As filed with the Securities and Exchange Commission on August 12, 2005
Registration No. _________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADAL GROUP, INC
Delaware 3334 94-3012230
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
P.O. Box 177
Billhurst Studio
Lingfield Common Road
Lingfield, Surrey
United Kingdom
RH7 6B7
011-441-342-833855
(Address and Telephone Number of
Principal Executive Offices)
Nicholas Shrager
Chief Executive Officer and President
PO Box 177
Billhurst Studio
Lingfield Common Road
Lingfield, Surrey
United Kingdom
RH7 6B7
011-441-342-833855
(Name, Address and Telephone Number
of Agent for Service)
Copies of all communications to:
Mitchell S. Nussbaum, Esq.
Loeb & Loeb, LLP
345 Park Avenue
New York, NY 10154
Telephone: (212) 407-4159 Facsimile No. (212) 407-4990
Approximate Date of Proposed Sale to the Public: As soon as possible after this
registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
maximum maximum Amount of
Amount to be offering price aggregate registration
Title of each class of securities to be registered registered per share offering price fee
-------------------------------------------------- ------------ -------------- -------------- -------------
Common Stock, $.0001 par value per share 150,230 $5.25 (1) $ 788,708 $ 93
Common Stock, $.0001 par value per share, issuable upon 333,333 $3.00 $ 999,999 $118
conversion of a Secured Convertible Term Note
Common Stock, $.0001 par value per share, issuable upon 142,857 $3.50 $ 499,999 $ 59
conversion of a Secured Convertible Term Note
Common Stock, $.0001 par value per share, issuable upon 187,500 $6.30 $1,181,250 $139
exercise of a Common Stock Purchase Warrant
Common Stock, $.0001 par value per share, issuable upon 187,500 $6.83 $1,280,625 $150
exercise of a Common Stock Purchase Warrant
Common Stock, $.0001 par value per share, issuable upon 472 $0.0001 $ 0.472 $ 1
exercise of an Option
TOTALS 1,001,892 $560
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended, using
the average of the bid and asked prices, as reported on The Over the Counter
Bulletin Board, on August 11, 2005.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
SUBJECT TO COMPLETION, DATED August __, 2005
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
This prospectus shall not constitute an offer to sell or the solicitation
of an offer to buy, nor shall there be any sale of these securities in any state
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
PROSPECTUS
Adal Group, Inc.
1,001,892 Shares of Common Stock
This prospectus relates to the resale of up to 1,001,892 shares of our
common stock being offered by the selling stockholder. Of the shares covered by
this prospectus, 150,230 shares have been issued to the selling stockholders
upon exercise of an option by the selling stockholders, 476,190 shares are
issuable upon the conversion of a secured convertible term note by the selling
stockholder, 375,000 shares are issuable upon the exercise of a common stock
purchase warrant by the selling stockholder and 472 shares are issuable upon
exercise of the remainder of shares underlying the option by the selling
stockholder. We will not receive any proceeds from the sale of the shares of
common stock by the selling stockholders. Assuming that the warrant is exercised
in whole and the shares remaining under the Option are exercised , we will
realize proceeds of approximately $2,461,875.
Our shares of common stock are traded on The Over the Counter Bulletin
Board under the symbol "ADGR." The average of the high and low prices of our
common stock on August 11, 2005 was $5.25.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT
IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is __________, 2005.
TABLE OF CONTENTS
Page
SUMMARY.....................................................................1
FORWARD-LOOKING STATEMENTS..................................................3
RISK FACTORS................................................................3
USE OF PROCEEDS.............................................................8
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................9
DESCRIPTION OF BUSINESS....................................................16
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...............23
EXECUTIVE COMPENSATION.....................................................25
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................27
SELLING STOCKHOLDER........................................................28
DESCRIPTION OF SECURITIES..................................................29
PLAN OF DISTRIBUTION.......................................................29
INDEMNIFICATION............................................................31
LEGAL MATTERS..............................................................31
FINANCIAL STATEMENTS.......................................................31
EXPERTS....................................................................31
WHERE YOU CAN FIND MORE INFORMATION........................................32
INDEX TO FINANCIAL STATEMENTS..............................................33
i
SUMMARY
We were incorporated in Delaware under the name ESCAgenetics Corporation
on July 29, 1986. We are a diversified producer of aluminum extrusions and
manufactured parts and products. We are the parent company of several
established businesses located in the United Kingdom that provide complete
one-stop aluminum extrusion, machining, and assembly services. Aluminum is a
commodity that is traded on the London Metal Exchange (LME) and priced daily
based on market supply and demand. Our long-term goal is to create synergistic
benefits through the acquisition and streamlining of vertically-integrated,
value-added aluminum extrusion, machining, manufacturing and assembly
operations.
Products and Services
Through our subsidiaries and divisions we provide the following services
to our customers:
o Aluminum Extrusion Design and Production Services
We provide complete supply-chain management, including component
design, fabrication, warehousing and delivery. We emphasize product
precision, speed of order completion, extensive design knowledge and
a flexible manufacturing process. We specialize in meeting
just-in-time delivery schedules.
o Precision Engineering, Tool Making and Volume Production of Machined
Aluminum Components.
We manufacture parts for air conditioning units for motor vehicles
produced by major Original Equipment Manufacturers.
o Value - Added Finishing Services
We provide value added finishing services to extruded aluminum
parts, with services ranging from design, formation and machining to
assembly and welding.
o Architectural Design
We create aluminum-based designs that are unique, reliable and
highly efficient. We currently manufacture heating and ventilating
air conditioning systems.
o Manufacturing of Building Facades
We manufacture aluminum commercial building facades for suppliers to
and installers for the primary building contractors in the United
Kingdom.
Executive Offices
Our corporate headquarters in the UK is located at ICS House, Hall Road,
Heybridge, Maldon, Essex, CM9 4LA. The telephone number at our corporate
headquarters is 011-44-1621-874774.
Summary Financial Data:
The following summary of our financial information has been derived from
our unaudited consolidated financial statements for the quarters ended March 31,
2005 and March 31, 2004, our audited consolidated financial statements for the
years ended December 31, 2004 and December 31, 2003, and our pro forma condensed
consolidated financial statements which consolidated financial statements are
included elsewhere in this prospectus.
Three months ending March 31,
------------------------------
2005 2004
----------- -----------
Net Sales $ 7,896 $ 7,062
Cost of Sales 7,282 6,373
----------- -----------
Gross Profit 614 689
Selling, General and
Administrative Expense 1,048 748
----------- -----------
(Loss) from Operations (434) (59)
Interest Expense (263) (121)
(Loss) Before Income Taxes (697) (180)
Provision For Income Tax Expense -- 6
----------- -----------
Net (Loss) $ (697) $ (186)
=========== ===========
Earnings (Loss) Per Share - Basic and Diluted $(0.26) $(0.07)
=========== ===========
Weighted Average Number of Shares Outstanding 2,705,334 2,550,000
=========== ===========
2
FORWARD-LOOKING STATEMENTS
Statements in this prospectus that are not descriptions of historical
facts are forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Reference is
made in particular to the description of our plans and objectives for future
operations and assumptions underlying such plans and objectives and other
forward-looking terminology such as "may," "expects," "believes," "anticipates,"
"intends," "projects," or similar terms, variations of such terms or the
negative of such terms. Forward-looking statements are based on management's
current expectations. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
under "Risk Factors."
RISK FACTORS
Investing in our securities involves an element of risk. Our operations
are currently based in the United Kingdom and although we plan to expand our
businesses to the USA we are currently exposed to the Dollar / Sterling exchange
rate risks. Our advisors are based in the USA and we have a firm business plan
to acquire companies in the USA. The business currently has an infrastructure to
support the business plan and the costs of this are currently a burden to the
business. We have been loss making since completing our reverse merger in
October 2004 and do not expect to make a profit in 2005. Our underlying
operating companies are beginning to meet profit targets but the overall
business is unlikely to make a profit until we materially increase our turnover
through acquisition and organic growth. The businesses have several new products
under development and although these could generate significant revenues they
will incur development costs, Our business, financial condition or results of
operations could be affected materially and adversely by any or all of these
risks.
THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.
RISKS RELATED TO OUR BUSINESS
We have a limited operating history. We were founded and commenced operations in
October 2004 but our underlying operating subsidiaries have been trading between
thirty and forty years. Our operating history may be insufficient for you to
evaluate our business and future prospects. As we expand our business, we may
increase our borrowings and as a result increase our interest expenses. Any
significant failure to realize anticipated revenue growth could result in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:
o implement our business model and strategy and adapt and modify them
as needed;
o increase awareness of our brands, protect our reputation and develop
customer loyalty;
o manage our expanding operations and service offerings, including the
integration of any future acquisitions;
o maintain adequate control of our expenses;
o anticipate and adapt to changing conditions in markets in which we
operate as well as the impact of technological developments and
other significant competitive and market dynamics.
If we are not successful in addressing any or all of these risks, our business
may be materially and adversely affected.
Revenues may not be consistent due to fluctuating demand for products. We derive
revenues through the sale of products to our customers. Fluctuating demand for
products by our customers may result from a variety of factors, including, but
3
not limited to customers' industries market falling, the weather, and
competition from imports. If customer demand for our products is not consistent,
our revenues could be adversely affected. Our industry has historically
experienced a very slow start each year with December and the first three months
of the year being the lowest in terms of sales. This is largely due to the
seasonal nature of a large proportion of our customer base, the Christmas
holiday period slow down and year end inventory reduction by customers.
Rising costs of raw materials could adversely impact our margins. Our principal
raw material is aluminum billets, which are generally available from a variety
of suppliers. However, world commodity prices for aluminum could rise faster
than our ability to recoup increases in these costs from our customers. If raw
material costs increase in such a manner, our gross profit and net income could
be negatively impacted.
The acquisition of new businesses is costly and such acquisitions may not
enhance our financial condition. Our growth strategy is to acquire companies,
and identify and acquire assets from businesses in the United Kingdom, the
United States and elsewhere that have services, products, technologies, industry
specializations or geographic coverage that extend or complement our existing
business. We may be unable to successfully identify or acquire such companies on
favorable terms. Furthermore, any acquisitions we pursue may be subject to
approval by the relevant local government authorities, which approval we may not
obtain. Even if we are able to identify an acquisition candidate, the resources
expended may be significant. Any future acquisitions will be subject to a number
of challenges, including:
o the diversion of management time and resources and the potential
disruption of our ongoing business;
o difficulties in maintaining uniform standards, controls, procedures and
policies; and
o potential unknown liabilities associated with acquired businesses.
In February 2005, we acquired all of the outstanding shares of Guilform Holdings
Limited, a U.K. company, which is now known as Adal Guilform. We expect that
acquisitions will strengthen our position as a leader in the Architectural
market place, combining our current products and expertise with the aluminum
cladding marketplace.
However, we may not achieve the anticipated benefits of future acquisitions.
The establishment and expansion of international operations requires significant
management attention. All of our current revenues, are derived from the U.K. Our
international operations are subject to risks, including the following, which,
if not planned and managed properly, could materially adversely affect our
business, financial condition and operating results:
o legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;
o longer customer payment cycles and greater difficulties in
collecting accounts receivable;
o uncertainties of laws and enforcement relating to the protection of
intellectual property; and
o potentially uncertain or adverse tax consequences.
The market in which we compete is highly competitive and fragmented and we may
not be able to maintain market share. We operate in a marketplace that is
becoming more global, and the threat of lower cost imports is increasing. If we
are not able to differentiate ourselves in ways other than by reducing prices,
such as through technical experience, just in time service and quality, we may
lose market share.
Our operations could be curtailed if we are unable to obtain required additional
financing. We may need to raise additional funds through public or private
financing, which may include the sale of equity and/or debt securities,
including securities convertible into our common stock. The issuance of these
securities could result in dilution to our stockholders. If we are unable to
raise capital when needed, our business growth strategy may slow, which could
severely limit our ability to increase revenue.
4
Efforts to comply with recently enacted changes in securities laws and
regulations will increase our costs and require additional management resources
and we still may fail to comply. As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports on Form 10-KSB. In addition, the independent
registered public accounting firm auditing the company's financial statements
must attest to and report on management's assessment of the effectiveness of the
company's internal controls over financial reporting. This requirement will
first apply to our annual report on Form 10-KSB for our fiscal year ending
December 31, 2006. If we are unable to conclude that we have effective internal
controls over financial reporting or, if our independent auditors are unable to
provide us with an unqualified report as to the effectiveness of our internal
controls over financial reporting as of December 31, 2006 and future year ends
as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
lose confidence in the reliability of our financial statements, which could
result in a decrease in the value of our securities. We have only recently begun
a formal process to evaluate our internal controls over financial reporting.
Given the status of our efforts, coupled with the fact that guidance from
regulatory authorities in the area of internal controls continues to evolve,
substantial uncertainty exists regarding our ability to comply by applicable
deadlines.
We have never paid cash dividends and are not likely to do so in the foreseeable
future. We have never declared or paid any cash dividends on our common stock.
We currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate.
RISKS RELATED TO OUR TECHNOLOGY AND EQUIPMENT
An inability to respond quickly and effectively to new technological
developments could adversely impact our competitive position. Our failure to
maintain the superiority through lack of investment in new products, new
machinery and new processes or to respond to other technological changes could
adversely affect our ability to retain existing customers and secure new
customers. We will need to constantly seek out new technology to improve the
efficiency and effectiveness of our processes. If we are unable to keep current
with new developments, our competitors' technologies or products may render us
noncompetitive. This means that we must have a strong capital investment program
at our extrusion plant and our engineering factories. We need to continue to
automate machines and processes and invest in modernizing our plant and
equipment.
Systems failures and security breaches may harm our business. Any failure of our
current technology systems, the technology systems of our planned acquisitions
or any breach of security of our system or the systems of our planned
acquisitions, or the perception of a failure or breach of security of such
systems, could decrease our customers' trust in us and our content providers'
trust in us to safeguard confidential and valuable information and assets, which
could adversely affect their willingness to do business with us.
We rely on third parties for technology and backup systems. While we currently
manage our technology at various sites and at our headquarters, we are planning
to add additional technology and systems to support our business during the
third quarter of 2005. Some of the technologies and systems are to be managed by
third parties off site on outside servers for website hosting and backup. We may
not be able to control access and security to these servers as we would if they
were on site. While we make every effort to maximize the security and integrity
of our data, we cannot guarantee that third parties will do the same regardless
of their contractual obligation to do so.
Additionally, some of our distributors both domestically and overseas keep local
copies of a portion of our image library on their servers to expedite delivery
of images to their clients. We do not have control over the day-to-day
management of their technology and the security and integrity of their systems.
If our data is compromised, it may be rendered unusable or we may be unable to
prevent unauthorized copies of images from our library from entering the
marketplace.
We rely on electricity and gas to produce our products. The heating of aluminum
billets as part of the extrusion process employs electricity and gas heaters
requiring a large and continuous supply of electricity and gas. Our ageing ovens
are powered by electricity. Interruptions of electricity supply can result in
lengthy production shutdowns, increased costs associated with restarting
production and waste of production in progress. In extreme cases, interruptions
of electricity supply can also cause damage to or destruction of the equipment
and facilities. We encountered shortages of electric power supply in 2004. We do
not expect any significant improvement of this situation. Electricity and gas
costs are a principal production cost component of the aluminum extrusion
manufacturing process
5
Our revenues and earnings are heavily affected by the price of aluminum billets.
Volatile prices in the exchange traded secondary aluminum market and currency
markets could adversely affect our revenues and earnings. The price of billets
is controlled through London Metals Exchange. Increases or Decreases in the LME
price can have a substantial adverse effect on our revenues and earnings because
we are unable to adjust our selling prices to our market place as readily..
Secondary aluminum prices historically have been subject to significant cyclical
price fluctuations. We believe the timing of changes in the market price of
aluminum largely are unpredictable. Price fluctuations are affected by numerous
factors beyond our control, including
o the overall demand for, and worldwide supply of, primary aluminum
o the availability and price of competing commodities
o international economic trends
o currency exchange rate fluctuations
o expectations of inflation
o actions of commodity market participants
o consumption and demand patterns and
o political events in major producing countries.
We are subject to certain environmental laws and regulations. We are subject to
a wide variety of European and International environmental laws and regulations
(the "Environmental Laws"). From time to time, we are subject, with respect to
our current and former operations, to fines or penalties assessed for alleged
breaches of the Environmental Laws, and to claims and litigation based upon such
laws. Further, future environmental regulations are expected to impose stricter
compliance requirements on the aluminum industry. While uncertainties are
inherent in the final outcome of these environmental matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties should not have a material adverse effect on the our consolidated
financial position, results of operations, or liquidity.
If we are unable to effectively manage our growth we will be unable to
successfully operate our business in the future. Our growth has placed, and is
expected to continue to place, a significant strain on our managerial,
technical, operational and financial resources. To manage our expected growth,
we will have to implement and improve our operational and financial systems, and
we will have to train and manage our growing employee base. We will also need to
maintain and expand our relationships with customers, outside content providers
and other third parties. If we are unable to effectively manage our growth, our
business may become inefficient and therefore less profitable.
RISKS SPECIFIC TO THIS OFFERING
The price of our stock may fluctuate in the future. There is a significant risk
that the market price of our common stock will decrease in the future in
response to any of the following factors, some of which are beyond our control:
o variations in our quarterly operating results;
o announcements that our revenue or income are below analysts'
expectations;
o general economic slowdowns;
o changes in market valuations of similar companies;
o sales of large blocks of our common stock;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
o fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
6
The price in this offering will fluctuate based on the prevailing market price
of our common stock on The Over the Counter Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
You may suffer dilution upon the exercise of outstanding warrants and options.
We currently have outstanding warrants to purchase 375,000 shares of our common
stock and options to purchase 472 shares of our common stock, to the extent such
warrants or options are exercised, there will be further dilution. In addition,
in the event that any future financing should be in the form of securities
convertible into, or exchangeable for, equity securities, investors may
experience additional dilution upon the conversion or exchange of such
securities.
7
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders. Assuming that all of the warrants held by
selling stockholders are exercised for cash, we will realize proceeds of
approximately $2,461,875, based on current market value of our stock and our
agreement with Laurus Fund Management. We would use these funds for general
corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Over the Counter Bulletin Board under
the symbol "ADGR". The following table sets forth the range of high and low bid
prices reported by the Over the Counter Bulletin Board in each fiscal quarter
from January 1, 2003 to December 31, 2004, and for the first two fiscal quarters
of fiscal 2005. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
Information presented for dates prior to October 18, 2004, relate to the Company
prior to the share exchange transaction described elsewhere in this Registration
Statement on Form SB-2.
High Low
Fiscal 2003
-----------
Quarter Ended March 31, 2003 $0.84 $0.14
Quarter Ended June 30, 2003 $0.84 $0.15
Quarter Ended September 30, 2003 $4.90 $0.18
Quarter Ended December 31, 2003 $2.00 $1.01
Fiscal 2004
-----------
Quarter Ended March 31, 2004 $5.25 $2.75
Quarter Ended June 30, 2004 $3.25 $1.50
Quarter Ended September 30, 2004 $3.25 $1.01
October 1, 2004 - October 27, 2004 $1.01 $1.01
October 28, 2004 - December 31, $5.00 $1.01
2004*
Fiscal 2005
-----------
January 1, 2005 - March 31, 2005 $5.20 $5.00
April 1, 2005 - June 30, 2005 $6.00 $4.00
*Represents stock performance for periods after the share exchange transaction.
As of June 30, 2005, there were approximately 3,265,976 shares of common
stock of the Company issued and outstanding.
We have not paid any dividend on our common stock since inception and we
do not intend to pay any dividends on our common stock in the foreseeable
future.
2. Equity Compensation Plan Information
We do not currently have an equity compensation plan under which options,
warrants or rights are authorized for issuance to employees or non-employees. We
have not issued any options, warrants or rights under any individual
compensation arrangement. We did grant 100,000 restricted shares to our Chief
Financial Officer upon joining the company on June 1, 2005 and have issued 2,532
restricted shares to two employees as a bonus. We are considering equity
compensation plans for our senior managers and our employees.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
THIS REGISTRATION STATEMENT ON FORM SB-2 CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). DISCUSSION CONTAINING
SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH BELOW AND
UNDER "BUSINESS," AS WELL AS WITHIN THE ANNUAL REPORT GENERALLY. IN ADDITION,
WHEN USED IN THIS ANNUAL REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"PLANS," "INTENDS," "SHOULD," "WILL" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS AND STATEMENTS
OF EXPECTATIONS, PLANS AND INTENT ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM THOSE
DESCRIBED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CHANGES IN
TECHNOLOGY, CUSTOMER REQUIREMENTS AND NEEDS, AMONG OTHER FACTORS. WE UNDERTAKE
NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OVERVIEW
As discussed in the Notes to the Financial Statements contained in this
Registration Statement on Form SB-2 we acquired, through a reverse merger
transaction, Advanced Aluminium Group Limited ("AAG"), a company incorporated
under the Companies Acts of England and Wales.
As a result of this merger, we adopted the financial reporting year end of AAG
and therefore we now have a December 31 fiscal year end.
Our purchase of the shares of AAG has been treated for accounting and financial
reporting purposes as a reverse acquisition of us by AAG, since the former AAG
stockholders controlled us after the transaction. Under this accounting
treatment, AAG is deemed for accounting purposes to be the acquiring entity and
we are the acquired entity.
On October 20, 2003, AAG acquired all of the outstanding capital stock of
Advanced Aluminium Industries, Ltd. ("AAI"). AAI's activities as of the date of
acquisition consisted solely of the ownership of Seco, which was acquired by
AAI.
On January 30, 2004, AAG acquired all of the outstanding capital stock of Adal
Engineering f/k/a W.H.G. Fagg &Son LTD. through its wholly-owned subsidiary AAI.
The consolidated financial information for Adal Engineering included in this
Registration Statement on Form SB-2, is reflected as of the date of the
acquisition through December 31, 2004.
We intend to expand both organically and through acquisition. We completed our
second acquisition on February 7, 2005 when we acquired Guilform Holdings. This
acquisition was the first step in building our Architectural Division and the
focus in 2005 will be on building this Division and improving productivity and
efficiency at both Adal Seco and Adal Engineering.
The Adal Seco plant and machinery has been an area of investment focus in the
fourth quarter of 2004 and will require continued investment during fiscal years
2005 and 2006 to enable us to return to and improve upon historical productivity
and efficiency levels. Anticipated investment in plant and machinery over the
next two years is $2,000,000. We have invested in a new puller and heater at
Adal Seco and will invest in handling and packing equipment at Adal Seco in the
first half of 2005. We have also added new CNC machines at Adal Engineering and
an automation timetable, subject to allowable production downtime in the current
environment, has been budgeted. These investments are expected to improve the
throughput at these facilities without increasing labor costs at Adal Seco and
reducing labor cost at Adal Engineering, thus improving our cost of sales.
We reviewed our planned expansion in a machining and fabrication operation in
the Czech Republic and put this project on hold until 2006. We already formed
the corporate entity in the Czech Republic and established banking facilities,
which will remain in place. It is unlikely that there will be further major
acquisitions in the UK in 2005. Our focus will be on organic growth in the UK
and the acquisition of a US based aluminum manufacturer. We are currently
developing marketing plans and will work with our advisors to raise equity
capital to de-leverage the Balance Sheet, provide Investment Capital for Adal
Seco and to reduce our reliance on accounts receivable financing.
9
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements that have been
prepared under accounting principles generally accepted in the United States.
The preparation of financial statements requires our management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
materially differ from those estimates. We have disclosed all significant
accounting policies in Note 1 to the consolidated financial statements included
in this Registration Statement on Form SB-2. The consolidated financial
statements and the related notes thereto should be read in conjunction with the
following discussion of our critical accounting policies. Critical accounting
policies and estimates are:
o Revenue Recognition
o Accounting for Long-Lived Assets
o Impairment of Long-Lived Assets
REVENUE RECOGNITION
Revenue recognition rules are very complex, and certain judgments affect the
application of our revenue policy. The amount and timing of our revenue is
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter. In addition to determining our results of operations for a given
period, our revenue recognition determines the timing of certain expenses, such
as commissions and other variable expenses. We recognize revenue when products
are shipped to customers, the customer is obligated to pay for such product and
collectability is reasonably assured.
ACCOUNTING FOR LONG-LIVED ASSETS
We state our property and equipment at acquisition cost and compute depreciation
for book purposes by the straight-line method over estimated useful lives of the
assets. In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of an asset to the future cash
flows expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated future cash flows, an impairment charge is recognized to
the extent the carrying amount of the asset exceeds the fair value of the asset.
These computations are complex and subjective.
IMPAIRMENT OF LONG-LIVED ASSETS
In assessing the recoverability of our intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
asset is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 152 "Accounting for Real Estate Time-Sharing Transactions - An amendment of
SFAS No. 66 and 67." This Statement amends Statement of Financial Accounting
Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate," to reference
the financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in American Institute of Certified Public
Accountants Statement of Position (SOP) 04-2, "Accounting for Real Estate
Time-Sharing Transactions." This Statement also amends SFAS No. 67, "Accounting
for Costs and Initial Rental Operations of Real Estate Projects," to state the
guidance for (a) incidental costs and (b) costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting
for those operations and costs is subject to guidance in SOP 04-2. SFAS No. 152
is effective for financial statements for fiscal years beginning after June 15,
2005. Adoption of this Statement is not expected to have a material impact on
our financial statements.
10
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment to APBO No. 29." This Statement amends Accounting Principles
Board Opinion ("APBO") No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This is
effective for fiscal periods beginning after June 15, 2005. Adoption of this
Statement is not expected to have a material impact on our financial statements.
On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
the grant date fair value of the award. SFAS No. 123R was to be effective for
interim or annual reporting periods beginning on or after June 15, 2005, but in
April 2005 the SEC issued a rule that will permit most registrants to implement
SFAS No. 123R at the beginning of their next fiscal year, instead of the next
reporting period as required by SFAS No. 123R. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to
financial statement recognition. Under SFAS No. 123R, we must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at date of adoption. The transition methods include prospective and retroactive
adoption options. Under the retroactive options, prior periods may be restated
either as of the beginning of the year of adoption or for all periods presented.
The prospective method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retroactive methods would record
compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. We have adopted the requirements of
SFAS No. 123 for the fiscal year beginning on January 1, 2005, and we expect
that the adoption of SFAS No. 123R will have no material impact on our financial
statements.
In October 2004, the FASB issued SFAS No. 151 "Inventory Costs - an amendment of
ARB No. 43, Chapter 4." This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Adoption of this Statement is not expected to have
a material impact on our financial statements.
RESULTS OF OPERATIONS
Please refer to our interim consolidated financial statements , which are
included at the end of this document beginning on page Q-1 and our audited
consolidated financial statements, which are included at the end of this
document beginning on page F-1.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
When reviewing the results of operations compared to the prior period, it is
important to consider the evolution of the Company. The first quarter of 2004
includes a full quarter for Adal Seco, two months for Adal Engineering (acquired
on 30th January 2004), no results for Adal Guilform (acquired on 7th February
2005) and only reflects the start up of our corporate office and the very
beginnings of our corporate infrastructure, and does not include the costs
associated with being a US public company which began on October 28, 2004. The
first quarter of 2005 includes a full quarter for Adal Seco, Adal Engineering,
our corporate office and costs associated with being a public company and
includes about two months of Adal Guilform.
REVENUES. For the three months ended March 31, 2005, our consolidated revenues
were $7,896,000 compared to $7,062,000 for the comparable 2004 period, an
increase of $834,000 or 12%. The increase is due to incremental revenues from
Adal Engineering $426,000 (mainly due to the extra month in 2005), $417,000 of
revenues from Adal Guilform and $205,000 from favorable exchange rates (UK
sterling 3% stronger versus the dollar for the same period last year). These
gains are offset by a $214,000 revenue reduction at Adal Seco, a decrease of
approximately 2%. Based on published industry data, we believe that the aluminum
extrusion market in the United Kingdom has suffered a downturn of between 10%
and 15% in the first quarter of 2005.
11
COST OF GOODS SOLD. Cost of goods sold as a percentage of sales were 92% for the
three months ended March 31, 2005 versus 90% for the same period in 2004.
This increase is largely due to the increased raw material costs, which we have
not yet passed through to customers. It typically takes 3 to 4 months to adjust
prices. Our capital investment program and operating efficiency plans are well
underway and we expect to see significant reductions in our cost of sales by the
year end and expect to see some impact in quarters two and three.
Adal Seco's cost of goods sold was 94% of sales for the three months ending
March 31, 2005 compared to 90% in the same period last year. Raw material costs
were 56% of sales compared to 54% in the same period last year. Capital
investment in a new puller in December 2004 has helped our efficiency, but the
full impact will not be seen until we install other key pieces of equipment over
the next several months. Our next investment is scheduled for June 2005(this
date has passed). Direct Labor costs were also up by 0.4% as a percentage of
sales mainly due to the fixed nature of our direct labor and the lower sales
volume. Manufacturing overhead were up by 1% as a percentage of sales, mainly
due to the lower sales volume.
Adal Engineering's cost of goods sold was 93% of sales for the three months
ending March 31, 2005 compared to 92% in the same period last year. Raw material
costs are down 8% compared to the same quarter last year due to an improved mix
of business in the first quarter of 2005. Manufacturing Overheads are up 9% on
the same period last year. This increase is partly due to the increased running
costs of the Engineering's new facility, the business moved into new facilities
on January 31, 2005, and partly due to one time costs associated with moving to
the new facility and vacating the previous one.
Adal Guilform's cost of goods sold was almost equal to the sales for the period
and the first quarter of the year is typically very slow in Adal Guilform's
marketplace. Revenues for the second quarter appear to be increasing and are
inline with our expectations.(should be able to define now)
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. For the three month period ended
March 31, 2005, selling, general and administrative costs were $1,048,000
compared to $748,000 in the same period last year. At the operating company
level the SG&A costs are in line with the previous year. Adal Guilform's SG&A
was $45,000 from February 8 through March 31 and there were no such expenses
included in our 2004 operating results. The remaining increase is due to; (a)
the expenses associated with running the group corporate office, $70,000
($198,000 for the three months ending March 31, 2005 versus $128,000 in the same
period of 2004) (b) costs associated with the US public company, principally
legal and accounting costs, $125,000 ($140,000 in the three months to March 31,
2005, versus $15,000 in the same period of 2004); (c) amortization of Adal
Engineering and Adal Guilform's customer lists of $20,000 ($41,000 in the three
months to March 31, 2005, versus $21,000 in the same period for 2004); and (d)
effect of exchange rates of $30,000.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2005 was
$263,000 compared with $121,000 for the three months ended March 31, 2004. The
increase of $142,000, $138,000 after adjusting for the $4,000 exchange rate
impact, is due to; (a) increases in the bank of England base rate $22,000 (base
rate 4.75% for the 2005 period versus 3.75% for the 2004 period); (b) additional
debt associated with the acquisition of Adal Guilform $40,000 (c) additional
debt associated with development of the Witham site and the building of new
manufacturing facilities there $11,000; (d) incremental asset finance for new
machinery at Adal Engineering $11,000; (e) increased use of existing short term
accounts receivable revolving credit facilities $54,000.
NET LOSS. For the three month period ended March 31, 2005, the net loss was
$697,000, or $0.26 per share, compared to net loss of $186,000, or $0.07 per
share for the three month period ending March 31, 2004.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
When reviewing the results of the operations compared to the prior years the
reader should consider the transition of the group from two private UK companies
to a U.S. public company with the establishment of a corporate office. The costs
of this transition are identified in the relevant sections below. All
comparisons to 2003 reflect the combined amounts for the Company, which includes
Adal Seco.
REVENUES. For the year ended December 31, 2004 our consolidated revenues were
$29,228,000 up $7,981,000 on 2003. The Company had two operating subsidiaries in
2004. Adal Seco's revenues were $25,095,000 (including sales of $531,000 to Adal
Engineering, eliminated on consolidation) and Adal Engineering's revenues were
$4,664,000 for the eleven month period ended December 31, 2004. Revenues for
Adal Extra and Adal Climatix are consolidated within Adal Seco.
12
Excluding the effect of exchange rates ($1,430,415) this represents a 5.7%
increase on the prior year for Adal Seco, which was the result of an increase in
sales for Adal Seco of 272 tons from 5,373 tons in 2003 to 5,645 tons in 2004.
COST OF GOODS SOLD. Cost of goods sold as a percentage of sales was 95%,
$27,898,000, for the year ended December 31, 2004 versus 91% of sales,
$19,315,000 for the same period in 2003. Adal Engineering's cost of goods sold
for the eleven months ended December 31, 2004 was $4,686,000.
The major cause of the reduced margins, by 4%, relates to inefficiencies with
the plant and machinery resulting in incremental labor costs. Direct Labor costs
are up by 3% of sales, or $750,000. Higher prices for aluminum accounts for 1%
of the increase in the cost of sales. Aluminum price increases have now been
substantially offset by price increases to our customers. Through the timing of
raw material purchases, and price increases to customers, management has
recovered the increase in the price of aluminum and the exchange rate volatility
at the end of the year. However there was a time lag and this is responsible for
a 1% increase in the cost of sales. Aluminum purchases represent 60.6% of the
cost of sales.
The Adal Seco plant and machinery has been an area of investment focus in the
fourth quarter of 2004 and will require continued investment focus during 2005
and 2006 to enable us to return to and improve upon historical productivity and
efficiency levels. We anticipate investing $2,000,000 in plant and machinery
over the next two years.
Adal Engineering's cost of goods sold exceeded its sales for the eleven month
period ended December 31, 2004. Raw material costs, primarily aluminum and
steel, were 40% of sales. The cause of the reduced margins relates to
incremental labor and restructuring costs as a result of a major relocation of
the production facility from Braintree to the site of Adal Seco in Witham. To
facilitate the move and to ensure minimal disruption to our customers we worked
significant levels of overtime and employed additional temporary staff to enable
us to build stock. Our work on machine automation has also been delayed as we
focused on building inventory levels prior to the move. It now appears that
taking machines offline to automate them, which will generate labor savings,
will not be possible until the third quarter of 2005. In addition we encountered
problems setting production up in the new facility, resulting in additional
delays.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. For the year ending December 31,
2004, selling, general and administrative costs, including $190,000 of Related
Party Advisory Fees, were $2,973,000 compared to $1,323,000 in 2003. In 2003
there were only $70,000 of expenses associated with the central management team
and board of directors. SG&A in 2004 can be analyzed as follows: (a) Adal Seco's
SG&A $1,312,000 (5.2% of revenues) (b) Adal Engineering's SG&A $207,000 (1.0% of
revenues); (c) including amortization of Adal Engineering's customer list of
$112,000, (d) Central Management and Administration costs $813,000; (e) one time
costs associated with reverse merger $541,000 including $190,000 of Related
Party Advisory Fees which are separately disclosed in the statements of
operations and (f) costs related to being a public company of approximately
$100,000, principally legal and accounting costs which were not incurred by the
group prior to the reverse merger. Therefore, the increase in costs from 2003 to
2004 of $1,650,000 relates to the roll-up strategy being pursued by the
Company.
INTEREST EXPENSE. Interest expense for year ending December 31, 2004 was
$650,000 compared to $270,000 for 2003. AAG was created through leveraged buy
outs and the interest associated with the acquisition costs totaled $350,000 in
2004. The funding for the buy outs resulted primarily from secured real estate
financing (current borrowings reflect a 72% loan to appraised value). We
increased borrowings in 2004 to finance the building of two new manufacturing
facilities at the Witham site, which has resulted in incremental interest
expense in 2004 of $34,000 ($1,030,000 investment over 11 months). We now
operate Adal Seco and Adal Engineering businesses from premises where the Adal
Group own the freehold. This is a single site, having terminated Adal
Engineering's lease of the Braintree site in January of 2005.
Interest expense from operations totaled $266,000 in 2004.
Adal Seco and Adal Engineering fund their working capital requirements through
accounts receivable revolver facilities and their capital investment programs
through asset finance. In 2004, Adal Seco and Adal Engineering incurred interest
expenses related to these arrangements of $174,000 and $92,000, respectively.
NET INCOME (LOSS). For the year ended December 31, 2004, the net loss was
$2,290,000, or $0.98 per share compared to a profit of $255,000, or $0.12 per
share, for the year ended December 31, 2003.
13
Loss and earnings per share for periods prior to the reverse merger are computed
using the shares issued in the reverse merger which was 2,295,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets at March 31, 2005 were $21,897,000, which is
comprised of $9,034,000 property plant and equipment, accounts receivable
$8,118,000, inventory $2,890,000, cash and cash equivalents of $264,000
intangible assets (customer lists) from Adal Engineering and Adal Guilform
acquisitions $1,035,000 and other current assets of $556,000.
The Company's current liabilities are $17,448,000. The Company has long-term
debt (less current portion) of $5,995,000.
The accumulated deficit as of March 31, 2005 is $1,637,000.
At March 31, 2005, the Company had a working capital deficit of $5,620,000. The
company reported a net loss of $697,000 for the quarter ending March 31, 2005.
Management believes that the loss is due to the trading conditions historically
prevalent in the first quarter in this industry, the relatively high corporate
overheads (i.e. corporate overheads will decrease as a percentage of sales as we
grow the business organically) and because of interest charges associated with
the companies' current debt structure. With a view toward the future of the
Group, we determined to build our new manufacturing facility for Adal
Engineering and the Adal Guilform acquisition with debt.
Management has secured additional financing through the following actions:
o On June 29, 2005, the Company entered into a Securities Purchase
Agreement, with Laurus Master Fund LTD., pursuant to which the
Company sold a Secured Convertible Term Note in the aggregate
principal amount of One Million Five Hundred Thousand Dollars
($1,500,000), which is convertible into shares of the Company's
common stock, par value $0.0001 per share (the "Common Stock"). For
further details, see the section entitled "Recent Developments" on
page 21 of this Registration Statement on Form SB-2.
o In May 2005, two directors of the Company each loaned (pound)75,000
($137,000) to the Company. These loans are unsecured, non-interest
bearing and do not have a maturity date.
o The bank holding the mortgage on the Witham facility must refinance
the loan revalue the property to 75% of the current appraised value
of the property. This will generate incremental funding of $300,000.
o We have established a credit agreement with a bank based on the
finished goods inventory at Adal Seco, this provides approximately
$320,000 of cash availability.
The above actions have provided $470,000 to date and are expected to provide
additional cash resources of approximately $1,500,000, after fees, in the first
half of 2005. Management believes that this additional cash will be adequate to
sustain operations until the Company generates sufficient cash flows from
operations.
In addition, Plant and machinery requirements over the next six to twelve months
are expected to be financed through equipment leases or other available
financing methods.
Management recognizes that its reliance on its accounts receivable revolving
credit facilities needs to be reduced in 2005 and it is in active discussions
with a few financial institutions to provide either convertible debt financing
or equity through one or more private placement transactions. Management
anticipates raising additional equity capital in 2005. Any such additional funds
would be utilized to de-leverage the balance sheet, reduce reliance on accounts
receivable facilities and to provide additional working capital to build the
business.
On 29th June the Company closed a convertible debt financing with the Laurus
Capital Fund of $1.5million. After arrangement and legal fees the company
received $1.1m which has been employed at Seco, $0.7m to reduce reliance on
accounts receivable revolver as outlined above, $0.1m to build our Adal
Structures business and $0.3m to fund central Group costs.
14
If the Company does not raise sufficient additional equity capital to provide
positive working capital and is unable to return to profitability in the near
term, it may be required to curtail future operations and/or liquidate assets or
enter into credit arrangements on less favorable terms than would normally be
expected, to provide for future liquidity. The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might
be necessary in the event the Company cannot continue in existence.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet financing arrangements and has
not established any special purpose entities.
15
DESCRIPTION OF BUSINESS
Overview
Adal Group, Inc. f/k/a Sunningdale, Inc. ("We" or the "Company") was
incorporated in Delaware in 1986. Currently, our headquarters are located in the
United Kingdom. We are a diversified producer of aluminum extrusions and
manufactured parts and products. We are the parent company of several
established businesses in the United Kingdom that provide complete one-stop
aluminum extrusion, machining, and assembly services, which include: Adal Seco,
Adal Engineering, Adal Extra, Adal Climatix, and the newly added Adal
Architectural Division, consisting of Adal Guilform. Aluminum is a commodity
that is traded on the London Metal Exchange (LME) and priced daily based on
market supply and demand. Aluminum's valuable physical properties include its
light weight, resistance to corrosion, thermal and electrical conductivity and
high tensile strength. Our long-term goal is to create synergistic benefits
through the acquisition and streamlining of vertically-integrated, value-added
aluminum extrusion, machining, manufacturing and assembly operations.
Share Exchange
On October 28, 2004, we consummated the transactions contemplated by that
certain Share Exchange Agreement ("Exchange Agreement"), dated September 22,
2004, by and among us, Advanced Aluminium Group Limited, a company incorporated
under the laws of the United Kingdom ("AAG"), the stockholders of AAG, and
Keating Reverse Merger Fund, LLC ("KRM Fund"). Pursuant to the terms of the
Exchange Agreement, we acquired all of the outstanding capital stock of AAG in
exchange for the issuance to the AAG stockholders of 2,295,000 shares of the
Company's common stock. As a result of the transaction, AAG became our
wholly-owned subsidiary. On November 5, 2004, we changed our name from
Sunningdale, Inc. to Adal Group, Inc. ("Adal").
PRODUCTS AND SERVICES
The following describes the products and services that our active
subsidiaries and divisions provide:
o Aluminum Extrusion Design and Production Services
Adal Seco
Since 1965, Adal Seco (formerly Seco Aluminium Ltd.) has been a
leading UK provider of aluminum extrusion design and production
services, specializing in meeting just-in-time delivery schedules.
Adal Seco provides complete supply-chain management, including
component design, fabrication, warehousing and delivery. Adal Seco's
capabilities especially emphasize product precision, speed of order
completion, extensive design knowledge and a flexible manufacturing
process. Because of Adal Seco's ability to operate via a short run
cycle compared to its competitors who usually operate via a long run
cycle, Adal Seco is able to respond promptly to marketplace demands
and lend a desired level of flexibility to its clients.
The aluminum billet is the raw material used to manufacture aluminum
extrusions. In the aluminum extrusion process, a billet is first
heated, placed into an extrusion press, and forced, or extruded
through a uniquely shaped die, which defines the structural and
quality aspects of the product. Each customer's part has a steel die
designed to their specifications. Adal Seco currently houses
approximately 17,000 such dies for its customers. Most extrusions
are hardened by aging in large ovens for four to ten hours. The
extrusion process produces a strong, light weight and versatile
product that can be utilized across multiple industries. These
extrusions are then either packed and shipped directly to customers
or receive further finishing and/or fabrication as specified by the
customer. Adal Seco has a customer base of some 1,000 customers
across the HVAC, construction and automotive industries.
Adal Seco's manufacturing business functions with three extrusion presses: two
are seven inch presses that together have the capacity to produce roughly 8,500
tons of product annually (4,250 tons from each press) and one is a five inch
press that can produce up to 400 tons of product annually. The two larger
presses produce extrusions that range in size and alloys and the smaller press
is a specially crafted Adal Seco model that produces a `very fine' higher margin
niche product.
16
o Precision Engineering, Tool Making and Volume Production of Machined
Aluminum Components.
Adal Engineering
Adal Engineering Ltd. (formerly W.H.J. Fagg and Son Ltd) ("Adal
Engineering"), founded in 1965 and purchased by the Company in
January 2004, provides precision engineering, tool making and volume
production of machined aluminum components. The precision
engineering process is done on milling and turning machines that
provide a finished product for the extrusions. Adal Engineering uses
Computer Numeric Controlled (CNC) machines in its production
facilities.
Adal Engineering manufactures parts for air conditioning units for
motor vehicles produced by major Original Equipment Manufacturers
("OEMs"). Its products can be found in noted motor vehicle brands
such as Land Rover, BMW, Audi and Toyota. Adal Engineering provides
its components directly to the OEM's production lines on a
just-in-time basis.
Adal Engineering's building products consist primarily of aluminum
double-glazing and window bars, hardware and handles. Machining is
done on parts for electric motors, hydraulic and pneumatic products.
Adal Engineering also produces various parts for products used in
the leisure fishing industry such as chairs, tables, fish
transporters. Adal Engineering has also manufactured gun cleaning
kits for the United Kingdom's Ministry of Defense, which are used by
the country's frontline soldiers. In 2004, 30,000 such kits were
sold.
60% of Adal Engineering's revenues attributed to the automotive
sector is divided between two principal customers, Denso
Manufacturing and Calsonic Kansei, 40% and 20%, respectively,
principally in the form of parts for air conditioning units and
other components, 20% of Adal Engineering's revenues is attributed
to building products, hydraulics and pneumatics, electric motors and
leisure and 20% to the British Ministry of Defense for gun cleaning
kits.
Adal Seco and Adal Engineering have complimentary roles because
nearly every piece of extruded aluminum produced by Adal Seco
requires some degree of secondary machining, from the more
straight-forward aspects of cutting to the more complex CNC
machining. Thus, Adal Engineering has the opportunity to work with
Seco to offer customers a significantly higher level of value added
production. Management's plans for Adal Engineering over the next
twenty-four months include an increase in domestic market share, an
improved labor cost ratio and further penetration of the value-added
parts of the business.
o Value - Added Finishing Services
Adal Extra
Adal Extra Ltd ("EX"), a division of Adal Seco, specializes in
extrusion design, aluminum forming and machining, and aluminum
welding. EX provides complete product manufacturing, assembly,
warehousing and delivery. It also provides value added finishing
services to Adal Seco extruded parts. Currently, EX focuses on the
value-added aspects of the aluminum extrusions process, with
services ranging from design and machining to assembly and welding.
However, Management plans to build EX into a leading supplier of a
full assortment of off-the-shelf high quality products furniture,
our own lighting products and marketing display stands. This will
allow EX to become a provider of customized solutions, a carrier of
standard components, and a parts distribution company through
catalog marketing. We intend to on the post-extrusion production
which includes assembly, packaging, and delivery, and development of
proprietary products for our clients.
Client customers are in the lighting and shelving products
industries. EX also has a stock of standard extrusions that are used
in the automotive and construction industries.
o Architectural Design
17
Adal Climatix
Adal Climatix Ltd ("Climatix"), a division of Adal Seco, specializes
in the architectural design and manufacturing of heating and
ventilating air conditioning systems. This newly formed division
offers its customers a complete turnkey solution for customized
projects. Currently, Climatix creates aluminum-based designs that
are unique, reliable and highly efficient within the commercial and
residential heating markets. The products are all aluminum products
and can be customized to meet the end customers business need be it
residential, commercial, a school or a hospital. Several concepts
are underway and in varying stages ranging from establishment of
trademarks to prototype testing and contracts including low surface
temperature products, innovative space and cost saving domestic
heating products and radiant heat products for use in the building
and refurbishment of hospitals.
The principal customers of Climatix are radiant heat suppliers and
the automotive industry.
o Manufacturing of Building Facades
Adal Architectural Division
Adal Guilform formerly known as Guilform Holdings Ltd., is a United
Kingdom based manufacturer of aluminum building facades. In February
2005, we purchased all of the outstanding shares of Adal Guilform.
We also appointed Gary O'Connor as Managing Director of our newly
formed Architectural Division.
Guilform fabricates commercial building facades for suppliers to and
installers for the main building contractors in the United Kingdom.
Guilform has an excellent reputation in the market place, a very
experienced and professional workforce and quality standards that
are amongst the highest in the industry. We plan to develop the
business by adding Adal Architectural proprietary designs and
introduce these designs to architects globally. The building facades
are predominately made from aluminum but can be steel or stainless
steel.. We currently manufacture to contractors designs and plan to
develop our own designs, through our Structural Design team, to
improve our margins and compliment our Architectural services.
PRINCIPAL CUSTOMERS
We have a broad range of customers in various industries that utilize aluminum
products, such as, automotive- heat exchange and vehicle finishing products,
domestic and commercial properties (windows, doors, showers, blinds and
partitioning), lighting, heating and ventilation, aircraft and aerospace,
shipbuilding, oil/gas platforms, electrical machinery and equipment, shop
fittings and supply fabricators and extrusion wholesalers. We have no dependence
on any individual customer or small number of customers, the loss of which would
have a material adverse effect on our business or financial condition.
Our customer base is diverse and our top ten customers account for less than 10%
of our revenues. Equally less than 10% of our revenues are earned from any one
industry, evidencing our lack of reliance on a particular industry.
RAW MATERIALS
The Company's major raw materials are aluminum billets purchased on the open
market. Our Engineering business' major raw material is aluminum extrusions,
produced from the billets and we buy in sheet aluminum for our Architectural
business. Despite the wide availability of aluminum billets through the LME, the
Company protects itself against supply-chain interruption through contracts with
four to five smelters. The Company also hedges against price fluctuations in its
raw materials supply by buying a proportion of its raw materials through long
dated contracts (12 to 18 months out), a proportion through short dated
contracts (three to six months out) and the balance through the spot market.
Smelters provide the amount requested by Adal Seco on a monthly basis. The
contracts are re-negotiated annually and billets are priced at a set rate at the
time of renegotiation. Management has partially offset the negative impact of
aluminum price volatility by increasing customer cost and will continue to do so
in the future.
PRINCIPAL SUPPLIERS
We purchase our raw materials from the world's principal smelters e.g. Alcoa,
Dubai Aluminum, Hydro Aluminum and Rio Tinto Aluminum. There is an excellent
supply of aluminum globally and the raw materials for smelting are abundant in
the earth's crust. As a global commodity, aluminum is widely available, and no
single supplier or group of suppliers has been able to dictate pricing.
18
CAPITAL EXPENDITURES
Adal Seco. Through process enhancements and equipment upgrades, Adal Seco
can improve its existing output. We intend/have implemented the following
enhancements to its presses:
To be completed in 2005:
o Add a puller to one of our larger presses, which will reduce the
current amount of scrap made during production by up to 10%.
o Replace the existing heating elements on one press. If the existing
heating element malfunctions, it takes approximately nine hours to
cool it down, two hours to replace it, and nine hours to heat it up
to a total of 20 hours. By installing a new state of the art heating
element, this downtime will be reduced by roughly 80%.
o Add a complete new handling system for one of our 7 inch presses.
This handling system, known as a table, transports extruded aluminum
from the press to the cutting stations. The table will require a
capital investment of approximately $300,000, and we believe it will
improve our quality and thereby open up new market opportunities.
Planned for future development:
o Add another cutting station to the extrusion line. The current
process has a bottleneck caused by the production of extruded raw
product faster than the cutting station can cut metal. Another
cutting station will reduce costs related to production delays and
labor (overtime). The estimated cost of the new cutting station is
approximately $100,000 and it will provide a return on investment
within 12 to 18 months. Managements plans to install it in 2006.
Adal Engineering. To support the expected growth and anticipated
production increases, we plan to invest in additional automated equipment
and to advance our technological operations. In this regard, we intend to
purchase two fully automated machining centers, to upgrade existing
machinery to semi and full automation where needed, and adopt lean process
practices. This process is underway and we plan to complete before the end
of 2005.
LICENSING AGREEMENTS
In February 2005, we signed an interim global licensing agreement with
Stonescreen, a designer, manufacturer and installer of stone building facades.
We were granted a 12 month exclusive, non-transferable license to reproduce
drawings, and manufacture and install materials pertaining to the Stonescreen
stone cladding and curtain wall system, which is constructed using extruded
aluminum sections. The license is a short term measure and we expect to purchase
the Stonescreen system before the end of 2005.
19
SALES AND MARKETING
Sales and customer service for each of our operating subsidiaries is handled by
in-house sales employees. Over the next year, we plan on the cross-selling of
products and services among subsidiaries. We have a marketing plan that will
develop the businesses to focus on downstream added value products i.e. products
that are made from extrusions by drilling, cutting, welding etc and to grow our
core businesses by targeting our competitors customers and utilizing our just in
time high quality reputation.
We believe that most important elements of customer service in the extrusion
industry are responsiveness to customer orders, predictable lead times, short
delivery cycles and on-time delivery. We seek to provide our customers with
predictable lead times and short product delivery cycles so that our customers
can optimize their inventory management.
Pricing in the aluminum extrusion industry is typically based upon spreads over
aluminum prices, with the amount of the spreads determined primarily by the type
of extrusion. For example, spreads are generally higher for certain products
that are relatively more difficult or time consuming to extrude, such as hollow
shapes or thin-wall items.
We distribute a portion of our products through our own fleet of tractors and
trailers. A majority of our tractors and trailers are leased. We believe that
maintaining a fleet of tractor-trailers enhances the level of service to
customers by enabling us to deliver our products in a more timely manner with
less damage. Beginning in 1992, we rationalized our distribution strategy by
using contract carriers and common carriers for certain long hauls, partial
loads and trips where no back haul is available, thereby reducing the number of
leased tractors and trailers necessary, and reducing operating costs without
materially affecting delivery capabilities.
Competition
The UK extrusion market is dominated (75% of the market) by three major
extruders, Alcoa, Hydro and SAPA. Adal Seco is the fifth largest supplier in the
remaining 25%. We believe there are twenty-seven aluminum extrusion presses that
exist in the UK, which provided the market with nearly 150,000 tons of aluminum
in 2004 Adal Seco owns and operates three of these presses and produced
approximately 5,600 tons of product, or 3.7%, of the total estimated UK market
production of extruded aluminum in 2004. Adal Seco does not directly compete
with the three market leaders, who generally focus on the high volume low priced
market. Adal Seco differentiates itself by providing a very flexible, high
quality, "just in time" product to the market place. There is ample opportunity
for us to increase our market share and reach maximum capacity in the next few
years. The market clearly reacts to price but we believe a greater emphasis is
placed on service and quality and that Adal Seco is well placed to explore
further opportunities within its niche.
The Adal Engineering market place is largely untapped and we have focused our
core business on automotive heat exchange products and have very few UK
competitors. The barriers to entry in the automotive market are cost and time,
quality approval by manufacturers and the time period required to achieve that
approval (up to two years). These factors, coupled with the life cycles of a
vehicle model (six plus years) make this an excellent platform to build our
engineering business. We expect that the use of Adal Engineering's parts in cars
(in a wide range of noted brands) will continue due to the move toward
standardization of air conditioning units in cars. The competition in this
market sector is limited but customers are very focused on price and keeping
costs affordable to the customers. We believe that Adal Engineering is
considered to be a proven and reliable supplier with consistent quality. Our
focus is on maintaining our quality and delivery standards for our main
automotive customers and we wish to continue this core activity while adding
more diverse products to the Adal Engineering product mix.
Adal Engineering is a small player in other industry sectors, non automotive,
but the fact that its overheads are absorbed by the automotive business it gives
the company an excellent platform to develop its business.
20
Governmental Regulation
We currently comply with the environmental manufacturing requirements with
respect to waste. There are no material costs associated with environmental
compliance. Environmental regulations have very little impact on our business
operations. We expect that the government is likely to increase its support for
the aluminum industry in the UK and will promote the environmentally responsible
nature of the product, emphasizing the excellent recycling achievements over
recent years.
There are no government regulations that specifically affect the aluminum
extrusion business.
Employees
As of August 8, 2005, the Company employed 262 staff; 152 full time employees at
Adal Seco (122 manufacturing staff, 20 office and management), Adal Engineering
employed 66 staff (56 production staff, including 20 temporary staff and 10
office and management), Adal Guilform employed 39 staff and we have 5 employees
at the Company's headquarters.
Research and Development
We spent approximately $250,000 on research and development in the past two
years. This expenditure has largely been invested in machine automation at Adal
Engineering and new product development at Adal Seco.
Description of Property
We operate from the following facilities:
o We own a 160,000 square foot facility in Witham, Essex UK. Adal Seco
utilizes 49,000 square feet for production and warehouse space. Adal
Engineering utilizes approximately 20,000 square feet located on the
site of the Adal Seco plant in Witham. Adal Engineering's space
consists of two buildings, both newly built in 2004. Approximately
13,000 square feet is ground level production floor space, 3,000
square feet of storage & production mezzanine floor and
approximately 4,000 square feet of office space. Our mortgage on the
site is repayable over fifteen years.
o The UK accounting offices are in Heybridge in Essex.. We rent these
offices for $6,000 per annum.
Legal Proceedings.
We are not subject to any legal proceedings.
Recent Developments
1. On June 29, 2005, we entered into a Securities Purchase Agreement
(the "Agreement"), with Laurus Master Fund LTD., pursuant to which we sold a
Secured Convertible Term Note (the "Note") in the aggregate principal amount of
One Million Five Hundred Thousand Dollars ($1,500,000), which is convertible
into shares of our common stock, par value $0.0001 per share (the "Common
Stock"). Subject to adjustment and anti-dilution provisions set forth in the
Note, the fixed conversion price with respect to the first $1,000,000 principal
amount of the Note shall be $3.00, and with respect to the remaining principal
amount shall be $3.50. The principal amount and any and all accrued and unpaid
interest payable under the Note shall be paid on or before June 29, 2008 (the
"Maturity Date"). We shall pay interest on the principal amount of the Note at a
rate per annum equal to the "prime rate" published in The Wall Street Journal,
plus three percent, payable monthly in arrears, commencing on July 1, 2005 and
on the first business day of each consecutive calendar month thereafter. The
interest rate is subject to adjustment at the end of each month until the
Maturity Date, as provided for in the Note.
21
Also on June 29, 2005, in connection with the financing transaction, we
issued to Laurus (i) a common stock purchase warrant to purchase up to 375,000
shares of Common Stock (the "Warrant") at an exercise price of $6.30 for the
first 187,500 shares acquired thereunder and an exercise price of $6.83 for any
additional shares acquired thereunder , and (ii) an Option to purchase up to
150,702 shares of our Common Stock at an exercise price of $0.0001 per share(the
"Option"). Laurus exercised the Option for 150,230 shares on June 30, 2005.
To secure the payment obligations arising under, out of or in connection
with the Agreement, the other agreements entered into in connection with the
financing, we entered into a Master Security Agreement pursuant to which we
assigned and granted to Laurus a continuing security interest in certain of our
assets, including, without limitation, cash, accounts receivable and equipment.
We agreed to file this Registration Statement on Form SB-2 with the
Securities and Exchange Commission to register the shares underlying the Note,
the Warrant and the Option within 45 days of closing, and to have the
Registration Statement declared effective within 120 days of closing.
2. On February 7, 2005, we entered into a Share Sale and Purchase
Agreement (the "Guilform Agreement") relating to Guilform Holdings Limited
("Adal Guilform"), with Keith Malcolm Broome, the sole shareholder. We purchased
100% of the shares of Guilform Holdings Limited from Mr. Broome in consideration
of (i) (pound)300,000 (approximately $575,000) in cash; (ii) a promissory note
in the amount of (pound)200,000 (approximately $380,000) bearing interest at a
rate of 6% per annum; and (iii) 300,000 restricted shares (the "Shares") of our
common stock.
Under the Agreement, we have undertaken to ensure that Guilform meets its
payment obligations under certain commercial loan facilities provided to Adal
Guilform by State Securities plc in the sum of (pound)1,007,000 (approximately
$1,930,000), of which (pound)497,000 (approximately $950,000) was new borrowing
in connection with the consummation of the transactions contemplated by the
Guilform Agreement. Approximately (pound)321,000 (approximately $615,000) of the
new lending was loaned by Adal Guilform to us in respect of the payment due to
Mr. Broome on completion of the Guilform Agreement and completion expenses
incurred. Mr. Broome and Ms. Janice Conley, the previous Secretary of Guilform
Holdings Ltd., had guaranteed payment of the amounts owing by Guilform Holdings
Ltd. under the loan facilities. Under the Guilform Agreement, we have undertaken
to provide for the release of Mr. Broome and Ms. Conley as guarantors on the
loan facility by August 7, 2007. Further, in connection with another loan
facility provided to Guilform Holdings Ltd. by Venture Finance plc, with respect
to which Mr. Broome and Ms. Conley are also guarantors, we have undertaken to
provide for the release of Mr. Broome and Ms. Conley as guarantors on that loan
facility upon its expiration on May 31, 2005. We intend for Adal Guilform to
re-finance the Venture Finance plc loan facility on or prior to expiration. As a
condition to the consummation of the Guilform Agreement, our Board of Directors
appointed Mr. Broome to serve as a non-executive director on Board.
3. On October 28, 2004 (the "Closing"), Sunningdale, Inc., a Delaware
corporation ("Sunningdale") consummated the transactions contemplated by that
certain Share Exchange Agreement ("Exchange Agreement"), dated September 22,
2004, by and among the Company, Advanced Aluminium Group Limited ("AAG"), the
stockholders of AAG, and Keating Reverse Merger Fund, LLC ("KRM Fund"). Pursuant
to the terms of the Exchange Agreement, we acquired all of the outstanding
capital stock of AAG in exchange for our issuance to the AAG stockholders of
2,295,000 shares of our common stock. The issuance of the Company's shares of
common stock to AAG's stockholders was exempt from registration under the
Securities Act of 1933, as amended ("Securities Act") pursuant to Section 4(2)
thereof.
Following the Closing, the stockholders of AAG owned 2,295,000 shares of
our common stock, or 90% of the outstanding shares, and the stockholders of
Sunningdale immediately prior to Closing ("Existing Stockholders") owned 255,000
shares of our common stock, or 10% of the outstanding shares.
Under the Exchange Agreement, the Existing Stockholders also have
anti-dilution protection in the event we (i) issue any securities in any
offering during the twelve (12) month period following the Closing, or (ii)
issue any securities in connection with the license and/or acquisition by us of
technology related to electricity-generating roadway ramps following the Closing
(collectively, the "Events"). In such cases, we are required to issue to the
Existing Stockholders, in proportion to their respective ownership interests
prior to the Closing, such additional number of shares of our common stock so
that the Existing Stockholders shall own, in the aggregate, ten percent (10%) of
the issued and outstanding shares of our common stock, on a fully diluted basis,
after giving effect to the Events. On April 8, 2005, the Company and the KRM
Fund agreed to amend the Exchange Agreement to terminate the anti-dilution
provision. As consideration for this termination the Company agreed to issue
125,000 shares of its Common Stock to the KRM Fund.
22
Effective as of the Closing, Kevin R. Keating resigned as sole director of
the Company, and our newly-appointed board of directors consisted of Nicholas A.
Shrager and Charles K. Howe. Subsequent to the closing Brian Alleman and John
Sanderson joined the Board as independent directors, and Keith Broome joined the
Board as a non-executive director. On June 1, 2005, Stephen B Goodacre was
appointed to the board of directors. Pursuant to the terms of a Voting Agreement
among AAG, the stockholders of AAG and the KRM Fund (the "Voting Agreement"),
the AAG stockholders have agreed to vote their shares of the Company's Common
Stock to elect Mr. Sanderson to the Company's board for a period of one year
following the Closing. Under the terms of the Exchange Agreement, the vacant
director position at the time of Closing was to be filled by a person selected
by the AAG stockholders to be an independent director. Mr. Alleman was appointed
to fill this position.
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
Set forth below are the names of the directors, executive officers and key
employees of the Company as of August 8, 2005:
Name Age Position
------------------- --- --------------------------------------------
Nicholas A. Shrager 58 Chairman, Chief Executive Officer, President
and Director
Stephen B. Goodacre 48 Chief Financial Officer and Director
Charles K. Howe 70 Executive Vice President, Secretary and
Director
Brian Alleman 49 Director
John Sanderson 60 Director
Keith Broome 55 Director
Our executive officers are appointed at the discretion of our board of
directors with no fixed term. There are no family relationships between any
director or executive officer and any other director or executive officer.
The following is a brief description of each director's and executive
officer's business experience:
Nicholas A. Shrager, age 58, is the Chairman, Chief Executive Officer and
President of the Company. Mr. Shrager was one of the two co-founders and
directors of Advanced Aluminium Group Limited in 2003, serving as Chief
Executive Director of the company and each of its subsidiaries. He has served as
Chairman of Riverside Business Solutions, a consulting firm, since 1999. From
1994 to 1999, Mr. Shrager was a consultant with Riverside Management Consultants
Limited, assisting clients in the areas of corporate strategy, acquisitions and
marketing. From 1991 to 1994, Mr. Shrager was a Director of Old Nick's, a
successful enterprise focusing on retail liquor and beer sales. From 1987 until
its sale in 1991, Mr. Shrager served as Chairman of The Shrager Group, a timber
business in the United Kingdom. Mr. Shrager received an MBA from Southbank
University in London where he specialized in international marketing.
Stephen B. Goodacre, age 48, is the Chief Financial Officer and Director
of the Company. Mr. Goodacre joined the Adal Group board on June 1, 2005 and has
been working for the group since April 2004 through his consulting company,
Blackwater Consulting Ltd., a financial recruitment and consultancy business
established in April 2002. Mr. Goodacre was employed by Lehman Brothers Inc.
from 1990 to 2002, where he held various positions including Head of
International Management Accounting, Finance & Operations, Director of Lehman's
Global Equity Derivatives operation and Head of European Expense Management. Mr.
Goodacre was promoted to Vice President in 1994 and Senior Vice President in
2000. Prior to joining Lehman, he spent seven years with Philip Morris, serving
last as UK Financial Planning Manager.
Charles K. Howe, age 70, is a Director, Executive Vice President and
Secretary of the Company. Mr. Howe was one of the two co-founders and directors
of Advanced Aluminium Group Limited in 2003. Since 1985, he has been a director
of CH Resources Ltd, a business consultancy, through which he has held
directorships in a number of private manufacturing companies. From 1971 to 1985,
he was a board member and then Chief Executive Officer of Crystalate Holdings
plc, a United Kingdom public company primarily engaged in the production of
plastic molding and the business of acoustic and electronic components,
particularly for the telephone industry.
23
Brian Alleman, age 49, is a Director of the Company. Mr. Alleman has been
a partner with Tatum CFO Partners LLP, a national partnership of 400 career
CFO's which provides accounting and financial services to clients through
advisory or employment relationships since August 2002. In this capacity, Mr.
Alleman served as Chief Financial Officer of Polar Molecular Holding
Corporation, a developer of fuel additives, from August 2003 to August 2004.
From 1989 to July 2002, he was employed by TCW Capital, a private equity firm.
Through his connection with TCW Capital Mr. Alleman served from April 1993 to
June 2002 as Chief Financial Officer of Centuri Corporation, a leading U.S.
manufacturer of model rockets and small gas powered and electric radio
controlled airplanes, becoming Chief Operating Officer in August 2000.
John Sanderson, age 60, is a Director of the Company. Mr. Sanderson
recently retired as the managing director of Legg Mason Limited, London, which
he established in 1995 as the London subsidiary of Legg Mason (NYSE: LM), an
investment banking firm based in Baltimore, Maryland. From 1967 until 1995, Mr.
Sanderson worked for Kidder Peabody & Co. (and associated firms) in London,
where, in 1988 he was appointed managing director and Head of Equities in
London, responsible for the United Kingdom, the Middle East and Scandinavia. He
was also a member of Kidder, Peabody's management counsel and chaired its
European management committee.
Keith Broome, age 55, is a Director of the Company. From 1977 until
February 2005, Mr. Broome was managing director of the companies that were part
of Guilform Holdings Limited, which were all companies involved in the
manufacture of aluminum products. He has a strong engineering background coupled
with hands-on financial experience gained from managing Guilform Holdings
Limited for the past 28 years. On January 8, 2002, GFM Realisations Ltd. (f/k/a
Guilform Ltd.), a corporation formed under the laws of England and Wales
("GFM"), went into receivership, a process similar to Chapter 11 in the United
States, and subsequently liquidated. Mr. Broome was the managing director of GFM
from its incorporation until the appointment of a receiver. GFM was in the
business of manufacturing aluminum products. On January 9, 2004, Law Link (Legal
Expenses) Ltd., a corporation formed under the laws of England and Wales ("Law
Link"), went into receivership. Mr. Broome was a guarantor on a loan received by
Law Link from a local bank and, at the request of the bank, acted as a director
and secretary of the Law Link.
Audit Committee of the Board of Directors
Audit Committee
The following disclosure about the Company's audit committee does not
constitute soliciting material and shall not be deemed filed or incorporated by
reference into any of the Company's other filings under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates the report by reference therein.
The Audit Committee operates under a formal charter in accordance with all
applicable laws. The charter was approved and adopted by the Board of Directors
on February 23, 2005 and will be reviewed and reassessed annually by the Audit
Committee. The charter sets forth the responsibilities, authority and specific
duties of the Audit Committee. The charter specifies, among other things, the
structure and membership requirements of the Audit Committee, as well as the
relationship of the Audit Committee to the Company's independent auditors and
our management.
The Board of Directors has established an audit committee in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of
the Audit Committee are Messrs. Brian Alleman and John Sanderson, each of whom
are independent as defined in the Nasdaq Marketplace listing standards currently
in effect. None of the Audit Committee members is a current officer or employee
of the Company or any of its affiliates.
The Board of Directors has determined that Brian Alleman, Chairman of the
Audit Committee, qualifies as an "audit committee financial expert" under the
Securities and Exchange Commission's definition.
24
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued for the
fiscal year ended December 31, 2004 for the Company's Chief Executive Officer
and Chief Financial Officer. There are no other executive officers whose salary
and bonus were in excess of $100,000.
Annual Compensation
------------------------------
Other
Name and Annual
Principal Position Year Salary Compensation
--------------------- ---- -------------- ------------
Nicholas A. Shrager 2004 USD$26,640 (1) -0-
Chief Executive Officer 2003 N/A N/A
and President 2002 N/A N/A
Stephen B. Goodacre 2004 USD$37,000 (2) -0-
Chief Financial Officer 2003 N/A N/A
2002 N/A N/A
(1) On October 28, 2004, Mr. Shrager was appointed as Chief Executive Officer
and President of the Company. The salary disclosed here represents the
compensation paid to Mr. Shrager from October 28, 2004 through December 31,
2004.
(2) On October 28, 2004, Mr. Goodacre was appointed as Chief Financial Officer
of the Company. The salary disclosed here represents the consultancy fees paid
to Mr. Goodacre from October 28, 2004 through December 31, 2004. Mr. Goodacre
entered into an employment contract with the Company, effective June 1, 2005,
whereby he will receive base salary of $200,000 for a full fiscal year.
Option Grants in Last Fiscal Year.
None.
Aggregate Option Exercises In Last Fiscal Year
None.
Equity Compensation Plan Information
We do not have an equity compensation plan under which options, warrants
or rights are authorized for issuance to employees or non-employees. We have not
issued any options, warrants or rights under any individual compensation
arrangement.
Directors' Compensation
The Company pays its non-employee Directors USD$20,000 per year in
connection with their activities on behalf of the Company, plus travel expenses
in connection with the Board of Directors meetings. The director's fee will be
paid quarterly in arrears on April 1, July 1, October 1 and January 1 in a
combination of shares of Company common stock and cash. Each non-employee
director shall receive shares equal to USD$3,000 per quarter based on the
closing price of the Company's common stock on the date of grant as quoted on
the Over-the-Counter Bulletin Board (or applicable quotation medium or exchange
as of such date) and USD$2,000 per quarter in cash.
25
Employment Contracts
The Company entered into an employment agreement with Nicholas A. Shrager,
effective on October 28, 2004, pursuant to which Mr. Shrager will serve as
Chairman, Chief Executive Officer and President of the Company, reporting to the
Board of Directors. Mr. Shrager's initial salary is (pound)75,000, which will be
subject to an increase to (pound)100,000 provided that the Company's financial
performance objectives are achieved for each of the first three (3) fiscal
years, as determined by the Board of Directors each year. He is also eligible to
participate in the annual discretionary bonus program for executive management,
which is potentially five (5) percent of his current annual base salary. The
bonus payments shall be made in accordance with the following performance
targets: (i) 70% of the bonus potential shall be earned if the Company meets its
annual operating EBITDA target established by the Board of Directors each year;
(ii) 20% of the bonus potential shall be earned if the Company meets its annual
revenue target established by the Board of Directors each year; and (iii) 10% of
the bonus potential shall be earned based on Mr. Shrager's performance and
contribution to the business as determined by the Board of Directors each year.
In the event Mr. Shrager is terminated involuntarily without cause or he
terminates voluntarily for good reason as defined in the employment agreement,
the Company will pay him a termination benefit equal to (i) 100% of his base
salary plus his prior year bonus over a 12-month period if termination occurs
after January 1, 2005 but before January 1, 2006, or (ii) 100% of his base
salary plus the average of his bonus for the prior two fiscal years over a
12-month period if termination occurs after January 1, 2006. In the event Mr.
Shrager voluntarily terminates the employment agreement without cause or is
terminated involuntarily with good reason, he shall receive no termination
benefit.
The Company entered into an employment agreement with Stephen B. Goodacre,
effective on June 1, 2005, pursuant to which Mr. Goodacre will serve as Chief
Financial Officer of the Company. Mr. Goodacre's initial annual base salary is
(pound)100,000, and is subject to an automatic increase to (pound)150,000 per
annum in the year following the Company achieving a net income of $1 million or
more. Mr. Goodacre will be entitled to an annual bonus equal to 25% of his
annual base salary provided certain financial measures relating to the Company's
revenues and EBITDA are reached. On the effective date of his employment
contract, Mr. Goodacre received 100,000 shares of common stock of the Company.
Two thirds of these shares shall be returned to, and cancelled by the Company if
Mr. Goodacre voluntarily terminates his employment with the Company before June
1, 2006 and one third of the shares shall be returned to, and cancelled by the
Company if Mr. Goodacre voluntarily terminates his employment with the Company
before June 1, 2007. If Mr. Goodacre is terminated "without cause" or he
voluntarily terminates his employment with the Company for "good reason", he
shall be entitled to severance equal to: (a) 50% of his annual base salary if
such termination occurs prior to November 30, 2005; (b) 100% of his base salary
plus any bonus due if such termination occurs on or after December 1, 2005 but
before May 31, 2006; and (c) 100% of his base salary plus the average bonus from
the prior two years if termination occurs on or after June 1, 2006.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 7, 2005, we entered into a Share Sale and Purchase Agreement
(the "Guilform Agreement") relating to Guilform Holdings Limited ("Adal
Guilform"), with Keith Malcolm Broome, the sole shareholder. We purchased 100%
of the shares of Guilform Holdings Limited from Mr. Broome in consideration of
(i) (pound)300,000 (approximately $575,000) in cash; (ii) a promissory note in
the amount of (pound)200,000 (approximately $380,000) bearing interest at a rate
of 6% per annum; and (iii) 300,000 restricted shares (the "Shares") of our
common stock.
Under the Agreement, we have undertaken to ensure that Guilform meets its
payment obligations under certain commercial loan facilities provided to Adal
Guilform by State Securities plc in the sum of (pound)1,007,000 (approximately
$1,930,000), of which (pound)497,000 (approximately $950,000) was new borrowing
in connection with the consummation of the transactions contemplated by the
Guilform Agreement. Approximately (pound)321,000 (approximately $615,000) of the
new lending was loaned by Adal Guilform to us in respect of the payment due to
Mr. Broome on completion of the Guilform Agreement and completion expenses
incurred. Mr. Broome and Ms. Janice Conley, the previous Secretary of Guilform
Holdings Ltd., had guaranteed payment of the amounts owing by Guilform Holdings
Ltd. under the loan facilities. Under the Guilform Agreement, we have undertaken
to provide for the release of Mr. Broome and Ms. Conley as guarantors on the
loan facility by August 7, 2007. As a condition to the consummation of the
Guilform Agreement, our Board of Directors appointed Mr. Broome to serve as a
non-executive director on Board.
As a condition to the consummation of the Agreement, the Board of
Directors of the Company appointed Mr. Broome to serve as a non-executive
director on the Company's Board of Directors.
26
In connection with the Closing of the Share Exchange, the Company entered
into a financial advisory agreement with Keating Securities, LLC ("Keating
Securities"), a registered broker-dealer, under which Keating Securities will be
compensated by the Company for its advisory services rendered to the Company in
connection with these transactions. The transaction advisory fee is $190,000.
The financial advisory agreement also appoints Keating Securities as the
Company's exclusive placement agent for private and public offerings of the
Company's securities during the one year period following the Closing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 8, 2005, the number of shares
of our common stock beneficially owned by (i) each person who is known by us to
be the beneficial owner of more than five percent of the Company's common stock;
(ii) each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the stockholders listed in the table have sole
voting and investment power with respect to the shares indicated.
Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within sixty (60) days
upon the exercise of options, warrants or convertible securities (in any case,
the "Currently Exercisable Options"). Each beneficial owner's percentage
ownership is determined by assuming that the Currently Exercisable Options that
are held by such person (but not those held by any other person) have been
exercised and converted.
Name and Address of Beneficial Number of Shares Percentage of
Owner (1) (2)(3) Ownership
Nicholas A. Shrager 1,397,655(4) 42.8%
Charles K. Howe 727,515(5) 22.3%
Brian Alleman 6,071 *
635 Ravensworth Court
Colorado Springs, CO 80906
John Sanderson 6,071 *
Keith Broome 301,071 9.2%
Steve Goodacre 100,000 3.1%
Keating Reverse Merger Fund, LLC 313,501 9.6%
5251 DTC Parkway, Suite 1090
Greenwood Village, CO 80111-2739
All Directors and Executive 2,538,383 77.7%
Officers as a Group (6 persons)
----------------------
* Less than one percent
(1) Unless otherwise indicated, the address for each named individual is c/o
Adal Group, Inc., ICS House, Hall Road, Heybridge, Maldon Essex. CM9 4LA, United
Kingdom.
(2) Reflects 3,265,976 shares outstanding as of August 8, 2005.
(3) Includes 57,375 shares owned by The Nicholas Shrager Family Trust over which
Mr. Shrager is co-Trustee and shares voting and dispositive power over the
shares.
(4) Includes 172,125 shares owned by The C.K. Howe Discretionary Settlement 2004
over which Mr. Howe is co-Trustee and shares voting and dispositive power over
the shares.
27
SELLING STOCKHOLDER
Laurus Master Fund Ltd. has not held any position nor had any material
relationship with us or our affiliates during the past three (3) years.
Shares Number of
Beneficially Maximum Shares Percentage
Owned Number of Beneficially Ownership
Prior to Shares to Owned After After
Name of Selling Stockholder Offering be Sold Offering Offering
----------------------------- -------- --------- ------------ ----------
Laurus Master Fund Ltd.(1)(2)(3) 1,001,892 1,001,892 0 0
(1) Includes 476,190 shares of common stock issuable upon conversion of the
Note.
(2) Includes 375,000 shares of common stock issuable upon exercise of the
Warrant.
(3) Includes 472 shares of common stock issuable upon exercise of the Option.
28
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 100,000,000 shares of
common stock, par value $.0001 per share, of which 3,265,976 shares were issued
and outstanding as of August 8, 2005, and 1,000,000 shares of preferred stock,
par value $.0001 per share, none of which were issued and outstanding as of
August 8, 2005.
Common Stock
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by the stockholders. Subject to the
preferential rights of the preferred stock, the holders of shares of common
stock shall be entitled to receive, when and if declared by the board of
directors, out of the assets of the corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of capital
stock. In the event of our liquidation, dissolution or winding up, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the preferred stock, holders of common stock shall be
entitled to received all of the remaining assets of the Company of whatever kind
available for distribution to stockholders ratably in proportion to the number
of shares of common stock held by them respectively.
The holders of common stock, as such, have no preemptive, or preferential
right or subscription right to any stock of the Company or to any obligations
convertible into stock of the Company, or to any warrant or option for the
purchase thereof, except to the extent provided by written agreement with the
Company. All of the outstanding shares of common stock are validly issued,
fully-paid and nonassessable.
Preferred Stock
Under our Restated Certificate of Incorporation, as amended, the Board of
Directors is authorized, subject to any limitations prescribed by the laws of
the State of Delaware, but without any further action by our stockholders, to
provide for the issuance of up to 1,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in such series, to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series.
The board of directors may authorize and issue preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Corporate Stock
Transfer, Inc.
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling
stockholders. The selling stockholder is offering shares of common stock that it
received in connection with the financing. As used in this prospectus, the term
"selling stockholder" includes pledgees, transferees or other
successors-in-interest selling shares received from the selling stockholder as
pledgors, assignees, borrowers or in connection with other non-sale-related
transfers after the date of this prospectus. This prospectus may also be used by
transferees of the selling stockholder, including broker-dealers or other
transferees who borrow or purchase the shares to settle or close out short sales
of shares of common stock. The selling stockholder will act independently of us
in making decisions with respect to the timing, manner and size of each sale or
non-sale related transfer. We will not receive any of the proceeds of such sales
by the selling stockholders.
The selling stockholder may sell its shares of common stock directly to
purchasers from time to time. Alternatively, it may from time to time offer the
common stock to or through underwriters, broker/dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholder or the purchasers of such securities
for whom they may act as agents. The selling stockholder and any underwriters,
broker/dealers or agents that participate in the distribution of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
29
The common stock may be sold by the selling stockholder from time to time
in one or more transactions at or on any stock exchange, market or trading
facility on which shares are traded or in private transactions. The sales may be
made at fixed prices, at prevailing market prices at the time of sale, at
varying prices determined at the time of sale or at negotiated prices. The sale
of the common stock may be affected by means of one or more of the following
transactions (which may involve cross or block transactions):
o a block trade in which the broker-dealer so engaged will attempt to
sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o transactions on any exchange or quotation service on which the
shares may be listed or quoted at the time of sale in accordance
with the rules of the applicable exchange;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o privately negotiated transactions;
o transactions through the settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o transactions through the writing or settlement of options or other
hedging transactions, whether through an options exchange or
otherwise; and
o any other method permitted pursuant to applicable law.
The selling stockholder may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus. To the extent
required, this prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholder may also enter into option or other transactions
with broker-dealer's, or other financial institutions for the creation of one or
more derivative securities, which require the delivery to such broker-dealer or
other financial institution of shares offered by this prospectus, which shares
such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction.)
In connection with the sale of the common stock or otherwise, the selling
stockholder may enter into hedging transactions with broker/dealers of other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholder may also sell shares of our common stock short and deliver these
shares to close out such short positions, or loan or pledge common stock to
broker/dealers that in turn may sell such securities.
The selling stockholder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the common stock by the
selling stockholders. The foregoing may affect the marketability of such
securities.
30
Pursuant to the registration rights agreement with the selling
stockholder, all expenses of the registration of the common stock will be paid
by us, including, without limitation, SEC filing fees; provided, however, that
the selling stockholder will pay any broker or similar commissions, or, except
to the extent otherwise provided for, any legal fees or other costs of the
selling stockholders. The selling stockholder will be indemnified by us against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. We will be
indemnified by the selling stockholder against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.
To comply with the securities laws of certain jurisdictions, if
applicable, the common stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
INDEMNIFICATION
Our articles of incorporation provide that none of our directors will be
personally liable to Adal or any of our shareholders for monetary damages
arising from the director's breach of fiduciary duty as a director, with certain
limited exceptions.
Pursuant to Delaware corporation law, every Delaware corporation has the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation or is or was serving in such a capacity at the request of the
corporation for another corporation, partnership, joint venture, trust or other
enterprise, against any and all expenses, judgments, fines and amounts paid in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if such person acted in good
faith and in a manner such person reasonably believed to be in the best
interests, or not opposed to the best interests, of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the corporation as well, but only to the extent of defense and settlement
expenses and not to any satisfaction of a judgment or settlement of the claim
itself, and with the further limitation that in such actions no indemnification
shall be made in the event of any adjudication of negligence or misconduct
unless the court, in its discretion, believes that in light of all the
circumstances indemnification should apply. Our articles of incorporation
contain provisions authorizing it to indemnify our officers and directors to the
fullest extent permitted by Delaware corporation law.
We have been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act of
1933 (the "Act") is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to court of appropriate jurisdiction. We will then be governed by the
courts decision.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for us
by Loeb & Loeb LLP, New York, New York.
FINANCIAL STATEMENTS
Our consolidated financial statements and the footnotes thereto are
included in the section beginning on F-1.
EXPERTS
The consolidated financial statements of Adal Group, Inc. appearing in
this prospectus and registration statement have been audited by Moore Stephens
P.C., an independent registered public accounting firm, to the extent indicated
in their report (which contains an explanatory paragraph with respect to Adal
Group, Inc.'s ability to continue as a going concern), appearing elsewhere in
this prospectus and registration statement, and are included in reliance upon
such report given on the authority of such firm as experts in auditing and
accounting.
31
WHERE YOU CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
document we file at the SEC's public reference room at 100 F Street, N.E.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
room. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov.
This prospectus is only part of a registration statement on Form SB-2 that
we have filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the registration statement. We have also filed
exhibits and schedules to the registration statement that are excluded from this
Prospectus, and you should refer to the applicable exhibit or schedule for a
complete description of any statement referring to any contract or other
document. You may inspect or obtain a copy of the registration statement,
including the exhibits and schedules, as described in the previous paragraph at
no charge from us.
32
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements as of March 31, 2005 Q-1 to Q-8
Audited Financial Statements as of December 31, 2004 and 2003 F-1 to F-18
33
INDEX TO INTERIM FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of March 31, 2004.......................... Q-2
Consolidated Statements of Operations (Unaudited) for the Three Months
Ending March 31, 2004 and 2005............................................ Q-3
Consolidated Statements of Cash Flows (Unaudited) ........................ Q-4-5
Notes to Consolidated Financial Statements................................ Q-6
Q-1
Adal Group, Inc and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
March 31,
----------
2005
Assets: (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 264
Accounts Receivable 8,118
Inventories 2,890
Deferred Tax Asset 72
Other Current Assets 484
--------
Total Current Assets 11,828
Property, Plant and Equipment - Net 9,034
Intangible Assets 1,035
--------
TOTAL ASSETS $ 21,897
========
Liabilities and Stockholders' Equity (Deficit):
Current Liabilities:
Short-Term Borrowings and Credit
Agreements $ 7,797
Accounts Payable 7,091
Accrued Expenses - Related Party 90
Payroll and Excise Taxes Payable 759
Current Portion of Long-Term Debt 654
Other Current Liabilities 1,057
--------
Total Current Liabilities 17,448
Long-Term Debt, Less Current Portion 5,995
Deferred Tax Liability 91
--------
Total Liabilities 23,534
Commitments and Contingencies --
Stockholders' (Deficit):
Common Stock, $0.0001 par value,
100,000,000 shares authorized,
2,860,001 and 2,550,000 shares
issued and outstanding at March 31,
2005 and December 31, 2004, respectively --
Additional Paid In Capital 816
Retained Earnings (Deficit) (3,151)
Accumulated Other
Comprehensive Income:
Cumulative Translation Adjustment 698
--------
Total Stockholders' (Deficit) (1,637)
Total Liabilities and Stockholders' (Deficit) $ 21,897
========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
Q-2
Adal Group, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
Three months ending March 31,
------------ -----------
2005 2004
------------ -----------
Net Sales $ 7,896 $ 7,062
Cost of Sales 7,282 6,373
------------ -----------
Gross Profit 614 689
Selling, General and
Administrative Expense 1,048 748
------------ -----------
(Loss) from Operations (434) (59)
Interest Expense (263) (121)
(Loss) Before Income Taxes (697) (180)
Provision For Income Tax Expense -- 6
------------ -----------
Net (Loss) $ (697) $ (186)
============ ===========
Earnings (Loss) Per Share - Basic and Diluted $ (0.26) $ (0.07)
============ ===========
Weighted Average Number of Shares Outstanding 2,705,334 2,550,000
============ ===========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
Q-3
Adal Group, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
Three months ending March 31,
------------ -----------
2005 2004
------------ -----------
Operating Activities:
Net Income (Loss) $ (697) $ (186)
Adjustments to Reconcile Net (Loss)
to Cash From Operations:
Depreciation and Amortization 369 291
Changes in Assets and Liabilities:
Decrease (Increase):
Receivables (755) 1,023
Inventories 32 (17)
Other Current Assets (83) 107
Increase (Decrease):
Accounts Payable 492 126
Other Current Liabilities 596 89
------------ -----------
Net Cash - Operating Activities (46) 1,433
------------ -----------
Investing Activities:
Business Acquisition (1,015) (732)
Capital Expenditures (549) (99)
------------ -----------
Net Cash - Investing Activities (1,564) (831)
------------ -----------
Financing Activities:
Net Changes to Short-Term Borrowings 1,392 (3,852)
Borrowing of Long-Term Debt 210 3,571
Payment of Long-Term Debt (146) --
Issuance of Common Stock 26 --
------------ -----------
Net Cash - Financing Activities 1,482 (281)
------------ -----------
Effect Of Exchange Rates Changes on Cash 3 (204)
------------ -----------
Net Increase (Decrease) in Cash - Forward $ (125) $ 117
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
Q-4
Adal Group, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
Three months ending March 31,
------------ -----------
2005 2004
------------ -----------
(Unaudited) (Unaudited)
Net Increase (Decrease) in Cash - Forwarded $ (125) $ 117
Cash - Beginning of Periods 389 150
------------ -----------
============ ===========
Cash - End of Periods $ 264 $ 267
============ ===========
Supplemental Cash Flow Information:
Cash paid during the periods for:
Interest $ 251 $ 113
Income Taxes $ -- $ --
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
Q-5
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (UNAUDITED)
(1) Basis of Presentation
The Consolidated Financial Statements include the accounts of Adal Group, Inc.
and its subsidiaries (collectively, the "Company," "Adal," "we," "us" or "our").
We are a diverse aluminum manufacturer with a value-added focus serving the
construction, automotive, medical, defense, transportation and HVAC industries
to name but just a few. Our worldwide headquarters is in Lingfield, Surrey,
United Kingdom and our manufacturing facilities are all currently in the United
Kingdom, in Witham, Essex and St. Albans, Hertfordshire. We are engaged
primarily in providing manufacturing, fabricating, precision engineering and
design services. Our principal subsidiaries are Adal Seco Limited, Adal
Engineering Limited and Adal Guilform Limited. All material intercompany
accounts and transactions have been eliminated in consolidation.
These Consolidated Financial Statements are prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (the "SEC") with
respect to Form 10-QSB and reflect all normal recurring adjustments that are, in
the opinion of management, necessary for a fair presentation of the financial
position of Adal Group, Inc as of March 31, 2005 and the results of operations
and cash flows for the interim periods presented. Pursuant to such rules and
regulations, certain footnote disclosures that normally are required under
generally accepted accounting principles are omitted. These Consolidated
Financial Statements and notes should be read in conjunction with the audited
Consolidated Financial Statements and the notes thereto (the "2004 Consolidated
Financial Statements") included in our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004 (the "Form 10-KSB").
The Consolidated Financial Statements are prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.
The nature of our business is such that the results of any interim period may
vary significantly from quarter to quarter and may not be indicative of the
results to be expected for the fiscal year.
(2) Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Adal and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Q-6
Foreign Currency - Adal headquarters and principal business operations are
located in England. Although most purchase contracts for aluminum billets are
denominated in U.S. dollars, all other expenses and all revenues are denominated
in UK Pound Sterling. As such, management has determined that the functional
currency for financial reporting purposes is the UK Pound Sterling. Translation
into U.S. dollars has been effected in the following manner: assets and
liabilities using the exchange rates in effect at the balance sheet date,
stockholders' equity at historical rates, and results of operations and cash
flows at the average exchange rates during the period. The effect of exchange
rate changes is reflected as a separate component of stockholders' equity.
Use of Estimates - The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the periods reported. Actual results could differ from those
estimates.
Revenue Recognition - The Company recognizes revenue after its product is
shipped and collectibility is reasonably assured.
Earnings (Loss) Per Share - Basic earnings (loss) per share are computed by
dividing net income (loss) by the weighted-average number of shares of common
stock outstanding for the period. Diluted earnings (loss) per share is computed
giving effect to all potentially dilutive common stock.
Intangibles. Customer lists are the sole intangible asset of the Company. These
are recorded at cost and are amortized utilizing the straight-line method over a
weighted-average amortization period of 5 years. The customer lists were
recorded at a gross value of $1,163 and accumulated amortization of $128. There
was $41 of amortization expense during the three month period ended March 31,
2005 with $21 being recorded in the three months to March 31, 2004. When
changing circumstances warrant, the Company evaluates the carrying value and the
period of amortization based on the current and expected future undiscounted
cash flows from operations to determine whether a revised estimate of carrying
value or useful life is required. The estimated customer list amortization
expense for the fiscal year ending December 31, 2005, and for the subsequent
years is as follows:
Year ended
December 31, Total
------------ -----
2005 $ 221
2006 240
2007 240
2008 240
Thereafter 94
-----------
Total $ 1,035
===========
The Company assesses intangible assets for impairment on a periodic basis and
more frequently when circumstances warrant. No impairment has been recorded
during the periods presented.
Significant policies followed by the Company are set forth in Note 3 to the
Company's consolidated financial statements in the December 31, 2004 10-KSB
filed with the SEC.
(3) Acquisition of Guilform Holdings Limited
On February 7, 2005, the Company purchased all of the outstanding shares of
Guilform Holdings Ltd. ("Guilform"), for a total investment of $1.8 million.
Payment was made in the form of cash of $600 and notes in the amount of $375 and
from the issuance of 300,000 shares of the Company's common stock. Guilform
makes aluminum-based products for use in architecture, notably metal cladding
panels and composite panels which provide thermal and acoustic insulation and
fire protection.
The investment in excess of the net book value of Guilform Holdings Limited has
been allocated to intangible assets, representing the value assigned to
Guilform's customer list, which is being amortized over five years using the
straight-line method. The results of operations of Guilform are included in the
consolidated financial statements beginning February 8, 2005.
Q-7
The assets acquired and liabilities assumed in the acquisition of Guilform are
as follows:
Tangible Assets acquired at Fair Value $ 3,267
Cost in excess of net assets acquired 557
Liabilities Assumed at Fair Value (2,024)
Total Purchase Price $ 1,800
(4) Commitments
Purchase Contracts - Adal Seco, an indirect wholly-owned subsidiary of the
Company, requires a supply of aluminum billets as raw materials for its
production process. Though these billets are generally available on the open
market, the Company has entered into purchase contracts with five smelters to
reduce the risk of a disruption in supply. These contracts are for the delivery
of billets per month at an agreed rate for up to twelve months into the future.
Production cost per ton is set under an annual master agreement with each
smelter. In advance of production, the Company places material orders with the
smelter, at which time the cost of aluminum is determined.
At March 31, 2005 and December 31, 2004, there were purchase agreements totaling
approximately $2,422 and $3,510 respectively.
(5) Going Concern
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. We
have incurred net operating losses of approximately $697,000 for the three
months ended March 31, 2005, compared to $186,000 for the three months ended
March 31, 2004. Additionally, as of March 31, 2005, we had a net working capital
deficiency of approximately $5,620,000 and negative cash flows from operating
activities of approximately $46,000. We plan to convert a further $1,133 of
short term debt to long term debt in 2005. Our management expects cash flows
from operating activities to improve in our core businesses in the third quarter
of fiscal 2005. We still face the burden of a large central overhead, relative
to the current size of our business, and this will continue to be the case until
we reach a more significant size as an organization. We have an acquisition,
product development; new product and organic growth plans that we anticipate
will achieve the required economies of scale and expect to see growth over the
remainder of 2005 and into 2006. Management also plans to raise additional
capital through one or more transactions, utilizing H.C. Wainwright, a New York
based Broker / Dealer, appointed in July 2005, although there can be no
assurance thereof. Any such capital raised will be used for working capital,
reduction in short term debt, acquisitions and capital improvements. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going concern. If
we fail to generate positive cash flows or obtain additional financing when
required, we may have to modify, delay or abandon some or all of our business
and expansion plans.
Q-8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm ................. F-2
Consolidated Balance Sheet as of December 31, 2004....................... F-3
Consolidated Statements of Operations for the year
ended December 31, 2004 and for the period from October
20, 2003 (inception) to December 31, 2003, and of Seco
Aluminium Ltd. (as Predecessor Company) for the period
from January 1, 2003 to October 19, 2003................................. F-4
Consolidated Statements of Stockholders' Equity
(Deficit) and Comprehensive Income (Loss) for the year
ended December 31, 2004 and for the period from October
20, 2003 (inception) to December 31, 2003................................ F-5
Consolidated Statements of Cash Flows for the year
ended December 31, 2004 and for the period from October
20, 2003 (inception) to December 31, 2003, and of Seco
Aluminium Ltd. (as Predecessor Company) for the period
from January 1, 2003 to October 19, 2003................................. F-6
Notes to Consolidated Financial Statements............................... F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Adal Group Inc.
and its subsidiaries (the "Company") as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for the periods January 1, 2003 to
October 19, 2003 (predecessor Company), October 20, 2003 to December 31, 2003
and for the year ended December 31, 2004. 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 Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included 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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2004, and the consolidated results of their
operations and their cash flows for the periods January 1, 2003 to October 19,
2003 (predecessor Company), October 20, 2003 to December 31, 2003 and for the
year ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also discussed in Note 4. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 25, 2005 except for Note 4,
for which the date is April 11, 2005
F-2
ADAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS)
December 31, 2004
-----------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 389
Accounts Receivable 6,845
Inventories 2,408
Current Deferred Taxes 37
Other Current Assets 314
-----------------
Total Current Assets 9,993
Property, Plant and Equipment - Net 6,229
Intangible Assets, Less Accumulated
Amortization of $80 526
-----------------
Total Assets $16,748
=================
Liabilities and Stockholders' Equity (Deficit):
Current Liabilities:
Short-Term Borrowings and Credit
Agreements $ 6,048
Accounts Payable 6,243
Accrued Expenses - Related Party 120
Payroll and Excise Taxes Payable 617
Current Portion of Long-Term Debt 595
Other Current Liabilities 549
-----------------
Total Current Liabilities 14,172
Long-Term Debt, Less Current
Portion 4,275
Non-Current Deferred Taxes 99
-----------------
Total Liabilities 18,546
-----------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common Stock, $.0001 Per Share Stated
Value; 100,000,000 Shares Authorized, 2,550,000
Shares Issued and Outstanding --
Additional Paid in Capital 2
Accumulated Deficit (2,454)
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment 654
-----------------
Total Stockholders' Equity (Deficit) (1,798)
-----------------
Total Liabilities and Stockholders' Equity (Deficit) $16,748
=================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
F-3
ADAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
Predecessor
Adal Group Inc. and Subsidiaries Company
Year October 20, January 1,
Ended 2003 to 2003 to
December 31, December 31, October 19,
2004 2003 2003
--------- ---------- ---------
Net Sales $ 29,228 $ 4,194 $ 17,053
Cost of Sales 27,898 4,004 15,311
--------- ---------- ---------
Gross Profit 1,330 190 1,742
Selling, General and
Administrative Expenses 2,783 268 1,055
Advisory Fees - Related
Party 190 -- --
--- -- --
Income (Loss) from
Operations (1,643) (78) 687
Interest Expense 650 122 148
--------- ---------- ---------
Income Before Income
Taxes (2,293) (200) 539
Provision For Income Tax
Expense (Benefit) (3) (36) 120
--------- ---------- ---------
Net Income (Loss) $ (2,290) $ (164) $ 419
========= ========== =========
Basic and Diluted Income
(Loss) per Share: $ (0.98) $ (0.06) $ 0.18
========= ========== =========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
F-4
ADAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS) (IN THOUSANDS OF U.S. DOLLARS)
Accumulated
Comprehensive Additional Retained Other Total
Income Common Stock Paid-in Earnings Comprehensive Stockholders'
(Loss) Shares Amount Capital (Deficit) (Loss) (Deficit)
--------- --------- ----------- --------- --------- --------- ---------
Inception - October 20, 2003 $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock
For Cash -- 2,295,000 -- 2 -- -- 2
Net Loss (164) -- -- -- (164) -- (164)
Effect of Currency
Translation in
Period (3) -- -- -- -- (3) (3)
Balances
December 31, 2003 $ (167) 2,295,000 -- 2 (164) (3) (165)
=========
Shares Issued in Connection
With Merger $ -- 255,000 -- -- -- -- --
Net Loss (2,290) -- -- -- (2,290) -- (2,290)
Effect of Currency
Translation In
Period 657 -- -- -- -- 657 657
Balances -
December 31, 2004 $ (1,633) 2,550,000 $ -- $ 2 $ (2,454) $ 654 $ (1,798)
========= ========= =========== ========= ========= ========= =========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
F-5
ADAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
Predecessor
Adal Group Inc. and Subsidiaries Company
Year October 21, January 1,
Ended 2003 to 2003 to
December 31, December 31, October 19,
2004 2003 2003
--------- ---------- ---------
Operating Activities:
Net Income (Loss) $(2,290) $ (164) $ 419
Adjustments to Reconcile Net
Income (Loss) to Cash From
Operations:
Depreciation and Amortization 1,212 111 657
Deferred tax (Benefit) (3) -- --
Changes in Assets and
Liabilities:
Decrease (Increase):
Receivables 1,086 541 (877)
Inventories (217) (231) 226
Other Current Assets (150) 66 (3)
Increase (Decrease):
Accounts Payable 888 (107) 154
Taxes 127 (19) 88
Other Current Liabilities 162 86 (101)
--------- -------- -----------
Net Cash - Operating
Activities 815 283 563
--------- -------- ----------
Investing Activities:
Cash Paid for Seco
Acquisition, Net of Cash
Acquired -- -- (3,874)
Cash Paid for Fagg
Acquisition, Net of Cash
Acquired (732) -- --
Capital Expenditures (2,713) (87) (362)
---------- --------- -----------
Net Cash - Investing
Activities (3,445) (3,961) (362)
---------- --------- -----------
Financing Activities:
Net Changes to Short-Term
Borrowings (1948) 3,570 (177)
Borrowing of Long-Term Debt 4,530 -- --
Payment of Long-Term Debt (480) -- --
Issuance of Common Stock -- 2 --
--------- -------- ----------
Net Cash - Financing
Activities 2,102 3,572 (177)
--------- -------- -----------
Effect Of Exchange Rates
Changes on Cash 767 231 1
--------- -------- ----------
Net Increase (Decrease) in
Cash - Forward $ 239 $ 125 $ 25
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
F-6
ADAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
Predecessor
Adal Group Inc. and Subsidiaries Company
Year October 21, January 1,
Ended 2003 to 2003 to
December 31, December 31, October 19,
2004 2003 2003
--------- ---------- ---------
Net Increase (Decrease) in
Cash - Forwarded $ 239 $ 125 $ 25
Cash - Beginning of Period 150 25 --
--- -- --
Cash - End of Period $ 389 $ 150 $ 25
=== === ==
Supplemental Cash Flow
Information:
Cash paid during the periods for:
Interest $ 343 $ 116 $ 141
Income Taxes $ -- $ -- $ --
Non-Cash Transactions:
Debt Issued for Engineering
Acquisition $ 675 $ -- $ --
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
F-7
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Adal Group Inc. ("we" or the "Company"), through our operating subsidiaries, is
a diversified producer of aluminum extrusions and manufactured parts. Our
principal operating subsidiaries are Adal Seco and Adal Engineering (formerly
W.H.J. Fagg & Son Ltd.), both of which are located in England. Our customers are
also based in England. Adal Seco is a provider of aluminum extrusion design and
production services, providing complete supply-chain management including
component design, fabrication, warehousing and delivery. These added value
products are sold through the Adal Seco brands, Adal Extra and Adal Climatix.
Adal Engineering provides precision engineering, tool making and volume
production of machined (primarily aluminum) components principally for the
automotive industry. Adal Engineering was acquired effective February 1, 2004.
(2) Organization and Basis of Presentation
Adal Group Inc., a Delaware corporation, was formerly known as Sunningdale, Inc.
("Sunningdale") a shell corporation. A merger of Sunningdale and Advanced
Aluminium Group Ltd. ("AAG") incorporated under the laws of England, was
completed on October 28, 2004. The merger has been treated for accounting and
financial reporting purposes as a reverse acquisition of Sunningdale by AAG,
since the former AAG stockholders control the Company after the merger. Under
this accounting treatment, AAG is deemed for accounting purposes to be the
acquiring entity and Sunningdale the acquired entity. Accordingly, the
transaction has been treated as a recapitalization of AAG, with no goodwill
recorded. The financial statements of the Company after the merger now reflect
AAG on a historical basis. All references to the "Company" means Adal Group Inc.
and its subsidiaries. As of the date of the merger, Sunningdale had total assets
of $15 and total liabilities of $15, which were assumed by the Company.
Effective October 20, 2003, AAG acquired all of the outstanding capital stock of
Advanced Aluminium Industries, Ltd. ("AAI"). AAI's activities as of the date of
acquisition consisted solely of the ownership of Adal Seco, which was acquired
by AAI on October 20, 2003.
Since October 20, 2003 ("Inception") the Company's activities consisted solely
of activities related to the operation of AAI and Seco. Such activities, which
were not significant, have been included in the consolidated statement of
operations for the Company for the period from Inception through December 31,
2003. The primary operating activities included in the consolidated statement of
operations for the Company for the period from Inception through December 31,
2003 are those of Seco, which became an indirect subsidiary of the Company,
through its AAI subsidiary, on October 20, 2003.
The consolidated balance sheets as of October 19, 2003 and the consolidated
statements of operations and cash flows for the period from January 1, 2003 to
October 19, 2003 represent the financial position and results of operations and
cash flows of Seco, which was the "Predecessor Company" through the date of
acquisition. The consolidated balance sheets as of December 31, 2004 and
December 31, 2003 and consolidated statements of operations and cash flows for
the year ended December 31, 2004 and for the period from October 20, 2003
(Inception) to December 31, 2003 represent the consolidated financial position
and results of operations and cash flows for the Company and its subsidiaries.
The operations of Engineering have been included since February 1, 2004, the
date on which AAI acquired all of the outstanding capital stock of Engineering.
All amounts in the financial statements are presented in thousands of U.S.
Dollars.
(3) Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of its wholly-owned direct and indirect
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Accounting Policies (Continued)
Foreign Currency - The Company headquarters and principal business operations
are located in England. Although most purchase contracts for aluminum are
denominated in U.S. dollars, all other expenses and all revenues are denominated
in UK Pound Sterling. As such, management has determined that the functional
currency for financial reporting purposes is the UK Pound Sterling. Translation
into U.S. dollars has been accomplished in the following manner: assets and
liabilities using the exchange rates in effect at the balance sheet date,
stockholders equity at historical rates, and results of operations and cash
flows at the average exchange rates during the period. The effect of exchange
rate changes is reflected as a separate component of stockholders' equity.
Use of Estimates - The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the periods reported. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company considers all highly liquid debt
securities purchased with an original maturity of three months or less to be
cash equivalents.
Inventories - Inventories consist primarily of raw materials (principally
aluminum billets, extrusions and bar stock) and work in process/finished goods,
(aluminum extrusions and machined parts). Inventories are stated at the lower of
cost (first-in, first-out method) or market. Inventories consist of:
December 31,
2004
Raw Materials $ 1,255
Work in Process and Finished Goods 1,153
---------
Totals $ 2,408
====== =========
Income Taxes - The Company accounts for income taxes under the liability method,
whereby current and deferred tax assets and liabilities are determined based on
tax rates and laws enacted as of the balance sheet date. Deferred tax expense
(benefit) represents the change in the deferred tax asset/liability balance.
Property, Plant and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally using the straight-line method. The
estimated useful lives are:
Buildings and Improvements 50 Years
Equipment, Furniture and Fixtures 3 to 15 Years
Vehicles 3 to 5 Years
Expenditures for maintenance and repairs that do not materially extend the
useful lives of property, plant and equipment are charged to earnings. When
property or equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts with the
resulting gain or loss reflected in earnings. Property, plant and equipment
consist of the following:
F-9
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Accounting Policies (continued)
December 31,
2004
Land, Buildings and Improvements $ 2,521
Equipment, Furniture and Fixtures 12,214
Vehicles 66
--
Totals 14,801
Less Accumulated Depreciation (8,572)
----------
Property, Plant and Equipment - Net $ 6,229
=================================== =========
Depreciation expense was $1,100 for the year ended December 31, 2004, $111 for
the period ended December 31, 2003, and $657 for the period from January 1, 2003
to October 20, 2003.
Intangible Assets - Customer lists are the sole intangible asset of the Company.
These are recorded at cost and are amortized utilizing the straight-line method
over a period of 5 years. The customer lists were recorded at a value of $606
and there was $80 of amortization expense during the year ended December 31,
2004 with none prior. When changing circumstances warrant, the Company evaluates
the carrying value and the period of amortization based on the current and
expected future undiscounted cash flows from operations to determine whether a
revised estimate of carrying value or useful life is required.
Year ended
December 31, Total
------------ -----
2005 $129
2006 129
2007 129
2008 129
Thereafter 10
----
Total $526
====
The Company assesses intangible assets for impairment on a periodic basis and
more frequently when circumstances warrant. No impairment has been recorded
during the periods presented.
Revenue Recognition - The Company recognizes revenue after its product is
shipped and collectability is reasonably assured.
Net Revenues - Net revenues include the amounts charged for products shipped to
customers, plus recoveries of the freight charges to ship the product from the
manufacturing facility to the customer.
Cost of Sales - Cost of sales includes the direct cost of the product, including
material, labor, overhead, depreciation and the freight charges to ship the
product to the customer.
Selling, General and Administrative Expenses - Selling general and
administrative expenses include costs for administrative and sales employee
wages, benefits, legal, accounting and consulting services and other general and
administrative costs.
Impairment of Long-Lived Assets - The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When such factors and
circumstances exist, the projected undiscounted future cash flows associated
with the future use and disposal of the related asset or group of assets is
compared to their respective carrying amounts. Impairment, if any, is measured
as the excess of the carrying amount over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made.
F-10
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Accounting Policies (continued)
Fair Value of Financial Instruments - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No.107, "Disclosure about Fair Value of Financial
Instruments," which requires disclosing fair value, to the extent practicable,
for financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization or
settlement.
In assessing the fair value of these financial instruments, the Company used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, related party and trade and notes payable, it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturities.
The fair value of long-term debt is based upon current rates at which the
Company could borrow funds with similar remaining maturities. It was assumed
that the carrying amount approximated fair value for these instruments.
Research and Development Costs - The Company does not have a research and
development department. The development activity generally relates to designing
new products, which is principally done by employees with general administrative
or other operating responsibility. As such, the Company does not separately
account for such costs. However, management believes the total amounts expended
on these activities are not significant. All such costs are expensed as
incurred.
Advertising - The Company expenses advertising costs as incurred. Advertising
expenses were approximately $15 for the year ended December 31, 2004, $2 for the
period from October 20, 2003 to December 31, 2003, and $6 for the period from
January 1, 2003 to October 19, 2003.
Stock-Based Compensation - We account for stock-based compensation utilizing the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, no compensation expense is
recognized because the exercise prices of these employee stock options equal or
exceed the estimated fair market value of the underlying stock on the dates of
grant.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock
Based Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R is
the first reporting period beginning after December 15, 2005, although early
adoption is allowed. SFAS 123R requires companies to adopt its requirements
using a "modified prospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS 123R. The
"modified retrospective" method also permits entities to restate financial
statements of previous periods based on proforma disclosures made in accordance
with SFAS 123.
We currently utilize a standard option pricing model (i.e., Black-Scholes) to
measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. We have not yet determined which model we will use to
measure the fair value of employee stock options upon the adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with the tax deductions in
excess of recognized compensation cost be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. We
have not yet determined what effect, if any, this change will have on future
periods.
F-11
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Accounting Policies (continued)
We currently expect to adopt SFAS 123R effective January 1, 2006; however, we
have not yet determined which of the aforementioned adoption methods we will
use.
Earnings (Loss) Per Share - Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding for the period. Diluted earnings (loss) per share is computed giving
effect to all potentially dilutive common stock. There were no potentially
dilutive items for the periods presented. The weighted average shares
outstanding were 2,339,625 for the year ended December 31, 2004 and 2,295,000
for the other periods presented, including the Predecessor Company.
Recent Accounting Pronouncements - In October 2004, the FASB issued SFAS No. 151
"Inventory Costs - an amendment of ARB No. 43, Chapter 4." This Statement amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires the allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. Adoption of this Statement is not
expected to have a material impact on our financial statements.
In November 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
Time-Sharing Transactions - An amendment of SFAS No. 66 and 67." This Statement
amends SFAS No. 66. "Accounting for Sales of Real Estate," to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This Statement also
amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects," to state the guidance for (a) incidental costs and (b) costs
incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to
guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for
fiscal years beginning after June 15, 2005. Adoption of this Statement is not
expected to have a material impact on our financial statements.
Recent Accounting Pronouncements (Continued) - In November 2004, the FASB issued
SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment to APBO No. 29."
This Statement amends APBO 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This is
effective for fiscal periods beginning after June 15, 2005. Adoption of this
Statement is not expected to have a material impact on our financial statements.
(4) Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continuation of
the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. For the year ended
December 31, 2004, the Company has a net loss of approximately $2,290, a working
capital deficiency of approximately $4,179 and an accumulated deficit of
approximately $2,454. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management plans to secure
additional financing through the following actions:
o In February 2005 we moved Adal Engineering's accounts receivable
revolving credit facility from the existing bank to the same bank
used by Adal Seco. This move provided an additional $170 of
availability due to an improved advance rate against eligible
accounts receivable.
o The bank holding the mortgage on the Witham facility has agreed to
refinance the loan and allow us to increase our borrowings to 75% of
the current appraised value of the property. This will generate
incremental funding of approximately $300 and is expected to close
in late April 2005.
(4) Going Concern (Continued)
o We have established a credit agreement with a bank based on the
finished goods inventory at Adal Seco, which will provide
approximately $320 of cash availability. Funding is expected to
close by the end of April 2005.
o Two directors of the Company have agreed to lend the Company $150
each for a total of $300. These loans are expected to be in place in
May 2005.
F-12
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o On April 8, 2005, the Company and the Keating Reverse Merger Fund,
LLC agree to amend their Exchange Agreement to terminate the
anti-dilution provision. As consideration for this termination the
Company agreed to issue 125,000 shares of its Common Stock to the
Keating Reverse Merger Fund, LLC.
o On April 11, 2005 the investment committee of an investment company
approved a term sheet, subject to completion of final due diligence,
to provide $3,000 in funding through a three year convertible loan
facility. The first $1,000 of funds is expected to be received in
May 2005, and can be used for any purpose. The remaining $2,000 is
reserved for use in future acquisitions.
The above actions are expected to provide additional cash resources of
approximately $2,090 in the first half of 2005. Management believes that this
additional cash will be adequate to sustain operations until the Company
generates sufficient cash flows from operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
(5) Acquisitions
On October 20, 2003, the Company purchased all of the outstanding shares of the
Predecessor Company through its wholly-owned AAI subsidiary, for cash of
approximately $3.9 million, including acquisition costs of approximately $3,900.
Accordingly, the results of operations of Adal Seco are included in the
consolidated financial statements of the Company from the date of acquisition.
Because the total purchase price was less than the net book value of the
Predecessor Company, no allocation of the purchase price was made, and the
amount paid below net book value of approximately $913 was recorded as a
reduction to land, buildings and improvements.
On January 31, 2004, the Company purchased all of the outstanding shares of
W.H.J. Fagg & Son Ltd. ("Fagg") through its wholly-owned AAI subsidiary, for a
total investment of approximately $1,400 including transaction related costs of
$64. Payment was made in the form of cash of $739 and notes in the amount of
$675. Fagg was subsequently renamed Adal Engineering. Engineering provides
precision engineering, tool making and volume production of machined aluminum
components principally for the automotive industry. The engineering and
machining capabilities of Engineering are complementary to the extrusion
business of Seco. The investment in excess of the net book value of Engineering
has been allocated to intangible assets, representing the value assigned to
Engineering's customer list, and is being amortized over five years using the
straight-line method. The results of operations of Engineering are included in
the consolidated financial statements of the Company beginning February 1, 2004.
The following condensed balance sheet information has been derived from the
audited balance sheet of Engineering as of January 31, 2004.
F-13
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Acquisitions (Continued)
The assets acquired including the cost in excess of net assets acquired and
liabilities assumed in the acquisition of Engineering are as follows:
Tangible Assets acquired at Fair Value $ 2,725
Cost in excess of net assets acquired (customer lists) 606
Liabilities Assumed at Fair Value (1,917)
--------
Total Purchase Price $ --
$ 1,414
========
Selected unaudited proforma combined results of operations for the year ended
December 31, 2003, assuming that the Predecessor Company and Engineering
acquisitions occurred on January 1, 2003, including activity subsequent to their
actual acquisitions is as follows:
Year Ended
December
2003
Net Sales:
Predecessor Company and the Company from Inception $21,308
Engineering 5,034
-----
Combined $26,342
Net Income:
Predecessor Company and the Company from Inception $ (108)
Engineering (155)
Combined $ (263)
(6) Related Party Transactions
During the year ended December 31, 2004, the Company leased office space from a
Director on a month-to-month basis. The total of such rental expenses was
approximately $9 during the year ended December 31, 2004 with no expense in
other periods. This rent was included as a component of selling, general and
administrative expense.
On October 28, 2004, the Company entered into a financial advisory agreement
with an entity related to a former director of the Company who is also a major
shareholder. A fee of $190 was accrued related to this agreement, of which $70
was paid through December 31, 2004.
F-14
(7) Concentrations
(A) Concentration of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consists
principally of cash and cash equivalents and accounts receivable.
The Company and its subsidiaries maintain their cash and cash equivalents in
accounts with two major financial institutions in England and, principally in
the form of demand deposit accounts. Deposits in these banks may exceed the
amounts of insurance provided on such deposits. The Company has not experienced
any losses on its deposits of cash and cash equivalents.
The Company believes that the concentration of credit risk in its accounts
receivables is substantially mitigated by the Company's evaluation process,
relatively short collection terms, the high level of credit worthiness of its
customers and in the case of Seco the purchase of credit insurance for its
accounts receivable. The Company performs ongoing credit evaluations of its
customers' financial condition, but generally requires no collateral. Management
has entered into an insurance agreement to guarantee certain customer accounts
receivable balances up to specified limits as defined in the insurance
agreement. For those customer not covered under the insurance agreement the
Company often requires the customer to prepay for goods as a condition of sale.
The Company records an allowance for doubtful accounts specific to the accounts
receivable balances outstanding based upon the results of its evaluation of its
customers' financial condition and consideration of the insured balance. As of
December 31, 2004 the Company determined that no allowance for doubtful accounts
was required. Historically, the Company has recorded an immaterial amount of bad
debt write-offs.
(B) Concentration of Sources of Labor - Approximately 50% of the employees of
Seco, an indirect subsidiary of the Company are members of a trade union. Seco
is not a party to any collective bargaining agreement with this trade union.
Management believes that it has a good relationship with its employees.
C) Concentration of Sources of Materials - Seco purchases aluminum billets
from five smelters. Though these billets are commonly used by extruders, a
disruption in the supply from these smelters could cause production delays or a
material increase in production costs. The Company has entered into forward
supply contracts with these smelters to minimize such risk [See Note 6].
(8) Commitments and Contingencies
Operating Leases - The Company leases various vehicles and equipment under
operating leases. Rent expense for such vehicles and equipment was $68 for the
year ended December 31, 2004, $10 for the period from October 20, 2003 to
December 31, 2003, and $24 for the period from January 1, 2003 to October 19,
2003.
Future minimum lease payments under operating leases at December 31, 2003 are as
follows:
Years Ending
December 31, Amount
------------ ------
2004 $ 49
2005 42
2006 33
2007 13
Thereafter 1
Total $ 138
=====
Purchase Contracts - Adal Seco, an indirect subsidiary of the Company, requires
a supply of aluminum billets as raw materials for its production process. Though
these billets are generally available on the open market, the Company has
entered into purchase contracts with five smelters to reduce the risk of a
disruption in supply. These contracts are for the delivery of billets per month
at an agreed rate for up to twelve months into the future. Production cost per
ton is set under an annual master agreement with each smelter. In advance of
production, the Company places material orders with the smelter, at which time
the cost of aluminum is determined.
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Production cost per ton is set under an annual master agreement with each
smelter. In advance of production, the Company places material orders with the
smelter, at which time the cost of aluminum is determined.
At December 31, 2004 and December 31, 2003, there were purchase agreements
totaling approximately $3,500 and $829 respectively.
(9) Debt
The Company has a Credit Agreement with a bank that allows the Company to borrow
against customer accounts receivable of Adal Seco, subject to certain
restrictions. Under the terms of the Credit Agreement, the Company may borrow up
to a maximum of $9,600, subject to the availability of eligible customer
receivables. Interest is charged at the rate of 2% above the Base Rate of the
Bank of England for the first $4,000 borrowed and 1.4% above the Base Rate of
the Bank of England for the balance. At December 31, 2004, the Base Rate of the
Bank of England was 4.75%. The Company pays a commitment fee equal to 0.14% of
the eligible accounts receivable, at the time the accounts receivable are
reported to the bank. The amounts outstanding under this agreement are secured
by all of the outstanding accounts receivable of Adal Seco. The term of the
Credit Agreement is open, but can be terminated by either party with 90 days
notice and as such is classified as a component of current liabilities. As of
December 31, 2004, there was $4,955 outstanding under the Credit Agreement. As
of December 31, 2004, the Company had unused borrowing availability of $584.
The Company also has a Credit Agreement with another bank that allows the
Company to borrow against customer accounts receivable of Adal Engineering,
subject to certain restrictions. Under the terms of the Credit Agreement, the
Company may borrow up to a maximum of $770, subject to the availability of
eligible customer receivables. Interest is charged at the rate of 2.20% above
the Base Rate of the Bank of England (6.95% at December 31, 2004). The Company
pays a commitment fee equal to 0.50% of the eligible accounts receivable, at the
time the accounts receivable are reported to the bank. The amounts outstanding
under this agreement are secured by all of the outstanding accounts receivable
of Adal Engineering. The term of the Credit Agreement is open, but can be
terminated by either party with 90 days notice and as such is classified as a
component of current liabilities. As of December 31, 2004, there was $393
outstanding under the Credit Agreement. As of December 31, 2004, the Company had
unused borrowing availability of $166.
As of December 31, 2004, the weighted average interest rate for the credit
agreements was 6.49%.
The Company has an overdraft agreement with a bank that allows the Company to
borrow up to $1,000. As of December 31, 2004, there was $700 outstanding under
the agreement. The proceeds are to be used to finance building reconstruction
and will be converted into a mortgage upon completion of the construction. The
outstanding balance bears interest at 1.5% above the Base Rate of the Bank of
England (6.25% at December 31, 2004). The loan is secured by a lien on the
Company's real estate, including land, buildings and improvements of the
facilities located in Witham, England. These amounts are classified as a
component of short term liabilities.
In connection with the acquisition of Adal Engineering in January 2004, the
Company issued notes payable to the former owners in the original amount of
approximately $675. The notes did not bear interest and were paid in full in
November 2004.
Long-term debt consisted of the following at December 31, 2004:
December 31,
------------
2004
----
Mortgage Loan, 6.435% Due January 2019 $ 3,670
Machinery and Equipment Loans 1,200
------------
Total Long-Term Debt 4,870
Less: Amounts Due Within One Year (595)
------------
Long-Term Portion $ 4,275
============
F-16
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(9) Debt (continued)
The mortgage loan is secured by the real estate, including land, buildings and
improvements of the facilities located in Witham, England, and has a 15 year
term. The interest rate on the mortgage is fixed for five years, after which
time the Company has the option to accept a fixed rate based upon the then
market rates or accept a variable rate at the Bank of England Base Rate plus
1.5%.
The machinery and equipment loans are secured by certain machinery and equipment
of Engineering. The agreements range from 3 to 5 years with interest ranging
between 5% and 8%.
Following are the principal amounts due under long-term debt as of December 31,
2004 by fiscal year:
Years Ending
December 31, Amount
2005 $ 595
2006 513
2007 386
2008 337
2009 264
Thereafter 2,775
-----------
Total $ 4,870
-----------
(10)Common Stock
The Company has 100,000,000 shares of common stock authorized and 2,550,000
shares issued and outstanding as of December 31, 2004. The Company does not have
any equity incentive plans or other stock based compensation plans. There are no
outstanding warrants for the purchase of common stock.
(11) Income Taxes
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate is as follows:
Predecessor
Adal Group Inc. Company
--------------------------------------- ----------------
October 20, January 1,
Year Ended 2003 to 2003 to
December 31, December 31, October 19,
2004 2003 2003
--------------------------------------- ----------------
U.S. statutory rate applied to
income from continuing operations before taxes 35% 35% 35%
Differential arising from:
Foreign operations (5%) (5%) (5%)
Other Permanent Differences -- 18% 22%
Utilization of Net Operating Loss Carryforwards (30%) (30%) (30%)
-- -- --
Effective Rate $ --% $ (18%) $ 22%
=============== ================ ================
F-17
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(11) Income Taxes (continued)
--------------------------------------------------------------------------------
Foreign operations comprised substantially all operations for fiscal 2004 and
2003. The provision (benefit) from income taxes shown in the consolidated
statements of operations consists of the following:
Adal Group Inc. Predecessor
----------------------------------- Company
October 20, January 1,
Year Ended 2003 to 2003 to
December 31, December 31, October 19,
2004 2003 2003
------------- -------------- ------------
Current Provision
Federal $ -- $ -- $ --
Foreign -- (54) 165
State -- -- --
------------- -------------- ------------
Total $ -- $ (54) $ 165
------------- -------------- ------------
Deferred Provision
Federal $ -- $ -- $ --
Foreign (3) 18 (45)
State -- -- --
------------- -------------- ------------
Total $ (3) $ 18 $ (45)
============= ============== ============
Grand Total $ (3) $ (36) $ 120
============= ============== ============
Deferred Income taxes at December 31, 2004 consisted of the following:
Year Ended
December 31,
2004
-------------
Current Deferred Tax Asset:
Net Operating Loss Carryforward $ 259
Valuation Reserve (222)
Total $ 37
Non-Current Deferred Tax Liability:
Depreciation and Amortization $ (99)
============
Tax benefits of operating loss carryforwards are evaluated on an ongoing basis,
including a review of historical and projected future operating results, the
eligible carryforward period, and other circumstances. Management believes that
it is more likely than not that the deferred tax assets will be realized. During
fiscal 2004 the Company had no current tax liability due to current period
losses, foreign tax adjustments and utilization of net operating loss
carryforwards. Management has recorded a valuation allowance on available net
operating losses to adjust the deferred tax asset to an amount that is more
likely than not to be realizable.
F-18
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(12) Retirement Plans
The Company has defined contribution plans covering certain employees. The
Company's annual contribution to the defined contribution plans is based on the
matching of employee minimum contributions up to 2% of annual salary and
amounted to $82 for the year ended December 31, 2004, $13 for the period from
October 20, 2003 to December 31, 2003, and, $50 for the period from January 1,
2003 to October 19, 2003.
(13) Subsequent Events
On February 7, 2005, the Company purchased all of the outstanding shares of
Guilform Holdings Ltd. ("Guilform"), for a total investment of $2,625. Payment
was made in the form of cash of $600 and notes in the amount of $375 and $1,650
from the issuance of 300,000 shares of the Company's common stock. Guilform
makes aluminum-based products for use in architecture, notably metal cladding
panels and composite panels which provide thermal and acoustic insulation and
fire protection.
The following condensed balance sheet information has been derived from the
audited balance sheet of Guilform as of December 31, 2004.
The assets acquired and liabilities assumed in the acquisition of Guilform are
as follows:
Tangible Assets acquired at Fair Value $ 3,942
Cost in excess of net assets acquired 914
Liabilities Assumed at Fair Value (2,231)
---------
Total Purchase Price 2,625
=========
Selected unaudited pro-forma combined results of operations for the years ended
December 31, 2004, assuming that the Predecessor Company and Engineering
acquisitions occurred on January 1, 2004, including activity subsequent to their
actual acquisitions is as follows:
Year Ended
December 31, 2004
(In thousands of U.S. dollars)
------------------------------
Net Sales:
Company $ 29,228
Guilform (Year ended September 30, 2004) 4,141
-------------
Combined $ 33,369
=============
Net Income:
Company $ (2,290)
Guilform (Year ended September 30, 2004) (384)
-------------
Combined $ (2,674)
=============
In February of 2005, the Company issued 10,000 shares of common stock to its
independent Directors as compensation for their efforts on behalf of the
Company.
In February of 2005 the Company issued 1 share of stock to resolve a dispute.
In February of 2005 the Company refinanced the secured credit agreement of Adal
Engineering. As the result of this refinance, the credit terms for Engineering
are substantially similar to those of the Adal Seco secured credit agreement.
F-19
1,001,892 Shares of Common Stock
ADAL GROUP, INC.
PROSPECTUS
_______________, 2005
Until __________, 2005 (90 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
SEC Registration Fee ....................................... $ 560
Printing and Engraving Expenses ............................ $ 0
Legal Fees and Expenses .................................... $100,000
Accounting Fees and Expenses ............................... $ 3,00
--------
Total ................................................. $103,560
========
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law allows companies to
indemnify their directors and officers against expenses, judgments, fines and
amounts paid in settlement under the conditions and limitations described in the
law.
The Certificate of Incorporation and By-Laws of the Registrant provide
that the Registrant shall indemnify any person to the full extent permitted by
the Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL,
relating to indemnification, is hereby incorporated herein by reference. We
maintain Directors' and Officers' Insurance, under which the insurer will pay
the loss of each of our directors and officers arising from any claim made
against such directors and officers for actual or alleged wrongful act except
and to the extent that we have indemnified such director or officer.
The Registrant maintains Directors' and Officers' Insurance, under which
the insurer will pay the loss of each of our directors and officers arising from
any claim made against such directors and officers for actual or alleged
wrongful act except and to the extent that the Registrant has indemnified such
director or officer.
RECENT SALES OF UNREGISTERED SECURITIES
The following sale of unregistered securities of the Company was made in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended, and/or, Rule 506 of Regulation D or
Regulation S, promulgated under the Securities Act. The Company did not use
underwriters.
On October 28, 2004 (the "Closing"), Sunningdale, Inc., a Delaware
corporation ("Company") consummated the transactions contemplated by that
certain Share Exchange Agreement ("Exchange Agreement"), dated September
22,2004, by and among the Company, Advanced Aluminium Group Limited ("AAG"), the
stockholders of AAG, and Keating Reverse Merger Fund, LLC ("KRM Fund"). Pursuant
to the terms of the Exchange Agreement, the Company acquired all of the
outstanding capital stock of AAG in exchange for the Company's issuance to the
AAG stockholders of 2,295,000 shares of the Company's common stock. The issuance
of the Company's shares of common stock to AAG's stockholders was exempt from
registration under the Securities Act of 1933, as amended ("Securities Act")
pursuant to Section 4(2) thereof.
EXHIBITS
Exhibit
Number Description
--------------------------------------------------------------------------------
2.1 Share Exchange Agreement, by and among the Registrant., the
stockholders of Advanced Aluminium Group, Ltd., Advanced Aluminium
Group, Ltd. and the Keating Reverse Merger Fund, dated September 22,
2004 (1)
2.2 Financial Advisory Agreement, by and between the Registrant and
Keating Securities, LLC. dated October 28, 2004 (2)
2.3 Voting Agreement, by and among the Registrant, the Keating Reverse
Merger Fund, LLC and the Stockholders of Advanced Aluminium Group,
Ltd., dated October 28, 2004 (2)
2.4 Share Sale and Purchase Agreement Relating to Guilform Holding
Limited, between Keith Malcolm Broome and the Registrant, dated
February 7, 2005 (3)
3.1 Certificate of Incorporation, as amended (4)
3.2 By-laws (5)
4.1 Specimen Stock Certificate*
4.2 Form of Securities Purchase Agreement, , by and between the
Registrant and Laurus Master Fund LTD., dated June 29, 2005 (6)
4.3 Form of Secured Convertible Term Note, dated June 29, 2005 (6)
4.4 Form of Common Stock Purchase Warrant, dated June 29, 2005 (6)
4.5 Form of Option, dated June 29, 2005 (6)
5 Legal Opinion of Loeb & Loeb LLP
14 Code of Ethics (5)
21 Subsidiaries of the Registrant(4)
23.1 Consent of Moore Stephens P.C.*
23.2 Consent of Loeb & Loeb LLP (included in the opinion filed as
Exhibit 5)
24 Power of Attorney (included on signature page to Registration
Statement)*
----------------------
* Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the SEC on September 22, 2004.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the SEC on October 28, 2004.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the SEC on February 11, 2005.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
filed with the SEC on April 15, 2005.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB filed with the SEC on February 14, 1997.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the SEC on July 6, 2005.
UNDERTAKINGS
Undertaking Required by Item 512 of Regulation S-B.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(I) and (a)(1)(ii) of this
section do not apply if the Registration Statement is on Form S-3, Form
S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 hereof or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form SB-2 and has authorized this
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned in the City of Lingfield, Surrey, England, on August 12, 2005.
ADAL GROUP, INC.
By: /s/ Nicholas Shrager
---------------------------
Name: Nicholas Shrager
Title: Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Nicholas Shrager and Stephen Goodacre,
and each of them (with full power of each to act alone), severally, as his or
her true and lawful attorneys-in-fact and agent, with full power of substitution
and resubstitution, for him or her and in his or her name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to
this Registration Statement and any subsequent registration statement filed by
the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as
amended, which relates to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
---------------------------------- ------------------------------------------- ------------------------
/s/ Nicholas Shrager
---------------------------------- Chairman, Chief Executive Officer and August 12, 2005
Nicholas Shrager President
/s/ Stephen B. Goodacre
----------------------------------
Stephen B. Goodacre Chief Financial Officer August 12, 2005
/s/ Charles K. Howe
----------------------------------
Charles K. Howe Executive Vice President and Director August 12, 2005
/s/ Brian Alleman
----------------------------------
Brian Alleman Director August 12, 2005
/s/ John Sanderson
----------------------------------
John Sanderson Director August 12, 2005
----------------------------------
Keith Broome Director August __, 2005