Complete 2006 10-KSB for Advanced Materials Group, Inc.
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
(MARK
ONE)
|X|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE
FISCAL YEAR ENDED NOVEMBER 30, 2006.
|_|
TRANSITION REPORT PURSUANT TO 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.
(Name
of small business issuer as specified in its charter)
NEVADA
33-0215295
(State
or
other jurisdiction of I.R.S. Employer Identification
No.)
3303
LEE
PARKWAY SUITE 105 DALLAS, TEXAS 75219
(Address
of principal executive offices)(Zip code)
Issuer's
telephone number, including area code: (972) 432-0602
Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act: COMMON STOCK, $0.001
PAR VALUE
Check
whether the issuer: (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 last 90 days.
Yes
|X|
No | |
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation
S-B contained in this form, and no disclosure will be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. | |
Indicate
by check mark whether the issuer is a shell company (as defined in Rule
12b-2
of
the Exchange Act).
Yes|_|
No
|X|
State
issuers revenues for the year ended November 30, 2006: 9,996,280
State
the
aggregate market value of the voting and non-voting common equity held
by
non-affiliates computed by reference to the price at which the common equity
was
sold,
or the average bid and asked price of such common equity, as of a specified
date within the past 60 days. (See definition of affiliate in Rule 12b-2
of
the Exchange Act.)
The
aggregate market value on February 21, 2007 of the voting and non-voting
common
equity held by non-affiliates of the registrant was $6,542,640.
There
were 12,116,000 shares of our common stock, par value $0.001 per share,
outstanding as of February 21, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
Transitional
Small Business Format (check one): Yes |_| No |X|
|
TABLE
OF CONTENTS
|
|
PART
I
|
|
|
ITEM
1. DESCRIPTION OF
BUSINESS......................................................................................................................................................
|
1 |
|
ITEM
2. DESCRIPTION OF
PROPERTIES.................................................................................................................................................
|
6 |
|
ITEM
3. LEGAL
PROCEEDINGS.................................................................................................................................................................
|
6 |
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.................................................................................
|
6 |
|
PART
II
|
|
|
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.........................................................
|
6 |
|
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION..............................................................
|
8 |
|
ITEM
7. FINANCIAL
STATEMENTS........................................................................................................................................................
|
12 |
|
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL
DISCLOSURE..................................................................................................................................................................................................
|
12 |
|
ITEM
8A. CONTROLS AND
PROCEDURES.............................................................................................................................................
|
12 |
|
ITEM
8B. OTHER
INFORMATION............................................................................................................................................................
|
12 |
|
PART
III
|
|
|
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE
ACT..................................................................................................................................................................
|
12 |
|
ITEM
10. EXECUTIVE
COMPENSATION.................................................................................................................................................
|
13 |
|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERS........................................................................................................................................................................
|
15 |
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.......................................................................................
|
17 |
|
ITEM
13.
EXHIBITS.......................................................................................................................................................................................
|
17 |
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.............................................................................................................
|
17 |
|
PART
IV
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM.......................................................................................
|
F-1 |
|
SIGNATURES.................................................................................................................................................................................................
|
18 |
|
INDEX
TO
EXHIBITS....................................................................................................................................................................................
|
19 |
PART
I
ITEM
1.
DESCRIPTION OF BUSINESS
GENERAL
Advanced
Materials Group, Inc. (the "Company" or "AM") develops, manufactures
and
markets a wide variety of products from a raw material base of flexible
components.
The Company's principal subsidiary, Advanced Materials, Inc. (formerly
known as Wilshire Advanced Materials, Inc.) ("AM"), is the successor
to
a 50
year old business that converted specialty materials including foams,
foils,
films and adhesive composites into components and finished products.
Today,
the Company is making a transition from the foam fabricator / contract
manufacturing
business to proprietary medical and consumer products. Advanced Materials Group,
Inc. and Advanced Materials, Inc. are consolidated and referenced as "AM"
in this document. Examples of the
products AM is currently manufacturing include non-skid surgical instrument
pads
and
applicators for medical use, soap impregnated surgical prep kit sponges,
protective units for arthroscopic and orthopedic instruments, printer
cartridge
inserts and inking felts, automobile insulators and water and dust seals.
These products are made for a number of customers in various markets
including
medical, technology, aerospace, automotive and consumer.
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 3303 Lee Parkway, Suite
105
Dallas, Texas 75219, and its telephone number is (972) 432-0602. The
Company's
website is www.ami4.com.
BUSINESS
STRATEGY
The
common ingredient among our products is that the raw materials from
which all products are produced is "flexible" in nature. The Company
has
focused historically on the supply of specialty die-cut polymeric materials.
This core competency is
still
being utilized but expanded, and because polymers are synthetic chemical
structures
and are used in a variety of configurations and products, the applications
are
numerous. The equipment necessary to produce these proprietary products
is the same that has been historically employed by the Company, but AM is
finding ways
to
maximize equipment capabilities for growth.
The
Company's strategic focus is to continue to acquire proprietary products
and technology,
begin branding its own products, as well as to entrench its competencies
of
product development competencies
into customer-based solutions, primarily in the growing medical and consumer
industries.
Although
management believes that manufacturers are increasingly recognizing the
value
in
conserving or reallocating their resources by outsourcing the specialty
components
of their products, and the Company is positioning itself
in
the marketplace to benefit from this trend where and when it can, the
Company's primary focus will be generating its own proprietary opportunities
with both its
existing customer base as well as new prospects. The Company continuously
looks
for
new materials to work with as it has done historically, but with an emphasis
on patentable or otherwise proprietary applications related to its core
competencies.
The
Company's current short and long-term strategy also
includes the identification and acquisition of target companies whose resources
or talents could aid AM in its new strategy. Such acquisitions could add
strategic and economic value to the Company's product line and competitive
positioning. Management continually seeks to identify potential acquisition
targets to further strengthen the Company's business
strategy.
A
significant part of the Company's past strategy had been to attempt to
penetrate
foreign market places by establishing fabrication plants through subsidiaries
in such areas as Ireland and Singapore. This strategy has been abandoned
at the current time. Instead, Advanced Materials Foreign Sales Corp.
("AM
FSC"), was formed in 1997 in
order
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 work force to fabricate foam products at their Singapore facility.
The
manufacturing agreement was amended in July 2003, and although the Singapore
joint
venture is still producing product, the Company's role in the management
of
that
operations has been altered such that AM is receiving a percentage of
the
profit with only limited involvement.
PRODUCTS
The
Company manufactures a variety of products made from specialty flexible
materials including foams, foils, fabrics, non-woven paper products, needle
felts, films and adhesive composites. These products consist primarily of
components and finished products for the medical, consumer, aerospace,
technology, and automotive markets. These products have historically included
inserts for computer printer cartridges, insulators used in automobile
applications, water and dust seals for automobiles, computers, printers and
HVAC
systems, 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, we manufacture
private label products for medical accounts including electrosurgical grounding
pads, sponges, neck braces, knee pads and other specialty products. Most
of
these products have been designed and produced to meet the specifications
of
each customer.
Proprietary
products will be built to the Company's or customer's specifications,
but could very well be bought by many of the same customers the Company sells
to
today. Given the Company's change in focus, it anticipates that an increasing
percentage of its products, designs, and production methods will be patent
protected, or be proprietary in some aspect. Different from the strategy
adopted
in the previous years, research and development will be the objective of
AM. The
primary target markets will be medical and consumer, however it is expected
that
research and development efforts could produce ideas that would be equally
valuable to the Company's existing industrial customers outside the medical
and
consumer markets. In those cases the benefits of those non-medical or
non-consumer products will be shared with our existing customers and AM will
be
the manufacturer of those products for those customers. The Company currently
has a product development backlog that is expected to fuel future growth.
In
summary, the roots of the Company remain unchanged. Die cutting of flexible
materials will continue unabated. However, the "root system" will be used
to
support new "branches". AM's future is in proprietary and patented products
and
processes.
MANUFACTURING
AM's
corporate headquarters are located in Dallas, Texas and its manufacturing
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. Plans are
currently being made to improve the California facility. The Dallas space
was
previously utilized by a plant that was closed in 2001. Improvements to the
Company's California facility will be required now and in the future as the
Company focuses more effort on the development of products for medical and
consumer products.
AM
has
developed and employs a wide variety of techniques in the manufacturing of
its
products. These techniques include vacuum forming, pressure sensitive
lamination, coating, die cutting, splitting, slitting, heat sealing and
packaging. Vacuum forming is a process that involves heating 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. 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. In the coating operation,
materials are saturated in specific liquids and then dried with heat and
temperature in large ovens. Die cutting is a process that involves the use
of a
match tool die in a hydraulic press to cut material. Splitting and 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. Heat sealing involves
using
heat and pressure to seal thermoplastics together.
QUALITY
CONTROL
AM
is in
the process of becoming ISO 13485 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. AM 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
AM
purchases raw materials primarily consisting of polyurethane foam, cross-linked
polyolefin foams and pressure sensitive adhesives. AM's largest supplier of
raw
materials is Foamex Engineered Polyurethanes ("Foamex"), which in fiscal 2006
and 2005 supplied approximately 38% and 42%, respectively, of AM's raw
materials' requirements. Although the objectives of the Company have been
adjusted, it is not anticipated that the supplier base will change
significantly.
AM
is an
authorized fabricating distributor for 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 a decrease in the demand for Foamex by our customers 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 AM would retain the favorable supply position that it has earned
through over 25 years as an authorized converter/fabricator for Foamex.
MARKETING
AND SALES
AM's
products have traditionally been marketed and sold primarily to major divisions
of large industrial customers, many of which are industry leaders whose products
have significant market share. AM does not see a significant change to this
practice although the product mix is expected to change. In the past, most
of
AM's products have been components or finished products manufactured to order
for its industrial customers. As discussed previously, AM will also sell
and
manufacture products developed internally, and well as those licensed from
outside sources. The customer's purchase decision has often involved the
engineering, manufacturing and purchasing groups within the customer's
management. It is anticipated that the customers' team of management will
continue to be involved in the process, but will also include sales and
executive level management.
AM
currently has two full-time sales representatives who make sales calls on
a
direct basis. Sales representatives receive a salary plus incentive/commission
pay for performance.
AM's
domestic sales as a percentage of the Company's consolidated sales were
approximately 94% and 93% for fiscal years 2006 and 2005, respectively. AM
sells
to a number of foreign regions including Asia, South America and the Middle
East. Foreign sales, which accounted for approximately 6% and 7% of fiscal
2006
and 2005 sales, respectively, are made both directly and through sales agents
who receive commissions. During 2003, AM restructured its manufacturing
agreement in Singapore and shifted certain sales previously included in domestic
sales to Singapore. Although this change has not affected profits, it has
significantly reduced the Company's foreign sales. See further discussion
under
the heading "Business Strategy" included herein.
Total
revenue attributable to each geographic area in which the Company sells is
included in Note 11 of the Notes to Consolidated Financial Statements included
herein.
CUSTOMERS
AM
generally sells its products pursuant to customer purchase orders. There
can be
no assurance that any customers will continue to purchase products from AM.
AM's
customers are in the medical disposables, technology, aerospace, automotive
and
consumer markets. AM's plans are to continue to pursue customers in those
markets, but with an added emphasis in the medical and consumer segments
and
concentrating on proprietary and or patentable products. Management believes
that diversity spreads the risk of dependence on one customer or one market
sector.
AM
believes its current prices are competitive with those of other domestic
suppliers
of custom and flexible materials. AM sales are typically made on terms,
which require payment of the net amount due in 30 or 60 days. Product
development
efforts will continue to pursue designs and materials that create perceived
value.
AM's
customers of products made from bulk materials such as foam are located
primarily in the West and Southwest regions of the United States. For
those
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. However, in the medical
and consumer markets, with products whose base materials do not use high
volume
foam, AM can competitively supply products both domestically and internationally.
AM
relies
on a few large customers for a significant portion of our domestic
sales.
A
few of
AM's customers are material to our business and operations. Sales to our three
largest customers together accounted for approximately 60% of our domestic
sales
in 2006, 56.5% of our domestic sales in 2005. The loss or a substantial decrease
in the amount, of purchases by any of our major customers could adversely affect
our financial position and results of operations.
Our
customers’ adverse financial condition may have a corresponding material adverse
effect on our business, financial condition and results of
operations.
LICENSES
AND PROPRIETARY RIGHTS
AM
is
currently working with inventors to secure the licensing rights to products
it feels it can successfully manufacture and market. AM is also currently
developing products that it feels will be awarded a patent because of
the
unique design or function. AM has always relied on proprietary know-how,
exclusive
license rights and distribution agreements, and employs various methods
to protect its processes. However, such methods may not afford protection,
and there can be no assurance that others will not independently develop
such processes.
COMPETITION
The
custom materials fabrication industry in which AM has competed is highly
competitive.
The number of competitors is significant, and the Company's competitive
position is difficult to ascertain.
Low
barriers to entry and fragmented competition
characterize the industry. Most of the Company's competitors have been
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. AM has competed primarily on the basis
of
its
ability to meet customers' specifications promptly and cost effectively,
and
on
the quality of its products.
It
is
because of this low barrier to entry, that AM has made the decision to
focus
on
a long-term effort to secure proprietary and patentable products. Competition
is decreased with proprietary products since the barriers to entry increase.
Current or future competitors or new market entrants could introduce
new
or
enhanced products with features that render AM's products obsolete or
less
marketable, or could develop means of producing competitive products at a
lower
cost. The ability of AM to compete successfully will depend in large
measure
on its ability to adapt to technological changes in the industry by striving
to be the innovative leader. There can be no assurance that AM will be
able
to
keep pace with the technological and innovative demands of the market
place
or
successfully develop new products demanded by customers.
GOVERNMENT
REGULATION
The
manufacture of certain products by AM requires the purchase and use of
chemicals
and other materials, which are or may be classified as hazardous substances.
The Company does not maintain environmental impairment insurance. There
can
be no assurance that the Company will not incur environmental liability
or that hazardous substances are not or will not be present at their
facilities.
The
Company is 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. 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 injunction
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 also governed by state law, including
the California counterparts of CERCLA and RCRA. The Company and
its
subsidiaries believe that their manufacturing activities are in substantial
compliance with all material Federal and state laws and regulations governing
their operations. Amendments to existing statutes and regulations could
require the Company to modify or alter methods of operations at costs,
which
could be substantial. There can be no assurance that the Company 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 is in substantial compliance with
all
material Federal, state and local laws and regulations regarding safe
working
conditions.
EMPLOYEES
As
of February 16, 2007, the Company had 57 full-time employees. Of the
Company's full-time employees, 39 are employed in manufacturing, 3 are in sales,
4 perform general and administrative functions and 11 perform other
functions. The Company also utilizes the services of independent contract
workers as needed from time to time in its manufacturing operations. As
of February 16, 2007 the Company utilized approximately 15
independent contract workers.
None
of the employees of the Company are presently represented by a labor union
and
the Company's management considers the relationships with its employees to
be
good.
RISK
FACTORS
In
addition to the other information in the Annual Report on Form 10-KSB, investors
should carefully consider the following factors listed below about us. Certain
statements in "Risk Factors" are forward-looking statements. See item 6 -
Management's Discussion or Plan of Operation - "Forward-Looking
Statements."
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)
Concentrations of sales in markets and customers.
c)
Concentrations of raw material suppliers, including difficulties or delays
in
obtaining raw materials.
d)
Delays
or cancellations of orders; timing of significant orders; and introduction
of
new products.
e)
Delays
in development of production equipment required for new products.
f)
Adoptions of new, or changes in, accounting policies and practices and the
application of such policies and practices.
g)
Costs
of petroleum based raw materials (i.e. foam)
The
prices of raw materials account for 50% or more of our manufacturing costs.
We
have experienced increases in raw material costs since the middle of 2002.
Our
ability to pass on cost increases may be hindered by competition or selling
price.
Prices
of
raw materials are influenced by demand, manufacturing capacity and oil
and
natural gas prices. Historically, the prices of raw materials have been
cyclical
and volatile and our suppliers of raw materials have increased the price
of raw
materials several times over the past years. We have been successful in
implementing selling price increases in 2005 and 2006 and retaining our
customer base.
h)
Costs
of shipping due to rising fuel costs
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 or growth in net income to differ materially from prior results,
which in
turn could, among other things, cause the price of our common stock to
fluctuate
substantially.
ITEM
2.
DESCRIPTION OF PROPERTIES
The
Company leases approximately 56,000 square feet of manufacturing and office
space
in
Rancho Dominguez, California. The Company pays rent of approximately
$24,600
per month under its Rancho Dominguez lease which expires November
2010.
Effective
November 1, 2005 the Company rented office space in Dallas for its corporate
Headquarters. The Company pays approximately $5,200 per month and the
lease
expires in October 2010.
ITEM
3.
LEGAL PROCEEDINGS
As
of
February 21, 2007 the Company was involved in routine legal proceedings in
the
normal course of operations. Although the outcome of the proceedings cannot
be
determined, in the opinion of management any resulting future liability will
not
adversely effect the Company.
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 year 2006.
PART
II
ITEM
5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
INFORMATION
In
April
2004, the Company was delisted from the OTC-Bulletin Board
and
commenced trading on the OTC Pink Sheets under the symbol "ADMG.PK". 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 2006 |
HIGH |
LOW |
| Fourth
Quarter |
$0.70 |
$0.35 |
| Third
Quarter |
$0.45 |
$0.22 |
| Second
Quarter |
$0.45 |
$0.22 |
| First
Quarter |
$0.30 |
$0.20 |
| FISCAL 2005 |
HIGH |
LOW |
| Fourth
Quarter |
$0.25 |
$0.12 |
| Third
Quarter |
$0.30 |
$0.15 |
| Second
Quarter |
$0.51 |
$0.15 |
| First
Quarter |
$0.62 |
$0.37 |
HOLDERS
There
were approximately 2,800 shareholders of record as of January 1,
2007.
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 without prior
approval.
PRIVATE
PLACEMENT
In
August, 2005, AM issued to each of the Lenawee Trust and Plus Four Private
Equities,
L.P. 625,000 shares of AM's common stock for $0.20 per share ($125,000
each). The Lenawee Trust is an affiliate of Timothy R. Busch, the Chairman
of AM's Board of Directors.
In
October 2005, the Company sold 350,000 shares of the Company's common stock
for
total
proceeds of $70,000.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table provides information as of November 30, 2006 regarding
compensation
plans (including individual compensation arrangements) under which equity
securities of the Company are authorized for issuance.
|
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
|
475,000
|
$
0.94 |
2,587,000 |
| Total |
475,000 |
$ 0.94 |
2,587,000 |
ITEM
6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion and analysis should be read in conjunction with the
Company's audited consolidated financial statements and notes to financial
statements included elsewhere in this document. This report and the Company's
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 the Company's future economic performance and management's current
beliefs regarding revenues the Company might earn if it is successful in
implementing its 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)
Concentrations of sales in markets and customers.
c)
Concentrations of raw material suppliers, including difficulties or delays
in
obtaining raw materials.
d)
Delays
or cancellations of orders; timing of significant orders; and introduction
of
new products.
e)
Delays
in development of production equipment required for new products.
f)
Adoptions of new, or changes in, accounting policies and practices and the
application of such policies and practices.
g)
Costs
of petroleum based raw materials (i.e. Foam)
h)
Costs
of shipping due to rising fuel costs
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 or growth in net income 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 7 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,
income tax, and stock based compensation.
Revenue
Recognition
The
Company recognizes revenue from product sales when it is realized or
realizable
and earned, which is generally at the time of shipment and passage of
title.
Revenue is considered to be realized or realizable and earned when there
is
persuasive evidence of a sales arrangement in the form of a contract or a
purchase
order, the product has been shipped, the sales price is fixed or determinable
and collectibility is reasonably assured. The Company records revenue
for shipping costs charged to customers. The related shipping costs incurred
are recorded in cost of sales.
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,
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.
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
In
December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation
-- Transition and Disclosure", which amended FAS No. 123, "Accounting
for Stock-Based Compensation." The new standard provides alternative
methods
of transition for a voluntary change to the fair market value based method
for accounting for stock-based employee compensation. Additionally, the
statement
amends the disclosure requirements of FAS No. 123 to require prominent
disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on
reported results. In compliance with FAS No. 148, we have elected
to continue to follow the intrinsic value method in accounting for
stock-based
employee compensation plan as defined by APB No. 25.
RESULTS
OF OPERATIONS FOR FISCAL 2006 COMPARED WITH 2005
REVENUE
from operations for the fiscal year ended November 30, 2006
was
$9,996,280, an increase of 15.4% compared to the fiscal year ended November
30, 2005. Revenues from the Singapore strategic manufacturing venture
declined
to $584,020 in fiscal 2006 from $586,131 in fiscal 2005. Revenues from
U.S.
operations increased to $9,412,260 in fiscal 2006 from $8,078,343 in fiscal
2005.
The
increase in sales for the U.S. operations are due to additional sales
volumes
and new customers. The Company continues to focus on the development of
proprietary
products and the results of these efforts is beginning to increase revenues.
For
the
shipping cost sensitive foam commodities that the Company
has primarily sold in the past, it has been very difficult to be competitive
with the local fabricators in Asia. The Company shifted certain manufacturing
and sales from its U.S. operations to its Singapore joint venture in
late
2003. The Company has shifted its primary focus to generating its own
proprietary
opportunities with both its existing customer base as well as new prospects
in order to build a more competitive base of business in the United States.
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 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 work force to fabricate
foam products at Foamex Asia'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 |
There
was
an amendment to the Company's manufacturing agreement in Singapore with Foamex
Asia to change the vendor of record for the customer supplied under the
agreement from the Company to Foamex Asia effective July 17, 2003. Although
this
change does not affect the Company's share of the profitability under the
agreement, it has caused a significant reduction in its reported revenues.
This
agreement expires in early 2008. Previously, the Company purchased the raw
materials for the production of product and billed the end customer and
therefore recognized the gross sales and cost of sales on its financials.
Under
the amended agreement, it no longer purchases the raw materials or bills
the end
customer and only recognizes its portion of profit as revenue. Management
believes this change has been beneficial to the Company as it stills maintains
a
share of the profits from the Singapore agreement, while it has significantly
reduced its capital requirements since it no longer needs to purchase raw
materials several months in advance of realizing sales.
Revenues
as reported relating to the Singapore manufacturing agreement were $584,020
and
$586,131, for each of the two years ended November 30, 2006 and 2005,
respectively. Under the amended agreement, only the Company's share of the
profit is reported as revenue.
COST
OF
SALES in fiscal 2006 increased to $7,221,442 from $6,615,081 in fiscal 2005.
The
increase in cost of ales was due to increased demand from the Company's
customers. The Company's gross profit percentage was 27.8% in fiscal 2006,
compared to 23.7% in fiscal 2005. The increase in gross profit percentage
during
fiscal 2006 was primarily due to the Company's discontinuation of certain
low
margin sales, and lower labor and overhead costs due to the optimizing of
manufacturing process. The Company continues to assess ways to reduce its
manufacturing and overhead cost.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A") was $1,874,791 in fiscal 2006
compared to $1,786,584 in fiscal 2005. SG&A as a percentage of net sales was
18.8% in fiscal 2006 compared to 20.6% in fiscal 2005. Percentage of SG&A
costs decreased in fiscal 2006 compared to fiscal 2005 primarily due to
increase in sales.
INTEREST
EXPENSE in fiscal 2006 was $137,823 compared to $155,934 in fiscal 2005.
Interest expense was lower in 2006 due to a renegotiated line of credit which
resulted in a lower interest rate. Also, due to aggressive cost monitoring,
the
ability of the Company to borrow less was achieved, therefore reducing interest
expense.
INCOME
TAX benefit realized in 2006 from prior year net
operating loss carry-forward due to valuation adjustment based on management's
assumption of criteria for realization. The adjustment in 2006 was in the
amount of $634,000.
The
Company incurred significant net losses for three years until the Company
became
profitable again in 2004. During the period of losses through November
31, 2005
the Company recorded a full valuation allowance against all of its deferred
tax
assets under the guidance of FAS 109 which requires the Company to
reduce deferred tax assets by a valuation allowance based on the weight
of
evidence if it is “more
likely than not” (more
than 50%) that some portion or all of the deferred tax assets will not
be
realized. FAS 109 states that a valuation allowance should be sufficient
to
reduce the deferred tax asset to the amount that is more likely than not
to be
realized.
During
the period from fiscal 2001 through 2003, the Company was incurring losses
and
the future of the Company and its ability to generate profits was uncertain.
As
a result, management determined that it was more likely than not that the
Company’s deferred tax assets would not be realized and as such recorded a full
valuation allowance as noted in the Company’s annual financial statements in its
tax provision footnote.
In
2004,
the Company became profitable; however, management believed it in the best
interest not to record a deferred tax asset by relieving any of the tax
valuation allowance until the Company could prove a trend of earnings over
an
extended period. Management believes the Company has now proven a trend
of
profitability as the Company has had net income for three consecutive years
and
forecasts the Company to be profitable in the near term.
As
a
result of the Company’s profitability and expected future profitability, the
Company has reevaluated its valuation allowance related to deferred tax
assets
to determine if a it is more likely than not that some of the Company’s deferred
assets will be realized. Based on the Company’s analysis, it elected to relieve
the valuation allowance by $634,000.
NET
INCOME FROM OPERATIONS for fiscal 2006 was $1,333,973 compared to $157,150
for
fiscal 2005. The increase in net income was due to a variety of factors
including increased sales and increased margins on current products.
Fiscal 2005 results include other income of $155,000 which is comprised of
excess equipment sales related to the production of Hewlett-Packard
products.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's operating activities provided $627,579 of cash flows in fiscal
2006
compared to cash used of $256,391 in fiscal 2005. The cash flows provided
in
fiscal 2006 were primarily as a result of net income and non-cash adjustments
of
$405,227 and a decrease in inventory of $269,635 offset by a decrease in
accounts payable and other accrued liabilities of $492,353.
The
Company invested $51,122 and $70,270 in fiscal 2006 and 2005, respectively,
in
capital equipment. The Company continues to reduce non-essential capital
expenditures that are not specifically focused on revenue growth.
Cash
flows used by financing activities were $541,636 in fiscal 2006 compared
to cash
provided of $523,411 in fiscal 2005. The Company has used cash generated
by
operations to pay down its debt.
In
October 2003, the Company entered into a new line of credit agreement with
a
financial institution, which provides for borrowings up to $1,500,000,
as
defined. The line expired in October 2005. In September of 2005, the Company
renegotiated the term of this debt instrument, reducing the line of credit
from
$3.75 million to $1.5 million under the new agreement, the line of credit
bears
interest at Prime plus 1.5% the Company was able to cure its debt covenant
violations. In October of 2006, the Company renegotiated the term of this
debt
instrument. As a result of the new agreement, the interest at Prime plus
0.25%
at November 30, 2006. The line of credit is secured by substantially all
of the
assets of the Company. The line of credit agreement requires the Company
to
maintain certain financial covenants including the maintenance of debt
service and tangible net worth ratios.
At
November 30, 2006 there are additional $576,000 borrowings available under
this
line-of-credit.
The
Company continues to focus on business that will result in increased volume
and
margin. A number of objectives have been achieved over the past year and
management anticipates that more will be achieved in the coming year, resulting
in a greater financial strength.
The
Company has secured a new line of credit with JP Morgan Chase Bank which
replaced its previous asset based lender used previously. Management believes
this is a significant step in the strengthening of the Company's financial
health and will result in lower borrowing costs. The line of credit will
be used
for working capital purposes only. JP Morgan Chase also approved a line of
credit to be used for equipment purchases if needed in the future.
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 orders from original equipment manufacturers and
believes that its sales will increase in fiscal 2007. The Company expects
gross
profit and operating profit margins to improve in fiscal 2007 if its sales
increase as anticipated by management, barring untoward events. The Company
has
recently begun to shift its primary focus to generating its own proprietary
opportunities with both its existing customer base as well as new prospects
in
order to build a more competitive base of business in the United States.
There
is an inherent risk that this change in focus may not be successful.. The
Company expects to incur increased product development and selling expenses
pertaining to new products. The Company has successfully launched new products
in 2006 and is building a customer base for these products in 2007 and
beyond.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123
(revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R requires
measurement
of all employee stock-based compensation awards using a fair-value method
and the recording of such expense in the consolidated financial statements.
In addition, the adoption of SFAS 123R will require additional accounting
related to the income tax effects and disclosure regarding the cash flow
effects resulting from share-based payment arrangements. In January 2005,
the
U.S.
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107, which provides supplemental implementation guidance for SFAS
123R.
SFAS 123R is effective for our first quarter of fiscal 2007. We have
selected
the Black-Scholes option-pricing model as the most appropriate fair-value
method for our awards and will recognize compensation cost on a straight-line
basis over our awards' vesting periods. The adoption of SFAS 123R is
not
expected to have a material impact on our results of operations. However,
uncertainties,
including our future stock-based compensation strategy, stock price
volatility, estimated forfeitures and employee stock option exercise
behavior,
make it difficult to determine whether the stock-based compensation expense
that we will incur in future periods will be similar to the SFAS 123 pro
forma
expense disclosed in the Consolidated Financial Statements attached to this
report on Form 10-KSB.
In
June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of
FAS109, Accounting for Income Taxes (FIN 48), to create a single model to
address accounting for uncertainty in tax positions. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold
that
a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company will adopt FIN 48 as of December 1, 2007, as
required. The cumulative effect of adopting FIN 48 will be recorded in retained
earnings. The Company has not determined the effect, if any, that the adoption
of FIN 48 will have on the Company’s financial position and results of
operations.
In
June
2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3 (EITF
06-3), "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)." EITF 06-3 applies to any tax assessed by a
governmental authority that is directly imposed on a revenue producing
transaction between a seller and a customer. EITF 06-3 allows companies to
present taxes either gross within revenue and expense or net. If taxes
subject to this issue are significant, a company is required to disclose its
accounting policy for presenting taxes and the amount of such taxes are
recognized on a gross basis. EITF 06-3 is required to be adopted during
the first quarter of fiscal year 2008.
In
September 2006, the SEC published Staff Accounting Bulletin Topic 1N, Financial
Statements — Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB
108 addresses how a company should quantify the effect of an error on the
financial statements. The SEC staff concludes in SAB 108 that a dual approach
should be used to compute the amount of a misstatement. Specifically, the
amount
should be computed using both the “rollover” (current year income statement
perspective) and “iron curtain” (year-end balance sheet perspective)methods. SAB
108 does not address how to evaluate materiality, that is, how to assess
the
quantitative and qualitative effects of a misstatement on the financial
statements. The SEC staff’s views on evaluating the materiality of an error are
covered in SAB Topic 1M, Financial Statements — Materiality (“SAB 99”).Companies
that will need to change their method for computing the amount of an error
must
adopt the dual approach for fiscal years ending after November 15,2006, which
is
effective with our year ended November 30, 2006. A change in the method of
quantifying errors represents a change in accounting policy. Accordingly,
if the
use of the dual approach results in a larger, material misstatement, we will
have to adjust its financial statements. Under FAS 154, changes in accounting
policy generally are accounted for using retrospective application; however,
SAB
108 permits public companies to report the cumulative effect of the new policy
as an adjustment to opening retained earnings. the adoption of SAB 108 did
not
have a material impact on its consolidated financial position, results of
operations or cash flows.
ITEM
7.
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.
ITEM
8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
8A.
CONTROLS AND PROCEDURES
Our
management, including our principal executive officer and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange
Act of 1934) as of the year ended November 30, 2006, the period covered
by
the
Annual Report on Form 10-KSB. Based upon that evaluation, our principal
executive
officer and principal financial officer have concluded that the disclosure
controls and procedures provide reasonable assurance that material information
relating to the Company is made known to management including the CEO
and CFO.
There
were no changes in our internal control over financial reporting that
occurred
during our last fiscal quarter of 2006 that have materially affected,
or
are
reasonable likely to materially affect, our internal control over financial
reporting.
ITEM
8B.
OTHER INFORMATION
None
PART
III
ITEM
9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH
SECTION
16(A) OF THE EXCHANGE ACT
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, 52, has been the Chairman and a director of the Company since
February 1998 and September 1997, respectively. 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. He is a director of Radica
Games
International, a publicly held company, and is a director of several
privately
held companies. Mr. Busch is a licensed attorney in California, Michigan,
Texas and Washington, D.C. and has a non-practicing/inactive status as
a
CPA in
California and Michigan.
N.
PRICE
PASCHALL, 58, has been a director of the Company since 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 B.A.
in
Business Administration from California Polytechnic University at Pomona. He
currently
serves on the Board of Directors of CPU Tech, a private technology company
located in Pleasanton, CA.
MAURICE
J. DEWALD, 66, has been a director of the Company since 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 LLC Board of
Directors
and also served as the Managing Partner of the Los Angeles office of
KPMG
LLC
from 1986 to 1991. He currently serves on the Boards of Directors of
Mizuho
Corporate Bank of California, and Quality Systems, Inc., a publicly-held
developer
and marketer of healthcare information systems.
RICARDO
G. BRUTOCAO, 62, was appointed the position of Chief Executive Officer to
fill
the Company's previously announced vacancy at that position on January 2,
2006.
Mr. Brutocao, who already serves
as
a director of the Company, will serve in this capacity on a part-time,
at-will basis. Mr. Brutocao also serves as the part-time CEO and a director
of Centergistic Solutions, Inc., a maker of performance management
software, positions Mr. Brutocao has held since 2001. From 2000 to 2001,
Mr.
Brutocao was the interim Chief Executive Officer of ZLand, Inc., a software
company.
JOHN
SAWYER, 62, was elected as a director on March 6, 2006. Mr. Sawyer is
Chairman
and President of Penhall Company. He joined Penhall Company in 1978 as
the
Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was appointed
Manager of Penhall's National Contracting Division, and in 1984, he assumed
the position of Vice President and became responsible for managing all
construction
services divisions. Mr. Sawyer has been President of Penhall since 1989,
and
Chairman since 1998. Mr. Sawyer is also a director and member of the
audit
committee for H&E Equipment Services.
EXECUTIVE
OFFICERS
RICARDO
G. BRUTOCAO, 62, was appointed the position of Chief Executive Officer
to fill
the Company's previously announced vacancy at that position on January
2, 2006.
Mr. Brutocao, who already serves
as
a director of the Company, will serve in this capacity on a part-time,
at-will basis. Mr. Brutocao also serves as the part-time CEO and a director
of Centergistic Solutions, Inc., a maker of performance management
software, positions Mr. Brutocao has held since 2001. From 2000 to 2001,
Mr.
Brutocao was the interim Chief Executive Officer of ZLand, Inc., a software
company.
WILLIAM
G. MORTENSEN, 41, was appointed President and retained as the Chief Financial
Officer position on August 22, 2005 and previously held the position
of
Chief
Financial Officer and Controller as of June 1, 2004. Mr. Mortensen was
employed
by Cingular Wireless LLC as Associate Director in Finance, and before
the
Cingular joint venture he was with SBC, Inc. as a manager of SBC Services
supporting
the SBC Wireless division since 1999. Before joining SBC, Inc. Mr. Mortensen
worked for Frito-Lay, Inc. as a manager of finance and for over eight
years
with EDS, Inc. holding various financial positions. Mr. Mortensen holds a
BBA
degree in Business Administration from Abilene Christian University and has
experience
in the telecommunications, high-tech and manufacturing industries.
CODE
OF
ETHICS
The
Company has adopted a Code of Ethics which applies to directors, officers,
senior management, and certain other employees of the Company, including its
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics is available under the “Investor Relations" section on the Company's web
site located at http://ami4.com/investors/coc.php.
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.
With
the
exception of the two individuals identified below, 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 greater-than-10% shareholders were satisfied during
the
fiscal year ended November 30, 2006.
During
fiscal years 2005 and 2006, Timothy Busch failed to timely file Form 4's with
respect to four separate transactions in the Company's common stocks. A
Form 4 was filed on January 29, 2007 to report these four previously unreported
transactions. On January 29, 2007, Mr. Robert Delk, the former President
and Chief Executive Officer of the Company, filed a Form 4 with respect to
a
disposition of the Company's common stock that occurred on September 23,
2006.
During
fiscal year 2005 and 2006, Maurice DeWald and N.
Price Paschall served as members of AM's Audit Committee. Maurice DeWald
serves as the Chairman of the Audit Committee and serves as the financial expert
serving on the committee.
ITEM
10.
EXECUTIVE COMPENSATION
The
following table sets forth certain information regarding compensation paid
by
the
Company for services rendered to the Company by its current and former
Chief
Executive Officers 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, 2006 (the "Named Executive
Officers").
SUMMARY
COMPENSATION TABLE
ANNUAL
COMPENSATION
| |
|
|
|
OTHER
|
LONG-TERM
COMPENSATION
AWARDS SECURITIES
|
| NAME
AND PRINCIPAL POSITION |
FISCAL
YEAR
|
SALARY(1)
|
BONUS
|
ANNUAL
COMPENSATION
|
UNDERLYING
OPTIONS
GRANTED
|
| Ricardo Brutocao |
2006 |
$125,000 |
$65,949
|
-- |
-- |
| Chief
Executive Officer |
2005 |
$125,000 |
-- |
-- |
100,000 |
| |
|
|
|
|
|
| William
G. Mortensen |
|
|
|
|
|
|
President
and Chief
|
2006 |
$120,000 |
$65,949 |
-- |
-- |
|
Financial
Officer
|
2005 |
$120,000 |
$16,544 |
-- |
-- |
| |
|
|
|
|
|
|
Michael
Bowen (2)
|
2006 |
$135,000 |
$30,402 |
-- |
-- |
|
Former
Executive Vice President
|
2005 |
$135,000 |
$16,544 |
-- |
200,000 |
| |
|
|
|
|
|
Robert
E. Delk,
Former
President, Chief Executive Officer
|
2005 |
$125,000 |
-- |
-- |
-- |
(1)
Mr.
Delk's agreement provided for him to receive $125,000 annually beginning
in August 2004. Mr. Brutocao began receiving a salary of $125,000
in January 2006. Before January 2006, Mr. Brutocao was a director of
the
Company and was employed by the Company as a consultant receiving annual
compensation in the amount $120,000.
(2)
Effective July 7, 2006, Michael Bowen resigned from the Company to pursue
other
opportunities.
OPTION
GRANTS IN 2006
NONE
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 2006 and unexercised
stock
options held by the Named Executive Officers as of November 30, 2006.
| |
|
|
|
|
UNDERLYING
UNEXERCISED OPTIONS AT NOVEMBER
30, 2006
|
NUMBER
OF SHARES VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT NOVEMBER 30,
2006(2)
|
| NAME |
SHARES ACQUIRED ON EXERCISE |
VALUE
REALIZED(1)
|
EXERCISABLE |
UNEXERCISABLE |
EXERCISABLE |
UNEXERCISABLE
|
| Ricardo Brutocao |
-- |
-- |
40,000 |
60,000
|
$13,600 |
$20,400 |
| Will
Mortensen |
--
|
--
|
25,000
|
25,000
|
$3,500
|
$3,500 |
(1)
Market value of underlying securities on the date of exercise, minus the
exercise
price.
(2)
Based
on the last reported sale price ($0.54 per share) on the Pink Sheets
on February 21, 2007 (the Date of Record).
LONG-TERM
INCENTIVE PLAN (LTIP) AWARDS TABLE -
2006
NONE
EMPLOYMENT
CONTRACT, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
On
June
24, 2005, Robert E. Delk, who has served as a member of the board of
directors ("Board") of AM and as the President
and Chief Executive Officer of AM since August 1, 2003, resigned from
his
position on the board of directors. Pursuant to the letter dated June
24,
2005
addressed to the Chairman of the Board of AM in which Mr. Delk advised
the board of directors of his resignation as a director, Mr. Delk also
gave
written notice of termination of his employment with AM effective July
31,
2005
upon the expiration of his Employment Agreement dated August 1, 2003
with
AM.
On
August
22, 2005, AM entered
into Employment Agreements with William G. Mortensen ("Mortensen") and
Michael
Bowen ("Bowen"). Pursuant to these Employment Agreements, Mortensen serves
as
President and Chief Financial Officer of AM and Bowen served as
Executive
Vice President of AM. The terms of employment are at will; however, if
either
is terminated without cause (as defined in the Employment Agreements),
they
receive severance pay equal to six months' base salary if the termination
occurs
within the first year of the term, and equal to three months' base salary
if
the
termination occurs thereafter. Mortensen's base annual salary is set at
$120,000
and Bowen's base annual salary is set at $135,000. Mortensen and Bowen
are
each
entitled to bonuses calculated by formulas based upon AM's income from
continuing operations before taxes. In 2005 upon entering into his employment
agreement, Bowen also received a grant of an incentive
stock option to purchase up to 200,000 shares of AM's common stock for
$0.20
per share. The option vests 20% per year for five years, beginning one
year
from
the date of the grant. If Bowen's employment with AM terminates for any
reason other than for cause or his voluntary resignation, the option does
not
terminate and vesting continues. Due to Bowen's resignation as of July 7,
2006, all stock options have expired.
In
January 2006, the Company entered into an at-will
employment arrangement with Ricardo
G. Brutocao to fill the Company's open Chief Executive Officer Position.
Mr.
Brutocao has an unwritten agreement to be compensated by the Company at the
rate
of
$125,000. In November 2005, Mr. Brutocao was elected to the Company's
board
of
directors. Prior to that Mr. Brutocao had been providing consulting services
to the Company and as a result was granted 100,000 options at $.20 per
share
of
which 20% vested immediately and the remaining vest ratably over a four
year
period. Vesting is contingent on continued service to the
Company.
DIRECTOR
COMPENSATION
Each
of
the Company's directors receives $10,000 annually and reimbursement for
out-of-pocket expenses in connection with his attendance at each meeting
of the
Board of Directors or committee of the Board of Directors. In addition, each
director receives non-qualified stock options, pursuant to the Company's
2003
Stock Option Plan, to purchase 20,000 shares of the Company's common stock
at
fair market value when first elected to the Board of Directors, and 10,000
shares of common stock at fair market value each January subsequent to their
reelection to the Board of Directors. The options become fully vested six
months
after their issuance. The chairman of the AM Audit Committee receives an
additional $2,000 annually. All director fees are paid on a quarterly basis.
Mr.
Brutocao does not receive director compensation as he is paid a salary of
$125,000 plus expenses for his role as part-time CEO. Currently, no options
are
being issued until the Company is current in its periodic filings. At that
time,
these options will be issued with an exercise price of the fair market value
of
the underlying common stock on the date of the grant.
No
director options have been granted since 2004. The board of directors plan
to submit for shareholder approval, a new stock option plan in 2007. Director
options will then be issued to makeup for the past 2 years option were not
issued.
ITEM
11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding the common stock
beneficially owned as of February 21, 2007 by:
-
each
person who is known by the Company to own beneficially or exercise voting
or
dispositive control over 5% or more of the common stock;
-
each
of
the Company's directors and director nominees;
-
each
of
the Company's current Named Executive Officers; and
-
all
current executive officers and directors as a group.
There
were 12,116,000 shares of the Company's common stock outstanding as of the
close
of business on February 21, 2007.
Beneficial
ownership is determined in accordance with Rule 13d-3 promulgated by
the
Commission under the Securities Exchange Act of 1934 ("Exchange Act") and
generally
includes voting or investment power with respect to securities. Except
as
indicated below, the Company believes each holder possesses sole voting and
investment
power with respect to all of the shares of voting stock owned by that
holder,
subject to community property laws where applicable. In computing the
number
of
shares beneficially owned by a holder and the percentage ownership of
that
holder, shares of common stock subject to options or warrants held by that
holder
that are currently exercisable or are exercisable within 60 days after
the
date
of the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other
person or group.
The
inclusion of shares in this table as beneficially owned is not an admission
of
beneficial ownership. Except as indicated below, the address for each named
beneficial
owner is the same as the Company's. Ownership of less than 1.00% is indicated
with an asterisk.
|
NAME
AND ADDRESS OF BENEFICIAL OWNER
(1)
|
AMOUNT
AND NATURE OF BENEFICIAL
OWNERSHIP
|
PERCENTAGE
OF
OUTSTANDING SHARES(2)
|
| Dito
Caree LP, Dito Devcar LP, Plus 4 LLC and Richard
H. Pickup |
3,015,106(2) |
24.89% |
| Gregory J. Spagna |
904,500(3) |
7.47% |
| Delk
Partners Ltd., Robert E. Delk and Ann
Struckmeyer Delk |
100,000(4)
|
0.83% |
| Timothy R. Busch and the Lenawee Trust
|
2,719,919(5) |
22.45% |
| N.
Price Paschall |
270,000(6) |
2.23% |
| Maurice
J. DeWald |
50,000(7) |
0.41% |
| William
G. Mortensen |
125,000(8)
|
1.03% |
| Ricardo
G. Brutocao |
579,739(9) |
4.78% |
| All
current executive officers and directors as
a group (7 persons) (1) |
7,764,264(1) |
64.08% |
(1)
Mr.
Brutocao, Mr. Busch, Mr. Paschall and Mr. DeWald are directors of the Company.
Mr. Brutocao and Mr. Mortensen are executive officers of the
Company.
(2)
Represents 986,300 shares held by Dito Caree LP, 200,000 shares held by Dito
Devcar LP and 1,389,067 shares held by Plus 4 LLC. Mr. Pickup holds voting
and
dispositive power over these shares as general partner of each of three two
entities. Mr. Pickup's address is c/o David Hehn, 3753 Howard Hughes Parkway
#200, Las Vegas, Nevada 89109-0938. Mr Pickup also purchased 439,739 shares
from
Delk in a private transaction. (Refer to related transaction disclosure on
page
17)
(3)
Represents 617,000 shares held by Mr. Spagna and 287,500 shares held jointly
by
Mr. Spagna and his spouse and children, as reported on a Schedule 13D/A filed
with the Commission on February 5, 2003. Mr. Spagna's address is 515 Airport
Executive Park, Nanuet, New York 10954.
(4)
Represents 100,000 shares underlying warrants held by Delk. (Refer to related
transaction disclosure on page 17)
(5)
Represents 1,505,180 shares held by the Lenawee Trust, of which Mr. Busch
and
his spouse are beneficiaries and hold voting and dispositive power, 100,000
shares underlying warrants held by Mr. Busch, and 50,000 shares underlying
options held by Mr. Busch. Mr. Busch also purchased 439,739 shares from Delk
in
a private transaction.
(6)
Represents 10,000 shares outstanding and 260,000 shares underlying
options.
(7)
Represents Director stock options.
(8)
Represents 25,000 shares of vested options and 100,000 shares purchased from
Delk in a private transaction. (Refer to related transaction disclosure on
page
17)
(9)
Effective August 22, 2005, AM also granted a non-qualified stock option to
Mr.
Brutocao to purchase up to 100,000 shares of AM's common stock for $0.20
per
share. The option vests 20% immediately, and the remaining 80% in four 20%
increments on each anniversary date of the grant. If Brutocao ceases, for
any
reason, to provide consulting services or service in any capacity to AM,
vesting ceases and the option expires 90 days thereafter. Mr. Brutocao also
engaged in a private transaction to purchase 100,000 shares of AM stock from
the
Lenawee Trust. Mr. Brutocao also purchased 439,739 shares from Delk in a
private
transaction.
ITEM
12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On
April
22, 2004, each of Mr. Busch and Mr. Delk loaned the Company $150,000 in
exchange
for the issuance of unsecured promissory notes bearing interest at the
rate
of
10.0% per annum and warrants to purchase up to 50,000 shares of the Company's
common stock at an exercise price of $0.363 per share. Interest and principal
on the notes were due July 21, 2004 but were not paid timely. As a result,
the interest rate of the notes increased to the default rate of 12.0%
per
annum
on July 22, 2004, and in October 2004, the Company paid to each of Mr.
Busch
and
Mr. Delk $50,000 of principal plus interest accrued through July 21,
2004
on
the entire principal balances of their notes and issued as a penalty to
each
of
Mr. Busch and Mr. Delk an additional warrant to purchase up to 50,000
shares
of
the Company's common stock at an exercise price of $0.363 per share.
Each
of
the warrants issued to Mr. Busch and Mr. Delk expires May 13, 2008. The
outstanding
balance on the notes was approximately $44,000 at November 30,
2006.
On
August
26, 2005, AM issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of AM's common stock for $0.20 per share
($125,000
each). The Lenawee Trust is an affiliate of Timothy R. Busch, the Chairman
of AM's Board of Directors.
Effective
August 29, 2005, AM entered into a Separation and Release Agreement ("Separation
Agreement") with Robert Delk ("Delk"), Delk Holdings, Inc. ("Delk Holdings")
and Delk Partners, Ltd. ("DELK Partners"). Pursuant to the Separation
Agreement,
AM paid to Delk certain past due compensation, repaying amounts loaned
to
AM by Delk, and reimbursing him for certain expenses related to intellectual
property being transferred by Delk Holdings to AM as described below.
Delk, Delk Holdings and Delk Partners agreed not to compete with AM,
solicit employees, consultants or customers of AM, or disclose any confidential
information of AM for a period of one year from the date of this event. The
parties released
each other from all claims, whether known or unknown, other than
those arising under the Separation Agreement.
The
Company is or has been a party to employment, consulting and compensation
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."
Announced
October 25, 2006 AM announced that Robert Delk, past CEO and President of
the
Company, in a private transaction, sold 1,419,218 shares, or 11.1% of the
outstanding shares in the Company, to an investor group headed by AMDG Chairman
Tim Busch, CEO Ricardo Brutocao, President William G. Mortensen and the
Company’s largest single shareholder, Plus Four Private Equities,
LP.
ITEM
13.
EXHIBITS
(a)(1)
Financial Statements, included in Part II of this report:
Reports
of Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for the years ended November 30, 2006
and
2005
Consolidated
Balance Sheets for the years ended November 30, 2006 and 2005
Consolidated
Statements of Stockholders' Equity (Deficit) for the years ended
November 30, 2006 and 2005
Consolidated
Statements of Cash Flows for the years ended November 30, 2006
and
2005
Notes
to
Consolidated Financial Statements
(a)(2)
Index to Exhibits:
See
Index
to Exhibits included herein.
(b)
Index
to Exhibits. See Index to Exhibits included herein.
ITEM
14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is incorporated by reference from the
information
under the captions "Election of Directors" and "Other Matters" to be
contained
in the Company's 2007 Annual Meeting Proxy Statement to be filed with
the
Securities and Exchange Commission.
PART
IV
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FEI-FEI
CATHERINE FANG, CPA
================================================================================
6300
Stonewood Dr. Ste 308, Plano, TX 75024
TEL:
(972) 769-8588 FAX: (972) 769-0788
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
of Advanced
Materials Group, Inc.
We
have
audited the accompanying consolidated balance sheet of Advanced Materials
Group, Inc. and its subsidiaries (the Company) as of November 30, 2006
and
2005,
and the related consolidated statements of operations, stockholders'
equity,
and cash flows for the years then ended. 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 the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan
and
perform the audit to obtain reasonable assurance about whether the financial
statements
are free of material misstatement. The Company is not required to have, nor
were
we engaged to perform an audit of its internal control over financial reporting.
An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing
an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe that our
audits
provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Advanced Materials
Group,
Inc. and its subsidiaries, as of November 30, 2006 and 2005 and the results
of their operation and their cash flows the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
/s/
Fei-Fei Catherine Fang, CPA
Dallas,
Texas
February
27, 2007
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| YEARS
ENDED NOVEMBER 30, |
|
2006
|
|
2005
|
|
|
Net
sales
|
|
$ |
9,996,280
|
|
$ |
8,664,474 |
|
|
Cost
of sales (including depreciation of $144,165
and $192,978 for the years ended November
30, 2006 and 2005, respectively)
|
|
|
7,221,442
|
|
|
6,615,081 |
|
|
Gross
profit
|
|
|
2,774,838
|
|
|
2,049,393 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
1,874,791
|
|
|
1,786,584 |
|
|
Depreciation
and amortization
|
|
|
84,608
|
|
|
127,028 |
|
|
Total
operating expenses
|
|
|
1,959,399 |
|
|
1,913,612 |
|
|
Income
from operations
|
|
|
815,439 |
|
|
135,781 |
|
| |
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(137,823)
|
|
|
(155,934) |
|
|
Gain
on disposal of fixed assets
|
|
|
-- |
|
|
155,000 |
|
|
Other,
net
|
|
|
22,357
|
|
|
22,303 |
|
|
Total
other (expense) income, net
|
|
|
(115,466)
|
|
|
21,369 |
|
|
Income
from operations before income taxes
|
|
|
699,973
|
|
|
157,150 |
|
|
Income
tax benefit (expense)
|
|
|
634,000 |
|
|
-- |
|
|
Net
income
|
|
$ |
1,333,973
|
|
$ |
157,150 |
|
|
|
|
|
|
|
|
|
|
|
Net
income per share basic and diluted
|
|
$ |
0.11
|
|
$ |
0.01 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,116,026
|
|
|
11,020,193 |
|
|
Diluted
|
|
|
12,195,704
|
|
|
11,097,530 |
|
See
accompanying report of independent registered public accounting firm
and
notes
to consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
| YEARS
ENDED NOVEMBER 30, |
|
2006
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
441,860 |
|
$ |
407,039
|
|
|
Accounts
receivable
|
|
|
1,519,282
|
|
|
1,470,805 |
|
|
Inventories,
net of allowance for obsolescence of $0 and $34,900 as of
November 30, 2006 and 2005, respectively
|
|
|
815,422
|
|
|
1,085,057
|
|
|
Prepaid
expenses and other
|
|
|
253,476
|
|
|
218,242
|
|
| Deferred
tax assets |
|
|
634,000 |
|
|
-- |
|
|
Total
current assets
|
|
|
3,664,040
|
|
|
3,181,143 |
|
|
Property
and equipment, net
|
|
|
342,237
|
|
|
519,888 |
|
|
Other
assets
|
|
|
75,702
|
|
|
80,964
|
|
| Total
assets |
|
$ |
4,081,980 |
|
$ |
3,781,995
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
405,493
|
|
$ |
849,715
|
|
|
Accrued
liabilities
|
|
|
185,155
|
|
|
233,287 |
|
|
Notes
payables - related parties
|
|
|
43,952
|
|
|
99,418
|
|
|
Line
of credit
|
|
|
855,850
|
|
|
1,168,879
|
|
|
Term
loan - current
|
|
|
--
|
|
|
90,000
|
|
|
Current
portion of long-term obligations
|
|
|
19,728
|
|
|
31,886 |
|
|
Total
current liabilities
|
|
|
1,510,178
|
|
|
2,473,185
|
|
|
Capital
lease obligations, net of current portion of $19,728 and
$31,886 at November 30, 2006 and 2005, respectively
|
|
|
19,685
|
|
|
54,781
|
|
|
Term
loan - long term portion
|
|
|
--
|
|
|
35,885 |
|
|
Total
liabilities
|
|
$ |
1,529,863
|
|
$ |
2,563,851
|
|
|
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; 12,116,026
shares
issued and outstanding November 30, 2006 and 2005
|
|
|
12,116
|
|
|
12,116 |
|
|
Additional
paid-in capital
|
|
|
8,355,497
|
|
|
8,355,497 |
|
|
Accumulated
deficit
|
|
$ |
(5,815,495) |
|
$ |
(7,149,469) |
|
|
Total
stockholders' equity
|
|
|
2,552,117
|
|
|
1,218,144 |
|
|
Total
liabilities and stockholders' equity
|
|
$ |
4,081,980
|
|
$ |
3,781,995
|
|
See
accompanying report of independent registered public accounting firm and
notes
to
consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS SHAREHOLDERS' EQUITY
|
|
COMMON
STOCK
|
|
|
|
| |
SHARES
|
AMOUNT
|
PAID-IN
CAPITAL
|
ACCUMULATED
DEFICIT
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Balances,
November 30, 2004
|
10,516,026 |
$
10,516 |
$
8,037,097 |
$ (7,306,452)
|
$
741,161 |
|
Sale
of common stock
|
1,600,000 |
1,600 |
318,400 |
|
320,000 |
|
Prior
period adjustment
|
|
|
|
(167) |
(167) |
|
Net
income
|
|
|
|
157,150 |
157,150 |
|
Balances,
November 30, 2005
|
12,116,026 |
12,116 |
8,355,497 |
(7,149,469) |
1,218,144 |
|
Net
income
|
|
|
|
1,333,973 |
1,333,973 |
|
Balances,
November 30, 2006
|
12,116,026 |
$
12,116
|
$
8,355,497 |
$
(5,815,496)
|
$
2,552,117 |
See
accompanying report of independent registered public accounting firm and
notes
to
consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| YEARS
ENDED NOVEMBER 30, |
|
2006
|
|
2005
|
|
| Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
1,333,973
|
|
$ |
157,150 |
|
|
Adjustments
to reconcile net income to net cash provided
by (used) in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
228,773 |
|
|
320,006
|
|
|
Gain
on disposal of fixed assets
|
|
|
|
|
|
(155,000)
|
|
|
Deferred tax expenses |
|
|
(634,000) |
|
|
|
|
| Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(48,477)
|
|
|
(277,602)
|
|
|
Inventories |
|
|
269,635
|
|
|
(394,106)
|
|
| Prepaid
expenses and other |
|
|
(35,234 |
|
|
(55,466) |
|
| Other
assets |
|
|
5,262 |
|
|
(80,296) |
|
| Restructuring
reserve |
|
|
-- |
|
|
(25,312) |
|
|
Accounts
payable
and other accrued liabilities
|
|
|
(492,353)
|
|
|
254,235 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
627,579
|
|
|
(256,391) |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(51,122) |
|
|
(70,270) |
|
|
Proceeds from sale of equipment
|
|
|
--
|
|
|
155,000 |
|
|
Net
cash provided by (used in) investing activities
|
|
|
(51,122)
|
|
|
84,730 |
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings (payments) under line of credit, net
|
|
|
(313,029)
|
|
|
482,909 |
|
|
Payments on debt obligations
|
|
|
(228,607) |
|
|
(279,331) |
|
| Proceeds
from sales of common stock |
|
|
--
|
|
|
319,833 |
|
|
Net
cash provided by (used in) financing activities
|
|
|
(541,636) |
|
|
523,411 |
|
|
Net
change in cash and cash equivalents
|
|
|
34,821
|
|
|
351,750 |
|
|
Cash
and cash equivalents, beginning of year
|
|
|
407,039
|
|
|
55,289 |
|
|
Cash
and cash equivalents, end of year
|
|
$ |
441,860 |
|
$ |
407,039 |
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
137,823 |
|
$ |
155,933 |
|
|
Income taxes |
|
$ |
--
|
|
$ |
-- |
|
|
Fixed assets acquired under capital leases |
|
|
-- |
|
|
71,723 |
|
See
accompanying report of independent registered public accounting firm and notes
to
consolidated financial statements.
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. (the "Company") develops, manufactures and markets
a
wide variety of products from a base of flexible materials. The Company's
principal subsidiary, Advanced Materials, Inc. (formerly known as Wilshire
Advanced Materials, Inc.) ("AM"), is the successor to a 50 year old business
that converted specialty materials including foams, foils, films and
adhesive
composites into components and finished products. The Company is making
a
transition from the foam fabricator / contract manufacturing business to
proprietary
medical and consumer products. Examples of the products AM is currently
manufacturing include non-skid surgical instrument pads and applicators
for medical use, soap impregnated surgical prep kit sponges, protective
units for arthoroscopic and orthopedic instruments, printer cartridge
inserts
and inking felts, automobile insulators, water and dust seals. These
products
are made for a number of customers in various markets including medical,
technology, aerospace, automotive and consumer.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Advanced Materials
Group,
Inc. and its wholly owned subsidiary, Advanced Materials, Inc. and Advanced
Materials, Ltd. All significant intercompany accounts and transactions
have
been
eliminated.
Use
of
Estimates
The
preparation of consolidated 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 consolidated 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 an original maturity of
three
months or less when purchased to be cash equivalents.
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, 2006 because of the
relatively
short maturity of these instruments. The carrying value of debt approximated
fair value at November 30, 2006 as these instruments bear market rates
of
interest.
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 five 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 and amortization expense
was
approximately $229,000 and $320,000, for the years ended November 30, 2006,
and
2005
respectively, of which 144,000 and $193,000,
respectively, is included in
cost
of sales in the accompanying consolidated statements of operations.
Impairment
of Long-Lived Assets
Management
reviews long-lived assets for impairment whenever changes in circumstances
indicate that the carrying amount of the assets may not be recoverable and
would
record an impairment charge if necessary. Such evaluations compare the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset and are significantly impacted by estimates of future
prices for the Company’s products, capital needs, economic trends and other
factors. No impairment charges were recorded for the years ended November 30,
2006 and 2005.
Revenue
Recognition
The
Company recognizes revenue from product sales when it is realized or
realizable
and earned, which is generally at the time of shipment and passage of
title.
Revenue is considered to be realized or realizable and earned when there
is
persuasive evidence of a sales arrangement in the form of a contract or a
purchase
order, the product has been shipped, the sales price is fixed or determinable
and collectibility is reasonably assured. The Company records
revenue
for
shipping costs charged to customers. The related shipping
costs incurred
are recorded in cost of sales.
Concentrations
of Credit Risk
CASH
AND
CASH EQUIVALENTS
At
November 30, 2006, the Company maintained cash balances at certain financial
institutions in excess of federally insured limits. At November 30, 2006, the
Company had approximately $331,860 in cash in excess of federally insured
limits. The Company has experienced no losses related to uninsured
deposits.
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. Based on the Company's evaluation of its accounts receivable
it
has
determined a reserve is not necessary at November 30, 2006 and
2005.
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 in January 1998. Terms of the agreement call for the Company to
lease
production equipment and provide certain technology to Foamex Asia. Foamex
Asia
will
in turn provide its manufacturing facilities and work force to fabricate
foam products at Foamex Asia'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 |
Revenues
and profits as reported relating to the Singapore manufacturing agreement
were $584,020 and $586,131, for each of the two years ended November
30,
2006
and 2005, respectively. Under the amended agreement, only the Company's
shares
of
the profit are reported as revenue.
The
lower
sales in Singapore are primarily attributable to an amendment to the
Company's
manufacturing agreement in Singapore with Foamex Asia to change the vendor
of
record for the customer supplied under the agreement from the Company
to
Foamex
Asia effective July 17, 2003. Although this change does not affect the
Company's
share of the profitability under the agreement, it does cause a significant
reduction in its reported revenues. Previously, the Company purchased
the raw materials for the production of product and billed the end customer
and therefore recognized the gross sales and cost of sales on its financials.
Under the amended agreement, it no longer purchases the raw materials
or bills the end customer and only recognizes its portion of profit as
revenue.
Management believes this change has been beneficial to the Company as
it
stills
maintains a share of the profits from the Singapore agreement, while
it
has
significantly reduced its capital requirements since it no longer needs
to
purchase raw materials several months in advance of realizing
sales.
Risks
and Uncertainties
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 is 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. 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
believes that its manufacturing activities are in substantial compliance
with
all
material Federal and state laws and regulations governing its operations.
Amendments to existing statutes and regulations could require the Company
to modify or alter methods of operations at costs, which could be substantial.
There can be no assurance that the Company 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 and local laws and regulations
regarding safe working conditions.
SUPPLIERS
Foamex
International, Inc. ("Foamex") accounted for 38%
and 42%
of consolidated purchases
for the years ended November 30, 2006 and 2005, 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 the Company's customers in critical applications, there are
no
assurances
that the Company would retain the favorable supply position that it has
earned through over 25 years as an authorized converter/fabricator for
Foamex.
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
In
December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation
-- Transition and Disclosure", which amended FAS No. 123, "Accounting
for Stock-Based Compensation." The new standard provides alternative
methods
of transition for a voluntary change to the fair market value based method
for accounting for stock-based employee compensation. Additionally, the
statement
amends the disclosure requirements of FAS No. 123 to require prominent
disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on
reported results. In compliance with FAS No. 148, the Company has elected
to continue to follow the intrinsic value method in accounting for its
stock-based
employee compensation plan as defined by APB No. 25.
The
Company estimates the fair value of each stock award at the grant date by
using
the
Black-Scholes option-pricing model with the following weighted average
assumptions
used for grants in 2005: dividend yield of zero
percent; expected volatility of 106 percent; risk-free interest rate 4.18
percent and expected life of 7.0 years. There were no stock option grants in
2006.
The
following table represents the effect on net income and earnings per share
if
the
Company had applied the fair value based method and recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123,"Accounting
for Stock-Based Compensation", to stock-based employee compensation.
| YEARS
ENDED NOVEMBER 30: |
|
2006
|
|
2005
|
|
| Net
income available to common shareholders
|
|
$ |
1,333,973
|
|
$ |
157,150 |
|
|
Plus:
Stock-based employee compensation expense included in
reported net loss
|
|
$ |
-- |
|
$ |
-- |
|
|
Less:
Total stock-based employee compensation reversals (expense)
determined using fair value based method
|
|
$ |
(12,900) |
|
$ |
101,395
|
|
| Pro
forma net income available to common
shareholders |
|
$ |
1,321,073 |
|
$ |
258,545
|
|
|
Net
income per common share, as reported
Basic
and diluted
|
|
$
|
0.11 |
|
$ |
0.01 |
|
|
Net
income per common share, pro forma
Basic
|
|
$
|
0.11
|
|
$ |
0.02 |
|
| Diluted |
|
$ |
0.11 |
|
$ |
0.02 |
|
Earnings
per Share
The
Company has adopted the provisions of Statement of Financial Accounting
Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the presentation
of basic and diluted net income per share. Basic earnings per share 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. The difference
between basic and diluted weighted average shares outstanding for the
years
ended November 30, 2006 and 2005 relates to dilutive stock options and
warrants.
There
were 235,000 and 1,016,000 potentially dilutive options and warrants
outstanding
at November 30, 2006, and 2005, respectively, that were not included
in
the
computation of the net income per share because they would be anti-dilutive.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123
(revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R requires
measurement
of all employee stock-based compensation awards using a fair-value method
and the recording of such expense in the consolidated financial statements.
In addition, the adoption of SFAS 123R will require additional accounting
related to the income tax effects and disclosure regarding the cash flow
effects resulting from share-based payment arrangements. In January 2005,
the
U.S.
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107, which provides supplemental implementation guidance for SFAS
123R.
SFAS 123R is effective for our first quarter of fiscal 2007. We have
selected
the Black-Scholes option-pricing model as the most appropriate fair-value
method for our awards and will recognize compensation cost on a straight-line
basis over our awards' vesting periods. The adoption of SFAS 123R is
not
expected to have a material impact on our results of operations. However,
uncertainties,
including our future stock-based compensation strategy, stock price
volatility, estimated forfeitures and employee stock option exercise
behavior,
make it difficult to determine whether the stock-based compensation expense
that we will incur in future periods will be similar to the SFAS 123 pro
forma
expense disclosed in the Consolidated Financial Statements.
In
June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes,
an
Interpretation of FAS109, Accounting for Income Taxes (FIN 48), to create a
single model to address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes, by prescribing a minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company will adopt FIN 48 as of December
1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded
in retained earnings. The Company has not determined the effect, if any, the
adoption of FIN 48 will have on the Company’s financial position and results of
operations.
In
June 2006, the FASB ratified Emerging Issues Task
Force (EITF) Issue No. 06-3 (EITF 06-3), "How Taxes Collected from Customers
and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." EITF 06-3 applies to any tax
assessed by a governmental authority that is directly imposed on a revenue
producing transaction between a seller and a customer. EITF 06-3 allows
companies to present taxes either gross within revenue and expense or net.
If taxes subject to this issue are significant, a company is required to
disclose its accounting policy for presenting taxes and the amount of such
taxes
are recognized on a gross basis. EITF 06-3 is required to be adopted
during the first quarter of fiscal year 2008.
In
September 2006, the SEC published Staff Accounting Bulletin Topic 1N, Financial
Statements — Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB
108 addresses how a company should quantify the effect of an error on the
financial statements. The SEC staff concludes in SAB 108 that a dual approach
should be used to compute the amount of a misstatement. Specifically, the
amount
should be computed using both the “rollover” (current year income statement
perspective) and “iron curtain” (year-end balance sheet perspective)methods. SAB
108 does not address how to evaluate materiality, that is, how to assess
the
quantitative and qualitative effects of a misstatement on the financial
statements. The SEC staff’s views on evaluating the materiality of an error are
covered in SAB Topic 1M, Financial Statements — Materiality (“SAB 99”).Companies
that will need to change their method for computing the amount of an error
must
adopt the dual approach for fiscal years ending after November 15,2006, which
is
effective with our year ended November 30, 2006. A change in the method of
quantifying errors represents a change in accounting policy. Accordingly,
if the
use of the dual approach results in a larger, material misstatement, we will
have to adjust its financial statements. Under FAS 154, changes in accounting
policy generally are accounted for using retrospective application; however,
SAB
108 permits public companies to report the cumulative effect of the new policy
as an adjustment to opening retained earnings. the adoption of SAB 108 did
not
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE
2 -
INVENTORIES
Inventories
consist of the following at November 30:
| |
|
2006
|
|
2005
|
|
| Raw
materials |
|
$ |
355,773 |
|
$ |
479,206
|
|
| Work-in-progress
|
|
|
94,949
|
|
|
150,763
|
|
| Finished
goods |
|
|
364,700
|
|
|
489,988 |
|
|
|
|
|
815,422
|
|
|
1,119,957
|
|
| Less
allowance for obsolete inventory |
|
|
-- |
|
|
(34,900)
|
|
| |
|
$ |
815,422
|
|
$ |
1,085,057
|
|
NOTE
3 -
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at November 30:
| |
|
2006
|
|
2005
|
|
| Machinery
and equipment |
|
$ |
2,314,627 |
|
$ |
2,308,362 |
|
| Furniture
and fixtures |
|
|
1,451,649 |
|
|
1,425,503 |
|
| Transportation
equipment |
|
|
76,540 |
|
|
76,540 |
|
| Leasehold
improvements |
|
|
485,954 |
|
|
470,223 |
|
| Construction
in progress |
|
|
9,450 |
|
|
9,450 |
|
| |
|
|
4,338,220 |
|
|
4,290,078 |
|
| Less
accumulated depreciation |
|
|
(3,995,983 |
) |
|
(3,770,190 |
) |
| |
|
$ |
342,237 |
|
$ |
519,888 |
|
The
assets held under capital leases have been included in property and equipment
and total $342,237 and $519,888 with accumulated depreciation of $228,774
and
$351,401 for the years ended November 30, 2006 and 2005, respectively.
Amortization costs related to assets under capital leases are charged to
depreciation expense.
NOTE
4 -
LINE OF CREDIT
In
October 2003, the Company entered into a new line of credit agreement with
a
financial institution, which provides for borrowings up to $1,500,000, as
defined. The line expired in October 2005. In September of 2005, the Company
renegotiated the term of this debt instrument, reducing the line of credit
from
$3.75 million to $1.5 million under the new agreement, the line of credit
bears
interest at Prime plus 1.5% the Company was able to cure its debt covenant
violations. In October of 2006, the Company renegotiated the term of this
debt
instrument. As a result of the new agreement, the interest at Prime plus
0.25%
at November 30, 2006. The line of credit is secured by substantially all
of the
assets of the Company. The line of credit agreement requires the Company
to
maintain certain financial covenants including the maintenance of debt
service and tangible net worth ratios.
At
November 30, 2006 there are additional $576,000 borrowings available under
this
line-of-credit.
As
of
February 21, 2007 the Company has been approved for a Line-of-Credit with
JP
Morgan Chase to replace the current asset based lender. This line of credit
will
be used for working capital needs only. This interest rate of this instrument
is
the JP Morgan Prime Rate.
NOTE
5 -
TERM LOAN
In
October 2003, the Company obtained a term loan in the amount of $368,000. The
term
loan
had an outstanding balance of $0 as of November 30, 2006. It bore interest
at prime plus 2.0% and was secured by substantially all of the assets
of
the
Company.
NOTE
6 -
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases approximately 56,000 square feet of manufacturing and office
space
in
Rancho Dominguez, California at approximately $24,600 per month through
November
2010.
Effective
November 1, 2005 the Company rented office space in Dallas for its corporate
Headquarters. The Company pays approximately $5,200 per month and the
lease
expires in October 2010.
Approximate
future minimum operating and capital lease obligations at November 30,
2006,
are as follows:
|
|
|
|
OPERATING
LEASES
|
|
|
CAPITAL
LEASES
|
|
| 2007
|
|
$ |
361,000 |
|
$ |
39,000 |
|
|
2008
|
|
|
359,000 |
|
|
10,000 |
|
|
2009
|
|
|
359,000 |
|
|
-- |
|
| 2010
|
|
|
358,000 |
|
|
-- |
|
| 2011 |
|
|
-- |
|
|
-- |
|
| Total
minimum lease obligations |
|
$
|
1,437,000
|
|
$ |
49,000 |
|
| Less
amounts representing interest |
|
|
|
|
|
(9,000) |
|
| Present
value of capital lease payments |
|
|
|
|
|
40,000 |
|
| Current
portion |
|
|
|
|
|
(20,000) |
|
| Long-term
portion |
|
|
|
|
$
|
20,000 |
|
Lease
expense for the years ended November 30, 2006, and 2005 was $58,545 and $56,723,
respectively.
Interest
expense incurred under capital lease obligations was insignificant for
the
years
ended November 30, 2006, and 2005.
On
June
24, 2005, Robert E. Delk, who has served as a member of the board of
directors ("Board") of AM and as the President
and Chief Executive Officer of AM since August 1, 2003, resigned from
his
position on the board of directors. Pursuant to the letter dated June
24,
2005
addressed to the Chairman of the Board of AM in which Mr. Delk advised
the board of directors of his resignation as a director, Mr. Delk also
gave
written notice of termination of his employment with AM effective July
31,
2005
upon the expiration of his Employment Agreement dated August 1, 2003
with
AM.
On
August
22, 2005, AM entered
into Employment Agreements with William G. Mortensen ("Mortensen") and
Michael
Bowen ("Bowen"). Pursuant to these Employment Agreements, Mortensen serves
as
President and Chief Financial Officer of AM and Bowen served as
Executive
Vice President of AM. The terms of employment are at will; however, if
either
is terminated without cause (as defined in the Employment Agreements),
they
receive severance pay equal to six months' base salary if the termination
occurs
within the first year of the term, and equal to three months' base salary
if
the
termination occurs thereafter. Mortensen's base annual salary is set at
$120,000
and Bowen's base annual salary is set at $135,000. Mortensen and Bowen
are
each
entitled to bonuses calculated by formulas based upon AM's income from
continuing operations before taxes. In 2005 upon entering into his employment
agreement, Bowen also received a grant of an incentive
stock option to purchase up to 200,000 shares of AM's common stock for
$0.20
per share. The option vests 20% per year for five years, beginning one
year
from
the date of the grant. If Bowen's employment with AM terminates for any
reason other than for cause or his voluntary resignation, the option does
not
terminate and vesting continues. Due to Bowen's resignation as of July 7,
2006, all stock options have expired.
In
January 2006, the Company entered into an at-will employment arrangement
with
Ricardo
G. Brutocao to fill the Company's open Chief Executive Officer Position.
Mr.
Brutocao has an unwritten agreement to be compensated by the Company at the
rate
of
$125,000. In November 2005, Mr. Brutocao was elected to the Company's
board
of
directors. Prior to that Mr. Brutocao had been providing consulting services
to the Company and as a result was granted 100,000 options at $.20 per
share
of
which 20% vested immediately and the remaining vest ratably over a four
year
period. Vesting is contingent on continued service to the
Company.
NOTE
7 -
RELATED PARTY DEBT
On
April
22, 2004, the Company's President and CEO and the Company's Chairman of
the
Board
each loaned $150,000 to the Company pursuant to certain promissory notes.
The notes were payable on July 21, 2004 and bear interest at 10%. Upon
certain
events of default, including the nonpayment of principal, the interest
rate
increases to a default rate of 12%. The Company is continuing to pay down
these
notes and as a result of the default they are included in current liabilities
in the accompanying consolidated balance sheet. The outstanding balance as
of November 30, 2006 is approximately $44,000 payable to Timothy Busch
only. Mr. Delk was paid in full at his time of departure from the
Company.
In
conjunction with the promissory notes, the Company issued warrants to
purchase
an aggregate of 100,000 shares of the Company's common stock at an exercise
price of $0.363 per share. The warrants are exercisable at any time and
expire
on
May 13, 2008. Upon certain events of default, including the nonpayment
of
principal, the Company shall issue warrants to purchase an additional 100,000
shares
of
the Company's common stock with the same terms. As a result of the default
on this debt, the Company issued an additional 100,000 warrants for a
total
of
200,000 which were valued at $79,000 and were recorded as interest expense
for the year ended November 31, 2004.
NOTE
8 -
STOCKHOLDERS' EQUITY
Stock
Options
1998
STOCK OPTION PLAN
In
April
1998, the stockholders of the Company approved the 1998 Stock Option
Plan
("1998 Plan"). The Plan authorizes the granting of various options and
rights
to
purchase up to 1,250,000 shares of common stock of the Company.
The
1998
Plan provides for the grant by the Company of options to purchase shares
of
the Company's common stock to its officers, directors, employees and
consultants.
The 1998 Plan provides that it is to be administered by a committee consisting
of two or more members of the Board of Directors. The Committee has discretion,
subject to the terms of the 1998 Plan, to select the persons entitled
to receive options under the Plan, the terms and conditions on which
options
are granted, the exercise price, the time period for vesting such shares
and
the
number of shares subject thereto.
2003
STOCK PLAN
In
December 2003, the stockholders of the Company approved the 2003 Stock Plan
("2003
Plan"). The Plan authorizes the granting of various options and rights to
purchase
up to 3,000,000 shares of common stock of the Company. The 2003 Plan
provides
for the grant by the Company of options to purchase shares of the Company's
common stock to its employees, directors and consultants. The 2003 Plan
provides that it is to be administered by a committee consisting of two or
more
members of the Board of Directors. The Committee has discretion, subject to
the
terms
of the 2003 Plan, to select the persons entitled to receive options under
the
Plan, the terms and conditions on which options are granted, the exercise
price, the time period for vesting such shares and the number of shares
subject
thereto.
Options
granted under the 2003 Plan may be either "incentive stock options",
within
the meaning of Section 422 of the Internal Revenue Code, or "non-qualified
stock options". No incentive stock option may be granted to any person
who is not an employee of the Company at the date of grant. Options may
be
granted under the 2003 Plan for terms of up to 10 years, except for incentive
stock
options granted to 10% Stockholders, which are limited to 5-year terms.
The
exercise price in the case of incentive stock options granted under the 2003
Plan
has
to be at least equal to the fair market value of the common stock as of
the
date
of grant.
In
January 2006, the Company entered into an at-will employment arrangement with
Ricardo
G. Brutocao to fill the Company's open Chief Executive Officer Position.
Mr.
Brutocao has an unwritten agreement to be compensated by the Company at the
rate
of
$125,000. In November 2005, Mr. Brutocao was elected to the Company's
board
of
directors. Prior to that Mr. Brutocao had been providing consulting services
to the Company and as a result was granted 100,000 options at $.20 per
share
of
which 20% vested immediately and the remaining vest ratably over a four
year
period. Vesting is contingent on continued service to the Company.
The
following table summarizes options granted and outstanding:
|
|
|
|
NUMBER
OF SHARES |
|
|
WEIGHTED
AVERAGE EXERCISE PRICE |
|
|
Outstanding,
November 30, 2004 (1,182,000 exercisable at
a weighted average price of $0.82)
|
|
|
2,356,000
|
|
$ |
1.01 |
|
| Granted
(weighted average fair value of $0.17) |
|
|
300,000
|
|
$ |
0.20 |
|
| Canceled/Expired
|
|
|
(1,810,000 |
) |
$ |
1.03 |
|
|
Outstanding,
November 30, 2005 (466,000 exercisable at
a weighted average price of $1.04)
|
|
|
846,000
|
|
|
0.69 |
|
| Canceled/Expired
|
|
|
(371,000)
|
|
|
0.37
|
|
|
Outstanding,
November 30, 2006 (390,000 exercisable at
a weighted average price of $1.09)
|
|
|
475,000 |
|
|
$
0.94 |
|
The
following table sets forth the exercise prices, the number of options
outstanding
and exercisable, and the remaining contractual lives of the Company's
stock options at November 30, 2006.
|
EXERCISE
PRICE
|
OUTSTANDING
|
EXERCISABLE
|
WEIGHTED
AVERAGE CONTRACTUAL LIFE REMAINING
|
|
NUMBER
OF OPTIONS
|
|
$
0.17 - 0.40
|
240,000 |
155,000 |
3.4 years |
|
1.50
|
190,000 |
190,000 |
0.3 |
|
1.75
- 3.69
|
45,000
|
45,000
|
1.2 |
| |
475,000 |
390,000 |
|
In
August, 2005, AM issued to each of the Lenawee Trust and Plus Four Private
Equities,
L.P. 625,000 shares of AM's common stock for $0.20 per share ($125,000
each). The Lenawee Trust is an affiliate of Timothy R. Busch, the Chairman
of AM's Board of Directors.
In
August, 2005, the Company entered into Employment Agreements with William G.
Mortensen
("Mortensen") and Michael Bowen ("Bowen"). Pursuant to these Employment
Agreements, Mortensen will serve as President and Chief Financial Officer
of AM and Bowen will serve as Executive Vice President of AM. The terms
of
employment are at will; however, if either is terminated without cause
(as
defined in the Employment Agreements), they receive severance pay equal to
six
months' base salary if the termination occurs within the first year of the
term,
and
equal to three months' base salary if the termination occurs thereafter.
Mortensen's base annual salary is set at $120,000 and Bowen's base annual
salary is set at $135,000. Mortensen and Bowen are each entitled to bonuses
calculated by formulas based upon the Company's income from continuing
operations
before taxes. Bowen also received a grant of an incentive stock option
to
purchase up to 200,000 shares of the Company's common stock for $0.20
per
share. The option vests 20% per year for five years, beginning one year from
the
date
of the grant. If Bowen's employment with the Company terminates for any
reason
other than for cause or his voluntary resignation, the option does not
terminate
and vesting continues. Effective July 7, 2006, Michael Bowen resigned from
the Company to pursue other opportunities. Due to Bowen's resignation all
of his stock options granted have expired.
In
October 2005, the Company sold 350,000 shares of the Company's common stock
for
total
proceeds of $70,000.
NOTE
9 -
INCOME TAXES
Income
tax expense (benefit) from continuing operations is as follows:
|
YEARS
ENDED NOVEMBER 30:
|
|
2006
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
| Federal |
|
$ |
-- |
|
$ |
-- |
|
| State |
|
|
2,000 |
|
|
2,400 |
|
| |
|
|
2,000 |
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
| Deferred: |
|
|
|
|
|
|
|
| Federal |
|
|
(636,000) |
|
|
-- |
|
|
State |
|
|
-- |
|
|
-- |
|
|
|
|
|
-- |
|
|
-- |
|
| Total
income tax provision |
|
$ |
(634,000) |
|
$ |
2,400 |
|
The
components of deferred tax assets and liabilities at November 30 are as
follows:
|
|
|
2006
|
|
2005
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
| Tax
(under) over book depreciation |
|
$ |
85,000 |
|
$ |
56,000 |
|
| Accounts
receivable |
|
|
-- |
|
|
12,000
|
|
| Inventory
|
|
|
-- |
|
|
31,000
|
|
| Accrued
expenses |
|
|
19,000
|
|
|
21,000
|
|
| Federal
net operating loss carryforwards |
|
|
2,148,000
|
|
|
2,214,000
|
|
| State
net operating loss carryforwards |
|
|
151,000
|
|
|
124,000
|
|
| Goodwill
and
other intangible assets |
|
|
218,000
|
|
|
329,000
|
|
| Restructuring
reserve |
|
|
-- |
|
|
10,000
|
|
| Total
deferred tax assets |
|
|
2,621,000
|
|
|
2,797,000
|
|
| Less
valuation allowance for deferred tax assets |
|
|
(1,987,000 |
) |
|
(2,797,000 |
) |
| Net
deferred tax assets |
|
$ |
634,000 |
|
$ |
-- |
|
At
November 30, 2006 and 2005, the Company had a valuation allowance of
$1,987,000
and
$2,797,000, respectively, to reduce its deferred tax assets to estimated
realizable value. Based on the level of historical taxable income and
projections
for future taxable income over the periods in which temporary differences
are anticipated to reverse, management believes it is more likely than
not
that the Company will realize the benefits of these deferred tax assets,
net of the valuation allowance. However, the amount of the deferred tax
asset
considered realizable could be adjusted in the future if estimates of
taxable
income are revised due to changes in circumstances.
As
of November 30, 2006, the Company has net tax operating loss carryforwards
of
approximately $6,319,000 available to offset future Federal tax liabilities.
The
carryforwards expire through 2026. As of November 30, 2006, the Company has
net
operating tax loss carryforwards of approximately $1,689,000 available to offset
future state income tax liabilities, which expire through 2026.
The
reconciliation of the income tax provision (benefit) from continuing operations
to taxes computed at U.S. federal statutory rates is as follows:
|
YEARS
ENDED NOVEMBER 30:
|
|
|
2006
|
|
|
2005
|
|
|
Income
tax (benefit) at statutory rates
|
|
$ |
238,000 |
|
$ |
53,000 |
|
|
Permanent
timing differences and other items
|
|
|
(62,000 |
) |
|
(387,000 |
) |
|
Change
in federal valuation allowance and other permanent items
|
|
|
(812,000 |
) |
|
334,000 |
|
|
State
and local income taxes, net of federal income tax
|
|
|
2,000 |
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
| Total
|
|
$ |
(634,000 |
) |
$ |
2,400 |
|
NOTE
10 -
EMPLOYEE BENEFIT PLAN
The
Company has a 401(k) retirement plan that covers the majority of the Company's
domestic employees. An employee, at their discretion, can elect to make
voluntary contributions to the plan from 0% to 20% of their compensation, up
to
the maximum amount set by the Internal Revenue Service. The Company may
contribute an amount determined in its sole judgment. Total expense from this
plan related to continuing operations was approximately $0 and $0 for the years
ended November 30, 2006 and 2005, respectively. All employees, including
executive officers, may participate in this plan according to the rules set
forth by the IRS.
NOTE
11 -
FASB 131 SEGMENT REPORTING
The
Company's foreign operations consist of a sales joint venture located in
Singapore,
which began operations in fiscal 1998. All of their sales are made to
unaffiliated
customers. The following is a summary of operations by entities within
geographic areas for the year ending November 30, 2006, and 2005:
|
|
|
|
AMI-US
OPERATIONS
|
|
|
AMI-SINGAPORE
|
|
|
CONSOLIDATED
|
|
| NET
SALES |
|
|
|
|
|
|
|
|
|
|
| 2006
|
|
$
|
9,412,260
|
|
$ |
584,020 |
|
$ |
9,996,280 |
|
| 2005 |
|
$ |
8,078,343 |
|
$ |
586,131 |
|
$ |
8,664,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT
INCOME BEFORE CORPORATE ALLOCATION
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
115,953 |
|
$ |
584,020 |
|
$ |
699,973 |
|
|
2005
|
|
$ |
(428,981 |
) |
$ |
586,131 |
|
$ |
157,150 |
|
|
|
|
|
AMI-US
OPERATIONS
|
|
|
AMI-SINGAPORE
|
|
|
CONSOLIDATED
|
|
|
CORPORATE
ALLOCATION
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
58,402
|
|
|
(58,402 |
) |
|
--
|
|
|
2005
|
|
$ |
62,468 |
|
$ |
(62,468 |
) |
$ |
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
174,355 |
|
$ |
525,618 |
|
$ |
699,973 |
|
|
2005
|
|
$ |
(366,513 |
) |
$ |
523,663 |
|
$ |
157,150 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
(228,773 |
) |
$ |
-- |
|
$ |
(228,773 |
) |
|
2005
|
|
$ |
(320,006 |
) |
$ |
-- |
|
$ |
(320,006 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES BENEFIT (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
634,000 |
|
$ |
-- |
|
$ |
634,000 |
|
| 2005 |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
| TOTAL
ASSETS |
|
|
|
|
|
|
|
|
|
|
| 2006 |
|
$ |
4,081,981 |
|
$ |
-- |
|
$ |
4,081,981 |
|
| 2005 |
|
$ |
3,781,995 |
|
$ |
-- |
|
$ |
3,781,995 |
|
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.
ADVANCED
MATERIALS GROUP, INC.
Dated:
February 27, 2007
By:
/s/
RICARDO G. BRUTOCAO
------------------------
Ricardo
G. Brutocao
Chief
Executive Officer
By:
/s/
WILLIAM G. MORTENSEN
------------------------
William
G. Mortensen
President
and Chief Financial Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has
been
signed below by the following persons on behalf of the registrant and
in
the
capacities and on the dates indicated.
/s/
RICARDO G. BRUTOCAO Chief Executive Officer and Director February 27,
2007
--------------------------
Ricardo
G. Brutocao
/s/
WILLIAM G. MORTENSEN President and Chief Financial Officer February 27,
2007
--------------------------
William
G. Mortensen
/s/
TIMOTHY R. BUSCH Chairman and Director February 27, 2007
--------------------------
Timothy
R. Busch
/s/
MAURICE J. DEWALD Director February 27, 2007
--------------------------
Maurice
J. DeWald
/s/
N.
PRICE PASCHALL Director February 27, 2007
--------------------------
N.
Price
Paschall
/s/
JOHN
SAWYER Director February 27, 2007
--------------------------
John
Sawyer
INDEX
TO
EXHIBITS
NO.
EXHIBITS
---
--------
2.1
Agreement and Plan of Reorganization dated April 21, 1993 between Far
West
Ventures, Inc. (now known as Advanced Materials Group, Inc.), Wilshire
Advanced Materials, Inc. and the stockholders of Wilshire Advanced
Materials, Inc. (1)
3.1
Articles of Incorporation of Advanced Materials Group, Inc. (formerly
known
as
Far West Ventures, Inc.). (1)
3.2
Certificate of Amendment of Articles of Incorporation of Advanced Materials
Group, Inc. (1)
3.3
Bylaws, as amended, of Advanced Materials Group, Inc. (1)
10.1
Asset Purchase Agreement dated August 4, 1992 between Wilshire Advanced
Materials,
Inc. and Wilshire Technologies, Inc. (1)
10.2
Amendment to Asset Purchase Agreement dated August 4, 1992 between Wilshire
Advanced Materials, Inc. and Wilshire Technologies, Inc. dated December
2, 1992. (1)
10.3
Stock Purchase Agreement dated October 6, 1993 between Advanced Materials
Group, Inc. and the stockholders of Condor Utility Products, Inc.
(2)
10.4
The
1993 Stock Option Plan of Advanced Materials Group, Inc. (3)(*)
10.5
Form
of Convertible Debenture. (4)
10.6
Promissory Note of the Company dated March 25, 1994 payable to Michael
W.
Crow
in the amount of $787,618. (5)
10.7
Amended and Restated Promissory Note dated August 16, 1995 between Advanced
Material Group, Inc. and Hiram H. Johnson and Beth A. Johnson. (6)
10.8
Industrial Lease Agreement executed August 31, 1995 between New York
Life
Insurance and Annuity Corporation, as Landlord and Advanced Materials,
Inc., as Tenant. (7)
10.9
Form
of Equity Warrant between Advanced Materials Group, Inc. and Trilon
Dominion Partners, L.L.C. (8)
10.10
Form of Debt Warrant between Advanced Materials Group, Inc. and Trilon
Dominion
Partners, LLC. (9)
10.11
Loan Agreement dated as of November 26, 1996, between Advanced Materials,
Inc. And Wells Fargo National Association. (10)
10.12
First Amendment to Loan Agreement dated as of September 1, 1996, between
Advanced Materials, Inc. and Wells Fargo National Association. (11)
10.13
Asset Purchase and Sale Agreement dated as of September 1, 1996, between
Advanced Materials, Inc. and Gasket and Molded Products, Inc. and
Shareholders. (12)
10.14
Amendment One to Lease dated as of September 27, 1996, between Advanced
Materials
Group, Inc. And Riggs National Bank of Washington, D.C. as Trustee
of the Multi-Employer Property Trust. (13)
10.15
The
1997 Stock Option Plan of Advanced Materials Group, Inc. (14)
10.16
Industrial Sublease Agreement executed September 1, 1997 between Advanced
Material, Inc. as landlord and S-Line as tenant. (15)
10.17
Manufacturing Agreement dated January 30, 1998 by and between Advanced
Materials
FSC Ltd. and Foamtec (Singapore) Pte. Ltd. (16)
10.18
Form of Warrant Assignment Agreement dated September 15, 1997 between
Trilon
Dominion Partners, LLC. and certain individuals. (17)
10.19
Credit Agreement dated as of February 27, 1998 between Advanced Materials
Group, Inc. and Wells Fargo Bank, National Association. (18)
10.20
The
1998 Stock Option Plan of Advanced Materials Group, Inc. (19)(*)
10.21
Agreement of Settlement and General Release, dated October 20, 1998, by
and
among
Advanced Materials Group, Inc., Condor Utility Products, Inc. and
Gary
and Dora Valiska, former employees of Condor Utility Products, Inc.
(20)
10.22
Employment agreement dated September 11, 1998 between Advanced Materials
Group, Inc. and Steve F. Scott, Chief Executive Officer, President
and Director. (21)(*)
10.23
Consulting Agreement dated March 31, 1997, by and between Advanced Materials
Group, Inc. and Paschall and Company. (22)
10.24
Industrial Lease Agreement, including addenda and additional provisions,
executed June 30, 1999, by and between Riggs & Company, a division
of Riggs Bank N.A., as Trustee of the Multi-Employer Property Trust,
as
Landlord, and Advanced Materials, Inc., as Tenant. (23)
10.25
Employment Agreement dated August 1, 1999, by and between Advanced Materials
Group, Inc. and David A. Lasnier, Senior Vice President, General
Manager. (24)(*)
10.26
Employment Agreement dated August 1, 1999, by and between Advanced Materials
Group, Inc. and James Douglas Graven, Vice President, Chief Financial
Officer. (25)(*)
16.1
Letter from Ernst & Young, L.L.P., dated September 22, 2000, regarding
its
concurrence with Advanced Material Group, Inc.'s statement regarding
change of accountants. (26)
21.1
List
of Subsidiaries. (27)
31.1
Certification by Chief Executive Officer Required by Rule 13a-14(a) of
the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2
Certification by Chief Financial Officer Required by Rule 13a-14(a) of
the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(*)
Management contract or compensatory plan or arrangement.
(1)
Filed
as a like-numbered exhibit to the Company's Registration Statement on
Form
SB-2
dated December 6, 1993 (Registration No. 33-72500), incorporated herein
by
reference.
(2)
Filed
as Exhibit 10.10 to the Company's Registration Statement on Form SB-2
dated
December 6, 1993 (Registration No. 33- 72500), incorporated herein by
reference.
(3)
Filed
as Exhibit 10.18 to Amendment No. 1 dated March 1, 1994 to the Company's
Registration Statement on Form SB-2 dated December 6, 1993 (Registration
No. 33-72500), incorporated herein by reference.
(4)
Filed
as Exhibit 10.23 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration
Statement on Form SB-2 dated December 6, 1993 (Registration No. 33-72500),
incorporated herein by reference.
(5)
Filed
as Exhibit 10.24 to Amendment No. 2 dated May 6, 1994 to the Company's
Registration
Statement on Form SB-2 dated December 6, 1993 (Registration No. 33-72500),
incorporated herein by reference.
(6)
Filed
as Exhibit 10.2 to Form 10-QSB dated August 31, 1995, incorporated herein
by
reference.
(7)
Filed
as Exhibit 10.3 to Form 10-QSB dated August 31, 1995, incorporated herein
by
reference.
(8)
Filed
as Exhibit 2.2 to Form 8-K filed January 5, 1996, incorporated herein
by
reference.
(9)
Filed
as Exhibit 2.3 to Form 8-K filed January 5, 1996, incorporated herein
by
reference.
(10)
Filed as Exhibit 10.18 to Form 10-KSB dated November 30, 1996, incorporated
herein
by
reference.
(11)
Filed as Exhibit 10.19 to Form 10-KSB dated November 30, 1996, incorporated
herein
by
reference.
(12)
Filed as Exhibit 10.20 to Form 10-KSB dated November 30, 1996, incorporated
herein
by
reference.
(13)
Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1996, incorporated
herein
by
reference.
(14)
Filed as Exhibit 10.21 to Form 10-KSB dated November 30, 1997, incorporated
herein
by
reference.
(15)
Filed as Exhibit 10.22 to Form 10-KSB dated November 30, 1997, incorporated
herein
by
reference.
(16)
Filed as Exhibit 10.23 to Form 10-KSB dated November 30, 1997, incorporated
herein
by
reference.
(17)
Filed as Exhibit 10.24 to Form 10-KSB dated November 30, 1997, incorporated
herein
by
reference.
(18)
Filed as Exhibit 10.1 to Form 8-K filed February 27, 1998, incorporated
herein
by
reference.
(19)
Filed as Exhibit A to Form DEF-14A dated April 8, 1998, incorporated herein
by
reference.
(20)
Filed as Exhibit 10.21 to Form 10-KSB filed March 1, 1999, incorporated
herein
by
reference.
(21)
Filed as Exhibit 10.1 to Form 10-QSB filed July 10, 1997, incorporated
herein
by
reference.
(22)
Filed as Exhibit 10.4 to Form 10-QSB filed July 10, 1997, incorporated
herein
by
reference.
(23)
Filed as Exhibit 10.24 to Form 10-K filed February 28, 2000, incorporated
herein
by
reference.
(24)
Filed as Exhibit 10.25 to Form 10-K filed February 28, 2000, incorporated
herein
by
reference.
(25)
Filed as Exhibit 10.26 to Form 10-K filed February 28, 2000, incorporated
herein
by
reference.
(26)
Filed as Exhibit 16.1 to Form 8-K filed September 22, 2000, incorporated
herein
by
reference.
(27)
Filed as Exhibit 21 to Form 10-K filed February 28, 2000, incorporated
herein
by
reference.
EXHIBIT
31.1
CERTIFICATIONS
I,
Ricardo G. Brutocao, certify that:
1.
I have
reviewed this Form 10-KSB of Advanced Materials Group, Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a
material
fact or omit to state a material fact necessary to make the statements
made,
in
light of the circumstances under which such statements were made, not
misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the consolidated financial statements, and other financial
information included in this report, fairly present in all material respects
the consolidated financial condition, results of operations and cash
flows
of
the registrant as of, and for, the periods presented in this
report;
4.
The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC
Release
34-47986] for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls
and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b)
[Omitted pursuant to SEC Release 34-47986];
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures
and presented in this report our conclusions about the effectiveness
of
the
disclosure controls and procedures, as of the end of the period covered
by
this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control
over
financial reporting that occurred during the registrant's most recent
fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual
report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer(s) and I have disclosed, based on
our
most
recent evaluation of internal control over financial reporting, to the
registrant's
auditors and the audit committee of the small business issuer's board
of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely
to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over
financial
reporting.
Date:
February 27, 2007
/s/
RICARDO G. BRUTOCAO
-----------------------
Ricardo
G. Brutocao
Chief
Executive Officer
EXHIBIT
31.2
CERTIFICATIONS
I,
William G. Mortensen, certify that:
1.
I have
reviewed this Form 10-KSB of Advanced Materials Group, Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a
material
fact or omit to state a material fact necessary to make the statements
made,
in
light of the circumstances under which such statements were made, not
misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the consolidated financial statements, and other financial
information included in this report, fairly present in all material respects
the consolidated financial condition, results of operations and cash
flows
of
the registrant as of, and for, the periods presented in this
report;
4.
The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC
Release
34-47986] for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls
and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b)
[Omitted pursuant to SEC Release 34-47986];
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures
and presented in this report our conclusions about the effectiveness
of
the
disclosure controls and procedures, as of the end of the period covered
by
this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control
over
financial reporting that occurred during the registrant's most recent
fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual
report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer(s) and I have disclosed, based on
our
most
recent evaluation of internal control over financial reporting, to the
registrant's
auditors and the audit committee of the small business issuer's board
of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely
to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over
financial
reporting.
Date:
February 27, 2007
/s/
WILLIAM G. MORTENSEN
-------------------------
William
G. Mortensen
President
and Chief Financial Officer
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the annual report on Form 10-KSB of Advanced Materials Group,
Inc.
(the
"Company") for the fiscal year ended November 30, 2006 (the "Report"),
the
undersigned hereby certifies in his capacities as Chief Executive Officer of
the
Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934, as amended; and
2.
the
information contained in the Report fairly presents, in all material as
of,
and
for, the periods presented in the report respects, the consolidated financial
condition and results of operations of the Company.
Dated:
February 27, 2007
By:
/s/
RICARDO G. BRUTOCAO
-----------------------
Ricardo
G. Brutocao
Chief
Executive Officer
EXHIBIT
32.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the annual report on Form 10-KSB of Advanced Materials Group,
Inc.
(the
"Company") for the fiscal year ended November 30, 2006 (the "Report"),
the
undersigned hereby certifies in his capacities as Chief Executive Officer of
the
Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934, as amended; and
2.
the
information contained in the Report fairly presents, in all material as
of,
and
for, the periods presented in the report respects, the consolidated financial
condition and results of operations of the Company.
Dated:
February 27, 2007
By:
/s/
WILLIAM G. MORTENSEN
------------------------
William
G. Mortensen
President
and Chief Financial Officer