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| AACS.OB > SEC Filings for AACS.OB > Form 10-K on 15-Jun-2009 | All Recent SEC Filings |
15-Jun-2009
Annual Report
This discussion is intended to further the reader's understanding of the Company's financial condition and results of operations, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere herein. This discussion also contains forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth elsewhere in this Annual Report and in the Company's other SEC filings. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company is not party to any transactions that would be considered "off balance sheet" pursuant to disclosure requirements under ITEM 303(c).
RESULTS OF OPERATIONS
The Company owns two subsidiaries that operated in the manufacturing segment and the fiberglass segment during the fiscal year ended February 28, 2009 and February 29, 2008. To facilitate the readers understanding of the Company's financial performance, this discussion and analysis is presented on a segment basis.
MANUFACTURING SEGMENT
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 as well as sales of used equipment. 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 SEGMENT
Chariot Manufacturing Company, which was acquired on October 11, 2003 from a related party, manufactures motorcycle trailers with fiberglass bodies. These trailers are sold on the retail level. The company also provides non warranty repairs, modification of existing Chariot Trailers. Other fiberglass parts are manufactured by contract with an affiliate company, Tampa Fiberglass, Inc.
FISCAL YEAR 2009 COMPARED TO FISCAL YEAR 2008
General
The Company's consolidated net sales decreased to $2,584,854 for the fiscal year ended February 28, 2009, a decrease of $265,914 or 9%, from $2,850,768 for the fiscal year ended February 29, 2008. This decrease was mainly due to the current state of the economy and therefore, the customer base is cutting back on their orders. The company does not expect this decrease to be a continuing trend .
Gross profit for the consolidated operations decreased to $1,097,468 for the fiscal year ended February 28, 2009 from $1,213,454 for the fiscal year ended February 29, 2008. Gross profit as a percentage of sales decreased in fiscal year 2009 to 42% from 43% in fiscal year ended 2008. The decrease in gross profit margin was due to an increase in sales in the machining operations, which has a smaller gross profit margin related to International Machine and Welding, Inc.
Consolidated interest expense in fiscal 2009 was $222,306 compared to $193,192 in fiscal 2008. The overall increase in interest expense was due to the Company increasing the amount of outstanding debt.
Selling, general and administrative expenses decreased to $2,045,443 for fiscal 2009 from $2,057,215 for fiscal 2008, a decrease of $11,772 or 1%. The decrease in selling, general and administrative expenses is due to better control over costs.
The Company incurred a net consolidated loss of $1,151,785 for the year ended February 28, 2009 compared to a loss of $1,036,246 for the year ended February 29, 2008. The increase in the consolidated net loss is primarily due to the decrease in revenue of the manufacturing segment during the year ended February 28, 2009. As a result of the continued losses, the Independent Auditors have questioned the Company's continuation as a going concern.
Manufacturing Segment
The manufacturing operation, International Machine and Welding, Inc. provided net sales of $2,307,666 for the fiscal year ended February 28, 2009 compared to $2,640,796 for the fiscal year ended February 29, 2008. The machining operations provided $779,924 or 34% of net sales with parts and service providing $1,527,742 or 66% of net sales for the fiscal year ended February 28, 2009 as compared to machining operations contributing $818,280 or 31% of net sales with parts and service providing $1,822,516 or 69% of net sales for the fiscal year ended February 29, 2008.
Gross profit from International Machine and Welding, Inc. was $1,060,999 for the fiscal year ended February 28, 2009 compared to $1,195,589 in fiscal 2008 providing gross profit margins of 46% and 45%, respectively. The decrease is due to the Company having higher sales in the machining operations, which has a smaller profit margin.
Selling, general and administrative expenses for International Machine and Welding, Inc. were $1,004,857 for the fiscal year ended February 28, 2009 compared to $1,009,069 or the fiscal year ended February 29, 2008. The decrease in selling, general and administrative expenses is due to the Company controlling costs relative to sales.
Interest expense was $145,277 for the fiscal year ended February 28, 2009 compared to $138,405 for the fiscal year ended February 29, 2008. The increase in interest expense, net is due to the full year of interest expense from the Company's additional debt that had been taken on during the year ended February 29, 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 Segment
The fiberglass manufacturing operation, Chariot Manufacturing Company was acquired during the year ended February 2004 and provided net sales of $277,188 for the fiscal year ended February 28, 2009 as compared to $209,972 for the fiscal year ended February 29, 2008. The increase in net sales was due to a full year of production and the addition of new customers.
Gross profit from Chariot was $36,469 for the fiscal year ended February 28, 2009 as compared to $17,864 for the fiscal year ended February 29, 2008 providing a gross profit margin of 13% and 9%, respectively. The increase in gross profit and the related gross profit margin was primarily due to the increase in customers as the Company added the production of fiberglass septic tanks to their product list.
Selling, general and administrative expenses were $329,081 for 2009 and $306,375 for 2008. The increase in selling, general and administrative expenses was due to the rising cost of fuel, an increase in rent expense and an increase in marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal years ended February 28, 2009 and February 29, 2008, the Company used net cash for operating activities of $388,894 and $381,185, respectively. The decrease in use of cash is mainly due to the decrease in the net loss.
During the years ended February 28, 2009 and February 29, 2008, the Company used funds for investing activities of $5,915 and $155,897, respectively. This decrease in cash used from investing activities is mainly due to the Company having minimal acquisitions of property and equipment during the year ended February 28, 2009.
During the years ended February 28, 2009 and February 29, 2008, the Company provided cash from financing activities of $389,394 and $526,909, respectively. The decrease in net cash provided by financing activities is due to the decrease in the cash received from the issuance of notes payable.
Cash flows from financing activities provided for working capital needs and principal payments on long-term debt through fiscal 2009. As of February 28, 2009, the Company had a working capital deficit of $3,026,942. To the extent that the cash flows from financing activities 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.
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 where the majority of the revenue is generated while the processors await the next harvest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements include the activity of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; 2) in a business combination achieved in stages, sometimes referred to as a step acquisition, recognizes the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values; 3) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141R establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. This Statement is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS 141R will have an impact on our accounting for future business combinations; however, the materiality of that impact cannot be determined.
On December 4, 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 160, "Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). This new standard will significantly change the accounting for and reporting of non-controlling (minority) interests in consolidated financial statements. SFAS 160 became effective for the Company for the year ended February 28, 2009. The impact of adopting SFAS 160 on the consolidated financial statements will only apply to the extent we have business combinations in the future.
In May 2008, the FASB released 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 used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will be effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The Company does not believe the application of SFAS 162 will have a significant impact, if any, on the Company's financial statements.
On May 28, 2009, FASB issued SFAS No. 165, "Subsequent Events." The objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is not expected to have a material impact on the financial reporting of the Company.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110") which allows companies that do not have sufficient historical experience for estimating the expected term of "plain vanilla" share option grants to provide a reasonable estimate and to continue use of the "simplified" method after December 31, 2007. SAB 110 extends the opportunity to use the "simplified" method beyond December 31, 2007, as was allowed by Staff Accounting Bulletin No. 107 ("SAB 107"). Adoption of SAB 110 will not impact our financial statements as we did not use the "simplified" method to estimate lives of share-based awards.
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
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