SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-K

 

(Mark One)

 

ý

 

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 

 

For the fiscal year ended November 30, 2002.

 

 

 

o

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 

 

For the transition period from          to          

 

Commission File No. 0-16401

 

ADVANCED MATERIALS GROUP, INC.

(Exact name of registrant as specified in charter)

 

Nevada

 

33-0215295

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

20211 S. Susana Road, Rancho Dominguez, California

 

90221

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

 

There were 8,671,272 shares of the registrant’s voting common stock with a par value of $0.001 outstanding at February 21, 2003. The aggregate market value of the shares of voting common stock held by non-affiliates of the registrant on May 31, 2002 was $1,407,333.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 



 

PART I

Item 1.

Business

 

 

Item 2.

Properties

 

 

Item 3.

Legal Proceedings

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

 

 

Item 6.

Selected Financial Data

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 8.

Financial Statements and Supplementary Data

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

PART III

 

 

Item 10.

Directors and Executive Officers of the Registrant

 

 

Item 11.

Executive Compensation

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

Item 13.

Certain Relationships and Related Transactions

 

 

Item 14.

Controls and Procedures

 

 

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

Index to Financial Statements and Financial Statement Schedule

 

 

 

Index to Exhibits

 

 

 

Signatures

 

 

 

Certifications

 

 

 

Exhibits Filed with this Report

 

 



 

PART I

 

Item 1. Business.

 

General

 

Advanced Materials Group, Inc. (the “Company” or “AMG”), 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 49 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.

 

Business Strategy

 

The Company is 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 and is continuously looking for new materials to work with.

 

The Company’s strategy has been to penetrate foreign marketplaces by establishing fabrication plants in such areas as Singapore and Ireland. Plants located in Ireland and Singapore began production in fiscal 1998. The Ireland facility operates as AM Ltd., a wholly owned subsidiary of Advanced Materials Group, Inc. The Company formed AM FSC, a wholly-owned subsidiary of AM to enter into a strategic manufacturing agreement in Singapore. In 1998, AM FSC entered into a ten-year agreement with Foamex Asia. The terms of the agreement call for AM FSC to provide certain production equipment and technology to Foamex Asia. Foamex Asia in turn provides its manufacturing facilities and workforce to fabricate foam products at their Singapore facility. The 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 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, and foam/fabric composites for cushions and padding in helmets, soft luggage and other consumer products. In addition, private label

 

1



 

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. AMG typically provides no warranty for its products other than compliance with specifications at the time of delivery.

 

All of the products produced by AMG 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’s corporate headquarters and fabrication facility is located in Rancho Dominguez, California.  This facility is approximately 56,000 square feet and services a region consisting of the United States and parts of the Pacific Rim area.  A substantial amount of the manufacturing equipment has been designed and constructed by AM.

 

AM Ltd. leases approximately 37,500 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 FSC has a strategic manufacturing agreement in Singapore with Foamex Asia.  The terms of the agreement call for AM FSC to lease production equipment and provide certain technology to Foamex Asia. Foamex Asia in turn provides its manufacturing facilities and workforce to fabricate foam products at their Singapore facility.  See Note 1 of Notes to Consolidated Financial Statements.

 

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 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 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 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 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  produces a variety of products such as electrosurgical pads and printer components 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.

 

2



 

AM manufactures its products for its industrial customers pursuant to customer purchase orders, most of which provide for multiple shipping release dates. This system enables AM to plan raw material purchases and production scheduling. For its largest accounts, AM produces a two to four-week supply of products and stock them for quick delivery.

 

Quality Control

 

AMG is ISO 9002 certified and QS 9000 certified at its Rancho Dominguez facility. It also maintains systems and procedures that meet customer quality specifications and has successfully completed qualification surveys conducted by Fortune 500 OEM manufacturers. AMG maintains procedures for conducting quality compliance surveys of its major suppliers and has specific procedures in place for receiving inspection, source inspection, process inspection and control, instrument calibration standards, records maintenance, training and internal quality audits. The Company has implemented systems for statistical process control, which utilize statistical techniques to identify, monitor and improve critical manufacturing processes such as sawing, die cutting and thermoforming.

 

Suppliers

 

AMG purchases raw materials primarily consisting of polyurethane foam, cross-linked polyolefin foams and pressure sensitive adhesives. AMG’s largest supplier of raw materials is Foamex Engineered Polyurethanes (“Foamex”), which in fiscal 2002, 2001 and 2000 supplied approximately 50%, 68% and 62%, respectively, of AMG’s raw materials’ requirements.  Materials purchased from Foamex are used to produce the products for AMG’s most significant customer, Hewlett Packard.  See Customers below.

 

AM is an authorized fabricating distributor of a number of raw material suppliers, including Foamex, Voltek, Avery Dennison (pressure sensitive adhesives), Zotefoam (cross linked polyethylenes) and Rogers (cast urethanes). Management believes that these supply arrangements, many of which have been active for 25 years or more, provide AM with a diverse mix of raw materials at the best available prices. AM purchases raw materials pursuant to purchase orders placed from time to time in the ordinary course of business. Failure or delay by such suppliers in supplying necessary raw materials to AM could adversely affect AM’s ability to manufacture and deliver products on a timely and competitive basis. AM purchases its raw materials on standard credit terms and considers its relationships with its suppliers to be good.

 

Management believes that the loss of either Foamex or Voltek as a major supplier of foam could adversely affect the Company’s business.  If another supplier’s products were to be substituted by our customers in critical applications, there are no assurances that AMG would retain the favorable supply position that it has earned through over 25 years as an authorized converter/fabricator for Foamex and Voltek.

 

Marketing and Sales

 

AMG’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 AMG’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.

 

AMG currently has four full-time sales representatives who make sales on a direct basis. One of the sales representatives is in the field and three provide inside sales support. The field sales representative receives a base salary plus a commission and the inside sales representatives receive a salary.

 

AMG’s domestic sales as a percentage of the Company’s consolidated sales were approximately 41%, 46% and 58% for fiscal years 2002, 2001 and 2000, respectively.  AMG currently does business in a number of foreign regions including Asia, Europe, South America and the Middle East. Foreign sales, which accounted for approximately 67%, 54% and 42% of fiscal 2002, 2001 and 2000 sales, respectively, are made both directly and through sales agents who receive commissions.

 

3



 

Total revenue attributable to each geographic area in which the Company sells is included in Note 12 of the Notes to Consolidated Financial Statements included herein.

 

AMG relies primarily upon referrals by its customers and vendors and the activities of its sales representatives for new business. AM also participates in industrial design and engineering trade shows as a means of marketing its products.

 

Backlog

 

AMG 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 included in the Company’s backlog may be cancelled under certain conditions without significant penalty. At February 20, 2003, AMG’s backlog of orders was $12,424,000 compared to $11,912,000 at approximately the same time in the prior year.

 

Customers

 

AMG generally sells its products pursuant to customer purchase orders. There can be no assurance that any customers will continue to purchase products from AMG. AMG’s customers are in the computer printer, medical disposables, automotive air conditioning and consumer cleaning supply markets. Management believes that this diversity spreads the risk of dependence on one customer or one market sector. However, one customer, Hewlett Packard, accounted for 66%, 62% and 53% of consolidated revenues for the years ended November 30, 2002, 2001 and 2000, respectively. While AMG has acquired new customers as well as orders for new products from existing customers, the loss of Hewlett Packard as a customer or a decline in the economic prospects of Hewlett Packard would have  a material adverse effect on the Company’s consolidated financial position and results of operations.

 

AMG believes its prices are competitive with those of other fabricators of custom materials. AMG 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 and Southwest regions of the United States. For bulky, low price products, high freight costs on long distance shipments from AM’s Rancho Dominguez facility make it difficult for AM to be competitive in other regions of the United States or internationally.

 

Licenses and Proprietary Rights

 

The Company has secured a patent on a manufacturing process for fabricating plastic foam sheet material with compound radius. AMG 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 AMG competes is highly competitive. The number of competitors and the Company’s competitive position are not known or reasonably available.  Low barriers to entry and fragmented competition characterize the industry. Most of the Company’s competitors 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 Rogers Foam Corp. AMG competes primarily on the basis of its ability to meet customers’ specifications promptly and cost effectively, and on the quality of its products.

 

Current competitors or new market entrants could introduce new or enhanced products with features that render AMG’s products obsolete or less marketable, or could develop means of producing competitive products at a lower cost. The ability of AMG to compete successfully will depend in large measure on its ability to adapt to technological changes in the industry. There can be no assurance that AMG will be able to keep pace with the

 

4



 

technological demands of the market place or successfully develop new products demanded by customers.

 

Government Regulation

 

The manufacture of certain products by AMG requires the purchase and use of chemicals and other materials, which are or may be classified as hazardous substances. The Company 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 European Union (“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 environmental laws and regulations.

 

Various laws and regulations relating to safe working conditions, including the Occupational Safety and Health Act (“OSHA”), are also applicable to the Company and its subsidiaries. The Company believes it 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, 2002, the Company and its subsidiaries had 102 full-time employees, of whom 50 were located at AM’s Rancho Dominguez, California facility and 52 were located at the Company’s Ireland subsidiary.  Of the Company’s full-time employees, 73 are employed in manufacturing, 9 are in sales, 17 perform general and administrative functions and 3 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, 2002, the Company utilized approximately 47 contract workers.

 

None of the employees of the Company or its subsidiaries are presently represented by a labor union and the Company’s management considers the relationships of the Company and its subsidiaries with its employees to be good.

 

Item 2. Properties.

 

The Company leases approximately 56,000 square feet of manufacturing and office space in Rancho Dominguez, California and approximately 82,600 square feet of manufacturing and office space in Dallas, Texas.  The Company pays rent of approximately $22,400 per month under its Rancho Dominguez lease and approximately $31,000 per month under its Dallas lease.  The Rancho Dominguez lease expires November 2004 and the Dallas lease expires in November 2005.  The facility in Dallas is currently unoccupied and the Company is actively seeking to sublease the facility.

 

5



 

The Company’s Ireland subsidiary, AM Ltd., leases approximately 36,000 square feet of manufacturing and office space outside of Dublin, Ireland. AM Ltd. pays rent of EUR 18,570 per month (equivalent to approximately $19,970 per month at February 20, 2003) and the lease expires in February 2008.

 

Item 3. Legal Proceedings.

 

In October 1996, the Company was notified that it had been named in a bodily injury lawsuit pending in the 192nd Judicial District Court of Dallas County Texas, involving silicon breast implants. The suit alleges that the Company 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 are 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, adversely affect the Company’s financial condition.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

The Company did not submit any matter to a vote of security holders during the fourth quarter of  fiscal 2002.

 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

 

Market Information

 

The Company’s common stock traded on The Nasdaq Small-Cap Stock Market (“Nasdaq”) under the symbol “ADMG” from June 23, 1993 until December 13, 2000. Effective as of December 14, 2000, the Company’s common stock was delisted from Nasdaq and has traded on the NASD-regulated OTC-Bulletin Board under the symbol “ADMG.OB.”  The high and low closing prices for the common stock for the past two fiscal years as reported by The Pink Sheets, LLC are set forth in the following table. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

 

Fiscal 2002

 

High

 

Low

 

 

 

 

 

 

 

Fourth Quarter

 

$

0.23

 

$

0.14

 

Third Quarter

 

$

0.20

 

$

0.11

 

Second Quarter

 

$

0.30

 

$

0.15

 

First Quarter

 

$

0.29

 

$

0.15

 

 

Fiscal 2001

 

High

 

Low

 

 

 

 

 

 

 

Fourth Quarter

 

$

0.39

 

$

0.23

 

Third Quarter

 

$

0.53

 

$

0.25

 

Second Quarter

 

$

0.50

 

$

0.35

 

First Quarter

 

$

0.91

 

$

0.41

 

 

Holders

 

There were approximately 1,200 shareholders of record as of February 21, 2003.

 

Dividend Policy

 

The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company has paid no cash dividends during the past two fiscal years and management does not anticipate that it will do so in the foreseeable future.  The Company’s line of credit agreement with its bank currently prohibits the payment of cash dividends.

 

6



 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of November 30, 2002 regarding compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

 

Equity Compensation Plan Information

 

Plan Category

 

Number of Securities to be
Issued Upon Exercise of
Outstanding Options

 

Weighted-Average
Exercise Price of
Outstanding Options

 

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
Excluding Securities
Reflected in Column (a)

 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders

 

1,452,000

 

$

1.35

 

713,500

 

Equity compensation plans not approved by security holders

 

265,000

 

1.30

 

 

Total

 

1,717,000

 

$

1.33

 

713,500

 

 

7



 

Item 6. Selected Financial Data

 

Years Ended November 30,

 

2002

 

2001

 

2000

 

1999

 

1998

 

Consolidated Statement of  Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

36,287,000

 

$

38,483,000

 

$

40,329,000

 

$

34,798,000

 

$

28,916,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

32,412,000

 

35,102,000

 

34,152,000

 

30,257,000

 

22,513,000

 

Selling, general and administrative

 

3,274,000

 

4,484,000

 

4,463,000

 

4,528,000

 

4,027,000

 

Write-off of start-up costs

 

 

 

 

 

608,000

 

Write-off of capitalized license

 

 

 

 

 

158,000

 

Restructuring charges

 

226,000

 

1,334,000

 

 

 

 

Interest expense

 

415,000

 

501,000

 

523,000

 

504,000

 

298,000

 

Depreciation and amortization

 

268,000

 

344,000

 

286,000

 

220,000

 

322,000

 

Write-down of goodwill

 

387,000

 

 

 

 

909,000

 

Other, net

 

36,000

 

38,000

 

126,000

 

163,000

 

247,000

 

Total costs and expenses

 

37,018,000

 

41,803,000

 

39,550,000

 

35,672,000

 

29,052,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before  income taxes

 

(731,000

)

(3,320,000

)

779,000

 

(874,000

)

(166,000

)

Income tax (benefit) expense, net

 

(257,000

)

66,000

 

273,000

 

 

538,000

 

Income (loss) from continuing operations

 

(474,000

)

(3,386,000

)

506,000

 

(874,000

)

(704,000

)

Net income (loss) from discontinued operations

 

 

 

667,000

 

 

(1,627,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(474,000

)

$

(3,386,000

)

$

1,173,000

 

$

(874,000

)

$

(2,331,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing  operations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

$

(0.39

)

$

0.06

 

$

(0.10

)

$

(0.08

)

Diluted

 

$

(0.05

)

$

(0.39

)

$

0.06

 

$

(0.10

)

$

(0.08

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

8,671,272

 

8,671,272

 

8,599,721

 

8,581,630

 

8,717,609

 

Diluted

 

8,671,272

 

8,671,272

 

8,784,412

 

8,581,630

 

8,717,609

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

$

(0.39

)

$

0.14

 

$

(0.10

)

$

(0.27

)

Diluted

 

$

(0.05

)

$

(0.39

)

$

0.14

 

$

(0.10

)

$

(0.27

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital (deficit)

 

$

(107,000

)

$

111,000

 

$

3,375,000

 

$

1,356,000

 

$

2,055,000

 

Total assets

 

$

12,511,000

 

$

14,772,000

 

$

18,057,000

 

$

16,092,000

 

$

12,682,000

 

Total liabilities

 

$

12,080,000

 

$

13,867,000

 

$

13,766,000

 

$

13,105,000

 

$

8,565,000

 

Stockholders’ equity

 

$

431,000

 

$

905,000

 

$

4,291,000

 

$

2,987,000

 

$

4,117,000

 

 

8



 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes to financial statements included elsewhere in this document. This report and our audited consolidated financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation:

 

a)                                      General business conditions, including a worsening economy, which might slow the overall demand for the Company’s products and increases of interest costs based on the Company’s borrowing activities.

 

b)                                     Competitive factors, including heightened competition from existing competitors leading to increased price competition and margin erosion; and the introduction of new products or technologies by customers or competitors.

 

c)                                      Under utilization of the Company’s factories and plants.

 

d)                                     Concentrations of sales in markets and customers, including Hewlett Packard.

 

e)                                      Failure 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.

 

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)                                         Delays in development of production equipment required for new products.

 

k)                                      Short-term fluctuations in margins due to yields and efficiencies.

 

l)                                         The effects of changes in foreign currencies.

 

m)                                   Loss of executive management or other key employees.

 

n)                                     Changes in financing amount, availability or cost.

 

o)                                     The effects of changes in costs and availability of insurance coverage.

 

p)                                     The effects of changes in compensation or benefit plans.

 

q)                                     Adoptions of new, or changes in, accounting policies and practices and the application of such policies and practices.

 

r)                                        Adverse results in significant litigation matters.

 

9



 

The information contained in this document is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

 

We do not undertake to update, revise or correct any forward-looking statements. Any of the factors described above could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

 

Critical Accounting Policies

 

The Company’s significant accounting policies are described in Note 1 to the audited consolidated financial statements included in Item 8 of this report. The Company’s management believes the Company’s most critical accounting policies include revenue recognition, inventory valuation, impairment of long-lived assets, restructuring reserves and income tax assets and liabilities.

 

Revenue Recognition

 

The Company recognizes revenue upon shipment of product at which time title passes to the customer.

 

Inventory Valuation

 

Inventories are stated at the lower of cost (first-in, first-out method) or market.  Cost includes raw materials, labor, manufacturing overhead and purchased products.  Market is determined by comparison with recent purchases or net realizable value.  Net realizable value is based on forecasts for sales of the Company’s products in the ensuing years. Should demand for the Company’s products prove to be significantly less than anticipated, the ultimate realizable value of the Company’s inventories could be substantially less than the amount shown on the accompanying consolidated balance sheets.

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of its long-lived and certain intangible assets, including goodwill, by determining whether the related asset balance can be recovered through projected undiscounted cash flows.  The amount of impairment, if any is measured based on projected discounted future cash flows (fair value) and charged to operations in the period in which impairment is determined by management.

 

Restructuring Reserve

 

Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring reserves for certain costs associated with plant closures and business reorganization activities.  Such costs are recorded as a current liability and primarily include employee severance and contractual obligations.  These costs are not associated with nor do they benefit continuing activities.  Inherent in the estimation of these costs are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring.  Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities.  We review the status of restructuring activities on a quarterly basis and if appropriate record changes based on updated estimates.

 

10



 

Income Taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates expected to apply when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to amounts, which are more likely than not to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

Results of Operations for Fiscal 2002 Compared with 2001 and 2001 Compared with 2000

 

The Company’s revenue from continuing operations for the fiscal year ended November 30, 2002 was $36.3 million, a decrease of 5.7% compared to the fiscal year ended November 30, 2001. Revenues from the Singapore strategic manufacturing venture grew to $11,739,000 in fiscal 2002 from $11,541,000 in fiscal 2001. Revenues in Ireland grew to $9,699,000 in fiscal 2002 from $9,060,000 in fiscal 2001. Revenues from U.S. operations decreased to $14,849,000 in fiscal 2002 from $17,882,000 in fiscal 2001. Revenue from continuing operations, for the fiscal year ended November 30, 2001 was $38.5 million, a decrease of 4.6% compared to fiscal 2000. Revenues from the Singapore strategic manufacturing venture grew to $11,541,000 in fiscal 2001 from $10,046,000 in fiscal 2000. Revenues in Ireland grew to $9,060,000 in fiscal 2001 from $6,979,000 in fiscal 2000. Revenues from U.S. operations decreased to $17,882,000 in fiscal 2001 from $23,304,000 in fiscal 2000. The decline in the Company’s U.S. revenues in fiscal 2002 and 2001 is primarily attributable to lower domestic sales prices and volumes relating to the slowdown in domestic economic conditions.  The growth in foreign revenues is primarily due to increased demand from Hewlett Packard in those areas as well as the addition of new customers.  See Business Outlook section below.

 

Cost of sales in fiscal 2002 decreased to $32,412,000 from $35,102,000 in fiscal 2001 and $34,152,000 in fiscal 2000. Cost of sales as a percentage of net sales was 89.3% in fiscal 2002 compared to 91.2% and 84.7% in fiscal 2001 and fiscal 2000, respectively.  The Company’s gross profit percentage was 10.7% in fiscal 2002, compared to 8.8% in fiscal 2001 and 15.3% in fiscal 2000.  The Company has experienced significant pricing pressures during the past two years. Lower volumes at the Company’s domestic locations has led to lower capacity utilization and negatively impacted labor and overhead absorption for the domestic operations. The Company responded to declining U.S. volumes by relocating manufacturing capacity from plants in Texas, Oregon and Colorado to its California facilities during the second half of fiscal 2001.  The final closure of the Texas plant, which was the largest of the Company’s facilities, occurred in October 2001.  The improvement in the gross profit percentage during fiscal 2002 was primarily due to the benefits from the reduced overhead.

 

Selling, general and administrative (“SG&A”) expense decreased to $3,274,000 compared to $4,484,000 in fiscal 2001 and $4,463,000 in fiscal 2000.  SG&A costs decreased in fiscal 2002 due to the plant closures in late fiscal 2001 noted previously, and due to other overhead reductions including significant reductions in the number of employees during the past year.  SG&A as a percent of revenues decreased to approximately 9.0% in fiscal 2002 compared to approximately 11.7% in fiscal 2001 and 11.0% in fiscal 2000.

 

Write-down of goodwill of $387,000 was recorded in fiscal 2002.  Effective December 1, 2001, the Company adopted new accounting rules for goodwill and certain intangible assets.  Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques.  During the fourth quarter of 2002, the Company completed an impairment evaluation and determined that their goodwill has been impaired and accordingly, recorded a $387,000 non-cash pretax charge for the impairment of goodwill.  Amortization expense of approximately $60,000 recognized during 2001 and 2000 would not have been recognized under the new accounting rules.

 

Restructuring charges of $226,000 and $1,334,000 were recorded in fiscal 2002 and 2001, respectively, relating to the plant closures noted above.  During 2002, approximately $63,000 in severance costs and $334,000 in lease costs were charged against the reserve.  During fiscal 2001, approximately $135,000 in severance costs, $139,000 in lease costs and $7,000 in service contract costs were charged against the reserve.  The remainder of the

 

11



 

restructuring reserve consists of lease abandonment costs of $876,000 (net of probable lease revenue of $240,000) and severance costs of $6,000, which have been substantially classified as a long-term liability since the payments will be made through November 2005, with the exception of the severance costs which are expected to be paid within the next twelve fiscal months.

 

Interest expense in fiscal 2002 was $415,000 compared to$501,000 and  $523,000 in fiscal 2001 and 2000, respectively. The decrease was due primarily to lower interest rates.

 

Income taxes were a net benefit of $257,000 in fiscal 2002.  This benefit was due to a tax refund of $297,000 received during the period relating to a net operating loss carryback filed for federal tax purposes, partially offset by taxes payable for the period.  Income taxes were $66,000 in fiscal 2001 compared to $273,000 in fiscal 2000.  Income taxes were only $66,000 in fiscal 2001 due to operating losses offset by an increase in the valuation allowance relative to deferred tax assets.  The provision for income taxes in fiscal 2000 is the tax payable for the period less the change during the period in deferred tax assets.

 

Net loss from continuing operations for fiscal 2002 was $474,000 compared to $3,386,000 for fiscal 2001 and compared to income from continuing operations in fiscal 2000 of $506,000. Fiscal 2002 and 2001 results included non-recurring restructuring charges of $226,000 and $1,334,000, respectively.  Additionally, fiscal 2002 included  non-recurring costs for the write down of goodwill of $387,000 and a benefit for a tax refund of $297,000 as noted above.

 

The Company formed Advanced Materials Foreign Sales Corporation Ltd., a wholly-owned subsidiary of the Company, to enter into a strategic manufacturing agreement in Singapore.  The Company entered into a ten-year agreement with Foamex Asia (“Foamex”) in January 1998.  Terms of the agreement call for the Company to lease production equipment and provide certain technology to Foamex. Foamex will in turn provide its manufacturing facilities and workforce to fabricate foam products at Foamex’s Singapore facility.  The manufacturing agreement has a profit sharing provision that changes annually.  The profit sharing split is as follows (in percentages):

 

Year

 

The Company

 

Foamex

 

1998

 

65

 

35

 

1999

 

60

 

40

 

2000

 

50

 

50

 

2001

 

50

 

50

 

2002

 

45

 

55

 

2003

 

40

 

60

 

2004 – 2007

 

35

 

65

 

 

During 2001, Foamex agreed to maintain the year 2000 profit sharing split of 50/50.  However, in 2002 the profit sharing was changed to 45/55 and it is expected that the Company’s profit sharing split will continue to decrease to the 35% level over the next couple of years, and, accordingly, the Company’s gross margin related to this arrangement will decline (see note 12).  The continued success of the Company’s Singapore operations depends upon the continued relationship with Foamex.  The net income from operations provided by the Singapore operation was $1,206,000 and $1,471,000 for the fiscal years ended November 30, 2002 and 2001, respectively.

 

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’s operating activities used $419,000 of cash flows in fiscal 2002 compared to providing $2,157,000 in fiscal 2001.  In fiscal 2000, operating activities provided $1,525,000.  The cash flows for fiscal 2002 were primarily used to pay down accounts payable and accrued liabilities by $2,136,000.

 

Accounts receivable decreased $932,000 in fiscal 2002 primarily as a result of improved collections and lower

 

12



 

sales.  Accounts receivable and inventories decreased $1,253,000 and $928,000, respectively, in fiscal 2001.  Funds were also provided by an increase in accounts payable and accrued liabilities of $441,000 in fiscal 2001. During the three-year period encompassing fiscal years 2000 through 2002, the Company experienced an increase in its concentration of credit risk as one customer, Hewlett Packard, accounted for 66%, 62% and 53% of revenue during fiscal 2002, 2001 and 2000, respectively. The same customer accounted for 51% and 47% of accounts receivable at the end of fiscal 2002 and 2001, respectively.

 

The Company invested $568,000, $566,000 and $1,107,000 in fiscal 2002, 2001 and 2000, respectively, in capital equipment.  The equipment purchased is primarily to automate the production of parts for Hewlett Packard in Ireland and to upgrade the computer systems throughout the Company.

 

The Company had $764,000 of cash and cash equivalents at November 30, 2002. The Company has a $4,500,000 operating credit line with its primary lenders with approximately $3,701,000 currently outstanding as of November 30, 2002, which expires in May 2003.  There was approximately $232,000 available under the line at November 30, 2002.  The line bears interest at prime plus 3.25% (7.5% at November 30, 2002). The Company anticipates that existing cash, cash from operations and existing lines of credit will supply sufficient cash for its short- and long-term projected needs for operations as long as the Company is successful in curing its covenant violations or finding a replacement lender with acceptable terms.  (See discussion below).

 

At November 30, 2002, the Company was not in compliance with minimum net income, minimum book net worth and debt service coverage ratio and therefore is in technical default under the compliance provisions of its bank line of credit and term loan.  The lender has amended its agreement to extend the termination date of the line of credit from February 2003 to May 2003 and to decrease the availability under the line by $10,000 per week during the period from March 1, 2003 through May 31, 2003.  In order to fund present and future operations, the Company needs to cure its covenant violations with its lender or find a replacement lender with acceptable terms. While the Company is in the process of attempting to cure its line of credit violations, and has initiated plans to return to profitability, there are no assurances that the Company will be successful in completing these critical tasks. If the Company is unable to successfully complete these critical tasks, it may be forced to significantly reduce, restructure or cease its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations.

 

Business Outlook

 

This Business Outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.

 

The Company currently has sufficient orders from OEMs to believe that its sales will remain stable or grow slightly in fiscal 2003.  The Company expects gross profit and operating profit margins to improve in fiscal 2003, primarily due to effects of the cost reductions throughout 2001 and 2002.

 

The Company expects interest expense to remain relatively unchanged in fiscal 2003.

 

Contractual Obligations and Contingent Liabilities and Commitments

 

The Company has contractual obligations and commitments primarily with regards to payment of debts and lease arrangements.  See Notes 4, 5, 6 and 8 in the Notes to Consolidated Financial Statements for further description.

 

13



 

The following table aggregates the Company’s expected contractual obligations and commitments subsequent to November 30, 2002.

 

 

 

Payments Due by Period

 

Contractual Obligations

 

2003

 

2004 – 2005

 

2006 – 2007

 

Beyond
2007

 

Total

 

Line of credit

 

$

3,701,000

 

 

 

 

 

 

 

$

3,701,000

 

Long-term debt (including debentures)

 

278,000

 

$

405,000

 

 

 

 

 

683,000

 

Capital lease commitments(1)

 

182,000

 

132,000

 

$

13,000

 

 

 

327,000

 

Operating lease commitments

 

854,000

 

1,417,000

 

480,000

 

$

60,000

 

2,811,000

 

Retirement benefits to former employees

 

157,000

 

293,000

 

311,000

 

3,361,000

 

4,122,000

 

Employee contracts

 

250,000

 

145,000

 

 

 

 

 

395,000

 

Total contractual cash obligations

 

$

5,422,000

 

$

2,392,000

 

$

804,000

 

$

3,421,000

 

$

12,039,000

 

 


(1)  Includes amounts classified as interest.

 

Recent Accounting Pronouncements

 

In July 2001, the FASB issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations and No. 142, “Goodwill and Other Intangible Assets”.  These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life.  Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment.  Effective December 1, 2001, the Company adopted new accounting rules for goodwill and certain intangible assets.  Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques.  During the fourth quarter of 2002, the Company completed an impairment evaluation and determined that their goodwill has been impaired and accordingly, recorded a $387,000 non-cash pretax charge for the impairment of goodwill.  Amortization expense of approximately $60,000 recognized during 2001 and 2000 would not have been recognized under the new accounting rules.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets.”  This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.”  SFAS 144 is effective for fiscal years beginning after December 15, 2001.  AMG will adopt SFAS 144 beginning in the fiscal year 2003.  The Company does not believe that the adoption of SFAS 144 will materially impact the Company’s financial position or results of operations.

 

On July 30, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  Management currently believes that the adoption of SFAS No. 146 will not have a material impact on the financial statements.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123.”  SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-

 

14



 

based employee compensation.  It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.  Finally, this Statement amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in the interim financial information.  The amendments to SFAS No. 123 that provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation are effective for financial statements for fiscal years ending after December 15, 2002.  The amendment to SFAS No. 123 relating to disclosure and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.  Early application is encouraged.  Management currently believes that the adoption of SFAS No. 148 will not have a material impact on the financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Rate Risk

 

A significant portion of the Company’s operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the United States, Ireland and Singapore and sells the products in those markets as well. As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company’s functional currency has been determined to be United States dollars since the parent company funds all the capital and start-up costs, ongoing capital expenditures as well as the operating losses of the foreign subsidiaries. In addition, the majority of the sales are also denominated in United States dollars.

 

The Company maintains the books of its Singapore operations in United States dollars and maintains the books of its Ireland operations in Euros. Accordingly, the financial statements of the Irish subsidiary are remeasured to United States dollars and the translation gains or losses are reflected in the Company’s statement of operations. The Company believes its exposure to translation gains and losses with respect to its foreign operations is minimal due to the stability of the foreign markets in which the Company operates.

 

The Company’s interest expense is most sensitive to changes in interest rates relating primarily to the Company’s current and future debt obligations. The Company is vulnerable, however, to significant fluctuations of interest rates on its floating rate debt.

 

The following table provides information about the Company’s debt obligations that are sensitive to changes in interest rates (dollars in thousands):

 

 

 

2003

 

2004

 

Total

 

Fair
Value
11/30/02

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

3,701

 

 

 

$

3,701

 

$

3,701

 

Avg. interest rate

 

P+3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan

 

$

278

 

 

 

$

278

 

$

278

 

Avg. interest rate

 

P+3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conv. debentures

 

 

 

$

405

 

$

405

 

$

405

 

Avg. interest rate

 

 

 

7.5

%

 

 

 

 

 

15



 

Item 8. Financial Statements and Supplemental Data

 

(a)  Financial Statements

 

The Report of Independent Certified Public Accountants and the Consolidated Financial Statements listed in the “Index to Financial Statements” are filed as part of this report.

 

(b)  Consolidated Financial Statement Schedules

 

Schedule II – Valuation and Qualifying Accounts

 

 

 

Balance at
Beginning of
Period

 

Additions/
Charges to
Expenses

 

Inventory/
Bad Debts
Written Off

 

Balance at End
of Period

 

 

 

 

 

 

 

 

 

 

 

Year Ended November 30, 2000

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

100,000

 

$

 

$

 

$

100,000

 

Allowance for obsolete inventory

 

166,000

 

(10,000

)

 

156,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

266,000

 

$

(10,000

)

$

 

$

256,000

 

 

 

 

 

 

 

 

 

 

 

Year Ended November 30, 2001

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

100,000

 

$

99,000

 

$

 

$

199,000

 

Allowance for obsolete inventory

 

156,000

 

483,000

 

516,000

 

123,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

256,000

 

$

582,000

 

$

516,000

 

$

322,000

 

 

 

 

 

 

 

 

 

 

 

Year Ended November 30, 2002

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

199,000

 

$

5,000

 

$

107,000

 

$

97,000

 

Allowance for obsolete inventory

 

123,000

 

160,000

 

42,000

 

241,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

322,000

 

$

165,000

 

$

149,000

 

$

338,000

 

 

16



 

Report of Independent Certified Public Accountants

 

 

Board of Directors

Advanced Materials Group, Inc.

 

The audits referred to in our report dated January 30, 2003, except as to notes 4 and 5 which are as of February 11, 2003, relating to the 2002, 2001 and 2000 consolidated financial statements of Advanced Materials, Group, Inc., which are contained in Item 8 of this Form 10-K, included the audits of the consolidated financial statement schedules listed in the accompanying index.  These consolidated financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statement schedules based upon our audits.

 

In our opinion, the 2002, 2001 and 2000 consolidated financial statement schedules presents fairly, in all material respects, the information set forth therein.

 

 

 

/s/ BDO Seidman, LLP

 

BDO SEIDMAN, LLP

 

Costa Mesa, California

January 30, 2003

 

17



 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

Directors are elected annually and hold office until the next annual meeting of shareholders or until their respective successors are duly elected and qualified.  Officers are appointed by, and serve at the discretion of the Company’s Board of Directors, subject to the terms of any applicable employment agreements.  The directors and executive officers of the Company are as follows:

 

Directors

 

Timothy R. Busch, 48, was elected to the Company’s Board of Directors in September 1997 and was appointed Chairman in February 1998.  Mr. Busch is a tax attorney and is president and managing partner of a professional services practice, The Busch Firm, which he founded in 1979.  Until May 1999, he was a director of IMPAC Commercial Holdings, Inc., a publicly held company, and is currently a director for several privately held companies.  Mr. Busch is a licensed attorney in California, Michigan, Texas and Washington, D.C. as well as a licensed CPA in California and Michigan.

 

Steve F. Scott, 58, has been the President and a Director of the Company since June 1991, and was appointed Chief Executive Officer in July 1994.  He has been with the Company and its predecessors for a total of nearly 15 years, including previous positions as General Manager and Vice President of Sales.  Mr. Scott was President of Pleuss–Staufer, a Swiss-based mining company, from 1989 to 1991.  Mr. Scott has a B.S. in Chemical Engineering from the University of Cincinnati and an M.B.A. from California State University of Long Beach.

 

N. Price Paschall, 54, was elected to the Company’s Board of Directors in January 1994.  Mr. Paschall has been Managing Director of Context Capital Group, an investment-banking firm that serves clients in the medical and industrial markets, since February 1992.  Mr. Paschall was a partner of Shea, Paschall, Powell-Hambros Bank, and its predecessor company, a firm specializing in mergers and acquisitions, from January 1983 to January 1992.  Mr. Paschall holds a degree in Business Administration from California Polytechnic University in Pomona.  In addition, he currently serves on the board of Biopool International, Inc. a publicly-held medical device company.

 

Maurice J. DeWald, 62, was elected to the Company’s Board of Directors in February 1998.  From June 1992 to the present, Mr. DeWald has been Chairman and Chief Executive Officer of Verity Financial Group, Inc., a private investment and financial advisory firm.  Mr. DeWald is a former member of the KPMG Peat Marwick Board of Directors and also served as the Managing Partner of the Los Angeles office of KPMG Peat Marwick from 1986 to 1991.  He currently serves on the boards of two publicly held companies in the healthcare industry, Tenet Healthcare Corporation and ARV Assisted Living, Inc.  In addition, he currently serves on the boards of Dai-Ichi Kangyo Bank of California and Monarch Funds, a publicly held investment fund.

 

James R. Swartwout, 57, was elected to the Company’s Board of Directors in May 2001. From August 1990 to the present, Mr. Swartwout has been Chairman of the Board of Directors of Summa Industries, Inc., a publicly held manufacturer of proprietary engineered plastic products. He joined Summa Industries in October 1988 as its Executive Vice President and Chief Operating Officer, was promoted President and Chief Operating Officer in August 1989 and to Chief Executive Officer in July 1990.   Formerly, Mr. Swartwout was a principal in a private leveraged buyout venture. From April 1984 to December 1986, Mr. Swartwout was Executive Vice President of Delphian Corporation, Sunnyvale, California, a manufacturer of analytical instruments, and had held management positions at Farr Company, El Segundo, California, a manufacturer of industrial filtration systems. He earlier worked for American Air Filter Co. and Eastman Kodak Co., and is a former U.S. Navy officer. Mr. Swartwout holds a Bachelor of Science degree in Industrial Engineering from Lafayette College and a Masters in Business Administration from the University of Southern California.

 

18



 

Robert E. Delk, 52, was elected to the Company’s Board of Directors in January 2003.  Mr. Delk is a  private investor and has been a significant shareholder of the Company since 1996.  From 1980 to 1995, he was the Chairman and CEO of the Struckmeyer Corporation, a medical products manufacturing business whose products were made from similar raw materials to those used by Advanced Materials.  Struckmeyer Corporation was based in Dallas, Texas, and specialized in the product development and manufacture of disposable surgical products.  Mr. Delk holds a Bachelor of Science degree from Stephen F. Austin University, and has experience in the Banking, Consumer Products, and the Advertising industries.  He has served on numerous business and civic boards.

 

Executive Officers

 

Gayle Arnold, 41, joined the Company in February 2001 as Chief Financial Officer. Prior to joining the Company, Ms. Arnold was Chief Financial Officer and Treasurer for I-Flow Corporation, a publicly held manufacturer of medical devices. She joined I-Flow in April 1991 to serve as Controller and was promoted to Chief Financial Officer in February 1994.  Prior to joining I-Flow, Ms. Arnold served as a Manager with the accounting firm Deloitte & Touche LLP where she was employed from 1984 to 1991.  Ms. Arnold is a CPA in the state of California and received a Bachelor of Business Administration from the University of Texas in Austin in 1982.

 

Tom Lane, 39, has been Chief Executive, Europe, for Advanced Materials, Ltd., a subsidiary of the Company, since joining the Company in January 1998.  From 1993 to 1998 he was Chief Executive of Killeen SBU, a group of Jefferson Smurfit companies in the corrugated packaging industry in Ireland.  Mr. Lane received a BCL degree from the University College in Dublin in 1984.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the officers and directors of the Company as well as persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission.  Officers, directors and grater-than-10% shareholders are required by the regulations of the Securities and Exchange Commission to furnish the company with copies of all Section 16(a) forms that they file.

 

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, all Section 16(a) requirements applicable to our officers, directors and grater-than-10% shareholders were satisfied during the fiscal year ended November 30, 2002.

 

19



 

Item 11. Executive Compensation.

 

The following table sets forth certain information regarding compensation paid by the Company for services rendered to the Company by its Chief Executive Officer and to each of the other most highly compensated executive officers of the Company who earned more than $100,000 in salary and bonus during the fiscal year ended November 30, 2002 (the “Named Executive Officers”).

 

Summary Compensation Table

 

 

 

Annual Compensation

 

Long-Term
Compensation

 

Name and Principal Position

 

Fiscal
Year

 

Salary(1)

 

Bonus(2)

 

Other
Compensation (3)

 

Securities
Underlying
Options Granted

 

Steve F. Scott

 

2002

 

$

187,144

 

 

$

17,980

 

10,000

 

President and Chief

 

2001

 

$

243,526

 

 

$

12,947

 

10,000

 

Executive Officer

 

2000

 

$

234,429

 

 

$

18,771

 

10,000

 

David Lasnier(4)

 

2002

 

$

131,750

 

 

$

12,421

 

25,000

 

Senior Vice President

 

2001

 

$

155,745

 

 

$

14,425

 

 

 

 

2000

 

$

153,363

 

$

30,000

 

$

11,901

 

 

Tom Lane

 

2002

 

$

155,475

 

$

28,947

 

$

14,524

 

 

Chief Executive, Europe

 

2001

 

$

116,618

 

$

35,073

 

$

11,662

 

100,000

 

 

 

2000

 

$

129,210

 

$

37,175

 

$

12,138

 

 

 


 

(1)               Mr. Scott and Mr. Lasnier received voluntary salary reductions of 25% and 15%, respectively, in October 2001.  These voluntary reductions were done to help facilitate the current operations of the Company and will be reviewed on a periodic basis.

 

(2)               Bonuses levels for each indicated fiscal year were determined and paid in the first quarter of the following fiscal year.  Thus, fiscal 2000 bonuses levels were actually determined and paid in fiscal 2001 but were based on the Company’s performance in the preceding year.  See “Report of the Compensation Committee.”

 

(3)               For Mr. Scott, includes an allowance of $10,350 for automobile expenses and an allowance of $7,630, $2,597 and $8,421 for 2002, 2001 and 2000, respectively, for medical insurance.  For Mr. Lasnier, includes an allowance of $8,401 for automobile expenses and an allowance of $4,020, $6,024 and $3,500 for fiscal 2002, 2001 and 2000, respectively, for medical insurance.  For Mr. Lane, includes pension contributions of  $14,524, $12,138 and $12,591 for fiscal 2002, 2001 and 2000, respectively.

 

(4)               As of February 2003, Mr. Lasnier is no longer with the Company.

 

Stock Option Grants

 

The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers during the fiscal year ended November 30, 2002.  This information includes hypothetical potential gains from stock options granted during the fiscal year ended November 30, 2002.  These hypothetical gains are based entirely on assumed annual growth rates of 5% and 10% in the value of the Company’s common stock price over the 10-year life of the stock options granted during this fiscal year.  These assumed rates of growth were selected by the Securities and Exchange Commission for illustrative purposes only, and are not intended to predict future stock prices, which will depend upon market conditions and the Company’s future performance and prospects.  The Company granted options to purchase at total of 50,000 shares of common stock during fiscal 2002, all of which were options

 

20



 

granted as director compensation.  See “Director Compensation.”

 

Option Grants in Last Fiscal Year

 

Award Recipient

 

Number of
Securities
Underlying
Options
Granted

 

% of Total
Options
Granted
During FY 02

 

Exercise
Price
Per Share

 

Expiration
Date

 

Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
for Option Term

 

0%

 

5%

 

10%

Steve F. Scott

 

10,000

 

20

%

$

0.17

 

1/18/2007

 

$

0

 

$

470

 

$

1,038

 

David Lasnier

 

 

 

 

 

 

 

 

Tom Lane

 

 

 

 

 

 

 

 

 

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

 

The following table sets forth certain information regarding the exercise of options by the Named Executive Officers during fiscal 2002 and unexercised stock options held by each of the Named Executive Officers as of November 30, 2002.

 

Name

 

Shares
Acquired
on Exercise

 

Value
Realized(1)

 

Number of Shares Underlying
Unexercised Options at
November 30, 2002

 

Value of Unexercised
In-The-Money Options
at November 30, 2002(2)

 

Exercisable

 

Unexercisable

Exercisable

 

Unexercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steve F. Scott

 

 

 

475,500

 

 

$

900

 

 

David Lasnier

 

 

 

180,000

 

20,000

 

 

 

Tom Lane

 

 

 

170,000

 

80,000

 

 

 

 


 

(1)           Market value of underlying securities on the date of exercise, minus the exercise price.

 

(2)           Based on the Nasdaq last reported sale price on November 30, 2002  ($0.26 per share).

 

Employment Contract, Termination of Employment and Change-in-Control Arrangements

 

The Company is party to an employment agreement with Steve F. Scott, its President and Chief Executive Officer, dated July 1, 1998, which currently provides Mr. Scott with an annual salary of $250,000 per year.  The employment agreement is effective through June 30, 2004.  Upon termination by the Company, Mr. Scott will be entitled to any unpaid compensation accrued through the effective date of his termination.  In addition, if he is terminated by the Company other than for cause (as defined in the agreement), the Company will provide Mr. Scott with a severance payment equivalent to two times his most recent annual base salary plus the aggregate annual cash value of his automobile allowance and health insurance.  Upon a change in control of the Company (as defined Mr. Scott’s employment agreement), Mr. Scott may receive a severance payment equal to five times his most recent annual salary plus the remaining value of his automobile allowance and health insurance payable under this contract.

 

The Company is party to an employment agreement with Tom Lane, Chief Executive of Advanced Materials, Ltd., dated November 4, 1997 that provides Mr. Lane with an annual salary of EUR 167,110 (approximately $179,000 as of February 20, 2003).  Pursuant to this agreement, The Company may be obligated to pay Mr. Lane a severance payment equal to two years of his base salary if his employment is terminated without cause (as defined in the employment agreement).

 

21



 

Director Compensation

 

All non-employee directors are entitled to receive $500 and reimbursement for out-of-pocket expenses in connection with their attendance at meetings of the Board of Directors.  In addition, each director is entitled to receive non-qualified stock options, pursuant to the Company’s 1998 Stock Option Plan, to purchase 20,000 shares of the Company’s common stock at fair market value when first elected to the Board, and 10,000 shares of common stock at fair market value each January subsequent to their re-election to the Board.

 

Stock Performance Graph

 

Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder returns on the Company’s common stock, based on its market price, over a five-year period with the cumulative total return of the Nasdaq Composite Index and the S&P 600 Small Cap Index as a peer group comparison, assuming reinvestment of dividends.  The Company has selected the S&P 600 Small Cap Index on the basis that it believes that it cannot reasonably identify a reasonable pool of peer issuers in the same line of business.  This graph assumes that the value of the investment in the Company’s common stock and each of the comparison groups was $100 at the beginning of the measurement period.

 

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee consisted of the following non-employee directors during fiscal 2002: Messrs. Paschall, Busch and DeWald.

 

Report of the Compensation Committee

 

The compensation committee of the Board of Directors, composed of Messrs. Paschall, Busch and DeWald, has the authority to administer the Company’s executive compensation programs, including the Company’s stock incentive plans.  The Company’s executive compensation program is designed to provide competitive levels of base compensation in order to attract, retain and motivate high quality employees, tie individual total compensation to individual performance and success of the Company, and align the interests of the Company’s executive officers with those of its stockholders.

 

22



 

Executive Compensation Programs

 

The Company’s executive compensation program consists of three principal elements: base salary, cash bonus, and stock options. The Board of Directors sets the annual base salary for executives after consideration of the recommendations of the Compensation Committee. Prior to making its recommendations, the Compensation Committee reviews historical compensation levels of the executives, evaluates past performance, and assesses expected future contributions of the executives. In making the determinations regarding base salaries, the Company considers generally available information regarding the salaries prevailing in the industry.

 

The Company maintains incentive plans under which executive officers may be paid cash bonuses at the end of each fiscal year.  The bonuses under these incentive plans depend upon individual performance and the achievement by the Company of certain financial targets established by the Board of Directors prior to the start of each fiscal year.

 

Total compensation for executive officers also includes long-term incentives offered in the form of stock options, which are generally provided through initial stock option grants at the date of hire and periodic additional stock options grants. Stock options align the interests of the executive officer with the interests of stockholders due to the fact that the executive can realize a gain only if the Company’s stock appreciates in value. In determining the amount of such grants, the Compensation Committee considers the contributions of each executive to the overall success of the Company in the past fiscal year, the responsibilities to be assumed in the upcoming fiscal year, appropriate incentives for the promotion of the long-term growth of the Company, and grants to other executives in the industry holding comparable positions as well as the executive’s position within the Company.

 

Chief Executive Officer Compensation

 

Mr. Scott’s employment contract provides for a current base salary of $250,000 and he is eligible for the grant of stock options and a cash bonus awarded at the discretion of the Compensation Committee.  Option grants and cash bonus awards granted by the Company in fiscal 2002 are based upon the Company’s performance in that year.  In determining Mr. Scott’s total compensation, the Compensation Committee considers the Company’s overall performance, as measured by sales revenue, profitability, earnings per share and share valuation.  After considering these indicia of performance, the Compensation Committee awarded no cash bonus in fiscal 2002, 2001 or 2000.  In each of these years, Mr. Scott received an option purchase up to 10,000 shares of common stock as compensation for his services as a director of the Company.

 

 

This report was furnished by

 

Messrs. Paschall, Busch and DeWald

 

23



 

Item 12. Security Ownership of Certain Beneficial Owners and Management.

 

The following table sets forth certain information regarding the common stock beneficially owned as of February 21, 2003 by: (i) each person who is known by the Company to own beneficially or exercise voting or dispositive control over 5% or more of the common stock; (ii) each of the Company’s directors; (iii) each of the Named Executive Officers; and (iv) all officers and directors as a group.

 

Name and Address
of Beneficial Owner(1)

 

Amount and Nature
of Beneficial Ownership

 

Percentage of
Outstanding Shares(2)

 

 

 

 

 

 

 

Dito Caree LP, Dito Devcar LP and Richard H. Pickup
c/o David Hehn
3753 Howard Hughes Parkway #200
Las Vegas, NV 89109-0938

 

1,186,300

 (3)

13.7

%

 

 

 

 

 

 

Gregory J. Spagna
201 E. 45th Street, 18th Floor
New York, NY 10017

 

904,500

 (4)

10.4

%

 

 

 

 

 

 

Delk Partners Ltd.
4040 Grassmere Lane
Dallas, TX 75205

 

834,300

 (5)

9.6

%

 

 

 

  

 

 

Timothy R. Busch and the Lenawee Trust

 

835,307

 (6)

9.6

%

Steve F. Scott

 

495,500

 (7)

5.4

%

N. Price Paschall

 

250,000

 (8)

2.8

%

Maurice J. DeWald

 

60,000

 (9)

*

 

James Swartwout

 

20,000

 (10)

*

 

David Lasnier

 

180,000

 (11)

2.0

%

Tom Lane

 

205,000

 (12)

2.1

%

 

 

 

 

 

 

All officers and directors as a group (8 persons)

 

2,880,107

 (13)

29.0

%

 


 

(1)                                  Unless otherwise indicated, the address of each beneficial owner is care of Advanced Materials Group, Inc., 20211 South Susana Road, Rancho Dominguez, California 90221.

 

(2)                                  Ownership of less than one percent is indicated by the mark “*”.

 

(3)                                  Comprised of 986,300 shares held by Dito Caree LP and 200,000 shares held by Dito Devcar LP.   Mr. Pickup does not directly own any shares, but he indirectly controls both Dito Caree LP and Dito Devcar LP as general partner of each of those two entities.  Mr. Pickup, Dito Caree, LP and Dito Devcar, LP acknowledge that they are a “group” with respect to the referenced shares.

 

(4)                                  Based solely on that certain Form 13G/A filed with the Securities and Exchange Commission February 14, 2003 and comprised of 617,000 shares held by Mr. Spagna and 287,500 shares held jointly by Mr. Spagna and his wife and children.

 

(5)                                  Comprised of 814,300 shares held by Delk Partners, Ltd. and 20,000 shares which Mr. Delk has the right to acquire upon exercise of stock options presently exercisable or exercisable with 60 days of February 21, 2003.  As the general partners of Delk Partners, Ltd., Mr. Robert Delk and Mrs. Ann Struckmeyer Delk may be deemed, for purposes of determining beneficial ownership pursuant to Rule 13d-3, to have shared power to vote, or direct the vote of, or dispose of, or direct the disposition of, the 814,300 shares of

 

24



 

common stock owned directly by Delk Partners, Ltd.

 

(6)                                  Comprised of 765,307 shares held by the Lenawee Trust, of which Mr. Busch and his spouse are beneficiaries; and 70,000 shares issuable upon exercise of options held by Mr. Busch that are presently exercisable or exercisable within 60 days of February 21, 2003.  Mr. Busch and the Lenawee Trust acknowledge that they are a “group,” as that term is used under Section 13(d)(3) of the Exchange Act, with respect to the referenced shares.

 

(7)                                  Comprised of 20,000 shares, which Mr. Scott owns, and 475,500 shares which Mr. Scott has the right to acquire upon exercise of stock options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(8)                                  Comprised of 250,000 shares which Mr. Paschall has the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(9)                                  Comprised of 60,000 shares which Mr. DeWald has the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(10)                            Comprised of 20,000 shares which Mr. Swartwout has the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(11)                            Comprised of 180,000 shares which Mr. Lasnier has the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(12)                            Comprised of 35,000 shares, which Mr. Lane owns, and 170,000 shares, which Mr. Lane has the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

(13)                            Comprised of 1,634,607 shares owned by the directors and Named Executive Officers and 1,240,500 shares, which the directors and Named Executive Officers have the right to acquire upon exercise of options presently exercisable or exercisable within 60 days of February 21, 2003.

 

Item 13. Certain Relationships and Related Transactions.

 

The Company is or has been a party to employment and consulting arrangements with related parties, as more particularly described above under the headings “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” and “Compensation of Directors.”

 

Item 14. Controls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of February 20, 2003 (“Evaluation Date”), that the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by the Company under the Exchange Act is accumulated, recorded, processed, summarized and reported to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.

 

There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. As a result, no corrective actions were required or undertaken.

 

25



 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 

(a)(1)

Financial Statements, included in Part II of this report:

 

 

 

Report of Independent Certified Public Accountants

 

 

 

Consolidated Statements of Operations for the years ended November 30, 2002, 2001 and 2000

 

 

 

Consolidated Balance Sheets for the years ended November 30, 2002 and 2001

 

 

 

Consolidated Statements of Stockholders’ Equity for the years ended November 30, 2002, 2001 and 2000

 

 

 

Consolidated Statements of Cash Flows for the years ended November 30, 2002, 2001 and 2000

 

 

 

Notes to Consolidated Financial Statements

 

 

(a)(2)

Financial Statement Schedules:

 

 

 

Schedule II – Valuation and Qualifying Accounts

 

 

(a)(3)

Index to Exhibits:

 

 

 

See Index to Exhibits included herein.

 

 

(b)

Reports on Form 8-K

 

 

 

None

 

 

(c)

Index to Exhibits.  See Index to Exhibits included herein.

 

26



ADVANCED MATERIALS GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Certified Public Accountants

 

Consolidated Statements of Operations for the years ended November 30, 2002, 2001 and 2000

 

Consolidated Balance Sheets as of November 30, 2002 and 2001

 

Consolidated Statements of Stockholders’ Equity for the years ended November 30, 2002, 2001 and 2000

 

Consolidated Statements of Cash Flows for the years ended November 30, 2002, 2001 and 2000

 

Notes to Consolidated Financial Statements

 

F-1



 

Report of Independent Certified Public Accountants

 

Board of Directors

Advanced Materials Group, Inc.

Rancho Dominguez, California

 

We have audited the accompanying consolidated balance sheets of Advanced Materials Group, Inc. and its subsidiaries (the “Company”) as of November 30, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2002. These consolidated financial statements are the  responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Advanced Materials Group, Inc. and its subsidiaries, as of November 30, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.

 

The Company is currently in technical default under the compliance provisions of its bank line of credit and term loan.  See Notes 1, 4 and 5 to these consolidated financial statements.

 

 

 

/s/ BDO Seidman, LLP

 

BDO SEIDMAN, LLP

 

January 30, 2003,

   except as to notes 4 and 5

   which are as of February 11, 2003

 

F-2



 

ADVANCED MATERIALS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Years Ended November 30,

 

2002

 

2001

 

2000

 

 

 

 

 

 

 

 

 

Net sales

 

$

36,287,000

 

$

38,483,000

 

$

40,329,000

 

Cost of sales (including depreciation of $571,000, $553,000 and $592,000 for the years ended November 30, 2002, 2001 and 2000, respectively)

 

32,412,000

 

35,102,000

 

34,152,000

 

 

 

 

 

 

 

 

 

Gross profit

 

3,875,000

 

3,381,000

 

6,177,000

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

3,274,000

 

4,484,000

 

4,463,000

 

Restructuring charges

 

226,000

 

1,334,000

 

 

Write-down of goodwill

 

387,000

 

 

 

Depreciation and amortization

 

268,000

 

344,000

 

286,000

 

 

 

 

 

 

 

 

 

Total operating expenses

 

4,155,000

 

6,162,000

 

4,749,000

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(280,000

)

(2,781,000

)

1,428,000

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

Interest expense

 

(415,000

)

(501,000

)

(523,000

)

Foreign exchange gain (loss)

 

44,000

 

13,000

 

(67,000

)

Other, net

 

(80,000

)

(51,000

)

(59,000

)

 

 

 

 

 

 

 

 

Total other expense, net

 

(451,000

)

(539,000

)

(649,000

)

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(731,000

)

(3,320,000

)

779,000

 

Income tax (benefit) expense

 

(257,000

)

66,000

 

273,000

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(474,000

)

(3,386,000

)

506,000

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Estimated gain on disposal of Condor Utility Products, Inc.

 

 

 

667,000

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(474,000 

)

$

(3,386,000 

)

$

1,173,000

)

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.05

)

$

(0.39

)

$

0.06

 

Estimated gain on disposal of Condor Utility Products, Inc

 

 

 

0.08

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

$

(0.05

)

$

(0.39

)

$

0.14

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.05

)

$

(0.39

)

$

0.06

 

Estimated gain on disposal of Condor Utility Products, Inc

 

 

 

0.07

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

$

(0.05

)

$

(0.39

)

$

0.13

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

8,671,272

 

8,671,272

 

8,599,723

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

8,671,272

 

8,671,272

 

8,784,412

 

 

See accompanying notes to consolidated financial statements

 

F-3



 

ADVANCED MATERIALS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

 

November 30,

 

2002

 

2001

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

764,000

 

$

1,303,000

 

Accounts receivable, net of allowance for doubtful accounts of $97,000 and $199,000 as of November 30, 2002 and 2001, respectively

 

5,464,000

 

6,401,000

 

Inventories, net of allowance for obsolescence of $241,000 and $123,000 as of November 30, 2002 and 2001, respectively

 

3,456,000

 

3,551,000

 

Prepaid expenses and other

 

143,000

 

308,000

 

 

 

 

 

 

 

Total current assets

 

9,827,000

 

11,563,000

 

 

 

 

 

 

 

Property and equipment, net

 

2,485,000

 

2,654,000

 

Goodwill, net of accumulated amortization of $568,000 as of November 30, 2001

 

 

387,000

 

Other assets

 

199,000

 

168,000

 

 

 

 

 

 

 

Total assets

 

$

12,511,000

 

$

14,772,000

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

4,387,000

 

$

6,457,000

 

Accrued liabilities

 

772,000

 

838,000

 

Restructuring reserve

 

378,000

 

406,000

 

Deferred income

 

97,000

 

255,000

 

Line of credit

 

3,701,000

 

2,788,000

 

Current portion of long-term obligations

 

599,000

 

708,000

 

 

 

 

 

 

 

Total current liabilities

 

9,934,000

 

11,452,000

 

 

 

 

 

 

 

Convertible debentures

 

405,000

 

405,000

 

Restructuring reserve

 

504,000

 

647,000

 

Retirement benefit to former employees, net of current portion of $157,000 and $154,000 and of discount of $2,871,000 and $2,994,000 at November 30, 2002 and 2001, respectively

 

1,094,000

 

1,129,000

 

Capital lease obligations, net of current portion of $164,000 and $146,000 at  November 30, 2002 and 2001, respectively

 

143,000

 

234,000

 

 

 

 

 

 

 

Total liabilities

 

12,080,000

 

13,867,000

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock-$.001 par value; 5,000,000 shares authorized; no shares issued  and outstanding

 

 

 

Common stock-$.001 par value; 25,000,000 shares authorized; 8,671,272 shares issued and outstanding at November 30, 2002 and 2001

 

9,000

 

9,000

 

Additional paid-in capital

 

7,083,000

 

7,083,000

 

Accumulated deficit

 

(6,661,000

)

(6,187,000

)

 

 

 

 

 

 

Total stockholders’ equity

 

431,000

 

905,000

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

12,511,000

 

$

14,772,000

 

 

See accompanying notes to consolidated financial statements

 

F-4



 

ADVANCED MATERIALS GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Paid-in
Capital

 

Accumulated
Deficit

 

Total Stockholders’
Equity

 

Common Stock

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

Balances, November 30, 1999

 

8,519,055

 

$

9,000

 

$

6,987,000

 

$

(4,009,000

)

$

2,987,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

152,217

 

 

96,000

 

 

96,000

 

Subsidiary year end change

 

 

 

 

35,000

 

35,000

 

Net income

 

 

 

 

1,173,000

 

1,173,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, November 30, 2000

 

8,671,272

 

9,000

 

7,083,000

 

(2,801,000

)

4,291,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(3,386,000

)

(3,386,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances, November 30, 2001

 

8,671,272

 

9,000

 

7,083,000

 

(6,187,000

)

905,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(474,000

)

(474,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances, November 30, 2002

 

8,671,272

 

$

9,000

 

$

7,083,000

 

$

(6,661,000

)

$

431,000

 

 

See accompanying notes to consolidated financial statements

 

F-5



 

ADVANCED MATERIALS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended November 30,

 

2002

 

2001

 

2000

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(474,000

)

$

(3,386,000

)

$

1,173,000

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

839,000

 

897,000

 

878,000

 

Provision for bad debt

 

5,000

 

99,000

 

 

Provision for obsolete inventory

 

160,000

 

483,000

 

(10,000

)

Write-off of goodwill

 

387,000

 

 

 

Change in restructuring reserve

 

(171,000

)

1,053,000

 

 

Deferred tax provision

 

 

 

267,000

 

Interest and other on deferred compensation

 

141,000

 

125,000

 

160,000

 

Gain (loss) on disposal of fixed assets

 

(13,000

)

(25,000

)

(25,000

)

Discontinued operations:

 

 

 

 

 

 

 

Write-off of property and equipment

 

 

 

308,000

 

Reversal of litigation accrual

 

 

 

(975,000

)

Effect of November 2000 cash flow activity for a subsidiary year end change

 

 

 

35,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

932,000

 

1,253,000

 

(515,000

)

Income taxes

 

 

264,000

 

229,000

 

Inventories

 

(65,000

)

928,000

 

(1,095,000

)

Prepaid expenses and other

 

165,000

 

59,000

 

(192,000

)

Other assets

 

(31,000

)

(16,000

)

85,000

 

Accounts payable and other accrued liabilities

 

(2,136,000

)

441,000

 

1,266,000

 

Deferred income

 

(158,000

)

(18,000

)

(64,000

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(419,000

)

2,157,000

 

1,525,000

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(568,000

)

(566,000

)

(1,107,000

)

Proceeds from sale of property and equipment

 

13,000

 

150,000

 

54,000

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(555,000

)

(416,000

)

(1,053,000

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Exercise of common stock options

 

 

 

96,000

 

Net borrowings (repayments) under line of credit

 

913,000

 

(667,000

)

(238,000

)

Borrowings (repayments) under term loans

 

(127,000

)

(614,000

)

496,000

 

Payments on capital lease obligations

 

(175,000

)

(126,000

)

(92,000

)

Payments on deferred compensation

 

(176,000

)

(132,000

)

(129,000

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

435,000

 

(1,539,000

)

133,000

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(539,000

)

202,000

 

605,000

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

1,303,000

 

1,101,000

 

496,000

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

 

$

764,000

 

$

1,303,000

 

$

1,101,000

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid (received) during the year for:

 

 

 

 

 

 

 

Interest

 

$

501,000

 

$

524,000

 

$

445,000

 

 

 

 

 

 

 

 

 

Income taxes

 

$

(220,000

)

$

29,000

 

$

(229,000

)

 

 

 

 

 

 

 

 

Fixed assets acquired under capital leases

 

$

102,000

 

$

39,000

 

$

237,000

 

 

See accompanying notes to consolidated financial statements

 

F-6



 

ADVANCED MATERIALS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Advanced Materials Group, Inc. and its subsidiaries (collectively, the “Company”), engage in the conversion of specialty materials, including foams, films and adhesive composites into components and finished products for the computer peripheral, medical, automotive, aerospace and consumer products markets. The Company has manufacturing facilities in the United States and in Ireland, as well as strategic manufacturing alliances in Puerto Rico and Singapore.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Advanced Materials Group, Inc. and its wholly owned subsidiaries, Advanced Materials, Inc. and Advanced Materials Ltd. All significant intercompany accounts and transactions have been eliminated.

 

Liquidity

 

The Company has incurred substantial losses from operations, has a working capital deficit and is currently in technical default under the compliance provisions of its bank line of credit and term loan (see notes 4 and 5). In order to fund present and future operations, the Company needs to cure its covenant violations with its lender and extend the terms of such line, or find a replacement lender with acceptable terms. While the Company is in the process of attempting to cure its line of credit violations, and has initiated plans to return to profitability, there are no assurances that the Company will be successful in completing these critical tasks. If the Company is unable to successfully complete these critical tasks, it may be forced to significantly reduce, restructure or cease  its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations.

 

Reclassifications

 

Certain fiscal 2001 and 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2002 presentation.

 

Fiscal Year Change

 

During calendar 2000, the Company’s Ireland subsidiary, Advanced Materials Ltd., changed its fiscal year end from October 31 to November 30.  The consolidated statement of operations for the year ended November 30, 2000 includes the results of this subsidiary’s operations for the twelve months ended October 31, 2000.  The results of operations for the transition period of November 1 to November 30, 2000 for this subsidiary were charged to retained earnings in order to report only twelve months of operating results.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. The Company’s cash equivalents at November 30, 2002 consist primarily of investments in a money market fund.

 

F-7



 

Fair Value of Financial Instruments

 

The Company’s cash and cash equivalents, accounts receivable, accounts payable and line of credit approximated fair value at November 30, 2002 because of the relatively short maturity of these instruments. The carrying value of debt approximated fair value at November 30, 2002 due to the Company’s ability to obtain financing at similar interest rates from other lenders.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market.  Cost includes raw materials, labor, manufacturing overhead and purchased products.  Market is determined by comparison with recent purchases or net realizable value.  Net realizable value is based on forecasts for sales of the Company’s products in the ensuing years. Should demand for the Company’s products prove to be significantly less than anticipated, the ultimate realizable value of the Company’s inventories could be substantially less than the amount shown on the accompanying consolidated balance sheets.

 

Property and Equipment

 

Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses from retirements and dispositions are credited or charged to operations.

 

Depreciation and amortization are computed using the straight-line method over estimated useful lives of 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 $839,000, $833,000, and $815,000 for the years ended November 30, 2002, 2001, and 2000, respectively, of which $571,000, $553,000, and $592,000, respectively, is included in cost of sales in the accompanying consolidated statements of operations.

 

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.

 

Effective December 1, 2001, the Company adopted new accounting rules for goodwill and certain intangible assets.  Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques.  During the fourth quarter of 2002, the Company completed an impairment evaluation and determined that their goodwill has been impaired and accordingly, recorded a $387,000 non-cash pretax charge for the impairment of goodwill.  Amortization expense of approximately $60,000 recognized during 2001 and 2000 would not have been recognized under the new accounting rules.

 

There were no impairment charges for the year ended November 30, 2001.

 

During fiscal year 2000, the Company wrote down equipment with a carrying value of $308,000 relating to the discontinued operations of one of its subsidiaries.

 

Revenue Recognition

 

The Company recognizes revenue upon shipment of product at which time title passes to the customer.

 

F-8



 

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs were approximately $25,000, $27,000, and $22,000, for the years ended November 30, 2002, 2001, and 2000, 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, 2002, the Company maintained cash balances at certain financial institutions in excess of federally insured limits.

 

Customers

 

The Company provides credit in the normal course of business to customers throughout the United States and foreign markets.  The Company performs ongoing credit evaluations of its customers.  The Company maintains reserves for potential credit losses based upon the Company’s historical experience related to credit losses.

 

Hewlett Packard accounted for 66%, 62% and 53% of consolidated revenues for the years ended November 30, 2002, 2001 and 2000, respectively.  Hewlett Packard accounted for 51% and 47% of consolidated accounts receivable as of November 30, 2002 and 2001, respectively.  The loss of Hewlett Packard as a customer or a decline in the economic prospects of Hewlett Packard would have a material adverse effect on the Company’s consolidated financial position and results of operations.

 

Suppliers

 

Foamex accounted for 50%, 68% and 62% of consolidated purchases for the years ended November 30, 2002, 2001 and 2000, respectively.   Foamex accounted for 43% and 22% of consolidated accounts payable at November 30, 2002 and 2001, respectively. Management believes that the loss of Foamex as a major supplier of foam could adversely affect the Company’s business.  If another supplier’s products were to be substituted by our customers in critical applications, there are no assurances that AMG would retain the favorable supply position that it has earned through over 25 years as an authorized converter/fabricator for Foamex and Voltek.

 

The Company formed Advanced Materials Foreign Sales Corporation Ltd., a wholly-owned subsidiary of the Company, to enter into a strategic manufacturing agreement in Singapore.  The Company entered into a ten-year agreement with Foamex Asia (“Foamex”) in January 1998.  Terms of the agreement call for the Company to lease production equipment and provide certain technology to Foamex. Foamex will in turn provide its manufacturing facilities and workforce to fabricate foam products at Foamex’s Singapore facility.  The manufacturing agreement has a profit sharing provision that changes annually.  The profit sharing split is as follows (in percentages):

 

Year

 

The Company

 

Foamex

 

1998

 

65

 

35

 

1999

 

60

 

40

 

2000

 

50

 

50

 

2001

 

50

 

50

 

2002

 

45

 

55

 

2003

 

40

 

60

 

2004 – 2007

 

35

 

65

 

 

F-9



 

During 2001, Foamex agreed to maintain the year 2000 profit sharing split of 50/50.  However, in 2002 the profit sharing was changed to 45/55 and it is expected that the Company’s profit sharing split will continue to decrease to the 35% level over the next couple of years, and, accordingly, the Company’s gross margin related to this arrangement will decline (see note 12).  The continued success of the Company’s Singapore operations depends upon the continued relationship with Foamex.  The net income from operations provided by the Singapore operation was $1,206,000 and $1,471,000 for the fiscal years ended November 30, 2002 and 2001, respectively.

 

Risks and Uncertainties

 

Licenses and Proprietary Rights

 

The Company has secured a patent on a manufacturing process for fabricating plastic foam sheet material with compound radius. The 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 manufacture of certain products by the Company requires the purchase and use of chemicals and other materials, which are or may be, classified as hazardous substances.  The Company and its subsidiaries do not maintain environmental impairment insurance.  There can be no assurance that the Company and its subsidiaries will not incur environmental liability or that hazardous substances are not or will not be present at their facilities.

 

The Company 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, 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.

 

The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that costs arising from existing environmental laws will not have a material adverse effect on the Company’s consolidated financial condition or results of operations. There can be no assurance, however, that environmental laws will not become more stringent in the future or that the Company will not incur costs in the future in order to comply with such laws.

 

Various laws and regulations relating to safe working conditions, including the Occupational Safety and Health Act (“OSHA”), are also applicable to the Company and its subsidiaries.  The Company believes it and its subsidiaries are in substantial compliance with all material Federal, state, local, EU and Irish laws and regulations regarding safe working conditions.

 

F-10



 

 

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 (gains) losses for the years ended November 30, 2002, 2001 and 2000 were approximately $(44,000), $(13,000) and $67,000, respectively.

 

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 requires 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.

 

Earnings (Loss) per Share

 

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 requires the presentation of basic and diluted net income per share. Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential common shares including stock options, warrants, and convertible debentures have been excluded for the years ended November 30, 2002 and 2001 as their effect would be antidilutive.

 

F-11



 

Basic and Diluted net income (loss) per share computed in accordance with SFAS 128 for the years ended November 30 are as follows:

 

 

 

2002

 

2001

 

2000

 

 

 

 

 

 

 

 

 

BASIC EPS:

 

 

 

 

 

 

 

Net income (loss)

 

$

(474,000

)

$

(3,386,000

)

$

1,173,000

 

Denominator:  Weighted average common shares outstanding

 

8,671,272

 

8,671,272

 

8,599,723

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

(0.05

)

$

(0.39

)

$

0.14

 

 

 

 

 

 

 

 

 

DILUTED EPS:

 

 

 

 

 

 

 

Net income (loss)

 

$

(474,000

)

$

(3,386,000

)

$

1,173,000

 

Denominator:  Weighted average common shares outstanding

 

8,671,272

 

8,671,272

 

8,599,723

 

Common equivalent shares outstanding:

 

 

 

 

 

 

 

Options

 

 

 

162,870

 

Warrants

 

 

 

21,819

 

 

 

 

 

 

 

 

 

Total shares

 

8,671,272

 

8,671,272

 

8,784,412

 

 

 

 

 

 

 

 

 

Net income (loss) per share - diluted

 

$

(0.05

)

$

(0.39

)

$

0.13

 

 

There were 1,717,000 and 1,735,000 potentially dilutive options, exclusive of effect of convertible debentures, outstanding at November 30, 2002 and 2001, respectively, that were not included above because they would be anti-dilutive.

 

Recent Accounting Pronouncements

 

In July 2001, the FASB issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations and No. 142, “Goodwill and Other Intangible Assets”.  These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life.  Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment.  Effective December 1, 2001, the Company adopted new accounting rules for goodwill and certain intangible assets.  Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques.  During the fourth quarter of 2002, the Company completed an impairment evaluation and determined that their goodwill has been impaired and accordingly, recorded a $387,000 non-cash pretax charge for the impairment of goodwill.  Amortization expense of approximately $60,000 recognized during 2001 and 2000 would not have been recognized under the new accounting rules.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets.”  This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.”  SFAS 144 is effective for fiscal years beginning after December 15, 2001.  AMG will adopt SFAS 144 beginning in the fiscal year 2003.  The Company does not believe that the adoption of SFAS 144 will materially impact the Company’s financial position or results of operations.

 

F-12



 

On July 30, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 replaces the prior guidance that  was provided by EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  Management currently believes that the adoption of SFAS No. 146 will not have a material impact on the financial statements.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123.”  SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.  Finally, this Statement amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in the interim financial information.  The amendments to SFAS No. 123 that provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation are effective for financial statements for fiscal years ending after December 15, 2002.  The amendment to SFAS No. 123 relating to disclosure and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.  Early application is encouraged.  Management currently believes that the adoption of SFAS No. 148 will not have a material impact on the financial statements.

 

NOTE 2–INVENTORIES

 

Inventories consist of the following at November 30:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Raw materials

 

$

2,051,000

 

$

2,235,000

 

Work-in-progress

 

170,000

 

209,000

 

Finished goods

 

1,476,000

 

1,230,000

 

 

 

 

 

 

 

 

 

3,697,000

 

3,674,000

 

 

 

 

 

 

 

Less allowance for obsolete inventory

 

(241,000

)

(123,000

)

 

 

 

 

 

 

 

 

$

3,456,000

 

$

3,551,000

 

 

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NOTE 3–PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at November 30:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Machinery and equipment

 

$

4,548,000

 

$