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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001.
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-16401
---------------------------
ADVANCED MATERIALS GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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. X Yes 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, 8,671,272 SHARES AS OF JULY 13, 2001.
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ADVANCED MATERIALS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
(UNAUDITED)
Page
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the three and six months
ended May 31, 2001 and May 28, 2000........................................... 3
Consolidated Balance Sheets at May 31, 2001 and November 30, 2000.............. 4
Consolidated Statements of Cash Flows for the six months ended May 31, 2001
and May 28, 2000............................................................... 5
Notes to Consolidated Financial Statements..................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................... 13
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to be a Vote of Security Holders......................... 13
ITEM 6. Exhibits and Reports on Form 8-K............................................... 15
Signatures..................................................................... 16
PART I - FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, 2001 MAY 28, 2000 MAY 31, 2001 MAY 28, 2000
-------------- -------------- -------------- --------------
Net sales $ 9,955,000 $ 10,243,000 $ 19,904,000 $ 19,724,000
Cost of sales 8,874,000 8,655,000 17,755,000 16,658,000
--------------- --------------- --------------- ---------------
Gross profit 1,081,000 1,588,000 2,149,000 3,066,000
--------------- --------------- --------------- ---------------
Operating expenses:
Selling, general and administrative 1,125,000 1,094,000 2,294,000 2,145,000
Depreciation and amortization 90,000 67,000 170,000 133,000
Restructuring costs 1,440,000 --- 1,440,000 ---
--------------- --------------- --------------- ---------------
Total operating expenses 2,655,000 1,161,000 3,904,000 2,278,000
--------------- --------------- --------------- ---------------
(Loss) Income from operations (1,574,000) 427,000 (1,755,000) 788,000
Other income (expense):
Interest expense (132,000) (131,000) (292,000) (250,000)
Foreign exchange gain (loss) 25,000 (10,000) 14,000 1,000
Other, net (28,000) (20,000) (44,000) (22,000)
--------------- --------------- --------------- ---------------
Total other income and expenses (135,000) (161,000) (322,000) (271,000)
--------------- --------------- --------------- ---------------
(Loss) income before income taxes (1,709,000) 266,000 (2,077,000) 517,000
Income tax expense (17,000) ---- (41,000) ----
--------------- --------------- --------------- ---------------
Net (loss) income $ (1,726,000) $ 266,000 $ (2,118,000) $ 517,000
=============== =============== =============== ===============
Basic (loss) earnings per common share $ (0.20) $ 0.03 $ (0.24) $ 0.06
=============== =============== =============== ===============
Diluted (loss) earnings per common share $ (0.20) $ 0.03 $ (0.24) $ 0.06
=============== =============== =============== ===============
Basic weighted average common shares outstanding 8,671,272 8,589,555 8,671,272 8,568,889
=============== =============== =============== ===============
Diluted weighted average common shares outstanding 8,671,272 8,894,168 8,671,272 8,861,555
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements
3
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 2001 AND NOVEMBER 30, 2000
ASSETS
2001 2000
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 735,000 $ 1,101,000
Accounts receivable, net 6,777,000 7,753,000
Inventories, net 3,649,000 4,962,000
Income tax receivable 32,000 32,000
Deferred income taxes 337,000 337,000
Prepaid expenses and other 363,000 364,000
------------ ------------
Total current assets 11,893,000 14,549,000
------------ ------------
Property and equipment, net 2,964,000 3,007,000
Goodwill, net 419,000 451,000
Deferred income taxes 206,000 206,000
Other assets 218,000 152,000
------------ ------------
Total assets $ 15,700,000 $ 18,365,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,588,000 $ 5,952,000
Accrued liabilities 1,190,000 1,210,000
Restructuring reserve,current 491,000 --
Deferred income 344,000 273,000
Line of credit 3,111,000 3,585,000
Current portion of long-term obligations 346,000 360,000
------------ ------------
Total current liabilities 10,070,000 11,380,000
Term loan 886,000 892,000
Convertible debentures 405,000 405,000
Deferred compensation, net of current protion 1,056,000 1,056,000
Restructuring reserve, net of current portion 802,000 --
Capital leases, net of current portion 308,000 341,000
------------ ------------
Total liabilities 13,527,000 14,074,000
------------ ------------
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;
8,671,272 shares issued and outstanding at May 31,
2001 and November 30, 2000, respectively 9,000 9,000
Additional paid-in capital 7,083,000 7,083,000
Accumulated deficit (4,919,000) (2,801,000)
------------ ------------
Total stockholders' equity 2,173,000 4,291,000
------------ ------------
Total liabilities and stockholders' equity $ 15,700,000 $ 18,365,000
============ ============
See accompanying notes to consolidated financial statements
4
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
MAY 31, 2001 MAY 28, 2000
------------ ------------
Cash flows from operating activities:
Net (loss) income $(2,118,000) $ 517,000
Adjustments to reconcile net( loss) income
to net cash provided by operating activities
Depreciation 406,000 492,000
Amortization 32,000 31,000
Provision for obsolete inventory 262,000 (28,000)
Discontinued operations -- (10,000)
Interest on deferred compensation 78,000 71,000
Deferred income 71,000 (15,000)
Loss on disposal of fixed assets 15,000 --
Changes in operating assets and liabilities:
Accounts receivable - trade 976,000 105,000
Inventories 1,051,000 (851,000)
Prepaid expenses and other 1,000 47,000
Accounts payable and accrued liabilities (1,384,000) 33,000
Restructuring reserve 1,293,000 --
----------- -----------
Net cash provided by operating activities 683,000 392,000
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (378,000) (490,000)
Increase in other assets (66,000) --
Amounts borrowed by affiliate -- 28,000
----------- -----------
Net cash used in investing activities (444,000) (462,000)
----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit (474,000) 393,000
Repayments of other long-term obligations (131,000) (166,000)
Proceeds received from capitalized financing -- 25,000
Exercise of common stock options -- 51,000
----------- -----------
Net cash (used in) provided by financing activities (605,000) 303,000
----------- -----------
Net change in cash and cash equivalents (366,000) 233,000
Cash and cash equivalents, beginning of period 1,101,000 496,000
----------- -----------
Cash and cash equivalents, end of period $ 735,000 $ 729,000
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 288,000 $ 243,000
=========== ===========
Income taxes $--- $---
=========== ===========
See accompanying notes to consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet at May 31, 2001, and
the condensed consolidated statements of operations and cash flows for the
three and six months ended May 31, 2001 and Mary 28, 2000 are unaudited and
have been prepared by Advanced Materials Group, Inc. (the "Company"),
pursuant to the rules and regulations of the Security and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures
included herein are adequate to make the information presented not
misleading. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary to fairly state the
consolidated financial position as of May 31, 2001, and the results of
operations and cash flows for the related interim periods ended May 31,
2001 and May 28, 2000. The results of operations for the three and six
months ended May 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending November 30, 2001 or any other
period.
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:
MAY 31, 2001 NOVEMBER 30, 2000
------------ -----------------
Raw Materials $ 2,514,000 $ 3,091,000
Work-in-process 301,000 204,000
Finished Goods 1,252,000 1,823,000
----------- -----------
4,067,000 5,118,000
Less allowance for obsolete inventory (418,000) (156,000)
----------- -----------
$ 3,649,000 $ 4,962,000
=========== ===========
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 May 31, 2001 computations, common equivalent shares are excluded from
diluted loss per share as their effect is antidilutive. Basic and Diluted
income (loss) for the three and six months ended May 31, 2001 and May 28,
2000 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
MAY 31, 2001 MAY 28, 2000 MAY 31, 2001 MAY 28, 2000
------------ ------------ ------------ ------------
BASIC EPS:
Net (loss) income $(1,726,000) $ 266,000 $(2,118,000) $ 517,000
Denominator: Weighted average common shares outstanding 8,671,272 8,589,555 8,671,272 8,568,889
----------- ----------- ----------- -----------
Net (loss) income per share (basic) $ (0.20) $ 0.03 $ (0.24) $ 0.06
=========== =========== =========== ===========
DILUTED EPS:
Net (loss) income $(1,726,000) $ 266,000 $(2,118,000) $ 517,000
----------- ----------- ----------- -----------
Denominator: Weighted average common shares outstanding 8,671,272 8,589,555 8,671,272 8,568,889
Common equivalent shares outstanding (options and warrants) -- 842,717 -- 869,967
Hypothetical shares repurchased at average market price
with proceeds of exercise -- (538,104) -- (577,301)
----------- ----------- ----------- -----------
Total shares 8,671,272 8,894,168 8,671,272 8,861,555
----------- ----------- ----------- -----------
Net (loss) income per share (diluted) $ (0.20) $ 0.03 $ (0.24) $ 0.06
=========== =========== =========== ===========
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 second quarter and six months ended May 31, 2001 and May 28, 2000.
THREE MONTHS ENDED MAY 31, 2001 AND MAY 28, 2000
REVENUE:
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
2001................................... $5,041,000 $2,738,000 $2,176,000 $ 9,955,000
2000................................... $6,186,000 $2,599,000 $1,458,000 $ 10,243,000
NET INCOME (LOSS):
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
2001................................... $(2,065,000) $ 252,000 $ 87,000 $(1,726,000)
2000................................... $ (130,000) $ 355,000 $ 41,000 $ 266,000
SIX MONTHS ENDED MAY 31, 2001 AND MAY 28, 2000
REVENUE:
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
2001................................... $10,394,000 $5,171,000 $4,339,000 $ 19,904,000
2000................................... $11,853,000 $4,874,000 $2,997,000 $ 19,724,000
NET INCOME (LOSS):
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
2001................................... $(2,783,000) $ 462,000 $ 203,000 $(2,118,000)
2000................................... $ (287,000) $ 726,000 $ 78,000 $ 517,000
ASSETS: AS OF MAY 31, 2001 AND NOVEMBER 30, 2000
AMI-US OPERATIONS AMI-SINGAPORE AMI IRELAND CONSOLIDATED
2001................................... $ 8,968,000 $ 3,201,000 $ 3,531,000 $ 15,700,000
2000................................... $ 11,681,000 $ 3,648,000 $ 3,036,000 $ 18,365,000
6
5) RESTRUCTURING CHARGES
The Company has announced the closure of its manufacturing facility in
Dallas, Texas and its distribution centers in Portland, Oregan and Parker,
Colorado which is expected to be completed by the end of fiscal year 2001.
The Company is closing these facilities in order to consolidate its U.S.
operations into its plant in California and reduce overhead costs in
response to its lower domestic sales. A one-time restructuring charge of
$1,440,000 was recorded in the second quarter of fiscal year 2001 relating
to the plant closures. Approximately 20 employees will be terminated in
conjuction with the closures and estimated serverance costs are
approximately $135,000. The remainder of the restructuring charge consists
of lease abandonment costs of approximately $1 million (net of probable
sub-lease revenue of $250,000) which have been substantially classified as
a long-term liability as payment will be made through November 2005.
6) 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) DEBT
At May 31, 2001, the Company was not in compliance with minimum net income,
minimum book net worth and debt service coverage ratio and therefore is in
technical default under the compliance provisions of its bank line of
credit. The Company is currently in discussions with the lender to amend
the financial covenants. Although, management believes it will be
successful with its discussions, there can be no assurance of this success
or that management would be successful in finding a replacement lender with
acceptable terms. In order to fund present and future operations, the
Company needs to cure its covenant violations with its lender or find a
replacement lender with acceptable terms. While the Company is in the
process of attempting to cure its line of credit violations, and has
initiated plans to return to profitability, there are no assurances that
the Company will be successful in completing these critical tasks. If the
Company is unable to successfully complete these critical tasks, it may be
forced to reduce its operations and/or liquidate inventory at amounts below
current carrying value to generate the necessary working capital to fund
its operations.
8) 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. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. ADMG adopted the standard during the
first quarter of fiscal year 2001. The Company currently does not engage in
derivative or hedging activities, and accordingly, there has been no impact
to its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company believes that its current revenue
recognition policies comply with SAB 101.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
involving Stock Compensation." The adoption of this Interpretation did not
have a material impact on the consolidated results of operations or
financial position of the Company.
In November 2000, the Emerging Task Force ("EITF") issued EITF 00-27,
"Application of Issue No. 98-5, "Accounting for Convertible Conversion
Features or Contingently Adjustable Conversion Ratios to Certain
Convertible Instruments".
7
The adoption of this EITF did not have a material impact on the
consolidated results of operations or financial position of the Company.
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, 2000.
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 01 CURRENT THREE MONTHS VERSUS FY 00
Net revenue for the second quarter ended May 31, 2001 was $9,955,000,versus
$10,243,000 for the same period of fiscal 2000, a decrease of 3%. The decrease
in net revenues for the second quarter of fiscal 2001 is primarily attributable
to lower domestic sales prices and volumes relating to the slowdown in domestice
economic conditions.
Cost of sales for the second quarter ended May 31, 2001 and May 28, 2000 was
$8,874,000 and $8,655,000, respectively. Cost of sales as a percentage of net
revenue was 89% for the second quarter of fiscal 2001,compared to 84% for the
second quarter of fiscal 2000. Cost of sales as a percentage of net revenue
increased for the second quarter of fiscal 2001 compared to the second quarter
of fiscal 2000. This increase is primarily due to inventory write offs relating
to the closing of the Company's plant in Texas, lower domestic sales prices and
a reduction in the Companies share of the gross profit per its agreement with
its strategic manufacturing partner in Singapore.
Selling, general and administrative expenses for the second quarter of May 31,
2001 and May 28, 2000 was $1,125,000 and $1,094,000, respectively. The increase
was due primarily to the Company's expansion in Ireland and unfavorable foreign
currancy fluctuations in 2001 compared to 2000. The Company continues to focus
on the reduction of operating expense ratios and optimization of manufacturing
processes in order to improve profitability.
The Company has announced the closure of its manufacturing facility in
Dallas, Texas and its distribution centers in Portland, Oregan and Parker,
Colorado which is expected to be completed by the end of fiscal year 2001.
The Company is closing these facilities in order to consolidate its U.S.
operations into its plant in California and reduce overhead costs in response
to its lower domestic sales. A one-time restructuring charge of $1,440,000
was recorded in the second quarter of fiscal year 2001 relating to the plant
closures. Approximately 20 employees will be terminated in conjuction with
the closures and estimated serverance costs are approximately $135,000. The
remainder of the restructuring charge consists of lease abandonment costs of
approximately $1 million (net of probable sub-lease revenue of $250,000)
which have been substantially classified as a long-term liability as payment
will be made through November 2005.
Interest expense for the second quarter of fiscal 2001and 2000 was $132,000 and
$131,000, respectively.
Net loss for the second quarter of fiscal 2001 was $(1,726,000) and excluding
restructuring charges net loss was $(286,000), compared to net income of
$266,000 for the second quarter of 2000. Basic income (loss) per share for the
second quarter of fiscal 2001 was $(0.20) per share on a weighted average of 8.7
million shares, compared to $0.03 on a weighted average of
8
8.6 million shares for the second quarter of fiscal 2000. Diluted loss per share
for the second quarter of fiscal 2001 was $(0.20) per share on a weighted
average of 8.7 million shares, compared to $0.03 on a weighted average of 8.9
million shares for the second quarter of fiscal year 2000.
FY 01 SIX MONTHS VERSUS FY 00
Net revenue for the six months ended May 31, 2001 was $19,904,000,versus
$19,724,000 for the same period of fiscal 2000. Net revenues continue to slow
due to domestic economic conditions.
Cost of sales for the six months ended May 31, 2001 and May 28, 2000 was
$17,755,000 and $16,658,000, respectively. Cost of sales as a percentage of net
revenue was 89% for the six months of fiscal 2001,compared to 84% for the six
months of fiscal 2000. Cost of sales as a percentage of net revenue increased
for the six months of fiscal 2001, compared to the six months of fiscal 2000.
This increase is primarily due to inventory write offs relating to the closing
of the Company's plant in Texas, lower domestic sales prices and a reduction in
the Companies share of the gross profit per its agreement with its strategic
manufacturing partner in Singapore.
Selling, general and administrative expenses for the six months of May 31, 2001
and May 28, 2000 was $2,294,000 and $2,145,000, respectively. The increase was
due to Company's expansion in Ireland. The Company continues to focus on the
reduction of operating expense ratios and optimization of manufacturing
processes in order to improve profitability.
The Company has announced the closure of its manufacturing facility in
Dallas, Texas and its distribution centers in Portland, Oregan and Parker,
Colorado which is expected to be completed by the end of fiscal year 2001.
The Company is closing these facilities in order to consolidate its U.S.
operations into its plant in California and reduce overhead costs in response
to its lower domestic sales. A one-time restructuring charge of $1,440,000
was recorded in the second quarter of fiscal year 2001 relating to the plant
closures. Approximately 20 employees will be terminated in conjuction with
the closures and estimated serverance costs are approximately $135,000. The
remainder of the restructuring charge consists of lease abandonment costs of
approximately $1 million (net of probable sub-lease revenue of $250,000)
which have been classified as a long-term liability as payment will be made
through November 2005.
Interest expense for the six months of fiscal 2001and 2000 was $292,000 and
$250,000, respectively. Increase due to higher average loan balance in the first
quarter.
Net loss for the six months of fiscal 2001 was $ (2,118,000) and excluding
restructuring charges net loss was $(678,000), compared to net income of
$517,000 for the six months of 2000. Basic income (loss) per share for the
second quarter of fiscal 2001 was $(0.24) per share on a weighted average of 8.7
million shares, compared to $0.06 on a weighted average of 8.6 million shares
for the six months of fiscal 2000. Diluted loss per share for the six months of
fiscal 2001 was $(0.24) per share on a weighted average of 8.7 million shares,
compared to $0.06 on a weighted average of 8.9 million shares for the six months
of fiscal 2000.
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.
FY 01 CURRENT THREE MONTHS VERSUS FY 00
AMI-U.S. OPERATIONS
Net revenue for the second quarter ended May 31, 2001 was $5,041,000, compared
to net revenue for the second quarter ended May 28, 2000 of $6,186,000. Net loss
for the second quarter ended May 31, 2001 was $(2,314,000), excluding
restructuring charges net loss was $(624,000), compared to net loss for the
second quarter of ended May 31, 2000 of $(130,000). The increase in net loss is
primarily attributable to lower net revenue volumes coupled with fixed
manufacturing costs.
9
AMFSC-SINGAPORE
Net revenue for the second quarter ended May 31, 2001 was $2,738,000, compared
to net revenue for the second quarter ended May 28, 2000 of $2,599,000. The
increase in net revenues for the second quarter of fiscal 2000 is primarily
attributable to higher volumes of component sales to computer printer
manufacturers. Printer supply sales to key customer accounts have 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
ended May 31, 2001 was $252,000, compared to net income for the second quarter
ended May 28, 2000 of $355,000. Decrease in net income is primarily attributable
to the gross profit sharing agreement with the Company's strategic manufacturing
partner in Singapore.
AML-IRELAND
Net revenue for the second quarter ended May 31, 2001 was $2,176,000, compared
to net revenue for the second quarter ended May 28, 2000 of $1,458,000. The
increase in net revenues for the second quarter of fiscal 2001 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 ended May
31, 2001 was $87,000, compared to net income for the second quarter ended May
28, 2000 of $41,000.
FY 01 SIX MONTHS VERSUS FY 00
AMI-U.S. OPERATIONS
Net revenue for the six months ended May 31, 2001 was $10,394,000, compared to
net revenue for the six months ended May 28, 2000 of $11,853,000. Net loss for
the six months ended May 31, 2001 was $(3,033,000), excluding restructuring
charges net loss was $(1,343,000), compared to net loss for the six months ended
May 31, 2000 of $(287,000). The increase in net loss excluding restructuring
charges is primarily attributable to lower net revenue volumes coupled with
fixed manufacturing costs.
AMFSC-SINGAPORE
Net revenue for the six months ended May 31, 2001 was $5,171,000, compared to
net revenue for the six months ended May 28, 2000 of $4,874,000. The increase in
net revenues for the six months of fiscal 2001 is primarily attributable to
higher volumes of component sales to computer printer manufacturers. Printer
supply sales to key customer accounts will reflect continued growth in the
installed base, growth in printing from the Internet and increased usage of
newly introduced products. Net income for the six months ended May 31, 2001 was
$462,000, compared to net income for the six months ended May 28, 2000 of
$726,000. Decrease in net income is primarily attributable to the gross profit
sharing agreement with the Company's strategic manufacturing partner in
Singapore.
AML-IRELAND
Net revenue for the six months ended May 31, 2001 was $4,339,000, compared to
net revenue for the six months ended May 28, 2000 of $2,997,000. The increase in
net revenues for the six months of fiscal 2001 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 six months ended May 31, 2001 was
$203,000, compared to net income for the six months ended May 28, 2000 of
$78,000. Increase is primarily due to higher sales volume.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $735,000 at May 31, 2001, compared with
$1,101,000 at November 30, 2000. During the second quarter cash flows from
operating activities were used to pay down short- and long-term debt and
purchase property, plant and equipment.
10
Operating activities generated $683,000 of cash during the second quarter fiscal
2001, compared with $392,000 in the corresponding period in fiscal 2000. The
increase in cash generated from operating activities in fiscal 2001 resulted
primarily from operations and a decrease in accounts receivables.
Inventory at May 31, 2001 was $3,649,000, compared to $4,962,000 at November 30,
2000. Inventory levels decreased primarily due to an anticipated short-term
reduction in the domestic sales volume.
Net trade receivables at May 31, 2001 were $6,777,000, compared to $7,753,000 at
November 30, 2000. The decrease is due to reduction in domestic net revenues.
Capital expenditures were $378,000 for the second quarter of fiscal 2001,
compared to $462,000 for the corresponding period in fiscal 2000. 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 second quarter of
fiscal 2001 decreased by $480,000.
The Company had $735,000 of cash and cash equivalents at May 31, 2001. The
Company has a $5,000,000 operating credit line with its primary lenders with
approximately $2,795,000 currently outstanding as of June 15, 2001, which
expires in February 2002. The Company has an outstanding term loan of $886,000
as of May 31, 2001 with the same bank. The term loan bears interest at prime
plus 1.25% and libor plus 1.0% (8.25% and 6.5% at May 31, 2001). The Company
anticipates that existing cash, cash from operations and existing lines of
credit will supply sufficient cash for its short and long term projected needs
for operations as long as the Company is successful in curing its covenant
violations or finding a replacement lender with acceptable terms. (See
discussion below).
At May 31, 2001, the Company was not in compliance with minimum net income,
minimum book net worth and debt service coverage ratio and therefore is in
technical default under the compliance provisions of its bank line of credit.
The Company is currently in discussions with the lender to amend the financial
covenants. Although, management believes it will be successful with its
discussions, there can be no assurance of this success or that management would
be successful in finding a replacement lender with acceptable terms. In order to
fund present and future operations, the Company needs to cure its covenant
violations with its lender or find a replacement lender with acceptable terms.
While the Company is in the process of attempting to cure its line of credit
violations, and has initiated plans to return to profitability, there are no
assurances that the Company will be successful in completing these critical
tasks. If the Company is unable to successfully complete these critical tasks,
it may be forced to reduce its operations and/or liquidate inventory at amounts
below current carrying value to generate the necessary working capital to fund
its operations.
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,
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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 46% 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
- 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.
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.
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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.
The Company's common stock traded on the NASDAQ Small-Cap Stock Market
("NASDAQ") under the symbol "ADMG" from June 23, 1993 until December 13, 2000.
Effective as December 14, 2000, the Company's common stock was delisted from the
NASDAQ and has traded on the NASD-regulated OTC Bulletin Board ("Bulletin
Board") under the symbol "ADMG.OB." The high and low closing prices for the
common stock for the past two fiscal years as reported by NASDAQ and the
Bulletin Board are set forth in the forth in the following table. Such
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
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."
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders (the "Annual Meeting") on
May 23, 2001. At the Annual Meeting, the Company's shareholders elected Timothy
R. Busch, Steve F. Scott, N. Price Paschall, Dr. Michael Ledeen, and Maurice J.
DeWald to the Company's Board of Directors and approved the ratification of BDO
Seidman LLP to serve as the Company's independent accountants for fiscal 2001.
Proxies were solicited by the Company pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. As of March 26, 2001, the record
date for the Annual Meeting, there were approximately 8,671,272 shares of the
Company's Common Stock outstanding, of which 5,901,259 shares, or 68% 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 shareholders and until his successor has been selected and
qualified or until his resignation or removal with no abstentions or broker
non-votes:
VOTES FOR VOTES AGAINST
--------- -------------
Timothy R. Busch............................... 5,584,010 317,249
Steve F. Scott................................. 5,584,037 317,222
N. Price Paschall.............................. 5,584,037 317,222
Dr. Michael Ledeen............................. 5,584,037 317,222
Maurice DeWald................................. 5,584,037 317,222
2) Ratification of Selection of Accountants. The selection of BDO Seidman LLP
as the Company's independent accountants for the fiscal year ending
November 30, 2001 was voted on and ratified by the Company's stockholders
as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINING
--------- ------------- ----------------
5,678,733 192,411 30,014
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K
No reported 8-K developments submitted in quarter.
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.
Dated: July 13, 2001 ADVANCED MATERIALS GROUP INC.
By: /s/ STEVE F. SCOTT
------------------
Steve F. Scott
President and CEO
(Chief Executive Officer)
/s/ GAYLE ARNOLD
------------------
Gayle Arnold
Vice President
(Chief Financial Officer)
(Principal Financial and Accounting Officer)
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