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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MAY 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
------------------------
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.)
</TABLE>
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, 8,749,055 SHARES AS OF JUNE 19, 1998.
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ADVANCED MATERIALS GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations
for the Three and Six months ended May 31, 1998 and June 1, 1997............................. 3
Consolidated Balance Sheets
at May 31, 1998 and November 30, 1997........................................................ 4
Consolidated Statements of Cash Flows
For the Six months ended May 31, 1998 and June 1, 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 4. Submission of Matters to a Vote of Security Holders............................................ 9
ITEM 6. Exhibits and Reports on Form 8-K............................................................... 10
Signatures..................................................................................... 11
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
MAY 31, 1998 JUNE 1, 1997 MAY 31, 1998 JUNE 1, 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................ $7,440,000 $ 7,068,000 $ 15,711,000 $ 13,862,000
Cost of sales........................................ 5,547,000 5,276,000 11,622,000 10,382,000
------------ ------------- ------------- -------------
Gross profit......................................... 1,893,000 1,792,000 4,089,000 3,480,000
------------ ------------- ------------- -------------
Operating expenses:
Selling, general and administrative................ 913,000 975,000 2,053,000 1,821,000
Intangible asset amortization...................... 78,000 79,000 156,000 157,000
------------ ------------- ------------- -------------
Total operating expenses............................. 991,000 1,054,000 2,209,000 1,978,000
------------ ------------- ------------- -------------
Income from operations............................... 902,000 738,000 1,880,000 1,502,000
Other income and expenses:
Interest expense................................... (87,000) (83,000) (152,000) (179,000)
Realized gain on sale of securities................ -- -- -- 139,000
Other, net......................................... (25,000) 11,000 (74,000) 9,000
------------ ------------- ------------- -------------
Total other income and expenses................ (112,000) (72,000) (226,000) (31,000)
------------ ------------- ------------- -------------
Income before income taxes........................... 790,000 666,000 1,654,000 1,471,000
Income tax provision................................. 216,000 1,000 566,000 80,000
------------ ------------- ------------- -------------
Net income after income taxes........................ $ 574,000 $ 665,000 $ 1,088,000 $ 1,391,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Income per share
Basic per common share:............................ $ 0.07 $ 0.06 $ 0.13 $ 0.13
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average shares outstanding.................. 8,735,722 10,473,327 8,682,764 10,466,034
Diluted per share:................................. $ 0.06 $ 0.06 $ 0.11 $ 0.12
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average shares outstanding.................. 9,718,597 11,164,552 9,768,020 11,176,028
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND NOVEMBER 30, 1997
<TABLE>
<CAPTION>
1997
1998 -------------
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 396,000 $ 312,000
Accounts receivable, net......................................................... 4,538,000 4,079,000
Inventories, net................................................................. 2,938,000 2,466,000
Prepaid expenses and other....................................................... 582,000 239,000
------------- -------------
Total current assets........................................................... 8,454,000 7,096,000
------------- -------------
Property and equipment, net........................................................ 2,714,000 2,337,000
Goodwill, net...................................................................... 2,202,000 2,323,000
Other assets....................................................................... 782,000 845,000
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Total assets................................................................... $ 14,152,000 $ 12,601,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,102,000 $ 2,125,000
Current portion of long-term obligations......................................... 187,000 164,000
Unearned revenues................................................................ 251,000 --
Other............................................................................ 1,493,000 1,302,000
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Total current liabilities...................................................... 4,033,000 3,591,000
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Long-term liabilities:
Long-term debt................................................................... 2,472,000 2,582,000
Other............................................................................ 92,000 92,000
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Total liabilities.............................................................. 6,597,000 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; 8,744,055 and
8,604,805 shares issued and outstanding at May 31, 1998 and November 30, 1997,
respectively................................................................... 9,000 9,000
Additional paid-in capital....................................................... 7,262,000 7,131,000
Accumulated earnings/(deficit)..................................................... 284,000 (804,000)
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Total stockholders' equity....................................................... 7,555,000 6,336,000
------------- -------------
Total liabilities and stockholders' equity..................................... $ 14,152,000 $ 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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<CAPTION>
SIX MONTHS ENDED
--------------------------
MAY 31, 1998 JUNE 1, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $1,088,000 $ 1,391,000
Adjustments to reconcile net income to net cash used in operating activities:....... 77,000 (174,000)
Depreciation and amortization....................................................... 572,000 517,000
Changes in operating assets and liabilities......................................... (718,000) (354,000)
------------ ------------
Net cash provided by operating activities............................................. 1,019,000 1,380,000
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment................................................. (789,000) (435,000)
Proceeds from sale of available-for-sale securities................................. -- 163,000
Other............................................................................... (120,000) 25,000
------------ ------------
Net cash used in investing activities................................................. (909,000) (247,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs....................... 131,000 17,000
Net change in borrowings............................................................ (93,000) (729,000)
Other............................................................................... (64,000) (128,000)
------------ ------------
Net cash used in financing activities................................................. (26,000) (840,000)
------------ ------------
Net change in cash and cash equivalents............................................... 84,000 293,000
Cash and cash equivalents, beginning of period........................................ 312,000 2,639,000
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 396,000 $ 2,932,000
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.......................................................................... $ 116,000 $ 139,000
------------ ------------
------------ ------------
Income taxes...................................................................... $ 368,000 $ 79,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
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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 six months ended
May 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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MAY 31, 1998 NOVEMBER 30, 1997
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Raw materials............................................... $2,355,000 $ 2,025,000
Work-in-process............................................. 330,000 252,000
Finished goods.............................................. 423,000 379,000
------------ -----------------
3,108,000 2,656,000
Less allowance for obsolete inventory....................... (170,000) (190,000)
------------ -----------------
$2,938,000 $ 2,466,000
------------ -----------------
------------ -----------------
</TABLE>
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").
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
MAY 31, 1998 JUNE 1, 1997 MAY 31, 1998 JUNE 1, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income............................................ $ 574,000 $ 665,000 $1,088,000 $ 1,391,000
Denominator: Weighted average common shares
outstanding......................................... 8,735,722 10,473,327 8,682,764 10,466,035
------------ ------------- ------------ -------------
Net income per share (basic).......................... $ 0.07 $ 0.06 $ 0.13 $ 0.13
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
DILUTED EPS:
Net income............................................ $ 573,000 $ 665,000 $1,088,000 $ 1,391,000
Denominator: Weighted average common shares
outstanding......................................... 8,735,722 10,473,327 8,682,764 10,466,034
Common equivalent shares outstanding (options &
warrants)........................................... 1,479,355 1,618,967 1,939,105 1,563,425
Hypothetical shares repurchased at average market
price with proceeds of exercise..................... (496,480) (927,742) (853,849) (853,432)
------------ ------------- ------------ -------------
Total shares.......................................... 9,718,597 11,164,552 9,768,020 11,176,028
Net income per share (diluted)........................ $ 0.06 $ 0.06 $ 0.11 $ 0.12
------------ ------------- ------------ -------------
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</TABLE>
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 increased by 5.4% to $7,440,000 compared to the
same three month period in fiscal 1997. The growth was primarily driven by
volume increases from the Company's sales of products to the computer printer
industry in the US and Singapore. Those sales increases accounted for
approximately $1,361,000. The increases were offset by a decline of $1,283,000,
due to the discontinuation of one customer's product, also sold to the computer
printer industry. Growth in sales to other product areas served by the Company
was approximately $294,000.
Gross profit was favorably impacted, as a result of the volume increases and
change in product mix. Gross profit for 1998 increased by 5.6%, to $1,893,000,
over the year ago period.
SG&A expenses were $913,000 in fiscal 1998 versus $975,000 in fiscal 1997.
As a percent of sales, fiscal 1998 was 12.3% compared to 13.8% in fiscal 1997.
Operating expenses were lower in fiscal 1998 as a result of the Company's
continuing efforts to control SG&A expenses.
Earnings before income taxes increased by 18.6% to $790,000 compared to
$666,000 in the year ago period. The Company recorded an income tax provision of
$216,000 in FY98 versus $1,000 in FY97. In FY97 the Company was utilizing net
operating loss tax carryforwards. By the end of fiscal 1997 all net operating
loss tax carryforwards had been exhausted.
Net income for fiscal 1998 was $574,000, or $0.06 per diluted share,
compared to $665,000, or $0.06 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 SIX MONTHS VERSUS FY97
The Company achieved record sales for the first half of fiscal 1998. Sales
were $15,711,000 compared to $13,862,000 in fiscal 1997, an increase of 13.3%.
The increase was driven by volume increases from the Company's sales of products
to the computer printer industry in the US, Ireland and Singapore. Those sales
increases accounted for approximately $2,488,000. The increases were offset by a
decline of $1,234,000, due to the discontinuation of one customer's product,
also sold to the computer printer industry. Sales to other product areas served
by the Company grew by approximately $595,000.
Gross profit was favorably impacted, as a result of the volume increase and
shift in product mix. As a per cent of sales, fiscal 1998 was 26.0 versus 25.1.
Gross profit for 1998 increased by 17.5%, to $4,089,000, over the year ago
period. Volume increases resulted in favorable labor and overhead utilization
and product mix lead to favorability on the direct material line.
SG&A expenses were $2,053,000 in fiscal 1998 versus $1,821,000 in fiscal
1997. As a percent of sales, fiscal 1998 was 13.1% compared to 13.1% in fiscal
1997. Operating expenses were higher in fiscal 1998 due primarily to the
write-off of $173,000 of start-up costs associated with the opening of the
Company's facility in Ireland.
Earnings before income taxes increased by 12.4% to $1,654,000 compared to
$1,471,000 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 tax were up 24.2%.
The Company recorded an income tax provision of $566,000 in FY98, resulting
in an effective tax rate of 34.2%. This rate is substantially lower than US
statutory rates and is a result of growth in the Company's foreign sales, which
are subject to lower tax rates. In FY97 the Company was utilizing net operating
loss tax carryforwards. As a result, the Company recorded an income tax
provision of $80,000, or an effective rate of 5.4% The net operating loss tax
carryforwards were exhausted by the end of fiscal 1997.
7
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Net income for fiscal 1998 was $1,088,000, or $0.11 per diluted share,
compared to $1,391,000, or $0.12 per diluted share. Excluding the $139,000 from
a one-time gain from the sale of stock, FY97 pro forma net income would have
been $1,252,000, or $0.11 per 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 to 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 $790,000 and $1,737,000 of cash during the
current three months and six months of fiscal 1998, respectively. The Company
used cash from operations to fund net working capital additions of $718,000,
primarily additions of $439,000 in accounts receivable and $452,000 in
inventory. The growth of accounts receivable and inventory is directly
attributable to sales volume increases.
The Company made capital purchases of $595,000 and $789,000 during the
current three months and six months of fiscal 1998, respectively. The capital
expenditures added necessary capacity for die cutting operations in response to
volume increases. At the end of the period, the Company had commitments for
capital expenditures totaling approximately $100,000.
The Company had approximately $396,000 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 June 19,
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 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 above 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 term. As volume levels increase profit margins should return to historical
levels.
Interest expense is expected to increase in fiscal 1998 as borrowing levels
expand to support investment and working capital requirements in Ireland. This
will be partially offset by lower average interest rates.
Income taxes will increase in fiscal 1998. The Company's net operating loss
carryforwards 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.
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
8
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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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Stockholders (the "Annual
Meeting") on April 28, 1998. At the Annual Meeting, the Company's stockholders
elected Timothy R. Busch, Steve F. Scott, N. Price Paschall, Dr. Michael Ledeen,
Dr. Allan H. Meltzer and Maurice J. DeWald to the Company's Board of Directors
and approved certain proposals described more fully below. Proxies were
solicited by the Company pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. As of March 31, 1998, the record date for the
Annual Meeting, there were approximately 8,687,805 shares of the Company's
Common Stock outstanding, of which 6,836,367 shares, or 78.7%, were present in
person or by proxy at the Annual Meeting.
The following matters were brought before the Annual Meeting:
1) Election of Directors. Each of the following persons was elected as a
director of the Company, to serve until the next annual meeting of the
Company's stockholders and until his successor has been elected and
qualified or until his earlier resignation and removal:
<TABLE>
<CAPTION>
SHARES IN
FAVOR SHARES WITHHELD
-------------- ---------------
<S> <C> <C>
Timothy R. Busch............................................ 6,818,300 18,067
Steve F. Scott.............................................. 6,819,378 16,989
N. Price Paschall........................................... 6,819,378 16,989
Dr. Michael Ledeen.......................................... 6,819,367 17,000
Dr. Allan Meltzer........................................... 6,819,329 17,038
Maurice DeWald.............................................. 6,819,367 17,000
</TABLE>
2) Approval of 1998 Stock Option Plan was voted on and approved by the
stockholders as follows:
<TABLE>
<CAPTION>
SHARES IN
FAVOR SHARES AGAINST SHARES ABSTAINED BROKER NON-VOTE
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<S> <C> <C> <C>
3,648,243 260,012 26,388 2,901,724
</TABLE>
9
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3) Ratification of Selection of Independent Accountants. The selection of Ernst
& Young, L.L.P. as the Company's independent accountants for the fiscal year
ending November 30, 1998 was voted on and ratified by the Company's
stockholders as follows:
<TABLE>
<CAPTION>
SHARES IN
FAVOR SHARES AGAINST SHARES ABSTAINING
- -------------- --------------- -------------------
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6,796,446 30,495 9,426
</TABLE>
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 March 18, 1998 to disclose the signing of a
two-year $10 million credit facility with Wells Fargo Bank.
The Company filed a Form 8-K on April 8, 1998 in order to disclose the
dismissal of the Company's former independent accountants, Corbin & Wertz, and
the appointment of Ernst & Young L.L.P. as the Company's new independent
accountants.
10
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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.
<TABLE>
<S> <C> <C>
Dated: July 1, 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>
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> MAR-02-1998
<PERIOD-END> MAY-31-1998
<CASH> 396
<SECURITIES> 0
<RECEIVABLES> 4,643
<ALLOWANCES> 105
<INVENTORY> 2,938
<CURRENT-ASSETS> 8,454
<PP&E> 5,610
<DEPRECIATION> 2,895
<TOTAL-ASSETS> 14,152
<CURRENT-LIABILITIES> 4,033
<BONDS> 405
0
0
<COMMON> 9
<OTHER-SE> 7,546
<TOTAL-LIABILITY-AND-EQUITY> 14,152
<SALES> 7,440
<TOTAL-REVENUES> 7,440
<CGS> 5,547
<TOTAL-COSTS> 5,547
<OTHER-EXPENSES> 991
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> 790
<INCOME-TAX> 216
<INCOME-CONTINUING> 574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
