U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2004
COMMISSION FILE NUMBER: 1-9431
ADAL GROUP INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3012230
--------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
BILLHURST STUDIO
LINGFIELD COMMON ROAD
LINGFIELD SURREY RH7 6B7, UK
(Address of principal executive offices)
441-342-833855
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_].
As of November 12, 2004, there were 2,550,000 shares of common stock, par value
$0.0001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X].
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003 3
Consolidated Condensed Statements of Operations for the
three month and nine month periods ended September 30, 2004
and 2003 (unaudited) 4
Consolidated Condensed Statements of Cash Flows for the nine
month periods ended September 30, 2004 and 2003 (unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 19
Certifications 20-24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAL GROUP, INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
PREDECESSOR
ADAL GROUP, INC. COMPANY
SEPTEMBER 30, DECEMBER 31,
-------- --------
2 0 0 4 2 0 0 3
-------- --------
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 389 $ 150
Accounts Receivable - Net 7,203 6,312
Inventories 2,248 1,618
Other Current Assets 194 164
-------- --------
TOTAL CURRENT ASSETS 10,034 8,244
PROPERTY, PLANT AND EQUIPMENT - NET 4,929 3,063
INTANGIBLE ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $80 518 --
NON-CURRENT DEFERRED TAXES -- 55
-------- --------
TOTAL ASSETS $ 15,481 $ 11,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Short-Term Borrowings and Credit
Agreements $ 5,971 $ 6,332
Accounts Payable 5,408 4,445
Current Portion of Long-Term Debt 387 --
Other Current Liabilities 956 750
-------- --------
TOTAL CURRENT LIABILITIES 12,722 11,527
LONG-TERM DEBT, LESS CURRENT
PORTION 3,600 --
NON-CURRENT DEFERRED TAXES 84 --
-------- --------
TOTAL LIABILITIES 16,406 11,527
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock, $0.0001 par value,
100,000,000 shares authorized,
2,550,000 shares issued and outstanding
at September 30, 2004 and $2 Per Share Stated
Value; 1,000 Shares Authorized, Issued
and Outstanding at December 31, 2003 -- 2
Retained Earnings (Deficit) (933) (164)
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment 8 (3)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (925) (165)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 15,481 $ 11,362
======== ========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
3
ADAL GROUP, INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
ADAL GROUP INC PREDECESSOR COMPANY
-------------- -------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDING ENDING ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2 0 0 4 2 0 0 4 2 0 0 3 2 0 0 3
---------- ---------- ---------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET SALES $ 7,740 $ 22,284 $ 5,768 $ 15,947
COST OF SALES 7,034 20,066 5,082 14,352
---------- ---------- ---------------- -----------
GROSS PROFIT 706 2,218 686 1,595
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 964 2,632 372 1,026
---------- ---------- ---------------- -----------
INCOME (LOSS) FROM
OPERATIONS (258) (414) 314 569
INTEREST EXPENSE 151 431 30 94
---------- ---------- ---------------- -----------
INCOME BEFORE INCOME
TAXES (409) (845) 284 475
PROVISION FOR INCOME TAX
EXPENSE (BENEFIT) (10) (74) 64 106
---------- ---------- ---------------- -----------
NET INCOME (LOSS) $ (399) $ (771) $ 220 $ 369
========== ========== ================ ===========
Earnings (Loss) Per Share $ (0.16) $ (0.30) $ 0.09 $ 0.14
========== ========== ================ ===========
Weighted Average Number of
Shares Outstanding (a) 2,550,000 2,550,000 2,550,000 2,550,000
========== ========== ================ ===========
(a) Reflects the total shares outstanding after closing of the reverse merger
discussed in Note 1.
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
4
ADAL GROUP, INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
ADAL GROUP, INC. PREDECESSOR COMPANY
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -------------
2004 2 0 0 3
--------------- -------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net Income (Loss) $ (771) $ 369
Adjustments to Reconcile Net
Income (Loss) to Cash From
Operations:
Depreciation and Amortization 868 731
Changes in Assets and Liabilities:
Decrease (Increase):
Receivables 162 (836)
Inventories (219) 246
Other Current Assets 95 134
Increase (Decrease):
Accounts Payable 354 (204)
Other Current Liabilities 28 197
--------------- -------------
NET CASH - OPERATING
ACTIVITIES 517 637
--------------- -------------
INVESTING ACTIVITIES:
Cash Paid for Fagg
Acquisition, Net of Cash Acquired (732) --
Capital Expenditures (1,499) (480)
--------------- -------------
NET CASH - INVESTING
ACTIVITIES (2,231) (480)
--------------- -------------
FINANCING ACTIVITIES:
Net Changes to Short-Term
Borrowings (1,720) (150)
Borrowing of Long-Term Debt 4,041 --
Payment of Long-Term Debt (364) --
---------------- -------------
NET CASH - FINANCING
ACTIVITIES 1,957 (150)
--------------- -------------
EFFECT OF EXCHANGE RATES
CHANGES ON CASH (4) 66
---------------- -------------
NET INCREASE (DECREASE) IN
CASH - FORWARD $ 239 $ 73
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
5
ADAL GROUP,INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
PREDECESSOR COMPANY
NINE MONTHS NINE MONTHS
TO SEPTEMBER 30 TO SEPTEMBER 30
--------------- ---------------
2004 2 0 0 3
--------------- ---------------
(UNAUDITED) (UNAUDITED)
NET INCREASE (DECREASE) IN
CASH - FORWARDED $ 239 $ 73
CASH - BEGINNING OF PERIODS 150 --
--------------- -------------
CASH - END OF PERIODS $ 389 $ 73
=============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 431 $ 94
Income Taxes $ -- $ --
NON-CASH ACTIVITY:
Debt Issued for Fagg
Acquisition $ 675 $ --
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
6
ADAL GROUP, INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These unaudited consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnotes normally included in financial
statements prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP) have been condensed or omitted pursuant
to such rules and regulations. The results of operations for interim periods are
not necessarily indicative of results which may be expected for any other
interim period or for the year ending December 31, 2004. This Form 10-QSB should
be read in conjunction with our audited financial statements for the year ended
December 31, 2003 included in the Form 8-K filed with the Securities and
Exchange Commission on October 28, 2004. The interim consolidated financial
statements have been prepared following the same accounting policies and methods
of computation as the audited consolidated financial statements for the year
ended December 31, 2003.
(1) ACQUISITION OF ADVANCED ALUMINIUM GROUP LIMITED
On October 28, 2004 (the "Closing"), Sunningdale, Inc., a Delaware corporation
("the Company") consummated the transactions contemplated by a Share Exchange
Agreement ("Exchange Agreement"), dated September 22, 2004, by and among the
Company, Advanced Aluminium Group Limited ("AAG"), the stockholders of AAG, and
Keating Reverse Merger Fund, LLC. Pursuant to the terms of the Exchange
Agreement, the Company acquired all of the outstanding capital stock of AAG in
exchange for the Company's issuance to the AAG stockholders of 2,295,000 shares
of the Company's common stock. On November 5, 2004 the Company changed its name
to AdAl Group Inc. ("AdAl"). All references to Sunningdale, Inc. or the Company
also refer to AdAl Group Inc.
Following the Closing, the stockholders of AAG own 2,295,000 shares of the
Company's common stock, or 90% of the outstanding shares of the Company's common
stock, and the stockholders of the Company immediately prior to Closing
("Existing Stockholders") own 255,000 shares of the Company's common stock, or
10% of the outstanding shares of the Company's common stock.
Under the Exchange Agreement, the Existing Stockholders also have anti-dilution
protection in the event the Company: (i) issues any securities in any offering
during the twelve (12) month period following the Closing, or (ii) issues any
securities in connection with the license and/or acquisition by the Company of
technology or systems following the Closing (collectively, the "Events"). In
such cases, the Company is required to issue to the Existing Stockholders, in
proportion to their respective ownership interests prior to the Closing, such
additional number of shares of common stock of the Company so that the Existing
Stockholders shall own, in the aggregate, ten percent (10%) of the issued and
outstanding shares of common stock of the Company, on a fully diluted basis,
after giving effect to the Events.
The Company through its subsidiaries is a diversified producer of aluminum
extrusions and manufactured parts. The Company's two principal operating
subsidiaries are Seco Aluminium Ltd. ("Seco" or the "Predecessor Company") and
W.H.J. Fagg & Son Ltd. ("Fagg"), both of which are located in England. Seco is a
provider of aluminum extrusion design and production services, providing
complete supply-chain management including component design, fabrication,
warehousing and delivery. Fagg provides precision engineering, tool making and
volume production of machined (primarily aluminum) components principally for
the automotive industry. Fagg was acquired by AAG effective February 1, 2004.
(2) BASIS OF PRESENTATION
The purchase of the shares of AAG by the Company has been treated for accounting
and financial reporting purposes as a reverse acquisition of the Company by AAG,
since the former AAG stockholders control the
7
ADAL GROUP INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company after the transaction. Under this accounting treatment, AAG is deemed
for accounting purposes to be the acquiring entity and the Company the acquired
entity. The financial statements of the Company for the three months and nine
months ended September 30, 2004 now reflect AAG on a historical basis. As the
Company had not pursued any revenue generating activity in the year preceding
the closing, the merger has been treated as a recapitalization of AAG, with no
goodwill recorded. As of September 30, 2004 the Stockholders' Equity accounts
have been adjusted to reflect the authorized and issued capital of the Company
based on the number of common shares outstanding after the Closing. The
Stockholders' Equity accounts as of December 31, 2003 reflect the authorized and
issued common stock of AAG, as if it existed at that date.
Effective October 20, 2003, AAG acquired all of the outstanding capital stock of
Advanced Aluminium Industries, Ltd. ("AAI"). AAI's activities as of the date of
acquisition consisted solely of the ownership of Seco (referred to herein as the
Predecessor Company), which was acquired by AAI on October 20, 2003.
The accompanying consolidated statements of operations for the three and nine
month periods ended September 30, 2003 and the statement of cash flows for the
nine months ended September 30, 2003 represent the results of operations and
cash flows of the Predecessor Company for such periods. The consolidated balance
sheet as of September 30, 2004 and consolidated statements of operations for the
three and nine month periods ended September 30, 2004 and the statement of cash
flows for the nine months ended September 30, 2004 represent the consolidated
financial position and results of operations and cash flows for AdAl and its
wholly-owned subsidiaries.
The accompanying consolidated financial statements as of September 30, 2004 and
for the three and nine month periods ended September 30, 2004 and 2003 are
unaudited, however, in the opinion of the management of the Company and its
subsidiaries, all adjustments have been made in order to make the financial
statements not misleading. The results for the interim periods ended September
30, 2004 are not necessarily indicative of the results to be obtained for a full
fiscal year.
(3) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY - AdAl headquarters and principal business operations are
located in England. Although most purchase contracts for aluminum billets are
denominated in U.S. dollars, all other expenses and all revenues are denominated
in UK Pound Sterling. As such, management has determined that the functional
currency for financial reporting purposes is the UK Pound Sterling. Translation
into U.S. dollars has been effected in the following manner: assets and
liabilities using the exchange rates in effect at the balance sheet date,
stockholders' equity at historical rates, and
8
ADAL GROUP INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
results of operations and cash flows at the average exchange rates during the
period. The effect of exchange rate changes is reflected as a separate component
of stockholders' equity.
USE OF ESTIMATES - The preparation of the 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 disclosures of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the periods reported. Actual results could differ from those
estimates.
REVENUE RECOGNITION - The Company recognizes revenue after its product is
shipped and collectibility is reasonably assured.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share are computed by
dividing net income (loss) by the weighted-average number of vested common
shares outstanding for the period. Diluted earnings (loss) per share is computed
giving effect to all potentially dilutive common stock.
INTANGIBLES. Intangibles, which consist of customer lists, are recorded at cost
and are amortized utilizing the straight-line method over a period of 5 years.
When changing circumstances warrant, the Company evaluates the carrying value
and the period of amortization based on the current and expect future
undiscounted cash flows from operations to determine whether a revised estimate
of carrying value or useful life is required.
Total
Year Ended (In thousands of
December 31, U.S. dollars)
------------ ----------------
2004 $111
2005 121
2006 121
2007 121
2008 121
Thereafter 11
----
Total $606
(4) ACQUISITION OF WHJ FAGG & SON
On January 31, 2004, AAG purchased all of the outstanding shares of W.H.J. Fagg
& Son Ltd. ("Fagg") through its wholly-owned subsidiary AAI, for a total
investment of approximately $1.4 million including transaction related costs of
$64,000. Payment was made in the form of cash of $739,000 and notes in the
amount of $675,000. The investment in excess of the net book value of Fagg has
been allocated to intangible assets, representing the value assigned to Fagg's
customer list, which is being amortized over five years using the straight-line
method. The results of operations of Fagg are included in the consolidated
financial statements beginning February 1, 2004.
(5) COMMITMENTS
PURCHASE CONTRACTS - Seco, an indirect wholly-owned subsidiary of the Company,
requires a supply of aluminum billets as raw materials for its production
process. Though these billets are generally available on the open market, the
Company has entered into purchase contracts with five smelters to reduce the
risk of a disruption in supply. These contracts are for the delivery of billets
per month at an agreed rate for up to twelve months into the future. Production
cost per ton is set under an annual master agreement with each smelter. In
advance of production, the Company places material orders with the smelter, at
which time the cost of aluminum is determined.
At September 30, 2004 and December 31, 2003, there were purchase agreements
totaling approximately $1,811,000 and $829,000 respectively.
9
ADAL GROUP INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT
The Company has a Credit Agreement with a bank that allows the Company to
borrow against customer accounts receivable of Seco, subject to certain
restrictions. Under the terms of the Credit Agreement, the Company may borrow up
to a maximum of $7,200,000, subject to the availability of eligible customer
receivables. Interest is charged at the rate of 2% above the Base Rate of the
Bank of England (6.75%, 4.75% base rate plus 2%, at September 30, 2004 and 5.75%
at December 31, 2003). The Company pays a commitment fee equal to 0.14% of the
eligible accounts receivable, at the time the accounts receivable are reported
to the bank. The amounts outstanding under this agreement are secured by all of
the outstanding accounts receivable of Seco. The term of the Credit Agreement is
open, but can be terminated by either party with 90 days notice. As of September
30, 2004 and December 31, 2003, there was $4,440,000 and $6,332,000 outstanding
under the Credit Agreement and the Company had unused borrowing availability of
$690,000 and $340,000, respectively.
The Company also has a Credit Agreement with another bank that allows the
Company to borrow against customer accounts receivable of Fagg, subject to
certain restrictions. Under the terms of the Credit Agreement, the Company may
borrow up to a maximum of $630,000, subject to the availability of eligible
customer receivables. Interest is charged at the rate of 2.20% above the Base
Rate of the Bank of England (6.95%, 4.75% base rate plus 2.20%, at September 30,
2004). The Company pays a commitment fee equal to 0.50% of the eligible accounts
receivable, at the time the accounts receivable are reported to the bank. The
amounts outstanding under this agreement are secured by all of the outstanding
accounts receivable of Fagg. The term of the Credit Agreement is open, but can
be terminated by either party with 90 days notice. As of September 30, 2004,
there was $469,000 outstanding under the Credit Agreement and the Company had
unused borrowing availability of $161,000.
The Company has an overdraft agreement with a bank that allows the Company to
borrow up to $800,000. As of September 30, 2004, there was $701,000 outstanding
under the agreement. The proceeds are to be used to finance building
construction and will be converted into a mortgage upon completion of the
construction. The outstanding balance bears interest at 2% above the Base Rate
of the Bank of England (6.75% at September 30, 2004).
In connection with the acquisition of Fagg in January 2004, the Company issued
notes payable to the former owners of Fagg in the original principal amount of
$675,000. The notes do not bear interest and are payable in monthly installments
of $54,000 beginning February, 2004. The notes are secured by fifty percent of
the common shares of Fagg. As of September 30, 2004, the unpaid balance on the
notes was $242,000.
10
ADAL GROUP INC. AND SUBSIDIARIES (F/K/A SUNNINGDALE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term debt consisted of the following at September 30, 2004:
September 30,
-----------
2 0 0 4
-----------
(Unaudited)
(In thousands
of U.S. dollars)
----------------
Mortgage Loan, 6.435% Due January 2019 $ 3,456
Machinery and Equipment Loans 531
-----------
Total Long-Term Debt 3,987
Less: Amounts Due Within One Year (387)
-----------
Long-Term Portion $ 3,600
===========
The mortgage loan is secured by the real estate, including land, buildings and
improvements of the facilities located in Witham, England, and has a 15 year
term. The interest rate on the mortgage is fixed for five years, after which
time the Company has the option to accept a fixed rate based upon the then
market rates or accept a variable rate at the Bank of England Base Rate plus
1.5%.
The machinery and equipment loans are secured by certain machinery and equipment
of Fagg. The agreements range from 3 to 5 years with interest ranging between 5%
and 8%.
Following are the principal amounts due under long-term debt arrangements as of
September 30, 2004 by fiscal year:
Years Ending
December 31, Amount
------------ ------
(In thousands of U.S. dollars)
2004 $ 97
2005 325
2006 274
2007 236
2008 224
Thereafter 2,831
------------
TOTAL $ 3,987
===========
11
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition ("MD&A") contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about us, our future
performance, the industries in which we operate, our beliefs and our
management's assumptions. In addition, other written or oral statements that
constitute forward-looking statements may be made by or on behalf of us. Words
such as "expects," "anticipates," "targets," "goals," "projects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecast in such forward-looking statements. These risks and uncertainties
include, but are not limited to: failure of general economic conditions to
improve or improve at the pace we anticipate; continued net losses may increase
our deficit; our ability to secure additional sources of funds on reasonable
terms; our credit ratings; our ability to compete effectively; our reliance on a
limited number of key customers; our exposure to the credit risk of our
customers' accounts receivable; our ability to retain and recruit key personnel;
future litigation; changes in environmental health and safety law; changes to
existing regulations or technical standards; and the social, political and
economic risks of our foreign operations. Except as otherwise required under
federal securities laws and the rules and regulations of the Securities and
Exchange Commission (the "Commission"), we do not have any intention or
obligation to update publicly any forward-looking statements after the
distribution of this MD&A, whether as a result of new information, future
events, changes in assumptions or otherwise.
OVERVIEW
As discussed in the Notes to the Financial Statements contained in this Form
10-QSB the Company acquired, through a reverse merger transaction, Advanced
Aluminium Group Limited ("AAG"), a company incorporated under the Companies Acts
of England and Wales, on October 19, 2003.
As a result of this merger, the Company has adopted the financial reporting year
end of AAG and therefore now has a December 31st fiscal year end.
The purchase of the shares of AAG by the Company has been treated for accounting
and financial reporting purposes as a reverse acquisition of the Company by AAG,
since the former AAG stockholders control the Company after the transaction.
Under this accounting treatment, AAG is deemed for accounting purposes to be the
acquiring entity and the Company the acquired entity. AAG acquired all of the
outstanding capital stock of Advanced Aluminium Industries, Ltd. ("AAI"). AAI's
activities as of the date of acquisition consisted solely of the ownership of
Seco, which was acquired by AAI on October 20, 2003.
12
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
The Company intends to expand both organically and through acquisition. It is
currently developing marketing plans and will work with its advisors to raise
equity capital in 2005. The funds will be utilized to help the Company reduce
its reliance on debt and provide funds to support the capital investment and
marketing plans of existing businesses and businesses that may be acquired in
the future.
RESULTS OF OPERATIONS
When reviewing the results of the operations compared to the prior years the
reader should consider the transition of the group from two private UK companies
to a public company with the establishment of a corporate office. The costs of
this transition are identified in the relevant sections below.
REVENUES. For the nine months ended September 30, 2004 our consolidated revenues
were $22,284,000 compared to $15,947,000 for the Predecessor Company in the
comparable 2003 period, an increase of $6,337,000 (40%). The increase is due to
the revenues from Fagg, $3,547,000 (22%), which was acquired effective February
1, 2004, exchange rate changes $2,019,000 (13%, average exchange rate 2003 year
to date $1.62 to (pound)1.00 versus 2004 of $1.82 to (pound)1.00) and an
increase in sales volume at Seco of approximately 5%.
Although the revenues for Fagg have been included since February 1, 2004, on a
stand alone basis, Fagg's revenue was $3,547,000 for the eight months ended
September 30, 2004 compared to $3,568,000 for the same period in 2003.
Our revenues for the three months ended September 30, 2004 were $7,740,000,
$6,396,000 for Seco and $1,344,000 for Fagg. Total revenues were up 34% (19%
after adjusting for exchange rate differences) above the same period last year,
predominately due to the acquisition of Fagg.
COST OF GOODS SOLD. Cost of goods sold as a percentage of sales was 90% for the
nine months ended September 30, 2004 versus 90% for the same period in 2003.
Aluminium price increases were nearly fully absorbed by increasing customer
prices. Cost of goods sold as a percentage of sales was 91% for the three months
ended September 30, 2004 versus 88% of sales for the same period in 2003.
Aluminum prices increased by 2.6% in the three months ended September 30, 2004
and although we have recovered some of these costs, we are continuing to request
customer price increases and hope to fully recover the cost increases by the end
of the fourth quarter.
Seco's cost of goods sold was 92% of sales in the nine months ending September
30, 2004 compared to 90% in the same period last year. For the three months
ended September 30, 2004, Seco's cost of goods of sold was 92% of sales compared
to 88% of sales in the same period last year.
13
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Fagg's cost of goods sold was 77% of sales in the eight months ending September
30, 2004 compared to 60% of sales in the same period last year (the difference
is principally due to the relatively high margin contract in the 2003 period,
that was not repeated in 2004). For the three months ended September 30, 2004
cost of goods of sold was 75% compared to 63% in the same period last year.
In general, management has addressed the increase in the price of aluminum and
the exchange rate volatility through price increases to customers. Increases in
aluminum costs have been passed on to the Company's customers in the form of
price increases on extrusions, however, the Company was not able to react
quickly enough to cover the initial increases. The Company believes the
necessary price increases are now in place.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. For the nine month period ended
September 30, 2004, selling, general and administrative costs were $2,632,000
compared to $1,026,000 for the Predecessor Company in the same period of 2003.
Included in the increased costs are the expenses associated with establishing
and operating a corporate office, amounting to $422,000; and legal, professional
and accounting fees associated with the reverse merger amounting to $207,000;
leaving a net increase of $977,000, consisting of the following: (a) Increases
in costs at Seco of $584,000; (b) expenses of Fagg of $179,000; (c) amortization
of Fagg customer list of $80,000; and (d) effect of exchange rates of $134,000.
For the three month period ended September 30, 2004, selling, general and
administrative costs were $964,000 compared to $372,000 for the Predecessor
Company in the same period of 2003. The increase of $592,000 is due to: (a)
Increases in costs at Seco of $191,000; (b) Fagg expenses of $104,000; (c)
$171,000 of expenses related to operations of the corporate office; (d) effect
of exchange rates of $49,000; (e) amortization of the Fagg customer list of
$30,000; and (f) $47,000 of legal and accounting fees related to the reverse
merger.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2004
was $431,000 compared with $94,000 for the nine months ended September 30, 2003.
Interest expense for the three months ended September 30, 2004 was $151,000
compared to $30,000 for the three months ended September 30, 2003. The increase
reflects the additional debt issued for the acquisitions of both Seco and Fagg,
which account for interest expense of approximately $271,000 and $93,000 for the
nine months and three months ended September 30, 2004, respectively. Increases
in the Bank of England base rate account for approximately $60,000 and $38,000
for the nine months and three months ended September 30, 2004. The net change in
interest after base rate increases and acquisition funding costs is not
significant. Interest on existing Fagg debt is $66,000 for the nine month period
and $20,000 for the three month period.
14
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET INCOME (LOSS). For the nine month period ended September 30, 2004, the net
loss was $771,000, or $0.30 per share, compared to net income of $369,000, or
$0.14 per share for the Predecessor Company in the prior year.
For the three month period ended September 30, 2004, the net loss was $399,000,
or $0.16 per share, compared to net income of $220,000, or $0.09 per share for
the Predecessor Company in the prior year.
Loss and earnings per share for each period are computed using the number of
shares outstanding after the closing of the reverse merger.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets at September 30, 2004 are $15,481,000, which is
comprised of $4,929,000 property plant and equipment, accounts receivable
$7,203,000, inventory $2,248,000, cash and cash equivalents of $389,000 and
other assets of $712,000.
The Company's current liabilities are $12,722,000. The Company has long-term
debt of $3,987,000, of which $387,000 is current.
The accumulated deficit as of September 30, 2004 is $933,000.
At September 30, 2004, the Company had a working capital deficit of $2,688,000.
The Company also incurred a net loss for both the three month and nine month
periods ending September 30, 2004 of $399,000 and $771,000, respectively.
Management believes that the loss is due to the changes that the Company has
gone through in the past year, including: (a) costs associated with operation of
the corporate office; (b) costs associated with the reverse merger; and (c)
interest costs associated with the acquisitions of Seco and Fagg. In addition,
the Company has been making changes in the manufacturing operations at both Seco
and Fagg, and improving facilities for the future (including construction of a
new building for Fagg's manufacturing operations).
As of September 30, 2004 the Company had its short term bank debt split between
two major UK banks. All bank debt is secured by our accounts receivable. The
mortgage is secured by a lien on the land and buildings. Equipment loans are
secured by a lien on the specific machinery and equipment financed. As of
November 8, 2004, we had authorized but un-utilized credit lines of
approximately $150,000 against our land and buildings and $200,000 against our
accounts receivables.
The Company has approximately $450,000 of unsecured assets that it plans to
utilize to secure additional debt financing in the fourth quarter. This
prospective financing is expected to generate additional cash of approximately
$350,000. In addition, any plant and machinery requirements over
15
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the next six to twelve months are expected to be financed through equipment
leases or other available financing methods.
The consolidation of the Company's banking operations to one bank and the
raising of financing against its unsecured assets is expected to enable the
Company to manage its cash flow through the fourth quarter, which has
traditionally seen a downturn in sales in December due to the holiday shutdown.
In addition to the $350,000 to be raised from monetizing its remaining unsecured
assets the Company anticipates raising an additional $1,000,000 to $1,500,000
from the consolidation of our banking relationships discussed above.
Over the next year, the Company anticipates that it will invest an additional
$500,000 at Seco and Fagg, to improve production efficiency and increase daily
output. The Company plans to invest in a new puller, heater and handling and
packing equipment at Seco and new CNC machines and automation at Fagg. These
investments are expected to improve the throughput at these facilities without
increasing labor costs, thus improving the Company's cost of sales. The Company
is also considering investing in a machining and fabrication operation in the
Czech Republic as well as other potential acquisitions in the UK and the United
States.
The Company estimates that an additional $1.5 million will be required for the
Czech Republic operation in 2005, to acquire the building and machinery as well
as start up costs. The Company expects that it will finance potential
acquisitions with a combination of sellers' notes, issuance of common shares and
additional debt secured by the assets of the acquired companies.
The Company is planning to consolidate its banking relationships with one of the
existing banks in the fourth quarter of 2004, which it expects will result in
higher advance rates against its accounts receivable, overdraft availability,
and lower fees. The Company's negotiations are expected to be complete before
the end of the fourth quarter and are expected to enable the Company to meet its
financial commitments in the fourth quarter.
The Company is also pursuing additional capital through a series of private
placement transactions in 2005, although no specific transactions are currently
being negotiated. It is anticipated that the proceeds, if any, will be used to
provide working capital, investment capital and product marketing and
development funds. If the Company does not raise additional equity capital
sufficient to provide for positive working capital and is unable to return in
the near term to profitability, it may be required to curtail future operations
and/or liquidate assets or enter into credit arrangements on less favorable
terms than would normally be expected, to provide for future liquidity.
The Company does not expect to be profitable in the fourth quarter of 2004, as
historically the fourth quarter is the lowest in terms of sales. However,
management expects that the Company will return to profitability in 2005, as the
benefits of the investments in production efficiency are realized. While
16
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the Company will not be profitable for the next few quarters, management
believes that it will have the cash resources necessary to sustain operations
during that time, based on the actions discussed above.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet financing arrangements and has
not established any special purpose entities.
ITEM 3. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined under Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and in reaching a reasonable level of assurance our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Our chief
executive officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)), have
concluded that, as of September 30, 2004, our disclosure controls and procedures
were adequate and designed to ensure that material information relating to us
and our consolidated subsidiaries would be made known to them by others within
those entities.
There were no significant changes in our internal controls or to our
knowledge, in other factors that could materially affect, or would be reasonably
likely to materially affect, our disclosure controls and procedures, or our
internal control over financial reporting, subsequent to September 30, 2004.
17
ADAL GROUP INC. (F/K/A SUNNINGDALE, INC.)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No. Description
3.1 Amendment to Registrant's Certificate of Incorporation, as
filed November 5, 2004.
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002
32 CEO and CFO Certification Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AdAl Group Inc.
By: /s/ Nicholas Shrager
----------------------------------
Nicholas Shrager
President and Chief Executive Officer
By: /s/ Stephen Goodacre
----------------------------------
Stephen Goodacre
Chief Financial Officer
Date: November 15, 2004
19