As filed with the Securities and Exchange Commission on ___________, 2006
Registration No. 333-131709
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GALES INDUSTRIES INCORPORATED
(Name of small business issuer in its charter)
Delaware 3728 20-4458244
(State or Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Identification
or Organization) Classification Number)
Code Number)
1479 North Clinton Avenue
Bay Shore, NY 11706
(631) 968-5000
(Address and telephone number of principal executive offices)
1479 North Clinton Avenue
Bay Shore, NY 11706
(Address of principal place of business)
Michael A. Gales, Executive Chairman
Gales Industries Incorporated
1479 North Clinton Avenue
Bay Shore, NY 11706
(631) 968-5000
(Name, address and telephone number of agent for service)
Copies of communications to:
Vincent J. McGill, Esq.
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
(212) 779-9910
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Registered Proposed Maximum Proposed Maximum Amount of Registration
Securities to be Offering Price Per Aggregate Offering Fee
Registered Share Price
- -------------------------------------------------------------------------------------------------------------------------------
$.001 par value per share 60,924,388 $0.50 (1) $30,462,194 $3,260
common stock
- -------------------------------------------------------------------------------------------------------------------------------
$.001 par value per share 100,000 $0.86 (2) $855,000 $9.15
common stock
- -------------------------------------------------------------------------------------------------------------------------------
Amount Previously Paid $(30,462,194) $(3,260)
- -------------------------------------------------------------------------------------------------------------------------------
Amount Due with This $105,500 $11.29
Filing
- -------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(c), solely for the purpose of calculating the
registration fee, based on the average of the high and low prices of the
Registrant's common stock as reported on February 2, 2006, prior to the date of
the Registrant's initial filing of this registration statement on February 9,
2006.
(2) Pursuant to Rule 457(c), solely for the purpose of calculating the
registration fee, based on the average of the high and low prices of the
Registrant's common stock on the OTC Bulletin Board on June 13, 2006.
(3) This registration statement relates to the resale by certain selling
security holders identified herein of up to 61,024,388 shares of common stock,
of which up to 11,585,725 shares of common stock are held by selling security
holders, up to 40,909,538 shares of common stock are issuable upon conversion of
Series A Convertible Preferred Stock purchased by investors in a recent
offering, up to 1,636,380 shares of common stock are issuable upon conversion of
Series A Convertible Preferred Stock which may be issued as payable-in-kind
dividends, up to 1,663,156 shares of common stock are issuable upon the
conversion of certain convertible promissory notes and up to 5,229,589 shares of
our common stock are issuable upon exercise of common stock purchase warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Subject to Completion, Dated June ___, 2006
61,024,388 Shares
GALES INDUSTRIES INCORPORATED
Common Stock
This prospectus relates to the resale of up to 61,024,388 shares of our
common stock, $.001 par value per share ("Common Stock"), by the selling
security holders listed in the prospectus commencing on page 50, consisting of
up to 11,585,725 shares of Common Stock held by selling security holders, up to
40,909,538 shares of Common Stock issuable upon conversion of the outstanding
shares of our Series A Convertible Preferred Stock, up to 1,636,380 shares of
Common Stock issuable upon conversion of Series A Convertible Preferred Stock
which may be issued as payable-in-kind dividends, up to 1,663,156 shares of
Common Stock issuable upon the conversion of certain convertible promissory
notes and up to 5,229,589 shares of Common Stock issuable upon exercise of
common stock purchase warrants. The transactions in which the selling security
holders acquired the shares of Common Stock covered by this prospectus are
described in the section of this prospectus entitled "Selling Security Holders."
The selling security holders, by themselves or through brokers and
dealers, may offer and sell the shares at prevailing market prices or in
transactions at negotiated prices. We will not receive any proceeds from the
selling security holders' resale of the shares of Common Stock. The selling
security holders will receive all proceeds from such sales. We will, in the
ordinary course of business, receive proceeds from the issuance of our Common
Stock upon exercise of the common stock purchase warrants. If all of such
warrants are exercised, without the utilization of the "cashless" exercise
option, we will receive approximately $1,083,010 in return for issuing the
5,229,589 shares of Common Stock offered hereby which underly common stock
purchase warrants.
It is not possible to determine the price to the public in any sale of the
shares of Common Stock by the selling security holders and the selling security
holders reserve the right to accept or reject, in whole or in part, any proposed
purchase of shares. Accordingly, the selling security holders will determine the
public offering price, the amount of any applicable underwriting discounts and
commissions and the net proceeds at the time of any sale. The selling security
holders will pay any underwriting discounts and commissions. The selling
security holders, and the brokers through whom sales of the securities are made,
will be "underwriters" within the meaning of Section 2(11) of the Securities Act
of 1933, as amended, referred to herein as the "Securities Act".
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"GLDS". On June 13, 2006 the average of the high and low sale prices of our
Common Stock on the OTC Bulletin Board was $0.86.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. The selling security holders are offering to sell
and seeking offers to buy shares of our Common Stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our Common Stock.
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No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the selling security
holders, the securities or any matter discussed in this prospectus, other than
the information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling security holder. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy the securities in any circumstances under
which the offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any distribution of securities in accordance with this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus.
The date of this prospectus is June __, 2006
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 100 F
Street, NE, Washington, D.C. 20549, a registration statement on Form SB-2, under
the Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement, any amended
registration statement and the exhibits filed with them for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
We are required to file reports with the Commission pursuant to Section 13
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We file
reports such as annual reports on Form 10-KSB, quarterly reports on Form 10-QSB
and current reports on Form 8-K. We intend to furnish our stockholders with
annual reports containing audited financial statements and other reports as we
think appropriate or as may be required by law.
The registration statement and reports, statements or other information
that we have filed with the Commission may be read and copied at the
Commission's Public Reference Room at 100 F Street, NE, Room 1580, Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. You may also access
such filings and information electronically on the web. The Commission maintains
a web site (HTTP://WWW.SEC.GOV) that contains the registration statements,
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC such as us. These filings are
also available to the public from commercial document retrieval services.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, competition
and the effect of economic conditions include forward-looking statements within
the meaning of section 27A of the Securities Act of 1933, referred to herein as
the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
referred to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
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As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our Common Stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision. The information in
this prospectus reflects a 1-for-1.249419586 reverse split of our Common Stock
(the "Reverse Split") which became effective as of November 21, 2005.
In this prospectus, the "Company" and terms such as "we," "us" and "our,"
refer to (i) Gales Industries Incorporated, a Delaware corporation, (ii) our
100% owned Delaware subsidiary, Gales Industries Merger Sub, Inc. ("Merger
Sub"), and (iii) Air Industries Machining, Corp., a New York corporation ("AIM")
which is wholly owned by Merger Sub. When we refer to "Ashlin" in this
prospectus, we are referring to our Company prior to the transactions of
November 30, 2005.
Our Company
Through our wholly-owned subsidiary, AIM, we manufacture aircraft
structural parts and assemblies principally for prime defense contractors in the
aerospace industry including, Sikorsky, Lockheed Martin, Boeing and Northrop
Grumman. Approximately 85% of our revenues are derived from sales of parts and
assemblies directed toward military applications, although direct sales to the
military (U.S. and NATO) constitute less than 10% of our revenues. Parts
manufactured by us are installed onboard Sikorky's VH-3D, otherwise known as
Marine One, the primary Presidential helicopter, and onboard Air Force One,
Boeing's 747-2000B customized for use by the President.
On February 15, 2006 we changed our name from Ashlin Development
Corporation to Gales Industries Incorporated and changed our state of
incorporation from Florida to Delaware.
Our principal offices are at 1479 North Clinton Avenue, Bay Shore, New
York 11706 and our telephone number is (631) 968-5000.
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The Acquisition and Related Transactions
We, then known as Ashlin Development Corporation, and our newly formed
wholly-owned subsidiary ("Merger Sub") entered into a Merger Agreement (the
"Merger Agreement") on November 14, 2005 with Gales Industries Incorporated, a
privately-held Delaware corporation ("Original Gales"). On November 30, 2005
(the "Closing Date"), Original Gales merged (the "Merger") into Merger Sub.
Pursuant to the Merger Agreement, we issued 10,673,107 shares of our common
stock ("Common Stock") (representing 74% of our outstanding shares as of the
date of the Merger) and 900 shares of our Series A Convertible Preferred Stock
("Preferred Stock"), which in the aggregate are convertible into 40,909,500
shares of our Common Stock, for all the issued and outstanding common shares and
preferred shares of Original Gales. As a result of the transaction, the former
stockholders of Original Gales became the controlling stockholders of our
Company. Additionally, since we had no substantial assets immediately prior to
the Merger, the transaction was treated for accounting purposes as a reverse
acquisition and the transaction has been accounted for as a recapitalization of
Original Gales rather than a business combination. Consequently, the historical
financial statements of Original Gales are now the historical financial
statements of our Company. Assuming the value of each of our shares issued in
connection with the Merger was equal to the amount paid for such shares in the
private placement of Original Gales in which it issued 900 shares of its
convertible preferred stock, on an as converted basis the aggregate value of our
shares issued in connection with the Merger was $11,348,174. See "THE
ACQUISITION AND RELATED TRANSACTIONS - Transactions of November 30, 2005."
Immediately prior to the closing of the Merger, Original Gales acquired
(the "Acquisition") all of the outstanding capital stock of AIM pursuant to a
Purchase Agreement entered into on July 25, 2005 (the "Purchase Agreement").
Because of the change in ownership, management and control that occurred in
connection with the Acquisition, for financial reporting purposes the
Acquisition was accounted for as a purchase. Simultaneously with the
Acquisition, AIM entered into a bank facility (the "New Loan Facility") with an
institutional lender and used a portion of the proceeds from the facility to
acquire the real estate comprising AIM's corporate campus (the "Real Estate
Acquisition"). The completion of the Real Estate Acquisition was a condition to
the closing of the Acquisition of AIM.
The Offering
This prospectus relates to the resale by the selling security holders of
up to 61,024,388 shares of our Common Stock, consisting of 11,585,725 shares of
Common Stock held by selling security holders, up to 40,909,538 shares of Common
Stock issuable upon conversion of the outstanding shares of our Series A
Convertible Preferred Stock ("Preferred Stock"), up to 1,636,380 shares of
Common Stock issuable upon conversion of Series A Convertible Preferred Stock
which may be issued as payable-in-kind dividends, up to 1,663,156 shares of
Common Stock issuable upon the conversion of certain convertible promissory
notes and up to 5,229,589 shares of our Common Stock issuable upon exercise of
common stock purchase warrants. The 40,909,538 shares include 38 additional
shares which may be issuable as a result of the rounding up of fractional shares
upon conversion of the outstanding Preferred Stock.
The issuances of such securities to the selling security holders was made
in reliance upon exemptions from the registration requirements of the Securities
Act provided by Section 4(2) of the Securities Act for private transactions.
Additional information concerning the transactions in which the rights to
acquire the shares covered by this prospectus were obtained by the selling
security holders are set forth in the section of this prospectus entitled
"Selling Security Holders."
Sales By Selling Security Holders
The selling security holders may offer the Common Stock pursuant to this
prospectus in varying amounts and transactions so long as this prospectus is
then current under the rules of the SEC and we have not withdrawn the
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registration statement. The offering of Common Stock may be through the
facilities of the OTC Bulletin Board or such other exchange or reporting system
where the Common Stock may be traded. Brokerage commissions may be paid or
discounts allowed in connection with such sales; however, it is anticipated that
the discounts allowed or commissions paid will be no more than the ordinary
brokerage commissions paid on sales effected through brokers or dealers. To our
knowledge, as of the date hereof, no one has made any arrangements with a broker
or dealer concerning the offer or sale of the Common Stock. See "Plan of
Distribution."
Outstanding Securities
As of May 31, 2006, there were 14,723,421 shares of our Common Stock
outstanding. On a fully-diluted basis, giving effect to and assuming the
exercise or conversion of all of our options, warrants and derivative
securities, we had outstanding an aggregate of approximately 67,427,751 shares
of Common Stock as of May 31, 2006. This number does not give effect to any
interest or dividends which may accrue on the outstanding Preferred Stock or
convertible notes or to any rounding up to the nearest whole share in connection
with the conversion of Preferred Stock or convertible notes.
An investment in the shares of our Company is subject to a number of
risks. We have set forth these risk factors below under the heading "Risk
Factors" which you should carefully review.
Summary Financial Data
Summary data representing our and AIM's results of operations are set
forth below under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations". The following table sets
forth: our unaudited balance sheet data as of March 31, 2006; our audited
balance sheet data as of December 31, 2005; and AIM's audited balance sheet data
as of December 31, 2004. This summary financial information should be read in
conjunction with the financial statements which are a part of this prospectus.
Balance Sheet Data: At March 31, 2006 At December 31, 2005 At December 31, 2004
-----------------------------------------------------------------
Working Capital $ 4,072,651 $ 4,113,235 $ 7,695,227
Total Assets $28,087,448 $26,137,718 $17,801,807
Total Current Liabilities $14,540,794 $12,448,322 $ 6,030,947
Long-Term Liabilities $ 6,274,750 $ 6,579,762 $ 7,109,696
Total Stockholders' Equity $ 7,271,904 $ 7,109,634 $ 4,661,164
RISK FACTORS
The purchase of our Common Stock involves a high degree of risk. Before
you invest you should carefully consider the risks and uncertainties described
below and other information and our consolidated financial statements and
related notes included elsewhere in this prospectus. If any of the events
described below actually occurs, our operating results would be dramatically
adversely affected, which in turn could cause the price of our Common Stock to
decline, perhaps significantly. Further, we may not be able to continue our
operations. This means you could lose all or a part of your investment.
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Risks of the Acquisition
There can be no assurance that any benefits to AIM's business will be
achieved from its acquisition by Original Gales and the merger of Original Gales
into a public company, the Real Estate Acquisition or the New Loan Facility (the
"Transactions") or that the results of operations of AIM prior to the Merger
will not be adversely impacted by the Transactions. As of November 30, 2005,
Luis Peragallo and Jorge Peragallo, formerly the principal shareholders of AIM,
resigned from their positions with AIM. Even though Peter Rettaliata and Dario
Peragallo, two of AIM's officers (President and Executive Vice President,
respectively), will continue to serve as officers of AIM and will serve as
officers of our Company, there can be no assurance that the management of our
company will have the necessary experience to operate AIM's business. The
process of combining the organizations of Original Gales, AIM and our Company
could interrupt the activities of part or all of AIM's business, and could cause
fundamental changes in AIM's business, which could have an adverse effect on the
results of operations. The past results of AIM's operations are not necessarily
indicative of the future results of our operations. In addition, AIM's results
of operations will be affected by the significant increase in expenses relating
to financial statements preparation and other requirements applicable to
publicly traded companies. Prior to November 30, 2005, Ashlin's auditor had
expressed substantial doubt about Ashlin's ability to continue as a going
concern. AIM's results of operations will be negatively affected when combined
with the expenses of its parent public company.
Limited Recourse Against AIM Shareholders
Pursuant to the Stock Purchase Agreement relating to the acquisition of
AIM by Original Gales, the obligations of the former shareholders of AIM (the
"AIM Shareholders") to indemnify us for breaches of their representations and
warranties are, with certain exceptions, limited to $2.5 million. Consequently,
we will have no recourse against the AIM Shareholders for claims in excess of
such amount.
The inability to successfully manage the growth of our business may have a
material adverse effect on our business, results or operations and financial
condition.
We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth and acquisitions. Such activities
could result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. There can be no assurance that we will be able to identify, attract
and retain experienced personnel.
Our future success depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected.
The unsuccessful integration of a business or business segment we acquire
could have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
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among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.
Any reduction in government spending on defense could materially adversely
impact our revenues, results of operations and financial condition.
There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding to pay
for other programs. Future reductions in United States Government spending on
defense or future changes in the kind of defense products required by United
States Government agencies could limit demand for our products, which would have
a materially adverse effect on our operating results and financial condition.
In addition, potential shifts in responsibilities and functions within the
defense and intelligence communities could result in a reduction of orders for
defense products by segments of the defense industry that have historically been
our major customers. As a result, demand for our products could decline,
resulting in a decrease in revenues and materially adversely affecting our
operating results and financial condition.
We depend on revenues from a few significant relationships and any loss,
cancellation, reduction, or interruption in these relationships could harm our
business.
As of March 31, 2006, one customer accounted for approximately 50% of our
accounts receivable. In addition, this customer accounted for approximately 69%
of our total revenue for the quarter ended March 31, 2006. In the event such
customer is unable or unwilling to pay us our accounts receivable from such
customer, or in the event our relationship with such customer is severed or
negatively affected, our results of operations will be materially adversely
affected and we may not have the resources to meet our capital obligations.
In general, AIM has derived a material portion of its revenue from one or
a limited number of customers. We expect that in future periods we may enter
into contracts with customers which represent a significant concentration of our
revenues. If such contracts were terminated, our revenues and net income could
significantly decline. Our success will depend on our continued ability to
develop and manage relationships with significant customers. Any adverse change
in our relationship with our significant customers could have a material adverse
effect on our business. Although we are attempting to expand our customer base,
we expect that our customer concentration will not change significantly in the
near future. The markets in which we sell our products are dominated by a
relatively small number of customers who have contracts with United States
governmental agencies, thereby limiting the number of potential customers. We
cannot be sure that we will be able to retain our largest customers or that we
will be able to attract additional customers, or that our customers will
continue to buy our products in the same amounts as in prior years. The loss of
one or more of our largest customers, any reduction or interruption in sales to
these customers, our inability to successfully develop relationships with
additional customers or future price concessions that we may have to make, could
significantly harm our business.
Continued competition in our markets may lead to a reduction in our
revenues and market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will continue to increase. Current
competitors have significantly greater technical, manufacturing, financial and
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marketing resources than we do. We expect that more companies will enter the
defense and aerospace component manufacturing market. We may not be able to
compete successfully against either current or future competitors. Increased
competition could result in reduced revenue, lower margins or loss of market
share, any of which could significantly harm our business.
Our future revenues are inherently unpredictable, our operating results
are likely to fluctuate from period to period and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, some of which are
outside our control. Accordingly, we believe that period-to-period comparisons
of our results of operations are not meaningful and should not be relied upon as
indications of performance. Some of the factors that could cause quarterly or
annual operating results to fluctuate include conditions inherent in government
contracting and our business such as the timing of cost and expense recognition
for contracts, the United States Government contracting and budget cycles,
introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic
conditions and economic conditions specific to the defense market. Because we
base our operating expenses on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term, any delay in generating or
recognizing forecasted revenues could significantly harm our business.
Fluctuations in quarterly results, competition or announcements of extraordinary
events such as acquisitions or litigation may cause earnings to fall below the
expectations of securities analysts and investors. In this event, the trading
price of our Common Stock could significantly decline. In addition, there can be
no assurance that an active trading market will be sustained for our Common
Stock. These fluctuations, as well as general economic and market conditions,
may adversely affect the future market price of our Common Stock, as well as our
overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
of sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
Attracting and retaining key personnel is an essential element of our
future success.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Terrorist acts and acts of war may seriously harm our business, results of
operations and financial condition.
United States and global responses to the Middle East conflict, terrorism,
perceived nuclear, biological and chemical threats and other global crises
11
increase uncertainties with respect to U.S. and other business and financial
markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats,
and other global crises and responses thereto, may adversely affect the Company.
While some of our products may experience greater demand as a result of
increased U.S. Government defense spending, various responses could realign U.S.
Government programs and affect the composition, funding or timing of our
government programs and those of our customers. U.S. Government spending could
shift to defense programs in which we and our customers do not participate. As a
result of the September 11th terrorist attacks and given the current Middle East
and global situation, U.S. defense spending is generally expected to increase
over the next several years. Increased defense spending does not necessarily
correlate to increased business, because not all the programs in which we
participate or have current capabilities may be earmarked for increased funding.
Terrorist acts of war (wherever located around the world) may cause damage
or disruption to us, our employees, facilities, partners, suppliers,
distributors and resellers, and customers, which could significantly impact our
revenues, expenses and financial condition. The terrorist attacks that took
place in the United States on September 11, 2001 were unprecedented events that
have created many economic and political uncertainties. The potential for future
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business and results
of operations in ways that cannot presently be predicted. In addition, as a
company with headquarters and significant operations located in the United
States, we may be impacted by actions against the United States.
Our indebtedness may affect operations.
As described below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Liquidity and Capital
Resources", we incurred significant indebtedness under the New Loan Facility.
This indebtedness far exceeds the amount of pre-Merger debt of AIM. As a result,
we are significantly leveraged and our indebtedness is substantial in relation
to our stockholders' equity. Our ability to make principal and interest payments
will depend on future performance, which is subject to many factors, some of
which are outside our control. In addition, the New Loan Facility is secured by
substantially all of our assets, including the real estate acquired in the Real
Estate Acquisition. In the case of a continuing default under the New Loan
Facility, the lender will have the right to foreclose on AIM's assets, which
would have a material adverse effect on the Company. Payment of principal and
interest on the New Loan Facility may limit our ability to pay cash dividends to
shareholders and the documents governing the New Loan Facility will prohibit the
payment of cash dividends. Our leverage may also adversely affect our ability to
finance future operations and capital needs, may limit our ability to pursue
other business opportunities and may make our results of operations more
susceptible to adverse economic conditions.
Absence of Principal Shareholders' Guarantees and Financial Accommodations
Historically, AIM obtained money and achieved other financial
accommodations through arrangements guaranteed by the AIM Shareholders. Since
they sold their shares of AIM in connection with the Acquisition, the AIM
Shareholders will not be providing any financial assistance to us or AIM on a
going-forward basis. Consequently, we are no longer able to rely upon the credit
of AIM's Shareholders when seeking to borrow money or obtain other financial
accommodations.
We may issue shares of our capital stock or debt securities to complete an
acquisition, which would reduce the equity interest of our stockholders.
We will, in all likelihood, issue additional shares of our Common Stock or
preferred stock, or a combination of common and preferred stock, to complete an
acquisition. The issuance of additional shares of our Common Stock or any number
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of shares of our preferred stock may significantly reduce the equity interest of
our current stockholders, may subordinate the rights of holders of our Common
Stock if preferred stock is issued with rights senior to the Common Stock and
may adversely affect prevailing market prices for our Common Stock.
Similarly, if we issue debt securities, it could result in default and
foreclosure on our assets if our operating revenues after an acquisition were
insufficient to pay our debt obligations, could result in the acceleration of
our obligations to repay the indebtedness even if we have made all principal and
interest payments when due if the debt security contains covenants that require
the maintenance of certain financial ratios or reserves and any such covenant is
breached without a waiver or renegotiation of that covenant and could result in
our inability to obtain additional financing, if the debt security contains
covenants restricting our ability to obtain additional financing while such
security is outstanding.
Because of our limited resources and the significant competition for
acquisitions, we may not be able to consummate an acquisition with growth
potential, if at all.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions. Many of these
entities are well established and have extensive experience in identifying and
effecting business combinations directly or through affiliates. Many of these
competitors possess greater technical, human and other resources than we do and
our financial resources will be relatively limited when contrasted with those of
many of these competitors. While we believe that there are numerous potential
target businesses that we could acquire, our ability to compete in acquiring
certain target businesses will be limited by our available financial resources.
This inherent competitive limitation gives others an advantage in pursuing the
acquisition of certain target businesses.
We may be unable to obtain additional financing, if required, to complete
an acquisition or to fund the operations and growth of any business acquired,
which could compel us to abandon a particular prospective acquisition.
If we require additional financing to complete an acquisition, we cannot
assure you that such financing would be available on acceptable terms, if at
all. To the extent that additional financing proves to be unavailable when
needed to consummate a particular acquisition, we would be compelled to
restructure the transaction or abandon that particular acquisition. In addition,
if we consummate an acquisition, we may require additional financing to fund the
operations or growth of the business acquired. The failure to secure additional
financing could have a material adverse effect on the continued development or
growth of our business.
There is only a limited public market for our securities.
The trading market for our Common Stock is limited and conducted on the
OTC Bulletin Board. Our Common Stock is very thinly traded. There can be no
assurance that we will ever achieve a listing of our securities on Nasdaq or a
stock exchange or that a more active trading market will ever develop, or, if
developed, that it will be sustained.
If our Common Stock becomes subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,000 or less and our
Common Stock has a market price per share of less than $5.00, transactions in
our Common Stock may be subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. If our Common Stock falls within the definition
of penny stock and is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together
with their spouse).
13
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's Common Stock and
may affect the ability of investors to sell our Common Stock in the secondary
market. Such rules may also cause fewer broker-dealers to be willing to make a
market in our Common Stock, and it may affect the level of news coverage we
receive.
Potential Adverse Effect on Market Price of Securities from Future Sales
of Common Stock.
Future sales of Common Stock pursuant to a registration statement or Rule
144 under the Securities Act, or the perception that such sales could occur,
could have an adverse effect on the market price of the Common Stock. We have
filed a Registration Statement on form SB-2 covering the resale by selling
security holders of more than 60,000,000 shares of Common Stock. This
Registration Statement (No. 333-131709) has not yet been declared effective.
Relative to the number of shares of our freely-trading Common Stock outstanding,
which we estimate to be approximately 2.52 million shares, the number of shares
which will be sold into the marketplace pursuant to our current Registration
Statement will be enormous. We believe that such sales will severely depress the
market price of our Common Stock. We also intend to register on Form S-8 under
the Securities Act an additional 10,000,000 shares of Common Stock, which are
the shares available for issuance under our 2005 Stock Incentive Plan, of which,
as of May 31, 2006, we have granted (and reserved for grant) stock options to
purchase 4,850,000 shares of our Common Stock. In addition, shares of our Common
Stock held for one year or more will be eligible for public resale pursuant to
Rule 144. In general, the shares of Common Stock which we issued in connection
with the Merger and the Acquisition will become eligible for public resale under
Rule 144 as of November 30, 2006. In addition, we may use our capital stock in
the future to finance acquisitions and to compensate employees and management,
which will further dilute the interests of our existing shareholders and could
eventually significantly depress the trading price of our Common Stock.
Effect of Stock Options
Our 2005 Stock Incentive Plan allows for the issuance of up to 10,000,000
shares of Common Stock, either as stock grants or options, to employees,
officers, directors, advisors and consultants of the Company. As of November 30,
2005, options to purchase 4,850,000 shares of Original Gales' common stock
became options to purchase shares of our Common Stock under our 2005 Stock
Incentive Plan. The committee administering such plans will have sole authority
and discretion to grant options under such plans. We may grant options which
become immediately exercisable in the event of a change in control of the
Company and in the event of certain mergers and reorganizations of the Company.
The existence of such options could limit the price that certain investors might
be willing to pay in the future for shares of our Common Stock and may have the
effect of delaying or preventing a change in control of the Company. The
issuance of additional shares upon the exercise of such options could also
decrease the amount of earnings and assets available for distribution to the
holders of the Common Stock and could result in the dilution of voting power of
the Common Stock.
14
Dilution from Shares to Be Issued in Potential Acquisitions
Our business plan calls for our making acquisitions in the future. We will
very likely issue a significant number of shares of our capital stock to pay for
each such acquisition. Such issuances of shares will dilute the interests of our
existing shareholders and could depress the trading price of our Common Stock.
Prior to November 30, 2005, AIM was not subject to Sarbanes-Oxley
regulations and, therefore, may have lacked the financial controls and
procedures of public companies.
Prior to November 30, 2005, AIM did not have the internal or financial
control infrastructure necessary to meet the standards of a public company,
including the standards required by the Sarbanes Oxley Act of 2002 ("Sarbanes
Oxley"). Because AIM was not subject to Sarbanes Oxley, its internal and
financial controls reflected its status as a non-public company. AIM did not
have the internal infrastructure necessary to complete an attestation about its
financial controls that would be required under Section 404 of Sarbanes Oxley.
We are now required to comply with portions of Sarbanes Oxley and currently
estimate that the costs of complying with Sarbanes Oxley and other requirements
associated with being a public company will be $750,000 during calendar year
2006, and such cost will likely increase at such time as we are required to
comply with Section 404 of Sarbanes Oxley.
THE ACQUISITION AND RELATED TRANSACTIONS
Michael Gales and Louis Giusto formed Original Gales as a private company
in October 2004 to acquire a company operating in the defense sector. Mr. Gales
had been introduced to AIM in 1996 and initiated discussions about the
possibility of acquiring AIM even prior to the formation of Original Gales. As a
result of these discussions, in July 2005, Original Gales, AIM and the
shareholders of AIM entered into the Purchase Agreement.
While it was negotiating with the shareholders of AIM, Original Gales
determined that it would be more likely to raise the funds necessary to acquire
AIM if Original Gales were a public company or were to be acquired by a public
company. In August 2005, after the execution of the Purchase Agreement and after
it had entered into a letter of intent with GunnAllen Financial, Inc. (sometimes
referred to herein as "GunnAllen"), Original Gales was introduced to James
Brown, then our President. At such time, we had no operating business. Original
Gales proposed that we enter into a transaction whereby we would be acquired by
Original Gales in a "reverse merger." Given that Original Gales had already
entered into the Purchase Agreement with AIM's shareholders and a letter of
intent with GunnAllen, we determined that it was in the interests of our
shareholders to do so, provided that prior to the consummation of the reverse
merger Original Gales received the necessary financing through a private
placement with GunnAllen (as the placement agent) and acquired AIM. To that end,
we entered into negotiations with Original Gales that resulted in the execution
of the Merger Agreement on November 14, 2005. The terms of the Merger Agreement
were the result of arms' length negotiations between our management and the
management of Original Gales and were unanimously approved by our board of
directors. In determining to enter into the Merger Agreement, we sought to
ensure that our shareholders would retain shares valued, in the aggregate, at
approximately $800,000 based upon the price at which Original Gales was offering
its shares in its private placement.
Pursuant to the Merger Agreement, on November 30, 2005, Original Gales
merged into our wholly-owned subsidiary, Merger Sub. Pursuant to the Merger
Agreement, we issued 10,673,107 shares of our common stock (representing 74% of
our outstanding shares as of the date of the Merger) and 900 shares of our
Series A Convertible Preferred Stock convertible into an aggregate of 40,909,500
shares of our Common Stock for all the issued and outstanding shares of Original
Gales. Such shares were the only consideration we paid for Original Gales. Our
15
shareholders prior to the Merger continued to own 3,823,980 shares of our Common
Stock. Based upon a value of approximately $.22 per share (the price at which
the common shares of Original Gales were effectively sold in its private
placement of preferred stock) on an as converted basis, our shares issued in
connection with the Merger were valued at approximately $11,348,174 and the
shares that our shareholders prior to the Merger continued to hold were valued
at approximately $800,000.
Immediately prior to the closing of the Merger, Original Gales acquired
all of the outstanding capital stock of AIM pursuant to the Purchase Agreement.
The aggregate purchase price paid to AIM's four shareholders for 100% of the
capital stock of AIM was: (i) $3,114,296 in cash, (ii) $1,627,262 principal
amount of promissory notes, of which notes in the principal amount of $665,262
are convertible into common stock at a conversion price of $.40 per share and
(iii) 490,060 shares of common stock. In addition, Original Gales paid an
aggregate of $1,053,862 in connection with the Acquisition, which included legal
and accounting expenses ($300,000) incurred by AIM and its shareholders and
$270,403 to enable AIM's shareholders to pay income taxes accrued prior to
closing. The purchase price paid to AIM's shareholders was the result of arms'
length negotiation between Original Gales and the AIM shareholders.
The funds used by Original Gales to acquire AIM were obtained through a $9
million private placement of its preferred stock (the "Private Placement"), the
initial closing of which occurred on November 30, 2005 and the second and last
closing of which occurred on December 15, 2005. In its Private Placement,
Original Gales sold 90 Units, each Unit consisting of 10 shares of convertible
preferred stock, each such share convertible into 45,455 shares of Original
Gales' common stock, without giving effect to shares of common stock which may
be issued upon conversion of shares of preferred stock issuable to investors as
dividends. On an as converted basis, without giving any effect to the shares
which may be issued as dividends, Gales Industries sold its common stock in the
private placement at a price of approximately 22 cents per share. In addition to
the payment of the cash portion of the purchase price for AIM, the proceeds of
Original Gales' Private Placement were used to pay expenses relating to the
Private Placement, the Acquisition of AIM, the Merger with us and related
transactions, and to repay $150,000 in promissory note obligations which
Original Gales incurred in bridge financings, and for working capital. Pursuant
to the Merger each share of convertible preferred stock of Original Gales was
converted into one share of our Series A Convertible Preferred Stock. Each share
of our Series A Preferred Stock is convertible into 45,455 shares of our Common
Stock, or 40,909,500 shares in the aggregate. The price at which the preferred
shares of Original Gales was offered in the Private Placement and the terms of
such shares were determined by negotiation with GunnAllen based, in part, upon
the parties' estimations of the value of AIM and the ability of the management
of Original Gales to execute their business strategy.
Contemporaneously with the Acquisition, AIM completed the acquisition from
affiliates of AIM, for $4,190,000, of a three-building (76,000 square feet),
5.4-acre corporate campus which was being leased by AIM from its affiliates
prior to the Closing Date in Bay Shore, New York. The purchase price for the
real property was determined by arms' length negotiations between Original Gales
and the owners of the real estate and approximated the value thereof as
determined by an independent appraisal obtained by the sellers of the real
estate. In connection with such real estate purchase, AIM entered into a loan
facility with PNC Bank, secured by all of AIM's assets, including the newly
acquired real property. The New Loan Facility provides AIM with up to
$14,000,000 in debt facilities as follows: $9,000,000 in a revolving credit
facility, $3,500,000 in a term loan, and $1,500,000 in new equipment financing.
In addition to paying for the Real Estate Acquisition, the proceeds of the New
Loan Facility were used to pay off debts of AIM to its prior lender and certain
of its shareholders, totaling approximately $5,800,000, and will be used for
working capital. The completion of the Real Estate Acquisition was a condition
to the closing of the Acquisition of AIM.
Currently, the operations of AIM are our only business. As a result of the
Merger, the former stockholders of Original Gales became the controlling
stockholders of our company. Additionally, since we had no substantial assets
16
immediately prior to the Merger, the transaction was treated for accounting
purposes as a reverse acquisition and accounted for as a recapitalization of
Gales rather than a business combination. Consequently, the historical financial
statements of Original Gales are now the historical financial statements of our
Company and the historical stockholders' equity of Original Gales has been
restated to reflect the recapitalization.
GunnAllen Financial, Inc., a Delaware corporation, acted as Placement
Agent ("Placement Agent") in Oringial Gales' private placement of preferred
stock and received: (i) a sales commission equal to 6% and a management fee
equal to 4%, of the aggregate purchase price of the Units sold and (ii) a
non-accountable expense allowance equal to 2% of the aggregate purchase price of
the Units sold. In addition, the Placement Agent received warrants (the
"Placement Agent Warrants"), exercisable at a price of $0.22 per share during a
five-year term, to purchase 4,090,950 shares of Common Stock, which is equal to
10% of the number of shares of Common Stock into which the Preferred Stock sold
in the Offering may be converted.
Prior to our acquisition of Original Gales, we were required by it to
effect a reverse split of our Common Stock (the "Reverse Split"). The Reverse
Split became effective as of November 21, 2005. As a result of the Reverse
Split, the conversion pursuant to the Merger of the outstanding securities of
Original Gales for new shares of our securities was on a one-for-one basis. Any
of our shareholders who, as a result of the Reverse Split, held a fractional
share of Common Stock received a whole share of Common Stock in lieu of such
fractional share. All share numbers set forth in this prospectus, unless
otherwise noted, give effect to the Reverse Split. After giving effect to the
Reverse Split, prior to the acquisition of Original Gales, we had outstanding
approximately 3,823,980 shares of Common Stock and stock options exercisable
into approximately 44,020 shares of our Common Stock. Such 3,823,980 shares
continued to be outstanding after, and were not cancelled or redeemed pursuant
to, the Merger and such 44,020 stock options expired in connection with the
Merger. On a fully-diluted basis, in connection with the Merger and the
Offering, we issued an aggregate of approximately 63,325,352 shares of our
Common Stock (or approximately 94.3% of the outstanding on a fully-diluted
basis), after taking into account the shares underlying the Preferred Stock,
placement agent warrants, stock options and convertible notes which were
previously convertible or exercisable into shares of Original Gales common
stock.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders'
sale of the shares offered under this prospectus.
DETERMINATION OF OFFERING PRICE
We are not selling any of the Common Stock that we are registering. The
Common Stock will be sold by the selling security holders listed in this
prospectus. The selling security holders may sell the Common Stock at the market
price as of the date of sale or a price negotiated in a private sale. Our Common
Stock is traded on the OTC Bulletin Board under the symbol "GLDS". On June 13,
2006 the reported closing price for our Common Stock on the OTC Bulletin Board
was $0.80.
We have agreed to pay certain expenses in connection with the registration
of the securities offered by the selling security holders for resale pursuant to
this prospectus.
17
BUSINESS
Transactions of November 30, 2005
We, then known as Ashlin Development Corporation, and our newly formed
wholly-owned subsidiary (Merger Sub) entered into the Merger Agreement on
November 14, 2005 with Original Gales. Michael Gales and Louis Giusto formed
Original Gales as a private company in October 2004 to acquire a company
operating in the defense sector. On November 30, 2005, Original Gales merged
into Merger Sub. Pursuant to the Merger Agreement, we issued 10,673,107 shares
of our Common Stock (representing 74% of our outstanding shares as of the date
of the Merger) and 900 shares of our Series A Convertible Preferred Stock, which
in the aggregate are convertible into 40,909,500 shares of our Common Stock, for
all the issued and outstanding common shares and preferred shares of Original
Gales. As a result of the transaction, the former stockholders of Original Gales
became the controlling stockholders of our Company. Additionally, since we had
no substantial assets immediately prior to the Merger, the transaction was
treated for accounting purposes as a reverse acquisition and the transaction has
been accounted for as a recapitalization of Original Gales rather than a
business combination. Consequently, the historical financial statements of
Original Gales are now our financial statements.
Immediately prior to the closing of the Merger, Original Gales acquired
all of the outstanding capital stock of AIM, pursuant to the Purchase Agreement
entered into on July 25, 2005. Because of the change in ownership, management
and control that occurred in connection with this acquisition, for financial
reporting purposes it was accounted for as a purchase. Simultaneously with the
acquisition of AIM by Original Gales, AIM entered into the New Loan Facility
with an institutional lender and used a portion of the proceeds from the
facility to acquire the real estate comprising AIM's corporate campus.
As a consequence of the transactions described above, through our
wholly-owned subsidiary, AIM, we manufacture aircraft structural parts and
assemblies principally for prime defense contractors in the aerospace industry
including, Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. Approximately
85% of our revenues are derived from sales of parts and assemblies directed
toward military applications, although direct sales to the military (U.S. and
NATO) constitute less than 8.5% of our revenues. Parts manufactured by us are
installed onboard Sikorky's VH-3D, otherwise known as Marine One, the primary
Presidential helicopter, and onboard Air Force One, Boeing's 747-2000B
customized for use by the President.
On February 15, 2006, we changed our name from Ashlin Development
Corporation to Gales Industries Incorporated and changed our state of
incorporation from Florida to Delaware. Prior to January 25, 2005, we were known
as the Health & Nutrition Systems International, Inc. and we were organized
under that name in the State of Florida in October 1993.
On October 15, 2004, we filed in the Southern District of Florida a plan
of reorganization under Chapter 11 of the United States bankruptcy code. The
Court confirmed our plan of reorganization on January 10, 2005 and it was
declared effective on January 21, 2005. We formally emerged from bankruptcy
protection on April 29, 2005, without any operating business.
Our offices are at 1479 North Clinton Avenue, Bay Shore, New York 11706
and our telephone number is (631) 968-5000.
About AIM
Founded in 1969, AIM manufactures aircraft structural parts and assemblies
principally for prime defense contractors in the defense/aerospace industry
including, Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. Approximately
18
85% of AIM's revenues are derived from sales of parts and assemblies directed
toward military applications, although direct sales to the military (U.S. and
NATO) constitute less than 8.5% of AIM's revenues. The remaining 15% of revenues
represent sales in the airframe manufacturing sector to major aviation
manufacturers such as Boeing. AIM is a provider of flight critical, technically
complex structures: AIM's parts are installed onboard Sikorky's VH-3D, otherwise
known as Marine One, the primary Presidential helicopter, and on Air Force One,
Boeing's 747-2000B customized for use by the President.
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force into electromechanical
devices, mixer assemblies, and rotorhub components for Blackhawk helicopters,
rocket launching systems for the F-22 Raptor Advanced Stealth Fighter, arresting
gear for E2C Hawkeye and other US Navy Fighters, vibration absorbing assemblies
for a variety of Sikorsky helicopters, landing gear components for the F-35
Joint Strike Fighter, and many other subassembly packages. AIM's achievements in
manufacturing quality control have enabled it to receive various international
certifications that distinguish it from less qualified manufacturers, as well as
several highly technical, customer-based proprietary quality approvals,
including supplier of the year awards from notable customers such as United
Technologies and Northrop Grumman.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky accounted for approximately 51% of AIM's
revenues during 2005, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2010.
The parts and subassemblies produced by AIM are built to customer
specifications and are not protected by patents, trademarks or other rights
owned or licensed by AIM. As a result, AIM is not required to procure product
liability insurance for such parts and subassemblies because such insurance is
provided for by the customer. Historically, AIM has spent little or no money on
the development of new proprietary products. AIM did not spend any money on
research and development during 2004 and 2005. In the past AIM has spent capital
to acquire and retool machinery and equipment to enable it to qualify to bid on
contracts to produce parts and subassemblies needed by its customers or, once
such a contract was obtained, to improve its manufacturing efficiencies to
increase its profits from a contractor or ensure that the contract would be
retained as future quantities of the product were required.
Sales and Marketing
Our approach to sales and marketing can be best understood through the
concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. We seek to
position ourselves within the supply chain of these contractors and
manufacturers to be selected for subcontracted projects as they develop.
Successful positioning requires that a company qualify to be a preferred
supplier by achieving and maintaining independent third party quality approval
certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts.
In addition to maintaining our status as a preferred supplier, we work
closely with customers to assure that our investments are concentrated in
production capabilities that are aligned with customer sourcing and
subcontracting strategies. Also, we constantly work to support our customers in
their political, industrial and international initiatives.
Initial contracts are usually obtained through competitive bidding against
other qualified subcontractors, while follow-on contracts are usually obtained
by successfully performing initial contracts. Our long-term business base
generally benefits from barriers to entry resulting from investments,
certifications and manufacturing techniques developed during the initial
manufacturing phase.
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As our business base grows with targeted customers and significant market
share is obtained, we endeavor to develop our relationship to one of a
partnership where initial contracts are also obtained as single source awards
and follow-on pricing is negotiated on a cost plus basis.
The Market
During most of the 1990s, defense spending remained flat or experienced a
slight decline. In the late 1990's and the early years of the new decade, Boeing
experienced some market share loss to Airbus which adversely affected the
domestic aerospace business. The events of 9/11 caused a further deterioration
in the domestic commercial aircraft industry, which had been poised for growth
as a result of the anticipated replacement of aging airframes.
More recently, the United States defense budget is at an all time high and
is currently expected to continue at this level through the Bush Administration
and for the next several years. In addition, the world wide commercial aircraft
industry is experiencing an increase in activity as a consequence of significant
growth in passenger flights and air cargo traffic, and the development of the
Boeing 787 Fuel Efficient Dreamliner. Increased utilization of existing
resources in the commercial aircraft industry should result in demand for our
services. More specific to our business, the war on terrorism has hastened the
need to replace older helicopters in the various state Army and Air National
Guard Units with up to date Blackhawk models as these units have been mobilized
to serve in Afghanistan and Iraq. We are the largest supplier of flight critical
parts for the Sikorsky Blackhawk.
Backlog
We have a number of long-term multi-year agreements with several of our
customers. These agreements specify the part number, specifications and price of
the covered products for a specified period of performance, but do not authorize
immediate shipment. These agreements do not obligate a customer to buy required
product from us. Nevertheless, generally, before a customer will award such an
agreement we or any other supplier must demonstrate the ability to produce
product meeting the customer's specifications at an acceptable price. It is a
time consuming process for a customer to qualify us or any other supplier for a
particular part or subassembly, so most customers tend to limit the number of
contracts awarded and, so long as performance is acceptable, will only seek to
re-bid a contract at lengthy intervals. Customers issue release orders against
these contracts periodically to satisfy their needs. In addition to our long
term agreements, we regularly enter into agreements with customers calling for a
specified quantity of a product at a fixed price on firm delivery dates. Our
reported backlog includes only dollar amounts under long term agreements for
which we have actual release orders with firm delivery dates and fixed
contracts. The backlog information set forth herein does not include the sales
that we expect to generate from long-term agreements associated with long-term
production programs but for which we do not have actual purchase orders with
firm delivery dates.
As of April 10, 2006, our continuing operations had outstanding purchase
orders representing an aggregate invoice price of approximately $39 million.
Competition
The markets for our products are highly competitive. For the most part we
manufacture items to customer design and compete against companies that have
similar manufacturing capabilities in a global marketplace. Consequently, our
ability to obtain contracts is tied to our ability to provide quality products
at competitive prices which requires continuous improvements in our capabilities
to assure competitiveness and value to our customers. Our marketing strategy
involves developing long term ongoing working relationships with customers based
on large multi-year agreements which foster mutually advantageous relationships.
20
Many of our competitors are well-established subcontractors engaged in the
supply of aircraft parts and components to prime military contractors and
commercial aviation manufacturers, including Monitor Aerospace, a division of
Stellex Aerospace, Hydromil, a division of Triumph Aerospace Group, Heroux
Aerospace and Ellanef Manufacturing, a division of Magellan Corporation. Many of
our competitors are divisions of larger companies having significantly larger
infrastructures, greater resources and the capabilities to respond to much
larger contracts.
Raw Materials and Replacement Parts
As a product integrator our manufacturing processes require substantial
purchases of raw materials, hardware and subcontracted details. As a result,
much of our success in meeting customer demand involves effective subcontract
management. Price and availability of many raw materials utilized in the
aerospace industry are subject to volatile global markets. Most suppliers are
unwilling to commit to long-term contracts, which can represent a substantial
risk as our strategy often involves long term fixed pricing with our customers.
We believe that the availability of raw materials to us is adequate to support
our operations.
We have approximately 14 key sole-source suppliers of various parts that
are important for one or more of our products. These suppliers are our only
source for such parts and, therefore, in the event any of them were to go out of
business or be unable to provide us parts for any reason, our business could be
materially adversely affected.
Future Expansion and Acquisition Strategy
Since the 1990's, the aerospace and defense industry has undergone a
radical restructuring and consolidation. The largest prime contractors have
merged, resulting in fewer, but larger, entities. A prime example is Boeing,
which acquired McDonnell Douglas. Others include Lockheed Martin, the result of
Lockheed's acquisition of Martin Marietta, and the aerospace divisions of
General Dynamics and Northrop Grumman, which fused together Northrop, Grumman,
Westinghouse and Litton Industries into one entity.
This trend has permeated through the industry eliminating many companies
as the prime contractors streamlined their supply chains. To survive, companies
must invest in systems and infrastructures that align their capabilities with
the needs of the prime contractors. At a minimum, Tier III and IV suppliers must
be fully capable to interactively work within a computer aided three dimensional
automated engineering environment and must have third party quality system
certifications attesting to their abilities.
The industry's drive to efficiency will create enhanced pressures on many
aerospace/defense critical component manufacturers, particularly those with
$15-$100 million in annual sales, referred to herein as the "Tier III/IV
Manufacturing Sector", and these manufacturers will have to either upgrade their
systems to achieve quality approvals or leave the industry.
In response to this drive towards greater operating and economic
efficiency, our objective is to achieve a leading role in the consolidation of
the Tier III and IV Manufacturing Sectors. In this regard, our core strategy
will be to selectively acquire synergistic manufacturers of "lynch platforms can
be established. We believe that numerous acquisition opportunities of such kind
exist, particularly given the evolutionary stage of a number of existing
businesses in the sector, the age of many of the owner-principals and their
perceived and stated desire to facilitate a liquidity event for their investment
in the near term. Furthermore, we believe that by executing a well-defined
consolidation strategy in the Tier III and IV Manufacturing Sectors, we will be
able to achieve significant cost savings, operational efficiencies and overall
economic synergies. AIM was our initial strategic acquisition and will serve as
our operating platform for subsequent acquisitions and organic growth.
21
The Company will focus on acquiring profitable, privately held entities or
divisions of larger entities with annual sales between $15 and $100 million in
the aerospace and defense-related fields. The Company will initially seek
enterprises whose products are synergistic and complementary to AIM's current
product line and which can benefit from the Company's existing engineering
talents and manufacturing capabilities. The Company will look for candidates
whose products are components of larger mission critical systems and which can
be upgraded from simple parts to complex, higher-margin component system
subassemblies through the use of AIM's engineering talents. The Company intends
to focus on entities with reputations for high quality standards whose
management can be absorbed into the Company. When possible, the Company will
seek to combine existing operations to absorb excess capacity and eliminate
duplicative facilities. It is contemplated that future acquisitions will be
facilitated by using either the Company's stock, cash or debt financing, or some
combination thereof. Given our limited available cash, it is likely that we will
have to rely upon seller financing or debt financing provided by third parties
to complete acquisitions for the foreseeable future. There can be no assurance
that such financing will be made available to us and without such forms of
financing we may be unable to successfully complete any acquisitions. Further,
our need to rely upon such sources of financing may make it difficult for us to
complete any transaction in competition with larger better capitalized
competitors.
The Company also intends to expand its operations through internal growth.
The Company will seek to attract new customers through proactive industry
marketing efforts including direct sales programs, participation at trade shows,
technical society meetings and similar activities. Additionally, the Company
will seek to capitalize on its engineering capabilities by partnering with other
lower cost manufacturers which can benefit from the Company's expertise.
Government Regulation
Environmental Regulation
We are subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on us. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA) imposes strict, joint and several liability on the present and
former owners and operators of facilities that release hazardous substances into
the environment. The Resource Conservation and Recovery Act of 1976 (RCRA)
regulates the generation, transportation, treatment, storage and disposal of
hazardous waste. In New York, the handling, storage and disposal of hazardous
substances are governed by the Environmental Conservation Law, which contains
the New York counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment
that is free from recognized and preventable hazards that are likely to cause
serious physical harm to employees, obligates employers to provide notice to
employees regarding the presence of hazardous chemicals and to train employees
in the use of such substances.
Federal Aviation Administration Regulation
22
We are subject to regulation by the Federal Aviation Administration (FAA)
under the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components. We are subject to inspections by the FAA and may be subjected to
fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations ("FAR"). Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed thereto. These audits may result in adjustments to our
contract costs. Additionally, we may be subject to U.S. government inquiries and
investigations because of our participation in government procurement. Any
inquiry or investigation can result in fines or limitations on our ability to
continue to bid for government contracts and fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
Litigation
A legal action seeking $5,000,000 has been brought against AIM by an
independent contractor for personal injury allegedly caused by a fall in AIM's
premises. AIM has insurance coverage for this claim in the amount of $4,000,000.
The carrier has assumed the defense of this action and at a settlement
mediation, the plaintiff made a demand of $2,000,000, which was rejected by the
carrier. The Company believes that any judgment or settlement in this matter
will be paid by the carrier.
We were involved in litigation with J.C. Herbert Bryant, III, a former
officer, director and shareholder of our Company, and KMS-Thin Tab 100, Inc.,
which was settled in September 2002. As part of the settlement, we entered into
a distribution agreement with Mr. Bryant, beginning on September 26, 2002 and
ending on September 25, 2007, permitting Mr. Bryant to purchase certain products
from us and to exclusively distribute those products in Florida from Orlando
south. In October 2003, we terminated the distribution agreement with KMS based
on KMS's breach of material terms of the agreement. On December 1, 2003, we
filed suit against KMS-Thin Tab 100, Inc. in the Palm Beach County Circuit Court
(Case No. 2003CA012757XXCDAN) for breach of contract, trademark infringement and
for a declaration of rights that the distribution agreement is terminated and of
no further force and effect. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should
prevail, and rejected a request for attorney's fees by KMS-Thin Tab 100 Inc.,
thus adjudicating the matter. KMS-Thin Tab 100 Inc. subsequently filed a notice
of appeal.
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted
our motion to dismiss the appeal by KMS-Thin Tab 100 Inc.
Employees
AIM employs approximately 160 principally union employees and maintains
what it believes are, and what historically have been, good relationships with
23
its union. AIM is a party to two collective bargaining agreements with the
United Services Workers, IUJAT, Local 355 (the "Union"). One is dated September
1, 2004, and covers all of AIM's full time employees (the "2004 Collective
Bargaining Agreement") and the other is dated January 1, 2005, and covers all of
AIM's administrative employees (the "2005 Collective Bargaining Agreement",
together with the 2004 Collective Bargaining Agreement, the "Collective
Bargaining Agreements"). The terms and provisions of each of the Collective
Bargaining Agreements are substantially the same. Each of the Collective
Bargaining Agreements terminates on December 31, 2007; however, the 2005
Collective Bargaining Agreement automatically renews from year to year
thereafter unless written notice is given by either party not less than sixty
(60) days prior to the termination date of its intention to terminate or modify
the 2005 Collective Bargaining Agreement. AIM is required to make a monthly
contribution to each of the Union's United Welfare Fund and the United Service
Worker's Security Fund. Each of the Collective Bargaining Agreements contains a
"no strike" clause, whereby, during the terms of each of the Collective
Bargaining Agreements, the Union will not strike and AIM will not lockout its
employees. Employees of AIM covered by the 2004 Collective Bargaining Agreement
have a sixty (60) day probationary period where they can be discharged by AIM
for any reason whatsoever; however, employees of AIM covered by the 2005
Collective Bargaining Agreement have a thirty (30) day probationary period. Any
discharge that occurs after the expiration of the probationary period may be
challenged by the Union through the grievance procedure set forth in the
Collective Bargaining Agreements.
Real Property
Our headquarters are situated on a 5.4-acre corporate campus in Bay Shore,
New York. On such campus, we occupy three buildings consisting of 76,000 square
feet. Prior to November 30, 2005, AIM leased such real property. Simultaneously
with the closing of the Acquisition and the Merger, AIM purchased such property.
As a consequence of such purchase, AIM is no longer required to pay rent for the
use of such property.
From January 2005 to November 30, 2005, Ashlin's corporate office was
located at 4400 North Federal Highway, Suite 210, Boca Raton, Florida 33431. The
lease for this property expired on March 31, 2006 and provided for a monthly
rent of approximately $950. As a result of the Merger, our headquarters have
been relocated to AIM's corporate campus in Bay Shore, New York.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Prior to the acquisition of AIM, Original Gales had no operating assets.
Because of the change in ownership, management and control that occurred in
connection with the Acquisition of AIM, for financial reporting purposes the
Acquisition was accounted for as a purchase by Original Gales. Accordingly, the
purchase price was allocated among AIM's assets and liabilities based upon their
fair values as of the completion of the Acquisition. Because the purchase price,
net of the liabilities assumed, exceeded the fair value of the assets acquired,
Original Gales recorded goodwill of $1,265,963. Because the real estate
acquisition was completed subsequent to the Acquisition of AIM, the shareholders
24
of the entities which owned the real estate were not affiliates of AIM as of the
time the real estate acquisition was completed. Therefore, the acquisition of
the real estate was treated as a purchase by AIM and the purchase price and
related acquisition costs, which approximated the fair market value of the
property, were reflected on Original Gales' financial statements (which now form
the basis of our financial statements) as the basis of the real estate.
In the first table presented below, we have set forth our unaudited
results of operations for the quarter ended March 31, 2006. As a basis for
comparison, we have set forth below the unaudited pro forma results of AIM's
operations for the quarter ended March 31, 2005. Such pro forma results reflect
the operations of AIM after giving effect to the Merger, the Acquisition and the
Real Estate Acquisition as if they occurred on January 1, 2005. See Note 4 to
our Condensed Consolidated Financial Statements for the quarter ended March 31,
2006.
In the second table presented below, the financial statements for the year
ended December 31, 2005 are those of Original Gales, inclusive of the activity
of AIM from November 30, 2005. The Management's Discussion and Analysis below
includes the combined results of operations of Original Gales and AIM
(unaudited) for the 2005 year as if these entities were combined for that
period. To provide a basis for comparison, there are also included below
historical financial information of AIM for the 11 months ended November 30,
2005, and the years ended December 31, 2004 and 2003. AIM is currently our only
operating business. AIM historically operated as a private company. There can be
no assurance that our future operating results will be comparable to those
achieved by AIM in the past and the financial statements of AIM set forth in
this prospectus are not indicative of our future results of operations. It
should also be noted that prior to the Acquisition, AIM operated as a Subchapter
S company and incurred no income taxes. For purposes of the following
discussion, we have assumed that AIM incurred income taxes during years 2003,
2004 and 2005 at an effective rate of 40.02%.
Overview
AIM manufactures aircraft structural parts and assemblies principally for
prime defense contractors in the defense/aerospace industry. Approximately 85%
of AIM's revenues are derived from sales of parts and assemblies directed toward
military applications, although direct sales to the military (U.S. and NATO)
constitute less than 8.5% of AIM's revenues. The remaining 15% of revenues
represent sales in the airframe manufacturing sector to major aviation
manufacturers.
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force into electromechanical
devices, mixer assemblies, rotorhub components, rocket launching systems,
arresting gear, vibration absorbing assemblies, landing gear components and many
other subassembly packages.
Sales of parts and services to one customer account for the majority of
AIM's revenue, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2010.
The, following discussion and analysis should be read in conjunction with
the financial statements and notes, included with this report.
Results of Operations
The following tables set forth, for the periods indicated, certain
components of our statements of operations:
25
- --------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005 (pro
(unaudited) forma) (1)
- --------------------------------------------------------------------------------
Net Sales $8,898,272 $6,265,206
Cost of Sales 7,385,566 5,278,591
Gross Profit 1,512,706 986,615
Selling and Marketing Expenses 155,702 69,919
G&A Expense 849,383 365,855
Interest and financing costs 325,050 205,279
Gain on sale of life insurance policy 53,047
Income before Provision for
Income Taxes 235,618 345,562
Provision for Income Taxes(2) 99,253 138,294
Net Income 136,365 207,268
Less Dividend Attributable to
Preferred Stock 180,000 180,000
Net Income (Loss) Attributable to
Common Stock (43,635) 27,268
- --------------------------------------------------------------------------------
1) The information for March 31, 2005, reflects the historical operations of
AIM after giving effect to the Merger, the Acquisition and the Real Estate
Acquisition as if they occurred on January 1, 2005.
2) Prior to November 30, 2005, AIM elected to be treated under Subchapter "S"
of the Internal Revenue Code and incurred no income taxes. For purposes of
presentation, taxes were calculated using an effective 40.02% tax rate in
accordance with FAS 109.
26
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2005(1)(3) December 31, 2004(2)(3) December 31, 2003(2)(3)
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales $30,735,103 $24,818,333 $22,334,926
Cost of Sales 26,426,553 21,400,878 19,531,292
Gross Profit 4,308,550 3,417,455 2,803,604
Selling Expenses 357,854 321,727 309,479
G&A Expense 2,440,194 1,356,809 1,249,184
Interest Expense 783,894 514,274 444,756
Minority Interest 74,904 131,552 83,363
Income before Provision for taxes 651,704 1,092,893 716,852
Pro-Forma Provision for Taxes 260,812 437,376 286,884
Pro-Forma Net Income 390,892 655,517 429,968
- -------------------------------------------------------------------------------------------------------------------------------
1) The information for December 31, 2005, combines the operating results of
Original Gales and AIM, operating as a Subchapter S corporation for the
period January 1, 2005 through November 30, 2005.
2) The information for December 31, 2004 and 2003 are from the audited
operating statements of AIM.
3) Prior to November 30, 2005, AIM elected to be treated under Subchapter "S"
of the Internal Revenue Code and incurred no income taxes. For purposes of
the above presentation, taxes were calculated using an effective 40.02%
tax rate in accordance with FAS 109. The information above does not give
pro-forma effect to the acquisition of AIM. Unaudited pro-forma financial
statements giving effect to the acquisition of AIM are included in Note 14
to the financial statements.
Three months ended March 31, 2006 compared with three months ended March
31, 2005
Net Sales. Net sales were $8,898,272 for the three months ended March 31,
2006 ("First Quarter 2006"), an increase of $2,633,066 (42.0%) from net sales of
$6,265,206 for the three months ended March 31, 2005 ("First Quarter 2005"). The
increase in net sales was attributable to increased shipments of parts and
related defense components to one customer which caused the portion of our
revenues derived from such customer to increase from approximately 50% in 2005
to approximately 69% in the First Quarter 2006.
Gross Profit. Gross profit was $1,512,706 in First Quarter 2006 (17.0% of
net sales), compared to gross profit of $986,615 in First Quarter 2005 (15.7% of
net sales). The increase in gross profit primarily reflects the increase in net
sales. The increase in gross profit as a percentage of net sales represents a
slight increase in the sales of higher margin products, as well as the
elimination of rent paid on the Company's facilities as a result of the Real
Estate Acquisition, partially offset by the mortgage interest and depreciation
of the Company's facilities allocated to sales, and reduction of payroll taxes
and related benefits as a result of the reallocation of the costs of certain
executives.
Selling and Marketing Expenses. Selling and marketing expenses were
$155,702 in First Quarter 2006, an increase of $122.7% from selling and
marketing expenses of $69,919 in First Quarter 2005. The increase in selling and
marketing expenses reflects the up-front recognition of costs related to leased
automobiles for the Company's executives and increased travel and entertainment
expenses related to increased sales activity.
27
General and Administrative Expenses. General and administrative expenses
were $849,383 in First Quarter 2006, an increase of $483,528 (132.2%) from
general and administrative expenses of $365,855 in First Quarter 2005. The
increase reflects (i) higher depreciation relating to the increase in basis of
the Company's real property under purchase accounting and mortgage interest
charges resulting from the Real Estate Acquisition, partially offset by the
elimination of rent expense, and (ii) higher salaries as a result of the
reallocation of the costs of certain executives.
Interest and Financing Costs. Interest and financing costs were $325,050
in First Quarter 2006, an increase of $119,771 (58.3%) from interest and
financing costs of $205,279 in First Quarter 2005. The increase in interest and
financing costs resulted from higher interest rates, interest accruing on the
promissory notes issued to the former shareholders of AIM in connection with the
AIM Acquisition, interest accruing on the new term loan and the larger revolving
credit facility.
Gain on the Sale of Life Insurance Policy. Gain on the sale of life
insurance policy was $53,047 in First Quarter 2006 and was a one-time gain.
Income before Income Taxes. Income before provision for income taxes was
$235,618 in First Quarter 2006 and $345,562 in First Quarter 2005. Provision for
income taxes was $99,253 for First Quarter 2006 and $138,294 for First Quarter
2005, based on an effective tax rate of 40.02% for 2005.
Net Income. Net income decreased from $207,268 in First Quarter 2005 to
$136,365 in First Quarter 2006. The decrease in net income reflects the fact
that the Company's higher gross profit was more than offset by an increase in
interest and financing costs from First Quarter 2005 to First Quarter 2006, as
well as increases in general and administrative and selling and marketing
expenses.
Net Loss Attributable to Common Stock. Because the dividend payable on the
Company's preferred stock for the First Quarter 2006 exceeded the Company's net
income during such period. There was a Net Loss Attributable to Common Stock of
$43,635 as compared to Net Income Attributable to Common Stock, on a pro forma
basis, of $27,268 for the First Quarter 2005.
Year ended December 31, 2005 compared to year ended December 31, 2004
Net Sales. Net sales were $30,735,103 in the year ended December 31, 2005
("Fiscal 2005") an increase of $5,916,770 (23.8%) from net sales of $24,818,333
in Fiscal 2004. The increase in net sales was attributable to continued
significant growth in sales in the military aerospace sector resulting from
increased military activity, together with price increases that took effect in
late 2005 under a number of our long term agreements with a significant
customer.
Gross Profit. Gross profit was $4,308,550 in Fiscal 2005 (14.0% of net
sales), compared to gross profit of $3,417,455 in Fiscal 2004 (13.8% of net
sales). The increase in gross profit reflects the increase in revenues. The
increase in gross profits as a percentage of sales represents a continuation of
the shift in production to higher margin military products.
Selling Expenses. Selling expenses were $357,854 in Fiscal 2005, an
increase of $36,127(11.2%) from selling expenses of $321,727 in Fiscal 2004. The
increase in selling expenses reflects an increase in shipping supplies,
transportation expenses and depreciation of transportation equipment partially
offset by decreases in field engineering expenses and out bound freight
expenses.
General and Administrative Expenses. General and administrative expenses
were $2,440,194 in Fiscal 2005, an increase of $1,083,385 (79.8%) from general
and administrative expenses of $1,356,809 in Fiscal 2004. The increase was
primarily due to an increase in officers' salaries, an increase in office
personnel to support the increased sales, an increase in professional fees
28
attributable to legal, accounting and audit fees as well as consulting costs
incurred in connection with modifications to AIM's information technology
network. In addition, Fiscal 2005 reflects non-cash compensation resulting from
the inclusion of expenses calculated pursuant to FAS 123R dealing with the
post-Merger Company's stock option plan. In addition, a provision for bad debt
was booked based upon management's assessment of the collectibility of
outstanding receivables.
Interest Expense. Interest expense was $783,894 in Fiscal 2005 an increase
of $245,078 (47.7%) from interest expense of $514,474 in Fiscal 2004. The
increase in interest expense resulted from an increase in borrowing rates as
well as additional interest expense as a result of the financing of the
Acquisition of AIM and purchase of the real estate.
Minority Interest. Minority interest represents the income attributable to
AIM's real estate realized by the affiliates of AIM that owned the real estate
prior to its acquisition by AIM in 2005. Minority interest income was $74,904 in
Fiscal 2005 a decrease $56,648 from $131,552 in Fiscal 2004. The decrease
reflects the elimination of the interest of AIM's affiliates as a result of the
acquisition of the real estate by AIM on November 30, 2005.
Income before provision for income taxes was $651,704 in Fiscal 2005 a
decrease of $441,189 (40.4%) from income before taxes of $1,092,893 in Fiscal
2004. The income before taxes in 2005 combines the income earned by AIM during
the eleven month period ended November 30, 2005 of $1,401,408, with a $749,704
loss incurred during December 2005. The loss resulted primarily from the impact
on AIM's business of the Acquisition, together with expenses relating to the
Company as a new public entity.
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Sales. Net sales were $24,818,333 in the year ended December 31, 2004
("Fiscal 2004") an increase of $2,483,407 (11.1%) from net sales of $22,334,926
in the year ended December 31, 2003 ("Fiscal 2003"). The increase in net sales
was attributable to significant growth in sales in the military aerospace sector
resulting from increased military activity, partially offset by a decrease in
sales to the commercial sector as a result of a shift by certain customers to
overseas suppliers and the expiration of multi-year contracts to support
machined components and assemblies on a number of Boeing's aircraft.
Gross Profit. Gross profit was $3,417,455 in Fiscal 2004 (13.8% of net
sales), compared to gross profit of $2,803,634 in Fiscal 2003 (12.6% of net
sales). The increase in gross profit reflects the increase in revenues. The
increase in gross profits as a percentage of sales represents a shift in
production to higher margin military products.
Selling Expenses. Selling expenses were $321,727 in Fiscal 2004 an
increase of $12,248(4%) from selling expenses of $309,479 in Fiscal 2003. The
increase in selling expenses reflects an increase in freight expenses,
transportation expenses and depreciation of transportation equipment.
General and Administrative Expenses. General and administrative expenses
were $1,356,809 in Fiscal 2004, an increase of $107,625 (8.62%) from general and
administrative expenses of $1,249,184 in Fiscal 2003. The increase was primarily
due to an increase in officers' salaries, an increase in office personnel as a
result of the increased sales, an increase in professional fees attributable
primarily to legal costs related to shareholder matters, and consulting costs
incurred in connection with modifications to AIM's IT network.
Interest Expense. Interest expense was $514,474 in Fiscal 2004 an increase
of $69,718 (15.68%) from interest expense of $444,756 in Fiscal 2003. The
increase in interest expense resulted primarily from an increase in AIM's
borrowings and increases in amounts due to AIM's shareholders, principal
commercial lender and under capital lease obligations more than offset decreases
in the mortgages on AIM's real estate and long term capital lease obligations.
29
Minority Interest. Minority interest income was $131,552 in Fiscal 2004 an
increase of $48,189 (57.8%) from $83,363 in Fiscal 2003. The increase in
minority interest income reflects the impact of the acquisition of portions of
the real estate by AIM's affiliates in the fourth quarter of Fiscal 2003.
Income before minority interest in net income was $1,224,445 in Fiscal
2004 an increase of $424,230 (53.0%) from $800,215 in Fiscal 2003.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Financial Liquidity and Capital Resources
At March 31, 2006, we had cash and cash equivalents of $877,812 and
working capital of $4,072,651 as compared to $1,058,416 and $4,113,235 as of
December 31, 2005. We believe that our cash requirements in the next twelve
months will be met by our revenues from operations, our cash reserves, and the
amounts available under the New Loan Facility put in place in connection with
the acquisition of AIM.
AIM financed its operations and investments up to November 30, 2005
principally through revenues from operations. As a private company, AIM did not
have many of the expenses which we will have as a public company. In connection
with the transaction that occurred on November 30, 2005, we have undertaken
various significant commitments, including our obligations under the New Loan
Facility, and will have significant cash requirements relating to the
preparation of financial statements, our compliance with the Exchange Act
requirements, the registration of shares under the Securities Act, and other
requirements applicable to public companies. We expect such increased cash
requirements to be approximately $750,000 in 2006, subject to a substantial
increase if we become obligated to comply with Section 404 of Sarbanes-Oxley.
The expenses associated with the obligations undertaken in connection with the
transactions that occurred on November 30, 2005, and the costs of being a public
company, may exceed the profits that AIM might have generated in the absence of
such expenses. In such event, the results of our operations will not match those
historically experienced by AIM.
In connection with the Acquisition of AIM, we incurred notes payable
obligations in the aggregate principal amount of $1,627,262, of which $665,262
are in the form of convertible promissory notes which we may convert into shares
of Common Stock at $.40 per share upon effectiveness of the Registration
Statement on Form SB-2 which we have filed under the Securities Act. The
remaining $962,000 principal amount of note is repayable by us in 20 equal
quarterly installments of $48,100 principal plus interest. The holder of a
convertible bridge note in the principal amount of $22,500 has converted such
note into shares of our Common Stock.
As of November 30, 2005, under the New Loan Facility, we incurred
approximately $5,943,000 in debt under the revolving credit facility and
$3,500,000 under a term loan. Under the New Loan Facility, as of March 31, 2006,
we had revolving loan balances of $5,942,661 and $160,959, a term loan balance
of $3,468,333 and an equipment loan balance of $411,200. We have a $1.5 million
equipment line of credit available under the New Loan Facility. The revolving
credit facility requires us to pay interest monthly on the outstanding principal
amount. This monthly interest payment amount fluctuates because the outstanding
principal amount and interest rate under the revolving credit facility varies
from month to month. The term loan requires us to make 47 equal monthly payments
of $31,667 plus interest with the balance due at the time of the 48th payment.
We believe that all of the applicable interest rates under the New Loan Facility
are consistent with prevailing interest rates in the lending industry.
All of the proceeds of the term loan and approximately $850,316 of the
borrowings under the revolving credit facility were used to complete the Real
Estate Acquisition. In addition, proceeds from the New Loan Facility were used
to pay off AIM's debt to its prior lender and will be used for working capital
for AIM's business.
30
As of March 31, 2006, we had capital lease obligations totaling
$1,090,628.
On November 30, 2005, we completed (through Original Gales) the first
closing of the Offering to accredited investors for gross proceeds of
$6,793,280. Commissions, management fees and non-accountable expense allowance
which Original Gales paid to the placement agent in such first closing amounted
to an aggregate of $815,194. The proceeds of the first closing of the Offering,
in general, were and will be used for paying the cash portion of the purchase
price for the Acquisition of AIM, for the repayment of $150,000 in note
obligations which Original Gales incurred in bridge financings, for payment of
certain real estate taxes and accrued rent on AIM's real property, for expenses
of the Offering, Acquisition, Merger and related transactions, for satisfaction
of certain loans from the shareholders of AIM to AIM, and for working capital
for us and AIM. We received $2,206,720 in additional gross proceeds from the
second closing of the Offering on December 15, 2005.
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. However, if a registration statement for the resale of the Common
Stock underlying the Preferred Stock is not declared effective by June 15, 2006,
the dividend on the Preferred Stock will be due in cash from the date of such
default until the default is cured.
Prior to the Acquisition, AIM was a Subchapter S corporation and
periodically made distributions to its shareholders. AIM distributed to its
shareholders $1,175,279 during the eleven months ended November 30, 2005 and
$561,557 during the year ended December 31, 2004. These distributions were made
from time to time to AIM's shareholders in proportion to their ownership
interests in AIM at such times as AIM had sufficient cash on hand or
availability under its lines of credit. Such distributions were in amounts
sufficient to allow the shareholders of AIM to pay the taxes owed on their
proportionate share of AIM's income from the fiscal year immediately preceding
such distributions and, in the case of certain distributions, to allow two of
AIM's shareholders to pay the purchase price owed to a former shareholder of AIM
who sold all of his shares of AIM to such two shareholders. The Company does not
anticipate paying dividends to its shareholders for the foreseeable future.
We expect that cash flows from operations and our cash reserves will be
sufficient to pay our obligations for the next twelve months as they arise.
Further, we may be able to borrow additional funds under our revolving credit
facility provided that we have sufficient inventory, receivables and equipment
and machinery. However, we may require additional working capital and additional
financing to expand our business and make acquisitions. In the event we are not
able to increase working capital and obtain additional financing, we may not be
able to expand our business or make acquisitions.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our financial results.
Inventory Valuation
We value inventory at the lower of cost or market on a first-in-first-out
basis.
31
We purchase inventory only when we have signed non-cancellable contracts
with our customers for orders of finished goods. We occasionally produce
finished goods in excess of purchase order quantities in anticipation of future
purchase order demands but historically this excess has been used in fulfilling
future purchase orders. We occasionally evaluate inventory items that are not
secured by a purchase order and reserve for obsolescence accordingly. We also
reserve an allowance for excess quantities, slow-moving goods, and obsolete
items.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." We generally recognize revenue when products are shipped
and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. Payments received in advance from
customers for products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
Income Taxes
Income taxes are calculated using an asset and liability approach as
Prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or all of the deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123 (R)). SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized as compensation expense based on their fair
value. Effective December 31, 2005, we adopted, earlier than required, the fair
value recognition provisions of SFAS No. 123(R).
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. The Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets and accordingly do not amortize
goodwill but test it for impairment. Impairment testing for goodwill will be
performed annually, unless indicators of impairment exist, using a two-step
approach. Step one compares the fair value of the net assets (calculated using a
discounted cash flow method) to its carrying value, a second step is performed
to compute the amount of the impairment. In this process, a fair value for
goodwill is estimated, based in part on the fair value of the operations, and is
compared to its carrying value. The shortfall of the fair value below carrying
value represents the amount of goodwill impairment.
Quantitative and Qualitative Disclosure about Market Risk
Our primary exposure to market risk consists of changes in interest rates on
borrowings under the New Loan Facility. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rate fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the New Loan Facility, we do not have debts or hold
instruments that are sensitive to changes in interest rates, foreign currency
exchange rates or commodity prices.
32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS AND RELATED SHAREHOLDER MATTERS
The following table sets forth information known to us regarding
beneficial ownership of our Common Stock as of June 13, 2006 by (i) each person
known by us to own beneficially more than 5% of the outstanding Common Stock,
(ii) each of our directors and executive officers, (iii) any other "Named
Executive Officer" identified in the Executive Compensation section, below, and
(iv) all of our officers and directors as a group. Except as otherwise
indicated, we believe, based on information provided by each of the individuals
named in the table below, that such individuals have sole investment and voting
power with respect to such shares, subject to community property laws, where
applicable. The address of each executive officer and director is c/o the
Company, 1479 North Clinton Avenue, Bay Shore, NY 11706. The address of ACS
Holdings, LLC is 135 East 57th Street, New York, New York, 10022.
Percentage of
Name Number of Shares Shares Outstanding
- ---- ---------------- ------------------
Michael A. Gales 4,326,219(1) 28.9%
Louis A. Giusto 3,644,538(2) 24.4%
Peter Rettaliata 1,100,000(3) 7.0%
Dario Peragallo 1,100,000(4) 7.0%
Seymour G. Siegel 100,000 *
Rounsevelle W. Schaum 100,000 *
Ira A. Hunt, Jr. 100,000 *
Stephen Nagler 145,455(5) 1.0%
James A. Brown 676,268 4.6%
Luis Peragallo 253,214 1.7%
Jorge Peragallo 0 *
ACS Holdings, LLC 876,705(6) 6.0%
All Directors and
Officers as a group, 9 persons (1)(2)(3)(4)(5) 65.6%
- ----------
* Less than 1%
(1) Includes 250,000 shares of Common Stock underlying the vested portion
of the 1,250,000 options granted (and reserved for grant) to Mr. Gales pursuant
to his Employment Agreement. For a more complete description of the terms of
such options, see note 1 to the table "Executive Compensation - Option Grants in
Last Fiscal Year", below.
(2) Includes 240,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted (and reserved for grant) to Mr. Giusto pursuant
to his Employment Agreement. For a more complete description of the terms of
such options, see note 2 to table "Executive Compensation - Option Grants in
Last Fiscal Year", below.
(3) Includes 150,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted (and reserved for grant) to Mr. Rettaliata
pursuant to his Employment Agreement. For a more complete description of the
terms of such options, see note 3 to table "Executive Compensation - Option
Grants in Last Fiscal Year", below. Includes 831,577 shares of Common Stock
issuable upon conversion of the $332,631 principal amount convertible note
issued to Mr. Rettaliata in connection with the Acquisition.
33
(4) Includes 150,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted (and reserved for grant) to Mr. Peragallo
pursuant to his Employment Agreement. For a more complete description of the
terms of such options, see note 3 to table "Executive Compensation - Option
Grants in Last Fiscal Year", below. Includes 831,577 shares of Common Stock
issuable upon conversion of the $332,631 principal amount convertible note
issued to Mr. Peragallo in connection with the Acquisition. Does not include
253,214 shares of Common Stock issued to Luis Peragallo pursuant to the terms of
the Acquisition. Luis Peragallo is the father of Dario Peragallo.
(5) Includes 45,455 shares of Common Stock issuable upon exercise of
warrants held by Mr. Nagler. Does not include 150,000 shares of Common Stock
held by Eaton & Van Winkle LLP, a law firm of which Mr. Nagler is a partner.
(6) ACS Holdings, LLC is an affiliate of Atlas Capital Services, LLC which
had the right to receive 1,477,230 shares of Common Stock as of the Closing Date
and instructed us to issue such shares to its designees, including the 876,705
shares to ACS Holdings, LLC. In addition, Atlas Private Equity, LLC, an
affiliate of Atlas Capital Services, LLC, is the holder of 226,334 shares of
Common Stock, and is also the holder of warrants to purchase 409,091 shares of
Common Stock at the exercise price of $.055 per share. The address of ACS
Holdings, LLC is 135 East 57th Street, New York, New York 10022. Michael D.
Farkas is the controlling person and chief executive of ACS Holdings, LLC. He is
also the controlling person of Atlas Private Equity, LLC. The controlling person
of Atlas Capital Services, LLC is Steven Pollan, who is its chief executive. All
three of the companies discussed in this Note 6 are owned directly or indirectly
by The Atlas Group of Companies, LLC.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
The following table sets forth information with respect to our directors
and executive officers.
Name of Individual Age Position with the Company
- ----------------------------- ------ -----------------------------------------
Michael A. Gales 60 Executive Chairman of the Board
Louis A. Giusto 63 Vice Chairman, Chief Financial Officer
and Treasurer
Peter D. Rettaliata 55 Director, Chief Executive Officer and
President
Dario A. Peragallo 41 Director and Executive Vice President,
Manufacturing
Stephen M. Nagler 67 Director and Secretary
Seymour G. Siegel 63 Director
Rounsevelle W. Schaum 72 Director
M.Gen. Ira A. Hunt, Jr. 80 Director
(USA, Ret.)
James A. Brown 53 Director
The business experience of each of our directors and executive officers is
set forth below. Each of our directors and executive officers, except Mr. James
A. Brown, began their service with our Company as of November 30, 2005. The term
of each of our directors is for one year or until such time as his successor is
duly elected and qualified.
34
Mr. Gales has been our Executive Chairman of the Board since November 30,
2005. He is the Chairman of the Executive and Management Committee of the Board.
He has thirty-two years experience in Corporate Finance, Mergers & Acquisitions
and corporate management of both publicly and privately held middle market
companies. Since 1992, Mr. Gales has been Chairman and President of Gales &
Company, a Wall Street M&A Advisory and Principal firm. From March 2003 to
present, Mr. Gales has concentrated his efforts on the formation of Original
Gales, the Acquisition, and the development of Original Gales' business
strategy, including the future expansion of the business of AIM. From September
2001 to March 2003, Mr. Gales concentrated on the operation of Gales & Company.
From 1997 to 2001, Mr. Gales served as the Managing Director of Corporate
Finance and Executive Vice President of Corporate Finance for Janssen-Meyers
Associates, LP and Andrew, Alexander, Wise & Company, Inc., respectively. Prior
to 1997, Mr. Gales served in senior management and executive roles principally
focused in heavy industries, including tenure as Principal, Co-Founder and
President of American United Corporation, an international maritime engineering
and technical systems group, and as President and Chief Operating Officer of
Aquaglobal, Inc., a manufacturer and marketer of desalination systems serving
customers such as Exxon, Shell, Mobil, Gulf and the U.S. Navy. Mr. Gales was the
founding Chairman and CEO of AquaSciences International, Inc., a publicly traded
organization engaged in the design and manufacture of water purification
systems, and the founding Chairman of lntersearch Group, Inc., a publicly traded
international HR consulting firm. In addition Mr. Gales has served as a Director
of ProtoSource Corporation, a publicly traded internet service provider. Mr.
Gales attended Oklahoma University and has been a member of various professional
associations including the Royal Institute of Marine Engineers (London), Society
of Naval Architects & Marine Engineers, Society of Piping Engineers & Designers,
The Investment Company Institute and the President's Association of the American
Management Association.
Mr. Giusto, our Vice Chairman, Chief Financial Officer and Treasurer since
November 30, 2005, has over 30 years of financial control experience with
foreign and domestic banks, non-bank financial service entities and consumer
product companies. He is a member of the Executive and Management Committee of
the Board and reports to the Executive Chairman. Since 2003 in addition to his
activities on behalf of Original Gales, Mr. Giusto has been acting as an
independent consultant to a number of private businesses. From 2000 to 2003, Mr.
Giusto was an Account Manager for a public accounting firm and the SVP Finance
and Operations of Credit2B.com a web-based internet company bringing to market
advanced credit decisioning platforms and sophisticated small business lending,
insurance, securitization and factoring products. Before joining C2B, Mr. Giusto
served for fourteen years in various positions with Fleet Bank and, prior to its
acquisition by Fleet Bank, NatWest PLC, London. During his tenure at NatWest,
Mr. Giusto served as Senior Financial Officer and Treasurer of NatWest
Commercial Services, Inc. (a billion dollar wholly owned subsidiary of NatWest
PLC, London) and a Credit Administrator (Risk Manager) with Fleet Bank. Mr.
Giusto serves as a director of Long Island Consultation Center, a not-for-profit
psychiatric care facility in Long Island, New York. Mr. Giusto graduated from
New York University with a BS in Economics and Accounting and from Long Island
University (with Distinction) with an MBA in Finance.
Mr. Rettaliata has been our President and Chief Executive Officer, and
also a member of our Board of Directors, since November 30, 2005. He has been
the President of AIM and has served in such capacity since 1994. Prior to his
involvement at AIM, Mr. Rettaliata was employed by Grumman Aerospace Corporation
for twenty-two years. Professionally, Mr. Rettaliata is the Chairman of "ADAPT",
an organization of regional aerospace companies, a past member of the Board of
Governors of the Aerospace Industries Association, and a member of the Executive
Committee of the AIA Supplier Council. Recently, Mr. Rettaliata testified to the
President's Commission on aerospace in Washington, D.C. He is a graduate of
Niagara University where he received a B.A. in History and the Harvard Business
School where he completed the PMD Program. Upon completion of the Acquisition,
Mr. Rettaliata began serving as corporate Chief Executive Officer and President
of AIM, reporting to the Executive Chairman of the Company. He is a member of
the Executive and Management Committee of the Board.
35
Mr. Peragallo, who since November 30, 2005 has been a member of our Board
of Directors, is also the Executive Vice President of Manufacturing for AIM. He
is a member of the Executive and Management Committee of the Board. Mr.
Peragallo has been associated with AIM for over 25 years. He was elevated in
2000 to Director of Manufacturing. In addition, he has helped develop and
maintain AIM's current business systems. Mr. Peragallo has been the company
"Lean Advocate" since the inception of the program at AIM to decrease its
inventory and increase productivity. He has led AIM on its "Lean" course of
evolution and has participated in seventeen "Lean" events. Mr. Peragallo became
Executive Vice President with overall responsibility for engineering,
manufacturing and customer-critical technical matters (including "Lean" and
"Supply Chain" activities) in 2003. He has been an active member of Diversity
Business since 2000, which is an organization specializing in the promotion of
small and minority owned businesses. He is a graduate of SUNY Farmingdale where
he received a B.A. in Manufacturing Engineering. Mr. Peragallo oversees all
engineering and production matters relating to AIM. Luis Peragallo is the father
of Dario Peragallo and Jorgo Peragallo is the uncle of Dario Peragallo. Mr.
Peragallo reports to the Company's and AIM's CEO and President, Mr. Rettaliata.
Mr. Nagler, who has been a member of our Board of Directors and our
Secretary since November 30, 2005, is a member of Eaton & Van Winkle LLP, a law
firm in New York City which he joined as a Partner in October 2004. Prior to
joining Eaton & Van Winkle, Mr. Nagler was affiliated with Phillips Nizer LLP as
Counsel since 1995. Mr. Nagler chairs TriState Ventures LLC, an angel investor
group in the New York area. Mr. Nagler is a graduate of the City College of New
York and NYU School of Law. The firm of Eaton & Van Winkle LLP served as counsel
to Original Gales and will be serving as counsel to the Company.
Mr. Siegel, a member of our Board since November 30, 2005, has been a
principal in the Siegel Rich Division of Rothstein, Kass & Company, P.C. since
April 2000. Rothstein, Kass is a national firm of accountants and consultants
with approximately 650 members and offices in 7 cities. He specializes in
providing strategic advice to business owners including mergers acquisitions
strategies; succession planning; capital introductions and long range planning.
In 1974, Mr. Siegel founded, and from 1974 to 1990 was managing partner of,
Siegel Rich and Co, P.C., CPAs. In 1990, Siegel Rich merged into Weiser LLP,
then known as M.R.Weiser & Co., LLC, a large regional firm where he had been a
senior partner. In 1995, Mr. Siegel founded another firm called Siegal Rich,
which became a division of Rothstein, Kass in April 2000. Mr. Siegel has been a
director, trustee and officer of numerous businesses, philanthropic and civic
organizations. He serves as a director and audit committee chairman of Hauppauge
Digital Inc., as well as Emerging Vision Incorporated has served in a similar
capacity at Oak Hall Capital Fund, Prime Motor Inns Limited Partnership, Noise
Cancellation Technologies and Barpoint.com and serves as a member of the audit
committee for Global Aircraft Solutions Incorporated. Mr. Siegel is the Chairman
of the Audit Committee of the Board.
Mr. Schaum has been a member of our Board since November 30, 2005. Since
1993, Mr. Schaum has served as Chairman of Newport Capital Partners, a private
investment banking and financial advisory firm specializing in providing
assistance to emerging growth companies in private placements, corporate
governance and negotiation of mergers and acquisitions. Mr. Schaum also serves
as a director and Chairman of the Audit Committee of the Quigley Corporation
(NASDAQ: "QGLY"); as Chairman of Mosaic Nutraceuticals, Inc. (OTC: "MCNJ.PK");
and as a director of Camelot Entertainment Group, Inc (OTC:BB "CMEG");
Intelligent Security Networks, Inc. (OTC: "ISNT.PK") and Turboworx, Inc., a
private firm specializing in high speed computation technologies. Mr. Schaum was
a founder, director and treasurer of Streaming Media Corporation, and has also
served as Chairman and CEO of BusinessNet Holdings Corporation; as a crisis
manager for Heller Financial Corporation; as Chairman of the California Small
Business Development Corporation, a private venture capital syndicate; and was
the founder and Managing Director of the Center of Management Sciences, a
consulting firm serving the aerospace industry. He has been a consultant on
project management procedures to the Departments of the Army, Navy and Air
Force, and numerous defense contractors, including General Dynamics,
MacDonald-Douglas, Raytheon, Hughes Aircraft and the Logistics Management
Institute. Mr. Schaum is a graduate of Phillips Andover Academy and holds a
Bachelor of Science degree in Mechanical Engineering from Stanford University
and an MBA degree from the Harvard Business School. He was also a member of the
faculty and Defense Research Staff of the Massachusetts Institute of Technology,
where he participated in the development of the computer programs for the
Ballistic Missile Early Warning System. Mr. Schaum is the Chairman of the
Compensation Committee of the Board.
36
General Hunt, a member of our Board since November 30, 2005, graduated
from the United States Military Academy in 1945 and subsequently served
thirty-three years in various command and staff positions in the U.S. Army,
retiring from active military service as a Major General in 1978. His last
military assignment was as Director of the Office of Battlefield Systems
Integration. Subsequently, General Hunt was president of Pacific Architects and
Engineers in Los Angeles and Vice President of Frank E. Basil, Inc. in
Washington, D.C. Since 1990, General Hunt has been a director of SafeNet Inc.
(Nasdaq: SFNT), an information security technology company. He is a Freeman
Scholar of the American Society of Civil Engineers and has a M.S. in Civil
Engineering from the Massachusetts Institute of Technology, a M.B.A. from the
University of Detroit; a Doctor of the University Degree from the University of
Grenoble, France and a Doctor of Business Administration Degree from the George
Washington University. General Hunt is a member of the Compensation Committee
and the Audit Committee of the Board.
Mr. Brown was Ashlin's Chief Executive Officer and Secretary from
September 2004 to November 30, 2005 and was Ashlin's Chairman of the Board from
May 2003 to November 30, 2005. Since November 30, 2005, Mr. Brown has served as
a member of our Board of Directors. Ashlin filed for bankruptcy protection while
Mr. Brown was its Chairman and CEO. Mr. Brown served as the Chief Operating
Officer of Private Investor Reserves Corp., a financial services firm, from May
2000 through 2004. Mr. Brown co-founded A.S. Partners.com, Inc., an internet
application service provider, and served as its Chief Executive Officer from
December 1998 to April 2000. Mr. Brown is a member of the Audit Committee of the
Board.
The Audit Committee
Our Audit Committee consists of Messrs. Siegel, Hunt and Brown. Mr. Siegel
is our audit committee financial expert and is "independent" as defined in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
EXECUTIVE COMPENSATION
The following table shows for fiscal years ended December 31, 2005, 2004
and 2003, respectively, certain compensation which we (including AIM) awarded or
paid to, or which was earned from us by, the following persons (collectively,
the "Named Executive Officers").
o Michael A. Gales, our Executive Chairman since November 30, 2005;
o Louis A. Giusto, our Vice Chairman, Chief Financial Officer and Treasurer
since November 30, 2005;
o Peter D. Rettaliata, our Chief Executive Officer since November 30, 2005
and officer of AIM;
o Dario A. Peragallo, our Executive Vice President since November 30, 2005
and officer of AIM;
o Luis Peragallo, a former officer of AIM who is not employed by us;
o Jorge Peragallo, a former officer of AIM who is not employed by us; and
o James A. Brown, our Chief Executive Officer from September 26, 2004 to
November 30, 2005.
Luis Peragallo is the brother of Jorge Peragallo and the father of Dario
Peragallo. Other than the Named Executive Officers, none of our executive
officers earned more than $100,000 in salary and bonus for the 2005 fiscal year.
Unless otherwise indicated, we did not grant stock options or restricted stock
to them during the periods indicated.
37
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- --------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------
Restricted Securities LTIP All Other
Name and Stock Underlying Payouts Compensation
Principal Bonus Other Annual Award(s) Options/SARs
Position Year Salary ($) ($) Compensation ($) ($) (#) ($) ($)
- --------------- ------ ------------- -------- ----------------- ------------ ----------------- ---------- ----------------
Michael A. 2005 $ 21,233(1) -- -- -- 1,250,000(3) -- --
Gales, ----------------------------------------------------------------------------------------------------------
Executive 2004 -- -- -- -- -- -- --
Chairman of ----------------------------------------------------------------------------------------------------------
the Company 2003 -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Louis A. 2005 $ 19,534(2) -- -- -- 1,200,000(3) -- --
Giusto, ----------------------------------------------------------------------------------------------------------
Vice 2004 -- -- -- -- -- -- --
Chairman, ----------------------------------------------------------------------------------------------------------
Chief 2003 -- -- -- -- -- -- --
Financial
Officer and
Treasurer
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Peter D. 2005 $241,510 -- -- -- 1,200,000(3) -- --
Rettaliata, ----------------------------------------------------------------------------------------------------------
Chief 2004 217,724 -- -- -- -- -- --
Executive ----------------------------------------------------------------------------------------------------------
Officer of 2003 219,182 -- -- -- -- -- --
the Company
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Dario A. 2005 $242,344 -- -- -- 1,200,000(3) -- --
Peragallo, ----------------------------------------------------------------------------------------------------------
Executive 2004 197,211 -- -- -- -- -- --
Vice ----------------------------------------------------------------------------------------------------------
President of 2003 151,666 -- -- -- -- -- --
the Company
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Luis 2005 $297,063 -- -- -- -- -- --
Peragallo, ----------------------------------------------------------------------------------------------------------
Former 2004 322,536 -- -- -- -- -- --
officer of AIM ----------------------------------------------------------------------------------------------------------
2003 255,375 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Jorge 2005 $226,563 -- -- -- -- -- --
Peragallo, ----------------------------------------------------------------------------------------------------------
Former 2004 219,449 -- -- -- -- -- --
officer of AIM ----------------------------------------------------------------------------------------------------------
2003 230,301 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------------------------------------------------
James A. 2005 $ 95,646 -- -- $51,000(5) -- -- --
Brown, ----------------------------------------------------------------------------------------------------------
Former Chief 2004 27,817(4) -- -- -- -- -- --
Executive ----------------------------------------------------------------------------------------------------------
Officer 2003 -- -- -- 10,000(5) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
- ----------
(1) This amount represents pay for only part of December 2005. Mr. Gales did
not receive a salary from us prior to November 30, 2005. Mr. Gales'
employment agreement provides that, for 2006, he is to receive a salary of
at least $250,000 and a bonus of at least $125,000.
(2) This amount represents pay for only December 2005. Mr. Giusto did not
receive a salary from us prior to November 30, 2005. Mr. Giusto's
employment agreement provides that, for 2006, he is to receive a salary of
at least $230,000 and a bonus of at least $115,000.
(3) Consist of stock options to purchase shares of Common Stock, the vesting
schedule and other terms of which are set forth in the footnotes to the
table below under the caption "Option Grants In Last Fiscal Year (2005)".
(4) Prior to becoming Chief Executive Officer, Mr. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services.
(5) Consists of shares of restricted stock and not stock options. As of August
13, 2003, Mr. Brown received 80,038 restricted shares of Common Stock,
valued at $10,000. Of the 596,231 restricted shares of Common Stock
granted to Mr. Brown in 2005, 100,000 shares, with a fair value of $7,000,
were issued to him as of November 2005 in connection with the Merger,
240,112 shares were issued to him in January 2005 (with a fair value of
$12,000) upon our emergence from bankruptcy protection, and 256,119 shares
(with a fair value of $32,000) were issued to him in March 2005.
Incentive Plans
Prior to January 28, 2005, the effective date of our Plan of
Reorganization, we had outstanding stock options under our 1998 Stock Option
Plan. As of January 28, 2005, all of our outstanding options were terminated
pursuant to the Plan of Reorganization except options to purchase 40,018 shares
of Common Stock held by Steven Pomerantz and options to purchase 4,002 shares of
Common Stock held by Ted Alflen, both of whom served on our Board of Directors
following our emergence from bankruptcy proceedings until the completion of the
Merger. As of November 30, 2005, such stock options held by Mr. Pomerantz and
Mr. Alflen were canceled.
Option Grants in Last Fiscal Year
As set forth in the following table, during 2005 we granted, and reserved
for grant, under our Stock Incentive Plan, the following stock options to the
Named Executive Officers:
39
Option Grants In Last Fiscal Year (2005)
Number of % of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Year Granted Fiscal Year Price Date
---- ------- ----------- ----- ----
Michael A. Gales .................... 2005 1,250,000(1) 25.8% $.22 9/26/15
Louis A. Giusto ..................... 2005 1,200,000(2) 24.7% $.22 9/26/15
Peter D. Rettaliata ................. 2005 1,200,000(3) 24.7% $.22 9/26/15
Dario A. Peragallo .................. 2005 1,200,000(3) 24.7% $.22 9/26/15
- --------------------------------------------------------------------------------
(1) One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 250,000 shares each on the first through fourth
anniversaries of September 15, 2005. The options which vested on November 30,
2005 are exercisable at $0.22 per share and the exercise price of the options
vesting on each of September 15, 2006, 2007, 2008 and 2009 will be the higher of
(a) $0.22 per share or (b) the average trading price of the Common Stock for the
thirty trading days ending December 15, 2005, September 15, 2006, September 15,
2007 and September 15, 2008, respectively.
(2) One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 240,000 shares each on the first through fourth
anniversaries of September 15, 2005. The options which vested on November 30,
2005 are exercisable at $0.22 per share and the exercise price of the options
vesting on each of September 15, 2006, 2007, 2008 and 2009 will be the higher of
(a) $0.22 per share or (b) the average trading price of the Common Stock for the
thirty trading days ending December 15, 2005, September 15, 2006, September 15,
2007 and September 15, 2008, respectively.
(3) One-eighth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 150,000 shares each on the first through
seventh anniversaries of September 15, 2005. The options which vested on
November 30, 2005 are exercisable at $0.22 per share and the exercise price of
the options vesting on each of September 15, 2006, 2007, 2008, 2009, 2010, 2011
and 2012 will be the higher of (a) $0.22 per share or (b) the average trading
price of the Common Stock for the thirty trading days ending December 15, 2005,
September 15, 2006, September 15, 2007, September 15, 2008, September 15, 2009,
September 15, 2010 and September 15, 2011, respectively.
40
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Option Value at December 31, 2005
Number of Securities Value of
Underlying Unexercised Unexercised In-The-Money
Options at December 31, 2005 Options at December 31, 2005
---------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable(1)
----------- ------------- ----------- ----------------
Michael A. Gales ................ 250,000 1,000,000 $40,000 $160,000
Louis A. Giusto ................. 240,000 960,000 $38,400 $153,600
Peter D. Rettaliata ............. 150,000 1,050,000 $24,000 $168,000
Dario A. Peragallo .............. 150,000 1,050,000 $24,000 $168,000
(1) The values in this column are calculated based on an assumed exercise
price of $0.22 per share. However, the actual exercise price for the stock
options which have not yet vested may be greater than $0.22 per share, as
described in the footnotes to the table, "Option Grants In The Last Fiscal
Year", above.
The last sale price of the Common Stock was $0.38 on December 30, 2005, the last
trading day of 2005.
Employment Agreements
The employment agreement of Michael A. Gales became effective as of November 30,
2005 and will terminate five years thereafter, but will be extendable for
successive three one-year renewal periods unless he decides not to extend the
agreement. Pursuant to his employment agreement, Mr. Gales will receive a base
salary at an annual rate of $250,000, which will increase a minimum of 10% per
year if our operating profits have increased by at least 5% over the preceding
12-month period. Mr. Gales will be entitled to an annual bonus to be determined
by our Board of Directors but which must equal at least 50% of Mr. Gales' annual
base salary. If he is dismissed without cause, Mr. Gales would be entitled to
receive salary and benefits for the period which is the greater of the remaining
initial term (or renewal period, as the case may be) of his employment agreement
or three years. In addition, we granted (and reserved for grant) to Mr. Gales,
upon the execution of his employment agreement, options to purchase 1,250,000
shares of Common Stock, exercisable over a ten-year period commencing on the
date of grant. See the applicable footnote under the foregoing table captioned,
"Option Grants In Last Fiscal Year (2005)". Mr. Gales' employment agreement also
contains restrictive covenants prohibiting Mr. Gales (i) from directly or
indirectly competing with the Company, (ii) from soliciting any customer of the
Company or AIM for any competitive purposes and (iii) from employing or
retaining any employee of the Company or AIM or soliciting any such employee to
become affiliated with any entity other than the Company or AIM during the
twelve-month period commencing upon the termination of his agreement (the
"Employee Restrictive Covenants").
The employment agreement of Louis A. Giusto became effective as of November 30,
2005, and will terminate five years thereafter, but will be extendable for
successive three one-year periods unless he decides not to extend the agreement.
Pursuant to his employment agreement, Mr. Giusto will receive a base salary at
an annual rate of $230,000. The terms of Mr. Giusto's employment agreement
relating to bonus, annual increases in base salary and severance upon
termination are the same as those provided for in Mr. Gales' employment
agreement, the terms of which are set forth above. In addition, the Company
granted (and reserved for grant) to Mr. Giusto, upon the execution of his
employment agreement, options to purchase 1,200,000 shares of Common Stock,
exercisable over a ten-year period commencing on the date of grant. The vesting
schedule and exercise price relating to Mr. Giusto's options are the same as
those relating to Mr. Gales' options set forth above. Mr. Giusto's employment
agreement also contains the Employee Restrictive Covenants.
41
The employment agreement of Peter Rettaliata became effective as of
November 30, 2005, and will terminate five years thereafter, but will be
extendable for successive three one-year periods unless he or the Company
decides not to extend the agreement. Pursuant to his employment agreement, Mr.
Rettaliata will receive a base salary at an annual rate of $230,000, which will
increase a minimum of 5% per year if our operating profits have increased by at
least 5% over the preceding 12-month period, and such bonus compensation as the
Board of Directors may determine. The terms of Mr. Rettaliata's employment
agreement relating to severance upon termination without cause are the same as
those provided for in Mr. Gales' employment agreement, the terms of which are
set forth above. In addition, the Company granted (and reserved for grant) to
Mr. Rettaliata, upon the execution of his employment agreement, options to
purchase 1,200,000 shares of Common Stock, exercisable over a ten-year period
commencing on the date of grant. Please see the applicable footnote under the
foregoing table captioned, "Option Grants In Last Fiscal Year (2005)". Mr.
Rettaliata's employment agreement also contains the Employee Restrictive
Covenants.
The employment agreement of Dario Peragallo became effective as of
November 30, 2005, and will terminate five years thereafter, but will be
extendable for successive three one-year periods unless he or the Company
decides not to extend the agreement. Pursuant to his employment agreement, Mr.
Peragallo will receive a base salary at an annual rate of $230,000, which will
increase a minimum of 5% per year if our operating profits have increased by at
least 5% over the preceding 12-month period, and such bonus compensation as the
Board of Directors may determine. The terms of Mr. Peragallo's employment
agreement relating to severance upon termination without cause are the same as
those provided for in Mr. Gales' employment agreement, the terms of which are
set forth above. In addition, the Company granted (and reserved for grant) to
Mr. Peragallo, upon the execution of his employment agreement, options to
purchase 1,200,000 shares of Common Stock, exercisable over a ten-year period
commencing on the date of grant. The vesting schedule and exercise price
relating to Mr. Peragallo's options are the same as those relating to Mr.
Rettaliata's options set forth above. Mr. Peragallo's employment agreement also
contains the Employee Restrictive Covenants.
Pursuant to our Plan of Reorganization, Ashlin had entered into an
employment agreement with James A. Brown, who at the time was Ashlin's chairman
and chief executive officer. As a result of the Merger, such employment
agreement was terminated as of November 30, 2005 and Mr. Brown waived all of his
rights under such employment agreement.
The Company has agreed with the Placement Agent that the employment
agreements of the above-mentioned individuals will not be changed or amended
without the prior consent of the Placement Agent during the two year period
following the completion of the Offering and no further stock options will be
granted to such individuals during such time period without the prior consent of
the Placement Agent.
Director Compensation
As a result of the Merger, our new compensation policy for each of our
non-employee directors calls for: $10,000 per year, $1,250 per Board meeting and
stock options to purchase a number of shares of Common Stock to be determined.
We reimburse each director for expenses related to attending Board meetings. We
pay an additional $3,000 per year to each independent director serving as the
chairman of a committee of the Board. We estimate the aggregate cost of our
Board compensation for 2006 will be approximately $100,000.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions of Ashlin Prior to the Merger:
42
In connection with our Plan of Reorganization, in January 2005, we entered
into an employment agreement with James A. Brown, who was then our Chief
Executive Officer, and disposed of substantially all of our assets to an entity
controlled by another person who had been our former Chief Executive Officer.
Prior to becoming our Chief Executive Officer, James A. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services to us. As of August 13, 2003, Mr. Brown received from us 80,003 shares
of Common Stock, valued at $10,000. He also received 100,000 shares, with a fair
value of $7,000, as of November 2005 in connection with the Merger.
Transactions Relating to Original Gales Prior to the Merger:
In August 2005, Mr. Stephen Nagler, one of our directors and our
Secretary, loaned $10,000 to Original Gales. Co-investors of Mr. Nagler loaned
an additional $35,000 to Original Gales in the same financing (the "$45,000
Financing"). In connection with the $45,000 Financing, Original Gales issued to
such investors 12% convertible bridge notes (the "$45,000 Bridge Notes") in the
aggregate principal amount of $45,000. The $45,000 Bridge Notes were repaid with
a portion of the proceeds of the Offering. In connection with the $45,000
Financing, Original Gales issued to the investors warrants ("$45,000 Bridge
Warrants") to purchase 204,547 shares of its common stock at $0.22 per share
and, as a result of the Merger, such warrants became warrants to purchase an
equal number of shares of our Common Stock. The $45,000 Bridge Warrants allow
for cashless exercise and have weighted-average anti-dilution protection with
respect to the exercise price.
Stephen Nagler is a partner of the law firm of Eaton & Van Winkle LLP,
which was counsel to Original Gales until the Merger and has been our counsel
since November 30, 2005. In October 2004, Eaton & Van Winkle LLP and Mr. Nagler
subscribed for 150,000 shares and 100,000 shares, respectively, of Original
Gales' common stock for $.00001 per share. Upon cancellation of such shares in
connection with the Merger, we issued to Eaton & Van Winkle 150,000 shares of
our Common Stock and issued to Mr. Nagler 100,000 shares of our Common Stock.
In October 2004, Original Gales issued 4,401,219 shares of its common
stock to Michael Gales, its founder and Executive Chairman, and 3,404,538 shares
of its common stock to Louis Giusto, its Vice Chairman, pursuant to
subscriptions for such shares by such individuals. As of the same date, three of
our directors (Messrs. Schaum, Siegel and Hunt) subscribed for 100,000 shares
each of Original Gales common stock. The subscription price for the shares
described in this paragraph was $.00001 per share.
Transactions Relating to Air Industries Machining Corporation Prior to the
Merger:
Prior to its Acquisition by Original Gales, AIM leased manufacturing and
office space from KPK Realty Corp. which, since October, 1974, has been owned
49% by Luis Peragallo, an officer, a director and the largest shareholder of AIM
prior to its Acquisition by Original Gales. The annual rent for such lease was
approximately $300,000 plus annual real estate taxes on the leased property.
Between 1989 and 1990, AIM advanced $208,233 to KPK Realty Corp. In partial
repayment of such advances from AIM, rent in the amount of $22,992 in 2003,
$127,737 in 2004 and $11,496 in 2005 was offset by KPK Realty Corp. from the
amounts due under such lease. In addition, from 1990 to 2005, AIM was a
guarantor of the mortgage (with a balance of approximately $677,000 as of
September 30, 2005) on such leased property. This guaranty was terminated in
connection with the Real Estate Acquisition.
Prior to its Acquisition by Original Gales, AIM leased manufacturing space
at an annual rental of approximately $82,800, plus annual real estate taxes on
such property, from DPPR Realty Corp. which, since January, 2003 has been 100%
owned by Peter Rettaliata and Dario Peragallo. Prior to the Acquisition, Messrs.
Rettaliata and D. Peragallo owned an aggregate of 36.84% of AIM's outstanding
capital stock. Messrs. Rettaliata and D. Peragallo were officers of AIM and are
officers and directors of our Company. From February 2003 to November 30, 2005,
AIM was also a guarantor of the mortgage (with a balance of approximately
$567,000 as of September 30, 2005) on such leased property. This guaranty was
terminated in connection with the Real Estate Acquisition.
43
In December, 2002, Peter Rettaliata and Dario Peragallo purchased from AIM
for $257,058 an option to purchase DPPR Realty Corp. Subsequently, Mr.
Rettaliata and D. Peragallo purchased DPPR Realty Corp. and each now owns 50% of
DPPR Realty Corp.
In June, 1995, an individual who held 49% of the outstanding capital stock
of AIM sold such interest to Jorge Peragallo and Peter Rettaliata for cash and a
$625,000 principal amount promissory note from each of Mr. J. Peragallo and Mr.
Rettaliata ($1,250,000 in the aggregate). AIM guaranteed the repayment of these
promissory notes, which aggregated $1,250,000 in principal amount. These
promissory notes were repaid in full in June 2005.
Peter Rettaliata, who was an officer of AIM, advanced $5,000 to AIM during
2003 and $42,678 to AIM during 2004. Dario Peragallo, who was an officer of AIM,
advanced $5,000 to AIM during 2003 and $39,334 to AIM during 2004. Luis
Peragallo, who was an officer of AIM, advanced $5,000 to AIM during 2003 and
$18,179 to AIM during 2004. Jorge Peragallo, who was an officer of AIM, advanced
$5,000 to AIM during 2003 and $38,344 to AIM during 2004. As of September 30,
2005, AIM had received an aggregate of $363,323 in loans from its officers and
was obligated to repay such amount to its officers. Such amount was repaid in
connection with our Acquisition of AIM. In October, 2005, AIM agreed to pay an
aggregate of $225,000 to its officers to enable them to pay income taxes accrued
while operating AIM as a Subchapter S corporation. Such amount was paid in
connection with our Acquisition of AIM.
Transactions Relating to the Merger, Acquisition and Other Closing Transactions:
On November 30, 2005, Original Gales completed the acquisition (the
"Acquisition") from Messrs. Luis Peragallo, Jorge Peragallo, Peter Rettaliata
and Dario Peragallo (the "AIM Shareholders"), of all of the outstanding capital
stock of AIM. Original Gales had entered into a Stock Purchase Agreement with
AIM and the AIM Shareholders ("Acquisition Agreement") as of July 25, 2005. The
aggregate purchase price paid to the AIM Shareholders consisted of (i)
$3,114,296 in cash, (ii) $1,627,262 principal amount of promissory notes,
payable over five years, of which $962,000 were in the form of a secured
subordinated promissory note payable to Mr. Luis Peragallo and $665,262 were in
the form of unsecured convertible promissory notes ($332,631 payable to Mr.
Peter Rettaliata and $332,631 payable to Mr. Dario Peragallo), convertible into
shares of Common Stock at a price of $0.40 per share, and (iii) 490,060 shares
of newly issued Common Stock. The 490,060 shares of Common Stock issued to the
AIM Shareholders were allocated as follows: 253,214 shares to Luis Peragallo,
118,423 shares to Peter Rettaliata and 118,423 shares to Dario Peragallo. The
unsecured convertible promissory notes issued to Messrs. Rettaliata and D.
Peragallo will automatically be converted into Common Stock if the shares into
which such notes may be converted are registered under the Securities Act and
such registration has become effective. In addition to the purchase price,
Original Gales paid an aggregate of $1,053,862 in connection with the
Acquisition, a portion of which represented legal and accounting expenses
($300,000) incurred by AIM and its shareholders and $270,403 to enable AIM's
shareholders to pay income taxes accrued prior to closing. The purchase price
paid to AIM's shareholders was the result of arms' length negotiation between
Original Gales and the AIM shareholders.
Our employment agreements with Messrs. Gales, Giusto, Rettaliata and D.
Peragallo became effective on November 30, 2005 and we issued stock options to
them as of such date. See "Executive Compensation - Employment Agreements",
above.
As of November 30, 2005, Original Gales Acquisition Corp., Inc. completed
the purchased from entities which are owned, in part, by affiliates of AIM (KPK
Realty Corp. and DPPR Realty Corp.), for the aggregate purchase price
$4,190,000, of the properties, described above, which were being leased by AIM
prior to November 30, 2005 from such entities. The purchase price paid to KPK
Realty Corp. was $2,690,000 and the purchase price paid to DPPR Realty Corp. was
44
$1,500,000. Gales Industries Acquisition Corp., Inc. contemporaneously merged
into AIM, with AIM being the surviving entity, so that AIM became the owner of
such properties.
PLAN OF DISTRIBUTION
All costs, expenses and fees in connection with the registration of the
Common Stock offered by this prospectus will be borne by us. Brokerage
commissions, if any, attributable to the sale of the Common Stock will be borne
by the selling security holders.
The selling security holders may sell the Common Stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals. The selling stockholders may distribute the Common
Stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an existing
market for the Common Stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales made through
agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
Selling security holders will not be restricted as to the price or prices
at which the selling security holders may sell their Common Stock. Sales of
Common Stock by the selling security holders may depress the market price of our
Common Stock since the number of shares which may be sold by the selling
security holders is very large compared to the historical average weekly trading
volume of our Common Stock, which has been quite low. Accordingly, if the
selling security holders were to sell, or attempt to sell, all of such
securities at once or during a short time period, we believe such a transaction
would dramatically adversely affect the market price of our Common Stock.
From time to time a selling security holder may pledge its Common Stock
under margin provisions of customer agreements with its brokers or under loans
with third parties. Upon a default by the selling security holder, the broker or
such third party may offer and sell any pledged securities from time to time.
In effecting sales, brokers and dealers engaged by a selling security
holder may arrange for other brokers or dealers to participate in the sales as
agents or principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of such Common Stock, from the purchaser in amounts to be negotiated,
which compensation as to a particular broker dealer might be in excess of
customary commissions customary in the types of transactions involved.
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of Common Stock at a stipulated price, and to the extent the
broker-dealer is unable to do so acting as agent for the selling security
holders, to purchase as principal any unsold securities at the price required to
fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire securities as principal may then resell those
securities from time to time in transactions: in the over-the counter market or
otherwise; at prices and on terms prevailing at the time of sale; at prices
related to the then-current market price; or in negotiated transactions.
45
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of the Common Stock commissions as described above. The selling security holders
may also sell the Common Stock in open market transactions under Rule 144 under
the Securities Act, rather than under this prospectus.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in sales of the Common Stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In this event, any commissions received by these
broker-dealers or agents and any profit on the resale of the Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities arising under the
Securities Act.
GunnAllen Financial, Inc., is a registered broker dealer and NASD member
firm. GunnAllen Financial served as placement agent in our the Offering and
received, in addition to cash commissions, five-year warrants to purchase an
aggregate of 4,090,950 shares of our Common Stock with an exercise price of $.22
per share. It also served as placement agent in a September 2005 bridge note
financing in which Original Gales raised $105,000 and, in connection therewith,
GunnAllen Financial received, in addition to a cash commission, a five year
warrant to purchase 47,728 shares of Common Stock with an exercise price of $.22
per share. The registration statement of which this Prospectus forms a part
includes the shares underlying the warrants held by GunnAllen Financial. In
addition, GunnAllen Financial has been retained by us as a financial consultant
and receives cash compensation at the rate of $7,500 per month. The advisory
agreement is for a minimum period of six months (until August 2006), after which
we can terminate the agreement upon thirty days' notice.
The 4,090,950 shares of Common Stock issuable upon conversion of placement
agent warrants received by GunnAllen Financial in connection with the Offering
are restricted from sale, transfer, assignment, pledge or hypothecation and may
not be the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the
effective date of this registration statement except transfers of the warrants
to officers or partners or registered representatives of GunnAllen Financial.
GunnAllen Financial has indicated to us its willingness to act as selling
agent on behalf of the selling shareholders named in this Prospectus under
"Selling Security Holders" who purchased our privately placed securities. All
shares sold, if any, on behalf of selling shareholders by GunnAllen Financial
would be in transactions executed by GunnAllen Financial on an agency basis and
commissions charged to its customers in connection with each transaction shall
not exceed a maximum of 5% of the gross proceeds. GunnAllen Financial does not
have an underwriting agreement with us and/or the selling shareholders and no
selling shareholders are required to execute transactions through GunnAllen
Financial. Further, other than their existing brokerage relationship as
customers with GunnAllen Financial, no selling shareholder has any pre-arranged
agreement with GunnAllen Financial to sell their securities through GunnAllen
Financial.
NASD Notice to Members 88-101 states that in the event a selling
shareholder intends to sell any of the shares registered for resale in this
Prospectus through a member of the NASD participating in a distribution of our
securities, such member is responsible for insuring that a timely filing is
first made with the Corporate Finance Department of the NASD and disclosing to
the NASD the following:
o it intends to take possession of the registered securities or to
facilitate the transfer of such certificates;
46
o the complete details of how the selling shareholders shares are and
will be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof
have entered into, will facilitate or otherwise participate in any
type of payment transaction with the selling shareholders, including
details regarding any such transactions; and
o in the event any of the securities offered by the selling
shareholders are sold, transferred, assigned or hypothecated by any
selling shareholder in a transaction that directly or indirectly
involves a member firm of the NASD or any affiliates thereof, that
prior to or at the time of said transaction the member firm will
timely file all relevant documents with respect to such
transaction(s) with the Corporate Finance Department of the NASD for
review.
We have advised the selling shareholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling shareholders and their affiliates. In
addition, we will make copies of this Prospectus available to the selling
shareholders for the purpose of satisfying the Prospectus delivery requirements
of the Securities Act. The selling security holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act.
The selling security holders are subject to applicable provisions of the
Securities Exchange Act of 1934 and the SEC's rules and regulations, including
Regulation M, which provisions may limit the timing of purchases and sales of
the securities by the selling security holders.
In order to comply with certain states' securities laws, if applicable,
the Common Stock may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not be sold
unless they have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
We have agreed to indemnify each selling stockholder whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
DESCRIPTION OF SECURITIES
As of August 24, 2005, our shareholders approved an amendment to our
Articles of Incorporation which increased the number of our authorized shares of
Common Stock, $.001 par value per share, from 30,000,000 to 150,000,000 shares,
and authorized 10,000,000 shares of "blank check" preferred stock, $.001 par
value per share. In connection with the Reverse Split on November 21, 2005, our
total authorized Common Stock was reduced to 120,055,746 shares and our total
authorized preferred stock was reduced to 8,003,716 shares.
Common Stock
We have a total of 120,055,746 authorized shares of Common Stock, $.001
par value, of which 14,723,421 shares were outstanding as of June 13, 2006.
47
The holders of Common Stock are entitled to receive dividends when and as
declared by the Board out of funds legally available therefore. Upon dissolution
of the Company, the holders of Common Stock are entitled to share, pro rata, in
the Company's net assets after payment of or provision for all debts and
liabilities of the Company, and after provision for any class of Preferred Stock
or other senior security which may be issued by the Company. Each share of
Common Stock is entitled to participate on a pro rata basis with each other
share of such stock in dividends and other distributions declared on shares of
Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders and may not cumulate their votes
for the election of directors. The holders of Common Stock do not have
preemptive rights to subscribe for additional shares of any class that may be
issued by the Company, and no share of Common Stock is entitled in any manner to
any preference over any other share of such stock.
Preferred Stock
We also have authorized a total of 8,003,716 shares of "blank check"
preferred stock, $.001 par value, of which 1,000 shares have been designated
Series A Convertible Preferred Stock ("Preferred Stock"). 900 shares of
Preferred Stock were issued in connection with the Merger and are outstanding as
of May 31, 2006.
In accordance with the Company's Articles of Incorporation, the Board of
Directors may, by resolution, issue additional preferred stock in one or more
series at such time or times and for such consideration as the Board of
Directors may determine. The Board of Directors is expressly authorized to
provide for such designations, preferences, voting power (or no voting power),
relative, participating, optional or other special rights and privileges as it
determines.
The Company has the power to issue additional preferred stock, or
different classes or series of preferred stock ranking senior to or on parity
with the Preferred Stock as to dividend rights or rights upon liquidation,
winding up, or dissolution, only with the approval or consent of at least a
majority of the then-outstanding shares of Preferred Stock.
The Company may issue additional preferred stock to effect a business
combination, to raise capital or for other reasons. In addition, additional
preferred stock could be utilized as a method of discouraging, delaying or
preventing a change in control of the Company.
The Series A Convertible Preferred Stock
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. Dividends are cumulative and accrue if not paid. No dividends will
accrue on shares of Preferred Stock which are issued as a dividend. If the
registration statement of which this prospectus is a part is not declared
effective by June 15, 2006, the dividend on the Preferred Stock will be paid in
cash from the date of such default until the default is cured. Such dividends
will be paid until the Preferred Stock is converted into shares of Common Stock.
Fractional shares of Preferred Stock may be issued as a dividend on the
Preferred Stock. Each share of Preferred Stock will have a stated value of
$10,000 and such stated value will be the basis for calculating dividends on the
Preferred Stock. For example, one share of Preferred Stock will accrue a
dividend of .08 share of Preferred Stock per year or .02 share of Preferred
Stock per quarter and, if dividends are due in cash, will accrue a dividend of
$800 per year.
Subject to adjustment, each share of Preferred Stock is convertible at the
option of the holder at any time into 45,455 shares of Common Stock, at the
conversion price of $0.22 per share. The Preferred Stock will be automatically
converted into Common Stock, at the then applicable conversion rate, at such
48
time as the shares of Common Stock underlying the Preferred Stock have been
registered for resale under the Securities Act and the registration statement
with respect to such shares has been declared effective. Any fractional share of
Common Stock issuable upon conversion of any holder's Preferred Stock will be
rounded up to a whole share of Common Stock.
Without the approval of the holders of at least a majority of the
outstanding Preferred Stock voting together as a single class on an
as-if-converted to Common Stock basis, the Company will not take any action to
(i) alter, change or amend preferences, privileges or rights of the Preferred
Stock, (ii) redeem shares of Preferred Stock or Common Stock, (iii) pay or
declare any dividends (other than dividends on the Preferred Stock) or make any
other distributions on the Company's capital stock, or (iv) authorize, create
and/or issue capital stock with rights or privileges that are or superior to the
Preferred Stock.
The Preferred Stock has anti-dilution protection on a weighted-average
basis in the event of future issuances of Common Stock (or securities
convertible into Common Stock) at a price (or conversion price) below the price
at which the Preferred Stock may be converted into Common Stock, which is $0.22
per share. No such anti-dilution adjustment will be made in the case of the
issuance of (i) any shares or other securities in connection with any employee,
management or director stock option or incentive plans; (ii) any shares or other
securities in connection with any acquisition or merger transactions entered
into by the Company or its subsidiaries; (iii) any shares or other securities to
the Placement Agent; (iv) any shares of Common Stock issuable upon conversion of
the Preferred Stock; and (v) any shares or other securities outstanding as of
November 30, 2005 or to be outstanding upon conversion or exercise of such
securities.
The holders of the Preferred Stock do not have any voting rights on
matters with respect to which the holders of the Common Stock may vote until six
months after the earlier of the termination or the final closing of the
Offering, except that the holders of Preferred Stock may vote as a class with
respect to the protective provisions relating to the Preferred Stock, set forth
in the second preceding paragraph. After such six-month period, the holders of
the Preferred Stock will have voting rights as though their shares of Preferred
Stock were converted into Common Stock. In addition, the holders of Preferred
Stock will vote on an as-if-converted basis if the Company defaults in its
obligation to timely file a registration statement with respect to the Common
Stock into which the Preferred Stock is convertible and such default is
continuing.
The registration statement of which this prospectus is a part registers
all shares of Common Stock issuable upon conversion of the outstanding Preferred
Stock and all shares of Preferred Stock which may be issued as dividends during
a six-month period following their date of issuance. The holder of the Preferred
Stock may transfer to a transferee of Preferred Stock the registration rights
with respect to the Preferred Stock. The registration rights of any holder of
Preferred Stock will terminate at the earlier of (i) two years from the earlier
of the termination or the final closing of the Offering, or (ii) the date as of
which all shares of Common Stock underlying such holder's Preferred Stock can be
sold in any three-month period without volume restriction in compliance with
Rule 144 under the Securities Act. If a registration statement is not declared
effective by June 15, 2006, the dividend on the Preferred Stock is required to
be paid in cash from the date of such default until the default is cured.
In the event of any liquidation or winding up of the Company, the holders
of Preferred Stock will be entitled to receive, in preference to the holders of
Common Stock, an amount equal to two times the stated value of the Preferred
Stock, plus any dividends thereon ("Liquidation Payment"). Thereafter, the
remaining assets of the Company will be distributed ratably to the holders of
Common Stock. If the assets of the Company are insufficient to permit the full
payment of the Liquidation Payment, then the assets will be distributed pro rata
among the holders of the Preferred Stock.
Original Gales' Series A Convertible Preferred Stock
49
Original Gales issued 900 shares of its series A convertible preferred
stock in the Private Placement. Such shares of preferred stock have terms which
are virtually identical to our Series A Convertible Preferred Stock. In
connection with the Merger, the outstanding shares of Original Gales' series A
convertible preferred stock were automatically converted, by their terms, into
shares of our Series A Convertible Preferred Stock on a one-for-one basis.
SELLING SECURITY HOLDERS
Based on information provided by the selling security holders, the table
below sets forth certain information, as of June 13, 2006 unless otherwise
noted, regarding the selling security holders.
Percentage ownership of common stock is based on 14,723,421 shares of our
Common Stock outstanding as of June 13, 2006. In addition, the table below
assumes, for calculating each selling security holder's beneficial ownership,
that options, warrants and convertible securities held by such security holder
(but not, unless otherwise noted, those held by any other person) that are
exercisable within 60 days as of June 13, 2006, have been exercised and
converted and the shares underlying them added to the number of shares of our
Common Stock deemed to be outstanding. For purposes of calculating the
post-offering ownership of each selling security holder, the table also assumes
the sale of all of the securities being offered by such selling security holder.
Where the name of a natural person appears next to a selling stockholder, listed
below, that is not a natural person, that person has the power to exercise
voting and/or investment power over the shares owned by such selling
stockholder.
The second column in the table below lists the number of shares of Common
Stock beneficially owned by each selling stockholder, based on his/her ownership
of the shares of our Common Stock.
The third column lists the shares of Common Stock being offered by this
prospectus by the selling stockholders.
The fourth column assumes the sale of all of the shares offered by the
selling stockholders pursuant to this prospectus.
Each of the nine members of our Board of Directors has agreed to a lock-up
of their restricted shares (including shares underlying any options, warrants or
convertible securities) of Common Stock until November 30, 2006.
The selling stockholders may sell all, some or none of their shares in
this offering. See "Plan of Distribution."
50
Common stock beneficially owned after
the offering
Name of selling security holders Number of Number of
shares of shares being
common stock offered
beneficially
owned prior to Percentage of
the offering Number of shares outstanding shares
Company Officers and Directors and Certain
Designees:
Michael Gales (1) 4,326,219 4,076,219 250,000 *
Louis Giusto (2) 3,644,538 3,404,538 240,000 *
Peter Rettaliata (3) 1,100,000 950,000 150,000 *
Dario Peragallo (3) 1,100,000 950,000 150,000 *
Luis Peragallo (4) 253,214 253,214 0 0
Seymour Siegel (5) 100,000 100,000 0 0
Rounsevelle Schaum (5) 100,000 100,000 0 0
Ira A. Hunt, Jr. (5) 100,000 100,000 0 0
Stephen Nagler (6) 145,455 145,455 0 0
ECH Consulting, Inc. (7) 325,000 325,000 0 0
Croft Investments Limited Partnership (8) 250,000 250,000 0 0
Atlas Capital Services, LLC and Designees: (9)
ACS Holdings, LLC 876,705 876,705 0 0
Edward Wahrsager 50,000 50,000 0 0
Robert A. Schecter 185,546 185,546 0 0
Shimon S. Fishman 46,387 46,387 0 0
Steven Pollan 318,592 318,592 0 0
Atlas Private Equity, LLC 635,425 635,425 0 0
$45,000 Bridge Financing Warrants: (10)
Rhoda Lewis 45,455 45,455 0 0
MTP Operating Corp. 45,455 45,455 0 0
Marilyn Thypin 68,182 68,182 0 0
$105,000 Bridge Financing Warrants: (11)
Stephen Caragol 340,909 340,909 0 0
Frank and Cynthia Gasztonyi 136,364 136,364 0 0
Placement Agent:
GunnAllen Financial Services, Inc.(12) 4,138,678 4,138,678 0 0
Previous Ashlin Shareholders:
James Brown (13) 676,268 676,268 0 0
Robert Africk (14) 80,038 80,038 0 0
Global Business Resources, Inc. (15) 80,038 80,038 0 0
Shares Representing Dividends for Preferred
Stockholders: (16) 1,636,380 1,636,380 0 0
Preferred Stockholders from
First Closing of Offering: (17)
51
IRA FBO James L. Robbins
Pershing LLC As Custodian 227,275 227,275 0 0
IRA FBO James J. O'Neill
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Theodore Haberer
Pershing LLC As Custodian
Roth Account 113,638 113,638 0 0
IRA FBO John Carlson
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Larry W. Williams
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Joseph P. Chrisman
Pershing LLC As Custodian
Rollover Account 227,275 227,275 0 0
IRA FBO Thomas A. Ross
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Don Walker
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Andrew McClure
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Allen Ruth
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Arthur Kenyon
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO George A. Lee
Pershing LLC As Custodian
Rollover Account 454,550 454,550 0 0
Michelle Levite DDS
PSP - Pershing LLC As Custodian 227,275 227,275 0 0
IRA FBO Sandra Rake
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Walter G. Clemons
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Stanley Watkins
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Mike Cushner
Pershing LLC As Custodian 113,638 113,638 0 0
James Wickenden 909,100 909,100 0 0
Leon Cooprider 113,638 113,638 0 0
Jonathan Kratter &
Lisa Kratter JT TEN 1,363,650 1,363,650 0 0
Mickey D. Tucker &
Shelley A.Tucker JT WROS
c/o Refinery Specialties 113,638 113,638 0 0
52
Dave Dhondt 227,275 227,275 0 0
Timothy Wallace &
Lisa B. Wallace JT TEN 159,093 159,093 0 0
TWM Capital, LP (Tom Muller) 1,136,375 1,136,375 0 0
Gordon Van Vliet 454,550 454,550 0 0
Mark Heiman 909,100 909,100 0 0
David C. Megan 454,550 454,550 0 0
Charles R. Costa &
Carol Costa JT TEN 227,275 227,275 0 0
Alan Harney &
Margie A. Harney JT TEN 227,275 227,275 0 0
Paul Whitcomb 227,275 227,275 0 0
Stuart A. Becker 227,275 227,275 0 0
Stuart Heller 454,550 454,550 0 0
James A. Mastrocola 340,913 340,913 0 0
Randy McFarland
Defined Benefit Plan 454,550 454,550 0 0
Lon Rake 227,275 227,275 0 0
Louis Suglia 454,550 454,550 0 0
Robert Olivadoti &
Lana Olivadoti JT TEN 340,913 340,913 0 0
Kaushik B. Patel 113,638 113,638 0 0
John Signorelli &
Kathleen Signorelli JT TEN 113,638 113,638 0 0
Tobias Salgado (BNT Erosion Control) 568,188 568,188 0 0
Mathew Zacharia 113,638 113,638 0 0
Beat the Street, Inc. (Barry A. Clark) 113,638 113,638 0 0
Paul Gittelson 113,638 113,638 0 0
Chuck Ennis 227,275 227,275 0 0
Daniel Farrell &
Roni Farrell JT TEN 113,638 113,638 0 0
Andrew McClure 113,638 113,638 0 0
William Lynch Defined Benefit Pl
William H. Lynch TTEE 227,275 227,275 0 0
Steven S. Cole &
Anat Cole JT TEN 113,638 113,638 0 0
James F. Selander 113,638 113,638 0 0
Stephan Gais 909,100 909,100 0 0
Robert Wolf
L Wolf Company 113,638 113,638 0 0
Carl & Phillis Elkins Trust
UAD 8/17/98
Carl A. Elkins TTEE 454,550 454,550 0 0
Anthony Rakos &
Dorothy L. Rakos JT WROS 113,638 113,638 0 0
Off Shore Drywall, Inc.
c/o Glen R. Goodsell 227,275 227,275 0 0
J & B Rentals Inc. (Neil Kipp) 227,275 227,275 0 0
Gerald W. Moreland 113,638 113,638 0 0
Moreland Crosby Industries
Attn: Gerald Moreland 113,638 113,638 0 0
53
Jochen Burrichter
c/o Hengeler Mueller 454,550 454,550 0 0
Jack Friedman 454,550 454,550 0 0
Daniel A. Diaz 454,550 454,550 0 0
Dr. Herbert Goldberg &
Rosalie Goldberg JT TEN 172,729 172,729 0 0
Joe Pillari &
Loretta Pillari JT TEN 227,275 227,275 0 0
Theodore Brayer & Marilouise Brayer JT TEN 114,911 114,911 0 0
Joseph Zappulla &
Lawrence F. Frasca TEN COM 113,638 113,638 0 0
James Herold 113,638 113,638 0 0
Jerred D. Ruble 454,550 454,550 0 0
Patrick Boyce &
Sonja Boyce JT TEN 227,275 227,275 0 0
Eric Billingsley 227,275 227,275 0 0
George E. Foote 454,550 454,550 0 0
John Bridwell 454,550 454,550 0 0
Betty Bridwell 454,550 454,550 0 0
James Jones &
Diana Jones JT TEN 227,275 227,275 0 0
Greg Small
c/o Deloitte & Touche 227,275 227,275 0 0
Dave Tennant 454,550 454,550 0 0
Patrick Sherman 227,275 227,275 0 0
Kalman Pila 227,275 227,275 0 0
Tim P. Baldwin, Jr. 227,275 227,275 0 0
The Larsen 2000 Revocable Trust
UAD 7/26/00
David L. Larsen & Kristen B. Larsen TTEES 227,275 227,275 0 0
Paul P. Pompa, Jr. 454,550 454,550 0 0
Jerome A. Shinkay 113,638 113,638 0 0
Ty P. Johnston 227,275 227,275 0 0
David Kincheloe 454,550 454,550 0 0
Caroline Rispoli &
Joseph Rispoli JT TEN 227,275 227,275 0 0
Pedro Hernandez 159,093 159,093 0 0
Mansukh Pipaliya 113,638 113,638 0 0
Steve W. Thompson 340,913 340,913 0 0
Theodore Green 113,638 113,638 0 0
John Klopp 227,275 227,275 0 0
Ronnie Kirkland 113,638 113,638 0 0
Jerry H. Chitwood 172,729 172,729 0 0
Jason Salgado &
Jamie Salgado JT TEN 113,638 113,638 0 0
Joseph G. Albano &
Louise A. Albano JT TEN 113,638 113,638 0 0
Scott Evanter 227,275 227,275 0 0
54
Thomas Prendergast 454,550 454,550 0 0
Jeffrey A. Grossman
& Elizabeth Grace JT TEN 113,638 113,638 0 0
Ken W. Chism 454,550 454,550 0 0
Christopher P. Schlieker 113,638 113,638 0 0
Charles S. Madden 113,638 113,638 0 0
Dave Ertler 227,275 227,275 0 0
David Cheung
Kwok Shwg Import Export 454,550 454,550 0 0
PCR Inc. (Jeffrey Cox) 113,638 113,638 0 0
Jay A. Hintze 227,275 227,275 0 0
Charles A. Rizzuto Sr. 113,638 113,638 0 0
John William Long Rev Trust
John William Long TTEE
DTD 7/2/92 113,638 113,638 0 0
Paul Goudie 113,638 113,638 0 0
Joseph J. Perrini &
Tessie Perrini JT TEN 213,639 213,639 0 0
Doug Ross & Lidia Ross JT TEN 681,825 681,825 0 0
Robert A. Loe 227,275 227,275 0 0
George D. Johnston
c/o Balfrey & Johnston Inc. 113,638 113,638 0 0
Pat McQuillan 113,638 113,638 0 0
James H. Landers &
Agnes L. Miller JT TEN 227,275 227,275 0 0
William H. Reynolds 113,638 113,638 0 0
Preston Morris 136,365 136,365 0 0
Joseph A. Santoro 318,185 318,185 0 0
George M. Martin 113,638 113,638 0 0
James E. Clark 227,275 227,275 0 0
Ira Agustus Hunt, Jr. & Maria P. Hunt (5) 454,550 454,550 0 0
Preferred Stockholders from
Second Closing of Offering: (18)
Douglas Coleman 113,638 113,638 0 0
John Duncan 454,550 454,550 0 0
J. J. Pierce 227,275 227,275 0 0
E. Scott Nolan 113,638 113,638 0 0
James E. Clark 227,275 227,275 0 0
D. Dale Bryant 113,638 113,638 0 0
Phillip E. Thompson 113,638 113,638 0 0
Abraham M. Fishoff 909,100 909,100 0 0
C & G Family Christopher J. Heller &
Geneva C. Heller TTEES UAD
12/26/1991 227,275 227,275 0 0
James Herold 113,638 113,638 0 0
James A. Dailey, Jr. & Lisa A. Dailey JT TEN 113,638 113,638 0 0
Piotr D. Moncarz 113,638 113,638 0 0
Doug Ross & Lidia Ross JT TEN 113,638 113,638 0 0
55
Joseph A. Santoro
PSP - Pershing LLC As Custodian 136,365 136,365 0 0
C. Eric Mayer 113,638 113,638 0 0
Jeffrey A. Grossman& Elizabeth Grace JT TEN 113,638 113,638 0 0
Joseph G. Albano & Louise A. Albano JT TEN 45,455 45,455 0 0
Joseph Zappulla & Lawrence F. Frasca TEN COM 45,455 45,455 0 0
Ira A. Hunt, Jr. & Maria P. Hunt (5) 227,275 227,275 0 0
Jason Salgado & Jamie Salgado JT TEN 227,275 227,275 0 0
Bernard Klein 227,275 227,275 0 0
Michael E. Rose 90,910 90,910 0 0
Mary O'Neil Revocable Trust
Mary R. & James J. O'Neil TTEE
UA DTD 3/25/00 86,365 86,365 0 0
Joseph J. Perrini & Tessie Perrini JT TEN 250,003 250,003 0 0
Randy McFarland
Defined Benefit Plan 454,550 454,550 0 0
Marty Johnson 113,638 113,638 0 0
Ronald M. Diaz & Sonja Diaz JT TEN 136,365 136,365 0 0
James A. Mastrocola 113,638 113,638 0 0
Jonathan Kratter & Lisa Kratter JT TEN 227,275 227,275 0 0
Jonathan Webb 113,638 113,638 0 0
Herman Moskowitz 113,638 113,638 0 0
Chuck Ennis 48,728 48,728 0 0
David Davis 113,547 113,547 0 0
Brooklyn Property Management, Ltd.
(Strato Malamas) 227,275 227,275 0 0
Huffman Development Corp
Attn: Mr. Rod Huffman 113,638 113,638 0 0
Shirlee Gordon 56,819 56,819 0 0
Melvin S. Jacobson & Cynthia Jacobson JT WROS 454,550 454,550 0 0
Adam Harris 113,638 113,638 0 0
Pat McQuillan 113,638 113,638 0 0
George E. Foote 227,275 227,275 0 0
Dave Tennant 454,550 454,550 0 0
Dr. Herbert Goldberg & Rosalie Goldberg JT TEN 54,546 54,546 0 0
Larry Edgar 113,638 113,638 0 0
Larry Gelbfish 454,550 454,550 0 0
Allan S. Kalt Revocable Trust
UAD 2/11/98 Alan S. Kalt TTEE 113,638 113,638 0 0
William B. Perillo & Martha Perillo 681,825 681,825 0 0
Lina R. Merlino 227,275 227,275 0 0
Luis Peragallo & Lucia Peragallo (4) 670,553 670,553 0 0
Miscellaneous:
Victor J. DiGioia (19) 39,000 39,000 0 0
56
Rochelle Goldstein (19) 29,000 29,000 0 0
Michael Goldstein (19) 10,000 10,000 0 0
Barbara Ceneglino (19) 2,000 2,000 0 0
Brien Daughney (19) 20,000 20,000 0 0
Totals: 61,814,388 61,024,388
* Less than 1%
- ----------
(1) Beneficially owned shares consist of 4,076,219 shares of Common Stock and
vested options exercisable for 250,000 shares of Common Stock at $0.22 per
share. Mr. Gales acquired the 4,076,219 shares of our Common Stock as of
November 30, 2005 in exchange for the cancellation of the same number of
shares of Original Gales common stock. Mr. Gales was the Executive
Chairman of Original Gales and, as of November 30, 2005, became our
Executive Chairman.
(2) Beneficially owned shares consist of 3,404,538 shares of Common Stock and
vested options exercisable for 240,000 shares of Common Stock at $0.22 per
share. Mr. Giusto acquired the 3,404,538 shares of our Common Stock as of
November 30, 2005 in exchange for the cancellation of the same number of
shares of Original Gales common stock. Mr. Giusto was the Chief Financial
Officer of Original Gales and, as of November 30, 2005, became our Chief
Financial Officer, Treasurer and Vice Chairman.
(3) Beneficially owned shares for each of Mr. Rettaliata and Mr. Peragallo
consist of 118,423 shares of Common Stock, vested options exercisable into
150,000 shares of Common Stock at $0.22 per share and a convertible note
in the principal amount of $332,631, convertible into 831,577 shares of
Common Stock, all of which were acquired as of November 30, 2005 in
connection with the Acquisition and the Merger. Mr. Rettaliata has been
President of AIM and, as of November 30, 2005, became a director of the
Company as well as its President and Chief Executive Officer. As of
November 30, 2005, Dario Peragallo became one of our directors as well as
our Executive Vice President.
(4) Mr. Luis Peragallo was an officer and major shareholder of AIM prior to
November 30, 2005 and is the brother of Jorge Peragallo and father of
Dario Peragallo. He acquired such 253,214 shares of Common Stock in
connection with the Acquisition on such date. In addition, jointly with
his spouse on December 15, 2005, Luis Peragallo acquired shares of our
Preferred Stock which can be converted at any time into 670,553 shares of
Common Stock.
(5) Messrs. Siegel, Schaum and Hunt are members of our Board of Directors.
General Hunt, jointly with his wife, is also the holder of Preferred
Stock, convertible into an aggregate of 681,775 shares of Common Stock,
which were purchased in the Offering.
(6) Beneficially owned shares consist of 100,000 shares of Common Stock, which
Mr. Nagler acquired in exchange for Original Gales common stock which he
subscribed for in October 2004, and 45,455 shares of Common Stock issuable
upon exercise of a warrant at $0.22 per share. Such warrants were granted
to Mr. Nagler when he invested in a Original Gales bridge financing in
August 2005. Mr. Nagler, our Secretary and a member of our Board, is a
partner of Eaton & Van Winkle LLP, a law firm which is our counsel and,
prior to November 30, 2005, was counsel to Original Gales.
(7) ECH Consulting, Inc. is a consultant to us. Its 325,000 Shares of Common
Stock were part of a finders' fee which was paid in connection with our
PNC Bank loan facility which we entered into on November 30, 2005. Such
325,000 shares were contributed to ECH Consulting, Inc. by Michael Gales
and did not require the additional issuance of shares by us. The
controlling person of ECH Consulting, Inc. is Edmund Chavez.
57
(8) Croft Investments Limited Partnership acquired the 250,000 shares of
Common Stock as of November 30, 2005 in exchange for the cancellation of
the same number of shares of Original Gales common stock. Mr. Milton
Barbarosh who controls Croft Investments, acquired such Original Gales
shares through subscription as of October 28, 2004.
(9) Atlas Capital Services, LLC was entitled to acquire 1,477,230 shares of
our Common Stock as of November 30, 2005 in exchange for the cancellation
of the same number of shares of its Original Gales common stock and
instructed us to issue such 1,477,230 shares of Common Stock to its
designees (ACS Holdings, LLC, Edward Wahrsager, Robert A. Schecter, Shimon
S. Fishman and Steven Pollan) in the amounts set forth in the table
opposite the names of such designees. Atlas Private Equity, LLC holds
226,334 shares of Common Stock, which it acquired by converting a
convertible promissory note issued by us in the principal amount of
$22,500, and also holds a warrant to purchase 409,091 shares of Common
Stock at the exercise price of $.055 per share. It acquired such warrant
from us in February 2005 in connection with its purchase of such $22,500
convertible note from us. Atlas Capital Services, LLC, ACS Holdings, LLC
and Atlas Private Equity, LLC are directly or indirectly owned by the same
entity.
(10) Rhoda Lewis, MTP Operating Corp., Stephen Nagler and Marilyn Thypin were
investors in a convertible bridge note financing, completed in August
2005, in which Original Gales raised $45,000 and issued to the investors,
along with $45,000 principal amount of convertible notes, warrants
exercisable into an aggregate of 204,545 shares of Original Gales common
stock at the exercise price of $0.22 per share. These warrants allow for
cashless exercise. These warrants were automatically converted as of
November 30, 2005 into warrants exercisable into the same number of shares
of our Common Stock upon the same terms. The 45,455 shares set forth next
to each of Rhoda Lewis' and MTP Operating Corp.'s name, 45,455 of the
shares set forth next to Stephen Nagler's name (see note 6 to this table),
and the 68,182 shares set forth next to Marilyn Thypin's name, represent
shares of Common Stock issuable upon exercise of such warrants. The
controlling person of MTP Operating Corp. is David Avital.
(11) Stephen Caragol and Frank and Cynthia Gasztonyi were investors in a bridge
note financing (the $105,000 Bridge Financing"), completed in September
2005, in which Original Gales raised $105,000 and issued to the investors,
along with $105,000 principal amount of notes, warrants exercisable into
an aggregate of 477,273 shares of Original Gales common stock at the
exercise price of $0.22 per share. These warrants allow for cashless
exercise. These warrants were automatically converted as of November 30,
2005 into warrants exercisable into the same number of shares of our
Common Stock upon the same terms. The 340,909 shares set forth next to
Stephen Caragol's name, and the 136,364 shares set forth next to Frank and
Cynthia Gasztonyi's names, represent shares of Common Stock issuable upon
exercise of such warrants. A warrant to purchase 47,728 shares was issued
to the placement agent in the $105,000 Bridge Financing (see note 12).
(12) GunnAllen Financial, Inc. was the placement agent for the Offering and the
$105,000 Bridge Financing and serves as a consultant to us. The 4,138,678
shares represent shares of Common Stock issuable to GunnAllen upon
exercise of placement warrants which were issued to GunnAllen in
connection with the Offering in December 2005 and the $105,000 Bridge
Financing in September 2005. The placement agent warrants from the
Offering may be exercised until December 15, 2010 into a total of
4,090,950 shares of Common Stock and the placement agent warrants from the
$105,000 Bridge Financing may be exercised until September 2010 into a
total of 47,728 shares of Common Stock. All of such warrants have an
exercise price of $0.22 per share and allow for cashless exercise.
GunnAllen Financial is an NASD member brokerage firm and a registered
broker dealer. It is controlled by Richard A. Frueh, who has the control
and power to vote and/or sell the securities held by GunnAllen Financial.
58
(13) James A. Brown is a member of our Board of Directors and, until November
30, 2005, was our Chairman, Chief Executive Officer and Secretary. Of his
676,268 shares of Common Stock, 100,000 shares were issued to him on
November 30, 2005 upon cancellation of the same number of shares of
Original Gales common stock (which were issued to him as of November 14,
2005 in connection with his agreement to serve on our Board),
approximately 256,119 shares were issued to him in March 2005 in
connection with our Plan of Reorganization, approximately 240,112 shares
were issued to him in January 2005 in connection with our Plan of
Reorganization, and approximately 80,038 shares were issued to him in
August 2003 in connection with his services on our Board.
(14) Robert Africk was a consultant to us until November 30, 2005. We issued to
him his 80,038 shares of Common Stock as of September 16, 2005 in
consideration for consulting services.
(15) We issued to Global Business Resources, Inc. its 80,038 shares of Common
Stock in March 2005 in consideration for consulting services. The
controlling person of the holder is Peter Goldstein.
(16) The holders of Preferred Stock are entitled to receive dividends of 8% per
annum payable in shares of Preferred Stock (the "PIK Dividends"). The
1,636,380 shares of Common Stock represent shares of Common Stock issuable
upon conversion of PIK Dividends which would accrue if all of the
Preferred Stock remained outstanding for six months from the date of their
original issuance.
(17) These selling stockholders were investors in the first closing of the
Offering on November 30, 2005. All of the shares listed opposite their
names represent shares of Common Stock issuable upon conversion of the
Preferred Stock which they purchased in connection with the Offering. Ira
A. Hunt is a member of our Board of Directors.
(18) These selling stockholders were investors in the second closing of the
Offering on December 15, 2005. All of the shares listed opposite their
names represent shares of Common Stock issuable upon conversion of the
Preferred Stock which they purchased in connection with the Offering. Ira
A. Hunt is a member of our Board of Directors. Luis Peragallo was an
Officer and major shareholder of AIM prior to November 30, 2005 and is the
brother of Jorge Peragallo and the father of Dario Peragallo.
(19) These holders are assignees of Goldstein & DiGioia, LLP, a law firm, which
acquired 100,000 shares of Common Stock in exchange for Original Gales'
common stock which it acquired as of October 2004. Goldstein & DiGioia
certain legal services to Original Gales in 2004 and was, for a time,
counsel for the Placement Agent in connection with the Offering.
MARKET PRICE OF AND DIVIDENDS ON OUR
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is quoted on the OTC Bulletin Board under the trading
symbol "GLDS" ("ASHN" prior to February 15, 2006). Prior to the effectiveness of
our Plan of Reorganization, our symbol was "HNNS". The prices set forth below
reflect the quarterly high and low sale price information for shares of our
Common Stock during the last two fiscal years. These quotations reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
represent actual transactions. There were no trades of our securities on the
OTCBB prior to October 4, 2000.
59
2006 Quarter Ended High Low
- ------------------ ---- ---
March 31, 2006 $2.25 $0.30
2005 Quarter Ended High Low
- ------------------ ---- ---
December 31, 2005 $0.85 $0.11
September 30, 2005 $0.15 $0.07
June 30, 2005 0.10 0.06
March 31, 2005 0.18 0.05
2004 Quarter Ended High Low
- ------------------ ---- ---
December 31, 2004 $0.07 $0.01
September 30, 2004 0.25 0.06
June 30, 2004 0.75 0.18
March 31, 2004 0.68 0.13
2003 Quarter Ended High Low
- ------------------ ---- ---
December 31, 2003 $0.53 $0.11
September 30, 2003 0.60 0.07
June 30, 2003 0.10 0.04
March 31, 2003 0.05 0.04
As of May 31, 2006, there were approximately 77 holders of record of our
Common Stock and approximately 164 holders of record of our Preferred Stock.
Prior to June 29, 2000, we were not a reporting company and were not
required to file quarterly, annual, and other reports with the SEC.
We have not declared or paid any cash dividends on our Common Stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
Prior to the Merger, AIM was a Subchapter S corporation and made distributions
to its shareholders to enable them to pay income taxes on their allocable
portion of the Company's income.
As of May 31, 2006, 52,683,495 shares of our Common Stock were subject to
issuance upon exercise or conversion of outstanding options or warrants to
purchase, or securities convertible into, shares of Common Stock.
The following table provides information as of December 31, 2005 about our
equity compensation plans and arrangements as of December 31, 2005.
60
Equity Compensation Plan Information - December 31, 2005
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------- -------------------------- ---------------------- -------------------------
Equity compensation plans
approved by security holders
(1) -- $ -- --
- ------------------------------- -------------------------- ---------------------- -------------------------
Equity compensation plans not
approved by security holders
(2) 8,988,678 $.22 5,150,000
- ------------------------------- -------------------------- ---------------------- -------------------------
Total (1)(2) 8,988,678 $.22 5,150,000
=============================== ========================== ====================== =========================
(1) All of the options previously granted under our 1998 Stock Option Plan were
terminated or cancelled during 2005. We terminated our 1998 Stock Option Plan
following the Merger.
(2) Shareholder approval of our 2005 Stock Incentive Plan was completed as of
February 15, 2006. In connection with the Merger, our Board adopted our 2005
Stock Incentive Plan, and issued stock options to purchase 4,850,000 shares to
our new executive officers. The vesting and exercise prices of the 4,850,000
options which we granted to executive officers in 2005 are described below in
the footnotes under "Executive Compensation - Option Grants In Last Fiscal
Period". 5,150,000 shares remain available for grant under our 2005 Stock
Incentive Plan. Of the 8,988,678 shares issuable upon exercise of outstanding
options, warrants, and other rights, 4,090,950 shares underlie a warrant issued
to GunnAllen Financial, Inc. in connection with our offering of our Series A
Convertible Preferred Stock and 47,728 shares underlie a warrant issued to
GunnAllen Financial, Inc. in connection with our $105,000 Bridge Financing. Both
warrants are exercisable at $0.22 per share.
Transfer Agent
Florida Atlantic Stock Transfer, with offices at 7130 N. Nob Hill Road,
Tamarac, Florida 33321-1841, is the registrar and transfer agent for our Common
Stock. American Stock Transfer & Trust Company, with offices at 59 Maiden Lane,
New York, New York 10038, is the registrar and transfer agent for our Preferred
Stock.
LEGAL PROCEEDINGS
A legal action seeking $5,000,000 has been brought against AIM by an
independent contractor for personal injury allegedly caused by a fall in AIM's
premises. AIM has insurance coverage for this claim in the amount of $4,000,000.
The carrier has assumed the defense of this action and at a settlement
mediation, the plaintiff made a demand of $2,000,000, which was rejected by the
carrier. The Company believes that any judgment or settlement in this matter
will be paid by the carrier.
61
We were involved in litigation with J.C. Herbert Bryant, III, a former
officer, director and shareholder of our Company, and KMS-Thin Tab 100, Inc.,
which was settled in September 2002. As part of the settlement, we entered into
a distribution agreement with Mr. Bryant, beginning on September 26, 2002 and
ending on September 25, 2007, permitting Mr. Bryant to purchase certain products
from us and to exclusively distribute those products in Florida from Orlando
south. In October 2003, we terminated the distribution agreement with KMS based
on KMS's breach of material terms of the agreement. On December 1, 2003, we
filed suit against KMS-Thin Tab 100, Inc. in the Palm Beach County Circuit Court
(Case No. 2003CA012757XXCDAN) for breach of contract, trademark infringement and
for a declaration of rights that the distribution agreement is terminated and of
no further force and effect. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should
prevail, and rejected a request for attorney's fees by KMS-Thin Tab 100 Inc.,
thus adjudicating the matter. KMS-Thin Tab 100 Inc. subsequently filed a notice
of appeal.
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted
our motion to dismiss the appeal by KMS-Thin Tab 100 Inc. We are not aware of
any other outstanding litigation.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
(a) On December 15, 2005, we appointed the firm of Goldstein Golub Kessler
LLP ("GGK") as our independent auditor and, as of such date, dismissed the firm
of Daszkal Bolton LLP ("DB"), which had been serving as our independent auditor
up to such date. The change in auditors is in connection with the Merger which
occurred on November 30, 2005 and the change in control of the Company relating
thereto.
(b) The reports of DB on our financial statements for the fiscal years
ended December 31, 2004 and December 31, 2003 did not contain an adverse
opinion, a disclaimer of opinion or any qualifications or modifications related
to uncertainty, limitation of audit scope or application of accounting
principles, except that such reports of DB express "substantial doubt about our
ability to continue as a going concern" and state that "The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty". These "going concern" qualifications relate only to periods prior
to November 30, 2005 and do not relate to the financial statements of Original
Gales or AIM. During the fiscal years ending December 31, 2004 and December 31,
2003 and the period from January 1, 2005 to December 15, 2005, we did not have
any disagreements (within the meaning of Instruction 4 of Item 304 of Regulation
S-K) with DB as to any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure and there have been no
reportable events (as defined in Item 304 of Regulation S-K).
(c) We have not consulted with GGK regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on our financial statements during the two most recent fiscal years
through the present.
(d) The dismissal of DB and appointment of GGK as our independent auditor
was approved by our Board of Directors on December 15, 2005.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Tenth of our Articles of Incorporation and VII of our By-laws
provide for the indemnification of directors to the fullest extent permissible
under Florida law.
62
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our Directors, officers and controlling persons, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
Director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
LEGAL MATTERS
Our counsel, Eaton & Van Winkle LLP, located in New York, New York, is
passing upon the validity of the issuance of the shares of Common Stock that are
being offered pursuant this prospectus.
EXPERTS
Goldstein Golub Kessler LLP, independent certified public accountants,
located in New York, New York has audited our financial statements, and Bildner
& Giannasco LLP, independent certified public accountants, located in Jericho,
New York, has audited AIM's Financial Statements, included in this registration
statement to the extent, and for the periods set forth in their reports. We have
relied upon such reports, given upon the authority of such firms as experts in
accounting and auditing.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Stephen Nagler, our Secretary and one of our directors, is also a partner
of Eaton & Van Winkle LLP, a law firm which serves as our counsel. Eaton & Van
Winkle LLP owns 150,000 shares of our Common Stock. Mr. Nagler is the beneficial
owner of 145,455 shares of our Common Stock.
FINANCIAL STATEMENTS
Our unaudited financial statements as of and for the quarter ended March
31, 2006 are included in this prospectus. We have also included in this
prospectus the financial statements of Original Gales' as of and for the year
ended December 31, 2005, inclusive of the activity of AIM from the date of the
Acquisition. To provide a basis of comparison, we have also included with this
prospectus the historical financial information of AIM as of and for the 11
months ended November 30, 2005 and as of and for the years ended December 31,
2004 and December 31, 2003.
63
GALES INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
F-1
GALES INDUSTRIES INCORPORATED
INDEX
Page No.
Condensed Consolidated Financial Statements
Balance Sheet as of March 31, 2006 (unaudited)..................... F-3
Statement of Operations for the three month period
ended March 31, 2006 (unaudited).................................... F-4
Statement of Cash Flow for the three month period
ended March 31, 2006 (unaudited).................................... F-5
Notes to Condensed Consolidated Financial
Statements.......................................................... F-6 - F-10
F-2
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Interim Balance Sheet
Historical Proforma Proforma
March 31, 2006 Adjustments March 31, 2006
-------------- ----------- --------------
(unaudited) (unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 877,812 $ 877,812
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $45,000 3,805,208 3,805,208
Inventory 13,530,482 13,530,482
Prepaid Expenses and Other Current Assets 323,019 323,019
Deposits 76,924 76,924
---------------------------- ------------
Total Current Assets 18,613,445 $ -- 18,613,445
Property, Plant, and Equipment, net 7,678,003 7,678,003
Cash Surrender Value - Officer's Life 37,756 37,756
Deferred Financing Costs 451,059 451,059
Other Assets 41,222 41,222
Goodwill 1,265,963 1,265,963
---------------------------- ------------
TOTAL ASSETS $ 28,087,448 $ -- $ 28,087,448
============================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 7,172,396 $ 7,172,396
Advance Payment - Customers 188,199 188,199
Mortgage
Notes Payable - Current Portion 6,483,625 6,483,625
Notes Payable - Sellers - Current Portion 240,500 240,500
Capital Lease Obligations - Current Portion 364,990 364,990
Due to Sellers 91,084 91,084
---------------------------- ------------
Total current liabilities 14,540,794 -- 14,540,794
Long term liabilities
Notes Payable - Net of Current Portion 3,499,529 3,499,529
Notes Payable - Sellers - Net of Current Portion 1,386,762 1,386,762
Capital Lease Obligations - Net of Current Portion 725,638 725,638
Deferred Tax Liability 662,821 662,821
---------------------------- ------------
Total liabilities 20,815,544 -- 20,815,544
---------------------------- ------------
Commitments and contingencies
Stockholders' Equity
Series A Convertible Preferred - $.001 Par value, 8,003,716
Shares Authorized
900 Shares Issued and Outstanding as of March 31, 2006 and -0-
shares on a proforma basis; Liquidation Value, $18,240,000 1 (1)(1) --
Common Stock - $.001 Par, 120,055,746 Shares Authorized
14,723,421 Shares Issued and Outstanding as of March 31, 2006 and
55,632,921 shares on a proforma basis 14,723 40,910 (1) 55,633
Additional Paid-In Capital 7,870,518 (40,909)(1) 7,829,609
Accumulated Deficit (613,338) (613,338)
---------------------------- ------------
Total Stockholders' Equity 7,271,904 0 7,271,904
---------------------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,087,448 $ -- $ 28,087,448
============================ ============
Explanation of Adjustments
- --------------------------------------------------------------------------------
(1) Conversion of Preferred Stock to Common Stock that will mandatorily convert
on effectiveness of registration statement using latest interim balance sheet
Calculation was derived from 900 shares of preferred stock with each share of
preferred converted 900
to 45,455 shares of common stock 45,455
------------
common shares 40,909,500
common stock par value @ $.001 0.001
------------
value of common stock 40,910
============
See notes to condensed consolidated financial statements
F-3
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Statement of Operations
For the three month period ended March 31, 2006 (1)
(unaudited)
Net sales $ 8,898,272
Cost of Sales 7,385,566
------------
Gross profit 1,512,706
------------
Operating costs and expenses:
Selling and marketing 155,702
General and administrative 849,383
------------
Total operating expenses 1,005,085
------------
Income from operations 507,621
Interest and financing costs (325,050)
Gain on sale of life insurance policy 53,047
------------
Income before provision for income taxes 235,618
Provision for income taxes 99,253
------------
Net income 136,365
Less: Dividend attributable to preferred stockholders 180,000
------------
Net loss attributable to common stockholders $ (43,635)
============
Loss per share (basic and diluted) $ (0.00)
============
Weighted average shares outstanding (basic and diluted) 14,723,421
============
(1) For the period from October 28, 2004 (date of inception) through March 31,
2005 the Company had no business activity other than the issuance of a $22,500
convertible bridge note that accrued approximately $325 in interest for the
three month period ended March 31, 2005; the note and respective accrued
interest were subsequently converted to shares of the Company's common stock as
part of the Merger (see note 1 to condensed consolidated financial statements)
and accordingly a Statement of Operations is not presented.
See notes to condensed consolidated financial statements
F-4
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Statement of Cash Flows
For the three month period ended March 31, 2006 (1)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 136,365
Adjustments to Reconcile Net Income to Net
Cash Used in Operating Activities:
Depreciation and amortization of property and equipment 138,111
Amortization of deferred financing costs 35,148
Deferred taxes (13,573)
Stock based compensation expense 25,905
Changes in Assets and Liabilities
(Increase) Decrease in Assets:
Accounts receivable (1,181,596)
Inventory (926,671)
Prepaid expenses and other current assets (112,895)
Deposits (11,329)
Cash surrender value - officer's life insurance 28,460
Other assets 84
Increase in Liabilities:
Accounts payable and accrued expenses 1,877,767
-----------
NET CASH USED IN OPERATING ACTIVITIES (4,225)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (99,645)
-----------
NET CASH USED IN INVESTING ACTIVITIES (99,645)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of capital lease obligations (88,944)
Repayment of notes payable to sellers (148)
Proceeds from notes payable, net 12,358
-----------
NET CASH USED IN BY FINANCING ACTIVITIES (76,734)
-----------
Net decrease in cash and cash equivalents (180,604)
Cash and cash equivalents at the beginning of period 1,058,416
-----------
Cash and cash equivalents at the end of period $ 877,812
===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 170,995
===========
(1) For the period from October 28, 2004 (date of inception) through March 31,
2005 the Company had no business activity other than the issuance of a $22,500
convertible bridge note that accrued approximately $325 in interest for the
three month period ended March 31, 2005; the note and respective accrued
interest were subsequently converted to shares of the Company's common stock as
part of the Merger and accordingly a Statement of Cash Flow is not presented.
See notes to condensed consolidated financial statements
F-5
Note 1. FORMATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida
corporation and its newly-formed subsidiary Merger Sub, entered into a
Merger Agreement (the "Merger Agreement") on November 14, 2005 with Gales
Industries Incorporated, a privately-held Delaware corporation ("Original
Gales"). On November 30, 2005 (the "Closing Date") Original Gales merged
(the "Merger") into Merger Sub. Pursuant to the Merger Agreement, the
Company issued 10,773,107 shares of its common stock ("Common Stock")
(representing 73.6% of Ashlin's outstanding shares) and 900 shares of
Series A Convertible Preferred Stock which was initially convertible into
40,909,500 shares of common stock of the Company for all the issued and
outstanding shares of Original Gales. 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 was the surviving entity.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated ("we" or the "Company") and its state of domicile from
Florida to Delaware.
Prior to the closing of the Merger, Original Gales, which did not have any
business operations other than in connection with the transactions
contemplated by the Merger Agreement, acquired (the "Acquisition") all of
the outstanding capital stock of Air Industries Machining, Corp. ("AIM").
Because of the change in ownership, management and control that occurred
in connection with the Acquisition, in accordance with Statement of
Financial Accounting Standards ("SFAS") 141, Business Combinations, the
transaction was accounted for as a purchase. Accordingly, the purchase
price was allocated to assets acquired and liabilities assumed based on
SFAS No. 141. Simultaneously with the Acquisition, AIM entered into a bank
facility (the "New Loan Facility") and used proceeds from the facility to
acquire real estate (the "Real Estate Acquisition").
Prior to the Acquisition, Original Gales raised bridge financing. In
connection with the Acquisition, Original Gales procured a private
placement of Series A Preferred Stock, the proceeds of which were used to
acquire AIM. Immediately prior to the Merger, Original Gales had
outstanding certain bridge notes convertible into shares of Original
Gales' common stock and certain bridge warrants to purchase shares of
Original Gales' common stock.
Original Gales was formed in October 2004 and prior to the Acquisition did
not have any business operations or other activity other than transactions
contemplated with the Merger. For presentation purposes, (see Note 4) to
see what the results of operations would have looked like if we had made
the Acquisition on January 1, 2005.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are
adequate to make the financial information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the
F-6
notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2005, filed with the Securities and Exchange
Commission on April 17, 2006. All adjustments were of a normal recurring
nature unless otherwise disclosed. In the opinion of management, all
adjustments necessary for a fair statement of the results of operations
for the interim period have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the
full year.
Reverse stock split
Pursuant to the terms of the Merger Agreement, prior to the Merger, Ashlin
effected a 1-for-1.249419586 reverse split of its Common Stock (the
"Reverse Split"). The Reverse Split became effective November 21, 2005.
The Reverse Split reduced the number of shares of Common Stock which the
Company had outstanding on a fully diluted basis to 3,868,000. As a result
of the Reverse Split, the conversion of the outstanding shares of Original
Gales pursuant to the Merger for new shares of the Company's Common Stock
was on a one-for-one basis. Any of the Company's shareholders who, as a
result of the Reverse Split, held a fractional share of Common Stock
received a whole share of Common Stock in lieu of such fractional share.
After giving effect to the Reverse Split, prior to the Merger, the Company
had outstanding 3,823,980 shares of Common Stock which continued to be
outstanding after the Merger.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, unamortized finance costs, accrued
expenses and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS
No. 123 and supersedes Accounting Principles Board Opinion No. 25. SFAS
No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values at the date of grant. The Company recorded an
expense of approximately $26,000 in the accompanying statement of
operations for the three month period ended March 31, 2006 in accordance
with the measurement requirements under SFAS No. 123 (R) (see Note 3).
Note 2. CASH SURRENDER VALUE - LIFE INSURANCE
During the quarter ended March 31, 2006, the Company sold one of its
key-man life insurance policies. Proceeds from the sale of the insurance
policy were $86,000 which was offset by the cash surrender value of
$32,953. The resulting gain of $53,047 was recognized as Other
Non-Operating Income in the accompanying Statement of Operations for the
three month period ended March 31, 2006.
F-7
Note 3. STOCK-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option plan
and reserved 10,000,000 shares of its Common Stock for issuance under the
plan. The stock option plan permits the Company to grant non-qualified and
incentive stock options to employees, directors, and consultants. Awards
granted under the Company's plans vest over four and seven years.
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment ("SFAS 123R"). The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model. During the three months ended March 31, 2006, no
stock options were granted.
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock
options will be issued based on average trading prices of the Company's
Common Stock at the end of a given future period. Due to this variable
feature, these stock options are not deemed to be granted for purposes of
applying SFAS 123(R) and accordingly, their fair value will be calculated
and expensed in future periods.
At March 31, 2006, 790,000 options are vested and exercisable. The
weighted average exercise price of exercisable options at March 31, 2006
was $0.22 per share.
A summary of the status of the Company's stock options as of March 31,
2006, and changes during the period then ended is presented below:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Shares Price Term Value
--------- --------- ----------- ---------
Outstanding and reserved for
grants at
January 1, 2006 4,850,000 $ 0.32
Granted -- --
Cancelled -- --
Exercised -- --
--------- --------- --------- --------
Outstanding and reserved for
grants at
March 31, 2006 4,850,000 $ 0.32 9.75 219,620
========= ========= ========= ========
Options vested and exercisable at
March 31, 2006 790,000 $ 0.22 9.75 61,620
========= ========= ========= ========
The Company recorded an expense of $25,905 in its consolidated statement
of operations for the three month period ended March 31, 2006. The stock
option
F-8
expense relates to stock options granted in the previous fiscal year. The
Company granted no stock options during the quarter ended March 31, 2006.
The following table illustrates stock options granted through March 31,
2006:
Options Outstanding Options Vested and Exercisable
-------------------------------------------------- -----------------------------------
Weighted-
Average Weighted-
Remaining Average Weighted-
Number Contractual Exercise Number Average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price
-------------------------- ---------------- ------------- ------------- -------------- ------------------
$0.220 790,000 9.75 $ 0.220 790,000 $ 0.22
$0.428 790,000 9.75 $ 0.428 -- --
Based on future market
price 3,270,000 9.75 N/A -- --
----------- ----------- ----------- ----------- -----------
4,850,000 9.75 $ 0.32 790,000 $ 0.22
=========== =========== =========== =========== ===========
A summary of the status of the Company's non-vested shares as of March 31,
2006 and changes during the three months ended March 31, 2006 is presented
below:
Weighted Weighted
Average Average
Exercise Remaining
Number Price Per Contractual
of Shares Share Term (in years)
----------- ----------- ---------------
Nonvested Shares at
January 1, 2006 790,000 $ 0.428 9.75
Shares based on future
market price 3,270,000 N/A N/A
Options granted -- -- --
Options vested -- -- --
Options forfeited or
expired -- -- --
----------- ----------- -----------
Nonvested shares at
March 31, 2006 4,060,000 $ 0.428 9.75
=========== =========== ===========
As of March 31, 2006, there was $72,417 of unrecognized compensation cost
related to nonvested stock option awards, which is to be recognized over
the remaining weighted average vesting period of nine months.
Note 4. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed statement of operations for
the three months ended March 31, 2005 gives effect to the Merger
Agreement, Acquisition, and Real Estate Acquisition as if they occurred on
January 1, 2005. The Acquisition was accounted for under the purchase
method of accounting in accordance with Statement of Financial Accounting
Standards No. 141, Accounting for Business Combinations. Under the
purchase method of accounting, the total purchase price was allocated to
the assets acquired and liabilities assumed based upon the fair values at
the completion of the Acquisition.
F-9
The unaudited pro forma condensed consolidated Statement of Operations has
been prepared for illustrative purposes and are not necessarily indicative
of the condensed consolidated results of operations in future periods or
the results that would have been realized had the Acquisition actually
occurred on January 1, 2005. The pro forma adjustments are based on the
information available at the time of the preparation of this document.
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Statement of Operations
For the quarter ended
March 31,
-----------------------------
2006 2005
Actual
(unaudited) (proforma)
------------ ------------
Net sales $ 8,898,272 $ 6,265,206
Cost of Sales 7,385,566 5,278,591
------------ ------------
Gross profit 1,512,706 986,615
------------ ------------
Operating costs and expenses
Selling and marketing 155,702 69,919
General and administrative 849,383 365,855
------------ ------------
Total operating expenses 1,005,085 435,774
------------ ------------
Income from operations 507,621 550,841
Other expenses
Interest and financing costs (325,050) (205,279)
Gain on sale of life insurance policy 53,047 --
------------ ------------
Income before provision for income taxes 235,618 345,562
Provision for income taxes 99,253 138,294
------------ ------------
Net income 136,365 207,268
Less: Dividend attributable to preferred stockholders 180,000 180,000
------------ ------------
Net income (loss) attributable to common stockholders $ (43,635) $ 27,268
============ ============
Earnings (loss) per share:
Basic $ 0.00 $ 0.00
============ ============
Diluted $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding:
Basic 14,723,421 14,723,421
============ ============
Diluted 14,723,421 27,871,958
============ ============
F-10
GALES INDUSTRIES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
F-11
GALES INDUSTRIES INCORPORATED
Table of Contents
Page No.
Financial Information
Independent Auditor's Report....................................... F-13
Gales Industries Incorporated - Consolidated Balance Sheet........ F-14
Gales Industries Incorporated - Consolidated Statement of
Operations F-15
Gales Industries Incorporated - Consolidated Statement of
Stockholders' Equity............................................. F-16
Gales Industries Incorporated - Consolidated Statement of Cash Flow F-17 - F-18
Gales Industries Incorporated - Notes to Consolidated Financial
Statements....................................................... F-19 - F-37
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Gales Industries Incorporated
We have audited the accompanying consolidated balance sheet of Gales Industries
Incorporated and Subsidiaries as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period October 28, 2004 (inception) to December 31, 2004 and the year ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gales
Industries Incorporated and Subsidiaries as of December 31, 2005, and the
results of their operations and their cash flows for the period October 28, 2004
(inception) to December 31, 2004 and the year ended December 31, 2005, in
conformity with United States generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 28, 2006
F-13
GALES INDUSTRIES INCORPORATED
Consolidated Balance Sheet At December 31, 2005
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,058,416
Accounts Receivable, Net of Allowance for Doubtful Accounts of $45,000 2,623,612
Inventory 12,603,810
Prepaid Expenses and Other Current Assets 210,124
Deposits 65,595
------------
Total Current Assets 16,561,557
Property, Plant, and Equipment, net 7,716,469
Cash Surrender Value - Officer's Life 66,216
Deferred Financing Costs 486,207
Other Assets 41,306
Goodwill 1,265,963
------------
TOTAL ASSETS $ 26,137,718
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 5,294,629
Advance Payment - Customers 188,199
Notes Payable - Current Portion 6,322,665
Notes Payable - Sellers - Current Portion 192,400
Capital Lease Obligations - Current Portion 359,197
Due to Sellers 91,232
------------
Total current liabilities 12,448,322
Long term liabilities
Notes Payable - Net of Current Portion 3,648,131
Notes Payable - Sellers - Net of Current Portion 1,434,862
Capital Lease Obligations - Net of Current Portion 820,375
Deferred Tax Liability 676,394
------------
Total liabilities 19,028,084
------------
Commitments and contingencies
Stockholders' Equity
Series A Convertible Preferred - $.001 Par value, 8,003,716 Shares Authorized 1
900 Shares Issued and Outstanding as of December 31, 2005
Liquidation Value, $ 18,060,000
Common Stock - $.001 Par, 120,055,746 Shares Authorized
14,723,421 Shares Issued and Outstanding as of December 31, 2005 14,723
Additional Paid-In Capital 7,844,614
Accumulated Deficit (749,704)
------------
Total Stockholders' Equity 7,109,634
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,137,718
============
See notes to financial statements
F-14
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Operations for the Year Ended December 31, 2005(1)
Net sales $ 2,777,409
Cost of Sales 2,539,433
------------
Gross profit 237,976
------------
Operating costs and expenses
Selling and marketing 34,987
General and administrative 774,401
------------
Total operating expenses 809,388
------------
Loss from operations (571,412)
Interest and financing costs 178,292
------------
Net Loss (749,704)
Less: Dividend attributable to preferred stockholders 60,000
------------
Net Loss attributable to common stockholders $ (809,704)
============
Loss per share (basic and diluted) $ (0.06)
============
Weighted average shares outstanding (basic and diluted) 12,722,060
============
(1) For the period from October 28, 2004 (date of inception) through
December 31, 2004 the Company had no business activity and accordingly a
statement of operations is not presented.
See notes to financial statements
F-15
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Stockholders' Equity For the Period October 28, 2004
(inception) to December 31, 2004 and the Year Ended December 31, 2005
Series A
Common Stock Preferred Stock Additional Total
---------------------- --------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------------ -------- ------ ------ ------------ ------------ ------------
Issuance of common stock effected for
100,000 for 1 stock split 8,705,757 $ 8,706 $ (8,706) $ --
Retroactive restatement of common stock
issued in recapitalization 3,823,980 3,824 (128,158) (124,334)
------------------------------------------------------------------------------------
Balance, December 31, 2004 12,529,737 12,530 (136,864) (124,334)
Issuance of common stock to merger
and acquisition intermediary on
recapitalization 1,477,290 1,477 (1,477) --
Contribution of common stock from
shareholder in connection with
bank financing 71,500 71,500
Value of warrants issued in connection
with bridge financing 43,861 43,861
Beneficial conversion feature on shares
issued in connection with bridge financing 24,897 24,897
Non-cash stock option compensation 121,297 121,297
Issuance of shares in connection with
convertible note 226,334 226 24,671 24,897
Issuance of common stock to Sellers 490,060 490 489,570 490,060
Private placement issued at $10,000 per share 900 1 8,999,999 9,000,000
Expenses of private placement (1,792,840) (1,792,840)
Net loss (749,704) (749,704)
----------------------- --------------- ------------ ------------ ------------
Balance, December 31, 2005 $ 14,723,421 $ 14,723 900 $ 1 $ 7,844,614 $ (749,704) $ 7,109,634
======================= =============== ============ ============ ============
See notes to financial statements
F-16
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31, 2005(1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (749,704)
------------
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation and Amortization 78,659
Write-off of building improvements 256,632
Non-Cash Interest Expense 93,655
Bad debt expense 45,000
Non-Cash Compensation Expense 121,297
Changes in Assets and Liabilities, net of effects of Acquisition
and recapitalization:
(Increase) Decrease In Assets -
Accounts Receivable 534,378
Inventory (434,362)
Prepaid Expenses and Other Current Assets (31,058)
Deposits 168,499
Cash Surrender Value - Officer's Life (3,455)
Other Assets (41,306)
Increase (Decrease) In Liabilities -
Accounts Payable and Accrued Expenses (1,389,406)
Advance Payment-Customers 188,199
------------
Total adjustments (413,268)
NET CASH USED IN OPERATING
ACTIVITIES (Forward) (1,162,972)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in acquisition, including transaction costs of $1,053,862,
net of cash received of $47,538 (4,120,620)
Cash received on recapitalization 1,684
Purchase of property and equipment (4,322,975)
------------
NET CASH USED IN INVESTING ACTIVITIES (Forward) (8,441,911)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Principal - Capital Lease Obligations (29,277)
Repayment of notes payable to Officers and Sellers (884,815)
Proceeds from Short-Term Financing, Net 9,970,796
Payment of Notes Payable - Bank (5,180,000)
Proceeds from Private Placement 9,000,000
Payment of issuance costs on private placement (1,792,840)
Payment of Deferred Financing Costs (420,565)
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (Forward) 10,663,299
------------
Net increase in cash and cash equivalents
and cash and cash equivalents at end of the year $ 1,058,416
============
(1) For the period from October 28, 2004 (date of inception) through December
31, 2004 the Company had no business activity and accordingly a statement of
cash flows is not presented.
See notes to financial statements
F-17
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31, 2005(1)
NET CASH USED IN OPERATING
ACTIVITIES (Brought Forward) $ (1,162,972)
------------
NET CASH USED IN INVESTING ACTIVITIES (Brought Forward) (8,441,911)
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (Brought Forward) 10,663,299
------------
Net increase in cash and cash equivalents
and cash and cash equivalents at end of the year $ 1,058,416
============
Supplemental cash flow information
Cash paid during the year for interest $ 64,078
============
Supplemental schedule of non cash investing and financing activities
Shares issued in connection with deferred financing costs $ 71,500
============
Beneficial conversion feature charged as interest on bridge financing $ 24,897
============
Common stock issued on conversion of bridge note $ 24,897
============
Issuance of warrants in bridge financing $ 43,861
============
Common stock issued to Sellers in acquisition $ 490,060
============
Net liabilities assumed on recapitalization restated to 2004 $ 124,334
============
Notes payable issued for acquisition $ 1,627,262
============
The Company purchased all of the outstanding stock of AIM for an
aggregate purchase price of $6,285,480,including transaction costs, and in
conjunction with this acquisition, liabilities assumed were as follows:
Fair value of assets acquired $ 20,884,787
Consideration given for acquisition 6,285,480
------------
Liabilities assumed $ 14,599,307
============
(1) For the period from October 28, 2004 (date of inception) through December
31, 2004 the Company had no business activity and accordingly a statement of
cash flows is not presented.
See notes to financial statements
F-18
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp (the "Company" or "Ashlin"), a Florida corporation
and its newly-formed subsidiary, Merger Sub, entered into a Merger
Agreement (the "Merger Agreement") on November 14, 2005 with Gales
Industries Inc., a privately-held Delaware corporation ("Gales"). On
November 30, 2005 (the "Closing Date") Gales merged (the "Merger") into
Merger Sub. Pursuant to the Merger Agreement, the Company issued
10,673,107 shares of common stock (representing 73.6% of Ashlin's
outstanding shares) and 900 shares of Series A Convertible Preferred Stock
which is convertible into 40,909,500 shares of common stock of the Company
for all the issued and outstanding shares of Gales. As a result of the
transaction, the former stockholders of Gales became the controlling
stockholders of Ashlin. Additionally, since Ashlin had no substantial
assets prior to the merger, the transaction was treated for accounting
purposes as a reverse acquisition of a public shell and the transaction
has been accounted for as a recapitalization of Gales rather than a
business combination. The historical financial statements of Gales are now
the historical statements of the Company. The historical stockholders'
equity of Gales have been restated to reflect the capitalization.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated and its state of domicile from Florida to Delaware.
Prior to the closing of the Merger, Gales, which did not have any business
operations other than those in connection with the Merger Agreement (the
"Acquisition"), acquired all of the outstanding capital stock of Air
Industries Machining Corp ("AIM"). Because of the change in ownership,
management and control that occurred in connection with the Acquisition,
in accordance with Statement of Financial Accounting Standards ("SFAS")
141, Business Combinations, the transaction was accounted for as a
purchase (See Note 13 Acquisition). Accordingly, the purchase price was
allocated to assets acquired and liabilities assumed based on SFAS No.141.
Simultaneous with the Acquisition, AIM entered into a bank facility and
used proceeds from the facility to acquire real estate (See Note 13 Real
Estate Acquisition and Credit Facility).
Prior to the Acquisition, Gales raised bridge financing. In connection
with the Acquisition, Gales procured a private placement of Series A
Preferred Stock, the proceeds of which were used to acquire AIM (See Note
13 Bridge Financing, and Private Placement). Immediately prior to the
Merger, Gales had outstanding certain bridge notes convertible into shares
of Gales' common stock and certain bridge warrants to purchase shares of
Gales' common stock.
F-19
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The financial statements presented are those of Gales and its wholly -
owned subsidiary AIM from the date of acquisition, November 30, 2005, to
December 31, 2005. Gales was formed in October 2004 and prior to the
Acquisition did not have any business operations or other activity. For
presentation purposes, see Note 14 for the results of pro forma operations
if the acquisition occurred on January 1, 2005 and 2004.
Reverse stock split
Pursuant to the terms of the Merger Agreement, prior to the Merger, Ashlin
effected a 1-for-1.249419586 reverse split of its Common Stock (the
"Reverse Split"). The Reverse Split became effective November 21, 2005.
The Reverse Split reduced the number of shares of Common Stock which the
Company had outstanding on a fully diluted basis to 3,868,000. As a result
of the Reverse Split, the conversion of the outstanding shares of Gales
pursuant to the Merger for new shares of the Company's Common Stock was on
a one-for-one basis. Any of the Company's shareholders who, as a result of
the Reverse Split, held a fractional share of Common Stock received a
whole share of Common Stock in lieu of such fractional share. After giving
effect to the Reverse Split, prior to the Merger, the Company had
outstanding 3,823,980 shares of Common Stock which continued to be
outstanding after the Merger.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural
parts and assemblies principally for prime defense contractors in the
aerospace industry in the United States. The Company's customer base
consists mainly of publicly traded companies in the aerospace industry.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of the
Company and Merger Sub and Merger Sub's wholly owned subsidiary, AIM.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The operations of the Company are conducted principally
through AIM.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an original maturity of three months or less. Cash consists of aggregate
cash balances in the Company's bank accounts and cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances net of allowances for bad debt. The Company provides for
allowances for uncollectible receivables based on management's estimate of
uncollectible amounts at year-end, considering age, collection history,
and any other factors considered appropriate.
F-20
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Inventory Valuation
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property and Equipment
Property and equipment are carried at cost net of accumulated depreciation
and amortization. Repair and maintenance charges are expensed as incurred.
Property, equipment, and improvements are depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in earnings.
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. The carrying amount
of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. If impairment is recognized, the carrying value
of the impaired asset is reduced to its fair value, based on discounted
estimated future cash flows.
Deferred Financing Cost
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition." The Company generally recognizes
revenue when products are shipped and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists, and the sales price is fixed
or determinable. Payments received in advance from customers for products
delivered are recorded as customer advance payments until earned, at which
time revenue is recognized.
F-21
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and various
contingencies. Actual results could differ from those estimates. Changes
in facts and circumstances may result in revised estimates, which are
recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of December
31, 2005 approximately 23% and 10% are attributable to two respective
customers.
One customer accounted for approximately 51% of the total revenues for the
year ended December 31, 2005.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." Management of the Company believes that the fair value of
financial instruments, consisting of cash, accounts receivable, accounts
payable and accrued liabilities, approximates carrying value due to the
immediate or short-term maturity associated with these instruments and
that the notes payable approximate fair value in that they carry
market-based interest rates.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and
deferred taxes, due to temporary differences between financial statement
and tax bases of assets and liabilities. In addition, future tax benefits
are recognized to the extent that realization of such benefits is more
likely than not. Valuation allowances are established when management
determines that it is more likely than not that some portion or all of the
deferred asset will not be realized. The effect of a change in tax rates
is recognized as income or expense in the period of change.
F-22
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Earnings per share
Basic earnings per share is computed by dividing the net income applicable
to common stockholders by the weighted-average number of shares of common
stock outstanding for the period. Potentially dilutive shares, using the
treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.
The Company did not include 5,229,589 warrants and 4,850,000 options to
purchase the Company's common stock in the calculation of diluted earnings
per share for the year ended December 31, 2005 because the effects of
their inclusion are anti-dilutive.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123 (R)). SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense based on
their fair value. Effective December 31, 2005, the Company adopted,
earlier than required, the fair value recognition provisions of SFAS No.
123(R).
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. The Company
applies SFAS No. 142, Goodwill and Other Intangible Assets and accordingly
does not amortize goodwill but tests it for impairment. Impairment testing
for goodwill will be performed annually, and more frequently when
indicators of impairment exist, using a two-step approach. Step one
compares the fair value of the net assets of the relevant reporting unit
(calculated using a discounted cash flow method) to its carrying value, a
second step is performed to compute the amount of the impairment. In this
process, a fair value for goodwill is estimated, based in part on the fair
value of the operations, and is compared to its carrying value. The
shortfall of the fair value below carrying value represents the amount of
goodwill impairment.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS
No. 123 and supersedes Accounting Principles Board Opinion No. 25. SFAS
No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values at the date of grant. Pro forma disclosure is
no longer an alternative reporting method under SFAS No. 123(R). The
Company recorded an expense of $121,297 in the accompanying statement of
operations for the year ended December 31, 2005 in accordance with the
measurement requirements under SFAS No. 123 (R) (see Note 12).
F-23
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which
clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company believes that SFAS No. 151 will not have a material
effect on its consolidated financial statements for the year ended
December 31, 2006.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, which eliminates the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance.
SFAS No. 153 is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company believes that
SFAS No. 153 will not have a material effect on its consolidated financial
statements for the year ended December 31, 2006.
Note 3. INVENTORY
The components of inventory consisted of the following as of December 31,
2005:
December 31, 2005
-----------------
Raw Materials $ 2,319,523
Work in Progress 4,905,535
Finished Goods 5,378,752
-----------------
Total Inventory $ 12,603,810
=================
F-24
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 4. PROPERTY AND EQUIPMENT
The components of property and equipment, at cost, as of December 31,
2005:
December 31, 2005 Useful Lives
----------------- ---------------
Land $ 1,075,589 --
Building 3,226,767 25 - 31.5 years
Machinery and Equipment 1,766,829 5 - 8 years
Capital Lease Machinery and Equipment 1,145,171 5 - 8 years
Tools and Instrument 253,994 7 years
Building Improvements 17,700 25 years
Automotive Equipment 26,827 5 years
Furniture and fixtures 248,998 5- 8 years
-----------------
Total property, plant, and equipment 7,761,875
Less: Accumulated Depreciation (including
$27,434 attributable to capital leases) (45,406)
-----------------
Property, plant, and equipment, net $ 7,716,469
=================
Depreciation and amortization expense for the year ended December 31, 2005
amounted to $45,406.
Note 5. NOTES PAYABLE - BANKS AND CREDIT FACILITY
On November 30, 2005 the Company executed a credit facility with PNC Bank
N.A. (the "New Loan Facility"), secured by all of its assets and the real
property acquired in the Real Estate Acquisition (see Note 13).
The New Loan Facility provides for a maximum loan amount of $14,000,000
consisting of (i) a $9,000,000 revolving loan, (ii) a $3,500,000 term
loan, and (iii) a $1,500,000 equipment financing loan. Upon completion of
the New Loan Facility, the Company paid to a third party a finder's fee
aggregating $196,500 which amount is included in deferred financing costs.
The finder's fee consisted of $125,000 in cash and 325,000 shares of the
Company's Common Stock. Such shares, which were valued at $0.22 per share,
were contributed by one of the Company's senior executives and accordingly
were accounted for as a capital contribution.
F-25
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The revolving loans bear interest, based at the option of the Company,
that is based on (i) the higher of (A) PNC's base commercial lending rate
as published from time to time ("PNC Rate") plus 0.25% or (B) the Federal
Funds rate plus 0.5%, or (ii) the Eurodollar Rate for the Interest Period
selected by the Company plus 2.5%. The revolving loans had an interest
rate of at 6.94% per annum on December 31, 2005. The revolving loans,
equipment loans and the term loan are due and payable in full on November
30, 2009 ("Termination Date") unless PNC agrees to extend the Termination
Date. At December 31, 2005, the revolving loan had a balance of
$5,942,661.
The term loan is for a period of 4 years and bears interest, at the option
of the Company at the end of an interest period, at the (i) PNC Rate plus
0.50% per annum or (ii) the Eurodollar Rate for the interest period
selected by the Company plus 2.75 %. The term loan requires forty eight
consecutive payments of $31,667 commencing in January 2006, provided that
all unpaid amounts on November 30, 2009 must then be paid in full unless
the Termination Date is extended by PNC. At December 31, 2005, the term
loan had balance of $3,500,000. The term loan has an interest rate of
7.19% per annum on $3,468,333 of the balance and 7.75% per annum on the
remaining $31,667.
The equipment loans bear interest, at the option of the Company, that is
based on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate
for the interest period selected plus 2.75% per annum. The equipment loan
had an interest rate of 7.50% per annum at December 31, 2005. Such
equipment financing is limited to an aggregate of $750,000 in any fiscal
year of the Company and amortized in equal installments of sixty months
following the close of each "borrowing period", the first of which ends
December 31, 2006 and each subsequent "borrowing period" ends on each
December 31 thereafter. All equipment loans are due and payable on
November 30, 2009, unless the Termination Date is extended by PNC. As of
December 31, 2005, the equipment financing loan had a balance of $528,135.
To the extent that the Company may dispose of collateral used to secure
any of the New Loan Facility, other than inventory, the Company must
promptly repay the draws on the credit facility in amount equal to the net
proceeds of such sale.
The terms of the New Loan Facility require that, among other things, the
Company maintain certain financial ratios and levels of working capital
and triggers for pre-maturing the due dates of the loans. As of December
31, 2005 the Company has met these terms. The New Loan Facility is also
secured by all assets of the Company and the Company's receivables are
payable directly into a lockbox controlled by PNC (subject to the terms of
the New Loan Facility). Also one of those triggers provides that PNC may
use some elements of subjective business judgment in determining whether a
material adverse change has occurred in the Company's condition, results
of operations, assets, business, properties or prospects. As such, the
revolving loan has been classified as a current liability.
F-26
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Interest expense related to these credit facilities amounted to $51,392
for the year ended December 31, 2005.
The Company incurred an aggregate of $492,065 in finders' fees and legal
costs in connection with the New Loan Facility which is being amortized
over the 48 month term of the New Loan Facility. For the period ended
December 31, 2005, the Company amortized $5,858 of these costs.
As of December 31, 2005, future minimum principal payments are as follows:
Year Amount
------- -----------
2006 $ 6,322,665
2007 485,631
2008 485,631
2009 2,676,869
-----------
9,970,796
Less: Current portion (6,322,665)
-----------
Long-term portion $ 3,648,131
===========
Note 6. CASH SURRENDER VALUE - LIFE INSURANCE
The Company is the owner and beneficiary of key-man life insurance
policies carried on the lives of certain key and former executives with
cash surrender values. The aggregate face amounts of the policies were
$3,250,000 for the year ended December 31, 2005. There are loans in place
against these policies. As of December 31, 2005 the cash surrender value
was $66,216, net of $226,632 in loans. As the Company has the right to
offset the loans against the cash surrender value of the policies, the
Company presents the net asset in its consolidated financial statements.
Note 7. CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
and computer equipment. All leases have bargain purchase options that
gives the Company the right to exercise at the termination of each lease.
Capital lease obligations totaled $1,179,572 as of December 31, 2005.
F-27
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
As of December 31, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ---------
2006 $ 440,140
2007 427,586
2008 422,878
2009 37,735
---------
Total future minimum lease payments 1,328,339
Less: imputed interest (148,767)
Less: current portion (359,197)
---------
Total long-term capital lease obligation $ 820,375
=========
Note 8. EMPLOYEE BENEFITS PLANS
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code ("the Plan"). Pursuant to the Plan qualified
employees may contribute a percentage of their pretax eligible
compensation to the Plan. The Company does not match any contributions
that employees may make to the Plan.
The employees of the Company are members of the United Service Workers
Union IUJAT Local 355 (the "Union"), which provides medical benefit plans
at defined rates which are contributed in their entirety by the Company.
Note 9. NOTES PAYABLE - SELLERS
On November 30, 2005, as part of the stock purchase between Gales and AIM
(See Note 13), Gales issued notes payable for an aggregate of $1,627,262
to three former AIM shareholders, two of whom have become part of the
Company's senior management and are also stockholders in the Company.
The notes payable to the two senior management members aggregate $665,262
and mature on November 30, 2010, along with accrued interest which bear an
interest rate equal to Prime Rate plus 0.5% per annum, (7.75% at December
31, 2005). Interest shall accrue on any portion of the principal amount of
these notes outstanding after November 30, 2010 until payment thereof in
full, at a floating rate equal to the Prime Rate plus 7% per annum.
Subsequent to January 1, 2006, all of the outstanding principal amounts of
these notes together with accrued interest are convertible, at the option
of the Company, into shares of the Company's common stock at $0.40 per
F-28
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
share. From and after the earlier of (i) January 1, 2007, and (ii) the
first date on which the Company intends to effect any capital
reorganization of the Company, any reclassification or recapitalization of
the capital stock of the Company, any merger, or consolidation or other
combination of the Company with or into any other Company, or any sale or
transfer of all or substantially all of the assets of the Company, the
outstanding principal amount of these notes together with interest accrued
thereon is convertible, at the option of the holder, into the Company's
Common Stock at $0.40 per share.
The remaining note of $962,000 matures on September 30, 2010 is
subordinated to all of Gale's senior debt and is payable in twenty
consecutive calendar quarters of equal installments of principal plus
accrued interest commencing on December 31, 2005. The interest rate on
this note is equal to Prime Rate plus 0.5% per annum (7.75% at December
31, 2005). Interest on outstanding balances at September 30, 2010, in the
event of nonpayment, shall accrue at a floating rate equal to the Prime
Rate plus 7% per annum.
As of December 31, 2005, future minimum principal payments on these notes
to the three former shareholders are as follows:
Year Amount
---- -----------
2006 $ 192,400
2007 192,400
2008 192,400
2009 192,400
2010 857,662
-----------
1,627,262
Less: Current portion (192,400)
-----------
Long-term portion $ 1,434,862
===========
Interest expense on these notes amounted to $10,711 for the year ended
December 31, 2005.
Note 10. COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
Customer Audits
The Company's government contracts and those of many of its customers are
subject to the procurement rules and regulations of the United States
government, including the Federal Acquisition Regulations ("FAR"). Many of
the contract terms are dictated by these rules and regulations. During and
after the fulfillment of a government contract, the Company may be audited
in respect of the direct and allocated indirect costs attributed thereto.
These audits may result in adjustments to its contract costs.
Additionally, the Company may be subject to U.S. government inquiries and
investigations because of its participation in government procurement. Any
inquiry or investigation can result in fines or limitations on the
Company's ability to continue to bid for government contracts and fulfill
existing contracts.
F-29
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The Company believes that it is in substantial compliance with all
federal, state and local laws and regulations governing its operations and
has obtained all material licenses and permits required for the operation
of its business.
Employment Contracts
In September 2005, the Company entered into employment agreements (the
"Agreements") with four senior executives that became effective November
30, 2005. The Agreements are for a period of approximately eight years.
Additionally, the Agreements provide for annual base compensation
aggregating $940,000. The Board, at its sole discretion, determines
whether a bonus is issued. To the extent that the Board authorizes
issuances of bonuses, two senior executives will receive at least 50% of
their annual base compensation. Each senior executive's agreement also
call for grants of stock options to purchase the Company's common stock
aggregating 4,850,000 shares of which 1,580,000 have been granted as of
December 31, 2005.
Note 11. INCOME TAXES:
The components of deferred income tax assets as of December 31, 2005, are
as follows:
Federal loss after temporary differences carryforward
(expires in 2025) $ 75,198
Bad debts 36,014
Contributions 400
Inventory - 263A Adjustment 137,897
Non-cash compensation 65,962
---------
Total deferred tax asset 312,471
Valuation allowance (312,471)
---------
Net deferred tax asset $ --
=========
The component of the deferred tax liability as of December 31, 2005 is as
follows:
Property and equipment $ 676,394
---------
Total deferred tax liability $ 676,394
=========
The difference between income taxes computed at the statutory federal rate
and the provison for income taxes for the year ended December 31, 2005
relates to the following:
Tax benefit at federal statutory rate 34.00%
State income taxes, net of federal income tax benefit 6.02%
---------
40.02%
Valuation allowance -40.02%
---------
Total effective tax rate --
=========
F-30
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory rate to the loss before
income taxes. This difference, as shown in the above table, is due to a
full reserve of our benefit for the utilization for net operation losses
since utilization cannot be determined to be more likely than not per SFAS
109.
Note 12. STOCK-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option and
reserved 10,000,000 shares of its Common Stock for issuance under the
plan. The stock option plan permits the Company to grant non-qualified and
incentive stock options to employees, directors, and consultants. Awards
granted under the Company's plans vest over four and seven years.
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment ("SFAS 123(R)"). The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 2005: risk-free
interest rates ranged from 4.095% to 4.375%; expected dividend yields of
0%; expected terms to exercise of 10 years after vesting; and expected
volatility of 35%. The weighted average fair values of options granted are
$0.17.
The Company's stock options contain features which include variability in
grant prices. A portion of the currently issued stock options will be
issued based on average trading prices of the Company's Common Stock at
the end of a given future period. Due to this variable feature, these
stock options are not deemed to be granted for purposes of applying SFAS
123(R) and accordingly, their fair value will be calculated and expensed
in future periods.
At December 31, 2005, 790,000 options are vested and exercisable. The
weighted average exercise price of exercisable options at December 31,
2005 was $0.22 per share.
A summary of the status of the Company's stock options as of December 31,
2005, and changes during the year then ended is presented below:
F-31
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Weighted
Number Average
of Exercise
Shares Price
--------- ---------
Outstanding at beginning of year -- --
Granted and reserved for grants 4,850,000 $ 0.32
Cancelled -- --
Exercised -- --
--------- ---------
Outstanding at end of year 4,850,000 $ 0.32
========= =========
The Company recorded an expense of $121,297 in its consolidated statement of
operations, which reflects the value of granted stock options over the vesting
period in accordance with SFAS No. 123R, for the year ended December 31, 2005.
The following table summarizes information about stock options at December 31,
2005:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted-
Average Weighted-
Remaining average Weighted-
Number Contractual Exercise Number average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price
- ---------------------------- ----------- ------------ ---------- ----------- --------------
$0.220 790,000 10 $ 0.220 790,000 $ 0.220
$0.428 790,000 10 0.428 -- --
based on future market price 3,270,000 10 N/A -- --
----------- ------------ ---------- ----------- --------------
4,850,000 10 $ 0.32 790,000 $ 0.220
=========== ============ ========== =========== ==============
The Company recorded $43,861 as additional interest expense with respect to
1,138,639 warrants issued in connection with Bridge Financing (see Note 13) and
$201,402 as an increase to additional paid in capital and a reduction of
preferred stock with respect to 4,090,950 warrant issued in connection with the
Private Placement (see Note 13) for the year ended December 31, 2005.
The following table summarizes the Company's outstanding warrants as of December
31, 2005 and changes during the year then ended:
F-32
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Weighted
Number Average
of Exercise
Shares Price
--------- ---------
Outstanding at beginning of year -- --
Granted 5,229,589 $ 0.21
Cancelled -- --
Exercised -- --
--------- ---------
Outstanding at end of year 5,229,589 $ 0.21
========= =========
Note 13. EQUITY TRANSACTONS AND ASSET ACQUISITION
Background
The Company is authorized to have two classes of shares, designated as
Common Stock and Preferred Stock. The Series A Convertible Preferred Stock
("Preferred Stock") votes together with the Common Stock as a single class
on all actions to be taken by the stockholders of the Company. Each share
of the Company's common and preferred stock is entitled to one vote.
The total authorized shares of Common Stock and Preferred Stock is
120,055,746 and 8,003,716, respectively.
Bridge Financing
Prior to the Merger and in various stages, Gales issued an aggregate of
$172,500 in convertible bridge notes that accrued 12% interest to meet
interim financing needs. The convertible bridge notes had warrants
attached that are exercisable for an aggregate of 1,138,639 shares of the
Company's Common Stock (at the exercise price of $0.22 per share with
respect to 729,548 of the warrants and $.055 per share with respect to
409,091 of the warrants). Accordingly, the Company allocated a portion of
the proceeds to the warrants, which were valued at $43,861 and recorded as
additional paid in capital. The Company accreted additional interest
expense of $43,861 for the value of the warrants. Contemporaneous with the
Merger Agreement, Gales repaid $150,000 of the principal of the
convertible bridge notes plus accrued interest of $4,253 and recorded the
value of the warrants as additional interest expense. The remaining
principal plus accrued interest were converted to 226,334 shares of the
Company's Common Stock at a conversion rate of $0.11 per share.
Additionally, in accordance with EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, the Company recorded $24,897 of interest expense in
connection with the beneficial conversion of these notes at the time of
issuance.
F-33
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Private Placement
Immediately prior to, and shortly after the completion of the Merger,
Gales received gross proceeds of $9,000,000 from the closing of a private
placement ("Private Placement") to accredited investors of 900 shares of
convertible preferred stock at $10,000 per share which, pursuant to the
Merger, were exchanged for shares of the Company's Preferred Stock, $.001
par value per share. The shares of Preferred Stock issued in connection
with such private placement are convertible into 40,909,500 shares of the
Company's Common Stock.
The proceeds of the Private Placement, in general, were used for paying
the cash portion of the purchase price of the Acquisition, for paying
expenses relating to the Private Placements, Acquisition, Merger, and
related transactions, for the repayment of $150,000 in promissory note
obligations which Gales incurred in bridge financings, and for working
capital for the Company.
The Placement Agent received 4,090,950 warrants, exercisable during a five
year term, to purchase 4,090,950 shares of the Company's Common Stock.
Such warrants have a "cashless exercise" feature and are exercisable at
$0.22 per share. These warrants were valued at $201,402 using the
Black-Scholes model.
Acquisition
Pursuant to a stock purchase agreement between Gales and AIM dated
November 2005, Gales acquired 100% of the capital stock of AIM. The total
aggregate price Gales paid to acquire AIM was $5,231,618 as follows: (i)
$3,114,296 in cash, (ii) $1,627,262 in principal amount of promissory
notes, and (iii) 490,060 shares of Common Stock valued at a negotiated
rate of $1.00 per share (concluded prior to the merger with the public
company). The results of AIM's operations have been included in the
consolidated financial statements since that date. A portion of the
proceeds from Gales' Private Placement was used to pay such purchase price
(See "Private Placement"), including transaction costs of $1,053,862. This
stock acquisition was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, Business Combinations. Under
the purchase method of accounting, the total purchase price was allocated
to the assets acquired and liabilities assumed based upon the fair values
as of the completion of the acquisitions. As a result of the stock
purchase, the Company recorded $1,265,963 in goodwill which represents the
excess of the fair market value over book value of the assets acquired and
liabilities assumed from AIM. The liabilities assumed also included
$676,394 of a deferred tax liability representing book to tax differences
on assets acquired.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of stock acquisition.
F-34
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Current assets $15,640,164
Other assets 283,128
Property and equipment 3,695,532
-----------
Total assets acquired 19,618,824
-----------
Current liabilities 8,277,921
Long-term debt 5,644,992
Deferred tax liability 676,394
-----------
Total liabilities assumed 14,599,307
-----------
Net assets acquired 5,019,517
Consideration given 6,285,480
-----------
Goodwill $ 1,265,963
===========
Real estate acquisition
Contemporaneously with the close of the Merger and the Acquisition: (i)
AIM completed the acquisition from affiliates of AIM, for an aggregate
purchase price of $4,190,000, of three buildings and land which was being
leased prior to the Close Date by AIM (the "Real Estate Acquisition"). The
purchase price and related acquisition costs approximated the appraised
value of both the buildings and land (ii) AIM entered into a credit
facility with PNC Bank for a New Loan Facility (See Note 5).
Preferred Stock
The holders of the Preferred Stock have the option at any time to convert
their shares into shares of Common Stock as follows: (i) by multiplying
the number of shares of Preferred Stock so as to be converted by $10,000
(the stated value of each share of Preferred Stock) and (ii) dividing the
result by the conversion price of $.22 per share. Each outstanding share
of Preferred Stock shall automatically be converted into Common Shares, at
the Conversion Price at the time in effect for such share, immediately as
of the date that a Registration Statement is declared effective by the SEC
under the Securities Act.
The holders of the Preferred Stock shall be entitled to receive quarterly
dividends, payable in kind shares, at a rate of 8% per annum. If a
registration statement for the resale by the holders of the common stock
issuable upon conversion of the Preferred Stock is not (i) filed with the
SEC under the Securities Act of 1933 within 45 days after the earlier of
the final closing or the Private Placement, or (ii) declared effective
within 180 days of such earlier date, the dividend of the Preferred Stock
will be payable in cash at a rate of $80.00 per year on each share of
Preferred Stock. Such cash dividends will be paid until the Preferred
Stock is converted into shares of Common Shares or on the effective date
of a mandatory conversion. At December 31, 2005, the cumulative undeclared
dividend is $60,000.
F-35
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Liquidation Preference for Preferred Stock
In the event of any liquidation or winding up of the Company, the holders
of Preferred Stock will be entitled to receive, in preference to the
holders of Common Stock, an amount equal to two times the stated value of
the Preferred Stock, plus any dividends thereon ("Liquidation Payment").
Thereafter, the remaining assets of the Company will be distributed
ratably to the holders of Common Stock. If the assets of the Company are
insufficient to permit the full payment of the Liquidation Payment, then
the assets will be distributed pro rata among the holders of the Preferred
Stock.
Note 14. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed statement of operations
gives effect to the Merger Agreement, Acquisition, and Real Estate
Acquisition as if they occurred on January 1, 2004. The Acquisition was
accounted for under the purchase method of accounting in accordance with
SFAS No. 141. Under the purchase method of accounting, the total purchase
price was allocated to the assets acquired and liabilities assumed based
upon the fair values at the completion of the acquisitions.
The unaudited pro forma condensed combined statement of operations has
been prepared for illustrative purposes and are not necessarily indicative
of the condensed consolidated results of operations in future periods or
the results that are actually would have been realized had the acquisition
actually occurred on January 1, 2005 or January 1, 2004. The pro forma
adjustments are based on the information available at the time of the
preparation of this document.
The unaudited pro forma condensed combined statement of operations should
be read in conjunction with the audited consolidated financial statements
of Gales Industries Inc. as of December 31, 2005.
F-36
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Year Ended
December 31,
-----------------------------
(Unaudited) (Unaudited)
2005 2004
----------- -----------
Net sales $30,735,103 $24,818,333
Cost of Sales 26,361,387 21,305,071
----------- -----------
Gross profit 4,373,716 3,513,262
----------- -----------
Operating costs and expenses
Selling and marketing 357,854 321,727
General and Administrative 2,583,375 1,519,008
----------- -----------
Total operating expenses 2,941,229 1,840,735
----------- -----------
Income from operations 1,432,487 1,672,527
Other expenses
Interest and financing costs 1,056,317 862,729
----------- -----------
Income before provision for income taxes 376,170 809,798
Provision for income taxes 151,031 325,539
----------- -----------
Net Income $ 225,139 $ 484,259
=========== ===========
Earnings per share
Basic $ 0.02 $ 0.03
=========== ===========
Diluted $ 0.01 $ 0.01
=========== ===========
Weighted average shares outstanding
Basic 14,723,421 14,723,721
=========== ===========
Diluted 40,282,810 40,282,810
=========== ===========
Note 15. SUBSEQUENT EVENTS
On February 15, 2006, the Company changed its name to Gales Industries
Incorporated and changed its jurisdiction of incorporation from Florida to
Delaware.
In February 2006, the Company sold a life insurance policy (see Note 6) to
a former officer of the Company and received proceeds of $86,000.
In February 2006, the Company filed Form SB-2 with the Securities and
Exchange Commission (the "SEC") and is currently in the process of
responding to comments received from the SEC.
F-37
AIR INDUSTRIES MACHINING, CORP.
FINANCIAL STATEMENTS
(PRIOR TO MERGER)
NOVEMBER 30, 2005
F-38
AIR INDUSTRIES MACHINING, CORP.
Table of Contents
November 30, 2005
PAGES
Accountants' Report.............................................. F-40
Balance Sheet.................................................... F-41 - F-42
Statement of Income and Retained Earnings........................ F-43
Statement of Cash Flows.......................................... F-44
Notes to Financial Statements.................................... F-45 - F-52
F-39
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have audited the accompanying Consolidated Balance Sheets of Air
Industries Machining Corporation as of November 30, 2005, and the related
Consolidated Statement of Income and Retained Earnings and Cash Flows for the
eleven months ended November 30, 2005. These consolidated financial statements
are the responsibility of the Air Industries Machining Corporation management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of Air
Industries Machining Corporation as of November 30, 2005, and the results of its
operations and its cash flows for the eleven months then ended in conformity
with accounting principles generally accepted in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
February 28, 2006
F-40
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheet
ASSETS November 30, 2005
-----------------
Current Assets
Cash and Cash Equivalents $ 71,197
Accounts Receivable 3,202,991
Inventory 11,588,521
Prepaid Expenses 174,850
Other Current Assets 4,215
Deposits 192,972
-----------------
Total Current Assets $ 15,234,746
Property, plant and equipment, net 3,919,599
Security Deposits 34,522
Cash Surrender Value - Officer's Life 62,761
Unamortized Finance Costs 102,187
-----------------
Total Assets $ 19,353,815
=================
The accompanying audit report and notes are an
integral part of these statements.
F-41
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY November 30, 2005
-----------------
Current Liabilities
Accounts Payable $ 4,429,016
Advance Payment - Customer 293,226
Mortgage Payable - Current 96,000
Dividends Payable 511,055
Obligations Under Capital Lease - Current 359,197
Notes Payable - Banks 5,180,000
Accrued Operating Expenses 1,074,025
-----------------
Total Current Liabilities 11,942,519
Long Term Liabilities
Advances From Shareholders 464,992
Mortgage Payable 1,145,813
Obligations Under Capital Lease - Long Term 849,652
-----------------
Total Long Term Liabilities 2,460,457
-----------------
Total liabilities 14,402,976
-----------------
Commitments and contingencies
Minority interest 446,805
Stockholders' Equity
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued and Outstanding
As of November 30, 2005 32,223
Additional Paid-In Capital 221,580
Retained Earnings 4,346,231
Less: Treasury Stock at Cost (96,000)
-----------------
Total Stockholders' Equity 4,950,839
-----------------
Total Liabilities and Stockholders' Equity $ 19,353,815
=================
The accompanying audit report and notes are an
integral part of these statements.
F-42
Consolidated Statements of Income and Retained Earnings
Audited Unaudited Pro Forma (1)
ELEVEN MONTHS ENDED ELEVEN MONTHS ENDED
November 30, 2005 November 30, 2005
Net sales $ 27,957,694 $ 27,957,694
Cost of sales 23,887,120 23,887,120
------------ ------------
Gross profit 4,070,574 4,070,574
------------ ------------
Operating expenses
Selling 322,867 $ 322,867
General and administrative 1,665,793 1,665,793
------------ ------------
Total operating expenses 1,988,660 1,988,660
------------ ------------
Income from operations 2,081,914 2,081,914
Interest and financing costs 605,602 605,602
------------ ------------
Income before minority interest and income taxes 1,476,312 1,476,312
Less: minority interest 74,904 74,904
------------ ------------
Income before provision for income taxes 1,401,408 1,401,408
Provision for income taxes (1) 560,843
------------ ------------
Net Income 1,401,408 $ 840,565
------------ ============
Retained Earnings, Beginning of Period 4,120,102
Deduct: Distribution to Shareholders (1,175,279)
------------
Retained Earnings, End of Period $ 4,346,231
============
(1) Since our inception we have elected to be treated as a Subchapter " S"
corporation of the Internal Revenue Code and incurred no income taxes. The pro
forma amounts include income taxes that would have been incurred if the Company
had been a "C" Corporation.
F-43
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
Eleven Months Ended
November 30, 2005
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,401,408
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation And Amortization 522,299
Minority Interest in Net Income 74,904
Non Cash Interest Expense 24,342
Changes in Assets and Liabilities:
(Increase) Decrease In Assets-
Accounts Receivable (559,455)
Inventory (730,065)
Prepaid Expenses (42,582)
Other Current Assets 1,264
Deposits (171,812)
Cash Surrender Value - Officer's Life 200,875
Increase (Decrease) In Liabilities-
Accounts Payable 736,956
Dividends Payable 390,599
Advance Payments - Customers (1,061,040)
Accrued Expenses 570,347
Advances from Shareholders 197,435
-----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,555,475
-----------------
CASH FLOWS (USED) IN INVESTING ACTIVITIES
Purchase of Equipment (301,051)
-----------------
NET CASH (USED) IN INVESTING ACTIVITIES (301,051)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Line Facilities 304,388
Principle Payments of Capital Lease Obligations (264,396)
Principle Payments of Mortgage (81,973)
Repayment of Notes Payable (100,000)
Distribution to Shareholders (1,090,521)
-----------------
NET CASH (USED) IN FINANCING ACTIVITIES (1,232,502)
-----------------
Net increase in cash and cash equivalents 21,922
Cash and cash equivalents, beginning of year 49,275
-----------------
Cash and cash equivalents, end of year $ 71,197
=================
Supplementary disclosure of cash flow information
Cash Paid During The Year For Interest $ 566,467
=================
Supplementary noncash disclosure of financing activities
Equipment acquisition through capital lease financing $ 449,559
=================
The accompanying audit report and notes are an
integral part of these statements.
F-44
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"), founded in
1969, was incorporated in the State of New York and maintains its
principal place of business in Bay Shore, New York. The Corporation is
primarily engaged in manufacturing aircraft structural parts and
assemblies principally for prime defense contractors in the aerospace
industry machining parts for the aerospace industry predominantly located
in the United States. The Company's customer base consists mainly of
publicly traded companies in the aerospace industry.
Principles of Consolidation
The Company's consolidated financial statements include those of variable
interest entities ("VIEs"). Conditions in which the Company would
consolidate VIE's are cases in which the Company is the primary
beneficiary. Conditions under which the Company would consolidate entities
that are not VIE's are cases in which the Company would maintain a
controlling interest (50% or more) investment or exert significant
management influence. (See Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an original maturity of three months or less. Cash consists of aggregate
cash balances in the Company's bank accounts and cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances. The Company writes off accounts when they are deemed to be
uncollectible. The Company has experienced insignificant amounts of bad
debts in such accounts.
Inventories
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Repair and maintenance charges are expensed as incurred.
Property under a capital lease is capitalized and amortized over the lease
terms. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is reflected in
earnings. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
F-45
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. If impairment is
recognized, the carrying value of the impaired asset is reduced to its
fair value, based on discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. Payments received in
advance from customers for products delivered are recorded as customer
advance payments until earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
F-46
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are taxed
on their proportionate share of the company's net income. Accordingly, no
provision for federal income taxes has been made in the accompanying
financial statements.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, unamortized finance costs, accrued
expenses and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of November
30, 2005, approximately 54% is attributed to two customers.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." Management of the
Company believes that the fair value of financial instruments, consisting
of cash, accounts receivable, accounts payable and accrued liabilities,
approximates carrying value due to the immediate or short-term maturity
associated with these instruments and that the notes payable is carried at
fair value in that it carries interest rates that are comparable to
similar instruments with similar maturities.
Reclassifications
Certain reclassifications have been made to prior year's financial
statement information to conform to the current year presentation.
F-47
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
2- INVENTORY
The components of inventory consisted of the following as of November 30,
2005:
November 30, 2005
-----------------
Raw Materials $ 2,294,020
Work in Progress 2,639,006
Finished Goods 6,655,495
-------------
Total Inventory $ 11,588,521
=============
3- PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment as of November 30, 2005 include:
November 30, 2005
-----------------
Land $ 134,922
Building 3,173,071
Machinery and Equipment 8,541,083
Tools and Instrument 279,803
Leasehold Improvements 515,211
Automotive Equipment 290,083
Furniture and fixtures 872,112
------------
Total property, plant, and equipment 13,806,285
------------
------------
Less: Accumulated Depreciation (9,886,686)
------------
------------
Property, plant, and equipment, net $ 3,919,599
============
Depreciation and amortization expense for the eleven months ended November
30, 2005 was $477,827.
F-48
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a
major lending institution with a termination date of March of 2006. The
facility is secured by a first priority interest in all accounts
receivable, inventory and equipment presently owned or hereafter acquired
by the Company. The indebtedness bears interest at the rate of 1/2 percent
above the prime rate of interest or a libor margin of 3%.
The terms of the facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of
November 30, 2005, the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the
Company, as well as the affiliated companies KPK Realty Corporation and
DPPR Realty Corp. (See Note 9)
Interest expense related to the notes payable - bank amounted to $337,447
for the eleven months ended November 30, 2005.
5- ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to
cover the Company's working capital needs. The Company imputed as interest
based on the prime rate and recorded as interest expense and additional
paid in capital an amount of $24,342 for the eleven months ended November
30, 2005.
5A- DISTRIBUTIONS TO SHAREHOLDERS
The Company distributed to its shareholders $1,175,279 during the eleven
months ended November 30, 2005. These distributions were made from time to
time to the Company's shareholders in proportion to their ownership
interests in the Company at such times as it had sufficient cash on hand
or availability under its lines of credit.
6- MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable
interest entities (see Note 11) it has two mortgages covering buildings
and land. These mortgages carry interest rates of 6.15% and 7.18% per
annum.
F-49
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Future mortgage payments are as follows for the period ended November 30,
2005:
Year Amount
---- ----------
2006 $ 126,000
2007 128,000
2008 139,000
2009 133,000
2010 142,000
Thereafter 573,813
----------
1,241,813
Less: current maturities: 96,000
----------
Long term $1,145,813
==========
6A. CASH SURRENDER VALUE - LIFE INSURANCE
The Company is the owner and beneficiary of key-man life insurance
policies carried on the lives of certain key executives with cash
surrender values. The aggregate face amounts of the policies were
$4,250,000 for the eleven months ended November 30, 2005. There are loans
in place against these policies. As of November 30, 2005 the cash
surrender value was $62,761, net of $226,632 in loans. As the Company has
the right to offset the loans against the cash surrender value of the
policies, the Company presents the net asset in its consolidated financial
statements.
7- CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options
that the Company expects to exercise at the termination of each lease.
Capital lease obligations totaled $1,208,849 as of November 30, 2005.
As of November 30, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ----------
2006 $ 404,000
2007 428,000
2008 427,000
2009 106,000
----------
Total future minimum lease payments 1,365,000
Less: imputed interest (156,151)
Less: current maturities (359,197)
----------
Total long-term capital lease obligation $ 849,652
==========
F-50
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
8- EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant
to the Plan qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan. The Company does not match any
contributions that employees may make to the Plan.
9- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. a corporation in which 49% is owned by the majority
stockholder of the Company.
Additionally, the Company leases manufacturing space from DPPR Realty
Corp. which is 100% owned by two of the shareholders of the Corporation
who in the aggregate own 36.84% of the Company.
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 11) and accordingly, their assets,
liabilities and results of operations have been consolidated into the
Company's financial statement.
10- COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
F-51
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
11- VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. Under FIN 46, we are required to consolidate variable interest
entities for which we are deemed to be the primary beneficiary by the
third quarter of 2003, and disclose information about those in which we
have significant variable interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable
Interest Entities and the Company is the primary beneficiary. Therefore,
the Company has consolidated the respective lessors' assets and debt into
these consolidated statements. At November 30, 2005, these entities had
gross assets of $1,900,000 and gross liabilities of $985,000. These
facilities were subsequently purchased in connection with a merger
transaction in November 2005. The minority interest on the Company's
financial statements consists of the non-controlling portion of these
respective entities (See Note 9).
12- SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the
Company and an Acquisition Entity and between the Acquisition Entity and a
Public Entity whose stock is traded in Over the Counter Market.
Contemporaneously with the merger agreements, the Company secured
$14,000,000 in debt facilities from a major lending institution and used
funds from the facility to purchase real property that it had subsequently
leased and paid off debts to its prior lender. As part of the merger
agreements, the Acquisition Entity completed the first of two closings of
private placement stock offerings which grossed $9,000,000 in the
aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-52
AIR INDUSTRIES MACHINING, CORP.
FINANCIAL STATEMENTS
(PRIOR TO MERGER)
DECEMBER 31, 2004 AND DECEMBER 31, 2003
F-53
AIR INDUSTRIES MACHINING, CORP.
Table of Contents
December 31, 2004 and 2003
PAGES
Accountants' Report............................................... F-55
Balance Sheet..................................................... F-56 - F-57
Statement of Income and Retained Earnings......................... F-58
Statement of Cash Flows........................................... F-59
Notes to Financial Statements..................................... F-60 - F-66
F-54
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have audited the accompanying Consolidated Balance Sheets of Air
Industries Machining Corporation as of December 31, 2004 and 2003, and the
related Consolidated Statement of Income and Retained Earnings and Cash Flows
for the twelve months ended December 31, 2004 and December 31, 2003. These
consolidated financial statements are the responsibility of the Air Industries
Machining Corporation management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of Air
Industries Machining Corporation as of December 31, 2004 and December 31, 2003,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
January 13, 2006
F-55
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets
ASSETS December 31,2004 December 31,2003
---------------- ----------------
Current Assets
Cash and Cash Equivalents $ 49,275 $ --
Accounts Receivable 2,643,536 1,200,806
Inventory 10,858,456 9,623,378
Advanced Rental -- 26,917
Prepaid Expenses 132,268 183,475
Other Current Assets 5,479 30,413
Deposits 37,160 --
---------------- ----------------
Total Current Assets $ 13,726,174 $ 11,064,989
Property, plant and equipment ,net 3,646,814 3,678,631
Security Deposits 18,522 18,522
Cash Surrender Value - Officer's Life 263,636 211,927
Unamortized Finance Costs 146,661 188,608
---------------- ----------------
Total Assets $ 17,801,807 $ 15,162,677
================ ================
The accompanying audit report and notes are an
integral part of these statements.
F-56
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,2004 December 31,2003
------------------------------------ ---------------- ----------------
Current Liabilities
Cash Overdraft $ -- $ 153,831
Accounts Payable 3,692,060 2,649,160
Advance Payment - Customer 1,354,266 771,616
Mortgage Payable - Current 96,000 96,000
Obligations Under Capital Lease - Current 384,943 325,380
Accrued Operating Expenses 503,678 304,921
---------------- ----------------
Total Current Liabilities 6,030,947 4,300,908
Long Term Liabilities
Advances From Shareholders 267,557 132,846
Mortgage Payable 1,227,786 1,348,601
Notes Payable - Banks 5,280,000 4,900,000
Obligations Under Capital Lease - Long Term 334,353 417,168
---------------- ----------------
Total Long Term Liabilities 7,109,696 6,798,615
---------------- ----------------
Total liabilities $ 13,140,643 $ 11,099,523
================ ================
Commitments and contingencies
Minority interest 407,601 352,548
Stockholders' Equity
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued and Outstanding
As of December 31, 2004 and 2003 32,223 32,223
Additional Paid-In Capital 197,238 185,617
Retained Earnings 4,120,102 3,588,766
Less: Treasury Stock at Cost (96,000) (96,000)
---------------- ----------------
Total Stockholders' Equity $ 4,661,164 $ 4,063,154
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 17,801,807 $ 15,162,677
================ ================
The accompanying audit report and notes are an integral
part of these statements.
F-57
Consolidated Statements of Income and Retained Earnings
Unaudited Pro Unaudited Pro
Audited Forma (1) Audited Forma (1)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
December 31, 2004 December 31, 2004 December 31, 2003 December 31, 2003
Net sales $ 24,818,333 $ 24,818,333 $ 22,334,926 $ 22,334,926
Cost of sales 21,400,878 21,400,878 19,531,292 19,531,292
------------ ------------ ------------ ------------
Gross profit 3,417,455 3,417,455 2,803,634 2,803,634
------------ ------------ ------------ ------------
Operating expenses
Selling & marketing 321,727 321,727 309,479 309,479
General and administrative 1,356,809 1,356,809 1,249,184 1,249,184
------------ ------------ ------------ ------------
Total operating expenses 1,678,536 1,678,536 1,558,663 1,558,663
------------ ------------ ------------ ------------
Income from operations 1,738,919 1,738,919 1,244,971 1,244,971
Interest and financing costs 514,474 514,474 444,756 444,756
------------ ------------ ------------ ------------
Net income before minority interest and income
taxes 1,224,445 1,224,445 800,215 800,215
Less: minority interest 131,552 131,552 83,363 83,363
------------ ------------ ------------ ------------
Income before provision for income taxes 1,092,893 1,092,893 716,852 716,852
Provision for income taxes (1) 437,376 286,884
------------
Net Income 1,092,893 655,517 716,852 429,968
------------ ============ ------------ ============
Retained Earnings, Beginning of Year 3,588,766 $ 3,300,449
Deduct: Distribution to Shareholders (561,557) (428,535)
------------ ------------
Retained Earnings End of Year $ 4,120,102 $ 3,588,766
============ ============
(1) Since our inception we have elected to be treated as a Subchapter " S"
corporation of the Internal Revenue Code and incurred no income taxes. The pro
forma amounts include income taxes that would have been incurred if the Company
had been a "C" Corporation.
F-58
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
YEAR ENDED YEAR ENDED
December 31,2004 December 31,2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,092,893 $ 716,852
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation And Amortization 509,518 591,200
Minority Interest in Net Income 131,552 83,363
Noncash interest expense 11,622 2,989
Changes in Assets and Liabilities:
(Increase) Decrease In Assets-
Accounts Receivable (1,442,730) 342,771
Inventory (1,235,078) (1,141,128)
Advanced Rental 26,917 (26,917)
Prepaid Expenses 51,207 87,021
Other Current Assets 24,934 29,304
Deposits (37,160) 1,200
Cash Surrender Value - Officer's Life (51,709) (75,807)
Advances from Shareholders 134,711 7,439
Increase (Decrease) In Liabilities-
Accounts Payable 1,042,900 508,263
Advance Payments - Customers 582,650 79,722
Accrued Operating Costs 198,757 (131,868)
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,040,984 1,074,404
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (477,700) (139,652)
---------------- ----------------
NET CASH (USED) IN INVESTING ACTIVITIES (477,700) (139,652)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (Repayments) from Credit Line Facilities 325,449 (427,607)
Payments for Obligations Under Capital Lease (23,252) (338,530)
Payments for Finance Related Costs (100,818) (200,853)
Distribution to Shareholders (561,557) (428,535)
(Repayment) Proceeds from Cash Overdraft (153,831) 153,831
---------------- ----------------
NET CASH (USED) IN FINANCING ACTIVITIES (514,009) (1,241,694)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 49,275 (306,942)
---------------- ----------------
Cash and cash equivalents, beginning of year -- 306,942
---------------- ----------------
Cash and cash equivalents, end of year $ 49,275 $ --
================ ================
Supplementary disclosure of cash flow information
Cash paid during the year for interest $ 482,087 $ 372,993
The accompanying audit report and notes are an
integral part of these statements.
F-59
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"), founded in
1969, was incorporated in the State of New York and maintains its
principal place of business in Bay Shore, New York. The Corporation is
primarily engaged in manufacturing aircraft structural parts and
assemblies principally for prime defense contractors in the aerospace
industry machining parts for the aerospace industry predominantly located
in the United States. The Company's customer base consists mainly of
publicly traded companies in the aerospace industry.
Principles of Consolidation
The Company's consolidated financial statements include those of variable
interest entities ("VIEs"). Conditions in which the Company would
consolidate VIE's are cases in which the Company is the primary
beneficiary. Conditions under which the Company would consolidate entities
that are not VIE's are cases in which the Company would maintain a
controlling interest (50% or more) investment or exert significant
management influence. (See Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an original maturity of three months or less. Cash consists of aggregate
cash balances in the Company's bank accounts and cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances. The Company writes off accounts when they are deemed to be
uncollectible. The Company has experienced insignificant amounts of bad
debts in such accounts.
Inventories
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order
quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase
orders. The Company occasionally evaluates inventory items that are not
secured by a purchase orders and reserves for obsolescence accordingly.
The Company also reserves an allowance for excess quantities, slow-moving
goods, and obsolete items.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that add to
the productive capacity or extend the useful life of an asset are
capitalized. Repair and maintenance charges are expensed as incurred.
Property under a capital lease is capitalized and amortized over the lease
terms. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is reflected in
earnings. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
F-60
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. If impairment is
recognized, the carrying value of the impaired asset is reduced to its
fair value, based on discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. Payments received in
advance from customers for products delivered are recorded as customer
advance payments until earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling
and those indirect costs related to manufacturing, such as indirect labor,
supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
F-61
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are taxed
on their proportionate share of the company's net income. Accordingly, no
provision for federal income taxes has been made in the accompanying
financial statements.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, unamortized finance costs, accrued
expenses and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of December
31, 2004 and 2003, approximately 78% is attributed to three customers and
64% is attributed to four customers, respectively.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." Management of the
Company believes that the fair value of financial instruments, consisting
of cash, accounts receivable, accounts payable and accrued liabilities,
approximates carrying value due to the immediate or short-term maturity
associated with these instruments and that the notes payable is carried at
fair value in that it carries interest rates that are comparable to
similar instruments with similar maturities.
Reclassifications
Certain reclassifications have been made to prior year's financial
statement information to conform to the current year presentation.
F-62
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
2- INVENTORIES
The components of inventories consisted of the following as of December
31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Raw Materials $ 1,759,502 $ 1,365,429
Work in Progress 6,934,325 4,558,587
Finished Goods 2,164,629 3,699,362
-------------- --------------
Total Inventory $ 10,858,456 $ 9,623,378
============== ==============
3- PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment as of December 31, 2004 and 2003
include:
December 31, 2004 December 31, 2003
----------------- -----------------
Land $ 134,922 $ 134,922
Building 3,173,071 3,173,071
Machinery and Equipment 7,987,665 7,639,875
Tools and Instrument 279,803 279,803
Leasehold Improvements 489,328 418,431
Automotive Equipment 290,083 284,205
Furniture and fixtures 700,801 647,666
-------------- --------------
Total property, plant, and equipment 13,055,673 12,577,973
-------------- --------------
-------------- --------------
Less: Accumulated Depreciation (9,408,859) (8,899,342)
-------------- --------------
-------------- --------------
Property, plant, and equipment, net $ 3,646,814 $ 3,678,631
============== ==============
Depreciation and amortization expense for the period ended December 31,
2004 and 2003 was $509,518 and $591,200, respectively.
F-63
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a
major lending institution with a termination date of March of 2006. The
facility is secured by a first priority interest in all accounts
receivable, inventory and equipment presently owned or hereafter acquired
by the Company. The indebtedness bears interest at the rate of 1/2 percent
above the prime rate of interest or a libor margin of 3%.
The terms of the facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of
December 31, 2004, the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the
Company, as well as the affiliated companies KPK Realty Corporation and
DPPR Realty Corp. (See Note 9)
Interest expense related to the notes payable - bank approximately
amounted to $249,000 and $229,000 for the years ended December 31, 2004
and 2003, respectively.
5- ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to
cover the Company's working capital needs. The Company imputed as interest
based on the prime rate and recorded as interest expense and additional
paid in capital the amounts of $11,622 and $2,989 for the years ended
December 31, 2004 and 2003, respectively.
5A- DISTRIBUTIONS TO SHAREHOLDERS
The Company distributed to its shareholders $561,557 during the year ended
December 31, 2004. These distributions were made from time to time to the
Company's shareholders in proportion to their ownership interests in the
Company at such times as it had sufficient cash on hand or availability
under its lines of credit.
6- MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable
interest entities (see Note 11) it has two mortgages covering buildings
and land. These mortgages carry interest rates of 6.15% and 7.18% per
annum.
Future mortgage payments are as follows for the year ended December 31,
2004:
Year Amount
---------------- -------------
2005 $ 124,000
2006 126,000
2007 128,000
2008 139,000
2009 133,000
Thereafter 673,786
-------------
1,323,786
Less: current maturities 96,000
-------------
Long term $ 1,227,786
=============
F-64
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
6A- CASH SURRENDER VALUE - LIFE INSURANCE
The Company is the owner and beneficiary of key-man life insurance
policies carried on the lives of certain key executives with cash
surrender values. The aggregate face amounts of the policies were
$4,250,000 for the year ended December 31, 2004 and for the year ended
December 31, 2003. As of December 31, 2004 the cash surrender value was
$263,636 and, as of December 31, 2003, the cash surrender value was
$211,927.
7- CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options
that the Company expects to exercise at the termination of each lease.
Capital lease obligations totaled $719,296 and $742,548 as of December 31,
2004 and 2003, respectively.
As of December 31, 2004, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ---------
2005 $ 433,000
2006 232,000
2007 108,000
2008 25,000
2009 1,000
---------
Total future minimum lease payments 799,000
Less: imputed interest (79,704)
Less: current maturities (384,943)
---------
Total long-term capital lease obligation $ 334,353
=========
8- EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant
to the Plan qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan. The Company does not match any
contributions that employees may make to the Plan.
9- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. a corporation in which 49% is owned by the majority
stockholder of the Company.
Additionally, the Company leases manufacturing space from DPPR Realty
Corp. which is 100% owned by two of the shareholders of the Corporation
who in the aggregate own 36.84% of the Company.
F-65
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 11) and accordingly, their assets,
liabilities and results of operations have been consolidated into the
Company's financial statement.
10- COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the
Company's premises. The Company has insurance coverage for this claim in
the amount of $4,000,000. The carrier has assumed the defense of this
action and at a settlement mediation, the plaintiff made a demand of
$2,000,000 which was rejected by the carrier. The Company believes that
any judgement or settlement in this matter will be paid by the carrier.
11- VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. Under FIN 46, we are required to consolidate variable interest
entities for which we are deemed to be the primary beneficiary by the
third quarter of 2003, and disclose information about those in which we
have significant variable interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable
Interest Entities and the Company is the primary beneficiary. Therefore,
the Company has consolidated the respective lessors' assets and debt into
these consolidated statements. At December 31, 2004 and 2003, these
entities had gross assets of $1,901,000 and $1,902,000, respectively and
gross liabilities of $1,165,000 and $1,210,000, respectively. These
facilities were subsequently purchased in connection with a merger
transaction in November 2005. The minority interest on the Company's
financial statements consists of the non-controlling portion of these
respective entities (See Note 9).
12- SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the
Company and an Acquisition Entity and between the Acquisition Entity and a
Public Entity whose stock is traded in Over the Counter Market.
Contemporaneously with the merger agreements, the Company secured
$14,000,000 in debt facilities from a major lending institution and used
funds from the facility to purchase real property that it had subsequently
leased and paid off debts to its prior lender. As part of the merger
agreements, the Acquisition Entity completed the first of two closings of
private placement stock offerings which grossed $9,000,000 in the
aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-66
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. Offers of these securities are not being made in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus is
accurate as of any date other than the date of the document in which it is
contained.
TABLE OF CONTENTS
PAGE
WHERE YOU CAN FIND MORE INFORMATION 5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 5
PROSPECTUS SUMMARY 6
RISK FACTORS 8
THE ACQUISITION AND RELATED TRANACTIONS 15
USE OF PROCEEDS 17
DETERMINATION OF OFFERING PRICE 17
BUSINESS 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS AND RELATED SHAREHOLDER MATTERS 33
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 34
EXECUTIVE COMPENSATION 37
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 42
PLAN OF DISTRIBUTION 45
DESCRIPTION OF SECURITIES 47
SELLING SECURITY HOLDERS 50
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 59
LEGAL PROCEEDINGS 61
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 62
INDEMNIFICATION OF DIRECTORS AND OFFICERS 62
LEGAL MATTERS 63
EXPERTS 63
INTERESTS OF NAMED EXPERTS AND COUNSEL 63
FINANCIAL STATEMENTS 63
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
Pursuant to Article VII of our By-Laws, we have agreed to indemnify our
officers, directors, employees and agents to the fullest extent permitted by the
laws of the State of Delaware, as amended from time to time.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
Item 25. Other Expenses Of Issuance And Distribution
Our expenses in connection with the issuance and distribution of the
securities being registered, other than the underwriting discount, are estimated
as follows:
SEC Registration Fee $ 3,300
Legal Fees and Expenses $ 50,000
Accountants' Fees and Expenses $ 50,000
Miscellaneous Expenses $ 10,000
Total $ 113,300
Item 26. Recent Sales Of Unregistered Securities
Shares Issued By Gales Industries Prior to the Merger:
As of October 28, 2004, immediately after its incorporation, Original
Gales issued 4,401,219 shares of its common stock to its founder and Executive
Chairman and 3,404,538 shares of its common stock to its Vice Chairman pursuant
to subscriptions for such shares by such individuals. As of the same date, four
of our directors subscribed for 100,000 shares each of Original Gales common
stock. As of the same date, Original Gales issued 150,000 shares of its common
stock to a law firm and 100,000 shares of its common stock to another law firm
pursuant to their subscription for shares. As of the same date, Original Gales
issued in the name of a consultant 250,000 shares of its common stock pursuant
to its subscription for such number of shares. The subscription price for the
shares described in this paragraph was $.00001 per share.
Original Gales entered into an Investment Banking/Advisory Agreement
("Atlas Agreement"), dated as of January 11, 2005, with Atlas Capital Services,
LLC ("Atlas"). The Atlas Agreement provided that Atlas would receive newly
issued shares equal to 4% of a publicly-held company introduced by Atlas to
Original Gales, provided that Original Gales enters into a reverse merger
transaction with such company. Immediately prior to the closing of the Merger,
Original Gales issued to various designees of Atlas an aggregate of 1,477,230
shares of its common stock in satisfaction of such obligation to Atlas.
II-1
In connection with the Acquisition of AIM, Original Gales issued $332,631
principal amount convertible note to each of Mr. Rettaliata and D. Peragallo. As
a result of the Merger, each such convertible note is convertible into shares of
Common Stock at the conversion price of $0.40 per share. Also, in connection
with the Acquisition of AIM, Original Gales issued shares of its common stock
which, pursuant to the Merger, have become 253,214 shares of Common Stock in the
name of Luis Peragallo, 118,423 shares of Common Stock in the name of Peter
Rettaliata and 118,423 shares of Common Stock to Dario Peragallo. See "Certain
Relationships and Related Transactions - Transactions Relating to the
Acquisition and Other Related Transactions."
In February 2005, Original Gales, in consideration for an investment of
$22,500 (the "22,500 Financing"), issued to the investor a 12% convertible
promissory note in the principal amount of $22,500, convertible at the price of
$0.11 per share into shares of Common Stock. As of November 30, 2005, the holder
of such note converted the principal of, and interest accrued on, such note into
226,334 shares of Common Stock. For no additional consideration, Original Gales
issued a warrant to the investor to purchase 409,091 shares of Common Stock at
$.055 per share.
In August 2005, Original Gales, in consideration for $45,000 in aggregate
investment (the "$45,000 Financing"), issued to the investors convertible
promissory notes in the aggregate principal amount of $45,000, convertible at
the price of $0.22 per share of Common Stock. These notes have been repaid. For
no additional consideration, Original Gales issued to such investors warrants to
purchase the number of shares of Common Stock equal to the number of shares into
which the $45,000 Notes can be converted (204,545), exercisable at $0.22 per
share. See "Certain Relationships and Related Transactions - Transactions
Relating to Original Gales."
In September 2005, Original Gales received $105,000 in financing from two
investors (the "$105,000 Financing") and, in connection therewith, issued to
such investors warrants to purchase an aggregate of 477,273 shares of Common
Stock at a price of $0.22 per share, exercisable until September 30, 2010.
GunnAllen Financial, Inc. served as our placement agent in the $105,000
Financing and received cash compensation equal to $10,500 and a non-accountable
expense allowance equal to $2,100. GunnAllen Financial also received a warrant
to purchase 47,728 shares of Common Stock, exercisable at $0.22 per share until
September 30, 2010. Such warrant provided for cashless exercise.
As of November 30, 2005, Original Gales issued to its officers stock
options to purchase shares of common stock as follows: 1,250,000 options to Mr.
Gales, and 1,200,000 options each to Mr. Giusto, Rettaliata and D. Peragallo.
See "Executive Compensation - Employment Agreements."
As of November 30, 2005 and December 15, 2005, Original Gales issued an
aggregate of 900 shares of its convertible preferred stock to investors and
five-year warrants to the placement agent on the same terms as described below
with respect to the "First Closing" and the "Second Closing".
We believe that the issuances of shares described above were exempt from
registration under Section 4(2) of the Securities Act.
Shares Issued by the Company in Connection with the Merger:
As of November 30, 2005, pursuant to the Merger Agreement, we issued an
aggregate of 10,673,107 shares of our Common Stock. In addition, as a condition
to the Merger Agreement, we agreed to nominate James Brown to serve on our Board
and issued 100,000 shares of our Common Stock to him in November 2005.
Pursuant to the Merger, we issued the following securities as of November
30, 2005 in consideration for the cancellation of the corresponding Original
Gales securities: (i) stock options to four of our executives to purchase in the
aggregate 4,850,000 shares of Common Stock (the terms of which are described in
the footnotes to the table, "Executive Compensation-Option Grants in Last Fiscal
Year", above); (2) a convertible note in the principal amount of $332,631 to
II-2
each of Mr. Rettaliata and D. Peragallo, convertible into shares of Common Stock
at $0.40 per share; (3) five-year warrants to the investors in the $45,000
Financing to purchase an aggregate of 204,545 shares of Common Stock at the
exercise price of $0.22 per share; (5) five-year warrants to the placement agent
for the $105,000 Financing to purchase 47,728 share of Common Stock at the
exercise price of $0.22 per share; and (6) five-year warrants to the investor in
the $22,500 Financing to purchase 409,091 shares of Common Stock at the exercise
price of $0.055 per share. All of the warrants described in this paragraph
provide for "cashless exercise".
As of November 30, 2005, in connection with the Merger, 679.328 shares of
Gales Series A Convertible Preferred Stock were exchanged for the same number of
shares of Preferred Stock of the Company (the "First Closing"). Each share of
Preferred Stock is convertible at $0.22 per share into 45,455 shares of Common
Stock.
Such 679.328 shares of Preferred Stock (not including shares of Preferred
Stock issuable as dividends) are convertible into an aggregate of 30,878,855
shares of our Common Stock. On December 15, 2005, we privately issued 220.672
shares of our Preferred Stock to accredited investors (the "Second Closing").
In connection with the Second Closing, the gross purchase price of
$2,206,720 was paid by investors. Together, in the First Closing and the Second
Closing, we issued 900 shares of Preferred Stock to investors and the investors
paid an aggregate purchase price of $9,000,000. Our issuances of shares of
Preferred Stock to investors in connection with the First Closing and the Second
Closing were in exchange for the cancellation of the same number of shares of
series A convertible preferred stock of Original Gales, which merged into our
wholly-owned subsidiary as of November 30, 2005. The investors had acquired such
shares of Original Gales preferred stock by paying Original Gales (and its
successor) the aggregate purchase price of $9,000,000 in connection with Gales'
Industries private offering to accredited investors of up to 900 shares of its
series A convertible preferred stock, which offering was completed by Original
Gales on the date of the First Closing with respect to 679.328 shares of its
preferred stock and on the date of the Second Closing with respect to 220.672
shares of its preferred stock. The terms of our Preferred Stock and Original
Gales series A convertible preferred stock are substantially the same.
The 220.672 shares of Preferred Stock which we issued in the Second
Closing (not taking into account additional shares of Preferred Stock issuable
to the investors as dividends) are convertible at any time, at the option of the
holders, into an aggregate of approximately 10,030,645 shares of our Common
Stock (or 45,455 shares of Common Stock for each share of Preferred Stock), and
will automatically convert into shares of Common Stock if and when this
registration statement, which covers such shares of Common Stock underlying the
Preferred Stock, is declared effective and such shares thereby become available
for resale under the Securities Act.
In connection with the First Closing and the Second Closing, GunnAllen
Financial, Inc. acted as the placement agent and received warrants, exercisable
during a five-year term, to purchase the number of shares of Common Stock
(4,090,950 shares) equal to 10% of the number of shares of Common Stock into
which the Preferred Stock sold in the Offering may be converted. Such warrants
have a "cashless exercise" feature and are exercisable at $0.22 per share.
We believe that the issuances of shares described above were exempt from
registration under Section 4(2) of the Securities Act.
Shares Issued by Ashlin Development Corporation Prior to the Merger:
II-3
On July 30, 2003, Ashlin issued to two Board members an aggregate of
approximately 160,075 shares of Common Stock in return for services performed.
The fair value of such shares of Common Stock was recorded as $24,000 in the
aggregate.
During each of the years ended December 31, 2004 and 2003, Ashlin granted
options to purchase approximately 40,019 shares of Common Stock to its chief
executive officer.
As of January 2005, as part of the Plan of Reorganization, Ashlin issued
approximately 240,112 shares of Common Stock to James Brown (who was then its
chairman and chief executive officer) upon its emergence from bankruptcy
protection. The fair value of such shares was recorded as $12,000 in the
aggregate. In March 2005, Ashlin issued approximately 256,119 shares of Common
Stock to Mr. Brown. The fair value of such 256,119 shares was determined to be
$32,000 in the aggregate. On August 13, 2003, Ashlin issued approximately 80,038
shares of Common Stock to Mr. Brown in consideration of his services as a member
of its Board of Directors.
In March 2005, Ashlin issued approximately 80,038 shares of Common Stock
to Global Business Resources, Inc., a Fort Lauderdale based consulting firm, as
partial compensation for services to Ashlin.
As of September 16, 2005, Ashlin issued approximately 80,038 shares of
Common Stock to a consultant in return for consulting services.
Other than such sales of shares and the securities issued in connection
with the Merger and the Offering described above, during the past three years,
we and Original Gales did not sell any securities which were not registered
under the Securities Act. We believe that the issuances in connection with such
sales, the Merger and the Offering were exempt from registration under Section
4(2) of the Securities Act.
Subsequent Issuances
We issued as of April 1, 2006 to a consulting firm, in return for services
on public relations matters, a warrant to purchase 10,417 shares of our Common
Stock at the exercise price of $0.73 per share and a warrant to purchase 10,417
shares of our Common Stock at the exercise price of $1.56 per share. We issued
to the same firm as of May 1, 2006 a warrant to purchase 10,417 shares of our
Common Stock at the exercise price of $1.82 per share and as of June 1, 2006 a
warrant to purchase 10,417 shares of our Common Stock at the exercise price of
$1.65 per share. All of such warrants expire five years after the date as of
which they were issued and provide for cashless exercise and piggyback
registration rights with respect to new registration statements which we may
file in the future. We will be issuing to the same firm a warrant for the same
number of shares (10,417) of our Common Stock as of the first day of each month
following June 1, 2006 until February 1, 2007 (except that the February 1, 2007
warrant will have the right to purchase 10,416 shares). The exercise price per
share for each such warrant to be issued will equal 120% of the average closing
price of the Common Stock during the month immediately preceding the date as of
which such warrant is issued and will have all other terms which are the same as
the terms of the April 1, 2006, May 1, 2006 and June 1, 2006 warrants. In all,
we will have issued 12 warrants to the same firm which are exercisable into an
aggregate of 125,000 shares of Common Stock.
Such issuances of warrants to our consulting firm were, and will be,
exempt from registration pursuant to Section 4(2) under the Securities Act of
1933, as amended.
II-4
Item 27. Exhibits
Exhibit Nos.
- ------------
2.1 Debtor's Amended Plan of Reorganization (incorporated by
reference to Exhibit 2.1 of Registrant's Form 8-K, filed January
14, 2005.
2.2 Merger Agreement, dated as of November 14, 2005, among Gales
Industries Incorporated, two of its stockholders, Gales
Industries Merger Sub, Inc., and Ashlin Development Corporation
(incorporated herein by reference to Exhibit 10.1 of Registrant's
Form 8-K report filed November 21, 2005).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Form 8-K report, filed
February 15, 2006).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Form 8-K report, filed February 15,
2006).
4.2 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Dario Peragallo (incorporated by
reference to Exhibit 4.2 of the Registrant's Form 8-K report,
filed December 6, 2005).
4.3 Form of Warrant to be issued by the Registrant to GunnAllen
Financial, Inc. after completion of the Offering (incorporated by
reference to Exhibit 4.3 of the Registrant's Form 8-K report,
filed December 6, 2005).
4.4 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.
5.1* Opinion of Eaton & Van Winkle, LLP
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc.
dated October 15, 2004 (incorporated by reference of the
Registrant's Report of Form 8-K, filed on January 14, 2005).
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and among
Gales Industries Incorporated, Air Industries Machining, Corp.,
Luis Peragallo, Jorge Peragallo, Peter Rettaliata and Dario
Peragallo (incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K report, filed December 6, 2005.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005, in
the amount of $962,000, from Gales Industries Incorporated (and
assumed by the Registrant) to Luis Peragallo (incorporated by
reference to Exhibit 10.3 of the Registrant's Form 8-K report,
filed December 6, 2005).
10.4 Security Agreement, dated as of November 30, 2005, by and between
Gales Industries Incorporated (and assumed by the Registrant) and
Luis Peragallo (incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K report, filed December 6, 2005).
10.5 Contract of Sale, dated as of November 7, 2005, by and between
DPPR Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1480 North Clinton Avenue, Bay
Shore, NY (incorporated by reference to Exhibit 10.5 of the
Registrant's Form 8-K report, filed December 6, 2005).
II-5
Exhibit Nos.
- ------------
10.6 Contract of Sale, dated as of November 7, 2005, by and between
KPK Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1460 North Fifth Avenue and
1479 North Clinton Avenue, Bay Shore, NY (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 8-K report,
filed December 6, 2005).
10.7 Employment Agreement, dated as of September 26, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Michael A. Gales (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 8-K report, filed December
6, 2005).
10.8 Employment Agreement, dated as of September 26, 2005, by and
between Louis A. Giusto and Gales Industries Incorporated (and
assumed by the Registrant) (incorporated by reference to Exhibit
10.8 of the Registrant's Form 8-K report, filed December 6,
2005).
10.9 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Peter D.
Rettaliata (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 8-K report, filed December 6, 2005).
10.10 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Dario Peragallo
(incorporated by reference to Exhibit 10.10 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.11 Form of Placement Agency Agreement, dated as of September 26,
2005, between GunnAllen Financial Inc. and Gales Industries
Incorporated (including Amendments No.1 and No.2 thereto, dated
October 25, 2005 and November 10, 2005, respectively).
(Incorporated by reference to Exhibit 10.11 of Registrant's
registration statement on Form SB-2, No. 333-131709, filed on
February 9, 2006).
10.12 [Intentionally left blank.]
10.13 Registrant's 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.18 of the Registrant's annual report on Form 10-KSB,
filed April 12, 2002).
10.14 2005 Stock Incentive Plan of Gales Industries Incorporated
(incorporated by reference to Exhibit 10.14 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Michael A. Gales (incorporated by reference to Exhibit 10.15 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.16 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Louis A. Giusto (incorporated by reference to Exhibit 10.16 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.17 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Peter Rettaliata (incorporated by reference to Exhibit 10.17 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.18 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Dario Peragallo (incorporated by reference to Exhibit 10.18 of
the Registrant's Form 8-K report, filed December 6, 2005).
II-6
Exhibit Nos.
- ------------
10.19 Revolving Credit, Term Loan, Equipment Line and Security
Agreement, dated as of November 30, 2005, by and between Air
Industries Machining, Corp., PNC Bank, National Association, as
Lender, and PNC Bank, National Association, as Agent
(incorporated by reference to Exhibit 10.19 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.20 Mortgage and Security Agreement, dated as of November 30, 2005,
by and between Air Industries Machining, Corp. and PNC Bank
(incorporated by reference to Exhibit 10.20 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.21 Long Term Agreement, dated as of August 18, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation
(incorporated by reference to Exhibit 10.21 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.22 Long Term Agreement, dated as of September 7, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation
(incorporated by reference to Exhibit 10.22 of the Registrant's
Form 8-K report, filed December 6, 2005).
16.1 Letter of Daszkal Bolton LLP to the Securities and Exchange
Commission pursuant to the requirements of Item 304(a)(3) of
Regulation S-K (incorporated by reference to Exhibit 16.1 of the
Registrant's Form 8-K/A report, filed December 28, 2005).
21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1
of the Registrant's Form 8-K report, filed December 6, 2005).
23.1* Consent of Counsel (contained in the opinion annexed as Exhibit
5.1).
23.2* Consent of Goldstein Golub Kessler LLP for use of its report.
23.3* Consent of Bildner & Giannasco LLP for use of its report.
Numbers with (*) are filed herewith.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
II-7
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is a part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2/A and authorized this amended
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Bay Shore, New York on June 15, 2006.
GALES INDUSTRIES INCORPORATED
By: /s/ Michael A. Gales
------------------------
Michael A. Gales
Executive Chairman
In accordance with the Securities Act of 1933, as amended, this amended
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Capacities Date
/s/ Michael A. Gales Executive Chairman June 15, 2006
- -------------------------
Michael A. Gales
/s/ Louis A. Giusto Vice Chairman, Chief Financial
- ------------------------- Officer and Treasurer June 15, 2006
Louis A. Giusto
/s/ Michael A. Gales,
attorney-in-fact Director, President and Chief
- ------------------------- Executive Officer June 15, 2006
Peter D. Rettaliata
/s/ Michael A. Gales,
attorney-in-fact Director, Executive Vice
- ------------------------- President June 15, 2006
Dario A. Peragallo
/s/ Michael A. Gales,
attorney-in-fact Director June 15, 2006
- -------------------------
Seymour G. Siegel
/s/ Michael A. Gales,
attorney-in-fact Director June 15, 2006
- -------------------------
Rounsevelle W. Schaum
/s/ Michael A. Gales,
attorney-in-fact Director June 15, 2006
- -------------------------
Ira A. Hunt Jr.
II-9
/s/ Michael A. Gales,
attorney-in-fact Director, Secretary June 15, 2006
- -------------------------
Stephen M. Nagler
/s/ Michael A. Gales,
attorney-in-fact Director June 15, 2006
- -------------------------
James A. Brown
II-10
GALES INDUSTRIES INCORPORATED
INDEX OF EXHIBITS FILED WITH REGISTRATION STATEMENT
Exhibit Nos.
- ------------
4.7 Form of Warrant issued and to be issued to Porter, LeVay & Rose,
Inc.
5.1 Opinion of Eaton & Van Winkle LLP
23.1 Consent of Counsel (contained in the opinion annexed as Exhibit
5.1)
23.2 Consent of Goldstein Golub Kessler LLP for use of its report.
23.3 Consent of Bildner & Giannasco LLP for the use of its report.
II-11
Neither these securities nor the securities into which these securities are
exercisable have been registered with the Securities and Exchange Commission or
the securities commission of any state in reliance upon an exemption from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and, accordingly, may not be offered for sale, sold or otherwise disposed
of except pursuant to an effective registration statement filed under the
Securities Act or pursuant to an exemption from registration under such act and
in compliance with applicable state securities or blue sky laws.
No.
GALES INDUSTRIES INCORPORATED
COMMON STOCK WARRANT
This certifies that PORTER, LEVAY & ROSE, INC. (fed. Tax ID No.: )
("Holder") is entitled to purchase, subject to the terms and conditions of this
Warrant, from Gales Industries Incorporated, a Delaware corporation (the
"Company"), ___________________ ( ) fully paid and non assessable shares of the
Company's Common Stock, par value $0.001 per Share ("Common Stock"), in
accordance with Section 2 during the period commencing on ___________ and ending
at 5:00 p.m. EST, on _____________ (the "Expiration Date"), at which time this
Warrant will expire and become void unless earlier terminated as provided
herein. The shares of Common Stock of the Company for which this Warrant is
exercisable, as adjusted from time to time pursuant to the terms hereof, are
hereinafter referred to as the "Shares."
1. Exercise Price. The initial purchase price for the Shares shall be
$_____ per share. Such price shall be subject to adjustment pursuant to the
terms hereof (such price, as adjusted from time to time, is hereinafter referred
to as the "Exercise Price").
Exercise and Payment. Commencing on the date hereof, this Warrant may be
exercised, in whole or in part, from time to time by the Holder, during the term
hereof, by surrender of this Warrant and the Notice of Exercise annexed hereto
duly completed and executed by the Holder to the Company at the principal
executive offices of the Company, together with payment in the amount obtained
by multiplying the Exercise Price then in effect by the number of Shares thereby
purchased, as designated in the Notice of Exercise. Payment may be in cash, by
wire transfer of immediately available funds to an account specified by the
Company or by cashier's check payable to the order of the Company. In addition
to the foregoing, notwithstanding any provisions herein to the contrary, in lieu
of exercising this Warrant in the manner set forth in this Section 1, the Holder
may elect to exercise this Warrant or a portion hereof and to pay for the shares
of Common Stock issuable upon such exercise by way of cashless exercise by
surrendering this Warrant at the principal executive office of the Company,
together with the Notice of Exercise attached hereto duly executed, in which
event the Company shall issue to the Holder that number of shares of Common
Stock of the Company computed using the following formula:
X = Y (A - B)
---------
A
Where X = the number of shares of Common Stock to be issued to the Holder.
Y = the number of shares of Common Stock purchasable under this Warrant
or, if only a portion of the Warrant is being exercised, the portion
of the Warrant being cancelled (at the date of such calculation).
A = the greater of: (i) the Closing Price of one share of Common Stock (on
the date prior to such exercise) or (ii) the 10-day average of the
closing price of the shares of Common Stock on the OTC Bulletin Board
prior to such surrender.
B = the Exercise Price (as adjusted to the date of such calculation).
If the above calculation results in a negative number, then no shares of
Common Stock of the Company shall be issued or issuable upon conversion of this
Warrant.
2. Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company as are from time to time issuable upon exercise of this Warrant. All
such shares shall be duly authorized, and when issued upon such exercise, shall
be validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
3. Delivery of Stock Certificates. Within a reasonable time after
exercise, and in no event more than 10 business days thereafter, in whole or in
part, of this Warrant, the Company shall issue in the name of and deliver to the
Holder a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock which the Holder shall have requested in
the Notice of Exercise. If this Warrant is exercised in part, the Company shall
deliver to the Holder a new Warrant for the unexercised portion of this Warrant
at the time of delivery of such stock certificate or certificates.
4. No Fractional Shares. No fractional shares or scrip representing
fractional shares will be issued upon exercise of this Warrant. If upon any
exercise of this Warrant a fraction of a share results, the Company will pay the
Holder the difference between the fair market value of the fractional share and
the portion of the Exercise Price allocable to the fractional share.
5. Charges, Taxes and Expenses. The Company shall pay all transfer taxes
or other incidental charges, if any, in connection with the transfer of the
Shares purchased pursuant to the exercise hereof from the Company to the Holder.
6. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
7. Saturdays, Sundays, Holidays, Etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or a Sunday or shall be a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding weekday which
is not a legal holiday.
8. Adjustment of Exercise Price and Number of Shares. The Exercise Price
and the number of and kind of securities purchasable upon exercise of this
Warrant shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
shall at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights under
this Warrant exist, by stock split or otherwise, or combine its outstanding
securities as to which purchase rights under this Warrant exist, the number of
Shares as to which this Warrant is exercisable as of the date of such
subdivision, stock split or combination shall forthwith be proportionately
increased in the case of a subdivision, or proportionately decreased in the case
of a combination. Appropriate adjustments shall also be made to the Exercise
Price, but the aggregate purchase price payable for the total number of Shares
purchasable under this Warrant as of such date shall remain the same.
(b) Merger. If at any time after the date hereof there shall be a
merger or consolidation of the Company with or into another corporation when the
Company is not the surviving corporation, then lawful provision shall be made so
that the Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the aggregate
2
Exercise Price then in effect, the number of shares or other securities or
property of the successor corporation resulting from such merger or
consolidation, which would have been received by Holder for the shares of stock
subject to this Warrant had this Warrant been exercised prior to such merger or
consolidation.
(c) Reclassification, Etc. If at any time after the date hereof
there shall be a change or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
herein and upon payment of the Exercise Price then in effect, the number of
shares or other securities or property resulting from such change or
reclassification, which would have been received by Holder for the shares of
stock subject to this Warrant had this Warrant at such time been exercised.
9. Notice of Adjustments; Notices. Whenever the Exercise Price or number
of Shares purchasable hereunder shall be adjusted pursuant to Section 9 hereof,
the Company shall execute and deliver to the Holder a certificate setting forth,
in reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated and the Exercise
Price and number of and kind of securities purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first class mail, postage prepaid) to the Holder.
10. Rights As Stockholder; Notice to Holders. Nothing contained in this
Warrant shall be construed as conferring upon the Holder or his or its
transferees the right to vote or to receive dividends or to consent or to
receive notice as a shareholder in respect of any meeting of shareholders for
the election of directors of the Company or of any other matter, or any rights
whatsoever as shareholders of the Company. The Company shall give notice to the
Holder by registered mail if at any time prior to the expiration or exercise in
full of the Warrants, any of the following events shall occur:
(a) dissolution, liquidation or winding up of the Company shall be
proposed;
(b) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value of the Common Stock) or any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or change of Common Stock
outstanding) or in the case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety; or
(c) a taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other rights.
Such giving of notice shall be simultaneous with the giving of notice to
holders of Common Stock. Such notice shall specify the record date or the date
of closing the stock transfer books, as the case may be. Failure to provide such
notice shall not affect the validity of any action taken in connection with such
dividend, distribution or subscription rights, or proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or winding up.
11. Restricted Securities; Registration Rights. The Holder understands
that this Warrant and the Shares purchasable hereunder constitute "restricted
securities" under the federal securities laws inasmuch as they are, or will be,
acquired from the Company in transactions not involving a public offering and
accordingly may not, under such laws and applicable regulations, be resold or
transferred without registration under the Securities Act of 1933, as amended
(the "Securities Act") or an applicable exemption from such registration. Unless
3
the Shares are registered in accordance with the requirements of the Securities
Act, the Holder further acknowledges that a securities legend substantially in
the form appearing on the first page of this Warrant shall be placed on any
Shares issued to the Holder upon exercise of this Warrant.
The Holder of this Warrant shall be entitled to the "piggyback"
registration rights with respect to the Shares as set forth on Exhibit B annexed
hereto which in incorporated herein by reference.
12. Certification of Investment Purpose. Unless a current registration
statement under the Securities Act shall be in effect with respect to the
securities to be issued upon exercise of this Warrant, the Holder covenants and
agrees that, at the time of exercise hereof, it will deliver to the Company a
written certification executed by the Holder that the securities acquired by him
upon exercise hereof are for the account of such Holder and acquired for
investment purposes only and that such securities are not acquired with a view
to, or for sale in connection with, any distribution thereof. This Warrant is
acquired by the Holder for investment purposes, and not with a view to, or for
sale in connection with, any distribution thereof.
13. Miscellaneous.
(a) Construction. Unless the context indicates otherwise, the term
"Holder" shall include any transferee or transferees of this Warrant, and the
term "Warrant" shall include any and all warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange or substitution.
(b) Notices. Unless otherwise provided, any notice required or
permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
(3) days following deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified (or
one (1) day following timely deposit with a reputable overnight courier with
next day delivery instructions), or upon confirmation of receipt by the sender
of any notice by facsimile transmission, at the address indicated below or at
such other address as such party may designate by ten (10) days' advance written
notice to the other parties.
To Holder: Porter, LeVay & Rose, Inc.
Seven Penn Plaza, Room 810
New York, New York 10001
Facsimile: (212) 244-3075
Attention: Michael Porter, President
To the Company:
1479 North Clinton Avenue
Bay Shore, New York 11706
Facsimile: (631) 968-5377
Attention: Michael A. Gales, Executive Chairman
(c) Governing Law. This Warrant shall be governed by and construed
under the laws of the State of Delaware.
(d) Entire Agreement. This Warrant, the exhibits and schedules
hereto, and the documents referred to herein, constitute the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof.
4
(e) Binding Effect. This Warrant and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
the Company and its successors and assigns, and Holder and its successors and
assigns.
(f) Waiver; Consent. This Warrant may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Warrant or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto.
(g) Severability. If one or more provisions of this Warrant are held
to be unenforceable under applicable law, such provision shall be excluded from
this Warrant and the balance of the Warrant shall be interpreted as if such
provision were so excluded and the balance shall be enforceable in accordance
with its terms.
(h) Counterparts. This Warrant may be signed in several
counterparts, each of which shall constitute an original.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
exercised effective as of the ____ day of ___________, _____.
GALES INDUSTRIES INCORPORATED
By:
-------------------------
Name: Michael A. Gales
Title: Executive Chairman
5
EXHIBIT A TO WARRANT
EXERCISE AGREEMENT
(NOTICE OF EXERCISE)
To: Gales Industries Incorporated Dated: _____________________________
_____________________________
_____________________________
Attn: Chief Financial Officer
The undersigned, registered holder of the Warrant to Purchase Common Stock
delivered herewith, hereby irrevocably exercises such warrant for, and purchases
thereunder, ______ shares of Common Stock of GALES INDUSTRIES INCORPORATED, a
Delaware corporation.
The undersigned hereby elects to exercise this Warrant by (check one):
______ payment of cash and herewith makes payment of the warrant price of
$________ for such shares in full.
______ cashless exercise and hereby requests delivery of the number of
shares as determined in accordance with Section 2 of the Warrant.
Holder
Signature: ___________________________
Print Name: __________________________
Address: _____________________________
_____________________________
_____________________________
Telephone: ___________________________
Facsimile: ___________________________
Social Security
Number: ______________________________
6
Exhibit B
Registration Rights
Registered Holders shall have certain registration rights as
follows:
A. If the Company shall file with the Securities and Exchange
Commission ("SEC") a new registration statement ("Registration Statement") under
the Securities Act of 1933, as amended (other than on Form S-8 or S-4 and other
than any amendment to an existing registration statement), registering any
shares of Common Stock owned by any person or entity, the Company shall give
written notice to the Holder prior to such filing.
B. Within fifteen (15) days after such notice from Company,
the Holder shall give written notice to Company whether or not the Holder
desires to have included in the Registration Statement all of the shares into
which this Warrant is convertible (the "Registrable Securities"). If the Holder
fails to give such notice within such period, the Holder shall not have the
right to have the Holder's Registrable Securities registered pursuant to such
registration statement. If the Holder gives such notice, then Company shall
include the Holder's Registrable Securities in the registration statement.
C. If the registration statement relates to an underwritten
offering, and the underwriter shall determine that the total number of shares of
Common Stock to be included in the offering, including the Registrable
Securities, shall exceed the amount which the underwriter deems to be
appropriate for the offering, the number of shares of the Registrable Securities
shall be reduced in the same proportion as the remainder of the shares in the
offering and the Holder's Registrable Securities included in such registration
statement will be reduced proportionately. For this purpose, if other securities
in the registration statement are derivative securities, their underlying shares
shall be included in the computation. The Holder shall enter into such
agreements as may be reasonably required by the underwriters and the Holder
shall pay to the underwriters commissions relating to the sale of its
Registrable Securities.
D. The Holder shall furnish in writing to the Company such
information as the Company shall reasonably require in connection with a
registration statement.
7
Exhibit 5.1 - Opinion re legality of the common stock being registered
EATON & VAN WINKLE LLP
3 Park Ave, 16th Floor
New York, New York 10016
June 15, 2006
Gales Industries Incorporated
1479 North Clinton Avenue
Bay Shore, NY 11706
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to Gales Industries Incorporated, a Delaware
corporation (the "Company"), in connection with the filing of an amended
Registration Statement on Form SB-2/A (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), with respect to the
registration under the Securities Act of 1933, as amended (the "Act"), of
61,024,388 shares (the "Shares")of the Company's $.001 par value per share
common stock (the "Common Stock"), of which 49,438,663 shares (the "Underlying
Shares") are issuable upon exercise or conversion of warrants, preferred stock
or convertible notes.
In our capacity as counsel, we are familiar with the proceedings taken by
the Company in connection with the authorization, issuance and sale of the
Shares. In addition, in connection with the registration of the foregoing
securities, we have reviewed such documents and records as we have deemed
necessary to enable us to express an opinion on the matters covered hereby,
including, but not limited to, certain agreements relating to the authorization,
issuance, registration and sale of such securities and copies of resolutions of
the Company's Board of Directors authorizing the issuance of such securities and
their registration pursuant to the Registration Statement.
In rendering this opinion, we have (a) assumed (i) the genuineness of all
signatures on all documents examined by us, (ii) the authenticity of all
documents submitted to us as originals, and (iii) the conformity to original
documents of all documents submitted to us as photostatic or conformed copies
and the authenticity of the originals of such copies; and (b) relied on (i)
certificates of public officials and (ii) as to matters of fact, statements and
certificates of officers and representatives of the Company.
Based upon the foregoing, we are of the opinion that the Shares have been
validly issued and are fully paid and non-assessable except that the Underlying
Shares will be validly issued, fully paid and non-assessable when issued in
accordance with the terms of the corresponding warrants, preferred stock or
convertible notes, as the case may be.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Nothing herein shall be deemed to relate to or constitute an opinion
concerning any matters not specifically set forth above. The foregoing opinions
relate only to matters of the internal law of the State of Delaware without
reference to conflict of laws and to matters of federal law, and we do not
purport to express any opinion on the laws of any other jurisdiction. We assume
no obligation to supplement this opinion if, after the date hereof, applicable
laws change, or we become aware of any facts that might change our opinions, as
expressed herein.
The opinion expressed herein may be relied upon by the Company in
connection with the registration of the Shares, as contemplated by, and in
conformity with, the Registration Statement. With the exception of the
foregoing, the opinion expressed herein may not be relied upon by any other
person without our prior written consent.
We express no opinion as to compliance with the securities or "blue sky"
laws of any state or country in which the Shares are proposed to be offered and
sold.
Very truly yours,
/s/ Eaton & Van Winkle LLP
2
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Gales Industries Incorporated
We consent to the inclusion in the foregoing Amendment No. 1 to the Registration
Statement on Form SB-2/A of our report, dated March 28, 2006, relating to the
financial statements of Gales Industries Incorporated as of December 31, 2005
and for the year ended December 31, 2005. We also consent to the reference to
our firm under the caption "Experts".
/s/ Goldstein Golub Kessler LLP
-------------------------------
Goldstein Golub Kessler LLP
New York, New York
June 13, 2006
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTING FIRM
To the Board of Directors
Gales Industries Incorporated
We consent to the inclusion in the foregoing amended Registration Statement on
Form SB-2/A of (1) our report, dated February 28, 2006, relating to the
financial statements of Air Industries Machining, Corp. as of November 30, 2005
and for eleven months then ended and (2) our reported, dated January 13, 2006,
relating to the financial statements of Air Industries Machining, Corp. as of
December 31, 2004 and 2003 and for the years ended December 31, 2004 and 2003.
We also consent to the reference to our firm under the caption "Experts".
/s/ Bildner & Giannasco, LLP
------------------------------
Bildner & Giannasco, LLP
Jericho, New York
June 15, 2006
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
June 15, 2006
Securities and Exchange Commission
Division of Corporation Finance, Mail Stop 0408
100 F. Street, N.E.
Washington, D.C. 20649
RE: Gales Industries Incorporated,
f/k/a Ashlin Development Corporation (the "Company" or the "Registrant");
Commission's Comment Letter (the "Comment Letter"),
Dated March 8, 2006, re Form SB-2 of the Company (the "SB-2")
File No. 333-131709, filed February 9, 2006
Dear Sirs:
On behalf of the referenced Company, we are writing in response to the
referenced Comment Letter from the Commission's Division of Corporation Finance
(Todd K. Schiffman, Assistant Director) to the Company. The Company is filing
herewith an amended Registration Statement on Form SB-2/A (the "Amended SB-2")
which addresses all of the Staff's comments in the Comment Letter. For ease of
reference, each of the comments of the staff is set forth below, together with
the related response. Any capitalized terms used in this response letter have
the meanings assigned to them in the Amended SB-2. The sections of the
prospectus and page numbers referred to in the below responses, unless otherwise
noted, refer to such sections and page numbers in the Amended SB-2.
General
1. Please update your disclosure to account for the change in name and the
state of incorporation that you represented would occur on or about
February 15.
The requested changes were made on the cover and throughout the
Registration Statement.
Front Cover of Prospectus
2. Please disclose the proceeds to you assuming the maximum number of
warrants is exercised.
The proceeds to be received upon exercise of the warrants has been
disclosed in the second paragraph on the cover page.
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Where You Can find More Information, page 4
3. Please revise this section as follows:
o correct the address of the SEC; and
o provide the disclosure required by Item 101(c) of Regulation S-B.
The address of the SEC has been updated as appropriate and the
disclosures required by 101(c) have been made in the third paragraph under
the heading "Where You Can Find More Information." (Page 5)
The Acquisition and Related Transactions, page 5
4. Please revise this section as follows:
o (i) disclose the aggregate purchase price that you paid for Gale
Industries and the valuation of each share of your stock and that of
Gale Industries; and
o (ii) revise your statement that you issued "a significant number of
shares" to Gale by disclosing the number of shares that you issued
and the percentage of your outstanding shares that this represented.
Throughout this letter the term "Original Gales" is used to refer to the
privately held company that acquired Air Industries Machining, Corp.
("AIM") and, immediately thereafter, merged into a wholly owned subsidiary
of the Registrant.
(i) In response to this comment, the disclosure describing the
Registrant's acquisition of Original Gales (which was preceded by
Original Gales' purchase of AIM) has been revised substantially in
this and other sections of the registration statement. The value of
our shares issued in connection with the merger was not
independently determined and the number of shares issued was the
result of arms' length negotiations between the then Board of the
Registrant and representatives of Original Gales. Inasmuch as
pursuant to the terms of the Merger Agreement between us and
Original Gales one of our shares was issued for each outstanding
share of Original Gales, we have assumed that our shares had the
same value as the shares of Original Gales issued in its private
placement, approximately 22 cents per share. This has been disclosed
in the last sentence of the first paragraph under the heading
"Prospectus Summary-The Acquisition and Related Transactions." (Page
7)
(ii) The requested information is set forth in the first paragraph
under the heading "Prospectus Summary-The Acquisition and Related
Transactions."
Risk Factors, page 7
5. Please revise this section as follows:
o (i) address in your first risk factor the risks associated with the
fact that your auditor has expressed an opinion, in note 3 to your
most recent financial statements, that "there remains substantial
doubt about the company's ability to continue as a going concern;"
-2-
o (ii) add a risk factor addressing the risk of dilution resulting
from your issuance of additional shares of your common stock in any
potential acquisition pursuant to your current business strategy;
and
o (iii) revise your last risk factor to quantify the anticipated
annual costs of being a public company.
(i) As a result of the transactions that occurred on November 30,
2005, the opinion of the Registrant's auditor on the Registrant's
financial statements as at December 31, 2005, no longer expresses
doubt about the Registrant's ability to continue as a going concern.
(ii) The requested risk factor ("Dilution from Shares to be issued
in Potential Acquisitions") has been added as the penultimate risk
factor. (Page 15)
(iii) The requested information has been provided in the last risk
factor. (Page 15)
The Acquisition and Related Transactions, page 13
6. Please revise this section as follows:
o (i) revise your discussion of the "Transactions of November 30,
2005" to provide an overview of the transactions and an explanation
of the purposes for having these as separate transactions including
Gales Industries acquire AIM and then you acquiring Gales Industries
and for Gales Industries rather than you conducting the private
placement;
o (ii) revise your discussion of your acquisition of Gales Industries
to disclose the terms including, but not limited to, the following:
o (a) the aggregate purchase price;
o (b) the number and type of shares that you issued;
o (c) any other consideration;
o (d) the basis for the determination of the purchase price
including the value of Gales Industries and the value of each
share of your stock;
o (iii) revise your discussion of your acquisition of AIM by Gales
Industries as follows:
o (a) disclose the aggregate purchase price including cash,
notes, stock payments of loans and taxes, reimbursement of
legal and accounting expenses;
o (b) disclose the basis for the determination of the purchase
price including the value of AIM and the value of each share
of stock of Gales Industries
o (iv) revise your discussion of the acquisition by AIM of real estate
from affiliates to disclose whether AIM obtained an independent
appraisal and, if not, the basis for the purchase price; and
o (v) revise your discussion of the private placement of Gales
Industries convertible preferred stock to
-3-
o (a) disclose the closing date; and
o (b) the number of shares of your common stock of Ashlin that
holders now own and the effective price per share given the
price paid in the private placement.
(i) The requested information is set forth in the first two
paragraphs under this heading. (Page 15) This disclosure provides
the chronology of the transactions which, in part, determined how
they were structured. Supplementally, it should be noted that
Original Gales initiated each of the transactions and there was
little, if any, contact between the Registrant and either AIM or
GunnAllen until immediately prior to the completion of the
transactions.
(ii) (a) The requested information is set forth in the third
paragraph under this heading. (Page 15)
(b) The requested information is set forth in the third
paragraph in this section.
(c) No consideration other than shares of the Registrant was
paid in connection with the acquisition of Original Gales and
a statement to this effect has been added to the third
paragraph in this section.
(d) The purchase price paid for the acquisition of Original
Gales by the Registrant was determined by arms' length
negotiation between the parties and a sentence stating that
fact has been added to the second paragraph in this section.
The Registrant based its decision as to the value of any
shares to be issued, in part, on the price the investors were
to pay for shares of Original Gales in its private placement.
To a great degree, since this was effectively an acquisition
of the Registrant by Original Gales, the Registrant sought to
ensure that the shares retained by its stockholders would have
a value of approximately $800,000 and statements to this
effect have been added to the second and third paragraphs in
this section.
(iii) (a) The requested information is set forth in the fourth
paragraph in this section. (Page 16)
(b) The purchase price paid by Original Gales for AIM was
determined by arms' length negotiations between the parties
and a statement to this effect has been included at the end of
the fourth paragraph of this section. No independent
appraisals of the business of AIM were obtained. Original
Gales believes that the value of its shares was determined by
arms' length negotiation between it and GunnAllen as reflected
in the price at which its shares were offered in the private
placement. Without discounting the price for the fact that the
shares issued were convertible preferred stock, the shares of
Original Gales were sold in the private placement at a price
of approximately 22 cents per share. A statement setting forth
the price at which the shares were sold in the private
placement has been added in the fifth paragraph in this
section.
-4-
(iv) The purchase price for the real estate acquired by AIM was
determined by arms' length negotiations between Original Gales and
the owners of the real estate (some of whom had interests in AIM)
and was based upon appraisals. A statement to this effect has been
added to the sixth paragraph in this section.
(v) (a) The requested information is set forth in the fifth
paragraph in this section. (Page 16)
(b) The requested information is set forth in the third
paragraph in this section.
Business, page 15
7. Please revise this section to comply with Item 101(a) of Regulation S-B to
include a description of your development during the past three years
including, but not limited to, the form and year of organization and a
description of your business before the acquisition of Gales Industries.
Please explain the business without the use of technical terms such as
"Iso 9001 and AS 9100 Certifications" and "OEMs" or explain those terms in
plain English.
In response to this comment there has been added under the heading
"Transactions of November 30, 2005" (Page 18) a description of how the
Registrant came to acquire AIM, currently its only operating business. A
description of AIM and how it has evolved is contained in the first two
paragraphs under the heading "About AIM" and a more detailed description
of AIM is contained under the following subheadings. Prior to its reverse
merger with Original Gales, the Registrant was in bankruptcy and this is
disclosed in the last paragraph under the heading "Transactions of
November 30, 2005." Original Gales was recently formed for the specific
purpose of seeking to acquire a business in this industry and this has
been disclosed in the first paragraph under the heading "Transactions of
November 30, 2005."
8. Please comply with the requirements of Item 101(b) of Regulation S-B
including, but not limited to, the following:
o (i) describe the extent to which your products are protected by any
patents, trademarks or licenses;
o (ii) describe labor contracts with your unionized workers; and
o (iii) estimate the amount spent by you and AIM during the last two
fiscal years on research and developments activities.
(i) The requested information is set forth in the last paragraph
under the heading "About AIM." (Page 19)
(ii) The requested information is set forth in the paragraph under
the heading "Employees." (Page 23)
(iii) The requested information is set forth in the last paragraph
under the heading "About AIM." (Page 19)
9. Please provide more detail on page 16, regarding the "long term exclusive
multi-year agreements" to which you refer including whether or not these
agreements include binding obligations on the purchaser to buy from you.
-5-
In addition, please explain, on page 17, how you will finance your
acquisitions given your limited resources and how you will compete with
larger competitors with greater resources also seeking companies to
acquire.
The requested information regarding the Company's long-term
contracts is set forth in the first paragraph under the heading "Backlog."
(Page 20)
The requested information regarding the financing of acquisitions
and competition with larger entities is set forth in the penultimate
paragraph under the heading "Future Expansion and Acquisition Strategy."
(Page 22)
Management's Discussion and Analysis, page 19
10. Please revise this section to comply with Item 303 (b) to address your
future financial condition and results of operations. Specifically,
address the extent to which recent financial statements of AIM are not
indicative of future performance of Ashlin Development. Please discuss
your auditor's opinion in note 3 to your September 30, 2005 unaudited
financial statements that "there remains substantial doubt about the
company's ability to continue as a going concern." We note that this
opinion was based upon your September 30, 2005 financials and that since
then you have undertaken additional obligations. It appears that you may
not have any net income as a result of the additional commitments that you
have undertaken since the September 30, 2005 financials including but not
limited to various loans, promissory notes, the costs of being a public
company and increased compensation. Please provide discussion and
analysis. In addition, please provide discussion and analysis of your net
income, not just gross profit, in the past and in the future.
The extent to which AIM's financial performance is not indicative of
future performance of the Registrant has been addressed in the third
paragraph under the heading "Introduction" in this section. (Page 25)
Please note that the auditor's opinion to the Registrant's December
31, 2005, financial statements does not contain a qualification as to the
Registrant's ability to continue as a going concern. The September 30,
2005 financial statements are no longer required to the included in the
registration statement.
The impact of the additional commitments undertaken since the
September 30, 2005, is addressed and discussed in the second paragraph
under the heading "Financial Liquidity and Capital Resources" in this
section. (Page 30)
The requested discussion of net income in addition to that of gross
profit has been added in each of the period comparisons. (Page 28-30)
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003, page 19
-6-
11. Your discussion and explanation of changes in revenues, expenses, and
gross profits is overly general in nature. Please revise your disclosure
to identify the specific facts and circumstances surrounding these
material changes in your income statement. For example, you should discuss
the factors leading to increased purchase orders and shipments that caused
the $2.5 million increase in sales.
The requested information has been provided in various items in the
period comparisons. In particular, the reasons have been provided for the
increased net sales reported in 2005 and 2004.
Critical Accounting Policies, page 22
12. We note the cross-reference to Note 1 to the audited financial statements
of AIM intended to satisfy the requirement for the discussion of critical
accounting policies. These discussions are meant to supplement, not
duplicate the disclosures presented in the financial statements and to
provide greater insight into the quality and variability of information
regarding financial condition and operating performance. As such, please
revise your disclosure to comply with Part V of FR 76.
The disclosure has been revised to set forth the Company's critical
accounting policies in accordance with Part V of FR 76. (Page 31,32)
Security Ownership, page 22
13. Please disclose the natural person who is the control person of ACS
Holdings LLC.
The requested information is set forth in footnote 6 to the table of
significant shareholders. (Page 34)
Directors, Executive Officers, Promoters and Control Persons, page 23
14. Please comply with Item 401(a)(3) of Regulation S-B by giving the term of
each director.
The requested information is set forth in the paragraph under the
table of directors and officers. (Page 34)
Executive Compensation, page 26
15. Please revise this section as follows:
o (a) comply with Item 402(b) of Regulation S-B by providing a table
with all of the requisite columns and distinguishing in the table
between restricted stock and options;
o (b) disclose in a footnote that although you only paid your Chairman
$16,837 in 2005 you have agreed to pay him at least $250,000 in
salary and at least $125,000 in bonus in 2006; and
-7-
o (c) disclose the terms of the "comprehensive compensation policy"
that you intend to adopt and the estimated aggregate cost.
(a) the requested information is set forth in the compensation table
and notes thereto under the heading "Executive Compensation." (Page
38)
(b) the requested information is set forth in the compensation table
and notes thereto under the heading "Executive Compensation."
(c) The requested information is set forth in the paragraph under
the heading "Director Compensation." (Page 42)
Air Industries Machining Corporation
Independent Accountants' Report page F-2
16. You state that AIM constitutes all of your operations following the
merger. In view of this fact, your assumption that a reverse acquisition
has occurred and the issuance of the accountants' report subsequent to the
acquisition date, we would expect the audit to be conducted in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Please revise or advise.
As disclosed in the financial statements, for accounting purposes
the acquisition of AIM by Original Gales was treated as a purchase and the
merger of Original Gales into a subsidiary of Registrant was treated as a
reverse acquisition. Consequently, the financial statements to be
presented are those of Original Gales. The audit conducted as of December
31, 2005, was in accordance with the PCAOB.
17. As a related matter, refer to the Independent Accountants' Report on page
F-14. The report states that consolidated statements of income, retained
earnings and cash flows for the twelve months ended September 30, 2005 and
2004 have been reviewed. However, the financial statements which follow
appear to consist of the nine month periods ended September 30, 2005 and
2004. Please revise or advise, as appropriate.
The staff is correct. The statements as of September 30, 2005 were
incorrectly identified. The financial statements for the period referred
to in this comment are no longer required to be included in the
registration statement.
Audited Financial Statements for the Year Ended December 31, 2004
Consolidated Balance Sheets, page F-4
18. We note from your disclosure in Note 5 -- Advances from Shareholders on
page F-11 that AIM has historically used these advances for working
capital needs, and that these advances do not bear interest. As these long
term advances are from significant shareholders the interest that would
have been paid on these amounts had they been obtained from a third party
represents an expense paid on behalf of the company by a principal
stockholder, and should be recorded as an expense and a capital
contribution. Refer to SAB Topic 5T. As such, please revise your financial
statements to included imputed interest expense on these advances at rates
-8-
similar to rates you would have been able to obtain in the marketplace.
Disclose the maturity dates and any other significant contractual terms of
these advances in your footnote as well.
The financial statements have been revised to reflect the imputation
of interest on advances from stockholders.
19. Please add a footnote to the annual and interim financial statements to
discuss the asset captioned "Cash Surrender Value - Officer's Life" and
your method of accounting for same. The reasons for the significant
decline in this asset as of September 30, 2005 should be addressed in your
interim financial statements as well.
The requested footnote has been added and appears on pages
F-7, F-27, F-50 and F-65. Supplementally, please be advised that the
decline in value represents a combination of the sale of one of the
policies and a decline in value in the portfolio of securities underlying
the policies.
20. Please revise your interim balance sheet presentation to include a pro
forma balance sheet along side your historical balance sheet giving effect
to the conversion of preferred stock to common stock that will mandatorily
convert on effectiveness of the registration statement.
The requested pro-forma information has been provided with the March
31, 2006 balance sheet.
Consolidated Statements of Income and Retained Earnings, page F-5
21. It is unclear from your disclosure why you classify interest income and
interest expense within operations on your income statement.
Supplementally justify the inclusion of interest income in revenues from
operations and interest expense in operating expenses or reclassify both
items to Other Income.
The requested reclassification has been made in the financial statements
of the Registrant. (Page F-43, F-58)
22. We note your presentation here and on the face of the other financial
statement schedules of "Distributions to Shareholders" during 2004 and
2003. We also note your disclosure throughout your Form SB-2 that AIM
previously reported as a subchapter S corporation and made distributions
to its shareholders to cover their tax burden resulting from AIM's
operations. It does not appear however, that the nature of distributions
have been discussed in AIM's financial statements for the year ended
December 31, 2004. As such, please revise your financial statement
disclosure and your MD&A, as appropriate, to include the facts and
circumstances surrounding such distribution. This discussion should
include how the distribution amount was calculated or determined and the
timing and amount of the payment. Also, please supplementally tell us the
total amount of any undistributed earnings or losses as of the acquisition
date. Your attention is invited to SAB Topic 4-B with regard to the
treatment of any such undistributed earnings. We may have further comment
on your response.
-9-
The requested disclosure has been added to the financial statements of AIM
(Pages F-49 and F-64) and appropriate disclosure has been made in the M,D
& A (Page 31). Supplementally, there were no undistributed earnings as of
November 30, 2005, the date of the Acquisition.
23. As a related matter, the historical financial statements of AIM should
include pro forma tax information on the face of the income statement for
all periods presented. Subsequent to the acquisition, pro forma
presentations reflecting tax expense for earlier comparable periods should
continue to be presented for periods prior to becoming taxable and for the
period of change. Pro forma after tax EPS data should be presented for
each of these periods as well.
The pro forma financial information has been added to the historical
financial statements (income statements) of AIM. (Page F-43, F-58)
Note 1 -- Significant Accounting Policies
Principles of Consolidation, page F-7
24. Please revise your footnote to clarify how you determine which entities to
consolidate and how such consolidation is effected. For example, specify
the conditions under which you consolidate variable interest entities and
indicate the conditions under which you consolidate entities that do not
qualify as VIEs.
The requested revision has been made to the footnote. (Pages F-45 and
F-60)
Inventories, page F-10
25. We note that inventory represents over half of your total assets, but you
have not discussed your policy for determining what constitutes excess and
obsolete inventory. As such, please revise your accounting policy here to
indicate how you determine excess and obsolete inventory. As a related
matter, also please include either here or in Note 2 a roll forward of the
provision for excess and obsolete inventory for each year an income
statement is presented, as applicable and if significant.
The requested disclosure is in Note 2 to the Registrant's financial
statements under the heading "Inventories" or "Inventory Valuation."
(Pages F-21, F-45, F-60)
26. As a related matter, we note the methodology you use to value finished
goods inventory and work-in-process as described on page F-l9. Please
supplementally explain the rationale for your methodology in circumstances
where the inventory is not supported by an invoiced selling price based on
a purchase order from a company. Specifically, explain how you determined
that a sixty percent reduction of the historic selling price is
appropriate in every instance and tell us why you believe that a discount
for a general and administrative charge is appropriate. Such costs are
generally considered to be period costs and are often so unrelated to the
immediate production process that any allocation would be purely
arbitrary. Please advise.
-10-
Items not subject to a purchase order (which represented less than 5.2% of
total inventory as of December 31, 2005) were historically discounted by
60% by AIM's former management. The discount was taken to reflect the
possibility that the inventory which was produced without the benefit of a
purchase order would not be sold. This number was empirically derived by
prior management based upon historical experience and management's
knowledge of aircraft production rates.
Note 10 -- Commitments and Contingencies, page F-12
27. It is unclear how your disclosure and accounting treatment of the claim
for personal injury in the amount of $5,000,000 as described in Note 10
and elsewhere in your filing are in compliance with FAS 5. Specifically,
it is unclear why you believe right of setoff exists between the loss
contingency associated with the claim for personal injury and the
insurance recovery as the general principles of FIN 39 prohibit the offset
of any liability with an asset (such as a "probable" insurance recovery)
unless a legal right of setoff exists between the two parties (i.e. debtor
and creditor). Therefore, the amounts expected to be received from the
insurer cannot offset the liability to be booked, and it is necessary to
evaluate the loss and gain separately under paragraphs 8 and 17 of SFAS 5,
respectively. In addition, your current disclosure does not meet the
requirements of paragraphs 9-13 of SFAS 5 in that it is unclear what you
estimate the range of possible loss to be, if estimable, and what the
probability of such a payout is. As such, please revise your financial
statements and related disclosure to fully and completely discuss this
claim in accordance with the disclosure requirements of SFAS 5 independent
of any insurance recovery, per paragraphs 8-13 and 17 of SFAS 5.
Disclosure throughout your filing should be similarly revised.
The relevant disclosure is set forth under the heading "Litigation."
(Pages 23, 61, F-29, F-51 and F-66) Supplementally, please be advised that
it is the Company's position that its insurer is primarily liable for this
claim as a result of its insurer's assumption of the defense of the action
and thus there is no need to account for the liability in its financial
statements. The Company believes that it has adequate insurance coverage
to cover all liabilities under this claim.
Ashlin Development Corporation
Unaudited Financial Statements for the Nine-Month Period Ended September 30,
2005 and 2004
Condensed Statements of Operations, page F-28
28. As you sold your core operations, it appears that you disposed of a
"component of an entity" as described in paragraphs 41 and 42 of SFAS 144.
If our understanding is correct, we would expect your income statement
presentation to comply with the guidance and the example set forth in
paragraph 43 of that statement. Specifically, it appears that the order of
the line items in your income statement should be revised so that "Total
operating expense" is followed by "Loss from operations," "Other income,"
-11-
"Interest income," "Loss from continuing operations before income taxes,"
"Income taxes," "Loss from continuing operations," "Discontinued
operations (Note X)," "Income (loss) from discontinued operations
(including gain on disposal of $XXX)," "Income tax," "Loss on discontinued
operations," "Net income." Please revise or advise. Your current
presentation is confusing and it does not appear to comply with GAAP. We
may have further comments upon review of your revised format.
The financial statements that are the subject of this comment are no
longer required to be included in the Registration Statement.
Note 4--Equity
29. Please confirm that you issued 100,000 shares valued at $0.10 per share
resulting in $10,000 consulting expense pursuant to a new consulting
contract. Your current disclosure indicates the shares were valued at
$0.10 per share. If our understanding is correct, please revise your
financial statements accordingly.
The financial statements that are the subject of this comment are no
longer required to be included in the Registration Statement.
30. We note that the 300,000 shares issued to the CEO per his compensation
contract during the nine-month period ended September 30, 2005 were valued
at $0.04 per share, a value significantly less than the other issuances
discussed in this footnote. Supplementally explain to us how you
determined market value for this and the other issuances described in this
note. We may have further comment on your response.
The financial statements that are the subject of this comment are no
longer required to be included in the Registration Statement.
Supplementally, please be advised that the valuation reflects the then
Board's determination of the fair market value of the stock based upon
then current trading prices and volumes.
Gales Industries Incorporated
Unaudited Financial Statements for the Nine-Month Period Ended September 30,
2005 and 2004
General
31. We note that Gales Industries was incorporated on October 30, 2004, and
that they have had no operations since that date. Supplementally explain
the history of Ashlin's relationship with Gales and Gales relationship
with AIM. Include in your explanation a discussion of how the merger and
acquisition transaction was formulated; specifically address how the three
entities came initially came into contact with each other. We may have
further comment on your response.
The unaudited financial statements of Original Gales for the nine
month period ended September 30, 2005 are no longer included with the
registration statement. Disclosure responsive to this comment has been
added as relevant in the registration statement in response to other
comments. (Page 15) Original Gales was formed by Messrs. Gales and Giusto
for the purpose of acquiring one or
-12-
more companies in the defense industry. Mr. Gales had previously been
introduced to AIM and the acquisition of AIM quickly became the focus of
his efforts. Discussions, which later became negotiations, with respect to
the acquisition of AIM by Original Gales commenced in 2004. These
negotiations culminated in the execution of the Stock Purchase Agreement
on July 25, 2005. During the course of Original Gales' negotiations with
AIM, Original Gales entered into an engagement letter with GunnAllen for a
private placement to finance the acquisition of AIM. Subsequent to
execution of the Stock Purchase Agreement and the Engagement Letter,
Original Gales was introduced to various public entities, including
Ashlin, with which it might merge to facilitate the consummation of the
acquisition of AIM. After considering various options, Original Gales
elected to negotiate a merger with Ashlin.
Note 1 -- Organization and General
Private Placement of Preferred Stock, page F-38
32. Supplementally explain to us and revise your disclosure throughout your
filing, as appropriate, to indicate the material terms of the preferred
stock issued in the private placement. This explanation and disclosure
should include under what circumstances and when the preferred stock may
be converted, how you determined the offering price of the preferred
stock, and any other material terms. Please also supplementally tell us
how the purchasers of the preferred stock are related to the acquisition
and merger transaction. We may have further comment on your response.
The requested information is disclosed under the heading
"DESCRIPTION OF SECURITIES- Original Gales' Series A Convertible Preferred
Stock." (Page 49) As disclosed in the Registration Statement (Page 16),
the offering price was determined through negotiations between Original
Gales and GunnAllen. The purchasers of the preferred stock were investors
introduced to us by GunnAllen and, to our knowledge, were not related to
the acquisition and merger transaction, except that two of the investors
were Luis Peragallo (a former shareholder of AIM) and Ira Hunt (a member
of the Registrant's Board of Directors).
Bridge Financings, page F-38
33. We note that as of September 30, 2005 you had approximately $172,500 in
bridge financing notes outstanding, that approximately $150,000 of this
balance was repaid using the a portion of the proceeds from the private
placement of preferred stock, that $22,500 was converted per the terms,
and that warrants were issued in connection with each of the three
tranches of bridge financing (February, August, and September 2005).
Supplementally explain to us how you have valued and recorded the value of
the warrants and their effect on the conversion rate of each round of
bridge financing. It would appear that, at a minimum, the initial bridge
note may contain a beneficial conversion feature. Your response should
include an analysis using the guidance in EITF 00-19 and EITF 00-27, as
applicable. We may have further comment on your response.
-13-
Please see Appendix 33 enclosed for the computation of the requested
amounts. The requested disclosure is also in Note 13 to the Registrant's
December 31, 2005 financial statements under the heading, "Bridge
Financing."
Unaudited Pro Forma Financial Statements
General
34. Based upon the descriptions on page F-40 and elsewhere throughout the
filing, it sometimes appears that you regard the concurrent merger and
acquisition transactions as two separate and distinct acquisitions, each
of which constituted a reverse acquisition. However, on other occasions it
appears that, either you regard Gales as the acquirer in the first
transaction, or you regard the deals as a single transaction. Further, the
disclosure regarding these transactions contained elsewhere in your filing
is unclear as to how these transactions were treated under GAAP. Please
revise your disclosure throughout your filing to completely and clearly
present and discuss each of these transactions in accordance with the
disclosure requirements of paragraphs 51 and 52 of SFAS 141. In this
regard, your attention is also directed to paragraph 57 of that statement.
Your revised disclosure should discuss each transaction separately from
the viewpoint of the accounting acquirer. If AIM is considered to be the
accounting acquirer, please specifically state this fact, here and
throughout your filing. We may have further comment on review of your
revised presentation and your response.
The Registrant considers the two transactions to be separate. One is
the purchase and acquisition by Original Gales of AIM, the other is the
reverse acquisition by Original Gales of Ashlin. The requested disclosure
has been made in the registration statement under the headings -
"POSPECTUS SUMMARY - The Acquisition and Related Transactions;" "THE
ACQUISITION AND RELATED TRANSACTIONS;" "BUSINESS - Transactions of
November 30, 2005;" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS- Introduction." (Pages 7, 15, 18, 24)
35. Please revise your description of the transactions in the narrative on
page F-40 to include a complete description of each the specific terms of
each transaction directly related to the November 30, 2005 merger and
acquisition.
The requested revisions have been made in Note 1 to the December 31,
2005 Financial Statements of the Registrant. (Page F-19)
36. Supplementally explain to us and revise your disclosure here and
throughout your filing to indicate whether the real estate purchase by AIM
was conducted pursuant to terms of the transaction, or was conducted
contemporaneously with but separate from the transaction. If the real
estate purchase was not executed pursuant to the terms of the reverse
acquisition, please remove all adjustments relating to the real estate
transaction from the pro forma statements as they would not be considered
directly attributable to the transaction.
-14-
The real estate purchase by AIM was a transaction between AIM and the
holders of the real estate, some of whom were affiliates of AIM. The
purchase was a condition of the acquisition and, therefore, management
believes it is appropriate to include in the proforma financial statements
the adjustments relating to the real estate transaction as the acquisition
would not have occurred unless the real estate acquisition was
consummated. (Pages 7 and 16)
37. As a related matter, we note that AIM consolidates the two entities
holding the mortgages as of September 30, 2005 and December 31, 2004 as
you consider them to be VIE's under FIN 46 (R). Supplementally explain to
us why you believe recording the purchase of the property at the purchase
price paid is appropriate given that these properties appear to have been
recorded in your financial statements at a lower price in earlier periods.
Please see the response to Item 36.
38. Your current tabular presentation of the pro forma financial statements is
confusing. Please revise both your balance sheet and income statement
presentations to clearly label the unadjusted column as the historical
financial statements of AIM, and to break out your "adjustments" colunm
into several additional distinct columns, the first representing the
historical financial statements for the appropriate period of Gales, the
second presenting any adjustments or eliminations necessary to effect the
first acquisition, the third presenting a subtotal, the fourth
representing the historical financial statements for Ashlin, the fifth
presenting any adjustments or eliminations associated with that
transaction and the sixth presenting a final total. Our comment assumes
that you regard the transaction as two separate and distinct acquisitions.
Even if this is not the case, however, the pro forma financial statements
should still present the three sets of historical financial statements in
separate pro forma columns. Please revise as appropriate.
The disclosure responsive to this comment is no longer relevant. The
pro-forma information is now included in the Notes to the December 31,
2005 Financial Statements of the Registrant. See Note 14.
39. Individual adjustments should be self-balancing and prepared on a
standalone basis. For example, you have not identified the debit side of
adjustment (a). Further, the purpose of the reference to "See Contra" in
the line item labeled "Cash and Cash Equivalents" is neither explained nor
readily apparent. Please eliminate this type of reference from your
presentation as it only adds to the confusion. Finally, please clarify how
this adjustment is related to the November 30, 2005 transaction.
The disclosure responsive to this comment is no longer relevant.
40. Please review your presentation of positive and negative amounts as the
use of parentheses to represent negative amounts appears to be
inconsistently applied.
-15-
The presentation has been deleted.
41. We note that there are several adjustments to your pro forma balance sheet
that do not have explanations. Please remove these adjustments or add
footnotes explaining how these items are calculated, and why they are
directly attributable to the transaction and will have an ongoing impact.
The disclosure responsive to this comment is no longer relevant
42. If the pro forma balance sheet is not included in your next amendment as a
result of updating the financial statements, please provide a supplemental
pro forma balance sheet to the staff in order to facilitate our
understanding of the transaction. Supplemental responses should be
provided to all of our related comments.
Please see Appendix 42 enclosed herewith.
Consolidated Pro Forma Balance Sheet
Footnotes (b), (d), (1)
43. The methodology you have used to value these transactions does not appear
to be appropriate based upon the narrative disclosures presented.
Specifically, assuming you believe that two reverse acquisitions have
occurred, we would expect the costs to be determined in accordance with
GAAP. Where both the issuer and the target are nonpublic, the transaction
should be recorded at the fair value of the issuer's assets. Further, when
a public shell acquires a nonpublic target in a reverse acquisition, we
would normally expect cost to equal the recorded value of the issuer's net
tangible assets. Please explain your valuation methodology and assumptions
in detail and provide support for your proposed accounting. Identify your
basis in GAAP for the accounting methodology applied. Provide us with your
cost computations and purchase price allocations, as applicable. We may
have further comments upon review of your response.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
- ----------
Footnote (c)
44. Supplementally explain to us how the purchase price of the corporate
campus was determined.
The purchase price of the corporate campus was determined at arms'
length negotiations and reflects its appraised value. It should be noted
that although some of the owners of AIM owned interests in the real
estate, interests in the real estate were also owned by non-affiliates.
-16-
Footnote (f)
45. Please revise your calculation of the adjustment to amortization expense
so that the reader of the financial statements can recalculate your
adjustment from the explanation provided. You should consider the use of
tabular presentation for clarity. You should itemize each source of the
total adjustment and include how such adjustment was calculated, including
original cost basis and useful life.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
Footnote (g), (j), (n), (o)
46. To the extent the real estate transaction is directly attributable to the
purchase transaction, please revise your explanation (g) to include a
description of the material terms of the loan with PNC bank including the
entity with which the loan is associated and include the amounts of each
adjustment in each of these explanations. Otherwise, please remove these
pro forma adjustments
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
Footnote (i)
47. It is unclear from your explanation how the repayment of certain accrued
expenses is directly attributable to the transactions and not merely a
transaction in the ordinary course of business. Please either revise your
pro forma statements to exclude such adjustment or revise your footnote
explanation to completely and clearly state how this pay-down of accrued
expenses is directly related to the transactions.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
Footnote (k)
48. Please revise this explanation to specify the amounts of the legal and
accounting expenses associated with each transaction.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
Footnote (p), (r), (x)
49. Please revise these explanations to clearly state why they are directly
attributable to the transaction.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
-17-
Footnote (q)
50. Please revise your explanation to include the material terms of the notes
issued to shareholders of AIM.
The pro forma balance sheet to which this comment relates is no
longer included in the registration statement.
Pro Forma Statement of Income for the Year Ended December 31, 2004 and
Nine-Month Period Ended September 30, 2005
Footnotes (a) and (d) page F-47
51. Please revise your explanations so that the reader of the financial
statements is able to recalculate the amount of the adjustment from the
explanation provided. For example, an adjustment to depreciation expense
should be accompanied by an explanation including the change in basis of
the asset or assets in question as well as the useful life of such assets.
The pro forma statement of income to which this comment relates is
no longer included in the registration statement. There are pro forma
statements included in Note 14 to the Registrant's financial statements,
for the year ended December 31, 2005.
52, Supplementally explain to us whether the termination and hiring of the
employees named in part (ii) of explanations (a) and (d) was negotiated as
part of the transaction or was separately negotiated. We may have further
comment on your response.
The pro forma statement of income to which this comment relates is
no longer included in the registration statement. Supplementally, please
be advised that the termination of the former owners was negotiated as
part of the acquisition of AIM by Original Gales.
Footnotes (b) and (e)
53. Please revise part (i) of your explanations (b) and (e) to include the
material terms of the options and warrants to which the expense relates.
Your explanation should also include why you believe this adjustment is
directly attributable to the transaction.
The pro forma statement of income to which this comment relates is
no longer included in the registration statement.
54. It appears part (ii) of these explanations is in part a reclassification
of expenses from cost of sales to general and administrative expense. If
our understanding is correct, supplementally explain to us why the
previous accounting was correct and how the reclassification is justified
as a pro forma adjustment. We may have further comment on your response.
-18-
The pro forma statement of income to which this comment relates is
no longer included in the registration statement
Item 26. Recent Sales of Unregistered Securities
Shares Issued by Gales Industries Prior to the Merger, page I-I
55. Supplementally explain to us how you have valued and recorded the options
to purchase shares issued to Mr. Gales (1,250,000 options), Mr.Giusto
(1,200,000), Mr. Rettaliata (1,200,000), and Mr. D. Peragallo (1,200,000).
We may have further comment on your response.
Please see Appendix 55, attached, for the computation of the
requested amounts. Disclosure is also made in Note 12 to the
Registrant's financial statements for the year ended December 31,
2005.
Other
56. Please update the financial statement and related disclosures included in
the Company's Form SB-2 registration statement in accordance with Item 310
(g) of Regulation S-B.
The financial statements and related disclosure have been updated.
57. Please include a currently dated consent of the independent accountants in
any amendments to the Form SB-2 registration statement that are filed.
A currently dated consent of the accountants has been included with
the filing.
** ** * ** * * * * * *
The Company has directed us to confirm to the Commission that:
o the Company is responsible for the adequacy and accuracy of the
disclosures in its filings, including the Amended SB-2;
o the Staff's comments, or changes to our disclosure in response to the
Staff's comments, do not foreclose the Commission from taking any action with
respect to the Company's filings, including the Amended SB-2; and
o the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
Very truly yours,
Vincent J. McGill
cc: Michael A. Gales
Louis A. Giusto
-19-
Appendix 33
Bridge Financings
Response for Bridge Financings as it relates to Warrants:
Gales Industries Incorporated Warrants
Gales Industries Incorporated has issued an aggregate of 5,229,589 warrants. The
warrants issued in 2005 are as follows:
Holder Warrants
- ------------------------- ------------
GunnAllen Financial, Inc. 4,138,678
Atlas Private Equity, LLC 409,091
Bridge 1 204,546
Bridge 2 477,274
------------
5,229,589
============
GunnAllen Financial, Inc.
Two separate warrant agreements were entered into by Gales and GunnAllen. The
first agreement for 4,090,950 shares is effective December 15, 2005 and the
second for 47,728 shares is effective September 30, 2005. Both warrant amounts
were issued as compensation for services rendered by GunnAllen. The initial
purchase price for the shares on issuance was $0.22. Gales applied the
Black-Scholes valuation model to account for the fair value and presentation in
its financial statements for the period ended December 31, 2005. The following
assumptions were used to value the warrants issued to GunnAllen:
- -------------------------------------------------------------------------------
Variables Used
- -------------------------------------------------------------------------------
Amount of Warrants 47,728 4,090,950
Grant Date 9/30/05 12/15/05
Current Stock Price $ 0.17 $ 0.17
Exercise Price of Warrant $ 0.22 $ 0.22
Rf 4.18% 4.38%
Time to expiration 5 5
Volatility 35% 35%
Annual Div. Yield -- --
- -------------------------------------------------------------------------------
Warrant Value $ 0.05 $ 0.05
- -------------------------------------------------------------------------------
Risk free rates are based on the quoted yields on the date of grants. The
figures were retrieved from www.treasury.gov. Volatility percentages were based
upon a similar company within the same industry as Gales.
-1-
The journal entry to record the expense is:
Finders Fee Expense $201,402
APIC - Warrants $201,402
(4,090,950 shares)
-AND-
Financing Expense $ 2,616
APIC - Warrants $ 2,616
(47,728 shares)
Atlas Private Equity, LLC.
Gales issued Atlas Private Equity, LLC 409,091 warrants on February 15, 2005.
The initial purchase price for the shares on issuance was $0.055. Gales applied
the Black-Scholes valuation model to account for the fair value and presentation
in its financial statements for the period ended December 31, 2005. The
following assumptions were used to value the warrants issued to Atlas Private
Equity:
- -------------------------------------------------------------------------------
Variables Used
- -------------------------------------------------------------------------------
Amount of Warrants 409,091
Grant Date 2/15/05
Current Stock Price $ 0.055
Exercise Price of Warrant $ 0.055
Rf 3.71%
Time to expiration 5
Volatility 35%
Annual Div. Yield --
- -------------------------------------------------------------------------------
Warrant Value $ 0.02
- -------------------------------------------------------------------------------
Risk free rates are based on the quoted yield on the date of grant. The figures
were retrieved from www.treasury.gov. Volatility percentages were based upon a
similar company within the same industry as Gales.
The journal entry to record the expense is:
Financing Expense $8,337
APIC - Warrants $8,337
Bridge 1
Gales issued 204,546 warrants on November 30, 2005 to 2 separate holders. Both
issuances included different share amounts with the remaining terms and
-2-
conditions remaining primarily the same. One grant was for 136,364 shares and
the other for 68,182 shares. The initial purchase price for the shares on
issuance was $0.22. Gales applied the Black-Scholes valuation model to account
for the fair value and presentation in its financial statements for the period
ended December 31, 2005. The following assumptions were used to value the
204,546 warrants:
- -------------------------------------------------------------------------------
Variables Used
- -------------------------------------------------------------------------------
Amount of Warrants 204,546
Grant Date 11/30/05
Current Stock Price $ 0.17
Exercise Price of Warrant $ 0.22
Rf 4.42%
Time to expiration 5
Volatility 35%
Annual Div. Yield --
- -------------------------------------------------------------------------------
Warrant Value $ 0.05
- -------------------------------------------------------------------------------
Risk free rates are based on the quoted yield on the date of grant. The figures
were retrieved from www.treasury.gov. Volatility percentages were based upon a
similar company within the same industry as Gales.
The journal entry to record the expense is:
Financing Expense $9,916
APIC - Warrants $9,916
Bridge 2
Gales issued 477,274 warrants on November 30, 2005 to 4 separate holders. All
issuances included different share amounts with the remaining terms and
conditions remaining primarily the same. Grants were issued for 340,909, 45,455,
45,455 and 45,455 shares. The initial purchase price for the shares on issuance
was $0.22. Gales applied the Black-Scholes valuation model to account for the
fair value and presentation in its financial statements for the period ended
December 31, 2005. The following assumptions were used to value the 477,274
warrants:
- -------------------------------------------------------------------------------
Variables Used
- -------------------------------------------------------------------------------
Amount of Warrants 477,274
Grant Date 11/30/05
Current Stock Price $ 0.17
Exercise Price of Warrant $ 0.22
Rf 4.42%
Time to expiration 5
Volatility 35%
Annual Div. Yield --
- -------------------------------------------------------------------------------
Warrant Value $ 0.05
- -------------------------------------------------------------------------------
-3-
Risk free rates are based on the quoted yield on the date of grant. The figures
were retrieved from www.treasury.gov. Volatility percentages were based upon a
similar company within the same industry as Gales.
The journal entry to record the expense is:
Financing Expense $22,992
APIC - Warrants $22,992
Response for Bridge Financings as it relates to Beneficial Conversion:
Gales Industries Incorporated - Atlas Private Equity Convertible Note
Atlas Private Equity, LLC.
Fact Pattern
12% Convertible Note
Issued 2/16/05
Face - $22,500
Issued concurrently with financing
Instrument is convertible at inception
Fixed percentage conversion terms - 50%
Financing = $0.22
Conversion = $0.11
Shares = 226,334 ($22,500 plus accrued interest of $2,397 converted at $0.11)
Reg. Application - EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Ratios
EITF 98-5
-4-
o The embedded beneficial conversion feature should be measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to APIC
o The amount should be calculated at the commitment date as the difference
between the conversion price and the fair value of the common stock or
other securities into which the security is convertible, multiplied by the
number of shares into which the security if convertible
o Accounting treatment is similar to Case 1(c) of 98-5
Journal Entry on issuance of note
$ Dr. $ Cr.
---------------------------
Cash 22,500
Interest Expense 22,500
Note payable 22,500
APIC 22,500
Journal entry on conversion (.001 par)
$ Dr. $ Cr.
---------------------------
Note payable 22,500
Common Stock 205
APIC 22,295
-5-
APPENDIX 42
GALES INDUSTRIES INCORPORATED
Consolidated Supplemental Pro Forma Balance Sheet
- --------------------------------------------------------------------------------
(AAA)
November 30, 2005 Adjustments
(Audit-Include. F AS 141 Business
Fin 46) November 30, Combination Entries
Air Industires 2005 FIN 46 Elimination Entries
Machining (AIM) GALES Dr. **** Cr. ****
------------------------------------------------ -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 71,197 $ 150,000 $ -- $ 23,659 (6)
150,000 (21)
4,253 (21)
Accounts Receivable 3,202,991 --
Inventory 11,588,521 -- 580,927 (1)
Investment in Air Industries Machining -- 6,285,480 (8)
Prepaid Expenses and Other Current Assets 179,065 --
Deposits 192,972
--------------------------------------------- -----------
Total Current Assets 15,234,746 150,000 6,866,407 154,253
Property, Plant and Equipment, net 3,919,599 5,629,426 (2) 1,807,770 (6)
Cash Surrender Value - Officer's Life 62,761
Deferred Financing Costs 102,187 492,064 (16) 102,187 (15)
Other Assets 34,522 6,700 (15)
Goodwill 1,265,963 (3)
--------------------------------------------- -----------
TOTAL ASSETS $19,353,815 $ 150,000 $14,260,560 $ 2,064,210
============================================= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 5,503,041 $ 14,253 $ 6,690 (6) $ 504,560 (20)
4,253 (21)
Advance Payment - Customer 293,226
Bridge Loan 150,000 150,000 (21)
Mortgage Payable - Current Portion 96,000 96,000 (6) 380,004 (14)
Notes Payable - Current Portion 5,180,000 5,180,000 (4)
5,730,020 (11) 11,672,681 (9)
Notes Payable - Sellers - Current Portion -- 192,400 (12)
Capital Lease Obligations - Current Portion 359,197
Due to Sellers 511,055 419,971 (5)
Total Current Liabilities 11,942,519 164,253 11,586,934 12,749,645
Long Term Liabilities
Mortgage Payable - Net of Current Portion 1,145,813 1,145,813 (6) 3,119,996 (14)
Notes Payable - Net of Current Portion --
Advances from Shareholders 464,992 464,844 (13)
Notes Payable - Sellers - Net of Current Portion -- 1,434,862 (12)
Capital Lease Obligations - Net of Current Portion 849,652
Deferred Tax Liability -- 676,394 (17)
--------------------------------------------- -----------
Total liabilities 14,402,976 164,253 13,197,591 17,980,897
--------------------------------------------- -----------
Minority Interest 446,805 446,805 (6)
Commitments and Contingencies
Stockholders' Equity
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued and Outstanding
as of November 30, 2005 32,223 32,223 (7)
Retained Earnings 4,346,231 (85,091) 4,346,231 (7)
Less: Treasury Stock at Cost (96,000) 96,000 (7)
Series A Convertible Preferred - $.001 Par value,
900 Shares Issued and Outstanding -- 1 (19)
Common Stock - $.001 Par value, 14,723,421 Shares
Issued and Outstanding -- 10,899 (18)
Additional Paid-In Capital 221,580 70,838 211,580 (7) 6,285,480 (8)
10,000 (6) 6,040,020 (10)
Accumulated Deficit --
--------------------------------------------- -----------
Total Stockholders' Equity 4,950,839 (14,253) 5,046,839 12,432,400
--------------------------------------------- -----------
Total Liabilities and Stockholders' Equity $19,353,815 $ 150,000 $18,244,430 $30,413,297
============================================= ===========
Consolidated
December 1,
2005
(Supplemental
November 30, Reverse Merger Proforma
2005 Adjustments Elimination Balance
ASHLIN (Shell) Dr. Cr. **** Adjustments **** Sheet)
------------------------------------ ----------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 455 $ -- $ -- $ -- $ 43,740
Accounts Receivable -- 3,202,991
Inventory -- 12,169,448
Investment in Air Industries Machining (6,285,480) (8) 0
Prepaid Expenses and Other Current Assets -- 179,065
Deposits 192,972
---------------------------------- ----------- -----------
Total Current Assets 455 -- -- (6,285,480) 15,788,216
Property, Plant and Equipment, net 7,741,255
Cash Surrender Value - Officer's Life 62,761
Deferred Financing Costs 492,064
Other Assets 41,222
Goodwill 1,265,963
---------------------------------- ----------- -----------
TOTAL ASSETS $ 455 $ -- $ -- $(6,285,480) $25,391,481
================================== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 128,513 $ -- $ -- $ -- $ 6,139,424
Advance Payment - Customer 293,226
Bridge Loan --
Mortgage Payable - Current Portion 380,004
Notes Payable - Current Portion
5,942,661
Notes Payable - Sellers - Current Portion 192,400
Capital Lease Obligations - Current Portion 359,197
Due to Sellers 91,084
---------------------------------- ----------- -----------
Total Current Liabilities 128,513 -- -- -- 13,397,996
Long Term Liabilities
Mortgage Payable - Net of Current Portion 3,119,996
Notes Payable - Net of Current Portion --
Advances from Shareholders 148
Notes Payable - Sellers - Net of Current Portion 1,434,862
Capital Lease Obligations - Net of Current Portion 849,652
Deferred Tax Liability 676,394
---------------------------------- ----------- -----------
Total liabilities 128,513 -- -- -- 19,479,048
---------------------------------- ----------- -----------
Minority Interest --
Commitments and Contingencies
Stockholders' Equity
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued and Outstanding
as of November 30, 2005 --
Less: Treasury Stock at Cost --
Series A Convertible Preferred - $.001 Par value,
900 Shares Issued and Outstanding 1
Common Stock - $.001 Par value, 14,723,421 Shares
Issued and Outstanding 3,824 (18) 14,723
Additional Paid-In Capital 6,285,480 (8)
Retained Earnings/(Accumulated Deficit) (128,058) 5,897,709
--
---------------------------------- ----------- -----------
Total Stockholders' Equity (128,058) 0 3,824 6,285,480 5,912,433
---------------------------------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 455 $ -- $ 3,824 $ 6,285,480 $25,391,481
================================== =========== ===========
*** See Footnote On Attached Schedule
(AAA) - Adjustments directly above in summary relate to acquisition of AIM in
acordance with FAS 141, purchase of real estate, raising of equity, refinancing,
and removal of consolidated FIN 46 as a result of purchasing real estate.
****
Explanations
- --------------------------------------------------------------------------------
(1) Adjustment is due to raw material valuation as a result of FAS 141.
(2) Adjustment is due to fixed assets valuation resulting from independent
appraiser and real estate acquisition pursuant to FAS 141.
(3) Adjustments to record goodwill calculation pursuant to FAS 141.
(4) Adjustment to record pay down of former bank revolver resulting from
refinancing.
(5) Adjustment to record payment to former S Corp shareholders.
(6) Record adjustment for removal of FIN 46 no longer applicable after purchase
of real estate.
(7) Adjustment to remove former Air Industry Machining (AIM) stockholder's
equity @ 11/30/2005 resulting from stock purchase by Gales Industries
Incorporated.
(8) Adjustment to record Gale's Investment in Air Industry Machining (AIM) and
offsetting APIC resulting from acquisition of AIM by Gales subsequently
eliminated through consolidation.
(9) Adjustment to record the drawdown of bank debt to purchase AIM.
(10) Adjustment to record gross proceeds from the first preferred equity raise
offset by cash and non cash transactions associated with the private placement.
(11) Cash portion of first preferred equity raise used to partially paydown the
bank debt to acquire AIM.
(12) Adjustment to record portion of purchase price made up of promissory notes
to the sellers.
(13) Adjustment to record payment to former S Corp shareholders for their loans
to AIM.
(14) Adjustment to record term loan used to purchase the real estate.
(15) Adjust to expense remainder of unamortized loan costs from former bank plus
adjustment for removal of FIN 46 no longer being applicable as a result of
purchasing real estate.
(16) Adjustment to record capitalized loan costs for new credit facility.
(17) Adjustment to record deferred tax liability incurred resulting from the
seller's non election of section 338(h)(10).
(18) Adjustment to record common stock at par value resulting from
recapitalization and reverse merger.
(19) Adjustment to record preferred stock at par value.
(20) Adjustment to record liability for asset included in fixed assets valuation
which relates to above note (2) not yet paid.
(21) Adjustment to record payment of principal and interest of bridge loan as a
result of closing.
-1-
Appendix 55
Methodology for Valuation of Options:
Gales Industries Incorporated Stock Option Valuation
In 2005, Gales Industries Incorporated issued an aggregate of 4,850,000 options
to four of its Executive Officers. Two grants vest over a 4 year period and two
vest over 7 years. Each option grant has a portion of the grant vesting on grant
date with the balance vesting in annual increments.
The option grants made to Michael Gales contain the following features:
One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 250,000 shares each on the first through
fourth anniversaries of September 15, 2005. The options which vested on
November 30, 2005 are exercisable at $0.22 per share and the exercise
price of the options vesting on each September 15, 2006, 2007, 2008 and
2009 will be the higher of (a) $0.22 per share or (b) the average trading
price of Common Stock for the thirty trading days ending December 15,
2005, September 15, 2006, September 15, 2007, and September 15, 2008,
respectively.
The option grants made to Louis Giusto contain the following features:
One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 240,000 shares each on the first through
fourth anniversaries of September 15, 2005. The options which vested on
November 30, 2005 are exercisable at $0.22 per share and the exercise
price of the options vesting on each September 15, 2006, 2007, 2008 and
2009 will be the higher of (a) $0.22 per share or (b) the average trading
price of Common Stock for the thirty trading days ending December 15,
2005, September 15, 2006, September 15, 2007, and September 15, 2008,
respectively.
The option grants made to Peter Rettaliata and Dario Peragallo contain the
following features:
One-eighth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 150,000 shares each on the first through
seventh anniversaries of September 15, 2005. The options which vested on
November 30, 2005 are exercisable at $0.22 per share and the exercise
price of the options vesting on each September 15, 2006, 2007, 2008, 2009,
2010, 2011 and 2012 will be the higher of (a) $0.22 per share or (b) the
average trading price of Common Stock for the thirty trading days ending
December 15, 2005, September 15, 2006, September 15, 2007, September 15,
2008, September 15, 2009, September 15, 2010 and September 15, 2011,
respectively.
Grants made to each Executive Officer are as follows:
-1-
Michael Gales:
Strike
Options Grant Price Vested Strike Begin End
Granted Date Date Date Price Expense Expense Months
----------- ----------- ------------ ------------ --------- ------------ ------------ --------
1 250,000 9/26/2005 9/26/2005 11/30/2005 $0.220 11/30/2005 11/30/2005 --
2 250,000 9/15/2005 12/15/2005 9/15/2006 $0.428 12/15/2005 9/15/2006 9
3 250,000 9/15/2006 9/15/2006 9/15/2007 Unknown 9/15/2006 9/15/2007 12
4 250,000 9/15/2007 9/15/2007 9/15/2008 Unknown 9/15/2007 9/15/2008 12
5 250,000 9/15/2008 9/15/2008 9/15/2009 Unknown 9/15/2008 9/15/2009 12
-----------
1,250,000
===========
Louis Giusto:
Strike
Options Grant Price Vested Strike Begin End
Granted Date Date Date Price Expense Expense Months
----------- ----------- ------------ ------------ --------- ------------ ------------ --------
1 240,000 9/26/2005 9/26/2005 11/30/2005 $0.220 11/30/2005 11/30/2005 --
2 240,000 9/15/2005 12/15/2005 9/15/2006 $0.428 12/15/2005 9/15/2006 9
3 240,000 9/15/2006 9/15/2006 9/15/2007 Unknown 9/15/2006 9/15/2007 12
4 240,000 9/15/2007 9/15/2007 9/15/2008 Unknown 9/15/2007 9/15/2008 12
5 240,000 9/15/2008 9/15/2008 9/15/2009 Unknown 9/15/2008 9/15/2009 12
-----------
1,200,000
===========
Peter Rettaliata:
Strike
Options Grant Price Vested Strike Begin End
Granted Date Date Date Price Expense Expense Months
----------- ----------- ------------ ------------ --------- ------------ ------------ --------
1 150,000 9/26/2005 9/26/2005 11/30/2005 $0.220 11/30/2005 11/30/2005 --
2 150,000 9/15/2005 12/15/2005 9/15/2006 $0.428 12/15/2005 9/15/2006 9
3 150,000 9/15/2006 9/15/2006 9/15/2007 Unknown 9/15/2006 9/15/2007 12
4 150,000 9/15/2007 9/15/2007 9/15/2008 Unknown 9/15/2007 9/15/2008 12
5 150,000 9/15/2008 9/15/2008 9/15/2009 Unknown 9/15/2008 9/15/2009 12
6 150,000 9/15/2009 9/15/2009 9/15/2010 Unknown 9/15/2009 9/15/2010 12
7 150,000 9/15/2010 9/15/2010 9/15/2011 Unknown 9/15/2010 9/15/2011 12
8 150,000 9/15/2011 9/15/2011 9/15/2012 Unknown 9/15/2011 9/15/2012 12
-----------
1,200,000
===========
-2-
Dario Peragallo:
Strike
Options Grant Price Vested Strike Begin End
Granted Date Date Date Price Expense Expense Months
----------- ----------- ------------ ------------ --------- ------------ ------------ --------
1 150,000 9/26/2005 9/26/2005 11/30/2005 $0.220 11/30/2005 11/30/2005 --
2 150,000 9/15/2005 12/15/2005 9/15/2006 $0.428 12/15/2005 9/15/2006 9
3 150,000 9/15/2006 9/15/2006 9/15/2007 Unknown 9/15/2006 9/15/2007 12
4 150,000 9/15/2007 9/15/2007 9/15/2008 Unknown 9/15/2007 9/15/2008 12
5 150,000 9/15/2008 9/15/2008 9/15/2009 Unknown 9/15/2008 9/15/2009 12
6 150,000 9/15/2009 9/15/2009 9/15/2010 Unknown 9/15/2009 9/15/2010 12
7 150,000 9/15/2010 9/15/2010 9/15/2011 Unknown 9/15/2010 9/15/2011 12
8 150,000 9/15/2011 9/15/2011 9/15/2012 Unknown 9/15/2011 9/15/2012 12
-----------
1,200,000
===========
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
- -------------------------------------------------------------------------------
Variables Used
- -------------------------------------------------------------------------------
Grant Date 9/26/2005 9/15/2005
Current Stock Price $ 0.170 $ 0.460
Exercise Price of Option $ 0.220 $ 0.428
Rf 4.095% 4.375%
Time to expiration 10 10
Volatility 35% 35%
Annual Div. Yield -- --
- -------------------------------------------------------------------------------
Option Value $ 0.078 $ 0.259
- -------------------------------------------------------------------------------
Risk free rates are based on the average of the three and five year treasury
yields on the date of grant and were retrieved from www.treasury.gov. The listed
yields were 4.37% and 4.38% for the three and five year periods, respectively.
Volatility percentages were based upon a similar company within the same
industry as Gales. Each subsequent grant of options will use the volatility
percentage calculated on the trading prices of Gales stock since a history will
be accumulated at that point in time.
The current stock price used for the options granted on September 15, 2005 was
based upon the closing price for the 30 days ended December 15, 2005. The prices
were retrieved from Big Charts and are as follows:
-3-
- ---------------------------------------------------
Closing Closing
Date Price Date Price
- ---------------------------------------------------
14-Dec 0.460 29-Nov 0.490
13-Dec 0.460 28-Nov 0.370
12-Dec 0.440 25-Nov 0.500
9-Dec 0.420 24-Nov 0.380
8-Dec 0.490 23-Nov 0.380
7-Dec 0.470 22-Nov 0.620
6-Dec 0.565 21-Nov 0.245
5-Dec 0.610 18-Nov 0.245
2-Dec 0.650 17-Nov 0.230
1-Dec 0.480 16-Nov 0.205
30-Nov 0.490 15-Nov 0.210
------
Average $0.428
======
Based on the input variables noted above, the fair value of options granted are
$0.078 and $0.259 for the September 26, 2005 and September 15, 2005 grants,
respectively. Gales will need to recognize a stock-based compensation expense of
$121,297 in its financial statements as of December 31, 2005. This expense in
calculated as follows:
--------------------------------------------------------
Gales Giusto Rettaliata Peragallo
--------------------------------------------------------
9/26/2005 Grant
Vested Options 250,000 240,000 150,000 150,000
Option Value $ 0.078 $ 0.078 $ 0.078 $ 0.078
--------------------------------------------------------
Expense $ 19,500 $ 18,720 $ 11,700 $ 11,700
--------------------------------------------------------
9/15/2005 Grant
Vested Options 72,917 70,000 43,750 43,750
Option Value $ 0.259 $ 0.259 $ 0.259 $ 0.259
--------------------------------------------------------
Expense $ 18,885 $ 18,130 $ 11,331 $ 11,331
--------------------------------------------------------
Total Expense $ 38,385 $ 36,850 $ 23,031 $ 23,031 121,297
====================================================================
The journal entry to record the expense is:
Compensation Expense $121,297
APIC - Options $121,297
-4-