<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED AUGUST 27, 2000.
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-16401
------------------------
ADVANCED MATERIALS GROUP, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
NEVADA 33-0215295
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
</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, 8,626,055 SHARES AS OF August 27, 2000.
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<PAGE>
ADVANCED MATERIALS GROUP,INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the three and nine
months ended August 27, 2000 and August 29, 1999
(unaudited)................................................. 3
Consolidated Balance Sheets at August 27, 2000 (unaudited)
and November 30, 1999....................................... 4
Consolidated Statements of Cash Flows for the nine months
ended August 27, 2000 and August 29, 1999 (unaudited)....... 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 14
ITEM 6. Exhibits and Reports on Form 8-K............................ 14
Signatures.................................................. 15
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM I--CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 27, 2000 AUGUST 29, 1999 AUGUST 27, 2000 AUGUST 29, 1999
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales............................. $10,491,000 $ 7,737,000 $30,215,000 $24,176,000
Cost of sales......................... 8,877,000 7,291,000 25,535,000 21,359,000
----------- ----------- ----------- -----------
Gross profit.......................... 1,614,000 446,000 4,680,000 2,817,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative.................... 1,173,000 1,301,000 3,318,000 3,483,000
Depreciation and amortization....... 74,000 57,000 207,000 160,000
----------- ----------- ----------- -----------
Total operating expenses.............. 1,247,000 1,358,000 3,525,000 3,643,000
----------- ----------- ----------- -----------
Income (loss) from operations......... 367,000 (912,000) 1,155,000 (826,000)
Other income (expense):
Interest expense.................... (126,000) (175,000) (376,000) (343,000)
Foreign exchange gain............... 45,000 8,000 46,000 19,000
Other, net.......................... (26,000) (20,000) (48,000) (63,000)
----------- ----------- ----------- -----------
Total other income and expenses... (107,000) (187,000) (378,000) (387,000)
Income (loss) before income taxes..... 260,000 (1,099,000) 777,000 (1,213,000)
Income tax expense.................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss)..................... $ 260,000 $(1,099,000) 777,000 $(1,213,000)
=========== =========== =========== ===========
Basic earnings per common share....... $ 0.03 $ (0.13) 0.09 $ (0.14)
=========== =========== =========== ===========
Diluted earnings per common share..... $ 0.03 $ (0.13) 0.09 $ (0.14)
=========== =========== =========== ===========
Basic weighted average common shares
outstanding......................... 8,622,722 8,557,888 8,586,833 8,594,591
=========== =========== =========== ===========
Diluted weighted average common shares
outstanding......................... 8,745,199 8,557,888 8,822,770 8,594,591
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 27, 2000 AND NOVEMBER 30, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 312,000 $ 496,000
Accounts receivable, net.................................. 7,435,000 7,238,000
Inventories, net.......................................... 5,105,000 3,857,000
Income tax receivable..................................... 32,000 261,000
Deferred income taxes..................................... 337,000 337,000
Prepaid expenses and other................................ 138,000 172,000
----------- -----------
Total current assets.................................... 13,359,000 12,361,000
----------- -----------
Property and equipment, net................................. 2,708,000 2,507,000
Goodwill, net............................................... 467,000 514,000
Deferred income taxes....................................... 473,000 473,000
Other assets................................................ 291,000 237,000
----------- -----------
Total assets............................................ $17,298,000 $16,092,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,823,000 $ 4,448,000
Income taxes payable...................................... 301,000 308,000
Accrued liabilities....................................... 900,000 1,130,000
Net obligations of discontinued operations................ 667,000 677,000
Deferred income........................................... 267,000 337,000
Line of credit............................................ 3,234,000 3,823,000
Current portion of long-term obligations.................. 313,000 282,000
----------- -----------
Total current liabilities............................... 11,505,000 11,005,000
Term loan................................................. 286,000 396,000
Convertible debentures.................................... 405,000 405,000
Deferred compensation..................................... 1,056,000 1,056,000
Other..................................................... 195,000 243,000
----------- -----------
Total liabilities....................................... 13,447,000 13,105,000
----------- -----------
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; 8,626,055 and 8,519,055 shares issued and
outstanding at August 27, 2000 and November 30, 1999,
respectively............................................ 9,000 9,000
Additional paid-in capital................................ 7,074,000 6,987,000
Accumulated deficit....................................... (3,232,000) (4,009,000)
----------- -----------
Total stockholders' equity.............................. 3,851,000 2,987,000
----------- -----------
Total liabilities and stockholders' equity................ $17,298,000 $16,092,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 27,2000 AUGUST 29,1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 777,000 $(1,213,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation............................................ 755,000 661,000
Amortization............................................ 47,000 48,000
Provision for bad debt.................................. -- --
Provision for obsolete inventory........................ (45,000) 75,000
Discontinued operations................................. (10,000) (58,000)
Interest and other on deferred compensation............. 110,000 90,000
Deferred income......................................... (70,000) 71,000
Changes in operating assets and liabilities:
Accounts receivable -- trade.......................... (197,000) 524,000
Income taxes receivable............................... 229,000 --
Inventories........................................... (1,203,000) (955,000)
Prepaid expenses and other............................ (20,000) 222,000
Accounts payable and accrued liabilities.............. 1,144,000 71,000
Deferred income taxes................................. -- --
Income taxes payable.................................. (7,000) (48,000)
---------- -----------
Net cash provided by (used in) operating activities..... 1,510,000 (512,000)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment..................... (956,000) (883,000)
Other assets............................................ 28,000 (143,000)
---------- -----------
Net cash used in investing activities................... (928,000) (1,026,000)
---------- -----------
Cash flows from financing activities:
Purchase and retirement of common stock................. -- (267,000)
Exercise of common stock options........................ 60,000 --
Net borrowings under line of credit..................... (589,000) 1,134,000
Borrowings under term loan.............................. (110,000) 281,000
Proceeds received from capitalized financing............ 25,000 323,000
Payments on capital lease obligations................... (48,000) (23,000)
Payments on deferred compensation....................... (91,000) (23,000)
Payments on capitalized financing....................... (13,000) (15,000)
---------- -----------
Net cash provided by (used in) financing activities..... (766,000) 1,410,000
---------- -----------
Net change in cash and cash equivalents................. (184,000) (128,000)
Cash and cash equivalents, beginning of period............ 496,000 528,000
---------- -----------
Cash and cash equivalents, end of period.................. $ 312,000 $ 400,000
========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.............................................. $ 135,000 $ 73,000
========== ===========
Income taxes.......................................... $ -- $ --
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED 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-Q. The
interim statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K.
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:
<TABLE>
<CAPTION>
AUGUST 27, 2000 NOVEMBER 30, 1999
--------------- -----------------
<S> <C> <C>
Raw Materials......................................... $3,621,000 $2,700,000
Work-in-process....................................... 468,000 624,000
Finished Goods........................................ 1,137,000 699,000
---------- ----------
...................................................... 5,226,000 4,023,000
Less allowance for obsolete inventory................. (121,000) (166,000)
---------- ----------
...................................................... $5,105,000 $3,857,000
========== ==========
</TABLE>
3) BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic and Diluted income (loss) per share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). In the
August 29, 1999 computation, common equivalent shares are excluded from diluted
loss per share as their effect is antidilutive. Basic and Diluted income (loss)
for the three months and nine months ended August 27 and August 29 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
AUG. 27, 2000 AUG. 29, 1999 AUG. 27, 2000 AUG. 29, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income (loss)........................... $ 260,000 $(1,099,000) $ 777,000 $(1,213,000)
Denominator: Weighted average common shares
outstanding............................... 8,622,722 8,557,888 8,586,833 8,594,591
--------- ----------- --------- -----------
Net income (loss) per share (basic)......... $ 0.03 $ (0.13) $ 0.09 $ (0.14)
========= =========== ========= ===========
DILUTED EPS:
Net income (loss)........................... $ 260,000 $(1,099,000) $ 777,000 $(1,213,000)
--------- ----------- --------- -----------
Denominator: Weighted average common shares
outstanding............................... 8,622,722 8,557,888 8,586,833 8,594,591
Common equivalent shares outstanding
(options and warrants).................... 470,717 -- 736,884 --
Hypothetical shares repurchased at average
market price
with proceeds of exercise................... (348,240) -- (500,947) --
--------- ----------- --------- -----------
Total shares................................ 8,745,199 8,557,888 8,822,770 8,594,591
--------- ----------- --------- -----------
Net income (loss) per share (diluted)....... $ 0.03 $ (0.13) $ 0.09 $ (0.14)
========= =========== ========= ===========
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4) SEGMENT REPORTING
The Company's foreign operations include both manufacturing and sales. The
manufacturing facility is located in Ireland and the sales joint venture is
located in Singapore. Both facilities began operations in fiscal 1998. All of
the sales are made to unaffiliated customers. The following is a summary of
selected financial information by entities within geographic areas for the third
quarter and nine months ended August 27, 2000 and August 29,1999.
FY 00 CURRENT THREE MONTHS VERSUS FY 99
REVENUE:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $5,979,000 $2,809,000 $1,703,000 $10,491,000
1999.................................. $4,911,000 $1,812,000 $1,014,000 $ 7,737,000
</TABLE>
NET INCOME (LOSS):
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000................................... $ (124,000) $303,000 $ 81,000 $ 260,000
1999................................... $(1,261,000) $235,000 $(73,000) $(1,099,000)
</TABLE>
ASSETS:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $10,731,000 $3,347,000 $3,220,000 $17,298,000
1999.................................. $ 8,827,000 $2,382,000 $1,796,000 $13,005,000
</TABLE>
FY 00 CURRENT NINE MONTHS VERSUS FY 99
REVENUE:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $17,832,000 $7,683,000 $4,700,000 $30,215,000
1999.................................. $16,641,000 $5,707,000 $1,828,000 $24,176,000
</TABLE>
NET INCOME (LOSS):
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000................................... $ (410,000) $1,028,000 $ 159,000 $ 777,000
1999................................... $(1,550,000) $ 666,000 $(329,000) $(1,213,000)
</TABLE>
5) CONTINGENT LIABILITIES
Legal proceedings to which the Company is a party are discussed in Part 1
Legal Proceedings, in the latest Annual Report on form 10-K.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes account and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measure of those instruments at fair value. The statement,as amended, for fiscal
years beginning after June 15, 2000. ADMG will adopt the standard no later than
the first quarter of fiscal year 2001 and is in the process of determining the
impact that adoption will have on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The
staff accounting bulletin is effective no later than the first quarter of ADMG's
fiscal year 2001. ADMG is in the process of determining the impact that adoption
will have on its consolidated financial statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL INFORMATION
(UNAUDITED).
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes that appear elsewhere in this
document.
This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of the Company and its consolidated
subsidiaries to differ materially from those expressed or implied by such
forward-looking statements. These risks include the timely development,
production and delivery of new products; the challenge of managing asset levels,
including inventory and trade receivables; the difficulty of keeping expense
growth at modest levels while increasing revenues; and other risks described
from time to time in the Company's filings with the Securities and Exchange
Commission, including but not limited to the Annual Report on Form 10-K for the
year ended November 30, 1999.
Forward-looking statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected.
RESULTS OF OPERATIONS
FY 00 CURRENT THREE MONTHS VERSUS FY 99
Net revenue for the third quarter ended August 27, 2000 was $10,491,000, an
increase of 35.6% from the same period of fiscal 1999. The increase in net
revenues for the third quarter of fiscal 2000 is primarily attributable to
higher volumes.
Cost of sales as a percentage of net revenue was 84.6 percent for the third
quarter of fiscal 2000, compared to 94.2 percent for the third quarter of fiscal
1999, a 9.6 percentage point decrease. The decrease in cost of sales for the
third quarter of fiscal 2000, compared to the third quarter of fiscal 1999, is
primarily due to volume increases, the reduction of manufacturing fixed costs as
a result of the Company's expansion in Ireland and the gross profit sharing
agreement with the Company's strategic manufacturing partner in Singapore.
Operating expenses as a percentage of net revenue were 11.2 percent for the
third quarter of fiscal 2000, compared to 16.8 percent for the third quarter of
fiscal 1999, a 5.6 percentage point decrease. Increases in operating expenses at
the Company's Ireland subsidiary, for the third quarter of fiscal 2000, compared
to the third quarter of fiscal 1999, were offset by decreases in the U.S. The
Company continues to focus on the reduction of operating expense ratios and
optimization of manufacturing processes in order to improve profitability.
Interest expense for the third quarter of fiscal 2000 was $126,000 a
decrease of $49,000, compared to the third quarter of fiscal 1999. The decrease
is attributable to a one time adjustment to the deferred compensation interest
rate in the third quarter of fiscal 1999.
Net income for the third quarter of fiscal 2000 was $260,000, compared to
net loss of $(1,099,000) for the third quarter of 1999. Basic income per share
for the third quarter of fiscal 2000 was three cents per share on a weighted
average of 8.6 million shares, compared to a minus three cents on a weighted
average of 8.6 million shares for the third quarter of fiscal 1999. Diluted
income per share for the third quarter of fiscal 2000 was three cents per share
on a weighted average of 8.7 million shares.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FY 00 CURRENT NINE MONTHS VERSUS FY 99
Net revenue for the nine months ended August 27, 2000 was $30,215,000, an
increase of 25.0% from the same period of fiscal 1999. The increase in net
revenues for the nine months of fiscal 2000 is primarily attributable to higher
volumes.
Cost of sales as a percentage of net revenue was 84.5 percent for the nine
months of fiscal 2000, compared to 88.3 percent for the nine months of fiscal
1999, a 3.8 percentage point decrease. The decrease in cost of sales for the
nine months of fiscal 2000, compared to the nine months of fiscal 1999, is
primarily due to higher sales volume, cost savings from capacity reductions in
the U.S. and the gross profit sharing agreement with the Company's strategic
manufacturing partner in Singapore.
Operating expenses as a percentage of net revenue were 11.0 percent for the
nine months of fiscal 2000, compared to 14.4 percent for the nine months of
fiscal 1999, a 3.4 percentage point decrease. Operating expenses were
essentially unchanged for the nine months of fiscal 2000, compared to operating
expenses for the nine months of fiscal 1999. The Company continues to focus on
the reduction of operating expense ratios and optimization of manufacturing
processes in order to improve profitability.
Interest expense for the nine months of fiscal 2000 was $376,000 an increase
of $33,000, compared to the nine months of fiscal 1999. The increase is
attributable to higher interest rates and higher average loan balances.
Net income for the nine months of fiscal 2000 was $777,000, compared to net
loss of $(1,213,000) for the nine months of 1999. Basic income per share for the
nine months of fiscal 2000 was nine cents per share on a weighted average of
8.6 million shares, compared to basic loss per share of fourteen cents on a
weighted average of 8.6 million shares for the nine months of fiscal 1999.
Diluted income per share for the nine months of fiscal 2000 was nine cents per
share on a weighted average of 8.8million shares.
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.
SEGMENT INFORMATION
The following is a discussion of operating results for each of the Company's
business segments. Quarterly financial data for each segment can be found in
Note 4 to these consolidated financial statements. The reportable segments
disclosed in this Form 10-Q are based on the Company's internal management
responsibility.
AMI-U.S. OPERATIONS
Net revenue for the third quarter and nine months ended August 27, 2000 was
$5,979,000 and $17,832,000 respectively, compared to net revenue for the third
quarter and nine months ended August 29, 1999 of $4,911,000 and $16,641,000
respectively. Net losses for the third quarter and nine months ended August 27,
2000 was $(124,000) and $(410,000) respectively, compared to net losses for the
second quarter and nine months of $(1,261,000) and $(1,550,000) respectively,
for the third quarter and nine months ended August 29, 1999.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMFSC-SINGAPORE
Net revenue for the third quarter and nine months ended August 27, 2000 was
$2,809,000 and $7,682,000 respectively, compared to net revenue for the third
quarter and nine months ended August 29, 1999 of $1,812,000 and $5,707,000
respectively. The increase in net revenues for the third quarter and nine months
of fiscal 2000 is primarily attributable to the recovering economies in the
Pacific Rim and higher volumes of component sales to computer printer
manufacturers. Printer supply sales to key customer accounts reflected continued
growth in the installed base, growth in printing from the Internet and increased
usage of newly introduced products. Net income for the third quarter and nine
months ended August 27, 2000 was $303,000 and $1,028,000 respectively, compared
to net income for the third quarter and nine months ended August 29, 1999 of
$235,000 and $666,000 respectively.
AML-IRELAND
Net revenue for the third quarter and nine months ended August 27, 2000 was
$1,703,000 and $4,700,000 respectively, compared to net revenue for the third
and nine months ended August 29, 1999 of $1,014,000 and $1,828,000 respectively.
The increase in net revenues for the third quarter and nine months of fiscal
2000 is primarily attributable to higher volumes of component sales to computer
printer manufacturers. Printer supply sales to key customer accounts reflected
continued growth in the installed base, growth in printing from the Internet and
increased usage of newly introduced products. Net income for the third quarter
and nine months ended August 27, 2000 was $81,000 and $159,000 respectively,
compared to net loss for the third quarter and nine months ended August 29, 1999
of $(73,000) and $(329,000) respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $312,000 at August 27, 2000 compared with
$496,000 at November 30, 1999. During the third quarter cash flows from
operating activities were used to pay down short- and long-term debt and
purchase property, plant and equipment.
Operating activities generated $1,510,000 of cash during the first nine
months of fiscal 2000 compared with a cash use of $512,000 in the corresponding
period in fiscal 1999. The increase in cash generated in fiscal 2000 resulted
primarily from operations and increase in accounts payable.
Inventory as a percentage of net revenue was 16.9% at August 27, 2000
compared with 14.2% at the end of the third quarter of fiscal 1999 and 9.2% as
of November 30, 1999, as a result of increased inventory levels to support the
sales growth in Ireland. Trade receivables as a percentage of net revenue were
24.6% at August 27, 2000 compared with 18.4% at the end of the third quarter of
fiscal 1999 and 17.2% as of November 30, 1999.
Capital expenditures were $466,000 for the third quarter of fiscal 2000,
compared to $248,000 for the corresponding period in fiscal 1999. The Company
has instituted a Company-wide program to reduce non-essential capital
expenditures, which are not specifically focused on revenue growth.
The Company uses short- and long-term borrowings to supplement internally
generated cash flow. Short- and long-term borrowings in the third quarter of
fiscal 2000 decreased by $1,024,000.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Competition--We encounter aggressive competition in all areas of our
business. We have numerous competitors, ranging from several comparable-size
companies to many relatively small companies. The majority of our competitors
are private, closely held companies. We compete primarily on the basis of
performance, price, quality and customer service. Product life cycles are short,
with
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
numerous small one-time customer orders. To remain competitive, the Company must
be able to quickly develop new products and enhance existing products in
response to customer demands. In particular, management anticipates a continuing
need to lower the prices of many of the Company's products to stay competitive
and effectively manage financial returns with resulting reduced gross margins.
In some of our markets, we may not be able to successfully compete against
current and future competitors, and the competitive pressures we face could harm
our business and prospects.
New Product Introductions--If the Company cannot continue to rapidly develop
and manufacture innovative products that meet customer requirements for
performance, price, quality and customer service, we may lose market share and
future revenue and earnings may suffer. The process of developing new products
and corresponding manufacturing processes is complex and uncertain. The customer
decision-making process can be lengthy and some raw materials have extremely
long lead times. These circumstances often lead to long delays in new product
introductions. After a product is developed, we must be able to manufacture
sufficient volumes quickly at low enough costs. To do this we must accurately
forecast volumes and mix of products. Customer orders have also been subject to
dramatic swings from customer provided forecasts. Thus, matching customers'
demand and timing for particular products makes the process of planning
production and managing inventory levels increasingly difficult.
Short Product Life Cycles--The short life cycles of many of the Company's
products pose a challenge for us to manage effectively the transition from
existing products to new products. If we do not manage the transition
effectively, our future revenue and earnings could suffer. Among the factors
that make a smooth transition from current products to new products difficult
are delays in the customer decision-making process, development of manufacturing
processes, long lead times for the delivery of raw materials and variations in
product costs. Our future revenues and earnings could also suffer due to the
timing and introduction of new product offerings, which compete directly or
indirectly with our customers' products and new product offerings by our
competitors.
Reliance on Suppliers--The Company's manufacturing operations depend on our
suppliers' ability to deliver quality raw materials and components in time for
us to meet critical manufacturing and distribution schedules. We sometimes
experience a short supply of certain raw materials as a result of supplier
out-of-stock situations or long manufacturing lead times. If shortages or delays
exist, the Company's future operating results could suffer. Furthermore, we may
not be able to secure enough raw materials at reasonable prices to manufacture
new products in the quantities required to meet customer demand. Sudden or large
raw materials price increases could also cause future operating results to
suffer.
International--Sales outside the United States make up more than 40% of the
Company's revenues. Manufacturing for these products are also located outside of
the United States. The Company's future earnings or financial position could be
adversely affected by a variety of international factors, including:
- Changes in a country or region's political or economic conditions,
- Trade protection measures,
- Import or export licensing requirements,
- The overlap of different tax structures,
- Unexpected changes in regulatory requirements,
- Problems caused by the conversion of various European currencies to the
Euro, and
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Natural disasters.
Market Risk--The majority of the Company's sales are denominated in U.S.
dollars. All costs in Singapore and the majority of direct material costs in
Ireland are also denominated in U.S. dollars. However, the Company is exposed to
foreign currency exchange risk inherent in our sales commitments, anticipated
sales and assets and liabilities denominated in currencies other than the U.S.
dollar. See also "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk" in the Company's 1999 Annual Report on Form 10-K for more detailed
information.
Earthquake--Our corporate offices and manufacturing division in California
are located near major earthquake faults. The ultimate impact on the Company and
our general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake. We are predominantly uninsured for
losses and interruptions caused by earthquakes.
Environmental--Some of the Company's operations use substances regulated
under various federal, state and international laws governing the environment.
It is our policy to apply strict standards for environmental protection to sites
inside and outside the U.S., even when not subject to local government
regulations. THE COMPANY HAS NOT BEEN NOTIFIED OF ANY ENVIRONMENTAL INFRACTIONS.
Profit Margin--The Company's profit margins vary somewhat among our products
and geographic markets. Consequently, our overall profitability in any given
period is partially dependent on the product, customer and geographic mix
reflected in that period's net revenue.
Stock Price--The Company's stock price, like that of any other small-cap
company, can be volatile. Some of the factors that can affect our stock price
are:
- The Company's, our customer's or our competitor's announcement of new or
discontinued products,
- Quarterly increases or decreases of our earnings,
- Changes in revenue or earnings estimates by the investment community, and
- Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic
factors unrelated to the Company's performance may also affect our stock price.
For these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted. This type of litigation could result in substantial
costs and the diversion of management time and resources.
Earnings Fluctuations--Although management believes the Company has products
and resources needed for successful results, we cannot reliably predict future
revenue and margin trends. Actual trends may cause us to adjust our operations,
which could cause period-to-period fluctuations in our earnings.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A discussion of the Company's exposure to, and management of, market risk
appears in Item 2 of this Form 10-Q under the heading "Factors That Could Affect
Future Results."
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 14, 2000, the United States District Court for the Central
District of California entered a final judgment in favor of Advanced Materials
Group, Inc. (AMG) on the complaint filed by AMG for a judicial declaration that
it has no liability for any debts or obligations of Condor Utilities
Products, Inc. (Condor), a wholly owned subsidiary of AMG which has now ceased
operations. This includes a certain judgment obtained against Condor in 1998 in
favor of the former suppliers of Condor, Vern and Shirley Auten, arising out of
litigation which preceded the purchase of Condor by AMG in 1993. Evidence
presented to the Court indicated that Condor has no other unpaid trade
obligations or debts.
The Autens claimed that AMG was the "alter ego" of Condor, and therefore was
obliged to pay the outstanding judgment against Condor. The Court reviewed
extensive expert accounting testimony indicating that the financial and
corporate relationship between AMG and Condor was entirely proper and complied
with all corporate and accounting requirements. Based on this evidence, the
Court ruled that as a matter of law AMG has no financial responsibility to pay
the Auten judgment, or any other debt or obligation of Condor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
Changes in Registrant's Certifying Accountant
14
<PAGE>
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: October 11, 2000 ADVANCED MATERIALS GROUP INC.
By: /s/ STEVE F. SCOTT
-----------------------------------------
Steve F. Scott
President and CEO
(Chief Executive Officer)
By: /s/ JOHN WATKINS
-----------------------------------------
John Watkins
Controller
(Principal Accounting Officer)
</TABLE>
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