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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 MARCH 1, 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
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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, 8,687,805 SHARES AS OF MARCH 31, 1998.
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PART I--FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 1, 1998 AND NOVEMBER 30, 1997
ASSETS
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<CAPTION>
1998 1997
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Current assets:
Cash and cash equivalents........................................................ $ 355,000 $ 312,000
Accounts receivable, net......................................................... 5,336,000 4,052,000
Inventories, net................................................................. 2,490,000 2,466,000
Prepaid expenses and other....................................................... 215,000 266,000
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Total current assets........................................................... 8,396,000 7,096,000
Property and equipment, net........................................................ 2,332,000 2,337,000
Goodwill, net...................................................................... 2,262,000 2,323,000
Other assets....................................................................... 778,000 845,000
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$ 13,768,000 $ 12,601,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,400,000 $ 2,125,000
Current portion of long-term obligations......................................... 187,000 164,000
Other............................................................................ 1,322,000 1,302,000
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Total current liabilities...................................................... 3,909,000 3,591,000
Long-term liabilities:
Long-term debt................................................................... 2,907,000 2,582,000
Other............................................................................ 92,000 92,000
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Total liabilities.............................................................. 6,908,000 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; 8,624,805 and
8,604,805 shares issued and outstanding at March 1, 1998 and November 30, 1997,
respectively................................................................... 9,000 9,000
Additional paid-in capital....................................................... 7,141,000 7,131,000
Accumulated deficit.............................................................. (290,000) (804,000)
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Total stockholders' equity..................................................... 6,860,000 6,336,000
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$ 13,768,000 $ 12,601,000
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The accompanying notes are an integral part of this financial statement.
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
THIRTEEN WEEKS ENDED
MARCH 1,
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1998 1997
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Net sales............................................................................ $ 8,271,000 $ 6,794,000
Cost of sales........................................................................ 6,074,000 5,106,000
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Gross profit......................................................................... 2,197,000 1,688,000
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Operating expenses:
Selling, general and administrative................................................ 1,140,000 846,000
Intangible asset amortization...................................................... 78,000 78,000
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Total operating expenses............................................................. 1,218,000 924,000
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Income from operations............................................................... 979,000 764,000
Other income and expenses:
Interest expense................................................................... (65,000) (96,000)
Realized gain on sale of securities................................................ -- 139,000
Other, net......................................................................... (49,000) (2,000)
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Total other income and expenses.................................................. (114,000) 41,000
Income before income taxes........................................................... 865,000 805,000
Income tax provision................................................................. 350,000 79,000
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Net income after income taxes........................................................ $ 515,000 $ 726,000
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Income per share
Basic per common share:............................................................ $ 0.06 $ 0.07
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Weighted average shares outstanding.................................................. 8,616,427 10,458,742
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Diluted per share.................................................................. $ 0.05 $ 0.06
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Weighted average shares outstanding.................................................. 9,838,030 11,187,504
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The accompanying notes are an integral part of this financial statement.
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ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THIRTEEN WEEKS ENDED
MARCH 1,
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1998 1997
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Cash flows from operating activities:
Net income........................................................................... $ 515,000 $ 726,000
Adjustments to reconcile net income to net cash used in operating activities:........ 155,000 (75,000)
Depreciation and amortization:....................................................... 277,000 263,000
Changes in operating assets and liabilities.......................................... (943,000) (699,000)
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Net cash provided by operating activities.............................................. 4,000 215,000
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Cash flows from investing activities:
Purchases of property and equipment.................................................. (194,000) (201,000)
Proceeds from sale of available-for-sale securities.................................. -- 163,000
Other.................................................................................. (90,000) 11,000
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Net cash used in investing activities.................................................. (284,000) (27,000)
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Cash flows from financing activities:
Net change in borrowings............................................................. 364,000 66,000
Other................................................................................ (41,000) (73,000)
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Net cash provided by (used in) financing activities.................................... 323,000 (7,000)
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Net change in cash and cash equivalents................................................ 43,000 181,000
Cash and cash equivalents, beginning of period......................................... 312,000 2,639,000
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Cash and cash equivalents, end of period............................................... $ 355,000 $ 2,820,000
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................................... $ 47,000 $ 61,000
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Income taxes....................................................................... $ 93,000 $ 14,000
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The accompanying notes are an integral part of this financial statement.
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NOTES TO FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
These 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.
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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<CAPTION>
MARCH 1, 1998 NOVEMBER 30, 1997
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Raw Materials.............................................. $ 2,038,000 $ 2,025,000
Work-in-process............................................ 319,000 252,000
Finished Goods............................................. 303,000 379,000
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2,660,000 2,656,000
Less allowance for obsolete inventory...................... (170,000) (190,000)
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$ 2,490,000 $ 2,466,000
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3) 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.
4) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130 ("SFAS 130"), "Comprehensive Income" was issued
and becomes effective in 1998, requiring reclassification of earlier financial
statements for comparative purposes. SFAS 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities, be shown in the financial statements.
SFAS 130 does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. The Company does not
expect that the implementation of SFAS 130 will have a material effect upon the
Company's financial statements.
In June 1997, SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information" was issued. Implementation of SFAS 131 has
not had a material impact on the Company's financial statements.
In February 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of Information
about Capital Structure." Implementation of SFAS 129 has not required
significant revision of prior disclosures.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which is a
disclosure standard requiring public companies to present basic earnings per
share, and if applicable, diluted earnings per share, instead of primary and
fully diluted earnings per share. Earnings per share for the thirteen-week
period ended March 1, 1997 have been restated accordingly.
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MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION
RESULTS OF OPERATIONS
FY 98 CURRENT THIRTEEN WEEKS VERSUS FY97
The Company had sales for the current thirteen weeks of fiscal 1998 of
$8,271,000 compared to $6,794,000 for the thirteen weeks of fiscal 1997, an
increase of 22%. The growth came primarily from volume increases in sales to
computer printer makers.
Gross profit was favorably impacted, as a result of the volume increases.
Gross profit for 1998 increased by 30%, to $2,197,000, over the year ago period.
Volume increases created production efficiency gains as a result of longer
factory production runs.
Operating expenses were $1,140,000 in fiscal 1998 versus $846,000 in fiscal
1997. As a percent of sales, fiscal 1998 was 14% compared to 12% in fiscal 1997.
Operating expenses were higher in fiscal 1998 as a result of the Company
expensing $139,000 of one-time costs incurred during start-up of its facility in
Ireland, headcount increases in sales and engineering, and higher commission
expense associated with increased sales levels.
Interest expense decreased by 32%, or $31,000, in fiscal 1998 as a result of
lower debt levels.
Income tax provision for fiscal 1998 was $350,000 versus $79,000 in fiscal
1997, an increase of $271,000. The Company has exhausted Net Operating Loss
("NOLs") carryforwards and has recorded an effective tax rate of 40%. The taxes
recorded in fiscal 1997 represented only minimum tax and alternative minimum
tax.
Net income for fiscal 1998 was $515,000, or $0.05 per share, compared to
$726,000, or $0.06 per share for fiscal 1997. Net income for fiscal 1997
included a one-time gain of $139,000 from the sale of securities. Excluding the
one-time gain, the Company would have posted pro forma net income of $587,000.
Comparing fiscal 1998 to pro forma fiscal 1997 shows a decline of $72,000. The
decline is fully attributable to the $271,000 increase in taxes.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the 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 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 major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
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 $4,000 of cash during the current thirteen
weeks fiscal 1998. Accounts receivable expanded approximately $1.3 million
during the first quarter. The growth of accounts receivable is attributable to
sales volume increases.
The Company made capital purchases of approximately $200,000 during the
current thirteen weeks of fiscal 1998. The capital expenditures were in
conjunction with the Company's start-up in Ireland. At the
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end of the period, the Company had commitments for capital expenditures totaling
approximately $200,000.
The Company had approximately $355,000 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 March 31,
1998, of $3,321,000 with $1,643,000 currently outstanding.
AMG has entered into a $10 million revolving credit facility with Wells
Fargo Bank, with $1 million currently outstanding, and is negotiating with
several lenders in Ireland to provide a credit facility for capital equipment
purchases made by the Company's Irish subsidiary. The Company's business plans
call for substantial investments in both its Ireland and Singapore operations in
1998. The Company anticipates that existing cash, cash from operations and
existing lines of credit will supply sufficient cash for investment, working
capital requirements, capital expenditures and debt payments 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.
The Company has shifted its marketplace strategy to place primary marketing
emphasis on large volume and longer run products. The Company's operations have
shown 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 in fiscal 1998. Based on current projected order releases from major
customers, the sales growth year-to-year is projected to be above 20% 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.
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 from these
businesses 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 to expected levels,
profit margins should return to historical levels.
Interest expense is expected to increase in fiscal 1998 as borrowing levels
expand to support investment in Ireland and Singapore. This will be partially
offset by lower average interest rates.
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.
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
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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--None
(b) Reports on Form 8-K
On February 25, 1998 the Company filed a report on Form 8-K to disclose the
transfer of 800,000 shares of the Registrant's common stock pursuant to the
terms of a stipulation of settlement captioned IN RE WILSHIRE TECHNOLOGIES
SECURITIES LITIGATION.
8
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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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<S> <C> <C>
Dated: March 14, 1998 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)
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAR-01-1998
<CASH> 355
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 102
<INVENTORY> 2,490
<CURRENT-ASSETS> 8,396
<PP&E> 5,075
<DEPRECIATION> 2,743
<TOTAL-ASSETS> 13,768
<CURRENT-LIABILITIES> 3,909
<BONDS> 405
0
0
<COMMON> 9,000
<OTHER-SE> 7,141
<TOTAL-LIABILITY-AND-EQUITY> 13,768
<SALES> 8,271
<TOTAL-REVENUES> 8,271
<CGS> 6,074
<TOTAL-COSTS> 6,074
<OTHER-EXPENSES> 1,218
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 865
<INCOME-TAX> 350
<INCOME-CONTINUING> 515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
