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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934. FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-16401
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ADVANCED MATERIALS GROUP, INC.
(Name of small business issuer in its charter)
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<S> <C>
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
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20211 S. Susana Road, Rancho Dominguez, California 90221
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 537-5444
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
(Title of Class)
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Check whether the issuer: (1) 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 past 90 days. Yes _X_ No
___
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not 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. / /
The issuer's revenues for its most recent fiscal year were $14,728,000. The
aggregate market value of the voting stock held by non-affiliates of the issuer
on February 21, 1996 was $4,015,792. The number of shares outstanding of the
issuer's only class of Common Stock, $.001 par value, was 10,437,996 on February
21, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Stockholder Meeting to be held on May 8, 1996: Part
III.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Advanced Materials Group, Inc. (the "Company"), through its subsidiaries and
division, develops, manufactures and markets a wide variety of industrial
products. The Company's principal subsidiary, Advanced Materials, Inc. (formerly
known as Wilshire Advanced Materials, Inc.) ("AM"), is a forty year old business
that converts specialty materials including foams, foils, films and adhesive
composites into components and finished products such as printer inking felts,
disk drive gaskets, automobile air conditioning insulators, water and dust
seals, surgical pads and applicators for the medical, electronics, automotive
and consumer products markets. The Company's Condor Utility Products, Inc.
("Condor") subsidiary produces specialized systems for mixing and dispensing
multi-component chemicals which, when combined, form sealants that are sold to
end-users, chemical manufacturers and repackagers for use in the
telecommunications and power utility industries. The Company's Performance
Polymer Division plans to manufacture and market a hydrophilic polymer developed
by Innovative Technologies, Ltd. ("IT"). In 1993 the Company purchased a 25.1%
equity interest in IT and obtained an exclusive worldwide license to manufacture
and sell the polymer, assuming satisfactory results are obtained in testing the
product, as a waterproof/breathable fabric coating for products such as rain
gear, sports apparel, tents and medical and clean room garments. The Company's
interest in IT was later reduced by dilution to 12.3% and converted into a like
interest in Innovative Technologies Group, plc ("IT Group"). In January, 1996,
the Company sold a portion of its interest in IT Group, reducing its holdings to
11.1%.
The Company, which was formerly known as Far West Ventures, Inc., was
incorporated in Nevada in October, 1986. After acquiring an equity interest in a
computer training company and subsequently distributing such interest to its
stockholders as a dividend in January 1990, the Company became inactive. The
Company remained inactive 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 industrial 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 20211 S. Susana
Road, Rancho Dominguez, California 90221, and its telephone number is (310)
537-5444.
ACQUISITIONS
In November, 1992, AM acquired the industrial foam products division of WTI
for aggregate consideration of approximately $5,971,000, including the
assumption of approximately $3,971,000 of certain liabilities of WTI related to
its industrial foam products division. As part of the purchase price, AM issued
its secured subordinated promissory note to WTI in the amount of $1,000,000 (the
"AM Note"). Interest on the AM Note at the rate of 2% over prime is due and
payable quarterly and the principal amount is due and payable on December 3,
1997. The AM Note is secured by all of the assets of AM other than inventory and
accounts receivable. Certain liabilities, such as product and environmental
liabilities, were expressly not assumed by AM. WTI has agreed to indemnify AM
with respect to all such unassumed liabilities. In addition, AM assumed the
obligations of WTI under leases of facilities in Dallas, Texas and Carson,
California occupied by the industrial foam products division, and subleased
approximately one-half of the Dallas facility to WTI at cost which approximated
the market rate.
In April, 1993, AM effected a reverse acquisition of the Company (formerly
known as Far West Ventures, Inc.). In connection with the transaction, the
Company issued 5,030,160 shares of its Common Stock to the stockholders of AM.
In addition, the Company granted options to purchase
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440,000 shares of its Common Stock at a price of $.30 per share to existing
holders of options to purchase 440,000 shares of Common Stock of AM at a price
of $.30 per share (the "AM Options") in exchange for the transfer of the AM
Options to the Company.
In August, 1993, the Company purchased a 25.1% equity interest in IT and a
loan to IT of approximately $737,000 from Cedar Investments Ltd. for aggregate
consideration of approximately $2,175,000. Following a subsequent rights
offering, a private placement and IT's flotation on the Unlisted Securities
Market on the London Stock Exchange, the Company's interest in IT was reduced to
approximately 12.3% and converted in a restructuring into a like interest in IT
Group. Subsequently, in January, 1996, the Company sold 250,000 of its shares in
IT Group, reducing its holdings in IT Group to 11.1%. The Company has also
loaned approximately $750,000 to IT to fund a special development project which
is not expected to be related to the Company's products. In addition, the
Company obtained an exclusive worldwide license from IT to manufacture, use and
sell certain industrial products utilizing proprietary polymers and processes
developed by IT in consideration of an initial license fee payment of
approximately $338,000, one-half of which has been paid and the other half of
which is due within 30 days after the date on which the first licensed product
is sold in commercial quantities or the date which is six months after delivery
by IT to the Company of know-how necessary to manufacture the first licensed
product, whichever date occurs first.
In August, 1993, the Company purchased a 10% equity interest in Time Release
Sciences, Inc., a New York corporation ("Time Release") for $256,000 cash. Time
Release is a manufacturer of proprietary hydrophilic polyurethane foams (i.e.,
foams with an ability to absorb water based fluids), which are sold through
authorized fabricators and distributors. Due to legal and operating problems of
Time Release, the Company in December, 1995, sold its shares of Time Release to
another shareholder of such company for $32,000.
In October, 1993, the Company acquired all of the outstanding stock of
Condor for aggregate consideration of $1,025,000, payable $640,876 in cash and
the issuance of 55,975 shares of the Company's Common Stock. The Company also
agreed to pay additional consideration to the sellers based upon Condor
achieving specified levels of profit for calendar years 1993, 1994 and 1995. No
additional consideration was payable to the sellers for calendar years 1994 and
1995 because Condor failed to achieve the specified minimum amount of profit for
such calendar years. The Company assumed all of the obligations of Condor (other
than federal income tax liabilities) which amounted to approximately $207,000 as
of the closing date.
On November 23, 1993, AM purchased from WTI certain assets of WTI's OEM
Medical Products Division that had been used in connection with the private
label manufacturing of products for medical accounts. These products include
electrosurgical grounding pads, sponges, neck braces, knee pads and other
specialty foam products. Many of these products were being manufactured by AM
for sale to WTI and ultimate resale to medical accounts. The aggregate purchase
price was $2,300,000 plus the assumption of liabilities under certain executory
contracts in the approximate amount of $21,000. The purchase price was paid by
delivery of AM's secured promissory note in the amount of $1,550,000 which was
due and payable 45 days after closing, and the amendment and restatement of the
AM Note to increase the principal amount thereof from $1,000,000 to $1,750,000.
AM also agreed to purchase related finished goods, tools and drawings for an
aggregate purchase price of $555,000, which represented the full retail value of
such products. In addition, AM agreed to pay up to an additional $500,000 to WTI
based on sales of such medical supply products in AM's first two fiscal quarters
of 1994. However, no additional consideration was payable to WTI based on such
sales. On February 26, 1994, AM paid $575,000 of its $1,550,000 note to WTI and
Wilshire extended the due date to March 31, 1994. On March 25, 1994, AM paid the
balance of the note in full. AM borrowed $787,616 of the funds used to pay AM's
$1,550,000 note to WTI from Michael W. Crow, at the time an officer and director
of the Company.
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BUSINESS STRATEGY
The Company's objective is to become a leading supplier of specialty
polymeric and advanced materials in both domestic and foreign markets. Polymers
are synthetic chemical structures used in a variety of configurations and
products. The worldwide market for specialty industrial products used as
components in industrial products is substantial. Management believes that
manufacturers are increasingly recognizing the value in conserving or
reallocating their resources by outsourcing the specialty components of their
products. The Company is positioning itself to benefit from this trend. In the
near term (at least through fiscal 1996), the Company will focus on Condor's new
adhesives line (see "Description of Business -- Condor Utility Products") and on
attempting to increase revenue and profitability from existing products and
customer base and identified prospects.
The Company's long-term strategy has included such elements as adding
additional fabricating plants in the Northwest and Southwest regions of the
United States, which the Company cannot now effectively serve, and penetrating
the foreign marketplace by establishing fabrication plants in such areas as
Malaysia, Mexico and Europe. These elements remain part of the Company's
long-term strategy, although cash flow constraints and a decline in the
Company's stock price (affecting its ability to use stock as consideration in
acquisitions) have prevented the Company from realizing the strategy in fiscal
1995, and most elements of its long term strategy are unlikely to be pursued in
fiscal 1996.
PRODUCTS
The Company's AM subsidiary manufactures a variety of specialty materials
including foams, foils, films and adhesive composites, into components and
finished products for the automotive, electronics, medical and consumer products
markets. These products include insulators used in automobile air conditioners,
inking felts used in printers, water and dust seals for automobiles, computers,
printers and HVAC systems, foam filters for trucks, computers and electrical
humidifiers, sound attenuation foam for printers, and foam/fabric composites for
cushions and padding in helmets, soft luggage and other consumer products. All
of these products are designed and produced to meet the specifications of each
customer. AM typically provides no warranty for its products other than
compliance with specifications at the time of delivery.
On November 23, 1993, AM purchased certain assets of the OEM Medical
Products Division of Wilshire Technologies, Inc. ("WTI") that had been used in
connection with the private label manufacturing of products for medical
accounts. These products include electrosurgical grounding pads, sponges, neck
braces, knee pads and other specialty foam products. Many of these products were
previously manufactured by AM for WTI.
AM currently maintains product liability insurance in the amount of
$1,000,000, with excess umbrella coverage in the amount of $10,000,000. Although
no product liability claims have been made to date, there can be no assurance
that any such claims will not be made in the future in excess of such limits or
that any such claims, if successful and in excess of such limits, will not have
a material adverse effect on AM's assets and its ability to conduct its
business.
The Company's Condor subsidiary produces a line of products used for mixing
and dispensing multicomponent chemicals which, when combined, form sealants.
These products are sold primarily to the telecommunications and power utility
industry for use in sealing ducts containing telephone and power lines.
All of the products produced by AM are manufactured to specifications
furnished by its customers. Accordingly, the Company does not engage in research
and development of new products. The Company has, however, acquired new and
advanced equipment, an example of which is impulse sealing equipment for making
foam/non-woven filters, in order to maintain production capabilities consistent
with its customers' specifications.
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MANUFACTURING
AM currently has three fabrication facilities located in Rancho Dominguez,
California, Dallas, Texas and Portland, Oregon. The Rancho Dominguez facility is
approximately 56,000 square feet, the Dallas facility is approximately 65,000
square feet and the Portland facility is approximately 28,500 square feet. The
three current facilities serve different geographical markets. The Rancho
Dominguez and Portland facilities service a region consisting of the Western
United States, Northwestern Mexico and the Pacific Rim area. The Dallas facility
primarily services customers in the Southwest United States and the central and
northeast border area of Mexico. The Rancho Dominguez and Dallas facilities have
substantially the same equipment. The Rancho Dominguez facility also has
additional equipment such as a flame laminator, a vacuum former and a heat
embosser. A substantial amount of the equipment has been designed and
constructed by AM. The Rancho Dominguez and Dallas facilities each maintain a
separate sales and production staff, while administration and purchasing are
centralized in the Rancho Dominguez facility.
AM has developed and employs a wide variety of advanced processing
techniques in fabricating its products. These techniques include thermomolding,
vacuumforming, flame lamination, pressure sensitive lamination, die cutting and
slitting. Thermomolding is a process which involves heating a foam or
foam/fabric laminate until the material is pliable, using pressure to form the
material into a mold, and then cooling the material until it takes the form of
the mold. AM currently produces backpack components and display cases using its
thermomolding equipment. Vacuumforming is a process which involves heating a
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. AM currently produces automotive
air conditioner insulators and computer mousepad components with its
vacuumforming equipment. Flame lamination is a process which involves the use of
a flame to melt a thin layer on the surface of the foam, and then applying
fabric against the surface and as the foam surface cools it forms a "glue" layer
to the fabric. AM installed a new custom flame laminator in April, 1993, which
is currently being used by AM to fabricate leather substitute products such as
holsters, luggage and weight training belts. Pressure sensitive lamination is a
process which 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. AM currently
produces caulking and sealing foam tape using this process. Die cutting is a
process which involves the use of a match tool die in a hydraulic press to cut
material. AM currently produces a variety of products such as electrosurgical
pads, EKG pads, diagnostic swabs and artificial fingernail adhesive tabs with
its die cutting equipment. Slitting is a process which 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.
AM is able to produce a variety of products for different markets by using
the same fabrication techniques with different materials. For example, using its
slitter, pressure sensitive laminator and die cutter equipment in sequence, AM
can produce a variety of products, such as sound attenuation devices for
computer printers, gaskets for hard disk drives, water seals for automotive air
conditioners, inking pads and nail files. Using its slitter, flame laminating
and thermomolding equipment in sequence, AM can produce other products such as
padding for helmets, mouse pads for computers, sunglass frames, holsters and
back support belts.
In addition to fabricating polyurethane and polyethylene foam, AM fabricates
other materials used in combination with foam such as fabrics, pressure
sensitive adhesives and foils. AM also fabricates plastic films, pressure
sensitive adhesives and other materials not in combination with foam. This
capability enables AM to minimize its dependence on market sectors which may be
cyclical in nature.
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AM manufactures its products for its industrial customers pursuant to
customer purchase orders, most of which provide for multiple shipping release
dates. This enables AM to plan raw material purchases and production scheduling.
For its largest accounts, AM will produce a two to four week supply of products
and stock them for quick delivery.
QUALITY CONTROL
AM maintains systems and procedures that meet customer quality
specifications and has successfully completed qualification surveys conducted by
Texas Instruments, Hewlett Packard, Northrop, McDonnell Douglas, Nippondenso,
Calsonic and a number of other major customers. AM also maintains procedures for
conducting quality compliance surveys of its major suppliers. AM has specific
procedures in place for receiving inspection, source inspection, process
inspection and control, instrument calibration standards, records maintenance,
training and internal quality audits. AM 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.
SUPPLIERS
AM purchases raw materials primarily consisting of polyurethane foam,
crosslinked polyolefin foams and pressure sensitive adhesives. Polyurethane foam
accounted for approximately 48% of the raw materials purchased by AM in fiscal
1995. The Company's largest supplier of raw materials is Foamex Engineered
Polyurethanes ("Foamex"), which in fiscal 1995 and 1994 supplied approximately
39% and 17%, respectively, of AM's raw materials' requirement. One other
supplier accounted for raw material purchases of 20% and 17%, respectively, of
AM's total raw material purchases for the years ended November 30, 1995 and
1994.
AM is an authorized fabricating distributor of a number of raw material
suppliers, including Foamex, Voltek, Avery Dennison (pressure sensitive
adhesives), Zotefoam (crosslinked polyethylenes) and Ensolite (vinyl foam).
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 relationship with its suppliers to be good.
Management believes that the loss of either Foamex or Voltek as a major
supplier of foam would not have a materially adverse effect on AM's business in
the long term because other suppliers of foam could be relied upon to meet AM's
requirements at a comparable cost. However, the loss of either Foamex or Voltek
would have a materially adverse effect on AM's business in the short term
(approximately three months). Management believes that the loss of any other
supplier would not have a material adverse effect on AM.
MARKETING AND SALES
AM's products are marketed and sold primarily to major divisions of large
industrial customers, many of whom are industry leaders whose products have
significant market share. All of AM's products are components or finished
products manufactured to order for its industrial customers. The customer's
purchase decision often involves the engineering, manufacturing and purchasing
groups within the customer's management.
Sales in the United States are made on a direct basis by AM's eight
full-time salesmen. Five salesmen are in the field and three salesmen provide
inside sales support. The five field salesmen receive a base salary plus a
commission and the three inside salesmen receive a salary. Approximately 95% of
AM's sales are made in the United States.
AM also currently does business in a number of foreign countries including
Singapore, Mexico, Taiwan, Japan, Thailand and Israel. Foreign sales, which
account for approximately 5% of total 1995
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sales, are made on a direct basis and through sales agents who receive
commissions. In Mexico, an AM bilingual sales representative has been attempting
to expand the market for AM's products, and opportunities for corporate
partnering are being explored.
AM relies primarily upon referrals by its customers and vendors and the
activities of its salesmen for new business. AM advertises in the Thomas
Register, a sourcing guide for industrial engineering and purchasing groups. AM
also participates in industrial design and engineering trade shows as a means of
marketing its products.
BACKLOG
AM manufactures all of its products pursuant to customer purchase orders.
Backlog is comprised of firm orders for products which have a scheduled shipment
date within the next 12 months. Certain orders in the backlog may be canceled
under certain conditions without significant penalty. At November 30, 1995 and
1994, AM's backlog of orders believed to be firm was approximately $5,326,000
and $6,368,000, respectively.
CUSTOMERS
AM sells to industrial OEM customers, distributors and end-users primarily
in the Western, Southwestern and Southeastern regions of the United States. AM's
major customers for each of the last two fiscal years provided the following
percentages of gross revenues:
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FISCAL YEAR
ENDED NOVEMBER
30,
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1994 1995
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Hewlett Packard............................................. 8.5% 12.6%
Wilshire Technologies, Inc.................................. 8.0% 5.7%
Ethicon Endo Surgery........................................ 6.5% 4.2%
Baxter Healthcare........................................... 6.3% 5.1%
Calsonic.................................................... 5.1% 2.8%
Nippondenso................................................. 5.1% 5.1%
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AM generally sells its products pursuant to customer purchase orders. There
can be no assurance that any such customers will continue to purchase products
from AM in the future. These customers are in the computer printer, medical
disposables, automotive air conditioning and consumer cleaning supply markets.
Management believes that this diversity spreads the risk of dependence upon one
market sector. While AM has acquired new customers as well as orders for new
products from existing customers, the loss of one or more of its largest
customers or a decline in the economic prospects of such customers could have an
adverse effect on AM's business.
AM's other customers include U.S. Divers, Andrews, Calhac, Bianchi, Mattel,
Maxell and Poulan, plus approximately 300 other customers. None of these
additional customers provides a significant percentage of AM's gross revenues.
AM's prices are competitive with other fabricators of custom materials. AM
sales are typically made on terms which require payment of the net amount due in
30 days.
LICENSES AND PROPRIETARY RIGHTS; NEW PRODUCT
None of AM's current manufacturing processes are protected by patents. AM
relies 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.
The Company has obtained an exclusive worldwide license from IT to
manufacture, use and sell certain industrial products utilizing proprietary
polymers and processes developed by IT. As indicated below, such polymers and
processes are presently undergoing testing to determine their efficacy. The
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licensed products include waterproof/breathable fabrics, leather substitutes,
barrier coatings, controlled release materials and water soluble bags, but do
not include gloves for use in any medical or clean room application, medical
devices for use in the medical field or apparel for use in the areas of nuclear,
biological or chemical warfare. The initial product under this license which the
Company has determined to manufacture and sell, subject to the outcome of
product and process testing, is a waterproof/breathable coating for fabrics.
Although the waterproof/breathable fabric industry is intensely competitive, the
Company believes that its new coating product can compete if the new coating
affords improved breathability compared to existing waterproof/breathable fabric
coatings at a competitive price. The Company's Performance Polymer Division is
engaged in product testing, market research and feasibility studies in
preparation for the commercialization of this product. The Company is unable to
predict when, if ever, such new product will be commercialized. In the past two
years the Company has spent approximately $185,000 on research and development
activities, primarily in connection with the proprietary polymers and processes
originally developed by IT. Such costs have generally been absorbed by the
Company, rather than passed on to customers.
The Company is required to make an initial license fee payment to IT of
approximately $338,000, half of which has been paid and the other half of which
is due within 30 days after the date on which the initial licensed product is
sold in commercial quantities or the date which is six months after delivery by
IT to the Company of know-how necessary to manufacture the initial licensed
product, whichever date occurs first. The Company is also required to prepare
and provide IT with a business plan containing marketing and other information
relating to the initial licensed product which must be approved by IT and
updated annually by mutual consent.
The Company is required to use its best efforts to sell the initial licensed
product, and IT has the right to terminate the exclusive right of the Company as
to such product if no sales have been made within 12 months after IT delivers
know-how or if the level of sales after 3 years is less than contemplated by the
business plan. The Company must pay IT a royalty of 5% of all sales up to
$2,000,000, 4% of all sales between $2,000,000 and $4,000,000 and 3% of all
sales in excess of $4,000,000. In order to maintain exclusive rights, the
Company must make minimum annual royalty payments to IT in an agreed upon amount
in accordance with a schedule which forms a part of the business plan. The
Company has not completed the business plan for the initial product as of the
date of this report.
If the Company and IT agree to develop other licensed products utilizing
IT's proprietary polymers and processes, the Company must prepare and provide to
IT for its approval a business plan related to such additional products, and
must comply with the above-described provisions of the license agreement
regarding sales of such products and payment of royalties to IT. The term of the
license is ten years unless earlier terminated in the event of default. The
Company does not have the right to grant sublicenses without the prior approval
of IT.
COMPETITION
The custom materials fabrication industry in which AM competes is highly
competitive. This industry is generally characterized by high barriers to entry
and fragmented competition. Barriers to entry are high because most of the
products must be produced by customized, proprietary equipment which is designed
and/or built in-house and cannot be produced with standard equipment. Most of
the Company's competitors are 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 Foam Molders. AM competes primarily on
the basis of its ability to meet customers' specifications promptly and cost
effectively, and on the quality of its products.
Current competitors or new market entrants could introduce new or enhanced
products with features which render AM's products obsolete or less marketable,
or could develop means of producing competitive products at a lower cost. The
ability of AM to compete successfully will depend in large
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measure on its ability to adapt to technological changes in the industry. There
can be no assurance that AM will be able to keep pace with the technological
demands of the market place or successfully develop new products which are in
demand by the industry.
GOVERNMENT REGULATION
The manufacture of certain products by AM and Condor 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 and its AM and Condor subsidiaries are subject to regulations
administered by the United States Environmental Protection Agency, various state
agencies and county and local authorities acting in conjunction with federal and
state authorities. 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.
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 believes that their manufacturing activities are in
substantial compliance with all material Federal and state laws and regulations
governing their respective operations. Amendments to existing statutes and
regulations could require the Company or its subsidiaries to modify or alter
methods of operations at costs which could be substantial. There can be no
assurance that the Company or its subsidiaries will be able, for financial or
other reasons, to comply with applicable laws and regulations.
Various laws and regulations relating to safe working conditions, including
the Occupational Safety and Health Act, 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.
CONDOR UTILITY PRODUCTS
The Company's Condor subsidiary produces a line of molded plastic products
used for mixing and dispensing two chemical components which, when combined,
form sealants. Condor's products include dual syringe-style cartridges and
mixing nozzles. Many of these products are designed for one time use and are
disposable. The products are sold primarily to the telecommunications and power
utility industries and are used for such purposes as sealing duct systems
containing telephone or power lines against water, debris, vapor and vermin.
Condor has a production facility located in Stockton, California which is
approximately 8,000 square feet. Condor currently operates one full shift five
days per week. Management believes this capacity is adequate for current needs
and a significant amount of expansion.
Condor uses a variety of plastic component parts in its products. Most of
these components are produced for Condor by subcontractors utilizing injection
molds and tools designed and owned by Condor. The chemicals used in Condor's
products are purchased by Condor in drums from chemical manufacturers. Condor
assembles its products from the component parts, fills each dispenser with the
proper chemicals, and kits the filled dispensers with various ancillary parts
such as dispensing nozzles, protective eyeware and protective gloves. The kits
are then packaged and delivered to Condor's domestic and foreign customers.
9
<PAGE>
Condor manufactures its products pursuant to customer purchase orders.
Backlog is comprised of firm orders for products which have a scheduled shipment
date within the next 12 months. Certain orders in the backlog may be canceled
under certain conditions without significant penalty. At November 30, 1995,
Condor's backlog of orders believed to be firm was approximately $10,000.
Condor markets its products to the telecommunications and power utility
industries through a network of sales representatives in North America and a
number of foreign countries including Mexico and England. The sales
representatives receive commissions. Condor's customers are primarily in the
telecommunications and power utility business. Major customers for Condor's
sealants include Bell South, Ameritech, Southwestern Bell, United Telephone,
Chilean Telephone and De Telephone de Mexico. The electronics and aerospace
industries have been identified by Condor as future target markets for a new
line of adhesive products which Condor has developed and is introducing in 1996.
Condor believes that a direct sales force would be required to market its
products to customers in these industries.
The market in which Condor competes is competitive. Condor competes against
one large competitor, Courtaulds Aerospace, which has substantially greater
financial, marketing, personnel and other resources than Condor, and three
smaller competitors which supply only small segments of the market. Condor
competes primarily on the basis of the quality and utility of its products
rather than on the basis of price.
EMPLOYEES
As of January 31, 1996, the Company and its AM subsidiary had approximately
70 full-time employees, of whom approximately 38 were located at AM's Rancho
Dominguez, California facility, approximately 25 were located at AM's Dallas,
Texas facility, and 6 were located at AM's Portland, Oregon facility. Of AM's
full-time employees, approximately 50 are employed in manufacturing, 9 are in
sales, 2 perform clerical functions and 9 perform administrative functions. AM
also utilizes the services of contract workers as needed from time to time in
its manufacturing operations.
As of January 31, 1996, Condor had 8 full-time employees. Of Condor's
full-time employees, 5 are employed in assembly, 1 is in sales, and 2 perform
administrative functions.
The Company's Performance Polymer Division utilizes the services of
consultants as needed in product development and business planning activities.
None of the employees of the Company or its subsidiaries are presently
represented by a labor union, and management considers the relationship of the
Company and its subsidiaries with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 56,000 square feet of manufacturing and
office space in Rancho Dominguez, California, approximately 65,000 square feet
of manufacturing and office space in Dallas, Texas and approximately 28,500
square feet of manufacturing and office space in Portland, Oregon. The Company
pays rent of approximately $14,333 per month under its Rancho Dominguez lease,
approximately $27,500 per month under its Dallas lease and approximately $10,000
per month under its Portland lease. The Company has subleased approximately
35,000 square feet of its Dallas facility to WTI for approximately $9,075 per
month. The Rancho Dominguez lease expires in November, 1999, the Dallas lease
expires in November, 2000 and the Portland lease expires in February, 1997.
The Company's Condor subsidiary leases 8,000 square feet of manufacturing
and office space in Stockton, California. Condor pays rent of approximately
$3,000 per month under the lease which expires in July, 1996.
ITEM 3. LEGAL PROCEEDINGS.
On January 23, 1996, a settlement was approved by the court in the
previously disclosed class action suit against WTI, Michael Crow, the Company
and others, pursuant to which an amount of cash is to be paid on behalf of
Michael Crow and Peter Kuebler, former Chief Financial Officer of WTI, and
10
<PAGE>
Crow will contribute 800,000 shares of the Company's common stock to the
plaintiffs. The Company's obligations under the settlement are limited solely to
providing the necessary notices to its transfer agent with respect to the
transfer by Crow of the Company's common stock.
The Company's Condor subsidiary has been named in a lawsuit originally filed
in the Superior Court of California, San Joaquin County, on January 24, 1992 by
Vern Auten and Shirley Auten, doing business as Aglo Plastics Company.
Plaintiffs alleged that Condor breached a supply contract by obtaining various
molds from a competing supplier, and were seeking damages therefor. Plaintiffs
were also seeking damages based upon an alleged intentional infliction of
emotional distress upon plaintiffs by a Condor employee and by its then owner
(and current President). Condor filed a cross-complaint alleging that plaintiffs
breached the contract. Plaintiffs received a nonbinding arbitration award of
approximately $267,000 plus interest. Condor had requested a trial de novo. The
Company has been indemnified against any liability relating to the lawsuit by
the former owners of Condor.
Subsequently, Condor received notice from an attorney representing Vern and
Shirley Auten of an alleged infringement by Condor of a patent allegedly held by
the Autens. Condor has moved for declaratory relief in the United States
District Court for the Eastern District of California, and on July 17, 1994, the
Autens counterclaimed against Condor and the Company for an unspecified amount
of damages for the alleged patent infringement, and have counterclaimed against
Condor alleging an unspecified amount of damages for the breach of contract and
intentional infliction of emotional distress claims that were the subject of the
state court actions. The state court actions have been stayed. Condor and the
Company believe the Autens' claim to be without merit and intend to vigorously
defend against the claim.
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 the fiscal year covered by this report.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on The Nasdaq Small-Cap Stock Market
("NASDAQ") under the symbol ADMG since June 23, 1993. The high and low bid
prices for the common stock for the past two fiscal years as reported by NASDAQ
are set forth in the following table. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW FISCAL 1994 HIGH LOW
- ---------------------- -------- -------- ---------------------- -------- --------
<S> <C> <C> <C> <C> <C>
Fourth Quarter........ $ 29/32 $ 5/16 Fourth Quarter........ $ 15/16 $ 11/16
Third Quarter......... $ 1 5/16 $ 13/32 Third Quarter......... $ 2 1/2 $ 15/16
Second Quarter........ $ 1/2 $ 1/4 Second Quarter........ $ 3 1/8 $ 1 9/16
First Quarter......... $ 27/32 $ 3/8 First Quarter......... $ 4 7/8 $ 2 1/2
</TABLE>
There are approximately 774 stockholders of record as of February 21, 1996.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
The Company, through its subsidiaries, develops, manufactures and markets a
wide variety of industrial products. The Company's principal subsidiary, AM, is
a forty year old business that converts specialty foams, foils, films and
adhesive composites into components and finished products such as printer inking
felts, disk drive gaskets, automobile air conditioning insulators, water and
dust seals, surgical pads, electrosurgical grounding pads, sponges, neck braces,
knee pads and other specialty foam products. The Company's Condor subsidiary
produces custom packaging systems for single and multi-component adhesives,
coatings and sealants which are sold to end-users, chemical manufacturers and
repackagers for use in a variety of industrial applications. The Company owns a
11.1% equity interest in IT Group and has an exclusive worldwide license to
manufacture and, subject to product testing, sell products made from a
hydrophilic polymer developed by IT.
In December, 1994 AM completed the restructuring plan announced in the
fourth quarter of 1993 by vacating its manufacturing plant in Carson, California
and relocating its California manufacturing operations into a 56,000 square foot
building in Rancho Dominguez, California.
In a transaction reported on a Schedule 13D filed by Dominion Resources,
Inc., Dominion Capital, Inc. ("Dominion"), VC Holdings, Inc. and Ronald W.
Cantwell dated June 30, 1995, Dominion contributed its ownership of common stock
of the Company, including warrants to acquire common stock of the Company and a
line of credit, to a limited liability company, Trilon Dominion Partners, L.L.C.
(formerly known as Venture Capital Equities, L.L.C.)("Trilon") in exchange for a
non-voting Class B membership interest in Trilon. William J. Hopke, Chairman of
the Company's Board of Directors, was formerly Senior Vice President and
Treasurer of Dominion is now Executive Vice President and Director of Trilon. On
December 22, 1995, Trilon purchased an additional 1,260,807 shares of the
Company's common stock and increased the amount of the line of credit from
$700,000 to $1 million. The Company, on January 4, 1996, filed a Current Report
on Form 8-K with the Securities and Exchange Commission reporting a change of
control of the Company.
On January 30, 1996, the Company sold 250,000 shares of common stock of IT
Group for an aggregate price of $402,572, thereby reducing its holdings in such
company to 11.1%. These funds are intended to support the growth anticipated at
the Company's Condor subsidiary as it introduces a new adhesive line and to fund
working capital needs as the Company ramps up purchases of raw materials for new
projects. Certain known variables affecting the Company's financial condition
are raw material pricing, which the Company anticipates stabilizing in 1996, and
competition, which the Company sees as neither stronger nor weaker in fiscal
1996 as compared to the prior fiscal year.
12
<PAGE>
The Company has not received any notice of investigation, claim or
proceeding relating to product or environmental liability nor is the Company
aware of any product or environmental litigation, investigation or unasserted
claim involving the Company or its subsidiaries.
RESULTS OF OPERATIONS
1994 COMPARED TO 1995
Comparative financial information shown for 1994 has been adjusted to give
retroactive effect to a 1994 fourth quarter adjustment wherein the amortized
discount on certain deferred compensation due to the former owners of AM has
been classified from amortization expense to interest expense.
Net sales increased $287,000 or 2.0% from $14,441,000 in 1994 to $14,728,000
in 1995. Increased sales from high tech industrial, automotive and traditional
fabrication product lines through new product development were offset by
declines in contamination control and OEM medical products caused by both
reduced market demand and customer efforts to work down excess inventories in
the second half of the year. The Company cannot determine whether the decline in
contamination control business is permanent, but believes the decline in OEM
medical product business to be temporary.
Gross profit for 1995 decreased $667,000 or 23.4% from $2,855,000 in 1994 to
$2,188,000 in 1995. 1995 gross profit decreased due to higher raw material costs
and a shift in product mix to less profitable lines. Prices for base raw
materials increased 12% to 36% during the year continuing a trend first
experienced in the second half of 1994. The range reflects different
circumstances for each type of raw material but includes a tightening of supply
capacity and acute allocation of base chemicals. Historically, the Company's
results in passing through cost increases to the existing customer base has been
only partially successful because of competitive reactions. However the Company
has focused efforts to bring customer pricing into line with current costs.
Recent efforts have produced increases averaging 5 to 6 percent with a minimal
loss of sales. The Company also experienced productivity declines in January,
1995 due to flooded conditions while moving the California facility.
Marketing and selling costs decreased $35,000 or 4.7% from $742,000 in 1994
to $707,000 in 1995. Cost cutting initiatives included combining job duties and
reducing headcount in an effort to increase efficiency by reducing costs while
maintaining customer service at optimum levels.
General and administrative costs decreased 16.9% or $407,000 from $2,413,000
in 1994 to $2,006,000 in 1995. Decreased costs included costs related to
public/investor relations, consulting fees associated with the Company's
acquisition program and personnel reductions in 1994 and early 1995. These
reductions were partially offset by increased legal fees relating primarily to
the class action suit that was settled in January, 1996, and to the suit by and
against Vern and Shirley Auten, which is expected to go to trial during fiscal
1996.
Depreciation and amortization costs increased $133,000 from $804,000 in 1994
to $937,000 in 1995. Depreciation expense increased principally due to capital
spending in 1994 and 1995. Capital expenditures are expected to remain steady in
fiscal 1996.
In 1995, the Company assessed the recoverability of its goodwill balances by
determining whether the goodwill could be recovered through projected
undiscounted cash flows. The Company determined that a portion of its goodwill,
having been measured against projected undiscounted cash flows, was impaired and
a charge to operations was made in the amount of $719,000. The remaining
goodwill of $2,783,000 is not considered impaired.
Research and development costs decreased $161,000 from $173,000 in 1994 to
$12,000 in 1995. Research and development costs in 1994 were solely related to
product development efforts for the waterproof breatheable fabric project with
IT. Other than minimum funding for consultants in Europe, expenditures by the
Company have decreased pending the results from a new pilot testing line
recently installed by IT. Tests are expected to continue through the spring of
1996.
Interest expense increased $307,000 from $476,000 in 1994 to $783,000 in
1995. Higher interest costs were caused by increased debt between the two
periods, higher interest expense on all debt with
13
<PAGE>
variable interest tied to the prime rate and significantly higher short term
interest rates associated with the revolving line of credit established in May
of 1994. Borrowing was used to pay increased legal costs, tooling costs for the
Company's Condor subsidiary and working capital needs due to a reduction in the
Company's overall gross margin.
In 1994, the Company took a charge of $742,000, net of tax effect, against
earnings as an unrealized holding loss on its investment in 100,240 shares of
common stock of Wilshire Technologies, Inc. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company had classified the shares as
available-for-sale and determined that the decrease in fair value was other than
temporary.
In 1994, the Company, after considering operating and legal problems
experienced by Time Release Sciences, determined that the value of its
investment in that company had been permanently impaired and recorded a loss of
$256,000. Subsequent to the end of the fiscal year, in December, 1995, the
Company sold its equity investment in Time Release Sciences to a shareholder of
that company for $32,000.
The Company sustained losses for financial reporting and income tax purposes
for both 1994 and 1995. Accordingly, no provision for income taxes, except
minimum state franchise taxes, were made. As of November 30, 1995, the Company
has net operating loss carryforwards for federal and state purposes of
approximately $6,011,000 and $2,113,000, respectively, which expire in varying
amounts annually through 2010.
Net losses totaled $2,979,000 for 1995 compared to $2,756,000 for 1994. Net
profits were adversely impacted by less profitable product mix, higher raw
material prices, a write-down of excess goodwill and higher interest expense.
Excluding the write-down of goodwill, operating expenses as a whole declined
$470,000 or 11.4% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company used $1,314,000 in cash to fund operating activities. A
loss of $2,979,000 was partially offset by non cash items consisting of
depreciation and amortization of $937,000, a write-down off goodwill of $719,000
and amortized interest expense related to deferred compensation of $158,000.
Trade and affiliate accounts receivable declined $350,000 in 1995 while prepaid
expenses and other declined $55,000. Accounts payable and accrued liabilities
increased $544,000 while inventories increased $10,000.
The Company had net cash flows from investing activities of $1,349,000. In
1995 the Company collected $1,490,000 from IT due on notes receivable. The
Company collected $299,000 in other accounts receivable, including $201,000 in
interest due on the IT notes. The funds collected from IT on notes and for
interest were used to pay down short term debt and other general working capital
purposes. The Company made purchases of equipment and machines totaling $422,000
in 1995.
The Company used $19,000 in cash for financing activities in 1995, including
$59,000 in connection with the registration of certain shares of common stock
previously issued. The Company's net borrowing under its lines of credit and
other debt increased $227,000 while payments on debt totaled $68,000. The
Company made $52,000 in payments on capital lease obligations and $67,000 in
payments of deferred compensation.
In January 13, 1995 the Company amended the Credit and Security Agreement on
a $700,000 line of credit with Dominion to substitute as collateral for the note
800,000 shares of IT common stock in place of certain promissory notes due from
IT such notes having been paid-in-full in December, 1994. The termination date
of the note was extended to January 13, 1996. As noted earlier, on June 30,
1995, Dominion contributed the line of credit, along with stock and warrants of
the Company and securities in other companies, to Trilon in exchange for a Class
B non-voting membership interest in Trilon.
Subsequent to the end the fiscal year, on December 22, 1995, the Company
again amended the Credit and Security Agreement on the $700,000 line of credit
with Dominion to substitute Trilon as the Lender, increased the lending limit on
the line to $1,000,000 from $700,000, increased the interest
14
<PAGE>
rate to prime plus 1% from prime plus 5% and increased the collateral from
800,000 shares of IT common stock to 1,000,000 shares of IT common stock. The
termination date of the credit line was extended to the earlier of (1) the
closing of a single financing involving the sale of equities of the Company
exceeding $5,000,000, or (2) June 30, 1997. As of January 17, 1996 the amount
outstanding under the credit line was $700,000. In relation to the amendment of
the Credit and Security Agreement, the Company issued a warrant to Trilon
exercisable for 60,000 shares at an exercise price of $.75 expiring on December
22, 2000 and a warrant to acquire 30,000 shares, exercisable in the event of a
failure to pay the principal amount of the line of credit on or before June 30,
1997, at an exercise price equal to the fair market value of the Company's
common stock at such time.
On June 30, 1995, AM renewed a revolving line of credit with a commercial
lender for an additional term of twelve months. In addition, the maximum credit
was increased to $2,000,000 with a $600,000 sublimit applying to eligible
inventory. Borrowings under the line are limited to a percentage of eligible
receivables and inventory with a limit of approximately $1,390,000 on January
17, 1996. The balance owed at January 17, 1996 was $1,305,000. Interest on the
revolving line was reduced to prime plus 4% and the monthly administrative fee
on the inventory portion of the line was reduced to .25%. Covenants were added
to the loan agreement requiring AM to remain cash flow positive for the
remainder of fiscal year 1995 and profitable in fiscal year 1996 and thereafter,
with no more than one quarter of losses in any year. The amended agreement
includes provisions for additional twelve month terms at the discretion of AM
and the lender.
On August 16, 1995 the Company amended and restated two unsecured promissory
notes due to a former owner of the predecessor business of AM. The due dates of
the promissory notes in the amounts of $265,000 and $200,000 were extended for a
period of one year to November 30, 1996 and June 1, 1997 respectively. Interest
on the $265,000 note was increased to 10% from 8% per annum; accrued interest of
approximately $104,000 was paid December 21, 1995 after which payments of
interest are due monthly. Other than extending the due date, terms of the
$200,000 note remain unchanged with interest of 12% per annum due monthly.
On August 31, 1995 AM executed an agreement with its current landlord
extending the lease of its manufacturing facility in Dallas, Texas for a period
of five years effective December 1, 1995 and ending December 1, 2000. The lease
calls for rental payments of $330,000 per year plus certain excess costs as
defined in the agreement. The lease contains a renewal option for one additional
five year term. The lease also contains three one year options for the reduction
of up to one third of the leased area if WTI fails to exercise any of the
renewal options of their sublease or upon termination of the sublease at the end
of its term as described below.
Concurrent with the execution of the facility lease in Texas, AM as landlord
entered into an agreement with WTI as tenant to continue their sublease of
approximately one-third of the Texas facility for a period of one year effective
December 1, 1995 and ending November 30, 1996. The sublease calls for rental
payments of $108,900 per year plus certain excess costs as defined in the
agreement. The sublease calls for two one year renewal options.
Subsequent to the end of the year, on December 22, 1995, Trilon purchased
from the Company 1,260,807 newly issued shares of its common stock plus warrants
to acquire and additional 30,000 shares, at an exercise price of $.75 expiring
on December 22, 2000, for an aggregate purchase price of $700,000 in cash.
The Company made capital purchases of $422,000 in fiscal 1995 including
$126,000 of property and equipment financed by capital lease obligations. At the
end of the year, the Company had no material commitments for capital
expenditures.
The Company anticipates that cash from operations, along with existing lines
of credit, will supply sufficient working capital for the next twelve months.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Materials Group, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Materials Group, Inc. (the "Company") and its subsidiaries as of November 30,
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
November 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 consolidated financial position of
Advanced Materials Group, Inc. and its subsidiaries as of November 30, 1995, and
the results of their operations and their cash flows for each of the years in
the two-year period ended November 30, 1995 in conformity with generally
accepted accounting principles.
CORBIN & WERTZ
Irvine, California
January 17, 1996, except
as to Note 18, which
is as of January 30, 1996.
17
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1995
ASSETS (NOTE 8)
<TABLE>
<S> <C>
Current assets:
Cash........................................................................ $ 66,000
Available-for-sale securities (Notes 2 and 12).............................. 88,000
Accounts receivable -- trade, net of allowance for doubtful accounts of
$127,000 (Note 17)......................................................... 1,363,000
Receivable from affiliate (Note 14)......................................... 165,000
Notes receivable from affiliates (Note 4)................................... 19,000
Inventories (Notes 2 and 3)................................................. 2,096,000
Prepaid expenses and other.................................................. 199,000
-----------
Total current assets...................................................... 3,996,000
-----------
Property and equipment, net of accumulated depreciation and amortization of
$1,270,000 (Notes 2, 5 and 6)................................................ 2,480,000
Available-for-sale securities (Notes 2, 8, 12 and 16)......................... 3,322,000
Licenses (Notes 2 and 12)..................................................... 256,000
Goodwill, net of accumulated amortization of $604,000 (Notes 2 and 12)........ 2,783,000
Other assets.................................................................. 229,000
-----------
$13,066,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 14).................................................. $ 1,624,000
Accrued liabilities (Note 9)................................................ 855,000
Lines of credit (Note 8).................................................... 1,119,000
Current portion of deferred compensation, capital lease obligations, notes
payable and other long-term debt (Notes 6, 7 and 8)........................ 466,000
-----------
Total current liabilities................................................. 4,064,000
-----------
Lines of credit (Note 8)...................................................... 700,000
Convertible debentures (Note 8)............................................... 535,000
Deferred compensation, net of current portion of $53,000 (Note 7)............. 1,283,000
Notes payable and other long-term debt, net of current portion of $335,000
(Note 8)..................................................................... 988,000
Capital lease obligations, net of current maturities (Note 6)................. 117,000
Subordinated note payable to affiliate (Notes 1 and 8)........................ 1,750,000
-----------
5,373,000
-----------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 1, 14 and 15):
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; 9,173,541
shares issued and outstanding.............................................. 7,000
Additional paid-in capital.................................................. 9,495,000
Unrealized holding gain on available-for-sale securities (Note 2)........... 2,031,000
Accumulated deficit......................................................... (7,904,000)
-----------
3,629,000
-----------
$13,066,000
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net sales (Note 17)........................................................... $14,728,000 $14,441,000
Cost of sales (excluding depreciation and amortization)....................... 12,540,000 11,586,000
----------- -----------
Gross profit.................................................................. 2,188,000 2,855,000
----------- -----------
Operating expenses:
Marketing and selling....................................................... 707,000 742,000
General and administrative.................................................. 2,006,000 2,413,000
Depreciation and amortization............................................... 937,000 804,000
Write-down of goodwill (Note 2)............................................. 719,000 --
Research and development.................................................... 12,000 173,000
----------- -----------
Total operating expenses.................................................. 4,381,000 4,132,000
----------- -----------
Loss from operations.......................................................... (2,193,000) (1,277,000)
Interest expense, net (Notes 6, 7, 8 and 14).................................. (783,000) (476,000)
Unrealized loss on securities (Note 16)....................................... -- (998,000)
----------- -----------
Loss before income taxes...................................................... (2,976,000) (2,751,000)
Income taxes (Note 10)........................................................ (3,000) (5,000)
----------- -----------
Net loss...................................................................... $(2,979,000) $(2,756,000)
----------- -----------
----------- -----------
Net loss per common share (Note 2)............................................ $ (.32) $ (.31)
----------- -----------
----------- -----------
Weighted average common shares outstanding (Note 2)........................... 9,173,541 8,835,712
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK AVAILABLE- TOTAL
------------------ PAID-IN FOR-SALE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SECURITIES DEFICIT EQUITY
---------- ------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1993.................... 7,945,256 $6,000 $8,344,000 $(2,169,000) $ 6,181,000
Common stock issued for cash, net of offering
costs of $139,000........................... 106,000 -- 370,000 370,000
Common stock issued for cash, net of offering
costs of $18,000............................ 840,000 1,000 981,000 982,000
Common stock issued in connection with
exercise of options (see Notes 14 and 15)... 200,000 -- 60,000 60,000
Common stock issued for services (see Note
14)......................................... 82,285 -- 165,000 165,000
Offering costs (see Note 15)................. (366,000) (366,000)
Unrealized holding gain on available-for-sale
securities (Note 2)......................... $2,965,000 2,965,000
Net loss for the year ended November 30,
1994........................................ (2,756,000) (2,756,000)
---------- ------ ---------- ---------- ----------- -----------
Balance, November 30, 1994................... 9,173,541 7,000 9,554,000 2,965,000 (4,925,000) 7,601,000
Offering costs (see Note 15)................. (59,000) (59,000)
Unrealized holding loss on available-for-sale
securities (Note 2)......................... (934,000) (934,000)
Net loss for the year ended November 30,
1995........................................ (2,979,000) (2,979,000)
---------- ------ ---------- ---------- ----------- -----------
Balance, November 30, 1995................... 9,173,541 $7,000 $9,495,000 $2,031,000 $(7,904,000) $ 3,629,000
---------- ------ ---------- ---------- ----------- -----------
---------- ------ ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(2,979,000) $(2,756,000)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.......................................... 937,000 804,000
Loss on sale of equipment.............................................. -- 7,000
Write-down of goodwill................................................. 719,000 --
Interest expense on deferred compensation.............................. 158,000 151,000
Unrealized loss on available-for-sale securities....................... -- 998,000
Services paid through issuance of common stock......................... -- 165,000
Change in operating assets and liabilities:
Accounts receivable -- trade......................................... 301,000 (473,000)
Accounts receivable from affiliate................................... 49,000 72,000
Inventories.......................................................... (10,000) 16,000
Prepaid expenses and other........................................... 55,000 (34,000)
Accounts payable and accrued liabilities............................. (544,000) 22,000
----------- -----------
Net cash used by operating activities...................................... (1,314,000) (1,028,000)
----------- -----------
Cash flows from investing activities:
Accounts receivable -- other............................................. 299,000 (254,000)
Other assets............................................................. (18,000) (70,000)
Notes receivable from affiliates......................................... -- (403,000)
Collection of notes receivable from affiliates........................... 1,490,000 --
Purchase of marketable equity securities................................. -- (2,000)
Purchases of property and equipment...................................... (422,000) (575,000)
----------- -----------
Net cash provided by (used in) investing activities........................ 1,349,000 (1,304,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs................ (59,000) 1,046,000
Net borrowings under line of credit...................................... 177,000 1,642,000
Payments on debt......................................................... (68,000) (2,002,000)
Issuance of debt......................................................... 50,000 1,088,000
Issuance of convertible debentures....................................... -- 535,000
Payments on capital lease obligations.................................... (52,000) (15,000)
Payments on deferred compensation........................................ (67,000) (71,000)
----------- -----------
Net cash (used in) provided by financing activities........................ (19,000) 2,223,000
----------- -----------
Net change in cash......................................................... 16,000 (109,000)
Cash, beginning of period.................................................. 50,000 159,000
----------- -----------
Cash, end of period........................................................ $ 66,000 $ 50,000
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information --
Cash paid during the year for:
Interest............................................................... $ 632,000 $ 242,000
----------- -----------
----------- -----------
Income taxes........................................................... $ 3,000 $ 5,000
----------- -----------
----------- -----------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the fiscal years ended November 30, 1995 and 1994, the Company and its
subsidiaries acquired approximately $126,000 and $136,000, respectively, of
property and equipment through the issuance of capital lease obligations.
See accompanying notes to consolidated financial statements
21
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 1 -- ORGANIZATION
Advanced Materials, Inc. (AMI) formerly Wilshire Advance Materials, Inc.,
was formed in August 1992 to acquire the assets of the General Foam Division of
Wilshire Technologies, Inc. (WTI). All of the outstanding common stock of AMI
was owned by Michael W. Crow, a significant stockholder and chairman of WTI. On
December 2, 1992, AMI acquired the assets of the General Foam Division of
Wilshire Technologies, Inc. for an aggregate consideration of approximately
$5,971,000 in exchange for $1,000,000 in cash, the assumption of certain
liabilities with an aggregate balance of $3,971,000 and the issuance of a
subordinated note payable in the amount of $1,000,000 requiring quarterly
payments of interest at prime plus 2% per annum with the principal due in full
on December 3, 1997 (see Note 12). Certain liabilities, such as product and
environmental liabilities, were expressly not assumed by AMI and WTI agreed to
indemnify AMI with respect to all such liabilities.
The acquisition of the General Foam Division by AMI was accounted for as a
purchase for financial statement purposes, subject to historical cost basis
accounting, as required by Issue No. 88-16, Basis in Leverage Buyout
Transactions, of the Emerging Issues Task Force of the Financial Accounting
Standards Board, for Mr. Crow's 42% interest in Wilshire Technologies, Inc. on
November 30, 1992 before the completion of an initial public offering by
Wilshire Technologies, Inc.
The purchase price of $6,082,000 (which includes costs of $111,000 incurred
in connection with the acquisition) exceeded, by $959,000, the fair market value
of net assets acquired of $5,123,000, which was recorded as goodwill.
On April 21, 1993, AMI effected a reverse acquisition of Advanced Materials
Group, Inc., a publicly held company formerly known as Far West Ventures, Inc.
In connection with the transaction, Advanced Materials Group, Inc. issued
5,030,160 shares of its common stock to the stockholders of AMI. In addition,
Advanced Materials Group, Inc. granted options to purchase 440,000 shares of its
common stock at $0.30 per share to existing holders of options to purchase
440,000 shares of common stock of AMI (AMI Options) at $0.30 per share in
exchange for the transfer of the AMI Options to Advanced Materials Group, Inc.
For financial reporting purposes, the shares issued by Advanced Materials Group,
Inc. are considered outstanding since the date of issuance and the 350,000
shares retained by the stockholders of Advanced Materials Group, Inc. are
reflected as consideration issued to consummate the reverse acquisition.
The reverse acquisition was accounted for by the purchase method of
accounting and the purchase price of $25,000 approximated the fair market value
of the net assets acquired consisting of cash of $400,000 and liabilities of
$375,000. The operating results of Advanced Materials Group, Inc. are included
in the consolidated results of operations from the date of acquisition.
NOTE 2 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -- Advanced Materials Group, Inc. (the Company) and its subsidiaries
develop, manufacture and market industrial products as follows:
- Advanced Materials, Inc. (AMI), the Company's principal subsidiary,
converts specialty materials, including foams, films and adhesive
composites into components and finished products for the medical,
electronics, automotive and consumer products markets.
- Condor Utility Products, Inc. (Condor), a subsidiary acquired in October
1993 (see Note 12), produces specialized systems for mixing and dispensing
multi-component chemicals which, when combined, form sealants which are
sold to end-users, chemical manufacturers and repackagers for use in the
telecommunication and power utility industries.
22
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 2 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- Innovative Technologies, Limited. (IT), a 12.3% owned investee developed a
hydrophilic polymer to be manufactured and marketed by a division of the
Company (see Notes 11 and 12).
- Time Release Sciences, Inc., a 10% owned investee, is a manufacturer of
proprietary hydrophilic polyurethane foams (i.e. foams with an ability to
absorb water based fluids). The Company sold this investment in December
1995 (see Note 12).
The Company currently operates in one segment.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, AMI and Condor Utility Products, Inc. All intercompany balances
and transactions have been eliminated in consolidation.
AVAILABLE-FOR SALE SECURITIES -- In May 1993, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities." This
statement addresses the accounting and reporting for investments in equity
securities which have readily determinable fair values and all investments in
debt securities. The Company's marketable equity securities are classified as
available-for-sale under SFAS 115 and reported at fair value, with changes in
the unrealized holding gain or loss included in stockholders' equity. As of
November 30, 1995, available-for-sale securities consist of 100,240 shares of
common stock of Wilshire Technologies, Inc. (see Note 1) valued at $88,000 and
2,554,504 shares of common stock of Innovative Technologies Group (see Note 12)
valued at $3,322,000, and are carried at fair value in accordance with SFAS 115.
The securities have been classified as either current or long-term assets based
upon the intentions of management of the Company as to whether such securities
will be sold within the next twelve months. The change in the net unrealized
holding gain (loss) on available-for-sale securities that has been included as a
separate component of stockholders' equity totaled approximately $(934,000) and
$2,965,000 for the years ended November 30, 1995 and 1994, respectively. The net
unrealized holding gain has not been reduced by the related deferred income
taxes due to the availability of net operating loss carryforwards (see Note 10).
INVENTORIES -- Inventories are stated at the lower of cost or market.
Inventory costs are based on standard costs, which approximate the first-in,
first-out method and include materials, labor and overhead.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost, less
accumulated depreciation, and are being depreciated on a straight-line basis
over their estimated useful lives, which range from three 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.
Major betterments and renewals are capitalized, while routine repairs and
maintenance are charged to expense as incurred.
LICENSES -- Licenses represents a fee paid to IT for exclusive worldwide
rights to manufacture, use and sell certain industrial products utilizing
proprietary polymers and processes and is amortized over the life of the license
agreement of 10 years. See Note 11 for additional details as to the license
agreement.
ORGANIZATION COSTS AND OTHER ASSETS -- Organization costs aggregating
$108,000 are included in other assets and are being amortized using the
straight-line method over five years. During the years ended November 30, 1995
and 1994 amortization of organization costs amounted to approximately $42,000
and $36,000, respectively.
23
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 2 -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL -- Goodwill, which represents the excess of the purchase price over
the fair value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefitted. The Company assesses the
recoverability of the intangible asset by determining whether the goodwill
balance can be recovered through projected undiscounted cash flows. The amount
of goodwill impairment, if any, is measured based on projected discounted future
cash flows and charged to operations in the period in which goodwill impairment
is determined by management. During the year ended November 30, 1995, management
of the Company determined that $719,000 of goodwill had been impaired and,
accordingly, the Company charged this amount to operations as reflected in the
accompanying 1995 consolidated statement of operations. Goodwill has been
amortized on a straight-line basis over the expected fifteen year life and
amortization during the years ended November 30, 1995 and 1994 amounted to
$277,000 and $268,000, respectively.
REVENUES AND REVENUE RECOGNITION -- Revenues from product sales are
recognized upon shipment. The Company records a provision for the effect of
return products at the time units are shipped. Historically, the Company has
experienced minimal product returns.
RESEARCH AND DEVELOPMENT EXPENDITURES -- Research and development
expenditures are charged to operations as incurred.
WARRANTIES -- The Company recognizes the full estimated cost of warranty
expenses at the time of shipment.
FOREIGN CURRENCY TRANSACTIONS -- Foreign currency transaction gains or
losses are included in net loss for the period in which the exchange rate
changes or the underlying transaction settles. Foreign currency transaction
gains or losses were not material for the years ended November 30, 1995 and
1994.
NET LOSS PER SHARE -- Net loss per share is computed based on the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options and warrants are excluded from the computation as their
effect would be anti-dilutive.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
adopted Statement 109 on December 1, 1993. The cumulative effect of the change
to Statement 109 was not significant.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994
consolidated financial statements to conform to the 1995 presentation.
NOTE 3 -- INVENTORIES
Inventories consist of the following at November 30, 1995: Raw materials --
$1,322,000; Work in process -- $502,000; Finished goods -- $272,000.
24
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 4 -- NOTES RECEIVABLE FROM AFFILIATES
Note receivable from affiliates at November 30, 1995 consists of a note
receivable with a remaining principal balance due of $18,750 from a stockholder
which bore interest at 8.69% per annum. This amount was collected in December,
1995.
Notes receivable of $1,490,000 from Innovative Technologies, Inc. (IT) (see
Note 12), which bore interest at 50% of the base rate above the Lloyds Bank PLC
base rate, were collected in December 1994.
Interest income from affiliates for the years ended November 30, 1995 and
1994 amounted to approximately $5,000 and $117,000, respectively.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30, 1995:
<TABLE>
<S> <C>
Machinery and equipment.......................................... $ 2,600,000
Furniture and office equipment................................... 576,000
Transportation equipment......................................... 77,000
Leasehold improvements........................................... 170,000
Construction in progress......................................... 65,000
-----------
3,488,000
Less -- accumulated depreciation and amortization................ (1,216,000)
-----------
2,272,000
-----------
-----------
</TABLE>
NOTE 6 -- CAPITAL LEASE OBLIGATIONS
Assets under capital leases are capitalized using interest rates appropriate
at the inception of each lease. Assets under capital leases as of November 30,
1995 are as follows:
<TABLE>
<S> <C>
Machinery and equipment............................................. $218,000
Furniture and office equipment...................................... 44,000
--------
262,000
Accumulated amortization............................................ (54,000)
--------
$208,000
--------
--------
</TABLE>
Future annual minimum lease obligations for assets under capital leases are
as follows:
<TABLE>
<S> <C>
1996................................................................ $ 97,000
1997................................................................ 91,000
1998................................................................ 30,000
1999................................................................ 11,000
--------
Total minimum lease obligations..................................... 229,000
Less interest....................................................... (34,000)
--------
Present value of minimum lease obligations.......................... 195,000
Less current maturities............................................. (78,000)
--------
Long-term obligations............................................... $117,000
--------
--------
</TABLE>
25
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 7 -- DEFERRED COMPENSATION
The Company, through assumption of debt from WTI (see Note 1) is obligated
to: (i) make monthly payments beginning December 1996, of $5,500 (reduced to
$3,500 December 2006) and provide health insurance to a former employee of the
General Foam Division, who is currently a stockholder and a director of the
Company (ii) make monthly payments beginning December 1995, of $3,500 to a
former employee of the General Foam Division, and (iii) pay employment
termination benefits to the former employee of the General Foam Division of
$5,000 per month from June 1993 through November 1995. These obligations are
discounted at 12% per year, are based upon the actuarially determined remaining
lives of the obligees, are subject to cost-of-living adjustments based on the
Consumer Price Index (CPI) and are due until the later of the death of the
obligees or their spouses.
The present value of the estimated future non-contingent payments under the
above-mentioned agreements is $1,336,000, net of a discount of $5,176,000.
Estimated future non-contingent payments are due in subsequent years as follows:
1996 -- $53,000; 1997 -- $195,000; 1998 -- $147,000; Thereafter -- $6,117,000.
26
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 8 -- LINES OF CREDIT, DEBT AND CONVERTIBLE DEBENTURES
The lines of credit at November 30, 1995 consist of:
<TABLE>
<S> <C>
Revolving line of credit agreement with a commercial lender which provides for
borrowings of up to $2,000,000 based on 80% of eligible accounts receivable
with a $600,000 sub-limit applying to eligible inventory. The outstanding
borrowings under this agreement bear interest at 4% per annum over the prime
rate as published by the Wall Street Journal on the first day of each month
(12.75% per annum at November 30, 1995), plus a monthly administrative fee of
.25%. The line of credit is secured by substantially all of the assets of the
Company, expires in May 1996, and contains a provision for an additional
twelve month term at the discretion of the Company and the lender............. $1,119,000
Line of credit agreement, as amended on December 22, 1995 (see below), with a
stockholder of the Company which provides for borrowings of up to $1,000,000
and bears interest at 5% per annum over the prime rate as published by the
Wall Street Journal (13.75% per annum at November 30, 1995). The line of
credit is secured by 1,000,000 shares of common stock of Innovative
Technologies, Inc. and is due on June 30, 1997................................ 700,000
----------
$1,819,000
----------
----------
Debt at November 30, 1995 consists of:
To WTI (see Notes 1 and 12):
Subordinated note payable with quarterly interest only payments at a bank's
prime rate plus 2% per annum (10.75% at November 30, 1995); all due and
payable on December 3, 1997; secured by essentially all of AMI's assets
except inventory and accounts receivable.................................... $1,750,000
----------
----------
To others:
Covenants not to compete, non-interest bearing payments of $20,000 each
annually, through December 31, 1995 to a former employee and to a
stockholder, respectively. Such amount was paid in full in December 1995.... 20,000
Notes payable, as amended, to a former owner of the General Foam Division,
including interest ranging from 10% to 12% per annum; all due and payable on
November 30, 1996 and June 1, 1997.......................................... 465,000
Note payable to two stockholders of the Company, including interest at a
bank's prime rate plus 3% (11.75% at November 30, 1995); all due and payable
on May 19, 1996............................................................. 50,000
Notes payable to two stockholders of the Company with quarterly interest only
payments at a bank's prime rate plus 1% per annum (9.75% at November 30,
1995); all due and payable on March 25, 1997................................ 788,000
----------
Total.......................................................................... 1,323,000
Less current portion........................................................... (335,000)
----------
$ 988,000
----------
----------
</TABLE>
Future annual minimum principal payments due on debt are as follows: 1996
- -$335,000; 1997 -- $988,000; 1998 -- $1,750,000.
27
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 8 -- LINES OF CREDIT, DEBT AND CONVERTIBLE DEBENTURES (CONTINUED)
Interest expense to stockholders and affiliates for the years ended November
30, 1995 and 1994 amounted to approximately $230,000 and $184,000, respectively.
On December 22, 1995, the line of credit agreement with a stockholder was
amended to increase the maximum borrowings to $1,000,000, to increase the
interest rate to 5% per annum over the prime rate as published by the Wall
Street Journal and to extend the termination date to June 30, 1997. In addition,
the collateral held by the lender/stockholder was increased from 800,000 shares
of Innovative Technologies, Inc. to 1,000,000 shares.
In connection with the amendment, the lender/stockholder was granted a
warrant to purchase 60,000 shares of the Company's common stock exercisable for
5 years at an exercise price of $.75 per share, and a warrant to purchase 30,000
shares of the Company's common stock, exercisable in the event of a failure to
pay the principal amount of the line of credit on or before June 30, 1997, at an
exercise price equal to the fair market value of the Company's common stock at
that time (see Note 15).
CONVERTIBLE DEBENTURES
During the fiscal year ended November 30, 1994, the Company issued
convertible debentures totaling $535,000. The debentures bear interest at 7.5%
per annum, and interest is payable quarterly. The debentures were offered in
denominations of $1,000, or multiples thereof, and, together with all then
accrued and undeclared interest, will be convertible at any time after their
purchase at a conversion premium of 125% of the closing bid price of the common
stock on the date after their purchase (convertible at prices ranging from $3.59
to $4.73 per share). The debentures mature by March 2004. The debentures may not
be prepaid for 18 months, and thereafter for cash at the option of the Company
upon 20 days' prior notice, in whole or in part, at the offering price plus
accrued and unpaid dividends to the prepayment date. After 18 months, if the
Company's stock trades at a price equal to 150% of the closing bid price of the
common stock on the date after their purchase for 10 consecutive trading days,
then the Company will have the right to force conversion. The debentures carry
no voting rights. The common stock underlying the debentures were registered
pursuant to a registration statement that was effective January 17, 1995.
NOTE 9 -- ACCRUED LIABILITIES
Accrued liabilities as of November 30, 1995 consists of:
<TABLE>
<S> <C>
Accrued payroll and related......................................... $218,000
Other............................................................... 637,000
--------
$855,000
--------
--------
</TABLE>
28
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 10 -- INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at November 30, 1995 are
presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts...................................................... $ 51,000
Unrealized loss on securities recognized for financial
reporting purposes but deferred for tax purposes.............. 400,000
Inventories, principally due to allowance for inventory
obsolescence.................................................. 50,000
Accrued expenses, principally due to accrual for financial
reporting purposes............................................ 20,000
Accrued compensation, principally due to accrual for financial
reporting purposes............................................ 71,000
Goodwill, principally due to write-down for financial reporting
purposes...................................................... 425,000
Net operating loss carryforwards............................... 2,174,000
-----------
Total gross deferred tax assets.............................. 3,191,000
Less valuation allowance..................................... (2,131,000)
-----------
Total net deferred tax assets................................ 1,060,000
-----------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation.................................................. (67,000)
Asset acquisition basis adjustment............................. (178,000)
Unrealized gain on available-for-sale securities recognized for
financial reporting purposes but deferred for tax purposes.... (815,000)
-----------
Total gross deferred tax liabilities......................... (1,060,000)
-----------
Net deferred tax assets.......................................... $ --
-----------
-----------
</TABLE>
Income tax expense for the years ended November 30, 1995 and 1994 consists
of the following current provisions:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
U.S. federal..................................................... $ -- $ --
State and local.................................................. 3,000 5,000
------ ------
$3,000 $5,000
------ ------
------ ------
</TABLE>
No provision for income taxes for the years ended November 30, 1995 and 1994
is required, except for minimum state taxes, since the Company incurred a loss
during such years.
29
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 10 -- INCOME TAXES (CONTINUED)
Income tax expense for the years ended November 30, 1995 and 1994 differs
from the amounts computed by applying the U.S. federal income tax rate of 34
percent to net loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Computed "expected" tax benefit.................................. $(1,012,000) $(935,000)
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense....................................................... 1,012,000 935,000
State and local income taxes, net of federal income tax
benefit......................................................... 3,000 5,000
----------- ---------
$ 3,000 $ 5,000
----------- ---------
----------- ---------
</TABLE>
As of November 30, 1995, the Company has net operating loss carryforwards
for federal and state purposes of approximately $6,011,000 and $2,113,000,
respectively, which expire in varying amounts annually through 2010.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
PRODUCT DEVELOPMENT AND LICENSE AGREEMENT -- On August 23, 1993, the Company
entered into a product development and license agreement with IT (see Notes 2
and 12), whereby IT will develop industrial products for the Company and grant
an exclusive world-wide license to the Company to manufacture and/or finish and
to sell such products.
Under the terms of the agreement, the Company paid IT approximately $169,000
in cash upon execution of the agreement on August 23, 1993 and will pay an
additional L110,000 (British pounds) (the equivalent of $168,300 at November 30,
1995) in cash within thirty days after the commercialization of the product (as
defined). In addition, the Company shall pay IT royalties with respect to each
licensed product based upon a level of sales (as defined). No sales of "IT
products" were effected during fiscal 1995, and thus, no royalties were due.
LITIGATION -- Condor has been named as a defendant in a lawsuit which
alleges breach of a requirements contract for the construction of various molds.
The Company has filed a cross-complaint contending that the plaintiffs breached
the contract. Non-binding arbitration resulted in an award to the plaintiffs in
the amount of approximately $267,000 plus interest. Condor subsequently received
notice from an attorney representing the plaintiffs of an alleged infringement
by Condor of a patent held by the plaintiffs. Condor believes the plaintiff's
claim to be without merit, intends to vigorously defend against the claim and
has moved for declaratory relief in federal district court for the eastern
district of California and has joined the previously disclosed actions that were
the subject of claims between Condor and the plaintiffs in state court. In the
meantime, the state court actions have been stayed. The sellers of Condor have
agreed to indemnify the Company with respect to this potential liability. The
ultimate outcome of this litigation cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been made
in the consolidated financial statements.
WTI (see Note 1) has been named as a defendant along with Mr. Crow (see Note
14) in several class action lawsuits filed under the federal securities laws.
Subsequently, in August, 1994, the complaint in such class action suits was
refiled to name additional defendants, including the Company.
30
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The complaint alleged that the Company had violated Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. In July 1995, a settlement was reached between the plaintiffs and
the Company which releases the Company from any and all known and unknown claims
that have been or could have been asserted by the plaintiffs. In exchange for
this release, the Company has agreed to cooperate fully in the investigation and
any further prosecution of the litigation. The settlement does not require the
Company to pay any cash, stock or other monetary consideration as part of the
settlement.
LEASES -- The Company and its subsidiaries lease its facilities, equipment
and automobiles under non-cancelable operating leases which expire at various
dates through July 1999.
Future minimum rental payments required under the operating leases that have
remaining non-cancelable lease terms in excess of one year are as follows: 1996
- -- $618,000; 1997 -- $525,000; 1998 -- $502,000; 1999 -- $488,000, 2000 --
$330,000.
Rent expense was $497,000 and $473,000, respectively, for the years ended
November 30, 1995 and 1994.
NOTE 12 -- ACQUISITIONS
In August 1993, the Company acquired 25.1% of the outstanding common stock
of IT (see Note 2) and a loan to IT of approximately $737,000, plus accrued
interest, from Cedar Investments, Ltd., a stockholder of IT unrelated to the
Company, for an aggregate price of approximately $2,175,000.
Following a subsequent rights offering, a private placement and a recent
floatation on the Unlisted Securities Market on the London Stock Exchange, the
Company's interest in IT has been reduced to approximately 12.3% and converted
in a restructuring into a like interest in IT Group. The Company presently
accounts for its investment in IT in accordance with SFAS 115 (see Note 2).
In August 1993, the Company purchased a 10% equity interest in Time Release
Sciences, Inc., a New York corporation (Time Release) for $256,000. Time Release
is a manufacturer of proprietary hydrophilic polyurethane foams (i.e., foams
with an ability to absorb water based fluids), which are sold through authorized
fabricators and distributors. The Company accounted for this investment under
the cost method (see Note 16). This investment was sold to an unrelated
individual in December 1995.
On October 6, 1993, the Company acquired all of the outstanding stock of
Condor for aggregate consideration of $1,025,000, payable $640,876 in cash and
the issuance of 55,975 shares of the Company's common stock. The acquisition was
accounted for using the purchase method. The results of operations of the
acquired business have been consolidated with those of the Company commencing on
that date. The purchase price was allocated among the assets acquired and the
liabilities assumed on the basis of their estimated fair values with the excess
of the purchase price over the estimated fair values of the net assets acquired
of approximately $812,000 (subsequently increased by approximately $92,000, to
reflect adjustments relating to purchased accounts receivable and inventory)
being allocated to goodwill. The Company has agreed to pay additional
consideration to the sellers based upon the amount of Condor's profits for
calendar years 1993, 1994 and 1995. The amount of additional consideration, if
any, payable by the Company shall be paid one-third cash, one-third by a two
year unsecured 6% promissory note of the Company and one-third by the issuance
of shares of the Company's common stock at market price. The Company has the
right to offset against any required
31
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 12 -- ACQUISITIONS (CONTINUED)
future payments all amounts paid by the Company under certain obligations of
Condor assumed by the Company pursuant to the Agreement. No additional
consideration based on the amount of Condor profits for 1995, 1994 and 1993 was
required.
On November 23, 1993, AMI purchased from WTI (see Note 1) certain assets of
WTI's medical supply division (OEM Medical) that had been used in connection
with the private label manufacturing of products for medical accounts. These
products include electrosurgical grounding pads, sponges, neck braces, knee pads
and other specialty foam products. Many of these products were being
manufactured by AMI for sale to WTI and ultimate resale to medical accounts. The
aggregate purchase price was $2,300,000 plus the assumption of certain
liabilities aggregating $21,000. The purchase price was paid by delivery of
AMI's secured promissory note in the amount of $1,550,000 which was paid in
March 1994, and the amendment and restatement of an existing promissory note to
WTI to increase the principal amount thereof from $1,000,000 to $1,750,000. AMI
also purchased related finished goods, tools and drawings for an aggregate
purchase price of $555,000, which represented the full retail value of such
products. The acquisition was accounted for using the purchase method. The
results of operations of the acquired business have been consolidated with those
of the Company commencing on November 23, 1993. The purchase price was allocated
among the assets acquired and the liabilities assumed on the basis of their
estimated fair values with the excess of the purchase price over the estimated
fair values of the net assets acquired of approximately $2,247,000 being
allocated to goodwill.
NOTE 13 -- RESTRUCTURING CHARGES
In the fourth quarter of 1993, the Company initiated a restructuring plan to
downsize its Carson facility and to shift part of its manufacturing operations
to its Dallas, Texas facility and to a new plant to be located in Portland,
Oregon. The restructuring plan was designed to eliminate excess manufacturing
capacity for the Southern California market and shift operations closer to the
Company's existing customer base and markets with greater potential. The Company
recorded a non-recurring charge of $572,000 in fiscal 1993 to reflect costs
associated with the restructuring. The charge included estimates of excess
facility costs, severance pay, personnel relocation costs, professional fees,
contract termination costs and other expenses associated with the restructuring
plan.
During the years ended November 30, 1995 and 1994, the Company incurred
restructuring charges of approximately $245,000 and $99,000, respectively. The
restructuring plan was completed in fiscal 1995, and accordingly, there is no
liability remaining at November 30, 1995.
NOTE 14 -- RELATED PARTY TRANSACTIONS
On February 3, 1993, Mr. Crow transferred 99,563 shares of WTI common stock
owned by him at $9.75 per share (the closing price of the shares as reported on
NASDAQ) to AMI in exchange for the forgiveness of a $500,000 promissory note
plus accrued interest of $8,000 and the assumption of approximately $398,000 of
debt. The debt consisted of notes payable to financial institutions. In May,
1993, AMI purchased an additional 677 shares of WTI common stock from Mr. Crow
at the then current market price of approximately $11,000. Mr. Crow was Chairman
of the Board and Chief Executive Officer of WTI at the time of the transactions.
As of November 30, 1995, the market value of the WTI shares held by the Company
was approximately $88,000 (see Notes 2 and 16).
On December 10, 1992, the Company granted Mr. Crow an option to purchase
200,000 shares of common stock at a price of $.30 per share under its 1993 Stock
Option Plan in exchange for Mr. Crow's
32
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 14 -- RELATED PARTY TRANSACTIONS (CONTINUED)
AMI options (see Note 1), and on May 22, 1993 an option to purchase 20,000
shares at a price of $1.50 per share for services as a director. In March 1994,
Mr. Crow exercised the option to purchase 200,000 shares of common stock at a
price of $.30 per share.
The Company entered into a consulting agreement with Michael Ledeen, a
director of the Company, in June 1993, pursuant to which the Company agreed to
pay Mr. Ledeen the sum of $5,000 per year and granted Mr. Ledeen an option to
purchase 20,000 shares of common stock at a price of $1.50 per share. The
Company also granted Mr. Ledeen an option to purchase 20,000 shares of common
stock at a price of $1.50 per share for services as a director. As of November
30, 1995, all such options have been exercised.
No compensation was recorded in connection with the options referred to
above since they were granted at their fair market value.
The Company sold 175,000 shares of common stock to Rowland W. Day II at
$0.10 per share, issued 25,000 shares of common stock in 1993 and 82,285 shares
in 1994 to the law firm of Day & Campbell, of which Mr. Day is a member, as
payment of $37,500 and $164,570 of legal fees, respectively, granted an option
to Day & Campbell to purchase 50,000 shares of common stock at a price of $1.50
per share and granted an option to Mr. Day to purchase 20,000 shares of common
stock for services as a director at a price of $1.50 per share. Mr. Day was a
director of the Company through September 3, 1993. As of November 30, 1995, all
such options remain outstanding.
As of November 30, 1995, the Company was owed $165,000 by WTI and owed
$7,000 to WTI. WTI is considered an affiliate due to common ownership by an
institutional investor.
In May 1995, the Company, through one of its subsidiaries, entered into an
exclusive rights agreement with WTI whereby the Company granted to WTI the
exclusive right to manufacture, use, inventory, promote, market, sell and/or
resell certain of the Company's products, as defined. As compensation for the
rights granted by the Company, WTI agreed to pay the Company a royalty fee in
the amount of $.015 for each unit of product sold. The agreement expires in May
1998 and may be terminated by mutual consent of WTI and the Company. Royalty
income related to this agreement was not significant for the year ended November
30, 1995.
See Notes 4 and 8 for description of notes receivable and notes payable with
related parties.
NOTE 15 -- STOCKHOLDERS' EQUITY
COMMON STOCK
On December 1, 1992, the Company issued 4,000,000 shares of its common stock
to Mr. Michael W. Crow, its founder and then sole stockholder, for a note of
$500,000. The note was paid on February 3, 1993 through the transfer of 99,563
shares of WTI (see Note 1) common stock at $9.75 per share and the assumption of
$398,000 of debt (see Note 14).
During the fiscal years ended November 30, 1995 and 1994, the Company
incurred costs of approximately $59,000 and $366,000, respectively, in
connection with the registration of certain shares of common stock previously
issued. Such costs have been reflected as a reduction of stockholders' equity in
the accompanying consolidated financial statements.
On December 22, 1995, the Company issued 1,260,807 shares of its common
stock valued at $.55 per share to a lender/stockholder for $700,000 in cash. In
conjunction with the transaction, the
33
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 15 -- STOCKHOLDERS' EQUITY (CONTINUED)
Company granted the stockholder a warrant to acquire an additional 30,000 shares
of its common stock at an exercise price of $.75 per share, expiring in December
2000. See Note 8 for information relating to additional transactions with this
lender/stockholder subsequent to November 30, 1995.
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan, approved by the stockholders of the Company,
authorizes the granting of various options and rights to purchase 1,250,000
shares of common stock of the Company.
The 1993 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 1993 Plan provides that it is to be administered by a committee
appointed by the Board of Directors (the Committee) who are "disinterested" as
such term is defined under Rule 16b-3 of the Securities Exchange Act of 1934, as
amended. The Committee has discretion, subject to the terms of the 1993 Plan, to
select the persons entitled to receive options under the 1993 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 1993 Plan may be either "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code, or
"non-qualified stock options" as determined by the Committee at the time of
grant. No incentive stock option may be granted to any person who owns stock
possessing more than 10% of the combined voting power of all classes of the
Company's stock or of its parent (10% Stockholders) unless the exercise price is
at least equal to 110% of fair market value on the date of grant. Options may be
granted under the 1993 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 1993
Plan must be at least equal to the fair market value of the common stock as of
the date of grant. No incentive stock options may be granted to an optionee
under the 1993 Plan if the aggregate fair market value (determined on the date
of grant) of the stock with respect to which incentive stock options are
exercisable by such optionee in any calendar year under all such plans of the
Company and its affiliates exceeds $100,000.
The following is a summary of stock option transactions under the 1993 Stock
Option Plan during 1995 and 1994:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
-------- ---------------
<S> <C> <C>
Options outstanding at November 30, 1993............... 490,000 $0.30 - $1.50
Granted................................................ 300,000 $1.63 - $4.00
Exercised.............................................. (200,000) $0.30
Cancelled.............................................. (15,000) $0.30 - $1.50
--------
Options outstanding at November 30, 1994............... 575,000 $0.30 - $4.00
Granted................................................ 80,000 $0.40 - $0.59
Exercised.............................................. --
Cancelled.............................................. (220,000) $3.75 - $4.00
--------
Options outstanding at November 30, 1995............... 435,000 $0.30 - $4.00
--------
--------
</TABLE>
During the years ended November 30, 1995 and 1994, the Company issued
options, pursuant to the 1993 Plan, to purchase 80,000 and 300,000 shares,
respectively, of the Company's common stock at exercise prices ranging from
$0.40 to $4.00 per share.
34
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 15 -- STOCKHOLDERS' EQUITY (CONTINUED)
As of November 30, 1995, options to purchase 435,000 shares of common stock
were outstanding, 385,000 of which were exercisable, and 1,250,000 shares of
common stock were reserved for issuances.
No compensation was recorded in connection with these options since they
were issued at the fair market value of the underlying stock at the date of
grant or their impact was not significant.
STOCK OPTIONS
During the years ended November 30, 1994 and 1993, the Company issued
options, outside of the 1993 Plan, to purchase 450,000 and 60,000 shares,
respectively, of the Company's common stock at exercise prices ranging from
$1.50 to $5.00 per share. At November 30, 1995, options to purchase 440,000
shares of common stock were outstanding at exercise prices ranging from $1.50 to
$5.00 per share, all of which were exercisable.
No compensation was recorded in connection with these options since they
were issued at their fair market value of the underlying stock at the date of
grant or their impact was not significant.
WARRANTS
On August 10, 1993, the Company granted a consulting firm warrants to
purchase 30,000 shares of the Company's common stock at $5.50 per share. The
warrants vest based upon the performance of certain services. As of November 30,
1995, warrants to purchase 20,000 shares are exercisable.
In March, 1994, the Company issued a warrant to purchase 840,000 shares of
its common stock at an exercise price of $2.98, expiring on March 24, 1999. This
warrant is exercisable as of November 30, 1995.
In September, 1994, in connection with the line of credit with a
stockholder, the Company issued a warrant to the stockholder exercisable for
35,000 shares of its common stock at an exercise price of $.90, expiring on
September 30, 1999. This warrant is exercisable as of November 30, 1995.
No compensation was recorded in connection with these warrants since they
were issued at the fair market value of the underlying stock at the date of
grant.
See Note 8 for information relating to the issuance of warrants to acquire
30,000 and 60,000 shares of the Company's common stock in December 1995.
See above, under "Common Stock", for information relating to the issuance of
a warrant to acquire 30,000 shares of the Company's common stock in December
1995.
NOTE 16 -- LOSS ON SECURITIES
Beginning in fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses the accounting and reporting for investments
in equity securities which have readily determinable fair values and all
investments in debt securities. In accordance with this statement, the Company's
100,240 shares of common stock in WTI (see Note 1), have been classified as
available-for-sale and have been reported at fair value. During the first
quarter of 1994, the Company recorded an unrealized holding loss of $78,000, net
of taxes, and included such loss as a separate component of stockholders'
equity. In August, 1994, at a time when the stock had an aggregate market value
of approximately $176,000 and a historical cost of $917,000, management, in
their judgment, determined the decline in value was other than temporary.
Accordingly, the Company reversed the unrealized holding loss of $78,000 as
recorded in the first quarter of 1994, and recorded an unrealized holding loss
of $742,000,
35
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
NOTE 16 -- LOSS ON SECURITIES (CONTINUED)
as a charge against earnings in the second quarter of 1994. Management made that
decision after considering the public disclosure by WTI of numerous internal
operating, financial and legal problems and the uncertainty of future
operations.
As of November 30, 1994, management determined that the value of its
investment in Time Release Sciences (see Notes 1 and 12) had been impaired
permanently, and accordingly, recorded a loss of $256,000.
NOTE 17 -- CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS AND SUPPLIERS
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base and
their dispersion across different industries and geographic locations with the
exception of customers noted below. The Company reviews a potential customer's
credit history before extending credit. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Sales to the Medical and Contamination Control division of WTI were
approximately 6% and 8% of net sales for the years ended November 30, 1995 and
1994. Sales to one other customer accounted for approximately 13% and 9% of net
sales for the years ended November 30, 1995 and 1994, respectively. Accounts
receivable from this customer amounted to approximately $195,000 at November 30,
1995.
Raw material purchases from one supplier accounted for approximately 39% and
17% of total purchases for the years ended November 30, 1995 and 1994,
respectively. Raw material purchases from another supplier accounted for
approximately 20% and 17% of total purchases for the years ended November 30,
1995 and 1994, respectively.
NOTE 18 -- SUBSEQUENT EVENT
On January 30, 1996, the Company sold 250,000 shares of common stock of IT
(see Notes 2 and 12) for an aggregate price of $402,572, thereby reducing the
Company's interest to approximately 11.1%.
36
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information for Part III, Items 9, 10, 11 and 12 are hereby incorporated
by reference to the Company's Proxy Statement for a meeting to be held on May 8,
1996, which will be filed with the Commission within (120) one hundred twenty
days of the close of the fiscal year pursuant to Regulation 14A.
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
<TABLE>
<CAPTION>
NO. EXHIBITS
- ----- ---------------------------------------------------------------------------
<C> <S>
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 Security Agreement dated December 3, 1992 between Wilshire Advanced Materi-
als, Inc. and Wilshire Technologies, Inc. (1)
10.4 Amended and Restated Secured Subordinated Promissory Note of Wilshire Ad-
vanced Materials, Inc. dated November 23, 1993 in the principal amount of
$1,750,000 payable to Wilshire Technologies, Inc. (2)
10.5 Lease dated November 20, 1979 between Wilshire Foam Products, Inc. and
Hines/ Wilshire Associates, Ltd. and assignment thereof to Wilshire
Advanced Materials, Inc. dated December 3, 1992. (1)
10.6 Lease dated August 19, 1974 between Wilshire Foam Products, Inc. and Watson
Land Company and assignment thereof to Wilshire Advanced Materials, Inc.
dated December 3, 1992. (1)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- ----- ---------------------------------------------------------------------------
<C> <S>
10.7 Common Stock Purchase Agreement dated August 16, 1993 between Advanced
Materials Group, Inc. and Time Release Sciences, Inc. (1)
10.8 Acquisition Agreement dated August 23, 1993 between Advanced Materials
Group, Inc. and Innovative Technologies, Ltd., et al. (1)
10.9 Product Development and License Agreement dated August 23, 1993 between Ad-
vanced Materials Group, Inc. and Innovative Technologies, Ltd. (1)
10.10 Stock Purchase Agreement dated October 6, 1993 between Advanced Materials
Group, Inc. and the stockholders of Condor Utility Products, Inc. (1)
10.11 Asset Purchase Agreement dated November 23, 1993 between Wilshire Advanced
Materials, Inc. and Wilshire Technologies, Inc. (1)
10.12 Consulting Agreement dated December 6, 1992 between Wilshire Advanced
Materials, Inc. and Michael W. Crow. (1)
10.13 Consulting Agreement dated June 7, 1993 between Advanced Materials Group,
Inc. and Michael Ledeen. (1)
10.14 Consulting Agreement dated May 1, 1993 between Advanced Materials Group,
Inc. and Stephen P. Scibelli, Jr. (1)
10.15 Consulting Agreement dated July 1, 1993 between Advanced Materials Group,
Inc. and Chester Financial Corporation Incorporated. (1)
10.16 Consulting Agreement dated September 20, 1993 between Advanced Materials
Group, Inc. and Cooper & Khan. (1)
10.17 Consulting Agreement dated June 1, 1993 between Advanced Materials Group,
Inc. and Paschall and Company. (2)
10.18 The 1993 Stock Option Plan of Advanced Materials Group, Inc. (2)
10.19 Employment Agreement dated December 1, 1992 between AM and Michael W. Crow.
(3)
10.20 Employment Agreement dated January 10, 1994 between the Company and George
Pache. (2)
10.21 Amendment to Security Agreement dated November 23, 1993 between Wilshire
Advanced Materials, Inc. and Wilshire Technologies, Inc. (2)
10.22 Secured Promissory Note of Wilshire Advanced Materials, Inc. dated November
23, 1993 payable to Wilshire Technologies, Inc. in the amount of
$1,550,000. (2)
10.23 Form of Convertible Debenture. (3)
10.24 Promissory Note of the Company dated March 25, 1994 payable to Michael W.
Crow in the amount of $787,618. (3)
10.25 Lease dated February 1, 1994 between Advanced Materials Group, Inc. and The
Riggs National Bank of Washington D.C. as Trustee of the Multi-Employer
Property Trust. (3)
10.26 Lease dated May 23, 1994, between Wilshire Advanced Materials, Inc. and
Hewlett-Packard Company. (4)
10.27 Loan Agreement dated May 11, 1994, between Wilshire Advanced Materials,
Inc. and Concord Growth Corporation. (4)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- ----- ---------------------------------------------------------------------------
<C> <S>
10.28 Lease dated April 22, 1994, between Wilshire Advanced Materials, Inc. and
Alamo Holding Company. (4)
10.29 Credit Agreement dated as of September 21, 1994, between Advanced Materials
Group, Inc. and Dominion Capital, Inc. (4)
10.30 Lease dated August 2, 1994, between Wilshire Advanced Materials, Inc. and
Susana Property Co. (4)
10.31 Rider dated as of November 1, 1994, to Loan Agreement dated May 11, 1994,
between Wilshire Advanced Materials, Inc. and Concord Growth Corporation.
(5)
10.32 Amendment #5 dated July 14, 1995 to Loan Agreement dated May 1, 1994
between Concord Growth Corporation and Advanced Materials, Inc. (6)
10.33 Amended and Restated Promissory Notes dated August 16, 1995 between
Advanced Material Group, Inc. and Hiram H. Johnson and Beth A. Johnson.
(7)
10.34 Industrial Lease Agreement executed August 31, 1995 between New York Life
Insurance and Annuity corporation, as Landlord, and Advanced Materials,
Inc., as Tenant. (8)
10.35 Industrial Sublease Agreement executed August 31, 1995 between Advanced
Materials, Inc., as Landlord, and Wilshire Technologies, Inc., as Tenant.
(9)
10.36 Form of Subscription and Investment Representation Agreement between
Advanced Materials Group, Inc. and Trilon Dominion Partners, LLC. (10)
10.37 Form of Equity Warrant between Advanced Materials Group, Inc. and Trilon
Dominion Partners, LLC. (11)
10.38 Form of Debt Warrant between Advanced Materials Group, Inc. and Trilon
Dominion Partners, LLC. (12)
10.39 Form of Springing Warrant between Advanced Materials Group, Inc. and Trilon
Dominion Partners, LLC. (13)
21. List of Subsidiaries.
23.1 Consent of Corbin & Wertz.
27. Financial Data Schedule.
</TABLE>
- ------------------------
(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).
(2)Filed as a like-numbered exhibit 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).
(3)Filed as a like-numbered exhibit 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).
(4)Filed as a like-numbered exhibit to Amendment No. 3 dated October 24, 1994
to the Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500).
(5)Filed as a like-numbered exhibit to Amendment No. 4 dated December 21, 1994
to the Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500).
(6) Filed as Exhibit 10.1 to Form 10-QSB dated August 31, 1995.
(7) Filed as Exhibit 10.2 to Form 10-QSB dated August 31, 1995.
39
<PAGE>
(8) Filed as Exhibit 10.3 to Form 10-QSB dated August 31, 1995.
(9) Filed as Exhibit 10.4 to Form 10-QSB dated August 31, 1995.
(10) Filed as Exhibit 2.1 to Form 8-K filed January 5, 1996.
(11) Filed as Exhibit 2.2 to Form 8-K filed January 5, 1996.
(12) Filed as Exhibit 2.3 to Form 8-K filed January 5, 1996.
(13) Filed as Exhibit 2.4 to Form 8-K filed January 5, 1996.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended November 30, 1995.
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED MATERIALS GROUP, INC.
Dated: February 27, 1996
By: /S/ STEVE F. SCOTT
-----------------------------------
Steve F. Scott
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
/S/ STEVE F. SCOTT Chief Executive Officer, President
- -------------------------------------- (Principal Executive Officer), February 27, 1996
Steve F. Scott Secretary and Director
/S/ J. DOUGLAS GRAVEN
- -------------------------------------- Chief Financial Officer* February 27, 1996
J. Douglas Graven
- -------------------------------------- Chairman February , 1996
William J. Hopke
/S/ N. PRICE PASCHALL
- -------------------------------------- Director February 27, 1996
N. Price Paschall
/S/ ALLAN H. MELTZER
- -------------------------------------- Director February 27, 1996
Allan H. Meltzer
/S/ MICHAEL A. LEDEEN
- -------------------------------------- Director February 27, 1996
Michael A. Ledeen
</TABLE>
*Mr. Graven was appointed Chief Financial Officer on February 20, 1996, and was
not previously associated with the registrant.
41
<PAGE>
Exhibit 21
List of Subsidiaries
Advanced Materials, Inc., a California corporation
Condor Utility Products, a California corporation
<PAGE>
[Corbin & Wertz Letterhead]
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Advanced Materials Group, Inc.
We have issued our report dated January 17, 1996, accompanying the consolidated
financial statements included in the Annual Report of Advanced Materials
Group, Inc. on Form 10-KSB for the year ended November 30, 1995. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Advanced Materials Group, Inc. on Form S-3 (Registration
No. 33-72500).
/s/ Corbin & Wertz
Irvine, California
February 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
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0
0
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</TABLE>
