<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 UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MAY 28, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT.
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-16401
------------------------
ADVANCED MATERIALS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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
Registrant'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, 8,606,055 SHARES AS OF May 28, 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 six
months ended May 28, 2000 and May 30, 1999 (unaudited)...... 3
Consolidated Balance Sheets at May 28, 2000 (unaudited) and
November 30, 1999........................................... 4
Consolidated Statements of Cash Flows for the three and six
months ended May 28, 2000 and May 30, 1999 (unaudited)...... 5
Notes to Consolidated Financial Statements.................. 6
Management's Discussion and Analysis of Financial Condition
ITEM 2. and Results of Operations................................... 8
Quantitative and Qualitative Disclosures about Market
ITEM 3. Risk........................................................ 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders......... 13
ITEM 6. Exhibits and Reports on Form 8-K............................ 13
Signatures.................................................. 14
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM I--CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
<S> <C> <C> <C> <C>
MAY 28, MAY 30, MAY 28, MAY 30,
2000 1999 2000 1999
----------- ---------- ----------- -----------
Net sales.................................. $10,243,000 $9,059,000 $19,724,000 $16,439,000
Cost of sales.............................. 8,655,000 7,534,000 16,658,000 14,068,000
----------- ---------- ----------- -----------
Gross profit............................... 1,588,000 1,525,000 3,066,000 2,371,000
----------- ---------- ----------- -----------
Operating expenses:
Selling, general and administrative...... 1,094,000 1,087,000 2,145,000 2,183,000
Depreciation and amortization............ 67,000 50,000 133,000 99,000
----------- ---------- ----------- -----------
Total operating expenses................... 1,161,000 1,137,000 2,278,000 2,282,000
Income from operations..................... 427,000 388,000 788,000 89,000
Other income (expense):
Interest expense........................... (131,000) (95,000) (250,000) (178,000)
Foreign exchange gain (loss)............... (10,000) -- 1,000 11,000
Other, net................................. (20,000) (17,000) (22,000) (36,000)
----------- ---------- ----------- -----------
Total other income and expenses........ (161,000) (112,000) (271,000) (203,000)
Income (loss) before income taxes.......... 266,000 276,000 517,000 (114,000)
Income tax expense......................... -- -- -- --
----------- ---------- ----------- -----------
Net income (loss).......................... $ 266,000 $ 276,000 $ 517,000 $ (114,000)
Basic earnings (losses) per common share... $ 0.03 $ 0.03 $ 0.06 $ (0.01)
=========== ========== =========== ===========
Diluted earnings (losses) per common
share.................................... $ 0.03 $ 0.03 $ 0.06 $ (0.01)
=========== ========== =========== ===========
Basic weighted average common shares
outstanding.............................. 8,589,555 8,597,955 8,568,889 8,624,788
=========== ========== =========== ===========
Diluted weighted average common shares
outstanding.............................. 8,894,168 8,869,924 8,861,555 8,624,788
=========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 28, 2000 AND NOVEMBER 30, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 729,000 $ 496,000
Accounts receivable, net.................................... 7,133,000 7,238,000
Inventories, net............................................ 4,736,000 3,857,000
Income tax receivable....................................... 261,000 261,000
Deferred income taxes....................................... 337,000 337,000
Prepaid expenses and other.................................. 146,000 172,000
----------- -----------
Total current assets.................................... 13,342,000 12,361,000
----------- -----------
Property and equipment, net................................. 2,505,000 2,507,000
Goodwill, net............................................... 483,000 514,000
Deferred income taxes....................................... 473,000 473,000
Other assets................................................ 216,000 237,000
----------- -----------
Total assets............................................ $17,019,000 $16,092,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 4,793,000 $ 4,448,000
Income taxes payable........................................ 306,000 308,000
Accrued liabilities......................................... 820,000 1,130,000
Discontinued operations..................................... 667,000 677,000
Deferred income............................................. 322,000 337,000
Line of credit.............................................. 130,000
---
Current portion of long-term obligations.................... 306,000 282,000
----------- -----------
Total current liabilities............................... 7,344,000 7,182,000
Line of credit.............................................. 4,086,000 3,823,000
Term loan................................................... 328,000 396,000
Convertible debentures...................................... 405,000 405,000
Deferred compensation....................................... 1,056,000 1,056,000
Other....................................................... 217,000 243,000
----------- -----------
Total liabilities....................................... 13,436,000 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;
8,606,055 and 8,519,055 shares issued and outstanding at
May 28, 2000 and November 30, 1999, respectively.......... 9,000 9,000
Additional paid-in capital.................................. 7,066,000 6,987,000
Accumulated deficit......................................... (3,492,000) (4,009,000)
----------- -----------
Total stockholders' equity.............................. 3,583,000 2,987,000
----------- -----------
Total liabilities and stockholders' equity.................. $17,019,000 $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>
SIX
MONTHS ENDED
-----------------------
<S> <C> <C>
MAY MAY
28,2000 30,1999
-------- ----------
Cash flows from operating activities:
Net income (loss)......................................... $517,000 $ (114,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation.............................................. 492,000 433,000
Amortization.............................................. 31,000 32,000
Provision for bad debt....................................
--- ---
Provision for obsolete inventory.......................... (28,000)
---
Discontinued operations................................... (10,000) (24,000)
Interest and other on deferred compensation............... 71,000 60,000
Deferred income........................................... (15,000) 96,000
Changes in operating assets and liabilities:
Accounts receivable--trade.............................. 105,000 (1,795,000)
Income taxes receivable.................................
--- ---
Inventories............................................. (851,000) (419,000)
Prepaid expenses and other assets....................... 47,000 (27,000)
Accounts payable and accrued liabilities................ 35,000 714,000
Deferred income taxes................................... -- --
Income taxes payable.................................... (2,000) (48,000)
-------- ----------
Net cash provided by (used in) operating activities....... 392,000 (1,092,000)
-------- ----------
Cash flows from investing activities:
Purchases of property and equipment....................... (490,000) (635,000)
Amounts borrowed by affiliate............................. 28,000 --
-------- ----------
Net cash used in investing activities....................... (462,000) (635,000)
-------- ----------
Cash flows from financing activities:
Purchase and retirement of common stock................... -- (161,000)
Exercise of common stock options.......................... 51,000 --
Net borrowings under line of credit....................... 393,000 1,666,000
Borrowings (repayments) under term loan................... (68,000) 357,000
Proceeds received from capitalized financing.............. 25,000
---
Payments on capital lease obligations..................... (31,000) (20,000)
Payments on deferred compensation......................... (59,000) (64,000)
Payments on capitalized financing......................... (8,000) (10,000)
-------- ----------
Net cash provided by financing activities................. 303,000 1,768,000
-------- ----------
Net change in cash and cash equivalents................... 233,000 41,000
Cash and cash equivalents, beginning of period.............. 496,000 528,000
-------- ----------
Cash and cash equivalents, end of period.................... $729,000 $ 569,000
======== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.................................................. $243,000 $ 78,000
======== ==========
Income taxes.............................................. $ -- $ 32,000
======== ==========
</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/A.
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>
MAY 28, 2000 NOVEMBER 30, 1999
-------------- -------------------
<S> <C> <C>
Raw Materials........................................... $3,308,000 $2,700,000
Work-in-process 480,000 624,000
Finished Goods.......................................... 1,086,000 699,000
---------- ----------
4,874,000 4,023,000
Less allowance for obsolete inventories................. (138,000) (166,000)
---------- ----------
$4,736,000 $3,857,000
========== ==========
</TABLE>
3) BASIC AND DILUTED EARNING (LOSS) PER COMMON SHARE
Basic and Diluted earnings (losses) per share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). In the six
months ended May 30, 1999 computation, common equivalent shares are excluded
from diluted losses per share as their effect is antidilutive. Basic and Diluted
earnings (losses) for the three and six months ended May 28 are as follows:
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
----------------------- -----------------------
<S> <C> <C> <C> <C>
MAY 28, MAY 30, MAY 28, MAY 30,
2000 1999 2000 1999
--------- --------- --------- ---------
BASIC EPS:
Net income (loss)............................ $ 266,000 $ 276,000 $ 517,000 $(114,000)
Denominator: Weighted average common shares
outstanding................................ 8,589,555 8,597,955 8,568,889 8,624,788
--------- --------- --------- ---------
Net income (loss) per share (basic).......... $ 0.03 $ 0.03 $ 0.06 $ (0.01)
========= ========= ========= =========
DILUTED EPS:
Net income................................... $ 266,000 $ 276,000 $ 517,000 $(114,000)
Denominator: Weighted average common shares
outstanding................................ 8,589,555 8,597,955 8,568,889 8,624,788
Common equivalent shares outstanding (options
and warrants).............................. 842,717 986,967 869,967 --
Hypothetical shares repurchased at average
market price
with proceeds of exercise.................... (538,104) (714,998) (577,301) --
--------- --------- --------- ---------
Total shares................................. 8,894,168 8,869,924 8,861,555 8,624,788
Net income (loss) per share (diluted)........ $ 0.03 $ 0.03 $ 0.06 $ (0.01)
========= ========= ========= =========
</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 three
months and six months ended May 28, 2000 and May 30,1999.
THREE MONTHS ENDED MAY 28, 2000 AND MAY 30, 1999:
REVENUE:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $6,186,000 $2,599,000 $1,458,000 $10,243,000
1999.................................. $6,441,000 $2,161,000 $ 457,000 $ 9,059,000
</TABLE>
NET INCOME (LOSS):
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $ (130,000) $ 355,000 $ 41,000 $ 266,000
1999.................................. $ 14,000 $ 360,000 $ (98,000) $ 276,000
</TABLE>
ASSETS:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $10,752,000 $3,484,000 $2,783,000 $17,019,000
1999.................................. $10,083,000 $3,625,000 $1,426,000 $15,134,000
</TABLE>
SIX MONTHS ENDED MAY 28, 2000 AND MAY 30, 1999:
REVENUE:
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $11,853,000 $4,874,000 $2,997,000 $19,724,000
1999.................................. $11,783,000 $3,894,000 $ 816,000 $16,439,000
</TABLE>
NET INCOME (LOSS):
<TABLE>
<CAPTION>
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
----------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
2000.................................. $ (287,000) $ 726,000 $ 78,000 $ 517,000
1999.................................. $ (293,000) $ 432,000 $ (253,000) $ (114,000)
</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 10K/A.
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 Certain Hedging Activities." This
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
statement establishes accounting 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, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company 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 the
company's fiscal year 2001. The Company is in the process of determining the
impact that adoption will have on its consolidated financial statements.
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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/A 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
THREE MONTHS ENDED MAY 28, 2000 AND MAY 30, 1999
Net revenue for the three months ended May 28, 2000 was $10,243,000, an
increase of 13.1% from the same period of fiscal 1999. The increase in net
revenues for the three months ended May 28, 2000 is primarily attributable to
higher volumes.
Cost of sales as a percentage of net revenue was 84.5 percent for the second
quarter of fiscal 2000, compared to 83.2 percent for the second quarter of
fiscal 1999, a 1.3 percentage point increase. The increase in cost of sales for
the second quarter of fiscal 2000, compared to the second quarter of fiscal
1999, is primarily due to volume increases, the addition 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. The increases are partially offset by cost savings from capacity
reductions in the U.S.
Operating expenses as a percentage of net revenue were 11.3 percent for the
second quarter of fiscal 2000, compared to 12.6 percent for the second quarter
of fiscal 1999, a 1.3 percentage point decrease. Increases in operating expenses
at the Company's Ireland subsidiary, for the second quarter of fiscal 2000,
compared to the second quarter of fiscal 1999, were offset by decreases in the
U.S. The Company
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
continues to focus on the reduction of operating expense ratios and optimization
of manufacturing processes in order to improve profitability.
Interest expense for the second quarter of fiscal 2000 was $131,000 an
increase of $36,000, compared to the second quarter of fiscal 1999. The increase
is attributable to higher interest rates and higher average loan balances.
Net income for the second quarter of fiscal 2000 was $266,000, compared to
net income of $276,000 for the second quarter of 1999. Basic earnings per share
for the second quarter of fiscal 2000 was three cents per share on a weighted
average of 8.6 million shares, compared to three cents on a weighted average of
8.6 million shares for the second quarter of fiscal 1999. Diluted earnings per
share for the second quarter of fiscal 2000 was three cents per share on a
weighted average of 8.9 million shares, compared to three cents per share on a
weighted average of 8.9 million shares for the second quarter of fiscal 1999.
SIX MONTHS ENDED MAY 28, 2000 AND MAY 30, 1999
Net revenue for the six months ended May 28, 2000 was $19,724,000, an
increase of 20% from the same period of fiscal 1999. The increase in net
revenues for the six 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 six
months of fiscal 2000, compared to 85.6 percent for the six months of fiscal
1999, a 1.1 percentage point decrease. The decrease in cost of sales for the six
months of fiscal 2000, compared to the six months of fiscal 1999, is primarily
due to 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 11.5 percent for the
six months of fiscal 2000, compared to 13.9 percent for the six months of fiscal
1999, a 2.4 percentage point decrease. 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 six months of fiscal 2000 was $250,000, an increase
of $72,000, compared to the six months of fiscal 1999. The increase is
attributable to higher interest rates and higher average loan balances.
Net income for the six months of fiscal 2000 was $517,000, compared to net
loss of $114,000 for the six months of 1999. Basic earnings per share for the
six months of fiscal 2000 was six cents per share on a weighted average of
8.6 million shares, compared to basic loss per share of one cent on a weighted
average of 8.6 million shares for the six months of fiscal 1999. Diluted
earnings per share for the six months of fiscal 2000 was six cents per share on
a weighted average of 8.9 million shares, compared to a diluted loss per share
of one cent on a weighted average of 8.6 million shares for the six months ended
May 30, 1999.
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 second quarter and six months ended May 28, 2000 was
$6,186,000 and $11,853,000 respectively, compared to net revenue for the second
quarter and six months ended May 30,
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
1999 of $6,441,000 and $11,783,000, respectively. Net loss for the second
quarter and six months ended May 28, 2000 was $(130,000) and $(287,000),
respectively, compared to net income of $14,000 and net loss of $(293,000),
respectively, for the second quarter and six months ended May 30, 1999.
AMFSC-SINGAPORE
Net revenue for the second quarter and six months ended May 28, 2000 was
$2,599,000 and $4,874,000, respectively, compared to net revenue for the second
quarter and six months ended May 30, 1999 of $2,161,000 and $3,894,000,
respectively. The increase in net revenues for the second quarter and six 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 second quarter and six
months ended May 28, 2000 was $355,000 and $726,000, respectively, compared to
net income for the second quarter and six months ended May 30, 1999 of $360,000
and $432,000, respectively.
AML-IRELAND
Net revenue for the second quarter and six months ended May 28, 2000 was
$1,458,000 and $2,997,000, respectively, compared to net revenue for the second
quarter and six months ended May 30, 1999 of $457,000 and $816,000,
respectively. The increase in net revenues for the second quarter and six 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
second quarter and six months ended May 28, 2000 was $41,000 and $78,000,
respectively, compared to net loss for the second quarter and six months ended
May 30, 1999 of $(98,000) and $(253,000), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $729,000 at May 28, 2000 compared with
$496,000 at November 30, 1999. During the second quarter of fiscal 2000 cash
flows from operating activities were used to pay down short- and long-term debt
and purchase property, plant and equipment.
Operating activities generated $341,000 of cash during the first six months
of fiscal 2000 compared with a cash use of $1,091,000 in the corresponding
period in fiscal 1999. The increase in cash generated in fiscal 2000 resulted
primarily from operations and collection of receivables.
Inventory as a percentage of net revenue was 11.3% at May 28, 2000 compared
with 7.0% at the end of the second 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
17.0% at May 28, 2000 compared with 16.6% at the end of the second quarter of
fiscal 1999 and 17.2% as of November 30, 1999.
Capital expenditures were $490,000 for the six months ended May 28, 2000,
compared to $635,000 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 six months ended
May 28, 2000 increased by $252,000.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 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,
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
- Unexpected changes in regulatory requirements,
- Problems caused by the conversion of various European currencies to the
Euro, and
- 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."
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings to which the Company is a party are discussed in Part 1
Legal Proceedings, in the latest Annual Report on form 10K/A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the "Annual Meeting")
on April 4, 2000. At the Annual Meeting, the Company's stockholders elected
Timothy R. Busch, Steve F. Scott, N.Price Paschall, Dr. Michael Ledeen,
Dr. Allan Meltzer and Maurice J. DeWald to the Company's Board of Directors and
approved the ratification of Ernst & Young LLP to serve as the Company's
independent accountants for fiscal 2000. Proxies were solicited by the Company
pursuant to Regulation 14A under the Securites Exchange Act of 1934, as amended.
As of March 1, 2000, the record date for the Annual Meeting, there were
approximately 8,551,555 shares of the Company's Common Stock outstanding, of
which 6,066,901 shares, or 70.9% 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 if the
Company's stockholders and until his successor has been selected and
qualified or until his earlier resignation or removal:
<TABLE>
<CAPTION>
SHARES IN FAVOR SHARES WITHHELD
--------------- ---------------
<S> <C> <C>
Timothy R. Busch........................................ 6,013,230 53,671
Steve F. Scott.......................................... 6,013,259 53,642
N.Price Paschall........................................ 6,011,214 55,687
Dr. Michael Ledeen...................................... 6,043,851 23,050
Dr. Allan Meltzer....................................... 6,011,222 55,679
Maurice DeWald.......................................... 6,011,114 55,787
</TABLE>
2) Ratification of Selection of Accountants. The selection of Ernst & Young LLP
as the Company's independent accountants for the fiscal year ending
November 30, 2000 was voted on and ratified by the Company's stockholders as
follows:
<TABLE>
<CAPTION>
SHARES IN FAVOR SHARES AGAINST SHARES ABSTAINING
--------------- -------------- -----------------
<S> <C> <C>
6,046,360... 13,181 7,360
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<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: July 12, 2000 ADVANCED MATERIALS GROUP INC.
By: /s/ STEVEN F. SCOTT
-----------------------------------------
Steve F. Scott
President and CEO
(Chief Executive Officer)
/s/ JOHN WATKINS
-----------------------------------------
John Watkins
Controller
(Principal Accounting Officer)
</TABLE>
14
