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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-16401
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ADVANCED MATERIALS GROUP, INC.
(Name of small business issuer in its charter)
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<S> <C>
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20211 S. SUSANA ROAD, RANCHO DOMINGUEZ, 90221
CALIFORNIA
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (310) 537-5444
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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 $30,042,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on February 20, 1998 was $23,009,919. The number of shares outstanding of
the issuer's only class of Common Stock, $.001 par value, was 8,624,805 on
February 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Stockholder Meeting to be held on April 28, 1998: Part
III.
Transitional Small Business Disclosure Format (check one): Yes ____ No _X_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Advanced Materials Group, Inc. (the "Company"), through its subsidiaries and
division, develops, manufactures and markets a wide variety of industrial
products. The Company's principal subsidiary, Advanced Materials, Inc. (formerly
known as Wilshire Advanced Materials, Inc.) ("AM"), is 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. Advanced
Materials Foreign Sales Corporation Ltd. ("AM FSC") was formed in Fiscal Year
1997 ("FY97") as a wholly-owned subsidiary of AM to conduct the same business
activities in the Asian Market. Advanced Materials Ltd., ("AM Ltd.") was formed
in FY97 as a wholly-owned subsidiary of the Company to conduct the same business
activities in the European market. 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 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 AM. AM had previously been formed as a
California corporation in August, 1992 for the purpose of acquiring the assets
of the General Foam Products division of Wilshire Technologies, Inc. ("WTI").
The assets acquired by AM constituted a portion of the business and assets
previously acquired by WTI from Wilshire Foam Products, Inc. in November, 1990.
The Company's principal executive offices are located at 20211 S. Susana
Road, Rancho Dominguez, California 90221, and its telephone number is (310)
537-5444.
ACQUISITIONS
In November 1992, AM 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, AM effected a reverse acquisition of the Company (formerly
known as Far West Ventures, Inc.). In connection with the transaction, the
Company issued 5,030,160 shares of its Common Stock to the stockholders of AM.
In August 1993, the Company purchased an equity interest in IT. In addition,
the Company obtained an exclusive worldwide license from IT to manufacture, use
and sell certain industrial products utilizing proprietary polymers and
processes developed by IT. 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 performance. The Company
assumed all of the obligations of
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Condor (other than federal income tax liabilities) which amounted to
approximately $207,000 as of the closing date.
On November 23, 1993, AM purchased from WTI certain assets of WTI's OEM
Medical Products Division that had been used in connection with the private
label manufacturing of products for medical accounts. 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 Singapore, Ireland and Mexico.
Two fabrication plants are planned to begin production in fiscal 1998. The
plants are located in Ireland and Singapore, respectively. Ireland is a start-up
company and will operate as Advanced Materials Ltd., a wholly-owned subsidiary
of Advanced Materials Group, Inc. The Company formed Advanced Materials Foreign
Sales Corporation Ltd., a wholly-owned subsidiary of AM to enter into a joint
venture agreement in Singapore. AM FSC Ltd. has entered into a ten-year
agreement with Foamtec Pte. Ltd. ("Foamtec"). Terms of the agreement call for AM
FSC to lease production equipment and provide certain technology to Foamtec.
Foamtec will in turn provide its manufacturing facilities and workforce to
fabricate foam products at Foamtec's Singapore facility. The Company's long-term
strategy also includes the identification and acquisition of undervalued
entities which will add strategic and economic value to the Company's product
line and competitive positioning.
The Company will focus on launching Condor's new adhesives line (see
"Description of Business-- Condor Utility Products") in the near future. This
launch will lead to increases in revenue and profitability as we expand our
customer base.
PRODUCTS
The Company's AM subsidiary manufactures a variety of specialty materials
including foams, foils, films and adhesive composites, into components and
finished products for the automotive, electronics, medical and consumer products
markets. These products include 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. AM typically provides no warranty for its products other than
compliance with specifications at the time of delivery.
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The Company's Condor subsidiary produces a line of molded plastic products
used for mixing and dispensing two chemical components which, when combined,
form sealants. Condor's products include dual syringe-style cartridges and
mixing nozzles. Many of these products are designed for one time use and are
disposable. The products are sold primarily to the telecommunications and power
utility industries and are used for such purposes as sealing duct systems
containing telephone or power lines against water, debris, vapor and vermin.
All of the products produced by AM are manufactured to specifications
furnished by its customers. Accordingly, the Company does not engage in research
and development of new products. The Company has, however, acquired new and
advanced equipment, an example of which is impulse sealing equipment for making
foam/non-woven filters, in order to maintain production capabilities consistent
with its customers' specifications.
MANUFACTURING
AM 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 80,000 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 AM. The Rancho Dominguez and Dallas facilities each
maintain a separate sales and production staff, while administration and
purchasing are centralized in the Rancho Dominguez facility.
AM Ltd. is leasing approximately 25,000 square feet of space in Dublin,
Ireland. The facility will serve as the Company's European headquarters and will
have substantially the same equipment as the U.S. facilities.
AM 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. AM 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. AM 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. AM to 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. AM
currently produces caulking and sealing foam tape using this process. Die
cutting is a process which involves the use of a match tool die in a hydraulic
press to cut material. AM currently produces a variety of products such as
electrosurgical pads, EKG pads, diagnostic swabs and artificial fingernail
adhesive tabs with its die cutting equipment. Slitting is a process which uses
saws or slitters with blades ranging from saw tooth to razor edge, depending on
the material to be processed, to horizontally and/or vertically slice layers off
blocks of raw material.
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AM is able to produce a variety of products for different markets by using
the same fabrication techniques with different materials. For example, using its
slitter, pressure sensitive laminator and die cutter equipment in sequence, AM
can produce a variety of products, such as sound attenuation devices for
computer printers, gaskets for hard disk drives, water seals for automotive air
conditioners, inking pads and nail files. Using its slitter, flame laminating
and thermoforming equipment in sequence, AM can produce other products such as
padding for helmets, mouse pads for computers, sunglass frames, holsters and
back support belts.
In addition to fabricating polyurethane and polyethylene foam, AM fabricates
other materials used in combination with foam such as fabrics, pressure
sensitive adhesives and foils. AM also fabricates plastic films, pressure
sensitive adhesives and other materials not in combination with foam. This
capability enables AM to minimize its dependence on market sectors, which may be
cyclical in nature.
AM manufactures its products for its industrial customers pursuant to
customer purchase orders, most of which provide for multiple shipping release
dates. This enables AM to plan raw material purchases and production scheduling.
For its largest accounts, AM will produce a two to four week supply of products
and stock them for quick delivery.
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
AM maintains systems and procedures, and is ISO 9002 certified at its Rancho
Dominguez, Dallas and Portland facilities, that meet customer quality
specifications and has successfully completed qualification surveys conducted by
Fortune 500 OEM manufacturers. AM also maintains procedures for conducting
quality compliance surveys of its major suppliers. AM has specific procedures in
place for receiving inspection, source inspection, process inspection and
control, instrument calibration standards, records maintenance, training and
internal quality audits. AM has implemented systems for statistical process
control, which utilize statistical techniques to identify, monitor and improve
critical manufacturing processes such as sawing, die cutting and thermoforming.
SUPPLIERS
AM purchases raw materials primarily consisting of polyurethane foam,
crosslinked polyolefin foams and pressure sensitive adhesives. Polyurethane foam
accounted for approximately 48% of the raw materials purchased by AM in fiscal
1997 and fiscal 1996. The Company's largest supplier of raw materials is Foamex
Engineered Polyurethanes ("Foamex"), which in fiscal 1997 and 1996 supplied
approximately 54% and 31%, respectively, of AM's raw materials' requirement.
AM is an authorized fabricating distributor of a number of raw material
suppliers, including Foamex, Voltek, Avery Dennison (pressure sensitive
adhesives), Zotefoam (crosslinked polyethylenes) and Ensolite (vinyl foam).
Management believes that these supply arrangements, many of which have been
active for 25 years or more, provide AM with a diverse mix of raw materials at
the best available prices. AM purchases raw materials pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure or
delay by such suppliers in supplying necessary raw materials to AM could
adversely affect AM's
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ability to manufacture and deliver products on a timely and competitive basis.
AM purchases its raw materials on standard credit terms and considers its
relationship with its suppliers to be good.
Management believes that the loss of either Foamex or Voltek as a major
supplier of foam would not have a materially adverse effect on AM's business in
the long term because other suppliers of foam could be relied upon to meet AM's
requirements at a comparable cost. However, the loss of either Foamex or Voltek
would have a materially adverse effect on AM's business in the short term
(approximately three months). Management believes that the loss of any other
supplier would not have a material adverse effect on AM.
AM's business is subject to the risk of price fluctuations and periodic
shortages of raw materials. AM purchases raw materials pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure or
delay by such suppliers in supplying necessary raw materials to AM could
adversely affect AM's ability to manufacture and deliver products on a timely
and competitive basis.
MARKETING AND SALES
AM'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 AM's products are components or finished
products manufactured to order for its industrial customers. The customer's
purchase decision often involves the engineering, manufacturing and purchasing
groups within the customer's management.
AM's fifteen full-time salesmen make sales in the United States on a direct
basis. Nine salesmen are in the field and six salesmen provide inside sales
support. The nine field salesmen receive a base salary plus a commission and the
five inside salesmen receive a salary. For fiscal year 1997 and 1996,
approximately 95% of AM's sales were made in the United States.
AM currently does business in a number of foreign countries including
Singapore, Ireland, Mexico, Taiwan, Japan, Thailand and Israel. Foreign sales,
which accounted for approximately 5% of total 1997 and 1996 sales, are made on a
direct basis and through sales agents who receive commissions. In Mexico, an AM
bilingual sales representative has been attempting to expand the market for AM's
products, and opportunities for corporate partnering are being explored.
AM FSC will begin direct sales to customers in the Asian market , and AM
Ltd. will begin direct sales to customers in Ireland and the rest of Europe.
AM relies primarily upon referrals by its customers and vendors and the
activities of its salesmen for new business. AM advertises in the Thomas
Register, a sourcing guide for industrial engineering and purchasing groups. AM
also participates in industrial design and engineering trade shows as a means of
marketing its products.
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 plus bonus and the contract sales representatives
receive commissions.
BACKLOG
AM manufactures all of its products pursuant to customer purchase orders.
Backlog is comprised of firm orders for products, which have a scheduled
shipment date within the next 12 months. Certain orders in the backlog may be
canceled under certain conditions without significant penalty. At November 30,
1997 and 1996, AM's backlog of orders believed to be firm was approximately
$8,597,000 and $5,613,000, respectively.
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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,
1997 and 1996, Condor's backlog of orders believed to be firm was approximately
$24,000 and $10,000 respectively.
CUSTOMERS
AM generally sells its products pursuant to customer purchase orders. There
can be no assurance that any such customers will continue to purchase products
from AM in the future. These customers are in the computer printer, medical
disposables, automotive air conditioning and consumer cleaning supply markets.
Management believes that this diversity spreads the risk of dependence upon one
customer or one market sector. However, two customers accounted for 39% and 10%
of consolidated revenues for the year ended November 30, 1997 and one customer
accounted for 28% and 13% of consolidated revenues for the year ended November
30, 1996 and 1995, respectively. While AM has acquired new customers as well as
orders for new products from existing customers, the loss of one or more of its
largest customers or a decline in the economic prospects of such customers could
have an adverse effect on AM's business.
AM's prices are competitive with other fabricators of custom materials. AM
sales are typically made on terms, which require payment of the net amount due
in 30 days.
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 the near future.
AM's domestic customers are located primarily in the West, Southwest and
Southeast regions of the United States. For bulky, low value products, high
freight costs on long distance shipments from AM's Rancho Dominguez, Portland,
Denver and Dallas facilities make it difficult for AM to be competitive in other
regions of the United States or internationally.
LICENSES AND PROPRIETARY RIGHTS; NEW PRODUCT
Patents protect none of AM's current manufacturing processes. AM relies on
proprietary know-how, exclusive license rights and distribution agreements, and
employs various methods to protect its processes. However, such methods may not
afford complete protection, and there can be no assurance that others will not
independently develop such processes.
The Company has an exclusive worldwide license to manufacture, 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 product 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
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have been made within 12 months after IT delivers know-how or if the level of
sales after 3 years is less than contemplated by the business plan. The Company
must pay IT a royalty of 5% of all sales up to $2,000,000, 4% of all sales
between $2,000,000 and $4,000,000 and 3% of all sales in excess of $4,000,000.
In order to maintain exclusive rights, the Company must make minimum annual
royalty payments to IT in an agreed upon amount in accordance with a schedule
which forms a part of the business plan. The Company has not completed the
business plan for the initial product as of the date of this report.
If the Company and IT agree to develop other licensed products utilizing
IT's proprietary polymers and processes, the Company must prepare and provide to
IT for its approval a business plan related to such additional products, and
must comply with the above-described provisions of the license agreement
regarding sales of such products and payment of royalties to IT. The term of the
license is ten years unless earlier terminated in the event of default. The
Company does not have the right to grant sublicenses without the prior approval
of IT.
COMPETITION
The custom materials fabrication industry in which AM competes is highly
competitive. 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. AM competes primarily on the
basis of its ability to meet customers' specifications promptly and cost
effectively, and on the quality of its products.
Current competitors or new market entrants could introduce new or enhanced
products with features which render AM's products obsolete or less marketable,
or could develop means of producing competitive products at a lower cost. The
ability of AM to compete successfully will depend in large measure on its
ability to adapt to technological changes in the industry. There can be no
assurance that AM will be able to keep pace with the technological demands of
the market place or successfully develop new products, which are in demand by
the industry.
The market in which Condor competes is competitive. Condor competes against
one large competitor, Courtaulds Aerospace, which has substantially greater
financial, marketing, personnel, and other resources than Condor, and three
smaller competitors, which supply only small segments of the market. Condor
competes primarily on the basis of the quality and utility of its products
rather than on the basis of price.
GOVERNMENT REGULATION
The manufacture of certain products by AM and Condor requires the purchase
and use of chemicals and other materials, which are or may be, classified as
hazardous substances. The Company and its subsidiaries do not maintain
environmental impairment insurance. There can be no assurance that the Company
and its subsidiaries will not incur environmental liability or that hazardous
substances are not or will not be present at their facilities.
The Company and its AM and Condor subsidiaries are subject to regulations
administered by the United States Environmental Protection Agency, various state
agencies and county and local authorities acting in conjunction with federal and
state 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.
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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 November 30, 1997, the Company and its AM subsidiary had approximately
107 full-time employees, of whom approximately 54 were located at AM's Rancho
Dominguez, California facility, approximately 36 were located at AM's Dallas,
Texas facility, 7 were located at AM's Portland, Oregon facility and 10 were
located at AM's Denver, Colorado facility. Of AM's full-time employees,
approximately 76 are employed in manufacturing, 15 are in sales, 5 perform
clerical functions and 11 perform administrative functions. AM also utilizes the
services of contract workers as needed from time to time in its manufacturing
operations.
As of November 30, 1997 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.
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 80,000 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 20,000 square feet of
its Dallas facility to S-Line for approximately $7,700 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. AM is currently negotiating a one-year extension on the
Denver facility.
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.
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ITEM 3. LEGAL PROCEEDINGS.
In October 1996, the Company, and WTI, was notified that they have been
named in a bodily injury lawsuit pending in 192nd Judicial District Court of
Dallas County Texas, involving silicon breast implants. Such suit alleges that
AM 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: (1) AM was not incorporated at the
time of such implants; (2) AM has had no involvement with silicone or other
breast implants; (3) AM 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. An adverse ruling
could, however, have a marked adverse effect on the Company's financial
condition.
AM 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 AM's assets
and its ability to conduct its business.
The Company's Condor subsidiary has been named in a lawsuit originally filed
in the Superior Court of California, San Joaquin County, on January 24, 1992 by
Vern Auten and Shirley Auten, doing business as Aglo Plastics Company.
Plaintiffs alleged that Condor breached a supply contract by obtaining various
molds from a competing supplier, and are seeking damages therefor. Plaintiffs
are also seeking damages based upon an alleged intentional infliction of
emotional distress upon plaintiffs by a former 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 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. Trial has been set to commence in June, 1998.
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. An adverse ruling could, however, have a
material adverse effect on the Company's financial condition.
On January 7, 1998 the Company filed suit in the Superior Court of
California, County of Los Angeles, against a former employee of Condor for
breach of promissory note and money lent. The Company believes it will prevail
in this matter.
On February 20, 1998 the former employee of Condor filed a cross-complaint
in the Superior Court of California, County of Los Angeles, for damages and
declaratory relief. The cross-complaint alleges that the Company breached an
Employment Agreement with the former employee and claims damages. The Company
believes that the cross-complaint has no merit and intends to vigorously defend
against the claim. Accordingly, no provision for any liability has been made.
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.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on the NASDAQ Small-Cap Stock Market
("NASDAQ") under the symbol ADMG since June 23, 1993. The high and low bid
prices for the common stock for the past two fiscal years as reported by NASDAQ
are set forth in the following table. Such quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW
- -------------------- ------- ------- -------------------- ------- -------
<S> <C> <C> <C> <C> <C>
Fourth Quarter...... $ 5 1/4 $ 2 31/32 Fourth Quarter...... $ 2 3/4 $ 27/32
Third Quarter....... $ 2 31/32 $ 1 9/16 Third Quarter....... $ 1 3/8 $ 27/32
Second Quarter...... $ 2 $ 1 3/8 Second Quarter...... $ 1 13/32 $ 1/2
First Quarter....... $ 2 9/16 $ 1 7/16 First Quarter....... $ 1 3/32 $ 7/16
</TABLE>
There were 735 stockholders of record as of February 20, 1998.
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.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
AMG achieved record revenues, operating profit and cash flow from operating
activities in fiscal 1997. This year's performance highlights the Company's
continuing success in attracting large customers in rapidly growing, technology
driven industries.
THE COMPANY'S REVENUE rose to a record $30.0 million in the fiscal year
ended November 30, 1997, up 64% from 1996. This increase was primarily
attributable to volume increases in sales to computer printer manufacturers.
Revenues in 1995 were $18.3 million, a 24% increase attributable primarily to
the introduction of two new products sold to computer printer manufacturers.
COST OF SALES increased 50% in 1997 from 1996, and 14% in 1996 from 1995.
The overall growth in cost of sales was driven by unit volume growth of the
products sold. While revenues increased substantially from 1995 to 1997, growth
in cost of sales was significantly less. Volume increases improved capacity
utilization rates and created production efficiency gains, resulting in
favorable labor and overhead absorption.
AMG'S GROSS PROFIT percentage was 26% in 1997, compared to 19% in 1996 and
12% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased in absolute dollars
during the three-year period as the Company increased both its direct sales
force and engineering staff. However, SG&A declined as a percentage of revenues
during the same period. As a percentage of revenue, SG&A was 13%, 16% and 18% in
1997, 1996 and 1995, respectively.
INTEREST EXPENSE in 1997 amounted to $211,000, down from $564,000 in 1996.
The decrease resulted from AMG's $3.2 million reduction of debt over the
two-year period. The decrease in interest expense in 1996 from 1995 was
primarily attributable to the combination of lower interest rates and lower
level of average borrowings during the period.
INCOME TAXES for 1997 and 1996 included benefits from net operating loss
carry forwards. As a result, the Company's effective tax rates were
significantly lower than statutory rates. The effective tax rate was 6% in 1997
and 4% in 1996, including extraordinary gain. The Company's net operating loss
carry forwards have been fully utilized and effective tax rates in future
periods will be driven by statutory rates.
NET INCOME for fiscal 1997 was $2.9 million compared to $4.2 million in
1996. Fiscal 1997 results included a one-time transaction relating to the sale
of 50,000 shares of IT stock in January 1997, which resulted in a realized gain
of $139,000. Excluding this one-time transaction the Company would have had pro
forma net income of $2.8 million. Net income for 1996 included one-time gains
for sales of securities totaling $3.7 million, gain on stock rights of $572,000
and a one-time gain of $508,000, net of income tax, from the retirement of debt.
Excluding these one-time gains, AMG would have posted a pro forma net loss of
$634,000. The net loss in fiscal 1995 included a $719,000 write-down of
goodwill. Excluding this one-time transaction the Company would have posted a
pro forma net loss of $2.3 million.
PRO FORMA RESULTS, net of one-time transactions, for 1997 increased $3.4
from 1996 and $5.0 million from 1995.
THE COMPANY has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Year 2000 Issue is
the result of computer programs being written using two digits rather then four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose significant operational problems for
11
<PAGE>
the Company's computer systems as so modified and converted. However, if such
modifications and conversions are not completed timely, the Year 2000 problem
may have a material impact on the operations of the Company.
NEW ACCOUNTING STANDARDS include Statement of Financial Accounting Standards
128 ("SFAS 128"), "EARNINGS PER SHARE," which is a disclosure standard requiring
public companies to present basic earnings per share, and if applicable, diluted
earnings per share, instead of primary and fully diluted earnings per share.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997. Management has determined that the adoption of SFAS 128 would
not have a material adverse effect on the net income (loss) per share as
currently disclosed.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129 ("SFAS 129"), "DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE." SFAS 129
requires companies to disclose descriptive information about securities that is
not necessarily related to the computation of earnings per share. It also
requires disclosure of information about the liquidation preference of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997. The Company does not expect that the
implementation of SFAS 129 will require significant revision of prior
disclosures.
In June 1997, SFAS No. 130 ("SFAS 130"), "COMPREHENSIVE INCOME" was issued
which becomes effective in 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS 130 requires that changes in
the amounts of certain items, including foreign currency translation adjustments
and gains and losses on certain securities, be shown in the financial
statements. SFAS 130 does not require a specific format for the financial
statement in which comprehensive income is reported, but does require that an
amount representing total comprehensive income be reported in that statement.
The Company does not expect that the implementation of SFAS 130 will have a
material effect upon the Company's financial statements.
In June 1997, SFAS No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" was issued. This statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products, services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company does not expect that SFAS 131 will have a material effect upon
the Company's financial statements.
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
AMG's financial condition continued to show strong improvement in 1997.
During 1997 the Company generated a record $2.8 in cash from operating
activities, an increase of $3.7 million over 1996, principally as a result of
earnings. The 1997 cash generation provided the resources needed to invest
$794,000 in new plant and equipment and reduce debt by $1.1 million. The Company
also utilized cash from operations and existing cash balances to complete a $3.5
million share repurchase in July 1997.
Inventory, primarily in raw materials, increased in 1997 as a direct result
of the increase in sales volume. Accounts receivable increased $1.0 million and
$1.8 million in 1997 and 1996, respectively. The increases were attributable to
revenue growth. During the three-year period the Company experienced an increase
in its concentration of credit risk as one customer accounted for 39% of revenue
during fiscal
12
<PAGE>
1997, compared to 28% in 1996 and 13% in 1995. The same customer accounted for
49% and 38% of accounts receivable at the end of 1997 and 1996, respectively.
The Company invested $794,000 in capital equipment to support increases in
production volumes and upgrade computer systems throughout the company. AMG
invested $411,000 and $422,000 in 1996 and 1995, respectively. The Company has
made commitments to purchase approximately $300,000 of equipment for its
expansion in Ireland, with total year purchases anticipated to be approximately
$750,000.
The Company's operating credit line with Wells Fargo has current
availability, as of February 20, 1998, of $3,762,573 with $1,372,185
outstanding. The Company is scheduled to complete a new $10 million revolving
credit facility with Wells Fargo Bank on February 28, 1998. The Company's
business plans call for substantial investments in both its Ireland and
Singapore operations in 1998. The Company anticipates that existing cash, cash
from operations and existing lines of credit will supply sufficient cash for
investment, working capital requirements, capital expenditures and debt payments
for the next twelve months.
BUSINESS OUTLOOK
The outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
The Company currently has sufficient orders from OEMs to believe that sales
growth will continue in fiscal 1998. Based on current projected order releases
from major customers, the sales growth year-to-year is projected to be above 20%
for fiscal 1998.
Gross profit and operating profit margins are expected to slow in 1998. The
Company's fixed cost levels will increase, due to expansions in Ireland and
Singapore, more quickly than initial sales volumes.
Interest expense is expected to increase in fiscal 1998 as borrowing levels
expand to support investment in Ireland and Singapore. This will be partially
offset by lower average interest rates.
Income taxes will increase in fiscal 1998. The Company's net operating loss
carry forwards have been fully utilized and effective tax rates in future
periods will be driven by statutory rates.
Earnings per share calculations will be favorably impacted as a result of
the Company's repurchase of 2 million shares of common stock in July 1997.
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.
13
<PAGE>
d) Delays in construction of new factories and plants.
e) Concentrations of sales in markets and customers.
f) Failures to obtain new customers, retain customers or volume reductions by
current customers.
g) Concentrations of raw material suppliers, including difficulties or delays
in obtaining raw materials.
h) Inability to execute marketing and sales plans, including price increases.
i) Failure to attract and retain R&D/engineering staffing to support sales
efforts.
j) Inability to develop cost effective means for timely production of new
product orders in required quantities.
k) Delays or cancellations of orders; timing of significant orders; and
introduction of new products.
l) Short-term fluctuations in margins due to yields and efficiencies.
m) The effects of changes in foreign currencies.
n) Loss of executive management or other key employees.
o) Changes in financing amount, availability or cost.
p) The effects of changes in costs and availability of insurance coverage.
q) The effects of changes in compensation or benefit plans.
r) Adoptions of new, or changes in, accounting policies and practices and the
application of such policies and practices.
s) 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.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 30, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 1997 in conformity with generally
accepted accounting principles.
CORBIN & WERTZ
January 14, 1998
Irvine, California
15
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 312,000 $ 2,639,000
Available-for-sale securities.................................................... -- 112,000
Accounts receivable, net of allowance for doubtful accounts of $102,000 and
$100,000 as of November 30, 1997 and 1996, respectively........................ 4,002,000 3,014,000
Note receivable from related party............................................... 50,000 50,000
Inventories, net................................................................. 2,466,000 2,110,000
Income taxes receivable.......................................................... -- 20,000
Deferred income taxes............................................................ 136,000 184,000
Prepaid expenses and other....................................................... 130,000 190,000
------------- -------------
Total current assets........................................................... 7,096,000 8,319,000
Property and equipment, net........................................................ 2,337,000 2,279,000
Licenses, net of accumulated amortization of $149,000 and $115,000 as of November
30, 1997 and 1996, respectively.................................................. 188,000 222,000
Goodwill, net of accumulated amortization of $1,064,000 and $823,000 as of November
30, 1997 and 1996, respectively.................................................. 2,323,000 2,564,000
Deferred income taxes.............................................................. 367,000 --
Other assets, net.................................................................. 290,000 277,000
------------- -------------
$ 12,601,000 $ 13,661,000
------------- -------------
------------- -------------
</TABLE>
Continued
16
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,125,000 $ 1,993,000
Income taxes payable............................................................. 239,000 54,000
Accrued liabilities.............................................................. 1,063,000 809,000
Current portion of long-term obligations......................................... 164,000 1,197,000
------------- -------------
Total current liabilities...................................................... 3,591,000 4,053,000
Line of credit..................................................................... 1,175,000 1,039,000
Convertible debentures............................................................. 405,000 535,000
Deferred compensation, net of current portion of $135,000 and $127,000 at November
30, 1997 and 1996, respectively.................................................. 991,000 1,277,000
Capital lease obligations, net of current portion of $29,000 and $82,000 at
November 30, 1997 and 1996, respectively......................................... 11,000 37,000
Deferred income taxes.............................................................. 92,000 150,000
------------- -------------
Total liabilities.............................................................. 6,265,000 7,091,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.001 par value; 5,000,000 shares authorized; no shares issued
and outstanding................................................................ -- --
Common stock--$.001 par value; 25,000,000 shares authorized; 8,604,805 and
10,458,742 shares issued and outstanding at November 30, 1997 and 1996,
respectively................................................................... 9,000 10,000
Additional paid-in capital....................................................... 7,131,000 10,192,000
Unrealized holding gain on available-for-sale securities......................... -- 88,000
Accumulated deficit.............................................................. (804,000) (3,720,000)
------------- -------------
Total stockholders' equity..................................................... 6,336,000 6,570,000
------------- -------------
$ 12,601,000 $ 13,661,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 30,042,000 $ 18,306,000 $ 14,728,000
Cost of sales (including depreciation of $596,000, $502,000 and
$455,000 for the years ended November 30, 1997, 1996 and 1995,
respectively)..................................................... 22,354,000 14,859,000 12,995,000
------------- ------------- -------------
Gross profit........................................................ 7,688,000 3,447,000 1,733,000
------------- ------------- -------------
Operating expenses:
Selling, general and administrative............................... 3,956,000 2,926,000 2,711,000
Depreciation and amortization..................................... 446,000 444,000 482,000
Write-down of goodwill............................................ -- -- 719,000
------------- ------------- -------------
Total operating expenses........................................ 4,402,000 3,370,000 3,912,000
------------- ------------- -------------
Income (loss) from operations....................................... 3,286,000 77,000 (2,179,000)
Other income and expenses:
Realized gain on sale of securities............................... 139,000 4,310,000 --
Interest income................................................... 58,000 59,000 --
Interest expense.................................................. (211,000) (564,000) (822,000)
Other, net........................................................ (176,000) (44,000) 25,000
------------- ------------- -------------
Total other income and expenses................................. (190,000) 3,761,000 (797,000)
------------- ------------- -------------
Income (loss) before income taxes and extraordinary item............ 3,096,000 3,838,000 (2,976,000)
Income taxes........................................................ 180,000 162,000 3,000
------------- ------------- -------------
Net income (loss) before extraordinary item......................... 2,916,000 3,676,000 (2,979,000)
Extraordinary gain on forgiveness of debt, net of income tax of
$18,000........................................................... -- 508,000 --
------------- ------------- -------------
Net income (loss)................................................... $ 2,916,000 $ 4,184,000 $ (2,979,000)
------------- ------------- -------------
------------- ------------- -------------
Primary earnings per common share:
Net income (loss) before extraordinary item....................... $ 0.28 $ 0.34 $ (0.32)
Extraordinary item................................................ -- 0.05 --
------------- ------------- -------------
Net income (loss) per common share.............................. $ 0.28 $ 0.39 $ (0.32)
------------- ------------- -------------
------------- ------------- -------------
Fully diluted earnings per common share:
Net income (loss) before extraordinary item....................... $ 0.27 $ 0.34 $ (0.32)
Extraordinary item................................................ -- 0.05 --
------------- ------------- -------------
Net income (loss) per common share.............................. $ 0.27 $ 0.39 $ (0.32)
------------- ------------- -------------
------------- ------------- -------------
Primary weighted average common shares outstanding.................. 10,600,162 10,703,833 9,173,541
------------- ------------- -------------
------------- ------------- -------------
Fully diluted weighted average common shares outstanding............ 10,669,392 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, 1997, 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
Expense recorded in connection with stock
issued.................................. 16,877 -- 12,000 -- -- 12,000
Stock options exercised................... 95,000 1,000 135,000 -- -- 136,000
Stock issued as a result of conversion of
debt, at $3.59 or $4.37 per share....... 34,186 -- 130,000 -- -- 130,000
Stock purchased by the Company for cash of
$1.75 per share and retired............. (2,000,000) (2,000) (3,498,000) -- -- (3,500,000)
Consulting expense recorded as a result of
options granted to a non-employee....... -- -- 160,000 -- -- 160,000
Realized gain on available-for-sale
securities.............................. -- -- -- (88,000) -- (88,000)
Net income................................ -- -- -- -- 2,916,000 2,916,000
----------- --------- ------------ ------------ ------------ -------------
Balances, November 30, 1997............... 8,604,805 $ 9,000 $ 7,131,000 $ -- $ (804,000) $ 6,336,000
----------- --------- ------------ ------------ ------------ -------------
----------- --------- ------------ ------------ ------------ -------------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 2,916,000 $ 4,184,000 $ (2,979,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................... 1,042,000 946,000 937,000
Provision for bad debt........................................... 2,000 (27,000) --
Provision for obsolete inventory................................. 98,000 (33,000) --
Write-down of goodwill........................................... -- -- 719,000
Deferred tax provision........................................... (377,000) (34,000) --
Interest and other expense on deferred compensation.............. (137,000) 122,000 158,000
Loss on disposal of fixed assets................................. 7,000 44,000 --
Expense recorded in connection with stock issued................. 12,000 -- --
Consulting expense recorded as a result of options granted to a
non-employee................................................... 160,000 -- --
Gain on sale of stock rights..................................... -- (572,000) --
Gain on sale of available-for-sale securities.................... (139,000) (3,738,000) --
Extraordinary gain on forgiveness of debt........................ -- (526,000) --
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable--trade..................................... (990,000) (1,803,000) 301,000
Accounts receivable from affiliate............................. -- 165,000 49,000
Income taxes receivable........................................ 20,000 (20,000) --
Inventories.................................................... (454,000) 61,000 (10,000)
Prepaid expenses and other..................................... 60,000 9,000 55,000
Accounts payable and accrued liabilities....................... 386,000 274,000 (544,000)
Income taxes payable........................................... 185,000 54,000 --
------------- ------------- -------------
Net cash provided by (used in) operating activities.................. 2,791,000 (894,000) (1,314,000)
------------- ------------- -------------
Cash flows from investing activities:
Accounts receivable--other......................................... -- -- 299,000
Other assets....................................................... (51,000) (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................ 163,000 5,093,000 --
Purchases of property and equipment................................ (794,000) (411,000) (422,000)
Cash used in acquisition of business............................... -- (130,000) --
Sale of stock rights............................................... -- 572,000 --
------------- ------------- -------------
Net cash provided by (used in) investing activities.................. (682,000) 4,995,000 1,349,000
------------- ------------- -------------
</TABLE>
Continued
20
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs.......... -- 700,000 (59,000)
Exercise of common stock options................................... 136,000 -- --
Purchase and retirement of common stock of the Company............. (3,500,000) -- --
Net borrowings (repayments) under line of credit................... 136,000 (780,000) 177,000
Payments on debt................................................... (988,000) (1,318,000) (68,000)
Issuance of debt................................................... -- -- 50,000
Payments on capital lease obligations.............................. (79,000) (76,000) (52,000)
Payments on deferred compensation.................................. (141,000) (54,000) (67,000)
------------- ------------- -------------
Net cash used in financing activities................................ (4,436,000) (1,528,000) (19,000)
------------- ------------- -------------
Net change in cash and cash equivalents.............................. (2,327,000) 2,573,000 16,000
Cash and cash equivalents, beginning of period....................... 2,639,000 66,000 50,000
------------- ------------- -------------
Cash and cash equivalents, end of period............................. $ 312,000 $ 2,639,000 $ 66,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information--
Cash paid during the year for:
Interest......................................................... $ 312,000 $ 615,000 $ 632,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes..................................................... $ 352,000 $ 180,000 $ 3,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the year ended November 30, 1997, the Company issued common stock in
connection with the conversion of certain convertible debt totaling
$130,000.
During the year ended November 30, 1996, the Company off-set 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>
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.
See accompanying notes to consolidated financial statements
21
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 1--ORGANIZATION
Advanced Materials Group, Inc. ("AMG" or the "Company"), a Nevada
corporation, engages in the conversion of specialty materials, including foams,
films and adhesive composites into components and finished products for the
computer peripheral, medical, automotive and aerospace consumer products
markets, through its wholly owned subsidiaries Advanced Materials, Inc. ("AMI"),
a California corporation and Condor Utility Products, Inc. ("Condor"), a
California corporation.
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 11). 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.
On November 7, 1997, AMI established Advanced Materials Foreign Sales Corp.
Ltd. ("AM FSC"), a foreign sales corporation in Bermuda. AM FSC was formed to
carry out export sales, primarily related to a Singapore private limited
company.
On November 19, 1997, the Company established Advanced Materials Limited
("AM Ltd."), an Ireland corporation. AM Ltd. was formed to engage in the same
business as the Company. As of November 30, 1997, operations had not commenced
and assets were insignificant.
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.
NOTE 2--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
22
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
and the net realizability of deferred tax assets.
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, 1997 consist of
cash and cash equivalents, accounts receivable, note receivable from related
party, accounts payable, line of credit and convertible debentures. The carrying
amounts of the Company's financial instruments generally approximate their fair
values at November 30, 1997. In the case of the notes receivable from related
party, 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 November 30, 1997, the Company maintained 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.
Two customers accounted for 39% and 10% of consolidated revenues for the
year ended November 30, 1997. One customer accounted for 28% and 13% of
consolidated revenues for the year ended November 30, 1996 and 1995,
respectively. One customer accounted for 49% and 38% of consolidated accounts
receivable as of November 30, 1997 and 1996, respectively.
SUPPLIERS
Two suppliers accounted for 54% and 16% of consolidated purchases for the
year ended November 30, 1997. 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. Two
suppliers accounted for 11% and 10% of consolidated accounts payable at November
30, 1997. No one supplier accounted for 10% or more of consolidated accounts
payable at November 30, 1996.
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
23
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are 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, 1997 consist primarily of investments in a money
market fund.
AVAILABLE-FOR-SALE SECURITIES
The Company's marketable equity securities were 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 were
classified as either current or long-term based upon the intentions of
management of the Company as to whether such securities would be sold within
twelve months (see Note 3). The net unrealized holding gain was not reduced by
the related deferred income taxes due to the availability of net operating loss
carryforwards (see Note 13). All such securities were sold during the year ended
November 30, 1997.
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 1997 consolidated balance sheet.
24
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 approximately
$729,000, $643,000 and $584,000 for the years ended November 30, 1997, 1996 and
1995, respectively, of which $596,000, $502,000 and $455,000, respectively, is
included in cost of sales in the accompanying consolidated statements of
operations.
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, 1997, 1996 and 1995,
amortization amounted to approximately $34,000.
ORGANIZATION COSTS AND OTHER ASSETS
Net organization costs of $21,000 and $59,000 at November 30, 1997 and 1996,
respectively, are included in other assets and are being amortized using the
straight-line method over five years. During the years ended November 30, 1997,
1996 and 1995 amortization of organization costs amounted to approximately
$38,000, $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, 1997, 1996 and 1995
amounted to $241,000, $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 (fair value) 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 goodwill had been impaired and,
accordingly, the Company charged this amount to operations as reflected in the
accompanying 1995 consolidated statement of operations. No additional impairment
has been determined by management as of November 30, 1997.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to
25
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
continue to measure compensation cost related to stock and stock options issued
to employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES". Entities electing to remain with the accounting method of APB 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value method of accounting defined in SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25. Stock-based compensation issued to non-employees is accounted for
under the provisions of SFAS 123.
TREASURY STOCK
The Company records treasury stock purchases at cost. The excess of cost
over par value is allocated to paid in capital based on the per share amount of
paid in capital for all shares, with the difference charged to retained
earnings.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were
approximately $44,000, $28,000 and $11,000 for the years ended November 30,
1997, 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 insignificant for the
years ended November 30, 1997, 1996 and 1995.
NET INCOME (LOSS) PER SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective period. Common stock equivalents include
shares issuable upon the exercise of the Company's stock options and warrants,
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
26
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized in income in the period that includes the enactment date. A valuation
allowance is established for any deferred asset for which realization is less
likely than not.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards 128 ("SFAS 128"), "EARNINGS PER SHARE," which is a
disclosure standard requiring public companies to present basic earnings per
share, and if applicable, diluted earning per share, instead of primary and
fully diluted earnings per share. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. Management has determined
that the adoption of SFAS 128 would not have a material effect on the net income
(loss) per share as currently disclosed.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129 ("SFAS 129"), "DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE." SFAS 129
requires companies to disclose descriptive information about securities that is
not necessarily related to the computation of earnings per share. It also
requires disclosure of information about the liquidation preference of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997. The Company does not expect that the
implementation of SFAS 129 will require signification revision of prior
disclosures.
In June 1997, SFAS No. 130 ("SFAS 130"), "COMPREHENSIVE INCOME" was issued
which becomes effective in 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS 130 requires that changes in
the amounts of certain items, including foreign currency translation adjustments
and gains and losses on certain securities, be shown in the financial
statements. SFAS 130 does not require a specific format for the financial
statement in which comprehensive income is reported, but does require that an
amount representing total comprehensive income be reported in that statement.
The Company does not expect that the implementation of SFAS 130 will have a
material effect upon the Company's financial statements.
In June 1997, SFAS No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" was issued. This statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products, services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company does not expect that SFAS 131 will have a material effect upon
the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
27
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 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. Available-for-sale securities consist of the
following at November 30, 1996:
<TABLE>
<S> <C>
Fair value:
Innovative Technologies, Inc. ("IT") 50,000 shares held at
November 30, 1996............................................. $ 112,000
Unrealized holding gain........................................... (88,000)
---------
Cost basis........................................................ $ 24,000
---------
---------
</TABLE>
During 1996, the Company sold 100,240 shares of an entity considered to be a
related party and 2,504,504 shares of 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 $139,000.
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
Inventories consist of the following at November 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 2,025,000 $ 1,418,000
Work-in-process................................................... 252,000 440,000
Finished goods.................................................... 379,000 344,000
------------ ------------
2,656,000 2,202,000
Less allowance for obsolete inventory............................. (190,000) (92,000)
------------ ------------
$ 2,466,000 $ 2,110,000
------------ ------------
------------ ------------
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM RELATED PARTY
Note receivable from related party at November 30, 1997 and 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 matured November 1997.
In January, 1998, the Company filed with the Superior Court of the State of
California for the County of Los Angeles, a Complaint for Breach of the
Promissory Note. The claim asks for specific performance of payment of the note
plus all accrued interest and payment of legal fees. Management believes the
Company will prevail.
Interest income recorded in connection therewith was insignificant for the
years ended November 30, 1997 and 1996.
28
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
MUTUAL RELEASE AGREEMENT
On July 3, 1996, the Company entered into a mutual release agreement with a
related party whereby a subordinated note payable due a related party 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 $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 6--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Machinery and equipment......................................... $ 3,336,000 $ 2,891,000
Furniture and office equipment.................................. 849,000 637,000
Equipment under capital lease................................... 262,000 262,000
Transportation equipment........................................ 91,000 91,000
Leasehold improvements.......................................... 306,000 221,000
Construction in progress........................................ 58,000 19,000
------------- -------------
4,902,000 4,121,000
Less accumulated depreciation and amortization.................. (2,565,000) (1,842,000)
------------- -------------
$ 2,337,000 $ 2,279,000
------------- -------------
------------- -------------
</TABLE>
NOTE 7--LINE OF CREDIT
The line of credit consists of the following at November 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<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% (10.5% at November 30, 1997), 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. The line of credit has
certain financial covenants. The Company was in compliance with such covenants at
November 30, 1997................................................................... $ 1,175,000 $ 1,039,000
------------ ------------
1,175,000 1,039,000
Less current portion.................................................................. -- --
------------ ------------
$ 1,175,000 $ 1,039,000
------------ ------------
------------ ------------
</TABLE>
29
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 7--LINE OF CREDIT (CONTINUED)
Interest expense related to lines of credit totaled approximately $152,000,
$200,000 and $297,000 for the years ended November 30, 1997, 1996 and 1995,
respectively. Included therein was interest expense of $26,000 and $41,000
related to a stockholder line of credit for the years ended November 30, 1996
and 1995, respectively.
On December 9, 1997, the Company agreed to enter into a new line of credit
with its bank (see Note 14).
NOTE 8--NOTES PAYABLE
Notes payable consists of the following at November 30, 1996:
<TABLE>
<S> <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 paid on May 28,
1997........................................................................... $ 200,000
Notes payable to two former stockholders of the Company with quarterly interest
only payments at a bank's prime rate plus 1% per annum; all due and paid in
March, 1997.................................................................... 788,000
---------
988,000
Less current portion............................................................. (988,000)
---------
$ --
---------
---------
</TABLE>
Interest expense related to such notes payable to stockholders and affiliate
totaled approximately $35,000, $125,000 and $122,000 for the years ended
November 30, 1997, 1996 and 1995, respectively.
NOTE 9--CONVERTIBLE DEBENTURES
The Company had outstanding convertible debentures totaling $405,000 and
$535,000 at November 30, 1997 and 1996, respectively. The debentures bear
interest at 7.5% per annum, and interest is payable quarterly. The debentures
were issued 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 $4.37 per share). The debentures
mature through March 2004. 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 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.
During 1997, four noteholders elected to convert an aggregate $130,000 of
such debentures into an aggregate 34,186 shares of common stock at conversion
rates of $3.59 or $4.37 (see Note 12).
Interest expense related thereto totaled approximately $39,000 for the year
ended November 30, 1997 and $40,000 for each of the years ended November 30,
1996 and 1995.
30
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 10--DEFERRED COMPENSATION
The Company 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 who is currently a stockholder of the Company, (ii) make
monthly payments beginning December 1995, of $3,500 to a former employee and
(iii) pay employment termination benefits to the former employee of $5,000 per
month from June 1993 through November 1995.
At November 30, 1997, these obligations have been discounted at the
Company's average borrowing rate plus 50 basis points per annum (10.75% at
November 30, 1997). 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 approximately $1,126,000, net of a discount of
approximately $3,622,000. Estimated future non-contingent payments are due in
subsequent years as follows:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 135,000
1999.......................................................................... 135,000
2000.......................................................................... 139,000
2001.......................................................................... 143,000
2002.......................................................................... 147,000
Thereafter.................................................................... 4,049,000
------------
$ 4,748,000
------------
------------
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES
LEASES
The Company and its subsidiaries lease facilities and equipment under
non-cancelable operating leases which expire at various dates through November
2000. The Company and its subsidiaries also lease certain computers, machinery
and equipment under capital lease obligations.
31
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Approximate 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>
1998.............................................................. $ 35,000 $ 614,000
1999.............................................................. 12,000 600,000
2000.............................................................. -- 404,000
---------- ------------
Total minimum lease obligations................................... 47,000 $ 1,618,000
------------
------------
Less interest..................................................... (7,000)
----------
Present value of minimum lease obligations........................ 40,000
Less current maturities........................................... (29,000)
----------
Long-term obligations............................................. $ 11,000
----------
----------
</TABLE>
Rent expense incurred under operating lease arrangements totaled
approximately $592,000, $545,000 and $497,000 for the years ended November 30,
1997, 1996 and 1995, respectively.
Interest expense incurred under capital lease obligations was insignificant
for the years ended November 30, 1997, 1996 and 1995.
PRODUCT DEVELOPMENT AND LICENSE AGREEMENT
The Company is party to 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 L110,000 (British pounds) (the equivalent of $184,000 at November 30,
1997) in cash within thirty days after the commercialization of the product (as
defined). In addition, the Company shall pay IT royalties with respect to each
licensed product based upon a level of sales (as defined). No sales of "IT
products" were effected during fiscal 1997, 1996 or 1995, and thus, no royalties
were due.
EMPLOYMENT CONTRACTS
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 1% 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. During 1997, such stockholder was
paid an insignificant amount in stock and cash pursuant to this agreement in
connection with the incentive bonuses.
32
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company entered into three employment contracts with officers, which
expire through May 2000. Under the terms of the agreements, the Company is to
pay base salaries ranging from $110,000 to $190,000 per year.
In connection with the establishment of AM Ltd. (see Note 1), the Company
entered into a one year agreement with an officer expiring December 1998. Under
the terms of the agreement, the Company is to pay a base salary of L90,000
(Irish pounds), or the equivalent of approximately U.S. $150,000 at November 30,
1997. In addition, bonuses are to be paid equal to 4% of annual operating
profits, as defined and bonuses of L15,000 are to be paid upon completion of
certain milestones, as defined.
Approximate minimum future obligations under employment contracts are as
follows as of November 30, 1997:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 659,000
1999.......................................................................... 509,000
2000.......................................................................... 237,000
2001.......................................................................... 55,000
2002.......................................................................... --
------------
$ 1,460,000
------------
------------
</TABLE>
CONSULTING AGREEMENT
The Company is party to an annual consulting agreement with a director of
the Company, whereby the Company pays the director $5,000 per year. In
connection with the agreement, the Company has granted options to purchase
20,000 shares of the Company's common stock (see Note 12).
The Company was party to an annual consulting agreement, pursuant to which
the Company granted options to purchase 20,000 shares of the Company's common
stock annually, until termination of the agreement (see Note 12). Such agreement
was terminated during 1996.
On March 31, 1997, the Company entered into a minimum two year consulting
agreement with a director, whereby for various corporate finance and acquisition
services, the Company is obligated to pay $4,000 per month (plus a $10,000 first
month retainer). In addition, the Company granted options to purchase 50,000
shares of the company's common stock at an exercise price of $1.50 expiring
March 31, 2007 (see Note 12). If the director meets certain 'targets', as
defined, the Company is obligated to issue additional options to purchase the
Company's common stock, as defined. In connection with this agreement, the
Company also extended the terms of 140,000 options held by such director. The
extended options will expire March 31, 2007 (see Note 12).
33
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. During 1997, such bankruptcy was dismissed. A jury trial date is presently
set for June 1998. 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.
In October 1996, the Company and Wilshire Technologies, Inc. ("WTI") were
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 12--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.
On April 2, 1997, the Company issued an aggregate 16,877 shares of common
stock valued at $0.69 per share. Such shares were issued in connection with
certain provisions contained in the acquisition agreement of Condor.
During 1997, the Company issued 34,186 shares of common stock in connection
with the conversion of an aggregate $130,000 of debt, at $3.59 or $4.37 per
share.
34
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
On July 23, 1997, the Company repurchased 2,000,000 shares of common stock
for cash of $1.75 per share. These shares were subsequently retired.
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 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, 1997, 1996 and 1995, the Company issued
options, pursuant to the 1993 Plan, to purchase 95,217, 576,500 and 80,000
shares, respectively, of the Company's common stock at exercise prices ranging
from $0.41 to $1.78 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.
1997 STOCK OPTION PLAN
On May 4, 1997, the 1997 Stock Option Plan (the "1997 Plan") was adopted ,
effective January 1, 1997, and approved by the Board of Directors of the
Company. The 1997 Plan authorizes the granting of various options and rights to
purchase up to 1,250,000 shares of common stock of the Company. The 1997 Plan
was terminated on August 25, 1997.
The 1997 Plan provided 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 1997 Plan provided that it was to be administered by a
committee appointed by the Board of Directors (the Committee) of two or more
non-
35
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
employee directors, or if no committee was appointed, by the Board of Directors.
The Committee had discretion, subject to the terms of the 1997 Plan, to select
the persons entitled to receive options under the 1997 Plan, the terms and
conditions on which options were granted, the exercise price, the time period
for vesting such shares and the number of shares subject thereto.
Options granted under the 1997 Plan could only be "non-qualified stock
options". No "incentive stock options", within the meaning of Section 422 of the
Internal Revenue Code, could be granted.
During the year ended November 30, 1997, the Company issued options to
purchase 215,000 shares of the Company's common stock at exercise prices ranging
from $1.28 to $2.22 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.
OTHER STOCK OPTIONS
On March 31, 1997, the Company extended the terms of 140,000 options to
expire March 31, 2007. These options were issued outside of the aforementioned
1993 and 1997 Plans and were originally due to expire in June of 1998. Pursuant
to the provisions of SFAS 123, the fair value for the incremental benefit
received by the option holder was estimated at the date of extension using the
Black Scholes option pricing model with the following assumptions: risk free
interest rate of 7.0%, dividend yield of 0%, expected life of the option of 10
years, and a volatility factor of the expected market price of the Company's
common stock of 67%. Compensation expense, related to the fair value of such
options, of approximately $100,000 was recorded in connection therewith and is
included in other expense in the accompanying 1997 consolidated statement of
operations.
Effective May 1, 1995, the Company issued options to a consultant, outside
of the 1993 Plan, to purchase 20,000 shares of the Company's common stock at an
exercise price of $0.45 per share, expiring April 1998. Such options were fully
exercisable upon grant. 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.
Effective 1996, the Company issued options to employees and consultants,
outside of the 1993 Plan, to purchase 125,000 shares of the Company's common
stock at exercise prices ranging from $0.57 to $0.78 per share, expiring through
February 2001. Such options were fully exercisable at date of grant. 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.
On March 31, 1997, the Company issued options to a director for consulting
services, outside of the 1997 Plan, to purchase 50,000 shares of the Company's
common stock at an exercise price of $1.50 per share (fair market value of the
underlying stock at the date of grant), expiring March 2007. Such options were
fully exercisable at date of grant. Pursuant to the provisions of SFAS 123, the
fair value for these options was estimated at the date of grant using the Black
Scholes option pricing model with the following assumptions: risk free interest
rate of 7.0%, dividend yield of 0%, expected life of the option of 10 years, and
a volatility factor of the expected market price of the Company's common stock
of 67%. Compensation expense, related to the fair value of such options, of
$60,000 was recorded in connection with the issuance of these options, and is
included in other expense in the accompanying 1997 consolidated statement of
operations.
36
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
During 1997, the Company issued options to purchase 21,388 shares of the
Company's common stock outside of the 1993 and 1997 Plans, at exercise prices
ranging from $2.84 and $3.44 per share, expiring through August 2007. Such
options vest within six months from the date of grant. 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.
The following summarizes the options granted and outstanding as of November
30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------------------- EXERCISE
EMPLOYEE NON-EMPLOYEE TOTAL PRICE
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, November 30, 1994............ 575,000 440,000 1,015,000 $ 2.11
Granted................................. 80,000 20,000 100,000 0.46
Exercised............................... -- -- -- --
Canceled................................ (220,000) -- (220,000) 3.78
---------- ------------- ----------
Outstanding, November 30, 1995............ 435,000 460,000 895,000 2.22
Granted................................. 652,000 50,000 702,000 0.90
Exercised............................... (21,000) -- (21,000) 0.30
Canceled................................ (64,000) (250,000) (314,000) 2.55
---------- ------------- ----------
Outstanding, November 30, 1996............ 1,002,000 260,000 1,262,000 0.99
Granted................................. 332,000 50,000 382,000 1.28
Exercised............................... (45,000) (50,000) (95,000) 1.42
Canceled................................ (15,000) -- (15,000) 1.00
---------- ------------- ----------
Outstanding, November 30, 1997............ 1,274,000 260,000 1,534,000 $ 1.08
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
37
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at November 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE ----------------------- CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
- ---------------------------------------- ----------- ---------- -------------------------
<S> <C> <C> <C>
$0.30................................... 200,000 200,000 5.1 years
0.43................................... 10,000 10,000 2.5
0.44................................... 10,000 10,000 2.5
0.45................................... 20,000 20,000 0.4
0.52................................... 10,000 10,000 2.6
0.57................................... 20,000 20,000 1.4
0.59................................... 10,000 10,000 2.2
0.69................................... 155,000 95,000 7.0
0.78................................... 125,000 125,000 8.4
0.91................................... 10,000 10,000 3.6
1.00................................... 407,000 377,000 8.8
1.23................................... 10,000 10,000 3.5
1.27................................... 10,000 10,000 3.5
1.28................................... 175,000 -- 9.1
1.50................................... 210,000 210,000 8.5
1.63................................... 20,000 20,000 1.6
1.65................................... 10,000 -- 9.3
1.75................................... 10,000 10,000 4.2
1.78................................... 20,000 20,000 4.2
1.97................................... 10,000 -- 4.5
2.06................................... 10,000 -- 4.5
2.16................................... 10,000 10,000 1.5
2.22................................... 10,000 -- 4.6
2.63................................... 10,000 10,000 1.5
2.84................................... 2,000 2,000 9.6
3.44................................... 20,000 -- 4.8
4.00................................... 20,000 20,000 1.2
----------- ----------
1,534,000 1,209,000
----------- ----------
----------- ----------
</TABLE>
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value of these options was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions for
the years ended November 30, 1997 and 1996: risk free interest rate of 6.8%,
dividend yield of 0%, expected life of the options at 5 or 10 years, and
volatility factor of the expected market price of the Company's common stock of
100%.
38
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
The Black Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employees stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted after December 15, 1995, is amortized to expense over the
options vesting period. Adjustments are made for options forfeited prior to
vesting. The effect on compensation expense, net income, and net income per
share had compensation costs for the Company's stock option plan's been
determined based on a fair value at the date of grant consistent with the
provisions of SFAS 123, for the years ended November 30:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income, as reported........................................ $ 2,916,000 $ 4,184,000
Adjustment to compensation expense under SFAS 123.............. (382,000) (382,000)
------------- -------------
Net income, pro forma.......................................... $ 2,534,000 $ 3,802,000
------------- -------------
------------- -------------
Earning per share, as reported:
Primary...................................................... $ 0.28 $ 0.39
------------- -------------
------------- -------------
Fully-diluted................................................ $ 0.27 $ 0.39
------------- -------------
------------- -------------
Earnings per share, pro forma:
Primary...................................................... $ 0.24 $ 0.36
------------- -------------
------------- -------------
Fully diluted................................................ $ 0.24 $ 0.36
------------- -------------
------------- -------------
Primary weighted average shares................................ 10,600,162 10,703,833
------------- -------------
------------- -------------
Fully diluted weighted average shares.......................... 10,669,392 10,703,833
------------- -------------
------------- -------------
</TABLE>
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.
39
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
On December 22, 1995, in connection with an amendment to a line of credit
agreement with a stockholder, 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.
NOTE 13--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>
1997 1996
----------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts...................................................... $ 44,000 $ 43,000
Inventories, principally due to allowance for inventory
obsolescence.................................................. 134,000 86,000
Accrued expenses, principally due to accrual for financial
reporting purposes............................................ 62,000 64,000
Options valued for book purposes not deductible for tax purposes
until exercised............................................... 69,000 --
Alternative minimum tax......................................... -- 70,000
State taxes..................................................... 70,000 49,000
Goodwill and other intangible assets............................ 566,000 549,000
Net operating loss carryforwards................................ 34,000 890,000
----------- -------------
Total gross deferred tax assets............................... 979,000 1,751,000
Less valuation allowance...................................... (476,000) (1,567,000)
----------- -------------
Total net deferred tax assets................................. $ 503,000 $ 184,000
----------- -------------
----------- -------------
Deferred tax liability:
Plant and equipment, principally due to differences in
depreciation.................................................. $ (92,000) $ (150,000)
----------- -------------
Total gross deferred tax liability............................ $ (92,000) $ (150,000)
----------- -------------
----------- -------------
</TABLE>
40
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 13--INCOME TAXES (CONTINUED)
Income tax expense for the years ended November 30, 1997 and 1996 consists
of the following provisions:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Current: U.S. Federal................................................ $ 285,000 $ 81,000
State and local.............................................. 272,000 115,000
----------- ----------
557,000 196,000
----------- ----------
Deferred: U.S. Federal............................................... (403,000) (34,000)
State and local............................................. 26,000 --
----------- ----------
(377,000) (34,000)
----------- ----------
Total income tax provision........................................... $ 180,000 $ 162,000
----------- ----------
----------- ----------
</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.
Income tax expense for the years ended November 30, 1997 and 1996 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>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............................ $ 1,053,000 $ 1,305,000 $ (1,012,000)
Increase (reduction) in income taxes resulting from:
Changes in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax
(benefit) expense................................................ (1,010,000) (1,246,000) 1,012,000
State and local income taxes, net of federal income tax benefit.... 137,000 95,000 3,000
Other.............................................................. -- 8,000 --
------------- ------------- -------------
$ 180,000 $ 162,000 $ 3,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As of November 30, 1997, the Company has net operating loss carryforwards
for state purposes of approximately $366,000, which expire in varying amounts
annually through 1999.
NOTE 14--SUBSEQUENT EVENT
LINE OF CREDIT
On December 9, 1997, the Company agreed to enter into a new line of credit
(the "Line") with its bank. Such Line allows for borrowings up to $10,000,000,
as defined, and bears interest ranging from prime plus 0.25% up to prime plus
0.75%, as defined. The Line matures March 1, 2000 and replaces the
41
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
NOTE 14--SUBSEQUENT EVENT (CONTINUED)
Company's existing line of credit (see Note 7). The Company is required to
maintain certain financial ratios and pay certain fees, as defined.
OPTIONS
On January 1, 1998, in connection with an employment agreement (see Note
11), the Company granted options to purchase 150,000 shares of the Company's
common stock to an employee. The options have an exercise price of $4.00 and
vest over three years.
AM FSC AGREEMENT
In January 1998, the Company's AM FSC subsidiary entered into a ten-year
agreement with Foamtec Pte. Ltd. ("Foamtec"). Terms of the agreement call for AM
FSC to lease production equipment and provide certain technology to Foamtec.
Foamtec will in turn provide its manufacturing facilities and workforce to
fabricate foam products at Foamtec's Singapore facility. The agreement will
result in profits to AM FSC and Foamtec on products sold by AM FSC to customers
in Asia.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information for Part III, items 9, 10, 11 and 12 are hereby incorporated
by reference to the Company's Proxy Statement for a meeting to be held on April
28, 1998, which will be filed with the Commission within (120) one hundred
twenty days of the close of the fiscal year pursuant to Regulation 14A.
43
<PAGE>
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated April 21, 1993 between Far West Ventures, Inc. (now known
as Advanced Materials Group, Inc.), Wilshire Advanced Materials, Inc. and the stockholders of
Wilshire Advanced Materials, Inc. (1)
3.1 Articles of Incorporation of Advanced Materials Group, Inc. (formerly known as Far West Ventures,
Inc.). (1)
3.2 Certificate of Amendment of Articles of Incorporation of Advanced Materials Group, Inc. (1)
3.3 Bylaws, as amended, of Advanced Materials Group, Inc. (1)
10.1 Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced Materials, Inc. and Wilshire
Technologies, Inc. (1)
10.2 Amendment to Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced Materials, Inc.
and Wilshire Technologies, Inc. dated December 2, 1992. (1)
10.3 Product Development and License Agreement dated August 23, 1993 between 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 Form of Equity Warrant between Advanced Materials Group, Inc. and Trilon Dominion Partners, L.L.C.
(14)
10.16 Form of Debt Warrant between Advanced Materials Group, Inc. and Trilon Dominion Partners, LLC. (15)
10.17 Loan Agreement dated as of November 26, 1996, between Advanced Materials, Inc. And Wells Fargo
National Association. (16)
10.18 First Amendment to Loan Agreement dated as of September 1, 1996, between Advanced Materials, Inc. and
Wells Fargo National Association. (17)
10.19 Asset Purchase and Sale Agreement dated as of September 1, 1996, between Advanced Materials, Inc. and
Gasket and Molded Products, Inc. and Shareholders. (18)
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.20 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. (19)
10.21 The 1997 Stock Option Plan of Advanced Materials Group, Inc.
10.22 Industrial sublease agreement executed September 1, 1997 between Advanced Materials, Inc. as landlord
and S-Line as tenant.
10.23 Manufacturing agreement dated January 30, 1998 by and between Advanced Materials FSC Ltd. and Foamtec
(Singapore) Pte. Ltd.
10.24 Form of Warrant Assignment agreement dated September 15, 1997 between Trilon Dominion Partners, LLC.
and certain individuals.
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 2.2 to Form 8-K filed January 5, 1996.
(15) Filed as Exhibit 2.3 to Form 8-K filed January 5, 1996.
(16) Filed as Exhibit 10.18 to Form 10-KSB dated November 30, 1996.
(17) Filed as Exhibit 10.19 to Form 10-KSB dated November 30, 1996.
45
<PAGE>
(18) Filed as Exhibit 10.20 to Form 10-KSB dated November 30, 1996.
(19) Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1996.
(b) Reports on Form 8-K
On September 26, 1997 the Company filed a report on Form 8-K. The report
was filed to disclose change in control of the Company.
On October 7, 1997 the Company filed a report on Form 8-K/A, representing
an amended filing to the Form 8-K filed on September 26, 1997.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED MATERIALS GROUP, INC.
Dated: February 27, 1998
By: /s/ STEVE F. SCOTT
-----------------------------------
Steve F. Scott
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<C> <S> <C>
Chief Executive Officer,
/s/ STEVE F. SCOTT President and Director February 27,
- ------------------------------------------- (PRINCIPAL EXECUTIVE 1998
Steve F. Scott OFFICER)
Vice President/Chief
/s/ J. DOUGLAS GRAVEN Financial Officer and
- ------------------------------------------- Secretary (PRINCIPAL February 27,
J. Douglas Graven FINANCIAL AND ACCOUNTING 1998
OFFICER)
/s/ TIMOTHY R. BUSCH
- ------------------------------------------- Chairman and Director February 27,
Timothy R. Busch 1998
/s/ MAURICE J. DEWALD
- ------------------------------------------- Director February 27,
Maurice J. DeWald 1998
/s/ MICHAEL A. LEDEEN
- ------------------------------------------- Director February 27,
Michael A. Ledeen 1998
/s/ ALLAN H. MELTZER
- ------------------------------------------- Director February 27,
Allan H. Meltzer 1998
/s/ N. PRICE PASCHALL
- ------------------------------------------- Director February 27,
N. Price Paschall 1998
</TABLE>
47
<PAGE>
ADVANCED MATERIALS GROUP, INC.
1997 STOCK OPTION PLAN
1. PURPOSE; EFFECTIVENESS OF THE PLAN.
A. The purpose of this Plan is to advance the interests of the Company
and its stockholders by helping the Company obtain and retain the services of
employees, officers, consultants, and directors, upon whose judgment, initiative
and efforts the Company is substantially dependent, and to provide those persons
with further incentives to advance the interests of the Company.
B. This Plan will become effective on the date of its adoption by the
Board. This Plan will remain in effect until it is terminated by the Board or
the Committee (as defined hereafter) under section 9 hereof, or May __, 2007,
whichever is earlier. This Plan will be governed by, and construed in accordance
with, the laws of the State of Nevada.
2. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the following defined terms
(together with other capitalized terms defined elsewhere in this Plan) will
govern the construction of this Plan, and of any stock option agreements entered
into pursuant to this Plan
A. "1933 Act" means the Securities Act of 1933, as amended;
B. "Board" means the Board of Directors of the Company;
C. "called for under an Option," or words to similar effect, means
issuable pursuant to the exercise of an Option;
D. "Committee" means a committee of two or more Non-Employee
Directors, appointed by the Board, to administer and interpret this Plan;
provided that the term "Committee" will refer to the Board during such times as
no Committee is appointed by the Board;
E. "Company" means Advanced Materials Group, Inc., a Nevada
corporation;
F. "Disability" has the same meaning as "permanent and total
disability," as defined in Section 22(e)(3) of the Code;
G. "Non-Employee Director" means a member of the Board who (a) is not
currently an officer (as defined in Section 16a-1(f) of the Exchange Act) of the
Company or a parent or subsidiary of the Company, or otherwise currently
employed by the Company or
<PAGE>
a parent or subsidiary of the Company, (b) does not receive compensation,
directly or indirectly, from the Company or a parent or a subsidiary of the
Company, for services rendered as a consultant or in any capacity other than as
a Director, except for an amount that does not exceed the dollar amount for
which disclosure would be required pursuant to Item 404(a) of Regulation S-K of
the federal securities laws, (c) does not possess an interest in any other
transaction for which disclosure would be required pursuant to Item 404(a) of
Regulation S-K, and (d) is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K;
H. "Eligible Participants" means persons who, at a particular time,
are employees, officers, consultants, or directors of the Company or its
subsidiaries;
I. "Exchange Act" means the Securities Exchange Act of 1934;
J. "Fair Market Value" means, with respect to the Stock and as of the
date an Option is granted hereunder, the market price per share of such Stock
determined by the Committee, as follows:
i. If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value will be equal to the closing price
reported by the applicable composite-transactions report for such date;
ii. If the Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value will be equal to the last-transaction price quoted by the
NASDAQ system for such date;
iii. If the Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value will be equal to the average of the last reported
representative bid and asked prices quoted by the NASDAQ system for such
date; and
iv. If none of the foregoing provisions is applicable, then the
Fair Market Value will be determined by the Committee in good faith on such
basis as it deems appropriate.
K. "Just Cause Termination" means a termination by the Company of an
Optionee's employment by and/or service to the Company (or if the Optionee is a
director, removal of the Optionee from the Board by action of the stockholders
or, if permitted by applicable law and the by-laws of the Company, the other
directors), in connection with the good faith determination of the Company's
board of directors (or of the Company's stockholders if the Optionee is a
director and the removal of the Optionee from the Board is by action of the
stockholders, but in either case excluding the vote of the Optionee if he or she
is a director or a stockholder) that the Optionee has engaged in any acts
involving dishonesty
2
<PAGE>
or moral turpitude or in any acts that materially and adversely affect the
business, affairs or reputation of the Company or its subsidiaries;
L. "NSO" means any option granted under this Plan whether designated
by the Committee as a "non-qualified stock option," a "non-statutory stock
option" or otherwise;
M. "Option" means an option granted pursuant to this Plan entitling
the option holder to acquire shares of Stock issued by the Company pursuant to
the valid exercise of the option;
N. "Option Agreement" means an agreement between the Company and an
Optionee, in form and substance satisfactory to the Committee in its sole
discretion, consistent with this Plan;
O. "Option Price" with respect to any particular Option means the
exercise price at which the Optionee may acquire each share of the Option Stock
called for under such Option;
P. "Option Stock" means Stock issued or issuable by the Company
pursuant to the valid exercise of an Option;
Q. "Optionee" means an Eligible Participant to whom Options are
granted hereunder, and any transferee thereof pursuant to a Transfer authorized
under this Plan;
R. "Plan" means this 1997 Stock Option Plan of the Company;
S. "QDRO" has the same meaning as "qualified domestic relations order"
as defined in Section 414(p) of the Internal Revenue Code of 1986;
T. "Stock" means shares of the Company's Common Stock, $.001 par
value;
U. "Subsidiary" has the same meaning as "Subsidiary Corporation" as
defined in Section 424(f) of the Internal Revenue Code of 1986;
V. "Transfer," with respect to Option Stock, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
such Option Stock, including without limitation an assignment for the benefit of
creditors of the Optionee, a transfer by operation of law, such as a transfer by
will or under the laws of descent and distribution, an execution of judgment
against the Option Stock or the acquisition of record or beneficial ownership
thereof by a lender or creditor, a transfer pursuant to a QDRO, or to any decree
of divorce,
3
<PAGE>
dissolution or separate maintenance, any property settlement, any separation
agreement or any other agreement with a spouse (except for estate planning
purposes) under which a part or all of the shares of Option Stock are
transferred or awarded to the spouse of the Optionee or are required to be sold;
or a transfer resulting from the filing by the Optionee of a petition for
relief, or the filing of an involuntary petition against such Optionee, under
the bankruptcy laws of the United States or of any other nation.
3. ELIGIBILITY.
The Company may grant Options under this Plan only to persons who are
Eligible Participants as of the time of such grant. Subject to the provisions of
sections 4(d), 5 and 6 hereof, there is no limitation on the number of Options
that may be granted to an Eligible Participant.
4. ADMINISTRATION.
(a) COMMITTEE. The Committee, if appointed by the Board, will
administer this Plan. If the Board, in its discretion, does not appoint such a
Committee, the Board itself will administer this Plan and take such other
actions as the Committee is authorized to take hereunder; provided that the
Board may take such actions hereunder in the same manner as the Board may take
other actions under the Company's articles of incorporation and by-laws
generally.
(b) AUTHORITY AND DISCRETION OF COMMITTEE. The Committee will have
full and final authority in its discretion, at any time and from time to time,
subject only to the express terms, conditions and other provisions of the
Company's articles of incorporation, by-laws and this Plan, and the specific
limitations on such discretion set forth herein:
(i) to select and approve the persons who will be granted
Options under this Plan from among the Eligible Participants, and to grant
to any person so selected one or more Options to purchase such number of
shares of Option Stock as the Committee may determine;
(ii) to determine the period or periods of time during which
Options may be exercised, the Option Price and the duration of such
Options, and other matters to be determined by the Committee in connection
with specific Option grants and Option Agreements as specified under this
Plan; and
(iii) to interpret this Plan, to prescribe, amend and rescind
rules and regulations relating to this Plan, and to make all other
determinations necessary or advisable for the operation and administration
of this Plan.
4
<PAGE>
(c) DESIGNATION OF OPTIONS. The Committee will designate any Option
granted hereunder as an NSO.
(d) OPTION AGREEMENTS. Options will be deemed granted hereunder only
upon the execution and delivery of an Option Agreement by the Optionee and a
duly authorized officer of the Company. Options will not be deemed granted
hereunder merely upon the authorization of such grant by the Committee.
5. SHARES RESERVED FOR OPTIONS.
(a) OPTION POOL. The aggregate number of shares of Option Stock that
may be issued pursuant to the exercise of Options granted under this Plan will
not exceed _____ (_____)(the "Option Pool"), provided that such number will be
increased by the number of shares of Option Stock that the Company subsequently
may reacquire through repurchase or otherwise. Shares of Option Stock that would
have been issuable pursuant to Options, but that are no longer issuable because
all or part of those Options have terminated or expired, will be deemed not to
have been issued for purposes of computing the number of shares of Option Stock
remaining in the Option Pool and available for issuance.
(b) ADJUSTMENTS UPON CHANGES IN STOCK. In the event of any change in
the outstanding Stock of the Company as a result of a stock split, reverse stock
split, stock dividend, recapitalization, combination or reclassification,
appropriate proportionate adjustments will be made in: (i) the aggregate number
of shares of Option Stock in the Option Pool that may be issued pursuant to the
exercise of Options granted hereunder; (ii) the Option Price and the number of
shares of Option Stock called for in each outstanding Option granted hereunder;
and (iii) other rights and matters determined on a per share basis under this
Plan or any Option Agreement hereunder. Any such adjustments will be made only
by the Board, and when so made will be effective, conclusive and binding for all
purposes with respect to this Plan and all Options then outstanding. No such
adjustments will be required by reason of the issuance or sale by the Company
for cash or other consideration of additional shares of its Stock or securities
convertible into or exchangeable for shares of its Stock.
6. TERMS OF STOCK OPTION AGREEMENTS.
Each Option granted pursuant to this Plan will be evidenced by an
agreement (an "Option Agreement") between the Company and the person to whom
such Option is granted, in form and substance satisfactory to the Committee in
its sole discretion, consistent with this Plan. Without limiting the foregoing,
each Option Agreement (unless otherwise stated therein) will be deemed to
include the following terms and conditions:
(a) COVENANTS OF OPTIONEE. Nothing contained in this Plan, any Option
Agreement or in any other agreement executed in connection with the granting of
an Option under this Plan will confer upon any Optionee any right with respect
to the continuation of his
5
<PAGE>
or her status as an employee of, consultant or independent contractor to, or
director of, the Company or its subsidiaries.
(b) VESTING PERIODS. Except as otherwise provided herein, each Option
Agreement may specify the period or periods of time within which each Option or
portion thereof will first become exercisable (the "Vesting Period") with
respect to the total number of shares of Option Stock called for thereunder (the
"Total Award Option Stock"). Such Vesting Periods will be fixed by the Committee
in its discretion, and may be accelerated or shortened by the Committee in its
discretion.
(c) EXERCISE OF THE OPTION.
(i) MECHANICS AND NOTICE. An Option may be exercised to the extent
exercisable (1) by giving written notice of exercise to the Company,
specifying the number of full shares of Option Stock to be purchased and
accompanied by full payment of the Option Price thereof and the amount of
withholding taxes pursuant to subsection 6(c)(ii) below; and (2) by giving
assurances satisfactory to the Company that the shares of Option Stock to
be purchased upon such exercise are being purchased for investment and not
with a view to resale in connection with any distribution of such shares in
violation of the 1933 Act; provided, however, that in the event the Option
Stock called for under the Option is registered under the 1933 Act, or in
the event resale of such Option Stock without such registration would
otherwise be permissible, this second condition will be inoperative if, in
the opinion of counsel for the Company, such condition is not required
under the 1933 Act, or any other applicable law, regulation or rule of any
governmental agency.
(ii) WITHHOLDING TAXES. As a condition to the issuance of the shares
of Option Stock upon full or partial exercise of an NSO granted under this
Plan, the Optionee will pay to the Company in cash, or in such other form
as the Committee may determine in its discretion, the amount of the
Company's tax withholding liability required in connection with such
exercise. For purposes of this subsection 6(c)(ii), "tax withholding
liability" will mean all federal and state income taxes, social security
tax, and any other taxes applicable to the compensation income arising from
the transaction required by applicable law to be withheld by the Company.
(d) PAYMENT OF OPTION PRICE. Each Option Agreement will specify the
Option Price with respect to the exercise of Option Stock thereunder, to be
fixed by the Committee in its discretion. The Option Price will be payable to
the Company in United States dollars in cash or by check or, such other legal
consideration as may be approved by the Committee, in its discretion.
(e) TERMINATION OF THE OPTION. Except as otherwise provided herein,
each Option Agreement will specify the period of time, to be fixed by the
Committee in its
6
<PAGE>
discretion, during which the Option granted therein will be exercisable (the
"Option Period"). To the extent not previously exercised, each Option will
terminate upon the expiration of the Option Period specified in the Option
Agreement; provided, however, that each such Option will terminate, if earlier:
(i) ninety days after the date that the Optionee ceases to be an Eligible
Participant for any reason, other than by reason of death or disability or a
Just Cause Termination; (ii) twelve months after the date that the Optionee
ceases to be an Eligible Participant by reason of such person's death or
disability; or (iii) immediately as of the date that the Optionee ceases to be
an Eligible Participant by reason of a Just Cause Termination. In the event of a
sale of all or substantially all of the assets of the Company, or a merger or
consolidation or other reorganization in which the Company is not the surviving
corporation, or in which the Company becomes a subsidiary of another corporation
(any of the foregoing events, a "Corporate Transaction"), then notwithstanding
anything else herein, the right to exercise all then outstanding Options will
vest immediately prior to such Corporate Transaction and will terminate
immediately after such Corporate Transaction; provided, however, that if the
Board, in its sole discretion, determines that such immediate vesting of the
right to exercise outstanding Options is not in the best interests of the
Company, then the successor corporation must agree to assume the outstanding
Options or substitute therefor comparable options of such successor corporation
or a parent or subsidiary of such successor corporation.
(f) QUALIFICATION OF STOCK. The right to exercise an Option will be
further subject to the requirement that if at any time the Board determines, in
its discretion, that the listing, registration or qualification of the shares of
Option Stock called for thereunder upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
authority, is necessary or desirable as a condition of or in connection with the
granting of such Option or the purchase of shares of Option Stock thereunder,
the Option may not be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent or approval is effected or
obtained free of any conditions not acceptable to the Board, in its discretion.
(g) ADDITIONAL RESTRICTIONS ON TRANSFER. By accepting Options and/or
Option Stock under this Plan, the Optionee will be deemed to represent, warrant
and agree as follows:
(i) SECURITIES ACT OF 1933. The Optionee understands that the
shares of Option Stock have not been registered under the 1933 Act, and
that such shares are not freely tradeable and must be held indefinitely
unless such shares are either registered under the 1933 Act or an exemption
from such registration is available. The Optionee understands that the
Company is under no obligation to register the shares of Option Stock.
7
<PAGE>
(ii) OTHER APPLICABLE LAWS. The Optionee further understands
that Transfer of the Option Stock requires full compliance with the
provisions of all applicable laws.
(iii) INVESTMENT INTENT. Unless a registration statement is in
effect with respect to the sale of Option Stock obtained through exercise
of Options granted hereunder: (1) Upon exercise of any Option, the Optionee
will purchase the Option Stock for his or her own account and not with a
view to distribution within the meaning of the 1933 Act, other than as may
be effected in compliance with the 1933 Act and the rules and regulations
promulgated thereunder; (2) no one else will have any beneficial interest
in the Option Stock; and (3) he or she has no present intention of
disposing of the Option Stock at any particular time.
(h) COMPLIANCE WITH LAW. Notwithstanding any other provision of this
Plan, Options may be granted pursuant to this Plan, and Option Stock may be
issued pursuant to the exercise thereof by an Optionee, only after there has
been compliance with all applicable federal and state securities laws, and all
of the same will be subject to this overriding condition. The Company will not
be required to register or qualify Option Stock with the Securities and Exchange
Commission or any State agency.
(i) STOCK CERTIFICATES. Certificates representing the Option Stock
issued pursuant to the exercise of Options will bear all legends required by law
and necessary to effectuate this Plan's provisions. The Company may place a
"stop transfer" order against shares of the Option Stock until all restrictions
and conditions set forth in this Plan and in the legends referred to in this
section 6(j) have been complied with.
(j) NOTICES. Any notice to be given to the Company under the terms of
an Option Agreement will be addressed to the Company at its principal executive
office, Attention: Corporate Secretary, or at such other address as the Company
may designate in writing. Any notice to be given to an Optionee will be
addressed to the Optionee at the address provided to the Company by the
Optionee. Any such notice will be deemed to have been duly given if and when
enclosed in a properly sealed envelope, addressed as aforesaid, registered and
deposited, postage and registry fee prepaid, in a post office or branch post
office regularly maintained by the United States Government.
(k) OTHER PROVISIONS. The Option Agreement may contain such other
terms, provisions and conditions, including such special forfeiture conditions,
rights of repurchase, rights of first refusal and other restrictions on Transfer
of Option Stock issued upon exercise of any Options granted hereunder, not
inconsistent with this Plan, as may be determined by the Committee in its sole
discretion.
8
<PAGE>
7. PROCEEDS FROM SALE OF STOCK.
Cash proceeds from the sale of shares of Option Stock issued from time
to time upon the exercise of Options granted pursuant to this Plan will be added
to the general funds of the Company and as such will be used from time to time
for general corporate purposes.
8. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.
Subject to the terms and conditions and within the limitations of this
Plan, the Committee may modify, extend or renew outstanding Options granted
under this Plan, or accept the surrender of outstanding Options (to the extent
not theretofore exercised) and authorize the granting of new Options in
substitution therefor (to the extent not theretofore exercised). Notwithstanding
the foregoing, however, no modification of any Option will, without the consent
of the holder of the Option, alter or impair any rights or obligations under any
Option theretofore granted under this Plan.
9. Amendment and Discontinuance.
The Board may amend, suspend or discontinue this Plan at any time or
from time to time. No such action may alter or impair any Option previously
granted under this Plan without the consent of the holder of such Option.
10. PLAN COMPLIANCE WITH RULE 16b-3.
With respect to persons subject to Section 16 of the Securities
Exchange Act of 1934, transactions under this plan are intended to comply with
all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To
the extent any provision of the plan or action by the plan administrators fails
so to comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the plan administrators.
11. COPIES OF PLAN.
A copy of this Plan will be delivered to each Optionee at or before
the time he or she executes an Option Agreement.
***
Date Plan Adopted by Board of Directors: May__, 1997
9
<PAGE>
INDUSTRIAL SUBLEASE AGREEMENT
1. BASIC SUBLEASE INFORMATION AND CERTAIN DEFINED TERMS.
Lease Date: September 1, 1997
Tenant: S-Line, a Texas corporation
Tenant's Address: 11414 Mathis Avenue
Dallas, TX 75239
Contact: Jerry Squyres
Telephone: 972-402-9000
Landlord: ADVANCED MATERIALS, INC., a California corp.
20211 S. Susana Road
Rancho Dominguez, CA 90221
Guarantor(s): N/A
Project: 11420 Mathis Drive
more specifically defined in Paragraph 2.
Description: Approximately 27,869 square feet
Premises: As indicated by the cross-hatched area designated
"Reduction Area" on Exhibit "A1" attached to this
lease, situated in the building constituting a part
of the Project and shown on Exhibit "A2" (the
"Building") located on the land described on Exhibit
"B" attached to this lease (the "land").
Permitted Use: Manufacturing, fabrication, assembly,
warehousing and distribution
Term: September 1st, 1997 through May 31st, 1999
<TABLE>
<CAPTION>
Base Rent:
Rate Per Square Foot of
<PAGE>
Net Rentable Area in the
Monthly Annual Premises Per Annum
------- ------ ------------------
<S> <C> <C> <C>
$7663.98 $91,967.70 $3.30
Security Deposit: $7663.98
</TABLE>
Tenant's Proportionate
Share: 28%, which is the percentage obtained by dividing
(i) 27,869 square feet, which is the net rentable
area rented by Tenant hereunder by (ii) 100,000
square feet, which is the net rentable area in the
Building rented by Landlord.
Base Year: Calendar Year 1997
Broker or Agent: N/A
Sublease: It is understood and agreed that this Lease is in
fact a sublease, and that Tenant accepts this
Lease subject to all of the terms and conditions
of the underlying lease dated as of December,
1995, between New York Life and Annuity
Corporation, as Landlord, and Advanced Materials
Group, Inc., as tenant (the "Underlying Lease"), a
copy of which is attached hereto and made apart
hereof, under which Landlord hereunder holds the
leased premises as tenant. Tenant herein covenants
that it will do no act or thing which would
constitute a violation by Landlord here in of its
obligations under such Underlying Lease.
Underlying Lease: The terms and conditions of Sections 2 through 36
of the Underlying Lease are incorporated herein by
this reference, with references to any defined
terms herein, provided however that Sections 15,
l6, 18 and 22 are amended and restated in their
entirety herein.
Renewal Option: Landlord hereby grants to Tenant the right and
option to renew the lease on the same terms and
conditions. If exercised, the Lease will be
renewed
<PAGE>
for an additional eighteen (18) month term
ending on Nov 30, 2000.
4. RENT, SECURITY DEPOSIT, REIMBURSABLE EXPENSES AND ESCROW PAYMENTS.
C. In addition to Base Rent and Tenant's other obligations hereunder,
Tenant agrees to pay Tenant's proportionate share (as defined in PARAGRAPH 1)
of the following costs and expenses (collectively, the "REIMBURSABLE
EXPENSES") payable by Landlord as tenant under the Underlying Lease: (i)
Excess Common Area Charges (hereinafter defined) payable by Tenant in
accordance with PARAGRAPH 5, (ii) Excess Taxes (hereinafter defined) payable
by Tenant pursuant to PARAGRAPH 6, (iii) Excess Insurance Expenses
(hereinafter defined) payable by Tenant pursuant to PARAGRAPH 13, (iv) the
cost of any repair, replacement, or capital expenditures required under any
governmental law or regulation that was not applicable to the Building at
time of original construction, such costs to be amortized over such
reasonable period as Landlord shall determine, (v) the cost of any capital
improvements made to common areas of the Building after the date of this
Lease that is required under interpretations or regulations issued from time
to time under provisions of the Tex. Rev. Div. Stat. Ann. Art. 9102 and/or
the provisions of the Americans With Disabilities Act of 1990, 42 U.S.C.
Sections 12101-12213 (collectively, the "Disability Acts"), amortized over
such period as Landlord shall reasonably determine, together with interest at
the Prime Rate on the unamortized balance thereof, (vi) replacement reserves
for capital items and other operating expenses required by this Lease, and
(vii) Utility Payments (as such term is defined in Section 12. During each
month of the Term of this Lease, on the same day that Base Rent is due
hereunder, Tenant shall escrow with Landlord an amount equal to 1/12th of
Tenant's proportionate share of such Reimbursable Expenses, as estimated by
Landlord. Tenant authorizes Landlord to use the funds deposited with
Landlord under this PARAGRAPH 4C to pay such Reimbursable Expenses. On or
before December 31 of each calendar year during the Lease Term, or as soon
thereafter as reasonable practical, Landlord shall give Tenant written notice
of its estimate of Reimbursable Expenses for the ensuing calendar year
(provided Landlord's failure to do so shall not waive Tenant's obligations,
and until such estimate is provided the estimate of Reimbursable Expenses for
the prior year shall be used). Landlord shall be entitled to receive its
projection of such Reimbursable Expenses at any time and if Landlord so
revises such projection, Tenet shall pay to Landlord, on the same day as Base
Rent is due hereunder, an amount equal to 1/12th of Tenant's proportionate
share of such Reimbursable Expenses pursuant to Landlord's revised estimate
thereof. By April 30 of each calendar year (or as soon thereafter as may be
reasonably practicable) during the Term hereof Landlord shall determine the
actual Reimbursable Expenses for the preceding calendar year and shall notify
Tenant thereof. If the Tenant's total escrow payments are less than Tenant's
actual proportionate share of all such Reimbursable Expenses, Tenant shall
pay the difference to Landlord within ten (10) days after demand. If the
total escrow payments of Tenant are more than Tenant's actual proportionate
share of all such Reimbursable Expenses, Landlord shall retain such excess
and credit it against Tenant's next annual escrow payments.
5. EXCESS COMMON AREA CHARGES. In addition to other amounts required
to be paid by Tenant hereunder, each calendar year (other than the Base Year)
Tenant shall pay to Landlord Tenant's
<PAGE>
proportionate share of the amount by which the following costs and expenses
(collectively, the "COMMON AREA CHARGES") for such calendar year exceed the
Common Area Charge for the Base Year (such excess being referred to herein as
the "EXCESS COMMON AREA CHARGES") and are payable by Landlord as tenant under
the Underlying Lease:
A. The cost of repair, maintenance, and replacement of: (i) exterior of
the Building (including painting), other than structural repairs and
replacements for which landlord under the Underlying Lease is responsible
pursuant to PARAGRAPH 7 of the Underlying Lease; (ii) all mechanical,
electrical, plumbing, sewer, sprinkler and other life-safety equipment and
systems forming a part of the Project (including the cost of repair, replacement
and maintenance of the items which are tenant's responsibility pursuant to
PARAGRAPH B of the Underlying Lease which shall be paid entirely by tenant under
the Underlying Lease as provided in PARAGRAPH B of the Underlying Lease; (iii)
any spur or other track servicing the Project, including any amounts payable by
Landlord in any agreement relating to such tracks; and (iv) all other common
areas and facilities constituting a part of the Project (including, but not
limited to, all paved areas surrounding the Building).
B. The cost of maintenance and replacement of the grass, shrubbery and
other landscaping in and about the Project.
C. The cost of maintaining in a good, neat, clean and sanitary condition
all parking areas, driveways, alleys and grounds in and about the Project
(including trash removal).
D. The cost of maintaining and landscaping any property or facility that
is operated, maintained or landscaped by any property owner or community owner
association to which any of the Project is subject (including the cost of any
dues or other charges assessed by any such association).
E. The cost of operating and maintaining any property, facilities or
services provided for the common use of Tenant and other tenants of the
Project, which costs shall include, without limitation,
<PAGE>
management fees and security (if furnished by Landlord or the landlord under the
Underlying Lease), wages and employee benefits payable to employees of Landlord
or the landlord under the Underlying Lease whose duties are connected with the
operation and maintenance of the Project, amounts paid to contractors or
subcontractors for work or services performed in connection with the operation
and maintenance of the Project, all service, supplies, repairs, replacements and
other expenses for maintaining and operating the Project, and any other
facilities or services provided for the common use of Tenant and other tenants
of the Project.
6. TAXES.
A. Landlord agrees to be responsible for all taxes, assessments and
governmental charges of any kind and nature that accrue against any of the
Project (collectively referred to herein as "TAXES"). If at any time during
the Term of this Lease, there shall be levied, assessed or imposed on
Landlord or the landlord under the Underlying Lease a capital levy or other
tax directly on the rents received herefrom and/or a franchise tax,
assessment, levy or charge measured by or based, in whole or in part, upon
such rents from the Project, then all such taxes, assessments, levies or
charges, or the part thereof so measured or based, shall be deemed to be
included within the term "Taxes" for the purposes hereof, or the landlord
under the Underlying Lease. The landlord under the Underlying Lease has the
right pursuant to the Underlying Lease to employ a tax consulting firm to
attempt to assure a fair tax burden on the Project within the applicable
taxing jurisdiction. Tenant agrees to pay its proportionate share of the
cost of any such consultant incurred by Landlord in any year following the
Base Year.
B. In addition to other amounts required to be paid by Tenant hereunder,
each calendar year Tenant shall pay to Landlord Tenant's proportionate share of
the amount by which Taxes for such calendar year exceed Taxes for the Base Year
(such excess being referred to herein as the "EXCESS TAXES").
C. Tenant shall be liable for all taxes levied or assessed against any
personal property or fixtures placed in the Premises. If any such taxes are
levied or assessed against Landlord or the landlord under the Underlying Lease
their respective property and (i) Landlord pays the same or (ii) the assessed
value of their respective property is increased by inclusion of such personal
property and fixtures and Landlord or the landlord under the Underlying Lease
pays the increased taxes, then, upon demand Tenant shall pay to Landlord the
amount of such increase in taxes. In addition, if the Building is a multiple
occupancy building and the cost of any improvements constructed to the Tenant's
Premises is disproportionately higher than the cost of improvements constructed
to the premises of other tenants of the Building, then upon demand Tenant shall
pay the amount of Taxes attributable to such disproportionately more
expensive improvements, in addition to Tenant's proportionate share of Taxes.
<PAGE>
7. LANDLORD AND TENANT INSURANCE.
A. The landlord under the Underlying Lease must maintain insurance
covering the Building in an amount not less than eighty percent (80%) of the
"replacement cost" thereof insuring against the perils and costs of Fire,
Lightning, Extended Coverage, Vandalism and Malicious Mischief and such other
insurance as Landlord shall deem necessary. In addition to other amounts
required to be paid by Tenant hereunder, each calendar year (other than the Base
Year) Tenant shall pay to Landlord Tenant's proportionate share of the amount
payable by Landlord as tenant under the Underlying Lease, pursuant to paragraph
13A thereof; being the amount by which the cost of procuring insurance under
such PARAGRAPH 13A for such calendar year exceeds the cost of procuring such
insurance for the Base Year (such excess being referred to herein as the "EXCESS
INSURANCE EXPENSES").
8. FIRE AND CASUALTY DAMAGE.
A. If the Premises or the Building should be damaged or destroyed by fire
or other peril, Tenant immediately shall give written notice to Landlord. If
the Building of which the Premises are a part should be totally destroyed by any
peril covered by the insurance to be provided by the landlord under the
Underlying Lease, or if they should be so damaged thereby that, in the
landlord's estimation, rebuilding or repairs cannot be completed within one
hundred eighty (180) days after the date of the landlord's actual knowledge of
such damage, this Lease shall terminate and the rent shall be abated during the
unexpired portion of this Lease, effective upon the date of the occurrence of
such damage.
B. If the Building of which the Premises are a part, should be damaged
by any peril covered by the insurance to be provided by the landlord under
the Underlying Lease, and in the landlord's estimation, rebuilding or repairs
can be substantially completed within one hundred eighty (180) days after the
date of the landlord's actual knowledge of such damage, this Lease shall not
terminate, and the landlord has agreed to restore the Premises to
substantially its previous condition, except that the landlord shall not be
required to rebuild, repair or replace any part of the partitions, fixtures,
additions and other improvements that may have been constructed, erected or
installed in, or about the Premises for the Benefit of, or by or for Tenant
effective upon the date of the occurrence of such damage and ending upon
substantial completion, if the Premises are untenantable in whole or in part
during such period, the rent shall be reduced to such extent as may be fair
and reasonable under all of the circumstances. If such repairs and
rebuilding have not been substantially completed within one hundred eighty
(180) days after the date of the landlord's actual knowledge of such damage
(subject to Force Majeure Delays (hereinafter defined), either Landlord or
Tenant may terminate this Lease by delivering written notice of termination
to the other party in which event the rights
<PAGE>
[ILLEGIBLE]
and obligations hereunder shall cease and terminate (except as expressly
provided to the contrary herein).
C. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Premises requires that the insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made known to Landlord, whereupon all rights and obligations hereunder shall
cease and terminate (except as expressly provided to the contrary herein).
9. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of
recovery and causes of action that Tenant has released, Landlord shall hold
Tenant harmless and defend Tenant against any and all claims or liability for
any injury or damage to any person in, on or about the Premises, when such
injury or damage shall be caused by an affirmative act of negligence by such
landlord, its agents, servants and employees (unless the indemnified loss is
caused wholly or in part by Tenant's or any other party's negligence, in
which event this indemnity shall not apply to the allocable share of such
loss resulting from Tenant's or such other party's negligence). Except for
any claims, rights of recovery and causes of action that Landlord has
released, Tenant shall indemnify, protect, hold harmless and defend Landlord,
its agents, employees, contractors, partners, directors, officers and any
affiliates of the above-mentioned parties (collectively the "LANDLORD
AFFILIATES") from and against any and all obligations, suits, losses,
judgments, actions, damages, claims or liability (including, without
limitation, all costs, attorneys' fees, and expenses incurred in connection
therewith) in connection with any loss, injury or damage (i) to any person or
property whatsoever occurring in, on or about the Project, when such injury
or damage shall be caused by the act, neglect, fault of, or omission of any
duty with respect to the same by Tenant, its agents, servants, employees, or
invitees (ii) arising from the conduct of management of any work done by or
for Tenant in or about the Project, (iii) arising from transactions of the
Tenant, or (iv) arising from a breach, violation or non-performance of any
term, provision, covenant or agreement of Tenant hereunder, or a breach or
violation by Tenant of any court order or any law, regulation, or ordinance
of any federal, state or local authority (collectively, the "LOSSES"). If
any claim is made against Landlord or Landlord Affiliates, Tenant, at its
sole cost and expense, shall defend any such claim, suit or proceeding by or
through attorneys satisfactory to Landlord. The provisions of this paragraph
9 shall survive the expiration or termination of this Lease with respect to
any claims or liability occurring prior to such expiration or termination.
10. INSPECTION. Landlord and Landlord's agents and representatives
(including Landlord and its agents and affiliates under the Underlying Lease)
shall have the right to enter the Premises during business hours, upon prior
reasonable notice except in the event of an emergency, to (i) inspect the
Premises, (ii) make such repairs as may be required or permitted pursuant to
this Lease, and (iii) show the Premises to prospective purchasers of, or parties
who are anticipated to provide financing with respect to, the Building.
Notwithstanding the foregoing, Landlord and landlord under the Underlying Lease
shall have the right to enter the Premises at any time, without notice to
Tenant, in case of an emergency posing a threat to persons or property
<PAGE>
During the period that is six (6) months prior to the end of the Term, upon
telephonic notice to Tenant, Landlord and Landlord's representatives may
enter the Premises stating the Premises are available. Tenant shall notify
Landlord in writing at least thirty (30) days prior to vacating the Premises
and shall arrange to meet with Landlord for a joint inspection of the
Premises prior to vacating. If Tenant fails to give such notice or to
arrange for such inspection, then Landlord's inspection of the Premises shall
be deemed correct for the purpose of determining Tenant's responsibility for
repairs and restoration of the Premises.
11. QUIET ENJOYMENT. This Lease is a sublease, and Tenant agrees to
take the Premises subject to the provisions of the prior leases. Landlord
represents that it has the authority to enter into this Lease and that so
long as Tenant pays all amounts due hereunder and performs all other
covenants and agreements herein set forth, Tenant shall peaceably and quietly
have, hold and enjoy the Premises for the Term hereof without hindrance or
molestation from Landlord subject to the terms and provisions of this Lease.
<PAGE>
[GRID]
<PAGE>
12. LANDLORD'S REPAIRS.
Landlord's maintenance, repair and replacement obligations are limited
to those set forth in this PARAGRAPH 12. The landlord under the Underlying
Lease, at its own cost and expense, is responsible for roof replacement and for
repair and replacement of the foundation and the structural members of the
exterior walls of the Building, reasonable wear and tear excluded. The terms
"roof" and "walls" as used herein shall not include skylights, windows, glass or
plate glass, doors, special store fronts or office entries. Tenant shall
immediately give Landlord written notice of defect or need for repairs after
which Landlord shall have reasonable opportunity to demand the landlord under
the Underlying Lease repair same or cure such defect. Landlord shall cause
landlord under the Underlying Lease to maintain and repair the common area in
and about the Building in a reasonable and prudent manner including any spur
track, with the cost thereof being a part of the Common Area Charges.
13. TENANT'S REPAIRS AND MAINTENANCE.
In addition to Tenant's other obligations hereunder, Tenant, at its
own cost and expense, shall enter, or pay its proportionate share for
Landlord to enter, into a regularly scheduled preventive maintenance/service
contract with a maintenance contractor approved by Landlord for servicing all
hot water, heating and air conditioning systems and equipment within or
serving the Premises. The service contract must include all services
suggested by the equipment manufacturer in its operations/maintenance manual
and an executed copy of such contract must be provided to Landlord prior to
the date Tenant takes possession of the Premises.
14. UTILITIES. The landlord under the Underlying Lease has agreed to
provide normal water, sewer, gas and electricity service as same may be
available to the Premises. Tenant shall timely pay for all water, gas, heat,
light, power, telephone, sewer, sprinkler charges and other utilities and
services used on or at the Premises, together with any taxes, penalties,
deposits, surcharges or the like pertaining to the Tenant's use of the Premises,
and any maintenance charges for utilities. Tenant shall pay all impact fees
associated with utility hook-ups, meter installations or services to the
Premises. If the Tenant has given Landlord prior written consent, Landlord
shall have the right to cause any of said services to be separately metered to
Tenant, with the expense of the additional metering to be equally shared
between the Landlord and the Tenant. Tenant shall pay its proportionate share,
as reasonably determined by Landlord, of all charges for jointly metered
utilities (including those utilities jointly metered between Landlord hereunder
and landlord under the Underlying Lease, and including, but not limited to the
cost of utilities consumed in connection with providing electrical power for the
Building's canopy lighting, the lighting of the parking facilities and other
common areas and facilities associated with the Building, the Building's fire
pump room and irrigation system, as well as other electricity gauged by the
"house meter"). Landlord shall not be liable for any interruption or failure of
utility service on the premises.
<PAGE>
Landlord:
ADVANCED MATERIALS, INC.
a California corporation
By: /s/ DAVE LASNIER
-------------------------
Title: Sr.V. Pres. / GM
----------------------
Date of Execution: 8-10-97
----------
Tenant:
S-LINE
a Texas corporation
By: /s/ Liz Squyres
-------------------------
Name: Liz Squyres
-----------------------
Title: V.P.
----------------------
Date of Execution: 8-19-97
----------
PROPERTY OWNER:
New York Life Insurance Corp.
A Delaware Corporation
By: Bradford Co., its
Authorized Representative
By:
-------------------------
Date:
-----------------------
<PAGE>
MANUFACTURING AGREEMENT
THIS MANUFACTURING AGREEMENT (the "Agreement") is made and entered into
as of the 30th day of January, 1998 (the "Closing Date"), by and between
Advanced Materials Foreign Sales Corporation Ltd., a Bermuda corporation
("AMFS"), and Foamtec (Singapore) Pte Ltd., a Singapore private limited
company ("Foamtec").
RECITALS
WHEREAS, AMFS proposes to obtain raw material from Foamtec's affiliate in
the United States ("Foamex USA"), and to sell such raw material to Foamtec; and
WHEREAS, Foamtec proposes to fabricate foam products at Foamtec's facility
in Singapore, utilizing machinery and technology supplied by AMFS, for resale of
finished products to AMFS; and
WHEREAS, AMFS will sell such finished products to Hewlett-Packard and
certain other approved customers and products, on a case-by-case basis; and
WHEREAS, AMFS has agreed to lease certain machinery and equipment (the
"Equipment") to be located at Foamtec's facility pursuant to an equipment lease
in the form of Exhibit A hereto (the "Equipment Lease") and certain intellectual
property, trade secrets and "know-how" (the "Technology") pursuant to a license
agreement in the form of Exhibit B hereto (the "License Agreement") to Foamtec
for use in connection with the business contemplated by this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, AMFS and Foamtec hereby covenant and agree as follows:
ARTICLE 1
DEFINITIONS
The following defined terms used in this Agreement shall have the
respective meanings specified below.
"ADDITIONAL TERM" shall have the meaning set forth in Section 2.2(b).
An "AFFILIATE", when used with respect to a specified Person, shall mean
(i) any other Person directly or indirectly controlling, controlled by, or under
common control with, such specified Person, (ii) any officer, director, partner
(including any officer or director of AMFS or Foamtec), legal representative
(including a trustee for the benefit of such specified Person) or employee of
such
<PAGE>
specified Person, and (iii) any Person for which such specified Person acts as
an officer, director, partner or employee. As used in this definition of
"Affiliate," the term "control" and any derivatives thereof mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting
securities, by contract, or otherwise.
"AGREEMENT" shall have the meaning set forth in the preamble.
"AMFS" shall have the meaning set forth in the preamble.
"BUSINESS" shall have the meaning set forth in Section 2.1.
"BUSINESS PLAN" shall have the meaning set forth in Section 6.4(1).
THE "CLOSING DATE" shall have the meaning set forth in the preamble.
THE "DEFAULTING PARTY" shall have the meaning set forth in Section 7.1.
"EQUIPMENT" shall have the meaning set forth in the preamble.
"EQUIPMENT LEASE" shall have the meaning set forth in the preamble.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 7.1.
"FOAMEX USA" shall have the meaning set forth in the preamble.
"FOAMTEC" shall have the meaning set forth in the preamble.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 11.2.
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 11.2.
"LICENSE AGREEMENT" shall have the meaning set forth in the preamble.
"NONDEFAULTING PARTY" shall have the meaning set forth in Section 7.1.
"NOTICE OF DEFAULT" shall have the meaning set forth in Section 7.1.
"PARTY" shall mean either of AMFS or Foamtec, as the context requires.
"PARTIES" shall mean AMFS and Foamtec.
2
<PAGE>
"PERSON" shall mean any individual, partnership, association, governmental
instrumentality, corporation, trust or other legal person or entity.
"PRODUCTS" shall have the meaning set forth in Section 2.1.
"SIAC RULES" shall have the meaning set forth in Section 10.2.
"TECHNOLOGY" shall have the meaning set forth in the preamble.
"TERM" shall have the meaning set forth in Section 2.2.
ARTICLE 2
PURPOSES; TERM AND CONDUCT
2.1. PURPOSES. The purposes for which the Agreement is entered
(the "Business") are for AMFS to acquire raw material from Foamex USA, and to
sell such raw material to Foamtec, and for Foamtec to fabricate such raw foam
products at Foamtec's facility in Singapore, utilizing machinery and technology
supplied by AMFS, for resale of finished foam products to AMFS, which will then
sell such products to Hewlett-Packard and to certain other approved customers
and products, such products and such customers to be approved unanimously by the
Parties from time to time on a case-by-case basis (the "Products").
2.2. TERM.
(a) The Agreement shall commence on the Closing Date and, subject
to the provisions otherwise contained herein, shall terminate ten (10) years
thereafter subject to renewal as provided in Section 2.2(b), below (the
"Term") unless sooner terminated as otherwise provided in this Agreement or
by law.
(b) This Agreement may be renewed by either party for an
additional five (5) year period (the "Additional Term"), provided the party
desiring to renew the Agreement for such Additional Term notifies the other
party in writing at least six months prior to expiration of the Term hereof.
2.3. CONDUCT. The Agreement shall be effected as follows:
(a) AMFS shall purchase raw material from Foamex USA at a price
representing the best price for such material offered by Foamex USA anywhere in
the world at that time. Foamtec will reasonably cooperate with AMFS to ensure
AMFS receives from Foamex USA the pricing described in the previous sentence,
and to make such books and records reasonably available as are necessary or
desirable to AMFS's auditors to verify such best price.
3
<PAGE>
(b) AMFS will sell such raw material to Foamtec at a price as
determined in Section 3.3(a), below.
(c) Foamtec shall fabricate such raw material into finished
product at Foamtec's facility, utilizing Foamtec's personnel and the Equipment
and Technology of AMFS, and shall resell such finished product to AMFS at a
price equal to the price determined as set forth in Section 3.3(b), below.
(d) AMFS shall sell and deliver such finished products to
Hewlett-Packard and such other customers at the same prices as are determined in
accordance with Section 2.3(c) and Section 3.3(b).
ARTICLE 3
COSTING
3.1. PROFIT SHARING. Except as otherwise expressly stipulated herein,
the interest of the respective Parties in the profits resulting from the
difference between the price of the raw materials described in Section 2.3(a)
and the retail price for sales to customers described in Section 2.3(d) shall be
as follows (commencing as at the date of the first sale of the Products to a
retail customer hereunder):
<TABLE>
<CAPTION>
Year AMFS Foamtec
---- ---- -------
<S> <C> <C>
1 65 35
2 60 40
3 50 50
4 45 55
5 40 60
6-10 35 65
</TABLE>
3.2 CALCULATION OF PROFITS. Profits are to be determined by deducting
all costs arising under the Agreement from the revenues arising under the
Agreement.
(a) REVENUES. Payments received from customers as contemplated
by Section 2.3(c).
(b) COSTS - FOAMTEC. Foamtec shall be permitted to charge AMFS,
in U.S. dollars, amounts to compensate Foamtec for all raw materials, direct
labor costs (including compensation and benefits), variable overhead (utilities,
packaging, supplies, repairs and maintenance, outbound freight, inspection and
manufacturing, supervision), fixed overhead (facility rent, purchasing,
receiving, shipping, plant manager), operating expenses (sales and marketing,
accounting, legal and audit) and an amortization charge for start-up costs. The
foregoing manufacturing costs will be computed as further described in Schedule
3.2(b) and reviewed
4
<PAGE>
periodically and approved by the parties pursuant to Article 4. These
manufacturing costs must remain competitive to U.S. plant manufacturing
standards, usage and plant space utilization.
(c) COSTS - AMFS. Costs incurred by AMFS for direct material
(including costs of transportation, duties, brokers' fees, insurance,
manufacturing scrap and so forth), fixed overhead (including payments under the
Equipment Lease and the License Agreement, and quality control and purchasing
allocations), operating expenses (including sales and marketing) and
non-operating expenses (including imputed interest charges for inventory and
accounts receivable and an amortization charge for start-up costs will be
charged as costs). These costs will be reviewed periodically and approved by
the parties pursuant to Article 4.
3.3 CALCULATION OF PURCHASE PRICE.
(a) The price described in Section 2.3(b) shall be determined by
the parties pursuant to Article 4 and shall be intended to provide that the
difference between the price paid by AMFS to Foamex USA for raw material and the
price paid by Foamtec to AMFS for the same raw material shall represent the
portion of the profit in good faith estimated to accrue to AMFS as set forth in
Section 3.1 and as calculated in Section 3.2.
(b) The price described in Section 2.3(c) shall be determined by
the parties pursuant to Article 4 and shall be intended to provide in good faith
that the difference between the price paid by Foamtec to AMFS for raw material
and the price paid by AMFS to Foamtec for finished product fabricated from such
raw material shall represent the portion of the profit in good faith estimated
to accrue to Foamtec as set forth in Section 3.1 and as calculated in Section
3.2.
3.4 TIME OF PAYMENTS. Payments by AMFS to Foamtec and payments by
Foamtec to AMFS as contemplated herein shall be made on a quarterly basis within
ten (10) business days after the quarter is closed, and shall be netted against
each other, with such adjustments as may be determined in good faith by the
parties pursuant to Article 4 so as to most accurately reflect the intent of the
parties as set forth in Section 3.1.
ARTICLE 4
OVERSIGHT
4.1. OVERSIGHT. The parties shall perform under this Agreement under the
joint direction of an appointee of each of AMFS (initially, Steve F. Scott) and
Foamtec (initially, Stephen P. Scibelli). Any disputes or disagreements arising
from this Agreement shall initially be referred jointly to such appointees, who
shall in good faith attempt to resolve such disputes promptly and within the
spirit of this Agreement.
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ARTICLE 5
BOOKS AND RECORDS; AUDITS
5.1. BOOKS; STATEMENTS. The Parties shall keep accurate, full and
complete books and accounts showing its operations and transactions relating to
the Business.
5.2. ACCESS. Each Party shall have access to and may inspect and copy
the books, accounts and records of the other Party maintained in accordance with
Section 5.1, provided that any request for access to the books, accounts and
records of the other Party must be reasonable.
5.3. AUDITS. In addition to the foregoing, any Party may, at its option
and at its own expense, conduct internal audits of the books, records and
accounts of the other Party, but only to the extent that such books, records and
accounts relate to the Business. Audits may be on either a continuous or a
periodic basis or both and may be conducted by employees of any Party, or of an
Affiliate of any Party, or by independent auditors retained by any Party.
5.4. OTHER INFORMATION. Each Party shall make available to the other
Party such information and financial statements related to the Business, in
addition to the foregoing, as shall be required by either of them in connection
with the preparation of registration statements, current and periodic reports,
proxy statements and other documents required to be filed under foreign, federal
or state securities laws and shall cooperate in the preparation of any such
documents.
ARTICLE 6
NO ASSIGNMENT; RIGHTS TO PURCHASE AN INTEREST
6.1. CONSENT REQUIRED. Except as provided in Section 6.2, without the
prior written consent of the other Party (which may be withheld for any or no
reason), no Party, nor any assignee or successor in interest of any Party, shall
(voluntarily or involuntarily) sell, assign, give, pledge, hypothecate, encumber
or otherwise transfer all or any part of its interest in this Agreement.
6.2 RIGHT TO PURCHASE AND SELL. At any time following the third
anniversary of the date hereof, Foamtec shall have the right, exercisable from
time to time by written notice to AMFS, to purchase the interest of AMFS under
this Agreement at a price calculated as the present value, discounted at the
average over the prior three months of the prime rate as announced from time to
time by Wells Fargo Bank, N.A. Head Office as its prime rate, of the portion of
the income reasonably expected to accrue to AMFS as provided in Section 3.1
hereof over the remaining balance of the initial Term hereof (if exercised
during the initial Term) or for the balance of the Additional Term (if exercised
during the Additional Term) based on the forecast from Hewlett-Packard of its
orders for products of the Business during such period. Within 30 days of such
notice, the Parties shall execute such documents and instruments reasonably
acceptable to the Parties required to consummate the contemplated transaction,
including AMFS' transfer of the Technology to Foamtec. The closing of such
transaction shall take place within 30 days following the date on which any
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government regulatory approvals required for consummation of the transaction
have been obtained or otherwise satisfied.
ARTICLE 7
TERMINATION
7.1. EVENT OF DEFAULT. In the event:
(a) a receiver, liquidator, assignee, custodian, trustee,
conservator, sequestrator (or other similar official) shall take possession of a
Party or any substantial part of its property without its consent, or a court
having jurisdiction in the premises shall enter a decree or order for relief in
respect of a Party in an involuntary case under any applicable bankruptcy,
insolvency, moratorium or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, conservator,
sequestrator (or other similar official) of such Party or for any substantial
part of its property, or ordering the winding-up or liquidation of its affairs
and such decree or order shall remain unstayed and in effect for a period of 30
consecutive days; or
(b) a Party shall commence a voluntary case under any applicable
bankruptcy, insolvency, moratorium or other similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an involuntary
case under any such law, or shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian, conservator,
sequestrator (or other similar official) of such Party or of any substantial
part of its property, or shall make any general assignment for the benefit of
creditors, or shall take any corporate action in furtherance of any of the
foregoing; or
(c) a Party shall admit in writing its inability to pay its
debts as they mature; or
(d) a Party shall give notice to any governmental body of
insolvency or pending insolvency, or suspension or pending suspension of
operations; or
(e) any Party fails to perform any of its obligations or
covenants or breaches any of its representations under this Agreement or
pursuant to the agreements attached as Exhibits hereto (an "Event of Default"),
then the other Party (the "Nondefaulting Party") shall have the right to give
such party (the "Defaulting Party") a notice of default ("Notice of Default").
The Notice of Default shall set forth the nature of the obligations which the
Defaulting Party has not performed.
7.2 THIRTY (30) DAY PERIOD AFTER EVENT OF DEFAULT.
(a) If within the thirty (30) day period following receipt of
the Notice of Default, the Defaulting Party in good faith commences to perform
such obligations and cure such default, and thereafter prosecutes to completion
with diligence and continuity the curing thereof and cures such
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default within a reasonable time, then it shall be deemed that the Notice of
Default was not given and the Defaulting Party shall lose no rights hereunder.
If, within such thirty (30) day period, the Defaulting Party does not commence
in good faith the curing of such default or does not thereafter prosecute to
completion with diligence and continuity the curing thereof, then the
Nondefaulting Party may, at the option of the Nondefaulting Party, terminate
this Agreement by giving the Defaulting Party written notice thereof.
(b) Failure by a Nondefaulting Party to give any Notice of
Default as specified herein, or any failure to insist upon strict performance of
any of the terms of this Agreement, shall not constitute a waiver of any such
breach or any of the terms of this Agreement. No breach shall be waived and no
duty to be performed shall be altered or modified except by written instrument.
One or more waivers or failures to give Notice of Default shall not be
considered as a waiver of a subsequent or continuing breach of the same
covenant.
7.3. CONTINUING OBLIGATIONS. The termination of this Agreement for any
reason shall neither release either Party hereto from any liabilities,
obligations or agreements which, pursuant to any provisions of this Agreement,
are to survive or be performed after such termination nor shall it release
either Party hereto from its liability to pay any sums of money accrued, due,
and payable to the other Party or to discharge its then-accrued and unfulfilled
obligations.
7.4. NOT EXCLUSIVE REMEDY. The rights granted in Section 7.1 and Section
7.2 above shall not be deemed an exclusive remedy of a Nondefaulting Party or a
Solvent Party, but all other rights and remedies, legal and equitable, shall be
available to it.
ARTICLE 8
COVENANT NOT TO COMPETE
8.1. COVENANT NOT TO COMPETE. Each Party and its Affiliates, so long as
such Party remains a Party hereunder, are prohibited from directly or indirectly
engaging in or possessing an interest in an activity, the purpose or business of
which is identical to that described in Section 2.1, relating to the manufacture
of products of the sort manufactured under this Agreement, to be sold to
customers under this Agreement, during the Term of this Agreement, in Singapore
or Malaysia. However, notwithstanding anything in this Agreement to the
contrary, Foamex Asia Co., Ltd., a private limited company incorporated in the
Kingdom of Thailand which is an Affiliate of Foamtec, shall have the right to
sell raw materials to anyone in Singapore, Malaysia or elsewhere.
ARTICLE 9
REPRESENTATIONS AND WARRANTIES
9.1. REPRESENTATIONS AND WARRANTIES BY AMFS. AMFS represents and
warrants to, and covenants with Foamtec, as follows:
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(a) AMFS is a corporation duly organized and validly existing
under the laws of the State of California and is in good standing in such
jurisdiction. AMFS is qualified to do business and in good standing as a
foreign corporation in any other jurisdiction where the failure to be so
qualified or in good standing would have a material adverse impact on the
operation or financial condition of the Business.
(b) AMFS has the full right, power and authority to enter into
this Agreement and will at all times have the full power and authority to
perform its obligations under this Agreement. This Agreement has been duly
authorized, executed and delivered by it, and this Agreement constitutes its
valid and binding obligation, enforceable in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency, moratorium or other
loss affecting creditors' rights generally, or equitable principles, whether
applied in a proceeding in equity or law.
(c) AMFS is not, nor at any time will it be, a party to any
contract or other arrangement of any nature that will materially interfere with
its full, due and complete performance of this Agreement.
(d) There is no litigation or proceeding pending nor, to the
best of AMFS's knowledge and belief, is any investigation pending or litigation,
proceeding, or investigation threatened involving AMFS or its parent, which
could, if adversely determined, materially and adversely affect the operation or
financial condition of the Business or the performance of AMFS's obligations
under this Agreement.
(e) AMFS is not, nor at any time will it be, in violation of any
existing law, be it state or federal, by entering into and undertaking the
performance of this Agreement.
9.2. REPRESENTATIONS AND WARRANTIES BY FOAMTEC. Foamtec represents and
warrants to, and covenants with, AMFS, as follows:
(a) Foamtec is a private limited company duly organized and
validly existing under the law of the Republic of Singapore and is in good
standing in such jurisdiction. Foamtec is qualified to do business and in good
standing as a foreign corporation in any other jurisdiction where the failure to
be so qualified or in good standing would have a material adverse impact on the
business or financial condition of the Business.
(b) Foamtec has the full right, power and authority to enter
into this Agreement and will at all times have the full power and authority to
perform its obligations under this Agreement. This Agreement has been duly
authorized, executed and delivered by it, and this Agreement constitutes its
valid and binding obligation, enforceable in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency, moratorium or other
loss affecting creditors' rights generally, or equitable principles, whether
applied in a proceeding in equity or law.
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(c) Foamtec is not, nor at any time will it be, a party to any
contract or other arrangement of any nature that will materially interfere with
its full, due and complete performance of this Agreement.
(d) There is no litigation or proceeding pending nor, to the
best of Foamtec's knowledge and belief, is any investigation pending or
litigation, proceeding, or investigation threatened involving Foamtec or its
parent, which could, if adversely determined, materially and adversely affect
the operation or financial condition of the Business or the performance of
Foamtec's obligations under this Agreement.
(e) Foamtec is not, nor at any time will it be, in violation of
any existing law, be it state or federal, by entering into and undertaking the
performance of this Agreement.
ARTICLE 10
ARBITRATION
10.1. ARBITRATION. Any dispute arising out of or in connection with this
Agreement that has not been resolved pursuant to the procedures set forth in
Article 4 shall be referred to and finally resolved by arbitration in Singapore
in accordance with the Arbitration Rules of the Singapore International
Arbitration Centre ("SIAC Rules") for the time being in force which rules are
deemed to be incorporated by reference into this Section. The law of the
arbitration shall be the Singapore International Act 1994. The Tribunal shall
consist of three (3) arbitrators, each party to appoint one (1) arbitrator, and
the two arbitrators thus appointed shall choose the third arbitrator who will
act as the presiding arbitrator of the Tribunal. The governing law of this
Agreement shall be the substantive law of the State of California, U.S.A. The
language of the arbitration shall be English.
ARTICLE 11
INDEMNIFICATION
11.1. INDEMNIFICATION. Each Party shall indemnify, defend, and hold
harmless the other Party (including those who have been, but no longer are,
Parties) and its Affiliates from and against all loss, cost, liability and
expense which may be imposed upon or reasonably incurred by the other Party or
Affiliates, including reasonable attorneys' fees and disbursements and
reasonable settlement payments, in connection with any claim, action, suit or
proceeding or threat thereof, made or instituted in which the other Party or
Affiliates may be involved or be made a party by reason of a breach of such
Party's representations or covenants.
11.2. PROCEDURE FOR DEFENSE. Promptly after receipt by a person or entity
indemnified under any express provision of this Agreement (the "Indemnified
Party") of notice of the commencement of any action against the Indemnified
Party, such Indemnified Party shall give notice to the person or persons or
entity or entities obligated to indemnify the Indemnified Party pursuant to the
express provisions of this Agreement (the "Indemnifying Party"). The
Indemnifying Party shall be entitled to participate in the defense of the action
and, to the extent that it may elect in its
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discretion by written notice to the Indemnified Party, to assume the control and
defense and/or settlement of such action and the Indemnified Party shall execute
such documents or otherwise to permit the Indemnifying Party to do so; provided,
however, that (i) both the Indemnifying Party and the Indemnified Party must
consent and agree to any settlement of any such action, except that if the
Indemnifying Party has reached a bona fide settlement agreement with the
plaintiff(s) in any such action and the Indemnified Party does not consent to
such settlement agreement, then the dollar amount specified in the settlement
agreement shall act as an absolute maximum limit on the indemnification
obligation of the Indemnifying Party, and (ii) if the defendants in any such
action include both the Indemnifying Party and the Indemnified Party and if the
Indemnified Party shall have reasonably concluded that there are legal defenses
available to it which are in conflict with those available to the Indemnifying
Party, then the Indemnified Party shall have the right to select separate
counsel to assert such legal defenses and otherwise to participate in the
defense of such action on its own behalf, and the fees and disbursements of such
separate counsel shall be included in the amount which the Indemnified Party is
entitled to recover under the terms and subject to the conditions of this
Agreement.
ARTICLE 12
NOTICES
12.1. NOTICES. No notice or other communication hereunder shall be
sufficient to affect any rights, remedies or obligations of any party hereto
unless such notice or communication is in writing and delivered to the person or
persons whose rights, remedies or obligations are affected, except that any such
written notice or communication which is hand delivered, sent by facsimile
transmission with proof of receipt, delivered by prepaid courier service or
mailed by prepaid certified mail, return receipt requested, addressed to the
respective and appropriate party as follows (or to such other address as the
parties may indicate in writing in accordance with this Section), and shall be
deemed sufficient upon hand delivery or facsimile transmission, one day after
deposit with such courier service, or three days after such mailing, as the case
may be:
If to AMFS to: Advanced Materials Foreign Sales Corporation Ltd.
c/o M.Q. Services, Ltd.
Bermuda Commercial Bank Building
2nd Floor, 44 Church Street
Hamilton, Bermuda HM12
Facsimile: (310) 763-6869
Attention: President
with a copy to: Advanced Materials, Inc.
20211 S. Susana Road
Rancho Dominguez, CA 90221
Facsimile: (310) 763-6869
Attention: President
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If to Foamtec to: Foamtec (Singapore) Pte Ltd.
6 Sungei Kadut Crescent
Singapore 728689
Facsimile: 65-368-1831
with a copy to: Foamex Asia Co., Ltd.
175 Sathorn City Tower
22nd Floor
South Sathorn Road
Thungmahamek, Sathorn, Bangkok 10120
Thailand
Facsimile: 662-679-6107
Attention: Mr. Steve Scibelli
12.2. COPIES. A copy of any notice, service of process or other document
in the nature thereof relating to this Agreement, received by any Party from
anyone other than the other Party shall be delivered by the receiving Party to
the other Party as soon as practicable.
ARTICLE 13
MISCELLANEOUS
13.1. GOVERNING LAW; OWNERSHIP. Except as is expressly herein stipulated
to the contrary, the rights and obligations of the Parties and the
administration and termination of the Agreement shall be governed by the laws of
the State of California, U.S.A. The validity, performance, and all matters
relating to the interpretation and effect of this Agreement shall be governed by
the internal law in effect in the State of California, without regard to
principles of law (such as "conflicts of law") that might make the law of some
other jurisdiction applicable.
13.2. ADDITIONAL DOCUMENTS AND ACTS. In connection with this Agreement,
as well as all transactions contemplated by this Agreement, each Party agrees to
execute and deliver such additional documents and instruments, and to perform
such additional acts, as may be necessary or appropriate to effectuate, carry
out and perform all of the terms, provisions and conditions of this Agreement,
and all such transactions. All approvals of either party hereunder shall be in
writing.
13.3. SERVICE; JURISDICTION. Each of the parties agrees to (a) the
irrevocable designation of the Secretary of State of the State of California as
its agent upon whom process against it may be served, and (b) personal
jurisdiction in any action brought in any court, federal or state, within the
State of California having subject matter jurisdiction arising under this
Agreement.
13.4. PRONOUNS. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons may require.
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13.5. ENTIRE AGREEMENT. This instrument and the Schedule and Exhibits
hereto and the agreements contemplated hereby or referred to herein contain all
of the understandings and agreements of whatsoever kind and nature existing
between the parties hereto with respect to this Agreement and the rights,
interests, understandings, agreements and obligations of the respective parties
pertaining to the Agreement.
13.6. REFERENCES OF THIS AGREEMENT. Numbered or lettered articles,
sections and subsections herein contained refer to articles, sections and
subsections of this Agreement unless otherwise expressly stated.
13.7. HEADINGS. All headings herein are inserted only for convenience and
ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
13.8. BINDING EFFECT. Except as herein otherwise expressly stipulated to
the contrary, this Agreement shall be binding, upon and inure to the benefit of
the parties signatory hereto, and their respective successors and permitted
assigns.
13.9. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original and each of which shall constitute one and
the same Agreement.
13.10. AMENDMENTS. This Agreement may not be amended, altered or
modified except by a written instrument signed by each of the Parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ADVANCED MATERIALS FOREIGN SALES
CORPORATION LTD.
By: /s/ Steve F. Scott
-----------------------------
Title: President
-----------------------------
FOAMTEC (SINGAPORE) PTE
By: /s/ Stephen Scibelli
-----------------------------
Title: President
-----------------------------
Attachments:
Exhibit A: Equipment Lease
Exhibit B: License Agreement
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Schedule 3.2(b) Manufacturing Costs
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EXHIBIT A
ADVANCED MATERIALS FOREIGN SALES CORPORATION LTD.
EQUIPMENT LEASE
Foamtec (Singapore) Pte. January 30, 1998
- -------------------------------- ----------------------------
Name of ("Lessee") Date
Advanced Materials Foreign Sales Corporation Ltd. ("Lessor"), by its acceptance
hereof at its home office, hereby leases to Lessee, and Lessee hereby leases
from Lessor, in accordance with the terms and conditions hereinafter set forth,
the Equipment together with all replacements, parts, repairs, additions,
attachments and accessories incorporated therein or now or hereafter affixed
thereto (hereinafter collectively called the "Equipment") described in the
attached schedule annexed hereto and made a part hereof (hereinafter called the
"Schedule").
1. TERM OF LEASE.
The Lease is effective from the date executed by Lessor and shall remain in
force during the term of the Manufacturing Agreement dated the date hereof
between the parties hereto (the "Manufacturing Agreement"), and during any
extensions thereof (the "Term").
2. RENTAL COMMENCEMENT DATE.
The Rental Commencement Date of this Lease for the purpose of determining
when the monthly rental payments begin hereunder shall be the date on which
Lessor notifies Lessee that the Equipment is installed, ready for use, at
Lessee's installation site.
3. INSTALLATION.
The Equipment will be installed, ready for use, by Lessor, without
additional charge, on the Installation Date specified in the Schedule.
Lessee shall, at its expense, have the installation site prepared in
accordance with Lessor's site preparation instructions thirty (30) days
before the scheduled Installation Date to enable Lessor to promptly deliver
and begin installing the Equipment. In the event Lessor's installation
personnel arrive at Lessee's installation site on the scheduled
Installation Date and the installation site has not been prepared in
conformance with Lessor's site preparation instructions, the additional
cost incurred by Lessor for travel, labor and subsistence shall be payable
by Lessee at Lessor's then standard rates.
<PAGE>
4. RENTAL PAYMENTS.
The annual rental payment for the Equipment as set forth in the attached
Schedule shall begin on the Rental Commencement Date and be charged in
advance on the Rental Commencement Date and each anniversary thereof. All
rent shall be charged as a cost of Lessor in accordance with Section 3.2(c)
of the Manufacturing Agreement.
5. PAYMENT OF TAXES
Lessee shall also pay all taxes, however designated, which are levied or
based on this Lease, the Equipment or its use, lease, operation, or value,
including, without limitation, personal property taxes, retailer's
occupation taxes, state and local privilege or excise taxes based on gross
revenue, and any penalties or interest in connection therewith or taxes or
amounts in lieu thereof paid or payable by Lessor or Lessee in respect of
the foregoing, but excluding taxes based on Lessor's net income. Charges
for taxes, penalties and interest, if any, shall be promptly paid by
Lessee. Payments made by Lessee pursuant to this Clause 5 hereof may not
be charged as a cost of Lessee in accordance with Section 3.2(b) of the
Manufacturing Agreement. In the event Lessee defaults in the payment of
any such tax, Lessor may pay such tax and shall be reimbursed by Lessee,
with interest (plus attorneys fees and costs, if any) as additional rent.
The foregoing obligations shall survive the termination of this Lease.
6. LOCATION AND USE.
The Equipment will be kept by Lessee in its sole possession and control,
will at all times be located at the location specified in the Schedule, and
will not be removed without the prior written consent of Lessor. Lessee
will not make or permit to be made any alteration or addition to the
Equipment without the prior written consent of Lessor and Lessee will keep
and maintain the Equipment free and clear of all liens, charges and
encumbrances (except any placed thereon by Lessor).
7. TRANSPORTATION AND RETURN OF EQUIPMENT.
All transportation and other charges for delivery and installation of the
Equipment to Lessee's premises shall be paid by Lessee. On expiration or
termination of this Lease, Lessee, at its own risk and expense, will
immediately return the Equipment to Lessor in the same condition as
delivered, reasonable wear and tear excepted, at such location as Lessor
shall designate. Payments made by Lessee pursuant to this Clause 7 hereof
may not be charged as a cost of Lessee in accordance with Section 3.2(b) of
the Manufacturing Agreement. In the event Lessee fails to promptly return
the Equipment upon expiration or termination of the Lease, Lessee shall pay
to Lessor, as additional rental, twice the monthly rental payment set forth
in the Schedule for each month, or part thereof, in which Lessee fails to
return the Equipment.
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8. WARRANTY.
The Equipment is warranted against defects in materials or workmanship
during the Term hereof. Upon receipt of notice of such defects during the
warranty period, Lessor will, at its option, either repair or replace
Equipment which proves to be defective. The foregoing warranty shall not
apply to defects resulting from improper or inadequate maintenance by
Lessee; unauthorized modification or misuse; operation outside the
environmental specifications for the product; or improper site preparation
and maintenance.
THE WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND NO OTHER WARRANTY, WHETHER
WRITTEN OR ORAL, IS EXPRESSED OR IMPLIED. LESSOR SPECIFICALLY DISCLAIMS
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
THE REMEDIES PROVIDED HEREIN ARE LESSEE'S SOLE AND EXCLUSIVE REMEDIES. IN
NO EVENT SHALL LESSOR BE LIABLE FOR ANY LOSS OR DAMAGE CLAIMED TO HAVE
RESULTED FROM THE USE, OPERATION OR PERFORMANCE OF LESSOR'S PRODUCTS
REGARDLESS OF THE FORM OF ACTION EXCEPT FOR LOSS OR DAMAGE CAUSED BY THE
GROSS NEGLIGENCE OF LESSOR. IN NO EVENT SHALL LESSOR BE LIABLE TO LESSEE
FOR: (1) ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES; (2)
ANY DAMAGES RESULTING FROM LOSS OF USE, DATA OR PROFITS; OR (3) ANY CLAIMS
WHETHER IN CONTRACT OR TORT, THAT AROSE MORE THAN ONE YEAR PRIOR TO
INSTITUTION OF SUIT THEREON.
9. INSURANCE, INDEMNITY AND RISK OF LOSS.
A. Until such time as the Equipment is returned and delivered to Lessor
or its designee and accepted by Lessor, Lessee shall, at its sole expense,
procure and maintain in force at all times (a) insurance naming Lessor as
an additional insured, protecting against liability for bodily injury and
property damage resulting from the ownership, installation, functioning,
operation, presence, use or possession of the Equipment or any part
thereof, in such amounts as shall be reasonably acceptable to Lessor, and
(b) insurance against loss, theft, damage or destruction of the Equipment
from any cause, and against such other risks, including flood, as Lessor
may direct, in an amount not less than the aggregate amount of the total
rental payments due hereunder for the Term or for the Lessor's full list
price of the Equipment, whichever amount is greater, with loss payable to
Lessor or its assignee as their interests may appear, and with such
insurance companies as Lessor shall reasonably approve. Payments made by
Lessee pursuant to this Clause 9 hereof may not be charged as a cost of
Lessee in accordance with Section 3.2(b) of the Manufacturing Agreement.
All policies shall provide that they cannot be amended without the consent
of Lessor or its assignees. All policies and endorsements, or certificates
thereof, shall be promptly furnished to Lessor. At least thirty (30) days
prior to the expiration of the then current policy term, renewal policies
and
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endorsements, or certificates thereof, shall be provided to Lessor. Each
insurer shall agree in writing to give Lessor or its assignee thirty (30)
days prior written notice of the effective date of any alteration or
cancellation of such policy. In the event Lessee fails to procure or
maintain said insurance as hereinbefore specified, Lessor shall have the
right, but shall not be obligated, to effect such insurance. In that
event, the cost thereof shall be repayable to Lessor with the next rental
payment due, and failure to repay the same shall carry with it the same
consequence as failure to pay any rental payment.
B. Lessee shall bear the entire risk of loss, theft, damage or
destruction of the Equipment from any cause whatsoever, and no loss, theft,
damage or destruction of the Equipment shall relieve Lessee of the
obligation to pay rental payments or any other obligation under this Lease.
If any item of Equipment should be damaged by reason of any cause, and be
capable of repair, Lessee shall repair the same at Lessee's sole expense as
quickly as circumstances permit without any abatement or reduction of
rental payments. In such event, should Lessor be indemnified under any
insurance policy or policies pursuant to the provisions of this Lease,
provided that no default by Lessee exists hereunder, Lessor shall pay to
Lessee the proceeds received by Lessor from such insurance to assist Lessee
in defraying the cost and expense of such repair. If any item of Equipment
should be lost, stolen, destroyed, or damaged beyond repair by any cause
whatsoever, Lessee shall pay Lessor an amount equal to the full list price
of the Equipment less depreciation and the amount of any insurance received
by Lessor.
C. Lessee shall immediately give notice to Lessor of any damage to any
of the Equipment constituting or which might constitute an event of loss
under the applicable insurance policies.
D. Lessee shall indemnify and save Lessor and its assignee, if any,
harmless from all claims, liability, injury, loss and damage of any kind
(including claims for strict liability in tort) and any costs and expenses
incurred in connection therewith (including reasonable attorneys' fees)
asserted by Lessee or others arising from or allegedly caused by the
installation, presence, use, possession, selection, leasing, renting,
operation, control, maintenance, delivery and return of the Equipment, or
ownership of any of the Equipment and from loss of any kind, however
caused, arising from the malfunctioning or destruction of the Equipment,
and such indemnity shall survive termination of this Lease for any reason.
Insurance costs incurred by Lessee to insure Lessee for the risks relevant
to this Clause 9(D) may not be charged as a cost of Lessee in accordance
with Section 3.2(b) of the Manufacturing Agreement.
10. ASSIGNMENT; NO SET-OFF AGAINST ASSIGNEE.
Lessor shall have the right to assign all or any part of its rights under
this Lease without notice to Lessee, but such assignment shall not relieve
Lessor in any manner whatsoever of Lessor's obligations hereunder. In such
event, Lessor's assignee shall be entitled to enforce
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the rights assigned but shall be under no liability to Lessee to perform
any of the obligations of Lessor hereunder (except for the application of
any insurance proceeds received by the assignee as provided for herein),
and Lessee's rights hereunder as against Lessor shall be unaffected, except
as herein specifically provided. Lessee agrees that following its receipt
of notice of any assignment by Lessor of this Lease or of the rental
payments payable hereunder, it will pay the rental payments due hereunder
directly to the assignee (or to whomever the assignee shall designate),
notwithstanding (a) any agreements or amendments hereto now or hereafter
entered into by Lessor with Lessee, (b) the commencement by or against
Lessor of any proceeding under the laws of the United States or any State
relating to bankruptcy or insolvency or the appointment therein of any
trustee or receiver or similar officer to take custody of Lessor's estate
or the making by Lessor of an assignment for the benefit of creditors, or
(c) the availability of any claim, demand, defense (other than payment),
set-off, counterclaim or recoupment which Lessee may have against Lessor
other than arising out of (x) any breach of any obligation of Lessor in
respect of the Equipment, or (y) by reason of any other indebtedness or
liability at any time owing to Lessee by Lessor. Any assignee of Lessor's
rights may reassign such rights with the same force and effect as an
original assignment. Lessee will not modify or consent to any modification
of the terms of this Lease, assign this Lease, or sublet or move any item
of Equipment without the prior written consent of Lessor and its assignee,
if any.
11. DEFAULT AND REMEDIES.
A. If (a) Lessee shall fail to pay any rental payment or any other
payment hereunder within five (5) days after the date when such obligation
is due; or (b) Lessee shall fail to perform any other term or condition of
this Lease for a period of ten (10) days after written notice thereof from
Lessor to Lessee; or (c) proceedings under United States or other national
or local bankruptcy law or other insolvency laws shall be instituted
against Lessee, or a trustee or receiver or similar officer shall be
appointed for Lessee or any of its property, or any of the Equipment shall
be attached or levied upon and such proceedings shall not be vacated or
fully stayed within fifteen (15) days thereof; or (d) Lessee shall make an
assignment for the benefit of creditors or institute proceedings to be
adjudicated a bankrupt or insolvent or admit in writing its inability to
pay its debts as they become due; or (e) Lessee attempts to remove, sell,
transfer, encumber, sublet or part with possession of the Equipment, or
assigns or attempts to assign all or any part of this Lease or Lessee's
rights hereunder; or (f) Lessee ceases doing business as a going concern,
sells substantially all of its assets out of the ordinary course of
business, merges or consolidates with any other person, or, if a
corporation, sustains a change in the ownership of more than 20% in the
aggregate of its issued and outstanding stock of any class except a change
of ownership as a result of (x) a transfer to an Affiliate (as defined in
the Manufacturing Agreement) or (y) a bona fide reorganization, or abandons
any or all of the Equipment; or (g) Lessee is a corporation and ceases its
corporate existence or good standing; or (h) Lessee has made any material
misrepresentation (including the failure to disclose a material fact)
under this Lease or in connection with any credit or other information
submitted or furnished to Lessor, or breached
5
<PAGE>
any warranties made by it under this Lease; or (i) any adverse change in
the financial condition of Lessee or any surety or guarantor shall occur;
then, in any such event, the Lessee shall be deemed to have breached this
Lease and shall be in default hereunder.
B. Upon the happening of any event of default, the Lessor shall have
the right to do any of the following without demand or notice of any kind:
(a) declare the balance of the rental payments and all other sums due and
payable to Lessor and to become due hereunder immediately due and payable
forthwith, and Lessor shall have the right to take immediate possession of
the Equipment, and to lease or sell, or both, the Equipment or any portion
thereof, upon such terms as Lessor may elect and to apply the net proceeds,
less reasonable selling and administrative expenses, on account of Lessee's
obligations hereunder; or (b) terminate this Lease as to any and all
Equipment, and take immediate possession of the Equipment as aforesaid, and
retain the same as Lessor's sole property, in full satisfaction of Lessee's
obligations hereunder and as liquidated damages for Lessee's breach; or (c)
exercise any other right or remedy which may be available to Lessor under
the Uniform Commercial Code or other applicable law including, without
limitation, the right to recover damages for breach hereof.
C. Lessor shall have no obligation to exercise any such remedy, and the
exercise of any thereof shall not release Lessee from its obligations
hereunder. In addition, all of Lessor's remedies shall be cumulative, and
action on one shall not be deemed to constitute an election or waiver of
any other right to which Lessor may be entitled.
D. In addition to all of the foregoing, in the event of default, Lessee
shall pay Lessor's reasonable attorneys' fees, together with an amount
equal to all expenses paid or incurred by Lessor in the enforcement of any
of Lessor's rights or privileges hereunder.
12. GENERAL.
A. PERSONAL PROPERTY. This Lease is a contract of lease only, and
nothing herein shall be construed as conveying to Lessee any right, title
or interest in or to any of the Equipment except its rights as a Lessee
only. The Equipment is and shall be and shall at all times remain personal
property irrespective of its use or the manner in which it may be attached
to real property. Lessee agrees to procure for Lessor such estoppel
certificates, landlord's and mortgagee's waivers or other similar documents
as Lessor may reasonably request. Lessee, at the request of Lessor, shall
execute, and pay any filing and recording fees relating to, financing
statements or other documents or instruments under the Uniform Commercial
Code or similar statutes which Lessor may deem necessary to evidence or
protect its interest in the Equipment or in this Lease (such fees and
related costs incurred by Lessee may not be charged as a cost of Lessee in
accordance with Section 3.2(b) of the Manufacturing Agreement), and Lessee
hereby appoints Lessor or its assignee and any officer of Lessor or its
assignee as Lessee's attorney in fact and authorizes Lessor or such
assignee or such officer to execute and file any such statement, document
or instrument for and on behalf of Lessee.
6
<PAGE>
B. PERFORMANCE. If Lessee fails to perform any of its obligations
hereunder, Lessor may, but shall not be required to, perform the same. The
costs of such performance and the amount of any attorneys' fees or other
expenses incurred by Lessor in so doing shall be added to the next or any
subsequent rental payment due hereunder and shall be paid by Lessee in
accordance with Section 4 hereof.
C. EXONERATION FOR ENTERING PREMISES. In the event that it shall be
necessary for Lessor or its designee to enter upon premises owned or leased
by Lessee to inspect the Equipment, to perform any obligations of Lessee or
to recover possession of the Equipment, upon the expiration or earlier
termination of this Lease, Lessor or such designee may do so without court
order or other process of law and shall not be liable to Lessee for any
damage arising out of such entry and performance or repossession, except
for damages caused by Lessor's gross negligence or willful misconduct.
D. NOTICES. Any notice, consent, waiver or other communication (except
invoices and requests for documents) given hereunder by either party shall
be in writing and mailed, postage prepaid, certified mail, return receipt
requested, to the other party at the address set forth herein or to such
other address as such party shall hereafter designate by notice in writing
to the other party.
E. EFFECT OF AGREEMENT; ASSIGNMENT BY LESSEE. This Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, representatives, successors and assigns; provided,
however, that Lessee may not assign this Lease or any of Lessee's rights
hereunder or sublease any of the Equipment or permit others to use the
Equipment without the prior written consent of Lessor. Any assignment or
sublease effected by Lessee without such consent shall be void and shall
not relieve Lessee of any of its obligations or liabilities hereunder nor
confer any rights upon the intended assignee.
F. HEADINGS. The headings and sub-headings of the various sections of
this Agreement are inserted merely for the purpose of convenience and do
not expressly or by implication limit, define or extend the specific terms
of the section so designated.
G. SURVIVAL OF OBLIGATIONS. All covenants and obligations of Lessee to
be performed pursuant to this Lease, including all payments to be made by
Lessee hereunder, shall survive the expiration or earlier termination of
this Lease.
H. SEVERABILITY. In the event that any provisions of this Lease shall
be or become illegal or unenforceable in whole or in part for any reason
whatsoever, the remaining provisions shall nevertheless be valid, binding
and subsisting as if such illegal or unenforceable provision had never been
contained herein.
I. DELAY AND NON-WAIVER. No delay or omission by Lessor to exercise
any remedy or right accruing upon a default shall impair any such remedy or
right, nor be construed to be
7
<PAGE>
a waiver of any such default or any other default, nor an acquiescence
therein, nor a waiver of or in any manner affect Lessor's right not to
waive any subsequent default of the same or of a different nature.
J. ARBITRATION. In the event of any dispute arising out of the terms
of this agreement the parties shall attempt to reach an amicable
settlement. Failing such settlement the dispute shall be settled by
arbitration in accordance with the Rules of the Singapore International
Arbitration Centre in effect at the time of arbitration, by one or more
arbitrators designated in conformity with these rules, the awards being
formal and binding. The place of the arbitration shall be Los Angeles,
California. The arbitration shall be conducted in the English language.
K. GOVERNING LAW. This Lease shall be governed and construed in
accordance with the laws of the State of California.
L. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and all
negotiations and understandings have been merged herein. No modifications
or amendments shall be valid unless in writing and executed by the parties
hereto. The terms and conditions of this Lease shall prevail
notwithstanding any variance therein from the terms and conditions of any
other document relating to this transaction, whether prepared and submitted
by Lessor or by Lessee.
By execution hereof, the undersigned hereby certifies that he has read this
Lease and that he is a duly authorized corporate officer, partner or proprietor
of the below-named Lessee and is duly authorized to execute this Lease on behalf
of Lessee.
LESSOR: LESSEE:
ADVANCED MATERIALS FOREIGN FOAMTEC (SINGAPORE) PTE.
SALES CORPORATION LTD.
Accepted On: January 30, 1998 Signed By: /s/ Stephan Scibelli
----------------------- ----------------------------
Signed By: /s/ Steve S. Scott Title: President
------------------------- --------------------------------
Title: President
-----------------------------
Attachment: Equipment Lease Schedule
8
<PAGE>
EQUIPMENT LEASE SCHEDULE
This Schedule forms a part of and is subject to all of the terms and
conditions set forth in the Equipment Lease to which it is affixed.
EQUIPMENT LEASED: Ttarp Press
---------------------------------
---------------------------------
---------------------------------
RENTAL PAYMENTS: $1 per annum.
ESTIMATED INSTALLATION DATE: December 15, 1997
--------------------------
<PAGE>
EXHIBIT B
TECHNICAL INFORMATION LICENSE AGREEMENT
This TECHNICAL INFORMATION LICENSE AGREEMENT is effective this 30th day
of January, 1998, ("Agreement") by and between Advanced Materials Foreign
Sales Corporation Ltd., a Bermuda corporation ("AMFS") and Foamtec
(Singapore) Pte. Ltd., a Singapore private limited company ("Foamtec"),
either or both of which may also hereinafter be referred to respectively as
the "Party" or "Parties" to this Agreement.
WHEREAS this Agreement is an attachment to a Manufacturing Agreement
between the Parties of even date herewith (the "Manufacturing Agreement");
WHEREAS Foamtec is entering a joint venture with AMFS and requires a
license of certain technology in support of Foamtec's obligations thereunder;
and
WHEREAS AMFS represents that it is the owner of certain technology that (a)
is used in connection with the business of the Joint Venture that AMFS is
forming with Foamtec and (b) is also otherwise used by AMFS (hereinafter "Shared
Use Technology");
NOW, THEREFORE, in consideration of the promises and the mutual covenants
of this Agreement, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
1.1 The term "Products" and other capitalized terms not otherwise
defined in this Agreement shall have the meaning ascribed to them in the
Manufacturing Agreement.
1.2 The term "Technical Information", as used herein, means all
information and assistance (including, but not limited to, data, know-how,
technical, manufacturing, marketing information, designs, drawings,
specifications, bills of materials, and documentation of processes) which
pertains to the Shared Use Technology identified in Schedule A to this
Agreement. AMFS and Foamtec acknowledge that until November 1990, Mr. Steve
Scibelli, the President of Foamtex Asia Co., Ltd., an Affiliate (as defined in
the Manufacturing Agreement) of Foamtec, was the principal owner of Advanced
Materials, Inc., an Affiliate of AMFS and, as a result thereof, Foamtec has
prior knowledge of specific fabrication techniques used up until November 1990
to make finished foam products for Hewlett-Packard, although the parties also
acknowledge that the process used in the Shared Use Technology for
Hewlett-Packard was developed subsequent to November, 1991.
ARTICLE II. LICENSES GRANTED
2.1 AMFS grants and agrees to grant to Foamtec an irrevocable, fully
paid-up perpetual, non-exclusive, non-transferable license to make the Products
in Singapore as contemplated in the
<PAGE>
Manufacturing Agreement using all applicable Technical Information.
2.2 No license, either express or implied, is granted by AMFS to Foamtec
hereunder with respect to any patent or information or other intellectual
property except as specifically stated above.
2.3 No license, either express or implied, is granted hereunder to use
as a trademark or otherwise the trademarks "Advanced Materials" or any other
trademark or trade or product name of AMFS, or any word or mark similar thereto.
2.4 Nothing contained in this Agreement shall constitute, or be
construed to be, a limitation or restriction on either Foamtec or AMFS to use
existing technologies for future businesses.
2.5 Nothing contained in this Agreement shall constitute, or be
construed to be, to require AMFS to license Foamtec to use AMFS patents or
technology for other than the Products.
2.6 Nothing contained in this Agreement shall constitute, or be
construed to be, a limitation or restriction upon any right otherwise possessed
by Foamtec or AMFS to make, use or sell any product, or parts therefor, in any
country, except as otherwise provided in the Manufacturing Agreement.
2.7 AMFS agrees that no fees shall be charged for the license granted
hereunder.
ARTICLE III. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
3.1 AMFS shall at all times have the sole right to take whatever steps
it deems necessary or desirable to enforce its rights in the licensed Technical
Information, including the filing and prosecution of litigation; and AMFS shall
have the right to include Foamtec as a party in such litigation where necessary
for the conduct thereof. If AMFS and Foamtec desires to agree to joint
participation in any suit or other enforcement action with respect to any of the
Technical Information, the respective responsibilities of the parties, and their
contributions to the costs and participation in any recoveries, will be agreed
upon in writing prior to undertaking such joint enforcement action.
3.2 AMFS does not make any representation to Foamtec regarding the scope
or enforceability of the Technical Information, and does not warrant that any
Products manufactured or sold under this Agreement will not infringe patents of
others.
3.3 In the event of any actual or threatened infringement suit against
Foamtec or its customers which would affect the manufacture, use or sale of
Products, Foamtec shall promptly give written notice thereof to AMFS, and AMFS
will make available to Foamtec free of charge any information in its possession
which AMFS believes will assist Foamtec in defending or otherwise dealing with
such suit.
2
<PAGE>
ARTICLE IV. TECHNICAL INFORMATION
4.1 Foamtec shall be entitled to receive only the data, know-how and
assistance as set forth in Schedule A.
4.2 If approval by any government is required in order to render this
Agreement fully effective, AMFS shall not be obligated to furnish any
information or assistance hereunder until such approval has been obtained and
evidence thereof has been supplied to AMFS.
4.3 All Technical Information covered by this Agreement is property of
AMFS and shall be maintain in confidence by Foamtec.
4.4 Foamtec agrees that it will not at any time knowingly disclose to
any third party (except to its employees who reasonably require such information
in connection with the performance of their regular duties) any Technical
Information which is communicated to Foamtec by AMFS under this Agreement. The
foregoing obligation of confidentiality shall not apply to any Technical
Information that (a) is or may become generally available to the general public
through no act of the receiving party or any of its employees; (b) Foamtec can
demonstrate by means of prior documentation was in its unrestricted possession
at the time such Technical Information was first communicated to Foamtec by
AMFS; or (c) Foamtec received such information from a third party independent of
AMFS and such third party having a bona fide right to disclose such information
to Foamtec without any obligation of confidentiality.
ARTICLE V. MISCELLANEOUS PROVISIONS
5.1 WAIVER: Failure of either party to insist upon the strict
performance of any provisions hereof or to exercise any right or remedy shall
not be deemed a waiver of any right or remedy with respect to any existing or
subsequent breach or default; the election by either party of any particular
right or remedy shall not be deemed to exclude any other; and all rights and
remedies of either party shall be cumulative.
5.2 NOTICE: Any notice required or permitted hereunder shall be in
writing and shall be sufficiently given when mailed postpaid first class
registered or certified mail and addressed to the party for whom it is intended
at its record address, or when sent by facsimile, and such notice shall be
effective as of the date it is deposited in the mail or when a facsimile notice
of receipt is received. The record address of AMFS for this purpose is its
address set forth in the preamble and the record address of Foamtec is its
address set forth in the preamble of this Agreement. Either party may, at any
time substitute for its previous record address any other address by giving
written notice of the substitution.
3
<PAGE>
5.3 GOVERNMENT APPROVALS: Foamtec shall, at its own expense, take
whatever steps are required to satisfy the laws and requirements of the
respective countries within respect to declaring, recording and otherwise
rendering this Agreement valid.
5.4 SEVERABILITY: If any section or provision of this Agreement in any
way contravene a law of any state or country in which this Agreement is
effective, the remaining section of this Agreement shall not be affected thereby
and this Agreement shall be modified to conform with such law. Notwithstanding
the foregoing, in the event of any such contravention AMFS may at its option
terminate this Agreement forthwith by giving to Foamtec written notice of
termination.
5.5 ARBITRATION: In the event of any dispute arising out of the terms of
this agreement the parties shall attempt to reach an amicable settlement.
Failing such settlement the dispute shall be settled by arbitration in
accordance with the Rules of the Singapore International Arbitration Centre in
effect at the time of arbitration, by one or more arbitrators designated in
conformity with these rules, the awards being formal and binding. The place of
the arbitration shall be Los Angeles, California. The arbitration shall be
conducted in the English language.
5.6 GOVERNING LAW: This Agreement shall be interpreted and construed in
accordance with the laws of the State of California except as governed by the
trade secret laws of the United States of America.
5.7 FORCE MAJEURE: Neither Party shall be in default under this
Agreement for any delay or failure to perform hereunder due to causes beyond its
control and without its fault or negligence, including but not limited to acts
of nature, acts of any government in its sovereign or contractual capacity,
strikes, fires, floods, riots or embargoes; provided, however, that prompt
written notice is given to the other Party describing such cause.
5.8 EXPORT. Foamtec agrees to reasonably cooperate with AMFS to enable
AMFS to comply with all applicable export regulations and secure all required
export approvals prior to disclosure of any technology conveyed under this
license to a non US person either inside or outside the United States of America
or prior to the export or sale of a product of the technology conveyed under
this license to a non US person either inside or outside the United States of
America.
5.9 ENTIRE AGREEMENT: This Agreement contains all of the terms and
conditions agreed upon by AMFS and Foamtec regarding the specific subject matter
hereof; and this Agreement may be modified only by an instrument in writing
executed on behalf of AMFS and Foamtec by their respective duly authorized
representatives.
Foamtec and AMFS have caused this Agreement to be executed, in duplicate,
by their respective duly authorized representatives on the dates and at the
places indicated below.
ADVANCED MATERIALS FOREIGN FOAMTEC (SINGAPORE) PTE.
SALES CORPORATION LTD.
By /s/ Steve F. Scott By /s/ Stephan Scibelli
----------------------------- --------------------------------
4
<PAGE>
Typed Steve F. Scott Typed Stephan Scibelli
-------------------------- -----------------------------
Title President Title President
-------------------------- -----------------------------
Date January 30, 1998 Date January 30, 1998
--------------------------- ------------------------------
Schedule A: Shared Use Technology
5
<PAGE>
SCHEDULE A
Shared Use Technology
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto persons or entities listed on Schedule A hereto in the
denominations set forth on such Schedule, the rights represented by the Warrant
to Purchase Common Stock of Advanced Materials Group, Inc., Expiring December
22, 2000, entitling the holder to subscribe for and purchase 60,000 shares of
common stock, and appoints __________ attorney to transfer said rights on the
books of said corporation, with full power of substitution in the premises.
Dated:______,1997 TRILON DOMINION PARTNERS, L.L.C.,
a Delaware limited liability company
By:
-----------------------------
Its:
Signature guaranteed:
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatever.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
State/Country of
Name Incorporation
- ---- ----------------
Advanced Materials, Inc. California
Condor Utility Products California
Advanced Materials FSC Bermuda
Advanced Materials, Inc. LTD. Ireland
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Advanced Materials Group, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (33-72500 and 333-38601) and on Form S-8 (333-38959)
of our report dated January 14, 1998 appearing in the Annual Report on Form
10-KSB of Advanced Materials Group, Inc. for the year ended November 30, 1997.
/s/ CORBIN & WERTZ
CORBIN & WERTZ
Irvine, California
February 27, 1998
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<PAGE>
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<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
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<SECURITIES> 0
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<INVENTORY> 2,466
<CURRENT-ASSETS> 7,096
<PP&E> 4,902
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0
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<TOTAL-LIABILITY-AND-EQUITY> 12,601
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