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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-16401
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ADVANCED MATERIALS GROUP, INC.
(Name of small business issuer in its charter)
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NEVADA 33-0215295
(State 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
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
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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. /X/
The issuer's revenues for its most recent fiscal year were $28,916,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on February 12, 1999 was $12,001,422. The number of shares outstanding of
the issuer's only class of Common Stock, $.001 par value, was 8,729,455 on
February 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement in connection with the
Registrant's 1998 Annual Meeting Of Stockholders to be held April 26, 1999 are
incorporated by reference in 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. ("AMG" or the "Company"), through its
subsidiaries, 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-five 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, 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 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 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.
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BUSINESS STRATEGY
The Company's objective is to become a leading supplier of specialty
polymeric and advanced materials in both domestic and foreign markets. Polymers
are synthetic chemical structures used in a variety of configurations and
products. The worldwide market for specialty industrial products used as
components in industrial products is substantial. Management believes that
manufacturers are increasingly recognizing the value in conserving or
reallocating their resources by outsourcing the specialty components of their
products. The Company is positioning itself 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, located in Ireland and Singapore, respectively, began
production in fiscal 1998. The Ireland facility operates 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 strategic manufacturing 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.
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.
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
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 Southwestern United States and the central and
northeast border area of Mexico. The Rancho Dominguez, Dallas, Portland and
Denver facilities have substantially the same equipment. A substantial amount of
the equipment has been designed and constructed by AM. The Rancho Dominguez
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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 24,000 square feet of space in Dublin,
Ireland. The facility serves as the Company's European headquarters and has
substantially the same equipment as in 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 that 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 that 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 that 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 that involves the use of heat and pressure to apply an adhesive laminate
to the substrate and a paper liner to the adhesive, which can be pulled off by
the user to attach the substrate to the desired surface. AM currently produces
caulking and sealing foam tape using this process. Die cutting is a process that
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 that uses saws or slitters with blades ranging
from saw tooth to razor edge, depending on the material to be processed, to
horizontally and/or vertically slice layers off blocks of raw material.
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.
QUALITY CONTROL
AM is ISO 9002 certified at its Rancho Dominguez, Dallas, Portland and
Ireland facilities. It also maintains systems and procedures 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
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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. The Company's
largest supplier of raw materials is Foamex Engineered Polyurethanes ("Foamex"),
which in fiscal 1998 and 1997 supplied approximately 60% and 54%, 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 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 which 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 eighteen full-time salesmen make sales in the United States on a direct
basis. Nine salesmen are in the field and nine salesmen provide inside sales
support. The nine field salesmen receive a base salary plus a commission and the
nine inside salesmen receive a salary. AM Ltd. has three full-time salesmen who
concentrate on the European market. AM's domestic sales as a percentage of total
sales were approximately 91%, 95% and 95% for fiscal years 1998, 1997 and 1996,
respectively.
AM currently does business in a number of foreign regions including Asia,
Europe, South America and the Middle East. Foreign sales, which accounted for
approximately 9%, 5% and 5% of fiscal 1998, 1997 and 1996 sales, respectively,
are made on a direct basis and through sales agents who receive commissions.
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.
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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
cancelled under certain conditions without significant penalty. At November 30,
1998 and 1997, AM's backlog of orders was approximately $8,248,000 and
$8,597,000, 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, one customer accounted for 39% of
consolidated revenues for the year ended November 30, 1998, two customers
accounted for 39% and 10% of consolidated revenues for the year ended November
30, 1997 and one customer accounted for 28% of consolidated revenues for the
year ended November 30, 1996. 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.
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
The Company does not currently have patent protection on any of its
manufacturing processes, however, they currently have a patent pending on a
manufacturing process developed in 1998. 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.
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.
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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.
GOVERNMENT REGULATION
The manufacture of certain products by AM 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 subsidiaries are subject to regulations administered by
the United States Environmental Protection Agency, various state agencies,
county and local authorities acting in conjunction with federal and state
agencies and EU and Irish agencies. Among other things, these regulatory bodies
impose restrictions to control air, soil and water pollution. The extensive
regulatory framework imposes significant complications, burdens and risks on the
Company. Governmental authorities have the power to enforce compliance with
these regulations and to obtain injunctions and/or impose civil and criminal
fines or sanctions in the case of violations.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), imposes strict, joint and several liability
on the present and former owners and operators of facilities which release
hazardous substances into the environment. The Federal Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), regulates the generation,
transportation, treatment, storage and disposal of hazardous waste. In
California, the handling and disposal of hazardous substances is governed by the
law, which contains the California counterparts of CERCLA and RCRA. The Company
and its subsidiaries believe that their manufacturing activities are in
substantial compliance with all material Federal, state, EU, and Irish 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, local, EU and Irish
laws and regulations regarding safe working conditions.
EMPLOYEES
As of November 30, 1998, the Company and its subsidiaries had approximately
134 full-time employees, of whom approximately 66 were located at AM's Rancho
Dominguez, California facility, approximately 39 were located at AM's Dallas,
Texas facility, 10 were located at AM's Portland, Oregon facility, 11 were
located at AM's Denver, Colorado facility and 8 were located at the Company's
Ireland subsidiary. Of the Company's full-time employees, approximately 77 are
employed in manufacturing, 21 are in sales, 22 perform general and
administrative functions and 14 perform other functions. The Company also
utilizes the services of contract workers as needed from time to time in its
manufacturing operations. As of November 30, 1998, the number of contract
workers being utilized by the Company was approximately 106.
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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
$15,000 per month under its Rancho Dominguez lease, approximately $27,500 per
month under its Dallas lease, approximately $8,000 per month under its Portland
lease and approximately $4,000 per month under its Denver lease. The Company has
subleased approximately 18,000 square feet of its Dallas facility to S Line
Corporation for approximately $8,300 per month. The Rancho Dominguez lease
expires in August 1999, the Dallas lease expires in November 2000, the Portland
lease expires in February 2000 and the Denver lease expires in March 2001.
The Company's Ireland subsidiary, Advanced Materials, Ltd., leases
approximately 24,000 square feet of manufacturing and office space in Dublin,
Ireland. AM Ltd. pays rent of approximately 9,000 Irish Pounds per month
(equivalent to approximately $15,000 per month at November 30, 1998) and the
lease expires in February 2003.
ITEM 3. LEGAL PROCEEDINGS.
In October 1996, the Company was notified that it had been named in a bodily
injury lawsuit pending in the 192(nd) 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 never 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 was named in a lawsuit originally filed in
the Superior Court of California, San Joaquin County, on January 24, 1992 by
Vern Auten and Shirley Auten, doing business as Aglo Plastics Company.
Plaintiffs alleged that Condor breached a supply contract by obtaining various
molds from a competing supplier, and sought damages therefor. Plaintiffs also
sought damages based upon an alleged intentional infliction of emotional
distress upon plaintiffs by a Condor employee and by its then owner. Condor
filed a cross-complaint alleging that plaintiffs breached the contract.
Plaintiffs received a non-binding 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.
On October 5, 1998, a jury entered a partial verdict finding that Condor had
breached the supply contract. A judgment in the amount of $382,500 was entered
in favor of the plaintiffs. In response to a
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motion by the plaintiffs the court, on December 22, 1998 awarded attorneys' fees
in the amount of $266,000. Condor has recorded a provision in the amount of
$975,000, which also includes estimated interest on the award.
The jury was unable to reach a verdict on the alleged intentional infliction
of emotional distress upon plaintiffs by a Condor employee and by its then
owner. This matter has been remanded back to the Superior Court of California,
San Joaquin County. The jury further found that the plaintiffs had not breached
the supply contract. The jury also found that Condor did not infringe on the
patent held by the plaintiffs.
The sellers of Condor had agreed to indemnify the Company and Condor with
respect to any potential liability from the alleged breach of contract. Condor
has determined that it will be unable to collect against the indemnification
agreement. Since the assets of Condor are not sufficient to pay the full amount
of the award, Condor attempted to reach a settlement with the plaintiffs but was
unable to do so. It is unclear at this time if a settlement can be reached. The
plaintiffs have now indicated in writing that they may assert a claim against
the Company under principles of alter ego and related theories of liability. The
Company would vigorously defend itself against any such claim. 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. On March 9, 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. On December 2, 1998 the parties reached an agreement of
settlement and general release.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on the NASDAQ Small-Cap Stock Market
("NASDAQ") under the symbol ADMG since June 23, 1993. The high and low bid
prices for the common stock for the past two fiscal years as reported by NASDAQ
are set forth in the following table. Such quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.
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FISCAL 1998 HIGH LOW FISCAL 1997 HIGH LOW
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Forth Quarter............ $1 7/16 $ 7/8 Fourth Quarter........... $5 1/4 $2 31/32
Third Quarter............ $2 5/8 $1 1/2 Third Quarter............ $2 31/32 $1 9/16
Second Quarter........... $3 7/16 $2 5/8 Second Quarter........... $2 $1 3/8
First Quarter............ $3 1/2 $2 23/32 First Quarter............ $2 9/16 $1 7/16
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There were 1,355 stockholders of record as of February 12, 1999.
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.
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RECENT SALES OF UNREGISTERED SECURITIES
On February 18, 1998, upon exercise of an option, the Company issued 20,000
shares of its common stock to Stephen Scibelli at a price of $0.45 per share.
The option was granted on May 1, 1995 in connection with services provided to
the Company. Mr. Scibelli is an accredited investor under Rule 501 of the
Securities Act of 1933, as amended (the "Act"), and the transaction was an
exempt non-public offering under Section 4(2) and/or Regulation D under the Act.
On February 18, 1998, upon exercise of an option, the Company issued 20,000
shares of its common stock to Stephen Scibelli at a price of $0.57 per share.
The option was granted on May 1, 1996 in connection with services provided to
the Company. Mr. Scibelli is an accredited investor under Rule 501 of the Act,
and the transaction was an exempt non-public offering under Section 4(2) and/or
Regulation D under the Act.
On March 30, 1998, upon exercise of an option, the Company issued 30,000
shares of its common stock to Silverman Heller at a price of $0.69 per share.
The option was granted on February 22, 1996 in connection with services provided
to the Company. Silverman Heller is an accredited investor under Rule 501 of the
Act, and the transaction was an exempt non-public offering under Section 4(2)
and/or Regulation D under the Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR FISCAL 1998 COMPARED WITH 1997 AND 1997 COMPARED WITH
1996
THE COMPANY'S REVENUE from continuing operations, for the fiscal year ended
November 30, 1998 was $28.9 million, comparable to 1997. Revenues in 1997 grew
by 68.7% from $17.1 million in fiscal 1996. The increase was primarily
attributable to the introduction of two new products.
COST OF SALES in fiscal 1998 increased by 4.9% to $22,513,000, from
$21,460,000 in 1997. The Company added manufacturing capacity with expansions in
Ireland and a strategic manufacturing relationship with a Company in Singapore.
Lower volumes at the Company's domestic locations led to lower capacity
utilization and negatively impacted labor and overhead absorption. AMG also
experienced pricing pressures and larger than anticipated start-up costs on
certain new products in the second half of the year. Cost of sales increased
52.8% in 1997 from 1996. This increase in cost of sales was driven by unit
volume growth of the products sold. Volume increases improved capacity
utilization rates and created production efficiency gains, resulting in
favorable labor and overhead absorption.
AMG'S GROSS PROFIT percentage was 22.1% in 1998, compared to 25.7% in 1997
and 18.0% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased in 1998 to $4,793,000,
versus $3,554,000 in 1997, primarily as a result of the manufacturing expansion
at the Company's subsidiary in Ireland. SG&A increased by $1,006,000 in FY97, up
from $2,548,000 in 1996 as the Company increased both its direct sales force and
engineering staff to support increased sales levels. SG&A as a per cent of sales
was 16.6% in 1998, 12.3% in 1997 and 14.9% in 1996.
INTEREST EXPENSE in fiscal 1998 was $298,000 compared to $211,000 in fiscal
1997. The increase was due to higher borrowing levels to support the Company's
expansion in Ireland and Singapore. In 1997 interest expense declined by
$350,000 as a result of AMG's $3.2 million reduction of debt.
INCOME TAXES increased in fiscal 1998 due to foreign losses without tax
benefit and an increase in the valuation allowance relative to deferred tax
assets. The Company recorded an income tax provision of $538,000 resulting in an
effective tax rate of 35.7%. 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
5.4% in 1997 and 4.1% in 1996.
10
<PAGE>
NET LOSS FROM CONTINUING OPERATIONS for fiscal 1998 was $704,000 compared to
net income from continuing operations in 1997 of $3,139,000. Fiscal 1998 results
included several non-recurring items including start-up costs incurred of
approximately $608,000 related to the Company's Ireland facility, a write-off of
$158,000 for license rights relative to technology which has been discontinued
and an impairment charge of $909,000 on goodwill associated with the
discontinuance of product sales relative to the purchase of certain assets of
Wilshire Technologies Inc.'s OEM Medical Products Division in 1993. Exclusive of
these items, fiscal 1998 net income from continuing operations would have been
$971,000.
Fiscal 1997 results included a one-time transaction relating to the sale of
50,000 shares of IT stock in January 1997. Excluding this one-time transaction
the Company would have reported net income from continuing operations of $3
million. Net income from continuing operations for fiscal 1996 included one-time
gains for sales of securities totaling $3,738,000 and a gain on stock rights of
$572,000. Excluding these one-time gains, AMG would have posted a net loss from
continuing operations of $540,000.
LOSS FROM DISCONTINUED OPERATIONS, net of income tax, associated with the
Company's Condor Utility Products, Inc. subsidiary was $1,627,000, $223,000 and
$94,000 in fiscal years 1998, 1997 and 1996, respectively. The loss from
discontinued operations in 1998 included a $975,000 provision for an unfavorable
judgment rendered against Condor and the write-off of $614,000 of goodwill.
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
The Company generated $677,000 and $2,791,000 in cash from operating
activities in fiscal 1998 and 1997, respectively. In 1996, AMG operating
activities consumed $894,000.
Accounts receivable increased by approximately $1.5 million in 1998 as a
result of shipments to Singapore, which is partially offset by increases to
accounts payable and deferred income totaling $1.3 million. 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 both fiscal
1998 and 1997, compared to 28% in 1996. The same customer accounted for 34% and
49% of accounts receivable at the end of 1998 and 1997, respectively.
In fiscal 1998 AMG invested $1.3 million in capital equipment to start-up
operations in Ireland and to support domestic product-line expansion. In 1997,
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 in 1996. The Company currently has outstanding capital
equipment commitments totaling $250,000.
The Company had approximately $528,000 of cash at November 30, 1998. The
Company's operating credit line with its primary lenders has current
availability, as of February 17, 1999, of $10,000,000 with $2,500,000 currently
outstanding. AMG also has a commitment from a lender to provide $750,000 for
capital-lease financing. Currently, there is no outstanding balance against this
line. AML has a commitment from an Irish lender to provide up to $1,000,000 for
capital equipment expenditures. AML currently has $300,000 outstanding against
this line. AML also has a commitment from an Irish bank to provide a $200,000
overdraft facility. Currently, there is no outstanding balance against this
line. 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.
11
<PAGE>
Prior to year-end the Company requested a waiver for several debt covenants
which it violated in the fourth quarter of fiscal 1998. The bank granted the
waiver, with respect to all covenant violations. In addition, the Company is
currently in discussions with the bank to amend the financial covenants based on
forecasted operations. Management of the Company believes that these amendments
will allow the Company to maintain compliance with the financial covenants
throughout fiscal 1999.
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 resume in fiscal 1999. Based on current projected order releases
from major customers, the sales growth year-to-year is projected to be between
20% and 25% for fiscal 1999.
Gross profit and operating profit margins are expected to slow in 1999. The
Company's fixed cost levels have increased, due to expansions in Ireland and
Singapore, more quickly than initial sales volumes.
Interest expense is expected to increase in fiscal 1999 as borrowing levels
expand to support investment in Ireland and Singapore. This will be partially
offset by lower average interest rates.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer 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 system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In addressing the Year 2000 Issue, the Company is currently evaluating its
computer-based systems, facilities and products and identifying all steps
necessary to determine they are all Year 2000 Ready. The Company is employing a
combination of internal resources and outside consultants to address this issue.
The Company has identified systems which are not Year 2000 Ready, and is in the
process of upgrading or replacing those systems. The Company is currently on
schedule to complete these upgrades and replacements by year 2000. In addition,
the Company has contacted its vendors to determine whether they are Year 2000
Ready, and is in the process of accumulating those responses. Initial responses
indicate most of the Company's vendors are addressing their Year 2000 Issues.
While the Year 2000 Issue is a top priority of the Company and a significant
amount of resources have been allocated to this issue, there can be no assurance
that all of its systems and equipment or its vendors will be Year 2000 Ready.
However, at this time, the Company does not believe that its or its vendors Year
2000 related issues will have a material adverse effect on the Company's
business. In the unlikely event of a systems failure at one of the Company's
facilities, any one of a number of other facilities' systems could be utilized
as a backup system.
The total cost to standardize and upgrade all business computer systems is
currently estimated to be $50,000. Through November 30, 1998, the Company has
spend approximately $35,000 of this total. Given the nature of this project it
is impractical to attempt to estimate the total costs specifically related to
the Year 2000 Issue. As the process to become Year 2000 Ready continues,
additional costs may be identified that have not yet been considered.
Consequently, the full cost of all upgrades, replacements and modifications that
may be required to become Year 2000 Ready has not yet been determined.
The Private Securities Litigation Reform Act of 1995 provides for a "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
12
<PAGE>
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
leading to increased price competition and margin erosion; 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.
d) Concentrations of sales in markets and customers.
e) Failures to obtain new customers, retain existing customers or volume
reductions by current customers.
f) Concentrations of raw material suppliers, including difficulties or
delays in obtaining raw materials.
g) Inability to execute marketing and sales plans, including price
increases.
h) Inability to develop cost effective means for timely production of new
product orders in required quantities.
i) Delays or cancellations of orders; timing of significant orders; and
introduction of new products.
j) Short-term fluctuations in margins due to yields and efficiencies.
k) The effects of changes in foreign currencies.
l) Loss of executive management or other key employees.
m) Changes in financing amount, availability or cost.
n) The effects of changes in costs and availability of insurance coverage.
o) The effects of changes in compensation or benefit plans.
p) Adoptions of new, or changes in, accounting policies and practices and
the application of such policies and practices.
q) The effects from the failure of key customers and/or suppliers to
address year 2000 issues.
r) Adverse results in significant litigation matters.
The foregoing review of factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
effective date of said Act.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Advanced Materials Group, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Materials Group, Inc. as of November 30, 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Advanced Materials
Group, Inc. for the two years ended November 30, 1997, were audited by other
auditors whose report dated January 14, 1998, expressed an unqualified opinion
on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advanced
Materials Group, Inc. at November 30, 1998, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
January 18, 1999
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Materials Group, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Materials Group, Inc. and its subsidiaries (the "Company") as of November 30,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two 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 statement 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
the results of their operations and their cash flows for the two 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 STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................. $28,916,000 $28,898,000 $17,133,000
Cost of sales (including depreciation of $618,000, $499,000 and $409,000
for the years ended November 30, 1998, 1997 and 1996, respectively)...... 22,513,000 21,460,000 14,044,000
---------- ---------- ----------
Gross profit............................................................... 6,403,000 7,438,000 3,089,000
---------- ---------- ----------
Operating expenses:
Selling, general and administrative (including start-up costs totaling
$608,000 in 1998)...................................................... 4,793,000 3,554,000 2,548,000
Goodwill impairment charge............................................... 909,000 -- --
Depreciation and amortization............................................ 322,000 369,000 369,000
---------- ---------- ----------
Total operating expenses............................................... 6,024,000 3,923,000 2,917,000
Income from operations..................................................... 379,000 3,515,000 172,000
Other income (expense):
Realized gain on sale of securities...................................... -- 139,000 4,310,000
Interest expense......................................................... (298,000) (211,000) (561,000)
Foreign exchange loss.................................................... (44,000) -- --
Other, net............................................................... (203,000) (124,000) 11,000
---------- ---------- ----------
Total other income (expense)........................................... (545,000) (196,000) 3,760,000
Income (loss) from continuing operations before income taxes............... (166,000) 3,319,000 3,932,000
Income tax expense......................................................... 538,000 180,000 162,000
---------- ---------- ----------
Income (loss) from continuing operations................................... (704,000) 3,139,000 3,770,000
Discontinued Operations:
Loss from operations of Condor Utility Products, Inc. (net of income tax
benefit of $390,000, $0 and $0 for the years ended November 30, 1998,
1997 and 1996 respectively.)........................................... (1,405,000) (223,000) (94,000)
Estimated loss on disposal of Condor Utility Products, Inc. (net of
income tax benefit of $148,000)........................................ (222,000) -- --
---------- ---------- ----------
Net loss from discontinued operations...................................... (1,627,000) (223,000) (94,000)
---------- ---------- ----------
Net income (loss) before extraordinary item................................ (2,331,000) 2,916,000 3,676,000
Extraordinary Item:
Gain on forgiveness of debt (net of income tax of $18,000)............... -- -- 508,000
---------- ---------- ----------
Net income (loss).......................................................... $(2,331,000) $2,916,000 $4,184,000
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per common share:
Income (loss) from continuing operations................................. $ (0.08) $ 0.32 $ 0.36
Loss from discontinued operations........................................ (0.16) (0.02) (0.01)
Estimated loss on disposal of Condor Utility Products, Inc............... (0.03) -- --
---------- ---------- ----------
Income (loss) before extraordinary item.................................. (0.27) 0.30 0.35
Extraordinary item....................................................... -- -- 0.05
---------- ---------- ----------
Net income (loss) per share............................................ $ (0.27) $ 0.30 $ 0.40
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per common share:
Income (loss) from continuing operations................................. $ (0.08) $ 0.29 $ 0.35
Loss from discontinued operations........................................ (0.16) (0.02) (0.01)
Estimated loss on disposal of Condor Utility Products, Inc............... (0.03) -- --
---------- ---------- ----------
Income (loss) before extraordinary item.................................. (0.27) 0.27 0.34
Extraordinary item....................................................... -- -- 0.05
---------- ---------- ----------
Net income (loss) per share............................................ $ (0.27) $ 0.27 $ 0.39
---------- ---------- ----------
---------- ---------- ----------
Basic weighted average common shares outstanding........................... 8,717,609 9,664,513 10,448,965
---------- ---------- ----------
---------- ---------- ----------
Diluted weighted average common shares outstanding......................... 8,717,609 10,622,187 10,678,966
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 528,000 $ 312,000
Accounts receivable, net of allowance for doubtful accounts of $100,000 as of November
30, 1998 and 1997, respectively..................................................... 5,188,000 3,903,000
Inventories, net of allowance for obsolescense of $77,000 and $166,000 as of November
30, 1998 and 1997, respectively..................................................... 2,543,000 2,288,000
Income tax receivable................................................................. 199,000 --
Deferred income taxes................................................................. 526,000 136,000
Prepaid expenses and other............................................................ 119,000 120,000
Discontinued operations............................................................... -- 1,386,000
---------- ----------
Total current assets................................................................ 9,103,000 8,145,000
---------- ----------
Property and equipment, net............................................................. 2,392,000 1,894,000
Goodwill, net of accumulated amortization of $377,000 and $825,000 as of November 30,
1998 and 1997, respectively........................................................... 578,000 1,658,000
Licenses, net of accumulated amortization of $149,000................................... -- 188,000
Deferred income taxes................................................................... 504,000 275,000
Other assets............................................................................ 105,000 277,000
---------- ----------
Total assets........................................................................ $12,682,000 $12,437,000
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $2,887,000 $2,113,000
Income taxes payable.................................................................. 137,000 239,000
Accrued liablities.................................................................... 1,015,000 1,003,000
Discontinued operations............................................................... 748,000 --
Deferred income....................................................................... 224,000 --
Line of credit........................................................................ 1,800,000 --
Current portion of long-term obligations.............................................. 237,000 164,000
---------- ----------
Total current liabilities........................................................... 7,048,000 3,519,000
---------- ----------
Line of credit........................................................................ -- 1,175,000
Term loan............................................................................. 150,000 --
Convertible debentures................................................................ 405,000 405,000
Deferred compensation, net of current portion of $210,000 and $135,000 at November 30,
1998 and 1997, respectively......................................................... 931,000 991,000
Capital lease obligations, net of current portion of $27,000 and $29,000 at November
30, 1998 and 1997, respectively..................................................... 31,000 11,000
---------- ----------
Total liabilities................................................................... 8,565,000 6,101,000
---------- ----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock--$.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding......................................................................... -- --
Common stock--$.001 par value; 25,000,000 shares authorized; 8,729,455 and 8,604,805
shares issued and outstanding at November 30, 1998 and 1997, respectively........... 9,000 9,000
Additional paid-in capital............................................................ 7,243,000 7,131,000
Accumulated deficit................................................................... (3,135,000) (804,000)
---------- ----------
Total stockholders' equity.......................................................... 4,117,000 6,336,000
---------- ----------
Total liabilities and stockholders' equity.......................................... $12,682,000 $12,437,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
<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, 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 -- -- -- -- --
Sale of 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
Common stock repurchased by the
Company 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
Sale of 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
Stock options exercised.............. 154,250 -- 151,000 -- -- 151,000
Common stock repurchased by the
Company and retired................ (29,600) -- (39,000) -- -- (39,000)
Net loss............................. -- -- -- -- (2,331,000) (2,331,000)
------------ --------- ------------- ------------- ------------- -------------
Balances, November 30,1998........... 8,729,455 $ 9,000 $ 7,243,000 -- $ (3,135,000) $ 4,117,000
------------ --------- ------------- ------------- ------------- -------------
------------ --------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $(2,331,000) $2,916,000 $4,184,000
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation............................................................ 951,000 729,000 641,000
Amortization............................................................ 415,000 313,000 305,000
Write-off of IT license................................................. 158,000 -- --
Provision for bad debt.................................................. (2,000) 2,000 (27,000)
Provision for obsolete inventory........................................ (113,000) 98,000 (33,000)
Goodwill impairment charge.............................................. 1,523,000 -- --
Deferred tax provision.................................................. (619,000) (377,000) (34,000)
Interest and other on deferred compensation............................. 138,000 (137,000) 122,000
Loss on disposal of fixed assets........................................ 5,000 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)
Litigation (Note 9)..................................................... 975,000 -- --
Changes in operating assets and liabilities:
Accounts receivable--trade............................................ (1,464,000) (990,000) (1,803,000)
Income tax receivable................................................. (199,000) 20,000 (20,000)
Inventories........................................................... 36,000 (454,000) 61,000
Prepaid expenses and other............................................ 11,000 60,000 174,000
Accounts payable and accrued liabilities.............................. 1,071,000 386,000 274,000
Deferred income....................................................... 224,000 -- --
Income taxes payable.................................................. (102,000) 185,000 54,000
---------- ---------- ----------
Net cash provided by (used in) operating activities....................... 677,000 2,791,000 (894,000)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment..................................... (1,315,000) (794,000) (411,000)
Proceeds from sale of available-for-sale securities..................... -- 163,000 5,093,000
Amounts borrowed by affiliate........................................... -- -- (50,000)
Collection of notes receivable from affiliate........................... -- -- 19,000
Write-off note receivable from affiliate................................ 50,000 -- --
Other assets............................................................ 22,000 (51,000) (98,000)
Cash used in acquisition of business.................................... -- -- (130,000)
Sale of stock rights.................................................... -- -- 572,000
---------- ---------- ----------
Net cash provided by (used in) investing activities......................... (1,243,000) (682,000) 4,995,000
---------- ---------- ----------
</TABLE>
19
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sales of common stock, net................................ $ -- $ -- $ 700,000
Exercise of common stock options........................................ 151,000 136,000 --
Purchase and retirement of common stock................................. (39,000) (3,500,000) --
Net borrowings (repayments) under line of credit........................ 625,000 136,000 (780,000)
Borrowings under term loan.............................................. 150,000 -- --
Proceeds received from capitalized financing............................ 55,000 -- --
Payments on debt........................................................ -- (988,000) (1,318,000)
Payments on capital lease obligations................................... (31,000) (79,000) (76,000)
Payments on deferred compensation....................................... (123,000) (141,000) (54,000)
Payments on capitalized financing....................................... (6,000) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities......................... 782,000 (4,436,000) (1,528,000)
---------- ---------- ----------
Net change in cash and cash equivalents..................................... 216,000 (2,327,000) 2,573,000
Cash and equivalents, beginning of year..................................... 312,000 2,639,000 66,000
---------- ---------- ----------
Cash and equivalents, end of year........................................... $ 528,000 $ 312,000 $2,639,000
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................................ $ 222,000 $ 312,000 $ 615,000
---------- ---------- ----------
---------- ---------- ----------
Income taxes............................................................ $ 924,000 $ 352,000 $ 180,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the year ended November 30, 1998, the Company acquired approximately
$55,000 of property and equipment through capitalized financing agreements.
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>
<CAPTION>
<S> <C>
Accounts receivable............................................................... $ 62,000
Inventory......................................................................... 42,000
Property and equipment............................................................ 75,000
Accounts payable and accrued liabilities.......................................... (49,000)
----------
Cash used in acquistion........................................................... $ 130,000
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Advanced Materials Group, Inc. and its subsidiaries ("AMG" or the
"Company"), engages in the conversion of specialty materials, including foams,
films and adhesive composits into components and finished products for the
computer peripheral, medical, automotive, aerospace and consumer products
markets. The Company has manufacturing facilities throughout the United States
and Ireland, as well as a strategic manufacturing alliance in Singapore. During
1998 the Company discontinued the operations of its Condor Utility Products,
Inc. subsidiary. See Note 13, Discontinued Operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company's Ireland subsidiary, Advanced
Materials Ltd., operates under a fiscal year ending October 31. There were no
intervening events from October 31, 1998 to November 30, 1998 that would
materially affect the consolidated financial statements for the year ended
November 30, 1998.
Certain fiscal 1997 and 1996 amounts in the accompanying consolidated
financial statements have been reclassified to conform to the fiscal 1998
presentation.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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, 1998 consist primarily of investments in a money
market fund.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash equivalents,
accounts receivable and accounts payable approximated fair value at November 30,
1998 because of the relatively short maturity of these instruments. The carrying
value of debt approximated fair value at November 30, 1998 due to the Company's
ability to obtain financing at similar interest rates from other lenders.
Inventories
Inventories consist of raw materials, work-in-progress and finished goods
and are stated at the lower of cost (first-in, first-out basis) or market.
21
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over estimated useful lives of 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. Depreciation
expense was approximately $951,000, $729,000 and $643,000 for the years ended
November 30, 1998, 1997 and 1996, respectively, of which $618,000, $499,000 and
$409,000, respectively, is included in cost of sales in the accompanying
consolidated statements of operations.
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 15
years.
Impairment of Long-Lived Assets
The Company assesses the recoverability of its long-lived and certain
intangible assets, including goodwill, by determining whether the related asset
balance can be recovered through projected undiscounted cash flows. The amount
of impairment, if any, is measured based on projected discounted future cash
flows (fair value) and charged to operations in the period in which impairment
is determined by management. During the year ended November 30, 1998, management
determined that $909,000 of goodwill associated with the Company's purchase of
certain assets of Wilshire Technologies Inc.'s OEM Medical Products Division had
been impaired, as these products have been discontinued and no future cash flow
is anticipated. Accordingly, this amount was charged to operations as reflected
in the accompanying 1998 consolidated statement of operations.
Additionally, approximately $614,000 of goodwill related to the Condor
facility was written-off as part of the discontinuation of the operations of
Condor Utility Products, Inc. See Note 13, Discontinued Operations.
During 1998 the Company wrote-off the net balance of capitalized license
rights, approximately $158,000. The license pertained to a worldwide license to
manufacture, use and sell certain industrial products utilizing proprietary
polymers and processes to be developed by Innovative Technologies ("IT"). IT
never successfully developed such technologies and during 1998 cancelled all
plans to develop such technologies. Based on these events management of the
Company determined that the valuation of capitalized license rights had been
impaired, and accordingly, charged approximately $158,000 to operations as
reflected in the accompanying 1998 consolidated statement of operations.
Revenue Recognition
The Company recognizes revenue upon shipment of product.
22
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were
approximately $33,000, $44,000, and $28,000 for the years ended November 30,
1998, 1997 and 1996, respectively and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Concentrations of Credit Risk
CASH AND CASH EQUIVALENTS
At November 30, 1998 the Company maintained cash balances at certain
financial institutions in excess of 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 periodically evaluates its accounts receivable for
collectibility and provides a reserve for losses resulting therefrom.
One customer accounted for 39% of consolidated revenues for the year ended
November 30, 1998. Two customers accounted for 39% and 10% of consolidated
revenues for the year ended November 30, 1997. One customer accounted for 28% of
consolidated revenues for the year ended November 30, 1996. One customer
accounted for 34% and 49% of consolidated accounts receivable as of November 30,
1998 and 1997, respectively. While the Company 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 a material adverse effect on the Company's business.
SUPPLIERS
Two suppliers accounted for 60% and 11% of consolidated purchases for the
year ended November 30, 1998. 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 27% and 15% of consolidated accounts payable
at November 30, 1998. Two suppliers accounted for 11% and 10% of consolidated
accounts payable at November 30, 1997.
Management believes that the loss of any of its major suppliers would not
have a material adverse effect on the Company's operations long-term, due to the
availability of other suppliers. However, the loss of a major supplier could
have a material adverse effect on operations in the short-term (estimated by
management to be less than three months).
Risks and Uncertainties
LICENSES AND PROPRIETARY RIGHTS
The Company does not currently have patent protection on any of its
manufacturing processes; however, they currently have a patent pending on a
manufacturing process developed in 1998. The
23
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company relies on proprietary know-how, exclusive 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.
Foreign Currency Transactions
The functional currency of foreign subsidiaries is considered to be the
United States dollar. Foreign translation gains and losses from remeasurement
are included in the consolidated statements of operations. Foreign exchange loss
for the year ended November 30, 1998 was approximately $44,000.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under the asset and liability method of SFAS 109 deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates
expected to apply when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to
amounts which are more likely than not to be realized. The provision for income
taxes is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Stock-based Compensation
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The Company adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), which require the
disclosure of pro forma net income and earnings per share as if the Company
adopted the fair value-based method in measuring compensation expense.
24
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for Start-up Costs
Expenditures directly related to and incurred during the start-up phase of
the Company's foreign manufacturing facility were expensed in the period
incurred. Such costs amounted to approximately $608,000 for the year ended
November 30, 1998.
Earnings per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic and diluted net income per share. Basic earnings per share
excludes dilution and is computed by dividing net income by the weighted average
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Common share equivalents including stock options, warrants, and Convertible
Debentures have been excluded for the year ended November 30, 1998 as their
effect would be antidilutive. All prior period net income per-share amounts have
been restated to comply with SFAS 128.
Basic and Diluted net income per share computed in accordance with SFAS 128
for the years ended November 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EPS:
Net income (loss)............................... $ (2,331,000) $ 2,916,000 $ 4,184,000
Denominator: Weighted average common shares
outstanding................................... 8,717,609 9,664,513 10,448,965
------------- ------------- -------------
Net income (loss) per share (basic)............. $ (0.27) $ 0.30 $ 0.40
------------- ------------- -------------
------------- ------------- -------------
DILUTED EPS:
Net income (loss)............................... $ (2,331,000) $ 2,916,000 $ 4,184,000
Denominator: Weighted average common shares
outstanding................................... 8,717,609 9,664,513 10,448,965
Common equivalent shares outstanding (options
and warrants)................................. -- 1,835,272 501,209
Hypothetical shares repurchased at average
market price with proceeds of exercise........ -- (877,598) (271,208)
------------- ------------- -------------
Total shares.................................... 8,717,609 10,622,187 10,678,966
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per share (diluted)........... $ (0.27) $ 0.27 $ 0.39
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
consolidated financial statements. This statement is effective
25
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for fiscal years beginning after December 15, 1997. The Company will adopt SFAS
No. 130 in fiscal 1999 and does not expect that the implementation of SFAS 130
will have a material effect upon the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 changes 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. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 131 in fiscal 1999 and does not expect that SFAS 131 will have a
material effect upon the Company's financial statements.
NOTE 2--SALE OF SECURITIES
During 1996, the Company sold 100,240 shares of an entity considered to be a
related party and 2,504,504 shares of Innovative Technologies, Inc. ("IT") for
$5,093,000 which resulted in a net realized gain of $3,738,000. On January 17,
1997, the Company sold its remaining 50,000 shares of IT which resulted in a net
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 17, 1996 which granted
existing shareholders of IT rights in connection with an IT United Kingdom
offering. Such transaction has been recorded as a realized gain on sale of
securities in the accompanying consolidated statements of operations.
NOTE 3--INVENTORIES
Inventories consist of the following at November 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 2,042,000 $ 1,861,000
Work-in-progress.................................................. 313,000 252,000
Finished goods.................................................... 265,000 341,000
------------ ------------
2,620,000 2,454,000
Less allowance for obsolete inventory............................. (77,000) (166,000)
------------ ------------
$ 2,543,000 $ 2,288,000
------------ ------------
------------ ------------
</TABLE>
26
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at November 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Machinery and equipment......................................... $ 3,657,000 $ 2,810,000
Furniture and fixtures.......................................... 995,000 883,000
Transportation equipment........................................ 204,000 89,000
Leasehold improvements.......................................... 328,000 304,000
Construction in progress........................................ 110,000 58,000
------------- -------------
5,294,000 4,144,000
Less accumulated depreciation and amortization.................. (2,902,000) (2,250,000)
------------- -------------
$ 2,392,000 $ 1,894,000
------------- -------------
------------- -------------
</TABLE>
NOTE 5--LINE OF CREDIT
The line of credit consists of the following at November 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revolving line of credit agreement with a bank which provides for
borrowings up to $10,000,000, as defined. The line bears
interest at either prime plus 0.5% or LIBOR plus 3.0%, such rate
is determined at the discretion of the Company. All amounts
outstanding under the line at November 30, 1998 bear interest at
LIBOR plus 3.0% (8.27%). The line of credit is secured by
substantially all of the assets of the Company and expires March
1, 2000......................................................... $ 1,800,000 $ 1,175,000
------------ ------------
------------ ------------
</TABLE>
The line of credit agreement requires the Company to maintain certain
restrictions and financial covenants including the maintenance of working
capital and tangible net worth ratios. The Company was in violation of certain
financial covenants in fiscal 1998 and has obtained a waiver from the bank
through the period ended November 30, 1998. The Company is currently in
discussions with the bank to amend the financial covenants based on forecasted
operations. Management of the Company believes that these amendments will allow
the Company to maintain compliance with the financial covenants throughout
fiscal 1999. At November 30, 1998, the line of credit has been reclassified as a
current liability, since the amendments have not been finalized.
Interest expense related to lines of credit totaled approximately $179,000,
$152,000 and $200,000 for the years ended November 30, 1998, 1997 and 1996,
respectively. Included therein was interest expense of $26,000 related to a
stockholder line of credit for the year ended November 30, 1996.
27
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 6--TERM LOAN
Advanced Materials Limited, the Company's Ireland subsidiary, is party to a
term loan agreement with a bank which provides for borrowings up to 592,000
Irish Pounds (approximately $869,000 at November 30, 1998), as defined, and
bears interest at 2.5% over 3 month LIBOR (7.77% at November 30, 1998). The loan
facility is secured by substantially all of the plant and equipment acquired by
Advanced Materials Limited and is additionally guaranteed by Advanced Materials
Group, Inc. for an amount of $800,000 plus accrued interest thereon. The loan
facility expires in October, 2002, at such time the Company intends to repay any
outstanding balance thereon.
Interest expense related to the term loan was insignificant for the year
ended November 30, 1998.
NOTE 7--CONVERTIBLE DEBENTURES
The Company had outstanding covertible debentures totaling $405,000 at
November 30, 1998 and November 30, 1997, respectively. The debentures bear
interest at 7.5% per annum, with interest 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 in 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, the Company will have the right to force
conversion. The debentures carry no voting rights. The common stock underlying
the debentures was registered pursuant to a registration statement that was
effective January 17, 1995.
Interest expense related thereto totaled approximately $31,000, $39,000 and
$40,000 for the years ended November 30, 1998, 1997 and 1996, respectively.
NOTE 8--DEFERRED COMPENSATION
The Company is obligated to: (i) make monthly payments beginning December
1996, of $5,500 (reduced to $3,500 in December 2006) and provide life insurance
to a former employee who is currently a stockholder of the Company and (ii) make
monthly payments beginning December 1995, of $3,500 to a former employee.
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. These obligations have
been discounted at the Company's cost of capital.
28
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 8--DEFERRED COMPENSATION (CONTINUED)
The present value of the estimated future non-contingent payments under the
above-mentioned agreements is approximately $1,141,000, net of a discount of
approximately $3,424,000. Estimated future payments are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1999.......................................................................... $ 210,000
2000.......................................................................... 154,000
2001.......................................................................... 158,000
2002.......................................................................... 162,000
2003.......................................................................... 166,000
Thereafter.................................................................... 3,715,000
------------
$ 4,565,000
------------
------------
</TABLE>
NOTE 9--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
2003. The Company and its subsidiaries also lease certain machinery and
equipment under capital lease obligations which expire in 2002.
Approximate future minimum operating and capital lease obligations at
November 30, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------ ---------
<S> <C> <C>
1999................................................................. $ 852,000 $ 29,000
2000................................................................. 599,000 19,000
2001................................................................. 190,000 12,000
2002................................................................. 176,000 3,000
2003................................................................. 59,000 --
------------ ---------
Total minimum lease obligations...................................... $ 1,876,000 63,000
------------
------------
Amount representing interest......................................... 5,000
---------
Present value of lease payments...................................... 58,000
Current portion...................................................... 27,000
---------
Long-term portion.................................................... $ 31,000
---------
---------
</TABLE>
Rent expense for the years ended November 30, 1998, 1997 and 1996 was
$667,000, $592,000 and $545,000, respectively.
Interest expense incurred under capital lease obligations was insignificant
for the years ended November 30, 1998, 1997 and 1996.
29
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Contracts
On September 1, 1996, the Company purchased substantially all the assets and
assumed all the liabilities of Gasket and Molded Products, Inc. ("GMP"), a
Colorado corporation. In connection with the acquistions of GMP, the Company
entered into a five year employment contract with one of the prior stockholders
of GMP, which expires August 2001. Under 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 1998 and 1997 such
stockholder was paid an insignificant amount in stock and cash pursuant to this
agreement in connection with incentive bonuses.
The Company has entered into three employment contracts with officers, which
expire through June 2004. Under terms of the agreements, the Company is to pay
base salaries ranging from $110,000 to $225,000 per year.
Approximate minimum future obligations under employment contracts are as
follows as of November 30, 1998:
<TABLE>
<CAPTION>
YEARS ENDING
NOVEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1999.......................................................................... $ 530,000
2000.......................................................................... 369,000
2001.......................................................................... 290,000
2002.......................................................................... 235,000
2003.......................................................................... 235,000
Thereafter.................................................................... 137,000
------------
$ 1,796,000
------------
------------
</TABLE>
Purchase Commitment
The Company currently has outstanding capital equipment purchase commitments
totaling $250,000.
Consulting Agreement
On March 31, 1997 the Company entered into a minimum two year consulting
agreement with a director, whereby for various corporate finance and acquistion
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 per share,
expiring March 31, 2007 (see Note 10). 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 the 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 10).
30
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
In October 1996, the Company, and Wilshire Technologies, Inc. ("WTI"), were
notified that they had been named in a bodily injury lawsuit pending in the
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 had 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) Advanced Materials ("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
never 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.
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 allege that Condor breached a supply contract by obtaining various
molds from a competing supplier, and are seeking damages therefor. Plaintiffs
are also seeking damages based upon an alleged intentional infliction of
emotional distress upon plaintiffs by a Condor employee and by its then owner.
Condor filed a cross-complaint alleging that plaintiffs breached the contract.
Plaintiffs received a non-binding 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.
On October 5, 1998, a jury entered a partial verdict finding that Condor had
breached the supply contract. A judgment in the amount of $382,500 was entered
in favor of the plaintiffs. In response to a motion by the plaintiffs the court,
on December 22, 1998 awarded attorneys' fees in the amount of $266,000. Condor
has recorded a provision in the amount of approximately $975,000, which also
includes estimated interest on the award.
The jury was unable to reach a verdict on the alleged intentional infliction
of emotional distress upon plaintiffs by a Condor employee and by its then
owner. This matter has been remanded back to the Superior Court of California,
San Joaquin County. The jury further found that the plaintiffs had not breached
the supply contract. The jury also found that Condor did not infringe on the
patent held by the plaintiffs.
The sellers of Condor had agreed to indemnify the Company and Condor with
respect to any potential liability from the alleged breach of contract. Condor
has determined that it will be unable to collect against the indemnification
agreement. Since the assets of Condor are not sufficient to pay the full amount
of the award, Condor attempted to reach a settlement with the plaintiffs but was
unable to do so. It is unclear at this time if a settlement can be reached. The
plaintiffs have now indicated in writing that they may assert a claim against
the Company under principles of alter ego and related theories of liability. The
Company would vigorously defend itself against any such claim. An adverse ruling
could, however, have a material adverse effect on the Company's financial
condition.
31
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. On March 9, 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. On December 2, 1998 the parties reached an agreement of
settlement and general release.
32
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--STOCKHOLDERS' EQUITY
Common Stock
During 1998 the Company repurchased 29,600 shares of its common stock at
prices ranging from $1.04 to $1.38, for an aggregate purchase price of
approximately $39,000. These shares were subsequently retired.
On July 23, 1997 the Company repurchased 2,000,000 shares of its common
stock for cash of $1.75 per share. These shares were subsequently retired.
During 1997, the Company issued 34,186 shares of common stock in connection
with the conversion of an aggregate $130,000 of convertible debentures, at $3.59
and $4.37 per share.
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 Condor Utility Products, Inc. Stock Purchase
Agreement.
During the fiscal year ended November 30, 1996 the Company, in connection
with a private placement, issued 1,260,807 shares of its common stock valued at
$0.55 per share for $700,000 in cash. In addition, the Company granted the
stockholder a warrant to acquire an additional 60,000 shares of its common stock
at an exercise price of $0.75 per share, expiring in December 2000.
Stock Options
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan ("1993 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 was effectively
completed during 1997.
The 1993 Plan provided for the grant by the Company of options to purchase
common stock to employees, consultants, officers and directors of the Company.
Options granted under the 1993 Plan could be either "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code, or
"non-qualified stock options". Options could be granted for terms of up to 10
years, except for incentive stock options granted to 10% Stockholders, which
were limited to 5 years. The exercise price in the case of incentive stock
options granted under the 1993 Plan had to be at least equal to the fair market
value of the common stock as of the date of grant.
During the years ended November 30, 1997 and 1996, the Company issued
options, pursuant to the 1993 Plan, to purchase 95,217 and 576,500 shares,
respectively, of the Company's common stock at exercise prices ranging from
$0.41 to $1.78 per share. No compensation expense was recorded in connection
with the issuance of these options as they were issued at 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 ("1997 Plan") was adopted,
effective January 1, 1997, and approved by the Board of Directors of the
Company. The 1997 Plan authorized the granting of various
33
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
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 employees, consultants, officers and
directors of the Company. 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 expense was recorded in
connection with the issuance of these options as they were issued at the fair
market value of the underlying stock at the date of grant.
1998 STOCK OPTION PLAN
In April, 1998, the stockholders of the Company approved the 1998 Stock
Option Plan ("1998 Plan"). The Plan authorizes the granting of various options
and rights to purchase up to 1,250,000 shares of common stock of the Company.
The 1998 Plan provides for the grant by the Company of options to purchase
shares of the Company's common stock to its officers, directors, employees and
consultants. The 1998 Plan provides that it is to be administered by a committee
consisting of two or more members of the Board of Directors. The Committee has
discretion, subject to the terms of the 1998 Plan, to select the persons
entitled to receive options under the Plan, the terms and conditions on which
options are granted, the exercise price, the time period for vesting such shares
and the number of shares subject thereto.
Options granted under the 1998 Plan may be either "incentive stock options",
within the meaning of Section 422 of the Internal Revenue Code, or
"non-qualified stock options". No incentive stock option may be granted to any
person who is not an employee of the Company at the date of grant. Options may
be granted under the 1998 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 1998
Plan has to be at least equal to the fair market value of the common stock as of
the date of grant.
During the year ended November 30, 1998, the Company issued options under
the 1998 Plan to purchase 115,256 shares of the Company's common stock at
exercise prices ranging from $1.59 to $1.75 per share. No compensation expense
was recorded in connection with the issuance of these options as they were
issued at the fair market value of the underlying stock at the date of grant. Of
the 1,250,000 shares authorized to be issued under this plan, 1,134,744 shares
were available for issuance at November 30, 1998.
OTHER STOCK OPTIONS
During 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 expense was recorded in connection with the issuance of these
options as they were issued at the fair market value of the underlying stock at
the date of grant.
34
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
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, 1997 and 1998 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. 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.
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 the date of grant. Pursuant to the provisions of SFAS 123,
the fair value of these options was estimated at the date of grant using the
Black Scholes option pricing model. 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.
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 to $3.44 per share, expiring through August 2007. Such
options vest within six months from the date of grant. No compensation expense
was recorded in connection with the issuance of these options as they were
issued at the fair market value of the underlying stock at the date of grant.
During 1998, the Company issued options to purchase 301,000 shares of the
Company's common stock outside of the 1998 Plan, at exercise prices ranging from
$3.38 to $4.00 per share, with vesting periods up to four years and expiring
through December 2008. No compensation expense was recorded in connection with
the issuance of these options as they were issued at the fair market value of
the underlying stock at the date of grant.
35
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes the options granted and outstanding as of
November 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------------------- EXERCISE
EMPLOYEE NON-EMPLOYEE TOTAL PRICE
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, November 30, 1995............ 435,000 460,000 895,000 $ 2.22
Granted................................... 652,000 50,000 702,000 0.90
Exercised................................. (21,000) 0 (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) 0 (15,000) 1.00
---------- ------------- ----------
Outstanding, November 30, 1997............ 1,274,000 260,000 1,534,000 1.08
Granted................................... 416,000 0 416,000 3.70
Exercised................................. (84,000) (70,000) (154,000) 0.98
Canceled.................................. (1,000) 0 (1,000) 1.00
---------- ------------- ----------
Outstanding, November 30, 1998............ 1,605,000 190,000 1,795,000 $ 1.59
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
36
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--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, 1998.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE ----------------------- CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
- ----------- ----------- ---------- -------------------------
<C> <C> <C> <S>
4.00 170,000 20,000 8.0 years
3.69 70,000 70,000 4.1
3.44 26,000 20,000 5.0
3.38 75,000 0 9.2
2.84 2,000 2,000 8.8
2.63 10,000 10,000 0.5
2.22 10,000 10,000 3.6
2.16 10,000 10,000 0.5
2.06 10,000 10,000 3.5
1.97 10,000 10,000 3.5
1.75 122,000 10,000 9.1
1.65 10,000 10,000 8.3
1.63 20,000 20,000 0.6
1.59 3,000 3,000 9.7
1.50 190,000 190,000 8.3
1.28 175,000 175,000 8.1
1.27 10,000 10,000 2.5
1.23 10,000 10,000 2.5
1.00 362,000 347,000 7.8
0.91 10,000 10,000 2.6
0.78 125,000 125,000 7.4
0.69 125,000 105,000 6.9
0.59 10,000 10,000 1.2
0.52 10,000 10,000 1.6
0.44 10,000 10,000 1.5
0.43 10,000 10,000 1.5
0.30 200,000 200,000 4.1
----------- ----------
1,795,000 1,417,000
----------- ----------
----------- ----------
</TABLE>
37
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
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 assumptions for the years ended
November 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDING NOVEMBER 30:
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest rate................................. 5.46% 6.49% 6.46%
Dividend yield................................ 0.00% 0.00% 0.00%
Expected life of options (years).............. 5 5 and 10 5 and 10
Volatility factor............................. 73.00% 100.00% 100.00%
</TABLE>
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 plans been
determined based on the fair value method at the date of grant consistent with
the provisions of SFAS 123, for the years ended November 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net income (loss), as reported..................... $ (2,331,000) $ 2,916,000 $ 4,184,000
------------- ------------ ------------
------------- ------------ ------------
Net income (loss), pro forma....................... $ (2,755,000) $ 2,102,000 $ 3,839,000
------------- ------------ ------------
------------- ------------ ------------
Earnings per share, as reported
Basic............................................ $ (0.27) $ 0.30 $ 0.40
------------- ------------ ------------
------------- ------------ ------------
Diluted.......................................... $ (0.27) $ 0.27 $ 0.39
------------- ------------ ------------
------------- ------------ ------------
Earnings per share, pro forma
Basic............................................ $ (0.32) $ 0.22 $ 0.37
------------- ------------ ------------
------------- ------------ ------------
Diluted.......................................... $ (0.32) $ 0.20 $ 0.36
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
Warrants
In March, 1994, the Company issued a warrant to purchase 840,000 shares of
its common stock at an exercise price of $2.98 per share, 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 $0.90 per share,
expiring on September 30, 1999. This warrant became exercisable as of November
30, 1995.
38
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 10--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 60,000 shares of the Company's common stock exercisable for 5 years at
an exercise price of $0.75 per share.
On December 22, 1995, the Company issued 1,260,807 shares of its common
stock valued at $.55 per share to a lender/stockholder for $700,000 in cash. In
conjunction with the transaction, the Company granted the stockholder a warrant
to acquire an additional 30,000 shares of its common stock at an exercise price
of $.75 per share, expiring in December 2000.
NOTE 11--INCOME TAXES
Income tax expense from continuing operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30:
---------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Current:................................
Federal $ 427,000 $ 285,000 $ 81,000
State................................. 78,000 272,000 115,000
--------- ---------- ----------
505,000 557,000 196,000
Deferred................................
Federal 66,000 (403,000) (34,000)
State................................. (33,000) 26,000 --
--------- ---------- ----------
33,000 (377,000) (34,000)
--------- ---------- ----------
Total income tax provision.............. $ 538,000 $ 180,000 $ 162,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
39
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable............................. $ 43,000 $ 44,000
Inventory....................................... 92,000 134,000
Accrued expenses................................ 801,000 62,000
State taxes..................................... -- 70,000
Goodwill and other intangible assets............ 969,000 566,000
Net operating loss carryforward................. -- 34,000
Other........................................... 85,000 69,000
------------ -------------
Total deferred tax assets..................... 1,990,000 979,000
Less valuation allowance for deferred tax
assets...................................... (902,000) (476,000)
------------ -------------
Deferred tax assets............................... 1,088,000 503,000
Deferred tax liabilities:
Tax over book depreciation...................... 44,000 92,000
State taxes..................................... 14,000 --
------------ -------------
Total deferred tax liabilities................ 58,000 92,000
------------ -------------
Net deferred tax assets........................... $ 1,030,000 $ 411,000
------------ -------------
------------ -------------
</TABLE>
The valuation allowance is based on management's estimates as to the
Company's ability to utilize future tax deductions.
United States and foreign income (loss) from continuing operations before
income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30:
---------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Pretax income (loss)
Domestic.............................. $ 517,000 $3,139,000 $3,932,000
Foreign............................... (683,000) -- --
--------- ---------- ----------
Total................................. $(166,000) $3,139,000 $3,932,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
40
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES (CONTINUED)
The reconciliation of the income tax provision (benefit) for continuing
operations to taxes computed at U.S. federal staturtory rates is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30:
---------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Income tax (benefit) at statutory
rates................................. $ (56,000) $1,128,000 $1,337,000
Change in federal valuation allowance... 326,000 (1,085,000) (1,278,000)
Foreign losses recorded without tax
benefit............................... 232,000 -- --
State and local income taxes, net of
federal income tax benefit............ 30,000 137,000 95,000
Other................................... 6,000 -- 8,000
--------- ---------- ----------
Total................................... $ 538,000 $ 180,000 $ 162,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
NOTE 12--RELATED PARTY TRANSACTIONS
Settlement and General Release Agreement
In January, 1998 the Company filed with the Superior Court of the State of
California for the County of Los Angeles, against a former employee of Condor
for breach of promissory note. On March 9, 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. In October, 1998, management of the Company deemed the note receivable
as uncollectible and subsequently wrote it off, along with applicable accrued
interest receivable. The amount of such accrued interest receivable was
insignificant. On December 2, 1998 the parties reached an agreement of
settlement and general release whereby the Company agreed to give up
indemnification in exchange for the former employee dropping the cross-complaint
for breach of contract.
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 taxes of
$18,000, as an extraordinary item in the accompanying 1996 consolidated
statement of operations.
NOTE 13--DISCONTINUED OPERATIONS
In November, 1998 the Company adopted a formal plan to discontinue the
operations of its Condor Utility Products, Inc. subsidiary. The anticipated
disposal date is approximately November 30, 1999. The assets of Condor Utility
Products, Inc. to be disposed of consist primarily of accounts receivable and
41
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 13--DISCONTINUED OPERATIONS (CONTINUED)
property, plant and equipment of approximately $280,000 and $304,000,
respectively. If the Company is unable to execute the disposal under the plan,
the Company may abandon the operations. The Company believes the reserves
recorded in connection with the discontinued operations are sufficient to cover
losses, if any, on abandonment.
Operating results of Condor Utility Products, Inc. for the year ended
November 30, 1998 are shown seperately in the accompanying consolidated
statement of operations. The consolidated statement of operations for the years
ended November 30, 1997 and 1996 have been restated and operating results of
Condor Utiliity Products, Inc. are also shown seperately.
In connection with the closure, the Company recognized a charge in fiscal
1998 for discontinued operations totaling $1,627,000, net of income taxes of
$538,000.
Net sales of Condor Utility Products, Inc. for the years ended November 30,
1998, 1997 and 1996 were $954,000, $1,144,000 and $1,173,000, respectively.
These amounts are not included in net sales in the accompanying consolidated
statement of operations.
Assets and liabilities of Condor Utility Products, Inc. to be disposed of
consisted of the following at November 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable, net.......................................... $ 280,000 $ 99,000
Inventories, net.................................................. -- 178,000
Property, plant and equipment..................................... 304,000 443,000
Goodwill, net..................................................... -- 665,000
Prepaids and other assets......................................... -- 73,000
------------ ------------
Total assets.................................................. $ 584,000 $ 1,458,000
------------ ------------
Accounts payable.................................................. 132,000 12,000
Accrued liabilities............................................... 1,200,000 60,000
------------ ------------
Total liabilities............................................. $ 1,332,000 $ 72,000
------------ ------------
Net assets of discontinued operations......................... $ (748,000) $ 1,386,000
------------ ------------
------------ ------------
</TABLE>
NOTE 14--EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan that covers the majority of the
Company's domestic employees. An employee, at their discretion, can elect to
make voluntary contributions to the plan from 0% to 20% of their compensation,
up to the maximum amount set by the Internal Revenue Service. The plan requires
the Company to make a matching contribution of 33% of the first 6% of the
voluntary employee contribution. The Company may also contribute an additional
amount determined in its sole judgment. Total expense from this plan related to
continuing operations was approximately $46,000 for the year ended November 30,
1998.
42
<PAGE>
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
NOTE 15--GEOGRAPHIC INFORMATION
The Company's foreign operations include both manufacturing and sales. The
manufacturing facility is located in Ireland and the sales joint venture is
located in Singapore. Both facilities began operations in fiscal 1998. All of
their sales are made to unaffiliated customers. The following is a summary of
operations by entities within geographic areas for the year ending November 30,
1998:
Net revenues for North America, Singapore and Ireland were $26,458,000,
$2,035,000 and $423,000, respectively. Operating income(loss) for the three
regions was $470,000, $546,000 and $(637,000), respectively.
Total net assets at November 30, 1998 for North America, Singapore and
Ireland were $9,405,000, $2,756,000 and $1,105,000, respecively.
43
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information for Item 8 is hereby incorporated by reference to the
Company's FY98 Third Quarter 10QSB, filed with the Securities and Exchange
Commission on September 25, 1998.
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
26, 1999, which will be filed with the Commission within (120) one hundred
twenty days of the close of the fiscal year pursuant to Regulation 14A.
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- ----------------------------------------------------------------------------------------------------------
<S> <C>
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.
10.1 Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced Materials, Inc. and Wilshire
Technologies, Inc. (1)
10.2 Amendment to Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced Materials, Inc. and
Wilshire Technologies, Inc. dated December 2, 1992. (1)
10.3 Stock Purchase Agreement dated October 6, 1993 between Advanced Materials Group, Inc. and the stockholders
of Condor Utility Products, Inc. (2)
10.4 The 1993 Stock Option Plan of Advanced Materials Group, Inc. (3)
10.5 Form of Convertible Debenture. (4)
10.6 Promissory Note of the Company dated March 25, 1994 payable to Michael W. Crow in the amount of $787,618.
(5)
10.7 Amended and Restated Promissory Note dated August 16, 1995 between Advanced Material Group, Inc. and Hiram
H. Johnson and Beth A. Johnson. (6)
10.8 Industrial Lease Agreement executed August 31, 1995 between New York Life Insurance and Annuity
Corporation, as Landlord and Advanced Materials, Inc., as Tenant. (7)
10.9 Form of Equity Warrant between Advanced Materials Group, Inc. and Trilon Dominion Partners, L.L.C. (8)
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBITS
- --------- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.10 Form of Debt Warrant between Advanced Materials Group, Inc. and TrilonDominion Partners, LLC. (9)
10.11 Loan Agreement dated as of November 26, 1996, between Advanced Materials, Inc. And Wells Fargo National
Association. (10)
10.12 First Amendment to Loan Agreement dated as of September 1, 1996, between Advanced Materials, Inc. and
Wells Fargo National Association. (11)
10.13 Asset Purchase and Sale Agreement dated as of September 1, 1996, between Advanced Materials, Inc. and
Gasket and Molded Products, Inc. and Shareholders. (12)
10.14 Amendment One to Lease dated as of September 27, 1996, between Advanced Materials Group, Inc. And Riggs
National Bank of Washington, D.C. as Trustee of the Multi-Employer Property Trust. (13)
10.15 The 1997 Stock Option Plan of Advanced Materials Group, Inc. (14)
10.16 Industrial sublease agreement executed September 1, 1997 between Advanced Material, Inc. as landlord and
S-Line as tenant. (15)
10.17 Manufacturing agreement dated January 30, 1998 by and between Advanced Materials FSC Ltd. and Foamtec
(Singapore) Pte. Ltd. (16)
10.18 Form of Warrant Assignment agreement dated September 15, 1997 between Trilon Dominion Partners, LLC. and
certain individuals. (17)
10.19 Credit Agreement dated as of February 27, 1998 between Advanced Materials Group, Inc. and Wells Fargo
Bank, National Association. (18)
10.20 The 1998 Stock Option Plan of Advanced Materials Group, Inc. (19)
10.21 Legal settlement with a former employee of Condor Utility Products, Inc.
10.22 Employment agreement dated September 11, 1998 between Advanced Materials Group, Inc. and Steve F. Scott,
Chief Executive Officer, President and Director.
10.23 Consulting Agreement dated March 31, 1997 between Advanced Materials Group, Inc. and Paschall and Company.
21. List of Subsidiaries.
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 10.10 to the Company's Registration Statement on Form SB-2
dated December 6, 1993 (Registration No. 33-72500)
(3) Filed as Exhibit 10.18 to Amendment No. 1 dated March 1, 1994 to the
Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500)
(4) Filed as Exhibit 10.23 to Amendment No. 2 dated May 6, 1994 to the
Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500)
(5) Filed as Exhibit 10.24 to Amendment No. 2 dated May 6, 1994 to the
Company's Registration Statement on Form SB-2 dated December 6, 1993
(Registration No. 33-72500)
(6) Filed as Exhibit 10.2 to Form 10-QSB dated August 31, 1995.
(7) Filed as Exhibit 10.3 to Form 10-QSB dated August 31, 1995.
(8) Filed as Exhibit 2.2 to Form 8-K filed January 5, 1996.
(9) Filed as Exhibit 2.3 to Form 8-K filed January 5, 1996.
45
<PAGE>
(10) Filed as Exhibit 10.18 to Form 10-KSB dated November 30, 1996.
(11) Filed as Exhibit 10.19 to Form 10-KSB dated November 30, 1996.
(12) Filed as Exhibit 10.20 to Form 10-KSB dated November 30, 1996.
(13) Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1996.
(14) Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1997.
(15) Filed as Exhibit 10.22 to Form 10-KSB dated November 30, 1997.
(16) Filed as Exhibit 10.23 to Form 10-KSB dated November 30, 1997.
(17) Filed as Exhibit 10.24 to Form 10-KSB dated November 30, 1997.
(18) Filed as Exhibit 10.1 to Form 8-K filed February 27, 1998.
(19) Filed as Exhibit A to Form DEF-14A dated April 8, 1998.
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 5, 1998 to disclose a legal
judgement rendered, in the United States District Court for the Eastern District
of California, anainst the Registrant's Condor Utility Products, Inc. subsidiary
(Condor) for breach of a requirements contract.
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.
<TABLE>
<S> <C> <C>
ADVANCED MATERIALS GROUP, INC.
Dated: February 28, 1999
By: /s/ STEVE F. SCOTT
-----------------------------------------
Steve F. Scott
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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
- ------------------------------ (PRINCIPAL EXECUTIVE February 28, 1999
Steve F. Scott OFFICER)
Vice President/Chief
/s/ J. DOUGLAS GRAVEN Financial Officer and
- ------------------------------ Secretary (PRINCIPAL February 28, 1999
J. Douglas Graven FINANCIAL AND ACCOUNTING
OFFICER)
/s/ TIMOTHY R. BUSCH
- ------------------------------ Chairman and Director February 28, 1999
Timothy R. Busch
/s/ MAURICE J. DEWALD
- ------------------------------ Director February 28, 1999
Maurice J. DeWald
/s/ MICHAEL A. LEDEEN
- ------------------------------ Director February 28, 1999
Michael A. Ledeen
/s/ ALLAN H. MELTZER
- ------------------------------ Director February 28, 1999
Allan H. Meltzer
/s/ N. PRICE PASCHALL
- ------------------------------ Director February 28, 1999
N. Price Paschall
</TABLE>
47
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
ADVANCED MATERIALS GROUP, INC.
ARTICLE I
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of
this Company, for the purpose of fixing or changing the number of directors
of the Company, electing directors and transacting such other business as may
come before the meeting, shall be held on such date, at such time and at such
place as may be designated by the Board of Directors.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called at any time by the president or a vice-president or a majority of
the Board of Directors acting with or without a meeting, or the holder or
holders of ten percent of the shares outstanding and entitled to vote thereat.
SECTION 3. PLACE OF MEETINGS. Meetings of shareholders shall be held at the
principal office of the Company, unless the Board of Directors decides that a
meeting shall be held at some other place within or without the State of Nevada
and causes the notice thereof to so state.
SECTION 4. NOTICES OF MEETINGS. Unless waived, a written, printed, or
typewritten notice of each annual or special meeting, stating the day, hour
and place and the purpose or purposes thereof shall be served upon or mailed
to each shareholder of record entitled to vote or entitled to notice, not
more than sixty (60) days nor less than ten (10) days before any such
meeting. If mailed, it shall be directed to a shareholder at his or her
address as the same appears on the records of the Company. If a meeting is
adjourned to another time and place, no further notice as to such adjourned
meeting need be given if the time and place to which it is adjourned are
fixed and announced at such meeting. In the event of a transfer of shares
after notice has been given and prior to the holding of the meeting, it shall
not be necessary to serve notice on the transferee. Nothing herein contained
shall prevent the setting of a record date in the manner provided by law for
the determination of the shareholders who are entitled to receive notice of
or to vote at any meeting of shareholders or for any purpose permitted by law.
SECTION 5. WAIVER OF NOTICE. Notice of the time, place and purpose of any
meeting of shareholders may be waived in writing, either before or after the
holding of such meeting, by any shareholder.
SECTION 6. QUORUM. At any meeting of shareholders, the holders of a
majority in amount of the shares of the Company then outstanding and entitled
to vote thereat, present in person or represented by proxy, regardless of
whether the proxy has authority to vote on all matters, shall constitute a
quorum for such meeting but no action required by law, the Articles of
Incorporation
<PAGE>
or these Bylaws to be authorized or taken by the holders of a designated
proportion of the shares of any particular class, or of each class, may be
authorized or taken by a lesser proportion. The holders of a majority of the
voting shares represented at a meeting in person or by proxy may adjourn such
meeting from time to time, and at such adjourned meeting any business may be
transacted as if the meeting had been held as originally called.
SECTION 7. ORGANIZATION. At each meeting of the shareholders, the
president, or, in the absence of the president, a chairman chosen by a majority
in interest of the shareholders present in person or by proxy and entitled to
vote, shall act as chairman, and the secretary of the Company, or, if the
secretary of the Company not be present, the assistant secretary, or if the
secretary and the assistant secretary not be present, any person whom the
chairman of the meeting shall appoint, shall act as secretary of the meeting.
SECTION 8. SHAREHOLDERS ENTITLED TO VOTE. Every shareholder of record
shall be entitled at each meeting of shareholders to vote one vote for each
share standing in his name on the books of the Company.
A corporation owning shares in this Company may vote the same by its
president or its secretary or its treasurer, and such officer shall conclusively
be deemed to have authority to vote such shares and to secure any proxies and
written waivers and consents in relation thereto, unless, before a vote is taken
or a consent or waiver is acted upon, it shall be made to appear by a certified
copy of the regulations, by-laws or resolution of the Board of Directors of the
corporation owning such shares that such authority does not exist or is vested
in some other officer or person.
SECTION 9. SHAREHOLDER VOTING. At each meeting of the shareholders for the
election of directors at which a quorum is present, the persons receiving the
greatest number of votes shall be the directors. Such election may be by ballot
or viva voce, as the shareholders may determine. Action by the shareholders on a
matter other than the election of directors is approved if the number of votes
cast in favor of the action exceeds the number cast in opposition to the action,
unless for any particular purpose the vote of a greater proportion of the
shares, or of any particular class of shares, or of each class is otherwise
required by law, the Articles of Incorporation or these Bylaws.
SECTION 10. PROXIES. At meetings of the shareholders any shareholder of
record entitled to vote thereat may be represented and may vote by a proxy or
proxies appointed by an instrument in writing, but such instrument shall be
filed with the secretary of the meeting before the person holding such proxy
shall be allowed to vote thereunder. No proxy shall be valid after the
expiration of six (6) months after the date of its execution, unless coupled
with an interest of the shareholder executing it shall have specified therein
the length of time it is to continue in force, which in no case shall exceed
seven (7) years from the date of its execution.
SECTION 11. ORDER OF BUSINESS AND PROCEDURE. The order of business at
all meetings of the shareholders and all matters relating to the manner of
conducting the meeting shall be determined by the chairman of the meeting,
whose decisions may be overruled only by majority vote of the
2
<PAGE>
shareholders present and entitled to vote at the meeting in person or by
proxy. Meetings shall be conducted in a manner designed to accomplish the
business of the meeting in a prompt and orderly fashion and to be fair and
equitable to all shareholders, but it shall not be necessary to follow any
manual of parliamentary procedure.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS OF BOARD. The powers of the Company shall be
exercised, its business and affairs conducted, and its property controlled by
the Board of Directors, except as otherwise provided by the law of Nevada or in
the Articles of Incorporation.
SECTION 2. NUMBER AND QUALIFICATION. The number of directors of the
Company, none of whom need be shareholders or residents of Nevada, shall be
at least three. Without amendment of these Bylaws, the number of directors
may be fixed or changed by resolution adopted by the vote of the majority of
directors in office or by the vote of holders of shares representing a
majority of the voting power at any annual meeting, or any special meeting
called for that purpose; but not reduction of the number of directors shall
have the effect of removing any director prior to the expiration of his term
of office.
SECTION 3. TERM OF OFFICE. Unless he shall earlier resign, be removed
as hereinafter provided, die, or be adjudged mentally incompetent, each
director shall hold office until the SINE DIE adjournment of the annual
meeting of shareholders for the election of directors next succeeding his
election, or the taking by the shareholders of an action in writing in lieu
of such meeting, or, if for any reason the election of directors shall not be
held at such annual meeting or any adjournment thereof, until the SINE DIE
election of directors held thereafter as provided for in Section 4 of Article
I of these Bylaws, or the taking by the shareholders of an action in writing
in lieu of such meeting, and until his successor is elected and qualified.
SECTION 4. REMOVAL. Any director may be removed without cause at any
special meeting of shareholders called for such purpose by the vote of the
holders of two-thirds of the voting power entitling them to elect directors in
place of those to be removed, provided that unless all the directors, or all the
directors of a particular class are removed no individual director shall be
removed if the votes of a sufficient number of shares are cast against his
removal which, if cumulatively voted at an election of directors, or of all
directors of a particular class, as the case may be, would be sufficient to
elect at least one director. In case of any such removal, a new director may be
elected at the same meeting for the unexpired term of each director removed.
Failure to elect a director to fulfill the unexpired term of any director
removed shall be deemed to create a vacancy in the Board.
SECTION 5. RESIGNATIONS. Any director of the company may resign at any time
by giving written notice to the president or the secretary of the Company. Such
resignation shall take effect
3
<PAGE>
at the time specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 6. VACANCIES. Vacancies in the Board of Directors may be filled by
a majority vote of the remaining directors, even though they be less than a
quorum of the entire number of directors constituting a full Board, until an
election to fill such vacancies is had. Within the meaning of this Section, a
vacancy exists if the board of directors increases the authorized number of
directors or if the shareholders increase the authorized number of directors but
fail at the meeting at which such increase is authorized, or an adjournment
thereof, to elect the additional directors provided for, or if the shareholders
fail at any time to elect the whole authorized number of directors. Any director
elected under the provisions of this Section 6 shall serve until the next annual
election of directors and until their successors are elected and qualified.
SECTION 7. MEETINGS. The directors shall hold such meetings from time to
time as they may deem necessary and such meetings as may from time to time be
called by the president or the chairman of the board. Meetings shall be held at
the principal office of the Company or at such other place within or without the
State of Nevada as the president or a majority of the directors may determine. A
regular meeting of the Board of Directors shall be held each year at the same
place as and immediately after the annual meeting of shareholders, or at such
other place and time as shall theretofore have been determined by the Board of
Directors and notice thereof need not be given. At its regular annual meeting,
the Board of Directors shall organize itself and elect the officers of the
Company for the ensuing year, and may transact any other business.
SECTION 8. NOTICE OF MEETINGS. Notice of each special meeting or, where
required, each regular meeting, of the Board of Directors shall be given to
each director either by being mailed on at least the third day prior to the
date of the meeting or by being telegraphed or given personally or by
telephone on at least twenty-four (24) hours notice prior to the date of
meeting. Such notice shall specify the date and time of the meeting, the
purpose or purposes for which the meeting is called. At any meeting of the
Board of Directors at which every director shall be present, even though
without such notice, any business may be transacted. Any acts or proceedings
taken at a meeting of the Board of Directors not validly called or
constituted may be made valid and fully effective by ratification at a
subsequent meeting which shall be legally and validly called or constituted.
Notice of any regular meeting of the Board of Directors need not state the
purpose of the meeting and, at any regular meeting duly held, any business
may be transacted. If the notice of a special meeting shall state as a
purpose of the meeting the transaction of any business that may come before
the meeting, then at the meeting any business may be transacted, whether or
not referred to in the notice thereof. A written waiver of notice of a
special or regular meeting, signed by the person or person entitled to such
notice, whether before or after the time stated therein shall be deemed the
equivalent of such notice, and attendance of a director at a meeting shall
constitute a waiver of notice of such meeting except when the director
attends the meeting and prior to or at the commencement of such meeting
protests the lack of proper notice.
4
<PAGE>
SECTION 9. QUORUM AND VOTING. At all meetings of the directors fifty
percent of all of the authorized directors of the company shall constitute a
quorum, but less than fifty percent of the authorized directors may adjourn a
meeting of the directors from time to time, and at adjourned meetings any
business may be transacted as if the meeting had been held as originally
called. The act of a majority of Directors present at any meeting at which
there is a quorum shall be the act of the Board of Directors, except as
otherwise provided by law, the Articles of Incorporation or these Bylaws.
SECTION 10. COMPENSATION. Directors shall be entitled to receive for
services and expenses such reasonable compensation as the Board of Directors
may determine by affirmative vote of a majority of those directors in office.
The Board of Directors may also delegate its authority to establish
reasonable compensation for directors to one or more officers or directors by
an affirmative vote of a majority of those directors in office. Any vote
taken by the Board of Directors with respect to director compensation shall
be effective irrespective of the financial or personal interest of any of the
directors involved.
SECTION 11. COMMITTEES. The Board of Directors may create any
committee of directors, to be composed of one or more directors, and may
delegate to any such committee any of the authority and powers of the Board
of Directors, however conferred. Each such committee shall serve at the
pleasure of the Board of Directors shall act only in the intervals between
meetings of the Board of Directors and shall be subject to all times to the
control and direction of the Board of Directors. Any such committee may act
by a majority of its members. Any such committee shall keep written minutes
of its meetings and report same to the Board of Directors prior to or at the
next regular meeting of the Board of Directors. Any act or authorization of an
act by any such committee within the authority delegated to it shall be as
effective for all purposes as the act or authorization of the Board of
Directors.
ARTICLE III
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Company shall be a
president, such number of vice-presidents as the Board may from time to time
determine, a secretary, a treasurer and such other officers as the directors
may elect. The Company may also have, at the discretion of the Board of
Directors, a Chairman of the Board or Vice Chairman who shall have the duties
prescribed by the Board of Directors. Except as specifically provided in
these Bylaws, the directors shall determine the duties and term of each of
the officers of the Company and shall be responsible for the designation of
the Company's chief executive officer. Officers need not be shareholders of
the Company and may be paid such compensation as the Board of Directors may
determine. Any person may hold any two or more offices and perform the duties
thereof. If one person is chosen to hold the offices of secretary and
treasurer, he shall be known as secretary-treasurer if one person be elected
to both of these offices.
5
<PAGE>
SECTION 2. ELECTION, TERM OF OFFICE, AND QUALIFICATION. The officers of
the Company named in Section 1 of this Article III shall be elected by a
majority of the Board of Directors present and constituting a quorum for an
indeterminate term and shall hold office during the pleasure of the Board of
Directors. The qualifications of all officers shall be such as the Board of
Directors may see fit to impose.
SECTION 3. ADDITIONAL OFFICERS, AGENTS, ETC. In addition to the officers
mentioned in Section 1 of this Article III, the Company may have such other
officers, committees, agents, and factors as the Board of Directors may deem
necessary and may appoint, each of whom or each member of which shall hold
office for such period, have such authority, and perform such duties as may be
provided in these Bylaws, or as the Board of Directors may from time to time
determine. The Board of Directors may delegate to any officer or committee the
power to appoint any subordinate officers, committees, agents or factors. In the
absence of any officer of the Company, or for any other reason the Board of
Directors may deem sufficient, the Board of Directors may delegate, for the
time being, the powers and duties, or any of them, of such officer to any other
officer, or to any director.
SECTION 4. REMOVAL. Any officer of the Company may be removed either with
or without cause, at any time, by resolution adopted by the Board of Directors
at any meeting of the Board, the notices (or waivers of notice) of which shall
have specified that such removal action was to be considered. Any officer
appointed not by the Board of Directors but by an officer or committee to which
the Board shall have delegated the power of appointment may be removed, with or
without cause, by the committee or superior officer (including successors) who
made the appointment, or by any committee or officer upon whom such power of
removal may be conferred by the Board of Directors.
SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors, or to the president, or to the
secretary of the Company. Any such resignation shall take effect at the time
specified therein, and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 6. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise, shall be filled in the
manner prescribed in these Bylaws for regular appointments or elections to such
office.
ARTICLE IV
DUTIES OF THE OFFICERS
SECTION 1. THE PRESIDENT. The president shall manage and have general
supervision over the business of the Company and over its several officers,
subject, however, to the control of the Board of Directors. He shall, if
present, preside at all meetings of shareholders and of the Board of Directors.
He shall see that all orders and resolutions of the Board of Directors are
carried into effect, and shall from time to time report to the Board of
Directors all matters within his knowledge
6
<PAGE>
which the interests of the corporation may require to be brought to the notice
of the Board. He may sign with the secretary, the treasurer, or any other proper
officer of the company thereunto authorized by the Board of Directors,
certificates for share in the Company. He may sign, execute and deliver in the
name of the Company all deeds, mortgages, bonds, contracts, or other instruments
either when specially authorized by the Board of Directors or when required or
deemed necessary or advisable by him in the ordinary conduct of the Company's
normal business, except in cases where the signing and execution thereof shall
be expressly delegated by these Bylaws to some other officer or agent of the
Company or shall be required by law or otherwise to be signed or executed by
some other officer or affixed to any instrument requiring the same; and, in
general, perform all duties as from time to time may be assigned to him by the
Board of Directors. In case the president for any reason shall be unable to
attend to any of his duties, such duties may be performed by a vice-president of
the Company.
SECTION 2. VICE-PRESIDENTS. The vice-presidents shall perform such duties
as are conferred upon them by these Bylaws or as may from time to time be
assigned to them by the Board of Directors or the president. At the request of
the president (or in his or her absence or disability, the vice-president
designated by the Board) shall perform all the powers of the president. The
authority of vice-presidents to sign in the name of the Company all certificates
for shares and authorized deeds, mortgages, bonds, contracts, notes and other
instruments, shall be coordinate with like authority of the president.
SECTION 3. THE TREASURER. The treasurer shall:
(a) Have charge and custody of, and be responsible for, all funds,
securities, notes, contracts, deeds, documents, and all other indicia of title
in the Company and valuable effects of the Company; receive and give receipts
for moneys due and payable to the name of the Company in such banks, trust
companies, or other depositories as shall be selected by or pursuant to the
directions of the Board of Directors; cause such funds to be discharged by
checks or drafts on the authorized depositories of the Company, signed as the
Board of Directors may require; and be responsible for the accuracy of the
amounts of, and cause to be preserved proper vouchers for, all moneys to be
disbursed;
(b) Have the right to require from time to time reports or statements
giving such information as he may desire with respect to any and all financial
transactions of the Company from the officers or agents transacting the same;
(c) Keep or cause to be kept at the principal office or such other office
or offices of the Company as the Board of Directors shall from time to time
designate correct records of the business and transactions of the Company and
exhibit such records to any of the directors of the Company upon application at
such office;
(d) Have charge of the audit and statistical departments of the Company;
7
<PAGE>
(e) Render to the president or the Board of Directors whenever they shall
require him so to do an account of the financial condition of the company and of
all his transactions as treasurer and as soon as practicable after the close of
each fiscal year, make and submit to the Board of Directors a like report for
such fiscal year; and
(f) Exhibit at all reasonable times his cash books and other records to any
of the directors of the Company upon application.
SECTION 4. THE SECRETARY. The secretary shall:
(a) Keep the minutes of all meetings of the shareholders and of the
Board of Directors in one or more books provided for that purpose;
(b) See that all notices are duly given in accordance with the provisions
of these Bylaws or as required by law;
(c) Be custodian of the corporate records and, if one is provided, of the
seal of the Company, and see that such seal is affixed to all certificates for
shares prior to the issue thereof and to all other documents to which the seal
is required to be affixed and the execution of which on behalf of the Company
under its seal is duly authorized in accordance with the provisions of these
Bylaws;
(d) Have charge, directly or through such transfer agent or transfer agents
and registrar or registrars as the Board of Directors shall appoint, of the
issue, transfer and registration of certificates for shares in the Company and
of the records thereof, such records to be kept in such manner as to show at any
time the number of shares in the Company issued and outstanding, the manner in
which and time when such stock was paid for, the names and addresses of the
holders of record thereof, the number of classes of shares held by each, and the
time when each became such holder of record;
(e) Exhibit at all reasonable times to any directors, upon application, the
aforesaid records of the issue, transfer, and registration of such certificates;
(f) Sign (or see that the treasurer or other proper officer of the Company
thereunto authorized by the Board of Directors shall sign), with the president
or vice-president, certificates for shares in the Company;
(g) See that the books, reports, statements, certificates, and all other
documents and records required by law are properly kept and filed; and
(h) In general, perform all duties incident to the office of secretary, he
shall perform such duties as are conferred upon him by the officers of the
Company, or the Board of Directors, and in
8
<PAGE>
the absence or the inability of the secretary to act, shall perform all the
duties of the secretary and when so acting shall have all the powers of the
secretary.
In the event the Board of Directors shall elect an assistant secretary,
he shall perform such duties as are conferred upon him by the officers of the
Company, or the Board of Directors, and in the absence or inability of the
secretary to act, shall perform all the duties of the secretary and when so
acting shall have all the powers of the secretary.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. INDEMNIFICATION. The Company shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened or pending
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he, his testator, or intestate is or
was a director or officer of the Company, or is or was serving at the request of
the Company as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, or as a member of any
committee or similar body against all expenses (including attorneys' fees),
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
(including appeals) or the defense or settlement thereof of any claim, issue, or
matter therein, to the fullest extent permitted by the laws of Nevada as they
may exist from time to time.
SECTION 2 INSURANCE. The proper officers of the Company without further
authorization by the Board of Directors, may in their discretion purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent for another corporation,
partnership, joint venture, trust or other enterprise, against any liability.
SECTION 3. ERISA. To assure indemnification under this provision of all
such persons who are or were "fiduciaries" of an employee benefit plan governed
by the Act of Congress entitled "Employee Retirement Income Security Act of
1974", as amended from time to time, this Article shall, for the purposes
hereof, be interpreted as follows: an "other enterprise" shall be deemed to
include an employee benefit plan; the Company shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the Company also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to said Act of Congress shall be deemed "fines"; and action taken or
omitted by a person with respect to an employee beneficial plan in the
performance of such person's duties for a purpose reasonably believed by such
person to be in the interest of the participants and beneficiaries of the plan
shall be deemed to be for a purpose which is not opposed to the best interests
of the Company.
9
<PAGE>
SECTION 4. CONTRACTUAL NATURE. The foregoing provisions of this Article
shall be deemed to be a contract between the Company and each director and
officer who serves in such capacity at any time while this Article is in effect,
and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
SECTION 5. CONSTRUCTION. For the purposes of this Article, references to
"the Company" include in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a director or officer of such
constituent corporation or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or as a member of any
committee or similar body shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
SECTION 6. NON-EXCLUSIVE. The Company may indemnify, or agree to indemnify,
any person, and pay any expenses, including attorney's fees in advance of final
disposition of any action, suit or proceeding, if such indemnification and/or
payment is approved by the vote of the shareholders, disinterested directors, or
is in the opinion of independent legal counsel selected by the Board of
Directors for an indemnitee who acted in good faith in a manner he reasonably
believed to be in, or not opposed to, the best interest of the Company.
ARTICLE VI
SEAL
The Board of Directors may provide a corporate seal, which shall be in the
form of a circle and shall bear the full name of the Company, and the words
"Seal" and "Nevada".
ARTICLE VII
AMENDMENT OF BYLAWS
These Bylaws may be amended or added to, or repealed and superseded by new
Bylaws, at any annual or special meeting of shareholders in the notice (or
waivers of notice) of which the intention to consider such amendment, addition,
or repeal is stated, by the affirmative vote of the holders of record of shares
entitling them to exercise a majority of the voting power on such proposal, or
at anytime, by the affirmative vote of the Board of Directors.
10
<PAGE>
ARTICLE VIII
SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATE FOR SHARES. Every owner of one or more shares in
the Company shall be entitled to a certificate, which shall be in such form
as the Board of Directors shall prescribe, certifying the number and class of
paid-up shares in the Company owned by him. The certificates for the
respective classes of such shares shall be numbered in the order in which
they shall be issued and shall be signed in the name of the Company by the
president or vice-president and by the secretary, or any other proper officer
of the Company thereunto authorized by the Board of Directors, or the
treasurer, and the seal of the Company, if any, may be affixed thereto. A
record shall be kept of the name of the person, firm, or corporation owning
the shares represented by each such certificate and the number of shares
represented by each such certificate and the number of shares represented
thereby, the date thereof, and in case of cancellation, the date of
cancellation. Every certificate surrendered to the Company for exchange or
transfer shall be cancelled and no new certificate or certificates until such
existing certificates shall have been so cancelled, except in cases provided
for in Section 2 of this Article.
SECTION 2. LOST, DESTROYED AND MUTILATED CERTIFICATES. If any certificates
for shares in this Company become worn, defaced, or mutilated but are still
substantially intact and recognizable, the directors, upon production and
surrender thereof, shall order the same cancelled and shall issue a new
certificate in lieu of same. The holder of any shares in the Company shall
immediately notify the Company if a certificate therefor shall be lost,
destroyed, or mutilated beyond recognition, and the Board of Directors may, in
its discretion, require the owner of the certificate which has been lost,
destroyed, or mutilated beyond recognition, or his legal surety or sureties as
it may direct, not exceeding double the value of the stock, to indemnify the
Company against any claim that may be made against it on account of the alleged
loss, destruction, or mutilation of any such certificate. The Board of Directors
may, however, in its discretion, refuse to issue any such new certificate except
pursuant to legal proceedings, under the laws of the State of Nevada in such
case made and provided.
SECTION 3. TRANSFERS OF SHARES. Transfers of shares in the Company shall be
made only on the books of the Company by the registered holder thereof, his
legal guardian, executor, or administrator, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the secretary of
the Company or with a transfer agent appointed by the Board of Directors, and on
surrender of the certificate or certificates for such shares. The person in
whose name shares stand on the books of the Company shall, to the full extent
permitted by law, be deemed the owner thereof for all purposes as regards the
Company.
SECTION 4. REGULATIONS. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer, and registration of certificates for shares in
the Company. It may appoint one or more transfer agents or one or more
registrars or both, and may require all certificates for shares to bear the
signature of either or both.
11
<PAGE>
ARTICLE IX
DEPOSITORIES, CONTRACTS AND OTHER INSTRUMENTS
SECTION 1. DEPOSITORIES. The president and any vice-president of the
Company are each authorized to designate depositories for the funds of the
Company deposited in its name and the signatories and conditions with respect
thereto in each case, and from time to time, to change such depositories,
signatories and conditions, with the same force and effect as if each such
depository, the signatories and conditions with respect thereto and changes
therein had been specifically designated or authorized by the Board of Directors
or by the president, or any vice-president of the Company, shall be entitled to
rely upon the certificate of the secretary or any assistant secretary of the
Company setting forth the fact of such designation and of the appointment of the
officers of the Company or of both or of other persons who are to be signatories
with respect to the withdrawal of funds deposited with such depository, or from
time to time the fact of any change in any depository or in the signatories with
respect thereto.
SECTION 2. EXECUTION OF INSTRUMENTS GENERALLY. Except as provided in
Section 1 of this Article IX, all contracts and other instruments requiring
execution by the Company may be executed and delivered by the president or any
vice-president and authority to sign any such contracts or instruments, which
may be general or confined to specific instances, may be conferred by the Board
of Directors upon any other person or persons. Any person having authority to
sign on behalf of the Company may delegate, from time to time, by instrument in
writing, all or any part of such authority to any person or persons if
authorized so to do by the Board of Directors.
12
<PAGE>
CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
The undersigned hereby certifies that he is the duly elected, qualified and
acting Secretary of Advanced Materials Group, Inc., a Nevada corporation, and
that the foregoing Amended and Restated Bylaws, comprising 12 pages, were
approved by the Board of Directors of the corporation on ______________.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the
corporate seal this ____ day of _________, 1999.
------------------------------
J. Douglas Graven, Secretary
<PAGE>
AGREEMENT OF SETTLEMENT AND GENERAL RELEASE
This AGREEMENT OF SETTLEMENT AND GENERAL RELEASE (the "Agreement") is
made and entered into as of October 20, 1998 (the "Effective Date"), by and
between plaintiff and cross-defendant Advanced Materials Group, Inc. ("AMG")
and cross-defendant Condor Utility Products, Inc. ("Condor"), on the one
hand, and defendant and cross-complainant Gary Valiska and his wife, Doris
Valiska, (collectively, the "Valiskas") on the other hand. AMG, Condor and
the Valiskas are sometimes collectively referred to herein as the "Parties."
RECITALS
This Agreement is made with reference to the following facts and
circumstances:
A. On January 7, 1998, AMG filed its Complaint For Breach Of Promissory
Note And Money Lent against Gary Valiska in Los Angeles County Superior
Court, Case No. BC183893. On March 9, 1998, Gary Valiska filed his
Cross-Complaint For Damages And Declaratory Relief. The complaint and
cross-complaint are collectively referred to herein as the "Action."
B. The Parties wish to avoid the expense of litigation and settle all
of their current and ongoing differences concerning the claims the Parties
alleged, or could have alleged, in the Action, and any and all other claims
which may exist, on the following terms.
AGREEMENT
In consideration of the foregoing recitals, the mutual undertakings
contained in this Agreement, and other good, valuable and sufficient
consideration, the Parties agree as follows:
1. DISMISSAL OF THE ACTION. Upon receipt of a fully executed copy of
this Agreement, the Parties shall cause to be filed a fully executed Request
For Dismissal With Prejudice Of Entire Action, dismissing all parties
thereto, in the form attached hereto as Exhibit A. In addition, Gary Valiska
shall cause those claims which he submitted to the Securities and Exchange
Commission, Division of Enforcement (the "SEC") to be withdrawn by sending to
the SEC a letter in the form attached hereto as Exhibit B and performing any
and all other reasonable efforts to ensure that said claims are withdrawn.
1
<PAGE>
2. MUTUAL GENERAL RELEASE.
a. AMG and Condor, jointly and severally, do hereby fully and
forever release the Valiskas, and their partners, employees, attorneys,
agents, successors, representatives, shareholders, parent companies,
subsidiaries, affiliated companies and assigns, jointly and severally
(collectively, the "Valiskas, Et Al."), and do hereby fully and forever
discharge and agree to hold the Valiskas, Et Al. harmless from and against
any and all claims and causes of action, in law or in equity, disputes,
suits, debts, liens, rights, contracts, agreements, acts, promises,
liabilities, obligations, demands, damages, losses, costs, fees (including,
without limitation, those of attorneys) and expenses, of whatsoever kind or
nature, whether known or unknown, suspected or unsuspected, which exist or
may have existed between AMG and Condor or any of them, on the one hand, and
the Valiskas, Et Al. or any of them, on the other hand. This release of
claims includes, without limitation, AMG and Condor's claims for indemnity
for losses incurred to date in connection with the Auten/Aglo Plastics
Litigation(1), breach of the Stock Purchase Agreement between, among others,
AMG and the Valiskas dated October 6, 1993, breach of the Employment
Agreement between Gary Valiska and AMG dated October 6, 1993, breach of the
Employment Agreement between Gary Valiska, AMG and Condor dated February 16,
1995 and breach of the Promissory Note between Gary Valiska and AMG dated
April 5, 1996, but excludes claims, if any, for breach of this Agreement.
b. The Valiskas, jointly and severally, do hereby fully and forever
release AMG and Condor, and their officers, directors, partners, employees,
attorneys, agents, successors, representatives, shareholders, parent
companies, subsidiaries, affiliated companies and assigns, jointly and
severally (collectively, "AMG/Condor, Et Al."), and do hereby fully and
forever discharge and agree to hold AMG/Condor, Et Al. harmless from and
against any and all claims and causes of action, in law or in equity,
disputes, suits, debts, liens, rights, contracts, agreements, acts, promises,
liabilities, obligations, demands, damages, losses, costs, fees (including,
without limitation, those of attorneys) and expenses, of whatsoever kind or
nature, whether known or unknown, suspected or unsuspected, which exist or
may have existed
- ----------
(1) The Auten/Aglo Plastics Litigation refers to VERN AUTEN, ET AL. V.
CONDOR UTILITY PRODUCTS, INC., ET AL., San Joaquin County Superior Court Case
No. 241028; VERN AUTEN, ET AL. V. CONDOR UTILITY PRODUCTS, INC., ET AL., San
Joaquin County Superior Court Case No. 248951; and CONDOR UTILITY PRODUCTS,
INC., ET AL. V. VERN AUTEN, ET AL., United
2
<PAGE>
between the Valiskas or any of them, on the one hand, and AMG/Condor, Et Al.
or any of them, on the other hand. This release of claims includes, without
limitation, the Valiskas' claims for breach of the Stock Purchase Agreement
between, among others, AMG and the Valiskas dated October 6, 1993 and breach
of the Employment Agreement between Gary Valiska, AMG and Condor dated
February 16, 1995, as well as those claims made to the Securities and
Exchange Commission, Division of Enforcement, but excludes claims, if any,
for breach of this Agreement.
3. WAIVER OF CALIFORNIA CIVIL CODE SECTION 1542. The Parties understand
and agree that the mutual releases set forth above extend to all claims of
every nature and kind, whether known or unknown, suspected or unsuspected,
except for actions necessary to enforce the terms or intent of this
Agreement. WITH RESPECT TO SUCH MUTUAL RELEASES, THE PARTIES EXPRESSLY WAIVE
AND RELINQUISH ANY AND ALL RIGHTS UNDER SECTION 1542 OF THE CALIFORNIA CIVIL
CODE, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
4. NO ADMISSION OF LIABILITY. The Parties explicitly acknowledge that
this Agreement represents a settlement of disputed claims, and that by
entering into this Agreement no party admits or acknowledges the existence of
any liability or wrongdoing. Accordingly, neither this Agreement nor any of
its terms shall be offered or received as evidence in any proceeding in any
forum as an admission of liability or wrongdoing on the part of any party
hereto or its agents.
5. THE AUTEN/AGLO PLASTICS LITIGATION. The Parties agree as of the
Effective Date that each of the Parties shall be responsible for their own
ongoing costs and expenses, if any, which they may incur in connection with
the Auten/Aglo Plastics Litigation and for any new and/or resumed state
claims which may arise.
- -------------------------------------------------------------------------------
States District Court, Eastern District of California Case No. CIV-S-94-0863
GEB/PAN.
3
<PAGE>
6. THE VALISKAS' AMG COMMON STOCK. The Parties agree that within a
reasonable time after the Effective Date, AMG and Condor shall exercise their
very best efforts to cause American Stock Transfer Co. to register the
Valiskas' common stock in AMG (approximately 12,158 shares).
7. REPRESENTATION OF NO ASSIGNMENT. The Parties represent and warrant
that no portion of the Action or any claim, right, demand, cause of action or
claim for relief released by this Agreement has been assigned or transferred,
voluntarily, by operation of law, or otherwise, to any other person or
entity. In the event that any claim, demand or suit should be made or
instituted against any person or entity released hereby because of any
purported assignment, subrogation, or transfer, the Parties agree to
indemnify and hold the released person or entity harmless against such claim,
demand or suit and shall pay and satisfy such claim, demand or suit, and
necessary expenses, including but not limited to attorneys' fees and costs,
incurred by reason thereof.
8. NEUTRAL INTERPRETATION. The Parties agree that they have each had
equal opportunity to review and contribute to the language and format of this
Agreement. Therefore, the provisions of this Agreement shall be construed as
to their fair meaning, and not for or against any party on the basis that
such party was the source of the language in question.
9. SEVERABILITY. In the event any provision of this Agreement shall be
held to be void, voidable or unenforceable, the remaining provisions shall
remain in full force and effect.
10. ENTIRE AGREEMENT. This Agreement contains the entire integrated
agreement between the Parties respecting the subject matter of this Agreement
and supersedes all prior understandings and agreements, whether oral or in
writing, between the Parties respecting the subject matter of this Agreement.
There are no representations, agreements, arrangements or understandings,
oral or in writing, between or among the Parties relating to the subject
matter of this Agreement which are not fully expressed in this Agreement. The
terms of this Agreement are intended by the Parties as a final expression of
their agreement with respect to those terms and they may not be contradicted
by evidence of any prior agreement or of any contemporaneous agreement. The
Parties further intend that this Agreement constitute the complete and
exclusive statement of its terms and that no extrinsic evidence
4
<PAGE>
whatsoever may be introduced in any judicial proceeding involving this
Agreement.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which when executed and delivered, whether by facsimile
or otherwise, shall constitute an original, and all of which when executed
shall constitute one and the same instrument.
DATED: October , 1998
--
---------------------------------------
Gary Valiska
DATED: October , 1998
--
---------------------------------------
Doris Valiska
DATED: October , 1998 Advanced Materials Group, Inc.
--
By:
-----------------------------------
Name:
---------------------------------
Its:
----------------------------------
DATED: October , 1998 Condor Utility Products, Inc.
--
By:
-----------------------------------
Name:
---------------------------------
Its:
----------------------------------
5
<PAGE>
EXHIBIT A
<PAGE>
<TABLE>
<S><C>
- ----------------------------------------------------------------------------------------------------------------------------
ATTORNEY OR PARTY WITHOUT ATTORNEY (NAME AND ADDRESS): TELEPHONE NO.: FOR COURT USE ONLY
Kurt A. Ressler (SBN 178351) (949) 660-1600
GRANT & LAUBSCHER, LLP
2030 Main Street, Suite 1600
Irvine, CA 92614
ATTORNEY FOR (NAME): Advanced Materials Group, Inc.
and Condor Utility Products, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Insert name of court and name of judicial district and branch court, if any:
Superior Court of the State of California for the County of Los Angeles
- ----------------------------------------------------------------------------------------------------------------------------
PLAINTIFF/PETITIONER: Advanced Materials Group, Inc.
DEFENDANT/RESPONDENT: Gary Valiska, et al.
- ----------------------------------------------------------------------------------------------------------------------------
REQUEST FOR DISMISSAL CASE NUMBER: BC183893
/ / PERSONAL INJURY, PROPERTY DAMAGE, OR WRONGFUL DEATH
/ / MOTOR VEHICLE / / OTHER
/ / FAMILY LAW
/ / EMINENT DOMAIN
/X/ OTHER (SPECIFY): Employment/Contract
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
-- A CONFORMED COPY WILL NOT BE RETURNED BY THE CLERK UNLESS A METHOD OF RETURN IS PROVIDED WITH THE DOCUMENT. --
- ----------------------------------------------------------------------------------------------------------------------------
1. TO THE CLERK: Please dismiss this action as follows:
a. (1) /X/ With prejudice (2) / / Without prejudice
b. (1) / / Complaint (2) / / Petition
(3) / / Cross-complaint filed by (NAME): on (DATE):
(4) / / Cross-complaint filed by (NAME): on (DATE):
(5) /X/ Entire action of all parties and all causes of action
(6) / / Other (SPECIFY):*
Date:
Kurt A. Ressler >
- --------------------------------------------------------------- ---------------------------------------------------------
(TYPE OR PRINT NAME OF /X/ ATTORNEY / / PARTY WITHOUT ATTORNEY) (SIGNATURE)
*If dismissal requested is of specified parties only, of Attorney or party without attorney for: Advanced
specified causes of action only, or of specified Materials Group, Inc. and Condor Utility Products, Inc.
cross-complaints only, so state and identify the parties, /X/ Plaintiff/Petitioner / / Defendant/Respondent
causes of action, or cross-complaints to be dismissed. / / Cross-complainant
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
2. TO THE CLERK: Consent to the above dismissal is hereby given.**
Date:
Arthur A. Small, II >
- --------------------------------------------------------------- ---------------------------------------------------------
(TYPE OR PRINT NAME OF /X/ ATTORNEY / / PARTY WITHOUT ATTORNEY) (SIGNATURE)
**If a cross-complaint--or Response (Family Law) seeking Attorney or party without attorney for: Gary Valiska
affirmative relief--is on file, the attorney for the
cross-complainant (respondent) must sign this consent if / / Plaintiff/Petitioner /X/ Defendant/Respondent
required by Code of Civil Procedure section 581(i) or (j). /X/ Cross-complainant
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(TO BE COMPLETED BY CLERK)
3. / / Dismissal entered as requested on (DATE):
4. / / Dismissal entered on (DATE): as to only (NAME):
5. / / Dismissal NOT ENTERED as requested for the following reasons (SPECIFY):
6. / / a. Attorney or party without attorney notified on (DATE):
b. Attorney or party without attorney not notified. Filing party failed to provide.
/ / a copy to conform / / means to return conformed copy
Date: Clerk, by , Deputy
------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Form Adopted by the REQUEST FOR DISMISSAL Code of Civil Procedure, Section 581 et seq.
Judicial Council of California Cal. Rules of Court, rules 383, 1233
982(a)(5) [Rev. January 1, 1997]
</TABLE>
<PAGE>
EXHIBIT B
<PAGE>
GARY S. VALISKA
2803 Richland Court
Stockton, California 95207
Tel: 209-477-5932
Securities and Exchange Commission
Division of Enforcement
RE: ADVANCED MATERIALS GROUP, INC., A NEVADA CORPORATION, AND
CONDOR UTILITY PRODUCTS, INC., A CALIFORNIA CORPORATION
To whom it may concern:
On or about , I submitted to the Securities and Exchange
Commission, Division of Enforcement (the "SEC") a letter setting forth
claims, complaints, etc., I believed I had against Advanced Materials Group,
Inc., a Nevada corporation, ("AMG") and Condor Utility Products, Inc., a
California corporation ("Condor"). Upon further investigation and analysis on
my part, I do not wish to pursue these claims any further. Indeed, I have now
settled all of my disputes with AMG and Condor and now desire that my claims
be withdrawn. Accordingly, please withdraw any and all claims, complaints,
etc. which I have asserted against AMG and Condor. In addition, please
provide me with written confirmation that the SEC has withdrawn such claims.
Thank you in advance for your attention to this matter. Should you have
any questions or comments, please feel free to call me at 209-477-5932.
Very truly yours,
Gary S. Valiska
6
<PAGE>
ADVANCED MATERIALS GROUP, INC.
2532 DUPONT DRIVE
IRVINE, CALIFORNIA 92612-1254
- -------------------------------------------------------------------------------
Phone: (949) 474-7368 Fax: (949) 474-7732
- -------------------------------------------------------------------------------
TO: Board of Directors of Advanced Materials Group, Inc.: Steve Scott;
Price Paschall; Alan Meltzer; Michael Ledeen; Maurice DeWald.
FROM: Timothy R. Busch, Chairman of the Board
DATE: September 11, 1998
RE: OUR FILE NO. 2446-B-22.2
- -------------------------------------------------------------------------------
Enclosed is a signed Employment Contract between Steve Scott and the
Company, in accordance with the past Resolution adopted by the Board of
Directors.
This will be subject to ratification at the next Board meeting. Please
review it and if you have any comments contact Steve Scott directly.
TRB/os
Enclosure: Copy of letter to Steve Scott dated September 10, 1998
Copy of Executed Employment Agreement
Cc: Leonard McGill (w/encl.)
Douglas Graven (w/encl.)
icc: TRB; OCS.
Tckl: TRB:09/18/98
2446B/BD09098OS
<PAGE>
ADVANCED MATERIALS GROUP, INC.
2532 DUPONT DRIVE
IRVINE, CALIFORNIA 92612-1254
- -------------------------------------------------------------------------------
Phone: (949) 474-7368 Fax: (949) 474-7732
- -------------------------------------------------------------------------------
September 11, 1998
PERSONAL & CONFIDENTIAL
- -----------------------
Steve F. Scott
Advanced Materials Group, Inc.
20211 South Susana Road
Rancho Dominguez, CA 90221
Re: OUR FILE NO. 2446-B-22.2
Dear Steve:
Enclosed is a fully executed Employment Contract for your filing with the
Company and your copy.
Copies of this are being forwarded to the Board of Directors under separate
cover.
I reviewed the contract and based on my review, it appears to coincide with
the Board Resolution. However, at the next monthly Board meeting we will have
the Board ratify the Agreement in the full text that has been adopted, and we
will authorize the Chairman to execute the same.
Very truly yours,
/s/ Timothy R. Busch
------------------------------
TIMOTHY R. BUSCH
Chairman of the Board
Advanced Materials Group, Inc.
(949) 474-7368 Ext 100
email: [email protected]
TRB/os
Enclosure: Employment Agreement
cc: Board of Directors (w/encl.)
icc: TRB; OCS.
Tckl: TRB:09/18/98
2446B/SCO09098OS
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered July 1, 1998 by and
between ADVANCED MATERIALS GROUP, INC corporation (the "Company") and STEVE F.
SCOTT ("Executive").
WITNESSETH:
WHEREAS, the Company and Executive desire to enter into this Agreement to
assure the Company of the continuing and exclusive service of Executive and to
set forth the terms and conditions of Executive's employment with the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties agree as follows:
1. TERM. The Company agrees to employ Executive and Executive hereby
accepts such employment, in accordance with the terms of this Agreement,
commencing July 1, 1998 and ending June 30, 2004, unless this Agreement is
earlier terminated as provided herein.
2. SERVICES AND EXCLUSIVITY OF SERVICES. So long as this Agreement shall
continue in effect, Executive shall devote Executive's full business time,
energy and ability to the business, affairs and interests of the Company and
matters related thereto, shall use Executive's best efforts and abilities to
promote the Company's interests and shall perform the services contemplated by
this Agreement in accordance with policies established by and under the
direction of the Board of Directors of the Company (the "Board").
Without the prior express written authorization of the Board, Executive
shall not, directly or indirectly, during the term of this Agreement: (a) render
services to any other person or firm for compensation or (b) engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner, officer, director, employee or significant investor of or in any
other entity. (An investment of greater than 5% of the outstanding capital or
equity securities of an entity shall be deemed significant for these purposes.)
However, the expenditure of reasonable amounts of time for educational,
charitable or investment activities shall not be deemed a breach of this
Agreement if those activities do not materially interfere with the services
required under this Agreement. Furthermore, this Agreement shall not be
interpreted to prohibit Executive from making passive personal investments or
conducting private
<PAGE>
business affairs if those activities do not materially interfere with the
services required under this Agreement.
Executive represents to the Company that Executive has no other outstanding
professional commitments inconsistent with any of the terms of this Agreement or
the services to be rendered hereunder.
3. DUTIES AND RESPONSIBILITIES. Executive shall serve as President and
Chief Executive Officer of the Company for the duration of this Agreement. In
the performance of executive duties, Executive shall report directly to the
Board of Directors of the Company and shall be subject to the direction of the
Board and to such limits on Executive's authority as the Board may from time to
time impose.
Executive agrees to observe and comply with the rules and regulations of
the Company as adopted by the Board respecting the performance of Executive's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing. The Company agrees that the duties which may be assigned
to Executive shall be usual and customary duties of the office(s) of President
and Chief Executive Officer and shall not be inconsistent with the provisions of
the charter documents of the Company or applicable law. Executive shall have
such corporate power and authority as shall reasonably be required to enable
Executive to perform the duties required in any office that may be held.
4. COMPENSATION.
(a) BASE COMPENSATION.
During the term of this Agreement, the Company agrees to pay Executive a
base salary at the rate of $201,400 per year until December 1, 1998, and
thereafter shall pay Executive a base salary at the rate of $225,000 per year,
payable in accordance with the Company practices in effect from time to time the
("Base Salary"). Base Salary will be adjusted annually, to the median base
salary based on market conditions and current size of the Company, measured by
revenues, earnings, or market capitalization, or any other pertinent factors in
an annual independent Compensation Survey such as the one conducted by Personnel
Systems in April, 1998 for the Compensation Committee.
(b) ADDITIONAL BENEFITS
Executive shall also be entitled to all rights and benefits for which
Executive is otherwise eligible under any bonus plan, incentive, participation
or extra
<PAGE>
compensation plan, pension plan, profit-sharing plan, life, medical, dental,
disability, or insurance plan or policy or other plan or benefit that the
Company may provide for Executive or (provided Executive is eligible to
participate therein) for senior officers of the Company generally, as from time
to time in effect, during the term of this Agreement (collectively, "Additional
Benefits"). Until further notice during the term hereof, Executive will continue
to receive the Additional Benefits he now receives, and in no event will his
Additional Benefits be reduced below the current level.
(c) PERIODIC REVIEW.
The Board shall, prior to the end of each fiscal year, consider whether in
its reasonable discretion to award a bonus to Executive based on Executive's
performance, and the Company's performance, during such fiscal year.
(d) PERQUISITES.
Executive shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices as in effect generally with respect to other
senior executives of the Company.
During the term of this agreement, the Company shall provide Executive with
a vehicle allowance in the amount of at least $860 per month in accordance with
the Company's automobile policy as from time to time in effect.
For business travel, Executive shall be authorized, and is encouraged, to fly
business class when available; otherwise, Executive shall fly coach class.
5. TERMINATION. This Agreement and all obligations hereunder (except the
obligations contained in Sections 8, 9, 10, 11, 12, 13 and 14 (subject to the
last sentence thereof) (Confidential Information, Inventions and Patents,
Non-Competition, Non-Solicitation of Customers, Noninterference with Executives
and Assistance in Patent Applications, Indemnity) which shall survive any
termination hereunder) shall terminate upon the earliest to occur of any of the
following:
(a) EXPIRATION OF TERM. The expiration of the term provided for in Section
1 or the voluntary termination by Executive or retirement from the Company in
accordance with the normal retirement policies of the Company.
(b) DEATH OR DISABILITY OF EXECUTIVE. For the purposes of this Agreement,
disability shall mean the absence of Executive performing Executive's duties
with the Company on a fulltime basis for a period of three consecutive months,
or for
3
<PAGE>
shorter periods aggregating ninety or more business days in any twelve (12)
month period, as a result of incapacity due to mental or physical illness
which is determined to be total AND PERMANENT by a physician selected by the
Company or its insurers and acceptable to Executive or Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably). If Executive shall become totally disabled as described above,
Executive's employment may be terminated by written notice from the Company
to Executive. If Executive's employment is terminated by reason of
Executive's death or disability, this Agreement shall terminate without
farther obligations to Executive (or Executive's heirs or legal
representatives) under this Agreement, other than for (1) payment of the sum
of (A) fifty percent (50%) of Executive's annual Base Salary, payable
periodically as provided herein through June 30, 2004, (B) any compensation
previously deferred by Executive (together with any accrued interest or
earnings thereon), (C) any accrued vacation pay, in each case to the extent
not theretofore paid and (D) a pro rata portion of any bonus to which
Executive would have been entitled pursuant to Section 4(b) (the sum of the
amounts described in clauses (A), (B) (C) and (D) shall be hereinafter
referred to as the "Accrued Obligations"), which (except as provided in
Section 5(b)(A)) shall be paid to Executive or Executive's estate or
beneficiary, as applicable, in a lump sum in cash within 30 days after the
date of termination or any earlier time required by applicable law, and upon
the recipient thereof signing a release in customary form and mutually
satisfactory to the parties thereto; and (2) payment to Executive or
Executive's estate or beneficiary, as applicable, of any amount due pursuant
to the terms of any applicable welfare benefit plan (provided however that
the amount of any insurance benefits or welfare benefit plans actually paid
to Executive and with respect to which premiums were paid by the Company
shall be deducted from the amount of the Accrued Obligations).
(c) FOR CAUSE.
The Company may terminate Executive's employment and all of Executive's
rights to receive Base Salary and any Additional Benefits hereunder for cause.
For purposes of this Agreement, the term "cause" shall be defined as any of the
following:
(i) Executive's material breach of any of the duties and
responsibilities under this Agreement (other than as a result of incapacity
due to Executive's disability);
(ii) Executive's conviction by, or entry of a plea of guilty or nolo
contenders in, a court of competent jurisdiction for a felony, or any crime
which materially adversely affects the Company and/or its reputation in the
community
4
<PAGE>
or which involves moral turpitude or is punishable by imprisonment in the
jurisdiction involved;
(iii) Executive's commission of an act of fraud upon the Company;
(iv) Executive's willful failure or refusal to perform Executive's
duties or responsibilities under this Agreement or Executive's material
violation of any duty of loyalty to the Company or a breach of Executive's
fiduciary duty.
Notwithstanding the foregoing, Executive shall not be terminated for cause
pursuant to clauses (i) through (iv) of this Section 5(c) unless and until
Executive has received notice of a proposed termination for cause and Executive
has had a reasonable opportunity to cure any curable breach of this Agreement
and an opportunity to be heard before at least a majority of members of the
Board. Executive shall be deemed to have had such an opportunity if given
written or telephonic notice at least 72 hours in advance of a meeting if
scheduled in California or five (5) days in advance if such meeting is scheduled
outside California.
(d) WITHOUT CAUSE.
Notwithstanding any other provision of this Section 5, and subject to
Section 7, the Board shall have the right to terminate Executive's employment
with the Company without cause at any time, provided however that within fifteen
(15) days following any such termination, other than as expressly provided in
Section 5(a), (b) or (c) or Section 7 herein, the Company shall pay to Executive
a lump sum in cash equal to the aggregate of (i) two (2) times his most recent
Annual Base Salary plus (ii) the aggregate annual cash value of his automobile
allowance and health insurance. In circumstances in which Section 7 applies,
this Section 5(d) shall not apply.
(e) EXCLUSIVE REMEDY. Executive agrees that the payments expressly
provided and contemplated by this Agreement shall constitute the sole and
exclusive obligation of the Company in respect of Executive's employment with
and relationship to the Company and that the payment thereof shall be the sole
and exclusive remedy for any such termination of Executive's employment.
6. BUSINESS EXPENSES.
During the term of this Agreement, to the extent that such expenditures
satisfy the criteria under the Internal Revenue Code for deductibility by the
Company (whether or not fully deductible by the Company) for federal income tax
5
<PAGE>
purposes as ordinary and necessary business expenses, the Company shall
reimburse Executive promptly for reasonable business expenditures, including
travel, entertainment, parking, business meetings, and professional dues but
not the costs of (or dues associated with) maintaining club memberships, made
and substantiated in accordance with policies, practices and procedures
established from time to time by the Company generally with respect to other
senior officers and incurred in the pursuit and furtherance of the Company's
business and good will.
7. CHANGE IN CONTROL.
(a) If there should occur a "change in control" of the Company (or any
successor), as defined below, and Executive is terminated during the term hereof
following such Change of Control for any reason other than as provided in
Sections 5(a), (b) or (c), then the Company, subject to Section 5 (c), shall, no
later than fifteen (15) days after the date of termination, pay to Executive a
lump sum severance payment equal to (i) five (5) times the aggregate amount of
his most recent annual Base Salary, plus (ii) the amount of the cash value of
his automobile allowance and health insurance for the remainder of the term
hereof.
(b) For purposes of the foregoing provisions, a "change of control" means,
and shall be deemed to have taken place, if, (i) any person or entity or group
of affiliated persons or entities, including a group which is deemed a "person"
by Section I 3(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), after the date hereof first acquires in one or more
transactions, at least one of which is after the date of this Agreement,
ownership of 25% or more of the outstanding shares of stock then entitled to
vote in the election of directors of the Company, and (ii) as a result of, or in
connection with, any such acquisition or any related proxy contest, cash tender
or exchange offer, merger or other business combination, sale of all or
substantially all of the assets of the Company or any combination of the
foregoing transactions (other than a transaction unanimously approved by the
members of the Board voting thereon), hereinafter referred to as a
"Transaction", the persons who were directors of the Company immediately before
the acquisition shall cease to constitute three-fourths of the membership of the
Board or any successor to the Company during the period commencing with the
consummation of the Transaction and ending on the first to occur of the first
anniversary of such date or the conclusion of the next meeting of shareholders
to elect directors, except to the extent that any new directors during such
period were elected or nominated by at least three-fourths of such persons (or
new directors who were so nominated or elected). "OWNERSHIP means beneficial or
record ownership, directly or indirectly, other than (i) by a person owning such
shares merely of record (such as a member of a securities exchange,
6
<PAGE>
a nominee, or a securities depositary system), (ii) by a person as a bona
fide pledgee of shares prior to a default and determination to exercise
powers as an owner of the shares, (iii) by a person who is not required to
file statements on Schedule 13D by virtue of Rule 13d-1(b) of the Securities
and Exchange Commission under the Exchange Act, or (iv) by a person who owns
or holds shares as an underwriter acquired in connection with an underwritten
offering pending and for purposes of their public resale or planned private
placement in increments of less than such 25% amount, or by specified
controlling persons as of the date hereof or their respective successors.
Without limitation, the right to acquire ownership shall not of itself
constitute ownership of shares.
8. CONFIDENTIAL INFORMATION.
Executive acknowledges that the nature of Executive's engagement by the
Company is such that Executive shall have access to information of a
confidential and/or trade secret nature which has great value to the Company
and which constitutes a substantial basis and foundation upon which the
business of the Company is based. Such information includes financial,
manufacturing and marketing data, techniques, processes, formulas,
developmental or experimental work, work in process, methods, trade secrets
(including, without limitation, customer lists and lists of customer
sources), or any other secret or confidential information relating to the
products, services, customers, sales or business affairs of the Company or
its Affiliates (the "Confidential Information"). Executive shall keep all
such Confidential Information in confidence during the term of this Agreement
and at any time thereafter and shall not disclose any of such Confidential
Information to any other person, except to the extent such disclosure is (i)
necessary to the performance of this Agreement and in furtherance of the
Company's best interests, (ii) required by applicable law, (iii) lawfully
obtainable from other sources, or (iv) authorized in writing by the Company.
Upon termination of Executive's employment with the Company, Executive shall
deliver to the Company all documents, records, notebooks, work papers, and
all similar material containing any of the foregoing information, whether
prepared by Executive, the Company or anyone else.
9. INVENTIONS AND PATENTS.
Except as may be limited by Section 2870 of the California Labor Code, all
inventions, designs, improvements, patents, copyrights and discoveries conceived
by Executive during the term of this Agreement which are useful in or directly
or indirectly related to the business of the Company or to any experimental work
carried on by the Company, shall be the property of the Company. Executive will
7
<PAGE>
promptly and fully disclose to the Company all such inventions, designs,
improvements, patents, copyrights and discoveries (whether developed
individually or with other persons) and shall take all steps necessary and
reasonably required to assure the Company's ownership thereof and to assist
the Company in protecting or defending the Company's proprietary rights
therein.
Executive acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Executive) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
10. NON-COMPETITION.
In order to protect the Confidential Information, Executive agrees that
during the term of Executive's employment, and for a period of two year(s)
thereafter, Executive shall not directly, or indirectly, whether as an owner,
partner, shareholder, agent, employee, creditor, or otherwise, promote,
participate or engage in any activity or other business competitive with the
Company's business or the business of any present Affiliate of the Company in
any of the counties in California or in any state in the United States, or in
any other country in the world in which the Company currently operates if such
activity or other business involves any use by the Executive of any of the
Confidential Information.
11. NON-SOLICITATION OF CUSTOMERS.
Executive agrees that for a period of two (2) year(s) after the
termination of employment with the Company, Executive will not, on behalf of
Executive or on behalf of any other individual, association or entity, call
on any of the customers of the Company or any Affiliate of the Company for
the purpose of soliciting or inducing any of such customers to acquire (or
providing to any of such customers) any product or service provided by the
Company or any Affiliate of the Company, nor will Executive in any way,
directly or indirectly, as agent or otherwise, in any other manner solicit,
influence or encourage such customers to take away or to divert or direct
their business to Executive or any other person or entity by or with which
Executive is employed, associated, affiliated or otherwise related.
12. NONINTERFERENCE WITH EXECUTIVES.
In order to protect the Confidential Information, Executive agrees that
during the term hereof and for a period of two year(s) thereafter, Executive
will
8
<PAGE>
not, directly or indirectly, induce or entice any Executive of the Company to
leave such employment or cause anyone else to leave such employment.
13. ASSISTANCE IN PATENT APPLICATIONS.
Executive agrees to assist the Company in obtaining United States or
foreign letters patent and copyright registrations covering inventions assigned
hereunder to the Company and that Executive's obligation to assist the Company
shall continue beyond the termination of Executive's employment but the Company
shall compensate Executive at a reasonable rate for time actually spent by
Executive at the Company's request with respect to such assistance. If the
Company is unable because of Executive's mental or physical incapacity or for
any other reason to secure Executive's signature to apply for or to pursue any
application for any United States or foreign letters patent or copyright
registrations covering inventions assigned to the Company, then Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as Executive's agent and attorney-in-fact to act for and in
Executive's behalf and stead to execute and file any such applications and to do
all other lawfully permitted acts to further the prosecution and issuance of
letters patent or copyright registrations thereon with the same legal force and
effect as if executed by Executive. Executive hereby waives and quitclaims to
the Company any and all claims, of any nature whatsoever, which Executive now or
hereafter may have for infringement of any patent or copyright resulting from
any such application for letters patent or copyright registrations assigned
hereunder to the Company. Executive will further assist the Company in every way
to enforce any copyrights or patents obtained including, without limitation,
testifying in any suit or proceeding involving any of the copyrights or patents
or executing any documents deemed necessary by the Company, all without further
consideration but at the expense of the Company. If Executive is called upon to
render such assistance after the termination of Executive's employment, then
Executive shall be entitled to a fair and reasonable per them fee in addition to
reimbursement of any expenses incurred at the request of the Company.
14. INDEMNITY.
To the fullest extent permitted by applicable law and the bylaws of the
Company, as from time to time in effect, the Company shall indemnify Executive
and hold Executive harmless for any acts or decisions made in good faith while
performing services for the Company, and the Company shall use its best efforts
to obtain or maintain coverage for Executive under any liability insurance
policy or policies now in force or hereafter obtained during the term of this
Agreement that cover other officers of the Company having comparable or lesser
status and
9
<PAGE>
responsibility. To the same extent, the Company will pay and, subject to any
legal limitations, advance all expenses, including reasonable attorneys' fees
and costs of court approved settlements, actually and necessarily incurred by
Executive in connection with the defense of any action, suit or proceeding
and in connection with any appeal thereon, which has been brought against
Executive by reason of Executive's service as an officer or agent of the
Company or of any Affiliate of the Company. Executive's right to indemnity
shall survive any termination of this Agreement, save as to any matter which
resulted in Executive's being terminated for cause hereunder.
15. REMEDIES.
The parties hereto agree that the services to be rendered by Executive
pursuant to this Agreement, and the rights and privileges granted to the Company
pursuant to this Agreement, are of a special, unique, extraordinary and
intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Executive of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Executive hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Executive. This Section 15 shall not be construed as a waiver of
any other rights or remedies which the Company may have for damages or
otherwise.
16. SEVERABILITY.
If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, to achieve the
intent of the parties to the extent possible. In any event, all other provisions
of this Agreement shall be deemed valid and enforceable to the extent possible.
17. SUCCESSION.
This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement, by operation of law or
otherwise. The obligations and duties of Executive hereunder are personal and
otherwise not assignable. Executive's obligations and representations under this
10
<PAGE>
Agreement will survive the termination of Executive's employment, regardless
of the manner of such termination.
18. NOTICES.
Any notice or other communication provided for in this Agreement shall be
in writing and sent if to the Company to its principal office at:
Advanced Materials Group, Inc.
20211 5. Susana Road
Rancho Dominguez, CA 90221
Attention: Chairman of the Board
or at such other address as the Company may from time to time in writing
designate, and if to Executive at such address as Executive may from time to
time in writing designate. Each such notice or other communication shall be
effective (i) if given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 18, (ii) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when actually delivered at such address.
19. ENTIRE AGREEMENT.
This Agreement contains the entire agreement of the parties relating to the
subject matter hereof and supersedes any prior agreements, undertakings,
commitments and practices relating to Executive's employment by the Company,
including without limitation the agreement dated May 2,1997.
20. AMENDMENTS.
No amendment or modification of the terms of this Agreement shall be valid
unless made in writing and duly executed by both parties.
21. WAIVER.
No failure on the part of any party to exercise or delay in exercising any
right hereunder shall be deemed a waiver thereof of any other right, nor shall
any single or partial exercise preclude any farther or other exercise of such
right or any other right.
22. GOVERNING LAW.
11
<PAGE>
This Agreement, and the legal relations between the parties, shall be
governed by and construed in accordance with the laws of the State of
California without regard to conflicts of law doctrines and any court action
arising out of this Agreement shall be brought in any court of competent
jurisdiction within the State of California, County of Los Angeles.
23. ATTORNEYS' FEES.
If any litigation shall occur between Executive and the Company which
litigation arises out of or as a result of this Agreement or the acts of the
parties hereto pursuant to this Agreement, or which seeks an interpretation of
this Agreement, the prevailing party shall be entitled to recover all costs and
expenses of such litigation, including reasonable attorneys' fees and costs.
24. WITHHOLDING.
All compensation payable hereunder, including salary and other benefits
shall be subject to applicable taxes, withholding and other required, normal or
elected employee deductions.
25. COUNTERPARTS.
This Agreement and any amendment hereto may be executed in one or more
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.
26. HEADINGS.
Section and other headings contained in this Agreement are for convenience
of reference only and shall not affect in any way the meaning or interpretation
of this Agreement.
27. REPRESENTATION BY COUNSEL: INTERPRETATION.
The Company and Executive each acknowledge that each party to this
Agreement has been represented by counsel in connection with this Agreement and
the matters contemplated by this Agreement. Accordingly, any rule of law, or any
legal decision that would require interpretation of any claimed ambiguities in
this Agreement against the party that drafted it has no application and is
12
<PAGE>
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY
Advanced Materials Group, Inc.
/s/ Timothy R. Busch
---------------------------------
By: Timothy R. Busch
Its: Chairman
EXECUTIVE
/s/ Steve F. Scott
---------------------------------
Steve F. Scott
935 Third Street
Hermosa Beach, CA 90254
13
<PAGE>
Paschall and Company ("PASCO") has been retained by Advanced Materials
Group, Inc. ("AMG" or the "Company") to provide various corporate finance
services to the Company. These services will include the identification of
and successful acquisition of target companies ("Target") meeting the
criteria of AMG whether introduced by PASCO or other sources during the
term of this engagement. Services may also include identifying financing
for growth or acquisition purposes.
This Agreement shall become binding upon the execution hereof by PASCO and
AMG. The term of this Agreement shall extend for a minimum of 24 months.
The contract shall be renewed with the mutual consent of AMG and PASCO for
twelve month periods.
I. SERVICES
PASCO agrees to coordinate and initiate all discussions with targets and as
well contact all appropriate transaction sources that might be able to
assist in finding an appropriate Target.
II. COMPENSATION FOR SERVICES
In consideration for the services rendered, AMG shall pay PASCO a monthly
retainer due on the first of each month. The retainer shall be $10,000 for
the first month and for each of the next 23 months, a monthly retainer of
$4,000.
AMG agrees to reimburse PASCO monthly for all reasonable out-of-pocket
expenses incurred in carrying out the terms of this Agreement, including
travel, lodging, meals, telephone, facsimile, courier, printing charges,
data acquisition and mailing charges. These out-of-pocket expenses will be
payable upon invoicing by PASCO on a monthly basis.
<PAGE>
In addition to the retainer, PASCO will receive a 10 year option to purchase
50,000 AMG shares at a market price at the close of today. In addition, AMG
shall revise the previous option agreement earned for past acquisition
services to extend it for 10 years from the date of signing. The option price
shall be set as of the close of business 3/31/97.
A. If an acquisition of a Target is completed during the course of this
agreement or within one (1) year following the termination of this Agreement in
which AMG acquires the stock or assets of the Target, PASCO shall be compensated
based on the following schedule:
PASCO will earn options to purchase the following number of shares of AMG stock
at the price of the day the transaction closes.
1. Options in the amount of 75,000 shares shall be earned if total
consideration for the Target is $10.0 million or less,
2. Additional options will be issued at a pro-rata rate of 10,000 shares
for each additional $1.0 million of purchase price above $10.0
million.
For the purposes of this agreement consideration for stock shall be defined as
the cash, debt instruments and stock transferred to the shareholders in exchange
for their ownership in Target plus any long term debt assumed. Consideration for
assets shall be defined as cash, debt and stock instruments transferred for
selected assets and liabilities. In the event some portion of the consideration
is contingent payable based on future events, that portion of the fee shall be
payable at that time.
B. In the event of an acquisition PASCO shall have the right of first refusal as
placement agent for subordinated debt financing (non-bank) if appropriate.
III. DISCLOSURE
All non-public information provided by the AMG to Target(s) will be considered
as confidential information and shall be maintained as such by PASCO, except as
required by law.
IV. ENTIRE AGREEMENT, ETC.
This Agreement sets forth the entire understanding of the parties relating to
the subject matter hereof and supersedes and cancels any prior communications,
understandings, and agreements between the parties. This Agreement cannot be
modified or changed, nor can any of its provisions be waived, except by written
agreement signed by all parties hereto. Attached to this agreement is an
indemnification agreement that will survive this agreement.
<PAGE>
V. ACCEPTANCE
Please confirm that the foregoing is in accordance with your understanding by
signing upon behalf of the Company and returning an executed copy of this
Agreement.
Sincerely, ACCEPTED AND AGREED TO:
ADVANCED MATERIALS GROUP, INC.
PASCHALL and COMPANY
By: /s/ Steve Scott
/s/ N. Price Paschall -------------------------------
- ----------------------
N. Price Paschall
Managing Director Title: PRESIDENT/CEO
----------------------------
Date: APRIL 28, 1997
----------------------------
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State of incorporation
Subsidiary or area of organization
- ---------- -----------------------
<S> <C>
Advanced Materials, Inc. California
Condor Utility Products, Inc. California
AM Limited Ireland
AM Foreign Sales Corp. ("FSC") Singapore
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 528
<SECURITIES> 0
<RECEIVABLES> 5,188
<ALLOWANCES> 100
<INVENTORY> 2,543
<CURRENT-ASSETS> 9,103
<PP&E> 5,294
<DEPRECIATION> 2,902
<TOTAL-ASSETS> 12,682
<CURRENT-LIABILITIES> 7,048
<BONDS> 405
0
0
<COMMON> 9
<OTHER-SE> 4,108
<TOTAL-LIABILITY-AND-EQUITY> 12,682
<SALES> 28,916
<TOTAL-REVENUES> 28,916
<CGS> 22,513
<TOTAL-COSTS> 22,513
<OTHER-EXPENSES> 6,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 298
<INCOME-PRETAX> (166)
<INCOME-TAX> 538
<INCOME-CONTINUING> (704)
<DISCONTINUED> (1,627)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,331)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
