U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-29245
Air Industries Group, Inc.
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(Exact name of Registrant as specified in its charter)
New York 20-4458244
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1479 N. Clinton Avenue Bay Shore, New York 11706
------------------------------------------------
(Address of principal executive offices)
(631) 968-5000
---------------------------
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definitions of "accelerated filer." "large accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer (do not check if smaller reporting company) |_|
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 12, 2008, the Registrant had outstanding 71,524,475 shares of
common stock.
AIR INDUSTRIES GROUP, INC.
EXPLANATORY NOTE
The Quarterly Report on Form 10-QSB for the three and nine months ended
September 30, 2007 was initially filed with the Securities and Exchange
Commission ("SEC") on November 14, 2007 (the "Originally Filed 10-QSB"). During
the fourth quarter of the year ended December 31, 2007 we made certain
restatements to the condensed consolidated balance sheet as of September 30,
2007 and the condensed consolidated statements of operations and cash flows for
the three and nine months then ended. This restatement was as a result of the
Company's (a) determination to capitalize certain amounts related to development
expenditures made in the first three quarters of 2007 previously expensed and
(b) completion of the allocation of the purchase price paid for Sigma Metals
among certain intangible assets of that company that initially had been
allocated to goodwill. Accordingly, the development expenditures previously
expensed are now capitalized and amortized, and the identified intangible assets
are being amortized, in the condensed consolidated financial statements for the
three and nine months ended September 30, 2007, as restated. For a description
of this restatement, see Note 2 to the accompanying Condensed Consolidated
Financial Statements.
Also restated is Item 2 of Part I, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Originally Filed 10-QSB
with respect to amounts that relate to the items that have been restated. Except
as expressly stated by reference to a later date, no other information in the
Originally Filed 10-QSB has been restated to reflect events that have occurred
at a later date.
As stated in Note 10 to the Condensed Consolidated Financial Statements, certain
operations were discontinued during the third quarter of 2008.
On August 29, 2008, the Company received a letter of comment from the staff of
the SEC's Division of Corporation Finance which, among other things, asked the
Company to consider whether there was a beneficial conversion feature attending
the issuance of its Series B Convertible Preferred Stock ("Series B Preferred
Stock") in April and May of 2008 requiring an adjustment to its consolidated
financial statements.
After reviewing the terms of the certificate of designations relating to the
Series B Convertible Preferred, the presentation requirements of EITF D-98 and
the market price of the common stock into which the Series B Convertible
Preferred is convertible, and consultation with the Company's independent
certified public accountants, the Company's accounting staff concluded that the
adjustments to its consolidated financial statements described below were
appropriate.
On November 7, 2008, the Company's audit committee concluded that the Company's
consolidated financial statements as of and for the year ended December 31,
2007, which were included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2007, as well as its unaudited consolidated financial
statements as of and for the quarterly periods ended June 30, 2007 and September
30, 2007, which were included in the Company's quarterly reports on Form 10-Q
for the same quarterly periods and were restated in the Company's Annual Report
on Form 10-K for the year ended December 31, 2007, could no longer be relied
upon due to the need to make the adjustments discussed herein. Upon
authorization by the Company's board of directors, the Company's authorized
officers discussed with the Company's independent accountant the matters
disclosed above.
The Company plans to file amendments to its Quarterly Reports on Form 10-QSB or
Form 10-Q for the periods ended June 30, 2007 and September 30, 2007, as well as
for its Annual Report on Form 10-K for the fiscal year ended December 31, 2007,
to change the way in which it accounted for the issuance of its Series B
Preferred Stock in April and May of 2007.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2008 (unaudited)
and December 31, 2007, as restated 1
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2008 and 2007, as restated (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007, as restated (unaudited) 3 - 4
Notes to Condensed Consolidated Financial Statements 5 - 17
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18 - 27
ITEM 4T. Controls and Procedures 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 28
ITEM 1A. Risk Factors 28 - 31
ITEM 5 Other Information 31
ITEM 6 Exhibits 31
SIGNATURES 32
All other items called for by the instructions to Form 10-Q have been omitted
because the items are not applicable or the relevant information is not
material.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Balance Sheet
September 30 December 31
2008 2007
------------ ------------
(unaudited) (as restated)
ASSETS
Current Assets
Cash and cash equivalents -- --
Accounts receivable, net of allowance for doubtful
accounts of approximately $105,000 and $302,000 $ 3,645,000 $ 5,185,000
Inventory 21,555,000 18,240,000
Assets held for Sale 4,173,000 11,365,000
Prepaid expenses and other current assets 102,000 224,000
Deposits 404,000 905,000
------------ ------------
Total current assets 29,879,000 35,919,000
Property and equipment, net 5,165,000 4,669,000
Intangible assets, net 2,181,000 2,347,000
Goodwill 4,822,000 4,822,000
Capitalized engineering costs, net 2,027,000 1,522,000
Deferred financing costs, net, deposits and other assets 1,099,000 1,011,000
------------ ------------
TOTAL ASSETS $ 45,173,000 $ 50,290,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of notes payable and capital lease obligations $ 18,287,000 $ 17,687,000
Accounts payable and accrued expenses 4,679,000 4,792,000
Dividends payable 120,000 267,000
Liabilities held for Sale 2,136,000 1,794,000
Income taxes payable 21,000 391,000
------------ ------------
Total current liabilities 25,243,000 24,931,000
Long term liabilities
Notes payable and capital lease obligations - net of current portion 6,099,000 4,219,000
Deferred tax liability 1,614,000 1,879,000
Deferred gain on sale of real estate 647,000 675,000
Deferred rent 372,000 230,000
------------ ------------
Total liabilities $ 33,975,000 $ 31,934,000
Commitments and contingencies
Stockholders' equity
Preferred stock - par value, $0.001, 8,003,716 shares authorized -- --
Series A convertible preferred - $0.001 par value, 1,000 shares authorized
no shares issued and outstanding at September 30, 2008 and December 31, 2007,
respectively -- --
Series B convertible preferred - $0.001 par value 2,000,000 shares authorized,
1,022,840 and 829,098 shares issued and outstanding at September 30, 2008 and
December 31, 2007; Liquidation value, $18,060,000 1,000 1,000
Common stock - $0.001 par, 250,000,000 shares authorized, 71,524,475 shares
and 69,122,227 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively 71,000 69,000
Additional paid-in capital 20,479,000 18,744,000
Accumulated deficit (9,353,000) (458,000)
------------ ------------
Total stockholders' equity 11,198,000 18,356,000
------------ ------------
Total liabilities and stockholders' equity $ 45,173,000 $ 50,290,000
============ ============
See notes to condensed consolidated financial statements
1
AIR INDUSTRIES GROUP INC.
Condensed Consolidated Statement of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
(as restated) (as restated)
Net sales $ 8,870,000 $ 9,452,000 $ 27,342,000 $ 25,146,000
Cost of sales 7,419,000 6,572,000 20,268,000 18,414,000
------------ ------------ ------------ ------------
Gross profit 1,451,000 2,880,000 7,074,000 6,732,000
Operating costs and expenses:
Selling and marketing 179,000 151,000 476,000 363,000
General and administrative 3,706,000 1,751,000 7,881,000 4,364,000
------------ ------------ ------------ ------------
Total operating costs 3,885,000 1,902,000 8,357,000 4,727,000
Income (loss) from continuing operations (2,434,000) 978,000 (1,283,000) 2,005,000
Interest and financing costs 823,000 441,000 1,699,000 826,000
Other (income) expense, net (10,000) 26,000 (22,000) 23,000
------------ ------------ ------------ ------------
Income (loss) before income taxes
from continuing operations (3,247,000) 511,000 (2,960,000) 1,156,000
Benefit (provision) for income taxes
from continuing operations 659,000 (206,000) 666,000 (720,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (2,588,000) 305,000 (2,294,000) 436,000
Income (loss) from discontinued operations
net of taxes of $1,112,000 (6,274,000) 301,000 (6,600,000) 209,000
------------ ------------ ------------ ------------
Net income (loss) (8,862,000) 606,000 (8,894,000) 645,000
Less: Dividend attributable to preferred stockholders 157,000 137,000 456,000 247,000
Less: Beneficial conversion feature -- -- -- 1,589,000
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ (9,019,000) $ 469,000 $ (9,350,000) $ (1,191,000)
============ ============ ============ ============
Basic Earnings per Share:
Continuing operations ($ 0.04) $ 0.01 ($ 0.04) ($ 0.02)
Discontinued operations ($ 0.09) $ 0.00 ($ 0.09) $ 0.00
------------ ------------ ------------ ------------
Total ($ 0.13) $ 0.01 ($ 0.13) ($ 0.02)
============ ============ ============ ============
Diluted Earnings per Share:
Continuing operations ($ 0.04) $ 0.01 ($ 0.04) ($ 0.02)
Discontinued operations ($ 0.09) $ 0.00 ($ 0.09) $ 0.00
------------ ------------ ------------ ------------
Total ($ 0.13) $ 0.01 ($ 0.13) ($ 0.02)
============ ============ ============ ============
Weighted average shares outstanding (basic) 71,032,000 67,840,000 69,878,000 64,149,000
============ ============ ============ ============
Weighted average shares outstanding (diluted) 71,032,000 70,735,000 69,878,000 64,149,000
============ ============ ============ ============
See notes to condensed consolidated financial statements
2
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Statement of Cash Flows
Nine Months Ended
September 30,
2008 2007
Restated
------------
Net Income(Loss)
Adjustments to reconcile Net Income (loss) $ (8,894,000) $ 645,000
Depreciation & Amortization 1,019,000 555,000
Amortization of Intangibles 166,000 --
Amortization of Capt Engineering 306,000 --
Bad Debt Expense 134,000 129,000
Non- Cash Employee Compensation 256,000 329,000
Non- Cash Share Payment 51,000 31,000
Non-cash Interest Expense 93,000 17,000
Amortization Deferred Finance Costs 184,000 99,000
Deferred taxes (265,000) 349,000
Loss on Impairment 4,879,000 --
Changes in Assets & Liabilities
(Increase) Decrease in Operating Assets
Accounts Receivables 1,406,000 (681,000)
Income tax receivable -- 403,000
Assets Held for Sale 2,556,000 (60,000)
Inventory (3,315,000) (2,467,000)
Prepaid expenses & other Assets 123,000 129,000
Deposits-Suppliers 501,000 (157,000)
Other Assets 105,000 (309,000)
Increase (Decrease) in Operating Liabilities
Accounts Payable & Accrued Expenses (307,000) (3,436,000)
Income Taxes Payable (370,000) (653,000)
Deferred Rent 142,000 143,000
Liabilities Held for Sale 342,000 (638,000)
Deferred Gain on Real Estate Transaction (28,000) (28,000)
------------ ------------
Net Cash Used in Operating Activities (916,000) (5,600,000)
------------ ------------
Cash Flows from Investing
Cash paid for acquisitions, including transaction
costs of $486,000, net of cash received $95,000 -- (7,953,000)
Capitalized Engineering (811,000) (1,309,000)
Property Plant & equipment (1,047,000) (212,000)
Assets held for sale (243,000) --
------------ ------------
Net Cash used in Investing Activities (2,101,000) (9,474,000)
------------ ------------
Cash Flow from Financing
Capital Lease Obligations (271,000) (85,000)
Proceeds From Private Placement -- 8,023,000
Cash Paid for Private Placement 195,000 (698,000)
Notes Payable - Sellers (871,000) (337,000)
Notes Payable - Junior Subordinated Debt 4,905,000 --
Notes Payable - Bank (106,000) 3,231,000
Notes Payable - Revolver (692,000) 5,916,000
Deferred Financing Costs (143,000) (318,000)
------------ ------------
Net Cash provided by financing activities 3,017,000 15,732,000
------------ ------------
Cash Increase Decrease -- 658,000
Cash & Cash equivalents Beginning Of Year -- --
------------ ------------
Cash & Cash equivalents End of Period $ -- $ 658,000
------------ ------------
3
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION:
Nine Months Ended
September 30,
2008 2007
Cash paid during the period for interest $1,279,000 $ 127,000
========== ==========
Cash paid during the period for taxes $ -- $ --
========== ==========
Dividends paid in Stock $ 456,000 $1,836,000
========== ==========
Property and equipment acquired under capital leases $ 468,000 $ 673,000
========== ==========
Notes payable and accrued interest converted to common stock $ -- $ 720,000
========== ==========
Nine months ended
September 30,
-----------------
2007
-----------------
(as restated)
Purchase of all capital stock of Sigma Metals, Inc. and assumption of liabilities
in the acquisition in 2007, as restated, as follows:
Fair value of assets acquired $ 5,990,000
Goodwill 1,550,000
Intangible assets 3,720,000
Cash paid (includes transaction costs of $281,000) (4,341,000)
Notes issued to sellers (1,498,000)
Common stock issued (1,957,000)
-----------------
Liabilities assumed $ 3,464,000
=================
Purchase of all capital stock of Welding Metallurgy, Inc. and assumption of liabilities
in the acquisition in 2007, as restated, as follows:
Fair value of assets acquired
$ 1,588,000
Goodwill 3,556,000
Intangible assets 2,434,000
Cash paid (includes transaction costs of $206,000) (3,706,000)
Accrued Purchase Price (190,000)
Notes issued to sellers (1,860,000)
Common stock issued (566,000)
-----------------
Liabilities assumed $ 1,256,000
=================
See notes to condensed consolidated financial statements
4
AIR INDUSTRIES GROUP INC.
Notes to Condensed Consolidated Financial Statements
Note 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Air Industries Group, Inc. ("AIRI") and its wholly owned
subsidiaries Air Industries Machining Corporation ("AIM"), Sigma Metals, Inc.
("Sigma") and Welding Metallurgy, Inc. ("Welding", and together with AIRI, AIM
and Sigma, the "Company"). These condensed consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America for interim financial
reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
All intercompany accounts and transactions have been eliminated. These unaudited
interim condensed consolidated financial statements, which, in the opinion of
management, reflect all adjustments (including normal recurring adjustments)
necessary for a fair presentation, should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2007. Operating
results for the three and nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for any future
interim period or for the entire fiscal year.
As a result of management's decision to cease the operations of the
Company's metal distribution business, Sigma, as discussed in Note 10, the
Company's financial statements reflect Sigma as discontinued operations. Its
results of operations are treated as income (loss) from discontinued operations,
net of tax, and separately stated on the Condensed Consolidated Statements of
Operations after income (loss) from continuing operations.
The amounts in the accompanying condensed consolidated financial
statements have been rounded to the nearest thousand dollars. Certain
reclassifications have been made to prior period presentation to conform to the
current year presentation.
Liquidity Concerns. The Company continues to suffer as a result of its extreme
lack of liquidity. The Company is highly leveraged and will need to generate
substantial cash flow from operations to satisfy its debt service obligations.
As of September 30, 2008, the Company's indebtedness was approximately
$25,433,000, including approximately $15,100,000 payable to its bank lenders
secured by substantially all its assets. The Company was in default of certain
covenants in the agreements with its bank lenders as of the end of September and
October 2008. The Company has been attempting to negotiate new covenants with
its bank lenders. Nevertheless, as long as the Company remains in default of its
covenants, its bank lenders could elect to cease lending money to the Company.
Because the Company is required to maintain a "lock box" account with its bank
lenders into which substantially all of the Company's cash receipts are paid, if
its bank lenders were to cease lending, the Company would lack the funds to
continue its operations. The Company received gross proceeds from the sale of
its junior subordinated notes and equity securities of $4,905,000 between May
and the end of September 2008, and of approximately $630,000 during October
2008. The receipt of these gross proceeds did not alleviate the Company's
liquidity crisis and the Company's bank lenders elected to reduce availability
by $900,000 upon receipt of these funds. The Company's bank debt matures in the
fourth quarter of 2009. There can be no assurance that the Company's lenders
will agree to extend their loans and, in the absence of significant improvement
in the Company's results of operations, it is not likely that the Company will
be able to refinance its bank indebtedness with another lender. To alleviate its
liquidity difficulties, the Company is seeking to sell certain of the assets and
the operations of its Sigma business and extend the payment terms of its
indebtedness to the former owners of Welding. The Company also has ceased its
efforts to acquire Blair Industries, Inc. and certain of its affiliated
companies ("Blair-HSM"). In addition, due to its liquidity difficulties, the
Company has issued, and will likely continue to issue, additional shares of its
Series B Convertible Preferred Stock ("Series B Preferred Stock") in lieu of
payment of cash dividends on its Series B Preferred Stock, which will dilute the
equity ownership and voting power of holders of its Common Stock. Nevertheless,
the ability of the Company to maintain its current level of operations is
subject to the cooperation of its bank lenders and other parties which hold its
notes. If the Company's bank lenders were to reduce the amounts loaned to the
Company, the Company would have no choice other than to reduce it operations and
seek to liquidate certain assets. Any forced liquidation of assets would likely
yield less than the amounts at which such assets are valued by the Company. See
the discussion of "Risk Factors" under Item 1A of Part of this report.
5
Note 2. RESTATEMENTS
In the fourth quarter of 2007, the Company (a) determined to capitalize
certain amounts related to development expenditures made in the first three
quarters of 2007 that were previously expensed and (b) completed the allocation
of the purchase price paid for Sigma among certain intangible assets of that
company that initially had been allocated to goodwill. Additionally, due to poor
performance of our metals distribution business during 2008, we have decided to
discontinue the operation of Sigma. The table set forth below shows adjustments
to the results previously reported by the Company on Form 10-QSB for the three
and nine months ended September 30, 2007 to give effect to the items in (a) and
(b) above and also to give effect to the discontinuance of the Sigma operations.
As indicated below, as a result of these changes, the net income attributable to
common shareholders reported for the three months ended September 30, 2007
increased from $285,000 to $469,000, and the net loss attributable to common
shareholders reported for the nine months ended September 30, 2007 of ($212,000)
became a net loss of ($1,191,000)
The Company received a letter from the Staff of the Securities and Exchange
Commission dated August 29, 2008, requesting information regarding, among other
items, the accounting treatment of the Series B Preferred Stock issued in the
second quarter of 2007. Upon reviewing the issue, the Company determined to make
certain adjustments to its statement of operations to account for the
"beneficial conversion feature" upon the issuance of the Series B Preferred
Stock. The Company will restate its financial statements for each of the second
and third quarters and year ended December 31, 2007 to reflect the appropriate
accounting treatment for the issuance of the Series B Preferred Stock. The
financial statements appearing herein as at and for the periods ended September
30, 2008, and December 31, 2007, reflect the adjustments to be made to properly
account for the issuance of the Series B Preferred Stock. As a result of these
adjustments to the Company's consolidated results of operations for the nine
months ended September 30, 2007, net loss attributable to common stockholders
decreased by $979,000 (from $212,000 to $1,191,000) due to the $1,589,000
adjustment due to the beneficial conversion feature associated with the issuance
of the Series B Preferred Stock in April and May of 2007, and the net loss per
common share increased from $0.00 to $0.02. The adjustment had no effect on the
Company's consolidated balance sheet at September 30, 2007.
Three months ended September 30, 2007:
Q3 2007 Q3 2007
as filed Adjustment As Restated
----------- ----------- -----------
Net sales $12,846,000 (3,394,000) 9,452,000
Cost of sales 9,255,000 (2,683,000) 6,572,000
----------- ----------- -----------
Gross profit 3,591,000 (711,000) 2,880,000
Operating costs and expenses 2,617,000 (715,000) 1,902,000
----------- ----------- -----------
Income from continuing operations 974,000 4,000 978,000
Interest and financing costs 479,000 (38,000) 441,000
Other (income), net 26,000 -- 26,000
----------- ----------- -----------
Income before income taxes 469,000 42,000 511,000
Provision for income taxes 47,000 159,000 206,000
----------- ----------- -----------
Net income (loss) from continuing operations 422,000 (117,000) 305,000
Income from discontinued operations -- 301,000 301,000
----------- ----------- -----------
Net income (loss) 422,000 184,000 606,000
Less: Dividend attributable to preferred stockholders 137,000 -- 137,000
----------- ----------- -----------
Net income attributable to common stockholders $ 285,000 $ 184,000 $ 469,000
=========== =========== ===========
Net income per common share:
Net income per common share (Basic) $ 0.00 $ 0.01
=========== ===========
Net income per common share (Diluted) $ 0.00 $ 0.01
=========== ===========
Weighted average shares outstanding (Basic) 67,840,000 67,840,000
=========== ===========
Weighted average shares outstanding (Diluted) 70,735,000 70,735,000
=========== ===========
6
Nine months ended September 30, 2007:
Nine months ended Nine months ended
as filed Adjustment As Restated
----------------- ----------------- -----------------
Net sales $ 31,323,000 (6,177,000) 25,146,000
Cost of sales 24,110,000 (5,696,000) 18,414,000
----------------- ----------------- -----------------
Gross profit 7,213,000 (481,000) 6,732,000
Operating costs and expenses 6,074,000 (1,347,000) 4,727,000
----------------- ----------------- -----------------
Income from continuing operations 1,139,000 866,000 2,005,000
Interest and financing costs 891,000 (65,000) 826,000
Other (income), net 23,000 -- 23,000
----------------- ----------------- -----------------
Income (loss) before income taxes 225,000 931,000 1,156,000
Provision for income taxes 190,000 530,000 720,000
----------------- ----------------- -----------------
Net income from continuing operations 35,000 401,000 436,000
Net income from discontinued operations -- 209,000 209,000
----------------- ----------------- -----------------
Net income 35,000 610,000 645,000
Less: Dividend attributable to preferred stockholders 247,000 -- 247,000
Less: Beneficial conversion feature -- 1,589,000 1,589,000
----------------- ----------------- -----------------
Net (loss) attributable to common stockholders $ (212,000) $ (979,000) $ (1,191,000)
================= ================= =================
Net (loss) per common share:
Net (loss) per common share (Basic) $ (0.00) $ (0.02)
================= =================
Net (loss) per common share (Diluted) $ (0.00) $ (0.02)
================= =================
Weighted average shares outstanding (Basic) 64,149,000 64,149,000
================= =================
Weighted average shares outstanding (Diluted) 64,149,000 64,149,000
================= =================
Additionally, this change resulted in a restatement of the Condensed
Consolidated Statement of Cash Flows for the nine months ended September 30,
2007. Cash flows from operations and from investing activities, as restated, are
as follows:
Nine months ended September 30, 2007:
Cash flow from
--------------------------------------------
Operations Investing Financing
------------ ------------ ------------
As reported $ (6,807,000) $ (8,165,000) $ 15,732,000
Capitalized engineering costs 1,309,000 (1,309,000) --
Net Change in Assets/Liabilities (42,000) -- --
Assets Held for Sale (Net) (60,000) -- --
------------ ------------ ------------
As restated $ (5,600,000) $ (9,474,000) $(15,732,000)
------------ ------------ ------------
Note 3. ACQUISITIONS
On April 16, 2007, the Company acquired all of the issued and outstanding
capital stock of Sigma pursuant to a Stock Purchase Agreement, dated January 2,
2007, in exchange for approximately $4,061,000 in cash, promissory notes in the
aggregate principal amount of approximately $1,497,000, and 7,416,082 shares of
its Common Stock which were valued at an aggregate of approximately $1,957,000.
Costs associated with this acquisition amounted to approximately $281,000. Sigma
is a specialty distributor of strategic metals, primarily aluminum, stainless
steels of various grades, titanium and other exotic end user specified metals.
Sigma's products are sold to both aerospace/defense contractors as well as
commercial accounts throughout the U.S. and numerous international markets.
Customers include the world's largest aircraft manufacturers, subcontractors,
original equipment manufacturers and various government agencies.
Sigma's results in 2008 began to deteriorate and we concluded that to
revive the business would require a significant investment. Therefore, in the
third quarter of 2008, the Board of Directors decided to discontinue the
operations of Sigma. (See Note 10)
7
On August 24, 2007, the Company acquired all of the issued and outstanding
capital stock of Welding pursuant to a Stock Purchase Agreement, dated as of
March 9, 2007, as amended, in exchange for $3,500,000 in cash, a promissory note
in the principal amount of $2,000,000 (this note was originally recorded at
$1,860,000 to reflect the fact that no interest accrues for the first year, see
Note 5) and 2,035,529 shares of its Common Stock which were valued at an
aggregate of approximately $567,000. One-half of these shares are held in escrow
as secondary collateral for representations and warranties pursuant to the Stock
Purchase Agreement. In addition, the Company is obligated to pay an additional
$190,000 representing an adjustment to reflect additional working capital
acquired in excess of targeted working capital pursuant to the Stock Purchase
Agreement as described further in Note 5. Costs associated with this acquisition
amounted to approximately $206,000. Welding is a specialty welding and products
provider whose significant relationships include the world's largest aircraft
manufacturers, subcontractors, and original equipment manufacturers.
In accordance with Statement of Financial Accounting Standards ("SFAS")
141, Business Combinations, the acquisitions of Sigma and Welding were accounted
for using the purchase method of accounting. Accordingly, the purchase price was
allocated to assets acquired and liabilities assumed based on studies and
appraisals of their relative fair values. Results of operations include the
results of Welding beginning on August 27, 2007. As such, the operations of
Welding are included in operations for the entire nine month period ended
September 30, 2008, but for the three and nine month period ended September 30,
2007 Welding's results are included from August 27, 2007.
The following summary shows the unaudited pro-forma results of operations
for the nine months ended September 30, 2007, assuming that the Company had
purchased Welding as of January 1, 2007. This information gives effect to the
increased interest and financing costs and the amortization of fair value
adjustments (principally for amortization of identified intangibles) and a
provision for income taxes. This summary may not be indicative of what the
actual results of operations would have been had the purchases occurred at the
beginning of the period shown.
Nine months
ended
September 30,
2007
-------------
Net sales $ 27,499,000
Income from continuing operations $ 1,403,000
Income from Discontinued Operations $ 774,000
Net Income $ 1,457,000
Net Income per share $ 0.00
During the first half of 2008, and continuing into the third quarter, the
Company incurred substantial expenses in connection with its efforts to acquire
Blair-HSM. During the third quarter of 2008, management determined to cease its
efforts to acquire Blair-HSM. As a result, the Company expensed approximately
$838,000 in previously capitalized costs relating to the acquisition and
$350,000 for expenses of the shareholders of Blair-HSM it agreed to reimburse
associated with the acquisition in the accompanying Condensed Consolidated
Statement of Operations as part of General and Administrative Expenses.
8
Note 4. INVENTORY
The components of inventory consisted of the following:
September 30, December 31,
2008 2007
------------- -------------
(unaudited)
Raw materials $ 4,060,000 $ 5,471,000
Work in progress 11,320,000 7,755,000
Finished goods 6,175,000 5,014,000
------------- -------------
Total $ 21,555,000 $ 18,240,000
============= =============
Inventory for Welding is computed based on a "gross profit" method in the
first and third quarters and are adjusted to physical inventories in June and
December. Inventory owned by Sigma is classified in assets held for sale on the
accompanying condensed consolidated balance sheet. At September 30, 2008 and
December 31, 2007 the value of the inventory owned by Sigma was $2,742,000 and
$3,580,000, respectively. This material consists primarily of raw materials.
Note 5. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
September 30,
2008 December 31,
(unaudited) 2007
------------ ------------
Revolving credit notes payable to PNC Bank N.A. ("PNC") and
secured by substantially all assets $ 10,641,000 $ 11,332,000
Term loan, subject to acceleration, secured 4,500,000 4,500,000
Junior subordinated notes 4,905,000 --
Notes payable to sellers of acquired businesses 3,161,000 3,939,000
Capital lease obligations 1,676,000 1,479,000
Other notes payable to PNC, secured 550,000 656,000
------------ ------------
Subtotal 25,433,000 21,906,000
Less: Current portion of notes and capital lease obligations (18,287,000) (17,687,000)
Unamortized debt discount on junior subordinated notes (1,047,000) --
------------ ------------
Notes payable and capital lease obligations, net of current portion $ 6,099,000 $ 4,219,000
============ ============
Revolving credit and other notes payable to PNC -
In November 2005, the Company executed a credit facility with PNC which,
as amended, provided for maximum borrowings consisting of (i) $14,000,000 in
revolving loans pursuant to a borrowing base formula, (ii) $3,500,000 in term
loans and (iii) $1,500,000 in equipment financing loans. Borrowings under the
credit facility are secured by all of the assets of the Company and its
subsidiaries. At September 30, 2008 and December 31, 2007, borrowings under the
term loans were approximately $139,000 and $245,000, respectively, and
borrowings under the equipment loans were approximately $411,000 as of the end
of each period. The revolving loans and equipment loans mature on November 30,
2009 and the term loan matures in October 2009. Each day, the Company's cash
collections (except for Welding) are swept directly by the bank to reduce the
revolving loans and we then borrow according to a borrowing base. As such, the
Company generally has no cash on hand. Because the revolving notes contain a
subjective acceleration clause which could permit PNC to require repayment prior
to maturity, they are classified with current portion of notes and capital lease
obligations.
9
The revolving loans bear interest, at the option of the Company, at a rate
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%. As of September 30, 2008 and December 31, 2007 the
revolving loans had an interest rate of 7.25% and 7.75%, respectively.
The term loan and the equipment loan bear interest, at the option of the
Company, at the (i) PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate
for the interest period selected by the Company plus 2.75 %.
In June 2008, the Company entered into amendments to its revolving credit
agreement with PNC and term loans with Steel City Capital Funding ("SCCF") which
(a) waived certain defaults, (b) permitted the issuance of the junior
subordinated notes discussed below and (c) established a $900,000 availability
block under the revolving credit facility.
In September 2008, the Company entered into amendments to its revolving
credit agreement with PNC and term loans with SCCF which (a) waived certain
defaults, and (b) permitted the issuance of additional junior subordinated notes
discussed below.
As of September 30, 2008 the Company was in default of its financial
covenants under the terms of its credit facilities with PNC Bank and SCCF. As
such all amounts due under these credit facilities have been classified as
short-term in the accompanying Condensed Consolidated Balance Sheet for the
period ended September 30, 2008.
Term loan, subject to acceleration, secured -
In connection with the acquisition of Welding, SCCF provided a Term Loan
to the Company of $4,500,000. The Term Loan, although payable on August 24,
2010, is classified as current because it contains a subjective acceleration
clause that permits SCCF to demand immediate repayment. Borrowings under the
SCCF Loan Agreement bear interest, payable monthly, generally at a rate of 6%
over the base commercial lending rate of PNC as publicly announced from time to
time. In addition, to secure the obligations due SCCF, the Company pledged to
SCCF the capital stock of AIM, Sigma, and Welding and each of such entities
granted to SCCF a security interest in all of their assets. The interest rate on
the outstanding indebtedness under the Term Loan was approximately 11.00% during
the nine months ended September 30, 2008.
Junior subordinated notes -
In June 2008 the Company sold $2,950,000 principal amount of junior
subordinated notes (the "Old Notes"), together with 983,324 shares of its Common
Stock, in a private placement for a total purchase price of $2,950,000, to
provide additional working capital. The Old Notes, which are payable on May 31,
2010, or earlier upon completion of one or a series of financings resulting in
aggregate gross proceeds of at least $10 million. Interest on the Old Notes,
payable monthly, accrues at 2% per month commencing generally on July 15, 2008
and continuing generally until November 11, 2008; and 3% per month thereafter
until the Old Notes have been paid in full. Payment of the principal and accrued
interest on the Old Notes is subordinate to all of our indebtedness for borrowed
money, or obligations with respect to which the Company is a guarantor, to
financial institutions or other lenders. Subsequent to September 30, 2008, the
Old Notes were exchanged for an equal principal amount of junior subordinated
notes (the "New Notes"), together with shares of Series B Preferred Stock issued
on the basis of 8,000 shares per $100,000 principal amount of New Notes. The
terms of the New Notes are identical to the Old Notes, except that interest
accrues at the rate of 1% per month (or 12% per annum), generally commencing on
October 1, 2008.
In connection with the private placement, Taglich Brothers, Inc., as
placement agent, was paid a fee of $20,000 in cash plus 200,000 shares of our
common stock (which we valued at approximately $40,000), as well as
reimbursement of approximately $25,000 of out-of-pocket expenses.
Approximately $195,000 of the proceeds of the private placement has been
attributed to the fair value of the 983,324 shares of common stock issued. Such
amount was accounted for as additional paid in capital and a reduction of the
junior subordinated notes as debt discount. Because it was our intent to repay
the Old Notes in the near term, the debt discount is being amortized as
additional interest expense over the initial period to July 15, 2008 plus the
initial 60 day period following July 15, 2008, to yield a constant interest
rate, together with cash interest, of approximately 3% per month during that
approximately two month period. The costs of the transaction, including costs
associated with the placement agent, were approximately $60,000 and were being
amortized over a ten month period.
10
In September 2008, the Company sold $1,955,000 principal amount of New
Notes, together with 156,400 shares of Series B Preferred Stock, in a private
placement for a total purchase price of $1,955,000, to provide additional
working capital.
In connection with the second private placement, the Company agreed to pay
Taglich Brothers, Inc., as placement agent, a fee of 10% of the proceeds upon
completion of the offering, plus an amount equal to 8% of the principal amount
of the Old Notes exchanged for New Notes.
Approximately $1,047,000 of the proceeds of the private placement has been
attributed to the fair value of the 156,400 shares of Series B Preferred Stock
issued. Such amount was accounted for as additional paid in capital and a
reduction of the New Notes as debt discount. The debt discount is being
amortized as additional interest expense over the term of the New Notes, which
will yield a constant interest rate, together with interest, of approximately
3.68% per month (44.13% per annum) during the term of the New Notes. The costs
of the transaction, including costs associated with the placement agent, were
approximately $195,000 and are being amortized as Deferred Finance Cost over
that term of the notes.
The proceeds from these private placements were used for working capital
purposes.
Notes payable, sellers includes the following:
September 30,
2008 December 31,
(unaudited) 2007
------------- -------------
Note payable to former AIM shareholder $ 481,000 $ 625,000
Note payable to former Sigma shareholders 638,000 1,216,000
Note payable to former Welding shareholders 2,000,000 2,000,000
Additional purchase price payable to Welding shareholders 42,000 190,000
------------- -------------
Total 3,161,000 4,031,000
Less: discount for imputed interest on Welding notes -- (92,000)
------------- -------------
Notes payable to former shareholders 3,161,000 $ 3,939,000
============= =============
Notes payable to former AIM shareholder - The remaining $481,000 principal
amount of the note, originally issued in November 2005, matures on September 30,
2010, is subordinated to all of the debt payable to PNC and SCCF and is payable
in twenty consecutive calendar quarters of equal installments of $48,100 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 (5.50% and 7.75% at
September 30, 2008 and December 31, 2007, respectively). Interest on outstanding
balances at September 30, 2010, in the event of nonpayment, shall accrue at a
floating rate equal to the Prime Rate plus 7% per annum.
Notes payable to former Sigma shareholders - In connection with the
acquisition of Sigma, the Company incurred notes payable obligations to the
former shareholders of Sigma in the aggregate principal amount of approximately
$1,497,000. The remaining principal balance, at September 30, 2008 and December
31, 2007, of approximately $638,000 and $1,216,000, is payable in equal monthly
installments, after the prepayment described below, of $33,563 of principal plus
interest at 7% per annum through 2010. In April 2008, approximately $247,000 was
prepaid on the notes due the former shareholders. These notes are subordinated
to all of the Company's indebtedness to PNC and SCCF.
Notes payable to former Welding shareholders - In connection with the
acquisition of Welding, the Company incurred a note payable to the former
shareholders of Welding in the aggregate principal amount of $2,000,000, which
bore no interest until August 24, 2008, and bears interest thereafter at 7% per
annum.
11
To reflect the fact that this note does not bear interest for the first
year, the Company has reflected the value of the note in its balance sheet at
its estimated fair value of approximately $1,860,000 at inception and
approximately $2,000,000 and $1,907,000 at September 30, 2008 and December 31,
2007, respectively. The Company expenses the imputed interest on a monthly basis
and increases the value of the note, ultimately, to its face value of
$2,000,000. The indebtedness evidenced by this note is subordinated to the
Company's indebtedness to PNC and SCCF and is payable in one installment in the
principal amount of $500,000 was due on August 24, 2008 and twelve consecutive
quarterly installments of principal in the amount of $125,000, plus accrued
interest commencing on November 30, 2008 and continuing through August 31, 2011.
The Company is currently in discussions with this party regarding the possible
deferral or restructure of principal payments which was scheduled to begin in
August 2008. See Note 11, Subsequent Events, for changes to the term of the
note.
Additional purchase price payable to former Welding shareholders - As a
result of a post-closing working capital adjustment calculation required under
the stock purchase agreement with the former Welding shareholders, the Company
is obligated to pay an additional purchase price of approximately $190,000 to
the former owners. This is to be paid in four monthly installments of $47,494,
plus accrued interest at 7% per annum from November 1, 2007, which payments
commenced in March 2008. As of September 30, 2008, there is still approximately
$42,000 that remains unpaid.
Capital lease obligations -
The Company is committed under several capital leases for manufacturing
and computer equipment calling for payments through 2012. All leases have
bargain purchase options exercisable at the termination of each lease. Capital
lease obligations totaled approximately $1,676,000 and $1,479,000 as of
September 30, 2008 and December 31, 2007, respectively.
Note 6. STOCKHOLDERS EQUITY
Increase to authorized common stock and approval of reverse stock split
At a Special Meeting of Stockholders on April 3, 2008, the stockholders
approved an amendment to the certificate of incorporation increasing to
250,000,000 the number of shares of Common Stock the Company is authorized to
issue. In addition, the stockholders authorized the Board of Directors to
effect, at its discretion at any time not later than December 31, 2008, if at
all, a reverse stock split of Common Stock at a ratio within the range from
one-for-ten to one-for-thirty, with the ratio and timing to be selected and
implemented by the Board. The reverse stock split is part of a plan intended to
enable the Company to obtain a listing for Common Stock on a national securities
exchange. If the reverse stock split is effected, the number of authorized
shares of Common Stock would be reduced to 125,000,000 shares.
Common stock issued in the nine months ended September 30, 2008-
See note 5 regarding common stock issued in connection with the Company's
placement of junior subordinated notes in June 2008.
During the three and nine months ended September 30, 2008, 275,000 shares were
issued as payment to our investor relations firm. These shares were issued at
the prevailing market rate as of the date of issuance. The value of the shares
issued was approximately $51,000
During the three and nine month periods ended September 30, 2008 one of the
holders of our Preferred Series B Shares converted approximately 22,237 shares
of Series B Preferred Stock into 803,962 shares of Common Stock.
Issuance of Series B Preferred Stock
To finance the acquisition of Sigma and provide it with additional working
capital, in April and May of 2007, the Company completed a private placement of
its Series B Preferred Stock in which it raised gross proceeds of $8,023,000.
In connection with the private placement of its Series B Preferred stock,
the Company paid Taglich Brothers, Inc, as placement agent, a sales commission
of approximately $642,000, or 8% of the gross proceeds of the offering, and
$25,000 as reimbursement of its out-of-pocket expenses and issued to the
designees of Taglich Brothers, Inc. warrants to purchase 2,900,578 shares of
Common Stock at a per share exercise price of $0.305. These warrants have a term
12
of five-years and a "cashless exercise" feature. These warrants were valued at
$32,000 using the Black-Scholes model and the value of such warrants was
deducted from the additional paid in capital resulting from the offering.
Holders of the shares of Series B Preferred Stock are entitled to receive 7%
cumulative dividends payable at the option of the Company in cash or additional
shares of Series B Preferred Stock. Dividends for the three and nine months
ended September 30, 2008, paid in 15,680 and 58,873 respectively, shares of
Series B Preferred Stock, amounted to approximately $157,000 and $456,000.
In January 2008, the Company issued 16,456 shares of its Series B
Preferred Stock in payment of $146,500 of dividends that had been declared at
December 31, 2007.
On April 1, 2008, the Company declared a dividend on its Series B
Preferred Stock, payable in 19,825 shares of Series B Preferred Stock. On July
1, 2008, the Company declared a dividend on its Series B Preferred Stock,
payable in 23,298 shares of Series B Preferred Stock. On October 1, 2008 the
Company declared a dividend on its Series B Preferred Stock, payable in 39,103
shares of Series B Preferred Stock.
See note 5 regarding issuance of Series B Preferred Stock in connection
with the Company's placement of junior subordinated notes in September 2008.
Subsequent to September 30, the Company sold an additional $ 630,000 of
New Notes, together with 50,400 shares of Series B Preferred Stock, for a total
purchase price of $ 630,000. An aggregate of $2,585,000 principal amount of our
junior subordinated notes due 2010 and 206,800 shares of Series B Preferred
Stock were issued in the offering. (See Note 5 - Junior Subordinated Notes) In
addition, in October 2008, holders of an aggregate of $2,900,000 of outstanding
Old Notes issued in May and June 2008 exchanged their Old Notes for an equal
principal amount of New Notes, plus 232,000 shares of Series B Preferred Stock.
As of September 30, 2008, there were outstanding 1,022,840 shares of
Series B Preferred Stock. The shares of Series B Preferred Stock outstanding at
September 30, 2008 are convertible into 36,455,942 shares of common stock.
Note 7. SHARE-BASED COMPENSATION ARRANGEMENTS
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R),
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 nine months ended September 30, 2008 and 2007, options to purchase
25,000 and 2,280,000 shares, respectively 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 exercisable 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 is calculated and expensed in the period that
the price is known.
At September 30, 2008 and 2007, options to purchase 3,838,000 and
2,496,666 common shares are vested and exercisable, respectively. The weighted
average exercise price of exercisable options at September 30, 2008 was $0.30
per share.
During the nine months ended September 30, 2008, the Company issued
140,000 shares of its common stock to key employees under the 2005 Stock
Incentive Plan. The compensation expense, measured at the closing price on the
date of grant, approximately $34,000, was charged to expense in the three months
ended March 31, 2008 as there is no future service period or vesting required.
On April 11, 2008, the Company granted each of its four non-management
directors an option to purchase 100,000 shares of common stock at an exercise
price per share of $0.225 vesting immediately and exercisable for the next five
years. The costs associated with these options was approximately $68,000 and is
recorded in the nine months ended September 30, 2008. In addition, the terms of
the options previously granted to Messrs. Rettaliata, Giusto and Peragallo were
modified to provide that the options scheduled to vest from 2008 through 2012,
1, 200,000 options in the aggregate, will be exercisable at a per share price of
$0.225.
13
Warrants to acquire 125,000 shares with a grant date of March 16, 2007
were issued to a consulting firm. These warrants are exercisable at a per share
price of $0.28 the average closing price of the Company's common stock for the
20 days preceding the date of grant, and have a cashless exercise feature and
vested on the grant date. The warrants were valued using the Black-Scholes model
and the Company recorded a one time expense of approximately $26,000 in its
consolidated statement of operations for the quarter ended March 31, 2007.
Note 8. CONVERSION OF NOTES PAYABLE
On January 26, 2007, two executive officers exercised their right to
convert approximately $665,000 principal amount of the Company's notes plus
accrued interest of approximately $55,000 into an aggregate of 1,799,432 shares
of common stock at a conversion price of $0.40 per share.
Note 9. SIGNIFICANT CUSTOMERS AND BUSINESS SEGMENTS
One customer accounted for approximately 49% and 57% of net sales for the
three months ended September 30, 2008 and 2007, respectively, and approximately
51% and 61% of net sales for the nine months ended September 30, 2008 and 2007,
respectively. Amounts receivable from this customer at September 30, 2008 and
2007 were approximately $999,000 or 26% of net receivables and $1,497,000 or 29%
of net receivables respectively.
As a result of the acquisitions made in April 2007 of Sigma and in August
2007 of Welding, the Company now operates in three segments. Financial
information about the Company's operating segments for the three and nine months
ended September 30, 2008 and 2007 as required under Statement of Financial
Accounting Standard 131 is as follows:
Three months ended September 30, (unaudited)
--------------------------------------------
2008 2007
------------ ------------
(as restated)
AIM:
Net sales $ 7,988,000 $ 8,940,000
Gross profit 1,045,000 2,645,000
Pre tax income (loss) (308,000) 1,331,000
Assets 32,732,000 31,225,000
Sigma:
Net income (loss) From
Discontinued Operations (6,274,000) 301,000
Assets held for Sale 4,173,000 10,900,000
Welding:
Net sales 882,000 512,000
Gross profit 406,000 235,000
Pre tax income 24,000 127,000
Assets 8,360,000 6,719,000
Corporate:
Net sales -- --
Gross profit -- --
Pre tax income (loss) (2,963,000) (947,000)
Assets 15,301,000 24,021,000
Consolidated:
Net sales 8,870,000 9,452,000
Gross profit 1,451,000 2,880,000
Net income (loss) From
Discontinued Operations (6,274,000) 301,000
Pre tax income (loss) (3,247,000) 511,000
Benefit (provision) for
taxes 659,000 (206,000)
Net income (loss) (8,862,000) 606,000
Elimination of assets (15,393,000) (24,715,000)
Assets $ 45,173,000 $ 48,150,000
14
Nine months ended September 30, (unaudited)
-------------------------------------------
2008 2007
------------ ------------
(as restated)
AIM:
Net sales $ 24,443,000 $ 24,634,000
Gross profit 5,740,000 6,496,000
Pre tax income 2,067,000 3,272,000
Sigma:
Net income (loss) from
Discontinued Operations (6,600,000) 209,000
Welding:
Net sales 2,899,000 512,000
Gross profit 1,334,000 235,000
Pre tax income 98,000 127,000
Corporate:
Net sales -- --
Gross profit -- --
Pre tax income (5,125,000) (2,244,000)
Consolidated:
Net sales 27,342,000 25,146,000
Gross profit 7,074,000 6,731,000
Net income (loss) from
Discontinued Operations (6,600,000) 209,000
Pre tax income (loss) (2,960,000) 1,156,000
Benefit (provision) for taxes 666,000 (720,000)
Net income (loss) $ (8,894,000) $ 645,000
15
Note 10. DISCONTINUED OPERATIONS
The Company's financial statements reflect Sigma as discontinued
operations. The results of operations of this entity is treated as income from
discontinued operations, net of tax, and separately stated on the Condensed
Consolidated Statements of Operations below income (loss) from continuing
operations.
During the period ended September 30, 2008, the Board of Directors of the
Company elected to discontinue the operations of Sigma. Operations were
discontinued on October 31, 2008, when the Company came to an agreement in
principle to sell certain assets of Sigma to the former owners of Sigma
("Purchasers"), from whom the Company purchased Sigma in April 2007.
The Company agreed to consign the remaining physical inventory of
approximately $2 million to the Purchasers, who guaranteed the sale of same in a
period no longer than 12 months. The Company also agreed to honor the employment
contracts of the Purchasers until December 31, 2008. All other employees were
terminated on October 31, 2008. Additionally, the Purchasers exchanged their
promissory notes, which carried an outstanding balance of approximately
$638,000, for 58,500 shares of Series B Preferred Stock. As of October 31, 2008,
Sigma had approximately $2.2 million, not including allowance for bad debt, in
receivables and $3.0 million in accounts payable. The aggregate loss resulting
from the initial write down of the discontinued operations for the nine months
ended September 30, 2008 was $(6,600,000).
The following table presents the summarized results of discontinued
operations for the three and nine months ended September 30, 2008 and 2007:
3 Months Ended 9 Months Ended
09/30/08 09/30/07 09/30/08 09/30/07
----------- ----------- ----------- -----------
Net sales $ 2,226,000 $ 3,393,000 $ 9,781,000 $ 6,178,000
Cost of sales 2,376,000 2,226,000 8,480,000 4,388,000
----------- ----------- ----------- -----------
Gross profit (150,000) 1,167,000 1,301,000 1,790,000
Operating costs and expenses 2,349,000 827,000 4,084,000 1,516,000
----------- ----------- ----------- -----------
Income (loss) from operations (2,499,000) 340,000 (2,783,000) 274,000
Interest and financing costs 8,000 39,000 50,000 65,000
Write-off of Goodwill 1,550,000 -- 1,550,000 --
Write-off of Intangibles 3,329,000 -- 3,329,000 --
----------- ----------- ----------- -----------
Income (loss) before income taxes (7,386,000) 301,000 (7,712,000) 209,000
Benefit (Provision) for income taxes 1,112,000 -- 1,112,000 --
----------- ----------- ----------- -----------
Net income (loss) $(6,274,000) $ 301,000 $(6,600,000) $ 209,000
----------- ----------- ----------- -----------
Note 11. Subsequent events
Sale of additional New Notes and exchange of Old Notes for New Notes
Subsequent to September 30, the Company sold an additional $630,000 principal
amount of New Notes, together with 50,400 shares of Series B Preferred Stock,
for a total purchase price of $ 630,000. An aggregate of $2,585,000 principal
amount of junior subordinated notes due 2010 and 206,800 shares of Series B
Preferred Stock were issued in the offering. In addition, in October 2008,
holders of an aggregate of $2,900,000 principal amount of our outstanding Old
Notes exchanged their Old Notes for an equal principal amount of New Notes, plus
232,000 shares of Series B Preferred Stock. The terms of the New Notes and the
Old Notes are identical, except that the rate of interest on the New Notes is 1%
per month (12% per annum).
16
Service of Restraining Notice by HSM - Blair
The Company has ceased its efforts to acquire HSM- Blair. On November 3,
2008, the Company was served with an Information Request and Restraining Notice
by Blair as part of Blair's efforts to collect on the $350,000 Confession of
Judgment issued by the Company to secure its agreement to reimburse the
shareholders of HSM - Blair for certain expenses incurred in connection with the
acquisition. The Company had previously accrued the $350,000 for this liability
at September 30, 2008 which amount is included in general and administrative
expenses in the accompanying Condensed Consolidate Statement of Operations. The
Company and the principals of Blair have reached an agreement in principle under
which the Company will satisfy $100,000 of this obligation through the issuance
of its Series B Preferred Stock having a face value of $100,000 and to pay the
balance over six months.
Extension and reduction of principal amounts payable to the former owners of
Welding
The Company has been in discussions with the former shareholders of
Welding to extend and reduce the principal payments of the promissory note
issued in the acquisition.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Air Industries Machining Corp. ("AIM") manufactures aircraft structural
parts and assemblies principally for prime defense contractors in the aerospace
industry. During 2007, approximately 85% of our revenues were derived from sales
of parts and assemblies for military applications. The majority of our sales,
however, are to other military contractors and direct sales to the military
(U.S. and NATO) are only a minor portion of our business. We have evolved from
being a manufacturer of individual parts to being a manufacturer of
subassemblies (i.e. being an assembly constructor) and being an engineering
integrator.
We currently produce over 2,400 individual products (SKU's). These
products are produced and assembled by a skilled labor force into
electromechanical devices, mixer assemblies, rotor-hub components, flight
controls, arresting gears, vibration absorbing assemblies, landing gear
components and many other subassembly packages.
In the second and third quarters of fiscal 2007 we completed two
acquisitions as part of our plan to capitalize on our relationships in the
aerospace industry. Through our Sigma Metals subsidiary we became a specialty
distributor of strategic metals, primarily aluminum, stainless steels of various
grades, titanium and other exotic end user specified materials sourced from
suppliers throughout the world, and through Welding a provider of specialty
welding services. Our metals products are sold throughout the world to prime
contractors in the defense and commercial aerospace industries, aerospace engine
manufacturers and various subcontractors to aerospace manufacturers. Our welding
services and products are provided to similar customers in the United States.
Sigma's results in 2008 began to deteriorate and we concluded that to
revive the business would require a significant investment. As discussed in more
detail below, our working capital and liquidity remain constrained and during
the third quarter of 2008 we made the decision to discontinue the operations of
Sigma.
During the first half of 2008, and continuing into the third quarter, we
were attempting to acquire Blair Industries, Inc. and certain of its affiliated
companies ("Blair-HSM"). During the third quarter of 2008, management determined
to cease its efforts to acquire Blair-HSM. As a result, we expensed
approximately $838,000 in previously capitalized costs relating to the
acquisition and $350,000 for possible expenses associated with the confession of
judgment we delivered to the shareholders of Blair-HSM to secure our agreement
to reimburse them for certain expenses incurred in connection with the
acquisition.
We are engaged in an ongoing effort to position ourselves to win large,
long-term and higher margin contracts. During 2007, and continuing in 2008, we
devoted substantial funds (approximately $1.5 million in 2007 and $810 thousand
thus far in 2008) for new projects, including the production of subassemblies
for the Joint Strike Fighter ("JSF") landing gear and the A380 drag strut
assemblies. We began delivering the first articles for the Joint Strike Fighter
("JSF") program during December 2006, and we expect to make deliveries for the
CV (Navy) version by the end of December 2008. We delivered our first articles
for A380 assemblies in June 2008. We also have submitted proposals for gear
housing assemblies and throttle quadrants as part of the BlackHawk helicopter
program but we do not have firm orders for these parts.
Liquidity Concerns. The Company continues to experience liquidity difficulties.
The Company is highly leveraged and will need to generate substantial cash flow
from operations to satisfy its debt service obligations.
To supplement our working capital, in June 2008 we sold $2,950,000
principal amount of our junior subordinated notes (the "Old Notes"), together
with 983,324 shares of our common stock, to accredited investors for total cash
consideration of $2,950,000 in a private placement. In September 2008, to
address our liquidity concerns and to provide additional working capital, we
sold an additional $1,955,000 principal amount of junior subordinated notes,
(the "New Notes") together with 156,400 shares of our Series B Preferred Stock,
in a private placement for a total purchase price of $1,955,000. The New Notes,
which are payable on May 31, 2010, or earlier upon completion of one or a series
of financings resulting in aggregate gross proceeds of at least $10 million,
bear interest at the rate of 1% per month (or 12% per annum).
18
Subsequent to September 30, we sold an additional $630,000 principal
amount of New Notes, together with 50,400 shares of Series B Preferred Stock for
a total purchase price of $ 630,000. An aggregate of $2,585,000 principal amount
of our junior subordinated notes due 2010 and 206,800 shares of our Series B
Preferred Stock were issued in the offering. In addition, in October 2008,
holders of an aggregate of $2,900,000 principal amount of our outstanding Old
Notes exchanged their Old Notes for an equal principal amount of New Notes, plus
232,000 shares of Series B Preferred Stock. The terms of the New Notes and the
Old Notes are identical, except that the rate of interest on the New Notes is 1%
per month (12% per year).
Nevertheless, we remain highly leveraged and dependent on our bank lenders
for additional financing and are continuing to experience liquidity constraints
arising from
o Costs associated with our acquired businesses which have not yet
attained anticipated operating results, including Sigma which has
been discontinued
o Costs associated with an inventory build-up in anticipation of sales
o Costs incurred in connection with the efforts to acquire Blair-HSM.
These liquidity constraints became very acute during the third quarter of
2008, and negatively affected our revenues and gross margin. Our liquidity
difficulties affected our operations at AIM, Sigma Metals and Welding. Because
we were unable to purchase parts and raw materials on a timely basis, our
production of products was interrupted and shipments to customers delayed. This
reduced revenues at AIM. Gross Margin also was affected as our production lines
were frequently stalled awaiting delivery of raw materials or parts causing
labor cost inefficiencies.
While management is working towards and expects a return to more timely
delivery of product to customers and to gross margins in line with historical
results, we continue to experience liquidity difficulties. There can be no
assurance that we will be able to generate sufficient cash flow from operations
or obtain additional financing to the extent required for our working capital
needs.
Discontinued Operations:
During the quarter ended September 30,2008, the Company's Board of
Directors approved the discontinuance of operations at Sigma Metals Inc., a
wholly owned subsidiary. (See note 10 to the condensed consolidated financial
statements included elsewhere in this report.) Accordingly, Sigma's results of
operations have been reported as discontinued operations for all periods
presented. Sigma's assets and liabilities have been classified as held for sale
on the Company's consolidated balance sheet for all periods presented.
The below table indicates the results of operations for Sigma Metals for the
three and nine month periods ended September 30, 2008 and 2007, respectively.
Three Months Ended Nine Months Ended
09/30/08 09/30/07 09/30/08 09/30/07
----------- ----------- ----------- -----------
Net sales $ 2,226,000 $ 3,393,000 $ 9,781,000 $ 6,178,000
Cost of sales 2,376,000 2,226,000 8,480,000 4,388,000
----------- ----------- ----------- -----------
Gross profit (150,000) 1,167,000 1,301,000 1,790,000
Operating costs and expenses 2,349,000 827,000 4,084,000 1,516,000
----------- ----------- ----------- -----------
Income (loss) from operations (2,499,000) 340,000 (2,783,000) 274,000
Interest and financing costs 8,000 39,000 50,000 65,000
Write-off of Goodwill 1,550,000 -- 1,550,000 --
Write-off of Intangibles 3,329,000 -- 3,329,000 --
----------- ----------- ----------- -----------
Income (loss) before income taxes (7,386,000) 301,000 (7,712,000) 209,000
Benefit (Provision) for income taxes 1,112,000 -- 1,112,000 --
----------- ----------- ----------- -----------
Net income (loss) $(6,274,000) $ 301,000 $(6,600,000) $ 209,000
----------- ----------- ----------- -----------
19
Three months ended September 30, 2008
Net sales at Sigma decreased by $ 1,167,000 or 34.4 % for the three months
ended September 30, 2008 to $2,226,000 from $ 3,393,000 for the three months
ended September 30, 2007. Gross Margin was $ (150,000) for the three months
ended September 30, 2008, compared with $ 1,167,000 in the for the three months
ended September 30, 2007.
Income (loss) before income taxes at Sigma was $ (7,386,000) for the three
months ended September 30, 2008; a decrease of $7,687,000 or 2554 % compared
with $ 301,000 for the three months ended September 30, 2007. Net income (loss)
for the three months ended September 30, 2008, decreases primarily due to a
charge for the write-off of goodwill in the amount of $1,550,000, the write-off
of intangible assets in the amount of $3,329,000, and an increase in the reserve
for bad debts in the amount of $1,200,000 taken for all receivables exceeding 90
days due to the discontinuance of operations.
Nine months ended September 30, 2008
Net sales at Sigma for the nine months ended September 30, 2008 were $
9,781,000 as compared to $6,178,000 for the period April 16, 2007 (the date of
acquisition) to September 30, 2007. Gross margin for the nine months ended
September 30, 2008 was approximately $ 1,301,000 or 13.3% of sales as compared
with gross margin of approximately $1,790,000 or 29% of sales for the period
April 16, 2007 to September 30, 2007.
Net loss before income taxes at Sigma for the nine months ended September
30, 2008 was approximately $ (7,712,000) including a charge for the write-off of
goodwill in the amount of $1,550,000, and the write-off of intangible assets in
the amount of $3,329,000. Additionally a reserve for bad debt in the amount of
$1,200,000 taken for all receivables exceeding 90 days due to the discontinuance
of operations. Net income for the period April 16, 2007 to September 30, 2007
was approximately $ 209,000.
Continuing Operations
Three months ended September 30, 2008 compared with three months ended September
30, 2007 (as restated)
Consolidated net sales for the three months ended September 30, 2008
decreased by $ 582 thousand or (6%) to $ 8.870 million as compared to $ 9.452
million for the three months ended September 30, 2007. Due to the constraint on
capital, AIM was unable to maintain a consistent delivery level preventing AIM
from reducing its significant backlog.
- --------------------------------------------------------------------------------
Net Sales 2008 2007 Change %
- --------------------------------------------------------------------------------
AIM $7,988,000 $8,940,000 $ (952,000) -10.65%
- --------------------------------------------------------------------------------
Welding 882,000 512,000 370,000 72.27%
- --------------------------------------------------------------------------------
Consolidated $8,870,000 $9,452,000 $ (582,000) -6.16%
- --------------------------------------------------------------------------------
We completed the acquisition of our welding operations (Welding) on August
26, 2007; consequently, the results of operations of Welding are included in
operations for the entire nine month period ended September 30, 2008. For the
three and nine month periods ended September 30, 2007, Welding's results are
included only for the period August 27, 2007 through September 30, 2007. As such
the comparison of results for these periods has limited value in assessing the
performance of Welding.
We continue to see growth in customer demand as our 18 month backlog at
our AIM business grew to approximately $54.3 million at September 30, 2008
compared to approximately $33.6 million at September 30, 2007 and continue to
strive to coordinate production and shipping schedules to maximize revenues and
avoid increased inventories.
One customer accounted for approximately 49% and 57% of net sales for the
three months ended September 30, 2008 and 2007, respectively. Sales to that
customer are subject to General Ordering Agreements which extend through 2013.
Amounts receivable from this customer at September 30, 2008 and 2007 were
approximately $999,000 or 26% of net accounts receivable and $1,497,000 or 29%
of net accounts receivable, respectively.
20
Consolidated gross profit for the three months ended September 30, 2008
declined by $ 1.429 million or (50%) to $1.451 million. Gross profit as a
percentage of revenue totaled 16.36% of sales for the three months ended
September 2008 as compared with 30.5% for the prior year. Management believes
that the decline in gross profit for the period results from interruptions in
the delivery of raw materials and parts arising from the Company's liquidity
constraints experienced during the third quarter of 2008 which prevented us from
delivering product to our customers. Additionally, management believes that as a
result of deficiencies at AIM in measuring its labor costs and properly
allocating such costs among work-in-progress (inventory),cost of goods
sold-direct expensed labor and general and administrative expenses, there may be
discrepancies between its gross profit margin from period to period. Management
is in the process of developing a plan to resolve these issues in the most
expedient manner possible. Welding Metallurgy continues to enjoy significant
gross margins and has begun the implementation of Vantage ERP system to have a
clearer picture of available processes and cost savings that can be driven from
the manufacturing process.
Three months ended September 30,
Gross profit 2008 2007 Increase/Decrease %
- ------------------ ---------------- ----------------- -----------------------
AIM $ 1,045,000 2,645,000 (1,600,000) -60%
Welding 406,000 235,000 171,000 73%
---------------- ----------------- -----------------------
Consolidated $ 1,451,000 $ 2,880,000 $(1,429,000) -50%
---------------- ----------------- -----------------------
As a result of the above factors, income (loss) from operations decreased
by approximately $3.412 Million to a loss of approximately $2.434 million in the
three months ended September 30, 2008 as compared to income of approximately
$978 thousand for the three months ended September 30, 2007.
Operating costs increased by $1.983 million (104%) to $3.885 million in
the three months ended September 30, 2008 compared to $1.9 million in the three
months ended September 30, 2007. The principal components of the increase
include:
- Operating Costs at Welding Metallurgy increased by $148,000 (137%)
to $256,000. We did not own Welding Metallurgy for the entire three
month period ended September 30, 2007.
- Operating Costs at AIM increased by $74,000 (7%) to $1,069,000 from
$995,000 for the three months ended September 30, 2008 and 2007
respectively.
- Operating Costs at AIRI increased by $1,761,000 (220%) to $2,560,000
from $799,000 for the three months ended September 30, 2008 and 2007
respectively. This increase is attributable to approximately $1.1
million of pre-acquisition costs that were expensed during the
quarter based on the Company's decision to cease its efforts to
acquire Blair-HSM, $268 thousand for a charge related to a
consulting agreement with the former Chairman of the Board as part
of his severance agreement and $150,000 for consultants required by
our primary lender PNC Bank in the review and development of new
covenants.
Interest and financing costs consist of interest paid and accrued as well
as amortization of debt discount resulting from recording debt obligations at
fair value. Interest and financing costs increased by approximately $382
thousand (87%) to approximately $823 thousand in the three months ended
September 30, 2008 compared $441 thousand for the three months ended September
30, 2007. The principal reason for the increase is the higher debt levels
(approximately $24.8 million) associated with our acquisitions of Sigma and
Welding in the second and third quarters of 2007 and the Junior Subordinated
Notes we issued in June 2008 and September 2008. This increase was partially
offset by lower interest rates on our bank and term debt where the interest rate
declined to approximately 7.25% at September 30, 2008 compared to approximately
7.5% at September 30, 2007. If interest rates continue to decline as they have
recently it would have a positive impact our interest expense as compared to
2007, but that benefit would be largely or totally offset by our increased
borrowings.
As a result of the above factors, loss from continuing operations
increased by approximately $3,758,000 (735%) to approximately $3,247,000 in the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007.
21
The benefit for income taxes was approximately $659 thousand in the three
months ended September 30, 2008 compared to a provision of approximately $206
thousand in the three months ended September 30, 2007. The Company computes its
income tax provision or benefit according to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income taxes" which uses the asset and
liability approach to financial reporting for income taxes. The substantial
difference from income taxes expected at the statutory rate and actual income
tax provisions results primarily from expenses which will never be deductable
due to basis differences at the acquired companies and stock compensation and
other charges that are not deductable.
As a result of the factors described above, net loss from continuing
operations increased by approximately $2.893 million to a net loss of
approximately $2.588 million in the three months ended September 30, 2008
compared to net income of approximately $305 thousand in the three months ended
September 30, 2007.
The dividend attributable to our Series B Preferred Stock during the three
months ended September 30, 2008 increased our net loss attributable to common
stockholders for the quarter by approximately $157,000 to a loss of $9,019,000.
Nine months ended September 30, 2008 compared with nine months ended
September 30, 2007 (as restated)
Consolidated net sales for the nine months ended September 30, 2008
increased by approximately $2.2 million (9%) over the nine months ended
September 30, 2007. Revenues at AIM decreased slightly to $ 24.4 million for the
nine months ended September 2008 from $ 24.6 million for the nine months ended
September 2007. Revenues at Welding totaled $ 2.9 million for the nine months
ended September 2008 as compared to only $512 thousand for the nine months ended
September 2007. Welding was acquired on August 26, 2007 and as such only
one-month of revenue is included in the 2007 results.
Nine Months Ended September 30, 2008
Net Sales 2008 2007 Increase/Decrease %
- ------------------ ---------------- ----------------- -----------------------
AIM $ 24,443,000 24,634,000 (191,000) -1%
Welding 2,899,000 512,000 2,387,000 466%
---------------- ----------------- -----------------------
Consolidated $ 27,342,000 $ 25,146,000 $ 2,196,000 9%
---------------- ----------------- -----------------------
One customer accounted for approximately 51% and 61% of net sales for the
nine months ended September 30, 2008 and 2007, respectively. Sales to that
customer are subject to General Ordering Agreements which extend through 2013.
Amounts receivable from this customer at September 30, 2008 and 2007 were
approximately $999,000 or 26% of net accounts receivable, and $1,497,000 or 29%
of net accounts receivable, respectively.
Consolidated gross profit for the nine months ended September 30, 2008
increased by approximately $343 thousand or 5% to approximately $ 7.074 million
for the nine months ended September 2008, as compared to gross profit of $ 6.731
million for the nine months ended September 2007. Gross profit at AIM declined
by approximately $ 756 thousand or (12%) to $ 5.740 million for the nine months
ended September 2008, as compared to $ 6.496 million (as restated) for the prior
year. Gross profit at Welding increased by $ 1.099 million for the nine months
ended September 2008. This increase reflects the inclusion of only month of
results for the nine months ended September 2007:
Nine months ended September 30,
Gross profit 2008 2007 Increase/Decrease %
- ------------------ ---------------- ----------------- -----------------------
AIM $ 5,740,000 6,496,000 (756,000) -12%
Welding 1,334,000 235,000 1,099,000 468%
---------------- ----------------- -----------------------
Consolidated $ 7,074,000 $ 6,731,000 $ 343,000 5%
---------------- ----------------- -----------------------
Management believes that the decline in gross profit for the period
results from interruptions in the delivery of raw materials and parts arising
from the Company's liquidity constraints experienced during the third quarter of
2008, Additionally, management believes that at AIM significant operational
issues revolving around the capturing of direct labor to WIP exist and have been
a significant cause for the decline in gross margin and efforts will continue to
develop a plan of action and implementation of this plan to resolve these issues
in the most expedient manner possible. Welding Metallurgy continues to enjoy
significant gross margins and has begun the implementation of Vantage ERP system
to have a clearer picture of available processes and cost savings that can be
driven from the manufacturing process.
22
Operating costs increased by $3.630 million (77%) to $8.457 million in the nine
months ended September 30, 2008 compared to $4.727 million in the nine months
ended September 30, 2007. The principal components of the increase include the
following:
- Operating Costs at Welding Metallurgy increased by $714,000 (661%)
to $822,000. We did not own Welding Metallurgy for the entire nine
month period ended September 30, 2007.
- Operating Costs at AIM increased by $426,000 (17%) to $2,988,000
from $2,562,000 for the nine months ended September 30, 2008 and
2007 respectively.
- Operating Costs at AIRI increased by $2,498,000 (121%) to $4,554,000
from $2,056,000 for the nine months ended September 30, 2008 and
2007 respectively. This increase is attributable to approximately
$1.1 million of pre-acquisition costs that were expensed during the
quarter based on the Company's decision to cease its efforts to
acquire Blair-HSM, $268 thousand for the expensing of severance to
the former Chairman of the Board, $150,000 for consultants required
by our primary lender PNC Bank in the review and development of new
covenants, and additional professional fees of approximately
$300,000 for legal and accounting services.
Interest and financing costs consist of interest paid and accrued as well
as amortization of debt discount resulting from recording debt obligations at
fair value. Interest and financing costs increased by approximately $873
thousand (105%) to approximately $1,699 thousand in the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007. The
principal reason for the increase is the higher debt levels (approximately $24.8
million) associated with our acquisitions of Sigma and Welding in the second and
third quarters of 2007 and the junior subordinated notes we issued in June 2008
and September 2008. This increase was partially offset by lower interest rates
on our bank and term debt which were approximately 7.25% at September 30, 2008
as compared to approximately 7.5% at September 30, 2007. If interest rates
continue to decline it would have a positive impact on our interest expense as
compared to 2007, but that benefit would be largely or totally offset by our
increased borrowings.
As a result of the above factors, loss from continuing operations
increased by approximately $4,116,000 (356%) to approximately $2,960,000 in the
nine months ended September 30, 2008 compared to income of $1,156,000 for the
nine months ended September 30, 2007.
The benefit for income taxes was approximately $666 thousand in the nine
months ended September 30, 2008 compared to a provision of approximately $720
thousand in the nine months ended September 30, 2007. The Company computes its
income tax provision or benefit according to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income taxes" which uses the asset and
liability approach to financial reporting for income taxes. The substantial
difference from income taxes expected at the statutory rate and actual income
tax provisions and benefits results primarily from state income tax and
valuation allowance, and expenses which will never be deductable due to basis
differences at the acquired company (Sigma) and stock compensation and other
charges that are not deductable.
As a result of the factors described above, net loss from continuing
operations increased by approximately $2.73 million to a net loss of
approximately $2.294 million in the nine months ended September 30, 2008
compared to net income of approximately $436 million in the nine months ended
September 30, 2007.
In April and May of 2007, we issued shares of our Series B Preferred
Stock. The dividend attributable to our Series B Preferred Stock during the nine
months ended September 30, 2008 increased our net loss attributable to common
stockholders for the quarter by approximately $456,000 to a loss of $9,350,000.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Liquidity and Capital Resources
Liquidity Concerns. The Company continues to suffer as a result of its
extreme lack of liquidity. The Company is highly leveraged and will need to
generate substantial cash flow from operations to satisfy its debt service
obligations. As of September 30, 2008, the Company's indebtedness was
approximately $25,433,000, including approximately $15,100,000 payable to its
bank lenders secured by substantially all its assets. The Company was in default
of certain covenants in the agreements with its bank lenders as of the end of
September and October 2008. The Company has been attempting to negotiate new
23
covenants with its bank lenders. Nevertheless, as long as the Company remains in
default of its covenants, its bank lenders could elect to cease lending money to
the Company. Because the Company is required to maintain a "lock box" account
with its bank lenders into which substantially all of the Company's cash
receipts are paid, if its bank lenders were to cease lending, the Company would
lack the funds to continue its operations. The Company received gross proceeds
from the sale of its junior subordinated notes and equity securities of
$4,905,000 between May and the end of September 2008, and of approximately
$630,000 during October 2008. The receipt of these gross proceeds did not
alleviate the Company's liquidity crisis and the Company's bank lenders elected
to reduce availability by $900,000 upon receipt of these funds. The Company's
bank debt matures in the fourth quarter of 2009. There can be no assurance that
the Company's lenders will agree to extend their loans and, in the absence of
significant improvement in the Company's results of operations, it is not likely
that the Company will be able to refinance its bank indebtedness with another
lender. To alleviate its liquidity difficulties, the Company is seeking to sell
certain of the assets and the operations of its Sigma business and extend the
payment terms of its indebtedness to the former owners of Welding. The Company
also has ceased its efforts to acquire Blair-HSM. In addition, due to its
liquidity difficulties, the Company has issued, and will likely continue to
issue, additional shares of its Series B Preferred Stock in lieu of payment of
cash dividends on its Series B Preferred Stock, which will dilute the equity
ownership and voting power of holders of its Common Stock. Nevertheless, the
ability of the Company to maintain its current level of operations is subject to
the cooperation of its bank lenders and other parties which hold its notes. If
the Company's bank lenders were to reduce the amounts loaned to the Company, the
Company would have no choice other than to reduce it operations and seek to
liquidate certain assets. Any forced liquidation of assets would likely yield
less than the amounts at which such assets are valued by the Company. See the
discussion of "Risk Factors" under Item 1A of Part of this report.
Our measures of liquidity include the following:
September 30, December 31,
2008 2007 Change
(unaudited)
Cash -- -- --
Working Capital 4,636,000 10,950,000 (6,314,000)
Revolving Loan Balance 10,641,000 11,332,000 (691,000)
We continue to experience liquidity constraints due to:
o Costs associated with our acquired businesses which have not
yet attained anticipated operating results, including Sigma
which has been discontinued,
o Costs associated with an inventory build-up in anticipation of
sales,
o Costs incurred in connection with our efforts to acquire
Blair-HSM, which ceased in September 2008, and
o Inability to timely produce and ship products at AIR as a
result of disruptions due to delays in receiving inventory.
With the cessation of efforts to acquire Blair-HSM as well as the
disposition of Sigma, we have now refocused our efforts on managing our core
business at AIM and at Welding. We have begun initiatives to:
1) Reduce General and Administrative costs - beginning in June 2008, we
implemented a cost reduction program designed to reduce and provide
enhanced control of general and administrative expenses. These
initiatives have included layoffs of personnel and elimination of
management positions and a reduction in management compensation.
2) Enhance liquidity - We have sold an additional $ 2.5 million in
junior subordinated notes and preferred shares to increase our
liquidity.
3) Accelerate production - our liquidity issues have in part resulted
in delays in our receiving raw materials and component parts, thus
delaying our shipments to customers. With the recent increase in
available funds we are accelerating the completion and shipment of
product to customers.
24
Our credit facility with PNC requires that all cash receipts (except those
at Welding) be swept on a daily basis to our loan accounts reducing the loan
balance. Therefore, at any point in time our book cash balances are zero.
The revolving loan portion of the credit facility with PNC is for a
maximum of $14,000,000 subject to periodic, usually monthly, calculations of
borrowing availability under a borrowing base calculation. Daily cash
collections of accounts receivable reduce the loan balance by 15% of the amount
collected - the difference between the cash actually collected and the 85%
previously billed and against which the bank advanced funds - and daily
shipments to customers increase availability by 85% of the amount billed.
We incurred debt financing and issued the preferred stock indicated below
to support our acquisitions of Sigma and Welding:
September 30,
2008 December 31,
(unaudited) 2007
------------- -------------
Note payable to former AIM shareholder $ 481,000 $ 625,000
Note payable to former Sigma shareholders 638,000 1,216,000
Note payable to former Welding shareholders 2,000,000 2,000,000
Additional purchase price payable to Welding shareholders 42,000 190,000
------------- -------------
Total 3,161,000 4,031,000
Less: discount for imputed interest on Welding notes -- (92,000)
------------- -------------
Notes payable to former shareholders $ 3,161,000 $ 3,939,000
============= =============
To supplement our working capital, in June 2008 we sold $2,950,000
principal amount of our junior subordinated notes (the "Old Notes"), together
with 983,324 shares of our common stock, to accredited investors for total cash
consideration of $2,950,000 in a private placement. When the junior subordinated
notes were issued, SCCF requested and PNC blocked our ability to utilize certain
collateral in the amount of $ 900 thousand. Because of the nature of the line of
credit, it is classified with current liabilities. This blocking had the effect
of reducing the availability of cash resulting from the issuance of the junior
subordinated notes.
In September 2008, to address our liquidity concerns and to provide
additional working capital, we sold an additional $1,955,000 of principal amount
of junior subordinated notes, (the "New Notes") together with 156,400 shares of
our Series B Preferred Stock, in a private placement for a total purchase price
of $1,955,000. The New Notes, which are payable on May 31, 2010, or earlier upon
completion of one or a series of financings resulting in aggregate gross
proceeds of at least $10 million, bear interest at the rate of 1% per month (or
12% per annum).
Subsequent to September 30, we sold an additional $630,000 principal
amount of New Notes, together with 50,400 shares of Series B Preferred Stock for
a total purchase price of $ 630,000. An aggregate of $2,585,000 principal amount
of our junior subordinated notes due 2010 and 206,800 shares of our Series B
Preferred Stock were issued in the offering. In addition, in October 2008,
holders of an aggregate of $2,900,000 principal amount of our outstanding Old
Notes exchanged their Old Notes for an equal principal amount of New Notes, plus
232,000 shares of Series B Preferred Stock. The terms of the New Notes and the
Old Notes are identical, except that the rate of interest on the New Notes is 1%
per month (12% per year).
25
A summary of our contractual obligations as of September 30, 2008 is
included in the table below:
Payments Due By Period
-----------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year* 1-3 Years 3-5 Years 5 Years
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Long-term debt and capitalized lease obligations $24,843,000 $18,287,000 $ 6,556,000 $ -- $ --
Operating lease obligations .................... 18,250,000 1,060,000 3,300,000 3,500,000 10,390,000
----------- ----------- ----------- ----------- -----------
TOTAL .......................................... $43,093,000 $19,347,000 $ 9,856,000 $ 3,500,000 $10,390,000
=========== =========== =========== =========== ===========
* Includes revolving and term loans that are due in 2009 but the loan agreements
has a "subjective acceleration clause" that permits the lender to demand payment
at any time (see Note 5 to condensed consolidated financial statements).
In April 2008, we prepaid approximately $0.25 million of the Sigma seller
notes. As a result of our increased debt described above, interest expense has
risen to approximately $823 thousand and approximately $1.699 million in the
three and nine months ended September 30, 2008, respectively, compared to
approximately $441 thousand and approximately $826 thousand in the three and
nine months ended September 30, 2007.
During 2007, and continuing in the first nine months of 2008, we devoted
substantial funds (approximately $1.5 million in 2007 and 810 thousands in 2008)
to engineering costs and manpower as part of an ongoing effort to participate in
several significant long-term, higher margin projects, including the production
of subassemblies for the Joint Strike Fighter ("JSF") landing gear and the A380
drag strut assemblies in the future.
During the nine months ending September 2008 inventories increased for the
group by approximately $3.585 million (20%). This increase resulted in part from
the use of our production capacity at AIM to manufacture products whose delivery
dates have been pushed back and a shift in the nature of production at Welding.
The inventories per entity were as follows:
September 30, December 31,
Inventory 2008 2007 Increase %
- ------------------ ----------------- ----------------- ----------------------
AIM ........ $ 20,624,000 $ 17,634,000 $ 2,990,000 17%
Welding .... 931,000 606,000 325,000 54%
Consolidated $ 21,555,000 $ 18,240,000 $ 3,315,000 18%
Inventory owned by Sigma is classified in assets held for sale on the
accompanying condensed consolidated balance sheet. At September 30, 2008 and
December 31, 2007 the value of the inventory owned by Sigma was $2,742,000 and
$3,580,000, respectively.
The increase in our inventory levels, coupled with our decision to fund
engineering and other costs to secure future higher margin projects and the
costs associated with our efforts to acquire Blair-HSM have strained our working
capital negatively impacting our liquidity and consequently our ability to work
on all of the projects in-house.
The debt service associated with the junior subordinated notes and our
other debt obligations is substantial and will impair our ability to operate our
business. Further, until our liquidity improves significantly we will continue
to pay the 7% dividend on the outstanding shares of Series B Preferred Stock in
additional shares of Series B Preferred Stock rather than cash. Issuing
additional shares of Series B Preferred Stock will dilute the equity and voting
interests of holders of our common stock.
In order to enhance our liquidity we are undertaking several initiatives.
In an effort to reduce our inventory levels at AIM we are focusing on projects
with immediate and confirmed delivery dates, and we have implemented a cost
reduction programs related to general and administrative expenses. We have been
in discussions with the former shareholders of Welding to extend and reduce the
amount of the principal payments of the promissory note issued in that
acquisition.
26
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's senior
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act") designed to
ensure that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Our then Chief Financial Officer's employment with the Company was
terminated in September 2008.
The Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and our
controller who has been performing the functions of a chief financial officer
until a successor is named, as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and our controller have
concluded that our disclosure controls and procedures were not effective as of
the end of the period covered by this Report.
Certain of the deficiencies that exist in our disclosure controls and
procedures as of September 30, 2008, are those that were initially noted in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Specifically, as of September 30, 2008, there remained certain weaknesses in our
staffing and our internal controls over financial reporting that have prevented
us from accurately processing our accounts so as to be able to report our
results on a timely basis. Moreover, management believes that as a result of our
weaknesses, there exist deficiencies at AIM in measuring labor costs and
properly allocating such costs between work-in-progress (inventory) and current
cost of sales. Management is in the process of developing and implementing a
plan to resolve these issues in the most expedient manner possible. Welding
Metallurgies continues to enjoy significant gross margins and has begun the
implementation of our Vantage ERP system to have a clearer picture of available
processes and cost savings that can be driven from the manufacturing process.
(b) Changes in Internal Control Over Financial Reporting. We initially
determined that we had material weaknesses in our internal controls over
financial reporting as of December 31, 2007 in that we had not yet sufficiently
integrated and upgraded the reporting systems at our operating subsidiaries and
that we had insufficient staffing in our accounting department. These weaknesses
have continued to manifest themselves in deficiencies in our reporting systems.
To remediate these weaknesses, during the three months ended September 30, 2008
we (a) increased the attention to the reporting of our operating subsidiaries
and began the process of installing a centralized reporting and control system
and Welding (b) recruited an additional member of the Controller's group to
assist us in the timely preparation of our filings under the Exchange Act. Our
remediation efforts are continuing and will continue until such time as we are
timely and accurately reporting our financial results. Other than these changes,
there have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) under the Exchange Act) during our
most recently completed fiscal quarter which is the subject of this report that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
There are inherent limitations in any system of internal control. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that its objectives are met. Further, the
design of a control system must consider that resources are not unlimited and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgment in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls.
27
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company has ceased of its efforts to acquire HSM- Blair. On November
3, 2008, the Company was served with an Information Request and Restraining
Notice by Blair as part of Blair's efforts to collect on the $350,000 Confession
of Judgment issued by the Company to secure its agreement to reimburse the
shareholders of HSM - Blair for certain expenses incurred in connection with the
acquisition. The Company had previously accrued the $350,000 for this liability
at September 30, 2008, which amount is included in general and administrative
expenses in the accompanying Condensed Consolidated Statement of Operations. The
Company and the principals of Blair have reached an agreement in principle under
which the Company will satisfy $100,000 of this obligation through the issuance
of its Series B Preferred Stock having a face value of $100,000 and to pay the
balance over six months.
Item 1A. Risk Factors
The purchase of our common stock involves a high degree of risk. Before
you invest you should carefully consider the risks and uncertainties described
in our Annual Report on Form 10-K for the fiscal year ended December 31,2007
(the "2007 Form 10-K"), and our quarterly reports on Form 10-Q for the quarters
ended March 31, 2008 and June 30, 2008 under the caption "Risk Factors," the
risk factors described below, our Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 2 of Part I of
this report, our condensed consolidated financial statements and related notes
included in Item 1 of Part I of this report and our consolidated financial
statements and related notes, our Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other information in our
2007 Form 10-K. Readers should carefully review those risks, as well as
additional risks described in other documents we file from time to time with the
Securities and Exchange Commission.
If any of the events described below or in the portions of this report, or
our 2007 Form 10-K or Form 10-Qs referred to above actually occurs, our
financial condition or operating results may be materially and adversely
affected, our business may be severely impaired, and the price of our common
stock may decline, perhaps significantly.
Risks Related to Our Indebtedness
Repayment of our debt is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct our operations.
Accordingly, repayment of our indebtedness is dependent on the generation of
cash flow by our subsidiaries and their ability to make such cash available to
us, by dividend, debt repayment or otherwise. Unless they are guarantors of the
indebtedness, our subsidiaries do not have any obligation to pay amounts due on
our indebtedness or to make funds available for that purpose. Our subsidiaries
may not be able to, or may not be permitted to, make distributions to enable us
to make payments in respect of our indebtedness. Each subsidiary is a distinct
legal entity and, under certain circumstances, legal and contractual
restrictions may limit our ability to obtain cash from our subsidiaries. In the
event that we do not receive distributions from our subsidiaries, we may be
unable to make required principal and interest payments on our indebtedness
Our substantial level of indebtedness could materially adversely affect our
ability to generate sufficient cash to fulfill our obligations under our
existing indebtedness, our ability to react to changes in our business and our
ability to incur additional indebtedness to fund future needs.
We are highly leveraged. As of September 30, 2008, we had total
indebtedness of approximately $25,433,000, including $15,100,000 payable to our
bank lenders secured by substantially all our assets. Our interest expense for
the three months ended September 30, 2008 was $823,000.
Our substantial level of indebtedness increases the possibility that we
may be unable to generate cash sufficient to pay, when due, the principal of,
interest on or other amounts due in respect of our indebtedness. Our substantial
indebtedness, combined with our other financial obligations and contractual
commitments, could have important consequences for our creditors,. For example,
it could:
28
o make it more difficult for us to satisfy our obligations with
respect to our indebtedness and any failure to comply with the
obligations under any of our debt instruments, including restrictive
covenants, could result in an event of default under the agreements
governing such other indebtedness;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing funds
available for working capital, capital expenditures, acquisitions
and other purposes;
o increase our vulnerability to adverse economic and industry
conditions, which could place us at a competitive disadvantage
compared to our competitors that have relatively less indebtedness;
o limit our flexibility in planning for, or reacting to, changes in
our business and the aerospace industry; operate;
o limit our junior subordinated note holders' rights to receive
payments under the notes if secured creditors have not been paid;
and
o limit our ability to borrow additional funds, or to dispose of
assets to raise funds, if needed, for working capital, capital
expenditures, acquisitions, and other corporate purposes.
Restrictions imposed by our senior secured credit facilities and our other
outstanding indebtedness may limit our ability to operate our business and to
finance our future operations or capital needs or to engage in other business
activities.
The terms of our senior secured credit facilities restrict us and our
subsidiaries from engaging in specified types of transactions. These covenants
restrict our and our subsidiaries' ability to:
o incur additional indebtedness;
o pay dividends on our capital stock or redeem, repurchase or retire
our capital stock or indebtedness;
o make investments, loans, advances and acquisitions;
o create restrictions on the payment of dividends or other amounts to
us from our subsidiaries;
o sell assets, including capital stock of our subsidiaries;
o consolidate or merge;
o create liens; and
o enter into sale and lease-back transactions.
In the event of a default under any of our senior secured credit
facilities, the lenders could elect to declare all amounts outstanding under the
agreements governing our senior secured credit facilities to be immediately due
and payable. If the indebtedness under our senior secured credit facilities were
to be accelerated, our assets may not be sufficient to repay such indebtedness
in full.
Our lender maintains a lock box whereby our receipts are deposited
directly into an account controlled by the lender.
Our lender maintains a lock box whereby our receipts are deposited
directly into an account controlled by the lender. Consequently, our ability to
direct our funds to parties other than our lender is compromised.
We may not be able to generate sufficient cash to service all of our
indebtedness and may be forced to take other actions to satisfy our obligations
under our indebtedness, which may not be successful.
29
Our ability to make scheduled payments on or to refinance our debt
obligations depends on our financial condition and operating performance, which
is subject to prevailing economic and competitive conditions and to certain
financial, business and other factors beyond our control. We may not be able to
maintain a level of cash flows from operating activities sufficient to permit us
to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay investments and capital
expenditures or to sell assets, seek additional capital or restructure or
refinance our indebtedness. Our ability to restructure or refinance our debt
will depend on the condition of the capital markets and our financial condition
at such time. Any refinancing of our debt could be at higher interest rates and
may require us to comply with more onerous covenants, which could further
restrict our business operations. The terms of existing or future debt
instruments may restrict us from adopting some of these alternatives. In
addition, any failure to make payments of interest and principal on our
outstanding indebtedness on a timely basis would likely result in a reduction of
our credit rating, which could harm our ability to incur additional
indebtedness. In the absence of such operating results and resources, we could
face substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. Our senior
secured credit facilities restrict our ability to dispose of assets and use the
proceeds from the disposition. We may not be able to consummate those
dispositions or to obtain the proceeds that we could realize from them and these
proceeds may not be adequate to meet any debt service obligations then due.
These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations.
Risks Related to Our Issuance of Series B Preferred Stock in Lieu of Payment of
Cash Dividends on Series B Preferred Stock
The issuance of shares of our Series B Preferred Stock in lieu of payment of
cash dividends on our Series B Preferred Stock will reduce the equity interest
and voting power of our common stockholders and reduce the amount available for
distribution to holders of our common stock, if any, upon our liquidation and
dissolution.
Due to liquidity constraints, we have issued and expect to continue to
issue shares of our Series B Preferred Stock in lieu of payment of cash
dividends on our Series B Preferred Stock. To date we have issued an aggregate
of 86,000 shares of Series B Preferred Stock in lieu of payment of cash
dividends, which shares are convertible into an aggregate of 3,116,000 shares of
our common stock. The issuance of the shares of Series B Preferred Stock in lieu
of payment of cash dividends will dilute the equity interest of our common
stockholders upon conversion of the Series B Preferred Stock. Since holders of
Series B Preferred Stock vote together with holders of our common stock on
matters presented to stockholders for approval not requiring a class vote, with
holders of Series B Preferred Stock having a number of votes equal to the number
of whole shares of common stock they may acquire upon conversion of the Series B
Preferred Stock as of the record date for determining stockholders entitled to
vote on those matters, the number and percentage of total votes which may be
cast by holders of Series B Preferred Stock with respect to those matters will
increase and thereby dilute the voting power of the holders of our common stock.
In addition, the issuance of shares of Series B Preferred Stock in lieu of cash
dividends on the Series B Preferred Stock will increase the total liquidation
preference of the holders of the Series B Preferred Stock, thereby decreasing
amounts available for distribution to common stockholders, if any, upon a
liquidation and dissolution of our company.
As a result of our recent liquidity difficulties, we have been engaged in
negotiations with our bank lenders to relax and waive the terms of certain
restrictive covenants in the agreements relating to our secured credit facility
generally and specifically in connection with the sale of the business
operations and assets of our Sigma Metals subsidiary. We cannot assure you that
we will be successful in our negotiations with our bank lenders or that they
will not seek to accelerate payment of the substantial indebtedness under our
credit facilities.
30
Item 5. Other Information
On August 25, 2008, General Ira Hunt resigned from the Board of Directors.
On September 22, 2008, Louis Giusto, our Vice-Chairman and Chief Financial
Officer, resigned from the Board of Directors. Subsequently, Mr. Giusto's
employment as CFO of the Company was terminated .
On September 22, 2008, in connection with the offering of the private
placement of the New Notes and shares of Series B Preferred Stock, the Company
granted Taglich Brothers, Inc., as placement agent,, the right to designate
three members of the Board of Directors. Taglich Brothers, Inc. has designated,
and the Board has appointed, Michael N.Taglich, Robert F. Taglich and Robert
Schroeder as directors. Michael N. Taglich has been appointed Chairman of the
Board.
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 19, 2008
AIR INDUSTRIES GROUP INC.
By: /s/ Peter D. Rettaliata
-------------------------------------
Peter D. Rettaliata
President and Chief Executive Officer
32
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Peter D. Rettaliata, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Air Industries
Group, Inc. (the "Company");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Designed such internal controls over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 19, 2008
/s/ Peter D. Rettaliata
--------------------------------------------
Name: Peter D. Rettaliata
Title: Principal Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Glassman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Air Industries
Group, Inc. (the "Company");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal controls over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 19,2008
/s/ Scott Glassman
--------------------------------------------
Name: Scott Glassman
Title: Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the President and Chief Executive Officer of Air
Industries Group, Inc. (the "Company"), does hereby certify under the standards
set forth and solely for the purposes of 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form
10-Q of the Company for the quarter ended September 30, 2008 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and information contained in that Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 19, 2008
/s/ Peter D. Rettaliata
-------------------------------------
Peter D. Rettaliata
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the chief financial officer of Air Industries Group, Inc.
(the "Company"), does hereby certify under the standards set forth and solely
for the purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of the
Company for the quarter s ended September 30, 2008fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and information contained in that Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 19, 2008
/s/ Scott Glassman
-------------------------------------
Scott Glassman
Controller (principal financial officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.