UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2005.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 0-16401
--------------------------------------------------------------------------------
ADVANCED MATERIALS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3303 LEE PARKWAY SUITE 105 DALLAS, TEXAS 75219
(Address of principal executive offices)(Zip code)
Issuer's telephone number, including area code: (972) 432-0602
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.001 PAR VALUE
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. | |
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days.
Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. | |
Indicate by check mark whether the issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes|_| No |X|
State issuers revenues for the year ended November 30, 2005: 8,664,474
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
The aggregate market value on June 1, 2006 of the voting and non-voting common
equity held by non-affiliates of the registrant was $2,515,000.
There were 12,116,000 shares of our Common Stock, par value $0.001 per share,
outstanding as of July 1, 2006.
DOCUMENTS INCORPORATED BY REFERENCE None.
Transitional Small Business Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS.........................................................1
ITEM 2. DESCRIPTION OF PROPERTIES.......................................................5
ITEM 3. LEGAL PROCEEDINGS...............................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................6
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES..........................................6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS......................7
ITEM 7. FINANCIAL STATEMENTS...........................................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...............................................................11
ITEM 8A. CONTROLS AND PROCEDURES.......................................................12
ITEM 8B. OTHER INFORMATION......................................................................12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT......................................12
ITEM 10. EXECUTIVE COMPENSATION........................................................13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS............................................................15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................16
ITEM 13. EXHIBITS......................................................................17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................17
PART IV
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...............................F-1
SIGNATURES.............................................................................18
INDEX TO EXHIBITS......................................................................20
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Advanced Materials Group, Inc. (the "Company" or "AMG") develops, manufactures
and markets a wide variety of products from a raw material base of flexible
components. The Company's principal subsidiary, Advanced Materials, Inc.
(formerly known as Wilshire Advanced Materials, Inc.) ("AM"), is the successor
to a 50 year old business that converted specialty materials including foams,
foils, films and adhesive composites into components and finished products.
Today, the Company is making a transition from the foam fabricator / contract
manufacturing business to proprietary medical and consumer products. Examples of
the products AM is currently manufacturing include non-skid surgical instrument
pads and applicators for medical use, soap impregnated surgical prep kit
sponges, protective units for arthroscopic and orthopedic instruments, printer
cartridge inserts and inking felts, automobile insulators and water and dust
seals. These products are made for a number of customers in various markets
including medical, technology, aerospace, automotive and consumer.
The Company, which was formerly known as Far West Ventures, Inc., was
incorporated in Nevada in October 1986. The Company was inactive from January
1990 until April 1993, when it acquired AM. AM had previously been formed as a
California corporation in August 1992 for the purpose of acquiring the assets of
the General Foam Products division of Wilshire Technologies, Inc. ("WTI"). The
assets acquired by AM constituted a portion of the business and assets
previously acquired by WTI from Wilshire Foam Products, Inc. in November 1990.
The Company's principal executive offices are located at 3303 Lee Parkway Suite
105 Dallas, Texas 75219, and its telephone number is (972) 432-0602. The
Company's website is www.ami4.com
BUSINESS STRATEGY
The Company's new focus is to concentrate on developing and licensing or
acquiring proprietary products to be marketed primarily to the medical and
consumer industry. The objective is to turn the Company into a manufacturer and
marketer of disposable medical and consumer products. This goal will be pursued
through aggressive product development and the licensing of existing patented
and proprietary products or technology. In previous years the Company has been a
leading supplier of specialty die-cut polymeric materials. The common ingredient
with the past business plan and this new effort to develop and license or
acquire proprietary products is that the raw materials from which all products
will be produced is "flexible" materials. The core competency is still being
utilized; the equipment necessary to produce the proprietary products is the
same as has been historically employed by the Company. Since polymers are
synthetic chemical structures and are used in a variety of configurations and
products, the applications are numerous.
Although management believes that manufacturers are increasingly recognizing the
value in conserving or reallocating their resources by outsourcing the specialty
components of their products, U.S. companies are finding it increasingly
difficult to compete with Asian manufacturers. This Company is positioning
itself in the marketplace to benefit from this trend where and when it can, but
the primary focus will be generating its own proprietary opportunities with both
its existing customer base as well as new prospects. The Company continuously
looks for new materials to work with as was done in the past, but with an
emphasis on patentable or otherwise proprietary applications.
A significant part of the Company's past strategy had been to attempt to
penetrate foreign marketplaces by establishing fabrication plants through
subsidiaries in such areas as Ireland and Singapore. This strategy has been
abandoned. Advanced Materials Foreign Sales Corp. ("AM FSC"), was formed in 1997
in order to enter into a strategic manufacturing agreement in Singapore. In
1998, AM FSC entered into a ten-year agreement with Foamex Asia. The terms of
the agreement call for AM FSC to provide certain production equipment and
technology to Foamex Asia. Foamex Asia in turn provides its manufacturing
facilities and workforce to fabricate foam products at their Singapore facility.
The manufacturing agreement was amended in July 2003, and although the Singapore
joint venture is still producing product, the Company's role in the management
of that operations has been altered such that AM is receiving a percentage of
the profit with only limited involvement.
The Company's long-term strategy also includes the identification and
acquisition of other entities whose resources or talents could aid AM in its new
strategy. Such an acquisition could add strategic and economic value to the
Company's product line and competitive positioning. Although this is part of the
Company's strategy, no acquisition candidates have as yet been identified.
1
PRODUCTS
The Company manufactures a variety of products made from specialty flexible
materials including foams, foils, fabrics, non-woven paper products, needle
felts, films and adhesive composites. These products have primarily been
components and finished products for the medical, consumer, aerospace,
technology, and automotive markets. These products have historically included
inserts for computer printer cartridges, insulators used in automobile
applications, water and dust seals for automobiles, computers, printers and HVAC
systems, filters for trucks, computers and electrical humidifiers, sound
attenuation foam, and foam/fabric composites for cushions and padding in
helmets, soft luggage and other consumer products. In addition, private label
manufacturing of products for medical accounts include electrosurgical grounding
pads, sponges, neck braces, kneepads and other specialty products. Most of these
products have been designed and produced to meet the specifications of each
customer. AMG has typically provided no warranty for its products that are built
to the specification of its customers, other than compliance with those
specifications at the time of delivery.
Most of the products produced by AMG have been manufactured to specifications
furnished by its customers. Accordingly, the Company did not engage in research
and development of new products. The Company has, however, always sought to
acquire or build new and advanced equipment, in order to maintain production
capabilities consistent with its customers' specifications.
The proprietary products of the future will be built to the Company's
specifications, but could very well be bought by many of the same customers the
Company sells to today. Given the Company's change in focus, it anticipates that
an increasing percentage of its products, designs, and production methods will
be patent protected, or be proprietary in some aspect. Different from the
strategy adopted in the previous years, research and development will be the
objective of AM. The primary target markets will be medical and consumer,
however it is expected that research and development efforts could produce ideas
that would be equally valuable to the Company's existing industrial customers
outside the medical and consumer markets. In those cases the benefits of those
non-medical or non-consumer products will be shared with our existing customers
and AM will be the manufacturer of those products for those customers. The
Company currently has a product development backlog that is expected to fuel
future growth. In summary, the roots of the company remain unchanged. Die
cutting of flexible materials will continue unabated. However, the "root system"
will be used to support new "branches". AM's future is in proprietary and
patented products and processes.
MANUFACTURING
AM's corporate headquarters is located in Dallas, Texas and its manufacturing
facility is located in Rancho Dominguez, California. This facility is
approximately 56,000 square feet and services a region consisting of the United
States and parts of the Pacific Rim area. A substantial amount of the
manufacturing equipment has been designed and constructed by AM. Plans are
currently being made to improve the California facility. The Dallas space was
previously utilized by a plant that was closed in 2001. Improvements to the
Company's California facility are required as the Company focuses more effort on
the development of products for medical and consumer products.
AM has developed and employs a wide variety of techniques in the manufacturing
of its products. These techniques will include vacuum forming, pressure
sensitive lamination, coating, die cutting, splitting, slitting, heat sealing
and packaging. Vacuum forming is a process that involves heating foam until the
material is pliable and then pulling the material into a cooled mold using a
vacuum to get intimate contact to the mold surface with the material, which then
takes the form of the mold. Pressure sensitive lamination is a process that
involves the use of heat and pressure to apply an adhesive laminate to the
substrate and a paper liner to the adhesive, which can be pulled off by the user
to attach the substrate to the desired surface. In the Coating operation,
materials are saturated in specific liquids and then dried with heat and
temperature in large ovens. Die cutting is a process that involves the use of a
match tool die in a hydraulic press to cut material. Splitting and slitting is a
process that uses saws or slitters with blades ranging from saw tooth to razor
edge, depending on the material to be processed, to horizontally and/or
vertically slice layers off blocks of raw material. Heat sealing involves using
heat and pressure to seal thermoplastics together.
Few of AM's manufacturing processes are unique or proprietary. Most are basic
processes known to many in the foam fabricating industry. This is the reason
that competition is high and profits are low in this industry and why AM is
expanding into new markets. AM's machines and processes, though not proprietary
in themselves, will be used to produce proprietary medical and consumer
products. New, proprietary and patented products are the key to the future
success of AM. The management of AM will use the company's existing foundation
on which to build a medical and consumer product company.
QUALITY CONTROL
AMG is ISO 9002 certified and QS 9000 certified at its Rancho Dominguez
facility. It also maintains systems and procedures that meet customer quality
specifications and has successfully completed qualification surveys conducted by
Fortune 500 OEM manufacturers. AMG maintains procedures for conducting quality
compliance surveys of its major suppliers and has specific procedures in place
for receiving inspection, source inspection, process inspection and control,
instrument calibration standards, records maintenance, training and internal
quality audits. The Company has implemented systems for statistical process
control, which utilize statistical techniques to identify, monitor and improve
critical manufacturing processes such as sawing, die cutting and thermoforming.
2
SUPPLIERS
AMG purchases raw materials primarily consisting of polyurethane foam,
cross-linked polyolefin foams and pressure sensitive adhesives. AMG's largest
supplier of raw materials is Foamex Engineered Polyurethanes ("Foamex"), which
in fiscal 2005 and 2004 supplied approximately 42% and 15%, respectively, of
AMG's raw materials' requirements. Although the objectives of the Company have
been adjusted, it is not anticipated that the supplier base will change
significantly. Due to the amendment in the agreement in July 2003, the Company
no longer sells directly to Hewlett Packard, but rather receives a percentage of
the profit from its joint venture partner.
AM is an authorized fabricating distributor of a number of raw material
suppliers, including Foamex, Voltek, Avery Dennison (pressure sensitive
adhesives), Zotefoam (cross linked polyethylenes) and Rogers (cast urethanes).
Management believes that these supply arrangements, many of which have been
active for 25 years or more, provide AM with a diverse mix of raw materials at
the best available prices. AM purchases raw materials pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure or
delay by such suppliers in supplying necessary raw materials to AM could
adversely affect AM's ability to manufacture and deliver products on a timely
and competitive basis. AM purchases its raw materials on standard credit terms
and considers its relationships with its suppliers to be good.
Management believes that the loss of Foamex as a major supplier of foam could
adversely affect the Company's business. If another supplier's products were to
be substituted by our customers in critical applications, there are no
assurances that AMG would retain the favorable supply position that it has
earned through over 25 years as an authorized converter/fabricator for Foamex.
This key supplier has been consulted on the future direction of the Company, and
this product development initiative will be with their cooperation.
MARKETING AND SALES
AMG's products have traditionally been marketed and sold primarily to major
divisions of large industrial customers, many of which are industry leaders
whose products have significant market share. AMG does not see a significant
change to this practice although the product mix will change. In the past, all
of AMG's products have been components or finished products manufactured to
order for its industrial customers. As discussed previously, AMG will also sell
and manufacture products developed internally, and well as those licensed from
outside inventors. The customer's purchase decision has often involved the
engineering, manufacturing and purchasing groups within the customer's
management. It is anticipated that the customers' team of management will
continue to be involved in the process, but will also include sales and
executive level management.
AMG currently has three full-time sales representatives who make sales calls on
a direct basis. All three sales representatives receive a salary.
AMG's domestic sales as a percentage of the Company's consolidated sales were
approximately 93% and 88% for fiscal years 2005 and 2004, respectively. AMG
sells to a number of foreign regions including Asia, South America and the
Middle East. Foreign sales, which accounted for approximately 7% and 12% of
fiscal 2005 and 2004 sales, respectively, are made both directly and through
sales agents who receive commissions. During 2003, AMG restructured its
manufacturing agreement in Singapore and shifted certain sales previously
included in domestic sales to Singapore. Although this change will not affect
profits, it will significantly reduce the Company's foreign sales. See further
discussion under the heading "Business Strategy" included herein.
Total revenue attributable to each geographic area in which the Company sells is
included in Note 14 of the Notes to Consolidated Financial Statements included
herein.
AMG relies primarily upon referrals by its customers and suppliers and the
activities of its sales representatives and management for new business.
CUSTOMERS
AMG generally sells its products pursuant to customer purchase orders. There can
be no assurance that any customers will continue to purchase products from AMG.
AMG's customers are in the medical disposables, technology, aerospace,
automotive and consumer markets. AMG's plans are to continue to pursue customers
in those markets, but with an added emphasis in the medical and consumer
segments and concentrating on proprietary and or patentable products. Management
believes that diversity spreads the risk of dependence on one customer or one
market sector.
AMG believes its current prices are competitive with those of other domestic
suppliers of custom and flexible materials. AMG sales are typically made on
terms, which require payment of the net amount due in 30 or 60 days. Product
development efforts will continue to pursue designs and materials that create
perceived value.
3
AM's domestic customers of products made from bulk materials such as foam are
located primarily in the West and Southwest regions of the United States. For
those bulky, low price products, high freight costs on long distance shipments
from AM's Rancho Dominguez facility make it difficult for AM to be competitive
in other regions of the United States or internationally. However, in the
medical and consumer markets, with products whose base materials do not use high
volume foam, AM can competitively supply products both domestically and
internationally.
LICENSES AND PROPRIETARY RIGHTS
AMG is currently working with inventors to secure the licensing rights to
products it feels it can successfully manufacture and market. AMG is also
currently developing products that it feels will be awarded a patent because of
the unique design or function. AMG has always relied on proprietary know-how,
exclusive license rights and distribution agreements, and employs various
methods to protect its processes. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop such processes.
COMPETITION
The custom materials fabrication industry in which AMG has competed is highly
competitive. The number of competitors and the Company's competitive position
are not known or reasonably available. Low barriers to entry and fragmented
competition characterize the industry. Most of the Company's competitors have
been small, privately held companies, which generally specialize in only one
product or process. Three of the Company's principal competitors are Boyd
Industrial, which has four locations in the Western United States, Packaging
Alternatives Corp. and Rogers Foam Corp. AMG has competed primarily on the basis
of its ability to meet customers' specifications promptly and cost effectively,
and on the quality of its products.
It is because of this low barrier to entry, that AMG has made the decision to
focus on a long-term effort to secure proprietary and patentable products.
Competition is decreased with proprietary products since the barriers to entry
increase. Current or future competitors or new market entrants could introduce
new or enhanced products with features that render AMG's products obsolete or
less marketable, or could develop means of producing competitive products at a
lower cost. The ability of AMG to compete successfully will depend in large
measure on its ability to adapt to technological changes in the industry by
striving to be the innovative leader. There can be no assurance that AMG will be
able to keep pace with the technological and innovative demands of the market
place or successfully develop new products demanded by customers.
GOVERNMENT REGULATION
The manufacture of certain products by AMG requires the purchase and use of
chemicals and other materials, which are or may be classified as hazardous
substances. The Company does not maintain environmental impairment insurance.
There can be no assurance that the Company will not incur environmental
liability or that hazardous substances are not or will not be present at their
facilities.
The Company is subject to regulations administered by the United States
Environmental Protection Agency, various state agencies, county and local
authorities acting in conjunction with federal and state agencies. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution. The extensive regulatory framework imposes significant
complications, burdens and risks on the Company. Governmental authorities have
the power to enforce compliance with these regulations and to obtain injunction
and/or impose civil and criminal fines or sanctions in the case of violations.
The Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), imposes strict, joint and several liability on
the present and former owners and operators of facilities which release
hazardous substances into the environment. The Federal Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), regulates the generation,
transportation, treatment, storage and disposal of hazardous waste. In
California, the handling and disposal of hazardous substances is governed by the
law, which contains the California counterparts of CERCLA and RCRA. The Company
and its subsidiaries believe that their manufacturing activities are in
substantial compliance with all material Federal and state laws and regulations
governing their operations. Amendments to existing statutes and regulations
could require the Company to modify or alter methods of operations at costs,
which could be substantial. There can be no assurance that the Company will be
able, for financial or other reasons, to comply with applicable environmental
laws and regulations.
Various laws and regulations relating to safe working conditions, including the
Occupational Safety and Health Act ("OSHA"), are also applicable to the Company
and its subsidiaries. The Company believes it is in substantial compliance with
all material Federal, state and local laws and regulations regarding safe
working conditions.
4
EMPLOYEES
As of July 1, 2006 a, the Company had 28 full-time employees. Of the Company's
full-time employees, 21 are employed in manufacturing, 3 are in sales, 2perform
general and administrative functions and 2 perform other functions. The Company
also utilizes the services of contract workers as needed from time to time in
its manufacturing operations. As of July 1, 2006, the Company utilized
approximately 26 contract workers.
None of the employees of the Company are presently represented by a labor union
and the Company's management considers the relationships with its employees to
be good.
In addition to the other information in the Annual Report on Form 10-KSB,
investors should carefully consider the following factors listed below about us.
Certain statements in "Risk Factors" are forward-looking statements. See item 6
- Management's Discussion or Plan of Operations - "Forward-Looking Statements."
a) General business conditions, including a worsening economy, which might
slow the overall demand for the Company's products and increases of
interest costs based on the Company's borrowing activities.
b) Competitive factors, including heightened competition from existing
competitors leading to increased price competition and margin erosion;
and the introduction of new products or technologies by customers or
competitors.
c) Concentrations of sales in markets and customers.
d) Failure to obtain new customers, retain existing customers or volume
reductions by current customers.
e) Concentrations of raw material suppliers, including difficulties or
delays in obtaining raw materials.
f) Inability to execute marketing and sales plans.
g) Inability to develop cost effective means for timely production of new
product orders in required quantities.
h) Delays or cancellations of orders; timing of significant orders; and
introduction of new products.
i) Delays in development of production equipment required for new products.
j) Short-term fluctuations in margins due to yields and efficiencies.
k) Loss of executive management or other key employees.
l) Changes in financing amount, availability or cost.
m) The effects of changes in costs and availability of insurance coverage.
n) The effects of changes in compensation or benefit plans.
o) Adoptions of new, or changes in, accounting policies and practices and
the application of such policies and practices.
p) Costs of petroleum based raw materials (i.e. foam)
The prices of raw materials account for 50% or more of our manufacturing
costs. We have experienced increases in raw material costs since the
middle of 2002. Our ability to pass on cost increases may be hindered by
competition or selling price.
Prices of raw materials are influenced by demand, manufacturing capacity
and oil and natural gas prices. Historically, the prices of raw materials
have been cyclical and volatile and our suppliers of raw materials have
increased the price of raw materials several times over the past years.
We have been more successful in implementing selling price increases in
2005 than historically.
q) Costs of shipping due to rising fuel costs
We do not undertake to update, revise or correct any forward-looking
statements. Any of the factors described above could cause our financial
results, including our net income or growth in net income to differ
materially from prior results, which in turn could, among other things,
cause the price of our common stock to fluctuate substantially.
5
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 56,000 square feet of manufacturing and office
space in Rancho Dominguez, California. The Company pays rent of approximately
$24,600 per month under its Rancho Dominguez lease which expires November 2010.
Effective November 1, 2005 the Company rented office space in Dallas for its
corporate Headquarters. The Company pays approximately $5,200 per month and the
lease expires in October 2010.
ITEM 3. LEGAL PROCEEDINGS.
As of May 1, 2006 the Company was involved in legal proceedings in the normal
course of operations. Although the outcome of the proceedings cannot be
determined, in the opinion of management any resulting future liability will not
adversely effect on the Company.
The Company had previously made monthly payments aggregating approximately
$8,000 to two former employees in conjunction with a liability it had assumed in
a business combination in 1992. As of March 2003, the Company ceased making
payments to these individuals, as the Company believes it has fulfilled its
obligation. In May 2004 the Company settled the dispute for a lump-sum payment
of $250,000 which was paid prior to year-end. The remainder of the reserve was
released and included as gain on settlement of $974,000 in the accompanying
consolidated statement of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during the
fourth quarter of fiscal year 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's common stock traded on The NASDAQ Small-Cap Stock Market
("NASDAQ") under the symbol "ADMG" from June 23, 1993 until December 13, 2000.
Effective as of December 14, 2000, the Company's common stock was delisted from
NASDAQ and has been traded on the NASD-regulated OTC-Bulletin Board under the
symbol "ADMG.OB." In April 2004, the Company was delisted from the OTC-Bulletin
Board, but still trades on the OTC Pink Sheets under the symbol "ADMG.PK". The
high and low closing prices for the common stock for the past two fiscal years
as reported by The Pink Sheets, LLC are set forth in the following table. Such
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
FISCAL 2005 HIGH LOW
----------- ---- ---
Fourth Quarter $0.25 $0.12
Third Quarter $0.30 $0.15
Second Quarter $0.51 $0.15
First Quarter $0.62 $0.37
FISCAL 2004 HIGH LOW
----------- ---- ---
Fourth Quarter $0.67 $0.55
Third Quarter $0.74 $0.44
Second Quarter $0.71 $0.30
First Quarter $0.90 $0.28
HOLDERS
There were approximately 2,800 shareholders of record as of July 1, 2006.
DIVIDEND POLICY
The present policy of the Company is to retain earnings to provide funds for the
operation and expansion of its business. The Company has paid no cash dividends
during the past two fiscal years and management does not anticipate that it will
do so in the foreseeable future. The Company's line of credit agreement with its
bank currently prohibits the payment of cash dividends.
6
PRIVATE PLACEMENT
In August, 2005, ADMG issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
In October 2005, the Company sold 350,000 shares of the Company's common stock
for total proceeds of $70,000.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of November 30, 2005 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE QUITY COMPENSATION PLANS
ISSUED UPON EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a)
---------------------------------------- ---------------------------- ---------------------- -----------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 846,000 $ 0.69 2,216,000
---------------------------- ---------------------- -----------------------------
Total 846,000 $ 0.69 2,216,000
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited consolidated financial statements and notes to financial
statements included elsewhere in this document. This report and the Company's
audited consolidated financial statements and notes to financial statements
contain forward-looking statements, which generally include the plans and
objectives of management for future operations, including plans and objectives
relating to the Company's future economic performance and management's current
beliefs regarding revenues the Company might earn if it is successful in
implementing its business strategies. The forward-looking statements and
associated risks may include, relate to or be qualified by other important
factors, including, without limitation:
a) General business conditions, including a worsening economy, which might
slow the overall demand for the Company's products and increases of
interest costs based on the Company's borrowing activities.
b) Competitive factors, including heightened competition from existing
competitors leading to increased price competition and margin erosion;
and the introduction of new products or technologies by customers or
competitors..
c) Concentrations of sales in markets and customers.
d) Failure to obtain new customers, retain existing customers or volume
reductions by current customers.
e) Concentrations of raw material suppliers, including difficulties or
delays in obtaining raw materials.
f) Inability to execute marketing and sales plans.
g) Inability to develop cost effective means for timely production of new
product orders in required quantities.
h) Delays or cancellations of orders; timing of significant orders; and
introduction of new products.
i) Delays in development of production equipment required for new products.
j) Short-term fluctuations in margins due to yields and efficiencies.
k) Loss of executive management or other key employees.
l) Changes in financing amount, availability or cost.
7
m) The effects of changes in costs and availability of insurance coverage.
n) The effects of changes in compensation or benefit plans.
o) Adoptions of new, or changes in, accounting policies and practices and
the application of such policies and practices.
r) Costs of petroleum based raw materials (i.e. Foam)
s) Costs of shipping due to rising fuel costs
We do not undertake to update, revise or correct any forward-looking statements.
Any of the factors described above could cause our financial results, including
our net income or growth in net income to differ materially from prior results,
which in turn could, among other things, cause the price of our common stock to
fluctuate substantially.
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company had
net income of $157,150 and $714,548 in fiscal years 2005 and 2004, respectively.
Net income in 2004 includes a gain on settlement of $974,000 and the reversal of
a restructuring reserve of $84,032.
At November 30, 2005, the Company had limited cash resources. In September of
2005, the Company renegotiated the terms of its debt instruments, reducing the
line of credit from $3.75 million to $1.5 million and tending the term of the
term loan through October 1, 2006 with monthly principal payments of $7,500 and
the remainder due on October 1, 2006. Under the new agreement, the line of
credit and term loan bear interest at Prime plus 1.5% and Prime plus 2.0%,
respectively. As a result of the new agreement, the Company was able to cure its
debt covenant violations.
Management has implemented a plan to reduce expenses and improve sales. The
Company has continued to focus in the last few months on proprietary products
and will now be concentrating on securing proprietary products primarily for the
medical and consumer industry. The objective is to create advanced designs,
using current materials. These products will be pursued through aggressive
product development and the licensing of existing patented products or
technology. These new products are expected to have higher profit margins and be
less subject to competition. There can be no assurances that the Company will be
successful in completing these critical tasks. If the Company is unable to
successfully complete these critical tasks, it may be forced to significantly
reduce, restructure or cease its operations and/or liquidate inventory at
amounts below current carrying value to generate the necessary working capital
to fund its operations, and if necessary, seek other remedies available to the
Company including protection under the bankruptcy laws. As a result of these and
other factors, the Company's independent certified public accountants, Catherine
Fang, CPA, LLC, indicated in their report on the 2005 consolidated financial
statements, that there is substantial doubt about the Company's ability to
continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to the
audited consolidated financial statements included in Item 7 of this report. The
Company's management believes the Company's most critical accounting policies
include revenue recognition, inventory valuation, impairment of long-lived
assets, and income tax assets and liabilities.
Revenue Recognition
-------------------
The Company recognizes revenue from product sales when it is realized or
realizable and earned, which is generally at the time of shipment and passage of
title. Revenue is considered to be realized or realizable and earned when there
is persuasive evidence of a sales arrangement in the form of a contract or a
purchase order, the product has been shipped, the sales price is fixed or
determinable and collectibility is reasonably assured. The Company records
revenue for shipping costs charged to customers. The related shipping costs
incurred are recorded in cost of sales.
Inventory Valuation
-------------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor, manufacturing overhead and purchased
products. Market is determined by comparison with recent purchases or net
realizable value. Net realizable value is based on forecasts for sales of the
Company's products in the ensuing years. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown on the accompanying consolidated balance sheets.
8
Impairment of Long-Lived Assets
-------------------------------
The Company assesses the recoverability of its long-lived and certain intangible
assets, including goodwill, by determining whether the related asset balance can
be recovered through projected undiscounted cash flows. The amount of
impairment, if any is measured based on projected discounted future cash flows
(fair value) and charged to operations in the period in which impairment is
determined by management.
Restructuring Reserve
---------------------
Upon approval of a restructuring plan by management with the appropriate level
of authority, the Company records restructuring reserves for certain costs
associated with plant closures and business reorganization activities. Such
costs are recorded as a current liability and primarily include employee
severance and contractual obligations. These costs are not associated with nor
do they benefit continuing activities. Inherent in the estimation of these costs
are assessments related to the most likely expected outcome of the significant
actions to accomplish the restructuring. Changing business conditions may affect
the assumptions related to the timing and extent of facility closure activities.
The Company reviews the status of restructuring activities on a quarterly basis
and if appropriate records changes based on updated estimates.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates expected to
apply when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts, which are
more likely than not to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
RESULTS OF OPERATIONS FOR FISCAL 2005 COMPARED WITH 2004
THE COMPANY'S REVENUE from operations for the fiscal year ended November 30,
2005 was $8,664,474, an increase of 8.9% compared to the fiscal year ended
November 30, 2004. Revenues from the Singapore strategic manufacturing venture
declined to $586,131 in fiscal 2005 from $729,551 in fiscal 2004. Revenues from
U.S. operations increased to $8,078,343 in fiscal 2005 from $7,228,186 in fiscal
2004.
The increase in sales for the U.S. operations are due to additional sales
volumes and new customers. The Company continues to focus on the development of
proprietary products and the results of these efforts is beginning to increase
revenues. The Company continues to face increased competition and to feel the
effects of customers moving their manufacturing operations from the United
States to Asia. For the shipping cost sensitive foam commodities that the
Company has primarily sold in the past, it has been very difficult to be
competitive with the local fabricators in Asia. The Company shifted certain
manufacturing and sales from its U.S. operations to its Singapore joint venture
in late 2003. The Company has shifted its primary focus to generating its own
proprietary opportunities with both its existing customer base as well as new
prospects in order to build a more competitive base of business in the United
States.
There was an amendment to the Company's manufacturing agreement in Singapore
with Foamex Asia ("Foamex") to change the vendor of record for the customer
supplied under the agreement from the Company to Foamex effective July 17, 2003.
Although this change does not affect the Company's share of the profitability
under the agreement, it does cause a significant reduction in its reported
revenues. This agreement expires in early 2008. Previously, the Company
purchased the raw materials for the production of product and billed the end
customer and therefore recognized the gross sales and cost of sales on its
financials. Under the amended agreement, it no longer purchases the raw
materials or bills the end customer and only recognizes its portion of profit as
revenue. Management believes this change has been beneficial to the Company as
it stills maintains a share of the profits from the Singapore agreement, while
it has significantly reduced its capital requirements since it no longer needs
to purchase raw materials several months in advance of realizing sales.
The Company formed Advanced Materials Foreign Sales Corporation Ltd., a
wholly-owned subsidiary of the Company, to enter into a strategic manufacturing
agreement in Singapore. The Company entered into a ten-year agreement with
Foamex Asia ("Foamex") in January 1998. Terms of the agreement call for the
Company to lease production equipment and provide certain technology to Foamex.
Foamex will in turn provide its manufacturing facilities and workforce to
fabricate foam products at Foamex's Singapore facility. The manufacturing
agreement has a profit sharing provision that changes annually. The profit
sharing split is as follows (in percentages):
9
YEAR THE COMPANY FOAMEX
---- ----------- -------
1998 65 35
1999 60 40
2000 50 50
2001 50 50
2002 45 55
2003 40 60
2004 - 2007 35 65
The president of Foamex Asia is former employee of the Company to whom the
Company was paying retirement benefits until March of 2003. The Company was
previously involved in litigation with the former employee in regards to these
payments.
Revenues and profits as reported relating to the Singapore manufacturing
agreement Were $586,131 and $729,551, for each of the two years ended November
30, 2005 and 2004, respectively. Under the amended agreement, only the Company's
shares of the profit are reported as revenue.
As previously disclosed in prior reports the Company disagrees with the claims
by the IRAS that a tax is due and intends to aggressively contest the matter
should the IRAS make a specific claim for a tax. Based upon the foregoing, and
the fact that a final resolution of any proposed tax is uncertain and would, in
the Company's belief involve unsettled areas of the law, based upon currently
available information, the Company is unable to provide an estimate or a range
of estimates as to the probable tax liability for this matter. An unfavorable
resolution, depending upon the amount of tax claimed by IRAS, could have a
material effect on the Company's result of operations or cash flows in the
periods in which an adjustment is recorded or the tax is due or paid.
COST OF SALES in fiscal 2005 increased to $6,615,081 from $6,182,346 in fiscal
2004. Cost of sales as a percentage of net sales was 76.3% in fiscal 2005
compared to 77.7% in fiscal 2004. The Company's gross profit percentage was
23.7% in fiscal 2005, compared to 22.3% in fiscal 2004. The increase in gross
profit percentage during fiscal 2005 was primarily due to the Company's
discontinuing of certain low margin sales, and lower labor and overhead costs
due to the optimizing of manufacturing process. The Company continues to assess
ways to reduce its manufacturing and overhead cost.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSE was $1,786,584 in fiscal
2005 compared to $1,562,359 in fiscal 2004. SG&A costs increased in fiscal 2005
compared to fiscal 2004 primarily due to increasing sales and marketing and
product development expense. Also, as mentioned legal expense increased due to
the dispute with the IRAS over a tax issue. SG&A as a percent of net sales was
20.6% in fiscal 2005 compared to 19.6% in fiscal 2004. The increase in SG&A as a
percent of net sales for fiscal 2005 and 2004 is due to increase expense to
further the efforts of becoming a proprietary products company and increased
sales expense. The Company is currently operating out of a single plant and
therefore, does not expect similar expense reductions in the near future.
RESTRUCTURING RESERVE REVERSALS of $84,032 were recorded in fiscal 2004 relating
to the plant closures noted above. During 2004, $84,032 in restructuring reserve
was reversed due to continued operations in the Dallas area and corporate-office
relocated from California to Dallas Texas at the end of June 2004 and
approximately $23,000 in lease costs were paid against the reserve. During 2005
the remainder of the reserve was paid and as a result the balance is $0 at
November 30, 2005.
INTEREST EXPENSE in fiscal 2005 was $155,934 compared to $192,980 in fiscal
2004. Interest expense was lower in 2005 due to a renegotiated line of credit
with the current lender which resulted in lower interest rate. Also, due to
aggressive cost monitoring the ability of the Company to borrow less was
achieved.
LOSS ON DISPOSAL OF FIXED ASSETS of approximately $108,000 in fiscal 2004,
resulted from the Company's assessment of the impairment and resulting write off
of certain fixed assets no longer being used by the Company due to changes in
its operations.
THE COMPANY RECORDED A GAIN ON SETTLEMENT related to an instance where the
Company had previously made monthly payments aggregating approximately $8,000 to
two former employees in conjunction with a liability it had assumed in a
business combination in 1992. As of March 2003, the Company ceased making
payments to these individuals, as the Company believed it had fulfilled its
obligation. In May 2004 the Company settled the dispute for a lump-sum payment
of $250,000 which was paid prior to year-end. The remainder of the reserve was
released and included as gain on settlement of $974,000 in the accompanying
consolidated statement of operations.
INCOME TAXES were a charge of $0 and $2,400 in fiscal 2005 and 2004,
respectively.
10
NET INCOME FROM OPERATIONS for fiscal 2005 was $157,150 compared to $714,548 for
fiscal 2004. Fiscal 2005 results include other income of $155,000 which is
comprised of excess equipment sales related to the production of HP products.
Fiscal 2004 results included non-recurring restructuring charges (reversals) of
($84,032). Fiscal 2004 included a non-recurring gain on settlement of $974,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $256,391 of cash flows in fiscal 2005
compared to cash provided of $216,572 in fiscal 2004. The cash flows used in
fiscal 2005 were primarily as a result of change of $578,547 in changes from
operating assets and liabilities and a gain on sale of fixed assets of $155,000,
offset by net income of $157,150 and offset by non-cash adjustments.
Accounts receivable increased $277,602 and inventory increased $394,106 as a
result of the increased operations of the Company. Accounts payable and accrued
liabilities increased $254,235 mainly as a result of the increased operations of
the Company.
The Company invested $70,270 and $161,444 in fiscal 2005 and 2004, respectively,
in capital equipment. The Company has instituted a Company-wide program to
reduce non-essential capital expenditures that are not specifically focused on
revenue growth.
The Company had $407,039 of cash and cash equivalents at November 30, 2005. Cash
flows provided by financing activities were $523,411 in fiscal 2005 compared to
cash used of $80,839 in fiscal 2004. During fiscal 2005, the Company obtained
$482,909 from its line-of-credit offset by payment on debt of 279,331.
Additionally, the Company had proceeds of $319,833 through the issuance of
common stock.
In October 2003, the Company entered into a new line of credit agreement with a
financial institution, which provides for borrowings up to $3,750,000, as
defined. The line expires in October 2005. In September of 2005, the Company
renegotiated the term of this debt instrument, reducing the line of credit from
$3.75 million to $1.5 million. Under the new agreement, the line of credit bears
interest at Prime plus 1.5% (9.5% at November 30, 2005). As a result of the new
agreement, the Company was able to cure its debt covenant violations. The line
of credit is secured by substantially all of the assets of the Company. The line
of credit agreement requires the Company to maintain certain financials
covenants including the maintenance of debt service and tangible net worth
ratios.
At November 30, 2005 there are no additional borrowings available under this
line-of-credit.
BUSINESS OUTLOOK
This Business Outlook section contains a number of forward-looking statements,
all of which are based on current expectations. Actual results may differ
materially.
The Company currently has orders from OEMs and believes that its sales will
increase in fiscal 2006. The Company expects gross profit and operating profit
margins to improve in fiscal 2006. The Company has recently begun to shift its
primary focus to generating its own proprietary opportunities with both its
existing customer base as well as new prospects in order to build a more
competitive base of business in the United States. There is an inherent risk
that this change in focus may not be successful. Management does not expect
significant sales from the new opportunities in the next 6 to 12 months. The
Company expects to incur increased product development and selling expenses
pertaining to new products.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123 (revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R requires
measurement of all employee stock-based compensation awards using a fair-value
method and the recording of such expense in the consolidated financial
statements. In addition, the adoption of SFAS 123R will require additional
accounting related to the income tax effects and disclosure regarding the cash
flow effects resulting from share-based payment arrangements. In January 2005,
the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107, which provides supplemental implementation guidance for SFAS
123R. SFAS 123R is effective for our first quarter of fiscal 2006. We have
selected the Black-Scholes option-pricing model as the most appropriate
fair-value method for our awards and will recognize compensation cost on a
straight-line basis over our awards' vesting periods. The adoption of SFAS 123R
did not have a material impact on our results of operations. However,
uncertainties, including our future stock-based compensation strategy, stock
price volatility, estimated forfeitures and employee stock option exercise
behavior, make it difficult to determine whether the stock-based compensation
expense that we will incur in future periods will be similar to the SFAS 123 pro
forma expense disclosed in the Consolidated Financial Statements.
11
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151 requires
that the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. In addition, other items such as abnormal
freight, handling costs and wasted materials require treatment as current period
charges rather than a portion of the inventory cost. SFAS 151 is effective for
inventory costs incurred during periods beginning after June 15, 2005. The
adoption of SFAS 151 did not have a material impact on our results of operations
or financial condition.
ITEM 7. FINANCIAL STATEMENTS
The Report of Independent Certified Public Accountants and the Consolidated
Financial Statements listed in the "Index to Financial Statements" are filed as
part of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial officer, has evaluated the effectiveness 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 of the year ended November 30, 2005, the period covered
by the Annual Report on Form 10-KSB. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that the
disclosure controls and procedures provide reasonable assurance that material
information relating to us is made known to management including the CEO and
CFO.
There were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter of 2005 that have materially affected,
or are reasonable likely to materially affect, our internal control over
financial reporting.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors are elected annually and hold office until the next annual meeting of
shareholders or until their respective successors are duly elected and
qualified. Officers are appointed by, and serve at the discretion of the
Company's Board of Directors, subject to the terms of any applicable employment
agreements. The directors and executive officers of the Company are as follows:
DIRECTORS
TIMOTHY R. BUSCH, 51, has been the Chairman and a director of the Company
since February 1998 and September 1997, respectively. Mr. Busch is a tax
attorney and is president and managing partner of a professional services
practice, The Busch Firm, which he founded in 1979. He is a director of Radica
Games International, a publicly held company, and is a director of several
privately held companies. Mr. Busch is a licensed attorney in California,
Michigan, Texas and Washington, D.C. and is a non-practicing/inactive status as
a CPA in California and Michigan.
N. PRICE PASCHALL, 57, has been a director of the Company since January
1994. Mr. Paschall has been Managing Director of Context Capital Group, an
investment-banking firm that serves clients in the medical and industrial
markets, since February 1992. Mr. Paschall was a partner of Shea, Paschall,
Powell-Hambros Bank, and its predecessor company, a firm specializing in mergers
and acquisitions, from January 1983 to January 1992. Mr. Paschall holds a B.A.
in Business Administration from California Polytechnic University at Pomona. He
currently serves on the Board of Directors of CPU Tech a private technology
company located in Pleasanton, CA.
MAURICE J. DEWALD, 65, has been a director of the Company since February
1998. From June 1992 to the present, Mr. DeWald has been Chairman and Chief
Executive Officer of Verity Financial Group, Inc., a private investment and
financial advisory firm. Mr. DeWald is a former member of the KPMG LLC Board of
Directors and also served as the Managing Partner of the Los Angeles office of
KPMG LLC from 1986 to 1991. He currently serves on the Boards of Directors of
Mizuho Corporate Bank of California, and Quality Systems, Inc., a publicly-held
developer and marketer of healthcare information systems.
12
RICARDO G. BRUTOCAO, 61, was appointed the position of Chief Executive
Officer to fill the Company's previously announced vacancy at that position on
January 2, 2006. Mr. Brutocao, who already serves as a director of the Company,
will serve in this capacity on a part-time basis. Mr. Brutocao also serves as
the President and a director of Centergistic Solutions, Inc., a maker of
performance management software, positions Mr. Brutocao has held since 2001.
From 2000 to 2001, Mr. Brutocao was the interim Chief Executive Officer of
ZLand, Inc., a software company.
JOHN SAWYER, 61, was elected as a director on March 6, 2006. Mr. Sawyer is
Chairman and President of Penhall Company. He joined Penhall Company in 1978 as
the Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was
appointed Manager of Penhall's National Contracting Division, and in 1984, he
assumed the position of Vice President and became responsible for managing all
construction services divisions. Mr. Sawyer has been President of Penhall since
1989, and Chairman since 1998. Mr. Sawyer is also a director and member of the
audit committee for H&E Equipment Services.
EXECUTIVE OFFICERS
RICARDO G. BRUTOCAO, 61, was appointed the position of Chief Executive
Officer to fill the Company's previously announced vacancy at that position on
January 2, 2006. Mr. Brutocao, who already serves as a director of the Company,
will serve in this capacity on a part-time basis. Mr. Brutocao also serves as
the President and a director of Centergistic Solutions, Inc., a maker of
performance management software, positions Mr. Brutocao has held since 2001.
From 2000 to 2001, Mr. Brutocao was the interim Chief Executive Officer of
ZLand, Inc., a software company.
WILLIAM G. MORTENSEN, 40, was appointed President and retained the Chief
Financial Officer position on August 22, 2005 and previously held the position
of Chief Financial Officer and Controller as of June 1, 2004. Mr. Mortensen was
employed by Cingular Wireless LLC as Associate Director in Finance, and before
the Cingular joint venture he was with SBC, Inc. as a manager of SBC Services
supporting the SBC Wireless division since 1999. Before joining SBC, Inc. Mr.
Mortensen worked for Frito-Lay, Inc. as a manager of finance and for over eight
years with EDS, Inc. holding various financial positions. Mr. Mortensen holds a
BBA degree in Business Administration from Abilene Christian University and has
experience in the telecommunications, high-tech and manufacturing industries.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
officers and directors of the Company as well as persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and grater-than-10% shareholders are required by the
regulations of the Securities and Exchange Commission to furnish the company
with copies of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company, all Section 16(a) requirements applicable to
our officers, directors and grater-than-10% shareholders were satisfied during
the fiscal year ended November 30, 2005.
13
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by the Company for services rendered to the Company by its current and former
Chief Executive Officers and to each of the other most highly compensated
executive officers of the Company who earned more than $100,000 in salary and
bonus during the fiscal year ended November 30, 2005 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION
OTHER AWARDS SECURITIES
--------------------- --------------------
ANNUAL UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY(1) BONUS COMPENSATION GRANTED
----------------------------- --------------- -------------------- --------------------- --------------------- --------------------
Ricardo Brutocao 2005 $125,000 -- -- 100,000
Chief Executive Officer
William G. Mortensen
President and Chief 2005 $120,000 $16,544 --
Financial Officer 2004 $ 90,000 -- -- 50,000
Michael Bowen (2) 2005 $135,000 $16,544 -- 200,000
Former Executive Vice President 2004 $120,000 -- $5,000 --
Robert E. Delk, 2005 $125,000
Former President, Chief 2004 $125,000 -- -- --
(1) Mr. Delk's agreement was for him to begin receiving $125,000 annually
beginning in August 2004. Mr. Brutocao began receiving a salary of
$125,000 in January 2006. Before January 2006 Mr. Brutocao was a director
of the company and was employed by the company as a consultant receiving
annual compensation in the amount $120,000.
(2) Effective July 7, 2006, Michael Bowen resigned from the Company to pursue
other opportunities.
OPTION GRANTS IN 2005
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding the exercise
of options by the Named Executive Officers during fiscal 2005 and unexercised
stock options held by the Named Executive Officers as of November 30, 2005.
Options held by Mr. Scott, Mr. Lasnier and Mr. Lane terminated upon termination
of their employment prior to November 30, 2003.
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
NOVEMBER 30, 2005 AT NOVEMBER 30, 2005(2)
--------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------- ----------- ----------- ----------- ------------- ----------- -------------
Ricardo Brutacao........... -- -- 100,000 20,000 $400 $1,600
Will Mortensen............. -- -- 50,000 10,000 $0 $0
(1) Market value of underlying securities on the date of exercise, minus the
exercise price.
(2) Based on the last reported sale price ($0.22 per share) on the Pink Sheets
on April 21, 2006 (the Date of Record).
EMPLOYMENT CONTRACT, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In August 2003, the Company entered into an employment agreement with its
newly appointed President, Chief Executive Officer and Secretary, Robert E.
Delk. The agreement is to be effective through July 31, 2005, subject to renewal
for automatic successive additional one-year periods if neither the Company nor
Mr. Delk provides written notice of termination at least 30 days prior to the
end of the then current term. In lieu of salary during the first year of the
term of the employment agreement, Mr. Delk received common stock purchase
options described in the "Option Grants in 2004" above and also received
reimbursement of approximately $8,300 for health insurance premiums.
14
In fiscal 2003, compensation expense of $42,000 pertaining to the
employment agreement was recorded as an adjustment to paid in capital. In 2003,
the Company issued stock options under the 2003 Plan to Robert Delk, its
President and CEO, to purchase (1) 435,000 shares of the Company's common stock
at $0.28, vesting over one year, (2) 435,000 shares of the Company's common
stock at $0.56, vesting over five years, (3) 435,000 shares of the Company's
common stock at $1.12, vesting over five years, and (4) 435,000 shares of the
Company's common stock at $2.24, vesting over five years. Mr. Delk accepted the
position of President and CEO of the Company in August 2003 and under the terms
of his employment agreement he receives no cash compensation until August 2004.
This is recorded as non-cash compensation in selling, general and administrative
expenses in the accompanying consolidated statement of operations. The options
are subject to continued employment and expire in August 2008. No compensation
expense was recorded in connection with the issuance of these options as they
were issued at or above the fair market value of the underlying stock at the
date of grant.
The employment agreement with Mr. Delk provides for a base salary of at
least $125,000 per year beginning in August 2004. The Company and Mr. Delk are
in the process of negotiating a replacement employment agreement. Accordingly,
effective as of August 1, 2004, the Company began booking an accrued payroll
liability for the $125,000 annual salary. The Company intends to pay this
liability to Mr. Delk in a lump sum if negotiations are successfully completed.
The Company also continues to reimburse Mr. Delk for health insurance premiums.
On June 24, 2005, Robert E. Delk, who has served as a member of the board
of directors ("Board") of Advanced Materials Group, Inc. ("ADMG") and as the
President and Chief Executive Officer of ADMG since August 1, 2003, resigned
from his position on the board of directors. Pursuant to the letter dated June
24, 2005 addressed to the Chairman of the Board of ADMG in which Mr. Delk
advised the board of directors of his resignation as a director, Mr. Delk also
gave written notice of termination of his employment with ADMG effective July
31, 2005 upon the expiration of his Employment Agreement dated August 1, 2003
with ADMG.
On August 22, 2005, Advanced Materials Group, Inc. (OTC: ADMG.PK) ("ADMG")
entered into Employment Agreements with William G. Mortensen ("Mortensen") and
Michael Bowen ("Bowen"). Pursuant to these Employment Agreements, Mortensen will
serve as President and Chief Financial Officer of ADMG and Bowen will serve as
Executive Vice President of ADMG. The terms of employment are at will; however,
if either is terminated without cause (as defined in the Employment Agreements),
they receive severance pay equal to six months' base salary if the termination
occurs within the first year of the term, and equal to three months' base salary
if the termination occurs thereafter. Mortensen's base annual salary is set at
$120,000 and Bowen's base annual salary is set at $135,000. Mortensen and Bowen
are each entitled to bonuses calculated by formulas based upon ADMG's income
from continuing operations before taxes. Bowen also received a grant of an
incentive stock option to purchase up to 200,000 shares of ADMG's common stock
for $0.20 per share. The option vests 20% per year for five years, beginning one
year from the date of the grant. If Bowen's employment with ADMG terminates for
any reason other than for cause or his voluntary resignation, the option does
not terminate and vesting continues.
On January 2, 2006, the board of directors of the Company elected Ricardo
G. Brutocao as Chief Executive Officer to fill the Company's previously
announced vacancy at that position. Mr. Brutocao, who already serves as a
director of the Company, will serve in this capacity on a part-time basis.
DIRECTOR COMPENSATION
Each of the Company's directors is entitled to receive $10,000 annually and
reimbursement for out-of-pocket expenses in connection with his attendance at
each meeting of the Board of Directors or committee of the Board of Directors.
In addition, each director is entitled to receive non-qualified stock options,
pursuant to the Company's 2003 Stock Option Plan, to purchase 20,000 shares of
the Company's common stock at fair market value when first elected to the Board
of Directors, and 10,000 shares of common stock at fair market value each
January subsequent to their reelection to the Board of Directors. The options
become fully vested six months after their issuance. The chairman of the AMG
Audit Committee receives an additional $2,000 annually. All director fees are
paid on a quarterly basis. Mr. Brutocao does not receive director compensation
as he is paid a salary of $125,000 plus expenses for his role as part-time CEO.
Currently, no options are being issued until the company is current in its
periodic filings. At that time, these options will be issued with an exercise
price of the fair market value of the underlying common stock on the date of the
grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the common stock
beneficially owned as of April 21, 2006 by:
o each person who is known by the Company to own beneficially or
exercise voting or dispositive control over 5% or more of the common
stock;
o each of the Company's directors and director nominees;
15
o each of the Company's current Named Executive Officers; and
o all current executive officers and directors as a group.
There were 12,116,000 shares of the Company's common stock outstanding as of the
close of business on April 21, 2006, the record date.
Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by
the Commission under the Securities Exchange Act of 1934 ("Exchange Act") and
generally includes voting or investment power with respect to securities. Except
as indicated below, the Company believes each holder possesses sole voting and
investment power with respect to all of the shares of voting stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock subject to options or warrants held by that
holder that are currently exercisable or are exercisable within 60 days after
the date of the table are deemed outstanding. Those shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person or group.
The inclusion of shares in this table as beneficially owned is not an admission
of beneficial ownership. Except as indicated below, the address for each named
beneficial owner is the same as the Company's. Ownership of less than 1.00% is
indicated with an asterisk.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP OUTSTANDING SHARES(2)
---------------------------------------- ----------------------- ---------------------
Dito Caree LP, Dito Devcar LP, Plus 4 LLC and
Richard H. Pickup 2,575,367(2) 21.26%
Gregory J. Spagna 904,500(3) 7.46%
Delk Partners Ltd., Robert E. Delk and
Ann Struckmeyer Delk 1,519,218(4) 12.54%
Timothy R. Busch and the Lenawee Trust 2,280,180(5) 18.81%
N. Price Paschall 270,000(6) 2.23%
Maurice J. DeWald 50,000(7) *
William G. Mortensen 20,000(7) *
Michael Bowen 40,000(7) *
Ricardo G. Brutocao 140,000(8)
All current executive officers and directors
as a group (7 persons) (1) 2,800,180(1) 23.1%
(1) Mr. Brutocao, Mr. Busch, Mr. Paschall and Mr. DeWald are directors of the
Company. Mr. Bowen and Mr. Mortensen are executive officers of the
Company.
(2) Represents 986,300 shares held by Dito Caree LP, 200,000 shares held by
Dito Devcar LP and 1,389,067 shares held by Plus 4 LLC. Mr. Pickup holds
voting and dispositive power over these shares as general partner of each
of three two entities. Mr. Pickup's address is c/o David Hehn, 3753
Howard Hughes Parkway #200, Las Vegas, Nevada 89109-0938.
(3) Represents 617,000 shares held by Mr. Spagna and 287,500 shares held
jointly by Mr. Spagna and his spouse and children, as reported on a
Schedule 13D/A filed with the Commission on February 5, 2003. Mr.
Spagna's address is 515 Airport Executive Park, Nanuet, New York 10954.
(4) Represents 1,419,218 shares held by Delk Partners Ltd., 100,000 shares
underlying warrants held by Delk. Voting and dispositive power over the
shares held by Delk Partners Ltd. is shared by Mr. Delk and Ann
Struckmeyer Delk as partners of Delk Partners Ltd. Delk Companies address
is 4040 Grassmere Lane, Dallas, Texas 75205.
(5) Represents 1,505,180 shares held by the Lenawee Trust, of which Mr. Busch
and his spouse are beneficiaries and hold voting and dispositive power,
100,000 shares underlying warrants held by Mr. Busch, and 50,000 shares
underlying options held by Mr. Busch.
(6) Represents 10,000 shares outstanding and 260,000 shares underlying
options.
(7) Represents shares underlying options. Mr. Bowen's option will expire 90
days from July 7, 2006 given his resignation from the company.
(8) Effective August 22, 2005, ADMG also granted a non-qualified stock option
to Ricardo Brutocao ("Brutocao") to purchase up to 100,000 shares of
ADMG's common stock for $0.20 per share. The option vests 20%
immediately, and the remaining 80% in four 20% increments on each
anniversary date of the grant. If Brutocao ceases, for any reason, to
provide consulting services to ADMG, vesting ceases and the option
expires 90 days thereafter. Mr. Brutocao also engaged in a private
transaction to purchase 100,000 shares of AMG stock from the Lenawee
Trust.
16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 22, 2004, each of Mr. Busch and Mr. Delk loaned the Company $150,000 in
exchange for the issuance of unsecured promissory notes bearing interest at the
rate of 10.0% per annum and warrants to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $0.363 per share. Interest and
principal on the notes were due July 21, 2004 but were not paid timely. As a
result, the interest rate of the notes increased to the default rate of 12.0%
per annum on July 22, 2004, and in October 2004, the Company paid to each of Mr.
Busch and Mr. Delk $50,000 of principal plus interest accrued through July 21,
2004 on the entire principal balances of their notes and issued as a penalty to
each of Mr. Busch and Mr. Delk an additional warrant to purchase up to 50,000
shares of the Company's common stock at an exercise price of $0.363 per share.
Each of the warrants issued to Mr. Busch and Mr. Delk expires May 13, 2008. The
outstanding balance on the notes was approximately $99,000 at November 30, 2005.
On August 26, 2005, ADMG issued to each of the Lenawee Trust and Plus Four
Private Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
Effective August 29, 2005, ADMG entered into a Separation and Release Agreement
("Separation Agreement") with Robert Delk ("Delk"), Delk Holdings, Inc. ("Delk
Holdings") and Delk Partners, Ltd. ("DELK Partners"). Pursuant to the Separation
Agreement, ADMG paid to Delk certain past due compensation, repaying amounts
loaned to ADMG by Delk, and reimbursing him for certain expenses related to
intellectual property being transferred by Delk Holdings to ADMG as described
below. Delk, Delk Holdings and Delk Partners have agreed not to compete with
ADMG, solicit employees, consultants or customers of ADMG, or disclose any
confidential information of ADMG for a period of one year. The parties have
agreed to release each other from all claims, whether known or unknown, other
than those arising under the Separation Agreement.
The Company is or has been a party to employment, consulting and compensation
arrangements with related parties, as more particularly described above under
the headings "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements" and "Compensation of Directors."
ITEM 13. EXHIBITS
(a)(1) Financial Statements, included in Part II of this report:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended November 30,
2005 and 2004
Consolidated Balance Sheets for the years ended November 30, 2005 and
2004
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended November 30, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended November 30,
2005 and 2004
Notes to Consolidated Financial Statements
(a)(2) Index to Exhibits:
See Index to Exhibits included herein.
(b) Index to Exhibits. See Index to Exhibits included herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors" and "Other Matters"
contained in the Company's 2005 Annual Meeting Proxy Statement to be filed with
the Securities and Exchange Commission.
17
PART IV
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FEI-FEI CATHERINE FANG, CPA
================================================================================
6300 Stonewood Dr. Ste 308, Plano, TX 75024
TEL: (972) 769-8588 FAX: (972) 769-0788
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
Advanced Materials Group, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Materials Group, Inc. and its subsidiaries (the Company) as of November 30, 2005
and 2004, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public
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 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 also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Materials
Group, Inc. and its subsidiaries, as of November 30, 2005 and 2004 and the
results of their operation and their cash flows the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Fei-Fei Catherine Fang, LLP, CPA
Dallas, Texas
July 14, 2006
F-1
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2005 2004
------------------------ ------------ ------------
Net sales $ 8,664,474 $ 7,957,737
Cost of sales (including depreciation of
$192,978 and $225,295 for the years ended
November 30, 2005 and 2004, respectively) 6,615,081 6,182,346
------------ ------------
Gross profit 2,049,393 1,775,391
------------ ------------
Operating expenses:
Selling, general and administrative 1,786,584 1,562,359
Restructuring charges (reversal) -- (84,032)
Depreciation and amortization 127,028 189,016
------------ ------------
Total operating expenses 1,913,612 1,667,343
------------ ------------
Income from operations 135,781 108,048
------------ ------------
Other (expense) income:
Interest expense (155,934) (192,980)
Gain on settlement -- 974,000
Gain (Loss) on disposal of fixed assets 155,000 (108,232)
Other, net 22,303 (63,888)
------------ ------------
Total other income, net 21,369 608,900
Income from operations before income taxes 157,150 716,948
Income tax benefit (expense) -- (2,400)
------------ ------------
Net income $ 157,150 $ 714,548
============ ============
------------ ------------
Net income per share basic and diluted $ 0.01 $ 0.07
------------ ------------
Weighted average common shares outstanding:
Basic 11,020,193 10,033,343
Diluted 11,097,530 10,575,052
See accompanying report of independent registered public accounting firm
and notes to consolidated financial statements.
F-2
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2005 2004
---------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 407,039 $ 55,289
Accounts receivable 1,470,805 1,193,203
Inventories, net of allowance for obsolescence of $34,900 and $20,217 as
of November 30, 2005 and 2004, respectively 1,085,057 690,951
Prepaid expenses and other 218,242 162,776
----------- -----------
Total current assets 3,181,143 2,102,219
Property and equipment, net 519,888 697,901
Other assets 80,964 668
----------- -----------
Total assets $ 3,781,995 $ 2,800,788
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 849,715 $ 582,871
Accrued liabilities 233,287 245,896
Restructuring reserve -- 25,312
Notes payables - related parties 99,418 200,000
Line of credit 1,168,879 685,970
Term loan - current 90,000 90,000
Current portion of long-term obligations 31,886 45,275
----------- -----------
Total current liabilities 2,473,185 1,875,324
Capital lease obligations, net of current portion of $31,886 and $45,275 54,781 18,803
at November 30, 2005 and 2004, respectively
Term loan - long term portion 35,885 165,500
----------- -----------
Total liabilities 2,563,851 2,059,627
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock-$.001 par value; 5,000,000 shares authorized; no shares -- --
issued and outstanding
Common stock-$.001 par value; 25,000,000 shares authorized; 12,116,026 12,116 10,516
and 10,516,026 shares issued and outstanding November 30, 2005 and 2004,
respectively
Additional paid-in capital 8,355,497 8,037,097
Accumulated deficit (7,149,469) (7,306,452)
----------- -----------
Total stockholders' equity 1,218,144 741,161
----------- -----------
Total liabilities and stockholders' equity $ 3,781,995 $ 2,800,788
=========== ===========
See accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
F-3
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS SHAREHOLDERS' EQUITY (DEFICIT)
TOTAL
COMMON STOCK STOCKHOLDERS'
---------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- -----------
Balances, November 30, 2003 8,671,272 $ 9,000 $ 7,124,000 $(8,021,000) $ (888,000)
Exercise of common stock options 30,000 30 6,970 7,000
Sale of common stock 1,814,754 1,486 747,127 748,613
Non-cash compensation 80,000 80,000
Warrants issued in connection with debt 79,000 79,000
Net income 714,548 714,548
----------- ----------- ----------- ----------- -----------
Balances, November 30, 2004 10,516,026 10,516 8,037,097 (7,306,452) 741,161
Sale of common stock 1,600,000 1,600 318,400 320,000
Prior period adjustment (167) (167)
Net income 157,150 157,150
----------- ----------- ----------- ----------- -----------
Balances, November 30, 2005 12,116,026 $ 12,116 $ 8,355,497 $(7,149,469) $ 1,218,144
=========== =========== =========== =========== ===========
See accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
F-4
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2005 2004
---------------------------------------------------- ------------- -------------
Cash flows from operating activities:
Net income $ 157,150 $ 714,548
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Depreciation and amortization 320,006 414,311
Provision for obsolete inventory -- 22,000
Restructuring reserve adjustment -- (84,032)
Non-cash compensation -- 80,000
Gain on settlement -- (974,000)
Loss (Gain) on disposal of fixed assets (155,000) 108,232
Issuance of warrants -- 79,000
Changes in operating assets and liabilities:
Accounts receivable (277,602) 125,797
Inventories (394,106) 226,049
Prepaid expenses and other (55,466) (1,776)
Other assets (80,296) 47,332
Restructuring reserve (25,312) (22,656)
Accounts payable and other accrued liabilities 254,235 (518,233)
------------- -------------
Net cash provided by (used in) operating activities (256,391) 216,572
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (70,270) (161,444)
Proceeds from sale of equipment 155,000 --
------------- -------------
Net cash provided by (used in) investing activities 84,730 (161,444)
------------- -------------
Cash flows from financing activities:
Borrowings under line of credit, net 482,909 76,970
Proceeds from issuance of debt -- 248,000
Payments on debt obligations (279,331) (911,422)
Proceeds from exercise of stock option -- 6,609
Proceeds from sales of common stock 319,833 749,004
Payments on deferred compensation -- (250,000)
------------- -------------
Net cash provided by (used in) financing activities 523,411 (80,839)
------------- -------------
Net change in cash and cash equivalents 351,750 (25,711)
Cash and cash equivalents, beginning of year 55,289 81,000
------------- -------------
Cash and cash equivalents, end of year $ 407,039 $ 55,289
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 155,933 $ 95,047
------------- -------------
Income taxes $ -- $ --
------------- -------------
Fixed assets acquired under capital leases 71,723 --
See accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
F-5
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Advanced Materials Group, Inc. (the "Company") develops, manufactures and
markets a wide variety of products from a base of flexible materials. The
Company's principal subsidiary, Advanced Materials, Inc. (formerly known as
Wilshire Advanced Materials, Inc.) ("AM"), is the successor to a 50 year old
business that converted specialty materials including foams, foils, films and
adhesive composites into components and finished products. The Company is making
a transition from the foam fabricator / contract manufacturing business to
proprietary medical and consumer products. Examples of the products AM is
currently manufacturing include non-skid surgical instrument pads and
applicators for medical use, soap impregnated surgical prep kit sponges,
protective units for arthoroscopic and orthopedic instruments, printer cartridge
inserts and inking felts, automobile insulators, water and dust seals. These
products are made for a number of customers in various markets including
medical, technology, aerospace, automotive and consumer.
Basis of Presentation and Liquidity Matters
-------------------------------------------
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company had
net income of $157,150 and $714,548, in fiscal years 2005 and 2004,
respectively. Management has implemented a plan to reduce expenses and improve
sales. The Company has altered its focus and will now be concentrating on
securing proprietary products primarily for the medical and consumer industry.
The objective is to create advanced designs, using current materials. These
products will be pursued through aggressive product development and the
licensing of existing patented products or technology. These new products are
expected to have higher profit margins and be less subject to competition. There
can be no assurances that the Company will be successful in completing these
critical tasks. If the Company is unable to successfully complete these critical
tasks, it may be forced to significantly reduce, restructure or cease its
operations and/or liquidate inventory at amounts below current carrying value to
generate the necessary working capital to fund its operations, and if necessary,
seek other remedies available to the Company including protection under the
bankruptcy laws. As a result of these and other factors, the Company's
independent certified registered public accounting firm, Fei-Fei Catherine Fang,
LLP, indicated in their report on the 2005 consolidated financial statements,
that there is substantial doubt about the Company's ability to continue as a
going concern.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Advanced Materials
Group, Inc. and its wholly owned subsidiary, Advanced Materials, Inc. and
Advanced Materials, Ltd. All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates
----------------
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
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. Actual
results could differ materially from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
-----------------------------------
The Company's cash and cash equivalents, accounts receivable, accounts payable
and line of credit approximated fair value at November 30, 2005 because of the
relatively short maturity of these instruments. The carrying value of debt
approximated fair value at November 30, 2005 as these instruments bear market
rates of interest.
F-6
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor, manufacturing overhead and purchased
products. Market is determined by comparison with recent purchases or net
realizable value. Net realizable value is based on forecasts for sales of the
Company's products in the ensuing years. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown on the accompanying consolidated balance sheets.
Property and Equipment
----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to operations.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of five to seven years. Leasehold improvements are being
amortized on a straight-line basis over the lesser of the useful life of the
related improvements or term of the lease. Depreciation and amortization expense
was approximately $320,000 and $414,000, for the years ended November 30, 2005,
and 2004 respectively, of which $193,000 and $225,000, respectively, is included
in cost of sales in the accompanying consolidated statements of operations.
Impairment of Long-Lived Assets
-------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" provides a single accounting
model for long-lived assets to be disposed of. SFAS No. 144 also changes the
criteria for classifying an asset as held for sale, and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.
The Company adopted SFAS No. 144 on December 1, 2001. The adoption of SFAS
No.144 did not affect the Company's financial statements. In accordance with
SFAS No. 144, long-lived assets, such as furniture, fixtures and equipment are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, and impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets to be disposed of in accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
During the second quarter of fiscal 2004, the Company recorded a loss on
disposal of fixed assets of $108,232 as a result of the Company's assessment of
the impairment of certain fixed assets no longer being used by the Company due
to its change in operations.
Revenue Recognition
-------------------
The Company recognizes revenue from product sales when it is realized or
realizable and earned, which is generally at the time of shipment and passage of
title. Revenue is considered to be realized or realizable and earned when there
is persuasive evidence of a sales arrangement in the form of a contract or a
purchase order, the product has been shipped, the sales price is fixed or
determinable and collectibility is reasonably assured. The Company records
revenue for shipping costs charged to customers. The related shipping costs
incurred are recorded in cost of sales.
Concentrations of Credit Risk
-----------------------------
CASH AND CASH EQUIVALENTS
At November 30, 2005, the Company maintained cash balances at certain financial
institutions in excess of federally insured limits. At November 30, 2005, the
Company had approximately $346,000 in cash in excess of federally insured
limits. The Company has experienced no losses related to uninsured deposits.
F-7
CUSTOMERS
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company performs ongoing
credit evaluations of its customers. The Company maintains reserves for
potential credit losses based upon the Company's historical experience related
to credit losses. Based on the Company's evaluation of its accounts receivable
it has determined a reserve is not necessary at November 30, 2005 and 2004.
The lower sales in Singapore are primarily attributable to an amendment to the
Company's manufacturing agreement in Singapore with Foamex Asia to change the
vendor of record for the customer supplied under the agreement from the Company
to Foamex Asia effective July 17, 2003. Although this change does not affect the
Company's share of the profitability under the agreement, it does cause a
significant reduction in its reported revenues. Previously, the Company
purchased the raw materials for the production of product and billed the end
customer and therefore recognized the gross sales and cost of sales on its
financials. Under the amended agreement, it no longer purchases the raw
materials or bills the end customer and only recognizes its portion of profit as
revenue. Management believes this change has been beneficial to the Company as
it stills maintains a share of the profits from the Singapore agreement, while
it has significantly reduced its capital requirements since it no longer needs
to purchase raw materials several months in advance of realizing sales.
SUPPLIERS
Foamex International, Inc. ("Foamex") accounted for 42% and 15% of consolidated
purchases for the years ended November 30, 2005 and 2004, respectively.
Management believes that the loss of Foamex as a major supplier of foam could
adversely affect the Company's business. If another supplier's products were to
be substituted by our customers in critical applications, there are no
assurances that the Company would retain the favorable supply position that it
has earned through over 25 years as an authorized converter/fabricator for
Foamex.
The Company formed Advanced Materials Foreign Sales Corporation Ltd., a
wholly-owned subsidiary of the Company, to enter into a strategic manufacturing
agreement in Singapore. The Company entered into a ten-year agreement with
Foamex Asia in January 1998. Terms of the agreement call for the Company to
lease production equipment and provide certain technology to Foamex Asia. Foamex
Asia will in turn provide its manufacturing facilities and workforce to
fabricate foam products at Foamex Asia's Singapore facility. The manufacturing
agreement has a profit sharing provision that changes annually. The profit
sharing split is as follows (in percentages):
YEAR THE COMPANY FOAMEX
---- ----------- ------
1998 65 35
1999 60 40
2000 50 50
2001 50 50
2002 45 55
2003 40 60
2004 - 2007 35 65
The president of Foamex Asia is former employee of the Company to whom the
Company was paying retirement benefits until March of 2003. The Company was
previously involved in litigation with the former employee in regards to these
payments (see note 8).
Revenues and profits as reported relating to the Singapore manufacturing
agreement were $586,131 and $729,551, for each of the two years ended November
30, 2005 and 2004, respectively. Under the amended agreement, only the Company's
shares of the profit are reported as revenue.
Risks and Uncertainties
-----------------------
ENVIRONMENTAL REGULATION AND OPERATING CONSIDERATIONS
The manufacture of certain products by the Company requires the purchase and use
of chemicals and other materials, which are or may be, classified as hazardous
substances. The Company and its subsidiaries do not maintain environmental
impairment insurance. There can be no assurance that the Company and its
subsidiaries will not incur environmental liability or that hazardous substances
are not or will not be present at their facilities.
The Company is subject to regulations administered by the United States
Environmental Protection Agency, various state agencies, county and local
authorities acting in conjunction with federal and state agencies. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution. The extensive regulatory framework imposes significant
complications, burdens and risks on the Company. Governmental authorities have
the power to enforce compliance with these regulations and to obtain injunctions
and/or impose civil and criminal fines or sanctions in the case of violations.
F-8
The Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), imposes strict joint and several liability on
the present and former owners and operators of facilities which release
hazardous substances into the environment. The Federal Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), regulates the generation, governed by
the law, which contains the California counterparts of CERCLA and RCRA. The
Company believes that its manufacturing activities are in substantial compliance
with all material Federal and state laws and regulations governing its
operations. Amendments to existing statutes and regulations could require the
Company to modify or alter methods of operations at costs, which could be
substantial. There can be no assurance that the Company will be able, for
financial or other reasons, to comply with applicable laws and regulations.
The Company believes that it currently conducts, and in the past has conducted,
its activities and operations in substantial compliance with applicable
environmental laws, and believes that costs arising from existing environmental
laws will not have a material adverse effect on the Company's consolidated
financial condition or results of operations. There can be no assurance,
however, that environmental laws will not become more stringent in the future or
that the Company will not incur costs in the future in order to comply with such
laws.
Various laws and regulations relating to safe working conditions, including the
Occupational Safety and Health Act ("OSHA"), are also applicable to the Company
and its subsidiaries. The Company believes it and its subsidiaries are in
substantial compliance with all material Federal, state and local laws and
regulations regarding safe working conditions.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates expected to
apply when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts, which are
more likely than not to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Stock-based Compensation
------------------------
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amended FAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides alternative
methods of transition for a voluntary change to the fair market value based
method for accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of FAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. In compliance with FAS No. 148, the Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation plan as defined by APB No. 25.
The Company estimates the fair value of each stock award at the grant date by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2005 and 2004, respectively: dividend yield of
zero percent for all years; expected volatility of 106 percent and 86 percent in
2005 and 2004; risk-free interest rates of 4.18 percent and 4.77 percent in 2005
and 2004 and expected lives of 7.0 years and 5.7 years in 2005 and 2004.
The following table represents the effect on net income and earnings per share
if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No.
123,"Accounting for Stock-Based Compensation", to stock-based employee
compensation.
F-9
YEARS ENDED NOVEMBER 30: 2005 2004
---------------------------------------------------------- ------------- -------------
Net income available to common shareholders $ 157,150 $ 714,548
Plus: Stock-based employee compensation expense included
in reported net loss -- --
Less: Total stock-based employee compensation reversals
(expense) determined using fair value based method 101,395 (128,410)
------------- -------------
Pro forma net income available to common shareholders $ 258,545 $ 586,138
------------- -------------
Net income per common share, as reported
Basic and diluted $ 0.01 $ 0.07
------------- -------------
Net income per common share, pro forma
Basic and diluted $ 0.02 $ 0.06
------------- -------------
Earnings per Share
------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic and diluted net income per share. Basic earnings per share
exclude dilution and are computed by dividing net income by the weighted average
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that would occur if securities or other contracts
to issue common stock were exercised or converted into common stock. The
difference between basic and diluted weighted average shares outstanding for the
years ended November 30, 2005 and 2004 relates to dilutive stock options and
warrants.
There were 1,016,000 and 1,176,000 potentially dilutive options and warrants
outstanding at November 30, 2005, and 2004, respectively, that were not included
in the computation of the net income per share because they would be
anti-dilutive.
Recent Accounting Pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123 (revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R requires
measurement of all employee stock-based compensation awards using a fair-value
method and the recording of such expense in the consolidated financial
statements. In addition, the adoption of SFAS 123R will require additional
accounting related to the income tax effects and disclosure regarding the cash
flow effects resulting from share-based payment arrangements. In January 2005,
the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107, which provides supplemental implementation guidance for SFAS
123R. SFAS 123R is effective for our first quarter of fiscal 2006. We have
selected the Black-Scholes option-pricing model as the most appropriate
fair-value method for our awards and will recognize compensation cost on a
straight-line basis over our awards' vesting periods. The adoption of SFAS 123R
did not have a material impact on our results of operations. However,
uncertainties, including our future stock-based compensation strategy, stock
price volatility, estimated forfeitures and employee stock option exercise
behavior, make it difficult to determine whether the stock-based compensation
expense that we will incur in future periods will be similar to the SFAS 123 pro
forma expense disclosed in the Consolidated Financial Statements.
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151 requires
that the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. In addition, other items such as abnormal
freight, handling costs and wasted materials require treatment as current period
charges rather than a portion of the inventory cost. SFAS 151 is effective for
inventory costs incurred during periods beginning after June 15, 2005. The
adoption of SFAS 151 did not have a material impact on our consolidated results
of operations or financial condition.
F-10
NOTE 2 - INVENTORIES
Inventories consist of the following at November 30:
2005 2004
----------- -----------
Raw materials $ 479,206 $ 348,738
Work-in-progress 150,763 45,276
Finished goods 489,988 317,154
----------- -----------
1,119,957 711,168
Less allowance for obsolete inventory (34,900) (20,217)
----------- -----------
$ 1,085,057 $ 690,951
=========== ===========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at November 30:
2005 2004
----------- -----------
Machinery and equipment $ 2,308,362 $ 2,527,447
Furniture and fixtures 1,425,503 1,257,995
Transportation equipment 76,540 76,540
Leasehold improvements 470,223 470,223
Construction in progress 9,450 69,899
----------- -----------
4,290,078 4,402,104
Less accumulated depreciation (3,770,190) (3,704,203)
----------- -----------
$ 519,888 $ 697,901
=========== ===========
The assets held under capital leases have been included in property and
equipment and total $519,888 and $697,901 with accumulated depreciation of
$351,401 and $414,311 for the years ended November 30, 2005 and 2004,
respectively.
NOTE 4 - LINE OF CREDIT
In October 2003, the Company entered into a new line of credit agreement with a
financial institution, which provides for borrowings up to $3,750,000, as
defined. The line expired in October 2005. In September of 2005, the Company
renegotiated the term of this debt instrument, reducing the line of credit from
$3.75 million to $1.5 million under the new agreement, the line of credit bears
interest at Prime plus 1.5% (9.5% at November 30, 2005. As a result of the new
agreement, the Company was able to cure its debt covenant violations. The line
of credit is secured by substantially all of the assets of the Company. The line
of credit agreement requires the Company to maintain certain financial covenants
including the maintenance of debt service and tangible net worth ratios. At
November 30, 2005 there are no additional borrowings available under this
line-of-credit.
NOTE 5 - TERM LOAN
In October 2003, the Company obtained a term loan in the amount of $368,000. The
term loan had an outstanding balance of $125,885 as of November 30, 2005 and
amortizes straight line over 60 months with a balloon payment due in October
2005. It bears interest at prime plus 2.0% (9.0% at November 30, 2005) and is
secured by substantially all of the assets of the Company. The loan is payable
to the same lender as the Company's line of credit.
In September of 2005, the Company renegotiated the terms of this debt
instrument, extending the term of the term loan through October 1, 2006 with
monthly principal payments of $7,500 and the remainder due on October 1, 2006.
Under the new agreement, the term loan bears interest at Prime plus 2.0%. As a
result of the new agreement, the Company was able to cure its debt violations.
F-11
NOTE 6 - RESTRUCTURING CHARGES
In May 2001, the Company announced the closure of its manufacturing facility in
Dallas, Texas and its distribution centers in Portland, Oregon and Parker,
Colorado. The closure of the two distribution centers was completed during the
third quarter and the closure of the Texas facility was completed by the end of
the fourth quarter of fiscal 2001. The Company closed these facilities in order
to consolidate its U.S. operations into its plant in Rancho Dominguez,
California and reduce overhead costs in response to its lower domestic sales.
During 2004, $84,032 in restructuring reserve was reversed due to continued
operations in Dallas which included the relocation of the corporate office from
California t Dallas Texas at the end of June 2004. Additionally, approximately
$25,000 and $23,000 in lease costs were paid against the reserve, during 2005
and 2004, respectively.
The following table summarizes the changes in the restructuring reserve during
the fiscal years ended November 30, 2005 and 2004:
2005 2004
--------- ---------
Beginning Balance, November 30, 2004 $ 25,312 $ 132,000
Less: change in estimate -- (84,032)
Less: cash paid (25,312) (22,656)
--------- ---------
Balance, November 30, 2005 $ -- $ 25,312
========= =========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Retirement Benefits to Former Employees
---------------------------------------
The Company had previously made monthly payments aggregating approximately
$8,000 to two former employees in conjunction with a liability it had assumed in
a business combination in 1992. As of March 2003, the Company ceased making
payments to these individuals, as the Company believes it has fulfilled its
obligation. In May 2004 the Company settled the dispute for a lump-sum payment
of $250,000 which was paid prior to year-end. The remainder of the reserve was
released and included as gain on settlement of $974,000 in the accompanying
consolidated statement of operations.
Leases
------
The Company leases approximately 56,000 square feet of manufacturing and office
space in Rancho Dominguez, California at approximately $24,600 per month through
November 2010.
Effective November 1, 2005 the Company rented office space in Dallas for its
corporate Headquarters. The Company pays approximately $5,200 per month and the
lease expires in October 2010.
Approximate future minimum operating and capital lease obligations at November
30, 2005, are as follows:
OPERATING CAPITAL
LEASES LEASES
----------- -----------
2006 363,000 45,000
2007 361,000 42,000
2008 359,000 12,000
2009 359,000 1,000
2010 Thereafter 354,000
----------- -----------
Total minimum lease obligations $ 1,796,000 100,000
----------- -----------
Less amounts representing interest (13,000)
Present value of capital lease payments 87,000
Current portion (32,000)
-----------
Long-term portion $ 55,000
===========
F-12
Lease expense (not including the lease expense for the Texas facility, as it was
recorded as a reduction in the restructuring reserve) for the years ended
November 30, 2005, and 2004 was $56,723 and 106,938, respectively.
Interest expense incurred under capital lease obligations was insignificant for
the years ended November 30, 2005, and 2004.
Contingencies
-------------
On or about December 14, 2004, the Company received a letter from the Inland
Revenue Authority of Singapore ("IRAS") stating that the IRAS believed that
through its relationship with Foamtec (Singapore) Pte Ltd. ("Foamtec") the
Company had a permanent establishment in Singapore and, thus its share of
profits from its arrangement with Foamtec in Singapore was "liable to tax in
Singapore." The IRAS has not provided specific information regarding, nor can
the Company make any specific judgments or determinations as to, a variety of
matters relating to, among other things, the type of tax which the IRAS is
claiming (income tax and/or royalty/withholding tax), the amount, if any, of
credits, exemptions and/or deductions which would be appropriate with respect to
any such tax calculation, the method by which any tax would be calculated, he
amount of any tax and whether would be due from the Company or Foamtec. Without
specific information from IRAS relative to, among whether a tax is due, and if
so, the amount of such tax. Moreover, without any specific information from IRAS
regarding the nature of the IRAS allegations and the answers to, among other
things, the issues referred to above, the Company is not in a position to
determine whether a tax is due and what period, if any, the tax would relate to.
The Company disagrees with the claims by the IRAS that a tax is due and intends
to aggressively contest the matter should the IRAS make a specific claim for a
tax. Based upon the foregoing, and the fact that a final resolution of any
proposed tax is uncertain and would, in the Company's belief involve unsettled
areas of the law, based upon currently available information, the Company is
unable to provide an estimate or a range of estimates as to the probable tax
liability for this matter. An unfavorable resolution, depending upon the amount
of tax claimed by IRAS, could have a material effect on the Company's result of
operations or cash flows in the periods in which an adjustment is recorded or
the tax is due or paid.
Employment Contracts
--------------------
In fiscal 2004, compensation expense of $80,000 pertaining to the employment
agreement was recorded as an adjustment to be paid in capital and non-cash
compensation was recognized. The employment agreement with Mr. Delk provides for
a base salary of at least $125,000 per year beginning in August 2004. Effective
as of August 1, 2004, the Company began booking an accrued payroll liability for
the $125,000 annual salary. The Company subsequently paid this liability to Mr.
Delk.
On June 24, 2005, Robert E. Delk, who has served as a member of the board of
directors ("Board") of Advanced Materials Group, Inc. ("ADMG") and as the
President and Chief Executive Officer of ADMG since August 1, 2003, resigned
from his position on the board of directors. Pursuant to the letter dated June
24, 2005 addressed to the Chairman of the Board of ADMG in which Mr. Delk
advised the board of directors of his resignation as a director, Mr. Delk also
gave written notice of termination of his employment with ADMG effective July
31, 2005 upon the expiration of his Employment Agreement dated August 1, 2003
with ADMG.
On August 22, 2005, Advanced Materials Group, Inc. (OTC: ADMG.PK) ("ADMG")
entered into Employment Agreements with William G. Mortensen ("Mortensen") and
Michael Bowen ("Bowen"). Pursuant to these Employment Agreements, Mortensen will
serve as President and Chief Financial Officer of ADMG and Bowen will serve as
Executive Vice President of ADMG. The terms of employment are at will; however,
if either is terminated without cause (as defined in the Employment Agreements),
they receive severance pay equal to six months' base salary if the termination
occurs within the first year of the term, and equal to three months' base salary
if the termination occurs thereafter. Mortensen's base annual salary is set at
$120,000 and Bowen's base annual salary is set at $135,000. Mortensen and Bowen
are each entitled to bonuses calculated by formulas based upon ADMG's income
from continuing operations before taxes. Bowen also received a grant of an
incentive stock option to purchase up to 200,000 shares of ADMG's common stock
for $0.20 per share. The option vests 20% per year for five years, beginning one
year from the date of the grant. If Bowen's employment with ADMG terminates for
any reason other than for cause or his voluntary resignation, the option does
not terminate and vesting continues.
On January 2, 2006, the board of directors of the Company elected Ricardo G.
Brutocao as Chief Executive Officer to fill the Company's previously announced
vacancy at that position. Mr. Brutocao, who already serves as a director of the
Company, will serve in this capacity on a part-time basis.
F-13
Litigation
----------
The Company had previously made monthly payments aggregating approximately
$8,000 to two former employees in conjunction with a liability it had assumed in
a business combination in 1992. As of March 2003, the Company ceased making
payments to these individuals, as the Company believes it has fulfilled its
obligation. In May 2004 the Company settled the dispute for a lump-sum payment
of $250,000 which was paid prior to year-end. The remainder of the reserve was
released and included as gain on settlement of $974,000 in the accompanying
consolidated statement of operations.
NOTE 8 - RELATED PARTY DEBT
On April 22, 2004, the Company's President and CEO and the Company's Chairman of
the Board each loaned $150,000 to the Company pursuant to certain promissory
notes. The notes were payable on July 21, 2004 and bear interest at 10%. Upon
certain events of default, including the nonpayment of principal, the interest
rate increases to a default rate of 12%. The Company is continuing to pay down
these notes and as a result of the default they are included in current
liabilities in the accompanying consolidated balance sheet.
In conjunction with the promissory notes, the Company issued warrants to
purchase an aggregate of 100,000 shares of the Company's common stock at an
exercise price of $0.363 per share. The warrants are exercisable at any time and
expire on May 13, 2008. Upon certain events of default, including the nonpayment
of principal, the Company shall issue warrants to purchase an additional 100,000
shares of the Company's common stock with the same terms. As a result of the
default on this debt, the Company issued an additional 100,000 warrants for a
total of 200,000 which were valued at $79,000 and were recorded as interest
expense for the year ended November 31, 2004.
NOTE 9 - STOCKHOLDERS' EQUITY
Stock Options
-------------
1998 STOCK OPTION PLAN
In April 1998, the stockholders of the Company approved the 1998 Stock Option
Plan ("1998 Plan"). The Plan authorizes the granting of various options and
rights to purchase up to 1,250,000 shares of common stock of the Company.
The 1998 Plan provides for the grant by the Company of options to purchase
shares of the Company's common stock to its officers, directors, employees and
consultants. The 1998 Plan provides that it is to be administered by a committee
consisting of two or more members of the Board of Directors. The Committee has
discretion, subject to the terms of the 1998 Plan, to select the persons
entitled to receive options under the Plan, the terms and conditions on which
options are granted, the exercise price, the time period for vesting such shares
and the number of shares subject thereto.
2003 STOCK PLAN
In December 2003, the stockholders of the Company approved the 2003 Stock Plan
("2003 Plan"). The Plan authorizes the granting of various options and rights to
purchase up to 3,000,000 shares of common stock of the Company. The 2003 Plan
provides for the grant by the Company of options to purchase shares of the
Company's common stock to its employees, directors and consultants. The 2003
Plan provides that it is to be administered by a committee consisting of two or
more members of the Board of Directors. The Committee has discretion, subject to
the terms of the 2003 Plan, to select the persons entitled to receive options
under the Plan, the terms and conditions on which options are granted, the
exercise price, the time period for vesting such shares and the number of shares
subject thereto.
Options granted under the 2003 Plan may be either "incentive stock options",
within the meaning of Section 422 of the Internal Revenue Code, or
"non-qualified stock options". No incentive stock option may be granted to any
person who is not an employee of the Company at the date of grant. Options may
be granted under the 2003 Plan for terms of up to 10 years, except for incentive
stock options granted to 10% Stockholders, which are limited to 5-year terms.
The exercise price in the case of incentive stock options granted under the 2003
Plan has to be at least equal to the fair market value of the common stock as of
the date of grant.
In January 2006, the Company entered into an at-will employment arrangement with
Ricardo G. Brutocao to fill the Company's open Chief Executive Officer Position.
Mr. Brutocao has an unwritten agreement to be compensated by the Company at the
rate of $125,000. In November 2005, Mr. Brutocao was elected to the Company's
board of directors. Prior to that Mr. Brutocao had been providing consulting
services to the Company and as a result was granted 100,000 options at $.20 per
share of which 20% vested immediately and the remaining vest ratably over a four
year period. Vesting is contingent on continued service to the Company.
F-14
The following table summarizes options granted and outstanding:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
Outstanding, November 30, 2003 (567,980 exercisable
at a weighted average price of $1.02) 2,333,500 $ 1.03
Granted (weighted average fair value of $0.30) 190,000 0.40
Canceled/Expired (137,500) 0.82
Exercised (30,000) 0.22
---------- ---------
Outstanding, November 30, 2004 (1,182,000 exercisable
at a weighted average price of $0.82) 2,356,000 $ 1.01
Granted (weighted average fair value of $0.17) 300,000 0.20
Canceled/Expired (1,810,000) 1.03
---------- ---------
Outstanding, November 30, 2005 (466,000 exercisable
at a weighted average price of $1.04) 846,000 $ 0.69
---------- ---------
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at November 30, 2005.
WEIGHTED AVERAGE
EXERCISE CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
-------------------- ---------------------- ---------------------- -----------------
NUMBER OF OPTIONS
$ 0.17 - 0.53 570,000 170,000 6.8 years
1.00 - 1.50 231,000 231,000 1.2
1.75 - 3.69 45,000 45,000 2.2
---------------------- ----------------------
846,000 446,000
---------------------- ----------------------
In August, 2005, ADMG issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
In August, 2005, the Company entered into Employment Agreements with William G.
Mortensen ("Mortensen") and Michael Bowen ("Bowen"). Pursuant to these
Employment Agreements, Mortensen will serve as President and Chief Financial
Officer of ADMG and Bowen will serve as Executive Vice President of ADMG. The
terms of employment are at will; however, if either is terminated without cause
(as defined in the Employment Agreements), they receive severance pay equal to
six months' base salary if the termination occurs within the first year of the
term, and equal to three months' base salary if the termination occurs
thereafter. Mortensen's base annual salary is set at $120,000 and Bowen's base
annual salary is set at $135,000. Mortensen and Bowen are each entitled to
bonuses calculated by formulas based upon the Company's income from continuing
operations before taxes. Bowen also received a grant of an incentive stock
option to purchase up to 200,000 shares of the Company's common stock for $0.20
per share. The option vests 20% per year for five years, beginning one year from
the date of the grant. If Bowen's employment with the Company terminates for any
reason other than for cause or his voluntary resignation, the option does not
terminate and vesting continues.
In October 2005, the Company sold 350,000 shares of the Company's common stock
for total proceeds of $70,000.
F-15
NOTE 10 - INCOME TAXES
Income tax expense (benefit) from continuing operations is as follows:
YEARS ENDED NOVEMBER 30:
-----------------------------
2005 2004
---------- ----------
Current:
Federal $ -- $ --
State 2,400 2,400
---------- ----------
2,400 2,400
Deferred:
Federal -- --
State -- --
---------- ----------
Total income tax provision $ 2,400 $ 2,400
========== ==========
The components of deferred tax assets and liabilities at November 30 are as
follows:
2005 2004
----------- -----------
Deferred tax assets:
Tax (under) over book depreciation $ 56,000 $ (96,000)
Accounts receivable 12,000 --
Inventory 31,000 22,000
Accrued expenses 21,000 29,000
Federal net operating loss carryforwards 2,214,000 1,117,000
State net operating loss carryforwards 124,000 123,000
Goodwill and other intangible assets 329,000 480,000
Restructuring reserve 10,000 10,000
----------- -----------
Total deferred tax assets 2,797,000 2,339,000
Less valuation allowance for deferred tax assets (2,797,000) (2,339,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
At November 30, 2005 and 2004, the Company had a valuation allowance of
$2,797,000 and $2,339,000, respectively, to reduce its deferred tax assets to
estimated realizable value. Based on the level of historical taxable income and
projections for future taxable income over the periods in which temporary
differences are anticipated to reverse, management believes it is more likely
than not that the Company will realize the benefits of these deferred tax
assets, net of the valuation allowance. However, the amount of the deferred tax
asset considered realizable could be adjusted in the future if estimates of
taxable income are revised due to changes in circumstances.
As of November 30, 2005, the Company has net tax operating loss carryforwards of
approximately $7,859,753 available to offset future Federal tax liabilities. The
carryforwards expire through 2024. As of November 30, 2005, the Company has net
operating tax loss carryforwards of approximately $2,009,800 available to offset
future state income tax liabilities, which expire through 2014.
F-16
The reconciliation of the income tax provision (benefit) from continuing
operations to taxes computed at U.S. federal statutory rates is as follows:
YEARS ENDED NOVEMBER 30:
--------------------------
2005 2004
--------- ---------
Income tax (benefit) at
statutory rates $ 53,431 $ 242,946
Permanent timing differences
and other items (386,757) --
Change in federal valuation
allowance and other permanent items 333,326 (242,946)
State and Local income taxes,
net of federal income tax 2,400 2,400
--------- ---------
Total $ 2,400 $ 2,400
========= =========
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan that covers the majority of the
Company's domestic employees. An employee, at their discretion, can elect to
make voluntary contributions to the plan from 0% to 20% of their compensation,
up to the maximum amount set by the Internal Revenue Service. The Company may
contribute an amount determined in its sole judgment. Total expense from this
plan related to continuing operations was approximately $0 and $0 for the years
ended November 30, 2005 and 2004, respectively.
NOTE 14 - FASB 131 SEGMENT REPORTING
The Company's foreign operations consist of a sales joint venture located in
Singapore, which began operations in fiscal 1998. All of their sales are made to
unaffiliated customers. The following is a summary of operations by entities
within geographic areas for the year ending November 30, 2005, and 2004:
AMG-US AMI-US AMI-
OPERATIONS OPERATIONS SINGAPORE CONSOLIDATED
------------ ------------ ------------ ------------
NET SALES
2005 $ -- $ 8,078,343 $ 586,131 $ 8,664,474
2004 $ -- $ 7,228,186 $ 729,551 $ 7,957,737
SEGMENT INCOME BEFORE CORPORATE ALLOCATION
2005 $ -- $ (428,981) $ 586,131 $ 157,150
2004 $ -- $ (15,003) $ 729,551 $ 714,548
AMG-US AMI-US AMI-
OPERATIONS OPERATIONS SINGAPORE CONSOLIDATED
------------ ------------ ------------ ------------
CORPORATE ALLOCATION (1)
2005 $ -- $ 62,468 $ (62,468) $ --
2004 $ -- $ 114,899 $ (114,899) $ --
NET INCOME (LOSS)
2005 $ -- $ (366,513) $ 523,663 $ 157,150
2004 $ -- $ 99,896 $ 614,652 $ 714,548
DEPRECIATION AND AMORTIZATION
2005 $ -- $ (320,006) $ -- $ (320,006)
2004 $ -- $ (404,311) $ (10,000) $ (414,311)
F-17
INCOME TAXES
2005 $ -- $ -- $ -- $ --
2004 $ -- $ (2,400) $ -- $ (2,400)
TOTAL ASSETS
2005 $ -- $ 3,781,995 $ -- $ 3,781,995
2004 $ -- $ 2,800,788 $ -- $ 2,800,788
(1) Corporate allocation represents amounts allocated for general corporate
expenses including costs for management, professional services, insurance and
interest.
NOTE 12-SUBSEQUENT EVENTS
In January 2006, the Company entered into an at-will employment arrangement with
Ricardo G. Brutocao to fill the Company's open Chief Executive Officer position.
Mr. Brutocao has an unwritten agreement to be compensated by the Company at the
rate of $125,000. Previously, in November 2005, Mr. Brutocao had been elected to
the Company's board of directors. Prior to that Mr. Brutocao had been providing
consulting services to the Company and as a result was granted 100,000 options
at $.20 per share of which 20% vested immediately and the remaining vest ratably
over a four year period. Vesting is contingent on continued service to the
Company.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCED MATERIALS GROUP, INC.
Dated: July 18, 2006
By: /s/ RICARDO G. BRUTOCAO
------------------------
Ricardo G. Brutocao
Chief Executive Officer
By: /s/ WILLIAM G. MORTENSEN
------------------------
William G. Mortensen
President and Chief Financial Officer
18
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ RICARDO G. BRUTOCAO Chief Executive Officer and Director July 18, 2006
--------------------------
Ricardo G. Brutocao
/s/ WILLIAM G. MORTENSEN President and Chief Financial Officer July 18, 2006
--------------------------
William G. Mortensen
/s/ TIMOTHY R. BUSCH Chairman and Director July 18, 2006
--------------------------
Timothy R. Busch
/s/ MAURICE J. DEWALD Director July 18, 2006
--------------------------
Maurice J. DeWald
/s/ N. PRICE PASCHALL Director July 18, 2006
--------------------------
N. Price Paschall
/s/ JOHN SAWYER Director July 18, 2006
--------------------------
John Sawyer
19
INDEX TO EXHIBITS
NO. EXHIBITS
--- --------
2.1 Agreement and Plan of Reorganization dated April 21, 1993 between Far
West Ventures, Inc. (now known as Advanced Materials Group, Inc.),
Wilshire Advanced Materials, Inc. and the stockholders of Wilshire
Advanced Materials, Inc. (1)
3.1 Articles of Incorporation of Advanced Materials Group, Inc. (formerly
known as Far West Ventures, Inc.). (1)
3.2 Certificate of Amendment of Articles of Incorporation of Advanced
Materials Group, Inc. (1)
3.3 Bylaws, as amended, of Advanced Materials Group, Inc. (1)
10.1 Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced
Materials, Inc. and Wilshire Technologies, Inc. (1)
10.2 Amendment to Asset Purchase Agreement dated August 4, 1992 between
Wilshire Advanced Materials, Inc. and Wilshire Technologies, Inc. dated
December 2, 1992. (1)
10.3 Stock Purchase Agreement dated October 6, 1993 between Advanced
Materials Group, Inc. and the stockholders of Condor Utility Products,
Inc. (2)
10.4 The 1993 Stock Option Plan of Advanced Materials Group, Inc. (3)(*)
10.5 Form of Convertible Debenture. (4)
10.6 Promissory Note of the Company dated March 25, 1994 payable to Michael
W. Crow in the amount of $787,618. (5)
10.7 Amended and Restated Promissory Note dated August 16, 1995 between
Advanced Material Group, Inc. and Hiram H. Johnson and Beth A. Johnson.
(6)
10.8 Industrial Lease Agreement executed August 31, 1995 between New York
Life Insurance and Annuity Corporation, as Landlord and Advanced
Materials, Inc., as Tenant. (7)
10.9 Form of Equity Warrant between Advanced Materials Group, Inc. and
Trilon Dominion Partners, L.L.C. (8)
10.10 Form of Debt Warrant between Advanced Materials Group, Inc. and Trilon
Dominion Partners, LLC. (9)
10.11 Loan Agreement dated as of November 26, 1996, between Advanced
Materials, Inc. And Wells Fargo National Association. (10)
10.12 First Amendment to Loan Agreement dated as of September 1, 1996,
between Advanced Materials, Inc. and Wells Fargo National Association.
(11)
10.13 Asset Purchase and Sale Agreement dated as of September 1, 1996,
between Advanced Materials, Inc. and Gasket and Molded Products, Inc.
and Shareholders. (12)
10.14 Amendment One to Lease dated as of September 27, 1996, between Advanced
Materials Group, Inc. And Riggs National Bank of Washington, D.C. as
Trustee of the Multi-Employer Property Trust. (13)
10.15 The 1997 Stock Option Plan of Advanced Materials Group, Inc. (14)
10.16 Industrial Sublease Agreement executed September 1, 1997 between
Advanced Material, Inc. as landlord and S-Line as tenant. (15)
10.17 Manufacturing Agreement dated January 30, 1998 by and between Advanced
Materials FSC Ltd. and Foamtec (Singapore) Pte. Ltd. (16)
10.18 Form of Warrant Assignment Agreement dated September 15, 1997 between
Trilon Dominion Partners, LLC. and certain individuals. (17)
10.19 Credit Agreement dated as of February 27, 1998 between Advanced
Materials Group, Inc. and Wells Fargo Bank, National Association. (18)
10.20 The 1998 Stock Option Plan of Advanced Materials Group, Inc. (19)(*)
10.21 Agreement of Settlement and General Release, dated October 20, 1998, by
and among Advanced Materials Group, Inc., Condor Utility Products, Inc.
and Gary and Dora Valiska, former employees of Condor Utility Products,
Inc. (20)
10.22 Employment agreement dated September 11, 1998 between Advanced
Materials Group, Inc. and Steve F. Scott, Chief Executive Officer,
President and Director. (21)(*)
10.23 Consulting Agreement dated March 31, 1997, by and between Advanced
Materials Group, Inc. and Paschall and Company. (22)
10.24 Industrial Lease Agreement, including addenda and additional
provisions, executed June 30, 1999, by and between Riggs & Company, a
division of Riggs Bank N.A., as Trustee of the Multi-Employer Property
Trust, as Landlord, and Advanced Materials, Inc., as Tenant. (23)
10.25 Employment Agreement dated August 1, 1999, by and between Advanced
Materials Group, Inc. and David A. Lasnier, Senior Vice President,
General Manager. (24)(*)
10.26 Employment Agreement dated August 1, 1999, by and between Advanced
Materials Group, Inc. and James Douglas Graven, Vice President, Chief
Financial Officer. (25)(*)
16.1 Letter from Ernst & Young, L.L.P., dated September 22, 2000, regarding
its concurrence with Advanced Material Group, Inc.'s statement
regarding change of accountants. (26)
21.1 List of Subsidiaries. (27)
20
31.1 Certification by Chief Executive Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(*) Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
(1) Filed as a like-numbered exhibit to the Company's Registration Statement on
Form SB-2 dated December 6, 1993 (Registration No. 33-72500), incorporated
herein by reference.
(2) Filed as Exhibit 10.10 to the Company's Registration Statement on Form SB-2
dated December 6, 1993 (Registration No. 33- 72500), incorporated herein by
reference.
(3) Filed as Exhibit 10.18 to Amendment No. 1 dated March 1, 1994 to the
Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500), incorporated herein by reference.
(4) Filed as Exhibit 10.23 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration Statement on Form SB-2 dated December 6, 1993 (Registration No.
33-72500), incorporated herein by reference.
(5) Filed as Exhibit 10.24 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration Statement on Form SB-2 dated December 6, 1993 (Registration No.
33-72500), incorporated herein by reference.
(6) Filed as Exhibit 10.2 to Form 10-QSB dated August 31, 1995, incorporated
herein by reference.
(7) Filed as Exhibit 10.3 to Form 10-QSB dated August 31, 1995, incorporated
herein by reference.
(8) Filed as Exhibit 2.2 to Form 8-K filed January 5, 1996, incorporated herein
by reference.
(9) Filed as Exhibit 2.3 to Form 8-K filed January 5, 1996, incorporated herein
by reference.
(10) Filed as Exhibit 10.18 to Form 10-KSB dated November 30, 1996, incorporated
herein by reference.
(11) Filed as Exhibit 10.19 to Form 10-KSB dated November 30, 1996, incorporated
herein by reference.
(12) Filed as Exhibit 10.20 to Form 10-KSB dated November 30, 1996, incorporated
herein by reference.
(13) Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1996, incorporated
herein by reference.
(14) Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1997, incorporated
herein by reference.
(15) Filed as Exhibit 10.22 to Form 10-KSB dated November 30, 1997, incorporated
herein by reference.
(16) Filed as Exhibit 10.23 to Form 10-KSB dated November 30, 1997, incorporated
herein by reference.
(17) Filed as Exhibit 10.24 to Form 10-KSB dated November 30, 1997, incorporated
herein by reference.
(18) Filed as Exhibit 10.1 to Form 8-K filed February 27, 1998, incorporated
herein by reference.
(19) Filed as Exhibit A to Form DEF-14A dated April 8, 1998, incorporated herein
by reference.
(20) Filed as Exhibit 10.21 to Form 10-KSB filed March 1, 1999, incorporated
herein by reference.
(21) Filed as Exhibit 10.1 to Form 10-QSB filed July 10, 1997, incorporated
herein by reference.
(22) Filed as Exhibit 10.4 to Form 10-QSB filed July 10, 1997, incorporated
herein by reference.
(23) Filed as Exhibit 10.24 to Form 10-K filed February 28, 2000, incorporated
herein by reference.
(24) Filed as Exhibit 10.25 to Form 10-K filed February 28, 2000, incorporated
herein by reference.
(25) Filed as Exhibit 10.26 to Form 10-K filed February 28, 2000, incorporated
herein by reference.
(26) Filed as Exhibit 16.1 to Form 8-K filed September 22, 2000, incorporated
herein by reference.
(27) Filed as Exhibit 21 to Form 10-K filed February 28, 2000, incorporated
herein by reference.
21