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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-16401
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ADVANCED MATERIALS GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20211 S. SUSANA ROAD, RANCHO DOMINGUEZ, CALIFORNIA 90221
(Address of principal executive offices)
(310) 537-5444
Issuer's telephone number
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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 such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes __X__ No
_____
Indicate the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date:
COMMON STOCK, $.001 PAR VALUE, 8,597,955 SHARES AS OF March 31, 1999.
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ADVANCED MATERIALS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations
for the Three months ended February 28, 1999 and 1998........................................ 3
Consolidated Balance Sheets
at February 28, 1999 and November 30, 1998................................................... 4
Consolidated Statements of Cash Flows
For the Three months ended February 28, 1999 and 1998........................................ 5
Notes to Consolidated Financial Statements..................................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................ 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................. 9
ITEM 6. Exhibits and Reports on Form 8-K............................................................... 9
Signatures..................................................................................... 10
PART I - FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
ITEM I--CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED
FEBRUARY 28,
--------------------------
1999 1998
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Net sales............................................................................. $ 7,380,000 $ 8,037,000
Cost of sales......................................................................... 6,534,000 5,897,000
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Gross profit.......................................................................... 846,000 2,140,000
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Operating expenses:
Selling, general and administrative................................................. 1,096,000 1,052,000
Depreciation and amortization....................................................... 49,000 85,000
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Total operating expenses.............................................................. 1,145,000 1,137,000
Income (loss) from operations......................................................... (299,000) 1,003,000
Other income (expense):
Interest expense.................................................................... (83,000) (65,000)
Foreign exchange gain............................................................... 11,000 --
Other, net.......................................................................... (19,000) (50,000)
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Total other income and expenses................................................... (91,000) (115,000)
Income (loss) from continuing operations before income taxes.......................... (390,000) 888,000
Income tax expense.................................................................... -- 350,000
------------ ------------
Income (loss) from continuing operations.............................................. (390,000) 538,000
Discontinued Operations:
Loss from operations of Condor Utility Products, Inc................................ -- (23,000)
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Net income (loss)................................................................... $ (390,000) $ 515,000
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------------ ------------
Basic earnings per common share:
Income (loss) from continuing operations............................................ $ (0.05) $ 0.06
Loss from discontinued operations................................................... -- --
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Net income (loss) per share....................................................... $ (0.05) $ 0.06
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Diluted earnings per common share:
Income (loss) from continuing operations............................................ $ (0.05) $ 0.05
Loss from discontinued operations................................................... -- --
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Net income (loss) per share....................................................... $ (0.05) $ 0.05
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Basic weighted average common shares outstanding...................................... 8,651,622 8,616,427
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Diluted weighted average common shares outstanding.................................... 8,651,622 9,838,030
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See accompanying notes to consolidated financial statements
3
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1999 AND NOVEMBER 30, 1998
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 126,000 $ 528,000
Accounts receivable, net......................................................... 5,531,000 5,188,000
Inventories, net................................................................. 2,862,000 2,543,000
Income tax receivable............................................................ 199,000 199,000
Deferred income taxes............................................................ 526,000 526,000
Prepaid expenses and other....................................................... 236,000 119,000
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Total current assets........................................................... 9,480,000 9,103,000
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Property and equipment, net........................................................ 2,644,000 2,392,000
Goodwill, net...................................................................... 562,000 578,000
Deferred income taxes.............................................................. 504,000 504,000
Other assets....................................................................... 94,000 105,000
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Total assets................................................................... $ 13,284,000 $ 12,682,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 3,483,000 $ 2,887,000
Income taxes payable............................................................. 121,000 137,000
Accrued liabilities.............................................................. 786,000 1,015,000
Discontinued operations.......................................................... 752,000 748,000
Deferred income.................................................................. 198,000 224,000
Line of credit................................................................... 2,500,000 1,800,000
Current portion of long-term obligations......................................... 229,000 237,000
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Total current liabilities...................................................... 8,069,000 7,048,000
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Term loan........................................................................ 300,000 150,000
Convertible debentures........................................................... 405,000 405,000
Deferred compensation............................................................ 931,000 931,000
Other............................................................................ 25,000 31,000
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Total liabilities.............................................................. 9,730,000 8,565,000
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Stockholders' equity:
Preferred stock--$.001 par value; 5,000,000 shares authorized; no shares issued
and outstanding................................................................ -- --
Common stock--$.001 par value; 25,000,000 shares authorized; 8,597,955 and
8,729,455 shares issued and outstanding at February 28, 1999 and November 30,
1998, respectively............................................................. 9,000 9,000
Additional paid-in capital....................................................... 7,070,000 7,243,000
Accumulated deficit.............................................................. (3,525,000) (3,135,000)
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Total stockholders' equity..................................................... 3,554,000 4,117,000
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Total liabilities and stockholders' equity..................................... $ 13,284,000 $ 12,682,000
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See accompanying notes to consolidated financial statements
4
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
FEBRUARY 28,
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1999 1998
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Cash flows from operating activities:
Net income (loss)................................................................... $ (390,000) $ 515,000
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation...................................................................... 211,000 198,000
Amortization...................................................................... 16,000 79,000
Provision for bad debt............................................................ 1,000 --
Provision for obsolete inventory.................................................. -- (20,000)
Ireland start-up.................................................................. -- 139,000
Interest and other on deferred compensation....................................... 30,000 35,000
Loss on disposal of fixed assets.................................................. -- 1,000
Changes in operating assets and liabilities:
Accounts receivable--trade...................................................... (344,000) (1,258,000)
Inventories..................................................................... (319,000) (4,000)
Prepaid expenses and other...................................................... (113,000) 24,000
Accounts payable and accrued liabilities........................................ 367,000 62,000
Deferred income................................................................. (26,000) --
Income taxes payable............................................................ (16,000) 233,000
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Net cash provided by (used in) operating activities................................. (583,000) 4,000
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Cash flows from investing activities:
Purchases of property and equipment................................................. (463,000) (194,000)
Other assets........................................................................ 11,000 (90,000)
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Net cash used in investing activities............................................. (452,000) (284,000)
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Cash flows from financing activities:
Purchase and retirement of common stock............................................. (173,000) --
Exercise of common stock options.................................................... -- 10,000
Net borrowings under line of credit................................................. 700,000 364,000
Borrowings under term loan.......................................................... 150,000 --
Payments on capital lease obligations............................................... (5,000) (21,000)
Payments on deferred compensation................................................... (33,000) (30,000)
Payments on capitalized financing................................................... (6,000) --
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Net cash provided by financing activities......................................... 633,000 323,000
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Net change in cash and cash equivalents........................................... (402,000) 43,000
Cash and cash equivalents, beginning of period.................................... 528,000 312,000
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Cash and cash equivalents, end of period.......................................... $ 126,000 $ 355,000
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Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest...................................................................... $ 65,000 $ 47,000
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Income taxes.................................................................. $ 5,000 $ 93,000
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See accompanying notes to consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes are
unaudited. However, in the opinion of management, all adjustments necessary for
a fair presentation of these interim statements have been included and are of a
normal and recurring nature. These interim financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q. The
interim statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-KSB.
2) INVENTORIES
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market. Inventories consisted of the following:
FEBRUARY 28,
1999 NOVEMBER 30, 1998
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Raw Materials........................................... $ 2,212,000 $ 2,042,000
Work-in-process......................................... 401,000 313,000
Finished Goods.......................................... 326,000 265,000
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2,939,000 2,620,000
Less allowance for obsolete inventory................... (77,000) (77,000)
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$ 2,862,000 $ 2,543,000
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3) BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic and Diluted income (loss) per share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). In the
February 28, 1999 computation, common equivalent shares are excluded from
diluted loss per share as their effect is antidilutive. Basic and Diluted income
(loss) for the three months ended February 28 are as follows:
1999 1998
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BASIC EPS:
Net income (loss).................................................................... $ (390,000) $ 515,000
Denominator: Weighted average common shares outstanding.............................. 8,651,622 8,616,427
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Net income (loss) per share.......................................................... $ (0.05) $ 0.06
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DILUTED EPS:
Net income........................................................................... $ (390,000) $ 515,000
Denominator: Weighted average common shares outstanding.............................. 8,651,622 8,616,427
Common equivalent shares outstanding (options and warrants).......................... -- 2,804,855
Hypothetical shares repurchased at average market price with proceeds of exercise.... -- (1,583,297)
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Total shares......................................................................... 8,651,622 9,838,030
Net income (loss) per share.......................................................... $ (0.05) $ 0.05
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4) CONTINGENT LIABILITIES
Legal proceedings to which the Company is a party are discussed in Part 1
Legal Proceedings, in the latest Annual Report on form 10KSB.
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ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL INFORMATION
RESULTS OF OPERATIONS
FY 99 CURRENT THREE MONTHS VERSUS FY98
Net revenue for the first quarter ended February 28, 1999 was $7,380,000, a
decrease of 8.2% from the same period of fiscal 1998. The decline in net
revenues for the first quarter of fiscal 1999 is primarily attributable to lower
volumes and negative price variances in key customer accounts.
Cost of sales as a percentage of net revenue was 88.5% for the first quarter
of fiscal 1999, compared to 73.4% for the first quarter of fiscal 1998, a 15.1%
increase. The increase in cost of sales for the first quarter of fiscal 1999,
compared to the first quarter of fiscal 1998, is due to the following: (1) the
gross profit sharing agreement with the Company's strategic manufacturing
partner in Singapore; (2) the addition of manufacturing fixed costs due to the
Company's expansion in Ireland; and (3) lower volumes at the Company's domestic
locations which led to lower capacity utilization and negatively impacted labor
and overhead absorption.
Operating expenses as a percentage of net revenue were 15.5% for the first
quarter of fiscal 1999, compared to 14.1% for the first quarter of fiscal 1998,
a 1.4% increase. Despite the increase in operating expense percentage, operating
expenses remained constant for the first quarter of fiscal 1999, compared to
operating expenses for the first quarter of fiscal 1998.
The Company continues to focus on the reduction of operating expenses and
optimization of manufacturing processes in order to improve profitability.
The provision for taxes as a percentage of earnings before taxes was 0% in
the first quarter of fiscal 1999 compared to 39.4% for the corresponding period
in the prior year and 35.7% of income from continuing operations for the entire
fiscal 1998. The annual effective tax rate will be impacted by the loss incurred
in the first quarter and net operating loss carryforwards from fiscal 1998.
Net loss for the first quarter of fiscal 1999 was $390,000, compared to net
earnings of $515,000 for the first quarter of 1998. Basic loss per share for the
first quarter of fiscal 1999 was five cents per share on a weighted average of
8.7 million shares, compared to basic earnings per share of six cents on a
weighted average of 8.6 million shares for the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has amended its credit facility with its primary lender. The
Company's financial results for the fourth quarter of fiscal 1998 created
numerous defaults under the original credit agreement. As part of the amendment,
which restates financial covenants and waives all defaults, the Company and its
lender have agreed to a reduction in the Company's credit facility to $5
million. The Company had approximately $126,000 of cash at the end of the first
quarter, which consisted primarily of investments in money market funds. The
Company's operating credit line has current availability, as of March 31, 1999,
of $5 million with $3,050,000 currently outstanding. The Company anticipates
that existing cash and cash from operations, and existing credit facilities,
will supply sufficient cash for working capital requirements, capital
expenditures and debt repayments for the next twelve months.
Cash flows from operating activities during the first three months of fiscal
1999 were a negative $583,000 compared to a positive $4,000 for the
corresponding period of fiscal 1998. The decrease in cash flows from operating
activities in fiscal 1999 was primarily attributable to the operating loss
incurred during the period and the change in accounts receivable, inventories
and prepaid expenses, which was partially offset by the change in accounts
payable and accrued liabilities. Accounts receivable grew in response to
stronger sales at the end of the first quarter of fiscal 1999 compared to sales
at the end of the
7
fourth quarter of fiscal 1999. Inventory growth is primarily attributable to
production growth in Asia and Europe.
Capital expenditures for the first three months of fiscal 1999 were
$463,000, compared to $194,000 for the corresponding period in fiscal 1998. The
increase in capital expenditures was due in large part to a joint venture
production project underway in the Company's Texas and Oregon facilities. The
Company has instituted a Company-wide program to reduce non-essential capital
expenditures, which are not specifically focused on revenue growth.
Shares of the Company's common stock are repurchased under a systematic
program to manage dilution created by shares issued under employee stock plans.
During October 1998, the Company's Board of Directors authorized a repurchase
program under which up to $1 million of the Company's common stock can be
repurchased in the open market. Under this plan, during the first quarter ended
February 28, 1999, the Company purchased and retired approximately 132,000
shares for an aggregate purchase price of approximately $173,000.
BUSINESS OUTLOOK
The following statements are based on current expectations. These statements
are forward-looking and actual results may differ materially.
The Company currently has sufficient orders from OEMs to believe that sales
growth will resume in fiscal 1999. Based on current projected order releases
from major customers, the sales growth year-to-year is projected to be between
20% and 25% for fiscal 1999.
Gross profit and operating profit margins are expected to slow in 1999. The
Company's fixed cost levels have increased, due to expansions in Ireland and
Singapore, more quickly than initial sales volumes.
Interest expense is expected to increase in fiscal 1999 as borrowing levels
expand to support investment in Ireland and Singapore. This will be partially
offset by lower average interest rates.
The Private Securities Litigation Reform Act of 1995 provides for a new
"safe harbor" for forward looking statements to encourage Companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Act only became law in late December 1995 and, except for the Conference Report,
no official interpretations of the Act's provisions have been published.
Accordingly, the Company has identified important factors, in its recently filed
10-KSB, which could cause the Company's actual financial results to differ
materially from any such results which might be projected, forecast, estimated
or budgeted by the Company in forward looking statements.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In addressing the Year 2000 Issue, the Company is currently evaluating its
computer-based systems, facilities and products and identifying all steps
necessary to determine they are all Year 2000 Ready. The Company is employing a
combination of internal resources and outside consultants to address this issue.
The Company has identified systems which are not Year 2000 Ready, and is in the
process of upgrading or replacing those systems. The Company is currently on
schedule to complete these upgrades and replacements by the year 2000. In
addition, the Company has contacted its vendors to determine whether they are
8
Year 2000 Ready, and is in the process of accumulating those responses. Initial
responses indicate most of the Company's vendors are addressing their Year 2000
Issues.
While the Year 2000 Issue is a top priority of the Company and a significant
amout of resources have been allocated to this issue, there can be no assurance
that all of its systems and equipment or its vendors will be Year 2000 Ready.
However, at this time, the Company does not believe that its or its vendors Year
2000 related issues will have a material adverse effect on the Company's
business. In the unlikely event of a systems failure at one of the Company's
facilitites, any one of a number of other facilities' systems could be utilized
as a backup system.
The total cost to standardize and upgrade all business computer systems is
currently estimated to be $50,000. Through February 28, 1999, the Company has
spent approximately $35,000 of this total. Given the nature of this project it
is impractical to attempt to estimate the total costs specifically related to
the Year 2000 Issue. As the process to become Year 2000 Ready continues,
additional costs may be identified that have not yet been considered.
Consequently, the full cost of all upgrades, replacements and modifications that
may be required to become Year 2000 Ready has not yet been determined.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings to which the Company is a party are discussed in Part 1
Legal Proceedings, in the latest Annual Report on form 10KSB.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None
9
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 14, 1999 ADVANCED MATERIALS GROUP INC.
By: /s/ J. DOUGLAS GRAVEN
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J. Douglas Graven
VICE PRESIDENT AND CFO
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
10