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| AACS.OB > SEC Filings for AACS.OB > Form 10-Q on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Quarterly Report
This FILING contains forward-looking statements. The words "anticipated," "believe," "expect," "plan," "intend," "seek," "estimate," "project," "will," "could," "may," and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect the Company's current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond the Company's control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those ANTICIPATED, believed, estimated, or otherwise indicated. Consequently, all of the forward-looking statements made in this FILING are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
The Company cautions readers that in addition to important factors described elsewhere, the following important facts, among others, sometimes have affected, and in the future could affect, the Company's actual results, and could cause the Company's actual results during 2009 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.
This Management's Discussion and Analysis or Plan of Operation presents a review of the consolidated operating results and financial condition of the Company for the nine month periods ended November 30, 2008 and 2007. This discussion and analysis is intended to assist in understanding the financial condition and results of operation of the Company and its subsidiaries. This section should be read in conjunction with the consolidated financial statements and the related notes.
RESULTS OF OPERATIONS
The Company owns two subsidiaries that operated in the manufacturing segment and the fiberglass segment during the three and nine months ended November 30, 2008 and 2007. To facilitate the readers understanding of the Company's financial performance, this discussion and analysis is presented on a segment basis.
MANUFACTURING SUBSIDIARY
The manufacturing subsidiary, International Machine and Welding, Inc., generates its revenues from three divisions. Division 1 provides specialized machining and repair services to heavy industry and original equipment manufacturers. Division 2 provides repair and rebuild services on heavy equipment used in construction and mining. Division 3 provides parts sales for heavy equipment directly to the customer. The primary market of this segment is the majority of central and south Florida with parts sales expanding its market internationally. The current operations can be significantly expanded using the 38,000 square foot structure owned by International Machine and Welding, Inc.
FIBERGLASS SUBSIDIARY
Chariot Manufacturing Company manufactures a variety of fiberglass parts, as well as, motorcycle trailers with fiberglass bodies. These trailers are sold both on the retail and dealer levels. The company also provides non warranty repairs, modification of existing Chariot Trailers.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2008 AND 2007.
General
The Company's consolidated net sales decreased to $732,418 for the three months ended November 30, 2008, a decrease of $38,924 or 5%, from $771,342 for the three months ended November 30, 2007. The overall decrease in net sales is due to the downturn in the economy.
Gross profit for the consolidated operations decreased to $292,040 for the three months ended November 30, 2008 from $341,687 for the three months ended November 30, 2007. Gross profit as a percentage of sales was 40% and 44% for the three month periods ended November 30, 2008 and 2007, respectively. The decrease in gross profit was due to the mix of work sold having a higher ratio of lower profit business.
Consolidated interest expense, net for the three months ended November 30, 2008 was $54,299 as compared to $44,932 for same period in 2007 for an increase of $9,367 or 21%. This increase in interest expense is due to additional debt.
Selling, general and administrative expenses decreased to $502,345 for the three months ended November 30, 2008 as compared to $504,510 for the three months ended November 30, 2007, a decrease of $2,165 or .4%.
The Company incurred a net consolidated loss of $264,985 for the three months ended November 30, 2008 compared to a loss of $207,577 for the three months ended November 30, 2007. The increase in the consolidated net loss is primarily due to the overall decrease in revenues. As a result of the continued losses, the Independent Auditors have questioned the Company's continuation as a going concern.
Manufacturing Subsidiary
The manufacturing operation, International Machine and Welding, Inc. provided net sales of $646,973 for the three months ended November 30, 2008 compared to $716,219 for the three months ended November 30, 2007. The machining operations provided $175,556 or 27% of net sales with parts and service providing $471,417 or 73% of net sales for the three months ended November 30, 2008 as compared to machining operations contributing $217,060 or 30% of net sales with parts and service providing $499,159 or 70% of net sales for the three months ended November 30, 2007. The overall decrease in net sales is due to downturn in the economy which has caused customers to reduce or delay orders in 2008.
Gross profit from the International Machine and Welding, Inc. was $263,580 for the three months ended November 30, 2008 compared to $336,086 for the same period in 2007 providing gross profit margins of 41% and 47%, respectively. The increase in the gross profit margin is due to an increased markup monitored by management.
Selling, general and administrative expenses for International Machine and Welding, Inc. were $262,533 for the three months ended November 30, 2008 compared to $250,882 for the three months ended November 30, 2007. The decrease in selling, general and administrative expenses is due to the termination of the employee leasing company.
Interest expense, net was $36,248 for the three months ended November 30, 2008 compared to $31,943 for the same period ended 2007. The increase in interest expense, net is due to an increase in notes payable for the three months ended November 30, 2008.
The Company does not have discrete financial information on each of the three manufacturing divisions, nor does the Company make decisions on the divisions separately; therefore they are not reported as segments.
Fiberglass Subsidiary
The fiberglass manufacturing operation, Chariot Manufacturing Company, Inc. provided net sales of $85,445 for the three months ended November 30, 2008 as compared to $55,123 for the same period in 2007. The increase in net sales is due to production of trailers started in 2008; Chariot sold 7 trailers this quarter and is now manufacturing septic tanks for a new customer.
Gross profit from Chariot was $24,469 for the three months ended November 30, 2008 providing a gross profit margin of 29% as compared to $5,601 providing a gross profit margin of 10% for the same period in 2007. The increase in gross profit and the related gross profit margin was due to the increase in sales.
Selling, general and administrative expenses were $77,377 for the three months ended November 30, 2008 as compared to $82,052 for the same period in 2007. The decrease in selling, general and administrative expenses was mainly due to a decrease in employees.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 30, 2008 AND 2007.
General
The Company's consolidated net sales decreased to $1,921,620 for the nine months ended November 30, 2008, a decrease of $274,606 or 13%, from $2,196,226 for the nine months ended November 30, 2007. This decrease was mainly due to the current state of the economy and therefore, the customer base is cutting back on their orders.
Gross profit for the consolidated operations decreased to $793,420 for the nine months ended November 30, 2008 from $919,375 for the nine months ended November 30, 2007. Gross profit as a percentage of sales was 41% and 42% for the nine month periods ended November 30, 2008 and 2007, respectively. The decrease in gross profit margin was due to a decrease in sales of the higher gross profit margin products related to International Machine and Welding, Inc.
Consolidated interest expense, net for the nine months ended November 30, 2008 was $168,113 as compared to $136,959 for same period in 2007 for an increase of $31,153 or 23%. The increase in interest expense, net is due to the Company's additional debt taken on during first nine months of fiscal year ended February 28, 2009.
Selling, general and administrative expenses decreased to $1,550,460 for the nine months ended November 30, 2008 as compared to $1,546,329 for the nine months ended November 30, 2007, an increase of $4,131 or .2%.
The Company incurred a net consolidated loss of $915,382 for the nine months ended November 30, 2008 compared to a loss of $763,242 for the nine months ended November 30, 2007. The increase in the consolidated net loss is primarily due to the decrease in revenue of the manufacturing segment during the nine months ended November 30, 2008. As a result of the continued losses, the Independent Auditors have questioned the Company's continuation as a going concern.
Manufacturing Subsidiary
The manufacturing operation, International Machine and Welding, Inc. provided net sales of $1,697,479 for the nine months ended November 30, 2008 compared to $2,052,243 for the nine months ended November 30, 2007. The machining operations provided $563,404 or 33% of net sales with parts and service providing $1,132,513 or 67% of net sales for the nine months ended November 30, 2008 as compared to machining operations contributing $681,837 or 33% of net sales with parts and service providing $1,370,405 or 67% of net sales for the nine months ended November 30, 2007. The overall decrease in net sales is due to the current state of the economy and therefore, the customer base is cutting back on their orders.
Gross profit from the International Machine and Welding, Inc. was $766,105 for the nine months ended November 30, 2008 compared to $891,104 for the same period in 2007 providing gross profit margins of 47% and 42%, respectively. The overall increase in gross profit and gross profit margin is due to a change in the product mix to increase sales with a greater contribution to the profit margin than in the prior quarter.
Selling, general and administrative expenses for International Machine and Welding, Inc. were $745,084 for the nine months ended November 30, 2008 compared to $756,612 for the nine months ended November 30, 2007. The decrease in selling, general and administrative expenses is due to the Company not renewing the Officer's Life Insurance policy in 2008, the termination of the employee leasing company in 2008 and the decrease in collection fees, which is the result of the decrease in revenue.
Interest expense, net was $110,243 for the nine months ended November 30, 2008 compared to $97,969 for the same period ended 2007. The increase in interest expense, net is due to an overall increase in the outstanding debt for the nine months ended November 30, 2008.
The Company does not have discrete financial information on each of the three manufacturing divisions, nor does the Company make decisions on the divisions separately; therefore they are not reported as segments.
Fiberglass Subsidiary
The fiberglass manufacturing operation, Chariot Manufacturing Company, Inc. provided net sales of $224,141 for the nine months ended November 30, 2008 as compared to $143,983 for the same period in 2007. The increase in net sales is due to the start up of the production of trailers in 2008 and the addition of a new customer.
Gross profit from Chariot was $27,315 for the nine months ended November 30, 2008 providing a gross profit margin of 12% as compared to $28,271 providing a gross profit margin of 20% for the same period in 2007. The decrease in gross profit and the related gross profit margin was due higher cost of goods sold in 2008 for the production of the new septic tanks.
Selling, general and administrative expenses were $257,530 for the nine months ended November 30, 2008 as compared to $225,579 for the same period in 2007. The increase in selling, general and administrative expenses was mainly due to the rising cost of fuel, an increase in rent expense and an increase in marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended November 30, 2008 and 2007, the Company used net cash from operating activities of $328,352 and $329,216, respectively.
During the nine months ended November 30, 2008 and 2007, the Company used cash for investing activities of $11,814 and $118,415, respectively. The decrease in net cash used by investing activities is primarily due to the decrease in the acquisition of property and equipment in 2008 as compared to 2007.
During the nine months ended November 30, 2008 and 2007, the Company provided cash from financing activities of $334,999 and $435,191, respectively. The decrease in net cash provided from financing activities is due to the decrease in the proceeds from the issuance of notes payable and long term debt during the nine months ended November 30, 2008.
Cash flows from loans provided for working capital needs and principal payments on long-term debt through November 30, 2008. As of November 30, 2008, the working capital deficit was $2,967,632. To the extent that the cash flows from operations are insufficient to finance the Company's anticipated growth, or its other liquidity and capital requirements during the next twelve months, the Company will seek additional financing from alternative sources including bank loans or other bank financing arrangements, other debt financing, the sale of equity securities (including those issuable pursuant to the exercise of outstanding warrants and options), or other financing arrangements. However, there can be no assurance that any such financing will be available and, if available, that it will be available on terms favorable or acceptable to the Company.
Management has revised its business strategy to include the manufacture of additional products. Although management has reduced debt, new financing to finance operations and to facilitate additional production is still being sought. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
Seasonality
The diversity of operations in the Manufacturing Segment protects it from seasonal trends except in the sales of agricultural processing equipment whereby the majority of the revenue is generated while the processors await the next harvest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has prepared the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States for interim financial information. All intercompany transactions have been eliminated in consolidation. The preparation of consolidated unaudited financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated unaudited financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, recoverability of long-lived assets, recoverability of prepaid expenses and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates are reasonable; however, actual results could differ from these estimates.
We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated unaudited financial statements.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimate on an analysis of the Company's prior collection experience, customer credit worthiness, and current economic trends. If the financial condition of our customers were to deteriorate, additional allowances may be required.
We value our inventories at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out method; market is determined based on net realizable value. We write down inventory balances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
We value our property and equipment at cost. Amortization and depreciation are calculated using the straight-line and accelerated methods of accounting over the estimated useful lives of the assets. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Fair value estimates used in preparation of the consolidated unaudited financial statements are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company's notes payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated unaudited financial statements carrying amounts of existing assets and liabilities and their respective income 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 as income in the period that included the enactment date.
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