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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Check One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934. FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
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)
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20211 SOUTH SUSANA ROAD, RANCHO DOMINGUEZ, CALIFORNIA 90221
(Address of principal executive offices)
(310) 537-5444
(Issuer's telephone number, including area code)
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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 stock, as of the latest practicable date:
COMMON STOCK, $.001 PAR VALUE, 10,450,316 SHARES AS OF SEPTEMBER 24, 1996.
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PART I--FINANCIAL INFORMATION
ADVANCED MATERIALS GROUP, INC.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31 AUGUST 31
------------------------- -------------------------
1996 1995 1996 1995
------------ ---------- ------------ ----------
(UNAUDITED) (UNAUDITED)
Net sales............................... $ 4,593 $ 3,850 $ 12,257 $ 11,638
Cost of sales........................... 3,785 3,355 10,254 10,083
------------ ---------- ------------ ----------
Gross profit.......................... 808 495 2,003 1,555
Operating expenses:
Selling, general and administrative... 646 708 2,009 1,997
Research, development and
engineering......................... 21 19 58 57
Intangible asset amortization......... 74 95 221 269
------------ ---------- ------------ ----------
Total operating expenses.............. 741 822 2,288 2,323
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Operating income (loss)................. 67 (327) (285) (768)
------------ ---------- ------------ ----------
Other income (expense):
Interest expense...................... (105) (204) (510) (618)
Gain (loss) on sale of stock.......... (27) -- 3,715 --
Gain on stock rights.................. -- -- 572 --
Other, net............................ 7 -- 9 28
------------ ---------- ------------ ----------
(125) (204) 3,786 (590)
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Earnings (loss) before income taxes and
extraordinary item.................... (58) (531) 3,501 (1,358)
------------ ---------- ------------ ----------
Income tax provision.................... -- -- 157 3
------------ ---------- ------------ ----------
Earnings (loss) before extraordinary
item.................................. (58) (531) 3,344 (1,361)
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Extraordinary income on retirement of
debt, net of income tax of $18........ 508 -- 508 --
------------ ---------- ------------ ----------
Earnings (loss) after income taxes and
extraordinary item.................... $ 450 $ (531) $ 3,852 $ (1,361)
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
Earnings (loss) per share of Common
Stock
Earnings (loss) before extraordinary
item................................ $ (0.01) $ (0.06) $ 0.32 $ (0.15)
Extraordinary item.................... 0.05 -- 0.05 --
------------ ---------- ------------ ----------
Earnings (loss) per share........... $ 0.04 $ (0.06) $ 0.37 $ (0.15)
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
Average Number of Common and Common
Stock Equivalent Shares used in
Primary Calculation................... 10,450,316 9,173,541 10,350,139 9,173,541
------------ ---------- ------------ ----------
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The accompanying notes are an integral part of this financial statement.
1
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
ASSETS
AUGUST 31, NOVEMBER 30,
1996 1995
----------- ------------
(UNAUDITED)
Current assets:
Cash.................................................................................... $ 1,764 $ 66
Available-for-sale securities........................................................... -- 88
Accounts and notes receivable, net of allowance for doubtful accounts of $102 at August
31, 1996 and $127 at November 30,1995................................................. 2,273 1,484
Inventories............................................................................. 2,176 2,096
Prepaid expenses........................................................................ 80 108
Other................................................................................... 279 154
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Total Current Assets.................................................................. 6,572 3,996
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Fixed assets, net of accumulated depreciation of $1,672 and $1,270 at August 31, 1996
and November 30,1995 respectively..................................................... 2,182 2,480
Goodwill, net............................................................................. 2,619 2,783
Available-for-sale securities............................................................. -- 3,322
Other assets.............................................................................. 552 485
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$11,925 $13,066
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 1,670 $ 1,524
Accrued expenses........................................................................ 751 955
Notes payable........................................................................... -- 1,119
Current portion of long-term debt....................................................... 1,389 466
----------- ------------
Total Current Liabilities............................................................. 3,810 4,064
----------- ------------
Long-Term Debt:
Notes payable and other long-term debt.................................................. 60 3,555
Deferred compensation................................................................... 1,370 1,283
Convertible debentures.................................................................. 535 535
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Total Long-Term Debt.................................................................. 1,965 5,373
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Shareholders' equity:
Preferred stock--$.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding........................................................................... -- --
Common stock--$.001 par value; 25,000,000 shares authorized; 10,450,316 and 9,737,996
shares issued and outstanding at August 31, 1996 and November 30, 1995 respectively... 7 7
Paid in capital......................................................................... 10,195 9,495
Accumulated deficit..................................................................... (4,052) (7,904)
Unrealized holding gain on available-for-sale securities................................ -- 2,031
----------- ------------
Total shareholders' equity............................................................ 6,150 3,629
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$11,925 $13,066
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The accompanying notes are an integral part of this financial statement.
2
ADVANCED MATERIALS GROUP, INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
-------------- ----------------
1996 1995 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................................................... $ 450 $(531) $ 3,852 $(1,361)
Adjustments to net income (loss).......................................................... (276) 282 (4,111) 796
Net changes in assets and liabilities..................................................... 2,692 236 (996) (425)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......................................... 2,866 (13) (1,255) (990)
------- ----- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................................... (82) (112) (217) (441)
Proceeds from sales of securities......................................................... 155 -- 5,126 --
Proceeds from stock rights................................................................ -- -- 572 --
Other..................................................................................... (150) (28) (150) 1,484
------- ----- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.......................................... (77) (140) 5,331 1,043
------- ----- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs................................. -- -- 700 (68)
Net change in borrowings.................................................................. 29 141 87 812
Payments of debt.......................................................................... (1,189) (36) (3,165) (834)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.......................................... (1,160) 105 (2,378) (90)
------- ----- ------- -------
NET INCREASE (DECREASE) IN CASH........................................................... 1,629 (48) 1,698 (37)
CASH AT BEGINNING OF PERIOD............................................................... 135 61 66 50
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CASH AT END OF PERIOD..................................................................... $ 1,764 $ 13 $ 1,764 $ 13
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Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest................................................................................ $ 127 $ 155 $ 556 $ 489
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Income taxes............................................................................ $ 120 $-- $ 125 $ 3
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The accompanying notes are an integral part of this financial statement.
3
ADVANCED MATERIALS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements are not
included herein. The interim statements should be read in conjunction with
the financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full fiscal year 1996; in
the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature.
2. On December 22, 1995 the Company issued 1,260,807 shares of its common stock
valued at $0.55 per share to a lender/shareholder for $700,000 in cash. In
conjunction with the transaction, the Company granted the shareholder
warrants to acquire an additional 30,000 shares of its common stock at an
exercise price of $0.75 per share, expiring December, 2000.
3. On December 22, 1995 a line of credit with a lender/shareholder was amended
to increase the maximum borrowings to $1,000,000, and to increase the
interest rate to 5% per annum over the prime rate as published by the Wall
Street Journal. The termination date of the line was also extended to June
30, 1997. The collateral held by the lender/shareholder was increased from
800,000 shares of Innovative Technologies, Inc. ("IT") to 1,000,000 shares.
The Company prepaid the $700,000 borrowed against the credit line on March
19. In May, the lender/shareholder released the 1,000,000 shares of IT held
as collateral. On September 1, 1996 the credit line was terminated by the
Company.
4. On January 30, 1996 the Company sold 250,000 shares of IT for an aggregate
price of $402,567. On February 28, 1996 the Company sold an additional
1,000,000 shares of IT for an aggregate price of $1,431,337. On May 28,1996
the Company sold 1,254,000 shares of IT for an aggregate price of
$3,116,145. These sales reduce the number of IT shares held as an investment
to zero.
5. The Company concluded negotiations with Wilshire Technologies on July 3 to
retire the Company's Note Payable at a discount. The early extinguishment of
debt resulted in a one-time gain of $526,000, and is shown in the operating
statement as an extraordinary item, net of alternative minimum income tax of
$18.
6. On September 1, the Company acquired substantially all of the assets of
Gasket and Molded Products, Inc., a Denver, Colorado based foam fabricator,
in a transaction valued at $180,000. The Company assumed liabilities of
$115,000 and paid the remaining $65,000 in cash. The acquisition was funded
by internal cashflow.
7. Legal proceedings to which the Company is a party, are discussed in Part I
Legal Proceedings, in the Annual Report on Form 10-KSB. During the
nine-month period ended August 31,1996 the Company settled its portion of a
class action lawsuit originally brought against Wilshire Technologies, Inc.
that had been expanded to include the Company in August, 1994. Under the
settlement, the Company was released from all past or potential future
claims brought by the plaintiffs and was not required to pay any cash, stock
or other monetary consideration.
8. Earnings (loss) per common share equals net earnings (loss) divided by the
average number of common shares outstanding, after giving effect to dilutive
stock options and warrants. The 7 1/2% convertible debentures were
determined, at the time of issuance, to not be common stock equivalents, and
accordingly, are not included in earnings (loss) per share calculations for
either period. Stock options and warrants are not included in the earnings
(loss) per share calculation for the nine or
4
ADVANCED MATERIALS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
three-month periods ended August 31, 1995 because they would have been
anti-dilutive. Primary and fully diluted earnings for the nine-month and
three-month periods ended August 31, 1996 were substantially the same.
9. The Financial Accounting Standards Board has issued Statement of Financial
Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION" ("Statement
123"). Statement 123 is primarily a disclosure standard for the Company
because the Company will continue to account for employee stock options
under Accounting Principle Board Opinion No. 25. The disclosure requirements
for the Company required by Statement 123 are effective for financial
statements issued after fiscal year 1996.
5
MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION
RESULTS OF OPERATIONS
Sales for the third quarter of 1996 were $4,593,000 compared to $3,850,000
for the same period a year ago, an increase of 19%. Year-to-date sales were up
5%. Fiscal year 1996 sales were $12,257,000, while sales for the comparable
period in fiscal year 1995 were $11,638,000. The Company attributes both the
quarter and year-to-date sales increases to a significant shift in product mix,
with growth in sales of products to the computer peripheral industry offset in
part by slowing sales in the medical and contamination control product lines, as
major customers slowed orders to reduce excess inventory levels.
Gross profit for both the quarter and nine-month periods was favorably
influenced by the shift in product mix as the Company experienced production
efficiency gains as a result of longer factory production runs.
Net income for the third quarter was $450,000, or $0.04 per share versus a
loss of $531,000, or $0.06 per share for the third quarter of fiscal year 1995.
The results for the current quarter include extraordinary income of $508,000
from the settlement of the Company's note payable to Wilshire Technologies, Inc.
Excluding this one-time gain, net of alternative minimum tax provision of
$18,000, Advanced Materials posted a net loss of $58,000 for the third quarter
of fiscal year 1996. The near breakeven performance compares favorably to the
$531,000 loss posted for the comparable quarter of last year.
For the first nine months of fiscal 1996, net income was $3,852,000, or
$0.37 per share, compared to a loss of $1,361,000, or $0.15 per share for the
year ago period. The results for the first nine months of fiscal year 1996
include one-time gains totaling $3,715,000 from the Company's sale of
investments in securities, a gain of $572,000 on stock rights and $508,000 of
extraordinary income from the early retirement of debt. Excluding these one-time
gains, net of the alternative minimum tax provision, Advanced Materials incurred
a loss of $791,000 for the first nine months of the fiscal year, a 42%
improvement over the same period a year ago. The improvement in operations was
mainly due to a positive shift in the sales mix, an increase in production
efficiencies and a decrease in interest expense. Those improvements were
partially offset by higher selling expense.
On March 4, 1996 the Company announced that its specialty materials
fabrication plants in Rancho Dominguez, California, and Tualatin, Oregon were
certified ISO 9002. All of the Company's specialty materials fabrication plants
have now received ISO 9002 certification.
The Financial Accounting Standards Board has issued Statement of Financial
Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION" ("Statement 123").
Statement 123 is primarily a disclosure standard for the Company because the
Company will continue to account for employee stock options under Accounting
Principle Board Opinion No. 25. The disclosure requirements for the Company
required by Statement 123 are effective for financial statements issued after
fiscal year 1996.
LIQUIDITY
The Company has taken several actions during the year to enhance its ability
to fund future growth in new and existing markets and to strengthen its balance
sheet.
During the nine month period ended August 31, 1996 the Company liquidated
all securities held as investments. Sales of these securities infused $5,126,000
of cash into the Company. During the same period, the Company restructured its
debt through early repayment, with reductions totaling $3,691,000. The statement
of operations shows a corresponding reduction of interest expense, down $99,000
and $108,000 for the three and nine month periods, respectively. Interest
expense is projected to continue at current levels.
6
The remaining cash was used to increase working capital, complete the
acquisition of Gasket and Molded Products, Inc. and fund operations. The
Company's credit line of $2,000,000, with its primary lender, has $1,149,000 of
current availability.
The Company is currently negotiating an asset-based lending agreement with a
new lender, to replace the agreement expiring November 1, 1996. The Company
believes it will be successful in completing the agreement on more favorable
terms to the Company. As a result, the Company terminated its $1,000,000 credit
line with a lender/shareholder on September 1, 1996.
The Company believes it has adequate cashflow from operations and proposed
and or existing credit facilities to meet necessary funding requirements over
the next twelve months.
BUSINESS OUTLOOK
The following statements are based on current expectations. These statements
are forward-looking and actual results may differ materially.
Advanced Materials has shifted its marketplace strategy to place primary
marketing emphasis on the computer and related products niche. The Company's
operations in the three month period ending August 31, 1996 showed strong
results based on this shift in emphasis in terms of sales mix and gross margins.
The Company has sufficient orders from OEMs to believe that sales will continue
to grow substantially in the final quarter of 1996.
Based on current projected order releases from major customers, the sales
growth is projected to continue in fiscal 1997.
The statements contained in the previous "Business Outlook" are
forward-looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed, among the other factors that could cause
actual results to differ materially are the following: general business
conditions, competitive factors, concentration of sales in markets and
customers, concentration of raw material suppliers, delays or cancellations in
orders, fluctuations in margins, timing of significant orders, and other risks
and uncertainties currently unknown to management.
7
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--None
(b) Reports--None
8
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.
ADVANCED MATERIALS GROUP, INC.
/s/ J. DOUGLAS GRAVEN
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J. Douglas Graven
VICE PRESIDENT AND CFO
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
9