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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
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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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NEVADA 33-0215295
(State of Incorporation) (I.R.S. Employer
Identification
No.)
20211 S. SUSANA ROAD, RANCHO DOMINQUEZ, 90221
CALIFORNIA
(Address of principal executive offices) (Zip code)
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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 $18,306,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on February 20, 1997 was $11,679,921. The number of shares outstanding of
the issuer's only class of Common Stock, $.001 par value, was 10,458,742 on
February 20, 1997.
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.) ("AMI"), is the successor to a
forty-four year old business that converts specialty materials including foams,
foils, films and adhesive composites into components and finished products such
as printer cartridge inserts and 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 multicomponent 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, under license, to manufacture
and market a hydrophilic polymer being developed by Innovative Technologies,
Ltd. ("IT"), assuming satisfactory results are obtained in testing the product.
Product testing is ongoing and the Company is unable to predict when, if ever,
such new product will be commercialized.
The Company, which was formerly known as Far West Ventures, Inc., was
incorporated in Nevada in October 1986. The Company was inactive from January
1990 until April 1993, when it acquired AMI. AMI had previously been formed as a
California corporation in August 1992 for the purpose of acquiring the assets of
the General Foam Products division of Wilshire Technologies, Inc. ("WTI"). The
assets acquired by AMI 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, AMI acquired the General 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 General
Foam Products division
In April 1993, AMI 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 AMI.
In August 1993, the Company purchased an equity interest in IT, which it has
since sold. In addition, however, 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. Product testing is
ongoing and the Company is unable to predict when, if ever, such new product
will be commercialized.
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 subsequent calendar years, but that agreement was
replaced in 1995 with a bonus plan based on operating profit performance. 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.
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On November 23, 1993, AMI 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. The aggregate purchase
price was $2,300,000 plus the assumption of liabilities under certain executory
contracts in the approximate amount of $21,000.
On September 1, 1996 the Company entered into an asset purchase agreement
with Gasket and Molded Products, Inc. ("GMP"), a Colorado corporation, and its
shareholders, whereby for cash of $130,000, as adjusted, the Company acquired
substantially all of the assets and assumed certain liabilities of GMP.
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 are 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 in the marketplace to benefit from
this trend. In addition, the Company is reviewing strategic acquisition
candidates for expansion opportunities.
The Company's long-term strategy is to penetrate foreign marketplaces by
establishing fabrication plants in such areas as Malaysia, Mexico and Europe.
The Company expects to launch Condor's new adhesives line in fiscal year 1997.
This launch will lead to increases in revenue and profitability as the Company
expands its customer base.
PRODUCTS
The Company's AMI 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 foam inserts for computer printer cartridges,
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. In addition, private label
manufacturing of products for medical accounts include electrosurgical grounding
pads, sponges, neck braces, kneepads and other specialty foam products. All of
these products are designed and produced to meet the specifications of each
customer. AMI typically provides no warranty for its products other than
compliance with specifications at the time of delivery.
The Company's Condor subsidiary produces a line of molded plastic products
used for mixing and dispensing two chemical components which, when combined,
react to form adhesives or foams. 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.
All of the products produced by AMI 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
AMI currently has four fabrication facilities located in Rancho Dominguez,
California, Dallas, Texas, Portland, Oregon and Denver, Colorado. The Rancho
Dominguez facility is approximately 56,000 square feet, the Dallas facility is
approximately 65,000 square feet. The Portland facility is approximately 28,500
square feet and the Denver facility is approximately 9,000 square feet. The four
current facilities serve different geographical markets. The Rancho Dominguez,
Portland, and Denver 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, Dallas, Portland and
Denver 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 AMI. Each site maintains a separate sales and
production staff, while administration and purchasing are centralized in the
Rancho Dominguez facility.
AMI has developed and employs a wide variety of advanced processing
techniques in fabricating its products. These techniques include thermoforming,
vacuum forming, flame lamination, pressure sensitive lamination, die cutting and
slitting. Thermoforming 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. AMI currently produces backpack components and display cases using its
thermoforming equipment. Vacuum forming 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. AMI currently produces
automotive air conditioner insulators and computer mouse pad components with its
vacuum forming 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. AMI currently uses this process 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. AMI 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. AMI 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.
AMI is able to produce a variety of products for different markets by using
different combinations of fabrication techniques with a wide range of materials.
For example, using its slitter, pressure sensitive laminator and die cutter
equipment in sequence, AMI 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 thermoforming equipment in sequence, AMI 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, AMI
fabricates other materials used in combination with foam such as fabrics,
pressure sensitive adhesives and foils. AMI also fabricates plastic films,
pressure sensitive adhesives and other materials not in combination with foam.
This capability enables AMI to minimize its dependence on market sectors, which
may be cyclical in nature.
AMI manufactures its products for its industrial customers pursuant to
customer purchase orders, most of which provide for multiple shipping release
dates. This enables AMI to plan raw material purchases and production
scheduling. For its largest accounts, AMI will produce a two to four week supply
of products and stock them for quick delivery.
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Condor has a production facility located in Stockton, California, which is
approximately 15,600 square feet. Condor currently operates one shift five days
per week. Management believes this capacity is sufficient to meet current and
future needs.
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. Condor purchases the chemicals
used in Condor's products 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.
QUALITY CONTROL
AMI, which is ISO 9002 certified at its Rancho Dominguez, Dallas and
Portland facilities, maintains systems and procedures that meet customer quality
specifications and has successfully completed qualification surveys conducted by
Fortune 500 OEM manufacturers. AMI also maintains procedures for conducting
quality compliance surveys of its major suppliers. AMI has specific procedures
in place for receiving inspection, source inspection, process inspection and
control, instrument calibration standards, records maintenance, training and
internal quality audits. AMI 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
AMI 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 AMI in fiscal
1996 and fiscal 1995. The Company's largest supplier of raw materials is Foamex
Engineered Polyurethanes ("Foamex"), which in fiscal 1996 and fiscal 1995
supplied approximately 31% and 39%, respectively, of AMI's raw materials'
requirement.
AMI is an authorized fabricating distributor for 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 AMI with a diverse mix of raw materials at
the best available prices. AMI 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 AMI could
adversely affect AMI's ability to manufacture and deliver products on a timely
and competitive basis. AMI 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 AMI's business in
the long term because other suppliers of foam could be relied upon to meet AMI's
requirements at a comparable cost. However, the loss of either Foamex or Voltek
would have a materially adverse effect on AMI'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 AMI.
MARKETING AND SALES
AMI's products are marketed and sold primarily to major divisions of large
industrial customers, many of who are industry leaders whose products have
significant market share. All of AMI'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.
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AMI's eleven full-time salesmen make sales in the United States on a direct
basis. Six salesmen are in the field and five salesmen provide inside sales
support. The six field salesmen receive a base salary plus a commission and the
five inside salesmen receive a salary. Approximately 95% of AMI's sales are made
in the United States.
AMI 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 1996 and 1995 sales, are made on a direct
basis and through sales agents who receive commissions. In Mexico, an AMI
bilingual sales representative has been attempting to expand the market for
AMI's products, and opportunities for corporate partnering are being explored.
AMI relies primarily upon referrals by its customers and vendors and the
activities of its salesmen for new business. AMI advertises in the Thomas
Register, a sourcing guide for industrial engineering and purchasing groups. AMI
also participates in industrial design and engineering trade shows as a means of
marketing its products.
Condor markets its products to the telecommunications and power utility
industries through direct sales and a network of contract sales representatives
in North America and a number of foreign countries including Mexico and England.
The direct salesmen receive a salary plus bonus and the contract sales
representatives receive commissions.
BACKLOG
AMI 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,
1996 and 1995, AMI's backlog of orders believed to be firm was approximately
$5,613,000 and $5,326,000, respectively.
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,
1996 and 1995, Condor's backlog of orders, believed to be firm, was
approximately $10,000.
CUSTOMERS
AMI generally sells its products pursuant to customer purchase orders. There
can be no assurance that any such customers will continue to purchase products
from AMI 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
customer or one market sector. However, one customer accounted for 28% and 13%
of consolidated revenues for the year ended November 30, 1996 and 1995,
respectively. While AMI 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, and in
the case of its largest customer would, have an adverse effect on AMI's business
AMI's prices are competitive with other fabricators of custom materials. AMI
sales are typically made on terms which require payment of the net amount due in
30 days.
Major customers for Condor are primarily in the telecommunications and power
utility business. Condor has identified the electronics and aerospace industries
as future target markets for a new line of adhesive products, which Condor has
developed and is launching in fiscal 1997.
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LICENSES AND PROPRIETARY RIGHTS; NEW PRODUCT
Patents protect none of AMI's current manufacturing processes. AMI 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 an exclusive worldwide license to market, use and sell
certain industrial products utilizing proprietary polymers and processes
developed by IT. Such polymers and processes are presently undergoing testing to
determine their efficacy. Product testing is ongoing and the Company is unable
to predict when, if ever, such new products will be commercialized. The licensed
products include waterproof/ breathable fabrics, leather substitutes, barrier
coatings, controlled release materials and water soluble bags. 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. In the past three years the Company has spent approximately $200,000 on
research and development activities, primarily in connection with the
proprietary polymers and processes originally developed by IT. The Company has
absorbed such costs.
The Company is 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 also 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 AMI competes is highly
competitive. High barriers to entry and fragmented competition characterize the
industry. 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. AMI 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 AMI's products obsolete or less marketable,
or could develop means of producing competitive products at a lower cost. The
ability of AMI to compete successfully will depend in large measure on its
ability to adapt to technological changes in the industry. There can be no
assurance that AMI will be
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able to keep pace with the technological demands of the market place or
successfully develop new products, which are in demand by the industry.
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 at least
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.
GOVERNMENT REGULATION
The manufacture of certain products by AMI 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 AMI 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 agencies. Among other things, these regulatory bodies impose restrictions
to control air, soil and water pollution. The extensive regulatory framework
imposes significant complications, burdens and risks on the Company.
Governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions and/or impose civil and criminal fines or
sanctions in the case of violations.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), imposes strict joint and several liability
on the present and former owners and operators of facilities which release
hazardous substances into the environment. The Federal Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), regulates the generation,
transportation, treatment, storage and disposal of hazardous waste. In
California, the handling and disposal of hazardous substances is governed by the
law, which contains the California counterparts of CERCLA and RCRA. The Company
and its subsidiaries believe that their manufacturing activities are in
substantial compliance with all material Federal and state laws and regulations
governing their 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 ("OSHA"), are also applicable to the
Company and its subsidiaries. The Company believes it and its subsidiaries are
in substantial compliance with all material Federal, state and local laws and
regulations regarding safe working conditions.
EMPLOYEES
As of January 31, 1996, the Company and its AMI subsidiary had approximately
92 full-time employees, of whom approximately 51 were located at AMI's Rancho
Dominguez, California facility, approximately 25 were located at AMI's Dallas,
Texas facility, 9 were located at AMI's Portland, Oregon facility and 7 were
located at AMI's Denver facility. Of AMI's full-time employees, approximately 66
are employed in manufacturing, 11 are in sales, 7 perform clerical functions and
8 perform administrative functions. AMI also utilizes the services of contract
workers as needed from time to time in its manufacturing operations.
As of January 31, 1996, Condor had 10 full-time employees. Of Condor's
full-time employees, 7 are employed in production, 1 is in sales, and 2 perform
administrative functions.
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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, approximately 28,500 square
feet of manufacturing and office space in Portland, Oregon and approximately
9,000 square feet in Denver, Colorado. 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 $8,000 per month under its
Portland lease. The Company has subleased approximately 35,000 square feet of
its Dallas facility to WTI, which WTI has attempted to assign to Horizon Medical
Products ("Horizon"), for approximately $9,075 per month. The Rancho Dominguez
lease expires in November 1999, the Dallas lease expires in November 2000, the
Portland lease expires in February 2000 and the Denver, Colorado lease expires
in March 1998.
The Company's Condor subsidiary leases 15,600 square feet of manufacturing
and office space in Stockton, California. Condor pays rent of approximately
$5,000 per month under the lease, which expires in July 1999.
ITEM 3. LEGAL PROCEEDINGS.
In October 1996, the Company was notified that it was named in a bodily
injury lawsuit pending in 192nd Judicial District Court of Dallas County Texas,
involving silicon breast implants. Such suit alleges that AMI supplied certain
foam "wipers" which were incorporated into certain implants by manufacturers
also named in the suit, which have allegedly caused adverse effects to the
plaintiffs. The suit asks for unspecified damages. The Company believes it has
no exposure in this case as the Company: (1) was not incorporated at the time of
such implants; (2) neither the Company nor WTI has had any involvement with
silicone or other breast implants; (3) neither the Company nor WTI has ever
marketed such "wipers"; and, (4) there exists two indemnification agreements
that provide protection to the Company. The Company believes the aforementioned
provide several layers of protection in the event this case progresses.
Accordingly, no provision for any liability has been made in the accompanying
consolidated financial statements.
AMI currently maintains product liability insurance in the amount of
$1,000,000, with excess umbrella coverage in the amount of $10,000,000. Except
for the breast implant suit, no product liability claims have been made to date.
However, 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 AMI's assets
and its ability to conduct its business.
The Company's Condor subsidiary was 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 are seeking damages therefor. Plaintiffs
are 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.
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 moved
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for declaratory relief in federal district court for the eastern district of
California, and joined the actions that were the subject of claims between
Condor and the plaintiffs in state court.
In December 1996, the plaintiffs filed bankruptcy under Chapter 13 of the
United States Bankruptcy Code. Accordingly, the Federal and state court actions
have been stayed. The sellers of Condor have agreed to indemnify the Company
with respect to any potential liability from the alleged breach of contract. 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.
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.
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, markdown or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW FISCAL 1995 HIGH LOW
- ------------------------- ---------- ----- ------------------------- ---------- -----
<S> <C> <C> <C> <C> <C>
$
Fourth Quarter........... $2 3/4 27/32 Fourth Quarter........... $ 29/32 $ 5/16
Third Quarter............ $1 3/8 $ 27/32 Third Quarter............ $1 5/16 $ 13/32
Second Quarter........... $1 13/32 $ 1/2 Second Quarter........... $ 1/2 $ 1/4
First Quarter............ $1 3/32 $ 7/16 First Quarter............ $ 27/32 $ 3/8
</TABLE>
There were 759 stockholders of record as of February 20, 1997.
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.
RESULTS OF OPERATIONS
The Company achieved record sales levels for fiscal 1996, posting the first
profit in the Company's history. Sales for fiscal 1996 were $18,306,000 compared
to $14,728,000 in fiscal 1995, an increase of 24.3%. The increase was driven by
a volume increase as the Company introduced two new products. The two new
products, sold to computer printer makers, accounted for approximately
$3,900,000. The shift in product mix created by these new products was partially
offset by slower sales in the medical and contamination control product lines.
Gross profit was favorably impacted, as a result of the volume increases
from the new product introductions. Gross profit for 1996 increased by 84%, to
$4,030,000, over the year ago period. Volume increases lifted the Company above
breakeven levels and created production efficiency gains as a result of longer
factory production runs.
Operating expenses were $3,953,000 in fiscal 1996 versus $3,648,000,
excluding write-down of goodwill of $719,000, in fiscal 1995. As a percent of
sales, fiscal 1996 was 21.6% compared to 24.8% in fiscal 1995.
10
<PAGE>
Operating expenses were higher in 1996 as the Company added two outside
salesmen, an engineer and incorporated the Denver, Colorado acquisition into its
operations. The salesmen were added to continue the Company's sales growth
momentum, the engineer was added to support new product opportunities created by
the salesforce. The addition of the Denver, Colorado facility, in September,
solidifies the Company's presence in the west, opening up markets in Colorado,
Utah, Idaho, Arizona and New Mexico.
Interest expense decreased by $258,000 in fiscal 1996 as the Company
restructured its balance sheet and reduced its debt by approximately $2.1
million. The decrease in interest expense is not an annualized amount, as debt
reductions were made throughout the year. For a more complete discussion refer
to the liquidity and capital resources section.
Net income for fiscal 1996 was $4,184,000, or $0.39 per share compared to a
loss of $2,979,000, or $0.32 per share. Fiscal 1996 results included several
one-time transactions. During the year the Company sold 2,504,504 shares of IT
stock and 100,240 shares of WTI stock. The stock sales took place in the first
three quarters of the year and resulted in net gains totaling $3,738,000. In
April 1996, the Company received approximately $572,000, in accordance with a
distribution to shareholders of IT dated January 1, 1996 which granted existing
shareholders of IT rights in connection with an IT United Kingdom offering. The
Company recorded an extraordinary gain of $526,000, net of applicable income
taxes of $18,000, from the early retirement of a note payable, which was at a
substantial discount from face value. Excluding these one-time transactions the
Company results would have been a loss of $634,000.
Net income for fiscal 1995 included a one-time charge of $719,000 for the
writedown of goodwill. Excluding the one-time charge, the Company would have
posted a loss of $2,260,000.
Comparing net income for fiscal 1996, excluding one-time items, compared to
fiscal 1995, excluding one-time items, fiscal 1996 was a loss of $634,000 versus
a loss $2,260,000 in fiscal 1995. This was an improvement of $1,626,000 or 72%.
The Company has not received any notice of investigation, claim or
proceeding relating environmental liability nor is the Company aware of any
environmental litigation, investigation or unasserted claim involving the
Company or its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996 the Company made significant efforts to improve both
liquidity and capital resources. On December 22, 1995, in connection with a
private placement, the Company issued 1,260,807 shares of its common stock
valued at $0.55 per share for $700,000 in cash.
Management moved to liquidate its securities held as investments,
liquidating all but 50,000 shares of IT. These shares were subsequently
liquidated in January 1997. The sales, of these securities and stock rights,
generated approximately $5,665,000 of cash. The cash from the private placement
and IT securities largely funded the Company's 24.3% increase in sales discussed
in the operations section.
Management moved to restructure debt through early retirement, scheduled
retirements and debt restructuring. In March 1996 the Company paid down $700,000
of credit line debt, the credit line was cancelled in September 1996. The credit
line reduction saved approximately $60,000 in interest in fiscal 1996. In July
1996 the Company retired a $1,700,000 note payable due on December 3, 1997. The
note was retired at a substantial discount resulting in a $526,000 gain. The
early retirement saved approximately $72,000 in interest expense in fiscal 1996.
The Company's operating credit line with Concord Growth Corporation, a
$2,000,000 asset-based line, expired on November 1, 1996. The Company negotiated
a new $5,000,000 asset-based line with Wells Fargo with interest at prime plus
2%. The Concord Growth interest rate was prime plus 4%. Current availability on
the line is $2,420,000 with $1,029,000 outstanding.
Company operations generated $400,000 of cash during fiscal 1996.
11
<PAGE>
The Company used cash from operations, the sales of securities and proceeds
from the private placement to fund net working capital additions of $1,294,000,
primarily additions of $1,803,000 in accounts receivable. The growth of accounts
receivable is directly attributable to sales volume increases.
On September 1, 1996 the Company entered into an asset purchase agreement
with Gasket and Molded Products, Inc., a Colorado Corporation, and its
shareholders, whereby for cash of $130,000, as adjusted, the Company acquired
substantially all of the assets and assumed certain liabilities of GMP. In
addition, the Company made capital purchases of $411,000 in fiscal 1996. At the
end of the year, the Company had no material commitments for capital
expenditures.
The Company had approximately $2,639,000 of cash at year-end, which
consisted primarily of investments in money market funds. The Company
anticipates that existing cash and cash from operations, and existing lines of
credit, will supply sufficient cash for working capital requirements, capital
expenditures and debt payments, totaling $988,000 in fiscal 1997, for the next
twelve months.
BUSINESS OUTLOOK
The following statements are based on current expectations. These statements
are forward-looking and actual results may differ materially.
The Company currently has sufficient orders from OEMs to believe that sales
growth will remain strong in the first half of fiscal 1997. Based on current
projected order releases from major customers, the sales growth year-to-year is
projected to be 35% to 40%, i.e. an estimated sales range of approximately $24.7
million to $25.6 million for fiscal 1997.
Gross profit margins are anticipated to show continued improvement in fiscal
1997 as the Company's direct labor and variable and fixed overhead absorption
rates run favorably. However, the Company will not be able to sustain the 84%
improvement posted in fiscal 1996.
Operating expenses are expected to increase in fiscal 1997 in dollar terms,
but will continue to decrease as a percent of sales. This will be due, largely,
to the annualized effect of the two outside salesmen and the engineer added in
fiscal 1996 and the incorporation of the Denver, Colorado acquisition.
Interest expense is estimated to continue to decline in fiscal 1997 as a
result of debt reductions made in fiscal 1996, scheduled reductions in fiscal
1997 and rate differentials between the Concord and Wells Fargo credit lines.
The Private Securities Litigation Reform Act of 1995 provides for a new
"safe harbor" for forward looking statements to encourage Companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Act only became law in late December 1995 and, except for the Conference Report,
no official interpretations of the Act's provisions have been published.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's actual financial results to differ materially from any
such results which might be projected, forecast, estimated or budgeted by the
Company in forward looking statements.
(a) General business conditions, including a worsening economy which
might slow the overall demand for the Company's products; increased
inflationary pressures which might lead to increasing prices for raw
materials, labor, and increases of interest costs based on the Company's
borrowing activities.
(b) Competitive factors, including the entry of new competitors into the
marketplace and/or heightened competition from existing competitors; and the
introduction of new products or technologies by customers or competitors.
(c) Under utilization of the Company's factories and plants, or of any
new plants.
12
<PAGE>
(d) Concentrations of sales in markets and customers.
(e) Failures to obtain new customers, retain customers or volume
reductions by current customers.
(f) Concentrations of raw material suppliers, including difficulties or
delays in obtaining raw materials.
(g) Inability to execute marketing and sales plans, including price
increases.
(h) Failure to attract and retain R&D/engineering staffing to support
sales efforts.
(i) Inability to develop cost effective means for timely production of
new product orders in required quantities.
(j) Delays or cancellations of orders; timing of significant orders; and
introduction of new products.
(k) Short-term fluctuations in margins due to yields and efficiencies.
(l) Loss of executive management or other key employees.
(m) Changes in financing amount, availability or cost.
(n) The effects of changes in costs and availability of insurance
coverage.
(o) The effects of changes in compensation or benefit plans.
(p) Adoptions of new, or changes in, accounting policies and practices
and the application of such policies and practices.
(q) Adverse results in significant litigation matters.
The foregoing review of factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
effective date of said Act.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Materials Group, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Materials Group, Inc. and its subsidiaries (the "Company") as of November 30,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years then ended. 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, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
January 23, 1997
15
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 2,639,000 $ 66,000
Available-for-sale securities.................................................... 112,000 88,000
Accounts receivable, net of allowance for doubtful accounts of $100,000 and
$127,000 as of November 30, 1996 and 1995, respectively........................ 3,014,000 1,363,000
Receivable from affiliate........................................................ -- 165,000
Notes receivable from related party.............................................. 50,000 19,000
Inventories...................................................................... 2,110,000 2,096,000
Income taxes receivable.......................................................... 20,000 --
Deferred income taxes............................................................ 184,000 --
Prepaid expenses and other....................................................... 190,000 199,000
------------- -------------
Total current assets........................................................... 8,319,000 3,996,000
Property and equipment, net........................................................ 2,279,000 2,480,000
Available-for-sale securities...................................................... -- 3,322,000
Licenses, net of accumulated amortization of $115,000 and $81,000 as of November
30, 1996 and 1995, respectively.................................................. 222,000 256,000
Goodwill, net of accumulated amortization of $823,000 and $604,000 as of November
30, 1996 and 1995, respectively.................................................. 2,564,000 2,783,000
Deferred income taxes.............................................................. -- 1,060,000
Other assets....................................................................... 277,000 229,000
------------- -------------
$ 13,661,000 $ 14,126,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable................................................................. $ 1,993,000 $ 1,624,000
Income taxes payable............................................................. 54,000 --
Accrued liabilities.............................................................. 809,000 855,000
Lines of credit.................................................................. -- 1,119,000
Current portion of long-term obligations......................................... 1,197,000 466,000
------------- -------------
Total current liabilities...................................................... 4,053,000 4,064,000
Lines of credit.................................................................... 1,039,000 700,000
Notes payable, net of current portion of $335,000 at November 30, 1995............. -- 988,000
Convertible debentures............................................................. 535,000 535,000
Deferred compensation, net of current portion of $127,000 and $53,000 at November
30, 1996 and 1995, respectively.................................................. 1,277,000 1,283,000
Capital lease obligations, net of current portion of $82,000 and $78,000 at
November 30, 1996 and 1995, respectively......................................... 37,000 117,000
Subordinated note payable to affiliate............................................. -- 1,750,000
Deferred income taxes.............................................................. 150,000 1,060,000
------------- -------------
Total liabilities.............................................................. 7,091,000 10,497,000
------------- -------------
------------- -------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock - $.001 par value; 5,000,000 shares authorized; no shares issued
and outstanding................................................................ -- --
Common stock - $.001 par value; 25,000,000 shares authorized; 10,458,742 and
9,177,189 shares issued and outstanding at November 30, 1996 and 1995,
respectively................................................................... 10,000 9,000
Additional paid-in capital....................................................... 10,192,000 9,493,000
Unrealized holding gain on available-for-sale securities......................... 88,000 2,031,000
Accumulated deficit.............................................................. (3,720,000) (7,904,000)
------------- -------------
Total stockholders' equity..................................................... 6,570,000 3,629,000
------------- -------------
$ 13,661,000 $ 14,126,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net sales.......................................................................... $ 18,306,000 $ 14,728,000
Cost of sales (excluding depreciation and amortization)............................ 14,276,000 12,540,000
------------- -------------
Gross profit....................................................................... 4,030,000 2,188,000
------------- -------------
Operating expenses:
Selling, general and administrative.............................................. 3,007,000 2,711,000
Depreciation and amortization.................................................... 946,000 937,000
Write-down of goodwill........................................................... -- 719,000
------------- -------------
Total operating expenses....................................................... 3,953,000 4,367,000
------------- -------------
------------- -------------
Income (loss) from operations...................................................... 77,000 (2,179,000)
Other income and expenses:
Realized gain on sale of securities.............................................. 4,310,000 --
Interest income.................................................................. 59,000 --
Interest expense................................................................. (564,000) (822,000)
Other, net....................................................................... (44,000) 25,000
------------- -------------
Total other income and expenses................................................ 3,761,000 (797,000)
Income (loss) before income taxes and extraordinary item........................... 3,838,000 (2,976,000)
Income taxes....................................................................... 162,000 3,000
------------- -------------
Net income (loss) before extraordinary item........................................ 3,676,000 (2,979,000)
Extraordinary gain on forgiveness of debt, net of income tax of $18,000............ 508,000 --
------------- -------------
Net income (loss).................................................................. $ 4,184,000 $ (2,979,000)
------------- -------------
------------- -------------
Primary earnings (loss) per common share:
Net income (loss) before extraordinary item...................................... $ .34 $ (.32)
Extraordinary item............................................................... .05 --
------------- -------------
Net income (loss) per common share............................................. $ .39 $ (.32)
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 10,703,833 9,173,541
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<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>
Balances, December 1, 1994..................... 9,177,189 $ 9,000 $ 9,552,000 $ 2,965,000 $ (4,925,000) $ 7,601,000
Offering costs................................. -- -- (59,000) -- -- (59,000)
Unrealized holding loss on available-for-sale
securities................................... -- -- -- (934,000) -- (934,000)
Net loss....................................... -- -- -- -- (2,979,000) (2,979,000)
------------ --------- ------------- ------------ ------------- -------------
Balances, November 30, 1995.................... 9,177,189 9,000 9,493,000 2,031,000 (7,904,000) 3,629,000
Stock issued for cash of $0.55 per share....... 1,260,807 1,000 699,000 -- -- 700,000
Stock options exercised........................ 20,746 -- -- -- -- --
Realized gain on available-for-sale
securities................................... -- -- -- (1,943,000) -- (1,943,000)
Net income..................................... -- -- -- -- 4,184,000 4,184,000
------------ --------- ------------- ------------ ------------- -------------
Balances, November 30, 1996.................... 10,458,742 $ 10,000 $ 10,192,000 $ 88,000 $ (3,720,000) $ 6,570,000
------------ --------- ------------- ------------ ------------- -------------
------------ --------- ------------- ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................................. $ 4,184,000 $ (2,979,000)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization................................................................. 946,000 937,000
Provision for inventory and accounts receivable............................................... (60,000) --
Write-down of goodwill........................................................................ -- 719,000
Interest and other expense on deferred compensation........................................... 122,000 158,000
Loss on disposal of fixed assets.............................................................. 44,000 --
Gain on sale of stock rights.................................................................. (572,000) --
Gain on sale of available-for-sale securities................................................. (3,738,000) --
Extraordinary gain on forgiveness of debt..................................................... (526,000) --
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable-trade................................................................... (1,803,000) 301,000
Accounts receivable from affiliate.......................................................... 165,000 49,000
Inventories................................................................................. 61,000 (10,000)
Prepaid expenses and other.................................................................. 9,000 55,000
Accounts payable and accrued liabilities.................................................... 274,000 (544,000)
------------- -------------
Net cash used in operating activities........................................................... (894,000) (1,314,000)
------------- -------------
------------- -------------
Cash flows from investing activities:
Accounts receivable--other.................................................................... -- 299,000
Other assets.................................................................................. (98,000) (18,000)
Amounts borrowed by affiliate................................................................. (50,000) --
Collection of notes receivable from affiliates................................................ 19,000 1,490,000
Proceeds from sale of available-for-sale securities........................................... 5,093,000 --
Purchases of property and equipment........................................................... (411,000) (422,000)
Cash used in acquisition of business.......................................................... (130,000) --
Sale of stock rights.......................................................................... 572,000 --
------------- -------------
Net cash provided by investing activities....................................................... 4,995,000 1,349,000
------------- -------------
------------- -------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs..................................... 700,000 (59,000)
Net borrowings under line of credit........................................................... (780,000) 177,000
Payments on debt.............................................................................. (1,318,000) (68,000)
Issuance of debt.............................................................................. -- 50,000
Payments on capital lease obligations......................................................... (76,000) (52,000)
Payments on deferred compensation............................................................. (54,000) (67,000)
------------- -------------
Net cash used in financing activities........................................................... (1,528,000) (19,000)
------------- -------------
Net change in cash and cash equivalents......................................................... 2,573,000 16,000
Cash and cash equivalents, beginning of period.................................................. 66,000 50,000
------------- -------------
Cash and cash equivalents, end of period........................................................ $ 2,639,000 $ 66,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the year for:
Interest............................................................ $ 615,000 $ 632,000
---------- ----------
---------- ----------
Income taxes........................................................ $ 180,000 $ 3,000
---------- ----------
---------- ----------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the year ended November 30, 1996, the Company offset certain debt
against accounts receivable amounting to $241,000.
During the year ended November 30, 1996, the Company acquired assets and
assumed liabilities as follows:
<TABLE>
<S> <C> <C>
Accounts receivable..................................... $ 62,000
Inventory............................................... 42,000
Property and equipment.................................. 75,000
Accounts payable and accrued liabilities................ (49,000)
---------
Cash used in acquisition................................ $ 130,000
---------
---------
</TABLE>
During the year ended November 30, 1995, the Company and its subsidiaries
acquired approximately $126,000, of property and equipment through the issuance
of capital lease obligations.
21
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 1--ORGANIZATION
Advanced Materials, Inc. ("AMI"), formerly known as Wilshire Advanced
Materials, Inc. was formed in August 1992 to acquire the assets of the General
Foam Division of Wilshire Technologies, Inc. ("WTI"). Such acquisition was
accounted for as a purchase and was completed in December 1992. In April 1993,
AMI effected a reverse acquisition of Advanced Materials Group, Inc. (the
"Company" or "AMG"), a public company formerly known as Far West Ventures, Inc.
AMI converts specialty materials, including foams, films and adhesive composites
into components and finished products for the computer peripheral, medical (see
discussion of OEM medical, below), automotive and aerospace consumer products
markets, principally in the United States.
In October 1993, the Company acquired all of the outstanding stock of Condor
Utility Products, Inc. ("Condor"). The acquisition was accounted for as a
purchase. In connection therewith, the Company agreed to pay additional
consideration to the sellers based upon the amount of Condor's profits, as
amended, for calendar years 1993 and 1994, as defined. No additional
consideration based on the amount of Condor profits was required for calendar
year 1993 and an insignificant amount was required for calendar year 1994.
Condor mixes and dispenses multi-component chemicals which, when combined, form
sealants which are sold to end-users, chemical manufacturers and repackagers for
use in the telecommunication, aerospace and power utility industries.
In November 1993, AMI purchased from WTI 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. The acquisition was
accounted for as a purchase. In connection therewith, the Company entered into a
note payable arrangement, as restated in fiscal 1994, totaling $1,750,000 (see
Note 11).
On September 1, 1996, the Company entered into an asset purchase agreement
with Gasket and Molded Products, Inc., a Colorado Corporation and its
shareholders ("GMP"), whereby for cash of $130,000, as adjusted, the Company
acquired substantially all of the assets and assumed certain liabilities of GMP.
The acquisition has been accounted for as a purchase. The purchase price
approximated the fair value of the net assets acquired. In connection therewith,
the Company entered into an employment contract with one of the former
stockholders (see Note 12). The results of operations of GMP have been included
in the consolidated financial statements since September 1, 1996. Pro forma
incremental revenues, net income (loss) before extraordinary item, net income
(loss) and net income (loss) per common share as if the acquisition had occurred
at the beginning of fiscal 1996 and fiscal 1995 would have been $466,000,
$27,000, $27,000 and zero for fiscal 1996 and $586,000, $(54,000), $(54,000) and
$(.01) for fiscal 1995, respectively.
RESTRUCTURING
During 1995, the Company completed 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 incurred
restructuring charges of approximately $245,000 for the year ended November 30,
1995.
22
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 2--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AMG and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Certain estimates made by management also effect the reported
operating results during the reported periods. Actual results could materially
differ from those estimates. Significant estimates made by management include
the provision for loss on accounts receivable, the net realizability of
inventory, the evaluation of the potential impairment of property and equipment,
goodwill and licenses, the net realizability of deferred tax assets and the
provisions for sales returns and warranties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The consolidated financial statements contain financial instruments whereby
the fair market value of the financial instruments could be different than those
recorded on a historical basis in the accompanying consolidated financial
statements. The Company's financial instruments at November 30, 1996 consist of
cash and cash equivalents, available-for-sale securities (see Note 3), accounts
receivable, notes receivable from affiliates, accounts payable, lines of credit,
notes payable, convertible debentures and deferred compensation. The carrying
amounts of the Company's financial instruments generally approximate their fair
values at November 30, 1996. In the case of the notes receivable from
affiliates, it was not practicable to determine fair values due to the lack of a
market for such financial instruments.
CONCENTRATIONS OF CREDIT RISK
CASH AND CASH EQUIVALENTS
At times, the Company maintains cash balances at certain financial
institutions in excess of the federally insured limits.
CUSTOMERS
The Company generally sells its products pursuant to customer orders. The
Company extends credit to customers and performs periodic credit evaluations of
such customers. The Company does not obtain collateral to secure its accounts
receivable. The Company periodically evaluates its accounts receivable for
collectibility and provides a reserve for losses resulting therefrom.
One customer accounted for 28% and 13% of consolidated revenues for the year
ended November 30, 1996 and 1995, respectively. The same customer accounted for
38% and 14% of consolidated accounts receivable as of November 30, 1996 and
1995, respectively.
23
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 2--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLIERS
One supplier accounted for 31% of consolidated purchases for the year ended
November 30, 1996. Two suppliers accounted for 39% and 20% of consolidated
purchases for the year ended November 30, 1995. No one supplier accounted for
10% or more of consolidated accounts payable at November 30, 1996 or 1995.
Management believes that the loss of any of its major suppliers would not
have a material adverse effect on the Company's operations long-term, due to the
availability of other suppliers. However, the loss of a major supplier could
have a material adverse effect on operations in the short-term (estimated by
management to be less than three months).
RISKS AND UNCERTAINTIES
LICENSES AND PROPRIETARY RIGHTS
None of the Company's current manufacturing processes is protected by
patents. The Company relies on proprietary know-how, exclusive license rights
and distribution agreements, and employs various methods to protect its
processes, including employment contracts with key personnel. There can be no
assurance that others will not independently develop similar processes.
ENVIRONMENTAL REGULATION AND OPERATING CONSIDERATIONS
The Company's operations are subject to a variety of extensive and changing
federal, state and local environmental laws, regulations and ordinances that
govern activities or operations that may have adverse effects on human health or
the environment. Such laws, regulations and ordinances may impose liability for
the cost of remediating, and for certain damages resulting from sites of past
releases of hazardous materials. The Company believes that it currently
conducts, and in the past has conducted, its activities and operations in
substantial compliance with applicable environmental laws, and believes that
costs arising from existing environmental laws will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations. There can be no assurance, however, that environmental laws will not
become more stringent in the future or that the Company will not incur costs in
the future in order to comply with such laws.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a remaining maturity of
three months or less when purchased to be cash equivalents. The Company's cash
equivalents at November 30, 1996 consist primarily of investments in a money
market fund.
AVAILABLE-FOR-SALE SECURITIES
The Company's marketable equity securities are classified as
available-for-sale and reported at fair value, with changes in the unrealized
holding gain or loss included in stockholders' equity. The securities have been
classified as either current or long-term based upon the intentions of
management of the Company as to whether such securities will be sold within the
next twelve months (see Note 3). The net
24
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 2--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unrealized holding gain has not been reduced by the related deferred income
taxes due to the availability of net operating loss carryforwards (see Note 14).
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 (see Note 4). Should demand for the
Company's products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown on the accompanying consolidated 1996 balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization, 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 (see Note 6). Depreciation expense was $643,000 and
$584,000 for the years ended November 30, 1996 and 1995, respectively.
LICENSES
Licenses represent a fee paid for exclusive worldwide rights to manufacture,
use and sell certain industrial products utilizing proprietary polymers and
processes and is being amortized over the life of the license agreement of 10
years. For each of the years ended November 30, 1996 and 1995, amortization
amounted to approximately $34,000.
ORGANIZATION COSTS AND OTHER ASSETS
Net organization costs of $59,000 and $109,000 at November 30, 1996 and
1995, respectively, are included in other assets and are being amortized using
the straight-line method over five years. During the years ended November 30,
1996 and 1995 amortization of organization costs amounted to approximately
$50,000 and $42,000, respectively.
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 fifteen
years. Amortization during the years ended November 30, 1996 and 1995 amounted
to $219,000 and $277,000, respectively.
LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived and certain
intangible assets, including goodwill, by determining whether the related asset
balance can be recovered through projected undiscounted cash flows. The amount
of impairment, if any, is measured based on projected discounted future cash
flows and charged to operations in the period in which impairment is determined
by management. During the year ended November 30, 1995, management of the
Company determined that $719,000 of
25
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 2--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill had been impaired and, accordingly, the Company charged this amount to
operations as reflected in the accompanying 1995 consolidated statement of
operations.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment. The Company
records a provision for the effect of product returns at the time units are
shipped. Historically, the Company has experienced minimal product returns.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $28,000
and $11,000 for the years ended November 30, 1996 and 1995, respectively, and
are included in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency transaction gains or losses are included in operations 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, 1996 and 1995.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding, unless
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 (see Note 14). A valuation allowance is established
for any deferred asset for which realization is less likely than not.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 presentation.
26
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 3--AVAILABLE-FOR-SALE SECURITIES
The fair value of available-for-sale securities was determined using market
quotations at November 30, 1996 and 1995. Available-for-sale securities consist
of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
---------- -------------
<S> <C> <C>
Fair value:
WTI-100,240 shares at November 30, 1995............................ $ -- $ 88,000
Innovative Technologies, Inc. 50,000 and 2,554,504 shares held at
November 30, 1996 and 1995, respectively......................... 112,000 3,322,000
---------- -------------
112,000 3,410,000
Unrealized holding gain............................................ (88,000) (2,031,000)
---------- -------------
Cost basis......................................................... $ 24,000 $ 1,379,000
---------- -------------
---------- -------------
</TABLE>
During 1996, the Company sold 100,240 shares of WTI and 2,504,504 shares of
Innovative Technologies, Inc. ("IT") for $5,093,000, which resulted in a net
realized gain of $3,738,000. On January 17, 1997, the Company sold its remaining
50,000 shares of IT which resulted in a realized gain of $145,000.
In April 1996, the Company received approximately $572,000, in accordance
with a distribution to shareholders of IT dated January 1, 1996 which granted
existing shareholders of IT rights in connection with an IT United Kingdom
offering. Such has been recorded as a realized gain on sale of securities in the
accompanying consolidated statement of operations.
NOTE 4--INVENTORIES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials..................................... $1,326,000 $1,322,000
Work-in-process................................... 440,000 502,000
Finished goods.................................... 344,000 272,000
---------- ----------
$2,110,000 $2,096,000
---------- ----------
---------- ----------
</TABLE>
NOTE 5--NOTES RECEIVABLE FROM RELATED PARTY
Notes receivable from related party at November 30, 1996 consists of an
unsecured note receivable of $50,000 from a stockholder of the Company, bearing
interest at prime plus 3% per annum (11.25% at November 30, 1996). The note
matures November 1997.
Note receivable from related party at November 30, 1995 consists of a note
receivable of $19,000 from a stockholder of the Company, which bore interest at
8.69% per annum. This amount was collected in December 1995.
Interest income from related party was insignificant for the years ended
November 30, 1996 and 1995.
27
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment........................... $ 2,891,000 $ 2,600,000
Furniture and office equipment.................... 637,000 576,000
Equipment under capital lease..................... 262,000 262,000
Transportation equipment.......................... 91,000 77,000
Leasehold improvements............................ 221,000 170,000
Construction in progress.......................... 19,000 65,000
----------- -----------
4,121,000 3,750,000
Less--accumulated depreciation and amortization... (1,842,000) (1,270,000)
----------- -----------
$ 2,279,000 $ 2,480,000
----------- -----------
----------- -----------
</TABLE>
NOTE 7--LINES OF CREDIT
The lines of credit consist of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revolving line of credit agreement with a bank,
which provides for borrowings of up to $5,000,000
based on percentages of eligible accounts
receivable, inventory and fixed assets. Borrowings
bear interest at prime plus 2% (10.25% at November
30, 1996), plus certain other fees, as defined.
The line of credit is secured by substantially all
of the assets of the Company and expires November
1999.............................................. $ 1,039,000 $ --
Revolving line of credit agreement with a
commercial lender, which provided for borrowings
of up to $2,000,000, based on eligible accounts
receivable and inventory, as defined. Borrowings
under this agreement bore interest at prime plus
4% per annum, as defined, plus a monthly
administrative fee of .25%. The line of credit was
secured by substantially all of the assets of the
Company and expired in November 1996. Such
agreement was not renewed......................... -- 1,119,000
Line of credit agreement, as amended, with a
stockholder which provided for borrowings of up to
$1,000,000 and bore interest at prime plus 5% per
annum, as defined. 1,000,000 shares of common
stock of Innovative Technologies, Inc secured the
line of credit. Such was repaid in full in March
1996 and was terminated on September 1, 1996...... -- 700,000
----------- -----------
Total............................................. 1,039,000 1,819,000
Less current portion.............................. -- (1,119,000)
----------- -----------
$ 1,039,000 $ 700,000
----------- -----------
----------- -----------
</TABLE>
28
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 7--LINES OF CREDIT (CONTINUED)
Interest expense related to the lines of credit totaled approximately
$200,000 and $297,000 for the years ended November 30, 1996 and 1995,
respectively. Included therein was interest expense of $26,000 and $41,000
related to the stockholder line of credit for the years ended November 30, 1996
and 1995, respectively.
NOTE 8--NOTES PAYABLE
Notes payable consists of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Notes payable, as amended, to a former owner of
Wilshire Foam Products, including interest
ranging from 10% to 12% per annum; all due and
payable June 1, 1997............................. $ 200,000 $ 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); paid on May 19,
1996............................................. -- 50,000
Covenants not to compete, non-interest-bearing
payments of $20,000 annually, through December
31, 1995 to a former employee and former
stockholder, respectively. Such amount was paid
in full in December 1995......................... -- 20,000
Notes payable to two former stockholders of the
Company with quarterly interest only payments at
a bank's prime rate plus 1% per annum (9.25% at
November 30, 1996); all due and payable on March
25, 1997......................................... 788,000 788,000
--------- -----------
Total............................................. 988,000 1,323,000
Less current portion.............................. (988,000) (335,000)
--------- -----------
$ -- $ 988,000
--------- -----------
--------- -----------
</TABLE>
Interest expense related to the notes payable to stockholders and affiliate
totaled approximately $125,000 and $122,000 for the years ended November 30,
1996 and 1995, respectively.
NOTE 9--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, are convertible at the election of the holder
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. At November 30, 1996, the debentures may be prepaid 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. If the Company's
stock trades at a price equal to 150% of the closing bid price of its
29
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 9--CONVERTIBLE DEBENTURES (CONTINUED)
common stock 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 was registered pursuant to a registration
statement that was effective January 17, 1995.
Interest expense related thereto totaled approximately $40,000 for each of
the years ended November 30, 1996 and 1995.
NOTE 10--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 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.
At November 30, 1996, these obligations have been discounted at the
Company's borrowing rate plus 50 basis points per annum (10.75% at November 30,
1996). In addition, these obligations 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), estimated by management at 3% per annum, 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 $1,404,000, net of a discount of $2,928,000.
Estimated future non-contingent payments are due in subsequent years as follows:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30,
- --------------------------------------------------
<S> <C>
1997............................................ $ 127,000
1998............................................ 131,000
1999............................................ 135,000
2000............................................ 139,000
2001............................................ 143,000
Thereafter...................................... 3,657,000
----------
$4,332,000
----------
----------
</TABLE>
NOTE 11--SUBORDINATED NOTE PAYABLE TO AFFILIATE
Subordinated note payable to affiliate consisted of $1,750,000 due to WTI
bearing quarterly interest only payments at a bank's prime rate plus 2% per
annum (10.25% at November 30, 1995); which was all due and payable on December
3, 1997; secured by essentially all of AMI's assets except inventory and
accounts receivable.
On July 3, 1996, the Company entered into a mutual release agreement with
WTI whereby the subordinated note payable due WTI in December 1997, totaling
$1,750,000, reduced by $50,000 in royalties due to the Company, plus due and
unpaid interest thereon, was satisfied in full with a payment totaling
30
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 11--SUBORDINATED NOTE PAYABLE TO AFFILIATE (CONTINUED)
$1,190,000. Such payment was made with cash after being reduced by approximately
$241,000 of trade accounts receivable due the Company. The Company recorded the
resulting gain of $526,000, net of applicable income taxes of $18,000, as an
extraordinary item in the accompanying 1996 consolidated statement of
operations.
NOTE 12--COMMITMENTS AND CONTINGENCIES
LEASES
The Company and its subsidiaries lease facilities and equipment under
non-cancelable operating leases, which expire at various dates through July
2001. The Company and its subsidiaries also lease certain computers, machinery
and equipment under capital lease obligations. Future annual minimum lease
payments for capital lease obligations and for operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30, CAPITAL OPERATING
------------- --------- ----------
<S> <C> <C>
1997............................................ $ 83,000 $ 643,000
1998............................................ 25,000 709,000
1999............................................ 23,000 665,000
2000............................................ -- 455,000
2001............................................ -- 1,000
--------- ----------
Total minimum lease obligations................. 131,000 $2,473,000
Less interest................................... (12,000)
---------
Present value of minimum lease obligations...... 119,000
Less current maturities......................... (82,000)
---------
Long-term obligations........................... $ 37,000
---------
</TABLE>
Rent expense incurred under operating lease arrangements totaled
approximately $545,000 and $497,000 for the years ended November 30, 1996 and
1995, respectively.
Interest expense incurred under capital lease obligations totaled $28,000
and $16,000 for the years ended November 30, 1996 and 1995, respectively.
PRODUCT DEVELOPMENT AND LICENSE AGREEMENT
On August 23, 1993, the Company entered into a product development and
license agreement with Innovative Technologies, Inc. ("IT"), whereby IT will
develop industrial products for the Company and grant an exclusive worldwide
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 -- 110,000 (British pounds) (the equivalent of $197,000 at November
30, 1996) 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
31
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
based upon a level of sales (as defined). No sales of "IT products" were
effected during fiscal 1996 or 1995, and thus, no royalties were due.
EMPLOYMENT CONTRACT
In connection with the acquisition of GMP (see Note 1), the Company entered
into a five year employment contract with one of the prior stockholders of GMP,
which expires August 2001. Under the terms of the agreement, the Company is to
pay $66,000 per annum plus a $630 per month auto allowance. The agreement also
specifies incentive bonuses equal to 10% of net sales and 7.5% of operating
profits, as defined, for each of the first two years and for the last three
years of the employment term, respectively.
CONSULTING AGREEMENT
The Company is party to an annual consulting agreement with a director of
the Company, pursuant to which the Company is to pay the director $5,000 per
year. In connection with the agreement, the Company granted options to purchase
20,000 shares of the Company's common stock (see Note 13).
EXCLUSIVE RIGHTS AGREEMENT
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 of
$50,000 in the amount of $.015 for each unit of product sold. In July 1996, the
agreement was terminated by mutual consent of WTI and the Company. In connection
with the repayment of a note payable to WTI, the $50,000 due under this
agreement was paid (see Note 11).
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 December 1996,
the plaintiffs filed bankruptcy under Chapter 13 of the United States Bankruptcy
Code. Accordingly, the Federal and state court actions have been stayed. The
sellers of Condor have agreed to indemnify the Company with respect to any
potential liability from the alleged breach of contract. 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.
32
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
WTI (see Note 1) has been named as a defendant along with Mr. Crow 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. The complaint
alleged that the Company had violated Section 10(b) of the Securities Exchange
Act of 1934, as amended, and Rule 10(b)-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 the plaintiffs have asserted unknown
claims that have been or could. 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.
In October 1996, the Company, and WTI, was notified that they have been
named in a bodily injury lawsuit pending in Dallas, Texas, involving silicon
breast implants. Such suit alleges that AMI supplied certain foam "wipers" which
were incorporated into certain implants by manufacturers also named in the suit,
which have allegedly caused adverse effects to the plaintiffs. The Company
believes it has no exposure in this case as the Company: (1) was not
incorporated at the time of such implants; (2) neither the Company nor WTI has
had any involvement with silicone or other breast implants; (3) neither the
Company nor WTI has ever marketed such "wipers"; and, (4) there exists two
indemnification agreements that provide protection to the Company. The Company
believes the aforementioned provide several layers of protection in the event
this case progresses. Accordingly, no provision for any liability has been made
in the accompanying consolidated financial statements.
NOTE 13--STOCKHOLDERS' EQUITY
COMMON STOCK
During the fiscal year ended November 30, 1995, the Company incurred $59,000
for 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, in connection with a private placement, the Company
issued 1,260,807 shares of its common stock valued at $0.55 per share for
$700,000 in cash. In addition, the Company granted the stockholder a warrant to
acquire an additional 60,000 shares of its common stock at an exercise price of
$0.75 per share, expiring in December 2000.
STOCK OPTIONS
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
33
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 13--STOCKHOLDERS' EQUITY (CONTINUED)
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.
During the years ended November 30, 1996 and 1995, the Company issued
options, pursuant to the 1993 Plan, to purchase 576,500 and 80,000 shares,
respectively, of the Company's common stock at exercise prices ranging from
$0.40 to $4.00 per share. No compensation was recorded in connection with the
issuance of these options as they were issued at or near the fair market value
of the underlying stock at the date of grant.
The following is a summary of stock option transactions under the 1993 Stock
Option Plan during 1996 and 1995:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
---------- -------------
<S> <C> <C>
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
Granted............................................................ 577,000 $0.69-$1.27
Exercised.......................................................... (21,000) $ 0.30
Cancelled.......................................................... (64,000) $0.30-$1.50
----------
Options outstanding at November 30, 1996........................... 927,000 $0.30-$4.00
----------
----------
Vested options at November 30, 1996................................ 762,000 $0.30-$4.00
----------
</TABLE>
OTHER STOCK OPTIONS
Through November 30, 1994, the Company has issued options, outside of the
1993 Plan, to purchase 510,000 shares of the Company's common stock at exercise
prices ranging from $1.50 to $5.00 per share. At November 30, 1996, options to
purchase 190,000 shares of common stock were exercisable at $1.50 per share. No
compensation was recorded in connection with the issuance of these options as
they were issued at their fair market value of the underlying stock at the date
of grant.
34
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 13--STOCKHOLDERS' EQUITY (CONTINUED)
On February 22, 1996, the Company issued options, outside of the 1993 Plan,
to purchase 30,000 shares of the Company's common stock at an exercise price of
$0.69 per share (the fair market value of the underlying common stock on the
date of grant). Such options are fully exercisable at November 30, 1996 and
expire February 21, 2001.
WARRANTS
In August 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
vested based upon performance of certain services. As of November 30, 1996, such
warrants had expired.
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 became 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 became exercisable as of November 30, 1995.
On December 22, 1995, in connection with an amendment to a line of credit
agreement with a stockholder (see Note 7), the lender/stockholder was granted a
warrant to purchase 30,000 shares of the Company's common stock exercisable for
5 years at an exercise price of $.75 per share.
STATEMENT NO. 123
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25 ("APB 25"). For
transactions that do not qualify for accounting under APB 25, such will be
accounted for under Statement No. 123. Statement No. 123 is effective for
transactions and years beginning after December 15, 1995.
35
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 14--INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at November 30 are presented
below:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts.................................................... $ 43,000 $ 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................................................ 86,000 50,000
Accrued expenses, principally due to accrual for financial
reporting purposes.......................................... 64,000 91,000
Alternative minimum tax....................................... 70,000 --
State taxes................................................... 49,000 --
Goodwill and other intangible assets, principally due to
write-down of goodwill for financial reporting purposes..... 605,000 425,000
Net operating loss carryforwards.............................. 890,000 2,174,000
------------- -------------
Total gross deferred tax assets............................. 1,807,000 3,191,000
Less valuation allowance........................................ (1,623,000) (2,131,000)
------------- -------------
Total net deferred tax assets............................... $ 184,000 $ 1,060,000
------------- -------------
------------- -------------
Deferred tax liabilities:
Plant and equipment, principallydue to differences in
depreciation................................................ $ (150,000) $ (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........................ $ (150,000) $ (1,060,000)
------------- -------------
------------- -------------
</TABLE>
Income tax expense for the years ended November 30, 1996 and 1995 consists
of the following current provisions:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
U.S. federal.................................................... $ 64,000 $ --
State and local................................................. 98,000 3,000
------------- -------------
$ 162,000 $ 3,000
------------- -------------
------------- -------------
</TABLE>
No provision for income taxes for the year ended November 30, 1995 was
required, except for minimum state taxes, since the Company incurred a loss
during such year and the deferred tax asset relating to the net operating loss
resulting therefrom was fully reserved.
36
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
NOTE 14--INCOME TAXES (CONTINUED)
Income tax expense for the years ended November 30, 1996 and 1995 differs
from the amounts computed by applying the U.S. federal income tax rate of 34
percent to income (loss) before income taxes and extraordinary item as a result
of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Computed "expected" tax expense (benefit)....................... $ 1,305,000 $ (1,012,000)
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
(benefit) expense........................................... (1,246,000) 1,012,000
State and local income taxes, net of federal income tax
benefit....................................................... 95,000 3,000
Other........................................................... 8,000 --
------------- -------------
$ 162,000 $ 3,000
------------- -------------
------------- -------------
</TABLE>
As of November 30, 1996, the Company has net operating loss carryforwards
for Federal and state purposes of approximately $2,540,000 and $288,000,
respectively, which expire in varying amounts annually through 2010. As a result
of changes in the Company's ownership, approximately $1,160,000 and $288,000 of
the Company's Federal and state net operating loss carryforwards, respectively,
are subject to an annual limitation.
NOTE 15--RELATED PARTY TRANSACTIONS
As of November 30, 1995, the Company was owed $165,000 by WTI and owed
$7,000 to WTI, respectively. See Note 11 regarding the settlement of such
amounts. WTI is considered an affiliate due to common ownership by an
institutional investor. Insignificant amounts were owed from and due to WTI at
November 30, 1996.
37
<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.
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and other officers expected to make
important contributions to the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS(S) HELD
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Steve F. Scott 52 President, Chief Executive Officer and
Chairman of the Board
Ronald W. Cantwell 53 Director
Michael Ledeen 55 Director
Allan H. Meltzer 69 Director
N. Price Paschall 48 Director
J. Douglas Graven 41 Vice President, Chief Financial Officer and
Secretary
David Lasnier 47 Senior Vice President and General Manager
of Advanced Materials, Inc.
Gary Valiska 47 President, Conder Utility Products, Inc.
</TABLE>
STEVE F. SCOTT, has been President and Director of the Company since June
1991, and was appointed Chief Executive Officer in July 1994. He has been with
the Company and its predecessors for a total of nearly 13 years, including
previous positions as General Manager and Vice President of Sales. Mr. Scott
returned to the Company in June 1991 at the request of the Board of Directors to
complete the management and financial turnaround of the business. Mr. Scott was
President of Pleuss-Staufer, a Swiss based mining company, from 1989 to 1991.
Mr. Scott has a B.S. in Chemical Engineering from the University of Cincinnati
and an MBA from California State University of Long Beach.
RONALD W. CANTWELL, has been a Director of the Company since January 24,
1997, and has served as President of Trilon Dominion Partners, LLC since its
inception in June 1995. Prior to joining Trilon Dominion, Mr. Cantwell served as
the President of The Catalyst Group, Inc. where he successfully executed a
variety of merchant banking activities and managed the operations of a diverse
mix of utility assets. Prior to joining Catalyst, Mr. Cantwell spent 19 years in
the practice of public accounting, most recently with Ernst & Young where he was
a tax partner and headed the Dallas-based Mergers and Acquisitions practice.
Since December 1996, Mr. Cantwell has been a Director and Chairman of the Board
of Wilshire Technologies, Inc.
DR. MICHAEL LEDEEN, was elected to the Company's Board of Directors in June
1993. Dr. Ledeen, a Resident Scholar at the American Enterprise Institute in
Washington, D.C., since 1989 and a Senior Advisor at Bear Stearns, an investment
banking firm, since May, 1993, is an expert in foreign policy, intelligence, and
international business. The author of a dozen books and hundreds of articles on
twentieth-century history, Dr. Ledeen served as Special Advisor to Secretary of
State Alexander Haig, and as a consultant to the National Security Council
during the Reagan presidency. The founder of the Washington Quarterly, Dr.
Ledeen writes regularly for the American Spectator and Commentary. He holds a
Ph.D. in European History and Philosophy from the University of Wisconsin, and a
B.A. from Pomona College.
38
<PAGE>
DR. ALLAN H. MELTZER, was elected to the Company's Board of Directors in
July 1994. Dr. Meltzer has been a Professor at the Carnegie Institute of
Technology, Graduate School of Industrial Administration, since 1964. He has
been a director of Cooper Tire & Rubber since 1984, has held a number of
visiting and honorary teaching posts, and has been a member of several policy
advisory boards and committees. He received an A.B. in economics from Duke
University in 1948, and an M.A. in economics in 1955 and a Ph.D. in economics in
1958 from the University of California, Los Angeles.
N. PRICE PASCHALL, was elected to the Company's Board of Directors in
January 1994. Mr. Pashcall has been President of Paschall and Company, an
investment banking firm that serves clients in the medical and industrial
markets, since February 1992. Mr. Paschall was a partner of Shea, Paschall,
Powell-Hambros Bank, a firm specializing in mergers and acquisitions, from
August 1987 to January 1992. Mr. Paschall holds a degree in Business
Administration from California Polytechnic University in Pomona.
J. DOUGLAS GRAVEN, has been Vice President/CFO since joining the Company in
February 1996. In May 1996 he was named Corporate Secretary. Prior to joining
the Company he was Corporate Controller for the Milhous Group from August 1994
to February 1996 and from March 1991 to April 1994 he was Manager, Corporate
Accounting for Nissan Motor Corporation in U.S.A.
DAVID LASNIER, is the Senior Vice President and General Manager for Advanced
Materials, Inc. He has held several other titles, primarily in sales and
manufacturing, since joining the Company six years ago. Mr. Lasnier is a named
Executive Officer of the Company.
GARY VALISKA, was the founder of Condor Utility Products, Inc. and has
served as its President since the Company acquired Condor in October 1993. Mr.
Valiska is a named Executive Officer of the Company.
All directors are entitled to receive $500 and reimbursement for
out-of-pocket expenses in connection with their attendance at meetings of the
Board of Directors. In addition, each director is entitled to receive
non-qualified stock options, pursuant to the Company's 1993 Stock Option Plan,
to purchase 20,000 shares of the Company's Common Stock at fair market value
when elected to the Board, and 10,000 shares of Common Stock at fair market
value on each anniversary of the date of his election to the Board.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and any persons who own more than 10% of a
registered class of the Company's equity securities to file with the SEC reports
of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such reports
furnished to the Company or written representations that no other reports were
required, the Company believes that, during fiscal 1996, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except that each of the directors was late in filing a Form
5 report at the end of fiscal 1996. Such reports have now been prepared with
respect to all the directors. The Company has enhanced its compliance program to
ensure compliance by directors and officers with future Section 16(a) reporting
obligations.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal years
ended November 30, 1994, 1995 and 1996, respectively, to the Company's Chief
Executive Officer during such period. No other executive officer of the Company
holding office in fiscal 1996 received total annual salary and bonus exceeding
$100,000.
39
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- AWARDS SECURITIES
YEAR ENDING OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION NOVEMBER 30, SALARY BONUS COMPENSATION OPTIONS/SARS (#)
- ---------------------------------------- --------------- ---------- ---------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Steve F. Scott, 1994 $ 123,008 $ 9,000(2) 10,000(3)
President and Chief Executive 1995 $ 137,495 $ 9,000(2) 10,000(3)
Officer(1) 1996 $ 143,523 $ 9,231(2) 185,000(3)
</TABLE>
- ------------------------
(1) Mr. Scott was appointed Chief Executive Officer on July 6, 1994. He was
appointed Chairman of the Board on May 8, 1996.
(2) Includes an allowance for automobile expenses. Does not include an allowance
for medical insurance, which had aggregated $6,000 over the three-year
period immediately prior to the end of fiscal 1996.
(3) Options to purchase 10,000 shares at a price of $2.63 per share were granted
to Mr. Scott in fiscal 1994, options to purchase 10,000 shares at a price of
$0.44 were granted to Mr. Scott in fiscal 1995 and options to purchase
10,000 shares at a price of $1.27 per share were granted to Mr. Scott in
fiscal 1996, in each case under the Company's 1993 Stock Option Plan for
services as a director. In addition, options to purchase 75,000 shares at a
price of $0.78 and options to purchase 100,000 shares at a price of $1.00
were granted to Mr. Scott in fiscal 1996.
OPTION GRANTS IN FISCAL YEAR ENDED NOVEMBER 30, 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF TOTAL EXERCISE OR
NUMBER OF OPTIONS GRANTED TO BASE PRICE
NAME OPTIONS GRANTED EMPLOYEES IN 1996 ($/SH.) EXPIRATION DATE
- ------------------------------------------ --------------- ----------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Steve F. Scott............................ 75,000 $ 0.78 11/30/05
10,000 $ 1.27 5/31/01
100,000 $ 1.00 9/8/06
------- ---
185,000 34.5
J. Douglas Graven......................... 60,000 $ 0.69 2/19/06
50,000 $ 1.00 9/8/06
------- ---
110,000 20.5
David Lasnier............................. 40,000 $ 0.69 2/18/06
50,000 $ 1.00 9/8/06
------- ---
90,000 16.8
</TABLE>
No executive officer named in the Summary Compensation Table above exercised
stock options during the fiscal year ended November 30, 1996. The following
table sets forth for each person the fiscal year-end value of unexercised
options:
40
<PAGE>
AGGREGATED OPTION EXERCISES IN
FISCAL YEAR ENDED NOVEMBER 30, 1996 AND OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE
NUMBER OF UNEXERCISED
SHARES OPTIONS AT 11/30/96 MONEY OPTIONS AT 11/30/96(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ------------ -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Steve F. Scott.......................... 0 -- 385,000 0 $778,850 0
J. Douglas Graven....................... 0 -- 0 110,000 0 211,100
David Lasnier........................... 0 -- 110,000 0 218,900 0
</TABLE>
- ------------------------
(1) The value of the Company's Common Stock for purposes of the calculation was
based upon the average of the bid and asked prices for the Common Stock on
November 30, 1996 as reported by NASDAQ, minus the exercise price.
STOCK OPTION PLAN
In 1993, the company adopted, and the Company's stockholders approved, the
Advanced Materials Group, Inc. 1993 Stock Option Plan ("1993 Plan") initially
providing for the grant by the Company of options to purchase 1,250,000 shares
of the Company's Common Stock. At February 27, 1997, options to purchase 927,000
shares were outstanding at a weighted average exercise price of $0.93 per share,
and 221,000 options had been exercised.
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 such 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.
401(K) PLAN
In October, 1993, the Company adopted a 401(k) retirement plan, under which
eligible employees may contribute, on a pre-tax basis, up to 15% of the
employee's total annual income from the Company, including bonuses, but not to
exceed the statutory prescribed annual limit. All of these contributions are
fully vested. The Company does not currently make additional contributions under
the plan.
LIMITATION ON DIRECTOR'S LIABILITIES UNDER NEVADA LAW
The Company's Bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed actions, suits
or proceedings against such persons by reason of serving or having served as
41
<PAGE>
officers, directors or in other capacities, except in relation to matters with
respect to which such persons shall be determined to have acted not in good
faith, unlawfully or not in the best interest of the Company; provided, however,
that in the case of a suit or proceeding by or in the right of the Company, such
persons shall be indemnified only to the extent of expenses actually and
reasonably incurred by them in connection with the defense or settlement thereof
and no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such corporate suit or
proceeding was pending shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper. The Company has also obtained directors' and
officers' liability insurance in the amount of $2,000,000.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors and officers of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Common
Stock beneficially owned as of February 27, 1997, (i) by each person who is
known by the Company to own beneficially or exercise voting or dispositive
control over 5% or more of the Common Stock, (ii) by each of the Company's
directors and (iii) by all officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED OUTSTANDING SHARES
- ------------------------------------------ ----------------- -----------------------
<S> <C> <C>
Trilon Dominion Partners, L.L.C. 4,565,807(l) 40%
245 Park Ave.
28th Floor
New York, NY 10167
Directors:
Steve F. Scott 385,000(2) 3.6%
20211 South Susana Road
Rancho Dominguez, California 90221
Ronald W. Cantwell 0 *
245 Park Ave.
28th Floor
New York, NY 10167
Michael A. Ledeen 80,000(3) *
7312 Western Avenue
Chevy Chase, Maryland 20815
Allan H. Meltzer 41,000(4) *
GSIA Carnegie-Mellon University
Schenley Park
Pittsburgh, Pennsylvania 15213
N. Price Paschall 200,000(5) 1.9%
One Penn Plaza, Suite 2134
New York, New York 10119
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED OUTSTANDING SHARES
- ------------------------------------------ ----------------- -----------------------
Officers:
<S> <C> <C>
J. Douglas Graven 55,217(6) *
20211 South Susana Road
Rancho Dominguez, California 90221
David Lasnier 160,000(7) 1.5%
20211 South Susana Road
Rancho Dominguez, California 90221
Gary Valiska 41,981(8) *
20211 South Susana Road
Rancho Dominguez, California 90221
All officers and directors as a group (8 963,198 8.5%
persons)
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 965,000 shares issuable upon the exercise of warrants held by
Trilon Dominion Partners, L.L.C. (Trilon) which are presently exercisable or
exercisable within 60 days of February 27, 1997.
(2) Comprised of 385,000 shares which Mr. Scott has the right to acquire upon
exercise of stock options presently exercisable or exercisable within 60
days of February 27, 1997.
(3) Includes 10,000 shares which Mr. Ledeen owns jointly with his wife and
30,000 shares which Mr. Ledeen has the right to acquire upon exercise of
stock options presently exercisable or exercisable within 60 days of
February 27, 1997.
(4) Includes 40,000 shares, which Mr. Meltzer has the right to acquire upon
exercise of options presently exercisable or exercisable within 60 days of
February 27, 1997.
(5) Comprised of 200,000 shares which Mr. Paschall has the right to acquire upon
exercise of options presently exercisable or exercisable within 60 days of
February 27, 1997.
(6) Comprised of 55,217 shares which Mr. Graven has the right to acquire upon
exercise of options presently exercisable or exercisable within 60 days of
February 27, 1997.
(7) Comprised of 160,000 shares which Mr. Lasnier has the right to acquire upon
exercise of options presently exercisable or exercisable within 60 days of
February 27, 1997.
(8) Comprised of 41,981 shares Mr. Valiska owns jointly with his wife.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
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 Product Development and License Agreement dated August 23, 1993 between Ad-Advanced Materials Group, Inc.
and Innovative Technologies, Ltd. (2)
10.4 Stock Purchase Agreement dated October 6, 1993 between Advanced Materials Group, Inc. and the stockholders
of Condor Utility Products, Inc. (3)
10.5 Consulting Agreement dated June 7, 1993 between Advanced Materials Group, Inc. and Michael Ledeen. (4)
10.6 Consulting Agreement dated June 1, 1993 between Advanced Materials Group, Inc. and Paschall and Company.
(5)
10.7 The 1993 Stock Option Plan of Advanced Materials Group, Inc. (6)
10.8 Form of Convertible Debenture. (7)
10.9 Promissory Note of the Company dated March 25, 1994 payable to Michael W. Crow in the amount of $787,618.
(8)
10.10 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. (9)
10.11 Credit Agreement dated as of September 21, 1994, between Advanced Materials Group, Inc. and Dominion
Capital, Inc. (10)
10.12 Lease dated August 2, 1994, between Wilshire Advanced Materials, Inc. and Susana Property Co. (11)
10.13 Amended and Restated Promissory Note dated August 16, 1995 between Advanced Material Group, Inc. and Hiram
H. Johnson and Beth A. Johnson. (12)
10.14 Industrial Lease Agreement executed August 31, 1995 between New York Life Insurance and Annuity
Corporation, as Landlord and Advanced Materials, Inc., as Tenant. (13)
10.15 Industrial Sublease Agreement executed August 31, 1995 between Advanced Materials, Inc., as Landlord and
Wilshire Technologies, Inc., as Tenant. (14)
10.16 Form of Equity Warrant between Advanced Materials Group, Inc. and Trilon Dominion Partners, L.L.C. (15)
10.17 Form of Debt Warrant between Advanced Materials Group, Inc. and Trilon Dominion Partners, LLC. (16)
10.18 Loan Agreement dated as of November 26, 1996, between Advanced Materials, Inc. and Wells Fargo National
Association.
10.19 First Amendment to Loan Agreement dated as of January 16, 1997, between Advanced Materials, Inc. and Wells
Fargo National Association.
10.20 Asset Purchase and Sale Agreement dated as of September 1, 1996, between Advanced Materials, Inc. and
Gasket and Molded Products, Inc. and Shareholders.
10.21 Amendment One to Lease dated as of September 27, 1996, between Advanced Materials Group, Inc. and Riggs
National Bank of Washington, D.C. as Trustee of the Multi-Employer Property Trust.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
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 Exhibit 10.9 to the Company's Registration Statement on Form SB-2
dated December 6, 1993 (Registration No. 33-72500).
(3) Filed as Exhibit 10.10 to the Company's Registration Statement on Form SB-2
dated December 6, 1993 (Registration No. 33-72500).
(4) Filed as Exhibit 10.13 to the Company's Registration Statement on Form SB-2
dated December 6, 1993 (Registration No. 33-72500).
(5) Filed as Exhibit 10.17 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).
(6) Filed as Exhibit 10.18 to Amendment No. 1 dated March 1, 1994 to the
Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500).
(7) Filed as Exhibit 10.23 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration Statement on Form SB-2 dated December 6, 1993 (Registration No.
33-72500).
(8) Filed as Exhibit 10.24 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration Statement on Form SB-2 dated December 6, 1993 (Registration No.
33-72500).
(9) Filed as Exhibit 10.25 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).
(10) Filed as Exhibit 10.29 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).
(11) Filed as Exhibit 10.30 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).
(12) Filed as Exhibit 10.2 to Form 10-QSB dated August 31, 1995.
(13) Filed as Exhibit 10.3 to Form 10-QSB dated August 31, 1995.
(14) Filed as Exhibit 10.4 to Form 10-QSB dated August 31, 1995.
(15) Filed as Exhibit 2.2 to Form 8-K filed January 5, 1996.
(16) Filed as Exhibit 2.3 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, 1996.
45
<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.
By: /s/ STEVE F. SCOTT
-----------------------------------------
Steve F. Scott
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
Dated: February 27, 1996 CHAIRMAN OF THE BOARD
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.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ STEVE F. SCOTT Officer, Chairman of the
- ------------------------------ Board and Director February 27, 1997
Steve F. Scott (PRINCIPAL EXECUTIVE
OFFICER)
Vice President/Chief
/s/ J. DOUGLAS GRAVEN Financial Officer and
- ------------------------------ Secretary (PRINCIPAL February 27, 1997
J. Douglas Graven FINANCIAL AND ACCOUNTING
OFFICER)
/s/ RONALD W. CANTWELL
- ------------------------------ Director February 27, 1997
Ronald W. Cantwell
/s/ MICHAEL A. LEDEEN
- ------------------------------ Director February 27, 1997
Michael A. Ledeen
/s/ ALLAN H. MELTZER
- ------------------------------ Director February 28, 1997
Allan H. Meltzer
/s/ N. PRICE PASCHALL
- ------------------------------ Director February 28, 1997
N. Price Paschall
46
<PAGE>
LOAN AGREEMENT
(LINE OF CREDIT)
This Loan Agreement (this "Agreement") is entered into as of November 26,
1996 by and between Wells Fargo Bank, National Association ("Lender") and
Advanced Materials, Inc., a California corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. Any accounting term used herein unless otherwise
defined or set forth in this Agreement shall have the meanings customarily given
to such term in accordance with GAAP. For purposes of this Agreement, the
following terms shall have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, whether or not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letters of Credit which would
otherwise be available to Borrower under the lending formula(s) provided for
herein, if in Lender's good faith judgment, such reduction is required pursuant
to the following standards: (a) to reflect events, conditions, contingencies or
risks which, as determined by Lender in good faith, do or may affect either (i)
the
<PAGE>
Collateral or its value, (ii) the assets, business or prospects of Borrower or
any Obligor, or (iii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and priority thereof), or
(b) to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower on any Obligor to
Lender is or may have been incomplete, inaccurate or misleading in any material
respect, or (c) in respect of any state of facts which Lender determines, in its
good faith judgment, constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default.
1.3 "Cash Collateral Account" shall have the meaning set forth in SECTION
6.1 hereof.
1.4 "Closing Date" shall mean the date of execution of this Agreement.
1.5 "Collateral" shall mean all the property in which Borrower or an
Obligor grants or is required to grant to Lender a security interest or lien, as
described in SECTION 5 hereof.
1.6 "Eligible Accounts" shall mean Accounts created by Borrower which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of Borrower's business which transactions are completed in
accordance with the terms and provisions contained in any documents related
thereto;
(b) such Accounts are not unpaid more than ninety (90) days after
the date of the original invoice thereto, or, if payment terms are 60 days, such
Accounts are not more than 60 days past due, or, if such Accounts are owed by
Hewlett Packard, such Accounts are not more than 90 days past due;
(c) such Accounts comply with the terms and conditions applicable
thereto contained in the Security Agreement executed in connection therewith;
(d) such Accounts do not arise from sales on consignment, guaranteed
sale, sale and return, sale on approval, or other terms under which payment by
the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect to
such Accounts is located in the United States of America, or, at Lender's
option, if: (i) the account debtor has
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<PAGE>
delivered to Borrower an irrevocable letter of credit issued or confirmed by a
bank satisfactory to Lender, sufficient to cover such Account, in form and
substance satisfactory to Lender and, if required by Lender, the original of
such letter of credit has been delivered to Lender or Lender's agent and the
issuer thereof notified of the assignment of the proceeds of such letter of
credit to Lender, or (ii) such Account is subject to credit insurance payable to
Lender issued by an insurer and on terms and in an amount acceptable to Lender,
or (iii) the account debtor resides in a province of Canada which recognizes
Lender's perfection and enforcement rights as to Accounts by reason of the
filing of a UCC-1 in the state of Borrower's chief executive office, or (iv)
such Account is otherwise acceptable in all respects to Lender (subject to such
lending formula with respect thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts;
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectibility of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer, employee or agent
of the account debtor with respect to such Accounts is an officer, employee or
agent of or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State or any political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State or any political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended, or any
similar State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
-3-
<PAGE>
(l) there are no proceedings or actions which are threatened or
pending against any account debtor with respect to such Accounts from such
account debtor which might result in any material adverse change in any such
account debtor's financial condition;
(m) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty-five percent (25%) (or, with respect to Hewlett
Packard, thirty percent (30%)) of all otherwise Eligible Accounts (but the
portion of the Accounts not in excess of such percentage may be deemed Eligible
Accounts);
(n) such Accounts are not owed by any account debtor who has
Accounts ineligible under clause (b) hereof and which constitute more than
thirty-three (33%) of the total Accounts from such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may still be deemed Eligible
Accounts); and
(p) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender in its good faith judgment.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.7 "Eligible Inventory" shall mean Inventory owned by Borrower which is
and remains acceptable to Lender for lending purposes and is located at one of
the addresses set forth in Schedule I to this Agreement; provided however, that
if any such location is owned by a party other than Borrower, Lender shall have
obtained from the owner thereof an agreement relative to Lender's rights with
respect to such Inventory, in form and content satisfactory to Lender; and
provided further that in no event however shall Eligible Inventory include: (a)
work-in-process; (b) inventory subject to a security interest or lien in favor
of any person other than Lender, except those permitted in this Agreement; and
(c) inventory which is not subject to the first priority, valid and perfected
security interest of Lender. General criteria for Eligible Inventory may be
established and revised from time to time by Lender in good faith. Any
Inventory which is not Eligible Inventory shall nevertheless be part of the
Collateral.
-4-
<PAGE>
1.8 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.9 "Equipment Amount" shall mean 80% of the orderly liquidation value of
the eligible equipment of Borrower as of the appraisal date (which shall be
prior to the Closing Date), not to exceed 100% of the auction value of such
equipment of Borrower as of the appraisal date (the "Appraisal Date Equipment
Amount") multiplied by the product of (i) 60 minus the number of months which
have passed since the Closing Date (the "Number of Months") divided by 60.
Expressed as a formula, the Equipment Amount shall be calculated as
follows:
Appraisal Date X 60 minus
Equipment Amount Number of Months
----------------
60
Eligibility criteria, orderly liquidation value and auction value will be
established by Lender in its good faith judgment.
1.10 "Event of Default" shall mean the occurrence or existence of any event
or condition described in Section 10.1 hereof.
1.11 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of SECTION 8.10 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof.
1.12 "General Intangibles" shall mean general intangibles (including, but
not limited to, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, chooses in action and other
claims and existing and future leasehold interests in equipment).
-5-
<PAGE>
1.13 "Information Certificate" shall mean the Information Certificate of
Borrower constituting EXHIBIT A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Loan Documents and the financing arrangements provided for herein.
1.14 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.15 "Line of Credit" shall mean a revolving line of credit under which
Lender agrees to make Revolving Loans and issue Letters of Credit, subject to
the terms and conditions of this Agreement.
1.16 "Line of Credit Note" shall have the meaning set forth in Section 2.1
hereof.
1.17 "Loan Documents" shall mean, collectively, this Agreement and all
notes, guarantees, security agreements, subordination agreements, and other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by Borrower or any Obligor in connection with this Agreement,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.18 "Maximum Amount" shall mean the amount of $5,000,000.00.
1.19 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less returns, discounts, claims, credits and allowances of any
nature at any time issued, owing, granted, outstanding, available or claimed
with respect thereto.
1.20 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Line of Credit or who is the owner
of any property which is security for the Line of Credit, or any of them, other
than Borrower.
1.21 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including
-6-
<PAGE>
any rights of Borrower with respect to the foregoing maintained with or by any
other person).
1.22 "Revolving Loans" shall mean advances made by Lender to Borrower on a
revolving basis under the Line of Credit, as set forth in Section 2.1 hereof.
1.23 "Rights to Payment" shall mean all Accounts, General Intangibles,
contract rights, chattel paper, documents, instruments, letters of credit,
bankers acceptances and guaranties, and all present and future liens,
security interests, rights, remedies, title and interest in, to and in
respect of Accounts and other Collateral, and shall include without
limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Accounts or other Collateral, including without limitation,
returned, repossessed and reclaimed goods, and (d) deposits by and property
of account debtors or other persons securing the obligations of account
debtors, monies, securities, credit balances, deposits, deposit accounts and
other property of Borrower now or hereafter held or received by or in transit
to Lender or any of its affiliates or at any other depository or other
institution from or for the account of Borrower, whether for safekeeping,
pledge, custody, transmission, collection or otherwise.
1.24 "Tangible Net Worth" shall mean, at any time, the aggregate of total
stockholders' equity plus subordinated debt less any intangible assets.
1.25 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP, or (b) market value.
1.26 "Working Capital" shall mean, at any time, total current assets less
total current liabilities (inclusive of the outstanding principal balance of the
Line of Credit).
SECTION 2. CREDIT FACILITIES
2.1 LINE OF CREDIT
(a) LENDING FORMULA. Subject to and upon the terms and conditions
contained herein, Lender agrees to make Revolving Loans (pursuant to Section 2.1
hereof) under a line of credit
-7-
<PAGE>
(the "Line of Credit") from time to time in amounts requested by Borrower up to
an aggregate outstanding principal amount equal to the lesser of: (i) the
Maximum Amount; or (ii) the sum of:
(A) eighty percent (80%) of the Net Amount of Eligible
Accounts; PLUS
(B) the lesser of (1) sixty percent (60%) of the Value of
Eligible Inventory consisting of raw materials, or, (2) an amount equal to
$2,500,000.00; PLUS
(C) the Equipment Amount; LESS
(D) any Availability Reserves.
(b) REDUCTION OF LENDING FORMULA. Lender may, in its discretion,
from time to time, upon not less than seven (7) days prior notice to Borrower,
(i) reduce the lending formula with respect to Eligible Accounts to the extent
that Lender determines in its good faith judgment that: (A) the dilution with
respect to the Accounts for any period (based on the ratio of (1) the aggregate
amount of reductions in Accounts other than as a result of payments in cash to
(2) the aggregate amount of total sales) has increased in any material respect
or may be reasonably anticipated to increase in any material respect above
historical levels, or (B) the general creditworthiness of account debtors has
declined, or (ii) reduce the lending formula with respect to Eligible Inventory
to the extent that Lender determines that: (A) the number of days of the
turnover of the Inventory for any period has changed in any material respect, or
(B) the liquidation value of the Eligible Inventory, or any category thereof,
has decreased, or (C) the nature and quality of the Eligible Inventory has
deteriorated. In determining whether to reduce the lending formula(s), Lender
may consider events, conditions, contingencies or risks which are also
considered in determining Eligible Accounts, Eligible Inventory or in
establishing Availability Reserves.
(c) OVERADVANCE. In the event that the outstanding amount of any
component of the Revolving Loans, or the aggregate amount of the outstanding
Revolving Loans, exceed the amounts available under the lending formulas or the
Maximum Amount, as applicable, such event shall not limit, waive or otherwise
affect any rights of Lender in that circumstance or on any future occasions and
Borrower shall, upon demand by Lender, which may be made at any time or from
time to time, immediately repay to Lender the entire amount of any such
excess(es) for which payment is demanded.
(d) LINE OF CREDIT NOTE. Borrower's obligation to repay Revolving
Loans made under the Line of Credit shall be
-8-
<PAGE>
evidenced by a promissory note executed by Borrower, substantially in the form
of Exhibit B hereto.
2.2 AVAILABILITY RESERVES. All Revolving Loans otherwise available to
Borrower pursuant to the lending formula(s) or sublimits, and subject to the
Maximum Amount and other applicable limits hereunder shall be subject to
Lender's continuing right to establish and revise Availability Reserves, to be
exercised in Bank's good faith judgment.
2.3 GUARANTIES. All indebtedness of Borrower to Lender pursuant to this
Agreement shall be guaranteed by Advanced Materials Group, Inc. and Condor
Utility Products, Inc. in a principal amount equal to the Maximum Amount each,
as evidenced by and subject to the terms of guaranties in form and substance
satisfactory to Lender.
2.4 SUBORDINATION OF DEBT. All obligations of Borrower to Advanced
Materials Group, Inc. shall be subordinated in right of repayment to all
obligations of Borrower to Lender, as evidenced by and subject to the terms of
subordination agreements in form and substance satisfactory to Lender.
SECTION 3. INTEREST AND FEES
3.1 INTEREST. The outstanding principal balance of Revolving Loans shall
bear interest at the rate(s) set forth in the Line of Credit Note.
3.2 CLOSING FEE. Borrower shall pay to Lender as a closing fee the
amount of $75,000.00, which shall be fully earned as of and payable on the date
hereof.
3.3 FACILITY FEE. Borrower shall pay to Lender annually a facility fee
in an amount equal to one quarter percent (0.25%) of the Maximum Amount while
this Agreement is in effect and for so long thereafter as any of the Revolving
Loans or Letter of Credit Obligations are outstanding, which fee shall be fully
earned as of and payable in advance on each anniversary of the date hereof.
3.4 UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused line
fee for the Line of Credit equal to: (i) for each month during which the average
daily principal balance of outstanding Revolving Loans exceeds $1,000,000.00, a
rate per annum of three-eighths percent (0.375%) of the amount by which the
Maximum Amount exceeds such average daily principal balance, or (ii) for each
month during which the average daily principal balance of Revolving Loans and
Letters of Credit Obligations does not exceed $1,000,000.00, the amount, if
any, by which $10,000.00 exceeds the amount of interest accrued during such
month. Such fee shall be payable on the first day of each month in arrears.
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<PAGE>
3.5 COMPUTATION AND PAYMENT. Interest (and fees computed on a per annum
basis) shall be computed on the basis of a 360-day year, actual days elapsed.
Interest shall be payable at times and place set forth in the Line of Credit
Note.
SECTION 4. CONDITIONS PRECEDENT
4.1. INITIAL CREDIT. The obligation of Lender to extend any credit
contemplated by this Agreement is subject to the fulfillment to Lender's
satisfaction of all of the following conditions:
(a) APPROVAL OF LENDER COUNSEL. All legal matters incidental to
the extension of credit by Lender shall be satisfactory to counsel of Lender.
(b) DOCUMENTATION. Lender shall have received, in form and
substance satisfactory to Lender, each of the following, duly executed:
i) This Agreement
ii) The Line of Credit Note
iii) Corporate Borrowing Resolution
iv) The Letter of Credit Agreement
v) UCC-1 Financing Statement(s)
vi) Security Agreement(s)
vii) Lock Box Agreement
viii) All guaranties required by Section 2.4 hereof, together with
such authorizations as Lender shall require from each
guarantor.
ix) All subordination agreements required by Section 2.5 hereof.
x) Such other documents as Lender may require under any other
Section of this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Lender in its good faith judgment, in the financial
condition or business of Borrower or any Obligor, nor any material decline, as
determined by Lender in its good faith judgment, in the market value of any
collateral required hereunder or a substantial or material portion of the assets
of Borrower or any Obligor.
(d) INSURANCE. Borrower shall have delivered to Lender evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Lender, and where
required by Lender, with loss payable endorsements in favor of Lender.
(e) APPRAISALS. Lender shall have obtained, at Borrower's cost,
appraisals of all Equipment, issued by an
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<PAGE>
appraiser acceptable to Lender and in form, substance and reflecting values
satisfactory to Lender, in its discretion.
(f) SECURITY INTERESTS. Lender shall have received evidence, in
form and substance satisfactory to Lender, that Lender has valid perfected and
first priority security interests in and liens upon the Collateral and any
other property which is intended to be security for the Line of Credit or the
liability of any Obligor in respect thereof, subject only to the security
interests and liens permitted herein or in the other Loan Documents.
(g) FIELD REVIEW. Lender shall have completed a field review of
the Records and such other information with respect to the Collateral as Lender
may require to determine the amount of Revolving Loans available to Borrower,
the results of which shall be satisfactory to Lender.
(h) OTHER DOCUMENTS. Lender shall have received, in form and
substance satisfactory to Lender, all consents, waivers, acknowledgments and
other agreements from third persons which Lender may, in its good faith
judgment, deem necessary or desirable in order to permit, protect and perfect
its security interests in and liens upon the Collateral or to effectuate the
provisions or purposes of this Agreement and the other Loan Documents, including
without limitation, acknowledgments by lessors, mortgagees and warehousemen of
Lender's security interests in the Collateral, waivers by such persons of any
security interests, liens or other claims by such persons to the Collateral and
agreements permitting Lender access to, and the right to remain on, the premises
to exercise its rights and remedies and otherwise deal with the Collateral.
(j) AVAILABILITY. Borrower shall have a minimum of $1,500,000.00 of
availability for Revolving Loans in addition to the amount paid or to be paid to
Borrower's prior lender to retire Borrower's line of credit with such prior
lender and bringing all other obligations to a current status satisfactory to
Lender.
4.2. SUBSEQUENT CREDIT. The obligation of Lender to make each extension
of credit requested by Borrower hereunder shall be subject to the fulfillment to
Lender's satisfaction of each of the following conditions:
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<PAGE>
(a) COMPLIANCE. The representations and warranties contained
herein and each of the other Loan Documents shall be true on and as of the date
of the signing of this Agreement and on the date of each extension of credit by
Lender pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Lender shall have received all additional
documents which may be required in connection with such extension of credit.
SECTION 5. GRANT OF SECURITY INTEREST
As security for all indebtedness of Borrower to Lender pursuant to this
Agreement, Borrower grants to Lender security interests of first priority in the
following property and interests in property of Borrower, whether now owned or
hereafter acquired or existing, and wherever located: all Rights to Payment,
Inventory, Equipment and Records, and all products and proceeds of any of the
foregoing, in any form, including without limitation, insurance proceeds and all
claims against third parties for loss or damage to or destruction of any or all
of the foregoing.
As security for the obligations of each Obligor under its respective
guaranty, Borrower shall cause each Obligor to grant to Bank security interests
of first priority in all the following property and interests in property of
such Obligor, whether now owned or hereafter acquired or existing, and wherever
located: all Rights to Payment, Inventory, Equipment and Records, and all
products and proceeds of any of the foregoing, in any form, including without
limitation, insurance proceeds and all claims against third parties for loss or
damage to or destruction of any or all of the foregoing.
All of the foregoing shall be evidenced by and subject to the terms of such
documents as Lender shall reasonably require, all in form and substance
satisfactory to Lender. Borrower shall reimburse Lender, immediately upon
demand, for all costs and expenses incurred by Lender in connection with any of
the foregoing security, including without limitation filing and recording fees
and costs of appraisals and audits.
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SECTION 6. COLLECTION AND ADMINISTRATION
6.1 CASH COLLATERAL ACCOUNT.
(a) CASH COLLATERAL ACCOUNT. Borrower shall, at Borrower's expense
and in the manner requested by Lender from time to time, direct that remittances
and all other collections and proceeds of Accounts and other Collateral shall be
deposited into a lock box account maintained in Lender's name. In connection
therewith, Borrower shall execute such lockbox agreement as Lender shall
require. Borrower shall maintain with Lender, and Borrower hereby grants to
Lender a security interest in, a non-interest bearing deposit account over which
Borrower shall have no control ("Cash Collateral Account") and into which the
proceeds of all Borrower's Rights to Payment shall be deposited immediately upon
their receipt.
(b) CALCULATIONS. For purposes of calculating interest on the Line
of Credit, such payments or other funds received will be applied (conditional
upon final collection) as a principal reduction on the business day of receipt
by Lender's Commercial Finance Division of the inter-branch advice of deposit
that such payments or other funds have been deposited in the Cash Collateral
Account. For purposes of calculating the amount of the Revolving Loans
available to Borrower such payments will be applied (conditional upon final
collection) to the Line of Credit on the business day of receipt by the
Commercial Finance Division, if such advices are received within sufficient time
(in accordance with Lender's usual and customary practices as in effect from
time to time) to credit Borrower's loan account on such day, and if not, then on
the next business day.
(c) IMMEDIATE DEPOSIT. Borrower and all of its affiliates,
subsidiaries, shareholders, directors, employees or agents shall, acting as
trustee for Lender, receive, as the property of Lender, any monies, checks,
notes, drafts, or any other payment relating to and/or proceeds of Accounts or
other Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Cash Collateral Account, or remit the same or cause the same to
be remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's own funds.
6.2 STATEMENTS. Lender shall render to Borrower each month a statement
setting forth the balance in Borrower's loan account(s) maintained by Lender for
Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by
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Borrower and conclusively binding upon Borrower as an account stated except to
the extent that Lender receives a written notice from Borrower of any specific
exceptions of Borrower thereto within thirty (30) days after the date such
statement has been mailed by Lender. Until such time as Lender shall have
rendered to Borrower a written statement as provided above, the balance in
Borrower's loan account(s) shall be presumptive evidence of the amounts due and
owing to Lender by Borrower. Adjustments shall be deemed effective as of the
date of the miscalculation which gave rise to the adjustment.
6.3 PAYMENTS. All amounts due under any of the Loan Documents shall be
payable to the Cash Collateral Account as provided in Section 6.1 hereof or such
other place as Lender may designate from time to time. Lender may apply
payments received or collected from Borrower or for the account of Borrower
(including, without limitation, the monetary proceeds of collections or of
realization upon any Collateral) to the Line of Credit, whether or not then due,
in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Loan Documents may be charged directly to the loan
account(s) of Borrower. Borrower shall make all payments due Lender free and
clear of, and without deduction or withholding for or on account of, any setoff,
counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. If after receipt of any
payment of, or proceeds of Collateral applied to the payment of, any of
Borrower's obligations to Lender under this Agreement, Lender is required to
surrender or return such payment or proceeds to any person or entity for any
reason, then the obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify
and hold Lender harmless for the amount of any payments or proceeds surrendered
or returned. This Section 6.3 shall remain effective notwithstanding any
contrary action which may be taken by Lender in reliance upon such payment or
proceeds. This Section 6.3 shall survive the payment of Borrower's obligations
under the Loan Documents and the termination of this Agreement.
6.4 USE OF PROCEEDS. Borrower shall use the initial proceeds of the
Revolving Loans provided by Lender to Borrower hereunder only for: (a) payments
to each of the persons listed in the disbursement order furnished by Borrower to
Lender on or about the date hereof; and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Revolving Loans made or
Letters of Credit provided by
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Lender to Borrower pursuant to the provisions hereof shall be used by Borrower
only for general operating, working capital and other proper corporate purposes
of Borrower not otherwise prohibited by the terms of this Agreement. None of
the proceeds will be used, directly or indirectly, for the purpose of purchasing
or carrying any margin security or for the purposes of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any margin
security or for the any other purpose which might cause any of the Revolving
Loans to be considered a "purpose credit" within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Lender,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Lender subject to this Agreement.
7.1 LEGAL STATUS. Borrower is a corporation duly organized and existing
and in good standing under the laws of the State of California, and is qualified
or licensed to do business, and is in good standing as a foreign corporation, if
applicable, in all jurisdictions in which such qualification or licensing is
required, except where the failure to so qualify or to be so licensed would not
have a material adverse effect on Borrower.
7.2 AUTHORIZATION AND VALIDITY. The Loan Documents have been duly
authorized, and upon their execution and delivery in accordance with the
provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms, subject to bankruptcy and equitable
remedies.
7.3 NO VIOLATION. The execution, delivery and performance by Borrower of
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in a breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound, except to the extent that a violation,
contravention or breach would not have a material adverse affect on Borrower.
7.4 NO CLAIMS. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings
before any governmental authority,
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arbitrator, court or administrative agency which may materially adversely affect
the financial condition or operation of Borrower other than those disclosed by
Borrower to Lender in the Information Certificate.
7.5 CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated September 30, 1996, heretofore delivered by Borrower to Lender
is complete and correct and presents fairly the financial condition of
Borrower as of the date thereof; discloses all liabilities of Borrower that
were required to be reflected or reserved against under GAAP, whether
liquidated or unliquidated, fixed or contingent; and was prepared in
accordance with generally accepted accounting principles consistently
applied. Since the date of such financial statement there has been no
material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged or granted a security interest in or encumbered
any of its assets or properties except as disclosed by Borrower to Lender in
writing in the Information Certificate or as permitted by this Agreement.
7.6 INCOME TAX RETURNS. Except as set forth in the Information
Certificate, Borrower has no knowledge of any pending assessments or adjustments
of its income tax payable with respect to any year.
7.7 NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this Agreement to any other obligation of Borrower.
7.8 PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess,
all permits, memberships, franchises, contracts and licenses required and rights
to all trademarks, trade names, if any, patents, and fictitious names necessary
to enable it to conduct the business in which it is now engaged in compliance
with applicable law.
7.9 ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time ("ERISA"); Borrower has not violated any
provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event
as defined in ERISA has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
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7.10 OTHER OBLIGATIONS. Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Lender in
writing prior to the date hereof, Borrower, to its knowledge, based on its due
diligence, is in compliance in all material respects with all applicable Federal
or state environmental, hazardous waste, health and safety statutes and any
rules or regulations adopted pursuant thereto, which govern or affect any of
Borrower's operations and/or properties, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource
Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act
and the California Health and Safety Code, as any of the same may be amended,
modified or supplemented from time to time. To Borrower's knowledge, based on
its due diligence, none of the operations of Borrower is the subject of any
Federal or state investigation evaluating whether any remedial action involving
a material expenditure is needed to respond to a release of any toxic or
hazardous waste or substance into the environment. To Borrower's knowledge,
based on its due diligence, Borrower has no material contingent liability in
connection with any release of any toxic or hazardous waste or substance into
the environment.
SECTION 8. AFFIRMATIVE COVENANTS
Borrower covenants that so long as Lender remains committed to extend
credit to Borrower pursuant to the terms of this Agreement or any liabilities
(whether direct or contingent, liquidated or unliquidated) of Borrower to Lender
under any of the Loan Documents remain outstanding, and until payment in full of
all obligations of Borrower subject hereto, Borrower shall:
8.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein, and immediately upon demand by Bank, the amount
by which the outstanding principal balance of Revolving Loans and/or Letter of
Credit Obligations at any time exceeds any limitation applicable thereto.
8.2 RECORDS AND PREMISES. Maintain proper books and records in which
true and complete entries shall be made of all dealings or transactions of or in
relation to Collateral and the business of Borrower in accordance with GAAP.
From time to time as requested by Lender, at the cost and expense of Borrower,
allow Lender or its designee reasonable access to all of
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Borrower's premises during normal business hours and after notice to Borrower,
or at any time and without notice to Borrower if an Event of Default exists or
has occurred and is continuing, for the purposes of inspecting, verifying and
auditing the Collateral and all of Borrower's books and records, including,
without limitation, the Records, and promptly furnish to Lender such copies of
such books and records or extracts therefrom as Lender may reasonably request,
and allow Lender during normal business hours to use such of Borrower's
personnel, equipment, supplies and premises as may be reasonably necessary for
the foregoing, and if an Event of Default exists or has occurred and is
continuing, for the collection of Accounts and realization of other Collateral.
8.3 COLLATERAL REPORTING. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender:
(a) on a regular basis as required by Lender, a schedule of
Accounts, including without limitation, daily sales, credit and adjustment
journals and cash receipts;
(b) on or before the 10th day after and as of the end of each
month, (or more frequently as Lender may request), agings of accounts payable
and accounts receivable.
(c) upon Lender's request, (i) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips and
bank statements, (ii) copies of shipping and delivery documents, and (iii)
copies of purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by Borrower;
(d) within two days after and as of the last day of each week,
perpetual inventory reports;
(e) upon Lender's request made in Lender's good faith judgment that
a report or appraisal is appropriate, Borrower shall (at its expense no more
than once in any twelve (12) month period) but at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Collateral in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender or upon which Lender is expressly permitted to rely; and
(f) such other reports as to the Collateral as Lender shall request
from time to time. If any of Borrower's records of the Collateral are prepared
or maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender
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and to follow Lender's instructions with respect to further services at any time
that an Event of Default exists or has occurred and is continuing.
8.4 FINANCIAL STATEMENTS. Provide to Lender all of the following, in
form and detail satisfactory to Lender:
(a) not later than 90 days after and as of the end of each fiscal
year, an audited financial statement of Borrower and each Obligor, prepared by a
certified public accountant acceptable to Lender, to include balance sheet,
income statement, statement of cash flows, consolidating schedules and
footnotes, if any (Borrower's current accountants, Corbin and Wertz are
currently acceptable to Lender);
(b) not later than 30 days after and as of the end of each month, a
financial statement of Borrower, prepared by Borrower, to include balance sheet
and income statement;
(c) not later than 45 days after and as of the end of each fiscal
quarter, a financial statement of each Obligor, prepared by such Obligor, to
include balance sheet, income statement and consolidating schedule;
(d) contemporaneously with each annual and monthly financial
statement of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that the financial statements delivered pursuant
thereto are accurate (subject to year end audit adjustments) and that there
exists no Event of Default nor any condition, act or event which with the giving
of notice or the passage of time or both would constitute an Event of Default;
and
(e) as soon as practicable and in any event by the last day of the
first month of each new fiscal year of Borrower, a plan and financial forecast
for such fiscal year including, without limitation, (1) a forecasted balance
sheet, statement of income and statement of cash flows for such fiscal year, (2)
forecasted balance sheets, statements of income and statements of cash flows for
each fiscal month of such fiscal year; and as soon as practicable, all material
amendments, updates and revisions, if any, to the information provided pursuant
to this paragraph; and
(f) from time to time such other information as Lender may
reasonably request, which may include, without limitation, budgets, forecasts,
projections and other information respecting the Collateral and the business of
Borrower.
8.5 COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and
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franchises necessary for the conduct of its business; conduct its business in an
orderly and regular manner; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower or its business except in
any case where the failure to do so would not have a material adverse effect.
8.6 INSURANCE. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to Borrower's,
including but not limited to fire, extended coverage, public liability, property
damage and workers' compensation, carried with companies and in amounts
reasonably satisfactory to Lender, and deliver to Lender from time to time at
Lender's request schedules setting forth all insurance then in effect. At its
option, Lender may apply any insurance proceeds received by Lender at any time
to the cost of repairs or replacement of Collateral and/or to payment of the
Borrower's Obligations to Lender under this Agreement, whether or not then due,
in any order and in such manner as Lender may determine or hold such proceeds as
cash collateral for such Obligations.
8.7 FACILITIES. Keep all Borrower's properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that Borrower's
properties shall be fully and efficiently preserved and maintained except where
failure to do so would not have a material adverse effect.
8.8 TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation, Federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Lender's satisfaction, for eventual payment thereof in
the event Borrower is obligated to make such payment.
8.9 LITIGATION. Promptly give notice in writing to Lender of any
litigation pending or threatened in writing against Borrower with a claim in
excess of $100,000.00.
8.10 FINANCIAL CONDITION. Maintain Borrower's financial condition as
follows:
(a) Working Capital not at any time less than $1,000,000.00.
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(b) Tangible Net Worth not at any time less than $2,000,000.00.
(c) Capital expenditures, inclusive of capitalized lease
expenditures, not greater than $1,000,000.00 in any fiscal year.
8.11 NOTICE TO LENDER. Promptly (but in no event more than seven (7) days
after the occurrence of each such event or matter) give written notice to Lender
in reasonable detail of: (a) the occurrence of any Event of Default, or any
condition, event or act which with the giving of notice or the passage of time
or both would constitute such an Event of Default; (b) the occurrence and nature
of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or
any funding deficiency with respect to any Plan; and (c) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any loss through liability or property damage, or through fire, theft or any
other cause affecting Borrower's property. Provide not less than thirty (30)
days prior written notice to Lender of any change in the name or the
organizational structure of Borrower.
8.12 FURTHER ASSURANCES. At the request of Lender made in good faith at
any time and from time to time, duly execute and deliver, or cause to be duly
executed and delivered, such further agreements, documents and instruments, and
do or cause to be done such further acts as may be necessary or proper to
evidence, perfect, maintain and enforce the security interests and the priority
thereof in the Collateral and to otherwise effectuate the provisions or purposes
of this Agreement or any of the other Loan Documents, at Borrower's expense.
Lender may at any time and from time to time request a certificate from an
officer of Borrower representing that all conditions precedent to the making of
Revolving Loans and issuing Letters of Credit contained herein are satisfied.
In the event of such request by Lender and if a certificate is not received by
Lender in seven (7) calendar days, Lender may, at its option, cease to make any
further Revolving Loans or provide any further Letters of Credit until Lender
has received such certificate and, in addition, Lender has determined that such
conditions are satisfied. Where permitted by law, Borrower hereby authorizes
Lender to execute and file one or more UCC financing statements signed only by
Lender.
SECTION 9. NEGATIVE COVENANTS
Borrower further covenants that so long as Lender remains committed to
Borrower pursuant to the terms of this Agreement or any liabilities (whether
direct or contingent, liquidated or unliquidated) of Borrower to Lender under
any of the Loan Documents remain outstanding, and until payment in full of all
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obligations of Borrower subject hereto, Borrower will not without the Lender's
prior written consent:
9.1 OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except the liabilities of Borrower to Lender and any other
liabilities of Borrower existing as of, and disclosed to Lender prior to, the
date hereof in the Information Certificate.
9.2 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate
with any corporation or other entity; make any substantial change in the conduct
or nature of Borrower's business; acquire all or substantially all of the assets
of any corporation or other entity; nor sell, lease, transfer or otherwise
dispose of all or a substantial or material part of its assets except in the
ordinary course of business.
9.3 GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except as
disclosed in the Information Certificate.
9.4 LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or
investments in any person or entity, except advances to employees in the
ordinary course of business not to exceed $350,000.00 outstanding at any time.
9.5 DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding; nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
9.6 PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, any of its assets of any kind, now owned or
hereafter acquired, except any of the foregoing in favor of Lender and except as
set forth in the Information Certificate.
9.7 NEW COLLATERAL LOCATION. Open any new location unless Borrower (a)
gives Lender thirty (30) days prior written notice of the intended opening of
any such new location, and (b) executes and delivers, or causes to be executed
and delivered, to Lender such agreements, documents, and instruments as Lender
may deem reasonably necessary or desirable to protect its interests
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in the Collateral at such location, including without limitation, UCC-1
financing statements.
SECTION 10. EVENTS OF DEFAULT
10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest,
fees or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate (including the
Information Certificate) furnished to Lender in connection with, or any
representation or warranty made by Borrower or any other party under this
Agreement or any other Loan Document shall prove to be incorrect, false or
misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained in this Agreement (other than
those described in paragraphs 10.1(a) and 10.1(b)) and if such default is
susceptible of being cured such default remains uncured for a period of 20 days
from its occurrence.
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower or any Obligor
has incurred any debt or other liability to any person or entity, including
Lender, and, if the debt or other liability is owed to a party other than
Lender, the amount thereof exceeds $200,000.00.
(e) Any default in the payment or performance of any obligation, or
any defined event of default, under any of the Loan Documents other than this
Agreement.
(f) The filing of a notice of judgment lien against Borrower or any
Obligor; or the recording of any abstract of judgment against Borrower or any
Obligor in any county in which Borrower or such Obligor has an interest in real
property; or the service of a notice of levy and/or of a writ of attachment or
execution, or other like process, against the assets of Borrower or any Obligor;
or the entry of a judgment against Borrower or any Obligor; and with respect to
any of the foregoing, the amount in dispute is in excess of $100,000.00, and the
proceeding in question is not dismissed or vacated in 30 days from its
occurrence, provided that Lender shall not be obligated to make Advances during
such 30 day period.
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(g) Borrower or any Obligor shall become insolvent, or shall suffer
or consent to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to pay its
debts as they become due, or shall make a general assignment for the benefit of
creditors; Borrower or any Obligor shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or any Obligor and such involuntary
petition or proceeding is not dismissed within 60 days from its occurrence,
provided that the Lender shall not be obligated to make Advances during such 60
day period, or Borrower or any Obligor shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition; or Borrower or any Obligor shall be adjudicated a bankrupt, or an
order for relief shall be entered by any court of competent jurisdiction under
the Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.
(h) There shall exist or occur any event or condition which Lender
reasonably and in its good faith judgment believes impairs, or is substantially
likely to impair, the prospect of payment or performance by Borrower of its
obligations under any of the Loan Documents.
(i) The dissolution or liquidation of Borrower or any Obligor; or
Borrower, or any of their directors, stockholders or members, shall take action
seeking to effect the dissolution or liquidation of Borrower or such Obligor.
(j) Any change in ownership during the term of this Agreement of
an aggregate of twenty-five percent (25%) or more of the common stock of
Borrower or any Obligor, and, with respect to Obligor, in a single or in related
transactions. A series of transactions shall not constitute related
transactions unless the series of transactions results in one or more affiliated
persons or entities owning or controlling an aggregate of more than 25% of the
common stock of Borrower or Obligor.
(k) Any Obligor revokes or terminates (or attempts or purports to
revoke or terminate) its guarantee, endorsement or other agreement in favor of
Lender. Any creditor of Borrower which has executed a subordination in favor of
Lender revokes or
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terminates (or attempts or purports to revoke or terminate) such subordination.
(1) The indictment or threatened (in writing) indictment of
Borrower or any Obligor under any criminal statute, or commencement or
threatened (in writing) commencement of criminal or civil proceedings against
Borrower or any Obligor, pursuant to which statute or proceedings the penalties
or remedies sought or available include forfeiture of any of the property of
Borrower or such Obligor.
(m) Any member of Borrower's Senior Management shall cease, for any
reason, to be employed by Borrower on a full-time basis, and is not replaced by
a person reasonably acceptable to Lender within 90 days. Senior Management
means Chief Executive Officer, President or Chief Financial Officer.
(n) The sale, transfer, hypothecation, assignment or encumbrance,
whether voluntary, involuntary or by operation of law, without Lender's prior
written consent, of all or any part of or interest in any real property
Collateral required hereby.
10.2 REMEDIES. If an Event of Default shall occur, (a) any indebtedness
of Borrower under any of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Lender's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are hereby expressly waived by Borrower; (b) the obligation, if any, of
Lender to permit further borrowings hereunder shall immediately cease and
terminate; and (c) Lender shall have all rights, powers and remedies available
under each of the Loan Documents, or accorded by law, including without
limitation the right to resort to any or all security for any credit
accommodation from Lender subject hereto and to exercise any or all of the
rights of a beneficiary or secured party pursuant to applicable law. All
rights, powers and remedies of Lender in connection with each of the Loan
Documents may be exercised at any time by Lender and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity.
SECTION 11. TERM OF AGREEMENT AND MISCELLANEOUS
11.1 TERM.
(a) MATURITY DATE. This Agreement and the other Loan Documents
shall become effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending on the date three (3)
years from the date hereof. Upon the date of termination of the Loan Documents,
Borrower
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shall pay to Lender, in full, all outstanding and unpaid obligations under this
Agreement and the other Loan Documents and shall furnish cash collateral to
Lender in such amounts as Lender determines are reasonably necessary to secure
Lender from loss, cost, damage or expense, including attorneys' fees and legal
expenses, in connection with any contingent obligations, including issued and
outstanding Letters of Credit and checks or other payments provisionally
credited to the obligations and/or as to which Lender has not yet received final
and indefeasible payment. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, California
time.
(b) CONTINUING OBLIGATIONS. No termination of this Agreement or
the other Loan Documents shall relieve or discharge Borrower of its respective
duties, obligations and covenants under this Agreement or the other Loan
Documents until all Borrower's obligations under this Agreement and the other
Loan Documents have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Loan Documents and applicable law, shall
remain in effect until all such obligations have been fully and finally
discharged and paid.
(c) EARLY TERMINATION FEE. If for any reason (other than as set
forth in paragraph 11.1(d)) this Agreement is terminated prior to the end of the
then current term of this Agreement, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits as a result thereof,
Borrower agrees to pay to Lender, upon the effective date of such termination,
an early termination fee in the amount set forth below if such termination is
effective in the period indicated:
Amount Period
------ ------
i) 3% of Maximum Amount Closing Date to and including the first
anniversary date hereof.
ii) 2% of Maximum Amount First anniversary of Closing Date hereof to
and including the second anniversary date
hereof.
iii) 1% of Maximum Amount Second anniversary of Closing Date hereof to
and including the third anniversary date
hereof.
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Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing.
(d) NO EARLY TERMINATION FEE. No early termination fee shall be
payable if a group or division of Wells Fargo Bank (other than the Commercial
Finance Division or the workout group), or an affiliate of Wells Fargo Bank
extends credit to Borrower, which credit refinances and/or replaces in full the
credit facilities granted under this Agreement.
11.2 NO WAIVER. No delay, failure or discontinuance of Lender in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Lender of any breach of or default under any of the Loan Documents must
be in writing and shall be effective only to the extent set forth in such
writing.
11.3 NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: ADVANCED MATERIALS, INC.
20211 South Susana Road
Rancho Dominguez, CA 90221
LENDER: WELLS FARGO BANK, NATIONAL ASSOCIATION
Commercial Finance Division
9000 Flair Drive, Third Floor
El Monte, CA 91731
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
11.4 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Lender
upon demand the full amount of all payments, advances, changes, costs and
expenses, including reasonable attorneys' fees (to include reasonable outside
counsel fees and all allocated costs of Lender's in-house counsel), incurred by
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Lender in connection with (a) the negotiation and preparation of this Agreement
and each other of the Loan Documents (not to exceed $1,500.00), Lender's
continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) all reasonably documented
out-of-pocket expenses and costs heretofore and from time to time hereafter
incurred by Lender during the course of periodic field examinations of the
Collateral and Borrower's operations, plus a per diem charge for Lender's
examiners in the field and office at Lender's Commercial Finance Division's rate
in effect from time to time, (c) the enforcement of Lender's rights and/or the
collection of any amounts which become due to Lender under any of the Loan
Documents, and (d) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation any action for
declaratory relief, and including any of the foregoing incurred in connection
with any bankruptcy proceeding relating to Borrower.
11.5 SUCCESSORS, ASSIGNMENT. This Agreement shall be binding on and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without the prior written consent of
Lender. Lender reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Lender's rights and
benefits under each of the Loan Documents. In connection therewith, Lender may,
upon 30 days' prior written notice, disclose all documents and information which
Lender now has or may hereafter acquire relating to any credit extended by
Lender to Borrower, Borrower or its business, any Obligor or the business of any
Obligor, or any Collateral required hereunder, subject to execution of a
confidentiality agreement reasonably acceptable to Lender and Borrower.
11.6 ENTIRE AGREEMENT, AMENDMENT. This Agreement and each other of the
Loan Documents constitute the entire agreement between Borrower and Lender with
respect to any extension of credit by Lender subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This Agreement may be amended or modified only by a
written instrument executed by each party hereto. In the event of a conflict
between the terms of this Agreement and of the other Loan Documents, the terms
of this Agreement shall prevail.
11.7 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered
into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or
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<PAGE>
claim in connection with, this Agreement or any other of the Loan Documents to
which it is not a party.
11.8 TIME. Time is of the essence of each and every provision of this
Agreement and each other of the Loan Documents.
11.9 SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
11.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
11.11 ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in Los Angeles,
California selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited
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<PAGE>
to matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER: PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must
be active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (A) the
arbitrators
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<PAGE>
shall not have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (B) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive law
of the state of California, and (C) the parties shall have in addition to the
grounds referred to in the Federal Arbitration Act for vacating, modifying or
correcting an award the right to judicial review of (1) whether the findings of
fact rendered by the arbitrators are supported by substantial evidence, and (2)
whether the conclusions of law are erroneous under the substantive law of the
state of California. Judgment confirming an award in such a proceeding may be
entered only if a court determines the award is supported by substantial
evidence and not based on legal error under the substantive law of the state of
California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the
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<PAGE>
subject matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan Documents.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ADVANCED MATERIALS, INC. NATIONAL ASSOCIATION
By: /s/ [illegible] By: /s/ [illegible]
--------------------------- ----------------------------
Title: VP/CFO Title: Vice President
------------------------ -------------------------
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<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into
as of January 16, 1997, by and among ADVANCED MATERIALS, INC. ("Borrower"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Loan Agreement between Borrower and Bank dated as of
November 26, 1996, as amended from time to time ("Loan Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Loan Agreement and have agreed to amend the Loan
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Loan Agreement
shall be amended as follows:
1. Section 11.4 is hereby amended to read as follows
"11.4 COSTS, EXPENSES AND ATTORNEYS' FEES.
Borrower shall pay to Lender upon demand the full amount of all payments,
advances, changes, costs and expenses, including reasonable attorneys' fees
(to include reasonable outside counsel fees and all allocated costs of
Lender's in-house counsel), incurred by Lender in connection with (a) the
negotiation and preparation of this Agreement and each other of the Loan
Documents, Lender's continued administration hereof and thereof, and the
preparation of any amendments and waivers hereto and thereto, (b) all
reasonably documented out-of-pocket expenses and costs heretofore and from
time to time hereafter incurred by Lender during the course of periodic
field examinations of the Collateral and Borrower's operations, plus a per
diem charge for Lender's examiners in the field and office at Lender's
Commercial Finance Division's rate in effect from time to time, (c) the
enforcement of Lender's rights and/or
<PAGE>
the collection of any amounts which become due to Lender under any of the
Loan Documents, and (d) the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation any
action for declaratory relief, and including any of the foregoing incurred
in connection with any bankruptcy proceeding relating to Borrower."
2. Except as specifically provided herein, all terms and conditions of
the Loan Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Loan Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Loan Agreement
shall be read together, as one document.
3. Borrower hereby remakes all representations and warranties contained
in the Loan Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Loan Agreement, nor any condition, act or event which
with the giving of notice or the passage of time or both would constitute any
such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ADVANCED MATERIALS, INC. NATIONAL ASSOCIATION
By: /s/ [illegible] By: /s/ [illegible]
--------------------------- ----------------------------
Title: VP/CFO Title: Vice President
------------------------ -------------------------
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ASSET PURCHASE AND SALE AGREEMENT
This Asset Purchase and Sale Agreement (this "Agreement") is made and
entered into as of September 1, 1996 by and among Advanced Materials, Inc., a
California corporation ("Buyer"), Gasket and Molded Products, Inc., a Colorado
corporation ("Seller") and Richard S. Rouse, a shareholder of Seller (the
"Shareholder") and Neal M. Price, a shareholder of Seller (as to Section 5.3
only).
RECITALS
WHEREAS, subject to the terms and conditions hereof, Seller desires to sell
all of its right, title and interest in and to the properties and assets owned
or used or held for use by Seller, whether tangible or intangible, of every kind
whatsoever, including all those relating to or used in connection with, or
useful or necessary for the conduct of, or otherwise material to, Seller's
business, wherever located, and the goodwill pertaining thereto, except the
Excluded Assets (the "Assets"); and
WHEREAS, subject to the terms and conditions hereof, Buyer desires to
purchase said Assets of Seller for the consideration specified herein; and
WHEREAS, Shareholder has agreed to guarantee certain of the obligations of
Seller hereunder.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the provisions set
forth below, and subject to the terms and conditions set forth herein, the
parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section 3.13.
"ADJUSTED PURCHASE PRICE" shall have the meaning set forth in Section
2.5(b).
"AFFILIATE" shall mean, in respect of any specified Person, any other
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person or if such specified Person bears a
familial relationship with such other Person (the terms "controls," "controlled"
or "control" meaning the possession, directly or indirectly, of the power to
direct or cause the direction of management policies of a Person, whether
through the ownership of securities by contract or credit arrangement, as
trustee or executor, or otherwise).
<PAGE>
"AFFILIATED PARTIES" shall have the meaning set forth in Section 7.1.
"AGENT" shall have the meaning set forth in Section 2.5(c).
"AGREEMENT" shall have the meaning set forth in the Preamble.
"ASSETS" shall have the meaning set forth in the Preamble.
"ASSUMED LIABILITIES" shall have the meaning set forth in Section 2.3.
"BUYER" shall have the meaning set forth in the Preamble.
"BUYER'S WARRANTY COSTS" shall have the meaning set forth in Section 5.4.
"CERCLA" shall have the meaning set forth within the definition of
"Environmental Protection Laws"
"CLOSING" shall have the meaning set forth in Section 2.4.
"CLOSING DATE" shall have the meaning set forth in Section 2.4.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONTRACTS" shall have the meaning set forth in Section 2.1(c).
"EMPLOYMENT-RELATED AGREEMENTS" shall mean (i) any employment, consulting,
collective bargaining or similar agreement, whether written or oral, to which
Seller is a party or by which it is bound, (ii) any plan, agreement or
arrangement sponsored by or contributed to by Seller, including, without
limitation, any life and health insurance, hospitalization, savings, bonus,
deferred compensation, incentive compensation, stock purchase, stock option,
holiday, vacation, severance pay, sick pay, sick leave, disability, educational
assistance, tuition refund, service award, company car, scholarship, relocation,
fringe benefit, severance contracts, sales commissions, automobile allowances or
insurance, supplemental, pension arrangements, and other policies, practices or
commitments, whether written or unwritten, providing employee or executive
compensation or benefits to employees of Seller, (iii) any employee benefit plan
as defined in Section 3(3) of ERISA, and (iv) any arrangement or understanding
for the payment of post-retirement benefits.
"EMPLOYEE BENEFIT PLANS" shall have the meaning set forth in Section 3.18.
"ENVIRONMENTAL PROTECTION LAWS" shall mean all federal, state, local and
foreign laws, statutes, regulations having the force and effect of law, permits,
court decrees, judgments, injunctions and written orders concerning (i) public
health and safety relating to toxic or hazardous substances or (ii) pollution or
protection of the environment or natural resources, including, without
limitation,
2
<PAGE>
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") (42 U.S.C. Section 9601 ET SEQ.); the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801 ET SEQ.); the Resource
Conservation and Recovery Act ("RCRA") (42 U.S.C. Section 6901 ET SEQ.); the
Clean Water Act (33 U.S.C. Section 1251 ET SEQ.); the Safe Drinking Water Act
(14 U.S.C. Section 1401 ET SEQ.); the Toxic Substances Control Act (15 U.S.C.
Section 2601 ET SEQ.), the Federal Insecticide, Fungicide, and Rodenticide
Act (7 U.S.C. Section 136 ET SEQ.), the Clean Air Act (42 U.S.C. Section 7401
ET SEQ. ); the Emergency Planning and Community Right-to-Know Act (42 U.S.C.
Sections 11001-11005, 11021-11023, and 11041-11050); the Porter-Cologne Water
Quality Act (California Water Code Sections 13000-13999.19); the Hazardous
Waste Control Law (California Health & Safety Code Sections 25100-25250.25);
the Safe Drinking Water and Toxic Enforcement Act (California Health & Safety
Code Sections 25249.5-25249.13); California Health & Safety Code Sections
25280-25299.81 (regarding Underground Storage of Hazardous Substances) and
Sections 25500-25545 (regarding Hazardous Materials Inventories and Emergency
Plans); the Hazardous Substance Account Act (California Health & Safety Code
Sections 25300-25393); and California Health & Safety Code Sections
39000-44384 regarding Air Resources; in each case including the regulations
promulgated thereunder.
"EPA" shall mean the United States Environmental Protection Agency, or any
successor United States governmental agency.
"EQUIPMENT" shall have the meaning set forth in Section 2.1(a).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
"ERISA AFFILIATE" of Seller shall mean any other Person that, together with
Seller as of the relevant measuring date under ERISA, was or is required to be
treated as a single employer under Section 414 of the Code.
"EXCLUDED ASSETS" shall have the meaning set forth in Section 2.2.
"EXCLUDED LIABILITIES" shall have the meaning set forth in Section 2.3.
"FINANCIALS" shall have the meaning set forth in Section 5.3.
"GAAP" shall mean generally accepted accounting principles as in effect at
the time in question.
"HOLD-BACK AMOUNT" shall have the meaning set forth in Section 2.5(c).
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.3.
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.3.
3
<PAGE>
"INDEPENDENT ACCOUNTING FIRM" shall have the meaning set forth in Section
2.5(b).
"INTANGIBLE PERSONAL PROPERTY" shall have the meaning set forth in Section
3.16.
"INVENTORY" shall have the meaning set forth in Section 2.1(b).
"IRS" shall mean the Internal Revenue Service.
"LEASE" shall have the meaning set forth in Section 3.14.
"LICENSES" shall have the meaning set forth in Section 3.16.
"LOSSES" shall have the meaning set forth in Section 7.1.
"MATERIAL CONTRACTS" shall have the meaning set forth in Section 3.19.
"PCBs" shall have the meaning set forth in the definition of "Regulated
Substance."
"PERSON" shall mean any entity or natural person or any corporation,
partnership, joint venture or other entity, whether or not a legal entity.
"PRIME RATE" shall mean the reference rate as reported by Wells Fargo Bank,
N.A.
"PURCHASE PRICE" shall have the meaning set forth in Section 2.5(a).
"REAL PROPERTY" shall have the meaning set forth in Section 3.14.
"RCRA" shall have the meaning set forth within the definition of
"Environmental Protection Laws."
"REGULATED SUBSTANCE" shall mean any chemical or substance subject to or
regulated under any Environmental Protection Law including, without
limitation, any "pollutant or contaminant" or "hazardous substance" as those
terms are defined in CERCLA, any "hazardous waste" as that term is defined in
RCRA, and any other hazardous or toxic wastes, substances, or materials,
petroleum (including crude oil and refined and unrefined fractions thereof),
polychlorinated biphenyls ("PCBs"), infectious waste, special waste,
pesticides, fungicides, solvents, herbicides, flammables, explosives,
asbestos and asbestos-containing material, and radioactive materials, whether
injurious by themselves or in combination with other materials.
"RELATED PARTIES" shall have the meaning set forth in Section 3.19(a)(v).
"RIGHTS" shall have the meaning set forth in Section 2.7(b).
4
<PAGE>
"SBA LOAN" shall have the meaning set forth in Section 2.3
"SELLER" shall have the meaning set forth in the Preamble.
"SHAREHOLDER" shall have the meaning set forth in the Preamble.
"TAX" OR "TAXES" shall mean any and all taxes imposed or required to be
collected by any federal, state or local taxing authority in the United States,
or by any foreign taxing authority under any statute or regulation, including,
without limitation, all income, gross receipts, sales, use, personal property,
use and occupancy, business occupation, unemployment, disability withholding,
mercantile, ad valorem, transfer, license, withholding, payroll, employment,
excise, real estate, environmental, capital stock, franchise, alternative or
add-on minimum, estimated or other tax of any kind whatsoever, including any
interest, penalties and other additions thereto.
"TRANSACTIONS" shall mean, in respect of any party, all transactions
contemplated by this Agreement that involve, relate to or affect such party.
ARTICLE II
PURCHASE AND SALE OF ASSETS
SECTION 2.1 SALE OF ASSETS. Subject to the provisions of this Agreement,
Seller agrees to sell and Buyer agrees to purchase, at the Closing, all of
Seller's right, title and interest in and to the Assets, including, without
limitation:
(a) All tangible assets, including without limitation, the tangible assets
listed in Schedule 2.1(a), and further including all of Seller's equipment,
machinery, tools, jigs and dies, computers, software and furniture
(collectively, "Equipment");
(b) All inventory (the "Inventory"), including, without limitation, the
Inventory listed in Schedule 2.1(b);
(c) All of the contracts, purchase orders, backlog and agreements with
customers to which Seller is a party (the "Contracts"), including, without
limitation, the contracts and agreements listed in Schedule 2.1(c);
(d) All goodwill;
(e) All patents, patent applications, trademarks, trademark applications,
copyrights, licenses, trade secrets, data, designs, drawings, specifications and
other documents, know-how and information and all files, books and records with
respect thereto; and
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(f) All books and records, data and other information, in whatever format,
whether on paper or computer disk or otherwise, in the possession of Seller.
SECTION 2.2 EXCLUDED ASSETS. Notwithstanding anything in this
Agreement to the contrary, there shall be excluded from the Assets (the
"Excluded Assets") (i) a 1992 Dodge Caravan; (ii) a 1995 Dodge Caravan; (iii)
two receivables aggregating no more than $10,000 from Aerobafloor and Yukon
Fitness; (iv) certain inventory described on Schedule 2.2(iv) hereof; and (v)
cash on hand and bank deposits at Closing.
SECTION 2.3 ASSUMPTION OF LIABILITIES.
(a) Subject to the provisions of this Agreement, Buyer assumes and agrees
to pay or to discharge the following obligations of Seller (the "Assumed
Liabilities"): (i) SBA Loan # GP750,241-30-06-DEN in the amount (principal and
interest) of approximately $68,417 (the "SBA Loan"); and (ii) accounts payable
and accrued expenses as at the date of Closing incurred in the ordinary course
of business and not payable to any Affiliate of Seller or the Shareholder, and
not including automobile loan payments relating to Seller's 1992 Dodge Caravan
and 1995 Dodge Caravan and in any event not to exceed (without the consent of
Buyer) $55,000.
(b) Except as specifically assumed by Buyer pursuant to the immediately
preceding sentence, Buyer shall not assume or have any liability with respect to
any other obligation or liability of Seller, whether absolute, accrued,
contingent or otherwise, and whether due or to become due (the "Excluded
Liabilities"). Without limiting the previous sentence, the parties acknowledge
that Buyer shall specifically not assume, in addition to all other Excluded
Liabilities, any liability for Taxes payable by Seller or any liability for any
legal, accounting or other fees or expenses incurred by Seller in connection
with the negotiation and execution of this Agreement or any related agreement.
The assumption of the Assumed Liabilities by Buyer hereunder shall not enlarge
any rights of third parties under contracts or arrangements with Buyer or Seller
and nothing herein shall prevent any party from contesting in good faith with
any third party any of the Assumed Liabilities.
(c) Buyer acknowledges that it shall pay all obligations, including Taxes
(other than any such taxes referred to in Section 2.9), incurred by Buyer
following the Closing.
SECTION 2.4 TIME AND PLACE OF CLOSING. The closing of the purchase
and sale provided for in this Agreement (herein called the "Closing") shall be
held at the offices of Day Campbell & McGill at 3070 Bristol, Suite 650, Costa
Mesa, California and shall be effective as of 12:01 a.m. on September 1, 1996,
or at such other place or earlier or later date or time as may be fixed by
mutual agreement of Buyer and Seller (the "Closing Date").
SECTION 2.5 PURCHASE PRICE: ADJUSTED PURCHASE PRICE.
(a) The aggregate purchase price (the "Purchase Price") to be paid by
Buyer in consideration of the sale and transfer of the Assets shall be $210,000,
minus the Assumed Liabilities.
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(b) As promptly as practicable after the Closing Date, Buyer shall prepare
and deliver to Seller a statement of the adjusted purchase price (the "Adjusted
Purchase Price") as at the Closing Date, which Adjusted Purchase Price shall be
derived from a balance sheet as at the Closing Date prepared in accordance with
generally accepted accounting principles, which balance sheet shall show the
adjusted value of the Assumed Liabilities as of August 31, 1996, and which
Adjusted Purchase Price shall reflect the asset value of the Assets, subject to
the following adjustments and net of the Assumed Liabilities as of August 31,
1996: (A) only good and usable Inventory satisfying the representation contained
in Section 3.20 hereof shall be included, and shall be valued at a fair value
mutually agreed upon between the parties; (B) only Equipment satisfying the
representation contained in Section 3.12 hereof shall be included, and shall be
valued at fair market value mutually agreed upon between the parties; (C) only
good and collectible Accounts Receivable satisfying the representation contained
in Section 3.13 hereof shall be included; and (D) prepaid taxes, expenses and
deposits shall be prorated as at the Closing Date.
(c) The Purchase Price shall be paid as follows:
(i) At the Closing Buyer shall deliver $150,000 of the Purchase Price
to Pacific National Bank, as agent (the "Agent") pursuant to a Fund Trust
Agreement in the form of Exhibit 2.5(c) attached hereto and incorporated herein
by reference.
(ii) On September 15, 1996, Buyer and Seller shall cause the Agent to
(x) pay to Seller the amount of the Adjusted Purchase Price, minus $10,000 (the
"Hold-back Amount") and net of the amount of Assumed Liabilities as of August
31, 1996, (y), direct a payment in the amount of the SBA Loan to an account at
Norwest Bank against which Seller shall write a check to pay off the SBA Loan,
and (z) distribute to Buyer the amount remaining thereafter, and Buyer shall
thereafter pay other Assumed Liabilities when due.
(iii) On or before November 30, 1996, Buyer shall cause Agent to pay
Seller the Hold-back Amount, adjusted downwards dollar-for-dollar by the amount
of any and all Losses of Buyer or its Affiliates resulting from (A) a breach of
any of Seller's or Shareholder's representations, warranties or covenants
hereunder, (B) the amount of any other Losses payable by Seller or Shareholder
to Buyer pursuant to Section 7.1 hereof; (C) the amount of any Excluded
Liabilities actually paid by Buyer, and (D) the amount of any Buyer's Warranty
Costs, and adjusted upwards dollar-for-dollar by the amount of any and all
Losses of Seller resulting from (A) a breach of any of Buyer's representations,
warranties and covenants hereunder, (B) the amount of any other Losses payable
by Buyer to Seller pursuant to Section 7.2 hereof; or (C) the amount of any
Assumed Liabilities actually paid by Seller. Seller shall co-sign any
instructions to Agent pursuant to this Section 2.5(c)(iii).
(iv) At the time that distributions are made pursuant to Section
2.5(c)(iii), above, Buyer shall pay Seller interest on the Holdback Amount at
the Prime Rate from September 1, 1996 through such date of payment.
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(d) All payments hereunder shall be in immediately available funds and
shall be paid by wire transfer to an account designated by the recipient
thereof.
SECTION 2.6 TRANSFER OF ASSETS.
(a) At the Closing, Seller shall deliver or cause to be delivered to Buyer
good and sufficient instruments of transfer transferring to Buyer title to all
the Assets. Such instruments of transfer (i) shall be in the form and will
contain provisions not inconsistent with the provisions hereof which are usual
and customary for transferring the type of property involved under the laws of
the jurisdictions applicable to such transfers, (ii) shall be in form and
substance reasonably satisfactory to Buyer and its counsel, and (iii) shall
effectively vest in Buyer title to all the Assets free and clear of all liens,
restrictions and encumbrances.
(b) At Closing Buyer shall further deliver to Buyer an Assignment or
Novation of Lease assigning Seller's lease to its manufacturing facility to
Buyer, such assignment or novation to be in form and substance satisfactory to
Buyer in the form of Exhibit 2.6 hereof.
SECTION 2.7 DELIVERY OF RECORDS AND CONTRACTS: FURTHER ASSURANCES.
(a) At the time of the Closing, subject to subsection (b) below, Seller
shall deliver or cause to be delivered to Buyer all of Seller's contracts,
commitments, agreements and rights which are included in the Assets, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
of the full benefit of the same. Seller shall also deliver to Buyer at the time
of the Closing all of Seller's business records, books and other data, and
Seller shall take all requisite steps to put Buyer in actual possession and
operating control of the Assets.
(b) If an attempted sale, conveyance, assignment, transfer or delivery of
any contracts, claims, commitments, franchises, privileges, permits, consents,
certificates, licenses or any other assets, rights or benefits to be sold,
conveyed, assigned, transferred and delivered to Buyer which are included in the
Assets (collectively, the "Rights") would be ineffective without the consent of
any other person, and such consent has not been obtained on or before the
Closing Date, this Agreement shall not constitute an assignment or an attempted
assignment of such Right if such assignment or attempted assignment would
constitute a breach thereof or be unlawful. In such case, Seller shall use
commercially reasonable efforts to obtain, as soon as practicable, the consent
of each such or other person in all cases in which such consent is required, and
Seller and Buyer will cooperate in any reasonable arrangement designed to enable
Seller to perform its obligations hereunder, and to provide for the assumption
by Buyer of the benefits, risks and burdens of, any such agreement consistent
with the provisions of this Agreement.
(c) Seller from time to time after the Closing at the request of Buyer and
without further consideration shall execute and deliver further instruments of
transfer and assignment and take such other action as Buyer may reasonably
require to more effectively transfer and assign to, and vest in, Buyer each of
the Assets.
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SECTION 2.8 ALLOCATION OF PURCHASE PRICE. Buyer and Seller shall use best
efforts to agree to an allocation of the purchase price (and all other
capitalized costs) among the Assets. Such allocation shall be made in accordance
with the provisions of Section 1060 of the Code, and shall be binding upon Buyer
and Seller for all federal and state income tax purposes.
SECTION 2.9 SALES AND TRANSFER TAXES. Seller represents that there are no
sales or transfer taxes, fees or duties under applicable law incurred in
connection with this Agreement or the Transactions contemplated thereby.
Notwithstanding the foregoing, Buyer agrees to pay sales taxes incurred in
connection with the Transactions contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDER
Sellers and Shareholder, jointly and severally, hereby represent and warrant to
Buyer that:
SECTION 3.1 ORGANIZATION AND GOOD STANDING. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado with full corporate power and authority to own or lease its properties
and to conduct its business in the manner and in the places where such
properties are owned or leased or such business is currently conducted. Seller
is qualified to do business and is in good standing in the State of Colorado.
SECTION 3.2 LICENSES AND PERMITS. Schedule 3.2 lists all permits,
registrations, licenses, franchises, certifications and other approvals required
from federal, state or local authorities in order for Seller to conduct and
operate its business as presently conducted.
SECTION 3.3 AUTHORITY: NO BREACH. Seller has all necessary authority and
power to enter into this Agreement and to carry out the Transactions
contemplated hereby. The execution, delivery and performance by Seller of this
Agreement and the consummation by Seller of the Transactions contemplated hereby
have been duly authorized by all necessary corporate action of Seller, including
shareholder approvals, and no other action on the part of Seller is required in
connection therewith. The Shareholder is under no legal disability. This
Agreement constitutes the valid and binding obligation of Seller and
Shareholder, enforceable against Sellers and Shareholder in accordance with its
terms. The execution, delivery and performance by Seller of this Agreement do
not, and the performance by Seller of the Transactions contemplated hereby, will
not:
(i) violate any provision of the Articles of Incorporation or by-laws
of Seller;
(ii) violate any laws of the United States, or any state or other
jurisdiction applicable to Seller or require Seller to obtain any approval,
consent or waiver of, or make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made;
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(iii) result in a violation or any breach of, constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, result in the acceleration of any indebtedness under or performance
required by, result in any right of termination of, increase any amounts payable
under, decrease any amounts receivable under, change any other rights pursuant
to, or conflict with, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Seller is a party or by which it or its properties is bound; or
(iv) result in the creation or imposition of any lien, charge,
encumbrance or restriction upon any of the Assets.
SECTION 3.4 TITLE. Seller has good title to the Assets (except the Real
Property) and on the Closing Date will transfer and convey good and valid title
to such Assets to Buyer, free and clear of any liens, encumbrances, pledges,
security interests, claims or rights of others of any kind or nature whatsoever,
except as otherwise created by Buyer.
SECTION 3.5 SUBSIDIARIES. Seller does not have any subsidiaries or any
other equity interest in any corporation, partnership or similar entity that
relates in any way to Seller.
SECTION 3.6 FINANCIAL STATEMENTS. Schedule 3.6 contains the following
financial statements of Seller (collectively, the "Financials"): (a) the balance
sheet of Seller as of December 31, 1993, December 31, 1994 and December 31,
1995, and the related statements of operations for the twelve months then ended,
and (b) the balance sheet of Seller as of July 15, 1996, and the related
statement of operations for the period from January 1, 1996 through July 15,
1996. Each of the balance sheets and statement of operations constituting part
of the Financials have been prepared in accordance with GAAP consistently
applied with prior periods, are complete and correct and fairly present the
financial condition and results of operations of Seller for the periods
indicated thereon, and contain and reflect reserves for all liabilities and
obligations of any nature, whether absolute, contingent or otherwise, except for
reserves not required to be maintained under GAAP. The Financials do contain any
items of extraordinary or nonrecurring income or any other income not earned in
the ordinary course of business.
SECTION 3.7 ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, there has
not occurred:
(a) Any adverse change in the assets, liabilities (whether absolute,
accrued, contingent or otherwise), condition (financial or otherwise), results
of operations, business or prospects of Seller not reflected in the Financials
and that has resulted in or may result in a loss to Seller of more than $5,000
in the aggregate;
(b) Any guarantee by Seller of any obligation, or any mortgage, pledge or
encumbrance on any of the properties or assets of Seller;
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(c) Any amendment or modification of any Material Contract, or any
termination of any agreement that would have been a Material Contract were such
agreement in existence on the date hereof;
(d) Any transaction by Seller, whether or not covered by the foregoing,
not in the ordinary course of business, including, without limitation, any
purchase or sale of any assets;
(e) Any alteration in the manner of keeping the books, accounts or records
of or pertaining to Seller, or in the accounting practices therein reflected;
(f) Any loss or threatened loss of a customer or customers;
(g) Any damage or destruction to, or loss of, any assets or property
owned, leased or used by Seller (whether or not covered by insurance); or
(h) Any agreement to do any of the things described in the preceding
subsections (a) - (g) of this Section 3.7.
SECTION 3.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the
Financials, there are no liabilities of Seller, whether absolute, accrued,
contingent or otherwise, and whether due or to become due.
SECTION 3.9 LOSS CONTRACTS. Seller does not have any Contracts on which
Seller expects to lose money. As used in this Section, "lose money" means that
the sales price for products under the purchase agreement, order or contract is
less than the sum of Seller's cost of goods sold, including labor, materials and
overhead.
SECTION 3.10 PROGRESS AND OTHER PAYMENTS. Seller has not received any
unliquidated progress payments, milestone payments, advance payments, deposits
or other similar payments from customers with respect to the Contracts.
SECTION 3.11 LETTERS OF CREDIT, BONDS, ETC. (a) Seller is not the
beneficiary of any letters of credit, performance or other bonds, or any other
financial instruments guaranteeing the payment or performance of any third party
under any Contract, and (b) Seller is not required to provide any letter of
credit, performance or other bond, or any other financial instrument for the
purpose of guaranteeing Seller's payment or performance under any Contract.
SECTION 3.12 MACHINERY, EQUIPMENT AND OTHER PERSONAL PROPERTY. Seller owns
all of the Equipment. All such Equipment is sold "as is, where is," but is
sufficient to carry on the business of Seller in the normal course as it is
presently conducted.
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SECTION 3.13 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE.
(a) All of Seller's accounts receivable ("Accounts Receivable") are
properly reflected on its books and records, are valid receivables subject to no
disputes, setoffs or counterclaims, are current and collectible, and will be
collected in accordance with their terms at their recorded amounts. Schedule
3.13 is an accurate aging of Seller's Accounts Receivable at August 31, 1996.
(b) All of the Assumed Liabilities were incurred in the ordinary course of
business and none is payable to any Affiliate of Seller or the Shareholder or
any Affiliate of the Shareholder.
SECTION 3.14 REAL PROPERTY. Seller does not own any real property. Each
lease (a "Lease") of real property relating to Seller (the "Real Property") is
valid, binding, enforceable and in full force and effect, and will be novated in
favor of Buyer as at Closing. No default or breach has occurred under any Lease,
and no event has occurred which, with the passage of time or giving of notice or
both, would constitute a breach or default thereunder or would cause the
acceleration of any obligation of any party thereto or the creation of a lien or
encumbrance upon any asset of Seller. All such Real Property, including all
buildings, fixtures, mechanical systems (including electrical, plumbing and
heating), and roof and structural systems, are in good operating condition and
repair, ordinary wear and tear excepted. No material expenditures are required
or anticipated to be required to be made by Seller for the repair or maintenance
of any improvements presently on any such Real Property. Such Real Property
currently is served by such gas, electricity, water, sewage and waste disposal
and/or other utilities as are adequate to operate such facility as it is
currently operated.
SECTION 3.15 ENVIRONMENTAL MATTERS.
(a) Seller has complied and is in compliance in all material respects with
all applicable Environmental Protection Laws pertaining to any of its properties
and assets (including the Real Property) at which the business of Seller has
ever been conducted, and the use and ownership thereof, and to the operation of
Seller. No violation by Seller is being alleged of any applicable Environmental
Protection Law relating to any of the properties and assets at which the
business of Seller has ever been conducted (including the Real Property) or the
use or ownership thereof, or to the operation of Seller.
(b) (i) Neither Seller nor any other Person (including any tenant or
subtenant) has caused or taken any action that will result in, and Seller is not
subject to, any material liability or obligation on the part of Seller or any of
its Affiliates, relating to (A) the environmental conditions on, under, or about
the Real Property or other properties or assets owned, leased, operated or used
by Seller or any predecessor thereto at the present time or in the past,
including without limitation, the air, soil and groundwater conditions at such
properties or (B) the past or present use, management, handling, transport,
treatment, generation, storage, disposal or release of any Regulated Substance.
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(ii) Seller has disclosed and made available to the Buyer all information,
including, without limitation, all studies, analyses and test results, in the
possession, custody or control of or otherwise known to any Seller relating to
(A) the environmental conditions on, under or about the Real Property or other
properties or assets owned, leased, operated or used by Seller or any
predecessor in interest thereto at the present time or in the past, and (B) any
Regulated Substance used, managed, handled, transported, treated, generated,
stored or released by Seller or any other Person on, under, about or from the
Real Property, and (C) the use or operation of any of the properties and assets
of Seller, and (D) Seller.
SECTION 3.16 INTANGIBLE PERSONAL PROPERTY.
(a) Seller has no: (i) patent, patent application, copyright, copyright
application, trademark, trademark application (in any such case, whether
registered or to be registered in the United States of America or elsewhere),
process, invention, trade secret, trade name, computer program, formula and
customer list (collectively, the "Intangible Personal Property"), or (ii) any
licenses or similar agreements or arrangements ("Licenses") to which Seller is a
party either as licensee or licensor for each such item of Intangible Personal
Property.
(b) There have been no actions or other judicial or adversary proceedings
involving Seller concerning any item of Intangible Personal Property, and, to
the knowledge of Seller, no such action or proceeding is threatened and no claim
or other demand has been made by any Person relating to any item of Intangible
Personal Property.
(c) Seller has the right and authority to use each item of Intangible
Personal Property in connection with the conduct of its businesses in the
manner presently conducted and to convey such right and authority, and such use
does not conflict with, infringe upon or violate any patent, copyright,
trademark or registration of any other person or entity.
(d) There are no outstanding or, to the knowledge of Seller, threatened
disputes or disagreements with respect to any License.
(e) No employee of Seller is in violation of any term of any employment
contract, proprietary information and inventions, agreement, non-competition
agreement, or any other contract or agreement relating to the relationship of
any such employee with Seller or, to the actual knowledge of Seller, any
previous employer.
(f) The conduct by Seller of its business, and the manufacture and sale by
Seller of its products, does not conflict with, infringe upon or violate any
patent, copyright, trademark or registration of any other person or entity.
SECTION 3.17 LABOR AND EMPLOYMENT AGREEMENTS. Seller is not a party to or
bound by any collective bargaining agreement and there are no labor unions or
other organizations representing, purporting to represent or attempting to
represent any employees of Seller. Since January 1, 1993,
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there has not occurred or, to the best knowledge of Seller after due inquiry,
been threatened any material strike, slowdown, picketing, work stoppage,
concerted refusal to work overtime or other similar labor activity with respect
to any employees of Seller. There are no labor disputes currently subject to any
grievance procedure, arbitration or litigation and there is no representation
petition pending, or to the best knowledge of Seller after due inquiry,
threatened with respect to any employee of Seller. Seller has complied with all
provisions of applicable law pertaining to the employment of employees,
including, without limitation, all such laws relating to labor relations, equal
employment, fair employment practices, entitlements, prohibited discrimination
or other similar employment practices or acts, except for any failure so to
comply that, individually or together with all such other failures, has not and
will not result in a liability or obligation on the part of the Buyer, and has
not had or resulted in, and will not have or result in, an adverse effect on the
business, operations or prospects of Seller.
SECTION 3.18 EMPLOYEE BENEFIT PLANS: ERISA. Other than a SEP plan Seller
does not maintain or contribute to (i) any employee pension benefit plan as
defined in Section 3(2) of ERISA, (ii) any employee welfare benefit plan as
defined in Section 3(a) of ERISA, (iii) any profit sharing, pension, deferred
compensation, bonus, stock option, stock purchase, severance or incentive plan
or agreement, (iv) any plan or policy providing for "fringe benefits" to its
employees, including but not limited to vacation, paid holidays, personal leave,
employee discount, educational benefit or similar programs, or (v) any other
Employment-Related Agreements, in any case under which employees or former
employees of Seller primarily employed in connection with the operation of
Seller are eligible to participate or derive a benefit (collectively, "Employee
Benefit Plans"). Seller has no liabilities to any person under its SEP plan.
Seller has not made contributions to, has never been a member of a controlled
group which has contributed to and has never been under common control with an
employer that contributed to any multi employer plan as defined in Section 3(37)
of ERISA. Seller has provided Buyer with true and correct copies of all Employee
Benefit Plans.
SECTION 3.19 MATERIAL CONTRACTS AND RELATIONSHIPS.
(a) Except for agreements specifically identified on other Schedules,
Schedule 3.19(a) sets forth a complete and correct list of the following:
(i) All agreements (or groups of agreements with one or more related
entities) between Seller and any customer or supplier in excess of $5,000 and
all agreements and blanket purchase orders extending beyond one year;
(ii) All agreements that create or continue any claim, lien, charge or
encumbrance against, or right of any third party with respect to, any of the
Assets;
(iii) All agreements by which Seller leases any capital equipment and
all other leases involving Seller as lessee or lessor;
(iv) All agreements to which Seller is a party not in the ordinary
course of business;
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(v) All agreements to which Seller, on the one hand, and any of
Seller's Affiliates (all such Affiliates being collectively referred to hereon
as "Related Parties"), on the other hand, are parties or by which they are bound
that relates to or is connected in any way with Seller or its operations,
business or prospects;
(vi) All contracts or commitments relating to commission arrangements
with others;
(vii) All license agreements, whether as licensor or licensee;
(viii) All agreements between Seller and its sales representatives,
distributors and dealers;
(ix) All agreements between Seller and its customers relating to
volume rebates or price reductions;
(x) All other agreements to which Seller is a party or by which it is
bound and that involve $5,000 or more or that extend for a period of one year or
more; and
(xi) All other agreements to which Seller is a party or by which it is
bound and that are or may be material to the assets, liabilities (whether
absolute, accrued, contingent or otherwise), condition (financial or otherwise),
results of operations, business or prospects of Seller.
As used in this Section 3.19, the word "agreement" includes both oral and
written contracts, leases, understandings, arrangements and all other
agreements. The term "Material Contracts" means the agreements of Seller
required to be disclosed or Schedule 3.19(a), including agreements specifically
identified in other Schedules.
(b) All of the Material Contracts are in full force and effect, are valid
and binding and are enforceable in accordance with their terms in favor of
Seller. There are no liabilities of any party to any Material Contract arising
from any breach or default of any provision thereof and no event has occurred
that, with the passage of time or the giving of notice or both, would constitute
a breach or default by any party thereto.
(c) Seller has fulfilled all material obligations required pursuant to
each Material Contract to have been performed by Seller prior to the date
hereof, and Seller has no reason to believe that Seller will not be able to
fulfill, when due, all of its obligations under the Material Contracts that
remain to be performed after the date hereof.
(d) Seller has maintained and continues to maintain good relations with
its customers, and agents of, and suppliers to Seller, and Seller has no reason
to believe that such relations will in the foreseeable future deteriorate or
suffer any changes adverse to Seller.
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SECTION 3.20 INVENTORY. The Inventory is good and merchantable material, of
a quantity and quality saleable in the ordinary course of business of Seller, is
not defective, and is carried on the books and records of Seller at the lower of
cost or market consistent with the past practices of Seller. The quantities of
all Inventory are reasonable and justified in the present circumstances, and
have been maintained at a level consistent with meeting delivery dates on firm
customer backlog at least since December 31, 1995.
SECTION 3.21 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither Seller nor any
employee, agent or other person acting on Seller's behalf, including, but not
limited to, any Seller, has, directly or indirectly, given or agreed to give any
gift or similar benefit to any customer, supplier, competitor or governmental
employee or official (domestic or foreign) relating in any way to the business
of Seller (i) that would subject Seller to any damage or penalty in any civil,
criminal or governmental litigation or proceeding, or (ii) that, if not given in
the past, would have had an adverse effect on the business of Seller.
SECTION 3.22 TRANSACTIONS WITH RELATED PARTIES. Except as set forth on
Schedule 3.22, (i) there have been no transactions by Seller with any Related
Party since April 1, 1994 and (ii) there are no agreements or understandings now
in effect between Seller and any Related Party, in either case that relates to
or is connected in any way with Seller or its operations, business or prospects.
In addition, none of the transactions with any Related Parties that have
occurred since April 1, 1994 has provided to Seller assets, income, financing or
business on a basis significantly more or less favorable than that available
from unaffiliated persons. Schedule 3.22 also (i) states the amounts due from
Seller to any Related Party and the amounts due from any Related Party to
Seller, (ii) describes the transactions out of which such amounts due arose and
(iii) describes any interest of any Seller or Related Party in any supplier or
customer of, or any other entity that has had business dealings with, Seller
since April 1, 1994. After the Closing, there will be no obligations or other
liabilities, including inter-company obligations, between Seller, on the one
hand, and Seller or any Related Party, on the other hand, other than pursuant to
this Agreement.
SECTION 3.23 COMPLIANCE WITH LAWS. The operation, conduct and ownership of
the property or business of Seller are being, and at all times have been,
conducted, in all material respects, in full compliance with all federal, state,
local and other (domestic and foreign) laws, rules, regulations and ordinances
and all judgments and orders of any court, arbitrator or governmental authority
applicable to it.
SECTION 3.24 LITIGATION. There is no legal, administrative, arbitration or
other proceeding, or any governmental investigation, pending or, to the
knowledge of Seller, threatened against or otherwise affecting Seller, or any of
its assets, and Seller is not aware of any fact that might reasonably be
expected to form the basis for any such proceeding or investigation relating in
any way to Seller.
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SECTION 3.25 TAXES. Except to the extent a breach hereof could not have an
adverse effect on the business, operations or prospects of Seller or the value
of the Assets:
(a) Seller has timely filed all Tax returns and reports required to have
been filed by it for all taxable periods ending on or prior to the date hereof,
and has paid all Taxes due to any taxing authority with respect to all taxable
periods ending on or prior to the date hereof, or otherwise attributable to all
periods prior to the date hereof. The Tax returns and reports filed are true and
correct in all material respects and reflect accurately all liability for Taxes
for the periods covered thereby;
(b) Seller has not received notice that the IRS or any other taxing
authority has asserted against Seller any deficiency or claim for additional
Taxes in connection therewith;
(c) All Tax deficiencies asserted or assessed against Seller have been paid
or finally settled and no issue has been raised by the IRS or any other taxing
authority in any examination which, by application of the same or similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Further, no state of facts exists or has
existed which would constitute grounds for the assessment of any liability for
Taxes with respect to periods which have not been examined by the IRS or any
other taxing authority;
(d) There is no pending or, to the knowledge of Seller, threatened action,
audit, proceeding, or investigation with respect to (i) the assessment or
collection of Taxes or (ii) a claim for refund made by Seller with respect to
Taxes previously paid;
(e) All amounts that are required to be collected or withheld by Seller,
or with respect to Taxes of Seller, have been duly collected or withheld: all
such amounts that are required to be remitted to any taxing authority have been
duly remitted;
(f) Seller has not waived any statute of limitations with respect to the
assessment of any Tax; and
(g) There are no liens for Taxes due and payable upon any Assets.
SECTION 3.26 INSURANCE. Schedule 3.26 sets forth a complete and correct
list of all insurance policies and of all claims made by Seller on any liability
or other insurance policies (or to the extent Seller is self insured that would
have been made on such policies) during the past five years (other than workers'
compensation claims). Schedule 3.26 is a complete and correct list of all
insurance currently in place (or, to the extent Seller is self-insured, would
have been in place and is reserved for or otherwise formally or informally
provided for) and accurately sets forth the coverages, deductible amounts,
carriers and expiration dates thereof relating to or in connection with Seller.
No notice or other communication has been received by Seller from any insurance
company within the five years preceding the date hereof canceling or materially
amending or materially increasing the annual or other premiums payable under any
of its insurance policies relating to or in connection with
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Seller, and, to the knowledge of Seller, no such cancellation, amendment or
increase of premiums is threatened. Such insurance will cover any liability
arising out of any injury to persons or property as a result of products
designed, used, manufactured, sold or leased, or any services performed by,
Seller for a period of at least three years, or Seller will obtain discontinued
product liability coverage for such period.
SECTION 3.27 NO POWERS OF ATTORNEY OR SURETYSHIPS. With respect to Seller,
(i) Seller has not granted any general or special powers of attorney and (ii)
Seller does not have any obligation or liability (whether actual, contingent or
otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor,
obligor on an asset or income maintenance agreement or otherwise in respect of
the obligation of any person, corporation, partnership, joint venture,
association, organization or other entity.
SECTION 3.28 BROKERAGE FEES. No Person is entitled to any brokerage or
finder's fee or other commission from Seller in respect of this Agreement or the
Transactions.
SECTION 3.29 PRODUCT WARRANTY AND LIABILITY. Each product of Seller
designed, used, manufactured, sold or leased by Seller and all services
performed by Seller have been in conformity with all applicable contractual
commitments and all express and implied warranties, and Seller has no liability
and there is no basis for any present or future action, suit or proceeding
giving rise to any liability, for replacement or repair thereof or other damages
in connection therewith, subject only to returns of product for warranty in the
ordinary course of business not exceeding one percent (1%) of sales of Seller in
any calendar year. Seller does not have any liability, and there is no basis for
any present or future action, suit or proceeding giving rise to any liability,
arising out of any injury to persons or property as a result of any products
designed, used, manufactured, sold or leased or any services performed by
Seller. Seller has not received any notice that an action, suit or proceeding
has been, or in the future may be, made alleging that products or services of
Seller are or were defective or deficient in any way.
SECTION 3.30 CONSENTS AND APPROVALS. Except as set forth in Schedule 3.30,
the execution and delivery of this Agreement by Seller do not, and the
performance of the Transactions contemplated by this Agreement by Seller will
not, require any filing with or notification to, or any consent, approval,
authorization or permit from, any governmental or regulatory authority or any
other Person.
SECTION 3.31 DISCLOSURE. The information provided by Seller in connection
with this Agreement, including, without limitation, the schedules hereto, and in
any other writing pursuant hereto does not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated herein or therein or necessary to make the statements and facts contained
herein or therein, in light of the circumstances under which they are made, not
false or misleading. Copies of all documents heretofore or hereafter delivered
or made available by Seller to Buyer pursuant hereto were or will be complete
and accurate records of such documents.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller and Shareholder that:
SECTION 4.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, with
full corporate power and authority to own or lease its properties and to conduct
its business in the manner and in the places where such properties are owned or
leased or such business is currently conducted.
SECTION 4.2 AUTHORITY OF BUYER. Buyer has all necessary authority and power
to enter into this Agreement and to carry out the Transactions contemplated
hereby. The execution, delivery and performance by Buyer of this Agreement and
the consummation of the Transactions contemplated hereby have been duly
authorized by all necessary corporate action of Buyer and no other action on the
part of Buyer is required in connection therewith. This Agreement constitutes
the valid and binding obligation of Buyer, enforceable in accordance with its
terms. The execution, delivery and performance by Buyer of this Agreement do
not, and the performance by Buyer of the Transactions contemplated hereby will
not:
(i) violate any provision of the Articles of Incorporation or by-laws of
Buyer;
(ii) violate any laws of the United States, or any state or other
jurisdiction applicable to Buyer or require Buyer to obtain any approval,
consent or waiver of, or make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made; or
(iii) result in a violation or any breach of, constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
result in the acceleration of any indebtedness under or performance required by,
result in any right of termination of, increase any amounts payable under,
decrease any amounts receivable under, change any other rights pursuant to, or
conflict with, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Buyer is a party or by which it or its properties is bound.
SECTION 4.3 OWNERSHIP OF CAPITAL STOCK OF BUYER. Advanced Materials Group,
Inc., a Nevada corporation, owns beneficially and of record all of the issued
and outstanding shares of Buyer.
SECTION 4.4 SUFFICIENT FUNDS. Buyer has and will have funds sufficient to
satisfy the sums due at Closing as set forth in this Agreement and to perform
and discharge the Assumed Liabilities.
SECTION 4.5 BROKERAGE FEES. No Person is entitled to any brokerage or
finder's fee or other commission from Buyer in respect of this Agreement or the
Transactions.
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SECTION 4.6 DISCLOSURE. The information provided by Buyer in this Agreement
and in any other writing furnished pursuant hereto does not and will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated herein or therein or necessary to make the statements and facts
contained herein or therein, in light of the circumstances under which they are
made, not false or misleading. Copies of all documents heretofore or hereafter
delivered or made available by Buyer to Seller pursuant hereto were or will be
complete and accurate records of such documents.
ARTICLE V
CERTAIN AGREEMENTS AND UNDERSTANDINGS
SECTION 5.1 USE OF NAME. Buyer acknowledges that it is not acquiring an
interest in the name "Gasket and Molded Products" and Buyer covenants and agrees
that it shall not use such name; provided that Buyer may use the name "Gasket
and Molded Products" and any trademarks related thereto to the extent such name
or mark is printed or otherwise appears on Inventory or other Assets, or in
connection with any public announcement of the purchase by Buyer of the Assets,
or for a period of three months following the Closing to the extent Buyer
desires to utilize any sales brochures previously published by Seller.
SECTION 5.2 COLLECTION OF ASSETS. Subsequent to the Closing, Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any
assets, cash or other property that Seller may discover or receive with respect
to any contracts, commitments, sales orders, purchase orders or any other items
included in the Assets.
SECTION 5.3 AGREEMENT NOT TO COMPETE.
(a) From the Closing Date to and including the fifth anniversary of the
Closing Date (or, in the case of Richard S. Rouse, the fifth anniversary of the
termination of his employment with the Company), Seller and Shareholder and Neal
M. Price hereby agree that he or it and its Affiliates shall not, directly or
indirectly, engage or be interested in any business that competes with, and
shall not, directly or indirectly, have any interest in, own, manage, operate,
control, be connected with as a stockholder (other than as a stockholder of less
than five percent (5%) of the issued and outstanding stock of a publicly held
corporation), joint venturer, or otherwise engage or invest or participate in,
any business that competes with the business of Seller as conducted on the date
hereof in any county or any other political subdivision of any of the following
states: California, Oregon, Texas, Colorado, Utah, New Mexico, Arizona and
Wyoming. All of the parties agree that the duration and area for which the
covenant not to compete set forth in this Section 5.3 is to be effective are
reasonable. In the event that any court determines that the time period or the
geographical areas provided for in this Section 5.3, or both of them, are
unreasonable and that such covenant is to that extent unenforceable, such
covenant shall remain in full force and effect for the greatest time period and
in the greatest geographical area that would not render it unenforceable. The
parties intend that this covenant shall
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be deemed to be a series of separate covenants, one for each and every county of
each and every state of the United States of America where this covenant is
intended to be effective.
(b) The parties agree that damages would be an inadequate remedy for Buyer
in the event of a breach or threatened breach of this Agreement and thus, in any
such event, Buyer may, either with or without pursuing any potential damage
remedies, immediately obtain and enforce an injunction prohibiting any of Seller
or any Shareholder or its Affiliates from violating this Agreement.
SECTION 5.4 PRODUCT WARRANTY MATTERS.
(a) As stated in Section 2.3, Buyer is not assuming any liabilities or
obligations of Seller for defective products or breach of warranty arising from
or relating to the design, use, manufacture, testing, sale or lease of any
products of Seller by Seller prior to the Closing Date. However, from the
Closing Date until the date of final disbursement of funds referred to in
Section 2.5(c)(iii), Buyer will provide warranty service on behalf of Seller, in
accordance with Buyer's normal business practices, with respect to warranties on
products of Seller sold by Seller prior to the Closing Date (the "Pre-Closing
Warranties"). Seller shall reimburse Buyer for all of Buyer's costs of labor and
materials, including overhead allocated to the cost of such labor and materials
in accordance with Buyer's standard practices (collectively, "Buyer's Warranty
Costs"), with respect to Buyer's performance in accordance with the Pre-Closing
Warranties.
(b) Buyer shall provide to Seller such information and documentation as
Seller reasonably requests in order for Seller to calculate the amount of
Buyer's Warranty Costs owed by Seller to Buyer. Seller shall provide to Buyer
such information and documentation as Buyer reasonably requests in order for
Seller to provide warranty service in accordance with Section 5.4(a) with
respect to Pre-Closing Warranties.
SECTION 5.5 CONDUCT OF BUSINESS. From the date hereof to the Closing Date,
except as expressly permitted or required by this Agreement or as otherwise
consented to by the Buyer in writing, Seller will:
(a) carry on the business of Seller in, and only in, the ordinary course,
in substantially the same manner as heretofore conducted, and use all reasonable
efforts to preserve intact its present business organization, maintain its
properties in good operating condition and repair, keep available the services
of its present significant employees, and preserve its relationship with
customers, suppliers and others having business dealings with it, to the end
that the goodwill and going business of Seller shall be in all material respects
unimpaired following the Closing;
(b) pay accounts payable and other obligations of Seller when they become
due and payable in the ordinary course of business consistent with prior
practice;
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(c) perform in all material respects all of its obligations under all
Contracts and other agreements and instruments relating to or affecting Seller
or the Assets, and comply in all material respects with all laws applicable to
the Assets or Seller;
(d) not enter into or assume any material agreement, contract or
instrument relating to Seller, or enter into or permit any material amendment,
supplement, waiver or other modification in respect thereof;
(e) not grant (or commit to grant) any increase in the compensation
(including incentive or bonus compensation) of any employee employed in the
operation of Seller or institute, adopt or amend (or commit to institute, adopt
or amend) any compensation or benefit plan, policy, program or arrangement or
collective bargaining agreement applicable to any such employee; and
(f) not take any action or omit to take any action, which action or
omission would result in a breach of any of the representations and warranties
set forth in Section 3.7.
SECTION 5.6 NO SOLICITATION. During the term of this Agreement, none of
Seller, any of its Affiliates or any Person acting on its or their behalf shall
(i) solicit or encourage any inquiries or proposals for, or enter into any
discussions with respect to, the acquisition of any properties and assets held
for use in connection with, necessary for the conduct of, or otherwise material
to, Seller or (ii) furnish or cause to be furnished any non-public information
concerning Seller to any Person (other than the Buyer and its agents and
representatives), other than in the ordinary course of business or pursuant to
applicable law and after prior written notice to the Buyer. Seller shall not
sell, transfer or otherwise dispose of, grant any option or proxy to any Person
with respect to, create any lien upon, or transfer any interest in, any Asset,
other than in the ordinary course of business and consistent with this
Agreement.
SECTION 5.7 ACCESS AND INFORMATION. So long as this Agreement remains in
effect, Seller will (and will cause each of its Affiliates and their respective
accountants, counsel, consultants, employees and agents) give Buyer and Buyer's
accountants, counsel, consultants, employees and agents, full access during
normal business hours to, and furnish them with all documents, records, work
papers and information with respect to, all of such Person's properties, assets,
books, contracts, commitments, reports and records relating to Seller, as Buyer
shall from time to time reasonably request. In addition, Seller will permit
Buyer and its accountants, counsel, consultants, employees and agents
reasonable access to such personnel of Seller during normal business hours as
may be necessary or useful to the Buyer in its review of the properties, assets
and business affairs of Seller and the above-mentioned documents, records and
information. Seller will keep Buyer generally informed as to the affairs of
Seller.
SECTION 5.8 PUBLIC ANNOUNCEMENTS. Except as required by applicable law,
Seller shall not, and it shall not permit any Affiliate to, make any public
announcement in respect of this Agreement or the transactions contemplated
hereby without the prior written consent of Buyer.
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SECTION 5.9 FURTHER ACTIONS.
(a) Seller agrees to use its best efforts to take all actions and to do
all things necessary, proper or advisable to consummate the transactions
contemplated hereby by the Closing Date.
(b) Seller will, as promptly as practicable, file or supply, or cause to
be filed or supplied, all applications, notifications and information required
to be filed or supplied by it pursuant to applicable law in connection with the
transactions contemplated hereby.
(c) Seller, as promptly as practicable, will use all reasonable efforts to
obtain, or cause to be obtained, all consents (including, without limitation,
all governmental approvals and any consents required under any Contract and all
consents listed on Schedule 3.30) necessary to be obtained in order to
consummate the sale and transfer of the Assets.
(d) At all times prior to the Closing, Seller shall promptly notify Buyer
in writing of any fact, condition, event or occurrence that will or may result
in the failure of any of the conditions contained in Section 6.2 to be
satisfied, promptly upon either of them becoming aware of same.
SECTION 5.10 EMPLOYEES. Buyer agrees promptly following the Closing to
offer employment as an employee-at-will to each person employed by Seller on the
date preceding the Closing Date at the same salary and wage rate as then in
effect for such employee as reflected in the books and records of Seller,
provided that Buyer may adopt or put into effect different work and benefit
policies and Employee Benefit Plans at Buyer's sole discretion. Seller shall be
responsible for any severance benefits due to any of its employees who do not
accept employment with Buyer. Buyer will provide those employees who accept
service with Buyer a service date as at Closing equal to their service date with
Seller, and such persons will become eligible for medical benefits under Buyer's
plans on the first day of the fourth calendar month following the Closing Date.
Prior to such date of coverage, such employees will receive medical coverage
under the provisions of Seller's existing health insurance coverage at Buyer's
cost, and Seller hereby covenants to Buyer that such continuing coverage is
permitted under such plans. Any employee contributions previously withheld by
Seller to offset Seller's cost of providing such extended coverage shall be
withheld from such continuing employees by Buyer for the period during which
such employees are employed by Buyer but are receiving medical coverage pursuant
to Seller's existing plan, and such monies shall be remitted to Seller as soon
as reasonably practicable. After the Closing Buyer shall provide a pool equal to
7% of gross wages paid to such continuing employees (other than Shareholder) to
be distributed among such employees (other than Shareholder) at the discretion
of Shareholder as wage or salary increases.
SECTION 5.11 ACCOUNTS RECEIVABLE. In the event that all Accounts
Receivable are not collected by Buyer within 120 days after the Closing Date,
despite reasonable efforts by Buyer to so collect (which shall not include
resort to, or threat of, litigation), Seller promptly shall purchase such
accounts receivable from Buyer for an amount equal to the aggregate
outstanding balance thereof.
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SECTION 5.12 FINANCING STATEMENTS. Seller shall cause Norwest Bank and
any other creditor to file termination statements closing all open financing
statements presently on file covering any of the Assets.
ARTICLE VI
CLOSING CONDITIONS
SECTION 6.1 CONDITIONS TO SELLER OBLIGATIONS. The obligation of Seller to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) The representations and warranties of Buyer set forth herein shall be
true and correct at and as of the Closing Date;
(b) Buyer shall have performed and complied with all of its covenants
hereunder through the Closing;
(c) No action, suit, or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(d) Buyer shall have delivered to Seller a certificate to Seller a
certificate to the effect that each of the conditions specified above in Section
6.1(a)-(c) is satisfied in all respects;
(e) Buyer shall deliver to Seller: (i) the Purchase Price to the extent
deliverable in accordance with Section 2.5; and (ii) a Fund Trust Agreement in
the form of Exhibit 2.5(c) hereto; and
(f) All actions to be taken by Buyer in connection with consummation of
the transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be satisfactory in form and substance to Seller. Seller
may waive any condition specified in Section 6.1 if it executes a writing so
stating at or prior to the Closing.
SECTION 6.2 CONDITIONS TO BUYER OBLIGATIONS. The obligation of the Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
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(a) The representations and warranties of Seller set forth herein shall be
true and correct at and as of the Closing Date;
(b) Seller shall have performed and complied with all of its covenants
hereunder through the Closing;
(c) Seller shall have procured all of the consents and approvals specified
in Schedule 3.30;
(d) No action, suit, or proceeding shall be pending of threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement, (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, or (iii) affect adversely the right of Buyer to own the
Assets or to operate Seller.
(e) Seller shall have delivered to Buyer a certificate to the effect that
each of the conditions specified above in Section 6.2(a)-(d) is satisfied in all
respects;
(f) Seller shall deliver to Buyer (i) a Bill of Sale; (ii) copies of
termination statements terminating all open UCC-1 financing statements; (iii) an
Assignment or Novation of Lease as described in Section 2.7(b) hereof; and (iii)
a Fund Trust Agreement in the form of Exhibit 2.5(c) hereto;
(g) Buyer shall have entered into an employment agreement with Richard S.
Rouse in the form of Exhibit 6.2(g) hereto and otherwise satisfactory to Buyer
in its sole discretion;
(h) Buyer shall be satisfied with the results of its due diligence
investigation, in its sole discretion;
(i) Buyer shall have received an opinion of Donald Glenn Peterson, Esq.,
counsel to Seller, in the form of Exhibit 6.2(i) hereto and otherwise in form
and substance satisfactory to Buyer in its sole discretion; and
(j) All actions to be taken by Seller in connection with consummation of
the transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be satisfactory in form and substance to Buyer. Buyer
may waive any condition specified in this Section 6.2 if it executes a writing
so stating at or prior to the Closing.
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ARTICLE VII
INDEMNIFICATION
SECTION 7.1 INDEMNIFICATION BY SELLER AND SHAREHOLDER. Seller and
Shareholder shall, jointly and severally, indemnify and hold harmless Buyer and
each of its Affiliates, directors, officers, employees, attorneys, agents,
representatives, successors and assigns (collectively, the "Affiliated Parties")
in respect of any and all claims, losses, damages, liabilities, declines in
value, penalties, interest, costs and expenses (including, without limitation,
any attorneys', accountants' and consultants' fees and other expenses, including
any such expenses incurred in connection with investigating, defending against
or settling any such claims) (collectively, "Losses") reasonably incurred by
Buyer or its Affiliated Parties, in connection with, or resulting from, each and
all of the following:
(a) Any breach of any representation or warranty made by Seller or
Shareholder in this Agreement or pursuant hereto or in any document or
instrument delivered by Seller or Shareholder pursuant hereto;
(b) Any misrepresentation contained in any written statement or
certificate furnished by any Seller or Shareholder pursuant to this Agreement or
in connection with the Transactions;
(c) Any breach of any covenant, agreement or obligation of Seller or
Shareholder contained in this Agreement or any other document or instrument
contemplated by this Agreement or delivered pursuant hereto;
(d) Any failure by Seller or Shareholder to perform and discharge any of
the Excluded Liabilities;
(e) (i) Any violation by Seller of any Environmental Protection Laws (as
amended or supplemented from time to time) prior to the Closing Date, (ii) any
liabilities arising under Environmental Protection Laws (as amended or
supplemented from time to time) as a result of the conduct of the business of
Seller prior to the Closing Date, (iii) any contamination of soil, groundwater
or other environmental media by or with any Regulated Substance on, in or under
the Real Property or, as a result of the operation of Seller's business, about
the Real Property; and (iv) any matters described in Section 3.15, whether or
not Seller had knowledge of such matters;
(f) (i) Any Taxes of Seller or its Affiliates, whether relating to
periods before or after the Closing Date, (ii) any Taxes arising in connection
with the Transactions, and (iii) any liability of Seller for Taxes of any other
Person, as a transferee or successor, by contract or otherwise;
(g) Any injury to persons or death or property damage resulting from
or contributed to, by any products designed, manufactured, sold or leased by
Seller, or any services performed, or actions taken, by Seller prior to the
Closing Date;
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(h) Any liability to any employee, former employee or beneficiary of any
of them arising under the provisions of the Consolidated Omnibus Budget
Reconsolidation Act of 1985, as amended, with respect to any qualifying event,
as defined in Section 4980B of the Code, occurring through the Closing Date; and
(i) Any violation of any laws, rules or regulations relating to United
States government contracts or subcontracts, including the Federal Acquisition
Regulations and related cost accounting standards, including without limitation
any such laws or regulations relating to defective pricing.
No claim, demand, suit or cause of action shall be brought against Seller
or Shareholder under Sections 7.1(a) or (b) unless and until the aggregate
amount of claims under such Sections 7.1(a) or (b) exceeds $5,000, in which
event Buyer and its Affiliated Parties shall be entitled to indemnification from
Seller or Shareholder for all claims hereunder relating back to the first
dollar. Notwithstanding the foregoing, such limitations do not apply to the
indemnification obligations of Seller or Shareholder set forth in Sections
7.1(c), (d), (e), (f), (g), (h) or (i).
SECTION 7.2 INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold
harmless Seller in respect of any and all Losses, reasonably incurred by
Seller, in connection with, or resulting from, each and all of the following:
(a) Any breach of any representation or warranty made by Buyer in this
Agreement or pursuant hereto or in any document or instrument delivered by
Seller; or
(b) Any misrepresentation contained in any written statement or
certificate furnished by Buyer pursuant to this Agreement or in connection with
the Transactions; or
(c) Any breach of any covenant, agreement or obligation of Buyer contained
in this Agreement or any other document or instrument contemplated by this
Agreement or delivered pursuant hereto.
No claim, demand, suit or cause of action shall be brought against Buyer
under Sections 7.2(a) or (b) unless and until the aggregate amount of claims
under such Sections 7.2(a) or (b) exceeds $5,000, in which event, Seller shall
be entitled to indemnification from Buyer for all claims hereunder relating back
to the first dollar. Notwithstanding the foregoing, such limitations do not
apply to the indemnification obligations of Buyer set forth in Section 7.2(c).
SECTION 7.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise
for indemnification hereunder, the party entitled to indemnification (the
"indemnified party") shall promptly notify the party obligated to provide
indemnification (the "indemnifying party") of the claim and, when known, the
facts constituting the basis for such claim; PROVIDED, HOWEVER, that the
failure to so notify the indemnifying party shall not relieve the
indemnifying party of its obligation hereunder to the extent such failure
does not materially prejudiced the indemnifying party. In the event of any
claim for indemnification hereunder resulting from or in connection with any
claim or legal
27
<PAGE>
proceedings by a third party, the notice to the indemnifying party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom.
SECTION 7.4 DEFENSE CLAIMS. In connection with any claim giving rise to
indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the indemnifying
party at its sole cost and expense and with counsel reasonably satisfactory to
the indemnified party may, upon written notice to the indemnified party, assume
the defense of any such claim or legal proceeding if (a) the indemnifying party
acknowledges to the indemnified party in writing, within fifteen (15) days after
receipt of notice from the indemnified party, its obligations to indemnify the
indemnified party with respect to all elements of such claim, (b) the
indemnifying party provides the indemnified party with evidence reasonably
acceptable to the indemnified party that the indemnifying party will have the
financial resources to defend against such third-party claim and fulfill its
indemnification obligations hereunder, (c) the third-party claim involves only
money damages and does not seek an injunction or other equitable relief, and (d)
settlement or an adverse judgment of the third-party claim is not in the good
faith judgment of the indemnified party, likely to establish a pattern or
practice adverse to the continuing business interests of the indemnified party.
The indemnified party shall be entitled to participate in (but not control) the
defense of any such action, with its counsel and at its own expense; PROVIDED,
HOWEVER, that if there are one or more legal defenses available to the
indemnified party that conflict with those available to the indemnifying party,
or if the indemnifying party fails to take reasonable steps necessary to defend
diligently the claim after receiving notice from the indemnified party that it
believes the indemnifying party has failed to do so, the indemnified party may
assume the defense of such claim; PROVIDED, FURTHER, that the indemnified party
may not settle such claim without the prior written consent of the indemnifying
party, which consent may not be unreasonably withheld. If the indemnified party
assumes the defense of the claim, the indemnifying party shall reimburse the
indemnified party for the reasonable fees and expenses of counsel retained by
the indemnified party and the indemnifying party shall be entitled to
participate in (but not control) the defense of such claim, with its counsel and
at its own expense. If the indemnifying party thereafter seeks to question the
manner in which the indemnified party defended such third party claim or the
amount or nature of any such settlement, the indemnifying party shall have the
burden to prove by a preponderance of the evidence that the indemnified party
did not defend or settle such third party claim in a reasonably prudent manner.
The parties agree to render, without compensation, to each other such assistance
as they may reasonably require of each other in order to insure the proper and
adequate defense of any action, suit or proceeding, whether or not subject to
indemnification hereunder.
SECTION 7.5 INTEREST. Any amount of money owed by an indemnifying party
to an indemnified party hereunder shall be paid with interest, at an annual
rate equal to the Prime Rate then in effect, from the date that the loss or
damage was sustained or cash disbursement made by the indemnified party until
such amount is paid by the indemnifying party.
SECTION 7.6 MANNER OF INDEMNIFICATION. All indemnification payments
hereunder shall be effected by payment of cash or delivery of a certified or
official bank check in the amount of the indemnification liability.
28
<PAGE>
SECTION 7.7 ADDITIONAL LIMITATIONS ON INDEMNIFICATION.
(a) No claim for indemnification shall be made by Buyer pursuant to
Sections 7.1(a), 7.1(b) or 7.1(c) or by Seller pursuant to Sections 7.2(a),(b)
or (c) if made more than three (3) years after the Closing Date, provided,
however, that claims for indemnification may be made by Buyer pursuant to
Sections 7.1(a), 7.1(b) or 7.1(c) with respect to the representations and
warranties made in Section 3.14 and Section 3.21 hereof for a period equal to
the relevant statutes of limitation.
(b) Notwithstanding the foregoing, the limitations set forth in Section
7.7(a) do not apply to the indemnification obligations of Seller set forth in
Sections 7.1(d), 7.1(e), 7.1(f), 7.1(g), 7 1(h) and 7.1(i).
(c) Notwithstanding the provisions of this Section 7.9 to the effect that
an indemnifying party's obligations under such section shall expire at specified
times set forth herein, such obligations shall continue (i) as to any matter as
to which a claim is submitted in writing to the indemnifying party prior to such
specified time and identified as a claim for indemnification pursuant to this
Agreement and (ii) as to any matter that is based upon faud by the indemnifying
party, until such time as such claims and matters are resolved.
ARTICLE VIII
TERMINATION
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by the written agreement of the Buyer and Seller;
(b) by either Seller or Buyer by written notice to the other party if the
Closing contemplated hereby shall not have been consummated pursuant hereto by
5:00 p.m. Los Angeles time on September 30, 1996, unless such date shall be
extended by the mutual written consent of Seller and Buyer;
(c) by Buyer by written notice to Seller if (i) the representations and
warranties of Seller shall not have been true and correct in all respects as of
the date when made or (ii) if any of the conditions set forth in Section 6.2
shall not have been, or if it becomes apparent that any of such conditions will
not be, fulfilled by 5:00 p.m. Los. Angeles time on September 30, 1996, unless
such failure shall be due to the failure of Buyer to perform or comply with any
of the covenants, agreements or conditions hereof to be performed or complied
with by it prior to the Closing; or
(d) by Seller by written notice to Buyer if (i) the representations and
warranties of Buyer shall not have been true and correct in all respects as of
the date when made or (ii) if any of the conditions set forth in Section 6.1
shall not have been, or if it becomes apparent that any of such
29
<PAGE>
conditions will not be, fulfilled by 5:00 p.m. Los Angeles time on
September 30, 1996, unless such failure shall be due to the failure of Seller to
perform or comply with any of the covenants, agreements or conditions hereof to
be performed or complied with by it prior to the Closing.
SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to the provisions of Section 8.1, this Agreement shall become
void and have no effect, without any liability to any Person in respect hereof
or of the transactions contemplated hereby on the part of any party hereto, or
any of its directors, officers, employees, agents, consultants, representatives,
advisers, stockholders or Affiliates except for any liability resulting from
such party's breach of this Agreement.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 BULK SALES LAW. Seller represents that there is no applicable
bulk sales law in connection with the transfer of the Assets under this
Agreement.
SECTION 9.2 FEES AND EXPENSES.
(a) Seller, on the one hand, and Buyer, on the other hand, will bear their
own expenses in connection with the negotiation and the consummation of the
Transactions contemplated by this Agreement, including, without limitation, any
broker's commission or finder's fee incurred by such party.
(b) Seller will pay all costs incurred, whether at or subsequent to the
Closing, in connection with the transfer of the Assets to Buyer as contemplated
by this Agreement, including without limitation, all sales, use, excise, real
property and other transfer taxes and charges applicable to such transfer and
all costs of obtaining or transferring permits, registrations, applications and
other tangible and intangible properties.
SECTION 9.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by facsimile transmission (with subsequent letter
confirmation by mail) or three days after being mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties,
their successors in interest or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:
IF TO BUYER: Advanced Materials, Inc.
- ------------ 20211 S. Susana Road
Rancho Dominguez, California 90221
Telecopy: (310) 763-6869
Attention: President
30
<PAGE>
With a concurrent copy to: Day Campbell & McGill
3070 Bristol, Suite 650
Costa Mesa, California 92626
Telecopy: (714) 429-2901
Attention: Leonard J. McGill, Esq.
IF TO SELLER OR SHAREHOLDER: Gasket and Molded Products, Inc.
- ---------------------------- 8218 E. Lakeshore Drive
Parker, Colorado 80134
Telecopy: (303) 841-2933
Attention: Richard S. Rouse
With a concurrent copy to: Donald Glenn Peterson, Esq.
4242 E. Amherst Avenue
Denver, Colorado 80222-6702
Telecopy: (303) 758-1091
SECTION 9.4 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall not
be assignable by any of the parties. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective permitted successors and
assigns.
SECTION 9.5 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal law, and not the law
pertaining to conflicts or choice of law, of the State of Colorado.
SECTION 9.6 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 9.7 COMPLETE AGREEMENT. This Agreement, the Exhibits and Schedules
and the documents delivered or to be delivered pursuant to this Agreement
contain or will contain the entire agreement among the parties with respect to
the Transactions and shall supersede all previous oral and written and all
contemporaneous oral negotiations, commitments and understandings.
SECTION 9.8 MODIFICATIONS. AMENDMENTS AND WAIVERS. This Agreement may be
modified, amended or otherwise supplemented only by a writing signed by all of
the parties. No waiver of any right or power hereunder shall be deemed effective
unless and until a writing waiving such right or power is executed by the party
waiving such right or power.
SECTION 9.9 DUE DILIGENCE INVESTIGATION; KNOWLEDGE. All representations and
warranties contained herein that are made to the knowledge of a party shall
require that such party make reasonable investigation and inquiry with respect
thereto to ascertain the correctness and validity thereof. Without limiting the
foregoing sentence, when any fact is stated to be to the "knowledge of
Seller," such reference shall mean that Seller knows or should have known of the
existence or non-
31
<PAGE>
existence of such fact based upon a reasonable investigation and inquiry of the
employees, accountants and attorneys of Seller.
SECTION 9.10 LIMIT ON INTEREST. Notwithstanding anything in this Agreement
to the contrary, no party shall be obligated to pay interest at a rate higher
than the maximum rate permitted by applicable law. In the event that an interest
rate provided in this Agreement exceeds the maximum rate permitted by applicable
law, such interest rate shall be deemed to be reduced to such maximum
permissible rate.
SECTION 9.11 ATTORNEYS' FEES AND COSTS. Should any party institute any
action or proceeding in any court to enforce any provision of this Agreement,
the prevailing party shall be entitled to receive from the losing party
reasonable attorneys' fees and costs incurred in such action or proceeding,
whether or not such action or proceeding is prosecuted to judgment.
SECTION 9.12 FURTHER ASSURANCES. Each party shall execute and deliver such
further instruments and take such further actions as any other party may
reasonably request in order to carry out the intent of this Agreement and to
consummate the Transactions.
SECTION 9.13 CONTRACT INTERPRETATION: CONSTRUCTION OF AGREEMENT.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.
(b) No party, nor its respective counsel, shall be deemed the drafter
of this Agreement for purposes of construing the provisions of this Agreement,
and all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
SECTION 9.14 ARBITRATION. Except as otherwise provided in Section 5.4 and
subject to Section 9.5, any controversy, dispute or claim arising under or
related to this Agreement shall be settled by arbitration conducted in Los
Angeles, California in accordance with the then existing Commercial Arbitration
Rules of the American Arbitration Association, and judgment upon any award
rendered by the arbitrator may be entered by any federal or state court having
jurisdiction thereof. The parties expressly provide that the provisions of
Section 1283.05 of the California Code of Civil Procedure are incorporated into,
and made a part of, this Section 9.14. The decision of the arbitrator shall be
final and binding upon the parties. The arbitrator shall be authorized to award
any relief, whether legal or equitable, to the party so entitled to such relief.
(b) In respect of any action, suit or other proceeding relating to the
enforcement of the award rendered by the arbitrator pursuant to this Section
9.14, each party hereby irrevocably submits to the non-exclusive jurisdiction
of any state or federal court located in the County of Los Angeles, State of
California. EACH PARTY HEREBY WAIVES ANY RIGHT EACH MAY HAVE TO
32
<PAGE>
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS, TO ASSERT THAT IT IS NOT SUBJECT TO
THE JURISDICTION OF THE AFORESAID COURTS, OR TO OBJECT TO VENUE TO THE EXTENT
THAT ANY ACTION, SUIT OR OTHER PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
SECTION 9.14.
SECTION 9.15 GUARANTEE OF OBLIGATIONS. The Shareholder hereby agrees that
he is fully liable for each and every obligation, covenant or liability of
Seller under this Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the date first above written.
BUYER
-----
ADVANCED MATERIALS, INC., a California corporation
By: /s/ Dave Lasnier
-------------------------------
Name: Dave Lasnier
Title: Executive Vice President/
General Manager
SELLER
------
GASKET AND MOLDED PRODUCTS, INC., a Colorado
corporation
By: /s/ Richard S. Rouse
-------------------------------
Name: Richard S. Rouse
Title: President
SHAREHOLDER
-----------
/s/ Richard S. Rouse
----------------------------------
Name: Richard S. Rouse
NEAL M. PRICE
-------------
(as to Section 5.3 only)
/s/ Neal M. Price
----------------------------------
Name: Neal M. Price
33
<PAGE>
LIST OF EXHIBITS
Exhibit 2.5(c) Fund Trust Agreement
Exhibit 2.6 Assignment or Novation of Lease
Exhibit 6.2(g) Employment Agreement
Exhibit 6.2(i) Opinion of Counsel
LIST OF SCHEDULES
Schedule 2.1(a) Equipment List
Schedule 2.1(b) Inventory List
Schedule 2.1(c) Contract List
Schedule 2.2(iv) Excluded Inventory
Schedule 3.2 Permits and Licenses
Schedule 3.6 Financials
Schedule 3.13 Receivables Aging
Schedule 3.19(a) Material Contracts
Schedule 3.22 Related Party Transactions
Schedule 3.26 Insurance
Schedule 3.30 Consents Required
<PAGE>
AMENDMENT ONE TO LEASE
THIS AMENDMENT ONE TO LEASE is made this 27th day of September, 1996, by and
between RIGGS BANK N.A., formerly known as The Riggs National Bank of
Washington, D.C., as trustee of the Multi-Employer Property Trust, (the
"Landlord"), and ADVANCED MATERIALS GROUP, INC., a Nevada corporation (the
"Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated February 1,
1994, (the "Lease"), for approximately 28,488 square feet of space located in
Building B of Tualatin Corporate Center at 9474 SW Tualatin-Sherwood Road,
Tualatin, Oregon (the "Premises"), as more fully described in the Lease; and
WHEREAS, the current term of the Lease expires February 28, 1997, and Landlord
and Tenant desire to extend the Lease Term, adjust the monthly base rent and to
modify the Lease accordingly;
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, the parties hereby mutually agree as follows:
1. The term of the Lease is hereby extended for a period of Thirty-six
(36) months commencing March 1, 1997, and terminating February 29, 2000.
2. Effective March 1, 1997, the monthly base rent as provided for in
Paragraph 2 of the Lease shall be as follows:
Months Monthly Base Rent
------ -----------------
3/1/97 - 8/31/98 $7,977.00
9/1/98 - 2/29/00 $8,262.00
3. Landlord hereby acknowledges receipt of the sum of Five Hundred
Seventy and No/100 Dollars ($570.00) as additional security deposit.
4. With the exception of this Lease, neither the Tenant nor any affiliate
of the Tenant is a tenant under a lease or any other tenancy arrangement (i)
with (a) Riggs Bank N.A., formerly known as The Riggs National Bank of
Washington, D.C., as trustee of the Multi-Employer Property Trust; (b) the
Multi-Employer Property Trust; (c) The National Bank of Washington
Multi-Employer Property Trust; (d) Alameda Industrial Properties Joint Venture;
(e) Harman International Business Campus Joint Venture; (f) Beaverton-Redmond
Tech Properties; (g) Corporate Drive Corporation as trustee of the Corporate
Drive Nominee Realty Trust; (h) Goldbelt Place Joint Venture; or (i) Boa 1515;
or (ii) involving any property in which the entities named in clauses (a), (b)
or (c) are known by the Tenant to have any ownership interest.
5. (a) As used in this paragraph, the term "Access Laws" shall mean the
Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of
1988, all state and local laws or ordinances related to handicapped access, or
any statute, rule, regulation, ordinance, order of governmental bodies or
regulatory agencies, or order or decree of any court adopted or enacted with
respect to any of the foregoing. The term Access Laws shall include all Access
Laws now in existence or hereafter enacted, adopted or applicable.
(b) Landlord makes no representations regarding the compliance of the
Premises, Building or the Project with Access Laws; provided that, if any
improvements or alternations constructed by Landlord do not comply with Access
Laws, Landlord shall be responsible for correcting such defects if and to the
extent required by law.
(c) Tenant agrees to notify Landlord immediately if Tenant becomes
aware of (i) any condition or situation in or on the Premises which would
constitute a violation of any Access Laws, or (ii) any threatened or actual
lien, action or notice of the Premises not being in compliance with any Access
Laws. Tenant shall inform Landlord of the nature of any such condition,
situation, lien, action or notice and of the action Tenant proposes to take in
response thereto.
(d) Tenant shall be solely responsible for all costs and expenses
relating to or incurred in connection with bringing the Premises, the Building
and the common areas into compliance with the Access Laws if and to the extent
such costs and expenses arise out of or relate to Tenant's use of the Premises
or Tenant's modifications, improvements or alterations to the Premises after the
date of this Lease.
(e) Tenant agrees to indemnify, defend and hold Landlord harmless
from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and costs and
expenses (including attorneys fees), arising directly or indirectly from or out
of, or in any way connected with, any activity on or use of the Premises, the
Building or the Project by Tenant,
<PAGE>
its agents, employees, contractors, invitees, or any subtenant or concessionaire
put into possession of all or any part of the Premises by Tenant, which activity
or use results in the Premises violating any applicable Access Laws.
(f) The provisions in this paragraph shall supersede any other
provisions in this Lease regarding Access Laws to the extent inconsistent with
the provisions of this paragraph. The provisions in this paragraph shall survive
the expiration of the Term or the termination of this Lease for any other reason
whatsoever.
6. In the event any payment due from Tenant to Landlord is made by a
party other than Tenant, such payment shall be deemed to have been made by and
for the account of Tenant, and the party making such payment shall have no
rights under this Lease.
7. Tenant warrants that all necessary corporate actions have been duly
taken to permit Tenant to enter into this Amendment to Lease and that each
undersigned officer has been duly authorized and instructed to execute this
Amendment to Lease.
8. Except as expressly modified above, all terms and conditions of the
Lease remain in full force and effect and are hereby ratified and confirmed.
LANDLORD: TENANT:
RIGGS BANK N.A., formerly known as ADVANCED MATERIALS GROUP, INC.,
The Riggs National Bank of Washington, a Nevada corporation
D.C., as trustee of the Multi-Employer
Property Trust
By: /s/ Maria E. Fleming By: /s/ James D. Graven VP/CFO
---------------------------------- --------------------------------
Maria E. Fleming
Senior Trust Officer Name: James D. Graven
------------------------------
Date: 11/8/96 Date: 10/3/96
------------------------------- -----------------------------
<PAGE>
TENANT
STATE OF California )
------------------------------
SS.
County of Los Angeles )
----------------------------
BE IT REMEMBERED, That on this third day of October, 1996, before me, the
undersigned a Notary Public in and for said County and State, personally
appeared the within name James D. Graven, known to me to be VP/CFO who executed
the within instrument and acknowledged to me that he executed the same freely
and voluntarily.
IN TESTIMONY WHEREOF, I hereunto set my hand and affixed my
official seal the day and year last above written.
-----------------------------------------------------
Notary Public for
-----------------------------------
My commission expires
-------------------------------
[SEAL]
LANDLORD
District of Columbia )
------------------------------
SS.
County of )
----------------------------
BE IT REMEMBERED, That on this 8th day of November, 1996, before me, the
undersigned a Notary Public in and for said County and State, personally
appeared the within name Maria Fleming known to me to be Senior Trust Officer
who executed the within instrument and acknowledged to me that he executed the
same freely and voluntarily.
IN TESTIMONY WHEREOF, I hereunto set my hand and affixed my
official seal the day and year last above written.
[illegible] M. Parker
-----------------------------------------------------
Notary Public for Riggs Bank
-----------------------------------
My commission expires 4-30-99
-------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 2,639
<SECURITIES> 112
<RECEIVABLES> 3,114
<ALLOWANCES> 100
<INVENTORY> 2,110
<CURRENT-ASSETS> 8,319
<PP&E> 4,121
<DEPRECIATION> 1,842
<TOTAL-ASSETS> 13,661
<CURRENT-LIABILITIES> 4,053
<BONDS> 572
0
0
<COMMON> 10
<OTHER-SE> 6,560
<TOTAL-LIABILITY-AND-EQUITY> 13,661
<SALES> 18,306
<TOTAL-REVENUES> 18,306
<CGS> 14,859
<TOTAL-COSTS> 14,859
<OTHER-EXPENSES> (901)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 510
<INCOME-PRETAX> 3,838
<INCOME-TAX> 162
<INCOME-CONTINUING> 3,676
<DISCONTINUED> 0
<EXTRAORDINARY> 508<F2>
<CHANGES> 0
<NET-INCOME> 4,184
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<FN>
<F1>INCLUDES $3,738 GAIN ON SALE OF STOCK AND $572 GAIN ON STOCK RIGHTS.
<F2>EXTRAORDINARY INCOME ON RETIREMENT OF DEBT, NET OF INCOME TAX OF $18.
</FN>
</TABLE>
