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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-23789
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FLOUR CITY INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 62-1709152
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(State of Incorporation) (I.R.S. Employer Identification No.)
915 Riverview Drive, Suite One, Johnson City, TN 37620
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(Address of principal executive offices, zip code)
(423) 928-2724
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Common stock 6,267,539 shares outstanding at August 3, 1998
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FLOUR CITY INTERNATIONAL, INC.
INDEX
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PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
EXHIBITS 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 10,004 $ 12,198 $ 23,395 $ 24,871
Cost of revenues (7,125) (6,766) (15,035) (14,125)
-------- -------- -------- --------
Gross profit 2,879 5,432 8,360 10,746
Selling, general and administrative expenses (1,937) (1,795) (4,890) (4,394)
Non-cash stock compensation expense (11) (17) (46) (40)
Amortization of negative goodwill 110 109 328 255
-------- -------- -------- --------
Operating profit 1,041 3,729 3,752 6,567
Other income and expense:
Interest income 155 48 218 70
Interest expense (12) (13) (34) (25)
Equity in income (loss) of unconsolidated affiliates 26 - (39) -
Foreign currency transaction losses (74) (637) (431) (637)
Other income 39 76 240 168
-------- -------- -------- --------
Income before taxes and minority interests 1,175 3,203 3,706 6,143
Income taxes (248) (770) (637) (1,455)
Minority interest in income of consolidated subsidiaries - - - 7
-------- -------- -------- --------
Net income $ 927 $ 2,433 $ 3,069 $ 4,695
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common share (basic) $ 0.16 $ 0.69 $ 0.69 $ 2.69
Earnings per common share (diluted) $ 0.16 $ 0.62 $ 0.64 $ 2.29
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
July 31, 1998 October 31, 1997
------------- ----------------
(unaudited)
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 15,099 $ 342
Restricted cash 4,517 3,046
Accounts receivable, net (note 2) 10,465 13,402
Claims receivable 882 -
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,000 774
Notes receivable 1,395 1,395
Deferred income taxes 481 697
Other current assets 478 444
--------- ---------
Total current assets 35,317 20,100
Property, plant and equipment, net 514 455
Receivable from joint ventures 721 177
Investment in joint ventures 563 193
Other assets 84 158
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Total assets $ 37,199 $ 21,083
--------- ---------
--------- ---------
Liabilities and stockholders' equity
------------------------------------
Accounts payable $ 3,356 $ 3,262
Bank borrowings 500 463
Accrued expenses 888 770
Billings in excess of cost and estimated earnings
on uncompleted contacts 5,322 5,857
Advance from shareholders and directors 143 148
Income taxes payable 336 507
Joint venture corporation capital contribution payable 24 297
Other current liabilities 15 285
--------- ---------
Total current liabilities 10,584 11,589
Negative goodwill 1,493 1,821
Commitments and contingencies (note 4)
Stockholders' equity:
Preferred stock par value $.0001; authorized 5,000,000
shares; issued and outstanding -0- shares. - -
Common stock par value $.0001; authorized 50,000,000
shares; issued 6,264,469 and 30,516,667 shares at
July 31, 1998 and October 31, 1997 (note 5) 1 3
Additional paid-in capital (note 5) 14,908 529
Retained earnings 9,894 6,824
Unearned compensation (141) (287)
Deferred foreign currency translation adjustment 460 792
Stock subscription receivable - (188)
--------- ---------
Stockholders' equity 25,122 7,673
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Total liabilities and stockholders equity $ 37,199 $ 21,083
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended July 31
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash provided by operating activities:
Net income $ 3,069 $ 4,695
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization (195) (221)
Provision for doubtful accounts 147 -
Non-cash compensation expense 46 40
Deferred income taxes 216 519
Changes in operating assets and liabilities
net of effects of acquisitions
Increase in restricted cash (1,471) (65)
Decrease (increase) in accounts receivable 2,600 (3,219)
Increase in claims receivable (882) -
Increase in costs and estimated earnings in excess of billings (1,226) (2,442)
Increase in receivable from joint ventures (544) (96)
Increase in accounts payable 94 4,226
Increase (decrease) in accrued expenses 118 (51)
Decrease in billings in excess of cost and estimated earnings (535) (3,962)
Increase (decrease) in advance from shareholders and directors (5) 35
Increase (decrease) in Income taxes payable (171) 485
Other (827) 1,070
-------- --------
Net cash provided by operating activities 434 1,014
-------- --------
Cash used in investing activities:
Purchases of property, plant and equipment (152) (171)
Investments in joint ventures (370) (273)
-------- --------
Net cash used in investing activities (522) (444)
-------- --------
Cash provided by financing activities:
Net increase in short-term debt 37 292
Dividends paid - (109)
Proceeds from issuance of common stock 14,666 -
-------- --------
Net cash provided by financing activities 14,703 183
Effect of exchange rates on cash 142 (38)
-------- --------
Net increase in cash and cash equivalents 14,757 715
Cash and cash equivalents at beginning of period 342 1,401
-------- --------
Cash and cash equivalents at end of period $ 15,099 $ 2,116
-------- --------
-------- --------
Supplemental cash flow information:
Interest paid during the period $ 30 $ 20
Taxes paid during the period $ 586 $ 243
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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FLOUR CITY INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts) (unaudited)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Flour City International, Inc. and its wholly owned and majority owned
subsidiary companies after elimination of material intercompany accounts and
transactions. Less than majority owned affiliates over which the Company
exercises significant influence are accounted for as equity investments.
Less than twenty percent owned affiliates over which the Company cannot
exercise significant influence are carried at cost.
When reading the financial information contained in this Quarterly
Report, reference should be made to the financial statements, schedules, and
notes for the year ended October 31, 1997, included in the Company's amended
Registration Statement on Form S-1 filed on May 21, 1998, (Commission
Registration Number 333-43793).
On May 28, 1998, the Company completed the issuance of 2,000,000 shares
of common stock through an initial public offering resulting in net proceeds
after estimated expenses of approximately $13,625. On July 9, 1998, the
Company's underwriters exercised their over-allotment option with respect to
143,000 shares resulting in net proceeds of approximately $1,041. (See note
5, Stockholders' Equity.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates, including those related to
contracts, litigation, and contingencies, based on current available
information. Changes in facts and circumstances may result in revised
estimates. In the opinion of management, the Condensed Consolidated Financial
Statements include all material adjustments necessary to present fairly the
Company's financial position, results of operations, and cash flows. Such
adjustments are of a normal recurring nature. The Company's construction
projects are awarded in a competitive bidding process. Due to the nature of
the process the Company has experienced and may continue to experience
significant delays in project awards which have caused and may continue to
cause substantial variations in quarterly results. The results for this
interim period are not necessarily indicative of results for the entire year
or any other interim period.
2. ACCOUNTS AND NOTES RECEIVABLE, NET
Accounts and notes receivable are net of allowance for doubtful accounts
of $863 and $778 at July 31, 1998, and October 31, 1997, respectively. In
accordance with terms of long-term contracts, customers withhold certain
percentages of billings until completion and acceptance of the contracts.
Final payments of all such amounts withheld which might not be received
within a one-year period from July 31, 1998, and October 31, 1997, are $4,906
and $2,825 respectively. In conformity with trade practice, however, the
full amount of accounts receivable has been included in current assets.
Notes receivable consists of a $1,395 note from Armco, Inc. (Armco) related
to contracts assumed when the Company acquired Flour City Architectural
Metals, Inc. (FCAM) from Armco.
3. INVESTMENT IN JOINT VENTURES
During the third quarter ended July 31, 1998, the Company formed a joint
venture in the Philippines to perform on two projects in Manila. The Company
contributed $200 as an initial investment in the joint venture.
4. COMMITMENTS AND CONTINGENCIES
As of July 31, 1998, the Company had a total of $2,033 in performance
guarantees outstanding in relation to construction contracts in progress in
Thailand and Hong Kong.
The Company is a party to legal proceedings of the type normally
associated with the Company's business and involving claims for damages. In
one case, the Company filed suit against a subcontractor for non-performance
in the amount of approximately $1,400 and the subcontractor has filed a
counterclaim against the
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Company in the amount of approximately $1,700. There is currently no
scheduled date for the commencement of trial. The aggregate claim amount of
all outstanding litigation, including the above, is approximately $2.3
million. The Company believes it has meritorious defenses in these actions.
FCAM was named as a party to certain environmental actions, which arose
prior to the Company's purchase of FCAM from Armco. Armco, pursuant to the
sale agreement, agreed to defend, indemnify, and hold harmless the Company in
connection with these actions.
In the opinion of management, any ultimate liability with respect to
these actions and other litigation to which the Company is a party will not
have a material effect on the Company's financial position, results of
operations or cash flows.
5. STOCKHOLDERS' EQUITY
On February 24, 1998 the Board of Directors declared a 1 for 7 reverse
stock split effective May 11, 1998. All per share and weighted average share
information has been restated to reflect the effect of such stock split.
On May 28, 1998, the Company completed the registration and issuance of
2,000,000 shares of the Company's $0.0001 par value common stock resulting in
net proceeds after deducting estimated issuance costs of approximately
$13,625. The proceeds of the offering will be used to establish or acquire an
interest in a fabrication facility in the People's Republic of China, capital
expenditures in connection with a joint venture in Mexico, capital
expenditures at its Johnson City, Tennessee fabrication facility, working
capital and general corporate purposes. In addition, increased stockholders'
equity resulting from the offering will allow the Company to secure more and
larger bonding facilities. On July 9, 1998, the Company's underwriters
exercised their over-allotment option with respect to 143,000 shares
resulting in net proceeds of approximately $1,041. Pending the application
of the net proceeds the Company intends to invest the net proceeds in
short-term, interest-bearing, investment grade securities. Additional
paid-in capital was increased by approximately $14,666 and common stock was
increased by a de minimus amount. Due to recent economic developments in the
region, the Company has delayed its plans to increase its manufacturing base
in Asia.
6. FOREIGN EXCHANGE
Almost all of the foreign currency transaction gains and losses
recognized in income to date relate to the baht denominated Empire Towers
project located in Bangkok, Thailand. As of July 31, 1998, the Company had
filed acknowledged claims totaling $3,790 to recoup losses resulting from the
devaluation of the baht. At July 31, 1998, the total amounts due to the
Company under the Empire Towers contract (including exchange loss claims) are
the baht-equivalent of $1,684. (See "Factors That May Affect Future Results"
in "Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.")
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Flour City International, Inc. (the Company), a Nevada corporation
existing under a charted granted in 1987, is a worldwide leader in the
design, fabrication and installation of custom exterior wall systems (known
as "curtain wall") used in the construction of a wide range of commercial and
governmental buildings. The Company works closely with architects, general
contractors and owners/developers in the development and construction of
highly recognizable mid-rise and high-rise office buildings, public-use
buildings such as courthouses and airport terminals and other well-known
landmark buildings and uniquely designed structures.
The Company's principal subsidiaries are Flour City Architectural
Metals, Inc., a Delaware corporation (FCAM), and Flour City Architectural
Metals (Pacific) Limited (FCAM Pacific), a British Virgin Islands
corporation. FCAM was initially formed in 1893 under the name Flour City
Ornamental Iron Company as a specialty metals fabricator for the
architectural industry, and was a subsidiary of Armco, Inc. (Armco)
immediately prior to the merger. FCAM Pacific was formerly known as Hockley
International Limited, an independent corporation.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS AND OTHER STATEMENTS MADE
ELSEWHERE IN THIS REPORT ARE MADE IN RELIANCE ON THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THE SECTION BELOW ENTITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS" SETS FORTH AND INCORPORATES BY REFERENCE CERTAIN
FACTORS THAT COULD CAUSE ACTUAL FINANCIAL RESULTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THESE STATEMENTS.
RESULTS OF OPERATIONS
QUARTER ENDED JULY 31, 1998 COMPARED TO QUARTER ENDED JULY 31, 1997
REVENUES. Revenues decreased by 18.0% from $12,198 to $10,004 in the
third quarter ended July 31, 1998, from the third quarter ended July 31,
1997. Revenues generated by projects in North America decreased by 26.1% from
$7,244 to $5,356 in the third quarter ended July 31, 1998 from the third
quarter ended July 31, 1997. Revenues generated by projects in Asia
decreased 6.2% from $4,954 to $4,648 in the third quarter ended July 31, 1998
from the third quarter ended July 31, 1997. The decline in revenues is
typical of the cyclical nature of the Company's business, reflecting the
simultaneous completion phase of a number of older projects and startup phase
of newer projects.
GROSS PROFIT. Gross profits declined 47.0% from $5,432 to $2,879 in the
third quarter ended July 31, 1998, from the third quarter ended July 31,
1997. Gross margin as a percent of revenues decreased 15.7% from 44.5% to
28.8% in the third quarter ended July 31, 1998, from the third quarter ended
July 31, 1997. The decline in gross margins is primarily due to a decline in
mix of projects in startup and completion phases versus projects in the
operating phase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $1,795 in the third quarter of 1997 to
$1,914 in the third quarter ended July 31, 1998. Selling, general and
administrative expenses as a percent of revenues increased to 19.1% as
compared to 14.7% for the same periods of 1997. The Company's selling,
general and administrative expenses are incurred to support current and
anticipated business levels and are by design relatively insensitive to
short-term changes in revenues.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. Foreign exchange losses
decreased to $74 for the third quarter ended July 31, 1998, compared to $637
in the third quarter ended July 31, 1997, due to fluctuations in the exchange
rate of the Thai baht. To the extent that foreign currencies strengthen or
weaken against the U.S. dollar and the extent to which the Company's
long-term contracts are denominated in foreign currencies, the Company will
continue to experience translation and transaction gains and losses.
INCOME TAXES. Income taxes decreased to $248 in the third quarter ended
July 31, 1998 compared to $770 in the third quarter ended July 31, 1997. The
decrease is attributable to a reduction in the mix of U.S. source income
versus foreign source income. The Company's effective consolidated tax rate
was 21.1% in the third quarter ended July 31, 1998, compared to 24.0% in the
third quarter ended July 31, 1997. The effective tax rate on U.S. source
income was approximately 36.8% in the third quarter ended July 31, 1998,
compared to 45.6% in the same period of 1997.
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BACKLOG. The Company's backlog increased to approximately $79 million
at July 31, 1998, including $35 million attributable to the Company's
Philippines joint venture, from approximately $45 million at October 31,
1997. The Company's construction projects are awarded in a competitive
bidding process. Due to the nature of the process the Company has experienced
and may continue to experience significant delays in project awards which
have caused and may continue to cause substantial variations in backlogs and
quarterly results.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
The Company's acquisition of FCAM was effective January 1, 1997, accordingly,
1997 results include the results of FCAM since that date.
REVENUES. Revenues decreased by 5.9% to $23,395 in the nine-month
period ended July 31, 1998, compared $24,871 in the same period of 1997 due
to decreased project activity. Revenues generated by projects in North
America remained unchanged at $13,661 in the nine-month period ended July 31,
1998 compared to $13,614 in the same period of 1997. Revenues generated by
projects in Asia decreased by 13.5% from $11,257 to $9,734 in the nine-month
period ended July 31, 1998 compared to the same period of 1997.
GROSS PROFIT. Gross profit decreased 22.2% from $10,746 to $8,360 in
the nine-month period ended July 31, 1998, compared to the same period of
1997 due to decreased project activity at lower margins in 1998 compared to
the same period of 1997. Gross profit margin as a percent of revenues
decreased 7.5% from 43.2% to 35.7% in the nine-month period ended July 31,
1998, compared to the same period of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10.8% from $4,394 to $4,867 in the
nine-month period ended July 31, 1998 compared to the same period of 1997 due
to increased costs associated with increased current and anticipated levels
of business. Selling, general and administrative expenses as a percent of
revenues increased to 20.8% as compared to 17.7% for the same periods.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. Foreign exchange losses
were $431 net of gains for the nine-month period ended July 31, 1998 compared
to losses of $637 in the same period of 1997. Practically all losses were
due to fluctuations in the exchange rate of the Thai baht. To the extent
that foreign currencies strengthen or weaken against the U.S. dollar, and the
extent to which long-term contracts are denominated in foreign currencies,
the Company will continue to experience translation and transaction gains and
losses.
INCOME TAXES. Income taxes decreased to $637 in the nine-month period
ended July 31, 1998, compared to $1,455 in the same period of 1997. The
decrease is attributable to a reduction in the mix of U.S. source income
versus foreign source income. The Company's effective consolidated tax rate
was 17.2% in the nine-month period ended July 31, 1998, compared to 23.7% in
the same period of 1997. The effective tax rate on U.S. source income was
approximately 37.8% in the nine-month period ended July 31, 1998 compared to
37.0% in the same period of 1997.
BACKLOG. The Company's backlog increased to approximately $79 million
at July 31, 1998, including $35 million attributable to the Company's
Philippines joint venture, from approximately $45 million at October 31,
1997. The Company's construction projects are awarded in a competitive
bidding process. Due to the nature of the process the Company has experienced
and may continue to experience significant delays in project awards which
have caused and may continue to cause substantial variations in backlogs and
quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
Management expects that the Company will have sufficient liquidity to
meet ordinary future short-term and long-term business needs. Sources of
liquidity generally available to the Company include cash from operations,
availability under its credit facility, cash and cash equivalents, and the
issuance of capital stock.
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Operating Activities
Net cash provided by operating activities was $434 for the nine months
ended July 31, 1998, compared to $1,014 for the nine months ended July 31,
1997. During the nine months ended July 31, 1998, the U.S. dollar equivalent
of $3,790 was recorded as a claim receivable on the Empire Towers project to
compensate the Company for a reduction in the U.S. dollar equivalent of
accounts receivable due to the devaluation of the Thai baht. As of July 31,
1998, $2,908 of the $3,790 had been collected. (see "Factors That May Effect
Future Results").
Investing Activities
During the nine months ended July 31, 1998, the Company contributed $20
to the startup of a curtain-wall fabrication joint venture in the PRC, $150
to the startup of a joint venture in Mexico, and $200 to the startup of a
joint venture in the Philippines. Contributions totaled $273 in the same
period of 1997.
Expenditures for capital equipment during the nine months ended July 31,
1998, totaled $152 compared to $171 for the same period of 1997. Capital
expenditures for the remainder of 1998 and first half of 1999 are expected to
be approximately $8 million higher than those in 1997 due to planned
increases in the Company's manufacturing and fabrication facilities.
Financing Activities
During the quarter ended July 31, 1998, the Company completed the
registration and issuance of 2,143,000 shares, including the underwriters
over-allotment, of the Company's $0.0001 par value common stock resulting in
net proceeds after deducting estimated issuance costs of approximately
$14,666. The proceeds of the offering will be used to establish or acquire
an interest in a fabrication facility in the People's Republic of China,
capital expenditures in connection with a joint venture in Mexico, capital
expenditures at its Johnson City, Tennessee fabrication facility, working
capital and general corporate purposes. Due to recent economic developments
in Asia, the Company has delayed its plans to increase its manufacturing base
in that area.
The Company maintains $2,000 of revolving lines of credit at banking
facilities in the United States and Hong Kong $500 of which was drawn at July
31, 1998. The net increase in short-term debt amounted to $37 in the nine
months ended July 31, 1998, compared to $292 in the same period of 1997.
During the nine months ended July 31, 1997, the Company declared and
paid dividends of $109 to stockholders of record.
Effect of Exchange Rates on Cash
The Company maintains foreign currency operating cash deposits and
collateral in countries where the Company does business. Such deposits and
collateral are predominately used for construction projects in process and
administrative matters. During the nine months ended July 31, 1998, the
Company gained approximately $142 due to the effect of exchange rates on cash
compared to a loss of $38 during the same period of 1997.
General
The Company attempts to structure payment arrangements with its
customers to match costs incurred under projects. To the extent the Company
is not able to match costs, it relies on its cash reserves and its credit
facility to meet its working capital needs. As of July 31, 1998, the Company
had working capital in excess of $24 million.
YEAR 2000 COMPLIANCE
The Company believes that the software packages currently in use and
expected to be in use prior to the year 2000 are year 2000 compliant. Other
systems such as those in use by the Company's vendors, service providers,
customers, or unconsolidated affiliates may not be year 2000 compliant. The
Company does not expect that the financial impact of required modifications
to the Company's software, if any, will be material to the Company's
financial position, cash flows or results of operations in any given year.
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EFFECT OF INFLATION
During the past three years, the rate of inflation in many of the Asian
countries in which the Company operates significantly exceeded that of the
U.S. However, the Company generally has been able to reduce the impact of
inflation on profitability by increasing the prices of its products and
reducing operating costs. No assurance can be given that the Company will be
able to minimize the impact of inflation on profitability in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
SEGMENT INFORMATION -- In June 1997, the FASB issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, which
supersedes portions of SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 is effective for the Company commencing in
its year ending October 31, 1999. Company management has not completely
assessed the effects of SFAS No. 131 on its segment reporting, however, it
does not currently believe that there will be significant changes from the
information currently being reported.
COMPREHENSIVE INCOME -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, which becomes effective for the Company
commencing in its year ending October 31, 1999. Company management does not
believe, based on current activities, that adoption of this statement will
have a significant effect on its financial statements except to the extent
that cumulative foreign currency translations are included in comprehensive
income.
FACTORS THAT MAY AFFECT FUTURE RESULTS
GENERAL. The Company has experienced in the past, and expects to
experience in the future, substantial variations in its results of operations
in any quarterly or annual reporting period as a result of numerous factors,
many of which are out of the Company's control. The Company's operating
results may vary because of: downturns in one or more segments of the
construction industry; changes in economic conditions; the Company's failure
to obtain or delays in awards of major projects; the cancellation or delay of
major projects; or the Company's failure to timely replace projects that have
been completed or are nearing completion. Any of these factors could cause
the Company's results of operations to fluctuate significantly from period to
period, including on a quarterly basis. The Company's projects are, and in
the foreseeable future will continue to be, awarded by private or
governmental entities in a competitive bidding process. Due to the nature of
the bidding and award process, the Company has experienced, and in the future
expects to experience, significant delays in project awards. These delays
have caused and will continue to cause substantial variations in quarterly
results. In addition, no assurance can be given that the timing of a project
award will be consistent with the Company's expectations.
The Company's results of operations are affected primarily by: the level
of commercial and government sponsored building construction in its principal
markets; the Company's ability to win project contracts and its accuracy in
project cost estimating; the Company's success in utilizing its resources
efficiently; the Company's ability to complete contracts in a timely and
cost-effective manner; and the mix of domestic and international projects.
The level of commercial building construction activity is affected by many
factors such as: local, regional, national and international economic and real
estate conditions; interest rates; availability of financing; and office
building occupancy rates in metropolitan areas in which the Company markets
its services. The level of government sponsored construction activity is
influenced by the levels of tax revenues, the need for new or upgraded public
facilities such as airports or courthouses and government spending policies
and initiatives designed to stimulate local or regional economies. The
Company expects that publicly funded projects will continue to provide a
significant portion of its revenues for the foreseeable future.
INCOME TAXES. Prior to acquiring FCAM the Company was not subject to
U.S. income tax and earned most of its income in jurisdictions with no or
relatively low income tax rates. The Company believes that it will continue
to earn a significant portion of its income outside of the U.S. and that the
majority of its offshore income will not be subjected to U.S. income tax. As
revenues from U.S. projects increase relative to revenues from international
projects, the Company's overall tax rate will increase.
FOREIGN EXCHANGE RISKS. The Company generally attempts to mitigate
foreign exchange risk by entering into contracts providing for payment in
U.S. dollars instead of the local currency wherever possible, nonetheless
local currency must be used to pay for local labor, raw materials or other
local country costs of operations. The
11
<PAGE>
Company currently has contracts denominated in the Hong Kong dollar, Thai
baht and Philippine peso. Future contracts may be denominated in the currency
of other countries.
Materials and services to perform project contracts are procured
globally. Aluminum extrusion is typically the largest material cost and is
generally denominated in U.S. dollars. Glass purchases are generally
denominated in U.S. dollars unless sourced locally in a foreign locale. The
expenses associated with erection services are generally denominated in local
currency. To the extent that foreign currencies weaken against the U.S.
dollar, the Company will experience translation losses due to the revaluation
of accounts payable, accounts receivable and other asset and liability
accounts.
The Company generally attempts to contract to secure compensation for
devaluation of local currencies relative to the U.S. dollar. In these
instances, although the Company may incur translation losses, the Company
seeks to offset such losses by increases in the amount of local currency
payable to the Company under contract so as to approximate the original U.S.
dollar equivalent value of the contract. There can be no assurance that the
Company will be successful in negotiating contracts with terms that maintain
an U.S. dollar equivalency.
As of July 31, 1998, the Company's backlog of non-US dollar based
contracts totaled approximately $43 million. Of that amount contract
provisions to ensure U.S. dollar equivalency did not protect approximately
$16 million. At July 31, 1998, the Company maintained funds in Hong Kong
dollars, Thai baht, and Philippine pesos for project operations, cash
guarantees and operating costs totaling approximately $4 million. Exchange
rate fluctuations in local currency denominated contracts that do not have a
U.S. dollar equivalency, and in bank exchange rates in general, could have a
material adverse effect on the Company's financial position, results of
operations, and cash flows.
EMPIRE TOWERS PROJECT. The Company has a contract for work to be
performed on the Empire Towers project located in Bangkok, Thailand (the
"Empire Towers Contract") which is denominated in Thai baht. Pursuant to a
clause in the Empire Towers Contract, which provides protection for changes
in government policy, the Company filed claims for change orders to recoup
losses resulting from the devaluation of the baht and has reflected $882 of
such claim as a receivable at July 31, 1998.
In January 1998, the counterparty to the contract did not pay the amount
billed on the scheduled payment date and requested that it be included in the
final claim settlement. In March 1998, the counterparty acknowledged
liability for the baht-equivalent of approximately $3 million, and agreed to
pay such amount in installments beginning in March 1998 through June 1998.
On April 2, 1998, the Company received an acknowledgment from the
counterparty for an additional $882 to be paid by July 31, 1998, which
remained uncollected at July 31, 1998.
At July 31, 1998, the total amounts due to the Company under the Empire
Towers Contract (including exchange loss claims) are the baht-equivalent of
$1,684. As of July 31, 1998, the Company had collected the equivalent of
$2,908 in relation to the claim for losses as a result of the baht
devaluation. Management believes that all amounts due under the Empire Towers
contract are collectable. However, in the event of non-payment, the Company
may be required to seek recourse through legal or other proceedings in
Thailand or other non-U.S. jurisdictions, which could have a material adverse
effect on the Company's financial position, results of operations, and cash
flows.
POLITICAL UNCERTAINTIES. One of the Company's manufacturing affiliates
is located in the People's Republic of China (PRC) outside the Hong Kong
Special Administrative Region. Due to recent economic developments in the
region, the Company has delayed its plans to increase its manufacturing base
in Asia. Economic development in the area may be limited as well by the
imposition of measures intended to control economic conditions, the
inadequate development of an infrastructure and the potential unavailability
of adequate transportation, adequate power and water supplies, satisfactory
roads and communications and raw materials and parts. Changes in
governmental policies, laws, regulations, or the interpretation thereof, or
the imposition of restrictions on imports and sources of raw materials,
increased taxes as well as general economic conditions including interest
rates or rates of inflation could have a material adverse affect on the
Company's financial position, results of operations, and cash flows.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information as of July 31, 1998, required by Item 701(f) of Regulation S-K is
set forth below:
The Company's registration statement on Form S-1, Commission file number
333-43793, for 2,000,000 shares of the Company's common stock was filed with
the Commission and was declared effective on May 21, 1998. All of the shares
offered to the public were sold by the termination date of May 28, 1998. On
July 3, 1998, the Company's underwriters exercised their option with respect
to an over-allotment of 143,000 shares of common stock. The aggregate price
of the 2,143,000 shares was $17,144,000.
FLOUR CITY INTERNATIONAL, INC.
COMMON STOCK
EXPENSES OF ISSUANCE AND USE OF PROCEEDS
AS OF JULY 31, 1998
(in thousands)
<TABLE>
<S> <C>
Aggregate offering price of amount sold to date $ 17,144
Expenses of issuance:
Underwriters discount 1,286
SEC registration fee 9
NASD filing fee 3
NASDAQ National Market listing fee 67
Blue sky fees and expenses including legal fees 15
Printing costs 260 (note 1)
Registrar and Transfer Agent fees 5 (note 1)
Legal fees and expenses 370 (note 1)
Underwriters nonaccountable expense allowance 257
Accounting fees and expenses 175 (note 1)
Miscellaneous 31 (note 1)
----------
Total expenses of issuance 2,478 (note 1)
----------
Net proceeds 14,666
Use of proceeds:
Direct or indirect payment to directors,
officers, 10% owners, affiliates and others - (note 2)
Proceeds used for construction of plant, building,
and facilities - (note 2)
Proceeds used for purchase and installation of
machinery and equipment 10
Proceeds used for investment in joint ventures 334
Proceeds used for working capital 2,505
Temporary investments in U.S. Government
securities, 1-A commercial paper,
and cash deposits
----------
$ 11,817
----------
----------
</TABLE>
Notes:
1 - estimated as of July 31, 1998
2 - none expended as of July 31, 1998
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Calculation of Earnings Per Share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended July 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of September, 1998.
FLOUR CITY INTERNATIONAL, INC.
/s/ ROBERT O. BRUCE
- -----------------------
Robert O. Bruce
Chief Financial Officer
14
<PAGE>
EXHIBIT 11
FLOUR CITY INTERNATIONAL, INC.
CALCULATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares
outstanding before public offering 3,853 3,514 3,859 1,743
Shares issued at public offering
including underwriters over-allotment 1,805 - 602 -
--------- -------- -------- --------
Weighted average basic shares
outstanding 5,658 3,514 4,461 1,743
Dilutive effect of employee stock
grants 293 400 364 311
--------- -------- -------- --------
Weighted average diluted shares
outstanding 5,951 3,914 4,825 2,054
--------- -------- -------- --------
--------- -------- -------- --------
Net income for the period $ 927 $ 2,433 $ 3,069 $ 4,695
--------- -------- -------- --------
--------- -------- -------- --------
Earnings per share - basic $ 0.16 $ 0.69 $ 0.69 $ 2.69
- diluted $ 0.16 $ 0.62 $ 0.64 $ 2.29
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 15,099
<SECURITIES> 0
<RECEIVABLES> 11,327
<ALLOWANCES> 862
<INVENTORY> 0
<CURRENT-ASSETS> 35,317
<PP&E> 732
<DEPRECIATION> 218
<TOTAL-ASSETS> 37,199
<CURRENT-LIABILITIES> 10,584
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 25,121
<TOTAL-LIABILITY-AND-EQUITY> 37,199
<SALES> 23,395
<TOTAL-REVENUES> 23,395
<CGS> 15,035
<TOTAL-COSTS> 15,035
<OTHER-EXPENSES> 282
<LOSS-PROVISION> 268
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 3,706
<INCOME-TAX> 637
<INCOME-CONTINUING> 3,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,069
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.64
</TABLE>
