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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD
ENDED FEBRUARY 28, 1997.
/ / TRANSITION REPORT UNDER 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, 10,458,752 SHARES AS OF MARCH 21, 1997.
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PART I - FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND NOVEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 2,820,000 $ 2,639,000
Accounts receivable, net......................................................... 3,491,000 3,064,000
Inventories...................................................................... 2,085,000 2,110,000
Prepaid expenses and other....................................................... 377,000 506,000
------------- -------------
Total current assets........................................................... 8,773,000 8,319,000
Property and equipment, net........................................................ 2,291,000 2,279,000
Goodwill, net...................................................................... 2,504,000 2,564,000
Other assets....................................................................... 473,000 499,000
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$ 14,041,000 $ 13,661,000
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</TABLE>
The accompanying notes are an integral part of this financial statement.
2
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND NOVEMBER 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable................................................................. $ 1,828,000 $ 1,993,000
Current portion of long-term obligations......................................... 1,177,000 1,197,000
Other............................................................................ 740,000 863,000
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Total current liabilities...................................................... 3,745,000 4,053,000
Long-term liabilities:
Long-term debt................................................................... 2,938,000 2,888,000
Other............................................................................ 150,000 150,000
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Total liabilities.............................................................. 6,833,000 7,091,000
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Stockholders' equity:
Preferred stock - $.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding................................... -- --
Common stock - $.001 par value; 25,000,000 shares
authorized; 10,458,742 shares issued and outstanding
at February 28, 1997 and November 30, 1996, respectively....................... 10,000 10,000
Additional paid-in capital....................................................... 10,192,000 10,192,000
Unrealized holding gain on available-for-sale securities......................... -- 88,000
Accumulated deficit.............................................................. (2,994,000) (3,720,000)
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Total stockholders' equity..................................................... 7,208,000 6,570,000
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$ 14,041,000 $ 13,661,000
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</TABLE>
The accompanying notes are an integral part of this financial statement.
3
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales............................................................................. $ 6,794,000 $ 3,810,000
Cost of sales......................................................................... 5,106,000 3,188,000
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Gross profit.......................................................................... 1,688,000 622,000
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Operating expenses:
Selling, general and administrative................................................. 846,000 736,000
Intangible asset amortization....................................................... 78,000 74,000
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Total operating expenses.......................................................... 924,000 810,000
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Income (loss) from operations......................................................... 764,000 (188,000)
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Other income and expenses:
Realized gain on sale of securities................................................. 130,000 1,279,000
Interest expense.................................................................... (96,000) (221,000)
Other, net.......................................................................... 7,000 (7,000)
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Total other income and expenses................................................... 41,000 1,051,000
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Income before income taxes............................................................ 805,000 863,000
Income taxes.......................................................................... 79,000 4,000
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Net income............................................................................ $ 726,000 $ 859,000
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Primary earnings per common share:.................................................... $ .07 $ .08
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Weighted average common shares outstanding............................................ 11,152,427 10,578,676
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</TABLE>
The accompanying notes are an integral part of this financial statement.
4
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 726,000 $ 859,000
Adjustments to reconcile net income to net cash
used in operating activities:................................................... 188,000 (1,044,000)
Changes in operating assets and liabilities....................................... (699,000) (1,760,000)
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Net cash provided by (used in) operating activities................................. 215,000 (1,945,000)
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Cash flows from investing activities:
Purchases of property and equipment............................................... (201,000) (27,000)
Proceeds from sale of available-for-sale securities............................... 163,000 435,000
Other............................................................................. 11,000 1,338,000
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Net cash (used in) provided by investing activities................................. (27,000) 1,746,000
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Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs......................... -- 700,000
Net change in borrowings.......................................................... 66,000 (191,000)
Payments on debt.................................................................. -- (20,000)
Other............................................................................. (73,000 --
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Net cash provided by (used in) financing activities................................. (7,000) 489,000
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Net change in cash and cash equivalents............................................. 181,000 290,000
Cash and cash equivalents, beginning of period...................................... 2,639,000 66,000
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Cash and cash equivalents, end of period............................................ $ 2,820,000 $ 356,000
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.......................................................................... $ 61,000 $ 172,000
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Income taxes...................................................................... $ 14,000 $ 2,000
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</TABLE>
The accompanying notes are an integral part of this financial statement.
5
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NOTES TO FINANCIAL STATEMENTS
1) The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements are not
included herein. The interim statements should be read in conjunction with
the financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full fiscal year 1997; in
the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature.
2) In January 1997 the Company sold 50,000 shares of Innovative Technologies,
Ltd. for approximately $163,000. These securities had been accounted for as
available-for-sale securities in accordance with Statement of Financial
Accounting Standards No. 115. As a result of the transaction the Company
recorded a gain of $130,000 in the current quarter.
3) Legal proceedings to which the Company is a party are discussed in Part 1
Legal Proceedings, in the Annual Report on Form 10-KSB.
4) Earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding, after giving effect to dilutive
stock options and warrants. The 7 1/2% convertible debentures were
determined, at the time of issuance, to not be common stock equivalents, and
accordingly, are not included in earnings per share calculations for either
period. Primary and fully diluted earnings per share for the three-month
periods ended February 28, 1997 and February 29, 1996 were approximately the
same.
5) During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which defines a fair value based method of
accounting for stock-based compensation. However, SFAS 123 allows an entity
to continue to measure compensation cost related to stock and stock options
issued to employees using the intrinsic method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting method
of APB 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value method of accounting defined in SFAS 123 had
been applied. The Company has elected to account for its stock-based
compensation to employees under APB 25.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock
options under the fair value method pursuant to SFAS 123, rather than the
method pursuant to APB 25 discussed above. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions: risk-free interest rates of 6.3%;
dividend yields of 0.0%; volatility factors of the expected market price of
the Company's common stock of 125%; and expected terms of three years.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
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For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
FEBRUARY 28, NOVEMBER 30,
1997 1996
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<S> <C> <C>
Pro forma net income:
Net income, as reported........................................................ $ 726,000 $4,184,000
Compensation expense under SFAS 123............................................ 84,000 428,000
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Pro forma net income........................................................... $ 642,000 $3,756,000
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Pro forma net income per share before extraordinary item....................... $ 0.06 $ 0.30
Extraordinary item............................................................. -- 0.05
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Pro forma net income per share................................................. $ 0.06 $ 0.35
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</TABLE>
Included in the three months ended February 28, 1997 and the year ended
November 30, 1996 are the effect of the 95,217 and 481,500 options issued to
key employees during the first quarter fiscal year 1997 and the fiscal year
1996, respectively, to purchase the Company's common stock which were fully
vested on the date of grant. Compensation expense under SFAS 123 for the
three months ended February 28, 1997 and for the year ended November 30,
1996 of $77,000 and $350,000, respectively, was charged to pro forma net
income for the entire estimated fair market value of the aforementioned
options awarded.
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MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION
RESULTS OF OPERATIONS
The Company achieved record sales for the first quarter of fiscal 1997.
Sales were $6,794,000 compared to $3,810,000 for the first quarter of fiscal
1996, an increase of 78.3%. The increase was driven by a volume increase as the
Company's sales of products introduced in the second and third quarters of
fiscal 1996. The two new products, sold to computer printer makers, accounted
for approximately $2,900,000. Revenues from the company's new facility in
Denver, Colorado accounted for $180,000 of volume increase. The volume increases
from the new products and the acquisition was partially offset by slower sales
in the medical and contamination control product lines
Gross profit was favorably impacted, as a result of the volume increases
from the new product introductions. Gross profit for 1997 increased by 174%, to
$1,688,000, over the year ago period. Volume increases lifted the Company above
breakeven levels and created production efficiency gains as a result of longer
factory production runs.
Operating expenses were $924,000 in fiscal 1997 versus $810,000 in fiscal
1996. As a percent of sales, fiscal 1997 was 13.6% compared to 21.3% in fiscal
1996. Operating expenses were higher in fiscal 1997 as a result of headcount
increases in sales and engineering, higher commission expense associated with
increased sales levels and the Company's incorporation of the Denver, Colorado
acquisition into its operations.
Interest expense decreased by 56.6%, or $125,000, in fiscal 1997 as a result
of the Company's efforts to restructure its balance sheet in fiscal 1996.
Net income for fiscal 1997 was $726,000, or $0.07 per share, compared to
$859,000, or $0.08 per share. Fiscal 1997 results included a one-time
transaction relating to the sale of 50,000 shares of IT stock in January 1997.
Excluding this one-time transaction the Company, would have had proforma net
income of $609,000 or $0.06 per share.
Net income for fiscal 1996 included one-time gains for sales of securities
totaling $1,279,000. Excluding these one-time gains, the Company would have
posted a proforma net loss of $420,000, or $0.04 per share.
Comparing proforma net income for fiscal 1997, excluding one-time items,
compared to fiscal 1996, excluding one-time items, fiscal 1997 proforma net
income was $609,000 versus a loss $420,000 in fiscal 1996. This was an
improvement of $1,029,000 in year-to-year results.
The Company has not received any notice of investigation, claim or
proceeding relating environmental liability nor is the Company aware of any
environmental litigation, investigation or unassorted claim involving the
Company or its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Company operations generated $914,000 of cash during the first quarter of
fiscal 1997. The Company used cash from operations and the sales of securities
to fund net working capital additions of $699,000, primarily additions of
$427,000 in accounts receivable. The growth of accounts receivable is directly
attributable to sales volume increases.
The Company made capital purchases of $201,000 in the first quarter of
fiscal 1997. The capital expenditures added necessary capacity for die cutting
operations in response to volume increases. At the end of the quarter, the
Company had no material commitments for capital expenditures.
The Company had approximately $2,820,000 of cash at year-end, which
consisted primarily of investments in money market funds. The Company's
operating credit line with Wells Fargo has current availability, as of March 21,
1997, of $2,514,000 with $936,000 currently outstanding. The Company
8
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anticipates that existing cash and cash from operations, and existing lines of
credit, will supply sufficient cash for working capital requirements, capital
expenditures and debt payments, totaling $988,000 in fiscal 1997, for the next
twelve months.
BUSINESS OUTLOOK
The following statements are based on current expectations. These statements
are forward-looking and actual results may differ materially.
Advanced Materials Group has shifted its marketplace strategy to place
primary marketing emphasis on the computer and related products niche. The
Company's operations in the three-month period ended February 1997, showed
strong results based on this shift in emphasis in terms of sales mix and gross
margins. Based on existing program orders and commitments, the Company
anticipates sales growth of between 35% to 40%, i.e. an estimated sales range of
approximately $24.7 million to $25.6 million for fiscal 1997.
The Company is also in the process of formulating plans to expand into the
Pacific Rim and Great Britain. This is in response to requests from some of
Advanced Materials' major customers who conduct operations in Europe and Asia
and would like the Company to establish a presence proximal to their operations.
Advanced Materials management believes the establishment of such operations
would be highly beneficial to the Company in that it would result in a greater
volume of business from the aforementioned customers while at the same time
positioning it to take advantage of additional growth opportunities in Southeast
Asia and Europe.
Separately, ongoing testing on the waterproof, breathable coating system
that Advanced Materials Group has been developing jointly in the United Kingdom
with Innovative Technologies plc remains inconclusive, and the Company is
planning to conduct follow-up tests in fiscal 1997.
Interest expense is estimated to continue to decline in fiscal 1997 as a
result of debt reductions made in fiscal 1996, scheduled reductions in fiscal
1997 and rate differentials between the Concord and Wells Fargo credit lines,
even though the prime interest has increased and may be increased further during
fiscal 1997.
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.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- None
(b) Reports -- None
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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 2, 1997 ADVANCED MATERIALS GROUP INC.
By: /s/ J. DOUGLAS GRAVEN
-----------------------
J. Douglas Graven
Vice President and CFO
(Principal Financial
Officer and
Principal Accounting
Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 2,820
<SECURITIES> 0
<RECEIVABLES> 3,541
<ALLOWANCES> 100
<INVENTORY> 2,085
<CURRENT-ASSETS> 8,773
<PP&E> 4,312
<DEPRECIATION> 2,021
<TOTAL-ASSETS> 14,041
<CURRENT-LIABILITIES> 3,745
<BONDS> 555
0
0
<COMMON> 10
<OTHER-SE> 7,198
<TOTAL-LIABILITY-AND-EQUITY> 14,041
<SALES> 6,794
<TOTAL-REVENUES> 6,794
<CGS> 5,106
<TOTAL-COSTS> 5,106
<OTHER-EXPENSES> 787<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 805
<INCOME-TAX> 79
<INCOME-CONTINUING> 726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 726
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>INCLUDES $130 GAIN ON SALE OF STOCK.
</FN>
</TABLE>
