 150,000 shares of common
stock that were previously awarded. The value of the options reflects the
expense recognized by us for accounting purposes calculated in accordance with
FASB 123 (R).
(6) No value has been assigned to the options to purchase 240,000 shares granted
to Mr. Giusto which vested on September 15, 2008 since those options, together
with all unexercised options granted to him, were cancelled upon termination of
his employment.
(7) Reflects the vesting in 2007 of options to purchase 150,000 shares of common
stock that were previously awarded. The value of the options reflects the
expense recognized by us for accounting purposes calculated in accordance with
FASB 123 (R). These options were cancelled upon the termination of Mr. Giusto's
employment.
(8) Represents the value of 5,000 shares of the common stock issued to Mr.
Glassman on February 12, 2008.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information as of December 31, 2008,
concerning outstanding equity awards granted to the individuals listed in the
Summary Compensation Table. We did not grant options, or make stock awards, to
any of our executive officers in 2008.
39
- -------------- ------------------------------------------------------------ -----------------------------------------
Option awards Stock awards
------------------------------------------------------------ -----------------------------------------
Equity
incentive
plan
awards:
Market Equity market
Number value incentive or
Equity of of plan payout
incentive shares shares awards: value of
plan or or number of unearned
awards: units units unearned shares,
Number of Number of number of of of shares, units or
securities securities securities stock stock units or other
underlying underlying underlying that that other rights
unexercised unexercised unexercised Option have have rights that
options options unearned exercise Option not not that have have not
(#) (#) options price expiration vested vested not vested vested
Name exercisable unexercisable (#) ($) date (#) (#) (#) ($)
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
Peter 600,000 600,000 -- (2) 9/26/2015 -- -- -- --
D.Rettaliata
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
Dario 600,000 600,000 -- (2) 9/26/2015 -- -- -- --
Peragallo
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
Louis A. -- -- -- -- -- -- -- -- --
Giusto (1)
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
Scott 2,000 8,000(3) -- 0.276 12/11/2012 -- -- -- --
Glassman
- -------------- ----------- -------------- ------------ --------- ----------- --------- -------- ----------- ----------
* On December 31, 2008, the last trading day of 2008, the last sale price of a
share of our common stock was $0.11.
(1) All of the options granted to Mr. Giusto were cancelled upon
termination of his employment r effective as of September 22, 2008.
(2) 150,000 of these options vested as of November 30, 2005 at an exercise
price of $0.22 per share, 150,000 vested on September 15, 2006, at an exercise
price of $0.428 per share, 150,000 vested on September 15, 2007 at the exercise
price of $0.48 per share, and another 150,000 vested on September 15, 2008 an
exercise price of $0.225 per share. The balance will vest in equal increments of
150,000 shares each on the fourth through seventh anniversaries of September 15,
2005. The exercise price of the options vesting on each of September 15, 2009,
2010, 2011 and 2012 will be the higher of (a) $0.22 per share or (b) the average
trading price of our common stock for the thirty trading days ending September
15, 2009, 2010, 2011 and September 15, 2012, respectively.
(3) An additional 2,000 of these options are scheduled to vest on January
1, 2009 and January 1 of each succeeding year through and including January 1,
2013.
40
Employment Agreements
The employment agreement of Peter D, Rettaliata became effective as of
November 30, 2005, and will terminate on November 30, 2010, but will be extended
for successive three one-year periods unless he or our company decides not to
extend the agreement. Under his employment agreement, Mr. Rettaliata was to
receive an annual base salary of $230,000 and was later reduced to $200,000 in
the fourth quarter of 2008, 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 other compensation as the Board of Directors may determine. Mr.
Rettaliata's employment agreement also contains restrictive covenants
prohibiting Mr. Rettaliata (i) from directly or indirectly competing with us,
(ii) from soliciting any customer of our company or AIM for any competitive
purposes and (iii) from employing or retaining any employee of our company or
AIM or soliciting any such employee to become affiliated with any entity other
than our company or AIM during the twelve-month period commencing upon the
termination of his agreement. In addition, upon the execution of his employment
agreement, we granted Mr. Rettaliata options to purchase 1,200,000 shares of
common stock, exercisable over a ten-year period commencing on the date of
grant. Please see the applicable footnote to the table captioned "Outstanding
Equity Awards at Fiscal Year-End".
The employment agreement of Dario A. Peragallo became effective as of
November 30, 2005, and will terminate on November 30, 2010, but will be extended
for successive three one-year periods, unless he or our company decides not to
extend the agreement. Under his employment agreement, Mr. Peragallo will receive
an annual base salary of $230,000, which will increase a minimum of 5% per year
if our operating profits have increased by at least 5% over the preceding
12-month period, and such other 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. Rettaliata's employment agreement. In addition, upon the execution of his
employment agreement, we granted Mr. Peragallo options to purchase 1,200,000
shares of common stock, exercisable over a ten-year period commencing on the
date of grant. The vesting schedule and exercise price relating to Mr.
Peragallo's options are the same as those relating to Mr. Rettaliata's options
set forth above. Mr. Peragallo's employment agreement also contains the
restrictive covenants included in Mr. Rettaliata's employment agreement,
discussed above.
Prior to his resignation on September 22, 2008, we employed Louis Giusto
as Vice Chairman, Chief Financial Officer and Treasurer under an employment
agreement which became effective as of November 30, 2005. Under his employment
agreement, Mr. Giusto was entitled to receive an annual base salary of $230,000,
which minimum annual increases of 10% per year if our operating profits increase
by at least 5% over the preceding 12-month period. Mr. Giusto was entitled to an
annual bonus to be determined by our Board of Directors but which must equal at
least 50% of his annual base salary. In addition, upon the execution of his
employment agreement, we granted Mr. Giusto options to purchase 1,200,000 shares
of common stock, exercisable over a ten-year period commencing on the date of
grant. See the applicable footnote to the table captioned "Outstanding Equity
Awards at Fiscal Year-End". Mr. Giusto's employment agreement also contains
restrictive covenants prohibiting Mr. Giusto (i) from directly or indirectly
competing with us, (ii) from soliciting any customer of our company or AIM for
any competitive purposes and (iii) from employing or retaining any employee of
our company or AIM or soliciting any such employee to become affiliated with any
entity other than our company or AIM during the twelve-month period commencing
upon the termination of his agreement. Under the terms of his separation
agreement, we agreed to pay Mr. Giusto $30,000, payable in 15 consecutive
monthly installments of $2,000 commencing September 15, 2009.
Prior to his resignation on November 21, 2008, we retained James A. Brown
as our Chairman under an agreement entered into in March 2007. Under the
agreement, we paid Mr. Brown $15,000 and we compensated him at a rate of
$175,000 per annum. In addition to his cash compensation, we issued to Mr.
Brown, under a Restricted Stock Agreement, 200,000 shares of our common stock,
of which 100,000 shares became vested on March 30, 2007 and the second 100,000
vested as of December 31, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth information known to us regarding
beneficial ownership of our Series B Preferred and our common stock as of
October 16, 2009 by (i) each person known by us to own beneficially more than 5%
of the outstanding shares of each of those classes, (ii) each of our directors,
nominees for director, and executive officers, and (iii) all of our officers and
directors as a group. Except as otherwise indicated, we believe, based on
information provided by each of the individuals named in the table below, that
such individuals have sole investment and voting power with respect to such
shares, subject to community property laws, where applicable.
41
As of October 16, 2009, we had outstanding 2,101,124 shares of our Series
B Preferred and 71,698,174 shares of our common stock. Except as stated in the
table, the address of the holder is c/o our company, 1479 North Clinton Avenue,
Bay Shore, New York 11706.
Number of Shares Percent of Class
Name Series B Preferred Common* Series B Preferred Common*
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Owner of More than 5% of Class
Hillson Partners LP(2)
Hillson Private Partners II, LLLP(1) 211,837 7,700,000 10.08% 9.70%
110 N. Washington Street, Suite 401
Rockville, MD 20850
Directors and Executive Officers
Peter D. Rettaliata -- 1,768,139(2) ** 2.44%
Dario Peragallo 345 1,780,559(3) ** 2.46%
Seymour G. Siegel 345 212,420(4) ** **
David J. Buonanno 345 273,863(5) ** **
Michael N. Taglich(6) 119,951(7) 5,206,764(8) 5.63% 6.79%
Robert F. Taglich(6) 114,261(7) 5,075,284(8) 5.36% 6.63%
Robert Schroeder(6) 35,356(9) 1,865,773(10) 1.66% 2.54%
Scott Glassman -- 7,000(11) -- **
All directors and officers 271,293(12) 16,189,802(13) 12.40% 20.56%
as a group (8 persons)
- ----------
* Assumes the conversion of the shares of Series B Preferred owned by the
stockholder listed in the table at the conversion rate of 36.35 shares of common
stock for each share of Series B Preferred Stock, but not by any other holder.
** Less than 1%
(1) The general partner of Hillson Partners LP and Hillson Private Partners II,
LLP is Daniel H. Abramowitz, who has the sole power to vote and dispose of the
shares.
(2) Includes 750,000 shares we may issue to Mr. Rettaliata upon exercise of the
vested portion of the 1,200,000 options granted to him under his employment
agreement.
(3) Includes 750,000 shares we may issue to Mr. Peragallo upon exercise of
vested portion of the 1,200,000 options granted to him under his employment
agreement.
(4) Includes 200,000 shares we may issue to Mr. Siegel upon exercise of options.
(5) Includes 200,000 shares we may issue to Mr. Buonanno upon exercise of
options.
(6) The address for Michael N. Taglich, Robert F. Taglich and Robert Schroeder
is c/o Taglich Brothers, Inc., 275 Madison Avenue, Suite 1618, New York, NY
10016. Michael N. Taglich is Chairman, President and a principal stockholder of
Taglich Brothers, Inc. and Robert F. Taglich is a Managing Director and a
principal stockholder of Taglich Brothers, Inc. Michael N. Taglich and Robert F.
Taglich are general partners of Tag/Kent Partners.
(7) Includes 7,374 shares owned by Taglich Brothers, Inc., 8,144 shares owned by
Tag/Kent Partners, and 30,000 shares which Mr. Taglich may acquire upon exercise
of a warrant (a "Preferred Stock Warrant").
(8) Includes 200,000 shares owned by Taglich Brothers, Inc., 693,674 shares Mr.
Taglich may acquire upon exercise of a warrant having an exercise price of
$0.305.
(9) Includes 27,428 shares Mr. Schroeder may acquire upon exercise of a
Preferred Stock Warrant.
(10) Includes 580,115 shares Mr. Schroeder may acquire upon exercise of a
warrant having an exercise price of $0.305.
(11) Includes 2,000 shares which Mr. Glassman may acquire upon exercise of the
vested portion of the 10,000 options granted to him.
(12) Includes a total of 87,428 shares which Michael N. Taglich, Robert F.
Taglich and Robert Schroeder may acquire upon exercise of the Preferred Stock
Warrants referred to in footnotes 7 and 9.
(13) Includes a total of 1,902,000 shares which Messrs. Rettaliata, Peragallo,
Siegel, Buonanno and Glassman may acquire upon exercise of the options referred
to in footnotes 2, 3, 4, 5 and 11, warrants to purchase a total of 1,967,463
shares which Michael N. Taglich, Robert F. Taglich and Robert Schroeder may
acquire upon exercise of the warrants referred to in footnotes 8 and 9, and
3,179,200 shares which Michael N. Taglich, Robert F. Taglich and Robert
Schroeder may acquire upon conversion of the 87,428 shares of Series A Preferred
Stock they may acquire upon exercise of the Preferred Stock Warrants referred to
in footnotes 7 and 9.
42
Our Equity Compensation Plans
The following table provides information as of December 31, 2008 about our
equity compensation plans and arrangements.
Equity Compensation Plan Information - December 31, 2008
- ------------------------ --------------------------- ------------------------- --------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans (excluding
Plan category warrants and rights warrants and rights securities reflected in column (a))
- ------------------------ --------------------------- ------------------------- --------------------------------------
(a) (b) (c)
- ------------------------ --------------------------- ------------------------- --------------------------------------
Equity compensation 8,020,000 - 1,980,000
plans approved by
security holders
- ------------------------ --------------------------- ------------------------- --------------------------------------
Equity compensation 14,299,067 $0.28 3,706,100
plans not approved by
security holders
- ------------------------ --------------------------- ------------------------- --------------------------------------
Total (1) 14,299,067 $0.28 3,706,100
- ------------------------ --------------------------- ------------------------- --------------------------------------
(1) Includes (i) 4,138,678 shares issuable upon exercise of the warrants
issued to the placement agent for private offerings of our securities
exercisable at $0.22 per share, and (ii) 2,900,578 shares issuable upon
exercise of warrants issued to the placement agent for a private offering
of our series B convertible preferred stock, which are exercisable at
$0.305 per share; and (iii) 125,000 shares issuable upon exercise of
warrants issued to a consulting firm exercisable at $0.28 per share.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Transactions with Related Persons
On December 31, 2008, the Company issued a warrant to purchase 137,138
shares of its Series B Preferred to Taglich Brothers, Inc. ("Taglich") for
nominal consideration. The warrant is intended to compensate Taglich for its
continued efforts to raise funds on behalf of the Company. The warrant may be
exercised until December 31, 2015. The exercise price of the warrant is $0.01
per share. The exercise price and number of shares of Series B Preferred
issuable upon exercise are subject to adjustment for stock dividends, stock
splits, and recapitalizations, as well as mergers and certain corporate
reorganizations. The warrant also includes a cashless exercise feature. In
addition, the warrant gives the Company a right of first refusal with respect to
the sale of shares of Series B Preferred issuable upon exercise of the warrants
and shares of common stock issuable upon conversion of the Series B Preferred
whereby the Company can purchase the shares for less than the amount for which
the shares are to be sold to a third party. The Company believes that the terms
of the warrant are not less favorable than could have been obtained from an
unaffiliated third party
In connection with the offering of the Company's junior subordinated notes
and Series B Preferred which commenced in September 2008 the Company issued to
Taglich a junior subordinated note in the principal amount of $509,970 and
39,640 shares of Series B Preferred, representing a fee of 10% of the amount of
new money raised ($2,810,000) and 8% of the amount of its outstanding junior
subordinated notes converted into the junior subordinated notes ($2,950,000) and
shares of Series B Preferred issued in that offering. In addition, the Company
granted Taglich the right to designate a total of three nominees for election to
our Board of Directors, which nominees are Michael N. Taglich, Robert F. Taglich
and Robert Schroeder. Michael N. Taglich, Chairman of the Company's Board of
Directors, is President and Chairman of Taglich. Robert F. Taglich is a Managing
Director of, and Robert Schroeder is Vice President - Investment Banking of
Taglich.
Taglich acted as placement agent for the sale of our Series B Preferred in
April and May of 2007 and our junior subordinated notes in June of 2008. For
acting as placement agent of our Series B Preferred, we paid Taglich a sales
commission of $641,840, representing 8% of the gross proceeds of that offering
($8,023,000), plus $25,000 in reimbursement of its actual and reasonable
out-of-pocket expenses, including fees and expenses of its counsel. We also
issued to Taglich warrants to purchase 2,900,574 shares of our common stock,
representing 10% of the number of shares into which the Series B Preferred may
be converted. These warrants, which may be exercised over a period of five
years, have an initial per share exercise price of $0.305 and allow a "cashless
exercise." For acting as placement agent of our junior subordinated notes in May
and June of 2008, we paid Taglich a fee of $20,000 in cash plus 200,000 shares
of our common stock (which we valued at approximately $40,000), as well as
reimbursement of approximately $25,000 of out-of-pocket expenses.
43
On November 30, 2005, in connection with our acquisition of AIM, we issued
our convertible promissory notes in the principal amount of $332,631 to each of
Peter Rettaliata, our Chief Executive Officer and a Director, and Dario
Peragallo, our Executive Vice President and a Director, convertible into shares
of our common stock at the conversion price of $0.40 per share. On January 26,
2007, each of Mr. Rettaliata and Mr. Peragallo exercised their right to convert
their promissory notes, including accrued interest of $27,255, into 899,716
shares of common stock. In consideration for the shares of common stock issued,
all of our indebtedness under the promissory notes was cancelled.
On February 13, 2007, we issued to each of the non-management members of
the Board an option to purchase 100,000 shares of our common stock. The options
vested as to 33,333 shares upon grant, as to a total of 66,666 on March 1, 2008
and as to all 100,000 shares on March 1, 2009 and are exercisable at a price of
$0.27 per share until March 1, 2014. On August 29, 2007, we granted David
Buonanno, a non-management director, an option to purchase 100,000 shares of our
common stock, which was immediately exercisable as to 33,333 shares, and became
exercisable as to a total of 66,666 shares on June 26, 2008, and as to all
100,000 shares on June 26, 2009. The exercise price of the option is $0.28 per
share. The option expires on August 1, 2014. On April 11, 2008, we granted each
non-management director an option to purchase 100,000 shares of common stock at
an exercise price per share of $0.225 exercisable immediately for five years. In
addition, the terms of the options previously granted to Messrs. Rettaliata,
Giusto and Peragallo were modified to provide that the options scheduled to vest
from 2008 through 2012, 1,440,000 options in the aggregate, will be exercisable
at a per share price of $0.225
Director Independence
Our Board has determined that based upon the criteria in Rule Section 803A of
the American Stock Exchange Company Guide (Corporate Governance Guidelines), as
of the date of this report, Seymour G. Siegel and David J. Buonanno are
"independent directors."
Item 14. Principal Accountant Fees and Services.
As required by our Audit Committee charter, our Audit Committee
pre-approved the engagement of GGK (McGladrey subsequent to December 3, 2007)
and RMSBG for all audit and permissible non-audit services. The Audit Committee
annually reviews the audit and permissible non-audit services performed by our
principal accounting firm and reviews and approves the fees charged by our
principal accounting firm. The Audit Committee has considered the role of
McGladrey and RMSBG in providing tax and audit services and other permissible
non-audit services to us and has concluded that the provision of such services,
if any, was compatible with the maintenance of such firm's independence in the
conduct of its auditing functions.
During fiscal year 2007 and fiscal year 2008, the aggregate fees which we
paid to or were billed by GGK, McGladrey and RMSBG for professional services
were as follows:
Year Ended December 31,
2008 2007
Audit Fees - GGK (1) $ -- $217,167
Audit Fees - McGladrey (1) 156,719 350,000
Audit Fees -RMSBG 180,000 --
Audit-Related Fees (2) -- --
Tax Fees (3) -- --
All Other Fees -- --
-------- --------
Total $336,719 $567,167
======== ========
(1) Fees for services to perform an audit or review in accordance with generally
accepted auditing standards and services that generally only our independent
registered public accounting firm can reasonably provide, such as the audit of
our consolidated financial statements, the review of the financial statements
included in our quarterly reports on Form 10-Q, and for services that are
normally provided by independent registered public accounting firms in
connection with statutory and regulatory engagements.
44
(2) Fees, if any, for assurance and related services that are traditionally
performed by our independent registered public accounting firm, such as audit
attest services not required by statute or regulation, and consultation
concerning financial accounting and reporting standards.
(3) Fees for tax compliance. Tax compliance generally involves preparation of
original and amended tax returns, claims for refunds and tax payment planning
services.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this Report:
1. Financial Statements
Our consolidated financial statements required by this Item are submitted
in a separate section beginning on page F-1 of this Report
2. Financial Statement Schedules:
None
3. Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Debtor's Amended Plan of Reorganization (incorporated by reference to
Exhibit 2.1 of Registrant's Form 8-K, filed January 14, 2005).
2.2 Merger Agreement, dated as of November 14, 2005, among Gales Industries
Incorporated, two of its stockholders, Gales Industries Merger Sub, Inc.,
and Ashlin Development Corporation (incorporated herein by reference to
Exhibit 10.1 of Registrant's Form 8-K report filed November 21, 2005).
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 of Registrant's Form 8-K report, filed February 15, 2006).
3.2 Certificate of Amendment to Certificate of Incorporation changing our
corporate name (incorporated by reference to Exhibit 3.1 of Registrant's
Form 8-K report, filed July 2, 2007).
3.3 Certificate of Amendment to Certificate of Incorporation increasing the
number of shares of our authorized capital stock (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 8-K report, filed April
7, 2008.
3.4 Certificate of Designation (incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K filed with the SEC on April
18, 2007).
3.5 Certificate of Amendment of Certificate of Designation of Series B
Convertible Preferred Stock as filed with the Office of the Secretary of
State of Delaware on October 16, 2009 (incorporated by reference to
exhibit 3.1 of the Registrant's Form 8-K report, filed October 16, 2009).
3.6 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 8-K report, filed February 15, 2006).
4.2 Form of Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and assumed by the
Registrant) to each of Peter Rettaliata and Dario Peragallo (incorporated
by reference to Exhibit 4.2 of the Registrant's Form 8-K report, filed
December 6, 2005).
4.3 Form of Warrant issued by the Registrant to GunnAllen Financial, Inc.
after completion of the Offering (incorporated by reference to Exhibit 4.3
of the Registrant's Form 8-K report, filed December 6, 2005).
45
4.4 Form of Warrant issued by Original Gales to Atlas Private Equity, LLC (and
assumed by the Registrant) (Incorporated by reference to Exhibit 4.4 of
the Registrants Form 10-KSB, filed April 17, 2006).
4.5 Form of Warrant issued by Gales Industries Incorporated (and assumed by
the Registrant) to investors in the $45,000 Bridge Financing in or about
August 2005 (incorporated by reference to Exhibit 4.5 of the Registrant's
Form 8-K report, filed December 6, 2005).
4.6 Form of Warrant issued by Gales Industries Incorporated (and assumed by
the Registrant) to investors in the $105,000 Bridge Financing in or about
September, 2005 (incorporated by reference to Exhibit 4.6 of the
Registrant's Form 8-K report, filed December 6, 2005).
4.7 Form of Warrant issued and to be issued to Porter, LeVay & Rose, Inc.
(incorporated herein by reference to the exhibit of the same number to
Registrant's Amendment No. 1 on Form SB-2/A, filed June 16, 2006).
4.8. Form of Warrant Agreement dated as of December 31, 2008 between the
Registrant and Taglich Brothers, Inc. (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 8-K report filed January 7, 2009).
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc. dated
October 15, 2004 (incorporated by reference of the Registrant's Report on
Form 8-K, filed on January 14, 2005).
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and among Gales
Industries Incorporated, Air Industries Machining, Corp., Luis Peragallo,
Jorge Peragallo, Peter Rettaliata and Dario Peragallo (incorporated by
reference to Exhibit 10.2 of the Registrant's Form 8-K report, filed
December 6, 2005.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005, in the
amount of $962,000, from Gales Industries Incorporated (and assumed by the
Registrant) to Luis Peragallo (incorporated by reference to Exhibit 10.3
of the Registrant's Form 8-K report, filed December 6, 2005).
10.4 Security Agreement, dated as of November 30, 2005, by and between Gales
Industries Incorporated (and assumed by the Registrant) and Luis Peragallo
(incorporated by reference to Exhibit 10.4 of the Registrant's Form 8-K
report, filed December 6, 2005).
10.5 Contract of Sale, dated as of November 7, 2005, by and between DPPR Realty
Corp. and Gales Industries Incorporated for the purchase of the property
known as 1480 North Clinton Avenue, Bay Shore, NY (incorporated by
reference to Exhibit 10.5 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.6 Contract of Sale, dated as of November 7, 2005, by and between KPK Realty
Corp. and Gales Industries Incorporated for the purchase of the property
known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore,
NY (incorporated by reference to Exhibit 10.6 of the Registrant's Form 8-K
Report, filed December 6, 2005).
10.7 Employment Agreement, dated as of September 26, 2005, by and between Gales
Industries Incorporated (and assumed by the Registrant) and Michael A.
Gales (incorporated by reference to Exhibit 10.7 of the Registrant's Form
8-K report, filed December 6, 2005).
46
10.8 Employment Agreement, dated as of September 26, 2005, by and between Louis
A. Giusto and Gales Industries Incorporated (and assumed by the
Registrant) (incorporated by reference to Exhibit 10.8 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.9 Employment Agreement, dated as of September 26, 2005, by and among Gales
Industries Incorporated (and assumed by the Registrant), Air Industries
Machining, Corp. and Peter D. Rettaliata (incorporated by reference to
Exhibit 10.9 of the Registrant's Form 8-K report, filed December 6, 2005).
10.10 Employment Agreement, dated as of September 26, 2005, by and among Gales
Industries Incorporated (and assumed by the Registrant), Air Industries
Machining, Corp. and Dario Peragallo (incorporated by reference to Exhibit
10.10 of the Registrant's Form 8-K report, filed December 6, 2005).
10.11 Form of Placement Agency Agreement, dated as of September 26, 2005,
between GunnAllen Financial Inc. and Gales Industries Incorporated
(including Amendments No.1 and No.2 thereto, dated October 25, 2005 and
November 10, 2005, respectively). (Incorporated by reference to Exhibit
10.11 of Registrant's registration statement on Form SB-2, No. 333-131709,
filed on February 9, 2006).
10.12 Registrant's 1998 Stock Option Plan (incorporated by reference to Exhibit
10.18 of the Registrant's annual report on Form 10-KSB, filed April 12,
2002).
10.13 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.14 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Michael A.
Gales (incorporated by reference to Exhibit 10.15 of the Registrant's Form
8-K report, filed December 6, 2005).
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Louis A.
Giusto (incorporated by reference to Exhibit 10.16 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.16 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Peter
Rettaliata (incorporated by reference to Exhibit 10.17 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.17 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Dario
Peragallo (incorporated by reference to Exhibit 10.18 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.18 Revolving Credit, Term Loan, Equipment Line and Security Agreement, dated
as of November 30, 2005, by and between Air Industries Machining, Corp.,
PNC Bank, National Association, as Lender, and PNC Bank, National
Association, as Agent (incorporated by reference to Exhibit 10.19 of the
Registrant's Form 8-K report, filed December 6, 2005).
10.19 Mortgage and Security Agreement, dated as of November 30, 2005, by and
between Air Industries Machining, Corp. and PNC Bank (incorporated by
reference to Exhibit 10.20 of the Registrant's Form 8-K report, filed
December 6, 2005).
47
10.20 Long Term Agreement, dated as of August 18, 2000, between Air Industries
Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by
reference to Exhibit 10.21 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.21 Long Term Agreement, dated as of September 7, 2000, between Air Industries
Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by
reference to Exhibit 10.22 of the Registrant's Current Report on Form 8-K
filed on December 6, 2005.
10.22 Stock Purchase Agreement, dated January 2, 2007, between Gales Industries
Incorporated, Sigma Metals, Inc. ("Sigma Metals"), and George Elkins,
Carole Tate and Joseph Coonan, the shareholders of Sigma Metals
(incorporated by reference to Exhibit 10.01 of the Registrant's Form 8-K
report, filed January 2, 2007).
10.23 Form of Subscription Agreement (incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed with the SEC on April
18, 2007).
10.24 Form of Promissory Note (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed with the SEC on April 18,
2007).
10.25 Agreement dated March 30, 2007 between Gales Industries Incorporated and
James A. Brown (incorporated by reference to Exhibit 10.11 of Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 2006).
10.26 Restricted Stock Agreement dated March 30, 2007 between Gales Industries
Incorporated and James A. Brown (incorporated by reference to Exhibit
10.12 of Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2006).
10.27 Stock Purchase Agreement, dated March 9, 2007, between Gales Industries
Incorporated and John Gantt and Lugenia Gantt, the shareholders of Welding
Metallurgy, Inc. (incorporated by reference to Exhibit 10.1 of the
Registrant's Form 8-K report, filed March 14, 2007).
10.28 Amendment No. 1 dated August 2, 2007 to the Stock Purchase Agreement,
dated March 9, 2007, between Gales Industries Incorporated and John Gantt
and Lugenia Gantt, the shareholders of Welding Metallurgy, Inc.
(incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K/A
report, filed August 3, 2007).
10.29 Separation Agreement and General Release dated March 16, 2007 between the
Registrant and Michael A. Gales (incorporated by reference from the
Registrant's Form 8-K filed on March 20, 2007).
10.30 7% Promissory Note of Registrant in the principal amount of $2,000,000 in
favor of John and Lugenia Gantt(incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.31 Escrow Agreement dated as of August 24, 2007 by and among the Registrant,
John and Lugenia Gantt and Eaton & Van Winkle LLP, as escrow agent
(incorporated by reference from the Registrant's Form 8-K filed on August
26, 2007).
10.32 Registration Rights Agreement dated as of August 24, 2007 by and among the
Registrant and John and Lugenia Gantt (incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
48
10.33 Fourth Amendment to the Revolving Credit, Term Loan and Security Agreement
dated as of November 30, 2005 with the financial institutions named
therein (the "Lenders") and PNC Bank N.A., as agent for the Lenders, as
amended, dated as of August 24, 2007 (incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.34 Loan and Security Agreement dated as of August 24, 2007 among Air
Industries Machining, Corp., Sigma Metals, Inc., Welding Metallurgy, Inc.
and Steel City Capital Funding LLC (the "SCCF Loan and Security
Agreement") (incorporated by reference from the Registrant's Form 8-K
filed on August 26, 2007).
10.35 Pledge Agreement dated as of August 24, 2007 by and among Air Industries
Machining, Corp. and Sigma Metals, Inc., as pledgors, and Steel City
Capital Funding LLC., as pledge incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.36 Pledge Agreement dated as of August 24, 2007 by and among Air Industries
Machining, Corp. and Sigma Metals, Inc., as pledgors, and John and Lugenia
Gantt, as pledges (incorporated by reference from the Registrant's Form
8-K filed on August 26, 2007).
10.37 Pledge Agreement dated as of August 24, 2007 by and between Air Industries
Group, Inc., as pledgor, and Steel City Capital Funding LLC, as pledge
(incorporated by reference from the Registrant's Form 8-K filed on August
26, 2007).
10.38 Guarantor Suretyship Agreement dated as of August 24, 2007 between the
Registrant and Steel City Capital Funding LLC (incorporated by reference
from the Registrant's Form 8-K filed on August 26, 2007).
10.39 Stock Purchase Agreement, dated as of November 15, 2007, by and among Air
Industries Group, Inc. and the shareholders of Blair Industries, Inc.,
Blair Accumulators, Inc., H.S.M. Machine Works, Inc., and H.S.M. Machine
Works, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on November 15, 2007).
10.40 Letter of Clarification between the Company and Michael A. Gales dated May
11, 2007 (incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2007).
10.41 Sublease agreement dated as of January 1, 2008 between Huttig Building
Products, Inc. and the Registrant.
10.42 Securities Purchase Agreement for sale of junior subordinated notes and
series B convertible preferred stock (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on
November October 7, 2008).
10.43 Junior Subordinated Note due 2010 (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on
October 7, 2008).
10.44 Ninth Amendment to the Revolving Credit, Term Loan, Equipment Line of
Credit and Security Agreement dated as of November 30, 2005 with the
Lenders and PNC Bank, N.A., as agent for the Lenders, as amended, dated as
of October 9, 2009.
10.45 Waiver, Consent and Amendment No. 4 to SCCF Loan and Security Agreement
dated September 24, 2009.
10.46 Amended and Restated Promissory Note dated as of August 26, 2009 payable
to John John and Lugenia Gantt (the "Amended and Restated Gantt Note").
10.47 Amendment dated as of October 9, 2009 to Amended and Restated Gantt Note.
49
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-144561) filed with the SEC on July 13, 2007 and declared effective on
July 27, 2007).
21.1 Subsidiaries
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
AIR INDUSTRIES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firms 50-51
Consolidated Balance Sheets 52
Consolidated Statements of Operations 53
Consolidated Statements of Stockholders' Equity 54
Consolidated Statements of Cash Flows 55
Notes to Consolidated Financial Statements 56
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Air Industries Group, Inc.
We have audited the accompanying consolidated balance sheet of Air Industries
Group, Inc. and Subsidiaries (the "Company") as of December 31, 2008 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. The consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2008 and the results of their operations and cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited the adjustments described in the first paragraph of Note 17
that were applied to restate the 2007 consolidated financial statements to
correct certain expenses which should have been included in cost of goods sold
that were classified as reductions of accounts payable and accrued expenses. In
our opinion, such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review, or apply any procedures to the 2007
consolidated financial statements of the Company other than with respect to the
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2007 consolidated financial statements taken as a whole.
/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
Saddle Brook, New Jersey
October 14, 2009
50
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Air Industries Group, Inc. (formerly Gales Industries Incorporated)
We have audited, before the effects of the adjustments for the correction of the
error described in the first paragraph of Note 17, the consolidated balance
sheet of Air Industries Group, Inc. (formerly Gales Industries Incorporated) and
subsidiaries as of December 31, 2007, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (the
2007 financial statements before the effects of the adjustments discussed in the
first paragraph of Note 17 are not presented herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, except for the error described in the first paragraph of Note 17
in the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Air Industries Group, Inc.
(formerly Gales Industries Incorporated) and subsidiaries as of December 31,
2007, and the results of their operations and their cash flows for year then
ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assertion about the effectiveness of
Air Industries Group, Inc. (formerly Gales Industries Incorporated) and
subsidiaries' internal control over financial reporting as of December 31, 2007
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion thereon.
As described in the second paragraph of Note 17 to the financial statements, the
2007 financial statements have been restated for an error in recording a
beneficial conversion on the issuance of Preferred Stock.
We were not engaged to audit, review or apply and procedures to the adjustment
for the correction of the error described in the first paragraph of Note 17 and
accordingly, we do not express an opinion or any other form of assurance about
whether such adjustments are appropriate and properly applied. Those adjustments
were audited by Rotenberg Meril Solomon Bertiger & Guttilla P.C.
/s/McGladry & Pullen, LLP
McGladry & Pullen, LLP
New York, New York
April 14, 2008, except for the 2nd paragraph of Note 17 for which the date is
November 19, 2008
51
AIR INDUSTRIES GROUP, INC.
Consolidated Balance Sheets At December 31,
ASSETS 2008 2007
------------ ------------
Current Assets
Cash and Cash Equivalents $ 164,000 $ --
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $302,000 and $176,000 5,279,000 5,185,000
Inventory 21,099,000 18,240,000
Assets Held for Sale 1,556,000 11,365,000
Prepaid Expenses and Other Current Assets 147,000 224,000
Income Taxes Receivable 53,000 --
Deposits - Customers 100,000 905,000
------------ ------------
Total Current Assets 28,398,000 35,919,000
Property and Equipment, net 5,507,000 4,669,000
Capitalized Engineering Costs - Net of
Accumulated Amortization of $562,000 and $11,000 2,033,000 1,522,000
Deferred Financing Costs, net, Deposit and Other Assets 994,000 1,011,000
Intangible Assets, Net of Accumulated Amortization of $277,000 and $87,000 respectively 2,126,000 2,347,000
Goodwill 291,000 4,822,000
------------ ------------
TOTAL ASSETS $ 39,349,000 $ 50,290,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion Notes Payable and Capital Lease Obligations $ 16,904,000 $ 17,687,000
Accounts Payable and Accrued Expenses 5,167,000 5,427,000
Dividends Payable 366,000 267,000
Deferred Gain on Sale - Current
Portion 38,000 38,000
Liabilities Held for Sale 2,878,000 1,794,000
Income Taxes Payable -- 145,000
------------ ------------
Total Current Liabilities 25,353,000 25,358,000
------------ ------------
Long-Term Liabilities
Notes Payable and Capital Lease Obligations - Net of Current Portion 5,973,000 4,219,000
Deferred Tax Liability 1,364,000 1,879,000
Deferred Gain on Sale - Net of Current Portion 637,000 675,000
Deferred Rent 420,000 230,000
------------ ------------
Total Liabilities 33,747,000 32,361,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred Stock Par Value $.001-Authorized 8,003,716 shares
Designated as Series "A" Convertible Preferred -$.001 par Value,
1,000 Shares Authorized 0 Shares issued and outstanding as of
December 31, 2008 and December 31, 2007, respectively. -- --
Designated as Series "B" Convertible Preferred -$.001 Par Value,
2,000,000 shares authorized, 1,387,205 and 829,098 shares issued and outstanding as of
December 31, 2008 and December 31, 2007,
respectively; Liquidation Value, $13,872,000 1,000 1,000
Common Stock - $.001 Par, 250,000,000 Shares Authorized,
71,524,481 and 69,122,189 Shares Issued and Outstanding as of
December 31, 2008 and 2007, respectively 72,000 69,000
Additional Paid-In Capital 22,957,000 18,744,000
Accumulated Deficit (17,428,000) (885,000)
------------ ------------
Total Stockholders' Equity 5,602,000 17,929,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,349,000 $ 50,290,000
============ ============
See notes to financial statements
52
AIR INDUSTRIES GROUP, INC.
Consolidated Statements of Operations for the Years Ended December 31,
2008 2007
------------ ------------
Net Sales $ 38,694,000 $ 36,178,000
Cost of Sales 29,633,000 26,902,000
------------ ------------
Gross profit 9,061,000 9,276,000
------------ ------------
Total Operating Expenses 10,018,000 7,525,000
Impairment of Goodwill 4,532,000 --
------------ ------------
(Loss) Income from Operations (5,612,000) 1,751,000
Interest and Financing Costs (2,780,000) (1,471,000)
Gain on Sale of Real Estate 38,000 38,000
Other Income 20,000 25,000
Other Expenses -- (81,000)
------------ ------------
(Loss) Income Before Provision for
Income Taxes (Tax Benefits) (8,211,000) 262,000
Provision For Income Taxes (Tax Benefits) (744,000) 365,000
------------ ------------
Loss From Continuing Operations (7,467,000) (103,000)
(Loss) Income From Discontinued Operations, net of taxes (9,076,000) 304,000
------------ ------------
Net (Loss) Income (16,543,000) 201,000
Dividend attributable to preferred stockholders 620,000 395,000
Beneficial Conversion Feature -- 1,589,000
------------ ------------
Net Loss Attributable to Common Stockholders $(17,163,000) $ (1,783,000)
============ ============
Loss per share (basic and diluted):
Continuing Operations $ (0.12) $ (0.03)
Discontinued Operations (0.13) 0.00
============ ============
Total $ (0.25) $ (0.03)
============ ============
Weighted average shares outstanding (basic and diluted) 70,292,090 65,402,711
============ ============
See notes to financial statements
53
AIR INDUSTRIES GROUP, INC.
Consolidated Statements of Stockholders' Equity For the Years
Ended December 31, 2007 and 2008
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional Total
------------------------------------------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
------ ------ --------- ------ ---------- ------- ----------- ------------ ------------
Balance, January 1, 2007 -- $ -- -- $ -- 57,269,301 $57,000 $ 7,899,000 $ (1,086,000) $ 6,870,000
Conversion of warrants -- -- -- -- 311,265 -- -- -- --
Conversion of Seller's Notes -- -- -- -- 1,799,432 2,000 718,000 -- 720,000
Issuance of Restricted Shares -- -- -- -- 200,000 -- 52,000 -- 52,000
Preferred Series B Stock
Issuance -- -- 802,300 1,000 -- -- 8,022,000 -- 8,023,000
Transaction costs paid for
Series B Issuance -- -- -- -- -- -- (699,000) -- (699,000)
Issuance of Stock for
Acquisition of Sigma -- -- -- -- 7,416,082 8,000 1,949,000 -- 1,957,000
Exercise of Stock Options -- -- -- -- 90,580 -- -- -- --
Issuance of Stock for
Acquisition of Welding Met -- -- -- -- 2,035,529 2,000 564,000 -- 566,000
Non-cash stock option expense -- -- -- -- -- -- 354,000 -- 354,000
Non-cash Warrants Expense -- -- -- -- -- -- 31,000 -- 31,000
Preferred Dividend Paid
In Stock -- -- 26,798 -- -- -- -- -- --
Dividend on Series B preferred
stock -- -- -- -- -- -- (146,000) -- (146,000)
Net Income -- -- -- -- -- -- -- 201,000 201,000
------ ------ --------- ------ ---------- ------- ----------- ------------ ------------
Balance, December 31, 2007 -- -- 829,098 1,000 69,122,189 69,000 18,744,000 (885,000) 17,929,000
Non-cash stock option expense -- -- -- -- -- -- 203,000 -- 203,000
Issuance of Stock to Employees -- -- -- -- 140,000 -- 34,000 -- 34,000
Preferred Dividend Paid In
Stock -- -- 98,758 -- -- -- -- -- --
Dividend on Series B preferred
stock -- -- -- -- -- -- (246,000) -- (246,000)
Dividend on Series B preferred
stock - 2007 -- -- -- -- -- -- 146,000 -- 146,000
Issuance of Stock for
financing transaction -
June '08 -- -- -- -- 983,330 1,000 194,000 -- 195,000
Issuance of Stock for fee
related to June 2008
financing transaction -- -- -- -- 200,000 -- 40,000 -- 40,000
Stock Issued to IR Firm -- -- -- -- 275,000 1,000 51,000 -- 52,000
Conversion of Preferred Stock
to Common Stock -- -- (23,091) -- 803,962 1,000 -- -- 1,000
Issuance of Stock to investors
related to September
2008 financing transaction -- -- 156,400 -- -- -- 1,048,000 -- 1,048,000
Issuance of Stock to investors
related to October
2008 financing transaction -- -- 50,400 -- -- -- 338,000 -- 338,000
Issuance of Stock for fee
related to September 2008
and October 2008 financing
transactions -- -- 39,640 -- -- -- 265,000 -- 265,000
Issuance of Stock related to
June 2008 financing
transaction -- -- 236,000 -- -- -- 1,584,000 -- 1,584,000
Issuance of Warrants in
related to financing
transaction -- -- -- -- -- -- 556,000 -- 556,000
Net Income -- -- -- -- -- -- -- (16,543,000) (16,543,000)
------ ------ --------- ------ ---------- ------- ----------- ------------ ------------
Balance, December 31, 2008 -- $ -- 1,387,205 1,000 71,524,481 $72,000 $22,957,000 $(17,428,000) $ 5,602,000
====== ====== ========= ====== ========== ======= =========== ============ ============
See notes to financial statements
54
AIR INDUSTRIES GROUP, INC.
Consolidated Statements of Cash Flows For the Years Ended December 31,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income $(16,543,000) $ 201,000
Adjustments to Reconcile Net (Loss) Income to Net
Cash Used in Operating Activities:
Depreciation and Amortization of Property and Equipment 1,490,000 850,000
Amortization of Intangible Assets 221,000 87,000
Amortization of Capitalized Engineering Costs 551,000 11,000
Bad Debt Expense 135,000 356,000
Non-Cash Compensation Expense 237,000 406,000
Non-Cash Share Payment for Services Rendered 81,000 31,000
Non-Cash Interest Expense Including Amortization of Debt Discounts 594,000 64,000
Amortization of Deferred Financing Costs 297,000 211,000
Gain on Sale of Real Estate (38,000) (38,000)
Deferred Income Taxes (515,000) 389,000
Deferred Rent 190,000 191,000
Loss on Impairment 9,410,000 --
Changes in Operating Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts Receivable (229,000) (1,657,000)
Assets Held for Sale 5,186,000 (504,000)
Inventory (2,859,000) (2,564,000)
Prepaid Expenses and Other Current Assets 77,000 9,000
Deposits 805,000 (725,000)
Other Assets 144,000 (421,000)
Increase (Decrease) in Operating Liabilities
Accounts Payable and Accrued Expenses (260,000) (2,344,000)
Income Taxes Payable (198,000) (508,000)
Liabilities Held For Sale 1,084,000 (91,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (140,000) (6,046,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Paid for Deposit on Leasehold Improvements -- (24,000)
Assets Held for Sale (256,000) --
Cash Paid for Acquisitions, Including Transaction Costs of
$486,200, Net of Cash Acquired of $94,448 -- (7,953,000)
Cash paid for Capitalized Engineering Costs (1,062,000) (1,533,000)
Deposits Escrow -- 472,000
Purchase of Property and Equipment (1,501,000) (581,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,819,000) (9,619,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Private Placement -- 8,023,000
Notes Payable - Sellers (961,000) (527,000)
Cash Paid for Private Placement -- (699,000)
Capital Lease Obligations (346,000) (154,000)
Notes Payable-Jr. Subordinated Debt 5,545,000 --
Notes payable-SFFC -- 4,500,000
Notes Payable-Revolver (553,000) 6,306,000
Notes Payable-Bank (138,000) (1,417,000)
Cash Paid for Deferred Financing Costs (424,000) (367,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,123,000 15,665,000
------------ ------------
Net Increase in Cash and Cash Equivalents 164,000 --
Cash and Cash Equivalents at Beginning of Year -- --
------------ ------------
Cash and Cash Equivalents at End of Year $ 164,000 $ --
============ ============
Supplemental cash flow information
Cash paid during the year for interest $ 1,969,000 $ 1,003,000
============ ============
Supplemental cash flow information
Cash paid during the year for income taxes $ -- $ 679,000
============ ============
Supplemental schedule of non cash investing and financing activities
Property and Equipment acquired under capital leases $ 827,000 $ 673,000
============ ============
Non-cash Dividends on Preferred Stock $ 246,000 $ 147,000
============ ============
Conversion of Preferred Stock to Common Stock $ 222,000 $ --
============ ============
Conversion of Preferred Dividends to Preferred Stock $ 374,000 $ 246,000
============ ============
Notes Payable-Seller and accrued interest converted to
common Stock $ -- $ 720,000
============ ============
Purchase of all capital stock of Sigma Metals, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ -- $ 5,590,000
Goodwill -- 1,550,000
Intangibles -- 3,720,000
Cash paid (includes transaction costs of $280,500) -- (4,341,000)
Notes payable issued to Sellers -- (1,498,000)
Common Stock issued -- (1,957,000)
------------ ------------
Liabilities Assumed $ -- $ 3,064,000
============ ============
Purchase of all capital stock of Welding Metallurgy, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ -- $ 1,588,000
Goodwill -- 3,556,000
Intangibles -- 2,434,000
Cash paid (includes transaction costs of $205,700) -- (3,706,000)
Accrued Purchase Price -- (190,000)
Notes payable issued to Sellers (net of accredited value of $140,000) -- (1,860,000)
Common Stock issued -- (566,000)
------------ ------------
Liabilities Assumed $ -- $ 1,256,000
============ ============
See notes to financial statements
55
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida
corporation, entered into a Merger Agreement on November 14, 2005 with Gales
Industries Incorporated, a privately-held Delaware corporation ("Original
Gales"). As a result of the transaction, the former stockholders of Original
Gales became the controlling stockholders of Ashlin. Additionally, since Ashlin
had no substantial assets prior to the merger, the transaction was treated for
accounting purposes as a reverse acquisition of a public shell. Accordingly, for
financial statement presentation purposes, Original Gales is the surviving
entity.
Prior to the closing of the merger, Original Gales acquired all of the
outstanding capital stock of Air Industries Machining Corporation ("AIM").
Because of the change in ownership, management and control that occurred in
connection with the acquisition of AIM by Original Gales, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," the transaction was accounted for as a purchase. Accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based on
SFAS No. 141.
Original Gales was formed in October 2004. Prior to the acquisition of
AIM, it did not have any business operations or activity other than transactions
contemplated with the merger and succeeded substantially all of the business
operations of AIM. As such, AIM is the "Predecessor" to Original Gales.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated and its state of domicile from Florida to Delaware. On June 26,
2007, the name of the Company was changed from Gales Industries Incorporated to
Air Industries Group, Inc.
The financial statements presented are those of Original Gales, now known
as Air Industries Group, Inc. ("AIRI") and its wholly-owned subsidiaries; AIM,
Sigma Metals Inc. ("Sigma") and Welding Metallurgy, Inc. ("Welding"). See Note
2.
56
Basis of Presentation
The Company is highly leveraged and will need to generate substantial cash
flow from operations to satisfy its debt service obligations. As of December 31,
2008, the Company's indebtedness was approximately $22,900,000, including
approximately $15,800,000 payable to its bank lenders secured by substantially
all its assets. Because the Company is required to maintain a "lock box" account
with PNC Bank N.A. into which substantially all of the Company's cash receipts
are paid, if its bank lenders were to cease lending, the Company would lack the
funds to continue its operations. The Company received gross proceeds from the
sale of its junior subordinated notes and equity securities of $5,535,000
between May 2008 and October 2008. The Company's senior bank debt matures in
April 2010 and its subordinated bank debt in August 2010. There can be no
assurance that the Company's lenders will agree to extend their loans and, in
the absence of significant improvement in the Company's results of operations,
it is not likely that the Company will be able to refinance its bank
indebtedness with another lender. To alleviate its liquidity difficulties, the
Company sold certain of the assets and the operations of its Sigma business and
extended the payment terms of its indebtedness to the former owners of Welding.
The Company also has ceased its efforts to acquire Blair Industries, Inc. and
certain of its affiliated companies ("Blair-HSM"). In addition, due to its
liquidity difficulties, the Company has issued, and will likely continue to
issue, additional shares of its Series B Convertible Preferred Stock ("Series B
Preferred") in lieu of payment of cash dividends on its Series B Preferred,
which will dilute the equity ownership and voting power of holders of its Common
Stock. Nevertheless, the ability of the Company to maintain its current level of
operations is subject to the cooperation of its bank lenders and other parties
which hold its notes. If the Company's bank lenders were to reduce the amounts
loaned to the Company, the Company would have no choice other than to reduce it
operations and seek to liquidate certain assets. Any forced liquidation of
assets would likely yield less than the amounts at which such assets are valued
by the Company. See Note 2 Acquisitions and Dispositions.
Note 2. ACQUISITIONS AND DISPOSITIONS
Sigma
On April 16, 2007, the Company purchased all of the outstanding capital
stock of Sigma for approximately $7.5 million. We paid $4,060,796 of the
purchase price in cash and issued to the former shareholders of Sigma our 7%
promissory notes due April 1, 2010 in the aggregate principal amount of
$1,497,411 and 7,416,082 shares of our common stock having a value of
$1,957,000. The remaining principal balance of the promissory notes, $1,216,488
as of December 31, 2007, is repayable in equal monthly installments of $43,446
principal, plus accrued interest at the rate of 7% per annum, through April
1,2010. In connection with the acquisition of Sigma, we entered into Employment
Agreements, discussed below, with three members of the management of Sigma.
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to the net tangible assets based on the estimated fair values. The allocation of
the purchase price was based upon valuation data as of April 17, 2007. The final
valuation has been completed. For tax reporting purposes the Company will
amortize goodwill. The allocation of the purchase price is as follows:
57
Purchase of all capital stock of Sigma Metals, Inc and assumption of liabilities
in the acquisition as follows:
Fair Value of Assets acquired $ 5,590,164
Goodwill 1,549,931
Intangibles 3,720,000
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common Stock issued (1,957,000)
-----------
Liabilities Assumed $ 3,064,388
===========
Sigma's results in 2008 began to deteriorate and we concluded that to
revive the business would require a significant investment. Therefore, in the
third quarter of 2008, the Board of Directors decided to discontinue the
operations of Sigma. Operations were discontinued on October 31, 2008. The
Company's financial statements reflect Sigma as discontinued operations. The
results of operations of this entity is treated as (loss) income from
discontinued operations, net of tax and separately stated on the Consolidated
Statements of Operations below loss from continuing operations. See Note 15
Discontinued Operations. Sigma's assets and liabilities have been classified as
held for sale on the Company's consolidated balance sheet for all periods
presented.
The Company reached an agreement to sell certain assets of the business to
the former stockholders of Sigma in October 2008. In January 2009, the sale was
closed. The Company sold assets including certain accounts receivable, property
and equipment, customer list and the rights, title and interest in the name
Sigma Metals, Inc. and the domain name Sigmametalsinc.com. In connection with
the sale, the Company and the former stockholders of Sigma consummated a
Settlement Agreement in which the balances due under the notes issued for the
Company's acquisition of Sigma were converted into 58,500 shares of the
Company's Series B Preferred. See Note 9 Stockholders' Equity. In addition, the
employment agreements entered into by the former stockholders of Sigma were
terminated. See Note 11 Commitments and Contingencies.
Welding
On August 24, 2007, the Company acquired all of the issued and outstanding
capital stock of Welding pursuant to a Stock Purchase Agreement, dated as of
March 9, 2007, as amended, in exchange for $3,500,000 in cash. The cash portion
of the purchase price was provided by the proceeds of a term loan of $4,500,000
under a Loan and Security Agreement dated as of August 24, 2007 by and among our
wholly-owned subsidiaries, AIM, Sigma and Welding, and Steel City Capital
Funding LLC (the "SCCF Loan Agreement"). In addition, a promissory note in the
principal amount of $2,000,000 (this note was originally recorded at $1,860,000
to reflect the fact that no interest accrues for the first year, see Note 8
Notes Payable and Capital Lease Obligations) and 2,035,529 shares of its Common
Stock which were valued at an aggregate of approximately $567,000. One-half of
these shares are held in escrow as secondary collateral for representations and
warranties pursuant to the Stock Purchase Agreement. In addition, the Company
was obligated to pay an additional $190,000 representing an adjustment to
reflect additional working capital acquired in excess of targeted working
capital pursuant to the Stock Purchase Agreement as described further in Note 8
Notes Payable and Capital Lease Obligations. Costs associated with this
acquisition amounted to approximately $206,000. Welding is a specialty welding
and products provider whose significant relationships include the world's
largest aircraft manufacturers, subcontractors, and original equipment
manufacturers.
58
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to assets acquired and liabilities assumed based on studies of their relative
fair values. The allocation of the purchase price of Welding was based upon
valuation data as of August 27, 2007. The final valuation has been completed.
The allocation of the purchase price of Welding is as follows:
Fair Value of Assets acquired $ 1,587,686
Goodwill 3,556,478
Intangibles 2,434,225
Cash paid (includes transaction costs of $205,700) (3,705,700)
Accrued Purchase Price (190,377)
Notes payable issued to Sellers (net of discount of $140,000) (1,860,000)
Common Stock issued (566,500)
-----------
Liabilities Assumed $ 1,255,812
===========
The components of the intangibles acquired for Sigma and Welding are comprised
of the following:
Estimated
2007 Useful Lives
---------- ---------------
Trade Names $2,480,000 20 Years
Customer Relationships 2,900,000 11 to 14 Years
Technical know-how 660,000 10 Years
Professional Certification Certificates 114,225 0.25 to 2 years
----------
Total $6,154,225
==========
Results of operations include the results of Welding beginning on August 27,
2007. As such, the operations of Welding are included in operations for the
entire year ended December 31, 2008, but for the year ended December 31, 2007.
Welding's results are included from August 27, 2007.
The expense for the amortization of the intangibles for the years ended December
31, 2008 and 2007 were $221,000 and $87,000, respectively.
Future amortization of intangibles is as follows:
Year Amount
2009 $ 183,000
2010 168,000
2011 168,000
2012 168,000
2013 168,000
Thereafter 1,256,000
----------
Total $2,111,000
==========
The following summary shows the unaudited pro forma results of operations for
the year ended December 31, 2007, assuming that the Company had purchased
Welding as of January 1, 2007. This information gives effect to the increased
interest and financing costs and the amortization of fair value adjustments
(principally for amortization of identified intangibles) and a provision for
income taxes. This summary may not be indicative of what the actual results of
operations would have been had the purchases occurred at the beginning of the
period shown.
(pro forma)
2007
------------
Net sales $ 37,858,000
Gross profit 13,671,000
Income from operations 1,686,000
------------
Net loss applicable to common stockholders $ (297,000)
============
Earnings per share, basic and diluted $ (0.01)
Weighted average shares outstanding, basic and diluted 68,889,275
============
59
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural
parts, and assemblies 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 its wholly-owned subsidiaries, AIM and Welding. Significant
inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments with an
original maturity of three months or less.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances net of allowances for uncollectable accounts. The Company provides for
allowances for uncollectible receivables based on management's estimate of
uncollectible amounts considering age, collection history, and any other factors
considered appropriate. The Company writes off accounts receivable against the
Allowance for Doubtful Accounts when a balance is determined to be
uncollectible.
Inventory Valuation
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
AIM generally purchases inventory only when it has non-cancellable
contracts from its customers for orders of its finished goods. Welding
Metallurgy generally produces pursuant to customer orders and maintains
relatively low inventory levels. AIM occasionally produces finished goods in
excess of purchase order quantities in anticipation of future purchase order
demand; historically this excess has been used in fulfilling future purchase
orders. The Company periodically evaluates inventory items that are not secured
by purchase orders and establishes reserves for obsolescence accordingly. The
Company also reserves for excess quantities, slow-moving goods, and for other
impairment of value.
Capitalized Engineering Cost
The Company has contractual agreements with customers to produce parts,
which the customers design. Though the Company has not designed and thus has no
proprietary ownership of the parts, the manufacturing of these parts require
pre-production engineering and programming of our machines. The Company accounts
for these pre-production costs pursuant to Emerging Issues Task Force Issue No.
99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements" ("EITF 99-5"). The pre-production costs associated with a
particular contract are capitalized and then amortized beginning with the first
shipment of product pursuant to such contract. These costs are amortized on a
straight line basis over the estimated length of the contract, or if shorter,
three years.
If the Company is reimbursed for all or a portion of the pre-production
expenses associated with a particular contract, only the unreimbursed portion
would be capitalized under EITF 99-5. The Company may also progress bill
customers for certain engineering costs being incurred. Such billings are
recorded as progress billings (a reduction of the associated inventory) until
the appropriate revenue recognition criteria have been met. The Terms and
Conditions contained in customer purchase orders may provide for liquidated
damages in the event that a stop-work order is issued prior to the final
delivery of the product.
60
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 asset or the particular
improvement. 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.
Long-Lived and Intangible Assets
Identifiable intangible assets are amortized using the straight-line
method over the period of expected benefit.
Long-lived assets and intangible assets subject to amortization to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the related carrying amount may be impaired. Under the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," the Company records an impairment loss if the undiscounted future cash
flows are found to be less than the carrying amount of the asset. If an
impairment loss has occurred, a charge is recorded to reduce the carrying amount
of the asset to fair value. There has been no impairment for the years 2008 or
2007.
Deferred Financing Costs
Costs incurred with obtaining and executing debt arrangements are
capitalized and amortized on the effective interest method over the term of the
related debt.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition." The Company recognizes revenue when
products are shipped and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists, and the sales price is fixed or determinable. Payments
received in advance from customers for products delivered are recorded as
customer advance payments until earned, at which time revenue is recognized. The
Terms and Conditions contained in our customer Purchase orders often provide for
liquidated damages in the event that a stop work order is issued prior to the
final delivery. The Company utilizes a Returned Merchandise Authorization or RMA
process for determining whether to accept returned products. Customer requests
to return products are reviewed by the contracts department and if the request
is approved, a credit is issued upon receipt of the product. Net sales represent
gross sales less returns and allowances. Shipping costs are included in cost of
sales.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. The more significant management estimates are
the useful lives of property and equipment, provisions for inventory
obsolescence, accrued expenses and various contingencies. Actual results could
differ from those estimates. Changes in facts and circumstances may result in
revised estimates, which are recorded in the period in which they become known.
Credit Risk
There were three customers that represented $27,899,000 or 71.3% of the
total sales for the year ended December 31, 2008 and $28,752,000 or 80.6% for
the year ended December 31, 2007. One customer accounted for approximately 49%
and 59% of net sales for the year ended December 31, 2008 and 2007,
respectively. Sales to that customer are subject to General Ordering Agreements
which extend through 2013. Amounts receivable from this customer at December 31,
2008 and 2007 were approximately $525,000 or 9.6% and $1,666,000 or 32.0% of net
accounts receivable, respectively. The second customer accounted for 10.7% and
10.7% of sales for 2008 and 2007, respectively, and $1,275,000 or 23.2% and
$1,221,000 or 23.0% of net accounts receivable at December 31, 2008 and 2007,
respectively. The third customer represented 11.9% and 10.4% of sales at
December 31, 2008 and 2007, respectively, and $1,296,000 or 23.7% and $541,000
or 12.8% of the net accounts receivable at December 31, 2008 and 2007
respectively.
61
AIM has several key sole-source suppliers of various parts that are
important for one or more of our products. These suppliers are our only source
for such parts and, therefore, in the event any of them were to go out of
business or be unable to provide us parts for any reason, our business could be
severely harmed.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable and accrued
liabilities, approximates carrying value due to the immediate or short-term
maturity associated with these instruments and that the notes payable
approximate fair value in that they carry market-based interest rates.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, "Accounting for Income Taxes". The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or the entire deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes--An Interpretation of FASB Statement No. 109" ("FIN 48") regarding
accounting for, and disclosure of, uncertain tax positions. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes," and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company will
recognize interest and penalties, if any, related to taxes not properly paid in
prior periods in tax expense. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 effective as of
January 1, 2007 and had no effect on the Company's financial statements upon
adoption as the Company did not have any unrecognized tax benefits. The Company
also evaluated its tax positions as of December 31, 2008 and 2007 and reached
the same conclusion. The Company does not currently expect any significant
changes to unrecognized tax benefits during the year ended December 31, 2009.
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 12,931,100 warrants and 6,522,764 options to
purchase the Company's common stock for the year ended December 31, 2008 and
3,025,578 warrants and 4,060,000 options to purchase the Company's common stock
for the year ended December 31, 2007 in the calculation of diluted earnings per
share because the effects of their inclusion would have been anti-dilutive. The
shares of Series B Preferred that are convertible into 50,425,482 and 30,039,783
shares of common stock at December 31, 2008 and 2007 are not included in the
calculation of diluted earnings per shares because the effect of the inclusion
would have been anti-dilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"). SFAS No.
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
reward--known as the requisite service period. No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. The grant-date fair value of employee share options and
similar instruments are estimated using option-pricing models adjusted for the
unique characteristics of those instruments.
62
Equity instruments issued to non-employees are recorded at their fair
values as determined in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods and
Services", and are periodically revalued as the stock options vest and are
recognized as expense over the related service period.
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. The Company performs impairment
testing for goodwill annually, or more frequently when indicators of impairment
exist, using a two-step approach. Step one compares the fair value of the net
assets of the relevant reporting unit (calculated using a discounted cash flow
method) to its carrying value, a second step is performed to compute the amount
of the impairment. In this process, a fair value for goodwill is estimated,
based in part on the fair value of the operations, and is compared to its
carrying value. The shortfall of the fair value below carrying value represents
the amount of goodwill impairment. As more fully described in Note 6, during the
year ended December 31, 2008, the Company recorded an impairment charge of
$4,532,000 related to goodwill.
Reclassifications
Certain amounts in the 2007 financial statements have been reclassified to
conform to the 2008 financial statement presentation.
Recently Issued Accounting Standards
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements," for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. SFAS 157 establishes a new
framework for measuring fair value and expands related disclosures. Broadly, the
SFAS 157 framework requires fair value to be determined based on the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants. SFAS 157
establishes market or observable inputs as the preferred source of values,
followed by unobservable inputs or assumptions based on hypothetical
transactions in the absence of market inputs.
o Level 1, is defined as observable inputs being quoted prices in
active markets for identical assets;
o Level 2, is defined as observable inputs including quoted prices for
similar assets; and
o Level 3, is defined as unobservable inputs in which little or no
market data exists, therefore requiring assumptions based on the
best information available.
The adoption of this pronouncement did not have a material effect on the
financial condition or results of operations of the Company.
In February 2008, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") FAS 157-2, "Effective Date of FASB Statement No.
157" ("FSP FAS 157-2"). FSP FAS 157-2 defers the implementation of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The aspects that have been deferred by FSP
FAS 157-2 were effective for the Company beginning January 1, 2009. The adoption
of FSP FAS 157-2 is not expected to have a material impact on the financial
condition or results of operations of the Company.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) requires contingent consideration to be recognized at its fair value on
the acquisition date and, for certain arrangements, changes in fair value to be
recognized in earnings until settled. SFAS No. 141(R) also requires
acquisition-related transaction and restructuring costs to be expensed rather
than treated as part of the cost of the acquisition. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This statement will be effective for the Company beginning in
fiscal 2009. The Company is currently evaluating SFAS No. 141(R), and has not
yet determined the impact if any, SFAS No. 141(R) will have on its consolidated
results of operations or financial position.
63
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests
in Consolidated Financial Statements an Amendment of ARB No. 51" ("SFAS 160"),
which establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. SFAS 160
also provides guidance when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent's owners and the interests of
the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. This statement will be effective for the Company beginning in
fiscal 2009. The Company is currently evaluating SFAS No. 160, and has not yet
determined the impact if any, SFAS No. 160 will have on its consolidated results
of operations or financial position.
In April 2008, the FASB issued Staff Position FSP 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The
intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R) and
other GAAP. FSP 142-3 was effective for the Company beginning January 1, 2009.
The Company will apply the FSP prospectively to intangible assets acquired.
In May 2008, FASB issued FSP Accounting Principles Board No. 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion (including partial cash settlement) to
separately account for the liability and equity components of the instrument in
a manner that reflects the issuer's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for
us beginning after January 1, 2009. The Company is evaluating the effect of
adopting FSP APB 14-1 on its financial statements.
In June 2008, FASB ratified EITF Issue No. 08-4, "Transition Guidance for
Conforming Changes to Issue No. 98-5" ("EITF No. 08-4"). Per EITF No. 08-4,
conforming changes made to EITF Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", that result from EITF Issue No. 00-27, "Application of Issue
No. 98-5 to Certain Convertible Instruments", and SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" , shall be effective for us beginning after January 1, 2009. The Company
is evaluating the effect of adopting FSP APB 14-1 on its financial statements.
Note 4. INVENTORY
The components of inventory consisted of the following:
2008 2007
------------ ------------
Raw Materials $ 6,809,000 $ 5,470,000
Work In Progress 9,633,000 7,755,000
Finished Goods 5,224,000 5,015,000
Inventory Reserve (567,000) --
------------ ------------
Total Inventory $ 21,099,000 $ 18,240,000
============ ============
Note 5. PROPERTY AND EQUIPMENT
The components of property and equipment consisted of the following:
2008 2007
----------- -----------
Machinery and Equipment $ 3,369,000 $ 2,968,000 5 - 8 years
Capital Lease Machinery and Equipment 2,499,000 1,670,000 5 - 8 years
Tools and Instruments 1,871,000 827,000 1.5 - 7 years
Automotive Equipment 30,000 30,000 5 years
Furniture and Fixtures 145,000 146,000 5 - 8 years
Leasehold Improvements 357,000 313,000 Term of Lease
Computers and Software 142,000 131,000 4-6 years
----------- -----------
Total Property and Equipment 8,413,000 6,085,000
Less: Accumulated Depreciation (2,906,000) (1,416,000)
----------- -----------
Property and Equipment, net $ 5,507,000 $ 4,669,000
=========== ===========
Depreciation and amortization expense for the years ended December 31,
2008 and 2007 were approximately $1,490,000 and $830,000, respectively.
Note 6. GOODWILL
Goodwill of $3,556,000 was recorded in connection with the acquisition of
Welding and consists of the cost over the fair value of net assets (see Note 2
Acquisitions). Additionally, goodwill in the amount of $1,266,000 was recorded
in connection with the acquisition of AIM. During the annual testing for the
impairment of goodwill, it was determined that the Company should reduce the
value of the recorded goodwill on AIM to $-0- and the value recorded on Welding
to $291,000. The basis for this impairment was due to liquidity constraints and
the results of operations during the year ended December 31, 2008. Therefore, an
impairment charge of $4,532,000 was recognized in the Consolidated Statement of
Operations for the year ended December 31, 2008.
Note 7. SALE AND LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated a Sale & Leaseback
Arrangement, whereby the Company sold the buildings and real property comprising
its corporate headquarters in Bay Shore, New York (the "Property") for a
purchase price of $6,200,000. The Company accounted for the transaction under
the provision of SFAS No. 98, "Accounting for Leases." As a result, the Company
realized a gain on the sale of $1,051,000 of which we recognized $300,000 during
the year ended December 31, 2006. The remaining $751,000 is being recognized
ratably over the remaining term of the twenty year lease at approximately
$38,000 per year. The unrecognized portion of the gain is classified as Deferred
Gain on Sale in the accompanying Consolidated Balance Sheet.
Simultaneous with the closing of the sale of the Property, the Company
entered into a 20-year triple-net lease (the "Lease") with the Purchaser for the
property. Base annual rent is approximately $540,000 for the first five years,
$560,000 for the sixth year, and thereafter increases 3% per year. The Lease
grants AIM an option to renew the Lease for an additional period of five years.
The Company deposited with the Purchaser $127,500 as security for the
performance of its obligations under the Lease, which it subsequently replaced
with a $127,500 letter of credit. In addition, the Company deposited with the
landlord $393,000 as security for the completion of certain repairs and upgrades
to the Property. This amount is included in the caption Deferred Finance costs,
net, Deposit and Other Assets on the accompanying Consolidated Balance Sheet.
Pursuant to the terms of the Lease, the Company is required to pay all of the
costs associated with the operation of the facilities, including, without
limitation, insurance, taxes and maintenance. These costs will be offset against
the funds that are deposited with the landlord. The lease also contains
customary representations, warranties, obligations, conditions and
indemnification provisions and grants the Purchaser customary remedies upon a
breach of the lease by the Company, including the right to terminate the Lease
and hold the Company liable for any deficiency in future rent. See Note 11
Commitments and Contingencies.
64
Note 8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital leases obligations consist of the following:
2008 2007
----------- -----------
Revolving credit notes payable to PNC Bank N.A. ("PNC") and
secured by substantially all assets $10,779,000 $11,332,000
Term loan, subject to acceleration, secured 4,500,000 4,500,000
Junior subordinated notes 6,055,000 --
Notes payable to sellers of acquired businesses 3,071,000 3,939,000
Capital lease obligations 1,960,000 1,479,000
Other notes payable to PNC, secured 518,000 656,000
----------- -----------
Subtotal 26,883,000 21,906,000
Less: Current portion of notes and capital obligations 16,904,000 17,687,000
Unamortized debt discount on junior subordinated notes 4,006,000 --
----------- -----------
Notes payable and capital lease obligations, net of current portion $ 5,973,000 $ 4,219,000
=========== ===========
PNC Bank N.A. ("PNC")
On November 30, 2005, the Company executed a credit facility with PNC (the
"Loan Facility"), secured by substantially all of its assets. The Loan Facility
provided for maximum borrowings of $14,000,000 consisting of the following:
(i) a $9,000,000 revolving loan with an original maturity date of
November 30, 2009
(ii) a $3,500,000 term loan originally maturing on November 30, 2009 and
(iii) a $1,500,000 equipment financing loan maturing on November 30, 2009.
In connection with the Loan Facility, the Company paid a finder's fee of
$196,500, consisting of $125,000 in cash and 325,000 shares of Common Stock,
which is included in deferred financing costs.
On January 10, 2007, the Company and PNC amended the terms of the Loan
Facility to revise the formula to determine the amounts of revolving advances
permitted to be borrowed under the Loan Facility. The cost of this amendment was
approximately $43,000 and is being amortized over the remaining term of the
Credit Facility. The amount that the Company is permitted to borrow as a
revolving advance under the Loan Facility is based on a percentage of the
Company's eligible receivables, which now includes government receivables that
have not been assigned by the Company.
65
On April 19, 2007, to refinance the debt of Sigma, the Company entered
into a Third Amendment to the Loan Facility. The amendment modified the terms of
the loan facility to:
o Add Sigma as a borrower, and requiring Sigma to pledge substantially
all of its assets and properties to PNC to secure its obligations
under the Loan Facility,
o Extend the termination date of the Loan Facility to April 30, 2010
and,
o Increase the maximum revolving advance amount from $9,000,000 to
$11,000,000.
In connection with the acquisition of Welding, the Company entered into
the Fourth Amendment to the Loan Facility, dated as of August 24, 2007. The
amendment modified the terms of the loan facility to:
o Add Welding as a borrower under the Loan Facility and AIRI as a
guarantor of the obligations there under, and
o Increase the maximum revolving advance amount from $11,000,000 to
$14,000,000.
The revolving loans bear interest, at the option of the Company, that is
based on (i) the higher of (A) PNC's base commercial lending rate as published
from time to time ("PNC Rate") plus 0.25% or (B) the Federal Funds rate plus
0.5%, or (ii) the Eurodollar Rate for the Interest Period selected by the
Company plus 2.5%. The interest rate was amended under the Ninth Amendment of
the Loan Facility (see discussion below). The revolving loans had an interest
rate of 6.25% and 7.75% per annum at December 31, 2008 and 2007, respectively,
and an outstanding balance of $10,779,000 and $11,333,000, respectively. The
revolving loans are payable in full in April 2010.
Each day, the Company's cash collections (except for Welding) are swept
directly by the bank to reduce the revolving loans and we then borrow according
to a borrowing base. As such, the Company generally has no cash on hand. Because
the revolving loans contain a subjective acceleration clause which could permit
PNC to require repayment prior to maturity, the loans are classified with
current portion of notes and capital lease obligations.
The term loan was for a period of four (4) years and bears interest, at
the option of the Company, at the (i) PNC Rate plus 0.50% per annum or (ii) the
Eurodollar Rate for the interest period selected by the Company plus 2.75 %. In
October 2006, the Term Note was reduced by a payment of $2,800,000 and an
Amended and Restated Term Note in the amount of $383,330 was issued providing
for principal payments of $10,648 per month. The maturity date was extended to
become the first business day of October 2009 and later extended again to April
30, 2010. At December 31, 2008 and 2007, the balance of the term loan was
$107,000 and $245,000, respectively.
In addition to the foregoing, the Loan Facility was further amended to
allow the Company to borrow or to obtain the issuance, renewal, extension and
increase of standby letters of credit, up to an aggregate availability of
$500,000, for its account until November 30, 2009. At December 31, 2008 the
Company had an outstanding letter of credit in the amount of $127,500.
The equipment loans bear interest, at the option of the Company, that is
based on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate for
the interest period selected plus 2.75% per annum. The equipment loan had an
interest rate of 7.75% per annum at December 31, 2008. Such equipment financing
is limited to an aggregate of $750,000 in any fiscal year and amortized in equal
installments of sixty months following the close of each "borrowing period", the
first of which ended December 31, 2007. Each subsequent "borrowing period" ends
on each December 31 thereafter. All equipment loans are due and payable on April
30, 2010. At each of December 31, 2008 and 2007, the equipment financing loan
had a balance of $411,000. The equipment financing loan was repaid in October
2009 as part of the renegotiation of the Company's loan covenants with PNC.
To the extent that the Company may dispose of collateral used to secure
the Loan Facility, other than inventory, the Company must promptly repay the
draws on the credit facility in amount equal to the net proceeds of such sale.
The terms of the Loan Facility require that, among other things, the
Company maintain certain financial ratios and levels of working capital. As of
December 31, 2008 the Company had not met these terms and was in default. Such
defaults were waived as part of the Ninth Amendment to the Loan Facility (see
discussion below).
The Loan Facility also is secured by all assets of the Company and the
Company's receivables are payable directly into a lockbox controlled by PNC
(subject to the terms of the Loan Facility). PNC may use some elements of
subjective business judgment in determining whether a material adverse change
has occurred in the Company's condition, results of operations, assets,
business, properties or prospects allowing it to demand repayment of the Loan
Facility, as such, the revolving loan has been classified as a current
liability.
66
During the fiscal years 2007 and 2008, the Company executed four (4)
supplemental amendments to the PNC Credit Facility.
o Effective December 28, 2007 the Fifth Amendment to the Loan Facility
was signed. This amendment was for the modification of the tangible
net worth covenant. The Company paid an amendment fee of $25,000.
o Effective January 31, 2008, the Sixth Amendment to the Loan Facility
was signed. This amendment increased the inventory sublimit to
$10,250,000. The Company paid an amendment fee of $10,000.
o Effective June 20, 2008, the Seventh Amendment to the Loan Facility
was signed. This amendment waived prior defaults, consented to the
unsecured subordinated indebtedness and established an availability
reserve. The Company paid an amendment fee of $45,000.
o Effective September 25, 2008, the Eighth Amendment to the Loan
Facility was signed. This amendment waived prior defaults and
consented to additional unsecured subordinated indebtedness by the
Company. There was no cost for this amendment.
On October 9, 2009, the Ninth Amendment to the Loan Facility was signed.
The terms of the Ninth Amendment included the following:
o Waived prior defaults
o Amended the financial ratios and now includes all entities,
including the parent company, in the calculations
o Amended the formula to determine the amounts of revolving advances
permitted to be borrowed under the Loan Facility.
o Reduced the availability reserve so that the excess availability
created by the reduction will be utilized to payoff in full the term
loan and equipment loans.
o Amended the revolving interest rate to (a) the sum of PNC Rate plus
2.25% or (b) the greater of (i) the sum of the Eurodollar rate plus
3.5% and (ii) 5.5%.
The Company paid an amendment fee of $20,000.
Under the terms of the Loan Facility, the amounts owed under the revolving
loan and equipment loan are not due to be repaid until April 30, 2010, but have
been included in current liabilities due to the right of PNC to demand immediate
repayment.
Steel City Capital Funding LLC ("SCCF")
In connection with the Welding acquisition, SCCF provided a Term Loan (the
"SCCF Loan Agreement") of $4,500,000, which is payable on August 24, 2010.
Borrowings under the SCCF Loan Agreement bear interest, payable monthly,
generally at a rate of 6% over the base commercial lending rate of PNC as
publicly announced to be in effect from time to time. The interest rate on the
outstanding indebtedness under the SCCF Loan Agreement was approximately 9.25%
and 9.75% for the years ended December 31, 2008 and 2007, respectively. At each
of December 31, 2008 and 2007, the balance owed on the SCCF Loan Agreement
amounted to $4,500,000.
On January 29, 2009, SCCF notified the Company of a default of covenants
under the SCCF Loan Agreement, and subsequently imposed a default rate of
interest of 13.25% as of April 6, 2009. Such defaults were waived as part of the
Fourth Amendment to the SCCF Loan Agreement (see discussion below).
On September 24, 2009 the Fourth Amendment to the Term Loan was signed.
The terms of the Fourth Amendment included the following:
o Waived prior defaults
o Amended the financial ratios and now includes all entities,
including the parent company, in the calculations
o Amended the interest rate to (a) the sum of (i) the greater of (1)
PNC Rate or (2) 4.75% plus (ii) 6% for domestic loans and (b) the
sum of (i) the greater of (1) the Eurodollar Rate or (2) 2.25% plus
(ii) 8.5% for Eurodollar Rate loans.
o Make cash payments to vendors of Sigma in excess of $150,000 in the
aggregate during each of (i) the period September 1, 2009 through
December 31, 2009, and (ii) each calendar year commencing January 1,
2010.
The Company paid an amendment fee of $50,000.
67
To secure payment of the indebtedness under the SCCF Loan Agreement, AIRI
pledged all of the outstanding shares of AIM and Sigma, which, in turn, pledged
all of the outstanding shares of Welding. Such security, though, is subordinate
to PNC.
Under the terms of the SCCF Loan Agreement, the amounts are not due to be
repaid until August 24, 2010, but have been included in current liabilities due
to the right of SCCF to demand immediate repayment.
Interest expense related to these credit facilities amounted to
approximately $1,262,000 and $821,000 for the years ended December 31, 2008 and
2007, respectively.
As of December 31, 2008, future minimum principal payments on the PNC and
SCCF Term Loans and the PNC Equipment Loan are as follows:
Year Amount
---- ------
2009 $4,607,000
2010 411,000
----------
Total Principal Reduction 5,018,000
Less: Current Portion 4,607,000
----------
Long-term portion $ 411,000
==========
Capital Leases Payable - Equipment
The Company is committed under several capital leases for manufacturing
and computer equipment. All leases have bargain purchase options exercisable at
the termination of each lease. Capital lease obligations totaled $1,960,000 and
$1,478,000 as of December 31, 2008 and 2007, respectively with various interest
rates ranging from 5% to 10%.
As of December 31, 2008, the aggregate future minimum lease payments,
including imputed interest, with remaining terms of greater than one year are as
follows:
Year Amount
- ----------------------------------- -----------
2009 $ 622,000
2010 622,000
2011 622,000
2012 357,000
2013 97,000
-----------
Total future minimum lease payments $ 2,320,000
Less: imputed interest (360,000)
Less: current portion (465,000)
-----------
Total Long Term Portion $ 1,495,000
===========
On April 28, 2009, the Company refinanced and consolidated its existing
capital leases into one new five-year capital lease. The monthly payment was
reduced to $38,000 from an average of $52,000 under the existing leases.
68
Notes Payable - Sellers
As of December 31, 2008, the balance owed to the sellers by acquisition
are:
2008 2007
---------- ----------
AIM $ 433,000 $ 625,000
Sigma 638,000 1,216,000
Welding 2,000,000 2,098,000
---------- ----------
Subtotal $3,071,000 $3,939,000
Less: Current Portion 1,053,000 1,436,000
---------- ----------
Total long-term portion $2,018,000 $2,503,000
========== ==========
AIM
On November 30, 2005, in connection with the acquisition of AIM, the
Company issued notes payable for an aggregate of $1,627,000 to three former AIM
shareholders, two of whom have remained as part of the Company's senior
management and are also stockholders of the Company. On January 26, 2007, the
two senior management members converted $665,000 principal amount of their
notes, plus accrued interest of $55,000, into an aggregate of 1,799,432 shares
of common stock at a conversion price of $0.40 per share.
The balance owed at December 31, 2008 and 2007 amounted to $433,000 and
$625,000, respectively and matures on September 30, 2010. The remaining balance
is subordinated to all of the Company's senior debt and is payable in twenty
consecutive calendar quarters of equal installments of $48,100 principal plus
accrued interest The interest rate on this note is equal to Prime Rate plus 0.5%
per annum (4.25% and 7.75% at December 31, 2008 and 2007, respectively).
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, 2008.
These notes are subordinated to all of the Company's PNC senior debt.
Sigma
In connection with the acquisition of Sigma, the Company incurred notes
payable obligations to the former stockholders of Sigma in the aggregate
principal amount of approximately $1,497,000. At December 31, 2008 and 2007, the
remaining principal balance totaled $638,000 and $1,216,000, respectively. The
amounts are classified as part of Liabilities Held for Sale on the Consolidated
Balance Sheet. These notes were subordinated to all of the Company's
indebtedness to PNC and SCCF.
In January 2009, as part of the sale of Sigma to its former stockholders, such
stockholders and the Company consummated a Settlement Agreement in which these
notes were converted into 58,500 shares of Series B Preferred. See Note 9
Stockholders' Equity and Note 15 Discontinued Operations.
Welding
In connection with the acquisition of Welding, the Company incurred a note
payable to the former stockholders of Welding in the aggregate principal amount
of $2,000,000, which bore no interest until August 24, 2008, and bears interest
thereafter at 7% per annum ("Old Note").
69
To reflect the fact that this note did not bear interest during the first
year of its term, the Company discounted the value of the note to $1,860,000 at
its inception. The Company expensed the imputed interest on a monthly basis
accreting the value of the note to its face value of $2,000,000 at August 2008.
Additionally, as a result of a post-closing working capital adjustment
calculation required under the stock purchase agreement with the former Welding
shareholders, the Company was obligated to pay an additional purchase price of
approximately $190,000 to the former owners. This was to be paid in four monthly
installments of $47,494, plus accrued interest at 7% per annum from November 1,
2007, which payments commenced in March 2008. As of September 30, 2008, $50,000
remained unpaid.
In August 2008, the Company and the former stockholders reached an
agreement restructuring the Company's obligation under this note by executing an
Amended and Restated Subordinated Promissory Note, the "New Note". The principal
balance of this New Note is $2,050,000 (consisting of $2,000,000 principal
amount of the promissory note dated August 25, 2007, plus the remaining unpaid
working capital adjustment referenced above in the amount of $50,000), Payments
due under the New Note are: $25,000 principal on each of October 31, 2008 and
December 31, 2008, an additional $50,000 inclusive of interest at 7% per annum
on March 31, 2009, followed by 23 equal consecutive quarterly installments of
$100,000 inclusive of interest at 7% per annum, commencing on June 30, 2009 and
continuing through December 31, 2014, payable on the last business day of each
March, June, September and December, with one final payment of $156,000 on March
31, 2015.
As additional consideration, the former stockholders were granted a
warrant exercisable for five (5) years to purchase 100,000 shares of common
stock at $0.109 per share. The warrant expires on August 24, 2014. For financial
reporting purposes, the Company recorded a debt discount expense of $10,000 to
reflect the value of the warrants issued.
The Company made the payments due on September 30, 2008 and December 31,
2008, leaving a principal balance due of $2,000,000 due at December 31, 2008.
The balance owed at December 31, 2007 amounted to $2,098,000
Our obligation under both the Old Note and New Note are subordinate to our
indebtedness to PNC and SCCF. In March 2009, the Company received a notice from
SCCF, exercising their right to block payments under the New Note. Accordingly,
the payment due on March 31 was not made. In April 2009, the Company received a
notice from the holders of the New Note that an event of default had occurred,
and accordingly, interest under the New Note would now accrue at 11% per annum.
Per the terms of the fourth amendment to the SCCF Loan, all payments have been
blocked until April 30, 2010. As a result of this, the Company has entered into
a modification agreement with the holder of the New Note to amend the payment
terms. The Company has paid a fee to the holder of $50,000 to modify the loan
agreement to block the payments until April 30, 2010 and accrue interest at a
rate of 9% per annum.
As of December 31, 2008, the aggregate future minimum payments for Notes
Payable - Sellers are as follows:
Year Amount
- --------------------- ----------
2009 $1,053,000
2010 515,000
2011 303,000
2012 324,000
2013 348,000
and Thereafter 528,000
----------
Sellers Notes Payable 3,071,000
Less: Current portion 1,053,000
----------
Long-term portion $1,968,000
==========
Interest expense on these notes amounted to approximately $128,000 and
$107,000 for the years ended December 31, 2008 and 2007, respectively.
Amortization of debt accretion for the years ended December 31, 2008 and
2007amounted to $93,000 and $47,000, respectively.
70
Junior Subordinated Notes
In June 2008, we sold in a private placement to accredited investors,
$2,950,000 principal amount of our junior subordinated notes (the "Old Notes"),
together with 983,324 shares of our common stock, for total cash consideration
of $2,950,000. The Old Notes bore interest at rates ranging up to 36% per annum
and were payable on May 31, 2010, or earlier upon completion of one or a series
of financings resulting in aggregate gross proceeds of at least $10 million. For
financial reporting purposes, the Company recorded a discount of $195,000 to
reflect the value of the common stock issued.
In September 2008 and October 2008, we sold in a private placement to
accredited investors an additional $2,595,000 principal amount of junior
subordinated notes, (the "New Notes") together with 207,600 shares of our Series
B Preferred, for a total purchase price of $2,595,000. The New Notes, which are
payable on May 31, 2010, or earlier upon completion of one or a series of
financings resulting in aggregate gross proceeds of at least $10 million, bear
interest at the rate of 1% per month (or 12% per annum). For financial reporting
purposes, the Company recorded a discount of $1,396,000 to reflect the value of
the Series B Preferred issued.
The terms of the New Notes and the Old Notes are identical, except that
the rate of interest on the Old Notes was adjusted to 1% per month (12% per
year) upon the issuance of the New Notes.
In October 2008, holders of the Old Notes exchanged their Old Notes for an
equal principal amount of New Notes and also received 236,000 shares of Series B
Preferred. For financial reporting purposes, the Company recorded a discount of
$1,584,000 to reflect the value of the Series B Preferred issued.
Subsequent to December 31, 2008, we sold in a private placement to
accredited investors, an additional $445,000 principal amount of New Notes
together with 35,600 shares of our Series B Preferred for a total purchase price
of $445,000.
The New Notes are subordinated to the Company's senior indebtedness.
In connection with the offering of the Company's junior subordinated notes
and Series B Preferred which commenced in September 2008 (see Note 9
Stockholders' Equity), the Company issued to Taglich Brothers, Inc. ("Taglich"),
as placement agent, a junior subordinated note in the principal amount of
$510,000 and 39,640 shares of Series B Preferred, The terms of the note issued
to Taglich are identical to the New Notes. In addition, the Company issued a
warrant to purchase 137,138 shares of its Series B Preferred to Taglich (see
Note 9 Stockholders' Equity). For financial reporting purposes, the Company
recorded a discount of $1,306,000 to reflect the commission, the value of the
warrants issued and the value of the Series B Preferred issued. In connection
with the amounts raised in 2009, the Company issued Taglich 3,560 shares of
Preferred Series B and will pay Taglich a commission of $44,500.
Amortization of debt discount for the year ended December 31, 2008 amounted to
$475,000. Interest expense amounted to $331,000 for the year ended December 31,
2008.
Note 9. STOCKHOLDERS' EQUITY
Authorized Shares
At a Special Meeting of Stockholders on April 3, 2008, the stockholders approved
an amendment to the certificate of incorporation increasing to 250,000,000 the
number of shares of Common Stock the Company is authorized to issue. In
addition, the stockholders authorized the Board of Directors to effect, at its
discretion at any time not later than December 31, 2008, if at all, a reverse
stock split of Common Stock at a ratio within the range from one-for-ten to
one-for-thirty, with the ratio and timing to be selected and implemented by the
Board. The reverse stock split was part of a plan intended to enable the Company
to obtain a listing for Common Stock on a national securities exchange. A
reverse stock split was not effected by December 31, 2008.
71
Common Stock Issuances
Issuances of Common Stock for the years ended December 31, 2008 and 2007 are as
follows:
In connection with the acquisition of AIM, the Company issued notes payable to
three former AIM shareholders, two of whom have remained as part of the
Company's senior management and are also stockholders of the Company. On January
26, 2007, the two senior management members converted $665,262 principal amount
of their notes plus accrued interest of $54,511 into an aggregate of 1,799,432
shares of common stock at a conversion price of $0.40 per share. See Note 8
Notes Payable and Capital Lease Obligations.
On April 16, 2007, the Company acquired all of the issued and outstanding
capital stock of Sigma pursuant to a Stock Purchase Agreement, dated January 2,
2007. The Company issued 7,416,082 shares of its Common Stock as part of the
transaction. See Note 2 Acquisitions.
On August 24, 2007, the Company acquired all of the issued and outstanding
capital stock of Welding pursuant to a Stock Purchase Agreement, dated as of
March 9, 2007. The Company issued 2,035,529 shares of its Common Stock as part
of the transaction. See Note 2 Acquisitions.
During the year ended December 31, 2007, holders of the Company's options and
warrants converted such securities into 401,845 shares of Common Stock.
During the year ended December 31, 2007, the Company issued 200,000 shares of
Common Stock for services valued at $52,000.
In June 2008, we sold in a private placement to accredited investors, $2,950,000
principal amount of our Old Notes together with 983,324 shares of our common
stock. In addition, the Company issued to Taglich , as placement agent, 200,000
shares of Common Stock as a partial sales commission. See Note 8 Notes Payable
and Capital Lease Obligations.
During the three months ended March 31, 2008, the Company issued 140,000 shares
of Common Stock to key employees under the 2005 Stock incentive Plan. The
Company incurred compensation expenses valued at $34,000.
During the year ended December 31, 2008, the Company issued 275,000 shares of
Common Stock for services valued at $50,943.
In the third quarter of 2008, holders of 23,091 shares of Series B Preferred
converted their shares and received 803,962 shares of Common Stock.
In June 2009, the Company issued 173,693 shares of Common Stock valued at
$43,423 to two vendors of Sigma as per settlement agreements signed with each.
See Note 11 Commitments and Contingencies.
Series B Convertible Preferred Stock
By resolution, the Board of Directors of the Corporation has established,
designated and fixed the terms, preferences, limitations and relative rights of
two million (2,000,000) shares of the authorized and unissued preferred stock of
the Corporation as Series B Preferred. Rights include the following:
1. Holders of the shares of Series B Preferred are entitled to receive
7% cumulative dividend of the original Series B Preferred issue
price.
2. Dividends shall accrue and be payable quarterly on January 2, April
1, July 1 and October 1 of each year.
3. The Company can elect to deliver additional shares of Series B
Preferred in lieu of cash payments.
4. The liquidation value is an amount equal to the greater of $10 per
share or such amount per share as would have been payable had each
such share been converted into Common Stock immediately prior to a
liquidation event (as defined).
5. Each holder of outstanding shares of Series B Preferred shall be
entitled to the number of votes equal to the number of whole shares
of Common Stock into which the shares of Series B Preferred held by
such holder are then convertible, at each meeting of stockholders of
the Corporation (or by written action of stockholders in lieu of
meeting) with respect to all matters presented to the stockholders
of the Corporation for their action or consideration. The holders of
Series B Preferred will generally vote together with the holders of
Common Stock as a single class.
72
6. Each share of Series B Preferred is convertible, at the option of
the holder thereof, at any time and from time to time, and without
the payment of additional consideration by the holder thereof, into
such number of fully paid and no assessable shares of Common Stock
as is determined by dividing (i) the Series B Original Issue Price
($10) by (ii) the Series B Conversion Price (as defined) in effect
at the time of conversion.
Issuances and conversions of Series B Preferred for the years ended December 31,
2008 and 2007 are as follows:
To finance the acquisition of Sigma and provide it with additional working
capital, in April and May of 2007, the Company completed a private placement of
802,300 shares of Series B Preferred in which it raised gross proceeds of
$8,023,000. In connection with the private placement of its Series B Preferred,
the Company paid Taglich, as placement agent, a sales commission of
approximately $642,000, or 8% of the gross proceeds of the offering and $25,000
as reimbursement of its out-of-pocket expenses and issued to the designees of
Taglich, warrants to purchase 2,900,578 shares of Common Stock at a per share
exercise price of $0.305. These warrants have a term of five-years and a
"cashless exercise" feature. These warrants were valued at $32,000 using the
Black-Scholes model and the value of such warrants was deducted from the
additional paid in capital resulting from the offering.
For the years ended December 31, 2008 and 2007, the Company issued 98,688
and 26,798 shares of Series B Preferred as dividends in lieu of cash payments,
respectively. Dividends amounted to $620,000 and $395,000 for the years ended
December 31, 2008 and 2007, respectively.
During 2008, the Company issued 206,800 shares of Series B Preferred to
note holders in connection with the Company's placement of junior subordinated
notes in September 2008. In addition, the Company issued to Taglich 39,640
shares of Series B Preferred as a partial sales commission. See Note 8 Notes
Payable and Capital Lease Obligations.
In October 2008, holders of an aggregate of $2,950,000 of outstanding Old
Notes issued in May and June 2008 exchanged their Old Notes for an equal
principal amount of New Notes. In addition, the note holders received 236,000
shares of Series B Preferred.
In the third quarter of 2008, holders of 23,091 shares of Series B
Preferred converted their shares and received 803,962 shares of Common Stock.
As of December 31, 2008, there were outstanding 1,387,205 shares of Series
B Preferred. The shares of Series B Preferred outstanding at December 31, 2008
are convertible into 50,425,482 shares of common stock.
In January 2009, as part of the sale of Sigma to its former stockholders,
such stockholders and the Company consummated a Settlement Agreement in which
these notes were converted into 58,500 shares of Series B Preferred. See Note 8
Notes Payable and Capital Lease Obligations.
The Company issued 35,600 shares of Series B Preferred to note holders in
connection with the Company's placement of junior subordinated notes in the
first quarter of 2009. In addition, the Company issued to Taglich 3,560 shares
of Series B Preferred as a partial sales commission.
In March 2009, the Company issued 4,211 shares of Series B Preferred
valued at $25,000 to a vendor for services rendered in 2008.
In April 2009, the Company issued 236,814 shares of Series B Preferred as
dividends in lieu of cash payments.
In June 2009, the Company issued 10,000 shares of the Series B Preferred
to Blair-HSM Companies in accordance with the settlement agreement, See Note 11
Commitments and Contingencies.
In July 2009, the Company issued 288,053 shares of Series B Preferred as
dividends in lieu of cash payments.
As of September 29, 2009, there were outstanding 2,101,124 shares of
Series B Preferred. The shares of Series B Preferred outstanding at September
29, 2009 are convertible into 76,376,751 shares of common stock.
74
Note 10. EMPLOYEE BENEFITS PLANS
The Company has both Union and Non-union employees, and different benefit
plans.
The union employees of the Company are members of the United Service
Workers Union TUJAT Local 355 (the "Union"), which during 2007 and part of 2008
provided medical benefit plans at defined rates which are contributed in their
entirety by the Company. In 2008 medical benefits were provided through a policy
with Administaff, the costs of which are borne by the Company. In addition the
Company is obligated to contribute to a security fund for the benefit of each
union employee of between $50 and $250 per month. The Company paid $1,878,000
and $1,712,000 in union benefits during the years ended December 31, 2008 and
2007 respectively.
All other Company employees including those of Welding are covered under a
co-employment agreement with Administaff.
The Company has two defined contribution plans under Section 401(k) of the
Internal Revenue Code (the "Plans"). Pursuant to the Plans 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 either
Plan.
Note 11. COMMITMENTS AND CONTINGENCIES
Real Estate Leases.
The Company leases its facilities under various operating lease
agreements, which contain renewal options and escalation provisions. Rent
expense was $1,109,000 and $842,795 for the years ended December 31, 2008 and
2007, respectively. The Company is responsible for paying all operating costs
under the term of the lease. As of December 31, 2008, the aggregate future
minimum lease payments are as follows:
Plant Avenue 5th Avenue
Year Annual Rent Annual Rent Total Rents
- ---------- ----------- ----------- -----------
2009 $ 530,000 $ 540,000 $ 1,070,000
2010 546,000 540,000 1,086,000
2011 562,000 560,000 1,122,000
2012 579,000 626,000 1,205,000
2013 597,000 644,000 1,241,000
Thereafter 1,247,000 10,125,000 11,372,000
----------- ----------- -----------
Total $ 4,061,000 $13,035,000 $17,096,000
=========== =========== ===========
The lease provides for scheduled increases in base rent. Rent expense is
charged to operations using the straight-line method over the term of the lease
which results in rent expense being charged to operations at inception of the
lease in excess of required lease payments. This excess is shown as deferred
rent in the accompanying balance sheet.
Litigation:
Blair - HSM Companies: During the first half of 2008, and continuing into
the third quarter of 2008, the Company attempted to acquire Blair Industries,
Inc. and certain of its affiliated companies ("Blair-HSM"). During the third
quarter of 2008, management determined to cease its efforts to acquire
Blair-HSM. On November 3, 2008, we were served with an Information Request and
Restraining Notice by the Blair-HSM as part of their efforts to collect on the
$350,000 Confession of Judgment issued by us to secure our agreement to
reimburse the stockholders of -Blair-HSM for certain expenses incurred in
connection with the acquisition.
75
On November 28, 2008, we entered into a settlement agreement with the
former stockholders of Blair-HSM under which we agreed to pay Blair-HSM $350,000
in full and complete satisfaction of amounts payable under the stock purchase
agreement as follows: $50,000 on each of February 12, 2009, March 12, 2009 and
April 12, 2009, $100,000 on May 12, 2009, with the balance payable by delivery
of 10,000 shares of our Series B Preferred having a face value of $100,000. Such
amount has been accrued and included as part of Accounts Payable and Accrued
Expenses on the Consolidated Balance Sheet. These payments have been made and we
issued the shares in June 2009.
In connection with the settlement, the former shareholders of Blair-HSM
and Blair-HSM agreed to file a Satisfaction of Judgment with the Supreme Court
of the State of New York, Suffolk County.
Sigma Metals, Inc: Several former vendors to Sigma have commenced legal
action against Sigma seeking to recover amounts owed to them totaling
approximately $400,000. While Sigma has no significant assets remaining, we have
been attempting to negotiate settlements of these claims. One former vendor has
been awarded a judgment against Sigma in the amount of approximately $107,000.
Another former vendor has commenced litigation under various legal theories
against AIRI and others in addition to Sigma, attempting to establish liability.
In March 2009, the Company signed settlement agreements with two vendors for
payables totaling approximately $75,000. The Company will pay cash and issued
173,693 shares of its Common Stock in June 2009. See Note 9 Stockholders'
Equity.
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 an initial period of five years and are
automatically extended for successive three (3) one year periods unless
terminated. The Agreements provide for annual base compensation aggregating
$940,000. The Board, at its sole discretion, determines whether a bonus is
issued, provided that in the case of two executives, the amount of the bonus
shall be predicated on their performance and the achievement by the Company of
its operating targets set forth in its annual budget, and in the case of these
two executives, provided further, in no event shall the amount of their bonuses
be less than 50% of their salary at that time. For the years ended December 31,
2008 and 2007 no bonuses were paid. Each senior executive's agreement also call
for grants of stock options to purchase the Company's common stock aggregating
4,850,000 shares of which 3,410,000 had been granted as of December 31, 2007. No
additional stock options were granted during 2008.
The Company and one of its four senior executives mentioned above entered
into a Separation Agreement and General Release (the "Separation Agreement")
effective March 16, 2007, whereby the executive resigned from his positions with
the Company. Pursuant to the Separation Agreement, the Employment Agreement
between the executive and the Company terminated effective March 16, 2007. In
lieu of the compensation payable to the executive pursuant to his Employment
Agreement, from March 16, 2007 to November 30, 2010, the executive will be paid
at a rate of $100,000 per annum and from December 1, 2010 to May 31, 2011, he
will be paid at a rate of $50,000 per annum. In addition, if the Company
achieves certain agreed-upon levels of performance, he may receive up to an
additional $50,000. The executive received an Affidavit of Confession of
Judgment from the Company. The remaining amounts owed to the executive totaling
$242,308 have been accrued and included in Accounts Payable and Accrued Expenses
at December 31, 2008. Upon the execution of his employment agreement mentioned
above, the Company granted this executive, options to purchase 1,250,000 shares
of Common Stock, subject to an agreed upon vesting schedule and exercisable over
a ten-year period commencing on the date of grant. Pursuant to the Separation
Agreement, all unvested options held by this executive vested as of March 16,
2007, and the right to exercise all of his options terminated as of March 16,
2008.
In April 2007, the Company entered into employment agreements (the "Sigma
Agreements") with the former stockholders of Sigma. The Sigma Agreements were
for a period of five years. The Agreements provided for annual base compensation
aggregating $600,000. The former Sigma stockholders were also entitled to an
annual performance bonus as defined. For the years ended December 31, 2008 and
2007 no bonuses were paid. Each senior executive's agreement also call for
grants of stock options to purchase the Company's common stock aggregating
4,850,000 shares of which 3,410,000 had been granted as of December 31, 2007. No
additional stock options were granted during 2008. In January 2009, as part of
the sale of Sigma to its former stockholders, such stockholders and the Company
consummated a Settlement Agreement in which the Sigma Agreements were
terminated.
76
Note 12 INCOME TAXES:
The provision for income taxes (tax benefits) at December 31, 2008 and 2007
consists of the following:
2008 2007
----------- -----------
Current
Federal $ -- $ 198,000
State 1,000 6,000
----------- -----------
Total Current Provision 1,000 204,000
----------- -----------
Deferred
Federal (2,671,000) (114,000)
State (113,000) 104,000
----------- -----------
Total Deferred Taxes (2,784,000) (10,000)
Valuation allowance 2,039,000 171,000
----------- -----------
Net deferred taxes after valuation allowance (745,000) 161,000
----------- -----------
Net (Benefit) Provision for Income Taxes $ (744,000) $ 365,000
=========== ===========
The components of net deferred tax liabilities as of December 31, are set
forth below:
Deferred tax assets: 2008 2007
----------- -----------
Net operating loss carry forwards $ 936,000 $ --
Bad debts 72,000 120,000
Inventory - 263A adjustment 403,000 341,000
Stock based compensation - warrants 44,000 43,000
Stock based compensation - options and restricted stock 327,000 241,000
Account payable, accrued expenses and reserves 1,219,000 --
Deferred rent 147,000 79,000
Deferred gain on sale of real estate 237,000 247,000
----------- -----------
Total deferred tax assets before valuation allowance 3,385,000 1,071,000
Valuation allowance (3,110,000) (1,071,000)
----------- -----------
Total deferred tax assets after valuation allowance 275,000 --
----------- -----------
Deferred tax liabilities:
Property and equipment (335,000) (481,000)
Capitalized engineering costs (289,000) (50,000)
Property and equipment - AIM Step-up (195,000) (242,000)
Amortization - Sigma Transaction -- (92,000)
Amortization - Welding Transaction (820,000) (1,014,000)
----------- -----------
Net deferred tax liabilities (1,639,000) (1,879,000)
----------- -----------
Net deferred tax liability $(1,364,000) $(1,879,000)
=========== ===========
77
The difference between income taxes computed at the statutory federal rate
and the provision for income taxes for the years ended December 31, 2008 and
2007 relates to the following:
2008 2007
-------- --------
Tax benefit at federal statutory rate 34.0% 34.00%
State income taxes, net of federal
income tax benefit 1.4% 1.12%
Permanent differences 0.3% 1.37%
Other 0.6% -0.39%
True-up -1.81%
Change in valuation allowance -8.4% 30.21%
Goodwill Impairment -18.8% --
-------- --------
Total 9.1% 64.50%
Valuation allowance 0.0% 0.00%
-------- --------
Total effective tax rate 9.1% 64.50%
======== ========
Realization of deferred tax assets is dependent on future earnings. Due to
the uncertainty of realization of the net deferred tax assets, the Company has
provided a valuation allowance. In assessing the realizability of it, management
considers whether it is more likely than not that some or perhaps all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making the assessment. The
valuation allowance at December 31, 2008 and 2007 amounted to $3,110,000 and
$1,071,000, respectively. The increase in the valuation allowance related
primarily to the Company's 2008 net operating losses to be carried forward and
account payable, accrued expenses and reserves to be deducted in future years.
The Company has net operating losses totaling $2,666,000 which will expire
in fiscal 2028.
In certain cases, the Company's uncertain tax positions are related to tax
years that remain subject to examination by the relevant tax authorities. The
Company files U.S. and state income tax returns in jurisdictions with varying
statutes of limitations. The 2005 through 2007 tax years generally remain
subject to examination by federal and state tax authorities
Note 13. STOCK OPTIONS AND WARRANTS
Stock-Based Compensation
During 2005, the Company's Board of Directors approved a stock option plan
and reserved 10,000,000 shares of its Common Stock for issuance under the plan.
The stock option plan permits the Company to grant non-qualified and incentive
stock options to employees, directors, and consultants. Awards granted during
2008 and 2007 under the Company's plans vest over zero, one and five years. The
weighted average fair values of options granted during the years ended December
31, 2008 and 2007 are $0.22 and $0.35, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model using weighted average assumptions for grants in the years ended
December 31, 2008 and 2007 as follows:
2008 2007
---- ----
Expected life of option 3-5.5 years 1-8 years
Risk-free interest rates 2.6% 3.6%-4.8%
Volatility of stock 133% 78%-177%
Expected dividend yields 0% 0%
78
The expected life is the number of years that the Company estimates, based
upon history, that options will be outstanding prior to exercise or forfeiture.
In addition to the inputs referenced above regarding the option pricing model,
the Company adjusts the stock-based compensation expense for estimated
forfeiture rates that are revised prospectively according to forfeiture
experience.
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock options
will be priced based on average trading prices of the Company's Common Stock at
the end of a given future period. Due to this variable feature, these stock
options are not deemed to be granted for purposes of applying SFAS No. 123(R)
and accordingly, their fair value will be calculated and expensed in future
periods.
On February 13, 2007, we issued to each of the non-management members of
the Board, an option to purchase 100,000 shares of our common stock. The options
vested as to 33,333 shares upon grant, as to a total of 66,666 on March 1, 2008
and will vest as to all 100,000 shares on March 1, 2009. The options are
exercisable at a price of $0.27 per share until March 1, 2014.
On August 29, 2007, we granted David Buonanno, a non-management director,
an option to purchase 100,000 shares of our common stock, which was immediately
exercisable as to 33,333 shares. The option will become exercisable as to a
total of 66,666 shares on June 26, 2008, and as to all 100,000 shares on June
26, 2009. The exercise price of the option is $0.28 per share. The option
expires on August 1, 2014.
On April 11, 2008, we granted each non-management director an option to
purchase 100,000 shares of common stock at an exercise price per share of $0.225
exercisable immediately for five years. In addition, the terms of the options
previously granted to Messrs. Rettaliata, Giusto and Peragallo were modified to
provide that the options scheduled to vest from 2008 through 2012, 1,440,000
options in the aggregate, The exercise price of the options vesting on each of
September 15, 2009, 2010, 2011 and 2012 will be (a) $0.22 per share or (b) the
average trading price of our common stock for the thirty trading days ending
September 15, 2008, 2009, 2010, 2011 and September 15, 2012,respectively
The Company recorded expenses of $203,264 and $437,202 in its consolidated
statement of operations for the years ended December 31, 2008 and 2007,
respectively, and is included as a component of general and administrative
expense.
A summary of the status of the Company's stock options as of December 31,
2008, and changes during the two years then ended is presented below.
Wtd. Avg.
Exercise
Options Price
---------- ----------
Balance, December 31, 2006 2,370,000 $ 0.38
Granted during the period 3,923,900 0.35
Exercised during the period (250,000) --
Terminated/Expired during the period (66,667) --
Reserved for grant based on future market price 1,440,000 --
---------- ----------
Balance, December 31, 2007 7,417,233 0.31
Granted during the period 430,000 0.23
Exercised during the period -- --
Terminated/Expired during the period (1,324,469) 0.24
---------- ----------
Balance, December 31, 2008 6,522,764 $ 0.30
========== ==========
Exercisable 3,929,100 $ 0.33
========== ==========
79
The following table summarizes information about stock options at December
31, 2008:
Range of Exercise Prices Remaining Number Wtd. Avg. Wtd. Avg.
Outstanding Life Exercise Price
-----------------------------------------------------
$ 0.22 - 0.29 4,942,764 4 years $ 0.25
$ 0.30 - 0.42 790,000 5 years 0.43
$ 0.43 - 0.48 790,000 5 years 0.48
---------------- ------------
6,522,764 4 years $ 0.30
================ ============
As of December 31, 2008, there was $536,762 of unrecognized compensation
cost related to non-vested stock option awards, which is to be recognized over
the remaining weighted average vesting period of five years.
The aggregate intrinsic value at December 31, 2008 was $0. The aggregate
intrinsic value was calculated based on the positive difference between the
closing market price of the Company's Common Stock and the exercise price of the
underlying options.
Warrants
The Company issued warrants for the following transactions:
Taglich acted as placement agent for the sale of our Series B Preferred in
April and May of 2007. For acting as placement agent, we issued to Taglich
warrants to purchase 2,900,578 shares of our common stock. See Note 9
Stockholders' Equity.
On December 31, 2008, the Company issued a warrant to purchase 137,138
shares of its Series B Preferred Taglich for nominal consideration. The warrant
is intended to compensate Taglich for its continued efforts to raise funds on
behalf of the Company. The warrant may be exercised until December 31, 2015. The
exercise price of the warrant is $0.01 per share. The exercise price and number
of shares of Series B Preferred issuable upon exercise are subject to adjustment
for stock dividends, stock splits, and recapitalizations, as well as mergers and
certain corporate reorganizations. The warrant also includes a cashless exercise
feature. In addition, the warrant gives the Company a right of first refusal
with respect to the sale of shares of Series B Preferred issuable upon exercise
of the warrants and shares of common stock issuable upon conversion of the
Series B Preferred whereby the Company can purchase the shares for less than the
amount for which the shares are to be sold to a third party. The Series B
Preferred is convertible into shares of common stock at $0.2766 per share
subject to certain adjustments.
In connection with the acquisition of Welding, the Company incurred a note
payable to the former stockholders of Welding. In August 2008, the Company and
the former stockholders reached an agreement restructuring the Company's
obligation under this note. As additional consideration, the former stockholders
were granted a warrant exercisable for five (5) years to purchase 100,000 shares
of common stock at $0.109 per share. The warrant expires on August 24, 2014. See
Note 8 Notes Payable and Capital Lease Obligations.
The following tables summarize the Company's outstanding warrants as of
December 31, 2008 and changes during the two years then ended:
Wtd. Avg.
Warrants Exercise Price
---------- ----------
Balance, December 31, 2006 5,271,257 $ 0.22
Granted during the period 3,025,578 0.30
Exercised during the period (409,091) --
Terminated/Expired during the period (41,668) (0.97)
Reserved for grant based on future market price --
---------- ----------
Balance, December 31, 2007 7,846,076 0.25
Granted during the period 100,000 0.11
Exercised during the period -- --
Terminated/Expired during the period -- --
---------- ----------
Balance, December 31, 2008 7,964,076 $ 0.25
========== ==========
Exercisable 7,946,076 $ 0.25
========== ==========
80
The following table summarizes information about warrants at December 31,
2008:
Wtd. Avg.
Range of Exercise Prices Warrants Wtd. Avg. Life Exercise Price
-----------------------------------------------------
$ 0 - 0.21 781,820 4 years $ 0.18
$ 0.22 - 0.29 4,400,816 4 years 0.22
$ 0.30 - 0.42 2,900,578 4 years 0.31
---------------- --------
8,083,214 4 years $ 0.25
================ ========
Note 14. RELATED PARTY TRANSACTIONS
On December 31, 2008, the Company issued a warrant to purchase 137,138
shares of its Series B Preferred to Taglich for nominal consideration. The
Company believes that the terms of the warrant are not less favorable than could
have been obtained from an unaffiliated third party. See Note 13 Stock Options
and Warrants.
In connection with the offering of the Company's junior subordinated notes
and Series B Preferred which commenced in September 2008, the Company issued to
Taglich a junior subordinated note in the principal amount of $510,000 and
39,640 shares of Series B Preferred. In connection with the amounts raised in
2009, the Company issued Taglich 3,560 shares of Preferred Series B and will pay
Taglich a commission of $44,500. See Note 8 Notes Payable and Capital Lease
Obligation. In addition, the Company granted Taglich the right to designate a
total of three nominees for election to our Board of Directors, which nominees
are Michael N. Taglich, Robert F. Taglich and Robert Schroeder. Michael N.
Taglich, Chairman of the Company's Board of Directors, is President and Chairman
of Taglich, Robert F. Taglich is a Managing Director of, and Robert Schroeder is
Vice President - Investment Banking of, Taglich.
Taglich acted as placement agent for the sale of our Series B Preferred in
April and May of 2007 and our junior subordinated notes in June of 2008. For
acting as placement agent of our Series B Preferred, we paid Taglich a sales
commission of $642,000 plus $25,000 in reimbursement of its actual and
reasonable out-of-pocket expenses, including fees and expenses of its counsel.
We also issued to Taglich warrants to purchase 2,900,578 shares of our common
stock. See Note 9 Stockholders' Equity. For acting as placement agent of our
junior subordinated notes in May and June of 2008, we paid Taglich a fee of
$20,000 in cash plus 200,000 shares of our Common Stock, as well as
reimbursement of approximately $25,000 of out-of-pocket expenses. See Note 8
Notes Payable and Capital Lease Obligations.
Stephen M. Nagler, a director of our Company until June 26, 2007, is a
partner in Eaton & Van Winkle LLP, our legal counsel. We paid Eaton & Van Winkle
LLP approximately $444,000 in 2007 for legal fees and disbursements.
Note 15. DISCONTINUED OPERATIONS
During the quarter ended September 30, 2008, the Company's Board of
Directors decided to discontinue the operations at Sigma. Operations were
discontinued on October 31, 2008. Accordingly, Sigma's results of operations
have been reported as discontinued operations for all periods presented. Sigma's
assets and liabilities have been classified as held for sale on the Company's
consolidated balance sheet for all periods presented.
81
The table below indicates the results of operations for Sigma for the
period January 1, 2008 through October 31, 2008 and the period April 16, 2007
(the date of acquisition) to December 31, 2007.
2008 2007
------------ ------------
Net sales $ 10,206,000 $ 9,891,000
Cost of sales 10,555,000 7,109,000
------------ ------------
Gross (loss) profit (349,000) 2,782,000
Operating costs and expenses 3,791,000 2,370,000
------------ ------------
(Loss) income from operations (4,140,000) 412,000
Interest and financing costs 57,000 108,000
Write-off of goodwill 1,550,000 --
Write-off of intangibles 3,329,000 --
------------ ------------
Net (loss) income $ (9,076,000) $ 304,000
============ ============
Note 16. SEGMENT REPORTING
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", the Company discloses financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available and regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
As a result of the acquisitions made in April 2007 of Sigma and in August
2007 of Welding, the Company now operates in three segments. Financial
information about the Company's operating segments for the years ended December
31, 2008 and 2007 is as follows:
82
Year Ended December 31,
2008 2007
------------ ------------
Air Industries Machining
Net Sales $ 34,746,000 $ 34,088,000
Gross Profit 6,917,000 7,688,000
Pre Tax Income 887,000 2,740,000
Assets 31,568,000 31,304,000
Sigma Metals
(Loss) Income From Discontinued Operations (9,076,000) 304,000
Assets Held for Sale 1,556,000 11,365,000
Welding Metallurgy
Net Sales 3,948,000 2,090,000
Gross Profit 2,144,000 1,588,000
Pre Tax (Loss) Income (2,776,000) 1,026,000
Assets 5,773,000 8,426,000
Corporate
Net Sales -- --
Gross Profit -- --
Pre Tax Loss (6,322,000) (3,504,000)
Assets 14,953,000 22,962,000
Consolidated
Net Sales 38,694,000 36,482,000
Gross Profit 9,061,000 9,276,000
Net Income (Loss) from Discontinued Ops (9,076,000) 304,000
Pre Tax Income (Loss) (8,211,000) 262,000
Provision (Benefit) for Taxes (744,000) 365,000
Net Income (Loss) (16,543,000) 201,000
Elimination of Assets (12,945,000) (23,767,000)
Assets 39,349,000 50,290,000
Note 17. RESTATEMENT OF 2007 FINANCIAL STATEMENTS
The 2007 financial statements were restated for the following:
During the preparation of the Company's December 31, 2008 consolidated
financial statements, the Company discovered that certain expenses which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses and therefore both cost of goods sold and
accounts payable and accrued expenses has been understated by a like amount, The
aggregate effect was to reduce the net income of the Company for the year ended
December 31, 2007 and to reduce stockholders' equity at December 31, 2007 by
approximately $426,000.
The Company received a letter from the Staff of the Securities and
Exchange Commission requesting information regarding, among other items, the
accounting treatment of the Series B Preferred issued in the second quarter of
2007. Upon reviewing the issue, the Company determined that it had to record a
beneficial conversion feature upon the issuance of the Series B Preferred of
$1,589,000.
As a result of the restatement, net loss attributable to common
stockholders for the year ended December 31, 2007 increased by $2,015,000 ($0.03
per share). Stockholders' equity at December 31, 2007 decreased by a like
amount. For a more detailed explanation of the restatement, see our amended Form
10-K for the year ended December 31, 2007 filed by the Company on or about
October 15, 2009.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIR INDUSTRIES GROUP, INC.
Dated: October 16, 2009
By: /s/ Peter D. Rettaliata
--------------------------------------------
Peter D. Rettaliata
President and CEO
(principal executive officer)
By: /s/ Scott Glassman
--------------------------------------------
Scott Glassman
Chief Accounting Officer and Treasurer
(principal financial and accounting officer)
84
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant on
October 16, 2009 in the capacities indicated.
Signature Capacity
- --------- --------
/s/ Peter D. Rettaliata
- -----------------------
Peter D. Rettaliata President, CEO and a Director
/s/ Scott Glassman
- -----------------------
Scott Glassman Chief Accounting Officer and Treasurer
/s/ Michael N. Taglich
- -----------------------
Michael N. Taglich Chairman of the Board
/s/ Dario A. Peragallo
- -----------------------
Dario A. Peragallo Executive Vice President and a Director
/s/ Seymour G. Siegel
- -----------------------
Seymour G. Siegel Director
/s/ Robert F. Taglich
- -----------------------
Robert F. Taglich Director
/s/ David J. Buonanno
- -----------------------
David J. Buonanno Director
/s/ Robert Schroeder
- -----------------------
Robert Schroeder Director
85
Exhibit Index
Exhibit No. Description
- ----------- -----------
10.44 Ninth Amendment to the Revolving Credit, Term Loan, Equipment Line of
Credit and Security Agreement dated as of November 30, 2005 with the
Lenders and PNC Bank, N.A., as agent for the Lenders, as amended, dated as
of October 9, 2009.
10.45 Waiver, Consent and Amendment No. 4 to SCCF Loan and Security Agreement
dated September 24, 2009.
10.46 Amended and Restated Promissory Note dated as of August 26, 2009 payable
to John John and Lugenia Gantt (the "Amended and Restated Gantt Note").
10.47 Amendment dated as of October 9, 2009 to Amended and Restated Gantt Note.
21.1 Subsidiaries
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
EXHIBIT 10.44
EXECUTION ORIGINAL
NINTH AMENDMENT TO REVOLVING CREDIT, TERM LOAN, EQUIPMENT LINE OF CREDIT AND
SECURITY AGREEMENT
THIS NINTH AMENDMENT TO REVOLVING CREDIT, TERM LOAN, EQUIPMENT LINE OF
CREDIT AND SECURITY AGREEMENT (this "Agreement") is entered into October 9, 2009
by and among AIR INDUSTRIES MACHINING, CORP. (as successor by merger with Gales
Industries Acquisition Corp., Inc.), a corporation organized under the laws of
the State of New York ("Air"), SIGMA METALS, INC. (as successor by merger with
GMS Sub, Corp.), a corporation organized under the laws of the State of New York
("Sigma" and collectively with Air, the "Borrower"), WELDING METALLURGY, INC.
(as successor by merger with WMS MERGER CORP.), a corporation organized under
the laws of the State of New York ("WM"), AIR INDUSTRIES GROUP, INC. (f/k/a
Gales Industries Incorporated), a corporation organized under the laws of the
State of Delaware ("Air Group" and collectively with the Borrower and WM, the
"Obligor"), the financial institutions which are now or which hereafter become a
party hereto (collectively, the "Lenders" and individually a "Lender") and PNC
BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity,
the "Agent").
RECITALS
Whereas, Borrower and PNC entered into a certain Revolving Credit, Term
Loan, Equipment Line of Credit and Security Agreement dated November 30, 2005
(which has been, is being and may be further amended, replaced, restated,
modified and/or extended, the "Loan Agreement"); and
Now, therefore, in consideration of PNC's continued extension of credit
and the agreements contained herein, the parties agree as follows:
AGREEMENT
1) ACKNOWLEDGMENT OF BALANCE. Borrower acknowledges that the most recent
statement of account sent to Borrower with respect to the Obligations is
correct.
2) MODIFICATIONS. The Loan Agreement be and hereby is modified as follows:
(a) The following definitions in Section 1.2 of the Loan Agreement are
hereby deleted, and are replaced to read as follows:
"Advances" shall mean and include the Revolving Advances and as well as
Letters of Credit.
"Contract Rate" shall mean, as applicable, the Revolving Interest Rate, as
more fully described in Section 3.1 herein.
"Earnings Before Interest and Taxes" shall mean for any period the sum of
(i) net income (or loss) of Air Group for such period (excluding
extraordinary gains and losses) on a consolidated basis, plus (ii) all
interest expense of Air Group for such period on a consolidated basis,
plus (iii) all charges against income of Air Group for such period for
federal, state and local taxes actually paid on a consolidated basis.
"EBITDA" shall mean for any period with regard to Air Group the sum of (i)
Earnings Before Interest and Taxes for such period on a consolidated basis
plus (ii) depreciation expenses for such period on a consolidated basis,
plus (iii) amortization expenses for such period on a consolidated basis.
"Fixed Charge Coverage Ratio" shall mean and include, with respect to Air
Group for any fiscal period, the ratio of (a) EBITDA on a consolidated
basis, minus the aggregate amount of unfunded capitalized expenditures
made during such period on a consolidated basis, minus the aggregate
amount of distributions made during such period on a consolidated basis,
minus the aggregate amount of cash taxes paid during such period on a
consolidated basis to (b) the aggregate amount of principal and/or
interest payments made on Funded Debt during such period on a consolidated
basis.
1
"Loans" shall mean the Revolving Advances.
"Maximum Loan Amount" shall mean $14,000,000.
"Note" shall mean the Revolving Credit Note.
"Revolving Advances" shall mean the Advances made other than Letters of
Credit.
"Revolving Interest Rate" shall mean an interest rate per annum equal to
(a) the sum of the Alternate Base Rate plus two and one quarter of one
percent (2.25%) with respect to Domestic Rate Loans and (b) the greater of
(i) the sum of the Eurodollar Rate plus three and one half of one percent
(3.50%) and (ii) five and one half of one percent (5.50%) with respect to
Eurodollar Rate Loans.
"Undrawn Availability" at a particular date shall mean an amount equal to
(a) the lesser of (i) the Formula Amount or (ii) the Maximum Revolving
Advance Amount, minus (b) the sum of (i) the outstanding amount of
Advances plus (ii) all amounts due and owing to Borrower's trade creditors
which are outstanding beyond normal trade terms, plus (iii) fees and
expenses for which Borrower is liable but which have not been paid or
charged to Borrower's Account.
(b) The following definition is hereby added to Section 1.2 of the Loan
Agreement to read as follows:
"Ninth Amendment Closing Date" shall mean October 9, 2009.
(c) The following definitions are hereby deleted in their entirety from
Section 1.2 of the Loan Agreement:
"Converted Equipment Loan(s)"
"Converted Equipment Line of Credit Note"
"Equipment Line of Credit Note"
"Equipment Line of Credit Rate"
"Equipment Loans"
"Equipment Note"
"Maximum Equipment Loan Amount"
"Term Loan"
"Term Loan Rate"
"Term Note"
(d) Subsection 2.1(a) of the Loan Agreement is deleted, and is replaced
by a new Subsection 2.1(a) to read as follows:
2.1 Revolving Advances. (a) Subject to the terms and conditions set
forth in this Agreement including Section 2.1(b), each Lender, severally
and not jointly, will make Revolving Advances to Borrower in aggregate
amounts outstanding at any time equal to such Lender's Commitment
Percentage of the lesser of (x) the Maximum Revolving Advance Amount or
(y) an amount equal to the sum of:
2
(i) up to the sum of (A) 85%, subject to the provisions
of Section 2.1(b) hereof (the "Receivables Advance Rate A"),
of Eligible Receivables that do not constitute Eligible
Unassigned Government Receivables (specifically excluding all
Eligible Receivables of Sigma) plus (B) the lesser of (I) 50%,
subject to the provisions of Section 2.1(b) hereof (the
"Receivables Advance Rate B" and collectively with the
Receivables Advance Rate A, the "Receivables Advance Rate"),
of Eligible Unassigned Government Receivables (specifically
excluding all Eligible Unassigned Government Receivables of
Sigma) and (II) the Unassigned Government Receivables
Sublimit, plus
(ii) up to the lesser of (A) 50%, subject to the
provisions of Section 2.1(b) hereof, of the value of the
Eligible Inventory (specifically excluding all Eligible
Inventory of Sigma), (B) 85% of the appraised net orderly
liquidation value of Eligible Inventory (as evidenced by an
Inventory appraisal satisfactory to Agent in its sole
discretion exercised in good faith and specifically excluding
all Eligible Inventory of Sigma) or (C) the Inventory Sublimit
in the aggregate at any one time ("Inventory Advance Rate" and
together with the Receivables Advance Rate, collectively, the
"Advance Rates"), minus
(iii) such reserves as Agent may reasonably deem proper
and necessary from time to time including, but not limited to,
the Seller Note Payable Reserve.
The amount derived from the sum of (x) Sections 2.1(a)(y)(i) and (ii)
minus (y) Section 2.1 (a)(y)(iii) at any time and from time to time shall
be referred to as the "Formula Amount". The Revolving Advances shall be
evidenced by one or more secured promissory notes (collectively, the
"Revolving Credit Note") substantially in the form attached hereto as
Exhibit 2.1(a).
(e) Section 2.4 of the Loan Agreement is deleted, and is replaced by a
new Section 2.4 to read as follows:
2.4 INTENTIONALLY DELETED.
(f) Subsection 2.6(a) of the Loan Agreement is deleted, and is replaced
by a new Subsection 2.6(a) to read as follows:
(a) The Revolving Advances shall be due and payable in full on
the Termination Date subject to earlier prepayment as herein provided.
(g) Subsections 2.10(a) and (b) of the Loan Agreement are deleted, and
are replaced by new Subsections 2.10(a) and (b) to read as follows:
(a) Each borrowing of Revolving Advances shall be advanced
according to the applicable Commitment Percentages of Lenders.
(b) Each payment (including each prepayment) by Borrower on
account of the principal of and interest on the Revolving Advances, shall
be applied to the Revolving Advances pro rata according to the applicable
Commitment Percentages of Lenders. Except as expressly provided herein,
all payments (including prepayments) to be made by Borrower on account of
principal, interest and fees shall be made without set off or counterclaim
and shall be made to Agent on behalf of the Lenders to the Payment Office,
in each case on or prior to 1:00 P.M., New York time, in Dollars and in
immediately available funds.
(h) Section 2.11 of the Loan Agreement is deleted, and is replaced by a
new Section 2.11 to read as follows:
3
2.11 Mandatory Prepayments. Subject to Section 4.3 hereof, when
Borrower sells or otherwise disposes of any Collateral other than
Inventory in the Ordinary Course of Business, Borrower shall repay the
Advances in an amount equal to the net proceeds of such sale (i.e., gross
proceeds less the reasonable costs of such sales or other dispositions),
such repayments to be made promptly but in no event more than one (1)
Business Day following receipt of such net proceeds, and until the date of
payment, such proceeds shall be held in trust for Agent. The foregoing
shall not be deemed to be implied consent to any such sale otherwise
prohibited by the terms and conditions hereof. Such repayments shall be
applied to the Advances in such order as Agent may determine, subject to
Borrower's ability to reborrow Revolving Advances in accordance with the
terms hereof.
(i) Section 3.1 of the Loan Agreement is deleted, and is replaced by a
new Section 3.1 to read as follows:
3.1 Interest. Interest on Advances shall be payable in arrears on
the first day of each month with respect to Domestic Rate Loans and, with
respect to Eurodollar Rate Loans, at the end of each Interest Period or,
for Eurodollar Rate Loans with an Interest Period in excess of three
months, at the earlier of (a) each three months from the commencement of
such Eurodollar Rate Loan or (b) the end of the Interest Period. Interest
charges shall be computed on the actual principal amount of Advances
outstanding during the month at a rate per annum equal to with respect to
Revolving Advances, the applicable Revolving Interest Rate (as applicable,
the "Contract Rate"). Whenever, subsequent to the date of this Agreement,
the Alternate Base Rate is increased or decreased, the applicable Contract
Rate for Domestic Rate Loans shall be similarly changed without notice or
demand of any kind by an amount equal to the amount of such change in the
Alternate Base Rate during the time such change or changes remain in
effect. The Eurodollar Rate shall be adjusted with respect to Eurodollar
Rate Loans without notice or demand of any kind on the effective date of
any change in the Reserve Percentage as of such effective date. Upon and
after the occurrence of an Event of Default, and during the continuation
thereof, (i) at the option of Agent or at the direction of Required
Lenders, the Obligations other than Eurodollar Rate Loans shall bear
interest at the applicable Contract Rate for Domestic Loans plus two
percent (2%) per annum and (ii) Eurodollar Rate Loans shall bear interest
at the Revolving Interest Rate for Eurodollar Rate Loans plus two percent
(2%) per annum (as applicable, the "Default Rate").
(j) Subsection 3.3(b) of the Loan Agreement is deleted, and is replaced
by a new Subsection 3.3(b) to read as follows:
(b) Collateral Monitoring Fee. Borrower shall pay to Agent on
the first day of each month following any month in which Agent performs
any collateral monitoring - namely any field examination, collateral
analysis or other business analysis, the need for which is to be
determined by Agent and which monitoring is undertaken by Agent or for
Agent's benefit - a collateral monitoring fee in an amount equal to
$850.00 per day for each person employed to perform such monitoring, plus
all costs and disbursements incurred by Agent in the performance of such
examination or analysis.
(k) Section 6.5 of the Loan Agreement is deleted, and is replaced by a
new Section 6.5 to read as follows:
6.5 Financial Covenants.
(a) Funded Debt Ratio. Maintain at all times a ratio of Funded
Debt (exclusive of Indebtedness subordinated to the Steel City
Subordinated Credit Facility but inclusive of Indebtedness for borrowed
money not subordinated to the Steel City Subordinated Credit Facility
whether or not it has a maturity of more than one year from its date of
creation) to EBITDA of Air Group on a consolidated basis not greater than
(i) 8.50 to 1.00 on September 30, 2009 tested on a rolling three month
basis, (ii) 6.25 to 1.00 on October 31, 2009 tested on a rolling four
month basis, (iii) 4.80 to 1.00 on November 30, 2009 tested on a rolling
five month basis, (iv) 3.80 to 1.00 on December 31, 2009 tested on a
rolling six month basis and (v) an amount equal to eighty five percent
(85%) of the projected amounts provided by the Obligor to the Agent
pursuant to Section 9.12 herein for each month thereafter, tested on a
rolling seven month basis on January 31, 2010 and building each month
thereafter to a rolling twelve (12) month basis.
4
(b) Fixed Charge Coverage Ratio. Maintain at all times a Fixed
Charge Coverage Ratio of not less than 1.25 to 1.00, tested monthly on a
consolidated basis for the three months ending September 30, 2009 and at
the end of each month thereafter building to a rolling twelve (12) month
basis. For purposes of calculating the Fixed Charge Coverage Ratio, the
repayment of the Term Loan, the Equipment Loans and the Converted
Equipment Loans pursuant to the reduction of the 2008 Reserve on the Ninth
Amendment Closing Date shall be excluded.
(l) Section 7.5 of the Loan Agreement is deleted, and is replaced by a
new Section 7.5 to read as follows:
7.5 Loans. Make advances, loans or extensions of credit to any
Person, including any Parent, Subsidiary or Affiliate except with respect
to (a) the extension of commercial trade credit in connection with the
sale of Inventory in the Ordinary Course of Business, (b) loans made by
Air to Air Group in an aggregate amount not to exceed $59,000 in any month
so long as (i) such monies are utilized by Air Group to pay outstanding
obligations of interest due and payable pursuant to the Junior
Subordinated Notes and the New Junior Subordinated Notes (as such terms
are defined in the Eighth Amendment to Revolving Credit, Term Loan,
Equipment Line of Credit and Security Agreement dated September 25, 2008)
and (ii) no Default and/or Event of Default has occurred and is continuing
at the time of each such loan and/or shall be caused by making any such
loan, and (c) loans to its employees in the Ordinary Course of Business
not to exceed the aggregate amount of $200,000 at any time outstanding.
(m) Sections 9.7, 9.8 and 9.9 of the Loan Agreement are deleted, and are
replaced by new Sections 9.7, 9.8 and 9.9 to read as follows:
9.7 Annual Financial Statements. Furnish Agent within ninety (90)
days after the end of each fiscal year of Air Group, audited financial
statements of Air Group including, but not limited to, statements of
income and stockholders' equity and cash flow from the beginning of the
current fiscal year to the end of such fiscal year and the balance sheet
as at the end of such fiscal year, all prepared on a consolidated and
consolidating basis in accordance with GAAP applied on a basis consistent
with prior practices, and in reasonable detail and reported upon without
qualification by an independent certified public accounting firm selected
by Air Group and satisfactory to Agent (the "Accountants"). The report of
the Accountants shall be accompanied by a statement of the Accountants
certifying that (i) they have caused this Agreement to be reviewed, (ii)
in making the examination upon which such report was based either no
information came to their attention which to their knowledge constituted
an Event of Default or a Default under this Agreement or any related
agreement or, if such information came to their attention, specifying any
such Default or Event of Default, its nature, when it occurred and whether
it is continuing, and such report shall contain or have appended thereto
calculations which set forth Borrower's compliance with the requirements
or restrictions imposed by Sections 6.5, 7.4, 7.5,7.6, 7.7, 7.8 and 7.11
hereof. In addition, the reports shall be accompanied by a Compliance
Certificate.
9.8 Quarterly Financial Statements. Furnish Agent within 45 days
after the end of each fiscal quarter, an unaudited balance sheet of Air
Group and unaudited statements of income and stockholders' equity and cash
flow of Air Group reflecting results of operations from the beginning of
the fiscal year to the end of such quarter and for such quarter, prepared
on a on a consolidated and consolidating basis consistent with prior
practices and complete and correct in all material respects, subject to
normal and recurring year end adjustments that individually and in the
aggregate are not material to Borrower's business. The reports shall be
accompanied by a Compliance Certificate.
9.9 Monthly Financial Statements. Commencing with the month of July,
2006, furnish Agent within thirty (30) days after the end of each month,
an unaudited balance sheet of Air Group and unaudited statements of income
and stockholders' equity and cash flow of Air Group reflecting results of
operations from the beginning of the fiscal year to the end of such month
and for such month, prepared on a on a consolidated and consolidating
basis consistent with prior practices and complete and correct in all
material respects, subject to normal and recurring year end adjustments
that individually and in the aggregate are not material to Borrower's
business. The reports shall be accompanied by a Compliance Certificate and
a thirteen (13) week cash flow forecast of each Obligor.
5
(n) Section 13.1 of the Loan Agreement is deleted, and is replaced by a
new Section 13.1 to read as follows:
13.1 Term This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of
Borrower, Agent and each Lender, shall become effective on the date hereof
and shall continue in full force and effect until the Termination Date
(the "Term") unless sooner terminated as herein provided. Borrower may
terminate this Agreement at any time upon thirty (30) days' prior written
notice upon payment in full of the Obligations. In the event the
Obligations are prepaid in full prior to the last day of the Term (the
date of such prepayment hereinafter referred to as the "Early Termination
Date"), Borrower shall pay to Agent for the benefit of Lenders an early
termination fee in an amount equal to (y) one percent (1%) of the Maximum
Loan Amount if the Early Termination Date occurs on or after the Third
Amendment Closing Date to and including the date immediately preceding the
first anniversary of the Third Amendment Closing Date, and (z) one half of
one percent (1/2%) of the Maximum Loan Amount if the Early Termination
Date occurs on or after the first anniversary of the Third Amendment
Closing Date to and including the date immediately preceding the second
anniversary of the Third Amendment Closing Date.
3) WAIVER OF PRIOR DEFAULTS. The Obligor acknowledges that it is in default
of various covenants including, but not limited to, (i) failure to comply
with Section 7.5 of the Loan Agreement for the extension of certain loans
by Air in favor of Air Group and (ii) the occurrence of an event of
default under the Subordinated Loan Documentation as set forth in Section
10.19. The Lenders hereby waive the Obligor's default under such covenants
as of the date hereof and the Default Rate is no longer in effect at this
time. Except as heretofore waived by the Lenders in writing, the Lenders
reserve their rights under the Loan Agreement and the Other Documents for
defaults under such covenants for any other periods and to institute the
Default Rate with regard to any other defaults. The Lenders hereby confirm
that there are no existing Defaults and/or Events of Default due to the
Obligor's failure to comply with any financial covenants set forth in
Section 6 of the Loan Agreement.
4) AVAILABILITY RESERVE. The Agent hereby reduces the amount of the 2008
Reserve from $900,000 to $488,800. The excess availability created by this
reduction of the 2008 Reserve shall be utilized to payoff in full the Term
Loan, the Equipment Loans and the Converted Equipment Loans.
5) EXTENSION OF DELIVERY DATE FOR 2008 AUDITED FINANCIAL STATEMENTS. The
Lenders hereby agree that, notwithstanding the requirements of Section 9.7
of the Loan Agreement, the annual audited financial statements of Air
Group for the fiscal year ended December 31, 2008 only, prepared on a
consolidated and consolidating basis, together with all other information
and documents required to be delivered pursuant to Section 9.7 for such
fiscal year only, shall be delivered to the Agent on or before October 23,
2009 along with revised annual audited financial statements of Air Group
for the fiscal year ended December 31, 2007. Nothing herein shall be
deemed or construed as (i) a consent by the Lenders to extend the delivery
date of any other financial statements or information required to be
delivered by the Obligor pursuant to Section 9.7 of the Loan Agreement
(other than with respect to the audited financial statements and other
related information for the fiscal year ended December 31, 2008 only, as
expressly set forth above) or (ii) a waiver of any of the other delivery
requirements of the Obligor under Section 9.7 of the Loan Agreement.
6) INVENTORY APPRAISAL. The Obligor and the Lenders hereby agree that the
Agent shall order an appraisal of the Obligor's Inventory which shall be
delivered to the Agent by not later than March 31, 2010.
7) PAYMENTS MADE WITH REGARD TO SIGMA'S ACCOUNTS PAYABLE. The Obligor hereby
agrees that any and all payments with regard to Sigma's accounts payable
shall not exceed (i) $150,000 from the Ninth Amendment Closing Date
through and including December 31, 2009 and (ii) $150,000 during any
fiscal year thereafter. The Obligor hereby agrees to provide to the Agent
on or before the 15th day of each month hereafter a monthly summary of all
accounts payable of Sigma for the immediately preceding month, which lists
all cash payments made to and all debt forgiven by any creditor.
6
8) CONSENT TO PRINCIPAL PAYMENTS WITH REGARD TO THE SUBORDINATED NOTE.
Notwithstanding anything to the contrary in the Subordination Agreement,
the Lenders hereby consent to the Obligor making monthly principal
payments to the Steel City with regard to the Subordinated Note so long as
(i) the aggregate amount of each such monthly payment does not exceed
$20,000, (ii) Air Group's consolidated Fixed Charge Coverage Ratio prior
to each such payment and immediately after each such payment is not less
than 1.05 to 1.00 (tested on a rolling three month basis as of September
1, 2009, a rolling four month basis as of October 1, 2009, a rolling five
month basis as of November 1, 2009, a rolling six month basis as of
December 1, 2009, a rolling seven month basis as of January 1, 2010, a
rolling eight month basis as of February 1, 2010, a rolling nine month
basis as of March 1, 2010, a rolling ten month basis as of April 1, 2010,
a rolling eleven month basis as of May 1, 2010 and a rolling twelve month
basis as of June 1, 2010 and for each month thereafter) and (iii) no
Default and/or Event of Default has occurred and is continuing at the time
of each such payment and/or shall be caused by making any such payment
other than any Default and/or Event of Default due to the Fixed Charge
Coverage Ratio being less than 1.25 to 1.00 for the applicable time
period.
9) CONSENT TO CONSIGNMENT AGREEMENT WITH TRANS WORLD ALLOYS. The Lenders
hereby consent to Sigma entering into a consignment agreement with TW
Alloys, a California corporation having a place of business at 334 East
Gardena Boulevard, Gardena, California 90248 ("TW Alloys"), so long as (i)
such consignment agreement is in form and substance acceptable to the
Agent and (ii) TW Alloys enters into an access agreement in form and
substance acceptable to the Agent.
10) LATE FEE. If, at any time, the Obligor does not provide and deliver to the
Agent and/or the Lenders any documents, information, financial statements,
notices and/or any other materials required to by provided pursuant to the
terms and conditions of the Loan Agreement and/or any Other Document, then
the Obligor shall pay to the Agent for the benefit of the Lenders a late
fee in the amount of $500 for each day that such materials are not
provided and delivered to the Agent and/or the Lenders. Failure to comply
with this Section 10 is an Event of Default under the Loan Agreement.
11) GUARANTORS RATIFICATION. WM and Air Group each hereby reaffirm their
respective continuing obligations under the terms of each respective
Guaranty and Suretyship Agreement dated August 24, 2007 executed by each
(collectively, the "Guaranty"), and acknowledges that (i) each has read
this Agreement, (ii) the Obligations under the Loan Agreement are secured
by their respective Guaranty, and (iii) each makes such reaffirmation with
full knowledge of the terms thereof.
12) ACKNOWLEDGMENTS. Borrower acknowledges and represents that:
(A) the Loan Agreement and Other Documents, as amended hereby, are in full
force and effect without any defense, claim, counterclaim, right or claim
of set-off;
(B) to the best of its knowledge, no default by the Agent or Lenders in
the performance of their duties under the Loan Agreement or the Other
Documents has occurred;
(C) all representations and warranties of the Borrower contained herein,
in the Loan Agreement and in the Other Documents are true and correct in
all material respects as of this date, except for any representation or
warranty that specifically refers to an earlier date;
(D) Borrower has taken all necessary action to authorize the execution and
delivery of this Agreement; and
(E) this Agreement is a modification of an existing obligation and is not
a novation.
13) PRECONDITIONS. As a precondition to the effectiveness of any of the
modifications, consents, or waivers contained herein, the Borrower agrees
to:
(A) provide the Agent with this Agreement, properly executed;
7
(B) pay to the Agent a modification fee in the amount of $25,000;
(C) pay all legal fees incurred by the Agent in entering into this
Agreement to Wilentz, Goldman & Spitzer; and
(D) pay all other fees and costs incurred by the Lenders in entering into
this Agreement.
14) MISCELLANEOUS. This Agreement shall be construed in accordance with and
governed by the laws of the State of New York, without reference to that
state's conflicts of law principles. This Agreement, the Loan Agreement
and the Other Documents constitute the sole agreement of the parties with
respect to the subject matter thereof and supersede all oral negotiations
and prior writings with respect to the subject matter thereof. No
amendment of this Agreement, and no waiver of any one or more of the
provisions hereof shall be effective unless set forth in writing and
signed by the parties hereto. The illegality, unenforceability or
inconsistency of any provision of this Agreement shall not in any way
affect or impair the legality, enforceability or consistency of the
remaining provisions of this Agreement, the Loan Agreement or the Other
Documents. This Agreement, the Loan Agreement and the Other Documents are
intended to be consistent. However, in the event of any inconsistencies
among this Agreement, the Loan Agreement and/or any of the Other
Documents, the terms of this Agreement, then the Loan Agreement, shall
control. This Agreement may be executed in any number of counterparts and
by the different parties on separate counterparts. Each such counterpart
shall be deemed an original, but all such counterparts shall together
constitute one and the same agreement.
15) DEFINITIONS. The terms used herein and not otherwise defined or modified
herein shall have the meanings ascribed to them in the Loan Agreement. The
terms used herein and not otherwise defined or modified herein or defined
in the Loan Agreement shall have the meanings ascribed to them by the
Uniform Commercial Code as enacted in State of New York.
IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement
the day and year first above written.
ATTEST: AIR INDUSTRIES MACHINING, CORP.
By: By:
------------------------------- -------------------------------
Name: DARIO PERAGALLO Name: PETER RETTALIATA
Title: Secretary Title: President
ATTEST: SIGMA METALS, INC.
By: By:
------------------------------- -------------------------------
Name: DARIO PERAGALLO Name: PETER RETTALIATA
Title: Secretary Title: President
8
ATTEST: WELDING METALLURGY, INC. (as successor by
merger with WMS Merger Corp.)
By: /s/ Dario Peragallo By: /s/ Peter Rettaliata
------------------------------- -------------------------------
Name: DARIO PERAGALLO Name: PETER RETTALIATA
Title: Secretary Title: President
ATTEST: AIR INDUSTRIES GROUP, INC.
(f/k/a Gales Industries Incorporated)
By: /s/ Dario Peragallo By: /s/ Peter Rettaliata
------------------------------- -------------------------------
Name: DARIO PERAGALLO Name: PETER RETTALIATA
Title: Secretary Title: President
PNC BANK, NATIONAL ASSOCIATION
Lender and as Agent
By: /s/ A. Roger Craig, Jr.
-------------------------------
Name: A. ROGER CRAIG, JR.
Title: Vice President
9
EXHIBIT 10.45
WAIVER, CONSENT AND
AMENDMENT NO. 4
TO TERM LOAN AND SECURITY AGREEMENT
THIS WAIVER, CONSENT AND AMENDMENT NO. 4 ("Amendment") is entered into as
of September 24, 2009, by and among AIR INDUSTRIES MACHINING, CORP. ("Air"),
SIGMA METALS, INC. ("Sigma"), WELDING METALLURGY, INC. ("WMI", and together with
Air and Sigma, each a "Borrower" and collectively the "Borrowers"), AIR
INDUSTRIES GROUP, INC. ("Air Group") and STEEL CITY CAPITAL FUNDING, LLC
("SCC").
BACKGROUND
Borrowers and SCC are parties to a Term Loan and Security Agreement (as
amended, restated, supplemented or otherwise modified from time to time, the
"Loan Agreement") dated as of August 24, 2007, pursuant to which SCC provided
Borrower with certain financial accommodations.
Borrowers (i) have violated Sections 6.5, 6.13 and 9.7 of the Loan
Agreement and seek a waiver of the Events of Default arising from such
violations as well as a waiver of the cross-default to the Senior Loan
Agreement, and (ii) seek consent to (a) the Consignment Agreement between Sigma
and TW Alloys and (b) Senior Lender reducing the Availability Block by the
amount of the outstanding term loan under the Senior Loan Agreement and
utilizing the resulting increased availability to repay in full such term loan,
and SCC is willing to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrowers by SCC and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendments to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 5 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1.2 of the Loan Agreement is hereby amended by adding
the following defined terms in their appropriate alphabetical order:
"Amendment No. 4" shall mean the Waiver, Consent and Amendment
No. 4 to Term Loan and Security Agreement dated as of
September __, 2009 by and among Borrowers and SCC.
"TW Alloys" shall mean TW Alloys with a place of business at
334 East Gardena Boulevard, Gardena, California 90248, a
California corporation.
(b) Section 1.2 of the Loan Agreement is hereby amended by amending
the defined term "Term Loan Rate" in its entirety as follows:
"Term Loan Rate" shall mean an interest rate per annum equal
to (a) the sum of (i) the greater of (1) the Alternate Base
Rate, or (2) 4.75%, (the "Prime Floor") plus (ii) six percent
(6.00%) with respect to Domestic Rate Loans, and (b) the sum
of (i) the greater of (1) the Eurodollar Rate, or (2) 2.25%
(the "LIBOR Floor"), plus (ii) eight and one-half of one
percent (8.50%) with respect to Eurodollar Rate Loans.
(c) Section 2.1 of the Loan Agreement is hereby amended by adding
the following sentence at the end thereof:
"Effective on the first day of the month following the
effective date of Amendment No. 4, anything in this Agreement
or the Term Note to the contrary notwithstanding, Borrowers
shall make monthly payments of principal equal to $20,000 on
the first day of each month."
(d) Section 6.5(a) of the Loan Agreement is hereby deleted and
Sections 6.5(b), (c) and (d) of the Loan Agreement are hereby amended in their
entirety to provide as follows:
"(b) Fixed Charge Coverage Ratio. Maintain at all times a
Fixed Charge Coverage Ratio of not less than 1.25 to 1.00,
tested monthly for the three months ending September 30, 2009
and at the end of each month thereafter building to a rolling
twelve (12) month basis. For purposes of calculating the Fixed
Charge Coverage Ratio, the repayment of the term loan under
the Senior Loan Agreement resulting from the reduction of the
Availability Block shall be excluded.
(c) Funded Debt Ratio. Maintain at all times a ratio of Funded
Debt (exclusive of Indebtedness subordinated to the Term Loan
but inclusive of Indebtedness for borrowed money not
subordinated to the Term Loan whether or not it has a maturity
of more than one year from its date of creation) to EBITDA not
greater than the ratio set forth below for the applicable time
period:
Time Period Ratio
----------- -----
Three months ending September 30, 2009 8.50 to 1.00
Four months ending October 31, 2009 6.25 to 1.00
Five months ending November 30, 2009 4.80 to 1.00
Six months ending December 31, 2009 3.80 to 1.00
The Funded Debt Ratio covenant for the seven months ending
January 31, 2010 and each month ending thereafter building to
a rolling twelve (12) month period will be based upon the
projections to be provided pursuant to Section 9.12 and
acceptable to SCC.
2
(d) Consolidated Basis. On and after the effective date of
Amendment No. 4, all financial covenants shall be determined
for Air Group and its Subsidiaries on a consolidated basis and
all financial statements and projections to be provided under
this Agreement shall be provided for Air Group and its
Subsidiaries on a consolidated and consolidating basis."
(e) A new Section 7.24 is hereby added to the Loan Agreement which
provides as follows:
"7.24 Payments to Sigma Vendors. Given the fact operations of
Sigma have been discontinued since October 31, 2008, make cash
payments to vendors of Sigma in excess of $150,000 in the
aggregate during each of (i) the period September 1, 2009
through December 31, 2009, and (ii) each calendar year
commencing January 1, 2010."
(f) Section 9.2(a) is hereby amended by amending clause (x) to add
the following language at the end thereof:
"together with a summary of accounts payable of Sigma which
shows cash payments and forgiveness of debt by vendors to
Sigma."
(g) A new Section 9.17 is hereby added to the Loan Agreement which
provides as follows:
"9.17 Additional Information. Provide SCC (1) within fourteen
(14) days of the effective date of Amendment No. 4 with the
consolidated and consolidating audited and unqualified year
end financial statements for 2008 and the revised year end
financial statements for 2007, (2) during the first quarter of
2010, with an appraisal of inventory at Borrower's expense,
which appraisal shall be in form and substance, and by an
appraiser, acceptable to SCC, and (3) with 13 week cash flow
forecasts together with the monthly financial statements to be
delivered pursuant to Section 9.9."
3. Consent. Subject to the satisfaction of the conditions precedent set
forth in Section 5 below, SCC hereby consents to (i) the Consignment Agreement
between Sigma and TW Alloys, and (ii) Senior Lender reducing the Availability
Block by the amount of the outstanding term loan under the Senior Loan Agreement
and utilizing the resulting availability to repay in full such term loan.
4. Waiver. Subject to the satisfaction of the conditions precedent set
forth in Section 5 below, SCC hereby waives the (i) breach of Section 6.5(c) of
the Loan Agreement for the period commencing November 1, 2008 and ending August
31, 2009, (ii) breach of Section 6.5(d) of the Loan Agreement for the period
commencing September 1, 2008 and ending May 31, 2009, (iii) breach of Section
6.13 of the Loan Agreement due to the failure to have new financial covenants
implemented on a timely basis, (iv) breach of Section 9.7 of the Loan Agreement
due to the failure to deliver the 2008 year end audited financial statements of
Borrower, and (v) Event of Default under Section 10.13 of the Loan Agreement due
to the events of default which occurred under the Senior Loan Agreement.
3
5. Conditions of Effectiveness. This Amendment shall become effective upon
receipt by SCC of (a) four (4) copies of this Amendment executed by Borrowers
and Guarantor, (b) an amendment fee of $50,000, (c) a copy of an amendment to
the Senior Loan Agreement which waives the existing defaults under the Senior
Loan Agreement, amends the Senior Loan Agreement in a manner consistent with
Section 2(d), (e), (f) and (g) of this Amendment and consents to the execution
and performance of this Amendment, (d) an executed copy of an amendment to the
Subordinated Loan Documentation pursuant to which the Subordinated Lender agrees
to defer any payments of the Subordinated Loan until the Obligations have been
paid in full, and (e) payment of legal fees and disbursements of SCC's counsel.
6. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrowers and are enforceable
against Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment such Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement, and agrees that all such covenants, representations and warranties
shall be deemed to have been remade as of the effective date of this Amendment.
(c) Borrowers have no defense, counterclaim or offset with respect
to the Loan Agreement.
7. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) Except as specifically provided herein, the execution, delivery
and effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of SCC, nor constitute a waiver of any provision of the Loan
Agreement, or any other documents, instruments or agreements executed and/or
delivered under or in connection therewith.
(d) Upon the effectiveness of this Amendment, SCC will not charge
interest at the Default Rate due to the occurrence of the Events of Default
which have been waived pursuant to Section 4 of this Amendment.
4
(e) The Senior Lender shall amend the Senior Loan Agreement so that
the Receivables and Inventory of Sigma shall not create any availability under
the Senior Loan Agreement.
8. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the internal laws of the
State of New York.
9. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
10. Counterparts; Facsimile. This Amendment may be executed by the parties
hereto in one or more counterparts, each of which shall be deemed an original
and all of which when taken together shall constitute one and the same
agreement. Any signature delivered by a party by facsimile or "pdf" transmission
shall be deemed to be an original signature hereto.
[signature page follows]
5
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
AIR INDUSTRIES MACHINING, CORP.
By: /s/ Peter Rettaliata
------------------------
Name: Peter Rettaliata
Title: Chief Executive Officer & President
SIGMA METALS, INC.
By: /s/ Peter Rettaliata
------------------------
Name: Peter Rettaliata
Title: Chief Executive Officer & President
WELDING METALLURGY, INC.
By: /s/ Peter Rettaliata
------------------------
Name: Peter Rettaliata
Title: Chief Executive Officer & President
STEEL CITY CAPITAL FUNDING, LLC,
By: /s/ Ronald J. Comito
------------------------
Name: Ronald J. Comito
Title: Senior Vice President
THE FOREGOING AMENDMENT IS HEREBY
ACKNOWLEDGED AND AGREED
BY THE FOLLOWING GUARANTOR:
AIR INDUSTRIES GROUP, INC.
By: /s/ Peter Rettaliata
------------------------
Name: Peter Rettaliata
Title: Chief Executive Officer & President
EXHIBIT 10.46
AMENDED AND RESTATED
SUBORDINATED PROMISSORY NOTE
$2,050,000.00 August 24, 2007
New York, New York
For good and valuable consideration, the receipt of which is hereby
acknowledged, Air Industries Group, Inc., a Delaware corporation (the
"Company"), promises to pay to the order of John Gantt and Lugenia Gantt or
their assigns (collectively, the "Holder"), the principal sum of Two Million
Fifty Thousand Dollars ($2,050,000.00), as such amount may be increased pursuant
to Section 1(d) of this Note, together with interest thereon as provided for
herein, which shall be payable as follows: $25,000 on each of October 31, 2008
and December 31, 2008, an additional $50,000 on March 31, 2009, followed by 19
equal consecutive quarterly installments of $100,000, commencing on June 30,
2009 and continuing through December 31, 2013, payable on the last business day
of each March, June, September and December, commencing June 30, 2009, and
continuing through and including December 31, 2013, and a final payment of
$50,000 on March 31, 2014, or, if earlier, (ii) when, upon or after the
occurrence of an Event of Default (as defined below), such amount is declared
due and payable by the Holder or made automatically due and payable in
accordance with the terms hereof (the "Maturity Date").
Interest shall be accrue on any portion of the principal amount of this
Note outstanding from time to time until payment thereof in full, at a simple
rate of seven percent (7%) per annum, commencing on August 24, 2008.
Notwithstanding the foregoing, effective upon and during the continuance of
occurrence of an Event of Default (as hereinafter defined), the outstanding
balance of any amount owed under this Note shall bear interest ("Default
Interest") at the rate of eleven percent (11%) per annum, with the Default
Interest accruing from and including such date of the occurrence of an Event of
Default. Interest shall be calculated on the basis of a 365/366 day year and the
actual number of days elapsed. In no event shall the Holder hereof, or any
permitted successor or assign, be entitled to receive, collect or retain any
amount of interest paid hereon in excess of that permitted by applicable law.
This Note may be prepaid in whole or in part at any time. All payments
made pursuant to this Note shall be applied first to reimbursable expenses
(including the expenses and costs described in Section 4(f) below), interest
accrued, if any, and then principal.
This Note is issued pursuant to that certain Stock Purchase Agreement,
dated as of March 9, 2007, as amended by Amendment No.1 thereto dated as of
August 2, 2007 (the "Stock Purchase Agreement"), entered into between the
Company and the Holder, and as the terms of this Note as originally issued were
further amended by a letter dated August 14, 2008 signed by the Company and the
Holder.
The following is a statement of rights of the Holder and the conditions to
which this Note is subject, and to which the Holder, by acceptance of this Note,
agrees:
1
1. Subordination. (a) This Note will be subordinate and inferior to the
Company's Senior Indebtedness (as hereinafter defined). The Company for itself,
its successors and assigns, covenants and agrees and the Holder of this Note,
for himself, his successors and assigns, by his acceptance of this Note likewise
covenants and agrees that, to the extent provided below, the payment of all
amounts due pursuant to this Note is hereby expressly subordinated and junior in
right of payment to the extent and in the manner hereinafter set forth, to the
Company's Senior Indebtedness. As used herein, the term "Senior Indebtedness"
shall mean the principal of, and interest and premium, if any, on any and all,
(i) indebtedness of the Company for borrowed money or obligations with respect
to which the Company is a guarantor, to banks, insurance companies, or other
financial institutions or entities regularly engaged in the business of lending
money, in each case as in effect as of the date hereof or as may be borrowed
hereafter for working capital of the Company or one of its subsidiaries, or the
acquisition by the Company of one or more businesses, and (ii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for or to refinance such Senior Indebtedness, or any indebtedness
arising from the satisfaction of such Senior Indebtedness by a guarantor,
provided that such indebtedness issued in exchange for or to refinance Senior
Indebtedness or arising from the satisfaction of Senior Indebtedness by a
Guarantor is on commercially reasonable terms as of the date of incurrence not
to exceed the principal amount under such Senior Indebtedness and provided
further that the Company provides the Holder with prior written notice of such
action.
(b) Upon the acceleration of any Senior Indebtedness or upon the
maturity of all or any portion of the principal amount of any Senior
Indebtedness by lapse of time, acceleration or otherwise, all such Senior
Indebtedness which has been so accelerated or matured shall first indefeasibly
be paid in full before any payment is made by the Company or any person acting
on behalf of the Company on account of any obligations evidenced by this Note.
(c) The Company shall not pay any principal portion of this Note, or
interest accrued thereon, before the scheduled due date thereof if at such time
there exists a Blockage Event (as hereafter defined) and written notice thereof
has been given to the Company and the Holder by the holders of the Senior
Indebtedness.
(d) A "Blockage Event" is deemed to exist for the period of time
commencing on the date of receipt by the Holder of written notice of the
occurrence of a Default or an Event of Default (as defined in the instruments
evidencing the Senior Indebtedness), which notice shall specify such Default or
Event of Default, and ending on:
(i) the date such Default or Event of Default under the Senior
Indebtedness, as applicable, is cured or waived, provided that such Default or
Event of Default is in the payment of any amount due thereunder; or
(ii) in the case of any other Default or Event of Default
under the Senior Indebtedness, the earlier of (A) the date on which such Default
or Event of Default shall have been cured or waived and (B) the date that is 180
days after the occurrence of such Default or Event of Default, provided that a
Blockage Event with respect to a single specified Default or Event of Default
may be deemed to occur only once for each twelve-month period, provided,
further, that no Default or Event of Default that existed at the commencement
of, or during the pendency of, a Blockage Event shall serve as the basis for the
institution of any subsequent Blockage Event.
2
The Holder has the right, but not the obligation, to cure any such Default
or Event of Default under Senior Indebtedness to the extent it can be cured by
the payment of money. If the Holder shall have cured any such Default or Event
of Default under Senior Indebtedness to the extent such Default or Event of
Default can be cured by the payment of money, then such amount of interest as
shall have accrued on this Note during the continuance of the Blockage Event
(each, an "Additional Principal Amount") shall be added to the aggregate
principal amount then owing to the Holder pursuant to this Note. The Company
shall pay equal quarterly installments of each Additional Principal Amount
pursuant to the first paragraph of this Note from the date such Additional
Principal Amount is incurred pursuant to the first paragraph through and
including August 31, 2011, subject to all principal amounts being declared due
and payable or made automatically due and payable when, upon or after the
occurrence of an Event of Default under this Note.
(e) At any time there exists a Blockage Event, (i) the Company shall
not, directly or indirectly, make any payment of any part of this Note, (ii) the
Holder shall not demand or accept from the Company or any other person any such
payment or cancel, set-off or otherwise discharge any part of the indebtedness
represented by this Note, and (iii) neither the Company nor the Holder shall
otherwise take or permit any action prejudicial to or inconsistent with the
priority position of any holder of Senior Indebtedness over the Holder of this
Note.
(f) No right of any holder of Senior Indebtedness to enforce the
subordination provisions of this obligation shall be impaired by any act or
failure to act by the Company or the Holder or by their failure to comply with
this Note or any other agreement or document evidencing, related to or securing
the obligations hereunder. Without in any way limiting the generality of the
preceding sentence, the holders of Senior Indebtedness may, at any time and from
time to time, without the consent of or notice to the Holder, without incurring
responsibility to the Holder and without impairing or releasing the
subordination provided in this Note or the obligations of the Holder to the
holders of Senior Indebtedness, do any one or more of the following: (i) change
the manner, place or terms of payment of any Senior Indebtedness provided that
such change does not materially impact Holder in an adverse manner; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing any Senior Indebtedness; (iii) release any person or entity
liable in any manner for the collection of any Senior Indebtedness; and (iv)
exercise or refrain from exercising any rights against the Company or any other
person or entity.
(g) In the event that the Company shall make any payment or
prepayment to the Holder on account of the obligations under this Note which is
prohibited by this Section, such payment shall be held by the Holder, in trust
for the benefit of, and shall be paid forthwith over and delivered to, the
holders of Senior Indebtedness (pro rata as to each of such holders on the basis
of the respective amounts and priorities of Senior Indebtedness held by them) to
the extent necessary to pay all Senior Indebtedness due to such holders of
Senior Indebtedness in full in accordance with its terms (whether or not such
Senior Indebtedness is due and owing), after giving effect to any concurrent
payment or distribution to or for the holders of such Senior Indebtedness.
3
(h) After all Senior Indebtedness indefeasibly is paid in full and
until the obligations under the Note are paid in full, the Holder shall be
subrogated to the rights of holders of Senior Indebtedness to the extent that
distributions otherwise payable to the Holder have been applied to the payment
of Senior Indebtedness. For purposes of such subrogation, no payments or
distributions to holders of such Senior Indebtedness of any cash, property or
securities to which the Holder would be entitled except for the provisions of
this Section and no payment over pursuant to the provisions of this Section to
holders of such Senior Indebtedness by the Holder, shall, as between the
Company, its creditors other than holders of such Senior Indebtedness, and the
Holder, be deemed to be a payment by the Company to or on account of such Senior
Indebtedness, it being understood that the provisions of this Section are solely
for the purpose of defining the relative rights of the holders of such Senior
Indebtedness, on the one hand and the Holder, on the other hand.
(i) In any insolvency, receivership, bankruptcy, dissolution,
liquidation or reorganization proceeding, or in any other proceeding, whether
voluntary or involuntary, by or against the Company under any bankruptcy or
insolvency law or laws relating to relief of debtors, to compositions,
extensions or readjustments of indebtedness:
(i) the claims of any holders of Senior Indebtedness against
the Company shall be paid indefeasibly in full in cash or such payment shall
have been provided for in a manner acceptable to the holders of at least a
majority of the then outstanding principal amount of the Senior Indebtedness
before any payment is made to the Holder;
(ii) until all Senior Indebtedness is indefeasibly paid in
full in cash or such payment shall have been provided for in a manner acceptable
to the holders of at least a majority of the then outstanding principal amount
of the Senior Indebtedness before any payment is made to the Holder, any
distribution to which the Holder would be entitled but for this Section shall be
made to holders of Senior Indebtedness, except for distribution of securities
issued by the Company which are subordinate and junior in right of payment to
the Senior Indebtedness; and
(iii) the holders of Senior Indebtedness shall have the right
to enforce, collect and receive every such payment or distribution and give
acquittance therefor. If, in or as a result of any action case or proceeding
under Title 11 of the United States Code, as amended from time to time, or any
comparable statute, relating to the Company, the holders of the Senior
Indebtedness return, refund or repay to the Company, or any trustee or committee
appointed in such case or proceeding receive any payment or proceeds of any
collateral in connection with such action, case or proceeding alleging that the
receipt of such payments or proceeds by the holders of the Senior Indebtedness
was a transfer voidable under state or federal law, then the holders of the
Senior Indebtedness shall not be deemed ever to have received such payments or
proceeds for purposes of this Note in determining whether and when all Senior
Indebtedness has been paid in full and the Company shall pay or cause to be
paid, and the Holder shall be entitled to receive any such funds, proceeds or
collateral to satisfy all amounts due hereunder.. In the event the holders of
Senior Indebtedness receive amounts in excess of payment in full (cash) of
amounts outstanding in respect of Senior Indebtedness (without giving effect to
whether claims in respect of the Senior Indebtedness are allowed in any
insolvency proceeding), the holders of Senior Indebtedness shall pay such excess
amounts to the Holder.
4
(k) By its acceptance of this Note, the Holder agrees to execute and
deliver such documents as may be reasonably requested from time to time by the
Company or the holder of any Senior Indebtedness in order to implement the
foregoing provisions of this Section.
2. Events of Default. If any of the events specified in this Section shall
occur (herein individually referred to as an "Event of Default"), the Holder
may, so long as such condition exists, in addition to any other right, power or
remedy granted to the Holder under this Note, the Stock Purchase Agreement, the
Security Agreement (as hereinafter defined), or applicable law, either by suit
in equity or by action at law, or both, declare the entire principal amount (and
accrued interest thereon) and all other amounts immediately due and payable,
without presentment, demand or notice of any kind, all of which are expressly
waived, provided, however, that upon the occurrence of any Event of Default
described in Section 2(c) or 2(d) hereof, the entire principal amount (and
accrued interest thereon) and all other amounts shall automatically become due
and payable:
(a) Payment of any portion of the principal of this Note or interest
accrued thereon shall be delinquent for a period of 10 days or more after the
due date thereof;
(b) If the Company shall fail to observe any covenant or other
provision contained in this Note (other than with respect to payment), the Stock
Purchase Agreement or the Security Agreement and such failure of observance
shall be continuing for 10 days after the Holder has given written notice
thereof;
(c) The institution by the Company of proceedings to be adjudicated
as bankrupt or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or answer or
consent seeking reorganization or release under the federal Bankruptcy Act, or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or the appointment of a receiver, liquidator, assignee,
trustee or other similar official of the Company, or of any substantial part of
its property, or the making by it of an assignment for the benefit of creditors,
or the taking of corporate action by the Company in furtherance of any such
action;
(d) If, within 45 days after the commencement of an action against
the Company (and service of process in connection therewith on the Company)
seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or
similar relief under any present or future statute, law or regulation, such
action shall not have been resolved in favor of the Company or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if there is appointed without the consent or acquiescence of the
Company of any trustee, receiver or liquidator of the Company or of all or any
substantial part of the properties of the Company, such appointment shall not
have been vacated;
(e) Any declared default of the Company under any Senior
Indebtedness whether now existing or hereafter created that gives the holder
thereof the right to accelerate such Senior Indebtedness, and such Senior
Indebtedness is in fact accelerated by the holder.
5
(f) One or more judgments for the payment of money in an amount in
excess of $100,000 in the aggregate shall be rendered against the Company or any
of its subsidiaries (or any combination thereof) and shall remain undischarged
for a period of ten consecutive days during which execution shall not be
effectively stayed, or any action is legally taken by a judgment creditor to
levy upon any such judgment; or
(g) Any representation or warranty made by the Company in the
Security Agreement or any other agreement between the Company and Holder is
false or incorrect in any material respect when made.
4. Miscellaneous.
(a) Waiver and Amendment. The rights and remedies herein reserved to
any party shall be cumulative and in addition to any other or further rights and
remedies available at law or in equity. The waiver by any party hereto of any
breach of any provision of this Note shall not be deemed to be a waiver of the
breach of any other provision or any subsequent breach of the same provision.
This Note and its terms may be changed, waived or amended only by the written
consent of the Company and the Holder and, if any such change, waiver, or
amendment is with respect to the subordination provisions, the holders of at
least a majority in the then-outstanding principal amount of the Senior
Indebtedness.
(b) Governing Law. This Note shall be governed by and construed in
accordance with the law of the State of New York without regard to conflict of
law provisions. Any legal suit, action or proceeding arising out of or based
upon this Note shall be instituted in any federal or state court only in the
County of Suffolk, State of New York. The aforementioned choice of venue is
intended to be mandatory and not permissive in nature, thereby precluding the
possibility of litigation arising out of this Note in any jurisdiction other
than that specified in this Section. The Holder and the Company each waive, to
the fullest extent permitted by applicable law, any right it may have to assert
the doctrine of forum non conveniens or similar doctrine or to object to venue
with respect to any proceeding brought in accordance with this Section, and
stipulates that the state and federal courts located in the City and County of
New York, State of New York, shall have in personam jurisdiction and venue over
them for the purpose of litigation any dispute, controversy or proceeding
arising out of or related to this Note.
(c) Successors and Assigns. All of the terms and provisions of this
Note shall be binding upon and inure to the benefit of the parties hereto and
their respective successors, heirs and permitted assigns.
(d) Headings. The section headings contained in this Note are
intended solely for convenience of reference and do not themselves constitute a
part of this Note.
(e) Severability. In case any provision contained herein (or part
thereof) shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or other unenforceability shall not
affect any other provision (or the remaining part of the affected provision)
hereof; but this Note shall be construed as if such invalid, illegal, or
unenforceable provision (or part thereof) had never been contained herein, but
only to the extent that such provision is invalid, illegal, or unenforceable.
6
(f) Costs of Collection. The Company shall reimburse Holder for all
reasonable costs and expenses, including without limitation, reasonable
attorneys' fees and expenses, incurred in connection with (i) drafting,
negotiating, executing and delivering any amendment, modification or waiver of,
or consent with respect to, any matter relating to the rights of Holder
hereunder; (ii) creating, perfecting and maintaining perfection of the Liens (as
defined in the Security Agreement) and security interests in the Collateral (as
defined in the Security Agreement) in favor of the Holder and (iii) enforcing
any provisions of this Note or the Security Agreement and/or collecting any
amounts due under this Note.
(g) Notices. All notices, requests, demands or other communications
which are required to be or may be given or permitted hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person or
after dispatch by a recognized overnight courier to the appropriate party to
whom the same is so given or made:
To Holder at: John Gantt
Lugenia Gantt
183 Montecito Crescent
Melville, New York 11747
with a copy to: Ruskin Moscou Faltischek, P.C.
1425 Rexcorp Plaza
East Tower, 15th Floor
Uniondale, New York 11556
Attention: Adam P. Silvers, Esq.
To Company at: Air Industries Group, Inc.
1479 North Clinton Avenue
Bay Shore, NY 11706
or to such other address as a party has designated by notice in writing to the
other party in the manner provided by this Section. All such notices, requests,
demands or other communications shall be deemed to have been received on the
date of delivery thereof (if delivered by hand) and on the next day after
sending thereof (if by overnight courier).
(h) Assignment by the Company. Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by the Company, without the prior written
consent of the Holder.
(i) No Set-Off. All payments by the Company under this Note shall be
made free and clear of and without any deduction for or on account of any
set-off or counterclaim.
(j) Waiver of Presentment, Demand, Etc. To the fullest extent
permitted by applicable law, the Company expressly waives presentment, demand,
protest, notice of dishonor, notice of non-payment, notice of maturity, notice
of protest, presentment for the purpose of accelerating maturity of the
obligations under this Note, diligence in collection, and the benefit of any
exemption or insolvency laws.
7
(k) Senior Lenders. For so long as any amount shall be outstanding
hereunder, upon request of a Holder the Company shall promptly advise the Holder
of the identity of the holders of the Senior Indebtedness and of the amount,
principal and interest, due each such lender.
(l) Blockage Event. Within ten days of the occurrence thereof, the
Company shall advise each Holder of the occurrence of a Blockage Event and of
the termination of a Blockage Event.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
and issued as of the date first written above.
AIR INDUSTRIES GROUP, INC.
By: /s/ Peter D. Rettaliata
---------------------------
Name: Peter D. Rettaliata
Title: CEO and President
8
Air Industries Group, Inc.
1479 Clinton Avenue
Bay Shore, New York 11706
As of October 9, 2009
Mr. and Mrs. John Gantt
183 Montecito Crescent
Melville, New York 11747
Re.: Welding Metallurgy, Inc.
Dear John and Lugenia:
Our Amended and Restated Promissory Note in your favor dated as of August
24, 2007 (the "Note"), is expressly subordinated to the payment of our Senior
Indebtedness as defined therein. As a condition to granting certain waivers,
Steel City Capital Funding LLC ("SCCF"), one of our senior lenders, requires
that neither Air Industries Group, Inc. nor any of its subsidiaries make any
further payments under the Note until April 30, 2010. As of the date hereof,
there is presently due and owing $2,043,871of principal and $157,548.50 of
interest, and interest is accruing at the default rate of $11% per annum. We
acknowledge that a default in our obligations under the Note has occurred and is
continuing and that we have no defenses or counterclaims relating thereto.
We hereby request your consent to a modification of the Note to defer all
payments thereunder until the earlier of (a) the date all indebtedness owed by
the Company to SCCF is paid in full or (b) April 30, 2010 (collectively, the
"Forbearance Date"). Notwithstanding anything in the Note to the contrary,
during the period from the date hereof until the Forbearance Date, interest
shall accrue on the outstanding principal balance of the Note at the rate of 9%
per annum and thereafter shall accrue at the rate as provided in the Note.
Unless otherwise agreed, for purposes of determining the schedule pursuant to
which the outstanding principal balance of the Note is to be repaid, a Blockage
Event (as such term is defined in the Note) shall be deemed to be in existence
during the period from the date hereof until the Forbearance Date, and as of the
Forbearance Date, payments under the Note will resume as provided therein.
Except as modified herein, the Note remains in full force and effect.
As consideration for your consent to the foregoing, simultaneously
herewith we shall pay to you a fee, not in reduction of amounts due under the
Note, of $50,000. Except as modified herein, this letter shall not constitute a
waiver of any rights or remedies which you may have under the Note or otherwise.
If the foregoing is acceptable to you, please so signify by signing this
letter in the space provided below whereupon this letter shall become a binding
agreement among us and a modification of the terms of the Note.
Very truly yours,
/s/Peter Rettaliata
-------------------
Peter D. Rettaliata
President
Accepted and agreed to as of the date first written above.
/s/ John Gantt
- -----------------
John Gantt
/s/ Lugenia Gantt
- -----------------
Lugenia Gantt
Exhibit 21.1
Subsidiaries
Name Jurisdiction of Incorporation Ownership
- ---- ----------------------------- ---------
Gales Acquisition Group, Inc. Delaware 100% (Direct)
Air Industries Machining, Corp. New York 100% (Indirect)
Sigma Metals, Inc. New York 100% (Indirect)
Welding Metallurgy, Inc. New York 100% (Indirect)
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Peter D. Rettaliata, certify that:
1. I have reviewed this annual report on Form 10-K of Air Industries
Group, Inc. (the "Company"),for the year ended December 31, 2008;
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 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 internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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 fiscal quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer 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: October 16, 2009 /s/ Peter D. Rettaliata
---------------------------------
Name: Peter D. Rettaliata
Title: President and Chief
Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Glassman, certify that:
1. I have reviewed this annual report on Form 10-K of Air Industries
Group, Inc. (the "Company"), for the year ended December 31, 2008;
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 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 internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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 fiscal quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer 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: October 16, 2009 /s/ Scott Glassman
-------------------------------
Name: Scott Glassman
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 President and Chief Executive Officer of Air Industries
Group, Inc. (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-K of
the Company for the year ended December 31, 2008 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-K fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: October 16, 2009 /s/ Peter D. Rettaliata
--------------------------------------
Peter D. Rettaliata
President and Chief Executive 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.
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 Air Industries Group, Inc.(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-K of the Company
for the year ended December 31, 2008 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-K fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: October 16, 2009 /s/ Scott Glassman
------------------------------
Scott Glassman
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.