U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number: 1-9431
ADAL GROUP, INC.
(Exact name of small business issuer in its charter)
Delaware 94-3012230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
67 Wall Street
22nd Floor
New York, New York 10005-3111
United States
(Address of principal executive offices)
Registrant's Telephone Number: 212.709.8122
Securities registered under 12(b) of the Exchange Act: None
Securities registered under 12(g) of the Exchange Act:
Common Stock, par value $0.0001
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.
Yes [ ] No [X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The issuer's revenues for the fiscal year ended December 31, 2005 were
$33,519,000.
The aggregate market value of the registrant's common stock held by
non-affiliates as of April 3, 2006 was $1,529,295.
State the number of shares outstanding of each of the issuer's classes of equity
securities, as of the latest practicable date:
Title of Each Class of Equity Securities Number of Shares Outstanding as of April 3, 2006
---------------------------------------- ------------------------------------------------
Common Stock, $0.0001 par value 23,019,665
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Duments Incorporated by Reference: None.
2
TABLE OF CONTENTS
Page
PART I.........................................................................2
Item 1. Description of Business.......................................2
Item 2. Description of Property......................................17
Item 3. Legal Proceedings............................................18
Item 4. Submission of Matters to a Vote of Security Holders..........18
PART II.......................................................................18
Item 5. Market for Common Equity and Related Stockholder Matters.....18
Item 6. Management's Discussion and Analysis.........................20
Item 7. Financial Statements.........................................27
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................28
Item 8A. Controls and Procedures......................................28
Item 8B. Other Information............................................28
PART III......................................................................29
Item 9. Directors, Executive Officers, Promoters And Control
Persons, Compliance With Section 16(A) Of The Exchange Act....29
Item 10. Executive Compensation.......................................32
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................34
Item 12. Certain Relationships and Related Transactions...............35
Item 13. Exhibits.....................................................36
Item 14. Principal Accountant Fees and Services.......................37
i
PART I
Item 1. Description of Business.
The Company's financial position deteriorated further during 2005 and the
first half of 2006. Operating conditions in 2005 were exceptionally difficult
with rapidly rising raw material prices, major mechanical breakdowns and a
declining demand in the marketplace. All operating companies posted losses in
the 2005 financial year, as they did in 2004. The company's SG&A costs continue
to be a burden on the Company. The Company received funding through the Laurus
Fund in 2005, in the form of a convertible note in the amount of $2,000,000, to
support cash flow requirements and to cover operating losses. In May 2006 the
Company was unable to meet interest and principal repayments under a revised
repayment schedule and is currently working with the Laurus Fund to restructure
the terms of the note. Although we have no formal notice from Laurus advising us
that we are in default, Laurus management are working with us to restructure the
terms of the note, although there can be no assurance that we will be able to do
so. As a result of the continued losses creditor pressure has increased. We have
been formally advised by a former supplier that they intend to take legal action
to recover their debt, which could lead to a bankruptcy proceeding. We will try
to negotiate with this creditor and hope to reach agreement with respect to
repayment over an extended timeframe. In addition, several of our current raw
material vendors are refusing to grant us additional credit and are requiring
payment for material in advance, plus repayment of a portion of the unpaid
balances owed. We are working with an Investment Bank and private investors to
provide additional capital, which could involve significant dilution to current
shareholders or the possible sale of assets. While we do not have any formal
agreements, we have signed non-disclosure agreements with four parties with
respect to possible sale of one or more of our operating companies. The
Company's key intellectual property, in particular Ticalium, is showing promise
but is at present a cost center and is not generating any revenue. We expect to
restructure the group in 2006 and expect the group to report losses for the full
year of 2006.
2
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Adal Group, Inc.
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| | | |
---------------- ---------------- ---------------- ----------------
Products &
Manufacturing Architectural Technologies Real Estate
Division Division Division Division
---------------- ---------------- ---------------- ----------------
| | | |
| ---------------- | ---------------- ---------------- ----------------
| Adal | Adal Adal Adal
|- Seco |- Guilform Innovation Estates
| Limited | Limited Limited Limited
| ---------------- | ---------------- ---------------- ----------------
| | |
| ---------------- | ---------------- ----------------
| Adal | Adal Guilform
|- Engineering |- Structures Holdings
| Limited | Limited Limited
| ---------------- | ---------------- ----------------
| |
| ---------------- | ----------------
| Adal | Adal
|- Extra |- Climatix
| Limited | Limited
| ---------------- | ----------------
Historical Development
On July 29, 1986, we were incorporated in Delaware under the name
ESCAgenetics Corporation. ESCAgenetics was organized to develop and
commercialize high-value plant derived products for the agricultural and
pharmaceutical markets. In January 1995, ESCAgenetics became a dormant business,
and, in January 1996, it filed for bankruptcy protection under Chapter 11 of the
U.S. Bankruptcy Code.
On August 22, 2003, pursuant to an Agreement and Plan of Reorganization,
as amended, ESCAgenetics completed a merger of its wholly-owned subsidiary,
Shecom Acquisition Corporation, with and into Shecom Corporation, thereby
acquiring 100% of the capital stock of Shecom. Pursuant to the 2003 Merger,
ESCAgenetics changed its name to Krystal Digital Corporation. On February 29,
2004, the Merger was rescinded because Shecom was unable to produce the audited
financial statements required to be filed with the Securities and Exchange
Commission. In April 2004, Krystal Digital Corporation changed its name to
Sunningdale, Inc.
Also, on April 15, 2004, Sunningdale, Inc. entered a Mutual Termination
Agreement by and between Shecom Acquisition Corporation and Shecom Corporation.
The termination agreement became effective on April 15, 2004, and the merger
agreement among the parties was rescinded. Prior to such agreement's effective
date, the members of the board of directors of Sunningdale appointed Kevin R.
Keating to the board of directors and appointed him as president, secretary, and
treasurer of Sunningdale. Consequently, on the agreement's effective date, Kevin
R. Keating was appointed to our board of directors, and all of the other
officers and directors resigned.
On October 28, 2004, pursuant to a Share Exchange Agreement (the "Exchange
Agreement"), dated September 22, 2004, Sunningdale, Inc. acquired all of the
outstanding shares of Adal Group (UK) Limited, formerly known as Advanced
Aluminium Group Limited.
On November 5, 2004, Sunningdale, Inc. changed its name to Adal Group,
Inc. Currently, our headquarters are located at 67 Wall Street, 22nd Floor, New
York, New York, 10005.
Share Exchange
On October 28, 2004, we consummated the transactions contemplated by a
Share Exchange Agreement (the "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"), now Adal Group (UK) Limited, 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
16,065,000 shares (or 2,295,000 on a pre 1-for-7 forward stock split basis) of
our common stock (the "Share Exchange"). The issuance of shares of our common
stock to AAG's stockholders was exempt from registration under the Securities
Act, pursuant to Section 4(2) thereof. As a result of the transaction, AAG
became our wholly-owned subsidiary. Immediately following the closing of the
share exchange, the AAG stockholders owned 90% of our common stock, and our
pre-transaction stockholders (the "Existing Stockholders") held 10%, of the
issued and outstanding shares of our common stock.
3
Under the Exchange Agreement, the Existing Stockholders had anti-dilution
protection if we issued any securities in any offering within 12 months after
closing of the Share Exchange and had anti-dilution protection if we issued any
securities in connection with the contemplated license and/or acquisition by us
of technology related to electricity-generating roadway ramps following the
closing (collectively, the "Events"). In such cases, we were 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 such that the Existing Stockholders would own, in the aggregate, 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, we issued 875,000 or 125,000
pre 1-for-7 stock split shares of our common stock to the KRM Fund.
In connection with the Exchange Agreement, Kevin R. Keating resigned as
our President, Secretary, Treasurer and sole director. Kevin R. Keating's
resignation as director and officer was not due to any disagreement with us.
Prior to Kevin R. Keating's resignation as a director, he appointed Nicholas A.
Shrager and Charles K. Howe to serve on our board of directors. David W. Beale
was disclosed as one of the initial directors appointed, but that disclosure was
erroneous. Three director positions remained vacant. Two of the three positions
were filled pursuant to a Voting Agreement among AAG, the AAG stockholders and
the KRM Fund (the "Voting Agreement"), and we continued discussions with David
W. Beale as to his appointment to the board of directors to fill the remaining
vacancy. Pursuant to the Voting Agreement, the AAG stockholders agreed to vote
their shares of our common stock to elect a person designated by KRM Fund, who
would be an independent director and a financial expert, qualified and available
to serve on our Audit Committee and Compensation Committee, and otherwise
acceptable to the AAG stockholders (the "KRM Fund Designee"). Under the terms of
the Exchange Agreement, the remaining vacant director position would be filled
by a person selected by the AAG stockholders and who was an independent
director. On January 18, 2005, Messrs. Brian Alleman, David W. Beale, and John
Sanderson were appointed to serve on our board of directors, with Mr. Sanderson
being the KRM Fund Designee, to bring the total number of directors to five.
On October 28, 2004, in connection with the Exchange Agreement, we entered
a Financial Advisory Agreement (the "Financial Advisory Agreement") with Keating
Securities, LLC, under which we compensated Keating Securities for its advisory
services in connection with the Share Exchange. Kevin R. Keating is the father
of the principal member, Tim Keating, of Keating Investments, LLC. Keating
Investments, LLC is the managing member of KRM Fund and Keating Securities is
the registered broker-dealer affiliate of Keating Investments, LLC. Kevin R.
Keating is not affiliated with and has no equity interest in Keating
Investments, LLC, KRM Fund or Keating Securities and disclaims any beneficial
interest in the shares of our common stock owned by KRM Fund. Similarly, Keating
Investments, LLC, KRM Fund and Keating Securities disclaim any beneficial
interest in the shares of our common stock currently owned by Kevin R. Keating.
Under the Financial Advisory Agreement, the advisory services provided by
Keating Securities in connection with the Share Exchange included the
identification and presentation of suitable private company acquisition targets,
corporate, business, and financial due diligence evaluation of the target
company, capital and transaction structuring, development of capital markets
strategy, valuation analysis, company, market and industry research, analysis of
various exchange listing requirements, and transaction negotiation and
execution. We paid a transaction advisory fee equal to $190,000 to Keating
Securities.
The Financial Advisory Agreement also appointed Keating Securities as our
exclusive placement agent for private and public offerings of our securities
until October 28, 2005 and required us to pay Keating Securities 10% of the
gross proceeds of any public or private offering of equity securities, 5% of the
gross proceeds of any public or private offering of debt securities, and 10%
warrant coverage on all shares of our common issuable upon exercise or
conversion of our securities in a public or private offering. As of December 31,
2005, we paid Keating Securities a 6.5% commission equal to $130,000 for
introducing us to Laurus Master Fund, Ltd.
4
Recent Developments
John Sanderson resigned from the board on March 1, 2006. Mr. Sanderson was given
33,333 shares as a termination payment from Adal Group, Inc.
Stock Dividend
On October 12, 2005, the Company declared a 7-for-1 stock split in the
form of a stock dividend. Stockholders on the close of business on October 6,
2005, the dividend record date, received six additional shares of common stock
for each share held. The ex-dividend date was October 14, 2005.
Convertible Loan and Short term Bridge Loan
On December 29, 2005, due to various complications,with the deal structure, Adal
Group Inc. were requested to withdraw Bridge our share registration statement
and to work with Laurus Master Fund to restructure our contacts. The Company has
agreed with Laurus Master Funds in 2006 to withdraw the SB-2 share registration
document and to restructure the loan. Principal repayments are scheduled at
$25,000 in April, May and June with a full review in July 2006 The interest as a
temporary arrangement to be charged on the loan will be 3% greater than the
prime rate quoted on the Wall Street Journal. The Company received funding
through the Laurus Fund in 2005, in the form of a convertible note in the amount
of $2,000,000, to support cash flow requirements and to cover operating losses.
In May 2006 the Company was unable to meet interest and principal repayments
under a revised repayment schedule and is currently working with the Laurus Fund
to restructure the terms of the note. Although we have no formal notice from
Laurus advising us that we are in default, Laurus management are working with us
to restructure the terms of the note, although there can be no assurance that we
will be able to do so.
Prior to the deal restructuring the following arrangements were in place:
The company entered into two agreements with Laurus Master Fund in 2005 and
issued an SB-2 share registration document.
On November 21, 2005, we entered a Securities Purchase Agreement (the "November
Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus"), pursuant to which
we sold a non-convertible Secured Term Note in the aggregate principal amount of
Five Hundred Thousand Dollars ($500,000) to Laurus (the "November Note"). The
principal amount and any and all accrued and unpaid interest payable under the
November Note shall be paid on or before May 21, 2006. This has been superseded
with the agreement described above. We shall pay interest on the principal
amount of the November Note at a rate per annum equal to the "prime rate"
published in The Wall Street Journal, plus three percent, payable monthly in
arrears. Interest accrued but was not payable during the period which commenced
on November 21, 2005 and ended on November 30, 2005. We began paying interest on
the principal amount commencing on December 1, 2005 and shall continue to pay on
the first business day of each consecutive calendar month thereafter.
We also entered a Reaffirmation and Ratification Agreement, dated as of
November 21, 2005, with Laurus (the "Reaffirmation Agreement"), whereby we
ratified and confirmed the terms of the Master Security Agreement, dated as of
June 29, 2005 by and between us and Laurus (as further described in the Form 8-K
filed with the Securities and Exchange Commission on July 6, 2005). Pursuant to
the Reaffirmation Agreement and Master Security Agreement, we assigned and
granted to Laurus a continuing security interest in certain of our, and each of
our subsidiaries' assets, including, without limitation, cash, accounts
receivable, and equipment.
On June 29, 2005, we entered a Securities Purchase Agreement (the "June Purchase
Agreement"), with Laurus, pursuant to which we sold a Secured Convertible Term
Note (the "June Note") in the aggregate principal amount of $1,500,000, which is
convertible into shares of our common stock. Subject to adjustment and
anti-dilution provisions set forth in the June Note, the fixed conversion price
with respect to the first $1,000,000 principal amount of the June Note is $0.43,
and with respect to the remaining principal amount is $0.50. The principal
amount and any and all accrued and unpaid interest payable under the June Note
is due June 29, 2008 (the "Maturity Date"). We paid interest on the principal
amount of the June 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 we will pay such interest 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 in
the June Note.
Also on June 29, 2005, in connection with the financing transaction, we
issued to Laurus (i) a warrant to purchase up to 2,625,000 shares of our common
stock at an exercise price equal to $0.90 for the first 1,312,500 shares
acquired thereunder and an exercise price equal to $0.98 for any additional
shares acquired thereunder, and (ii) an option to purchase up to 1,054,914
shares of our common stock at an exercise price equal to $0.0001 per share.
Laurus exercised this option for 1,051,610 shares on June 30, 2005.
5
To secure the payment obligations arising under, out of or in
connection with the June Purchase Agreement or the other agreements entered in
connection with the financing, we entered a Master Security Agreement pursuant
to which we assigned and granted to Laurus a security interest in all of our
assets. We, among other things, agreed to keep all of the collateral free of
additional liens in excess of $50,000 or as necessary for taxes or government
charges, not to sell any of the collateral without the prior written consent of
Laurus, and keep all collateral insured in Laurus' name.
We agreed to file a Registration Statement on Form SB-2 with the
Securities and Exchange Commission to register the shares underlying the June
Note, warrant, and option within 45 days of the closing of the June Note, and to
have this Registration Statement declared effective within 120 days such
closing. We initially filed this Registration Statement on August 12, 2005. On
November 21, 2005, we agreed with Laurus to extend our obligation such that this
Registration Statement must be declared effective by the Securities and Exchange
Commission by February 14, 2006. If we fail to have this Registration Statement
declared effective by February 14, 2006, we shall pay a penalty to the holder of
the June Note an amount equal to approximately $1,000 per day until this
Registration Statement is declared effective.
Licensing Agreements
Our licensing agreement for the Stonescreen product expired February 7, 2006.
Meetings were held to agree a long term license during the fourth quarter of
2005 and up to and including the end of February 2006. After various meetings
with Adal Group, Inc. board members a final meeting was held on February 28,
2006 with Nick Shrager, our Chairman and CEO, Keith Broome, Non-executive
director and Gary O'Connor. At this meeting Gary O'Connor decided not to renew
the Stonescreen license and terminated his employment contract.
The history of the Stonescreen licensing agreement: In February 2005, we signed
an interim global licensing agreement with Stonescreen, a designer,
manufacturer, and installer of stone building facades. Pursuant to that
agreement, 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. Under the terms of the license, the licensee, Adal
Structures, shall pay a royalty of either 4% of sales in cash or 5% of sales, if
settled, in shares of our common stock to Gary O'Connor, owner of the
Stonescreen system. Before the end of 2005, we expected to enter into a second
license agreement with Mr. O'Connor for our continued use of the exclusive
license to the Stonescreen system. During the fourth quarter of 2005, management
discussed a draft contract with Mr. O'Connor which would have the same royalty
terms as the existing license, including payment of cash and shares of our
common stock as consideration to the licensee and would have been directly
linked to Mr. O'Connor's employment contract as managing director of Adal
Structures and Adal Guilform.
Acquisitions
The Company acquired Guilform Holdings through a leveraged by-out with the
assistance of Keith Broome and Ms Janice Conley in the form of personal
guarantees on three loans, a real estate mortgage, accounts receivable revolver
and machinery and equipment asset finance. These loans have now been refinanced
with all previous lenders liabilities settled and personal guarantees are now
removed.
The history of the acquisition:
On February 7, 2005, we entered a Share Sale and Purchase Agreement (the
"Guilform Agreement") relating to Guilform Holdings Limited, to buy from Keith
Malcolm Broome, the sole shareholder, all of Guilform Holdings Limited's
outstanding shares. In consideration of the sale, we paid $636,000 in cash,
issued a 6% promissory note in the aggregate principal amount of $375,000, and
issued 21,000,000 shares (or 300,000 shares on a pre-split basis) of our common
stock.
6
In connection with the Guilform Agreement, we agreed to pay certain
obligations under commercial loan facilities provided to Guilform Holdings
Limited, which has re-advanced such loan to Guilform Holdings, by State
Securities plc in the aggregate sum of approximately $1,930,000. The interest
rate on this loan is LIBOR plus 4.25%. The initial installment of this loan was
paid by Guilform Holdings Limited on December 15, 2001 and installments are
payable monthly for a period of 180 months. Guilform Holdings Limited repaid the
entire outstanding principal amount plus interest before the end of 2005. This
loan facility includes the standard covenants and obligations and Guilform
Holdings Limited is in full compliance with the loan facility. There is no
prepayment penalty on the loan but rather Guilform Holdings Limited may prepay
the loan at anytime by payment of the outstanding principal amount plus any
interest due and payable and all interest payable on the outstanding principal
amount. Approximately $615,000 of the loan facility was loaned by Guilform
Holdings Limited to us in connection with the consummation of the Guilform
Agreement. Mr. Broome and Ms. Janice Conley, the previous Secretary of Guilform
Holdings Limited, agreed to personally guarantee the obligations of Guilform
Holdings Limited to pay back the loans. Under the Guilform Agreement, we have
released Mr. Broome and Ms. Conley as guarantors on the loan facility.
BUSINESS OPERATIONS
Products and Services
The following describes the products and services that we provide:
MANUFACTORING DIVISION - ADAL SECO, ADAL ENGINEERING AND ADAL EXTRA
Adal Seco - Aluminum Extrusion Design and Production Services
Adal Seco (formerly Seco Aluminium Limited) is a leading UK provider of
customized aluminum extrusions, such as hollow and solid tubing. Extruded
products are strong, lightweight and versatile, and account for approximately
50% of the market for aluminum products, of which the building and transport
industries consume the majority.
Adal Seco provides volume production with rapid turnaround time, and aims to
meet just-in-time delivery schedules. Adal Seco operates its presses on shorter
cycles, compared to its competitors, and therefore responds promptly and
flexibly to its customers' demands. At the same time, Adal Seco offers its
customers the benefit of its team's considerable design expertise and
experience, to help improve the performance and profitability of their products.
Adal Seco can provide its customers with complete "supply-chain management",
handling all stages of their product's production in-house - including design,
fabrication, finishing, assembly, warehousing and delivery. Adal Seco's
capabilities have been developed especially to deliver product precision, speed
of order completion, extensive design knowledge, and a flexible manufacturing
process. Adal Seco can provide rapid turnaround and precision as a result of its
technology and its customization of dies.
Adal Seco manufactures aluminum extrusions from aluminum billets, a raw
material. Extrusions are manufactured by placing an aluminum billet in a sealed
container, and heating the containers to approximately 450-500(0)C
(842-932(0)F). At such temperature it is possible to force the metal to flow
through a uniquely shaped steel die. A length of metal emerges, the cross
sectional shape of which is defined by the shape of the die. As it emerges, the
section is cooled, pulled out along a long 'run-out table', and cut to the
desired length. Heat treatment may then be used to optimize the material's
inherent mechanical properties. In addition to the normal mill condition,
various finishes can be applied to the extrusions for protection and improved
appearance - including 'anodizing' in natural or artificial color, and a full
range of colors in polyester powder coatings and electrophoretic white/bronze
acrylic paint. These extrusions are then either packed and shipped directly to
customers or receive further finishing or fabrication as specified by the
customer. The complete extrusion process produces a strong, lightweight, and
versatile product that can be utilized across multiple industries.
Adal Seco uses computer aided design and manufacture to reduce production time
and the fluctuations in the extrusion and product performance. Adal Seco
regularly keeps onsite approximately 10,000 steel die, 8,000 of which Adal Seco
has customized for the particular customers who own them; the remainder are
standardized die for general use.
Adal Seco uses three extrusion presses: two seven-inch presses that together can
produce roughly 6,500 tons of extrusions annually and one five-inch press that
can produce up to 400 tons of product annually. Adal Seco operates the seven
inch presses an average of 20 hours per day and 5 days per week, under constant
supervision. Adal Seco operates the five inch press 8 hours per day, and five
days per week, also under constant supervision. The extrusion presses currently
operate at a 65% utilization rate, and we hope to improve that rate to 75% with
investment in new technologies that enable more rapid die changes. 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.
7
Outside customers purchase approximately 92% of the extrusions produced by Adal
Seco, and the other 8% is used for Adal's own finished-goods manufacturing by
Adal Engineering. Adal Seco has a customer base of approximately 1,000 customers
across the architectural, construction, automotive, medical, defense,
transportation, and HVAC industries of which, at any one time, approximately 400
are active customers, and 600 are inactive customers. We consider an inactive
customer one that has not purchased anything from us within 18 months to two
years. Adal Seco is currently undertaking a data mining process to investigate
the inactive customers and help to increase the number of active customers.
Adal Engineering - Precision Engineering and Volume Production of Machined
Aluminum Components
Adal Engineering (formerly W.H.J. Fagg and Son Ltd.), incorporated in 1972 and
purchased by the Company in January 2004, uses milling and turning machines to
make customized machined aluminum components out of the aluminum extrusions
produced by Adal Seco.
Adal Engineering uses Computer Numeric Controlled (CNC) machines in its
production facilities. Each milling and turning machine is initially
manually loaded by an operator, and, through a computer program, the CNC
machine controls the movement of the output (the aluminum components).
Adal Engineering has an automation program with the goal of reducing labor
As of December 2005, Adal Engineering has the majority of its machines
semi-automated machines and in the fourth quarter of 2005 has successfully
fully automated one machine. The automation program will continue to
increase the volume and flexibility of production.
Adal Engineering predominantly manufactures motor vehicle tube connector parts
for sale to two major original equipment manufacturers ("OEMs"), Calsonic Kansei
and Denso Manufacturing UK Ltd., which account for 11% of Adal's consolidated
revenues. Adal Engineering's products can be found in noted motor vehicle brands
such as Land Rover, Renault, Ford, Audi, Volkswagen, and Toyota. Adal
Engineering provides its components directly to the OEMs' production lines on a
just-in-time basis (for which it receives no premium). Under its supply
agreement with Calsonic Kansei, Adal Engineering provides 100% of Calsonic's
requirements for the parts Adal Engineering manufactures. Denso buys automotive
parts from Adal Engineering by purchase order under a general purchase agreement
that renews automatically each year and obligates Adal Engineering to provide
replacement services for ten years after a part is sold.
Adal Engineering's building products consist primarily of aluminum window bars,
hardware, and handles. Some of our machine products include precision engineered
components that are attached to electric motors and hydraulic and pneumatic
motors of automobiles.
Adal Engineering also manufactures gun cleaning kits for the United Kingdom's
Ministry of Defense, which are used by the country's frontline soldiers for
their standard issue SA-80 rifles. Adal Engineering manufactures complete kits
and produces replacement parts for all of the kits.
Adal Seco and Adal Engineering have complementary roles. Nearly every piece of
extruded aluminum produced by Adal Seco requires some degree of secondary
machining, which Adal Engineering provides. Specifically, the extrusions
produced by Adal Seco are raw material for the components produced by Adal
Engineering. Thus, Adal Engineering complements Adal Seco's overall business
model to offer customers value-added production by cutting, drilling, milling,
and turning all extruded aluminum components.
Adal Extra - Value-Added Finishing Services
Adal Extra specializes in modifying extrusions by drilling, punching, cutting,
machining and welding. Adal Extra can also provide the finish coating to your
extrusion by either having polyester powder or anodized finish. Adal Extra
provides complete product manufacturing, assembly, warehousing, and delivery of
parts.
Our management plans that Adal Extra will become a supplier of a full assortment
of off-the-shelf and customer specific products, a carrier of standard
components, and a parts distribution company through catalog marketing.
8
One of Adal Extra's current projects is the production of Privacy Screens for
shared prison cells. Under current European Union law, dividers must be provided
in each prison cell to separate the toilet and bathroom area from the remainder
of the cell. The government engaged Adal Extra to produce these dividers for
each prison cell. Adal Extra uses aluminum extrusions produced by Adal Seco and
adds value by designing, forming, and painting each extrusion to produce the
finished product. Adal Extra's work accounts for the additional 80% of the value
of the finished product.
Other Adal Extra customers are in the lighting, display and shelving products
industries, as well as manufacture and assembly of running boards for 4x4
vehicles. Adal Extra aims to build its stock of standard extrusions that are
used in the automotive and construction industries, and increase sales and
marketing of its products. Adal Seco produces 95% of the aluminum extrusions
maintained in inventory by Adal Extra.
In 2006, Adal Extra and Adal Innovation aim to develop and market a range of
smoking shelters and smoking accessories in preparation for the smoking ban in
the UK in 2007.
ARCHITECTURAL DIVISION - ADAL GUILFORM, ADAL STRUCTURES AND ADAL CLIMATIX
Adal Guilform
In February 2005, we purchased all of the outstanding shares of Guilform
Holdings Limited and its wholly-owned subsidiary, Adal Guilform, a UK-based
fabricator of aluminum building facades. Guilform Holdings Limited was
incorporated in 1976. We believe that since its incorporation the Guilform brand
has built an excellent reputation for designing and fabricating unique,
reliable, and highly efficient metal panels and cladding for the construction
industry.
Adal Guilform produces specialist metal cladding panels, and provides a range of
sheet metal fabrication services. Adal Guilform has an informal agreement with
Schucco, a major curtain wall supplier (glass facades), to manufacture
components for Schucco systems. The factory features specialist machinery
including a 24 foot CNC metal guillotine and 24 foot CNC brake press, among the
largest in Europe.
Adal Structures
Until February 2006, Adal Structures held a twelve-month exclusive license to
market and sell the "Stonescreen" cladding system, which was Adal Structures'
first product. Stonescreen is a trademarked system that allows stone to be fixed
to building facades by using an aluminum framework. The license lapsed in
February 2006.
Adal Climatix - Architecturally Designed HVAC Systems
Adal Climatix specializes in the design and manufacturing of
'architectural' radiant heating skirting (base boards) and ceiling panels.
Climatix has a patent in the United Kingdom for its turnkey
aluminum-based, radiant heating gas-fired ceiling panel that we believe
are unique, reliable, and more efficient than other systems sold for
commercial and residential heating. We have an exclusive marketing
arrangement for our radiant ceiling panel "modular panels" marketed by
Frenger Systems.
Our base boards can operate using electricity or gas fired hot water.
Adal Seco supplies 80% of the aluminum extrusions that Climatix uses in
the production of the base board heating systems and 50% of the aluminum
extrusions that Climatix uses in the production of the ceiling heating
systems.
PRODUCTS AND TECHNOLOGIES DIVISION - ADAL INNOVATION
Adal Innovation
We established Adal Innovation in 2005 for the purpose of receiving profits from
intellectual property held by us. One of the products that we expect Adal
Innovation to receive profits from is Ticalium(TM).
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Ticalium combines aluminum with titanium and carbon to produce a super-hard
extrusion that is designed to increase the strength, hardness, and above all the
wear resistance of aluminum. Ticalium is up to three times lighter than - and
has comparable strength and wear-resistance to - cast iron and carbon steel. We
expect Ticalium to be more cost-effective than other metal matrix composites as
a result of its microstructural characteristics and mechanical properties,
enabling an easier production process.
Ticalium has been identified as having potential uses in many different areas
such as the automotive industry, train wheels, tire studs, and snowmobiles. In
particular, we believe Ticalium can be used to produce automobile brake discs
and drums with comparative wear resistance but far lighter weight than standard
cast iron brake discs and drums. We also believe Ticalium can be used to improve
stiffness and reduce flexibility of brake calipers. For train wheels, we believe
Ticalium can result in weight savings, reduced energy consumption and faster
acceleration and braking and thereby increase train speed and reduce traveling
time. Winter-long tests in Helsinki, Finland, with Ticalium tire stud jackets
have shown comparable wear to standard steel studs, but with much reduced
weight. Tests with snowmobile steering components have shown that Ticalium can
reduce weight as well as increase resistance and stiffness.
In the spring of 2006, we received delivery of our first trial production batch
of Ticalium billets, in 5WT%, 7WT% and 10WT% reinforcement levels. Performance
in extrusion and strength property tests has so far exceeded expectations, and
we have been approached by a number of prestigious companies in a variety of
industries, to many of whom we have issued material in return for the sharing of
test result data. Once we have completed our trial production tests, we aim to
begin marketing Ticalium to customers in a wide range of industries. We expect a
slow initial response to our marketing efforts of Ticalium because of the
extended length of time customers will likely use to evaluate the product.
In 2005, we filed a United Kingdom patent for the sole rights to use Ticalium,
to which we were entitled as the lead member of the development project.
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.
Each of our top ten customers accounts for less than 10% of our revenues.
Calsonic and Denso, two large automotive customers, account for 11% of our
revenues, in total. All of our customers require customized production, and,
thus, our companies produce little to no standardized products.
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 to focus on the
cross-selling of products and services among subsidiaries. We have a marketing
plan that will encourage the businesses to focus on value-added products (i.e.,
extrusions modified by drilling, cutting, machining, and welding). We plan to
win our competitors' customers by emphasizing our short lead time, delivery
capabilities, and reputation for high quality production. Currently, our sales
are predominantly to customers in the United Kingdom, with less than 5% of our
sales being sold overseas, in the year ended December 31, 2005 the exports were:
Spain - $990,000
Ireland - $259,00
Holland - $58,000
Denmark - $30,000
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Germany - $15,000
Belgium - $14,000
Slovakia - $11,000
France - $3,000
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 must provide high quality products with
rapid turnaround time for production to compete effectively in our marketplace.
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 markups over
the base aluminum prices, with the amount of the markups determined primarily by
the type of extrusion. For example, markups are generally higher for products
that are relatively more difficult or time consuming to extrude, such as hollow
shapes or thin-wall items. In general, we also capture higher premiums on
products that we produce and deliver on a faster schedule than our competitors.
We deliver the majority of products ourselves, instead of outsourcing delivery
to a common carrier enabling us to deliver our products in a more timely manner
with less damage. While we lease the vehicles that we use for delivery, we
manage delivery schedules and timing and packing processes through our own
staff. Each of the leased vehicles carries our logo when used for our
deliveries. We sometimes use contract carriers and common carriers for certain
long hauls and partial loads where no back haul is available, thereby reducing
the number of leased tractors and vehicles necessary, and reducing operating
costs without materially affecting delivery capabilities.
Adal Climatix has several concepts 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. For instance, Climatix is developing a technology to custom fit
copper tubing into the aluminum heating system to permit an easy connection to
both residential and commercial heating systems.
Raw Materials
Adal Seco's major raw materials are aluminum billets, which we purchase in the
open market. Adal Engineering's and Adal Extra's major raw material is aluminum
extrusions, which are predominantly produced by Adal Seco. Our Architectural
Division buys sheet aluminum, as its primary raw materials, from external
suppliers.
The steep increase in the cost of raw material on the London Metal Exchange in
the second half of 2005 and the first quarter of 2006 resulted in little
opportunity or desire for forward buying. Although some forward contracts have
been entered into, it is likely that extruders will only enter short term
contracts in 2006. We re-negotiate the purchase orders annually, and billets are
priced at a set rate at the time of renegotiation. We do not use a formal
hedging strategy, but rather rely upon our forward purchasing, up to 18 months
ahead of time, to limit our exposure to extreme price fluctuations.
Additionally, management has partially offset the negative impact of aluminum
price volatility by increasing selling prices and will attempt to continue to do
so in the future.
Principal Suppliers
We purchase our raw materials from the world's principal smelters such as 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.
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Licensing Agreement
In February 2005, we signed an interim global licensing agreement with
Stonescreen, a designer, manufacturer, and installer of stone building facades.
Pursuant to that agreement, 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. Under the terms of the
license, the licensee, Adal Structures, shall pay a royalty of either 4% of
sales in cash or 5% of sales, if settled, in shares of our common stock to Gary
O'Connor, owner of the Stonescreen system. Before the end of 2005, we expected
to enter into a second license agreement with Mr. O'Connor for our continued use
of the exclusive license to the Stonescreen system. During the fourth quarter of
2005, management discussed a draft contract with Mr. O'Connor which would have
had the same royalty terms as the existing license, including payment of cash
and shares of our common stock as consideration to the licensee and would have
had a term directly related to Mr. O'Connor's position as managing director of
Adal Structures and Adal Guilform. However, in February 2006, Mr. O'Connor
decided not to renew the contract with Stonescreen and Mr. O'Connor left our
company.
Competition
The UK extrusion market is dominated by three major extruders, Alcoa, Hydro, and
SAPA, which collectively account for 75% of the market. Adal Seco is the fifth
largest supplier. UK extruders provided the market with nearly 130,000 tons of
aluminum in 2005. Adal Seco, produced approximately 5,600 tons of product, or
4.3%, of the total estimated UK market production. UK domestic production was
down approximately 13.33% and with consumption flat year on year this represents
a significant increase in imports. Adal Seco rarely competes with the three
market leaders or overseas extruders, which generally focus on high-volume,
low-priced extrusions. Adal Seco does win work to top up supply to customers who
import to help them to manage long lead times. Adal Seco differentiates itself
by providing very flexible, high quality, short order lead time services. Adal
Seco's presses are more suited for short-run production than the competitors'
presses as operators can more easily change and replace the die on each of Adal
Seco's presses to maximize output. Adal Seco's customers expect rapid and high
volume production, which is mostly unmatched by its competitors who have slower
production processes. We believe that ample opportunities exist for us to
increase our sales and reach maximum capacity in the next few years. Although
price is a competitive factor, we believe a greater emphasis is placed on
service and quality and Adal Seco is well placed to explore further
opportunities within its niche.
Adal Engineering has focused its core business on automotive tube connector
parts. This market place is largely untapped as the barriers to entry are very
high. 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). Adal Engineering has achieved the quality standards ISO
9001:2000 and TS16949:2002. Adal Engineering has also had to demonstrate that it
is working towards zero defects within the production process. Milling machines
and turning machines are relatively expensive and require skilled operators to
supervise production. Adal Engineering has overcome this barrier to entry as it
already owns and operates these machines.
Component qualification requirements coupled with the life cycles of a vehicle
model (six plus years) assure to some degree that a long-term customer
relationship will be maintained. We expect that the use of Adal Engineering's
parts in cars (in a wide range of noted brands) will continue to the move toward
standardization of automobile air conditioner processes and thereby increase
market demand for such parts. Adal Engineering hopes to increase the number of
customers that rely upon its components. Even though competition in this market
sector is limited, customers demand prices that keep our margins on these
products low. We intend to maintain our quality and delivery standards for our
main automotive customers while diversifying Adal Engineering's product mix.
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.
Other than regulations associated with our disposal of waste, there are no
government regulations that specifically affect the aluminum extrusion business
nor do we have to obtain any government approval for the production and
distribution of our products.
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Employees
As of December 31, 2005, we employed 262 employees, including, 152 full-time
employees at Adal Seco and Adal Climatix (132 manufacturing staff and 20 office
and management staff), 66 employees at Adal Engineering (56 production staff,
including 20 temporary staff members and 10 office and management employees), 39
employees at Adal Guilform and 5 employees at our headquarters.
Research and Development
At Adal Engineering, we invested in machine automation and new product
development. Our research and development costs for the machine automation were
$100,000. For the development of Ticalium, we primarily relied on grants from
the European Union, which we also shared among our strategic partners.
Our current research and development efforts are focused on bringing Ticalium to
market. We have now cast billet slabs in a commercial casting house and have had
several customers testing the product with our in-house metallurgist, Dr. Cem
Selcuk, hired in June 2005.
Risk Factors
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 Profitability and Survival
Our 2005 financial statements include a going concern qualification, meaning
that our ability to continue in business is in question. Our independent
auditors have added an explanatory paragraph to their audit opinion on our
financial statements for the year ended December 31, 2005 citing Note 1 of the
Notes to Consolidated Financial Statements, which, states that the financial
statements raise substantial doubt as to our ability to continue as a going
concern. Our ability to make operations profitable or obtain additional
financing will determine our ability to continue as a going concern.
The Company's financial position deteriorated further during 2005 and the first
half of 2006. Operating conditions in 2005 were exceptionally difficult with
rapidly rising raw material prices, major mechanical breakdowns and a declining
demand in the marketplace. All operating companies posted losses in the 2005
financial year, as they did in 2004. The company's SG&A costs continue to be a
burden on the Company. The Company received funding through the Laurus Fund in
2005, in the form of a convertible note in the amount of $2,000,000, to support
cash flow requirements and to cover operating losses. In May 2006 the Company
was unable to meet interest and principal repayments under a revised repayment
schedule and is currently working with the Laurus Fund to restructure the terms
of the note. Although we have no formal notice from Laurus advising us that we
are in default, Laurus management are working with us to restructure the terms
of the note, although there can be no assurance that we will be able to do so.
As a result of the continued losses creditor pressure has increased. We have
been formally advised by a former supplier that they intend to take legal action
to recover their debt, which could lead to a bankruptcy proceeding. We will try
to negotiate with this creditor and hope to reach agreement with respect to
repayment over an extended timeframe. In addition, several of our current raw
material vendors are refusing to grant us additional credit and are requiring
payment for material in advance, plus repayment of a portion of the unpaid
balances owed. We are working with an Investment Bank and private investors to
provide additional capital, which could involve significant dilution to current
shareholders or the possible sale of assets. While we do not have any formal
agreements, we have signed non-disclosure agreements with four parties with
respect to possible sale of one or more of our operating companies. The
Company's key intellectual property, in particular Ticalium, is showing promise
but is at present a cost center and is not generating any revenue. We expect to
restructure the group in 2006 and expect the group to report losses for the full
year of 2006.
We have a history of losses and we anticipate future losses. We make no
assurances that we will be able to achieve profitability. Our ability to operate
profitably depends on increasing our sales, expanding our markets and achieving
sufficient gross profit margins is a very difficult challenge given the
volatility of the commodity market, particularly from July 2005 to May 2006.. We
can not assure you that we will achieve profitable operations in the future.
We do not generate enough cash to sustain our operations. Although our
revenue is sufficient for operations during our busy seasons, we do not generate
enough cash to sustain the business during December through March and rely on
non-bank financing for cash for that period. However, such financing may not be
available when we need it or, if available, it may not be on favorable terms.
There can be no assurance that our current cash will be sufficient to sustain
our business in the future.
We may be deprived of cash, if we default on our accounts receivable
revolving facility. We finance our business through an accounts receivable
revolver facility, pursuant to which all our accounts receivable are deposited
into a "lockbox" account controlled by our lender. The lender transfers the
receipts from the account into our checking account daily, but the lender is
entitled to not transfer the funds if we are in default of the loan facility. In
periods in which there is a dispute regarding our compliance with the loan
agreement, or in other circumstances, the lender could block transfer of
accounts receivable receipts into our checking account, leaving us with no cash.
In such a case, the failure of our business would become highly likely.
All of our assets are subject to security interests. We have granted to
Laurus Master Fund, Ltd. a security interest in all our assets not otherwise
subject to liens. As a result, we may be unable to procure debt financing on the
most favorable terms, and, upon a default in our obligations to Laurus, Laurus
might be able to seize some or all of our assets subject to its lien, which
could disrupt our operations.
13
Additional financing could result in dilution to our existing stockholders
or restrictions on our financial discretion. We must raise additional funds
through public or private financings. To the extent that we raise additional
capital by issuing equity securities, the issuance of these securities could
dilute our existing stockholders. Any debt financing we enter into may involve
covenants that restrict our operations. These restrictive covenants may include
limitations on additional borrowing, specific restrictions on our use of assets,
as well as, prohibitions on our ability to create liens, pay dividends, redeem
our common stock, or make investments.
We have a limited operating history and are subject to the risks of a new
enterprise any one of which could limit growth and product and market
development. Our underlying operating subsidiaries had been operating
independently for between 30 and 40 years, but, our short operating history may
be insufficient for you to evaluate our prospects. As we expand our business, we
may increase our borrowings and, as a result, we may increase our interest
expenses. 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, maintain
and expand our relationship with customers, 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;
o implement and improve our operational and financial systems; and
o manage and train our growing employee base.
If we are not successful in addressing any or all of these risks, our business
may be unable to properly grow and expand, we may be unable to retain existing
customers and acquire new customers, and we may therefore fail to realize
anticipated revenue growth and suffer significant operating losses.
Risks Related to our Business and Strategy
Our gross profits will suffer, if we are unable to offset rising raw
material prices with higher product sales prices. Rising costs of raw materials
are adversely impacting our margins. Our principal raw material is aluminum
billets, which are generally available from a variety of suppliers. 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
insofar as we are unable to adjust our product selling prices as readily.
Recently, commodity prices for aluminum have risen faster than our short-term
ability to recoup increases in these costs from our customers, and such
circumstances might occur again, impairing our gross profit and net income. We
try to mitigate this risk through our purchasing policies and committing a
portion of our forward requirements ahead of time. This strategy could introduce
further risk, however, if the price of aluminum decreases. 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 energy costs;
o international economic trends;
14
o currency exchange rate fluctuations;
o expectations of inflation;
o actions of commodity market participants; and
o consumption and demand patterns and political events in major
producing countries.
We will lose sales if we cannot continue to differentiate our products and
services from our competitors. We operate in a marketplace that is becoming more
global, and the threat of lower cost imports of extruded aluminum products is
increasing. If we are not able to differentiate ourselves in ways other than by
reducing prices, such as through technical expertise, short delivery lead time,
and high quality, we may lose sales.
We may be unable to obtain the additional capital required to grow our
business. We may have to curtail our business if we cannot find adequate
funding. Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new products; or
o the expansion of our operations, including the recruitment of
additional personnel.
We cannot be certain that we will be able to raise additional capital in the
future on terms acceptable to us or at all. If alternative sources of financing
are insufficient or unavailable, we may be required to modify our growth and
operating plans in accordance with the extent of available financing.
Fluctuating demand for our products may prevent us from maintaining
sufficient sales. Fluctuating customer demand for our products may result from a
variety of factors, including an overall decline in the profitability of our
customers' businesses, seasonal and weather changes, and increased competition
from imports. If customer demand for our products declines or is inconsistent,
our revenues could be adversely affected.
We manufacture most of our products on two machines, either of which, if
idle for an extended period, would substantially impair our business. Adal Seco
uses two main presses to produce the extrusions. If either of these presses
break-down, Adal Seco will be unable to meet its delivery commitments on time.
Because just-in-time delivery is a crucial basis upon which we operate, we will
likely lose customers for whom very short lead time deliveries is important. If
we make additional use of one press when the other is down, we risk damaging the
one in use.
Power failures could seriously impair our business. The heating of
aluminum billets as part of the extrusion process requires a large and
continuous supply of electricity. The ovens that we use to age the aluminum 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 damage or destroy our equipment and facilities.
We encountered shortages of electric power in 2004 and were able to employ a
generator to help offset our potential losses. We may be unable to offset such
potential losses in the future if we encounter future shortages of electricity.
An inability to respond quickly and effectively to new technological
developments could reduce demand for our products and adversely impact our
competitive position. Our customers rely upon our ability to deliver a high
volume of extrusions rapidly, and we require the most efficient machinery and
processes to meet this demand. Many of our machines require constant
supervisions by our employees. However, we continuously seek to automate the
processes to eliminate the need for supervision and the risk of human error. Our
failure to maintain our current quality and reputation through lack of
investment in new products, new machinery, and new processes or failure to
respond to other technological changes could adversely affect our ability to
retain existing customers and secure new customers.
15
Our business is seasonal, so our revenues vary from quarter to quarter.
Our core business experiences significantly reduced sales between each December
and through the following March. Although, historically, the slow-down reflected
seasonal demand for our principal products, more recently, our customers have
lengthened their year-end holiday vacations, further reducing our sales during
this time of year. To mitigate this seasonality, we intend to further diversify
our product lines, but we can give no assurance that we will be successful.
We rely on third parties for technology and backup systems and cannot
assure the security and integrity of our data and information systems to the
extent we might if we had our own equipment. 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. Some of our website
hosting and backup systems are to be managed by third parties offsite on outside
servers. We may not be able to control access and security to these servers as
we would if they were onsite. 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.
Our business involves exchange-rate risk. Our operations are currently
based in the United Kingdom. Our sales are paid predominately in pounds sterling
(over 95%), but aluminum billets trade on the London Metal Exchange (LME), in
U.S. dollars. Our U.S. Dollar expenses currently represent 35% to 40% of our
total expenses. The industry does pass aluminum billet and exchange rate
increases onto its customers, but, with a very competitive market, we often have
to bear the additional costs longer than we would like.
Our executive management has no previous experience in the aluminum
industry. Although our executive management has experience in business
consulting, acquisitions, and public accounting, none has had any experience
operating an aluminum extrusion business or any recent experience managing a
manufacturing business. Adal's businesses might not operate optimally, if
managing an aluminum extruding business at the executive level requires
significant experience in addition to that of our executive management.
We plan to grow, in part, by acquisition, a risky strategy. Our growth
strategy, in part, is to acquire businesses and assets 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 believe that such acquisitions could support our position
as a leading extrusion producer by combining our current products and expertise
with more advanced aluminum production. However, we may not achieve the
anticipated benefits of future acquisitions. We may be unable to successfully
identify or acquire such companies on favorable terms. 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.
Risks Specific to our Securities
Because our stock is listed on the OTC Bulletin Board, our stock price may
be volatile. There has only been a limited public market for our securities, and
there can be no assurance that an active trading market will be maintained. The
OTC Bulletin Board is a relatively unorganized, inter-dealer, over-the-counter
market that provides significantly less liquidity than NASDAQ and the national
securities exchanges. The trading price of our common stock is expected to
fluctuate significantly, and, as is the case for OTC Bulletin Board securities
generally, is not published in newspapers.
Limitations of the OTC Bulletin Board can hinder completion of trades.
Trades and quotations on the OTC Bulletin Board involve a manual process that
may delay order processing. Price fluctuations during a delay can result in the
failure of a limit order to execute or cause execution of a market order at a
price significantly different from the price prevailing when an order was
entered. Consequently, one may be unable to trade in our common stock at optimum
prices.
16
Penny stock regulations may restrict the market for our common stock. The
Securities and Exchange Commission has adopted regulations that generally define
a "penny stock" to be any equity security having a market price (as defined)
less than $5.00 per share, or an exercise price of less than $5.00 per share,
subject to certain exceptions. As a result, broker-dealers selling our common
stock are subject to additional sales practices when they sell such securities
to persons other than established clients and "accredited investors." For
transactions covered by these rules, before the transaction is executed, the
broker-dealer must make a special customer suitability determination, receive
the purchaser's written consent to the transaction, and deliver a risk
disclosure document relating to the penny stock market. The broker-dealer must
also disclose the commission payable to both the broker-dealer and the
registered representative taking the order; current quotations for the
securities; and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict trading in our common stock.
Securities listed on the OTC Bulletin Board are vulnerable to market
fraud, and, since our common stock is listed on the OTC Bulletin Board, it is
vulnerable to such market fraud. Securities listed on the OTC Bulletin Board are
frequent targets of fraud or market manipulation, both because of their low
prices and the OTC Bulletin Board reporting requirements which are less
stringent than those of national securities exchanges or NASDAQ. Such patterns
of fraud and abuse may include:
o control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
o manipulation of prices through pre-arranged matching of purchases
and sales and false and misleading press releases;
o "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
o excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
o dumping of securities after prices have been manipulated to a high
level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market and aware of the possibility of such fraud and abuse
affecting our common stock.
Increased dealer compensation could adversely affect our stock price. On
the OTC Bulletin Board, dealers' spreads (the difference between the bid and ask
prices) may be large, causing higher purchase prices and less sale proceeds for
purchasers of sellers of our securities.
Potential Impact on our Business from Risks Related to our Securities
The risks outlined above could result in our operations being curtailed if
we are unable to react quickly enough to mitigate the impact of the particular
risk. Management believes the risks could cause us operational difficulties but
may not result in total business failure.
Item 2. 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. 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. The current amount outstanding on our mortgage
for this site is $4,264,000, payable at a rate of 6.435%. The site
was valued at $5,897,000 as of December 31, 2005.
17
o We own a 25,000 square foot facility in St. Albans, Hertfordshire,
UK. Adal Guilform uses this space for manufacturing facilities and
office space. The current amount outstanding on our mortgage for
this site is $1,667,000, payable at a rate of 6.435%. The site was
valued at $2,223,000 as of December 31, 2005.
Item 3. Legal Proceedings.
We are not subject to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of 2005.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock is listed on the OTC Bulletin Board under the symbol
"ADGR". The following table sets forth the range of high and low bid prices
reported by the OTC Bulletin Board in each quarter from January 1, 2004 through
to December 31, 2005, and the subsequent interim period. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. Information for dates before October 28,
2004, relate to the price of our common stock prior to the Share Exchange.
--------------------------------------------------------------------
High Low
--------------------------------------------------------------------
Fiscal 2004
--------------------------------------------------------------------
Quarter Ended March 31, 2004 $0.75 $0.36
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Quarter Ended June 30, 2004 $0.46 $0.21
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Quarter Ended September 30, 2004 $0.46 $0.14
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October 1, 2004 - October 27, 2004 $0.14 $0.14
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October 28, 2004 - December 31, 2004 $0.71 $0.14
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Fiscal 2005
--------------------------------------------------------------------
Quarter Ended March 31, 2005 $0.73 $0.71
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Quarter Ended June 30, 2005 $0.85 $0.57
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Quarter Ended September 30, 2005 $0.75 $0.64
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Quarter Ended December 31, 2005 $0.79 $0.20
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Fiscal 2006
--------------------------------------------------------------------
Quarter Ended March 31, 2006 $0.40 $0.23
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As of March 31, 2006, there were approximately 490 record holders of the
common stock. This number does not reflect shareholders who beneficially own
common stock held in nominee or "street name". On October 13, 2005, we paid a
6-for-1 stock dividend in the form of a reverse stock split to the holders of
record as of October 6, 2005.
Recent Sales of Unregistered Securities
On February 11, 2005, the Company issued 35,000 shares of common stock to
each of Brian Alleman and John Sanderson, each a director of the Company. The
issuance to these directors was made in reliance on an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Appropriate restrictive legends are affixed to the stock
certificates issued in such transactions. No commission was paid in connection
with the issuance.
On February 14, 2005, the Company issued 7 shares of common stock to Doug
Marlette as consideration to the resolution of an ongoing dispute with the
Company and Mr. Marlette. The issuance to this employee was made in reliance on
an exemption from registration under Section 4(2) of the Securities Act.
Appropriate restrictive legends are affixed to the stock certificates issued in
such transactions. No commission was paid in connection with the issuance.
18
On April 1, 2005, the Company issued 3,500 shares of common stock to each
of Brian Alleman, John Sanderson and Keith Broome, each a director of the
Company. The issuance to these employees was made in reliance on an exemption
from registration under Section 4(2) of the Securities Act. Appropriate
restrictive legends are affixed to the stock certificates issued in such
transactions. No broker commissions were paid on this issuance.
On April 8, 2005, the Company issued 875,000 shares of common stock to
Keating Reverse Merger Fund, LLC (the "KRM Fund") and Garish Financial Inc. in
consideration for the KRM Fund's agreement to terminate the anti-dilution
provisions of the Exchange Agreement, dated September 22, 2004, by and among the
Company, KRM Fund and each signatory thereto. The issuance of these shares of
common stock was made in reliance on an exemption from registration under
Section 4(2) of the Securities Act. As such, the shares of common stock issued
to the KRM Fund will be restricted shares, and the holder thereof may not sell,
transfer or otherwise dispose of such shares without registration under the
Securities Act or an exemption there from. Appropriate restrictive legends are
affixed to the stock certificates issued in such transactions.
On April 22, 2005, the Company issued 12,656 shares of common stock to
Paul Michael Geary and 5,068 shares of common stock to Steve Pearce as employee
bonuses. These issuances were made in reliance on the exemption from the
registration under Section 4(2) of the Securities Act. No broker commissions
were paid on these issuances.
On April 22, 2005, the Company issued 35,000 shares of common stock to
Your Money Television LLC ("Your Money") in consideration for Your Money's
services for raising investor awareness and attracting new investors. The
Company believes that the issuance and sale of the restricted shares is exempt
from registration pursuant to Section 4(2) of the Act as a privately negotiated,
isolated, non-recurring transaction not involving any public solicitation. The
recipient represented its intention to acquire the restricted shares of common
stock for investment only and not with a view to the distribution thereof.
Appropriate restrictive legends are affixed to the stock certificates issued in
such transactions.
On May 3, 2005, the Company issued 140,000 shares of common stock to UTEK
Corporation ("UTEK"), the Company's investment banker and a strategic partner of
the company in consideration for UTEK's services rendered to the Company. The
Company believes that the issuance and sale of the restricted shares is exempt
from registration pursuant to Section 4(2) of the Act as a privately negotiated,
isolated, non-recurring transaction not involving any public solicitation. The
recipients represented its intention to acquire the restricted shares of common
stock for investment only and not with a view to the distribution thereof.
Appropriate restrictive legends are affixed to the stock certificates issued in
such transactions.
On June 1, 2005, the Company issued 700,000 shares of common stock, as
compensation, to the Chief Financial Officer, Stephen Goodacre. The issuance to
Mr. Goodacre was made in reliance on an exemption from registration under
Section 4(2) of the Securities Act. Appropriate restrictive legends are affixed
to the stock certificates issued in such transactions. No broker commissions
were paid on this issuance.
On March 15, 2006 the Company issued 44,500 shares of common stock to Paul
Michael Geary as an employee bonus. This issuance was made in reliance on the
exemption from the registration under Section 4(2) of the Securities Act. No
broker commissions were paid on these issuances.
Pending Issuances of Unregistered Securities
On May 4, 2006 each independent director, including Brian Alleman, Keith
Broome and John Sanderson received 20,000 shares of our common stock pursuant to
each such director's quarterly share issuances payable on October 1, 2005 and
January 1, 2005, collectively. These shares are issuable to each such
independent director in reliance on an exemption from registration under Section
4(2) of the Securities Act. Appropriate restrictive legends will be affixed to
each stock certificate issued in such transactions. No broker commissions will
be or have been paid on these issuances. Mr Sanderson also received a further
33,333 shares on May 4, 2006 that the company issued after Mr Sanderson
resigned.
We will also issue 177,525 shares of our common stock to our investor
relations firm and 19,725 shares of common stock to a certain employee of such
firm, as part of our agreement with our investor relations firm. These shares
are issuable in reliance on an exemption from registration under Section 4(2) of
the Securities Act. Appropriate restrictive legends will be affixed to each
stock certificate issued in such transactions. No broker commissions will be or
have been paid on these issuances.
19
We have entered into an agreement with a US firm of Investor Bankers. As
part of the deal shares will be issued as follows:
(1) 142,857 shares (which represents $40,000 divided by $1.18 per share)
restricted redeemable common stock. The redeemable common stock shall be
redeemable by the Investor Bankers for $70,000 and shall be redeemed at the
closing of the first financing by the Company proceeding the signing of this
agreement;
(2) 142,857 (which represents $40,000 divided by $1.18 per share) shares
of restricted common stock with piggy-back registration rights
Item 6. Management's Discussion and Analysis.
THIS ANNUAL REPORT ON FORM 10-KSB 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
The Company's financial position deteriorated further during 2005 and the first
half of 2006. Operating conditions in 2005 were exceptionally difficult with
rapidly rising raw material prices, major mechanical breakdowns and a declining
demand in the marketplace. All operating companies posted losses in the 2005
financial year, as they did in 2004. The company's SG&A costs continue to be a
burden on the Company. The Company received funding through the Laurus Fund in
2005, in the form of a convertible note in the amount of $2,000,000, to support
cash flow requirements and to cover operating losses. In May 2006 the Company
was unable to meet interest and principal repayments under a revised repayment
schedule and is currently working with the Laurus Fund to restructure the terms
of the note. Although we have no formal notice from Laurus advising us that we
are in default, Laurus management are working with us to restructure the terms
of the note, although there can be no assurance that we will be able to do so.
As a result of the continued losses creditor pressure has increased. We have
been formally advised by a former supplier that they intend to take legal action
to recover their debt, which could lead to a bankruptcy proceeding. We will try
to negotiate with this creditor and hope to reach agreement with respect to
repayment over an extended timeframe. In addition, several of our current raw
material vendors are refusing to grant us additional credit and are requiring
payment for material in advance, plus repayment of a portion of the unpaid
balances owed. We are working with an Investment Bank and private investors to
provide additional capital, which could involve significant dilution to current
shareholders or the possible sale of assets. While we do not have any formal
agreements, we have signed non-disclosure agreements with four parties with
respect to possible sale of one or more of our operating companies. The
Company's key intellectual property, in particular Ticalium, is showing promise
but is at present a cost center and is not generating any revenue. We expect to
restructure the group in 2006 and expect the group to report losses for the full
year of 2006.
We manufacture diverse extruded aluminum products, providing value-added
services for the architectural, construction, automotive, medical, defense,
transportation, and HVAC industries. Our principal subsidiaries are Adal Seco,
Adal Engineering, and Adal Guilform. Our worldwide headquarters is located in
New York City, and our manufacturing facilities for Adal Seco, Adal Engineering,
and Adal Guilform are all currently located in the United Kingdom, in Witham,
Essex and St. Albans, Hertfordshire.
We are primarily engaged in providing manufacturing, fabricating, precision
machining, and product design services. We believe Adal Seco to be the fifth
largest extruder in the United Kingdom, with approximately 4% market share,
based on industry data published by the Aluminum Federation. Adal Seco
differentiates itself from the other large United Kingdom extruders and lower
cost importers by offering customers low volume production orders and fast
turnaround services. Adal Seco typically produces and ships customer orders in
less than 30 days.
The United Kingdom aluminum extrusion industry has seen the impact of lower cost
imports from China and India. Based on information published by the United
Kingdom Aluminum Federation, there has been a 13% overall decrease in the tons
of aluminum extruded in the United Kingdom in 2006. Adal Seco has experienced
approximately only a one percent decline in demand for extrusions compared to
our competitors who have experienced more significant declines. We believe that
our strategy of providing customers with the option to place lower volume
orders, with shorter lead times, has protected our sales in 2005. We also
acknowledge that we were unable to apply raw material cost increases to our
customers as timely as we would have liked. We believe that this rise in raw
material costs equally impacted our competitors.
We believe our diversification into precision machining and architectural
products positions us well for future growth. We sell to customers in several
industries, thereby mitigating our risks to a particular industry. In the
future, we plan to enhance our margins by investing in plant and machinery to
improve quality, efficiency, and service levels. Seeking to expand our precision
engineering business, we hired another salesperson to explore opportunities in
the medical and construction industries. In addition, we have trained our Adal
Seco sales force to sell Adal Engineering's capabilities and have won some new
business through this route.
20
In the first quarter of 2005, we diversified into the architectural market when
we acquired Guilform Holdings Limited, and its wholly-owned subsidiary, Adal
Guilform, previously known as Guilform Limited. This acquisition was the first
step in building our Architectural Division. In the third quarter of 2005, we
expanded the Architectural Division by acquiring a start-up company, Adal
Structures. Adal Structures served as a construction contractor providing
complete building facades. In the fourth quarter of 2005, we concentrated on
further building the Architectural Division and improving its productivity and
efficiency. We have decided to focus on the fabrication and design in the
division and not to provide the complete service.
We will focus on organic growth in the United Kingdom from our existing
businesses and possible future acquisitions of United Kingdom or United States
based businesses that complement or enhance our current businesses. We also hope
to receive future revenue growth from new and innovative products such as
TicaliumTM, a new composite material developed by Adal Seco and strategic
partners. Ticalium combines aluminum with titanium and carbon to produce a
super-hard extrusion that is designed to increase the strength, hardness, and
wear resistance of aluminum. Ticalium has been identified as having potential
uses in many different areas such as the automotive industry for brake discs,
drums and callipers, train wheels, tire studs, and snowmobiles. In 2005, we
filed a patent for the sole rights to use Ticalium to which we were entitled as
the lead developer.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of
operations is 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 Annual Report on Form 10-KSB. 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 include but are not limited by the following:
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. Adal recognizes revenue when title, ownership, and risk of loss pass to
the customer, in accordance with the provisions of Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements."
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.
21
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. 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 May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections--a Replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
154). SFAS 154 requires retrospective application of voluntary changes in
accounting principles, unless impracticable. SFAS 154 supersedes the guidance in
APB Opinion No. 20 and SFAS No. 3, but does not change any transition provisions
of existing pronouncements. Generally, elective accounting changes will no
longer result in a cumulative effect of a change in accounting in the income
statement, because the effects of any elective changes will be reflected as
prior period adjustments to all periods presented. SFAS 154 will be effective
beginning in 2006 and will affect any accounting changes that we elect to make
thereafter.
In March 2005, the FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations and interpretation of FASB Statement No. 143" (FIN 47).
FIN 47 clarifies that conditional asset retirement obligations meet the
definition of liabilities and should be recognized when incurred if their fair
values can be reasonably estimated. The cumulative effect of initially applying
FIN 47 would be recognized as a change in accounting principle. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
Adoption of FIN 47 is not expected to have a material impact on our financial
condition or results of operations.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements, and (EITF 05-6). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance on EITF 05-6 will be applied prospectively and is
effective for periods after June 29, 2005. EITF 05-6 is not expected to have a
material impact on our consolidated financial statements.
In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
Instruments an amendment to FASB 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. FASB 155, provides the
framework for fair value remeasurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation as well
as establishes a requirement to evaluate interests in securitized financial
assets to identify interests. FASB 155 further amends FASB 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. The FASB 155 guidance also clarifies which
interest-only strips and principal-only strips are not subject to the
requirement of FASB 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. FASB 155 is not expected
to have a material impact on our consolidated financial statements.
In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140. FASB 156 requires the
recognition of a servicing asset or servicing liability under certain
circumstances when an obligation to service a financial asset by entering into a
servicing contract. FASB 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value
utilizing the amortization method or fair market value method. FASB 156 is
effective the beginning of the first fiscal year that begins after September 15,
2006. FASB 156 is not expected to have a material impact on our consolidated
financial statements.
For further information concerning accounting policies, refer to Note 4 of
consolidated financial statements.
Results of Operations
When evaluating the financial and operating results, management views Adal Seco
and Adal Engineering as a single business segment. These businesses are
principally involved in extruding aluminum and providing additional finishing to
such extrusions. The Architectural businesses, Adal Guilform and Structures are
also aluminum based businesses but most of their raw material is aluminum sheet
as opposed to extrusions.
22
When reviewing the results of the operations compared to the prior year, it is
important to consider the evolution of the Company. The year ended December 31,
2004 include a full year for Adal Seco, eleven months for Adal Engineering
(acquired January 30, 2004), and do not include the results of Adal Guilform
(acquired on February 7, 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 occurred on
October 28, 2004. 2005 includes a full year for Adal Seco, Adal Engineering, our
corporate office and costs associated with being a public company and includes
eleven months of Adal Guilform and six months of Adal Structures.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Revenues. For the year ended December 31, 2005, our consolidated revenues were
$33,519,000 compared to $29,228,000 for the comparable 2004 period, an increase
of $4,291,000 or (17%). The increase is due to revenues from Adal Guilform of
$3,162,000, revenues from Adal Structures of $372,000, incremental increase in
revenues from Adal Engineering of $449,000 (mainly due to the additional month
of operation as a consolidated business in 2005 compared to 2004), and revenues
from Adal Seco of $537,000, which were mainly due to a slight increase in the
average selling price and a decrease of $228,000 from unfavorable exchange
rates.
Based on published industry data from the Aluminium Federation, we believe that
the aluminum extrusion production in the United Kingdom has suffered a downturn
of 10% in the year, thus Adal Seco appears to be achieving revenue growth in
excess of its market in general by concentrating sales to more specialized
markets.
Cost of Goods Sold. Cost of goods sold as a percentage of sales was 98%
($32,831,000) for the year ended December 31, 2005 and 95% ($27,897,000) for the
same period in 2004.
The increase in the cost of goods sold in the amount of $217,000 was due to
exchange rate differences. The remaining increase in the amount of $4,934,000 is
largely due to the increased raw material costs.. In line with our competition,
we have started increasing the selling price of the products towards the end of
2005. Our cost reduction plans and price increases are beginning to have an
impact, but the price of aluminum has continued to rise through 2006.
Adal Seco's cost of goods sold was 97% ($24,397,000) for the year ended December
31, 2005 compared to 96% ($23,653,000) for the year ended December 31, 2004. Raw
material costs were 58% of sales for the year ended December 31, 2005 and 52%
for the year ended December 31, 2004. Adal Seco's increased cost of sales is due
to not passing on the raw material price increases to its customers until the
end of the year and two exceptional mechanical breakdowns including (a) a delay
in the installation of a new roll out table which caused two weeks downtime on
one press and (b) two weeks of downtime due to the failure of a pump which the
replacement had to come from the United States. This resulted in the significant
payroll expenses in overtime to make up the lost production time.
Adal Engineering's cost of goods sold was 91% ($4,641,000) of sales for the year
ended December 31, 2005 compared to 87% ($4,046,000) for the year ended December
31, 2004. In the last quarter of 2005 and the first quarter of 2006, management
has been increasing prices to customers.
Adal Guilform's cost of goods sold was 112% ($3,550,000) for the year ended
December 31, 2005. The high cost of goods sold is due to the start of Adal
Structures and Guilform positioning itself within the market place.
Adal Structures cost of goods sold was 106% ($394,000) for the year ended
December 31, 2005. The costs of goods sold were high at Adal Structures and was
one factor in management's decision not to offer a full construction service.
Selling, General & Administrative Expenses. For the year ended December 31,
2005, selling, general and administrative costs were $4,690,000 compared to
$2,783,000 for the year ended December 31, 2004. The increase in SG&A is a
result of an increase in SG&A at Adal Seco by $1,442,000 from $1,312,000 for the
year ended December 31, 2004 to $2,755,000 for the year ended December 31, 2005.
Additionally, the increase is due to the inclusion of Adal Guilform's SG&A. For
the eleven months from the acquisition of Adal Guilform through December 31,
2005, Adal Guilform's SG&A was $121,000 and we did not include this expense in
our 2004 operating results. An increase in the SG&A at Adal Engineering of
$77,000 due to one extra month in the period and changes in the management of
Adal Engineering.
23
The remaining increase in SG&A is due to the following:
a. The costs associated with being a US public company, $214,000
($1,030,000 in the year ended December 31, 2005, compared to $816,000 in the
same period of 2004). The additional costs were largely due to issuing
non-recurring shares to our Investment Banker, UTEK a strategic partner and Your
Money TV. UTEK has the rights to many innovative patents that the Adal Group may
wish to use to increase sales. Your Money TV is being used to raise investor
awareness of Adal Group Inc. The additional increase was due to higher legal and
accounting fees in the period ended December 31, 2005 compared to the same
period in 2004;
b. The expenses associated with running the group corporate office,
$313,000 ($1,063,000 for the year ended December 31, 2005 compared to $750,000
in the same period of 2004) and costs associated with the appointment of a chief
financial officer. The SG&A expenses, also included shares issued to employees
totaling $101,000;
c. The effect of exchange rates, which reduced SG&A by $39,000.
Interest Expense. Interest expense for the year ended December 31, 2005 was
$1,292,000 compared to $651,000 for the year ended December 31, 2004. The
increase of $633,000 was due to: (a) increases in short term borrowings of
$112,000 at Adal Sec; (b) additional debt of $222,000, associated with the
acquisition of Adal Guilform; (c) additional debt of $59,000, associated with
the development of the Witham site and the building of new manufacturing
facilities on that site; (d) the interest from the additional financing of
$231,000 and foreign exchange differences which reduced the interest by $9,000.
Net Loss. For the year ended December 31, 2005, the net loss was $6,059,000 or
$0.30 per share, compared to net loss of $2,294,000, or $0.02 per share for the
year ended December 31, 2004. The net loss reflects the effects of the revenue
and expense items discussed above.
Liquidity and Capital Resources
The group received funding through the Laurus fund in 2005, $2,000,000, to
support cash flow requirements and to cover trading losses. In May 2006 the
group were unable to meet interest and principal repayments under a revised
repayment schedule and are working with the Laurus fund to restructure the loan
again. Although we have no formal notice from Laurus advising us that we are in
default, Laurus management are working with us to restructure the terms of the
note, although there can be no assurance that we will be able to do so. We are
working with an Investment Bank and private investors to improve the capital
structure of the company and we are considering disposing of operating
companies. We have signed non-disclosure agreements with four parties with
respect to disposing of operating companies; we have no formal letter of intent
or sale agreements as yet.
Our total assets at December 31, 2005 were $19,672,000, which was comprised of
$8,419,000 of property, plant and equipment, accounts receivable of $7,344,000,
inventory of $2,075,000, cash and cash equivalents of $493,000, $779,000 of
intangible assets (capitalized customer list from Adal Engineering and Adal
Guilform acquisitions), $466,000 of prepaid expenses and $58,000 of deferred tax
asset of $37,000.
As of December 31, 2005, our current liabilities were $16,134,000. The Company
has long-term debt of $9,740,000 which is made up of a mortgage on the Witham
property of $4,259,000, a mortgage on the St. Albans property of $1,683,000,
leases raised against plant and machinery of 1,368,000, loans from two directors
of $258,000, loans from Laurus Master Fund, Ltd. of $2,118,000. The Company must
repay $696,000 of the long term debt within one year and thus this portion is
treated as current liabilities.
The other current liabilities are:
o $6,708,000 of borrowings secured against the accounts receivable of
the operating entities Adal Seco, Adal Engineering and Adal
Guilform.
o $6,011,000 accounts payable
o $1,461,000 of accrued expenses
o $1,468,000 of payroll and sales taxes
24
Adal Engineering has a deferred income tax liability of $55,000.
The main movements in the cash flow are:
o An increase in the accounts receivable $1,311,000 which is due
partly to increased revenues in the year ended December 31, 2005
compared to the same period in 2004 but mainly due to the
acquisition of Adal Guilform where the accounts receivable at the
year end were $663,000
o An increase in the tangible assets $3,031,000 of which $2,709,000
relates to the acquisition of Adal Guilform
o An increase in short term borrowings of $883,000 of which $665.000
relates to the purchase of Adal Guilform
o An increase in taxes on income and sales of $1,019 partly due to
higher sales values and $258,000 due to the purchase of Adal
Guilform.
The accumulated deficit as of December 31, 2005 was $5,507,000. At December 31,
2005, we had a working capital deficit of $5,660,000. The company incurred a net
loss for year ending December 31, 2005 of $5,266,000. Management believes that
the loss is due to the: (a) exceptional market conditions in the aluminum
extrusion industry, rapidly increasing raw material costs and the fall of 10% to
15% in UK domestic extrusion production; (b) costs associated with moving Adal
Engineering to a new site; (c) costs associated with integrating a new
subsidiary and the marketing and development of that Division; (d) interest
costs associated with acquisitions and funding in connection with Laurus Master
Fund, Ltd.; and (e) the costs associated with being a US public company.
As of December 31, 2005, the Company consolidated its short term bank debt with
a single major UK bank. All short term bank debt is secured by our accounts
receivable and finished goods inventory. As of December 31, 2005, we had credit
available of approximately $ 486,000 under our revolving bank lines.
The company owns freehold land and buildings, held on asset register at cost,
with a market value of $8,164,000. The company has fifteen year mortgages, 75%
loan to market value, which is major component of our long term debt and
represents $5,942,000 as of December 31, 2005. This loan is secured by a lien on
the land and buildings. The Company is in compliance with the covenants on the
mortgages.
Our machinery and equipment loans are secured by a lien on the specific
machinery and equipment financed.
Deferred consideration from the Guilform Holdings acquisition of $363,000 was
due to be paid on February 7, 2006. However, with Keith Broome's consent, we
delayed this payment until the company obtains cash from a capital raise. There
are no penalties associated with late payment, but interest continues to accrue
at 6% pa on the principal of $344,000.
The Company entered loan agreements with Laurus Master Fund, Ltd. in 2005,
pursuant to which, on June 29, 2005, Laurus advanced $1,500,000 (the "June
Note") and, on November 22, 2005, Laurus advanced $500,000 (the "November Note"
and, collectively, the "Notes"). The Notes were for $2,000,000 with funds to be
advanced for specific events in the Company's business plan. The June Note was
intended to be an equity convertible loan. Due to various complications with the
structure of the June Note, we are in the process of restructuring the June
Note. Additionally, pursuant to the June Note, the Company granted Laurus an
option, exercisable upon completion of the June loan. Laurus exercised this
option in June 2005, immediately after funding the loan, and, as a result,
currently owns 1,051,610 shares of common stock.
The June Note is secured by a lien on certain of our assets, pursuant to the
terms of the Master Security Agreement executed by us. If an event of default
occurs under the Master Security Agreement or the June Note, Laurus Master Fund,
Ltd. has the right to accelerate payments under the June Note and, in addition
to any other remedies available to it, foreclose upon the assets securing the
June Note. The documents executed in connection with the issuance of the June
Note and such financing contain certain restrictions regarding our operations
while the June Note remains outstanding. Such restrictions include our agreement
that, except with Laurus' prior written consent (such consent not to be
unreasonably withheld), we will not issue certain classes of debt securities or
equity securities. In addition, so long as 25% of the June Note remains
outstanding, the Securities Purchase Agreement, among other things, prohibits,
except with Laurus' prior written consent: (i) our payment of dividends or a
redemption of our shares of common stock, (ii) the issuance of preferred stock
that is manditorily redeemable prior to June 29, 2009, and (iii) the incurring
of additional debt in excess of $3,000,000, or any refinancing or replacements
thereof on terms no less favorable than the indebtedness being refinanced or
replaced, so long as any lien relating thereto shall only encumber the fixed
assets so purchased and no other assets of ours or our subsidiaries. The
presence of the Notes and the associated security arrangements raise substantial
doubt about the Company's ability to raise further financing.
25
We have not paid our principal and interest to the Laurus fund in May 2006, our
payments were current prior to May 2006,and we have discussed this with them and
are working to further restructure our agreement.
Two of our directors, Charles Howe and Nicolas Shrager, each lent $129,000 to
the company, in the form of unsecured loans in May 2005. The loans are not
repayable until the Company has positive cash flows. The loans are accruing
interest at the rate of 6% per annum.
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.
Our Architectural Division is going through a restructure and is not expected to
become profitable until the second half of 2006. The Company continues to be
burdened by the costs of being a public company.
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.
Capital Expenditures
Adal Seco has implemented improvements to its production facilities in the past
year. Through process enhancements and equipment upgrades, Adal Seco expects to
increase the volume and quality of its production output and reduce the volume
of scrap materials. In particular, in 2005, Adal Seco implemented the following
enhancements to its presses:
o Added a puller to one of the larger presses, reducing the current
amount of scrap made during production. We completed installation in
January 2005 at a cost of $150,000, which was funded through an
asset finance loan.
o Replaced the existing heating elements on one press. By installing a
new state-of-the-art heating element, we reduced the downtime for
heating element repair by approximately 80%. We completed
installation in January 2005 at a cost of $30,000, which was funded
from working capital.
o Added a complete new handling system for one of the seven inch
presses. This new handling system, known as a run table, transports
extruded aluminum from the press to the cutting stations. The table
has improved the quality of the extrusions and thereby opened new
market opportunities. We completed installation in June 2005 at a
cost of $350,000, which was funded through an asset finance loan.
26
Adal Seco is planning the following enhancements to its presses in the near
future:
o Adding another cutting station to the extrusion line to eliminate a
bottleneck created by the production of extruded raw product faster
than the cutting station can cut metal. The addition of 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, which we plan to fund through equity capital
investment.
o Adding a puller, new heating elements and a new handling system to
the other large press. This requires an investment of some $350,000,
which we plan to fund through an equity investment in 2006.
o Installing post-press materials handling and packing systems. This
requires an investment in excess of $550,000 is planned for 2007,
and the funding source has not yet been decided.
To support its anticipated expansion into the medical and construction
industries, Adal Engineering plans to invest in additional automated equipment
and advance technological operations. In this regard, Adal Engineering intends
to purchase two fully automated machining centers, upgrade existing machinery to
semi- and full-automation and adopt lean process practices that reduce waste.
Adal Structures was a start up company that was set up to improve building
quality and increase business opportunities. We have entered an informal
agreement with Shucco providing us with preferred finisher status and a credit
limit of approximately $300,000. Shucco produces curtain walling, structures
that support the glass on the exterior of buildings. Adal Guilform is on the
preferred finishers list for Shucco extrusions, meaning that Adal Guilform is
identified as an authorized supplier. Adal Structures completed the first
construction project in December but has decided not to proceed with providing a
full service for the construction industry but to focus on the fabrication of
panels for the construction industry. Adal Structures will continue until the
retentions are paid on the completed project.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet financing arrangements and has
not established any special purpose entities.
Item 7. Financial Statements.
The information required by Item 7 appears after the signature page to
this report.
27
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures.
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and the Chief Financial
Officer, the Company conducted an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, our Chief Executive Officer and the Chief Financial
Officer concluded as of the Evaluation Date that the Company's disclosure
controls and procedures were effective such that the material information
required to be included in our Securities and Exchange Commission reports is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission's rules and forms relating to the Company,
including our consolidating subsidiaries, and was made known to them by others
within those entities, particularly during the period when this report was being
prepared.
Item 8B. Other Information.
None.
28
PART III
Item 9. Directors, Executive Officers, Promoters And Control Persons,
Compliance With Section 16(A) Of The Exchange Act.
Set forth below are the names of our directors, executive officers, and
key employees as of December 31, 2005:
Name Age Position Date of Appointment
---- --- -------- -------------------
Nicholas A. Shrager 58 Chairman, Chief Executive Officer, October 28, 2004
President and Director
Stephen B. Goodacre 49 Chief Financial Officer and Director June 1, 2005
Charles K. Howe 71 Executive Vice President, Secretary October 28, 2004
and Director
Brian Alleman (1) 48 Director January 18, 2005
John Sanderson (2) 60 Director January 18, 2005
Keith Broome 57 Director February 7, 2005
(1) Denotes a member of our Audit Committee.
(2) Resigned from the Board of Directors, effective as of March 1, 2006.
Our directors are elected at our annual meeting to serve for one year,
until our next annual meeting or until their successors have been duly elected
and have qualified. 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 is our Chairman, Chief Executive Officer, President
and Director. Mr. Shrager was a co-founder and director of Adal Group (UK)
Limited, formerly Advanced Aluminium Group Limited, in 2003, serving as Chief
Executive Director of the company and each of its subsidiaries since October 28,
2004. He has served as Non-Executive Chairman of Riverside Business Solutions
Ltd., 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 liquor and beer retailers. 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 is our Chief Financial Officer and Director. Mr.
Goodacre was appointed Chief Financial Officer on October 28, 2004. From April
2002 until May 2005, Mr. Goodacre was employed, as a consultant, by Blackwater
Consulting Ltd., a financial recruitment and consultancy business. Mr. Goodacre
was employed by Lehman Brothers Inc. from January 1990 to March 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. Lehman promoted Mr. Goodacre 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.
29
Charles K. Howe is our Executive Vice President, Secretary and Director.
Mr. Howe was one of the co-founders of Adal Group (UK) Limited, formerly
Advanced Aluminium Group Limited, in 2003. Since 1985 and continuing through and
including the present date, he is a director of CH Resources Limited, a business
consultancy, through which he holds and 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 UK public company
primarily engaged in the production of plastic molding and the business of
acoustic and electronic components, particularly for the telephone industry.
Brian Alleman is on our Board of Directors. Since August 2002, 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. 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. Mr. Alleman received an B.A. from Seton Hall
University in Accounting.
John Sanderson was on our Board of Directors from January 18, 2005 through
March 1, 2006. Mr. Sanderson has been 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.
After retirement and until recently, Mr. Sanderson served as a consultant to
Legg Mason Limited, London. 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. Mr. Sanderson resigned from the Board of Directors on March 1, 2006.
Keith Broome, from 1977 until February 2005, was managing director of the
companies that were part of Guilform Holdings Limited, which were all companies
involved in the manufacturing of aluminum products. On January 8, 2002, GFM
Realisations Ltd. (f/k/a Guilform Limited), 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
The Audit Committee operates under a formal charter in accordance with all
applicable laws. The charter was approved and adopted by our 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.
As of December 31, 2005, the members of the Audit Committee were Messrs.
Brian Alleman and John Sanderson. Both Messr. Alleman and Sanderson are
independent as defined in the NASDAQ Marketplace listing standards currently in
effect and neither Messr. Alleman nor Messr. Sanderson is a current officer or
employee of our Company or any of our affiliates. However, as of March 1, 2006,
John Sanderson resigned from the Board of Directors and therefore Mr. Alleman is
the only remaining member of our Audit Committee. The Board 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.
Compliance with Section 16(a) of Exchange Act
Based on the Company's review of Forms 3, 4 and 5 and amendments to these
forms filed with the Securities and Exchange Commission or written
representations from certain reporting persons, we believe that during fiscal
year 2005, all parties subject to the reporting requirements of Section 16(a) of
the Exchange Act filed all such required reports during and with respect to the
fiscal year ended December 31, 2005.
30
Code of Ethics
On February 23, 2005, the Board of Directors adopted a Code of Business
Conduct and Ethics to promote its commitment to the legal and ethical conduct of
the Company's business. The Chief Executive Officer, Chief Financial Officer,
and other senior officers are required to abide by the Code of Business Conduct
and Ethics, which provides the foundation for compliance with all corporate
policies and procedures, and best business practices. The policies and
procedures address a wide array of professional conduct, including the
establishment of sound employment policies, methods for avoiding and resolving
conflicts of interest, safeguarding intellectual property, protecting
confidential information, and a strict adherence to all laws and regulations
applicable to the conduct of the Company's business. The Company intends to
satisfy its obligations, imposed under the Sarbanes-Oxley Act, to disclose
promptly on the Company's website amendments to, or waivers from, the Code of
Business Conduct and Ethics, if any.
31
Item 10. Executive Compensation.
The following table sets forth all cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, for each of
the last three fiscal years of our company to each named executive officer.
------------------------------------------
Annual Compensation
------------------------------------------
-------------------------------------------------------------------------------
Name / Principal Position Year Salary Bonus Other Annual
(Cash & ($) Compensation
Non-cash) ($)
($)
-------------------------------------------------------------------------------
Nicholas A. Shrager 2005 $130,923 $0 $0
Chief Executive Officer, 2004 $150,000 $0 $0
Chairman, President and (1) 2003 $0 $0 $0
Director
-------------------------------------------------------------------------------
Stephen B. Goodacre 2005 $211,136 $0 $0
Chief Financial Officer and (2) 2004 $37,000 $0 $0
Director 2003 $0 $0 $0
-------------------------------------------------------------------------------
1. On October 28, 2004, Mr. Shrager was appointed as our Chairman, Chief
Executive Officer, and President. The salary disclosed represents the
compensation paid to Mr. Shrager from January 2004 through December 31,
2004 and January 2005 through December 2005.
2. On April 21, 2004, Mr. Goodacre was appointed as our Interim Chief
Financial Officer and, on October 28, 2004, Mr. Goodacre was appointed as
our Chief Financial Officer. Mr. Goodacre entered an employment contract
with the Company, effective June 1, 2005, whereby he will receive base
salary of $200,000 for a full fiscal year. On June 1, 2005, Mr. Goodacre
received 700,000 shares of our common stock in connection with his
employment agreement.
Option Grants in Last Fiscal Year
None.
Aggregate Options Exercised 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 each of its independent directors US$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 are paid
quarterly, in arrears, on April 1, July 1, October 1 and January 1, in a
combination of shares of our common stock and cash. Each independent director
receives shares of our common stock equal to US$3,000 per quarter, based on the
closing price of our common stock on the date of grant, as quoted on the OTC
Bulletin Board (or applicable quotation medium or exchange as of such date) and
US$2,000 per quarter in cash. For the October 1, 2005 payment, we have agreed
with each independent director to postpone the payment of such director's
quarterly compensation of $3,000, in shares of our common stock, until January
1, 2006. As of December 31, 2005, each independent director is entitled to
receive 20,000 shares of common stock pursuant to each's quarterly issuances
which were initially payable on October 1, 2005 and January 1, 2006.
32
Employment Contracts with Executive Officers
The Company entered an oral 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, 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 an employment agreement with Stephen B. Goodacre,
effective on June 1, 2005, pursuant to which Mr. Goodacre will serve as Chief
Financial Officer. 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.
The Company entered an oral consulting agreement with Charles Howe,
effective on October 28, 2004, pursuant to which Mr. Howe will serve as an
executive level consultant. Mr. Howe's initial salary is $100,000, which will be
subject to an increase to $150,000 provided that certain revenue targets for the
Company, as established by the Board of Directors, are achieved for the year
ended December 31, 2005. Mr Howe has taken a reduced income in 2005 of $44,000
as the company has negative cashflow.
33
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of April 3, 2006, 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 our common stock (each a
"5% Owner"); (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 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.
-----------------------------------------------------------------------------------------------------
Amount and
Title of Nature of Percent of
Name (1) Position Held Class Beneficial Owner Class (2)
-----------------------------------------------------------------------------------------------------
Nicholas A. Shrager (3) Chief Executive
Officer, Chairman, Common
President and Director Stock 9,783,585 42.54%
------------------------------------------------------------------------------------------------------
Stephen B. Goodacre Chief Financial
Officer Common
and Director Stock 700,000 3.04%
------------------------------------------------------------------------------------------------------
Charles K. Howe (4) Executive Vice
President, Secretary Common
and Director Stock 5,092,605 22.15%
------------------------------------------------------------------------------------------------------
Brian Alleman (5) Director Common
Stock 72,497 *
------------------------------------------------------------------------------------------------------
John Sanderson (5) Director Common
Stock 72,497 *
------------------------------------------------------------------------------------------------------
Keith Broome (5) Director Common
Stock 2,137,497 9.29%
------------------------------------------------------------------------------------------------------
Keating Reverse (6) - Common
Merger Fund LLC Stock 2,165,507 9.42%
------------------------------------------------------------------------------------------------------
Total Ownership of
Common Stock by
All Directors and
Officers as a Group - 17,858,681 77.02%
------------------------------------------------------------------------------------------------------
----------------------
* Less than one percent
1. Unless otherwise indicated, the address for holder is c/o Adal Group,
Inc., 67 Wall Street, 22nd Floor, New York, NY 10005-3111.
2. Reflects 22,906,332 shares of our common stock outstanding as of April 3,
2006.
3. Includes (a) 9,381,960 shares of common stock owned by Mr. Shrager and (b)
401,625 shares owned by The Nicholas Shrager Family Trust. Mr. Shrager is
co- Trustee of The Nicholas Shrager Family Trust. Mr. Shrager has voting
and dispositive power over the shares owned by The Nicholas Shrager Family
Trust.
34
4. Includes 1,204,875 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. Mr. Howe has no right to acquire any shares of
common stock upon conversion or exercise of an outstanding note, warrant
or option.
5. Includes 13,334 shares of common stock issuable as compensation to each
independent director as payable on October 1, 2005 and January 1, 2006.
6. The address of the Keating Reverse Merger Fund, LLC is 5251 DTC Parkway,
Suite 1090, Greenwood Village, CO 80111-2739. Kevin R. Keating is the
father of the principal member of Keating Investments, LLC. Keating
Investments, LLC is the managing member of Keating Reverse Merger Fund,
LLC and Keating Securities is the registered broker-dealer affiliate of
Keating Investments, LLC. Kevin R. Keating is not affiliated with and has
no equity interest in Keating Investments, LLC, Keating Reverse Merger
Fund, LLC or Keating Securities and disclaims any beneficial interest in
the shares of our common stock owned by Keating Reverse Merger Fund, LLC.
Similarly, Keating Investments, LLC, Keating Reverse Merger Fund, LLC, and
Keating Securities disclaim any beneficial interest in the shares of our
common stock currently owned by Kevin R. Keating.
Item 12. Certain Relationships and Related Transactions.
Guilform Agreement
On February 7, 2005, we entered a Share Sale and Purchase Agreement (the
"Guilform Agreement") relating to Guilform Holdings Limited, with Keith Malcolm
Broome, the sole shareholder. We purchased 100% of the shares of Guilform
Holdings Limited from Mr. Broome in consideration of (i) approximately $636,000
in cash; (ii) a promissory note in the amount of approximately $380,000 bearing
interest at a rate of 6% per annum; and (iii) 21,000,000 shares (or 300,000
shares on a pre 1-for-7 forward stock split basis) of our common stock.
In connection with the Guilform Agreement, we agreed to pay certain
obligations under commercial loan facilities provided to Guilform Holdings
Limited, which has re-advanced such loan to Adal Guilform, by State Securities
plc in the aggregate sum of approximately $1,930,000, of which approximately
$950,000 was new borrowing in connection with the consummation of the
transactions contemplated by the Guilform Agreement. This loan facility includes
the standard covenants and obligations and Guilform Holdings Limited is in full
compliance with the loan facility. Approximately $615,000 of the loan facility
was loaned by Guilform Holdings Limited to us in connection with the
consummation of the Guilform Agreement. Mr. Broome and Ms. Janice Conley, the
previous Secretary of Guilform Holdings Limited, agreed to personally guarantee
the obligations of Guilform Holdings Limited to pay back the loans. Under the
Guilform Agreement, we have released Mr. Broome and Ms. Conley as guarantors on
the loan facility.
Keating Reverse Merger Fund, LLC
In connection with the Share Exchange, dated as of October 28, 2004, as
described further herein, we entered a Financial Advisory Agreement with Keating
Securities, the registered broker-dealer affiliate of Keating Investments, LLC,
under which we compensated Keating Securities for its advisory services in
connection with this transaction. The transaction advisory fee was $190,000.
Pursuant to the Financial Advisory Agreement, the advisory services provided by
Keating Securities included identification and presentation of suitable private
company acquisition targets, corporate, business, and financial due diligence
evaluation of the target company, capital and transaction structuring,
development of capital markets strategy, valuation analysis, company, market and
industry research, analysis of various exchange listing requirements, and
transaction negotiation and execution. We have paid a transaction advisory fee
equal to $190,000 to Keating Securities.
The Financial Advisory Agreement also appointed Keating Securities as our
exclusive placement agent for private and public offerings of our securities
until October 28, 2005 and required us to pay Keating Securities 10% of the
gross proceeds of any public or private offering of equity securities, 5% of the
gross proceeds of any public or private offering of debt securities, and 10%
warrant coverage on all shares of our common issuable upon exercise or
conversion of our securities in a public or private offering.
35
Kevin R. Keating is the father of the principal member of Keating
Investments, LLC. Keating Investments, LLC is the managing member of KRM Fund,
and Keating Securities is the registered broker-dealer affiliate of Keating
Investments, LLC. Kevin R. Keating is not affiliated with and has no equity
interest in Keating Investments, LLC, KRM Fund or Keating Securities and
disclaims any beneficial interest in the shares of our common stock owned by KRM
Fund. Similarly, Keating Investments, LLC, KRM Fund and Keating Securities
disclaim any beneficial interest in the shares of our common stock currently
owned by Kevin R. Keating.
Item 13. Exhibits.
The following is a list of exhibits to the Annual Report on Form 10-KSB of
the registrant. With the exception of the CEO and CFO certifications pursuant to
Section 302 and 906 of The Sarbanes-Oxley Act of 2002 and as otherwise
disclosed, these exhibits are not contained herein, but have been filed as part
of, or incorporated by reference into, the Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission. The registrant will furnish any
exhibit upon the payment of a fee, which fee shall be limited to the
registrant's reasonable expenses in furnishing such exhibit.
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, by and between Keith Malcolm Broome and the
Registrant, dated February 7, 2005 (3)
3.1 Certificate of Incorporation, as amended (4)
3.2 Amended and Restated By-laws (7)
4.1 Specimen Stock Certificate (6)
10.1 Securities Purchase Agreement, by and between the Registrant
and Laurus Master Fund, Ltd., dated June 29, 2005 (5)
(originally filed as Exhibit 4.2)
10.2 Secured Convertible Term Note, dated June 29, 2005 (5)
(originally filed as Exhibit 4.3)
10.3 Common Stock Purchase Warrant, dated June 29, 2005 (5)
(originally filed as Exhibit 4.4)
10.4 Option, dated June 29, 2005 (5) (originally filed as Exhibit
4.5)
10.8 Securities Purchase Agreement, by and between the Registrant
and Laurus Master Fund, Ltd., dated November 21, 2005 (8)
10.9 Secured Term Note, dated November 21, 2005 (8)
10.10 Reaffirmation and Ratification Agreement, dated November 21,
2005 (8)
10.11 Summary of Oral Employment Agreement with Nicholas A. Shrager*
10.12 Employment Agreement with Stephen Goodacre*
36
10.13 Summary of Oral Consulting Agreement with Charles Howe*
14 Code of Business Conduct and Ethics (4)
21 Subsidiaries of the Registrant (4)
* Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission Securities and Exchange
Commission on September 22, 2004.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 28, 2004.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 11, 2005.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission on April 15, 2005.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 6, 2005.
(6) Incorporated by reference to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on August 12, 2005.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB filed with the Securities and Exchange Commission on November 18,
2005.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 22, 2005.
Item 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billed for each of the last two years for professional
services rendered by the principal accountant for our audits of our annual
financial statements and interim reviews of our financial statements included in
our Form 10-KSB and 10-QSBs or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those years were approximately:
------------------------------------------------------------
2005: $123,336 Moore Stephens, P.C.
------------------------------------------------------------
2004: $70,352 Moore Stephens, P.C.
------------------------------------------------------------
Audit Related Fees
The aggregate fees billed in each of the last two years for the assurance
and related services provided by the principal accountant that are not
reasonably related to the performance of the audit or review of the Company's
financial statements and are not reported in paragraph (1) were approximately:
37
------------------------------------------------------------
2005: $18201 Moore Stephens, P.C.
------------------------------------------------------------
2004: $0 Moore Stephens, P.C.
------------------------------------------------------------
We incurred these fees in connection with registration statements and financing
transactions.
Tax Fees
The aggregate fees billed in each of the last two years for the
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning were approximately:
------------------------------------------------------------
2005: $915 Moore Stephens, P.C.
------------------------------------------------------------
2004: $0 Moore Stephens, P.C.
------------------------------------------------------------
All Other Fees
The aggregate fees billed in each of the last two years for the products
and services provided by the principal accountant, other than the services
reported in paragraph (1) were approximately:
------------------------------------------------------------
2005: $0 Moore Stephens, P.C.
------------------------------------------------------------
2004: $0 Moore Stephens, P.C.
------------------------------------------------------------
Audit Committee Approval
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by the Company's independent accountants. For audit
services, each year the independent auditor provides the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Committee
before the audit commences. The independent auditor also submits an audit
services fee proposal, which also must be approved by the Committee before the
audit commences.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: April __, 2006 ADAL GROUP, INC
By: /s/ Nicholas A. Shrager
-------------------------------------
Name: Nicholas A. Shrager
Title: Chief Executive Officer and
President (Principal Executive
Officer)
By: /s/ Stephen Goodacre
-------------------------------------
Name: Stephen Goodacre
Title: Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report on Form 10-KSB is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Nicholas A. Shrager Chief Executive Officer, President and May 19, 2006
------------------------------------ Director (Principal Executive Officer)
Nicholas A. Shrager
/s/ Stephen Goodacre Chief Financial Officer (Principal May 19, 2006
------------------------------------ Accounting Officer) and Director
Stephen Goodacre
/s/ Charles K. Howe Executive Vice President, Secretary and May 19, 2006
------------------------------------ Director
Charles K. Howe
/s/ Brian Alleman Director May 19, 2006
------------------------------------
Brian Alleman
/s/ Keith M. Broome Director May 19, 2006
------------------------------------
Keith M. Broome
39
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, 2005, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for each of the two years in the
period ended December 31, 2005. 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 Adal
Group, Inc. and its subsidiaries as of December 31, 2005, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2005, 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 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital and stockholders' deficiency and is in
default with regard to certain of its financial commitments 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 1. 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
April 12, 2006
40
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
December 31,
------------
2005
------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 655
Accounts Receivable - Net 7,363
Inventories 1,798
Other Current Assets 800
------------
Total Current Assets 10,616
Property, Plant and Equipment - Net 8,611
------------
Total Assets $ 19,227
============
Liabilities and Stockholders' Deficit:
Current Liabilities:
Convertible Loan and short term Bridge Loan 2,000
Short-Term Borrowings and Credit
Agreements $ 7,011
Accounts Payable 6,026
Current Portion of Long-Term Debt 696
Other Current Liabilities 2,515
------------
Total Current Liabilities 16,248
Long-Term Debt, Net of Current
Portion 6,621
Loans Repayable - Related Party 258
Deferred Tax Liability 55
------------
Total Liabilities 25,182
------------
Stockholders' Deficit:
Common Stock, $0.0001 par value,
100,000,000 shares authorized,
shares issued and outstanding 2
Additional Paid in Capital 1,477
Accumulated Deficit (8,513)
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment 1,079
------------
Total Stockholders' Deficit (5,955)
------------
Total Liabilities and Stockholders'
Deficit $ 19,227
============
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
41
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
Year Year
ended ended
December 31, December 31,
2005 2004
------------ ------------
Net Sales $ 33,519 $ 29,228
Cost of Sales 32,558 27,898
Inventory Write Down 258 --
------------ ------------
Gross Profit 703 1,330
Selling, General and
Administrative Expenses 4,690 2,783
Intangible Assets Write-Off 779
Advisory Fee - Related Party 190
Loss from ------------ ------------
Operations (4,766) (1,643)
Interest Expense 1,293 650
------------ ------------
Income Before Income
Taxes / (Benefit) (6,059) (2,293)
Provision For Income Tax
(Benefit) -- (3)
------------ ------------
Net Loss $ (6,059) $ (2,290)
============ ============
Basic and Diluted Loss Per Share $ (0.29) $ (0.02)
============ ============
Weighted Average Number of
Common Shares Outstanding -
Basic and Diluted 20,942,544 17,850,000
============ ============
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
42
ADAL GROUP INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS)
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
Accumulated Total
Comprehensive Additional Retained Other Stockholders'
Income Common Stock Paid-in Earnings Comprehensive Equity
(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 (2,293) -- -- -- (2,290) -- (2,290)
Effect of Currency
Translation In Period 657 -- -- -- -- 657 657
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances -
December 31, 2004 $ (1,636) 2,550,000 $ 2 $ -- $ (2,454) $ 654 $ (1,798)
============ ============ ============ ============ ============ ============ ============
Issuance of Common Stock
For Cash -- 715,976 -- 1,477 -- -- --
7-For-1 Stock Split -- 19,595,856 -- -- -- --
Net Loss (6,059) -- -- -- (6,059) -- (6,059)
Effect of Currency
Translation in Period 425 -- -- -- -- 425 425
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances -
December 31, 2005 $ (5,634) 22,861,832 $ 2 $ 1,477 $ (8,513) $ 1,079 $ (5,965)
============ ============ ============ ============ ============ ============ ============
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
Year ended
December 31,
------------------------------
2005 2004
------------ ------------
Operating Activities:
Net Loss $ (6,059) $ (2,290)
Adjustments to Reconcile Net (Loss) to Cash From Operations:
Depreciation and Amortization 2,001 1,212
Deferred tax (Benefit) -- (3)
Stock based compensation 677
Changes in Assets and Liabilities:
Decrease (Increase):
Accounts Receivable (635) 1,086
Inventories 484 (217)
Other Current Assets (506) (150)
Increase (Decrease):
Accounts Payable (200) 888
Taxes 879 127
Other Current Liabilities 397 162
------------ ------------
Net Cash - Operating Activities (2,962) 815
------------ ------------
Investing Activities:
Business Acquisition (636) (732)
Capital Expenditures (1,535) (2,713)
------------ ------------
Net Cash - Investing Activities (2,171) (3,445)
------------ ------------
Financing Activities:
Borrowing of Short-Term Debt 41,355 (1,948)
Payment of Short term debt (39,038)
Borrowing of Long-Term Debt 2,943 4,530
Payment of Long-Term Debt (140) (480)
------------ ------------
Net Cash - Financing Activities 5,120 2,102
Effect Of Exchange Rates Changes on Cash 279 767
------------ ------------
Net Increase (Decrease) in Cash - Forward $ 266 $ 239
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
44
Adal Group, Inc and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
--------------------------------------------------------------------------------
Year Ended
December 31,
------------------------------
2005 2004
------------ ------------
Net Increase (Decrease) in Cash - Forwarded $ 266 $ 239
Cash - Beginning of Years 389 150
------------ ------------
Cash - End of Years $ 655 $ 389
============ ============
Supplemental Cash Flow Information:
Cash paid during the years for:
Interest $ 1,283 $ 343
Income Taxes $ -- $ --
ADAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Going Concern
The accompanying financial statements have been prepared in conformity with
United States 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, 2005, the Company has a net loss of approximately
$6,059,000, a working capital deficiency of approximately $5,634,000 and an
accumulated deficit of approximately $8,733,000. Several key suppliers have
refused to grant the company additional credit and require that payment for
material be made in advance, and in some cases require payment of some portion
of the outstanding balance owed. We have been formally advised by a former
supplier that they intend to take legal action to recover their debt, which
could lead to a bankruptcy proceeding. We will try to negotiate with this
creditor and hope to reach agreement with respect to repayment over an extended
timeframe. In addition, several of our current raw material vendors are refusing
to grant us additional credit and are requiring payment for material in advance,
plus repayment of a portion of the unpaid balances owed. These factors raise
substantial doubt about our ability to continue as a going concern. 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. We are working with an Investment Bank and private
investors to provide additional capital, which could involve significant
dilution to current shareholders or the possible sale of assets. While we do not
have any formal agreements, we have signed non-disclosure agreements with four
parties with respect to possible sale of one or more of our operating companies.
There can be no assurance that our plans will be successful.
(2) Business
Adal Group Inc. (the "Company"), through its operating subsidiaries, is a
diversified producer of aluminum extrusions and manufactured parts. The
Company's three principal operating subsidiaries are Adal Seco ("Seco" or "Adal
Seco"), Adal Engineering (formerly W.H.J. Fagg & Son Ltd.) ("Engineering" or
"Adal Engineering") and Adal Guilform, all of which are located in England. The
Company's customers are also based in England. Seco is a provider of aluminum
extrusion design and production services, providing complete supply-chain
management including component design, fabrication, warehousing and delivery.
These added value products are sold through the Adal Seco brands, Adal Extra and
Adal Climatix. Engineering provides precision engineering, tool making and
volume production of machined (primarily aluminum) components principally for
the automotive industry. Adal Guilform was acquired effective February 7, 2005
and is a fabricator of panels for the construction industry.
45
(3) 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 controlled 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 $15,000 and total liabilities of $15,000, 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 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 a subsidiary of the Company, through its
AAI subsidiary, on October 20, 2003.
The consolidated balance sheet as of December 31, 2005 and the consolidated
statement of operations and cash flows for the period from January 1, 2005 to
December 31, 2005 represent the financial position and results of operations and
cash flows for the Company and its subsidiaries.
The operations of Adal Guilform have been included since February 7, 2005, the
date on which Adal Group, Inc acquired all of the outstanding capital stock of
Guilform Holdings the parent company of Adal Guilform.
All amounts in the financial statements are presented in thousands of U.S.
Dollars.
(4) 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.
Foreign Currency - The Company headquarters and principal business operations
are located in England. Although most purchase orders 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.
46
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,
2005
----------
Raw Materials $ 660,000
Work in Process 289,000
and Finished Goods 849,000
----------
Totals $1,798,000
==========
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; and 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:
December 31,
2005
------------
Land, Buildings and Improvements $ 4,039,000
Equipment, Furniture and Fixtures 14,809,000
Vehicles 66,000
------------
Totals 18,914,000
Less Accumulated Depreciation (10,303,000)
------------
Property, Plant and Equipment - Net $ 8,611,000
============
Depreciation expense was $1,107,000 for the year ended December 31,2005 ,
$1,100,000 for the year ended December 31, 2004.
Intangibles - The Company assesses intangible assets for impairment on a
periodic basis and more frequently when circumstances warrant.
47
The Company has written off the intangible assets relating to the customer lists
of Adal Engineering and Adal Guilform. The decision was made to write off
$779,000 due to the losses made by the operating entities in the year ended
December 31, 2005.
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. Adal recognizes revenue when title, ownership, and risk of
loss pass to the customer, in accordance with the provisions of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements."
Net Sales - Net sales 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.
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 $12,000 for the year ended December 31,2005, and
$15,000 for the year ended December 31, 2004.
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.
48
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.
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.
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.
Recent Accounting Pronouncements - In May 2005, the FASB issued SFAS No. 154,
"Accounting for Changes and Error Corrections--a Replacement of APB Opinion No.
20 and FASB Statement No. 3" (SFAS 154). SFAS 154 requires retrospective
application of voluntary changes in accounting principles, unless impracticable.
SFAS 154 supersedes the guidance in APB Opinion No. 20 and SFAS No. 3, but does
not change any transition provisions of existing pronouncements. Generally,
elective accounting changes will no longer result in a cumulative effect of a
change in accounting in the income statement, because the effects of any
elective changes will be reflected as prior period adjustments to all periods
presented. SFAS 154 will be effective beginning in 2006 and will affect any
accounting changes that we elect to make thereafter.
In March 2005, the FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations and interpretation of FASB Statement No. 143" (FIN 47).
FIN 47 clarifies that conditional asset retirement obligations meet the
definition of liabilities and should be recognized when incurred if their fair
values can be reasonably estimated. The cumulative effect of initially applying
FIN 47 would be recognized as a change in accounting principle. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
Adoption of FIN 47 is not expected to have a material impact on our financial
condition or results of operations.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements, and (EITF 05-6). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance on EITF 05-6 will be applied prospectively and is
effective for periods after June 29, 2005. EITF 05-6 is not expected to have a
material impact on our consolidated financial statements.
49
In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
Instruments an amendment to FASB 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. FASB 155, provides the
framework for fair value remeasurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation as well
as establishes a requirement to evaluate interests in securitized financial
assets to identify interests. FASB 155 further amends FASB 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. The FASB 155 guidance also clarifies which
interest-only strips and principal-only strips are not subject to the
requirement of FASB 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. FASB 155 is not expected
to have a material impact on our consolidated financial statements.
In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140. FASB 156 requires the
recognition of a servicing asset or servicing liability under certain
circumstances when an obligation to service a financial asset by entering into a
servicing contract. FASB 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value
utilizing the amortization method or fair market value method. FASB 156 is
effective the beginning of the first fiscal year that begins after September 15,
2006. FASB 156 is not expected to have a material impact on our consolidated
financial statements.
(5) Acquisitions
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 $636,000 and notes in the amount of
$375,000 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 were 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.
In connection with the Guilform Agreement, we agreed to pay certain obligations
under commercial loan facilities provided to Guilform Holdings Limited, which
has re-advanced such loan to Guilform Holdings, by State Securities plc in the
aggregate sum of approximately $1,930,000. The interest rate on this loan is
LIBOR plus 4.25%. The initial installment of this loan was paid by Guilform
Holdings Limited on December 15, 2001 and installments are payable monthly for a
period of 180 months. Guilform Holdings Limited repaid the entire outstanding
principal amount plus interest before the end of 2005. This loan facility
includes the standard covenants and obligations and Guilform Holdings Limited is
in full compliance with the loan facility. There is no prepayment penalty on the
loan but rather Guilform Holdings Limited may prepay the loan at anytime by
payment of the outstanding principal amount plus any interest due and payable
and all interest payable on the outstanding principal amount. Approximately
$615,000 of the loan facility was loaned by Guilform Holdings Limited to us in
connection with the consummation of the Guilform Agreement. Mr. Broome and Ms.
Janice Conley, the previous Secretary of Guilform Holdings Limited, agreed to
personally guarantee the obligations of Guilform Holdings Limited to pay back
the loans. Under the Guilform Agreement, we have released Mr. Broome and Ms.
Conley as guarantors on the loan facility.
The assets acquired and liabilities assumed in the acquisition of Guilform are
as follows:
Assets acquired at Fair Value $ 3,267,000
Customer List 557,000
Liabilities Assumed at Fair Value (2,024,000)
-----------
Total Purchase Price $ 1,800,000
===========
The intangible assets of $557,000 were written off during the year ended
December 31, 2005.
US Private Equity Valuation Guidelines, issued in December 2003, by the Private
Equity Industry Guidelines Group, provides guidance on valuing thinly traded
shares of public companies. Section III "Valuation of Public Securities", states
that
"A marketability discount should be taken on publicly traded securities
when there is a formal restriction that limits sale. Discounts for
restricted equity securities from market price typically range from 0% to
30%. When applying a discount to publicly traded securities, factors that
should be taken into consideration include the company's trading
characteristics (the extent to which the market for the security is liquid
or thinly traded), the investor's ability to sell its position when the
restriction expires, the magnitude of the investors position (the extent
to which orderly liquidation of the security would take a significant time
to complete, or would otherwise reduce the sales price), the term of the
restriction and other company factors such as its age, size, and industry
presence."
50
In February 2005, when Adal acquired Guilform Holdings Limited, it applied a
discount to the quoted price for its shares based on the above guidelines. That
discount resulted in a pre-split fair value of $2.6259 per share and a
post-split fair value of $0.38 per share.
Selected unaudited proforma combined results of operations for the year ended
December 31, 2005 and for the year ended December 31, 2004, assuming that the
Adal Guilform acquisitions occurred on January 1, 2004, including activity
subsequent to their actual acquisitions is as follows:
Year
ended
December 31,
2005 2004
$ $
Revenues 33,827,000 33,230,000
Net Loss (6,441,000) (2,351,000)
Loss per share (0.31) (0.31)
(6) Related Party Transactions
For 2004 and for the first seven months of the year ended December 31, 2005, the
Company leased office space from a Director on a month-to-month basis. The total
of such rental expenses was approximately $5,000 during the year ended December
31, 2005 with approximately $9,000 expensed in the year ended December 31,2004.
This rent was included as a component of selling, general and administrative
expense.
In May 2005, two directors of the Company loaned the Company $129,000 each.
Interest is accruing at 6% pa ($9,000 in 2005). The loan will not be repaid
until the company has positive cashflows.
(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 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, 2005, the
Company determined that no allowance for doubtful accounts was required.
Historically, the Company has recorded an immaterial amount of bad debt
write-offs.
51
(B) Concentration of Sources of Labor - Approximately 50% of the employees of
Adal Seco 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 - Throughout 2005, Seco purchased
aluminum billets from four 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.
(8) Commitments and Contingencies
Operating Leases - The Company leases various vehicles and equipment under
operating leases. Rent expense for such vehicles and equipment was $405,000 for
the year ended December 31, 2005 and $68,000 for the year ended December 31,
2004.
Future minimum lease payments under operating leases at December 31, 2005 are as
follows:
Years Ending
December 31, Amount
------------ ----------
2006 $ 710,000
2007 540,000
2008 450,000
2009 216,000
2010 15,000
----------
Total $1,932,000
==========
Purchase Orders - 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, in
previous years, entered into purchase orders with five smelters At December 31,
2005 there were no purchase contracts. At December 31, 2004, there were purchase
agreements totaling approximately $3,500,000.
(9) Debt
The Company has a Credit Agreement with a bank that allows the Company to borrow
against customer accounts receivable of Adal Seco, Adal Engineering and Adal
Guilform, subject to certain restrictions. Under the terms of the Credit
Agreement, the Company may borrow up to a maximum of $8,594,000, subject to the
availability of eligible customer receivables. Interest is charged at the rate
of 2% above the Base Rate of the Bank of England for the first $4,000,000
borrowed and 1.4% above the Base Rate of the Bank of England for the balance. At
December 31, 2005, the Base Rate of the Bank of England was 4.50%. 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, Adal Engineering and Adal Guilform. 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,
2005, there was $6,708,000 outstanding under the Credit Agreement. As of
December 31, 2005, the Company had unused borrowing availability of $486,000.
The Company has an overdraft agreement with a bank that allows the Company to
borrow up to $215,000. As of December 31, 2005, there was $303,000 outstanding
under the agreement. The outstanding balance bears interest at 1.5% above the
Base Rate of the Bank of England.
52
Long-term debt consisted of the following at December 31, 2005:
December 31,
2005
-----------
Mortgage Witham, Due Jan 2019 $ 4,259,000
Mortgage St. Albans Due Dec 2020 1,681,000
Machinery and Equipment Loans 1,377,000
-----------
Total Long-Term Debt 7,317,000
Less: Amounts Due Within One Year (696,000)
-----------
Long-Term Portion $ 6,621,000
===========
The mortgage loan, Witham, 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 mortgage loan, St. Albans, is secured by the real estate, including land,
buildings and improvements of the facilities located in St. Albans, 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,
2005 by fiscal year:
Years Ending
December 31, Amount
------------ ----------
2006 $ 696,000
2007 513,000
2008 386,000
2009 337,000
2010 264,000
Thereafter 5,121,000
----------
Total $7,317,000
==========
(9a)
Convertible Loan and Short term Bridge Loan
On December 29, 2005, due to various complications,with the deal structure, Adal
Group Inc. were requested to withdraw our share registration statement and to
work with Laurus Master Fund to restructure our contacts. The Company has agreed
with Laurus Master Funds in 2006 to withdraw the SB-2 share registration
document and to restructure the loan. Principal repayments are scheduled at
$25,000 in April, May and June with a full review in July 2006 The interest as a
temporary arrangement to be charged on the loan will be 3% greater than the
prime rate quoted on the Wall Street Journal. The Company received funding
through the Laurus Fund in 2005, in the form of a convertible note in the amount
of $2,000,000, to support cash flow requirements and to cover operating losses.
In May 2006 the Company was unable to meet interest and principal repayments
under a revised repayment schedule and is currently working with the Laurus Fund
to restructure the terms of the note. Although we have no formal notice from
Laurus advising us that we are in default, Laurus management are working with us
to restructure the terms of the note, although there can be no assurance that we
will be able to do so.
Prior to the deal restructuring the following arrangements were in place:
The company entered into two agreements with Laurus Master Fund in 2005 and
issued an SB-2 share registration document.
On November 21, 2005, we entered a Securities Purchase Agreement (the "November
Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus"), pursuant to which
we sold a non-convertible Secured Term Note in the aggregate principal amount of
Five Hundred Thousand Dollars ($500,000) to Laurus (the "November Note"). The
principal amount and any and all accrued and unpaid interest payable under the
November Note shall be paid on or before May 21, 2006. This has been superseded
with the agreement described above. We shall pay interest on the principal
amount of the November Note at a rate per annum equal to the "prime rate"
published in The Wall Street Journal, plus three percent, payable monthly in
arrears. Interest accrued but was not payable during the period which commenced
on November 21, 2005 and ended on November 30, 2005. We began paying interest on
the principal amount commencing on December 1, 2005 and shall continue to pay on
the first business day of each consecutive calendar month thereafter.
We also entered a Reaffirmation and Ratification Agreement, dated as of
November 21, 2005, with Laurus (the "Reaffirmation Agreement"), whereby we
ratified and confirmed the terms of the Master Security Agreement, dated as of
June 29, 2005 by and between us and Laurus (as further described in the Form 8-K
filed with the Securities and Exchange Commission on July 6, 2005). Pursuant to
the Reaffirmation Agreement and Master Security Agreement, we assigned and
granted to Laurus a continuing security interest in certain of our, and each of
our subsidiaries' assets, including, without limitation, cash, accounts
receivable, and equipment.
On June 29, 2005, we entered a Securities Purchase Agreement (the "June Purchase
Agreement"), with Laurus, pursuant to which we sold a Secured Convertible Term
Note (the "June Note") in the aggregate principal amount of $1,500,000, which is
convertible into shares of our common stock. Subject to adjustment and
anti-dilution provisions set forth in the June Note, the fixed conversion price
with respect to the first $1,000,000 principal amount of the June Note is $0.43,
and with respect to the remaining principal amount is $0.50. The principal
amount and any and all accrued and unpaid interest payable under the June Note
is due June 29, 2008 (the "Maturity Date"). We paid interest on the principal
amount of the June 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 we will pay such interest 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 in
the June Note.
Also on June 29, 2005, in connection with the financing transaction, we
issued to Laurus (i) a warrant to purchase up to 2,625,000 shares of our common
stock at an exercise price equal to $0.90 for the first 1,312,500 shares
acquired thereunder and an exercise price equal to $0.98 for any additional
shares acquired thereunder, and (ii) an option to purchase up to 1,054,914
shares of our common stock at an exercise price equal to $0.0001 per share.
Laurus exercised this option for 1,051,610 shares on June 30, 2005.
To secure the payment obligations arising under, out of or in
connection with the June Purchase Agreement or the other agreements entered in
connection with the financing, we entered a Master Security Agreement pursuant
to which we assigned and granted to Laurus a security interest in all of our
assets. We, among other things, agreed to keep all of the collateral free of
additional liens in excess of $50,000 or as necessary for taxes or government
charges, not to sell any of the collateral without the prior written consent of
Laurus, and keep all collateral insured in Laurus' name.
We agreed to file this Registration Statement on Form SB-2 with the
Securities and Exchange Commission to register the shares underlying the June
Note, warrant, and option within 45 days of the closing of the June Note, and to
have this Registration Statement declared effective within 120 days such
closing. We initially filed this Registration Statement on August 12, 2005. On
November 21, 2005, we agreed with Laurus to extend our obligation such that this
Registration Statement must be declared effective by the Securities and Exchange
Commission by February 14, 2006. If we fail to have this Registration Statement
declared effective by February 14, 2006, we shall pay a penalty to the holder of
the June Note an amount equal to approximately $1,000 per day until this
Registration Statement is declared effective.
53
(10) Common Stock
The Company has 100,000,000 shares of common stock authorized and 22,861,832
shares issued and outstanding as of December 31, 2005. 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:
Year Ended
December 31,
2005 2004
-------- --------
U.S. statutory rate applied to
income from continuing operations
before taxes 35% 35%
-------- --------
Differential arising from:
Foreign operations (5%) (5%)
Other Permanent Differences --
Utilization of Net Operating
Loss Carryforwards (30%) (30%)
Effective Rate --% --%
======== ========
Foreign operations comprised substantially all operations for fiscal 2005 and
2004. The provision (benefit) from income taxes shown in the consolidated
statements of operations consists of the following:
Year Ended
December 31,
2005 2004
---------- ----------
Current Provision
Federal $ --
Foreign -- $ --
State -- --
---------- ----------
Total $ -- $ --
---------- ----------
Deferred Provision
Federal $ --
Foreign -- $ (3,000)
State -- --
Total -- $ (3,000)
---------- ----------
Grand Total -- $ (3,000)
========== ==========
54
Deferred Income taxes consisted of the following:
Year Ended
December 31,
2005
------------
Total
Non-Current Deferred Tax Liability:
Depreciation and Amortization $ (55,000)
============
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.
(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 $80,000 for the year ended December 31, 2005 and $82,000 for the
year ended December 31, 2004
(13) Accounts Payable
The breakdown of the accounts payable as at December 31, 2005 is:
Metal Suppliers $3,756,000
Sub Contractors $ 411,000
Toolmakers $ 297,000
Transport $ 206,000
Others $1,356,000
----------
Total $6,026,000
==========
(14) Subsequent Event (Unaudited)
On May 4, 2006 each independent director, including Brian Alleman, Keith
Broome and John Sanderson received 20,000 shares of our common stock pursuant to
each such director's quarterly share issuances payable on October 1, 2005 and
January 1, 2005, collectively. These shares are issuable to each such
independent director in reliance on an exemption from registration under Section
4(2) of the Securities Act. Appropriate restrictive legends will be affixed to
each stock certificate issued in such transactions. No broker commissions will
be or have been paid on these issuances. Mr Sanderson also received a further
33,333 shares on May 4, 2006 that the company issued after Mr Sanderson
resigned.
We will also issue 177,525 shares of our common stock to our investor
relations firm and 19,725 shares of common stock to a certain employee of such
firm, as part of our agreement with our investor relations firm. These shares
are issuable in reliance on an exemption from registration under Section 4(2) of
the Securities Act. Appropriate restrictive legends will be affixed to each
stock certificate issued in such transactions. No broker commissions will be or
have been paid on these issuances.
55