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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998.
/ / 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)
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<S> <C>
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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20211 S. SUSANA ROAD, RANCHO DOMINGUEZ, CALIFORNIA 90221
(Address of principal executive offices)
(310) 537-5444
Issuer's telephone number
------------------------
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, 8,759,055 SHARES AS OF SEPTEMBER 21, 1998.
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ADVANCED MATERIALS GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations
for the Three and Nine months ended August 31, 1998 and August 31, 1997...................... 3
Consolidated Balance Sheets
at August 31, 1998 and November 30, 1997..................................................... 4
Consolidated Statements of Cash Flows
For the Nine months ended August 31, 1998 and August 31, 1997................................ 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
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PART I - FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
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Net sales...................................... $ 6,579,000 $ 7,474,000 $ 22,290,000 $ 21,336,000
Cost of sales.................................. 5,196,000 5,591,000 16,818,000 15,973,000
-------------- -------------- -------------- --------------
Gross profit................................... 1,383,000 1,883,000 5,472,000 5,363,000
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative.......... 1,017,000 1,008,000 3,070,000 2,829,000
Intangible asset amortization................ 94,000 78,000 250,000 235,000
-------------- -------------- -------------- --------------
Total operating expenses....................... 1,111,000 1,086,000 3,320,000 3,064,000
-------------- -------------- -------------- --------------
Income from operations......................... 272,000 797,000 2,152,000 2,299,000
Other income and expenses:
Interest expense............................. (67,000) (85,000) (219,000) (264,000)
Realized gain on sale of securities.......... -- -- -- 139,000
Foreign Exchange Loss........................ (31,000) -- (31,000) --
Other, net................................... (23,000) (1,000) (97,000) 8,000
-------------- -------------- -------------- --------------
Total other income and expenses............ (121,000) (86,000) (347,000) (117,000)
Income before income taxes..................... 151,000 711,000 1,805,000 2,182,000
Income tax provision........................... 10,000 (60,000) 576,000 20,000
-------------- -------------- -------------- --------------
Net income after income taxes.................. $ 141,000 $ 771,000 $ 1,229,000 $ 2,162,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Income per share
Basic per common share:...................... $ 0.02 $ 0.08 $ 0.14 $ 0.22
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares outstanding............ 8,755,722 9,167,286 8,707,083 10,033,118
Diluted per share............................ $ 0.02 $ 0.08 $ 0.13 $ 0.20
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares outstanding............ 9,375,000 10,123,897 9,637,013 10,825,318
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND NOVEMBER 30, 1997
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1997
1998 -------------
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 348,000 $ 312,000
Accounts receivable, net......................................................... 6,393,000 4,079,000
Inventories, net................................................................. 2,852,000 2,466,000
Prepaid expenses and other....................................................... 621,000 239,000
------------- -------------
Total current assets........................................................... 10,214,000 7,096,000
------------- -------------
Property and equipment, net........................................................ 2,799,000 2,337,000
Goodwill, net...................................................................... 2,141,000 2,323,000
Other assets....................................................................... 647,000 845,000
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Total assets $ 15,801,000 $ 12,601,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 3,466,000 $ 2,125,000
Current portion of long-term obligations......................................... 187,000 164,000
Unearned revenues................................................................ 595,000 --
Other............................................................................ 919,000 1,302,000
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Total current liabilities...................................................... 5,167,000 3,591,000
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Long-term liabilities:
Long-term debt................................................................... 2,918,000 2,582,000
Other............................................................................ -- 92,000
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Total liabilities................................................................ 8,085,000 6,265,000
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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; 8,759,055 and
8,604,805 shares issued and outstanding at August 31, 1998 and November 30,
1997, respectively............................................................. 9,000 9,000
Additional paid-in capital....................................................... 7,282,000 7,131,000
Accumulated earnings............................................................... 425,000 (804,000)
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Total stockholders' equity..................................................... 7,716,000 6,336,000
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Total liabilities & stockholders' equity....................................... $ 15,801,000 $ 12,601,000
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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
(UNAUDITED)
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NINE MONTHS ENDED
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AUGUST 31, AUGUST 31,
1998 1997
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Cash flows from operating activities:
Net income..................................................................... $ 1,229,000 $ 2,162,000
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization................................................ 860,000 781,000
Amortization of deferred costs--Ireland...................................... 24,000 --
Amortization of deferred costs--Singapore.................................... 30,000 --
Provision for obsolete inventory............................................. (39,000) --
Provision for doubtful accounts.............................................. -- 73,000
Ireland start-up............................................................. 139,000 --
Deferred Costs--Ireland...................................................... (424,000) --
Deferred Costs--Singapore.................................................... (61,000) --
Deferred Revenue............................................................. 595,000 --
Interest and other on deferred compensation.................................. 104,000 97,000
Loss on disposal of fixed assets............................................. 5,000 4,000
Gain on sale of available-for-sale securities................................ -- (139,000)
Changes in operating assets and liabilities:
Accounts receivable--trade................................................. (2,299,000) (741,000)
Accounts receivable--other................................................. (15,000) (22,000)
Inventories................................................................ (347,000) (527,000)
Prepaid expenses and other................................................. 52,000 153,000
Deferred Income taxes...................................................... (92,000) (289,000)
Accounts payable and accrueds.............................................. 1,306,000 292,000
Income taxes payable....................................................... (348,000) 40,000
-------------- --------------
Net cash provided by operating activities.................................. 719,000 1,884,000
-------------- --------------
Cash flows from investing activities:
Other assets................................................................... 6,000 35,000
Proceeds from sale of available-for-sale securities............................ -- 163,000
Purchases of property and equipment............................................ (1,095,000) (542,000)
-------------- --------------
Net cash used in investing activities...................................... (1,089,000) (344,000)
-------------- --------------
Cash flows from financing activities:
Exercise of common stock options............................................... 151,000 47,000
Purchase and retirement of common stock........................................ -- (3,500,000)
Net borrowings under line of credit............................................ 325,000 726,000
Proceeds received from capitalized financing................................... 55,000 --
Payments on debt............................................................... -- (988,000)
Payments on capital lease obligations.......................................... (29,000) (64,000)
Payments on deferred compensation.............................................. (91,000) (113,000)
Payments on capitalized financing.............................................. (5,000) --
-------------- --------------
Net cash provided by/(used in) financing activities........................ 406,000 (3,892,000)
-------------- --------------
Net change in cash and cash equivalents.................................... 36,000 (2,352,000)
Cash and equivalents, beginning of period.................................. 312,000 2,639,000
Cash and equivalents, end of period........................................ $ 348,000 $ 287,000
-------------- --------------
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................................... $ 162,000 $ 188,000
-------------- --------------
-------------- --------------
Income taxes........................................................... $ 626,000 $ 269,000
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</TABLE>
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NOTES TO 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-QSB. 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. Results of operations for the three and nine months ended
August 31, 1998 are not necessarily indicative of results to be expected for the
full year.
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:
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AUGUST 31,
1998 NOVEMBER 30, 1997
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Raw materials............................................. $ 2,154,000 $ 2,025,000
Work-in-process........................................... 412,000 252,000
Finished goods............................................ 437,000 379,000
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3,003,000 2,656,000
Less allowance for obsolete inventory..................... (151,000) (190,000)
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$ 2,852,000 $ 2,466,000
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3) BASIC AND DILUTED INCOME PER SHARE
Basic and Diluted income per share is computed in accordance with Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128").
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THREE MONTHS ENDED NINE MONTHS ENDED
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AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
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BASIC EPS:
Net income..................................... $ 141,000 $ 771,000 $ 1,229,000 $ 2,162,000
Denominator: Weighted average common shares
outstanding.................................. 8,755,722 9,167,286 8,707,083 10,033,118
-------------- -------------- -------------- --------------
Net income per share (basic)................... $ 0.02 $ 0.08 $ 0.14 $ 0.22
-------------- -------------- -------------- --------------
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DILUTED EPS:
Net income..................................... $ 141,000 $ 771,000 $ 1,229,000 $ 2,182,000
Denominator: Weighted average common shares
outstanding.................................. 8,755,722 9,167,286 8,707,083 10,033,118
Common equivalent shares outstanding (options &
warrants).................................... 1,432,967 1,695,384 1,770,392 1,607,411
Hypothetical shares repurchased at average
market price with proceeds of exercise....... (813,689) (738,773) (840,462) (815,212)
-------------- -------------- -------------- --------------
Total shares................................... 9,375,000 10,123,897 9,837,013 10,825,317
Net income per share (diluted)................. $ 0.02 $ 0.08 $ 0.13 $ 0.20
-------------- -------------- -------------- --------------
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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 Annual Report on Form 10KSB.
6
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MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION
RESULTS OF OPERATIONS
FY 98 CURRENT THREE MONTHS VERSUS FY97
The Company's sales in FY98 decreased by 12.0% to $6,579,000 compared to the
same three-month period in fiscal 1997. Growth in sales to computer printer
makers outside the U.S. and volume increases in other product areas served by
the Company totaled approximately $1,364,000. Reductions in Company sales to the
computer printer industry in the U.S. accounted for approximately $2,259,000.
Gross profit declined as a result of volume decreases and change in product
mix. Gross profit for 1998 decreased by $500,000, to $1,383,000, over the year
ago period. Fixed cost additions in the Ireland and Singapore operations also
contributed to the decrease.
Operating expenses were $1,017,000 in fiscal 1998 versus $1,008,000 in
fiscal 1997. Domestic operating expense levels in FY98 continue below FY97
levels as a result of the Company's continuing efforts to control SG&A expenses.
SG&A levels are higher primarily as a result of cost additions in Ireland.
Earnings before income taxes decreased by $560,000, to $151,000 compared to
$711,000 in the year ago period. The Company recorded an income tax provision of
$10,000 in FY98 versus an income tax benefit of $60,000 in FY97. In FY97 the
Company was utilizing net operating loss tax carry forwards. By the end of
fiscal 1997 all net operating loss tax carry forwards had been exhausted.
Net income for fiscal 1998 was $141,000, or $0.02 per diluted share,
compared to $771,000, or $0.08 per diluted share. EPS in fiscal 1998 was
positively impacted as a result of the 2,000,000-share repurchase completed by
the Company in July 1997.
FY 98 CURRENT NINE MONTHS VERSUS FY97
The Company achieved record sales for year-to-date fiscal 1998. Sales were
$22,290,000 compared to $21,336,000 in fiscal 1997, an increase of 4.5%. The
increase was driven by volume increases from the Company's sales of products to
the computer printer industry in Singapore and Ireland. Those sales increases
accounted for approximately $2,374,000. Sales to other product areas served by
the Company grew by approximately $1,595,000. Lower sales, approximately
$3,015,000, to the computer printer industry in the U.S. partially offset the
increases.
Gross profit was favorably impacted as a result of volume increases. Gross
profit for 1998 increased by $109,000, to $5,472,000, over the year ago period.
Positive volume variances were partially offset by fixed cost additions in
Ireland and Singapore.
Operating expenses were $3,070,000 in fiscal 1998 versus $2,829,000 in
fiscal 1997. As a percent of sales, fiscal 1998 was 13.8% compared to 13.3% in
fiscal 1997. Operating expenses were higher in fiscal 1998 due primarily to the
write-off of $207,000 of start-up costs associated with the opening of the
Company's operations in Ireland and Singapore, and continuing operational costs
in Ireland.
Earnings before income taxes decreased by $377,000 to $1,805,000 compared to
$2,182,000 in the year ago period. FY97 results included $139,000 from a
one-time gain from the sale of stock. Excluding this one-time gain, earnings
before income taxes decreased by $238,000 from the year ago period.
The Company recorded an income tax provision of $576,000 in FY98, resulting
in an effective tax rate of 31.9%. This rate is substantially lower than U.S.
statutory rates and is a result of growth in the Company's foreign sales
operations, which are subject to lower tax rates. In FY97 the Company was
utilizing net operating loss tax carry forwards. As a result, the Company
recorded an income tax provision of $20,000, or an effective rate of 0.9% The
net operating loss tax carry forwards were exhausted by the end of fiscal 1997.
7
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Net income for fiscal 1998 was $1,229,000, or $0.13 per diluted share,
compared to $2,162,000, or $0.20 per diluted share. EPS in FY98 was positively
impacted as a result of the 2,000,000-share repurchase completed by the Company
in July 1997.
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 unasserted claim involving the
Company or its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Company operations generated $725,000 and $2,462,000 of cash during the
three months and nine months of fiscal 1998, respectively. The Company used cash
from operations to fund net working capital additions of $1,743,000, primarily
additions of $2,299,000 in accounts receivable and $347,000 in inventory. The
growth of accounts receivable and inventory is directly attributable to sales
volume increases. The working capital additions were partially offset by a
$1,306,000 increase in accounts payable.
The Company made capital purchases of $306,000 and $1,095,000 during the
current three months and nine months of fiscal 1998, respectively. The capital
expenditures added necessary capacity for die cutting operations in response to
planned volume increases. At the end of the period, the Company had commitments
for capital expenditures totaling approximately $100,000.
The Company had approximately $348,000 of cash at quarter-end, which
consisted primarily of investments in money market funds. The Company's
operating credit line with Wells Fargo has current availability, as of September
21, 1998, of $10,000,000 with $1,500,000 currently outstanding. The Company
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 in fiscal 1998, 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 large volume and longer run products. The
Company's operations in the fiscal 1997 showed strong gross margin results based
on this shift in emphasis. The Company currently has sufficient orders from OEMs
to believe that sales growth will continue. Based on current sales trends and
projected order releases from major customers, the year to year sales growth is
projected to be below 10% for fiscal 1998.
The Company has previously announced the formation of a joint venture with
Foamtec Pte. Ltd in Singapore and green field manufacturing start-up in Ireland.
These facilities began shipments to customers in May and June respectively. We
expect these facilities to begin contributing to both revenues and net income in
the second half of this fiscal year. Revenues and net income should grow
substantially in fiscal year 1999. During the initial start-up phase the Company
will be adding fixed costs. This will result in lower profit margins in the
short run. As volume levels increase profit margins should return to historical
levels.
Income taxes will increase in fiscal 1998. The Company's net operating loss
carry forwards have been fully utilized and effective tax rates in future
periods will be driven by statutory rates. These rates can be partially offset
by careful tax planning and structuring of foreign operations.
Many computer systems experience problems handling dates in and beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the readiness and compliance of its internal computer systems for
handling the year 2000. The Company expects to implement successfully the
systems and programming changes necessary to address year 2000 issues and does
not believe that the cost of such actions will have a
8
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material effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations or financial condition.
The Company is also assessing and addressing the possible effects, on the
Company's operations, of the year 2000 readiness of key customers and suppliers.
The Company's reliance on customers and suppliers, and therefore, on the proper
functioning of their information systems and software, means that their failure
to address year 2000 issues could have a material impact on the Company's
operations and financial results. However, the potential impact and related
costs are not known at this time.
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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 7, 1998 the Company filed suit in the Superior Court of
California, County of Los Angeles, against a former employee of Condor for
breach of promissory note and money lent. The Company believes it will prevail
in this matter
On February 20, 1998 the former employee of Condor filed a cross-complaint
in the Superior Court of California, County of Los Angeles, for damages and
declaratory relief. The cross-complaint alleges that the Company breached an
Employment Agreement with the former employee and claims damages. The Company
believes that the cross-complaint has no merit and intends to vigorously defend
against the claim. Accordingly, no provision for any liability has been made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 20, 1998 to disclose the transfer of
800,000 shares of the Registrant's common stock from Michael W. Crow to various
plaintiffs involved in a class action suit. Terms of the settlement of the suit
were disclosed in a Form 8-K filed by the Registrant on February 25, 1998.
9
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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.
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Dated: September 24, 1998 ADVANCED MATERIALS GROUP INC.
By: /s/ J. DOUGLAS GRAVEN
-----------------------------------------
J. Douglas Graven
VICE PRESIDENT AND CFO
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
10
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 348
<SECURITIES> 0
<RECEIVABLES> 6,495
<ALLOWANCES> 102
<INVENTORY> 2,852
<CURRENT-ASSETS> 10,214
<PP&E> 5,901
<DEPRECIATION> 3,102
<TOTAL-ASSETS> 15,801
<CURRENT-LIABILITIES> 5,167
<BONDS> 405
0
0
<COMMON> 9
<OTHER-SE> 7,707
<TOTAL-LIABILITY-AND-EQUITY> 15,801
<SALES> 6,579
<TOTAL-REVENUES> 6,579
<CGS> 5,196
<TOTAL-COSTS> 5,196
<OTHER-EXPENSES> 1,111
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 151
<INCOME-TAX> 10
<INCOME-CONTINUING> 141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
