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EX-21 - M LINE HOLDINGS INC | v162591_ex21.htm |
EX-32.2 - M LINE HOLDINGS INC | v162591_ex32-2.htm |
EX-31.1 - M LINE HOLDINGS INC | v162591_ex31-1.htm |
EX-32.1 - M LINE HOLDINGS INC | v162591_ex32-1.htm |
EX-31.2 - M LINE HOLDINGS INC | v162591_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended June 30, 2009
OR
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from_____________ to _____________.
Commission
file number 000-53265
M
LINE HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of
incorporation
or organization)
|
88-0375818
(I.R.S.
Employer
Identification
No.)
|
2672
Dow Avenue
Tustin,
CA
(Address
of principal executive offices)
|
92780
(Zip
Code)
|
Registrant’s
telephone number, including area code (714)
630-6253
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
None
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001
(Title of
class)
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act. Yes x No
¨
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ¨ No
x
Aggregate market value of the voting
stock held by non-affiliates: $2,790,096 as based on last reported sales price
of such stock. The voting stock held by non-affiliates on that date
consisted of 13,950,480 shares of common stock.
Applicable
Only to Registrants Involved in Bankruptcy Proceedings During the Preceding
Five Years:
Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections
12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes o No
o
Indicate the number of shares
outstanding of each of the registrant’s classes of common stock, as of the
latest practicable date. As of October 7, 2009, there were 30,861,956
shares of common stock, par value $0.001, issued and outstanding.
Documents
Incorporated by Reference
List hereunder the following documents
if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3) Any prospectus
filed pursuant to rule 424(b) or (c) of the Securities Act of
1933. The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal year
ended December 24, 1980). None.
M
Line Holdings, Inc.
TABLE OF
CONTENTS
PART
I
|
|
ITEM 1
– BUSINESS
|
1
|
ITEM 1B – UNRESOLVED
STAFF COMMENTS
|
20
|
ITEM 2 - PROPERTIES
|
20
|
ITEM 3 - LEGAL PROCEEDINGS
|
21
|
ITEM 4 – SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
24
|
PART II
|
|
ITEM 5 – MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
25
|
ITEM 6 – SELECTED
FINANCIAL DATA
|
26
|
ITEM 7 – MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
26
|
ITEM 7A –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
38
|
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
38
|
ITEM 9 – CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|
38
|
ITEM 9A – CONTROLS
AND PROCEDURES
|
|
ITEM 9A(T) –
CONTROLS AND
PROCEDURES
|
39
|
ITEM 9B – OTHER
INFORMATION
|
41
|
PART
III
|
|
ITEM 10 –
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
|
41
|
ITEM 11 – EXECUTIVE
COMPENSATION
|
43
|
ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
48
|
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
49
|
ITEM 14 – PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
51
|
PART IV
|
|
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
52
|
i
PART
I
Explanatory
Note
This
Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the “Exchange Act”). These statements are
based on management’s beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading “Management's Discussion and Analysis of
Financial Condition or Plan of Operation.” Forward-looking statements also
include statements in which words such as “expect,”
“anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or
similar expressions are used.
Forward-looking
statements are not guarantees of future performance. They involve
risks, uncertainties and assumptions. The Company's future results
and shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue
reliance on any forward-looking statements.
ITEM
1 – BUSINESS
Corporate
History
M Line
Holdings, Inc. (“We,” “M Line” or “Company”) was incorporated in Nevada on
September 24, 1997, under the name Gourmet Gifts, Inc. Prior to December 11,
2001, we were engaged in the business of catalogue retail gifts. At the time,
our principal business activity entailed the packaging, sale and delivery of
seasonal gourmet food and beverage items. However, due to difficulty in raising
additional working capital to execute our business plan, we ceased operations,
and subsequently completed a reverse merger with E.M. Tool Company, Inc., a
California corporation d.b.a. Elite Machine Tool Company (“Elite
Machine”).
Acquisition of Elite Machine
and Reverse Acquisition Accounting
On
December 11, 2001, we finalized an agreement to acquire 100% of the issued and
outstanding capital stock of Elite Machine. Immediately prior to the merger, we
had 100,000,000 shares authorized, of which 6,768,000 shares were outstanding.
Pursuant to the merger, all of the outstanding shares of Elite Machine,
aggregating 21,262 shares, were exchanged for shares of our common stock on a 1
to 1,274 basis or into 27,072,000 (net of 600,000 shares subsequently cancelled)
shares of our common stock leaving a total of 33,240,000 shares of common stock
issued and outstanding after the merger. Immediately after the merger, our
previous officers and directors resigned and the executive officers and
directors of Elite Machine were elected and appointed to such positions, thereby
effecting a change of control.
Due to
the change in voting control and change in senior management in Gateway as a
result of the merger, the transaction was recorded as a “reverse-merger” whereby
Elite Machine was considered to be the acquirer for accounting purposes. At the
closing of the reverse merger, Elite Machine became our wholly-owned subsidiary
and we changed our corporate name to Gateway International Holdings, Inc.,
effective January 28, 2002.
Gateway
International Holdings, Inc. changed its name to M Line Holdings, Inc. effective
March 25,
2009.
After the
merger, through Elite Machine, we were a company engaged in the acquisition,
refurbishment, distribution and sales of pre-owned computer numerically
controlled (“CNC”) machine tools to manufacturing customers across the United
States of America. This was our sole business from this point until we acquired
the additional businesses listed herein.
1
Acquisition of Eran
Engineering, Inc.
In
October, 2003, pursuant to a Stock Purchase Agreement, dated June 17, 2003, we
acquired all the issued and outstanding shares of Eran Engineering, a California
corporation, from its two shareholders, Hans B. Thallmayer and Alice Thallmayer,
for an aggregate purchase price of $1,250,000. In addition to a cash payment of
$650,000, which was credited to the purchase price, we executed a promissory
note in favor of the sellers in the principal amount of $600,000, payable in
three equal annual installments of $200,000 and accruing simple interest at the
rate of six percent (6%) per annum. Our obligation under the promissory note was
secured by the pledge by Lawrence A. Consalvi, a former Director and former
President and Chief Executive Officer, and Joseph T.W. Gledhill, a former
Vice President and Director, of a security interest in certain shares of our
common stock worth approximately $4,285,716 as of the date of the pledge.
Concurrently with the closing of the acquisition, Eran Engineering purchased
from R & H Investments, a partnership owned by the two selling shareholders
of Eran Engineering, the building in which Eran Engineering operates its
business. The purchase price for the building was $1,250,000, and was paid as
follows:
|
·
|
$650,000
in cash and;
|
|
·
|
A
promissory note in the principal amount of $600,000, bearing simple
interest at the rate of 6% per
annum.
|
The cash
portion of the purchase price paid by us for Eran Engineering and the building
was financed pursuant to a term loan from Financial Federal Credit (“FFC”), in
the principal amount of $1,300,000. The loan from FFC was primarily secured by a
deed of trust on the building acquired by Eran Engineering and a security
interest in all the equipment owned by Eran Engineering. This note
has been paid in full.
Further,
in connection with the acquisition, Eran Engineering entered into employment
agreements with Erich Thallmayer to serve as the President and Chief Executive
Officer of Eran Engineering at an annual base salary of $105,600 and with Hans
Thallmayer to serve as its Operating Manager at an annual base salary of
$90,000. Our former Director and Vice President, Joseph T.W. Gledhill,
subsequently replaced Erich Thallmayer as the company's President and Chief
Executive Officer. Hans Thallmayer is no longer employed as the company's
Operating Manager. We have no obligation to either Erich Thallmayer or Hans
Thallmayer in connection with their past employment agreements.
As
discussed below, Eran Engineering manufactures and assembles specialized,
precision components used in the commercial aviation, medical, aerospace and
defense industries. Joseph T.W. Gledhill, a former Director and Executive Vice
President of the Company, currently serves as the President of Eran
Engineering.
Acquisition of CNC Sales,
Inc.
All
American CNC Sales, Inc. (“All American”) is a California corporation and was
incorporated on November 4, 1993. All American was founded by our former Chief
Executive Officer, Timothy D. Consalvi, and his wife. In October, 2004, pursuant
to a share exchange agreement, we acquired all the outstanding shares of All
American from Mr. Consalvi and his wife in exchange for 1,000,000 shares of our
common stock. On December 21, 2005, we issued an additional 500,000 shares to
the original shareholders pursuant to the earn-out provisions of the share
exchange agreement, which provided that if All American’s gross profit
exceeded the stated goal of $300,000 for each of fiscal year 2005 and fiscal
year 2006, we would issue to the shareholders an aggregate of 250,000 shares for
each year such target was reached. During the year ended September
2005, shortly after the first target measurement period, for which period the
gross profit threshold was achieved for the issuance of 250,000 shares, our
Board of Directors agreed to issue the second traunch of 250,000 shares even
though the gross profit threshold had not been achieved.
2
In
connection with the acquisition, we entered into an employment agreement with
Timothy Consalvi, the President and CEO of All American at the time of the
exchange, for him to continue as President of All American. The agreement was
superseded on November 20, 2006 with the execution of a new employment agreement
under which Mr. Consalvi became our President and Chief Executive Officer.
Timothy Consalvi was elected to our Board of Directors in March, 2005. Timothy
Consalvi is the brother of Lawrence A. Consalvi, formerly the President of
Elite Machine and formerly both one of our Directors and an Executive Vice
President. Timothy Consalvi resigned from our Board of Directors
effective March 25, 2009, and is no longer with the company in any capacity
effective June 30, 2009.
All
American was involved in selling new CNC machine tools but we elected to cease
operations of All American effective June 30, 2009 since it was not
economically feasible to continue to with its operations.
Acquisition of Assets of CNC
Repos, Inc..
On
October 1, 2007, pursuant to an Asset Purchase Agreement, we acquired certain
assets of CNC Repos, Inc., in exchange for 1,000,000 shares of our common stock.
At the request of CNC Repos, these shares were delivered to Douglas Redoglia,
Kenneth Collini, and Starr Garcia, all of whom were principals of CNC Repos. The
primary assets we purchased from CNC Repos were the following: (i) all the
rights to use CNC Repos, Inc., including any intellectual property in the
name, (ii) all customer lists, contact lists, and vendor lists of CNC Repos,
(iii) a list of all customers that purchased machines in that past 24 months,
and (iv) a list of all banks and other financial institutions that CNC Repos had
a relationship with over the past 36 months. CNC Repos was a company that was in
the business of purchasing used CNC machines, refurbishing them, and reselling
them to third parties, similar to Elite Machines.
In
connection with the acquisition of these assets, we entered into employment
agreements with Kenneth Collini and Douglas Redoglia, the President and Vice
President of CNC Repos, respectively, at the time of the asset purchase. Under
the terms of these employment agreements we hired Mr. Redoglia and Mr.
Collini to assist our machine tools segment with the purchase and sale of
used CNC machines each at an annual salary of $120,000 per year.
Former Acquisitions and
Subsidiaries
In early
2007, our management elected to streamline our operations, reorganize our
accounting, financial records and reporting systems, restructure our management
team, and organize our business activities into two primary operating segments:
the Machine Sales Group and the Precision Manufacturing Group. The restructuring
of our management team included promoting Timothy Consalvi to the position of
Chief Executive Officer, Lawrence A. Consalvi stepping down as our Chief
Executive Officer, as well as Lloyd Leavitt, Robert Page and David Lyons
resigning from our Board of Directors.
As part
of this process, we divested ourselves, through a share re-exchange, of two
prior operating subsidiaries that did not integrate with our new business
operations and focus, primarily due to the time and resources of management and
personnel required to manage and oversee those subsidiaries. Those two former
subsidiaries are Nu-Tech Industrial Sales, Inc. and Gledhill/Lyons,
Inc.
3
Nelson Engineering, Inc.
(“NEI”)
On
October 4, 2002, we entered into an agreement to acquire NEI, a manufacturer of
precision machine parts in the electronics, medical and automotive industry
sectors for a purchase price of $123,500. The purchase price consisted of the
issuance of 6,175,300 shares of our common stock. We valued the
shares issued based on the closing stock price on the date of the
acquisition.
In the
months following the merger, disputes arose between the President and former
controlling shareholder of NEI, and our management. As a result, the parties
amicably negotiated a Mutual Rescission of Contracts and Release of Claims on
May 13, 2003, pursuant to which the merger transaction was rescinded. In
connection with the rescission, we returned to the former shareholders of NEI
their shares of NEI acquired in the merger, in exchange for their return of the
shares of our stock they received in the merger, and the immediate resignation
of Don Nelson from our Board of Directors. The agreement also contained mutual
releases of any and all claims. Accordingly, NEI no longer operates as our
subsidiary or affiliate. The fair market value of the 6,175,300
shares of common stock returned to the Company was $370,518, based on the stock
price on the date of the rescission agreement.
Bechler Cams, Inc.
(“Bechler”)
On
November 15, 2002, we entered into an agreement to acquire Bechler, a machine
shop specializing in the manufacturing of precision component parts for
customers in the aerospace and defense sectors and surgical instruments and
components in the medical sector for a purchase price of $70,600. The purchase
price consisted of the issuance of 11,837,500 shares of our common stock. The
Company valued the shares issued based on the closing stock price on the date of
the acquisition.
Subsequent
to the merger, the former owners and executive officers of Bechler commenced
litigation against us, our former executives, and the former executive officers
of E.M. Tool Company, Inc. alleging, among other things, that the agreement of
the Bechler parties to enter into the merger was obtained by fraud. We
vigorously denied these allegations and, ultimately, the case was settled
pursuant to a Mutual Rescission of Contracts, Settlement Agreement and Release
of Claims on November 20, 2003, pursuant to which the merger transaction was
formally rescinded. In connection with the rescission, we returned to the former
shareholders of Bechler, their shares of Bechler acquired in the merger, in
exchange for their return of the shares of our stock acquired in the merger, and
the immediate resignation of Daniel Lennert from our Board of Directors. The
agreement also contained mutual releases of any and all claims. Accordingly,
Bechler no longer operates as our subsidiary or affiliate. The fair market value
of the 6,175,300 shares of common stock returned to us was $591,875, based on
the stock price of the date of the rescission agreement.
Nu-Tech Industrial Sales,
Inc. (“Nu-Tech”)
In March,
2005, we acquired Nu-Tech as a wholly-owned subsidiary from its two shareholders
in an exchange of all the outstanding stock of Nu-Tech for an aggregate of
2,500,000 shares of our common stock. At the time of the acquisition, Nu-Tech
supplied tools to the automotive, aerospace and medical equipment manufacturing
industries. As part of the terms of the acquisition, Robert Page, the president
of Nu-Tech, continued in that position. On March 23, 2007, we entered into a
share re-exchange agreement with the original shareholders of Nu-Tech whereby we
exchanged the shares in the earlier share exchange transaction. We exchanged all
the Nu-Tech shares we held for the 2,500,000 shares of our common stock held by
the Nu-Tech shareholders less 75,000 shares that those shareholders had
previously sold.
4
Gledhill/Lyons, Inc., dba
Accurate Technology (“Accurate”)
In
December, 2004, we acquired all the outstanding stock of Accurate from its
shareholders in an exchange for an aggregate of 12,000,000 shares of our common
stock. At the close of the acquisition, Accurate specialized in the
manufacture of precision metal systems with a diverse client base in the
aerospace, defense and automotive industries. In connection with the
acquisition, Accurate entered into employment agreements with David Lyons, the
President of Accurate, to serve as its President, and with William Gledhill, the
Vice President of Accurate, to serve as its Vice President and elected Mr.
Gledhill as one of our Directors. William Gledhill is the son of Joseph T.W.
Gledhill, one of our Directors and the President of Eran Engineering. On March
23, 2007, we entered into a share re-exchange agreement with the past Accurate
shareholders and exchanged all the Accurate shares for the 12,000,000 shares of
our common stock held by the Accurate principals. As part of the divestiture of
Accurate, William Gledhill resigned as one of our Directors.
In
addition to divesting our ownership in Nu Tech and Accurate, as part of this
reorganization we also streamlined other companies we had either acquired or
formed. These companies have been either merged into our existing operations,
dissolved, or both. The following is a description of these
companies.
ESK Engineering, Inc.
(“ESK”)
In
December, 2004, we acquired ESK Engineering Inc., a California corporation, as a
wholly-owned subsidiary from its sole shareholder, Erich Thallmayer, formally
the President of Eran Engineering, through an exchange of all of the outstanding
stock of ESK for an aggregate of 219,780 shares of our common stock and a cash
payment of $50,000. Prior to the acquisition, ESK had only one major customer:
Eran Engineering. Shortly after the acquisition, we transferred the operations
of ESK to Eran Engineering and dissolved ESK on June 25, 2007.
Spacecraft Machine Products,
Inc. (“Spacecraft”)
In
January, 2005, we acquired all the outstanding stock of Spacecraft Machine
Products, Inc., a California corporation, in exchange for 600,000 shares of our
common stock. The exchange agreement provided for the additional payment of
150,000 shares of our common stock in each year that Spacecraft met certain
annual profit goals as follows: $200,000 gross profits by December 31, 2005,
$300,000 gross profits by December 31, 2006, and $350,000 by December 31, 2007.
We anticipated that the gross profits would exceed the combined profit targets
specified in the exchange agreement, and accordingly, on December 21, 2005, our
Board of Directors approved and issued all 450,000 contingent
shares.
In
connection with the acquisition of Spacecraft, we executed a promissory note in
favor of the Leavitt Family Trust in the principal amount of $220,000 to be paid
in equal monthly installments over a 60-month period, secured by our pledge of a
security interest in the Spacecraft stock acquired pursuant to the share
exchange. In addition, we issued a second promissory note in the principal
amount of $75,000, payable in monthly installments of $6,250.
In
connection with the original share exchange transaction, Lloyd R. Leavitt, III,
previously the owner of Spacecraft, entered into an employment agreement with us
to serve as our Chief Operating Officer during the six months following the
closing of the acquisition of Spacecraft at an annual base salary of $115,000.
On February 28, 2007, we negotiated a mutually-acceptable termination of his
employment agreement.
Spacecraft
had been in operation for over 35 years in Torrance, California, operating as a
precision machine tool shop specializing in the manufacture of parts for the
defense, aerospace and automotive industries. In July, 2005, the operations of
Spacecraft were merged with Accurate Technology and we closed the manufacturing
facilities of Spacecraft and sold all the equipment, furniture, fixtures and
fittings in an auction pursuant to which we received proceeds of $560,000. We
dissolved the Spacecraft corporate entity on June 25, 2007.
5
A-Line Capital Corporation
(“A-Line”)
We
established A-Line Capital Corporation, a California corporation, in 2004, to
provide financial services to consumers seeking financing for the purchase
and/or lease of machine tools and equipment. Elite Machine and All American
frequently sell machines that are financed through equipment lease financing
companies that are not affiliated with us. A-Line was established to capture the
income stream that was lost to equipment lease brokers in prior years and to
provide equipment lease financing for transactions for our other subsidiaries.
No financing agreements were entered into by A-Line and subsequently, we
dissolved A-Line as part of our strategy to focus the time and skills of
management on our core business.
The Enforcement
Action
Our
common stock was previously registered with the Securities and Exchange
Commission (the “Commission”) under Section 12(g) of the Securities and Exchange
Act of 1934, as amended (the “Exchange Act”). Our stock was originally
registered on or around September 1999. From September 1999 through our
quarterly report for the quarter ended December 31, 2002, we filed the required
quarterly and annual reports with the Commission as a reporting company under
Exchange Act. However, beginning with our quarterly report for the quarter ended
March 31, 2003 through our quarterly report for the quarter ended March 31, 2005
we failed to timely file compliant annual and quarterly reports. Our failure to
file these reports was primarily caused by our failure to obtain financial
documentation from two companies we acquired in late 2002, Bechler Cams, Inc.
and Nelson Engineering, Inc. Our inability to obtain this financial information
led to our auditors being unable to adequately review and audit our financial
statements, as required under the Exchange Act. Although we requested this
information from Bechler Cams, Inc. and Nelson Engineering, Inc., in hindsight
there may have been additional actions our previous management and consultants
could have taken to obtain this information. Additionally, with proper due
diligence, our previous management and consultants should have obtained the
financial statements and determined their ability to be audited prior to closing
the acquisitions. These are two areas our new management and consultants have
looked at closely since that time to ensure this does not occur in the
future.
As a
result of not getting the required reports on file, the Commission instituted an
enforcement proceeding against us in April 2005. Although we were able to
eventually file our delinquent reports by unwinding certain acquisitions, the
Commission ruled that our audit reports and review were still non-compliant and
after a hearing in front of an administrative law judge and a subsequent appeal
heard by the Commission, on May 31, 2006, the Commission entered an Order
finding the following: i) our conduct with respect to our reporting obligations
was “serious, egregious, recurrent, and evidenced a high degree of culpability”
as evidenced by our knowledge, through our then Chief Executive Officer,
Lawrence A. Consalvi, of our reporting obligations and our failure to file a
total of seven annual and quarterly reports due between May 2003 and December
2004; ii) our failure to notify the Commission of our inability to file our
periodic reports; iii) our failure to terminate the registration of our common
stock; iv) our failure to hire new auditors to replace Squar Milner after they
resigned until eighteen months had passed; v) our continuation of an aggressive
growth strategy during a time when we were not complying with our Exchange Act
reporting requirements; vi) our failure to offer credible assurances against
future violations of our reporting obligations under the Exchange Act; and vii)
our failure to accept responsibility for our failure to meet our reporting
obligations under the Exchange Act, and not taking all measures available to us
to obtain the necessary financial information from Bechler Cams, Inc. and Nelson
Engineering.
Based on
these findings the Commission entered an Order Imposing Remedial Sanctions which
revoked the registration of our common stock pursuant to Section 12(j) of the
Exchange Act and ordered our then President and Chief Executive Officer,
Lawrence A. Consalvi, to cease and desist from causing any violations or future
violations of the Exchange Act.
6
Due to
the Commission’s decision to deregister our common stock we were de-listed from
the OTC Bulletin Board and Pink Sheets. Our common stock is not currently listed
on any national stock exchange or over-the-counter securities
market. As discussed below, we are planning to get re-listed on the
OTC Bulletin Board at some point in the future and have re-registered our common
stock as the first step in this process.
The Remedial Measures and
Re-Registration of our Common Stock
We have
new and different management since our common stock was deregistered and
de-listed. As a result of the Commission’s action, our management
underwent a comprehensive review of the primary causes for our delinquent
reports, and our inability to timely remedy these issues. Although the primary
cause of our inability to file timely compliant reports was the breach of the
acquisition agreements by the companies we acquired, there was also inadequate
internal financial personnel in place to properly review these acquisitions and
perform the day-to-day accounting functions necessary for a reporting company
under the Exchange Act. In order to remedy these issues we have undergone
numerous changes. With respect to our management, we have undergone the
following changes: i) Lawrence A. Consalvi stepped down as our President, Chief
Executive Officer , ii) Timothy D. Consalvi was appointed as our President and
Chief Executive Officer, and was from November, 2006 until December 2008 when he
resigned from those positions; and iii) Stephen M. Kasprisin, who has a long
public company accounting background, was our full-time Chief Financial Officer
from November 2006 until October 2007, and then was our part-time Chief
Financial Officer until March 31, 2009, when he resigned and we hired Mr. Jitu
Banker as our full time Chief Financial Officer. With respect to our board of
directors, we recently appointed George Colin, Jitu Banker and Robert Sabahat to
our board of directors.
Our
management, together with our advisors, have discussed the due diligence review,
and legal and financial preparations, that must occur prior to closing any
future acquisitions. These preparations include full legal review of any letters
of intent and acquisition agreements prior to execution, and review of any
target company’s financial statements and information by our Chief Financial
Officer, controller and outside financial consultants, if any, to ensure the
target company’s financial information can be fully audited prior to completing
any acquisition. Additionally, as a reporting company under the Exchange Act, we
conduct quarterly and annual evaluations, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities Exchange Commission's rules and forms,
including to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. As part of this process we
have worked with our executives at the subsidiary level to ensure proper
communication with our Controller and Chief Financial Officer, and have provided
our Controller and Chief Financial Officer with outside financial consultants to
assist as needed to ensure accurate and timely reporting of our financial
information.
With
these changes in place, on May 16, 2008, we filed a registration statement on
Form 10 to re-register our common stock under Section 12 of the Exchange
Act. As a result, on July 15, 2008, we became subject to the
reporting requirements under the Exchange Act.
7
Business
Overview
We currently conduct all of our
operations through two of
our three wholly-owned
subsidiaries: Elite
Machine and Eran
Engineering. We ceased operations of our
third subsidiary, All
American, effective June 30, 2009. Through our two operating subsidiaries we
provide services and products to the machine tool industry, including the sale
of new and refurbished CNC machines and the manufacture of precision metal
components.
Our
services and products are primarily marketed and sold to the commercial
aviation, medical, aerospace, and defense industries. Currently we manage the
operations of these subsidiaries. In the future we hope to expand our business,
both through the growing of our existing businesses and their client bases, as
well as through acquisitions of companies that complement the products and
services we currently offer.
Money Line Capital Letter of
Intent
As part
of that strategy, on June 30, 2009, we entered into a binding Letter of Intent
(the “LOI”) with Money Line Capital, Inc. (“MLCI”). MLCI is our
largest shareholder and specializes in business financing transactions and holds
equity in a number of operating subsidiaries in various fields, including
financing, aerospace, real estate, media, beverage, and
technology. Under the LOI the parties agree to complete a transaction
whereby all the MLCI shareholders will exchange their shares of MLCI stock for
shares of our stock. No cash will be exchanged in this
transaction. The parties have agreed to negotiate in good faith to
close the transaction on or before January 29, 2010. The LOI is
predicated on us being current in our reporting obligations under the Securities
and Exchange Act of 1934, as amended, and being publicly-traded at the time of
the closing; and MLCI having its financial statements (and its subsidiaries, as
applicable) audited for the period ended June 30, 2009, as well as completing a
valuation by a qualified third-party company.
Machine Sales
Group
The Machine
Sales Group is currently composed of one of our subsidiaries, Elite Machine,
which is in the business of acquiring and selling computer numerically
controlled (“CNC”) machines, and related tools, to manufacturing customers. The
operations of this group also include the business generated from our purchase
of certain assets of CNC Repos, Inc.
CNC
machines use commands from an onboard computer to control the movement of
cutting tools and the rotation speeds of the part being produced. The computer
controls enable the operator to program specific operations, such as part
rotation and tooling selection and movement for a particular part and then store
that program in memory for future use. Because CNC machines can manufacture
parts unattended and operate at speeds faster than similar manually-operated
machines, they can generate higher profits with less rework and scrap. Elite
Machines specializes in selling used, refurbished CNC machines.
For the
years ended June 30, 2009, and 2008, the Machine and Tools Group accounted
for $4,752,435 (49%) and $8,955,916 (59%) of our total sales, respectively.
This segment of our business also accounted for 25% and 22% of our gross profits
for the years ended June 30, 2009, and 2008, respectively.
8
(a) Company
Overview
Elite
Machine is a California corporation and was founded in 1990 by our former
Director and Executive Vice President, Lawrence A. Consalvi. Mr. Consalvi was
also the President of Elite Machine. Through the reverse merger transaction
described above, Elite Machines became our wholly-owned subsidiary, which today
specializes in the sale of previously-owned CNC machine tools from CNC machine
manufacturers including Mori Seiki, Matsuura and Kitamura. Elite Machine is a
leading dealer of pre-owned CNC machines in the Western United States.
Elite Machine purchases high-quality used CNC machinery from Japan, Europe, and
the United States, and then inspects and repairs them prior to being refurbished
for resale. Elite Machine’s refurbishments on CNC machines it purchases
typically include painting, replacing parts, and servicing the
machine.
(b) Principal
Products and Services.
Elite
Machines is in the business of selling CNC machines. However, the company
does not manufacture its own CNC machines. Elite Machines buys used CNC
machines, refurbishes them and sells them. CNC machines use commands from
an onboard computer to control the movement of cutting tools and the rotation
speeds of the part being produced. The computer controls enable the operator to
program specific operations, such as part rotation and tooling selection and
movement, for a particular part and then store that program in memory for future
use. The machines are then typically used to mass produce a particular part.
This helps ensure all the same parts are identical. The machine can then be
reprogrammed to manufacture a different part depending on the needs of the
customer.
Elite
Machines purchases all the used machines it sells, bears the risk of reselling
the machines, and is responsible for all costs incurred in order to resell the
machines. Normally the machines sold by Elite Machines are sold “as is.”
However, Elite Machines does offer a limited warranty to the purchasers of the
used CNC machines it sells, but the company is planning on moving away from this
practice. Currently, approximately 80% of Elite Machines’ customers are under
some type of warranty with Elite Machines with most on a 30-day
warranty.
(c) Product
Manufacturing.
Elite
Machines does not manufacture any of its own products.
Elite
Machine locates CNC machines for resale through relationships with past
customers and through its marketing efforts, the monitoring of both internet and
direct mail sale boards, and personal relationships with machine tool companies.
Elite Machine purchases the machines on credit terms or cash on delivery.
Machines are purchased based upon the desirability of the model and make and the
age and condition of the machine. Refurbishment generally entails cleaning the
machine, spot painting and testing for basic functionality. All machines are
either sold on an “as is” or a warranty basis, typically with 30-day expiration,
and Elite generally provides installation of the machine in the customer’s
facility.
(d) Sales,
Marketing and Distribution.
The Elite
Machine product line consists primarily of used CNC machines. These machines are
predominately marketed through our in-house sales staff. Sales personnel are
assigned regions and sell the machines in their territory. Used
machines are sold on a warranty basis, typically with 30-day expiration, and
generally includes installation of the machine at the customer’s location. We
are currently investigating a strategy to sell machine tools through alternative
channels such as the internet and
auctions.
On
September 24, 2008, Lawrence A. Consalvi resigned from his position as President
of Elite Machine. After his resignation we contracted with Mr.
Consalvi for him to be an independent sales agent, whereby Mr. Consalvi is
involved in selling CNC machines on behalf of Elite Machine.
Mr.
Lawrence A. Consalvi was re-appointed as President of Elite Machine Tool
effective July 1, 2009.
9
(e) New
Product Development.
Due to
Elite Machine selling machines manufactured by third parties, as opposed to
being a manufacturing company, the company does not engage in new product
development. However, the company does advise the CNC machine manufacturers
regarding customer needs and requirements to assist with their future machine
development.
(f) Competition.
Our
competitors in the machine tools industry consist of a large fragmented group of
companies, including certain business units or affiliates of our customers. Our
management believes that competition within the industry will increase
substantially as a result of industry consolidations and trends toward favoring
greater outsourcing of components and reducing the number of preferred
suppliers. Certain of our competitors may have substantially greater financial,
production and other resources and may have (i) the ability to adapt more
quickly to changes in customer requirements and industry conditions or trends,
(ii) stronger relationships with customers and suppliers, and (iii) greater name
recognition.
(g) Sources
and Availability of Raw Materials.
All of
the machines and parts sold by Machine Sales Group are manufactured by third
parties so we do not directly purchase any raw materials. However, the third
party companies that manufacture CNC machines rely on the availability of a
variety of raw materials, primarily metals such as steel and aluminum, but none
of the primary raw materials are scarce and we do not anticipate the third party
manufacturers will have any problems obtaining these raw materials.
(h) Dependence
on Major Customers.
Our
Machines and Tools Group does not depend on one or two major customers. In fact,
the largest single customer of this group accounted for less than 10% of the
total revenue for this group.
(i) Patents,
Trademarks and Licenses.
Elite
Machines does not have any patents or licenses, or other intellectual
property.
(j) Need
for Government Approval.
As noted
above, Elite Machines does not manufacture its own products, it merely sells
used CNC machines. As sellers of used CNC machines, Elite Machines does not need
government approval to operate its business.
(k) Effect
of Government Regulation on Business.
As noted
above, Elite Machines does not manufacture its own products, they merely sell
used CNC machines. As sellers of used CNC machines, Elite Machines is not
subject to onerous government regulation.
However,
inasmuch as Elite Machines refurbishes used CNC machines to resell, it maintains
strict control standards on the maintenance and use of its equipment to ensure
employee safety during the refurbishing process.
(l) Research
and Development.
Because
Elite Machine sells products manufactured by third parties this business segment
does not spend a material amount on research and development.
10
(m) Effects
of Compliance with Environmental Laws.
The
machine tool industry is subject to environmental laws and regulations
concerning emissions into the air, discharges into waterways, and the
generation, handling, storage and disposal of waste materials, some of which may
be hazardous. CNC machines contain coolants which are deemed as hazardous waste
and must be disposed of according to the laws of specific jurisdictions. In
addition, we perform spot painting of machines during the re-furbishing process.
As required we provide for waste containers for coolants and cleaning products
and contract with a hazardous waste company for proper disposal.
We strive
to comply with all applicable environmental, health and safety laws and
regulations. We believe that our operations are in compliance with all
applicable laws and regulations on environmental matters. These laws and
regulations, on federal, state and local levels, are evolving and frequently
modified and we cannot predict accurately the effect, if any, they will have on
its business in the future. In many instances, the regulations have not been
finalized, or are frequently being modified. Even where regulations have been
adopted, they are subject to varying and contradicting interpretations and
implementation. In some cases, compliance can only be achieved by capital
expenditure and we cannot accurately predict what capital expenditures, if any,
may be required.
Environmental
laws could become more stringent over time, imposing greater compliance costs
and increasing risks and penalties associated with any violations. As a
generator of hazardous materials, we are subject to financial exposure with
regard to intentional or unintentional violations. In addition, we utilize
facilities located in industrial areas with lengthy operating histories and it
is possible that historical or neighboring activities could impact our
facilities. Any present or future noncompliance with environmental laws or
future discovery of contamination could have a material adverse effect on our
results of operations or financial condition.
(n) Employees.
As of
June 30, 2009, we, with our subsidiaries, employ a total of 51 full-time
employees, including three executive employees. Of these employees
our Machine Sales Group employs two managerial employees, and two employees
engaged in the sales and processing of CNC machine sales.
We are
not aware of any problems in our relationships with our employees. Our employees
are not represented by a collective bargaining organization and we have never
experienced any work stoppage.
Precision Manufacturing
Group
The
Precision Manufacturing Group is composed of Eran Engineering, a wholly-owned
subsidiary, which is in the business of manufacturing and assembling
specialized, precision components used in equipment and machinery in the
commercial aviation, medical, aerospace and defense industries.
For the
years ended June 30, 2009 and 2008, the Precision Manufacturing Group
accounted for $4,898,749 (51%) and $6,263,190 (41%) of our sales, respectively.
This segment of our business also accounted for 35% and 39% our gross
profits for the years ended June 30, 2009 and 2008,
respectively.
11
(a) Company
Overview.
(1) Eran
Engineering, Inc.
In
October, 2003, pursuant to a Stock Purchase Agreement, dated June 17, 2003, we
acquired all the issued and outstanding shares of Eran Engineering, a California
corporation, from its two shareholders for an aggregate purchase price of
$1,250,000. In addition to a cash payment of $650,000, which was credited to the
purchase price, we executed a promissory note in favor of the sellers in the
principal amount of $600,000, payable in three equal annual installments of
$200,000 and accruing simple interest at the rate of six percent (6%) per annum.
Our obligation under the promissory note was secured by the pledge by
Lawrence A. Consalvi, our then President and Chief Executive Officer, and Joseph
T.W. Gledhill, our former Vice President and Director, of a security interest in
certain shares of our common stock worth approximately $4,285,716 as of the date
of the pledge. Concurrently with the closing of the acquisition, Eran
Engineering purchased from R & H Investments, a partnership owned by the two
selling shareholders of Eran Engineering, the building in which Eran Engineering
operated its business. The purchase price for the building was $1,250,000, and
was paid as follows:
|
·
|
$650,000
in cash and;
|
|
·
|
A
promissory note in the principal amount of $600,000, bearing simple
interest at the rate of 6% per
annum.
|
Concurrently
with the acquisition of Eran Engineering, we purchased the Santa Ana,
California, building in which Eran Engineering operated. The purchase price for
the building was $1,250,000, of which we paid $600,000 by a promissory note in
the amount of $600,000 and the remainder in cash financed pursuant to a term
loan in the principal amount of $1,300,000. On February 23, 2007, we completed
the sale of the building and property for a sales price of $2,017,000 resulting
in a net gain to us of over $600,000.
(b) Product
Manufacturing.
Eran
Engineering manufactures and assembles specialized, precision components used in
equipment and machinery in the commercial aviation, medical, aerospace and
defense industries. The primary components sold by Eran during the years ended
June 30, 2009 and, 2008, were parts sold to Panasonic Avionics Corporation, a
leading provider of in-flight entertainment systems for commercial aircraft. The
other components were parts manufactured for, and sold to, medical companies and
general commercial aircraft companies. Eran Engineering maintains approximately
39 CNC machines for use in its specialized manufacturing processes. Joseph T.W.
Gledhill, one of our former Directors and Executive Vice Presidents, serves as
the President of Eran Engineering.
(c) Sales,
Marketing and Distribution.
Eran
maintains an in-house sales staff that solicits orders from customers.
Solicitation of orders is generally based upon relationships with buyers versus
the use of advertising or other forms of solicitation. Orders are received via a
bid process and Eran prepares costs estimates and submits a bid for the
manufacturing order. Once an order is received, generally through a binding
purchase order, Eran programs its machines to manufacture the part. Parts are
manufactured internally and then in most cases, assembled at Eran’s facility.
Some assemblies require the receipt of parts manufactured by other companies and
as a result, delays in shipment could be encountered as a result of delays in
manufacturing by contractors retained by the customer. Eran has no control or
liability for these parts manufactured by other manufacturers used in the
assembly’s delivered by Eran.
(d) New
Product Development.
Eran does
not develop any proprietary products. Instead, Eran works with principal
manufacturers to machine the components they require for the development of
their products.
12
(e) Competition.
The
market for precision part manufacturing is extremely competitive. There are no
substantial barriers to entry, and we continue to face competition from domestic
and international manufacturers. We believe that our ability to compete
successfully depends upon a number of factors, including market presence,
connections in the industry, reliability, low error rate, technical expertise
and functionality, performance and quality of our parts, customization, the
pricing policies of our competitors, customer support, our ability to support
industry standards, and industry and general economic trends.
Many of
our competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to us. As a result, they may be able to develop and expand more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing of their services
than we can.
The
competition for design, manufacturing and service in precision machining and
machine tools consists of independent firms, many of which, however, are smaller
than our collective group of wholly-owned subsidiaries. We believe that this
allows it to bring a broader spectrum of support to its customers.
In
addition to similar companies, we compete against the in-house manufacturing and
service capabilities of our larger customers. We believe these large
manufacturers are increasingly outsourcing activities that are outside their
core competency to increase their efficiencies and reduce their costs. This
outsourcing provides an opportunity for us to grow with our current clients and
the addition of new clients.
Although
there are numerous domestic and foreign companies which compete in the markets
for the products and services offered by us, our management believes that it
will be able to compete effectively with these firms on price, ability to meet
customer deadlines and the stringent quality control standards. We strive to
develop a competitive advantage by providing high quality, high precision and
quick turnaround support to customers from design to delivery.
(f) Sources
and Availability of Raw Materials.
Our
precision equipment group utilizes a variety of raw materials in its specialized
manufacturing processes, however, the primary raw materials it uses are widely
available and we believe they will be readily available for our use as
needed.
(g) Dependence
on Major Customers.
Eran has
one major customer, Panasonic Avionics Corp., which accounted for 66% and 27% of
our total revenue for the years ended June 30, 2009 and 2008,
respectively.
(h) Patents,
Trademarks and Licenses.
Eran does
not have any patents or licenses, or other intellectual property.
(i) Need
for Government Approval.
As a
manufacturer of precision parts, Eran’s business is not subject to government
approval for its operations or its end products. .
13
(j) Effect
of Government Regulation on Business.
As a
manufacturer of precision parts there are certain regulations that relate to the
conduct of our business in general, such as regulations and standards
established by the Occupational Safety and Health Act or similar state laws
relating to employee health and safety. As such we maintain strict control
standards on the maintenance and use of its equipment to ensure employee safety.
We comply with all guidelines and recommendations regarding the use of safety
equipment such as safety goggles, protective gloves and aprons, ventilators or
air guards as may be required. Employees are specifically trained, including
emphasis on safety procedures, for each machine used. Management maintains and
reviews a schedule of maintenance and safety check for all the equipment used in
its operations.
Although
there are not many regulations on the manufacturing of precision parts, there
are certifications companies can receive in the industry. Eran is ISO 9001-2000
and AS9100 rev. B registered.
(k) Research
and Development.
Our
precision manufacturing group does not engage in research and development. Eran
purchases manufactured CNC machines and receives a purchase order with detailed
instructions from its customers regarding the specifications for the parts it
wishes to have Eran manufacture.
(l) Effects
of Compliance with Environmental Laws.
The
precision manufacturing industry is subject to environmental laws and
regulations concerning emissions into the air, discharges into waterways, and
the generation, handling, storage and disposal of waste materials, some of which
may be hazardous.
The
precision manufacturing division utilizes various coolants and lubricants that
could be considered hazardous waste. Care is taken to prevent accidental
discharge and all coolants and lubricants removed from machines are contained
and disposed of by an outside waste disposal company. In addition, our Tustin
facility is subject to certain local waste water regulations and is required
annually to have its waste water and backflow prevention equipment tested by an
outside testing agency. The last test was performed in September 2007 and we
passed without exception.
Eran
strives to comply with all applicable environmental, health and safety laws and
regulations. Eran believes that its operations are in compliance with all
applicable laws and regulations on environmental matters. These laws and
regulations, on federal, state and local levels, are evolving and frequently
modified and we cannot predict accurately the effect, if any, they will have on
its business in the future. In many instances, the regulations have not been
finalized, or are frequently being modified. Even where regulations have been
adopted, they are subject to varying and contradicting interpretations and
implementation. In some cases, compliance can only be achieved by capital
expenditure and we cannot accurately predict what capital expenditures, if any,
may be required.
Environmental
laws could become more stringent over time, imposing greater compliance costs
and increasing risks and penalties associated with any violations. As a
generator of hazardous materials, we are subject to financial exposure with
regard to intentional or unintentional violations. In addition, we utilize
facilities located in industrial areas with lengthy operating histories and it
is possible that historical or neighboring activities could impact our
facilities. Any present or future noncompliance with environmental laws or
future discovery of contamination could have a material adverse effect on our
results of operations or financial condition.
14
(m) Employees.
As of
June 30, 2009, we, with our subsidiaries, employ a total of 51 full-time
employees, including three executive employees. For the precision manufacturing
group, we employ one managerial employee, one sales manager, and 36 employees
engaged in tool manufacturing-related positions.
We are
not aware of any problems in its relationships with its
employees. The Company’s employees are not represented by a
collective bargaining organization and the Company has never experienced any
work stoppage.
Discontinued
Operations
Effective
June 30, 2009, our Board of Directors elected to cease the operations of All
American because the business was no longer economically
feasible. During the year ended June 30, 2009, All American was part
of our machine tools group. The company sold new CNC machines it
purchased from third party manufacturers. As a result of All American
shutting down its operations on June 30, 2009, the operations of All American
are included in the accompanying financial statements as discontinued
operations.
Prior to
being shut down and for our fiscal year ended June 30, 2009, All American
specialized in the sale of new CNC machines throughout the Orange County,
California market and had a customer base of over 530 companies, representing
approximately a 10% market share in that area. The primary product lines offered
through All American included: Fadal Vertical Machining Centers, Hwacheon CNC
Turning Centers and Vertical Machining Centers, Visionwide CNC Bridge Mills, and
Clausing Industrial CNC Vertical Machining Centers. The primary industry
segments in which All American sold machines was in the aerospace, military and
medical fields. However, on or about March 31, 2009, Fadal, one of
All American’s primary suppliers of CNC machines, ceased manufacturing CNC
machines.
Typically,
All American purchased a machine once a customer ordered and purchased the
machine from All American. However, at times, All American purchased a CNC
machine when it did not have a prospective customer to purchase the machine.
This normally occurred when All American either needed a CNC machine for a
showroom, management believed it was getting a good deal on the machine from the
manufacturer, and/or it needed one or more machines on hand to meet future
customer demand. Normally, the original manufacturer of the machine, not All
American, was responsible for any problems or issues with the machine, since the
machines are typically under warranty. As of June 30, 2009, when we
ceased operations of All American, we had no machines in our inventory, and
current assets totaling $116,868, consisting entirely of accounts receivable and
non-current assets totaling $63,704, consisting of company vehicles and office
equipment. These assets are listed accordingly on our balance sheet
in the accompanying financial statements.
15
Industry
Overview
CNC
Machines
Since the
introduction of CNC tooling machines, continual advances in computer control
technology have allowed for easier programming and additional machine
capabilities. A vertical turning machine permits the production of larger,
heavier and more oddly-shaped parts on a machine that uses less floor space when
compared to the traditional horizontal turning machine because the spindle and
cam are aligned on a vertical plane, with the spindle on the bottom. Horizontal
turning machines have become faster and more accurate with the ability to
perform more functions i.e. milling of the parts and cross milling both on and
off center line of the part. The vertical turning machines have additionally
increased thru-put for part production through increase spindle RPM’s (rotations
per minute), with the ability to accomplish high speed machining and increased
accuracy through new electronics. Finally, the horizontal machines through the
same features mentioned above and with the expansion of more tools and the
ability to add multiple pallets out in the field gives the customer the ability
to grow into the machine as his work flow increases.
Historically,
CNC machines had been sold by the manufacturer, however, more recently many
manufacturers are utilizing third party manufacturing representation companies,
like All American, to sell their machines in order to cut down on internal
overhead expenses related to a sales staff.
Precision
Tools
The
precision tools industry, as it relates to Eran and our business, deals with the
manufacturing of specific, specialized parts for use in several different
industries, including, but not limited to, the commercial aviation, medical,
aerospace and defense industries. Since the introduction of Computer Numerical
Control (CNC) machines into the manufacturing arena, the process of taking raw
material and producing a product have had a significant impact in today’s highly
competitive manufacturing environment. Precision tool manufacturing companies
operate by receiving a purchase order from a customer, then with a blueprint
drawing from engineering, and produce a part program which is then loaded into
the on board memory of the CNC machine tool. The machine tool follows the part
program and cuts the material into the desired shape which the engineers have
designed. The CNC Machine tool benefits are: a more consist end product as well
as a closer tolerance product on a consistent part-over-part process. In today’s
competitive market all types of raw materials are used from a varied type of
steel, aluminum, brass, copper as well as plastics.
The
precision manufacturing business is an ever changing segment and to remain
competitive companies must be prepared to constantly maintain their quality
programs, equipment and train their personnel. Manufacturing in today’s work
environment is extremely competitive and, therefore, maintaining ISO
registration is almost certainly a requirement. To become a first tier supplier
to major aerospace and defense contractors a company must become AS9100
compliant with a Continuous Improvement Operation with an eye on the future. All
of these programs in conjunction with a competitive price point and on time
delivery commitment will make a significant impact to a company’s ability to
maintain their business and grow.
16
ITEM
1A. – RISK FACTORS.
As a
smaller reporting company we are not required to provide a statement of risk
factors. However, we believe this information may be valuable to our
shareholders for this filing. We reserve the right to not provide risk factors
in our future filings. Our primary risk factors and other considerations
include:
If we are unable
to maintain relationships with our suppliers, our business could be materially
adversely affected.
Substantially
all of our products are manufactured by third parties. To the extent that a
manufacturer is unwilling to do business with us, or to continue to do business
with us once we enter into formal agreements with it, our business could be
materially adversely affected. In addition, to the extent that the manufacturer
modifies the terms of any contract it may enter into with us (including, without
limitation, the terms regarding price, rights of return, or other terms that are
favorable to us), or extend lead times, limit supplies due to capacity
constraints, or other factors, there could be a material adverse effect on our
business.
We operate in a
competitive industry and continue to be under the pressure of eroding gross
profit margins, which could have a material
adverse effect on our business.
The
market for the products we sell is very competitive and subject to rapid
technological change. The prices for our intended products tend to decrease over
their life cycle, which can result in decreased gross profit margins for us.
There is also substantial and continuing pressure from customers to reduce their
total cost for products. We expend substantial amounts on the value creation
services required to remain competitive, retain existing business, and gain
new customers, and we must evaluate the expense of those efforts against the
impact of price and margin reductions. Further, our margins will be lower in
certain geographic markets and certain parts of our business than in others. If
we are unable to effectively compete in our industry or are unable to maintain
acceptable gross profit margins, our business could be materially adversely
affected.
Products sold by
us may be found to be defective and, as a result, warranty and/or product
liability claims may be
asserted against us, which may have a material adverse effect on the
company.
We may
face claims for damages as a result of defects or failures in the products we
intend to sell to our customers. Although many of our products are sold under a
third-party warranty or are sold “as is” our ability to avoid liabilities,
including consequential damages, may be limited as a result of differing
factors, such as the inability to exclude such damages due to the laws of some
of the locations where we do business. Our business could be materially
adversely affected as a result of a significant quality or performance issue in
the products developed by us, if we are required to pay for the damages that
result.
Our
share ownership is concentrated.
Money
Line Capital, Inc., our largest shareholder, controls approximately 55% of our
outstanding common stock. Our officers and directors, as a group, own
a majority of Money Line Capital, Inc.’s common stock and own an additional 3.5%
of our common stock as a group. As a result, these stockholders can
exert significant influence over all matters requiring stockholder approval,
including the election and removal of directors, any merger, consolidation or
sale of all or substantially all of assets, as well as any charter amendment and
other matters requiring stockholder approval. In addition, these stockholders
may dictate the day to day management of the business. This concentration of
ownership may delay or prevent a change in control and may have a negative
impact on the market price of our common stock by discouraging third party
investors. In addition, the interests of these stockholders may not always
coincide with the interests of our other stockholders.
17
If we acquire
other companies or assets, we may
not
be able to successfully integrate them or attain the anticipated
benefits.
We intend
to acquire other businesses that are synergistic with ours. If we are
unsuccessful in integrating our acquisitions, or if integration is more
difficult than anticipated, we may experience disruptions that could have a
material adverse effect on our business. In addition, we may not realize all of
the anticipated benefits from our acquisitions, which could result in an
impairment of goodwill or other intangible assets.
If we fail to
maintain an effective system of internal controls or discover material
weaknesses in our internal controls over financial reporting, we may not be able
to report our financial results accurately or timely or detect fraud, which
could have a material adverse
effect on our business.
An
effective internal control environment is necessary for us to produce reliable
financial reports and is an important part of our effort to prevent financial
fraud. We will be required to periodically evaluate the effectiveness of the
design and operation of our internal controls over financial reporting. Based on
these evaluations, we may conclude that enhancements, modifications or changes
to internal controls are necessary or desirable. While management will evaluate
the effectiveness of our internal controls on a regular basis, and although we
have recently undergone substantial changes to address any weaknesses, these
controls may not always be effective. There are inherent limitations on the
effectiveness of internal controls, including collusion, management
override, and failure of human judgment. In addition, control procedures are
designed to reduce rather than eliminate business risks. If we fail to maintain
an effective system of internal controls, or if management or our
independent registered public accounting firm discovers material weaknesses in
our internal controls, we may be unable to produce reliable financial reports or
prevent fraud, which could have a material adverse effect on our business.
In addition, we may be subject to sanctions or investigation by regulatory
authorities, such as the SEC. Any such actions could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements, which could cause the market price of our
common stock to decline or limit our access to capital.
We
rely on third-party suppliers and manufacturers to provide our CNC machines, and
we will have limited control over these suppliers and manufacturers and may not
be able to obtain quality products on a timely basis or in sufficient
quantity.
All of
our CNC machines are manufactured by third-party manufacturers. We do not
have any long-term contracts with these suppliers or manufacturing
sources. We expect we will have to compete with our competitors for
production capacity and availability at these third-party
manufacturers.
There can
be no assurance that there will not be a significant disruption in the supply of
CNC machines from our intended sources or, in the event of a disruption, that we
would be able to locate alternative suppliers of equipment of comparable quality
at an acceptable price, or at all. In addition, we cannot be certain that our
unaffiliated manufacturers will be able to fill our orders in a timely manner.
If we experience significant increased demand, or need to replace an existing
manufacturer, there can be no assurance that additional manufacturing capacity
will be available when required on terms that are acceptable to us, or at all,
or that any supplier or manufacturer would allocate sufficient capacity to us in
order to meet our requirements. In addition, even if we are able to expand
existing or find new manufacturing sources, we may encounter delays in
production and added costs as a result of the time it takes to train our
suppliers and manufacturers in our methods, products and quality control
standards. Any delays, interruption or increased costs in the manufacture of our
products could have an adverse effect on our ability to meet retail
customer and consumer demand for our products and result in lower revenues and
net income both in the short and long-term.
18
In
addition, there can be no assurance that our suppliers and manufacturers will
continue to manufacture products that are consistent with our standards. We may
receive shipments of product that fail to conform to our quality control
standards. In that event, unless we are able to obtain replacement products in a
timely manner, we risk the loss of revenues resulting from the inability to sell
those products and related increased administrative and shipping costs. In
addition, because we do not control our manufacturers, products that fail to
meet our standards or other unauthorized products could end up in the
marketplace without our knowledge, which could harm our reputation in the
marketplace.
We
have one customer that accounts for greater than 66% of our total sales and more
than 66% of our precision manufacturing group’s sales.
Panasonic
Avionics Corp., accounts for 66% and 27% of our total sales for the years ended
June 30, 2009 and 2008, respectively, and more than 66% and 84% of our precision
manufacturing group’s sales for the years ended June 30, 2009 and 2008,
respectively. We do not have a long term, exclusive agreement with this
customer. If this customer reduced or stopped ordering precision parts from Eran
it would have a material adverse impact on our consolidated sales, results of
operations and cash flows.
Our
Machine Sales Group relies on the availability of used CNC machines for resale,
if no used machines are available for purchase our business will
suffer.
The
primary business of our Machine Sales Group is to purchase and resell used CNC
machines. If there are no or limited CNC machines available for
purchase, our Machine Sales Group sales will suffer. Likewise, if
there is a slow down in the economy and the current owners of CNC machines opt
not to sell their used CNC machines to purchase new ones, or our customers hold
on to their existing CNC machines longer and do not purchase additional used CNC
machines our sales will suffer.
The
current crisis in the credit markets may adversely affect our customers’ ability
to finance the purchase of new and used CNC machines. This would
result in a significant reduction in our sales.
Most of
our customers that purchase used CNC machines do so utilizing
credit. The current crisis in the credit markets may adversely affect
our customers’ ability to finance the purchase of a used CNC machine from
us. If this were to occur it would result in a significant reduction
in our sales.
Under
our credit agreement with Pacific Western Bank we have numerous affirmative and
negative financial and non-financial covenants we must comply with on at least a
quarterly basis. If we are unable to meet these covenants and cannot obtain a
waiver from Pacific Western Bank, our breach of these covenants would constitute
a default under the credit agreement, which could require us to repay all
indebtedness immediately. If this were to occur we likely would not be able to
repay this indebtedness and it would have a severe, negative impact on our
business and our ability to continue as a going concern.
We have a
business loan agreement with Pacific Western Bank dated August 21, 2006. This
loan agreement has numerous affirmative and negative financial and non-financial
covenants, which we are required to abide by as a condition of the loan. These
covenants primarily relate to our financial condition, such as tangible net
worth, working capital, debt ratio, etc., as well as restricts our ability to
enter into certain transactions outside the ordinary course of business without
prior written approval by Pacific Western Bank. Our failure to meet these
affirmative and negative covenants under the Agreement would constitute a
default under the loan agreement. If we were to default under the loan
agreement, and if at that time we are unable to get the lender to waive or
forbear the default, then the lender could immediately terminate the loan
agreement and all indebtedness then owed by us to the lender would be
immediately due and payable, without any further notice by the lender. Were this
to occur it would have a significant negative impact on our
business.
19
As of
June 30, 2008, we did not meet our capital expenditures and profitability
covenants, as set forth in the November 15, 2007 credit
agreement. Therefore, we were not in compliance with those two
covenants. However, on September 4, 2008, Pacific Western Bank provided us with
a letter of forbearance from the measurement of the required covenants as of
June 30, 2008. Effective July 1, 2008, we are required to comply with
all of the covenants of the amended credit agreement dated September 26,
2008. As of June 30, 2009, we believe we were in compliance with the
covenants under the amended credit agreement. The quarter ended June
30, 2009 was the end of our fiscal year.
As of September 21, 2009, our credit
agreement with Pacific Western Bank terminated. Pacific Western Bank and the
company have agreed to a two month extension to repay the line of credit and our
management feels confident that we will be able to do so in a timely
manner. As of June 30, 2009, we owed $440,000 under the line of
credit with Pacific Western Bank.
The
Commission previously revoked the registration of our common stock pursuant to
Section 12(j) of the Exchange Act due to our failure to timely file our periodic
reports under the Exchange Act. If we fail to timely file these reports in
the future, we could be delisted from an exchange and/or the Commission could
delist our common stock again, which could negatively impact our business and
cause a significant decrease in our stock price.
On May
31, 2006, the Commission entered an Order Imposing Remedial Sanctions which
revoked the registration of our common stock pursuant to Section 12(j) of the
Exchange Act and ordered our then president and chief executive officer,
Lawrence A. Consalvi, to cease and desist from causing any violations or future
violations of the Exchange Act. This deregistration was the result of our
inability to obtain financial information from acquisitions we completed in the
past. Although we have since divested ourselves of those acquisitions, and taken
numerous remedial measures to ensure this does not occur in the future, there
can be no assurance that future acquisitions by us will not have issues or cause
us to be delinquent with our required filings under the Exchange Act. Any
delinquent filings could have an adverse effect on our business and our stock
price, if we are publicly-traded. These adverse effects include being delisted
from any exchange where our common stock may be listed, such as the OTC Bulletin
Board, which could cause our stock price to decrease. Additionally, if we are
unable to timely file our periodic reports under the Exchange Act, the
Commission could again revoke the registration of our common stock pursuant to
Section 12(j) of the Exchange Act, prohibiting us from listing our stock on any
public marketplace, including the OTC Bulletin Board and Pink Sheets, which
would have the effect of our common stock not being publicly-traded and greatly
reduce the liquidity of our common stock and greatly reduce the ability of our
stockholders to sell or trade our common stock. Regarding our business, if we
were delinquent in our filings and/or had the registration of our common stock
revoked, we may be unable to effectuate our business plan to acquire other
companies in our industry since we likely would not be able to structure these
acquisitions using our common stock or other securities. This could negatively
impact our business and cause a significant decrease in our stock
price.
ITEM
1B – UNRESOLVED STAFF COMMENTS
This Item
is not applicable to us as we are not an accelerated filer, a large accelerated
filer, or a well-seasoned issuer; however, we have not received written comments
from the Commission staff regarding our periodic or current reports under the
Securities Exchange Act of 1934 within the last 180 days before the end of our
last fiscal year.
ITEM
2 – PROPERTIES
In July,
2007, we entered into a 5-year triple net lease for approximately 48,600 square
feet of manufacturing and office space in a free-standing industrial building at
2672 Dow Avenue, Tustin, California 92780 for a average monthly rental of
$28,390 for the first 12 months, $35,090 for the second 12 months, $36,143 for
the third 12 months, $37,227 for the fourth 12 months and $38,334 for the final
12 months. The lease contains an option to renew for an additional 60 months
with monthly rental of $39,494 for months 61 to 72, $40,679 for months 73 to 84,
$41,900 for months 85 to 96, $43,157 for months 97 to 108 and $44,451 for months
109 to 120.
20
We also
have a three year lease for approximately 13,820 square feet of office and
warehouse space located at 3840 East Eagle Drive, Anaheim, California at a
monthly rental rate of $7,968 for the first year, $8,499 for the second year,
and $9,030 for the third year. The lease for this property began
November 1, 2007 and expires on October 31, 2010. The Machines Sales
Group resides at this location.
ITEM
3 - LEGAL PROCEEDINGS
1. Onofrio Saputo and Christopher
Frisco v. Gateway International Holdings, Inc., Lawrence Consalvi, Timothy
Consalvi and Joe Gledhill, Court of the State of
California, County of Orange, Case No. 30-2008-00110905. Plaintiffs
filed this action on August 21, 2008. A Dismissal with Prejudice was
filed with the Court on or about April 24, 2009.
The
Complaint, which had causes of action for securities fraud, breach of fiduciary
duties, fraud and deceit, and rescission, alleged that the defendants
intentionally misrepresented, or failed to disclose, certain facts regarding the
company prior to the plaintiffs purchasing Gateway International Holdings, Inc.
(now M Line Holdings, Inc.) common stock. The Complaint sought total
monetary damages of approximately $188,415, plus interest, and punitive
damages. We filed an Answer to the Complaint on October 17, 2008,
denying the allegations of the Complaint, denying that plaintiffs are entitled
to any relief whatsoever and asserting various affirmative defenses. On
January 22, 2009, the parties signed a Settlement Agreement, whereby a party
unrelated to the lawsuit, Money Line Capital, Inc., our largest shareholder,
agreed to purchase the plaintiffs’ shares of our common stock for the purchase
price, or $289,000. This settlement closed on April 22,
2009. Of the $289,000 settlement money, $189,000 was paid to
plaintiffs and we received $100,000 in exchange for the cancellation of a
promissory note for $100,000 owed to us by one of the plaintiffs. Per
the settlement agreement, a Dismissal with Prejudice was filed by the plaintiffs
with the Court on or about April 24, 2009, for the purpose of dismissing this
lawsuit.
2. Voicu Belteu v. Mori Seiki Co.,
Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine
Tool Company; Ellison Manufacturing Tech., Superior Court for the State
of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this
action on March 7, 2008.
The
Complaint, which has causes of action for strict products liability and
negligence, alleges that a CNC machine manufactured by Mori Seiki and sold
through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool
Company, was defective and injured the plaintiff. The Complaint seeks
damages in excess of $6,300,000 for medical expenses, future medical expenses,
lost wages, future lost wages and general damages. All American CNC
Sales filed its Answer and Cross-complaint on July 1, 2008 against several
individuals and entities involved in the machine purchase and sales transaction,
seeking indemnity and contribution.
Plaintiff
and All American CNC Sales have both responded to discovery requests and are
engaged in the meet and confer process to resolve outstanding
discovery issues. Several depositions have been taken and we
anticipate more going forward. The Court has set a trial date for
March 22, 2010. Management believes we have meritorious defenses to
plaintiff’s claims and plan to vigorously defend against the lawsuit and pursue
Mori Seiki, and possibly other entities or individuals, for any damages we
incur. However, there can be no assurance as to the outcome of the
lawsuit.
3. James M. Cassidy v. Gateway
International Holdings, Inc., American Arbitration Association, Case No.
73-194-32755-08. We were served with a Demand for Arbitration and
Statement of Claim, which was filed on September 16,
2008.
21
The
Statement of Claim alleges that claimant is an attorney who performed services
for us pursuant to an agreement dated April 2, 2007 between us and the
claimant. The Statement of Claim alleges that we breached the agreement
and seeks compensatory damages in the amount of $195,000 plus interest,
attorneys’ fees and costs. We deny the allegations of the Statement of
Claim and will vigorously defend against these allegations. An arbitrator
has not yet been selected, and a trial date has not yet been
scheduled.
4. Elite Machine Tool Company v. ARAM
Precision Tool and Die, Avi Amichai, Superior Court for the State of
California, County of Orange, Case No. 30-2008-00090891. Elite Machine filed
this action on August 8, 2008.
The
Complaint alleged breach of contract for the defendants failing to pay Elite
Machine for a machine the defendants purchased from Elite Machine, and sought
damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and
Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that
Elite Machine failed to deliver certain parts of the machine per the sales
contract and seeks damages totaling $25,000. In late June, the
parties settled this matter and the lawsuits were dismissed on August 13,
2009. Under the terms of the settlement, Aram paid Elite Machine Tool
Company $4,000 in full and final settlement.
5. CNC Manufacturing v. All American
CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC
Repos, Superior Court for the State of California, County of Riverside,
Case No. RIC 509650. Plaintiff filed this Complaint on October 2,
2008.
The
Complaint alleges causes of action for breach of contract and rescission and
claims All American breached the agreement with CNC Manufacturing by failing to
deliver a machine that conforms to the specifications requested by CNC
Manufacturing, and requests damages totaling $138,750. Elite Machine
filed an Answer timely, on January 15, 2009. Discovery has commenced
in this matter but is not expected to be concluded for several
months. The Court has set a Case Management Conference
for March 29, 2010. Management intends to aggressively defend
itself against this claim. No trial date has been set.
6. Elite Machine Tool Co. v. Sunbelt
Machine, Orange County Superior Court, Case No.
0-2008-00112502. All American filed the Complaint on September 25,
2008. No trial date has been set.
This case involves a dispute between
Elite Machine and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by
Elite Machine to Sunbelt. Sunbelt has claimed that it received a
machine that does not conform to the specifications it ordered. The
amount at issue is approximately $140,000 at this
stage. Subsequent to filing of the above-referenced suit,
Sunbelt has filed a similar action in Federal District Court in Houston,
Texas. As a result, this case was dismissed and the case is being
heard in Federal District Court.
7. Sunbelt Machine Works Corp. v. All
American CNC Sales, Inc., United States District Court, Southern District
of Texas, Case No. 4:09-cv-108. Sunbelt filed the Complaint on
January 16, 2009.
This case involved a dispute between
All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All
American to Sunbelt. Sunbelt claimed that it received a machine that
does not conform to the specifications it ordered. The amount sought
in the Complaint was approximately $139,000. All American filed its
Answer on April 13, 2009. Sunbelt filed a Motion for Summary
Judgment, which was granted by the Court. As a result a Judgment has
been entered against All American in the amount of $153,000, which is accrued as
of June 30, 2009. Management for All American maintains the claim has
no merit and intends to appeal the Judgment.
22
8. Hwacheon Machinery v. All American
CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County,
Illinois, Case No. 09L544. The Complaint was filed on June 8,
2009.
The Complaint alleges causes of action
for account stated, and arises from a claim by Hwacheon that All American CNC
has not paid it for machines sold to All American CNC. The Complaint
seeks damages of approximately $362,000. All American filed an answer
on or about July 15, 2009. We denied the allegations in the Complaint
and plan to vigorously defend the Complaint. No trial date has been
set.
9. Fadal Machining v. All American CNC
Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case
No. BC415693. The Complaint was filed on June 12, 2009.
The Complaint alleges causes of
action for breach of contract and common counts against All American CNC seeking
damages in the amount of at least $163,578.88, and arises from a claim by Fadal
that All American failed to pay amounts due. On June 26, 2009, Fadal
amended the Complaint to include M Line Holdings, Inc. as a
Defendant. On or about August 11, 2009, the Court heard oral argument
on Fadal’s Motion for Right to Attach Order and Writ of
Attachment. The Court granted this Motion in part, issuing a Right to
Attach Order against All American CNC in the amount of approximately $164,000,
which has been accrued as of June 30, 2009. The Court denied the
Motion as to M Line Holdings, Inc. On August 12, 2009, All American
CNC filed an Answer to the Complaint, and M Line Holdings, Inc., filed a
demurrer to the Complaint. The Court has scheduled a hearing for the
demurrer for October 15, 2009. This hearing has been continued until
November 24, 2009. Management intends to aggressively defend itself against this
claim. No trial date has been set.
10. Do v. E.M. Tool Company,
Orange County Superior Court, Orange County, California, Case No.
30-2009-00123879. The Complaint was filed on June 1,
2009.
The Complaint alleges causes of action
for negligence, product liability and breach of warranty, and seeks damages to
be determined at time of trial. This lawsuit was tendered by E.M.
Tool Company to its insurance company, which is currently providing a
defense. We filed an Answer and a Cross-complaint against the
manufacturer of the equipment the Mori Seiki Company, Ltd. No trial date has
been set.
11. Fox Hills Machining v. CNC
Repos, Orange County Superior Court, Orange County, California, Case No.
30-2009-00121514. The Complaint was filed on April 14,
2009.
The
Complaint alleges causes of action for Declaratory Relief, Breach of Contract,
Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant
failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to
CNC Repos. The damages sought in the Complaint are not less than
$30,000. The Defendants filed an Answer on June 5,
2009. Management intends to aggressively defend itself against this
claim. No trial date has been set.
12. Laureano v. Eran Engineering,
State of California Worker’s Compensation Appeals Board, no case
number.
Mr. Laureano has filed a claim with the
Worker’s Compensation Appeals Board against Eran Engineering. At this
time, Eran Engineering has only been served with a subpoena for business
records, requesting Mr. Laureano’s employment file, personnel file, claim file,
and payroll documents. Management intends to aggressively defend this
claim.
Litigation
is subject to inherent uncertainties, and unfavorable rulings could
occur. If an unfavorable ruling were to occur in any of the above
matters, there could be a material adverse effect on our financial condition,
results of operations or liquidity.
23
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held
our 2009 Annual Meeting of Shareholders on March 25, 2009, in Tustin,
California. There were shareholders representing 14,941,334 votes
present at the meeting, either in person or by proxy, which represented over 50%
of the 27,611,956 total outstanding votes of the Company, so a quorum was
present. The following agenda items set forth in the Company’s 14C
Information Statement on file with the SEC, which had been pre-approved by the
holders of a majority of our common stock, went effective on March 25,
2009:
1. The
election of three (3) directors, namely George Colin, Stephen Kasprisin and Jitu
Banker, to serve until the next Annual Meeting of Shareholders and thereafter
until a successor is elected and qualified. All three nominees were
directors prior to the meeting. This agenda item was pre-approved by
a majority of our shareholders prior the meeting. The shares voting
in favor of this agenda item were as follows:
Director
|
Votes For
|
Votes
Against
|
Votes
Withheld
|
Abstentions
|
Broker
Non-Votes
|
|||||||||||
George
Colin
|
14,371,334 | -0- | -0- | -0- | -0- | |||||||||||
Stephen
Kasprisin
|
14,371,334 | -0- | -0- | -0- | -0- | |||||||||||
Jitu
Banker
|
14,371,334 | -0- | -0- | -0- | -0- |
2. An
amendment to our Articles of Incorporation to change the name of the Company to
M Line Holdings, Inc. This agenda item was pre-approved by a majority
of our shareholders prior the meeting. The shares voting in favor of
this agenda item were as follows:
Votes For
|
Votes
Against
|
Votes
Withheld
|
Abstentions
|
Broker
Non-Votes
|
||||||||
14,371,334
|
-0- | -0- | -0- | -0- |
3. The
ratification of the appointment of Kabani & Company as independent
auditors of the Company for the fiscal year ending June 30,
2009. Kabani & Company were approved as our independent auditors
in place of McKennon Wilson & Morgan LLP, who were removed by our Board of
Directors on March 16, 2009, prior to the meeting. The results of the
voting were as follows:
Votes For
|
Votes
Against
|
Votes
Withheld
|
Abstentions
|
Broker
Non-Votes
|
||||||||
14,371,334
|
-0- | -0- | -0- | -0- |
A more
detailed description of each agenda item at the 2009 Annual Shareholders Meeting
can be found in our Schedule 14C Information Statement dated and filed with the
Securities and Exchange Commission on February 25, 2009.
24
PART
II
ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock is not currently traded on any stock exchange or electronic
quotation system. We expect that our common stock will be traded on the OTC
Bulletin Board at some point in the future, but there is no guarantee this will
occur. On May 16, 2008, we filed a registration statement on Form 10
to re-register our common stock under Section 12 of the Exchange
Act. As a result, on July 15, 2008, we became subject to the
reporting requirements under the Exchange Act.
Holders
As of
June 30, 2009, there were 30,861,956 shares of our common stock outstanding held
by 88 holders of record of our common stock and numerous shareholders holding
shares in brokerage accounts. Of these shares, 13,950,480 are held by
non-affiliates. On the cover page of this filing we value these
shares at $2,790,096. These shares were valued at $0.20 per share,
which is the price of our shares the most recent private transactions involving
our common stock. Due to not being publicly traded at June 30, 2009,
this value may not have been an accurate value of our common stock, or
indicative of the true value of our common stock, at that time.
Dividends
In May
2005, we declared and paid a dividend of $0.005 on our common stock. The
dividend was paid to all shareholders except shareholders who are also directors
of the Company or members of their immediate family, all of whom waived their
right to receive the dividend payment. We have not paid any dividends since May,
2005 nor do we plan to in the foreseeable future.
Securities Authorized for
Issuance Under Equity Compensation Plans
There are
no outstanding options or warrants to purchase, or securities convertible into,
shares of our common stock.
Non-Qualified
Stock Option Plan
In
November 2006, the Board of Directors approved the creating of a non-qualified
stock option plan for key managers, which, among other provisions, would have
provided for the granting of options by the board at strike prices at or
exceeding market value, and expiration periods of up to ten
years. This plan was never created and no options were ever
issued.
25
As a
result, we did not have any options, warrants or rights outstanding as of June
30, 2009.
Plan Category
|
Number of Securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders
|
- 0 - | - 0 - | - 0 - | |||||||||
Equity
compensation plans not approved by security holders
|
- 0 - | - 0 - | - 0 - | |||||||||
Total
|
- 0 - | - 0 - | - 0 - |
Recent Issuance of
Unregistered Securities
On March
25, 2009, we entered into an Assignment of Promissory Note and Consent Thereto
(the “Assignment”) with Money Line Capital, Inc., a California corporation
(“MLCI”), and our largest shareholder, under which MLCI agreed to assume our
repayment obligations to Joseph Gledhill and Joyce Gledhill under that certain
$650,000 principal amount Promissory Note dated December 8, 2008 (the “Gateway
Note”) in exchange for the issuance of 3,250,000 shares of our common stock (the
“Shares”). We issued the Shares, restricted in accordance with Rule
144, to MLCI on June 30, 2009. The issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and MLCI is
a sophisticated investor and familiar with our operations.
If our stock is listed on an exchange
we will be subject to the Securities Enforcement and Penny Stock Reform Act of
1990 requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. The Commission has
adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to a few
exceptions which we do not meet. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.
ITEM
6 – SELECTED FINANCIAL DATA
As a smaller reporting company we are
not required to provide the information required by this
Item.
ITEM
7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Forward-Looking
Statements
This
annual report on Form 10-K of M Line Holdings, Inc. for the year ended June
30, 2009 contains forward-looking statements, principally in this Section and
“Business.” Generally, you can identify these statements because they use words
like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and
similar terms. These statements reflect only our current expectations. Although
we do not make forward-looking statements unless we believe we have a reasonable
basis for doing so, we cannot guarantee their accuracy and actual results may
differ materially from those we anticipated due to a number of uncertainties,
many of which are unforeseen, including, among others, the risks we face as
described in this filing. You should not place undue reliance on these
forward-looking statements which apply only as of the date of this annual
report. These forward-looking statements are within the meaning of Section 27A
of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended, and are intended to be covered by the safe
harbors created thereby. To the extent that such statements are not recitations
of historical fact, such statements constitute forward-looking statements that,
by definition, involve risks and uncertainties. In any forward-looking statement
where we express an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation of belief will be accomplished.
26
We
believe it is important to communicate our expectations to our investors. There
may be events in the future; however, that we are unable to predict accurately
or over which we have no control. The risk factors listed in this filing, as
well as any cautionary language in this annual report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Factors that could cause actual results or events to differ materially from
those anticipated, include, but are not limited to: our ability to successfully
maintain a credit facility to purchase new and used machines, manufacture new
products; the ability to obtain financing for product acquisition; changes in
product strategies; general economic, financial and business conditions; changes
in and compliance with governmental regulations; changes in various tax laws;
and the availability of key management and other personnel.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which requires us to make
estimates and assumptions in certain circumstances that affect amounts reported.
In preparing these financial statements, management has made its best estimates
and judgments of certain amounts, giving due consideration to materiality. We
believe that of our significant accounting policies (more fully described
in Notes to the Consolidated Financial Statements), the following are
particularly important to the portrayal of our results of operations and
financial position and may require the application of a higher level of judgment
by our management, and as a result are subject to an inherent degree of
uncertainty.
Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, these estimates and
judgments are subject to an inherent degree of uncertainty. We review our
estimates on an on-going basis, including those related to sales allowances, the
allowance for doubtful accounts, inventory reserves, long-lived assets, income
taxes and litigation. We base our estimates on our historical experience,
knowledge of current conditions and our beliefs of what could occur in the
future considering available information. Actual results may differ from these
estimates, and material effects on our operating results and financial position
may result. We believe the following critical accounting policies involve our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
27
Revenue
Recognition
We
recognize revenues when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred; (iii) our price to the customer is fixed or determinable; and
(iv) collection of the sales price is reasonably assured. Delivery occurs when
goods are shipped and title and risk of loss transfer to the customer, in
accordance with the terms specified in the arrangement with the customer.
Revenue recognition is deferred in all instances where the earnings process is
incomplete. We record reserves for estimated sales returns and allowances
for both CNC machine sales and manufactured parts in the same period as the
related revenues are recognized. We base these estimates on our historical
experience for returns or the specific identification of an event necessitating
a reserve. Our estimates may change from time to time in the event we ship
manufactured parts which in the customers’ opinion, do not conform to the
specifications provided. To the extent actual sales returns differ from our
estimates, our future results of operations may be affected.
Accounts
Receivable
We
perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
for doubtful accounts based upon our historical experience and any specific
customer collection issues that we have identified. While our credit losses have
historically been within our expectations and the allowance established, we may
not continue to experience the same credit loss rates as we have in the past.
Accounts receivable are written off or reserves established when considered to
be uncollectible or at risk of being uncollectible. While management believes
that adequate allowances have been provided in the Consolidated Financial
Statements, it is possible that we could experience unexpected credit losses.
Our accounts receivable are concentrated in a relatively few number of
customers. One customer, Panasonic Avionics Corporation (“Panasonic”), a leading
provider of in-flight entertainment systems for commercial
aircraft, accounts for 39% and 35% of our consolidated accounts receivable
balance at June 30, 2009 and 2008, respectively. Therefore, a
significant change in the liquidity or financial position of any one customer
could make it more difficult for us to collect our accounts receivable and
require us to increase our allowance for doubtful accounts, which could have a
material adverse impact on our consolidated financial position, results of
operations and cash flows.
Inventories
Within
our Precision Manufacturing segment, we seek to purchase and maintain raw
materials at sufficient levels to meet lead times based on forecasted demand.
Within our Machine Tools segment, we purchase machines held for resale based
upon management’s judgment of current market conditions and demand for both new
and used machines. If forecasted demand exceeds actual demand, we may need
to provide an allowance for excess or obsolete quantities on hand. We also
review our inventories for changes in the market prices of machines held in
inventory and provide reserves as deemed necessary. If actual market
conditions are less favorable than those projected by management, additional
inventory reserves may be required. We state our inventories at the lower of
cost, using the first-in, first-out method on an average costs basis, or
market.
We
adopted Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory
Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4
beginning January 1, 2006,” with no material effect on our financial condition
or results of operations. Abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) are recognized as current-period
charges. Fixed production overhead is allocated to the costs of conversion
into inventories based on the normal capacity of the production facilities. We
utilize an expected normal level of production within the Precision
Manufacturing segment, based on our plant capacity. To the extent we do not
achieve a normal expected production levels, we charge such under-absorption of
fixed overhead to operations.
28
Long-lived
Assets
We
continually monitor and review long-lived assets, including fixed assets
intangible assets with definite lives, for impairment whenever events or changes
in circumstances indicate that the carrying amount of any such asset may not be
recoverable. The determination of recoverability is based on an estimate of the
undiscounted cash flows expected to result from the use of an asset and its
eventual disposition. The estimate of cash flows is based upon, among other
things, certain assumptions about expected future operating performance, growth
rates and other factors. Our estimates of cash flows may differ from actual cash
flows due to, among other things increased competition, loss of customers and
loss of manufacturer representation contract, all which can cause materially
changes our operating performance. If the sums of the undiscounted cash flows
are less than the carrying value, we recognize an impairment loss, measured as
the amount by which the carrying value exceeds the fair value of the asset or
discounted cash flows. Long-lived assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Based on
managements review, we determined there were no impairments of long-lived assets
as of June 30, 2009 and 2008.
Goodwill and Acquired Intangible
Assets
SFAS No.
141 “Business Combinations” requires that all business combinations be accounted
for under the purchase method. The statement further requires
separate recognition of intangible assets that meet certain criteria. SFAS No.
142 “Goodwill and Other Intangible Assets”, requires that an acquired intangible
asset meeting certain criteria shall be initially recognized, and measured based
on its fair value.
In
accordance with SFAS No. 142, goodwill is not amortized, and is tested for
impairment at the reporting unit level annually or when there are any
indications of impairment. A reporting unit is an operating segment for which
discrete financial information is available and is regularly reviewed by
management.
SFAS No.
142 requires a two-step approach to test goodwill for impairment for each
reporting unit. The first step tests for impairment by applying fair value-based
tests to a reporting unit. The second step, if deemed necessary, measures the
impairment by applying fair value-based tests to specific assets and liabilities
within the reporting unit. Application of the goodwill impairment tests require
judgment, including identification of reporting units, assignment of assets and
liabilities to each reporting unit, assignment of goodwill to each reporting
unit, and determination of the fair value of each reporting unit. The
determination of fair value for a reporting unit could be materially affected by
changes in these estimates and assumptions. Based on its review, we
determined there were impairments of goodwill from continuing operations as of
June 30, 2009.
Accounting
for Income Taxes
We
account for income taxes under the provisions of SFAS No. 109, “Accounting for Income
Taxes”. Under this method, we determine deferred tax assets and liabilities
based upon the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. The tax consequences of
most events recognized in the current year's financial statements are included
in determining income taxes currently payable. However, because tax laws and
financial accounting standards differ in their recognition and measurement of
assets, liabilities, equity, revenues, expenses, gains and losses, differences
arise between the amount of taxable income and pre-tax financial income for a
year and between the tax bases of assets or liabilities and their reported
amounts in the financial statements. Because it is assumed that the reported
amounts of assets and liabilities will be recovered and settled, respectively, a
difference between the tax basis of an asset or a liability and its reported
amount on the consolidated balance sheet will result in a taxable or a
deductible amount in some future years when the related liabilities are settled
or the reported amounts of the assets are recovered. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and unless we believe that recovery is more likely than not, we must
establish a valuation allowance.
29
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109” (“FIN48”). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN 48 describes a recognition threshold and measurement
attribute for the recognition and measurement of tax positions taken or expected
to be taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Therefore, FIN 48 was effective for us beginning July 1,
2007. The adoption of FIN 48 on July 1, 2007 did not have a material impact
to our consolidated financial statements.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which
replaces FAS No. 141. SFAS No. 141(R) establishes principles and requirements
for how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest; recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R) is
to be applied prospectively to business combinations. The company is evaluating
this statement for the impact, if any, on its consolidated financial statements,
however, we will be required to expense cost related to any acquisition after
June 30, 2009
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. This statement
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and for the
deconsolidation of a subsidiary. Upon its adoption, effective for us in the
fiscal year beginning July 1, 2009, noncontrolling interests will be classified
as equity in the Company’s balance sheet and income and comprehensive income
attributed to the noncontrolling interest will be included in the Company’s
income and comprehensive income, respectively. The provisions of this standard
must be applied prospectively upon adoption except for the presentation and
disclosure requirements. We do not expect the adoption of SFAS No. 160 to have
an impact on our consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. SFAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. We do not expect the adoption of
SFAS No. 161 to have a significant impact on our consolidated financial
statements.
In April
2008, The FASB issued FASB Staff Position FSP No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142.
FSP 142-3 is effective for us in the fiscal year beginning July 1,
2009. We are currently evaluating the impact of the adoption of FSP
142-3 on our consolidated financial statements.
30
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS will become effective 60 days following the Security and
Exchange Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”. We do not expect the adoption of SFAS
No. 162 to have a significant impact on our consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”). SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 will be effective for interim or
annual period ending after June 15, 2009 and will be applied prospectively. We
will adopt the requirements of this pronouncement for the year ended June 30,
2009. We do not anticipate the adoption of SFAS 165 will have an impact on its
consolidated results of operations or consolidated financial
position.
EITF
07-5, “ Determining Whether an Instrument ( or embedded Feature” is Indexed to
an Entity’s Own Stock” (EIFT 07-5) was issued in June 2008 to clarity how to
determine whether certain instruments or features were indexed to an entity own
stock under EITF Issue No. 01-6, “ The Meaning of “ Indexed to a Company’s Own
Stock” (EITF 01-6). EITF 07-5 applies to any freestanding financial instrument
(or embedded feature” that has all the characteristics of a derivative as
defined in FAS 133, for purpose of determining whether that instrument (or
embedded feature) qualifies for the first part of the paragraph 11 (a) scope
exception. It is also applicable to any freestanding financial instrument (e.g.,
gross physically settled warrants) that is potentially settled in an entity’s
own stock, regardless of whether it has all the characteristics of a derivative
as defined in FAS 133, for purpose of determining whether to apply EITF 00-19.
EITF 07-5 does not apply to share-based payment awards within the scope of
FAS123(R), Share-Based Payment (FAS123R). However, an equity-linked
financial instrument issued to investors to establish a market-based measure of
the fair value of employee stock options is not within the scope of FAS 123 R
and therefore is subject to EITF 07-5.
The
guidance is applicable to existing instruments and is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Management is currently considering
the effect of this EITF on financial statements for the year beginning July 1,
2009.
On
January 12, 2009 FASB issued FSP EITF 99-20-01, “ Amendment to the Impairment
Guidance of EITF Issued No. 99-20”. This RSP amends the impairment
guidance in EITF Issued No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-that-temporary impairment has
occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “ Accounting for Certain Investments in
Debt and Equity Securities”, and other related guidance. The FSP is shall be
effective for interim and annual reporting periods ending after December 15,
2008, and shall be applied prospectively. Retrospective application to a prior
interim or annual reporting period is permitted. We do not believe
this pronouncement will impact our financial statements.
31
Results
of Operations
Discontinued
Operations
Effective
June 30, 2009, our Board of Directors elected to cease the operations of All
American because the business was no longer economically
feasible. During the year ended June 30, 2009, All American was part
of our machine tools group. The company sold new CNC machines it
purchased from third party manufacturers. As a result of All American
shutting down its operations on June 30, 2009, the operations of All American
are included in the accompanying financial statements as discontinued
operations.
All
American generated revenues of $2,964,928 and $4,298,613 during the years
ended June 30, 2009 and 2008, respectively.
During
the year ended June 30, 2009, we recognized pre-tax losses from discontinued
operations of ($2,264,216). Also during the year ended June 30, 2009,
we recorded a loss from discontinued operations, net of income tax benefit of
$2,264,216. The losses for All American resulted primarily from -
trading losses and the write off of intangible assets.
Since we
did not cease operating All American until the last day of our fiscal year the
shutdown of these operations did not impact our revenues or operating results
for fiscal 2009.
Sales
Concentration
The sales
within our Precision Manufacturing segment are highly concentrated within one
customer, Panasonic Sales to this customer accounted for 66% and 27% of
consolidated sales for the years ended June 30, 2009 and 2008, respectively. The
loss of all or a substantial portion of sales to this customer would cause us to
lose a substantial portion of our sales within this segment and on a
consolidated basis, and have a corresponding negative impact on our operating
profit margin due to operation leverage this customer provides. This could lead
to sales volumes not being high enough to cover our current cost structure or
provide adequate operating cash flows. Panasonic has been a customer of ours for
approximately 15 years and we believe our relationship is good.
Gross
Profit
Our gross
profit represents sales less the cost of sales. Gross margin represents our
gross profit divided by sales.
Cost of
sales for our Precision Manufacturing segment primarily consists of raw
materials, direct labor, depreciation of manufacturing equipment and overhead
incurred in the manufacturing of parts for our customers. Our gross margins will
increase and decrease depending on the amount of products we manufacture as
result of allocating fixed manufacturing costs over a larger or reduced number
of parts, which yields lower or higher per unit costs, respectively. As a
result, a change in manufacturing volume in a quarter can significantly affect
our gross margin in that and future quarters.
Cost of
sales for our Machine Sales Segment includes the cost of machines, replacement
parts, freight, and refurbishment expenses. Gross margins within the Machine
Sales segment can vary based on the price we procure equipment for in the
marketplace, sales mix between new and used equipment and the costs to refurbish
used machines.
32
Selling,
General and Administrative
Our
selling, general and administrative expenses consist of personnel costs,
including the sales, executive, finance and administration. These costs also
include non-manufacturing related depreciation, overhead and professional fees
(primarily legal and accounting).
Amortization
of Intangible Assets
Our
amortization expense includes the amortization of identifiable intangible
assets, consisting of customer lists, from our acquisition of All American CNC
Sales, Inc. in 2004 and our acquisition of CNC Repos, Inc. in fiscal
2008.
Interest
Expense
Interest
expense primarily consists of the cost of borrowings under our credit agreement
with Pacific Western Bank, loans from Joseph Gledhill, a former executive
officer and Director, amounts previously outstanding with First Financial Credit
and capital lease agreements. See Liquidity and Capital Resources and Notes to
Consolidated Financial Statements for further discussion.
Segment
Information
Year ended June 30,
|
||||||||||||||||
2009
|
2008
|
Change ($)
|
Change (%)
|
|||||||||||||
Sales
by segment
|
||||||||||||||||
Machine Sales
|
$ | 4,752,435 | $ | 8,955,916 | $ | (4,203,481 | ) | 47 | ||||||||
Precision
Manufacturing
|
4,898,749 | 6,230,190 | (1,331,441 | ) | 21 | |||||||||||
Gross
profit by segment
|
||||||||||||||||
Machine Sales
|
1,172,998 | 2,001,147 | 828,149 | 41 | ||||||||||||
Precision
Manufacturing
|
1,731,312 | 2,400,158 | 668,846 | 28 | ||||||||||||
Gross
Margin by segment-
|
||||||||||||||||
Machine Sales
|
25 | % | 22 | % | ||||||||||||
Precision
Manufacturing
|
35 | % | 39 | % |
Results
of Operations for the Year Ended June 30, 2009 and 2008
Introduction
For the twelve months ended June 30,
2009, we generated $9,651,183 in revenues on cost of sales of
$6,746,873. With these revenues and cost of sales for the year ended
June 30, 2009, we had a net income(loss) of ($2,258,883). For the
year ended June 30, 2008, we had revenues of $15,219,106, on cost of sales of
$10,817,801. With these revenues and costs of sales we had a net
income(loss) of $73,407, for year ended June 30, 2008. An explanation
of these numbers and how they relate to our business is contained
below.
33
Revenues, Expenses and Loss
from Operations
Year
Ended June
30,
2009
|
Year
Ended June
30,
2008
|
|||||||
Revenues
|
$ | 9,651,183 | $ | 15,219,106 | ||||
Cost
of Sales
|
6,746,873 | 10,817,801 | ||||||
Selling,
General and Administrative Expenses
|
2,771,762 | 3,989,227 | ||||||
Amortization
of Intangible Assets
|
41,783 | 17,410 | ||||||
Operating
Income
|
90,765 | 394,668 | ||||||
Interest
Expense
|
(109,147 | ) | (155,455 | ) | ||||
Interest
Income
|
9,990 | 7,029 | ||||||
Gain
on Sale of Assets
|
16,125 | (63,652 | ) | |||||
Total
Other Income
|
(83,032 | ) | (212,078 | ) | ||||
Net
Income (Loss)
|
$ | (2,258,883 | ) | $ | 73,407 |
Revenues
Our
revenues for the year ended June 30, 2009 were $9,651,183 compared to revenues
of $15,219,106 for the year ended June 30, 2008. Our approximately
33% reduction in our revenues from the year ended June 30, 2008 to year ended
June 30, 2009, was primarily due to a decline in orders due to a slowdown in the
overall economy. Our revenues for the year ended June 30, 2009
consisted primarily of sales of CNC machines and machined products.
Cost
of Sales
Our cost
of sales for the year ended June 30, 2009, were $6,746,873 and consisted
primarily of used CNC machines and raw materials usage, compared to our cost of
sales for the year ended June 30, 2008 of $10,817,305. The reduction
in our cost of sales was primarily due to a slowdown in the overall economy and
a lack of orders from our customers.
Selling,
General and Administrative Expenses
Our
selling, general and administrative expenses are those expenses we have related
to the actual sales of our products and the costs we incur in transporting those
products. For the year ended June 30, 2009 our selling and
distribution expenses were $2,771,762, compared to $3,989,227 for the year ended
June 30, 2008. Our selling, general and administrative expenses for
the year ended June 30, 2009, primarily consisted of salaries of $717,477, rent
of $490,196, legal and professional fees of $470,494, and insurance expenses of
$297,393.
Interest
Expense
For the
year ended June 30, 2009, our interest expense decreased by $46,308 compared to
the comparable period in 2008. The change is attributable to lower average debt
balances and decreases in the average interest rate paid on our debt and capital
lease obligations.
Gain
on Sale of Assets
During
2009, we recorded net gain from the sale of assets resulting from the sale
of certain manufacturing equipment within the Precision Manufacturing Group
during 2009 for proceeds of $16,125. During the 2008 period, we
recognized a net loss of $63,652 from the sale of assets as we sold certain
manufacturing equipment within the Precision Manufacturing
group.
34
Loss
from Discontinued Operations
The
profit (Loss) from discontinued operations were $(2,264,216) and
$917 for the years ended June 30, 2009 and 2008, respectively. As
noted above, for the period ended in 2009, this was primarily related to the
decision by our management to cease operating All American CNC Sales,
Inc. See Notes to Consolidated Financial Statements for further
discussion.
Provision
for Income Taxes
For the
2009 period, the effective tax rate was 31%. There was no tax provision for 2009
apart from the minimum state income taxes for the year.
Liquidity
and Capital Resources
Our
principal sources of liquidity consist of cash and cash equivalents, cash
generated from operations and borrowing from various sources, including Pacific
Western Bank. At June 30, 2009, our cash and cash equivalents totaled $438,030
and we had working capital of $440,594.
At June
30, 2009, we had $440,000 in debt outstanding under our credit agreement with
Pacific Western Bank. The credit agreement provides for borrowings of up to
$1,500,000, which includes a line of credit, a term loan and a letter of credit.
The amount outstanding under the line of credit, term loan and letter of credit
are $440,000, $250,000 and $0, respectively. The credit agreement is currently
secured by substantially all of our assets and personal guarantees by two of our
former executive officers, Joseph Gledhill and Timothy Consalvi. On
November 29, 2008, the term of the credit agreement was extended through
November 21, 2009. Since that time we have agreed on an additional
two month extension with Pacific Western Bank.
We have
no liability under the letter of credit as this was terminated during the year
ended June 30, 2009.
The line
of credit provides for borrowings of up to $1,000,000, bearing interest at the
lender's referenced prime rate plus 1.5%, and is payable monthly with the
outstanding principal balance due on November 21, 2008. The amount available for
borrowings is determined on a monthly basis based on 80% of eligible accounts
receivable, as defined. As of June 30, 2009, the amount that should have been
available for borrowings was $560,000; however, due to our request to change
personal guarantors, this line was frozen by Pacific Western Bank and no amount
was available for borrowings.
The term
loan provides for borrowings of up to $500,000. The loan bears interest at the
lender's referenced prime rate plus 1.5%, with principal and interest payments
due monthly.
The
current credit agreement requires us to maintain certain financial and
non-financial covenants. These covenants are as follows:
|
·
|
No
later than 90 days after the end of our fiscal year we must provide
audited financial statements for the period ended to the
lender;
|
|
·
|
No
later than 60 days after the end of each fiscal quarter we must provide
unaudited financial statements for the period ended to the
lender;
|
|
·
|
No
later than 30 days after the filing date for any tax returns we must
provide the tax returns for the period ended to the
lender;
|
|
·
|
Minimum
working capital of $800,000, to be evaluated
quarterly;
|
|
·
|
Maintain
a minimum current ratio of 1.15 to 1.00, to be evaluated
quarterly;
|
|
·
|
Maintain
a minimum tangible net worth of $2,750,000, to be evaluated
quarterly;
|
35
|
·
|
Maintain
a debt/worth” ratio of 2.50 to 1.00, to be evaluated quarterly, with
“debt/worth” ratio being defined as total liabilities (excluding debt
subordinated to lender) and divided by our tangible net
worth;
|
|
·
|
Maintain
a commercial loan debt service coverage ratio of 1.35 to 1.00, to be
evaluated annually, and is calculated as our net profit, plus depreciation
and amortization, minus any dividends, withdrawals and non-cash
income/expenses, divided by the current portion of our long term debt,
plus the current portion of any capital lease
obligations;
|
|
·
|
We
cannot, without prior written consent of the lender, make any capital
expenditure totaling $1,000,000 in any fiscal year, or incur any liability
for rentals of property in an amount which, together with capital
expenditures in any fiscal year exceeds such
sum;
|
|
·
|
We
must be profitable at the end of each fiscal year and cannot incur a net
loss in more than one fiscal quarter. For purposes of this covenant, the
profitability is calculated as our net profit, plus depreciation and
amortization, minus any dividends, withdrawals and non-cash
income/expenses items;
|
|
·
|
We
may not incur any trade debt, except in the normal course of business, and
we may not sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in or encumber any of our assets, without written
consent of the lender;
|
|
·
|
We
may not engage in any business activities substantially different than
those which we are presently engaged, or cease operations, liquidate,
merge, transfer, acquire or consolidate with any other entity, without
prior written consent of the
lender;
|
|
·
|
We
may not pay any cash dividends on our common stock without the prior
written consent of the lender; and
|
|
·
|
We
may not loan, invest in or advance money or assets to any other person,
enterprise or entity, or purchase, acquire, or create any interest in any
other enterprise or entity, or incur any obligation as a surety or
guarantor other than in the ordinary course of business, without the prior
written consent of the lender.
|
The
failure to meet these affirmative and negative covenants under the Agreement
would constitute a default under the loan agreement. If we were to default under
the loan agreement, and if at that time we are unable to get the lender to waive
or forbear the default, then the lender could immediately terminate the
loan agreement and all indebtedness then owed by us to the lender would be
immediately due and payable, without any further notice by the lender. Were this
to occur it would have a significant negative impact on our business and
liquidity position.
As of
June 30, 2008, we did not meet our capital expenditures and profitability
covenants, as set forth in our prior credit agreement with Pacific Western
Bank. On September 4, 2008, Pacific Western Bank provided us with a
letter of forbearance from the measurement of the required covenants as of June
30, 2008. Beginning on July 1, 2008, we are required to comply with
all of the covenants of the amended credit agreement. We were in
compliance with the covenants at June 30, 2009, we are currently in compliance
with the covenants under the amended credit agreement with Pacific Western
Bank.
As of
September 21, 2009, our credit agreement with Pacific Western Bank terminated.
Pacific Western Bank and the company have agreed to a two month extension to
repay the line of credit and our management feels confident that we will be able
to do so in a timely manner.
We
believe that our existing sources of liquidity, along with cash expected to be
generated from sales, will be sufficient to fund our operations, anticipated
capital expenditures, working capital and other financing requirements for the
foreseeable future. We may need to seek to obtain additional debt or equity
financing if we experience downturns or cyclical fluctuations in our business
that are more severe or longer than anticipated, or if we fail to achieve
anticipated revenue targets, or if we experience significant increases in the
cost of raw material and equipment for resale, lose a significant
customer, or increases in our expense levels resulting from being a
publicly-traded company, if we achieve this status. If we attempt to obtain
additional debt or equity financing, we cannot assure you that such financing
will be available to us on favorable terms, or at all.
36
Cash
Flows
The
following table sets forth our cash flows for the years ended June
30:
|
2009
|
2008
|
||||||
Provided
by (used in)
|
||||||||
Operating
activities
|
$ | (221,938 | ) | $ | 384,298 | |||
Investing
activities
|
14,277 | (230,603 | ) | |||||
Financing
activities
|
(378,953 | (101,598 | ) | |||||
|
(586,614 | ) | $ | 52,097 |
Cash
Flows for the Years Ended June 30, 2009 and 2008
Operating
Activities
Net cash
provided by (used in) operating activities was ($221,938) for the year ended
June 30, 2009, compared to $384,298 for the year ended June 30,
2008. Our cash from operating activities for the year ended June 30,
2009 was primarily $604,577 in accounts receivables, $419,868 in inventories,
$94,761 in prepaid expenses and other assets, ($181,071) in accounts payable and
accrued expenses, ($149,500) in customer deposits, and ($187,954) in income
taxes payables.
Investing
Activities
Net cash
provided by (used in) investing activities was $14,277 for the year ended June
30, 2009, compared to ($230,603) for the year ended June 30,
2008. For the year ended June 30, 2009, our cash provided by
(used in) investing activities consisted of $74,790 in proceeds from sale of
assets and ($60,513) in capital expenditures. These related to
equipment purchases and sales in our precision manufacturing group.
Financing
Activities
Net cash
provided by (used in) financing activities was ($378,953) for the year ended
June 30, 2009, compared to ($101,598) for the year ended June 30, 2008.
The cash provided by (used in) financing activities for the year ended
June 30, 2009, consisted of $110,000 in net borrowings on our line of credit,
($202,416) in payments on note payables, ($198,579) in payments on related party
notes payable, and ($87,958) in payments on capital leases.
Contractual
Obligations
The
following table summarizes our contractual obligations and commercial
commitments as of June 30, 2009:
|
2010
|
2011
|
2012
|
2013
|
2014
|
Total
|
||||||||||||||||||
|
|
|||||||||||||||||||||||
Debt
obligations
|
$ | 265,969 | $ | 167,165 | $ | 0 | $ | 0 | $ | 0 | $ | 433,134 | ||||||||||||
Capital
leases
|
82,519 | 53,830 | 50,329 | 3,038 | 0 | 189,716 | ||||||||||||||||||
Operating
leases
|
514,521 | 453,966 | 408,816 | 0 | 0 | 1,377,303 | ||||||||||||||||||
$ | 863,009 | $ | 674,961 | $ | 459,145 | $ | 3,038 | $ | 0 | $ | 2,000,153 |
37
Quantitative
and Qualitative Disclosures about Market Risk
The only
financial instruments we hold are cash and cash equivalents. We also have a
floating interest rate agreement with Pacific Western Bank. Changes in market
interest rates will impact our interest costs.
We are
currently billed by the majority of our vendors in U.S. dollars and we currently
bill the majority of our customers in U.S. dollars. However, our financial
results could be affected by factors such as changes in foreign credit n
currency rates or changes in economic conditions.
Off
Balance Sheet Arrangements
We have
no off balance sheet arrangements.
ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are
not required to provide the information required by this Item.
ITEM
8 - FINANCIALS STATEMENT AND SUPPLEMENTARY DATA
Reports
of Registered Public Accounting Firms
|
F-2
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the years ended June 30, 2009 and
2008
|
F-4
|
Consolidated
Statements of Shareholders’ Equity for the years ended June 30, 2009
and 2008
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 and
2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March
16, 2009, we dismissed McKennon Wilson & Morgan LLP, the independent
accountants previously engaged as the principal accountants to audit our
financial statements. The decision to change accountants was approved
by our Board of Directors.
Also
effective on March 16, 2009, we engaged Kabani & Company, Certified Public
Accountants, as our independent certified public accountants. The
decision to change accountants was approved by our Board of
Directors.
38
McKennon
Wilson & Morgan LLP, audited our financial statements for our fiscal year
ended June 30, 2008. The audit report of McKennon Wilson & Morgan
LLP on our financial statements for the fiscal year stated above (the “Audit
Period”) did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. During the Audit Period, and through March 16, 2009,
there were no disagreements with McKennon Wilson & Morgan LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountants, would have caused it to make reference
to the subject matter of the disagreements in connection with its report, and
there were no reportable events as described in Item 304(a)(1)(v) of Regulation
S-K.
During
the two most recent fiscal years, or any subsequent interim period prior to
engaging Kabani & Company, we nor anyone acting on our behalf consulted with
Kabani & Company regarding (i) the application of accounting principles to a
specific completed or contemplated transaction, or (ii) the type of audit
opinion that might be rendered on the company’s financial statements where
either written or oral advice was provided that was an important factor
considered by the company in reaching a decision as to the accounting, auditing,
or financial reporting issue, or (iii) any matter that was the subject of a
disagreement with the company’s former accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
former accountant, would have caused it to make reference to the subject matter
of the disagreements in connection with its audit report.
Item
9A(T) Controls and Procedures
(a)
Disclosure Controls and
Procedures
We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, as of June 30, 2009, to ensure that information required to be disclosed by
us in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities Exchange Commission's rules and forms, including to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that as of June 30, 2009, our
disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses identified and
described in Item 9A(T)(b).
(b)
Management Report on
Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act, as amended, as a process designed by, or under the supervision of,
our principal executive and principal financial officer and effected by our
board of directors, management and other personnel, 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 in the United States and includes those policies
and procedures that:
•
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and any disposition of our
assets;
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
39
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. Our management
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2009. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, Management has identified the
following three material weaknesses that have caused management to conclude
that, as of June 30, 2009, our disclosure controls and procedures, and our
internal control over financial reporting, were not effective at the reasonable
assurance level:
1. We
do not have sufficient segregation of duties within accounting functions, which
is a basic internal control. Due to our size and nature, segregation
of all conflicting duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of
transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact of
our failure to have segregation of duties on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted represented a material weakness.
2. We
have not documented our internal controls. We have limited policies
and procedures that cover the recording and reporting of financial
transactions. Although providing this report in this Annual Report is
optional for us at this time, written documentation of key internal controls
over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley
Act. We are required to provide written documentation of key
internal controls over financial reporting beginning with our fiscal year ending
June 30, 2009, however we have not documented these
controls. Management evaluated the impact of our failure to have
written documentation of our internal controls and procedures on our assessment
of our disclosure controls and procedures and has concluded that the control
deficiency that resulted represented a material weakness.
3. Prior
to Spring/Summer 2008, we did not have adequate internal controls, or policies
and procedures, with respect to our travel and expense reports. As a
result, it was discovered that certain expense reimbursements were paid to our
officers and directors even though complete expense reimbursement paperwork had
not been submitted with adequate documentation surrounding the nature of the
expense. These expenses reimbursements were paid based on the
incomplete paperwork. To the extent these expenses could not
subsequently be substantiated we requested reimbursement from that officer and
director.
To address these material weaknesses,
management performed additional analyses and other procedures to ensure that the
financial statements included herein fairly present, in all material respects,
our financial position, results of operations and cash flows for the periods
presented. Accordingly, we believe that the consolidated financial
statements included in this report fairly present, in all material respects, our
financial condition, results of operations and cash flows for the periods
presented.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only our management’s report
in this Annual Report.
40
(c)
|
Remediation
of Material Weaknesses
|
To remediate the material weakness in
our documentation, evaluation and testing of internal controls we plan to engage
a third-party firm to assist us in remedying this material
weakness.
To remediate the material weakness
related to our travel and expense reports we plan to develop written policies
and procedures regarding the payment of expenses to all our
employees. We adopted a policy in July 2008 which requires an officer
to approve another officer’s expense reports, and requiring, two signatures
required for any check issued to an officer or director, neither of which can be
the payee.
(d)
|
Changes
in Internal Control over Financial
Reporting
|
This filing contains our first report
on internal control over financial reporting and, therefore, there are no
changes to report during our most recently completed fiscal
quarter.
ITEM
9B – OTHER INFORMATION
There are no events required to be
disclosed by the Item.
PART
III
ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following table sets forth the names and ages of our current directors and
executive officers, the principal offices and positions held by each person, and
the date such person became a director or executive officer. Our executive
officers are elected annually by the Board of Directors. The directors serve one
year terms until their successors are elected. The executive officers serve
terms of one year or until their death, resignation or removal by the Board of
Directors. Unless described below, there are no family relationships among any
of the directors and officers.
Name
|
Age
|
Position(s)
|
||
George
Colin
|
76
|
Director
(3/09), Chief Executive Officer (12/08)
|
||
Jitu
Banker
|
69
|
Chief
Financial Officer (3/09) and Director (3/09)
|
||
Robert
Sabahat
|
46
|
Secretary
(3/09) and Director
(3/09)
|
George Colin has served as one
of the Company’s directors since January, 2009. Since 1994 Mr. Colin
has been an independent consultant for numerous businesses regarding general
business decisions and investment decisions. From 1976 to 1994, Mr.
Colin was the Chief Executive Officer and majority shareholder of Odyssey
Systems. In this role he managed all aspects of the business, which
manufactured and supplied swimming pool equipment. Mr. Colin also
served as a lieutenant in the U.S. Navy. Mr. Colin received NROTC
officer training at Villanova University and obtained a BSCE in
1955.
41
Jitu Banker has served as one
of the Company’s directors since January, 2009. Mr. Banker is
currently the President and Chief Financial Officer of Money Line Capital, Inc.,
the Company’s largest shareholder. Since 1990, Mr. Banker has also
been the owner of Banker & Co., a company specializing in tax, accounting,
Internal Revenue Service audits, and other related services. From
2004 to 2006, Mr. Banker was one of the Company’s Directors and the Company’s
Chief Financial Officer. Mr. Banker has a Bachelor of Arts in
Accounting with Economics and is a member of the Institute of Chartered
Accountants in England and Wales, the Institute of Management Accountants in
London, England, and the American Institute of Certified Public
Accountants.
Robert Sabahat is an owner and
partner of Madison Harbor Law Group, a law firm located in Orange County,
California. Mr. Sabahat has held this position since September
1999. In this position Mr. Sabahat has a practice focusing on real
estate and commercial litigation involving contract and tort based claims,
business transactions, commercial lease agreements, and unfair
competition. From June 1995 to September 1999, Mr. Sabahat was
Corporate Counsel for Unicorp Paper Industries, Inc., where he was responsible
for all legal matters for the multinational manufacturer of commercial printing
papers. Mr. Sabahat received his Juris Doctorate with honors from
Western State University, College of Law in 1994.
Other
Directorships
None of
our officers and directors are directors of any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to
the requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940.
Audit
Committee
We do not
currently have an audit committee.
Compliance with Section
16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
and executive officers and persons who own more than ten percent of a registered
class of the Company’s equity securities to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
During
the most recent fiscal year, to the Company’s knowledge, the following
delinquencies occurred:
Name
|
No. of Late
Reports
|
No. of
Transactions
Reported Late
|
No. of
Failures to
File
|
|||
Timothy
D. Consalvi
|
1
|
0
|
0
|
|||
Joseph
Gledhill
|
1
|
0
|
0
|
|||
Lawrence
A. Consalvi
|
2
|
1
|
0
|
|||
Stephen
M. Kasprisin
|
2
|
1
|
0
|
|||
George
Colin
|
0
|
0
|
0
|
|||
Jitu
Banker
|
1
|
0
|
0
|
|||
Robert
Sabahat
|
1
|
0
|
0
|
|||
Money
Line Capital, Inc.
|
1
|
3
|
0
|
42
Board Meetings and
Committees
During
the fiscal year ended June 30, 2009, the Board of Directors met on a regular
basis and took written action on numerous other occasions. All the
members of the Board attended the meetings. The written actions were
by unanimous consent
Code of
Ethics
We have
not adopted a written code of ethics, primarily because we believe and
understand that our officers and directors adhere to and follow ethical
standards without the necessity of a written policy.
ITEM
11 - EXECUTIVE COMPENSATION
Executive
Officers and Directors
The
following tables set forth certain information about compensation paid, earned
or accrued for services by (i) our Chief Executive Officer and (ii) all other
executive officers who earned in excess of $100,000 in the fiscal year ended
June 30, 2009, 2008 and 2007 (“Named Executive Officers”):
Name and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($) *
|
Option
Awards
($) *
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
George
Colin (1)
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
Chief
Executive Officer
|
||||||||||||||||||||||||||||||||||
Jitu
Banker (2)
|
2009
|
90,000 | 0 | 0 | 0 | 0 | 0 | 0 | 90,000 | |||||||||||||||||||||||||
Chief
Financial Officer
|
||||||||||||||||||||||||||||||||||
Robert
Sabahat (3)
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
Secretary
|
||||||||||||||||||||||||||||||||||
Timothy
D. Consalvi (4)
|
2009
|
230,000 | 0 | 0 | 0 | 0 | 0 | 3,157 | (9) | 233,157 | ||||||||||||||||||||||||
Former
President and Chief Executive Officer
|
2008
|
260,000 | 51,250 | - | - | - | - | 21,772 | (9) | 333,022 | ||||||||||||||||||||||||
2007
|
260,000 | - | - | - | - | - | 10,864 | (9) | 270,864 | |||||||||||||||||||||||||
Joseph
Gledhill (5)
|
2009
|
248,846 | 0 | 0 | 0 | 0 | 0 | 0 | (10) | 248,846 | ||||||||||||||||||||||||
Former
Executive Vice President
|
2008
|
260,000 | 52,000 | - | - | - | - | 15,372 | (10) | 327,372 | ||||||||||||||||||||||||
2007
|
260,000 | - | - | - | - | - | 16,327 | (10) | 276,327 | |||||||||||||||||||||||||
Lawrence
A. Consalvi (6)
|
2009
|
260,000 | 0 | 0 | 0 | 0 | 0 | 3,157 | (11) | 263,157 | ||||||||||||||||||||||||
Former
Executive Vice President
|
2008
|
260,000 | 50,899 | - | - | - | - | 18,657 | (11) | 329,556 | ||||||||||||||||||||||||
2007
|
260,000 | - | - | - | - | - | 15,629 | (11) | 275,629 | |||||||||||||||||||||||||
Stephen
M. Kasprisin (7)
|
2009
|
15,000 | 0 | 0 | 0 | 0 | 0 | 0 | (12) | 15,000 | ||||||||||||||||||||||||
Former
Chief Financial Officer
|
2008
|
58,333 | - | - | - | - | - | 3,128 | (12) | 81,461 | ||||||||||||||||||||||||
2007
|
134,615 | - | - | - | - | - | 4,874 | (12) | 139,489 | |||||||||||||||||||||||||
Lloyd
Leavitt (8)
|
2009
|
- | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Former
Chief Financial Officer
|
2008
|
- | - | - | - | - | - | - | - | |||||||||||||||||||||||||
2007
|
119,569 | - | - | - | - | - | 8,850 | (13) | 128,419 |
43
|
*
|
Based
upon the aggregate grant date fair value calculated in accordance with the
Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard (“FAS”) No. 123R, Share Based Payment. Our
policy and assumptions made in valuation of share based payments are
contained in the Notes to our June 30, 2009 financial
statements. The monies shown in the “option awards” column is
the total calculated value for each
individual.
|
(1)
|
George
M. Colin was hired as our Chief Executive Officer on December 9,
2008.
|
|
(2)
|
Jitu
Banker was hired as our Chief Financial Officer on March 31,
2009.
|
|
(3)
|
Robert
Sabahat was hired our Secretary effective March 31,
2009.
|
|
(4)
|
Timothy
D. Consalvi resigned from his position as our Chief Financial Officer on
December 9, 2009.
|
|
(5)
|
Joseph
Gledhill resigned from his position as our Executive Vice President on
March 25, 2009, but remains as President of Eran
Engineering.
|
|
(6)
|
Lawrence
Consalvi resigned all positions with us and our subsidiaries, effective
September 24, 2008.
|
|
(7)
|
Stephen
M. Kasprisin was hired on November 13, 2006 as Chief Financial Officer,
and resigned on October 17, 2007. In April 2008, Mr. Kasprisin agreed to
serve as our interim Chief Financial Officer. Mr. Kasprisin
resigned as our Chief Financial Officer and Secretary on March 31,
2009.
|
|
(8)
|
Lloyd
Leavitt joined the Company in January, 2005 through the acquisition of
Spacecraft. Mr. Leavitt’s employment was terminated in February,
2007.
|
|
(9)
|
Includes
vehicle reimbursements of $0, $13,181, and $8,156 in 2009, 2008 and 2007,
respectively, and medical and life insurance payments of $3,157, $8,591,
and $2,708, for those same years.
|
|
(10)
|
Includes
vehicle reimbursements of $0, $15,372 and $13,180, in 2009, 2008 and 2007,
respectively, and medical insurance payments of $3,147 in
2007.
|
|
(11)
|
Includes
vehicle reimbursements of $0, $11,897, and $12,921, in 2009,
2008, and 2007, respectively and medical and life insurance payments of
$3,157, $6,760, and $2,708, in 2009, 2008 and 2007,
respectively.
|
|
(12)
|
Includes
vehicle reimbursements of $1,500 and $2,400 in 2008 and 2007,
respectively, and medical and life insurance payments of $1,628 and $2,474
in 2008 and 2007, respectively.
|
|
(13)
|
Includes
vehicle reimbursements of $5,250 in 2007 and medical insurance payments of
$3,600 in 2007.
|
Employment
Contracts
We
currently do not have written employment agreements with our executive
officers. We had employment agreements with each of our former
principal executives, which provided for participation of the employee in any
tax-qualified and nonqualified deferred compensation and retirement plans, group
term life insurance plans, short-term and long-term disability plans, employee
benefit plans, practices, and programs maintained or to be established by us and
made available to similarly situated executives generally.
44
Agreement with Timothy D.
Consalvi. In connection with our acquisition of All American from its
sole shareholders in September, 2004, Timothy and Kathy Consalvi, All American
entered into an employment agreement with Mr. Consalvi to serve as the President
of All American at a compensation rate of $168,000 per annum. The initial term
of this employment agreement was for one year commencing on October 1, 2004, and
with automatic renewals for successive one year terms unless earlier terminated
by either party. On February 1, 2007, we entered into a new employment agreement
with Mr. Consalvi to serve as our President and Chief Executive Officer at an
annual compensation rate of $260,000. The initial term of this employment
agreement was for two years commencing February 1, 2007, with automatic renewals
for successive two year terms unless terminated by either party. On December 8,
2008, in conjunction with the sale of a portion of his stock to Money Line
Capital, Inc., we entered into a new employment agreement with Mr. Consalvi to
serve as the President of All American at a compensation rate of $200,000 per
annum. The employment agreement provided that Mr. Consalvi may be
terminated for cause with no further compensation. If Mr. Consalvi was
terminated without cause, he was entitled to a lump sum severance payment equal
to 75% of his annual salary at the date of termination, and medical benefits for
a period of nine months after termination. The agreement also provides that for
a period of 12 months following termination of the employment agreement, Mr.
Consalvi shall not (i) compete with respect to any services or products of the
Company which are either offered or are being developed by the Company,
(ii) attempt to influence any employee of ours to leave the employ of the
Company or to aid any competitor, customer or supplier to hire any employee of
ours, (iii) disclose any information about our affairs including trade secrets,
know-how, customer lists, business plans, operational methods, policies,
suppliers, customers or other such Company information, nor (iv) use or employ
any of our information for his own benefit or in any way adverse to our
interests. We terminated this agreement effective June 30, 2009, in conjunction
with closing down the operations of All American. At termination we
paid Mr. Consalvi $20,769, constituting his final paycheck and a severance
payment of $0.
Agreement with Joseph T.W.
Gledhill. On February 1, 2007, we entered into an employment agreement
with Joseph T. W. Gledhill to serve as our Executive Vice President, and
President of our wholly-owned subsidiary, Eran Engineering, Inc., at a
compensation rate of $260,000 per annum. The initial term of this employment
agreement is for two years commencing February 1, 2007, with automatic
renewals for successive two year terms unless terminated by either party. The
employment agreement provides that Mr. Gledhill may be terminated for cause. If
Mr. Gledhill is terminated without cause, he is entitled to a lump sum severance
payment equal to twice his annual salary at the date of termination, and medical
benefits for a period of 24 months after termination. The agreement also
provides that for a period of 12 months following termination of the employment
agreement, Mr. Gledhill shall not (i) compete with respect to any services
or products of the Company which are either offered or are being developed by
the Company, (ii) attempt to influence any employee of ours to leave the employ
of the Company or to aid any competitor, customer or supplier to hire any
employee of ours, (iii) disclose any information about our affairs including
trade secrets, know-how, customer lists, business plans, operational methods,
policies, suppliers, customers or other such Company information, nor (iv)
use or employ any of our information for his own benefit or in any way adverse
to our interests. The agreement provides that the parties will arbitrate any
disputes arising under the agreement.
However
there is no current employment agreement with Mr. Joseph Gledhill at this time.
All prior agreements were terminated effective December
2008.
45
Agreement with Lawrence A.
Consalvi. On February 1, 2007, we entered into an employment agreement
with Lawrence A. Consalvi to serve as our Executive Vice President, and
President of our wholly-owned subsidiary, E.M. Tool Company, Inc. (doing
business as Elite Machine), at a compensation rate of $260,000 per annum. The
initial term of this employment agreement is for two years commencing February
1, 2007, with automatic renewals for successive two year terms unless terminated
by either party. The employment agreement provides that Mr. Consalvi may be
terminated for cause. If Mr. Consalvi is terminated without cause, he is
entitled to a lump sum severance payment equal to twice his annual salary at the
date of termination, and medical benefits for a period of 24 months after
termination. The agreement also provides that for a period of 12 months
following termination of the employment agreement, Mr. Consalvi shall not (i)
compete with respect to any services or products of the Company which are either
offered or are being developed by the Company, (ii) attempt to influence any
employee of ours to leave the employ of the Company or to aid any competitor,
customer or supplier to hire any employee of ours, (iii) disclose any
information about our affairs including trade secrets, know-how, customer lists,
business plans, operational methods, policies, suppliers, customers or other
such Company information, nor (iv) use or employ any of our information for his
own benefit or in any way adverse to our interests. The agreement provides that
the parties will arbitrate any disputes arising under the
agreement. Mr. Consalvi resigned, effective September 24,
2008. We entered into a Separation Agreement with Mr. Consalvi on
September 26, 2008. Under the terms of the agreement, Mr. Consalvi
returned 400,000 shares of our common stock to us for cancellation in order to
repay certain obligations he owed us. The shares were cancelled,
effective October 6, 2008. Mr. Consalvi continues to work with us
selling CNC machines as an independent contractor.
Agreement with Stephen M.
Kasprisin. On November 13, 2006, we entered into an employment agreement
with Stephen M. Kasprisin to serve as our Chief Financial Officer at a
compensation rate of $200,000 per annum. The initial term of this employment
agreement was for one year commencing on November 13, 2006, with automatic
renewals for successive one year terms unless terminated by either party. Mr.
Kasprisin resigned and terminated the agreement on October 14, 2007. We did not
have an employment agreement with Mr. Kasprisin for serving as our interim Chief
Financial Officer. However, we did compensate Mr. Kasprisin the following
for serving as our interim Chief Financial Officer: i) $1,500, ii) 50,000 shares
of our common stock, paid upon close of the transaction with Money Line Capital,
Inc. Mr. Kasprisin resigned as our interim Chief Financial Officer,
our Secretary and a member of our Board of Directors, effective March 31,
2009.
Agreement with James M.
Cassidy. On April 2, 2007, we entered into an agreement with James M.
Cassidy to serve as our General Counsel, at a compensation rate of $120,000 per
annum. The initial term of this agreement was for one year commencing on April
2, 2007, with automatic renewals for successive one year terms unless terminated
by either party. The agreement provides that Mr. Cassidy may be terminated for
cause. If Mr. Cassidy was terminated without cause, he would be entitled to a
termination payment equal to his monthly retainer at the date of termination for
a period of three months. The agreement also provides that for a period of 12
months following termination of the employment agreement, Mr. Cassidy shall not
(i) disclose any information about the affairs of the Company including trade
secrets, know-how, customer lists, business plans, operational methods,
policies, suppliers, customers or other such Company information, nor (ii) use
or employ any such Company information for his own benefit or in any way adverse
to the Company’s interests. The agreement provides that the parties will
arbitrate any disputes arising under the agreement. On March 13, 2008, we
terminated the agreement with Mr. Cassidy for cause.
Agreement with Lloyd Leavitt.
In connection with our acquisition of Spacecraft Machine Products, Inc. from
Lloyd Leavitt, III and the Leavitt Family Trust in January 2005, Spacecraft
entered into an employment agreement with Lloyd Leavitt, III, to serve as its
President at a compensation rate of $115,050 per annum. The initial term of this
employment agreement was for one year commencing on January 31, 2005, with
automatic one-year renewals unless earlier terminated by either party. In
September 2005, we entered into a new employment agreement with Lloyd Leavitt to
perform the duties as our Chief Financial Officer, the terms of which included
the issuance of 300,000 restricted shares of our common stock. The shares were
valued at $357,000 based on the common stock price at the date of the award. As
a result of the closure of Spacecraft, Spacecraft’s employment agreement with
Mr. Leavitt was terminated. On February 28, 2007, we negotiated the termination
of Mr. Leavitt’s employment with us. Under the terms of the separation
agreement, Mr. Leavitt was paid his base salary for a period of 6 months
following termination.
46
Other
Compensation
We have
employment agreements with several of our other employees, including Kenneth
Collini and Douglas Redoglia, both of whom are salesmen for used CNC
Machines.
Director
Compensation
The following table sets forth director
compensation as of June 30, 2009:
Name
|
Fees Earned or
Paid in Cash
($)
|
Stock Awards
($) *
|
Option Awards
($) *
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
George
Colin (1)
|
0- | 0- | 0- | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Jitu
Banker (2)
|
0- | 0- | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Robert
Sabahat (3)
|
0- | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Timothy
D. Consalvi (4)
|
0- | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Joseph
Gledhill (5)
|
0- | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Lawrence
A. Consalvi (6)
|
0- | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Stephen
M. Kasprisin (7)
|
0- | 0 | 0 | 0 | 0 | 0 | 0 |
|
*
|
Based
upon the aggregate grant date fair value calculated in accordance with the
Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard (“FAS”) No. 123R, Share Based Payment. Our policy and
assumptions made in valuation of share based payments are contained in the
notes to our financial statements. The monies shown in the “option awards”
column is the total calculated value for each
individual.
|
(1)
|
George
M. Colin was appointed to our Board of Directors on January 28,
2009.
|
|
(2)
|
Jitu
Banker was appointed to our Board of Directors on January 28,
2009.
|
|
(3)
|
Robert
Sabahat was appointed to our Board of Directors on March 31,
2009.
|
|
(4)
|
Timothy
D. Consalvi resigned from our Board of Directors effective March 25,
2009.
|
|
(5)
|
Joseph
Gledhill resigned from our Board of Directors effective March 25,
2009.
|
|
(6)
|
Lawrence
Consalvi resigned all positions with us and our subsidiaries, effective
September 24, 2008.
|
|
(7)
|
Stephen
M. Kasprisin resigned from our Board of Directors effective March 31,
2009.
|
We do not provide any compensation to
our directors for serving as directors.
47
Outstanding Equity Awards at
Fiscal Year-End
The following table sets forth certain
information concerning outstanding stock awards held by the Named Executive
Officers as of June 30, 2009:
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
|
|||||||||||||||||||||||||||
George
Colin
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Jitu
Banker
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Robert
Sabahat
|
- | - | - | - | - | - | - | - | - |
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth, as of June 30, 2009, certain information with
respect to the Company’s equity securities owned of record or beneficially by
(i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 10% of each class of the Company’s outstanding equity
securities; and (iii) all Directors and Executive Officers as a
group.
Common Stock
|
||||||||||
Title of Class
|
Name
and Address
of Beneficial Owner (3)
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of
Class (1)
|
|||||||
Common
Stock
|
George
Colin (2)
|
690,000 | 2.2 | % | ||||||
Common
Stock
|
Jitu
Banker (2)
|
325,000 | (4) | 1.1 | % | |||||
Common
Stock
|
Robert
Sabahat (2)
|
0 | 0.0 | % | ||||||
Common
Stock
|
Money
Line Capital, Inc.
17702
Mitchell North, Suite 201
Irvine,
CA 92614
|
16,918,476 | (6) | 54.8 | % | |||||
Common
Stock
|
All
Directors and Officers
As
a Group (3 persons)
|
1,015,000 | (4) | 3.3 | % |
|
(1)
|
Unless
otherwise indicated, based on 30,861,956 shares of common stock issued and
outstanding. Shares of common stock subject to options or
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage of the person holding
such options or warrants, but are not deemed outstanding for the purposes
of computing the percentage of any other
person.
|
|
(2)
|
Indicates
one of our officers or directors.
|
|
(3)
|
Unless
indicated otherwise, the address of the shareholder is M Line Holdings,
Inc.
|
48
|
(4)
|
Includes
25,000 shares held by Mr. Banker’s
son.
|
|
(5)
|
All
three of our officers and directors own stock in Money Line Capital, Inc.,
but none individually or as a group control Money Line’s investment or
control decisions, and, therefore, disclaim ownership of Money Line
Capital’s stockholdings, including our common
stock.
|
|
(6)
|
Includes
1,130,000 shares not owned by Money Line Capital, but controlled by
irrevocable proxy.
|
The
issuer is not aware of any person who owns of record, or is known to own
beneficially, ten percent or more of the outstanding securities of any class of
the issuer, other than as set forth above. There are no classes of
stock other than common stock issued or outstanding.
Change of Control
Transaction
On June
30, 2009, we entered into a binding letter of intent (“LOI”) with Money Line
Capital, Inc. (“MLCI”), our largest shareholder. Under the LOI the
parties agree to complete a transaction whereby all the MLCI shareholders will
exchange their shares of MLCI stock for shares of our stock. No cash
will be exchanged in this transaction. The parties have agreed to
negotiate in good faith to close the transaction on or before January 29,
2010. The LOI is predicated on us being current in our reporting
obligations under the Securities and Exchange Act of 1934, as amended, and being
publicly-traded at the time of the closing; and MLCI having its financial
statements (and its subsidiaries, as applicable) audited for the period ended
June 30, 2009, as well as completing a valuation by a qualified third-party
company.
Technically
the transaction will result in a change of control since the shares currently
held by Money Line Capital, Inc., the owner of 54% of our common stock, will be
retired and become treasury shares, and the new owners of a majority of our
common stock will be the shareholders of Money Line Capital at the time of the
closing of the transaction.
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Letter of Intent with Money Line
Capital, Inc. On June 30, 2009, we entered into a binding
Letter of Intent (the “LOI”) with Money Line Capital, Inc., a California
corporation (“MLCI”). MLCI is our largest shareholder and specializes
in business financing transactions and holds equity in a number of operating
subsidiaries in various fields, including financing, aerospace, real estate,
media, beverage, and technology. Under the LOI the parties agree to
complete a transaction whereby all the MLCI shareholders will exchange their
shares of MLCI stock for shares of our stock. No cash will be
exchanged in this transaction. The parties have agreed to negotiate
in good faith to close the transaction on or before January 29,
2010. The LOI is predicated on us being current in our reporting
obligations under the Securities and Exchange Act of 1934, as amended, and being
publicly-traded at the time of the closing; and MLCI having its financial
statements (and its subsidiaries, as applicable) audited for the period ended
June 30, 2009, as well as completing a valuation by a qualified third-party
company.
Assignment of Gledhill
Note. On March 25, 2009, we entered into an Assignment of
Promissory Note and Consent Thereto (the “Assignment”) with MLCI, under which
MLCI agreed to assume our repayment obligations to Joseph Gledhill and Joyce
Gledhill under that certain $650,000 principal amount Promissory Note dated
December 8, 2008 (the “Gateway Note”) in exchange for the issuance of 3,250,000
shares of our common stock (the “Shares”). Mr. Gledhill, one of our
former directors, and Joyce Gledhill consented to the
Assignment. Pursuant to the Assignment, MLCI and the Gledhill’s
entered into a new $650,000 principal amount secured promissory note, a security
agreement and a pledge agreement. We issued the 3,250,000 shares of
our common stock to MLCI on June 30, 2009.
MLCI Demand
Note. we entered into a Demand Promissory Note dated March 25,
2009 (the “Note”), evidencing the terms under which MLCI will loan us up to
$500,000 on an “as needed” basis for working capital purposes. The
Note accrues interest at a of 10%.per annum. Under the terms of the
Note, MLCI is not obligated to loan us any money, but the Note sets forth the
terms in the event MLCI elects to loan us money for working capital
purposes. As of June 30, 2009, MLCI has loaned us $134,900 under this
Note, as is reflected on our balance sheet for June 30, 2009.
49
Patricia Consalvi Note. On
March 1, 2007, we executed a promissory note in favor of Patricia Consalvi, the
mother of Timothy D. Consalvi and Lawrence A. Consalvi, our President and
Executive Vice President, respectively, for the principal sum of $100,000, with
interest at a rate of 6% per annum payable in twenty-three (23) consecutive
installments of $4,435 with a final payment of $4,360 on February 1, 2009. The
proceeds of the note were used for working capital purposes. This note has been
repaid in full and $0 remains outstanding of June 30, 2009.
Leavitt Family Trust Note. We
currently have an unsecured note payable to a stockholder payable in monthly
installments of $4,505 per month, non-interest bearing, including interest
imputed at 12% per annum for financial statement purposes, in the aggregate
amount of $139,641. As of June 30, 2009, $31,526 remains
outstanding.
Joseph Gledhill Note. We have
an unsecured note payable outstanding to Joseph T.W. Gledhill, one of our
officers, directors and a stockholder, which was due January, 2008, with
interest of 6% per annum, in the aggregate amount of $706,200. This loan from
Mr. Gledhill was used for working capital requirements. This note was repaid in
accordance with its terms with the final payment being paid in the quarter ended
June 30, 2008.
Joseph Gledhill Note No. 2. We
have a second unsecured note payable outstanding to Joseph T.W. Gledhill, one of
our officers, directors and a stockholder, which is due January, 2009, with
interest of 6% per annum, in the aggregate amount of $706,200. This note
consolidated earlier promissory notes issued by us in favor of Mr. Gledhill.
This loan from Mr. Gledhill were used for working capital requirements. This
note was assigned to Money Line Capital, Inc. on March 25, 2009 in exchange for
the issuance of 3,250,000 shares of our common stock to Money Line Capital,
Inc., which were issued on June 30, 2009. As a result of the
assignment this note is no longer an obligation of the company.
Loan to Lawrence A.
Consalvi. In connection with the close of our financial
statements for the period ended June 30, 2008, it was determined that prior to
the filing of our Form 10 with the Securities and Exchange Commission on May 15,
2008, we paid Lawrence A. Consalvi, our then Chief Executive Officer, $81,000
for certain business expenses. Due to the lack of documentation
surrounding the nature of the expense Lawrence A. Consalvi agreed to reimburse
us for this amount. As a result, we recorded a receivable due from
Mr. Consalvi in our financial statements for year ended June 30,
2008. In conjunction with us becoming subject to the reporting
requirements of the Securities Exchange Act of 1934, we have requested that Mr.
Consalvi repay this amount to us or return 400,000 shares of our common stock to
us. Pursuant to Mr. Consalvi’s resignation we entered into a
Separation Agreement with Mr. Consalvi. Pursuant to the Agreement,
Mr. Consalvi returned 400,000 shares of our common stock to us for cancellation
in order to repay this obligation. The shares were cancelled,
effective October 6, 2008. As a result this amount is no longer owed
to us.
We have a
written policy that relates to the payment of expenses to officers and directors
that requires all expenses paid to officers and directors must be signed off on
the by our Chief Financial Officer. We also have a written policy
that any check payable to an officer or director, other than normal payroll
checks, must have the signatures of two officers or directors. Other
than these two policies we do not have a written policy concerning the review,
approval, or ratification of transactions with related persons.
We do not
have an audit, compensation, or nominating committee, and none of our Directors
are considered independent.
We have
not had a promoter during the last five fiscal years.
50
ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
and Restated Fees
During
the year ended June 30, 2009, Kabani & Company and McKennon Wilson
& Morgan LLP billed us $25,000 and $109,866, respectively, in fees for
professional services for the audit of our financial statements in our Form 10-K
and review of financial statements included in our Form 10-Q’s, as
applicable. During the year ended June 30, 2008, McKennon Wilson
& Morgan LLP billed us $109,690 in fees for professional services for
the audit and review of our financial statements.
Tax
Fees
During
the year ended June 30, 2009, Kabani & Company and McKennon Wilson &
Morgan LLP billed us $0 and $5,000, respectively, for professional services for
tax preparation. During the year ended June 30, 2008, McKennon Wilson &
Morgan LLP billed us $17,625 for professional services for tax
preparation.
All
Other Fees
During
the year ended June 30, 2009, Kabani & Company and McKennon Wilson &
Morgan LLP did not bill us any amounts for any other fees. During the year
ended June 30, 2008, McKennon Wilson & Morgan LLP did not bill us any
amounts for any other fees.
Of the
fees described above for the year ended June 30, 2009, 100% were approved by the
entire Board of Directors.
51
PART
IV
ITEM
15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)
|
Financial
Statements
|
The following financial statements are filed as part of this
report:
Reports
of Registered Public Accounting Firms
|
F-2
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the years ended
June 30, 2009 and 2008
|
F-4
|
Consolidated
Statements of Shareholders’ Equity
for the years ended June 30, 2009 and 2008
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 and
2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
(a)(2)
|
Financial
Statement Schedules
|
We do not have any financial statement
schedules required to be supplied under this Item.
(a)(3)
|
Exhibits
|
Refer to (b) below.
(b)
|
Exhibits
|
Item No.
|
Description
|
|
3.1
(1)
|
Articles
of Incorporation of M Line Holdings, Inc., a Nevada corporation, as
amended
|
|
3.2
(5)
|
Certificate
of Amendment of Articles of Incorporation
|
|
3.3
(1)
|
Bylaws
of M Line Holdings, Inc., a Nevada corporation
|
|
10.1
(1)
|
Asset
Purchase Agreement with CNC Repos, Inc. and certain of its shareholders
dated October 1, 2007
|
|
10.2
(1)
|
Commercial
Real Estate Lease dated February 15, 2007 for the office space located in
Tustin, CA
|
|
10.3
(1)
|
Commercial
Real Estate Lease dated November 15, 2007 for the office space located in
Anaheim, CA
|
|
10.4
(1)
|
Employment
Agreement with Timothy D. Consalvi dated February 1,
2007
|
52
10.5
(1)
|
Employment
Agreement with Joseph T.W. Gledhill dated February 5,
2007
|
|
10.6
(2)
|
Employment
Agreement with Lawrence A. Consalvi dated February 5,
2007
|
|
10.7
(1)
|
Share
Exchange Agreement with Gledhill/Lyons, Inc. dated March 26,
2007
|
|
10.8
(1)
|
Share
Exchange Agreement with Nu-Tech Industrial Sales, Inc. dated March 19,
2007
|
|
10.9
(1)
|
Fee
Agreement with Steve Kasprisin dated April 30, 2008
|
|
10.10
(3)
|
Separation
Agreement by and between Gateway International Holdings, Inc., and Mr.
Lawrence A. Consalvi dated September 26, 2008
|
|
10.11
(4)
|
Sales
Agent Agreement by and between Gateway International Holdings, Inc., and
Mr. Lawrence A. Consalvi dated September 30, 2008
|
|
10.12
(4)
|
Loan
Agreements with Pacific Western Bank dated September 20,
2008
|
|
10.13
(5)
|
Assignment
of Promissory Note and Consent Thereto by and between M Line Holdings,
Inc. and Money Line Capital, Inc. dated March 24, 2009
|
|
10.14
(5)
|
M
Line Holdings, Inc. Demand Note for up to $500,000 dated March 25,
2009
|
|
10.15
(6)
|
Letter
of Intent by and between M Line Holdings, Inc. and Money Line Capital,
Inc. dated June 30, 2009
|
|
21
|
List
of Subsidiaries (filed herewith)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of George Colin (filed
herewith).
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Jitu Banker (filed
herewith).
|
|
32.1
|
Section
1350 Certification of George Colin (filed herewith).
|
|
32.2
|
Section
1350 Certification of Jitu Banker (filed
herewith).
|
(1)
Incorporated by reference from our Registration Statement on Form 10-12G filed
with the Commission on May 16, 2008.
(2)
Incorporated by reference from our Registration Statement on First Amended Form
10-12G/A filed with the Commission on July 16, 2008.
(3)
Incorporated by reference from our First Amended Current Report on Form 8-K/A
filed with the Commission on October 10, 2008.
(4) Incorporated
by reference from our Quarterly Report on Form 10-Q for the period ended
September 30, 2008, as filed with the Commission on November 13,
2008.
(5) Incorporated
by reference from our Current Report on Form 8-K filed with the Commission on
April 24, 2009.
(6) Incorporated
by reference from our Current Report on Form 8-K filed with the Commission on
July 6, 2009.
53
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
M
Line Holdings, Inc.
|
||
Dated: October
12, 2009
|
|
/s/ George Colin
|
By:
|
George
Colin
|
|
Chief
Executive Officer
|
||
and
a Director
|
||
Dated: October
12, 2009
|
|
/s/ Jitu Banker
|
By:
|
Jitu
Banker
|
|
Chief
Financial Officer
|
||
and
a Director
|
||
Dated: October
12, 2009
|
|
/s/ Robert Sabahat
|
By:
|
Robert
Sabahat
|
|
Secretary
and a Director
|
In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
/s/ George Colin
|
|
Dated: October
12, 2009
|
||
By:
|
George
Colin
|
|
Chief
Executive Officer
|
||
and
a Director
|
||
|
/s/ Jitu Banker
|
|
Dated: October
12, 2009
|
||
By:
|
Jitu
Banker
|
|
Chief
Financial Officer
|
||
and
a Director
|
||
|
/s/ Robert Sabahat
|
|
Dated: October
12, 2009
|
||
By:
|
Robert
Sabahat
|
|
Secretary
and a Director
|
54
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
M Line
Holdings, Inc.
(formerly, Gateway International, Inc)
We have
audited the accompanying balance sheet of M Line Holdings, Inc. (formerly, Gateway International, Inc) as of June 30, 2009 and the
related statements of operation, stockholders' equity, and cash flow for the year ended June 30, 2009. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of M Line Holdings, Inc. as of June
30, 2009 and the results of its operation and its cash flow for the year ended
June 30, 2009 in conformity with accounting principles generally accepted in the
United States of America.
Kabani
& Company, Inc.
CERTIFIED
PUBLIC ACCOUNTANTS
Los
Angeles, California
October
12, 2009
The
Shareholders and Board of Directors
M Line
Holding, Inc. (formerly Gateway International Holdings, Inc.)
We have
audited the accompanying consolidated balance sheet of M Line Holding, Inc.
(formerly Gateway International Holdings, Inc.) and its subsidiaries
(collectively the “Company”) as of June 30, 2008, and the related statements of
operations, shareholders’ equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of M Line Holding, Inc.
(formerly Gateway International Holdings, Inc.) and subsidiaries as of June 30,
2008, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
/s/
McKennon, Wilson & Morgan LLP
Irvine,
California
October
1, 2008, except for “Note 2”, paragraph “Discontinued Operations”,
for
which the date is October 9, 2009
PART I-FINANCIAL
INFORMATION
M
LINE HOLDINGS, INC.
(FORMERLY,
GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED
BALANCE SHEETS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
As
of June 30,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 438,030 | $ | 901,707 | ||||
Accounts
receivable, net
|
892,718 | 904,262 | ||||||
Inventories
|
1,301,421 | 740,788 | ||||||
Due
from related party
|
- | 81,000 | ||||||
Prepaid
and other current assets
|
80,250 | 180,011 | ||||||
Deferred
Income Taxes - current
|
95,617 | 179,316 | ||||||
Current
assets -Discontinued Operations
|
116,868 | 1,847,392 | ||||||
Total
current assets
|
2,924,905 | 4,834,476 | ||||||
Property
and equipment, net
|
1,160,318 | 1,525,325 | ||||||
Intangible
assets, net
|
348,192 | 389,975 | ||||||
Goodwill
|
- | 198,169 | ||||||
Deposits
and other non current assets
|
66,146 | 61,146 | ||||||
Deferred
Income Taxes - non current
|
182,505 | 245,497 | ||||||
Non
current assets - Discontinued Operations
|
63,704 | 811,192 | ||||||
Total
Assets
|
$ | 4,745,770 | $ | 8,065,780 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities:
|
||||||||
Line
of Credit
|
$ | 440,000 | $ | 330,000 | ||||
Accounts
Payable
|
502,745 | 462,450 | ||||||
Income
Taxes Payable
|
- | 187,954 | ||||||
Accrued
Expenses and other
|
486,951 | 99,844 | ||||||
Accrued
interest due to related party
|
- | 82,173 | ||||||
Notes
payable
|
265,969 | 244,635 | ||||||
Notes
payable, related party
|
- | 734,880 | ||||||
Deferred
Income taxes-current
|
- | 11,263 | ||||||
Capital
Leases-current
|
70,747 | 65,094 | ||||||
Current
liabilities-Discontinued operations
|
717,899 | 1,468,268 | ||||||
Total
Current Liabilities
|
2,484,311 | 3,686,561 | ||||||
Notes
Payable
|
167,165 | 429,493 | ||||||
Notes
Payable, related party
|
- | 31,526 | ||||||
Capital
Leases-long term
|
97,351 | 102,596 | ||||||
Deferred
Income Taxes-long term
|
168,373 | 303,801 | ||||||
Deferred
Rent
|
65,849 | 79,126 | ||||||
Long
term liabilities-Discontinued operations
|
29,751 | 27,765 | ||||||
Total
Liabilities
|
3,012,800 | 4,660,868 | ||||||
Shareholders'
Equity
|
||||||||
Common
Stock, $0.001: 100,000,000 shares
|
||||||||
Authorized;
30,861,956 and 28,378,645 shares issued and outstanding at June 30, 2008
and 2009 respectively
|
30,862 | 28,379 | ||||||
Additional
paid in capital
|
9,505,812 | 8,921,354 | ||||||
Accumulated
deficit
|
(7,803,704 | ) | (5,544,821 | ) | ||||
Total
stockholders' equity
|
1,732,970 | 3,404,912 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 4,745,770 | $ | 8,065,780 |
See
accompanying Notes to Consolidated Financial Statements.
F-3
M
LINE HOLDINGS, INC.
(FORMERLY,
GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
June
30, 2009
|
June
30, 2008
|
|||||||
Net
sales
|
$ | 9,651,183 | $ | 15,219,106 | ||||
Cost
of sales
|
6,746,873 | 10,817,801 | ||||||
Gross
Profit
|
2,904,310 | 4,401,305 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
2,771,762 | 3,989,227 | ||||||
Amortization
of intangible assets
|
41,783 | 17,410 | ||||||
Total
operating expenses
|
2,813,545 | 4,006,637 | ||||||
Operating
income
|
90,765 | 394,668 | ||||||
Other
income (expense):
|
||||||||
Interest
Expense
|
(109,147 | ) | (155,455 | ) | ||||
Interest
Income
|
9,990 | 7,029 | ||||||
Gain
on sale of assets
|
16,125 | (63,652 | ) | |||||
Total
other income (expense)
|
(83,032 | ) | (212,078 | ) | ||||
Income
from continuing operations, before income tax
|
7,733 | 182,590 | ||||||
Income
tax provision
|
2,400 | 110,154 | ||||||
Income
from continuing operations
|
5,333 | 72,436 | ||||||
Income
(loss) from discontinued operations, net of income taxes
|
(2,264,216 | ) | 971 | |||||
NET
INCOME (LOSS)
|
$ | (2,258,883 | ) | $ | 73,407 | |||
NET INCOME PER SHARE:
|
||||||||
Basic
and diluted net income (loss) per share:
|
||||||||
Continuing
operations
|
$ | - | $ | - | ||||
Discontinued
Operations
|
(0.08 | ) | - | |||||
Total
|
$ | (0.08 | ) | $ | - | |||
Weighted
average number of common shares under in per share calculations (basic and
diluted)
|
27,817,257 | 28,219,631 |
See
accompanying Notes to Consolidated Financial Statements.
F-4
M
LINE HOLDINGS, INC.
(FORMERLY,
GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY
AS
OF JUNE 30, 2009 AND 2008
Additional
|
||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Amount
|
Deficit
|
Total
|
||||||||||||||||
Balance,
July 1 2007
|
27,645,334 | $ | 27,646 | $ | 8,419,087 | $ | (5,618,228 | ) | $ | 2,828,505 | ||||||||||
Common
stock issued for creditor settlement
|
150,000 | 150 | 62,850 | - | 63,000 | |||||||||||||||
Retirement
of stock securing repaid note
|
(416,689 | ) | (417 | ) | 417 | - | - | |||||||||||||
Common
stock issued for acquisition of CNC Repos, Inc.
|
1,000,000 | 1,000 | 439,000 | - | 440,000 | |||||||||||||||
Net
income
|
- | - | - | 73,407 | 73,407 | |||||||||||||||
Balance,
June 30, 2008
|
28,378,645 | 28,379 | 8,921,354 | (5,544,821 | ) | 3,404,912 | ||||||||||||||
Retirement
of stock securing repaid note
|
(416,689 | ) | (417 | ) | 417 | - | - | |||||||||||||
Stock
compensation expense -
|
50,000 | 50 | 15,433 | - | 15,483 | |||||||||||||||
Retirement
of stock
|
(400,000 | ) | (400 | ) | (80,600 | ) | - | (81,000 | ) | |||||||||||
Imputed
interest on related party notes
|
- | - | 2,458 | - | 2,458 | |||||||||||||||
Conversion
of note payable
|
3,250,000 | 3,250 | 646,750 | - | 650,000 | |||||||||||||||
Net
loss
|
- | - | - | (2,258,883 | ) | (2,258,883 | ) | |||||||||||||
Balance
sheet at June 30, 2009
|
30,861,956 | $ | 30,862 | $ | 9,505,812 | $ | (7,803,704 | ) | $ | 1,732,970 |
See
accompany Notes to Consolidated Financial Statements.
F-5
M
LINE HOLDINGS, INC.
(FORMERLY,
GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
For
the years Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Net
Income (Loss)
|
$ | (2,258,883 | ) | $ | 73,407 | |||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Gain
on sale of assets
|
(16,125 | ) | 70,354 | |||||
Bad
debt expense
|
34,055 | - | ||||||
Depreciation
|
427,600 | 446,317 | ||||||
Amortization
of Intangibles assets
|
127,323 | 113,396 | ||||||
Impairment
of Goodwill and intangible assets
|
845,471 | - | ||||||
Imputed
interest on related party note
|
2,458 | - | ||||||
Shares
issued for compensation
|
15,483 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
604,577 | (64,124 | ) | |||||
Inventories
|
419,868 | (757,415 | ) | |||||
Related
party receivable
|
- | (81,000 | ) | |||||
Prepaid
expenses and other assets
|
94,761 | 64,049 | ||||||
Accounts
payable and accrued expenses
|
(181,071 | ) | 486,982 | |||||
Customer
Deposits
|
(149,500 | ) | (45,500 | ) | ||||
Income
Taxes payable
|
(187,954 | ) | 59,568 | |||||
Deferred
Rent
|
- | 79,126 | ||||||
Deferred
Income taxes
|
- | (60,862 | ) | |||||
Net
cash provided by (used in) operating activities
|
(221,938 | ) | 384,298 | |||||
Cash
flows from investing activities:
|
||||||||
Capital
Expenditures
|
(60,513 | ) | (316,323 | ) | ||||
Proceeds
from sale of assets
|
74,790 | 49,943 | ||||||
Deposits
and other
|
- | 35,777 | ||||||
Net
Cash provided by (used) in investing activities
|
14,277 | (230,603 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Net
borrowings on line of credit
|
110,000 | 264,177 | ||||||
Proceeds
from issuance of Notes payable
|
- | 174,651 | ||||||
Payments
on notes payable
|
(202,416 | ) | (219,819 | ) | ||||
Payments
on related party notes payable
|
(198,579 | ) | (153,094 | ) | ||||
Payments
on capital leases
|
(87,958 | ) | (167,513 | ) | ||||
Net
cash used in financing activities
|
(378,953 | ) | (101,598 | ) | ||||
Net
Increase (decrease) in cash and cash equivalents
|
(586,613 | ) | 52,097 | |||||
Cash
and cash equivalents at beginning of year
|
1,024,643 | 972,546 | ||||||
Cash
and cash equivalents at end of year
|
$ | 438,030 | $ | 1,024,643 | ||||
Supplemental
disclosure of cash flow information
Cash paid during the year for: |
||||||||
Interest
|
$ | 109,147 | $ | 113,390 | ||||
Income
taxes
|
$ | - | $ | 49,028 | ||||
Supplemental
disclosure of non cash investing and financing activities:
|
||||||||
Conversion
of note payable
|
$ | 650,000 | $ | - | ||||
Conversion
of line of credit to term loan
|
$ | - | $ | 500,000 | ||||
Stock
issued for creditor settlement
|
$ | - | $ | 63,000 | ||||
Stock
issued for CNC Repos, Inc.
|
$ | - | $ | 440,000 | ||||
Shares
received for related party receivable
|
$ | 81,000 | $ | - | ||||
Capital
expenditures acquired under capital leases
|
$ | 45,584 | $ | 167,205 | ||||
Stock
retired on cancellation of note
|
$ | - | $ | 417 |
See
accompanying Notes to Consolidated Financial Statements.
F-6
.
M
LINE HOLDINGS, INC.
(FORMERLY,
GATEWAY INTERNATIONAL HOLDING, INC)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization and
Business
|
Organization
M. Line
Holdings, Inc. (the “Company”) was incorporated in Nevada on September 24, 1997,
under the name Gourmet Gifts, Inc. (“Gourmet Gifts”). On December 11, 2001,
Gourmet Gifts acquired 100% of the issued and outstanding capital stock of Elite
Machine Tool Company (“Elite”). Immediately prior to the merger, the Company had
100,000,000 shares of stock authorized, of which 6,768,000 shares were
outstanding. Pursuant to the merger, all of the outstanding shares of Elite,
aggregating 21,262 shares, were exchanged for shares of common stock of Gourmet
Gifts on a 1 to 1,274 basis or into 27,072,000 (net of 600,000 shares
subsequently cancelled) shares of common stock leaving a total of 33,240,000
shares of common stock issued and outstanding after the merger. Immediately
after the merger, the officers and directors of Gourmet Gifts resigned and the
executive officers and directors of Elite the company elected and appointed to
such positions, thereby effecting a change of control.
Due to
the change in voting control and change in senior management in Gourmet Gift as
a result of the merger, the transaction was recorded as a “reverse-merger”
whereby Elite was considered to be the acquirer for accounting purposes. At the
closing of the reverse merger, Elite became a wholly-owned subsidiary and the
company changed its corporate name to Gateway International Holdings, Inc.,
effective January 28, 2002. After the merger, through Elite, the Company became
engaged in the acquisition, refurbishment, distribution and sales of pre-owned
Computer Numerically Controlled (“CNC”) machine tools to manufacturing customers
across the United States of America. This was the Company’s sole business until
the acquisition of the additional businesses described below.
Gateway
International Holdings, Inc. changed its corporate name to M Line Holdings, Inc.
effective March 25, 2009.
Business
The
Company and its subsidiaries are engaged in the following
businesses:
|
Acquiring,
refurbishing and selling pre-owned CNC machine-tool equipment through its
Elite subsidiary.
|
|
Manufacturing
precision metal component parts in the defense, automotive, aerospace and
medical industries through its Eran Engineering, Inc. (“Eran”)
subsidiary.
|
F-7
Divestitures
of Companies
In April
2005, the Company acquired 100% of the outstanding common stock of Accurate
Technologies, Inc. (“Accurate”) for an aggregate purchase price of $8,760,000,
payable through the issuance of 12,000,000 shares of the Company’s common
stock.
In March
2005, the Company acquired 100% of the outstanding common stock of Nu-Tech
Industrial Sales, Inc. (“Nu-Tech”) for an aggregate purchase price of
$2,300,000, payable through the issuance of 2,425,000 shares of the Company’s
common stock.
In March
2007, the Board of Directors of the Company approved plans to divest Accurate
and Nu-Tech, as a part of its strategy to exit non-core businesses. These
companies were sold to the existing management of Accurate and Nu-Tech who were
also members of the Company’s Board of Directors at the time of the sale, but
they did not have controlling voting interests.
The
Company incurred aggregate non-cash loss from the sales of these businesses of
$2,280,909, net of income tax benefit of $1,212,559, primarily resulting from
the change in the fair value of the common stock issued in connection with these
acquisitions. These divestitures have been accounted for as discontinued
operations in the consolidated statements of operations and statements of cash
flows.
The
divestiture of Accurate, which was part of the Precision Manufacturing segment,
was completed March 23, 2007 for net consideration of 12,000,000 shares of the
Company’s common stock tendered with a value of $6,960,000 based upon the
trading price of the Company’s stock of $0.585 as quoted on the Pink Sheets OTC
Markets Inc. (“Pink Sheets”) on the date of the transaction which management
believes is the representative of fair market value. The divestiture transferred
substantially all of the assets and liabilities to purchasers of Accurate. The
total net assets (total assets less total liabilities) transferred were
$8,791,341.
The
divestiture of Nu-Tech, which was part of the Precision Manufacturing segment,
which closed on March 26, 2007 for net consideration of 2,425,000 shares of the
Company’s common stock of $0.58 as quoted on the Pink Sheets with a value of
$1,406,500 based upon the trading price of the Company’s stock on the date of
the transaction. The divestiture transferred substantially all of the assets and
liabilities to purchasers of Nu-Tech. The total net assets transferred were
$2,129,959.
F-8
2.
|
Basis of Presentation and
Significant Accounting
Policies
|
Discontinued
Operations
The Board
of Directors of the company decided to discontinue the operations AACNC, a
wholly owned subsidiary and a part of the Machine Sales segment, due to
continued losses and no prospect of AACNC of getting back to
profitability. During the year ended June 30, 2009, the company
incurred losses of $2,264,216 from discontinued operations of this
company.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of M Line
Holdings, Inc. and its wholly-owned subsidiaries: E.M. Tool Company, Inc. d.b.a.
Elite Machine Tool Company, Eran Engineering, Inc and AACNC as discontinued
operations. All intercompany accounts and transactions have been
eliminated.
Business
Segments
SFAS No.
131, “Disclosures About Segments of an Enterprise and Related Information”,
requires the determination of reportable business segments (i.e., the management
approach). This approach requires that business segment information used by the
chief operating decision maker to assess performance and manage company
resources be the source for segment information disclosure. The Company operates
in two reportable segments consisting of (1) Machine Sales and (2) Precision
Manufacturing.
Concentrations
of Credit Risks
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
The Company invests its cash balances through high-credit quality financial
institutions. From time to time, the Company maintains bank account levels in
excess of FDIC insurance limits. If the financial institution’s in which the
Company has its accounts has financial difficulties, the Company’s cash balances
could be at risk.
Accounts
receivable from significant customers representing 10% or more of the net
accounts receivable balance consists of the following:
June
30,
2009 |
June
30,
2008
|
|||||||
%
of accounts receivable
|
39 | % | 35 | % | ||||
#
of customers
|
1 | 1 |
Sales
from significant customers representing 10% or more of sales consist of the
following customers for the years ended June 30:
2009
|
2008
|
|||||||
%
of sales
|
66 | % | 27 | % | ||||
#
of customers
|
1 | 1 |
As a
result of the Company's concentration of its customer base and industries
served, the loss or cancellation of business from, or significant changes in
scheduled deliveries of product sold to the above customers or a change in their
financial position could materially and adversely affect the Company's
consolidated financial position, results of operations and cash
flows.
One
customer, Panasonic Avionics Corporation (“Panasonic”) included in the Precision
Manufacturing segment represents a significant concentration. Sales to Panasonic
as a percentage of sales within the Precision Manufacturing Segment are as
follows for the years ended June 30:
2009
|
2008
|
|||||||
%
of segment sales
|
66 | % | 84 | % |
The
Company’s Precision Manufacturing segment operates a single manufacturing
facility located in Tustin, California. A major interruption in the
manufacturing operations at this facility would have a material adverse affect
on the consolidated financial position and results of operations of the
Company.
F-9
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
sales and expenses during the reporting period. Significant estimates made by
management are, among others, realization of inventories, collectibility of
accounts receivable, litigation, impairment of goodwill, and long-lived assets
other than goodwill. Actual results could materially differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with insignificant interest rate
risk and original maturities of three months or less from the date of purchase
to be cash equivalents. The carrying amounts of cash and cash equivalents
approximate their fair values. The Company maintains cash and cash equivalents
balances at certain financial institutions in excess of amounts insured by
federal agencies. Management does not believe that as a result of this
concentration, it is subject to any unusual financial risk beyond the normal
risk associated with commercial banking relationships.
Accounts
Receivable
The
Company performs periodic credit evaluations and continually monitors its
collection of amounts due from its customers. The Company adjusts credit limits
and payment terms granted to its customers based upon payment history and the
customer's current creditworthiness. The Company does not require collateral
from its customers to secure amounts due from them. The Company regularly
reviews its accounts receivable and collection of these balances subsequent to
each of these periods. The Company maintains reserves for potential credit
losses, and historically, such losses have been within management
expectations.
Inventories
Inventories
are stated at the lower of cost, determined on a first in, first out (“FIFO”)
basis average cost basis, or market. The Company adopted SFAS No. 151,
“Inventory Costs, an amendment of Accounting Research Bulletin No. 43,
Chapter 4” beginning July 1, 2006, with no material effect on its financial
condition or results of operations. Abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) are recognized as
current-period charges. Fixed production overhead is allocated to the costs of
conversion into inventories based on the normal capacity of the production
facilities. Market value is based on management’s estimates for future sale of
the Company’s products.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Equipment under capital lease obligations is depreciated over the estimated
useful life of the asset. Leasehold improvements are amortized over the shorter
of the estimated useful life or the term of the lease. Repairs and maintenance
are expensed as incurred, while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation, which any resulting gain or loss included
in the consolidated statements of operations.
F-10
Long-Lived
Assets
The
Company reviews its fixed assets and certain identifiable intangibles with
definite lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long
Lived Assets”. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted
operating cash flow expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of the
asset or discounted cash flows. Long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell.
Based on
management’s review, the Company determined there were no impairments of
long-lived assets as of June 30, 2009 and 2008.
Goodwill
and Other Intangible Assets
SFAS No.
141 “Business Cominations” requires that all business combinations be accounted
for under the purchase method. The statement further requires separate
recognition of intangible assets that meet certain criteria. SFAS No. 142
“Goodwill and Other Intangible Assets”, requires that an acquired intangible
asset meeting certain criteria shall be initially recognized, and measured based
on its fair value.
In
accordance with SFAS No. 142, goodwill is not amortized, and is tested for
impairment at the reporting unit level annually or when there are any
indications of impairment. A reporting unit is an operating segment for which
discrete financial information is available and is regularly reviewed by
management.
SFAS No.
142 requires a two-step approach to test goodwill for impairment for each
reporting unit. The first step tests for impairment by applying fair value-based
tests to a reporting unit. The second step, if deemed necessary, measures the
impairment by applying fair value-based tests to specific assets and liabilities
within the reporting unit. Application of the goodwill impairment tests require
judgment, including identification of reporting units, assignment of assets and
liabilities to each reporting unit, assignment of goodwill to each reporting
unit, and determination of the fair value of each reporting unit. The
determination of fair value for a reporting unit could be materially affected by
changes in these estimates and assumptions. Based on its review, the Company
determined there were impairments of goodwill from continuing operations as of
June 30, 2009 Income
Taxes
F-11
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”. FIN 48 describes a recognition threshold and measurement attribute for
the recognition and measurement of tax positions taken or expected to be taken
in a tax return and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The cumulative effect of adopting FIN 48 is required to be reported as an
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) for that fiscal year, presented separately. The adoption
of FIN 48 on July 1, 2007 did not have a material impact to the Company’s
consolidated financial statements.
Income
taxes for the year ended June 30, 2009 has been classified to present tax
provision (benefit) for continuing operations and discontinued operations
separately.
Contingencies
and Litigation
The
Company evaluates contingent liabilities including threatened or pending
litigation in accordance with SFAS No. 5, “Accounting for Contingencies.” Management assesses
the likelihood of any adverse judgments or outcomes to a potential claim or
legal proceeding, as well as potential ranges of probable losses, when the
outcomes of the claims or proceedings are probable and reasonably estimable. A
determination of the amount of accrued liabilities required, if any, for these
contingencies is made after the analysis of each matter. Because of
uncertainties related to these matters, management bases its estimates on the
information available at the time. As additional information becomes available,
management reassess the potential liability related to its pending claims and
litigation and may revise our estimates. Any revisions in the estimates of
potential liabilities could have a material impact on the results of operations
and financial position.
Revenue
Recognition
The
Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104
“Revenue Recognition”. Revenue is recognized at the date of shipment to
customers when; a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist, and collectibility is reasonably assured.
F-12
Revenues
generated from the Precision Manufacturing segment consist of manufactured parts
and in some instances, assembly of these items based on detailed engineering
specifications received by the Company from the customer. The Company generally
begins to manufacture the parts upon the receipt and acceptance of a purchase
order which specifies the quantity, price and delivery dates such products are
required to be shipped within. Prior to shipment, physical inspection of the
parts is performed to ensure specifications meet the engineering requirements.
Historically, customer returns have been inconsequential.
Revenues
generated from the sales of new and pre-owned CNC machines from the Machine
Tools segment are based on the acceptance of a purchase order and the customer’s
acknowledgement of the Company’s terms and conditions which specifies the
shipping terms, payment terms and the warranty period, if any. In certain
instances, the Company may perform installation services including the leveling
of the machine, which is inconsequential. Under agreements with certain new
equipment manufacturers, a ninety day warranty is provided to customers whereby
the manufacturer is responsible for any replacement parts and the Company is
responsible for the installation of the parts. In certain instances, the Company
provides warranties for used equipment for periods ranging up to ninety days.
Historically, warranty costs have been inconsequential. Generally, the Company
does not accept returns.
Payments
received before all of the relevant criteria for revenue recognition are
satisfied are recorded as customer deposits.
Advertising
The
Company expenses the cost of advertising when incurred as selling expenses.
Advertising expenses were $41, 172and $21,321, for the years ended June 30, 2009
and 2008 respectively.
Net
Income (Loss) per Share
Basic net
income (loss) per share is calculated by dividing net loss by the Company’s
weighted average common shares outstanding during the period. Diluted net income
per share reflects the potential dilution to basic earnings per share that could
occur upon conversion or exercise of securities, options or other such items to
common shares using the treasury stock method, based upon the Company’s weighted
average fair value of the common shares during the period. For each period
presented, basic and diluted net income (loss) per share amounts are identical
as the Company does not have potentially dilutive securities.
Fair
Value of Financial Instruments
Financial
instruments are recorded on the consolidated balance sheets. The carrying amount
for cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses approximates fair value due to the immediate or short-term maturity of
these financial instruments. The fair value of long-term debt approximates the
carrying amounts based upon the expected borrowing rate for debt with similar
remaining maturities and comparable risk. The fair value of related party notes
cannot be readily determined because of the nature of the relationship between
the Company and the lenders.
F-13
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which
replaces FAS No. 141. SFAS No. 141(R) establishes principles and requirements
for how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest; recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R) is
to be applied prospectively to business combinations. The company is evaluating
this statement for the impact, if any, on its consolidated financial statements,
however, the Company will be required to expense cost related to any acquisition
after June 30, 2009
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. This statement
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and for the
deconsolidation of a subsidiary. Upon its adoption, effective for us in the
fiscal year beginning July 1, 2009, noncontrolling interests will be classified
as equity in the Company’s balance sheet and income and comprehensive income
attributed to the noncontrolling interest will be included in the Company’s
income and comprehensive income, respectively. The provisions of this standard
must be applied prospectively upon adoption except for the presentation and
disclosure requirements. We do not expect the adoption of SFAS No. 160 to have
an impact on our consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. SFAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. We do not expect the adoption of SFAS No. 161
to have a significant impact on our consolidated financial
statements.
In April
2008, The FASB issued FASB Staff Position FSP No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142.
FSP 142-3 is effective for us in the fiscal year beginning July 1, 2009. We are
currently evaluating the impact of the adoption of FSP 142-3 on our consolidated
financial statements.
F-14
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS will become effective 60 days following the Security and
Exchange Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”. We do not expect the adoption of SFAS
No. 162 to have a significant impact on our consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”). SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 will be effective for interim or
annual period ending after June 15, 2009 and will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the year ended
June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will
have an impact on its consolidated results of operations or consolidated
financial position.
EITF
07-5, “ Determining Whether an Instrument ( or embedded Feature” is Indexed to
an Entity’s Own Stock” (EIFT 07-5) was issued in June 2008 to clarity how to
determine whether certain instruments or features were indexed to an entity own
stock under EITF Issue No. 01-6, “ The Meaning of “ Indexed to a Company’s Own
Stock” (EITF 01-6). EITF 07-5 applies to any freestanding financial instrument
(or embedded feature” that has all the characteristics of a derivative as
defined in FAS 133, for purpose of determining whether that instrument (or
embedded feature) qualifies for the first part of the paragraph 11 (a) scope
exception. It is also applicable to any freestanding financial instrument (e.g.,
gross physically settled warrants) that is potentially settled in an entity’s
own stock, regardless of whether it has all the characteristics of a derivative
as defined in FAS 133, for purpose of determining whether to apply EITF 00-19.
EITF 07-5 does not apply to share-based payment awards within the scope of
FAS123(R), Share-Based Payment (FAS123R). However, an equity-linked financial
instrument issued to investors to establish a market-based measure of the fair
value of employee stock options is not within the scope of FAS 123 R and
therefore is subject to EITF 07-5.
The
guidance is applicable to existing instruments and is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Management is currently considering
the effect of this EITF on financial statements for the year beginning July 1,
2009.
On
January 12, 2009 FASB issued FSP EITF 99-20-01, “ Amendment to the Impairment
Guidance of EITF Issued No. 99-20”. This RSP amends the impairment
guidance in EITF Issued No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-that-temporary impairment has
occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “ Accounting for Certain Investments in
Debt and Equity Securities”, and other related guidance. The FSP is shall be
effective for interim and annual reporting periods ending after December 15,
2008, and shall be applied prospectively. Retrospective application to a prior
interim or annual reporting period is permitted. The Company does not believe
this pronouncement with impact its financial statements.
F-15
3.
|
Acquisition
|
On
October 16, 2007, the Company acquired 100% of the outstanding common stock of
CNC Repos, Inc. (“CNC Repos”) for an aggregate purchase price of $440,000 in
exchange for 1,000,000 shares of the Company’s common stock and an earn out
provision which provides for the issuance of an additional up to 500,000 shares
of the Company’s common stock if $3,000,000 of sales are generated within one
year from the date of acquisition. If sales are less than $3,000,000, but equal
or exceed $2,700,000, then the Company will be required to issue an additional
400,000 shares of common stock. CNC Repos provides repossession, recovery and
remarketing of CNC machines for financial institutions which will assist the
Company with reaching additional customers to sell machines to. The contingent
consideration will be recorded as compensation expense when and if the milestone
has been met.
The
acquisition has been accounted for using the purchase method of accounting in
accordance with SFAS No. 141, whereby the estimated purchase price has been
allocated to tangible and intangible net assets acquired based upon their fair
values at the date of acquisition. The fair value of the common stock of $0.42
per share was based on trading prices prior to the delisting of the Company
during 2007. Management believes this stock price is representative of the fair
market value of the Company’s stock on the date of acquisition.
The
components of the aggregate purchase price are as follows:
Consideration
paid:
|
||||
Fair
value of common stock issued
|
$
|
420,000
|
||
Direct
acquisition costs
|
20,000
|
|||
$
|
440,000
|
The
purchase price of CNC has been allocated to assets acquired and liabilities
assumed based on their estimated fair values determined by management as
follows:
Intangible
assets -customer relationships
|
$
|
417,831
|
||
Deferred
tax liability
|
(176,000
|
)
|
||
Goodwill
|
198,169
|
|||
$
|
440,000
|
F-16
The
purchase price represented a premium over CNC Repos acquired assets,
resulting in the recognition of $198,169 of goodwill. The resulting intangible
assets and goodwill are not deductible for federal and state income tax
purposes. As a result, the Company recorded a deferred tax liability equal to
value assigned to the intangible assets and goodwill multiplied by the statutory
income tax rates. The customer relationships are considered an intangible asset
and are being amortized over the estimated useful live of ten years from the
date of the acquisition. The estimated useful life was determined based upon the
historical lives of the customer base. The goodwill is not subject to
amortization and the amount assigned to goodwill is not deductible for tax
purposes.
Goodwill,
in the amount of $198,169, was written off during the fiscal year ended June 30,
2009.
The
assets acquired were the use of the name “CNC Repos”, the customer lists, and
engagement of key personnel. The company considered that there was no fair value
for these acquired assets as sales targets were not met during the current
fiscal year, sales being the basis for computing value, in
addition to the discontinuance of the operations of All American CNC, Inc., and
the absorbtion of the “CNC Repos” personnel by Elite Machine Tool
Company.
The
carrying value of the asset was considerably in excess of the implied fair
value. The company therefore wrote off the value of goodwill as that there was
no indication that the “CNC Repos” personnel would ever meet any of the sales
targets.
The
pro-forma has not been provided for “CNC Repos” because it was
immaterial
4.
|
Inventories
|
Inventories
consist of the following at June 30:
2009
|
2008
|
|||||||
Finished
Goods and components
|
$ | 843,305 | $ | 612,825 | ||||
CNC
Machines held for sale
|
183,500 | 304 | ||||||
Work
in progress
|
233,773 | 116,832 | ||||||
Raw
Materials and Parts
|
40,843 | 10,827 | ||||||
$ | 1,301,421 | $ | 740,788 |
F-17
5.
|
Due from Related
Party
|
In
connection with the close of our financial statements for the year ended June
30, 2008, the Company discovered it had paid Lawrence A. Consalvi, a former
directors for certain expenses submitted for reimbursement. Due to the lack of
documentation surrounding the nature of the expense, Mr. Consalvi agreed to
reimburse the Company $81,000 or return 400,000 shares of the Company’s common
stock. As a result a receivable for $81,000 has been recorded as of June 30,
2008 and received by the company during the year ended June 30,
2009.
6.
|
Prepaid and
Other
|
On
January 10, 2008, the Company entered into a promissory note agreement in the
amount of $100,000 with a shareholder of the Company and the brother in-law to
Larry Consalvi, the Company’s former Executive Vice President, member of the
Company’s board of directors, and the single largest shareholder. The note is
due on or before January 10, 2009 and is secured by 357,142 shares of common
stock of the Company. The note bears interest at a rate of 9.25% per annum and
is payable upon maturity of the note. See Note 15.
The note
was repaid during the year ended June 30, 2009.
7.
|
Property and
Equipment
|
Property
and equipment consists of the following at June 30:
Estimated
useful
life
(in
years)
|
2009
|
2008
|
||||||||||
Machinery
and Equipment
|
7 | $ | 2,472,488 | $ | 2,490,891 | |||||||
Equipment
under capital leases
|
4
to 5
|
215,021 | 215,021 | |||||||||
Fixtures,
Fittings and office equipment
|
3
to 5
|
173,885 | 173,587 | |||||||||
Vehicles
|
5 | 62,372 | 23,276 | |||||||||
Leasehold
Improvements
|
3 | 119,649 | 119,649 | |||||||||
3,043,415 | 3,022,424 | |||||||||||
Less
accumulated depreciation and amortization
|
(1,883,096 | ) | (1,497,099 | ) | ||||||||
$ | 1,160,319 | $ | 1,525,325 |
F-18
Depreciation
expense was $398,700 and $ 419,335 for the years ended June 30, 2009 and 2008,
respectively.
On
February 23, 2007, the Company completed the sale of its former manufacturing
facility for aggregate proceeds of $2,017,000 resulting in a gain on the sale of
$691,967. The facility was sold to facilitate the expansion of its Precision
Manufacturing operation.
8.
|
Intangible
Assets
|
Intangible
assets consist of the following at June 30:
Weighted
Average
Remaining
Life (in
years)
|
2009
|
2008
|
||||||||||||||||||
Cost
|
Carrying
Amount
|
Cost
|
Carrying
Amount
|
|||||||||||||||||
Customer
Relationships
|
7-6 | $ | 417,831 | 348,192 | $ | 417,831 | 389,975 |
Amortization
expense was $41,783 and $17,410 for the years ended June 30, 2009 and 2008,
respectively.
Estimated
intangible asset amortization expense for the remaining carrying amount of
intangible assets is as follows for the years ending June 30:
F-19
2009
|
||||
2010
|
$ | 41,783 | ||
2011
|
41,783 | |||
2012
|
41,783 | |||
2013
|
41,783 | |||
2014
|
41,783 | |||
Thereafter
|
139,277 | |||
$ | 348,192 |
9.
|
Goodwill
|
Goodwill,
as of June 30, 2009, has been written off as the parent company did not consider
the fair value of the reporting unit adequate to support the carrying
amount of goodwill in Elite Machine Tool, Inc..
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and other intangible assets with indefinite lives are
not amortized. Intangible assets with finite lives are amortized on a pattern of
estimated cash flow basis over their estimated useful lives or straight line if
a pattern cannot be determined. The Company tests goodwill and other intangible
assets with indefinite lives for impairment on an annual basis at the beginning
of the fourth quarter, or when circumstances change, such as a significant
adverse change in the business climate or the decision to sell a business, both
of which would indicate that an impairment may have occurred. The Company
applies the two step process in accordance with SFAS No. 142 in the
evaluation of goodwill impairment. The first step involves a comparison of the
fair value of the reporting unit with its carrying value. If the carrying amount
of the reporting unit exceeds its fair value, the second step of the process
involves a comparison of the implied fair value and carrying value of the
goodwill of that reporting unit. If the carrying value of goodwill exceeds its
implied fair value, an impairment charge is recorded in the statement of
operations.
Goodwill,
in the sum of $198,169, was written off during the current fiscal year as
management concluded that the carrying value of goodwill was very much in excess
of the fair value of the asset.
The basis
for computing fair value was sales. The sales for the fiscal year ended June 30,
2009 were negligible. Fair value was therefore non existent and management
determined that as the carrying value exceeded the fair value, goodwill should
be written off. In addition, CNC Repos personnel opted to join Elite Machine
Tool Company due to the discontinuance of the operations of All American CNC
Sales, Inc., and the entity known as CNC Repos therefore ceased to
exist.
F-20
10.
|
Accrued
Expenses
|
Accrued
expenses consist of the following at June 30:
2009
|
2008
|
|||||||
Compensation
and related benefits
|
$ | 170,518 | $ | 83,420 | ||||
Other
|
316,433 | 16,424 | ||||||
$ | 486,951 | $ | 99,844 |
11.
|
Capital
Leases
|
The
Company leases certain equipment under capital leases with terms ranging from
four to five years. Future annual minimum lease payments are as follows as of
June 30
|
2009
|
|||
2009
|
- | |||
2010
|
$ | 82,519 | ||
2011
|
53,830 | |||
2012
|
50,329 | |||
2013
|
3,038 | |||
2014
|
- | |||
Total
minimum lease payments
|
189,716 | |||
Less
amount representing interest
|
21,618 | |||
Present
value of future minium lease payments
|
168,098 | |||
Less
current portion of capital lease obligations
|
70,747 | |||
Capital
Lease obligations, net of current portion
|
$ | 97,351 |
F-21
12.
|
Line of Credit and Notes
Payable
|
Pacific
Western Bank Credit Agreement
On August
21, 2006, the Company entered into credit agreement with Pacific Western Bank
(“PWB”). The credit agreement provides for borrowings of up to $1,500,000
through a line of credit which is secured by substantially all of the Company’s
assets and personal guarantees by two of the executive officers, Joseph Gledhill
and Larry Consalvi. On November 15, 2007, the credit agreement was amended to
reduce the amount available under the line of credit to $1,000,000 and to
convert $500,000 of outstanding principal into a term loan. On September 29,
2008, the credit agreement was renewed through November 21, 2009, and Timothy
Consalvi replaced Larry Consalvi as a guarantor.
The line
of credit has a stated interest rate equal to the lender's referenced prime rate
plus 1.5%, or 9.75% and 6.5% per annum at June 30, 2008 and 2009, respectively.
Interest is payable monthly with the outstanding principal balance due on
September 21, 2009. The amount available for borrowings is determined based on a
monthly basis based on 80% of eligible accounts receivable, as defined. The
Company also has an irrevocable letter of credit outstanding of $100,000. The
proceeds are used for general working capital needs. The amount available for
borrowings under the line of credit was $440,000 and $570,000 June 30,
2009 and 2008, respectively.
The
irrevocable letter of credit outstanding of $100,000 has been released by the
bank subsequent to year end.
The term
loan provides for borrowings of up to $500,000. The loan has a stated interest
rate equal to the lender's referenced prime rate plus 1.5%, or 9.75% and 6.5%
per annum at June 30, 2009 and 2008, respectively. Principal and interest
payments are payable monthly.
As of
June 30, 2008, we did not meet our capital expenditures and profitability
covenants, as set forth in the November 15, 2007 credit agreement. On September
4, 2008, Pacific Western Bank provided us with a letter of forbearance from the
measurement of the required covenants as of June 30, 2008. Beginning on July 1,
2008, we are required to comply with all of the covenants of the amended credit
agreement dated September 26, 2008. We are currently in compliance with the
covenants under the amended credit agreement.
The
company is in the process of making arrangements to repay the line of credit to
Pacific Western Bank
Financial
Federal Credit Business Loan Agreement
On August
21, 2006, the Company, entered into a loan agreement with a bank for $1,350,000
in connection with the purchase of real property. On February 23, 2007, the
Company sold the real property secured by this loan and the loan was paid in
full. The loan, while outstanding, had an interest rate at the lender’s
referenced prime rate plus 1.5%, per annum.
Notes
payable consist of the following at June 30:
F-22
2009
|
2008
|
|||||||
Notes
payable to financial institutions, secured by the underlying equipment
payable in aggregate monthly installments of $7,292, including interest
rates between 7.2% and 9.75% per annum for a period of 50 and 60 months
|
$ | 151,608 | $ | 203,836 | ||||
|
||||||||
Notes
payable secured by the underlying vehicles, payable in aggregate monthly
installments of $2,301,incuding interest between 2.9% and 4.9% per
annum for a period of 36 and 60 months
|
- | 67,514 | ||||||
|
||||||||
Unsecured
Loan to an individual in respect of the acquisition of a former subsidiary
|
31,526 | - | ||||||
|
||||||||
Term
loan to PWB payable in monthly installments of $17,120 including interest
at a rate of Prime plus 1.50% per annum due November 25, 2010
|
250,000 | 402,778 | ||||||
|
||||||||
Total
|
433,134 | 674,128 | ||||||
Less
current portion
|
(265,949) | (244,635) | ||||||
Long
Term portion
|
$ | 167,185 | $ | 429,493 | ||||
2009
|
||||||||
2010
|
$ | 265,969 | ||||||
2011
|
167,165 | |||||||
2012
|
- | |||||||
2013
|
- | |||||||
Thereafter
|
- | |||||||
$ | 433,134 |
F-23
13.
|
Notes Payable to Related
Parties
|
Notes
payable to related parties consist of the following as of June 30:
2009
|
2008
|
|||||||
Unsecured
note payable to Joseph Gledhill for working capital requirements, due
January 2009 with interest of 6% per annum.
|
$ | - | $ | 646,200 | ||||
Unsecured
note payable to a related party, the mother of Tim Consalvi, for working
capital requirements due February
|
||||||||
February
1, 2009, payable in monthly installments of $4,435 including interest at
6% per annum.
|
- | 34,623 | ||||||
Unsecured note to a
shareholder payable in monthy installments of $4,505 per month. due
November 25, 2010
|
- | 85,583 | ||||||
Total
|
- | 766,406 | ||||||
Less
current portion
|
- | (734,880 | ) | |||||
Long
Term portion
|
$ | - | $ | 31,526 |
There are
no future maturities of notes payable to related parties at June 30,
2009.
All
related party notes were repaid or settled in 2009. During 2009, the Company
converted $650,000 of these notes and accrued interest with Joe Gledhill in
exchange for 3,250,000 shares of common stock. There was no additional costs or
charges incurred by the company
F-24
Interest
expense on notes payable, capital leases and notes payable-related parties for
years ended June 30, 2009 and 2008, was $109,147 and $141,265,
respectively.
14.
|
Guarantees, Commitments and
Contingencies
|
The
Company has entered into product warranty agreements for certain used CNC
machines it sells that contain features which meet the definition of a guarantee
under FASB Interpretation No. 45 (“FIN 45”). FIN 45 defines a guarantee to be a
contract that contingently requires the Company to make payments (either in
cash, financial instruments, other assets, common shares of the Company or
through provision of services) to a third party based on changes in an
underlying economic characteristic (such as interest rates or market value) that
is related to an asset, liability or an equity security of the other party. The
Company has the following guarantees which are subject to the disclosure
requirements of FIN 45:
The
Company has provided certain of its customers with product warranties of ninety
days from the date of sale based on management’s estimate of the probable
liability under its product warranties. Warranty expense was $30,049 and $25,000
for the years ended June 30, 2009 and 2008, respectively.
The
Company leased its manufacturing and office facilities under non-cancelable
operating lease arrangements.
Future
minimum lease payments under non-cancelable operating leases are as follows as
of June 30:
Amount
|
||||
2010
|
$ | 514,521 | ||
2011
|
453,966 | |||
2012
|
408,816 | |||
2013
|
- | |||
2014
|
- | |||
$ | 1,377,303 |
Rent
expense under operating leases was $490,196 and $469,702 for the years ended
June 30, 2009 and 2008, respectively.
F-25
15.
|
Litigation
|
1. Onofrio Saputo and Christopher
Frisco v. Gateway International Holdings, Inc., Lawrence Consalvi, Timothy
Consalvi and Joe Gledhill, Court of the State of California, County of
Orange, Case No. 30-2008-00110905. Plaintiffs filed this action on
August 21, 2008. A Dismissal with Prejudice was filed with the Court
on or about April 24, 2009.
The
Complaint, which had causes of action for securities fraud, breach of fiduciary
duties, fraud and deceit, and rescission, alleged that the defendants
intentionally misrepresented, or failed to disclose, certain facts regarding the
company prior to the plaintiffs purchasing Gateway International Holdings, Inc.
(now M Line Holdings, Inc.) common stock. The Complaint sought total
monetary damages of approximately $188,415, plus interest, and punitive
damages. We filed an Answer to the Complaint on October 17, 2008,
denying the allegations of the Complaint, denying that plaintiffs are entitled
to any relief whatsoever and asserting various affirmative defenses. On
January 22, 2009, the parties signed a Settlement Agreement, whereby a party
unrelated to the lawsuit, Money Line Capital, Inc., our largest shareholder,
agreed to purchase the plaintiffs’ shares of our common stock for the purchase
price, or $289,000. This settlement closed on April 22,
2009. Of the $289,000 settlement money, $189,000 was paid to
plaintiffs and we received $100,000 in exchange for the cancellation of a
promissory note for $100,000 owed to us by one of the plaintiffs. Per
the settlement agreement, a Dismissal with Prejudice was filed by the plaintiffs
with the Court on or about April 24, 2009, for the purpose of dismissing this
lawsuit.
2. Voicu Belteu v. Mori Seiki Co.,
Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine
Tool Company; Ellison Manufacturing Tech., Superior Court for the State
of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this
action on March 7, 2008.
The
Complaint, which has causes of action for strict products liability and
negligence, alleges that a CNC machine manufactured by Mori Seiki and sold
through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool
Company, was defective and injured the plaintiff. The Complaint seeks
damages in excess of $6,300,000 for medical expenses, future medical expenses,
lost wages, future lost wages and general damages. All American CNC
Sales filed its Answer and Cross-complaint on July 1, 2008 against several
individuals and entities involved in the machine purchase and sales transaction,
seeking indemnity and contribution.
Plaintiff
and All American CNC Sales have both responded to discovery requests and are
engaged in the meet and confer process to resolve outstanding
discovery issues. Several depositions have been taken and we
anticipate more going forward. The Court has set a trial date for
March 22, 2010. Management believes we have meritorious defenses to
plaintiff’s claims and plan to vigorously defend against the lawsuit and pursue
Mori Seiki, and possibly other entities or individuals, for any damages we
incur. However, there can be no assurance as to the outcome of the
lawsuit.
3. James M. Cassidy v. Gateway
International Holdings, Inc., American Arbitration Association, Case No.
73-194-32755-08. We were served with a Demand for Arbitration and
Statement of Claim, which was filed on September 16,
2008.
F-26
The
Statement of Claim alleges that claimant is an attorney who performed services
for us pursuant to an agreement dated April 2, 2007 between us and the
claimant. The Statement of Claim alleges that we breached the agreement
and seeks compensatory damages in the amount of $195,000 plus interest,
attorneys’ fees and costs. We deny the allegations of the Statement of
Claim and will vigorously defend against these allegations. An arbitrator
has not yet been selected, and a trial date has not yet been
scheduled.
4. Elite Machine Tool Company v. ARAM
Precision Tool and Die, Avi Amichai, Superior Court for the State of
California, County of Orange, Case No. 30-2008-00090891. Elite Machine filed
this action on August 8, 2008.
The
Complaint alleged breach of contract for the defendants failing to pay Elite
Machine for a machine the defendants purchased from Elite Machine, and sought
damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and
Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that
Elite Machine failed to deliver certain parts of the machine per the sales
contract and seeks damages totaling $25,000. In late June, the
parties settled this matter and the lawsuits were dismissed on August 13,
2009. Under the terms of the settlement, Aram paid Elite Machine Tool
Company $4,000 in full and final settlement.
5. CNC Manufacturing v. All American
CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC
Repos, Superior Court for the State of California, County of Riverside,
Case No. RIC 509650. Plaintiff filed this Complaint on October 2,
2008.
The
Complaint alleges causes of action for breach of contract and rescission and
claims All American breached the agreement with CNC Manufacturing by failing to
deliver a machine that conforms to the specifications requested by CNC
Manufacturing, and requests damages totaling $138,750. Elite Machine
filed an Answer timely, on January 15, 2009. Discovery has commenced
in this matter but is not expected to be concluded for several
months. The Court has set a Case Management Conference for
March 29, 2010. Management intends to aggressively defend itself
against this claim. No trial date has been set.
6. Elite Machine Tool Co. v. Sunbelt
Machine, Orange County Superior Court, Case No.
0-2008-00112502. All American filed the Complaint on September 25,
2008. No trial date has been set.
This case involves a dispute between
Elite Machine and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by
Elite Machine to Sunbelt. Sunbelt has claimed that it received a
machine that does not conform to the specifications it ordered. The
amount at issue is approximately $140,000 at this
stage. Subsequent to filing of the above-referenced suit,
Sunbelt has filed a similar action in Federal District Court in Houston,
Texas. As a result, this case was dismissed and the case is being
heard in Federal District Court.
F-27
7. Sunbelt Machine Works Corp. v. All
American CNC Sales, Inc., United States District Court, Southern District
of Texas, Case No. 4:09-cv-108. Sunbelt filed the Complaint on
January 16, 2009.
This case involved a dispute between
All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All
American to Sunbelt. Sunbelt claimed that it received a machine that
does not conform to the specifications it ordered. The amount sought
in the Complaint was approximately $139,000. All American filed its
Answer on April 13, 2009. Sunbelt filed a Motion for Summary
Judgment, which was granted by the Court. As a result a Judgment has
been entered against All American in the amount of $153,000, which is accrued as
of June 30, 2009. Management for All American maintains the claim has
no merit and intends to appeal the Judgment.
8. Hwacheon Machinery v. All American
CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County,
Illinois, Case No. 09L544. The Complaint was filed on June 8,
2009.
The Complaint alleges causes of action
for account stated, and arises from a claim by Hwacheon that All American CNC
has not paid it for machines sold to All American CNC. The Complaint
seeks damages of approximately $362,000. All American filed an answer
on or about July 15, 2009. We denied the allegations in the Complaint
and plan to vigorously defend the Complaint. No trial date has been
set.
9. Fadal Machining v. All American CNC
Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case
No. BC415693. The Complaint was filed on June 12, 2009.
The Complaint alleges causes of
action for breach of contract and common counts against All American CNC seeking
damages in the amount of at least $163,578.88, and arises from a claim by Fadal
that All American failed to pay amounts due. On June 26, 2009, Fadal
amended the Complaint to include M Line Holdings, Inc. as a
Defendant. On or about August 11, 2009, the Court heard oral argument
on Fadal’s Motion for Right to Attach Order and Writ of
Attachment. The Court granted this Motion in part, issuing a Right to
Attach Order against All American CNC in the amount of approximately $164,000,
which has accrued as of June 30, 2009. The Court denied the Motion as
to M Line Holdings, Inc. On August 12, 2009, All American CNC filed
an Answer to the Complaint, and M Line Holdings, Inc., filed a demurrer to the
Complaint. The Court has scheduled a hearing the demurrer for October
15, 2009. This hearing has been continued until November 24, 2009.
Management intends to aggressively defend itself against this
claim. No trial date has been set.
10. Do v. E.M. Tool Company,
Orange County Superior Court, Orange County, California, Case No.
30-2009-00123879. The Complaint was filed on June 1,
2009.
F-28
The Complaint alleges causes of action
for negligence, product liability and breach of warranty, and seeks damages to
be determined at time of trial. This lawsuit was tendered by E.M.
Tool Company to its insurance company, which is currently providing a
defense. We filed an Answer and a Cross-complaint against the
manufacturer of the equipment the Mori Seiki Company, Ltd. No trial date has
been set.
11. Fox Hills Machining v. CNC
Repos, Orange County Superior Court, Orange County, California, Case No.
30-2009-00121514. The Complaint was filed on April 14,
2009.
The
Complaint alleges causes of action for Declaratory Relief, Breach of Contract,
Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant
failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to
CNC Repos. The damages sought in the Complaint are not less than
$30,000. The Defendants filed an Answer on June 5,
2009. Management intends to aggressively defend itself against this
claim. No trial date has been set.
12. Laureano v. Eran Engineering,
State of California Worker’s Compensation Appeals Board, no case
number.
Mr. Laureano has filed a claim with the
Worker’s Compensation Appeals Board against Eran Engineering. At this
time, Eran Engineering has only been served with a subpoena for business
records, requesting Mr. Laureano’s employment file, personnel file, claim file,
and payroll documents. Management intends to aggressively defend this
claim.
Litigation
is subject to inherent uncertainties, and unfavorable rulings could
occur. If an unfavorable ruling were to occur in any of the above
matters, there could be a material adverse effect on our financial condition,
results of operations or liquidity.
16.
|
Income
Taxes
|
The
provision (benefit) for income taxes is comprised of the following for the years
ended June 30:
F-29
Year
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Current
federal
|
$ | 2,400 | $ | 130,586 | ||||
Current
state
|
- | 56,829 | ||||||
Deferred
federal
|
- | (126,684 | ) | |||||
Deferrred
state
|
- | 49,423 | ||||||
Provision
for income taxes
|
$ | 2,400 | $ | 110,154 |
The
benefit for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The differences between the federal statutory tax rate of 34% and the effective
tax rates are primarily due to state income tax provisions, net operating loss
(“NOL”) carry forwards, deferred tax valuation allowance and permanent
differences as follows for the years ended June 30:
Year Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Federal
tax at statutory rate
|
34 | % | 34 | % | ||||
Permanent
differences
|
||||||||
State
income taxes, net of federal benefit
|
6 | % | 7 | % | ||||
Amortization
of intangible assets
|
(2 | )% | 15 | % | ||||
Non-deductible
entertainment
|
(1 | )% | 8 | % | ||||
Domestic
production activity
|
0 | % | (14 | )% | ||||
Change
in valuation allowance/Other
|
(37 | )% | 20 | % | ||||
Other
|
31 | % | (10 | )% | ||||
Total
provision
|
31 | % | 60 | % |
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying value of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
F-30
Year
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Current:
|
||||||||
State
income taxes
|
$ | - | $ | 18,782 | ||||
- | ||||||||
Allowances
and reserves
|
64,674 | 92,755 | ||||||
Accrued
expenses
|
39,044 | 33,883 | ||||||
Other
|
33,896 | 33,896 | ||||||
- | ||||||||
137,614 | 179,316 | |||||||
Non-current:
|
||||||||
Net
operating loss carryforwards
|
182,505 | 176,905 | ||||||
Other
|
- | 68,592 | ||||||
- | - | |||||||
182,505 | 245,497 | |||||||
Gross
deferred tax asset
|
320,119 | 424,813 | ||||||
Valuation
allowance
|
(41,997 | ) | - | |||||
278,122 | 424,813 |
Significant
components of the Company’s deferred tax assets and liabilities consist of the
following at June 30:
F-31
Year
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax liabilities:
|
||||||||
Current:
|
||||||||
Other
|
- | (11,263 | ) | |||||
Non-current
|
||||||||
Depreciation
|
(168,373 | ) | (167,065 | ) | ||||
Intangible
assets
|
- | (136,736 | ) | |||||
(168,373 | ) | (303,801 | ) | |||||
Total
|
$ | 109,749 | $ | 109,749 |
The
Company’s income tax provision was computed based on the federal statutory rate
and the average state statutory rates, net of the related federal benefit. As of
June 30, 2009 the Company had federal and state net operating loss (“NOL”)
carryforwards of approximately $326,747 and $807,821 , respectively, net of
Internal Revenue Code ("IRC") Section 382 limitations. These net operating
losses are available to offset future regular and alternative minimum taxable
income.
Federal
and state tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change"
for tax purposes, as defined in IRC Section 382. The Company determined that
ownership changes have occurred that affect its ability to fully utilize its net
operating loss carryforwards. Consequently, a portion of the Company's tax
carryforwards will expire before they can be fully utilized. The Company has
reduced its reported available federal and state NOL carryforwards of $807,821
and $326,747 as of June 30, 2009. If not used, these carry forwards will begin
expiring between 2012 and 2021. The annual NOL deduction amount for both federal
and state is limited to $25,519. The Company has recorded as of June 30, 2009 a
valuation allowance for$41,997, it believes are not more
likely than not to be realizable in future years. Management has based its
assessment on available historical and projected operating results.
17.
|
Shareholders’
Equity
|
The
Company’s articles of incorporation authorize up to 100,000,000 shares of $0.001
par value preferred stock. Shares of preferred stock may be issued in one or
more classes or series at such time as the Board of Directors determine. The
Company had no shares of preferred stock issued and outstanding.
During
the year ended June 30, 2009, the company issued 50,000 shares of common stock
to Steve Kasprisin for services rendered to the company. The company also
converted the promissory note held by Mr. Joseph and Ms. Joyce Gledhill in the
sum of $650,000 into 3,250,000 shares of common stock.
F-32
Stock
Repurchase Program
On August
31, 2006, the Company announced a stock repurchase program to repurchase up to
2,500,000 shares of common stock. The program authorized the repurchase of
shares at certain times and price levels that are satisfactory to the Company.
As of June 30, 2007, the Company has repurchased and retired 600,000 shares of
common stock at $0.05 per share, or $30,000, in a private negotiated
transaction. The program was terminated on July 31, 2007.
Non-Qualified
Stock Option Plan
In
November 2006, the Board of Directors approved a Non-Qualified Stock Option Plan
for key managers, which, among other provisions, provides for the granting of
options by the board at strike prices at or exceeding market value, and
expiration periods of up to ten years. No stock options have been granted
under this plan.
18.
|
Segments and Geographic
Information
|
The
Company’s segments consist of individual companies managed separately with each
manager reporting to the Board. “Other” represents corporate functions. Sales,
and operating or segment profit, are reflected net of inter-segment sales and
profits. Segment profit is comprised of net sales less operating expenses and
interest. Income taxes are not allocated and reported by segment since they are
excluded from the measure of segment performance reviewed by
management.
Segment
information is as follows as of and for the year ended June 30,
2009:
Machine
Sales
|
Precision
Manufacturing
|
Corporate
|
Total
|
|||||||||||||
Revenues
|
$ | 4,752,435 | $ | 4,898,749 | $ | - | 9,651,184 | |||||||||
Interest
Income
|
- | - | 9,990 | 9,990 | ||||||||||||
Interest
Expense
|
(303 | ) | 23,339 | 86,111 | 109,147 | |||||||||||
Depreciation
and Amortization
|
8,198 | 389,322 | 1,180 | 398,700 | ||||||||||||
Income
(Loss) before taxes
|
(86,102 | ) | (439,805 | ) | 528,839 | 7,733 | ||||||||||
Total
assets
|
403,024 | 3,275,471 | 886,703 | 4,565,198 | ||||||||||||
Capital
Expenditures
|
$ | - | $ | 63,171 | $ | - | 63,171 |
F-33
Segment
information is as follows as of and for the year ended June 30,
2008:
Machine
Sales
|
Precision
Manufacturing
|
Corporate
|
Total
|
|||||||||||||
Revenues
|
$ | 8,955,916 | $ | 6,263,190 | $ | - | 15,219,106 | |||||||||
Interest
Income
|
2,543 | - | 4,486 | 7,029 | ||||||||||||
Interest
Expense
|
17,010 | 38,678 | 99,767 | 155,455 | ||||||||||||
Depreciation
and Amortization
|
19,689 | 409,928 | 7,128 | 436,745 | ||||||||||||
Income
(Loss) before taxes
|
105,456 | 1,016,349 | (939,215 | ) | 182,590 | |||||||||||
Total
assets
|
609,299 | 4,135,520 | 662,377 | 5,407,196 | ||||||||||||
Capital
Expenditures
|
$ | - | $ | 268,896 | $ | 3,539 | 272,435 |
F-34
Sales are
derived principally from customers located within the United States
Long-lived
assets consist of property, plant and equipment and intangible assets and are
located within the United States.
19.
|
Discontinued
Operations
|
The
following represents the results of discontinued operations for the year ended
June 30, 2009:
Net
sales
|
$ | 2,964,928 | ||
Loss
from discontinued operations before income taxes
|
(2,264,216 | ) | ||
Income
tax benefit
|
- | |||
Loss
from discontinued operations after income taxes
|
(2,264,216 | ) |
The
following is the combined, condensed balance sheet of All
American CNC as of the dates of the respective disposition.
Cash
|
$
|
-
|
||
Accounts
receivable and other (net)
|
116,868
|
|||
Property
and equipment, net
|
63,704
|
|||
Total
assets
|
$
|
180,572
|
||
Accounts
payable and accrued liabilities
|
$
|
(703,133
|
)
|
|
|
||||
Capital
lease obligations
|
(44,517
|
)
|
||
Total
liabilities
|
$
|
(747,650
|
)
|
The
following represents the results of discontinued operations for the year ended
June 30, 2008:
F-35
Net
Sales
|
$ | 4,298,613 | ||
Income
from discontinued operations
|
971 | |||
Income
Tax benefit
|
- | |||
Income
from discontiniued operations after income taxes
|
971 |
The
following is the combined, condensed balance sheet of All
American CNC as of June 30, 2008:
Cash
|
$ | 122,936 | ||
Accounts
receivable and other (net)
|
743,955 | |||
Inventory
|
980,501 | |||
Property
and equipment, net
|
78,350 | |||
Intangible
assets, net
|
538,464 | |||
Goodwill
|
194,378 | |||
TOTAL
ASSETS
|
2,658,584 | |||
Accounts
Payable and accrued liabilities
|
1,447,829 | |||
Capital
Lease obligations
|
48,204 | |||
TOTAL
LIABILITIES
|
1,496,033 |
F-36