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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 SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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 March 15, 1999
1
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FLOUR CITY INTERNATIONAL, INC.
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
9-13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
EXHIBITS 16
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts) (unaudited)
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THREE MONTHS ENDED JANUARY 31, 1999 1998
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Revenues $ 7,342 $ 6,461
Cost of revenues (6,391) (3,341)
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Gross margin 951 3,120
Selling, general and administrative expenses (2,128) (1,397)
Amortization, net 84 92
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Operating profit (loss) (1,093) 1,815
Foreign currency transaction losses - (874)
Equity in net loss of unconsolidated affiliates - (68)
Other income (expense), net 253 222
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Income (loss) before income taxes and minority interests (840) 1,095
Income tax benefit (expense) 62 (286)
Minority interests in earnings of consolidated subsidiaries (106) -
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Net income (loss) $ (884) $ 809
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Net income (loss) per share:
Basic $ (0.14) $ 0.21
Diluted $ (0.14) $ 0.19
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Weighted average shares outstanding:
Basic 6,104 3,870
Diluted 6,268 4,270
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share amounts)
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<CAPTION>
JANUARY 31, 1999 OCTOBER 31, 1998
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(UNAUDITED)
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ASSETS
Cash and cash equivalents $ 16,944 $ 19,297
Restricted cash 4,181 3,887
Accounts receivables, net 8,194 8,124
Claims receivable 971 970
Notes receivable 1,395 1,395
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,604 3,314
Deferred income taxes 204 204
Other current assets 2,906 2,244
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Total current assets 37,399 39,435
Plant and equipment, net 1,587 1,454
Other assets 1,321 1,362
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Total assets $ 40,307 $ 42,251
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LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 1,026 $ 1,282
Accounts payable and accrued expenses 3,898 4,119
Accounts payable to related parties - 79
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,175 8,543
Other current liabilities 426 485
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Total current liabilities 13,525 14,508
Negative goodwill, net 1,274 1,384
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Total liabilities and deferred credits 14,799 15,892
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Commitments and contingencies - -
Minority interests in equity of consolidated subsidiaries 316 207
Stockholders' equity:
Preferred stock, par value $0.0001; authorized
5,000,000 shares; no shares issued - -
Common stock, par value $0.0001; authorized
50,000,000 shares; issued and outstanding
6,267,539 shares at January 31, 1999, and
October 31, 1998 - -
Additional paid-in-capital 14,788 14,788
Retained earnings 9,914 10,798
Accumulated other comprehensive income 610 697
Other stockholders' equity (120) (131)
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Total stockholders' equity 25,192 26,152
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Total liabilities and stockholders' equity $ 40,307 $ 42,251
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) (unaudited)
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THREE MONTHS ENDED JANUARY 31, 1999 1998
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Cash flows from operating activities:
Net income (loss) $ (884) $ 809
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation and amortization (11) (33)
Non-cash stock compensation 11 17
Deferred income taxes - 129
Equity in loss of joint ventures - 68
Changes in assets and liabilities net of effects of
acquisitions of businesses:
Restricted deposits (294) 448
Accounts receivable (70) 4,885
Claims receivable - (2,967)
Costs, estimated earnings and billings, net 342 403
Other current assets (663) -
Other assets 41 (131)
Receivable from joint venture - 177
Accounts payable and accrued expenses (283) (1,269)
Income taxes payable (189) (261)
Other current liabilities 149 (114)
Accounts payable to related parties (79) (5)
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Net cash provided by (used in) operating activities (1,930) 2,156
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Cash flows from investing activities:
Purchase of property, plant and equipment (232) (77)
Investment in joint venture corporations - (341)
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Net cash used in investing activities (232) (418)
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Cash flows from financing activities:
Payments on bank borrowings (256) (388)
Changes in minority interest 109 -
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Net cash used in financing activities (147) (388)
Effect of exchange rate changes on cash (44) (1,086)
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Net increase (decrease) in cash and cash equivalents (2,353) 264
Cash and cash equivalents, beginning of year 19,297 342
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Cash and cash equivalents, end of year $ 16,944 $ 606
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Supplemental cash flow information:
Interest paid in cash $ 19 $ 17
Income taxes paid in cash 85 342
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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FLOUR CITY INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, included in the Company's Annual Report on Form 10-K for the year ended
October 31, 1998.
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. SIGNIFICANT ACCOUNTING PRINCIPLES
As of November 1, 1998, the Company adopted the provisions of 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 requires the reporting of segment information
based on the way management runs the business whereas SFAS No. 14 required
reporting along product lines. See note 5 - Segment Information.
As of November 1, 1998, the Company adopted the provisions of SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 requires the inclusion,
after net income, of the after-tax effect of certain items currently
affecting stockholders' equity, to arrive at comprehensive income. The
Company will display other comprehensive income as an element in the
statement of changes in equity at year's end. See note 6 - Comprehensive
Income.
3. ACCOUNTS AND NOTES RECEIVABLE, NET
(in thousands)
Accounts and notes receivable are net of allowance for doubtful
accounts of $749 and $539 at January 31, 1999, and October 31, 1998,
respectively. In accordance with the terms of long-term contracts, customers
withhold certain percentages of billings until completion and acceptance of
performance under the contracts. Final payments of all such amounts withheld
which might not be received within a one-year period from January 31, 1999, and
October 31, 1998, are $4,891 and $5,002 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
6
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note from Armco, Inc. (Armco) related to contracts assumed when the Company
acquired Flour City Architectural Metals, Inc. (FCAM) from Armco.
4. OTHER INCOME (EXPENSE), NET
(in thousands)
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THREE MONTHS ENDED JANUARY 31, 1999 1998
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Interest income $ 256 $ 8
Interest expense (18) -
Other 15 214
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Other income (expense), net $ 253 $ 222
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</TABLE>
5. SEGMENT INFORMATION
The Company is engaged in one industry segment: the design,
engineering, manufacture, and installation of custom curtainwall systems for the
construction industry. The Company manages its business in two segments based on
geographical location: North America and the Pacific-Rim. The accounting
policies for each segment are the same as for the Company. Intersegment revenues
consist of design and engineering performed by one segment for another. In
consolidation, such intersegment revenues are eliminated against the receiving
segment's cost of revenues. Segment profit or loss includes all items that
comprise net income for the respective segments.
SEGMENT REVENUES AND PROFIT
(in thousands)
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THREE MONTHS ENDED JANUARY 31, 1999 1998
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REVENUES
Revenues from external customers
North America $ 2,914 $ 3,730
Pacific 4,428 2,731
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Total revenues from external customers 7,342 6,461
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Intersegment revenues
North America 441 -
Pacific - -
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Total intersegment revenues 441 -
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Total revenues for reportable segments 7,783 6,461
Elimination of intersegment revenues (441) -
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Consolidated revenues $ 7,342 $ 6,461
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PROFIT OR LOSS
North America $ (166) $ 386
Pacific (742) 423
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Profit (loss) for reportable segments (908) 809
Unallocated corporate income and expenses, net 24 -
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Consolidated net income $ (884) $ 809
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</TABLE>
7
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Segment assets are the total assets of the segments. Unallocated corporate
assets consist primarily of cash and certificates of deposit.
SEGMENT ASSETS
(in thousands)
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<CAPTION>
AT JANUARY 31, 1999 AND OCTOBER 31, 1998 1999 1998
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ASSETS
North America $ 10,954 $ 10,914
Pacific 15,805 17,349
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Total assets for reportable segments 26,759 28,263
Unallocated corporate assets 13,548 13,988
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Consolidated total assets $ 40,307 $ 42,251
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</TABLE>
6. COMPREHENSIVE INCOME
(in thousands)
Comprehensive income for the Company is comprised solely of the
change in deferred foreign currency translation adjustments, net of tax. The
deferred foreign currency translation adjustment occurs as a result of
translating the financial statements of the Company's foreign operations into
United States Dollars. Since the Company's operations that give rise to the
deferred foreign currency translation adjustment are located primarily in
countries that have little or no income tax, and whose accumulated earnings
are not expected to be repatriated, no tax adjustment has been applied to the
change in the deferred foreign currency translation adjustment to arrive at
other comprehensive income. Comprehensive income for the three months ended
January 31, 1999 and 1998, was $(797) and $1,517 respectively.
7. COMMITMENTS AND CONTINGENCIES
(in thousands)
As of January 31, 1999, the Company had a total of $2,033 in
performance guarantees outstanding in relation to construction contracts in
progress in Thailand, Hong Kong and the Philippines.
Prior to the Company's purchase of FCAM from Armco (the "Armco Sale"),
FCAM operated facilities that allegedly generated hazardous substances. FCAM has
been named as a potentially responsible party (PRP) in relation to several sites
for actions that allegedly occurred prior to the Company's purchase of FCAM.
Pursuant to the terms of the Armco Sale, Armco agreed to defend, indemnify and
hold harmless the Company in connection with certain lawsuits, including
environmental claims associated with any property owned by FCAM at or before the
date of sale. Armco has assumed any and all cleanup responsibility and
litigation with respect to such environmental claims pursuant to the Armco Sale
agreement. The Company believes that to the extent FCAM incurs any loss or
liability in connection with any such actions, it will be fully compensated by
Armco. In the opinion of management, any ultimate liability with respect to
these actions will not have a material impact on the financial position of the
Company.
The Company has begun negotiations to reach a final settlement in a
lawsuit filed by Sky Lift Corporation in 1993 (prior to the purchase of FCAM
from Armco). In accordance with the terms in the agreement under which the
Company purchased FCAM from Armco in 1997, Armco agreed to reimburse the Company
for up to one half of any settlement in this matter. Management has determined
that it is probable that the Company will be required to make a payment in
settlement of the action and an estimate of such amount has been recorded as a
loss contingency in the quarter ended January 31, 1999.
8
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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 charter 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.
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES SUCH AS: THE DEPENDENCE OF THE COMPANY ON A SMALL NUMBER
OF LARGE CONTRACTS; THE SENSITIVITY OF THE COMPANY'S BUSINESS TO GLOBAL
ECONOMIC CONDITIONS; REFERENCES TO THE EXPECTED LEVELS OF GROSS MARGINS
AND EXPENSES; YEAR 2000 COMPLIANCE; THE COLLECTABILITY OF RECEIVABLES;
AND THE ADEQUACY OF CASH FLOWS. 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.
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RESULTS OF OPERATIONS
Although management anticipated a much lower gross margin percentage
in the first quarter ended January 31, 1999, versus the same period of 1998,
operating results for the quarter ended January 31, 1999, were adversely
impacted by the $1.0 million revenue adjustment on the Empire Towers project.
The project, located in Bangkok, Thailand, was initiated in 1994, had
experienced several delays, survived the 1997 devaluation of the baht, and is
now substantially complete. During the course of the project, approximately
$2.5 million in change orders and claims were presented to the customer who
asked that the final resolution of those items be delayed until completion of
the project. The Company believed that all revenues associated with change
orders and claims would be paid in full. Accordingly, the Company included
the value of such change orders and claims in total estimated revenues for
use in calculating revenues earned under the long-term percent of completion
accounting method. At October 31, 1998, total contract revenues were
estimated to be $24.8 million of which $23.3 million had been recognized in
revenue for the job to date.
Negotiations concerning the change orders and claims were completed
in March, 1999, with the customer accepting only $1.1 million of the change
orders and claims as an addition to contract revenues. Management determined
that legal action to enforce the Company's prior claims would be ineffective.
This resulted in the total contract revenue estimate being reduced from $24.8
million to $23.4 million. Revenues recognized job to date as of January 31,
1999, totaled $24.0 million. Revenues required to be allocated to remaining
cleanup work on the project amount to $0.4 million, resulting in a change in
estimated total contract revenues of $1.0 million at January 31, 1999, which
was written off against revenues previously recognized.
Accounts and claims receivable as of January 31, 1999, related to the
Empire Towers contract totaled $2.2 million. The Company has recorded an
additional provision for bad debts of $150 thousand in the quarter ended January
31, 1999, related to the collection of receivables on the Empire Towers project.
9
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SEGMENTS. The Company is engaged in one industry segment: the design,
engineering, manufacture, and installation of custom curtainwall systems for the
construction industry. The Company manages its business in two segments based on
geographical region: North America and Pacific-Rim.
REVENUES. Revenues for the quarter ended January 31, 1999, were $0.9
million higher than in the same period of 1998. Excluding the $1.0 million
write-off on Empire Towers, revenues increased $1.9 million due to increased
volume. During the quarter ended January 31, 1999, the Company was actively
working on 23 projects, 15 in North America and 8 in the Pacific-Rim. During the
same period of 1998, the Company was actively working in 18 projects, 12 in
North America and 6 in the Pacific-Rim.
North America revenues were $2.9 million for the quarter ended January
31, 1999, a $0.8 million, or 22%, reduction from the same period of last year.
The decrease in revenues was due to substantial delays in the startup of two
projects. One project, 33 Arch Street, located in Boston, has resumed its
building schedule after a two-month delay. The other project, Chapultepec Tower,
located in Mexico City, may be delayed for the foreseeable future or may be
cancelled by the owner.
Pacific-Rim revenues for the quarter ended January 31, 1999, were $4.4
million, a $1.7 million, or 62%, increase from the same period of last year.
Excluding the Empire Towers project, segment revenues were $2.7 million, or 97%,
higher than the same period of last year. Projects located in Hong Kong and in
the Philippines contributed to the increased revenues.
GROSS MARGIN. Gross margin for the quarter ended January 31, 1999, was
$1.0 million, or 13% of revenues, compared to $3.1 million, or 48% of revenues,
for the same period of 1998. Excluding the $1.0 million write-off on the Empire
Towers project, gross margin was $1.9 million, or 23% of revenues, as
anticipated, for the quarter ended January 31, 1999.
North America gross margin was $0.7 million, or 24% of revenues, for
the quarter ended January 31, 1999, compared to $1.4 million, or 38% of
revenues, for the same period in 1998.
Pacific-Rim gross margin was $0.3 million, or 6% of revenues, for the
quarter ended January 31, 1999, compared to $1.7 million, or 62% of revenues,
for the same period in 1998. Excluding the Empire Towers project from both
periods, gross margin was $1.2 million, or 23% of revenues, for the quarter
ended January 31, 1999, compared to $0.2 million, or 36% of revenues, for the
1998 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2.1 million for the quarter ended January 31,
1999, compared to $1.4 million for the same quarter of 1998. The increase in
selling, general and administrative expense was in support of increased volume
of business and the recording of a $0.1 million loss contingency for a lawsuit
and an additional $0.1 million bad debt reserve for Empire Towers. Excluding the
loss contingency and the write off for the Empire Towers project, selling,
general and administrative expenses would have been 22% of revenues as
anticipated.
North America selling, general and administrative expenses were $1.1
million for the quarter ended January 31, 1999, or 38% of revenues, compared to
$0.9 million, or 23% of revenues, for the same period in 1998.
Pacific-Rim selling, general and administration expenses were $0.9
million, or 21% of revenues, compared to $0.5 million, or 19% of revenues, for
the 1998 period.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. There were no foreign
currency transaction gains or losses recorded in the quarter ended January 31,
1999, while $0.9 million of losses due to Thai baht denominated transactions
were recorded in the 1998 period. With the conclusion of the Empire Towers
contract, the Company's exposure to Thai baht-denominated transaction losses
will be decreased but not eliminated. The Company's projects in Hong Kong and
the Philippines are tied to the United States dollar either by official pegging
of exchange rates or contract provisions.
BACKLOG. The Company's backlog totaled $80.3 million at January 31,
1999, of which $36.2 million was from North America and $44.2 was from the
Pacific-Rim. North America backlog excludes the Chapultepec Tower project, whose
continuation is now in question. Pacific-Rim backlog includes $13.6 million
related to projects in Hong Kong and $30.6 million related to projects in the
Philippines. Bids outstanding at January 31, 1999, totaled $247 million, $138
million in North America and $109 million in Pacific.
10
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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, funds
available under the Company's credit facility, and cash and cash equivalents.
OPERATING ACTIVITIES. $1.9 million in cash was used in operating
activities for the quarter ended January 31, 1999, compared to a contribution of
$2.2 million for the same quarter of 1998. The loss in the current quarter was
due to the $1.0 million loss on Empire Towers and a reduced level of cash
in-flows on new contracts in process in North America. North America projects
typically result in cash in-flows being less than cash outflows until units are
installed on the building, which can be as long as twelve months from the
beginning of the project. The Company typically receives substantial cash
advances for projects located in the Pacific-Rim. Significant uses of cash
during the current quarter included a $0.8 million increase in trade receivables
and a decrease of $0.2 million in contract billings in excess of cost and
estimated earnings in North America, $0.3 million increase in restricted cash,
$0.3 million decrease in accounts payable, and $0.7 million increase in deposits
and advance payments in the Pacific-Rim.
INVESTING ACTIVITIES. Capital expenditures used $0.2 million of cash
during the quarter ended January 31, 1999, compared to $0.4 million in the same
quarter of 1998. No investments in joint ventures or equity contributions were
recorded during the current quarter.
FINANCING ACTIVITIES. The Company reduced borrowings under lines of
credit by $0.3 million during the quarter ended January 31, 1999, compared to
$0.4 million during the 1998 period. Minority interest in the equity of the
Company's Philippines joint venture increased by $0.1 million during the current
quarter.
EFFECT OF EXCHANGE RATES ON CASH. Exchange rate fluctuations were not a
material contributor to cash flows during the quarter ended January 31, 1999,
compared to a loss of $1.1 million in 1998.
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 January 31, 1999, the Company
had working capital in excess of $23 million.
COMMITMENTS AND CONTINGENCIES. See note 7 to the Condensed Consolidated
Financial Statements for a discussion of environmental liabilities and loss
contingency established for a lawsuit.
YEAR 2000 COMPLIANCE
The Company has undertaken a project to address the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 1900 and the year 2000 (Y2K). The project is divided into three phases:
- - Phase I involves identifying areas where Y2K problems exist or may exist.
This phase includes both IT and non-IT systems. And the surveying of
suppliers and customers.
- - Phase II involves repairing or replacing items that are not Y2K compliant
including computer hardware and software. This phase also involves
identifying alternative sources of supply for major vendors that are not
Y2K compliant.
- - Phase III involves testing significant systems and processes to assure
their Y2K compliance.
Phase I is approximately 80% complete. The Company's main processes are
computer-assisted design and development of curtain-wall systems, manufacturing
information, and financial applications. The result of the Company's assessment
of potential Y2K problems indicates that the natures of the Company's operations
are such that there are few in-house date sensitive processes that could be
expected to cause damage to the Company's assets or have a material effect on
revenues. The survey of suppliers and customers is approximately 50% complete.
The survey results received so far indicate that about half of the Company's
suppliers of construction materials in the United States are Y2K compliant or
have active Y2K programs. Suppliers in other countries, mainly China, Thailand
and the Philippines typically employ manual processes. The remainder of Phase I
should be completed by May of 1999.
Phase II is approximately 50% complete. Operating system and software
patches have been received from developers or have been promised on specific
timetables. The Company has used the technical services of
11
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IBM to conduct a Y2K upgrade to one computer system. Company personnel are
handling all other Y2K upgrades. Replacements for non-compliant hardware are
taking place on a normal rotation. Phase II is expected to be completed by June
30, 1999.
Phase III testing of replacement software and upgraded hardware should
be completed by August 31, 1999.
The Company's costs incurred in connection with achieving Y2K are not
expected to be material. However, the Company does not separately track the
internal costs incurred for the Y2K project since such costs are principally the
related payroll costs for information systems employees. The total amount of
external costs expended to date is under five thousand dollars. Management
estimates the total external costs to be less than thirty thousand dollars.
The most reasonably likely worst case scenario of a major Y2K failure
would be the failure of several major suppliers to deliver required materials on
time. As discussed above, this would involve mainly suppliers in North America.
In such a case the Company could experience project delays of up to two weeks in
projects. Such delays could result in higher levels of overtime for production
and field installation workers as well as liquidating damages if projects are at
critical stages near completion. The costs in such a case could be $1.5 million.
Contingency plans are being formulated to minimize any Y2K problems.
In-house computer systems are expected to be Y2K compliant by August 1999. The
Company's purchasing agents and project managers will receive special training
during the summer of 1999 on how to increase their monitoring and expediting of
suppliers to reduce the impact of any production-related delays.
Management believes that the Company is adequately prepared for the
year 2000 and that its Y2K project will mitigate any material effect on the
Company's financial position, results of operations or cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
GENERAL. The Company's projects are 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. No assurance can be given that
the timing of a project award will be consistent with the Company's
expectations. In addition, numerous factors, many of which are out of the
Company's ability to control, have caused and will continue to cause substantial
variations in its results of operations in any quarterly or annual reporting
period. Some of these factors are:
- - Downturns in one or more segments of the construction industry;
- - Changes in economic conditions;
- - The failure of project owners to obtain adequate construction financing;
- - The failure of project owners and general contractors to accept change
orders and claims on projects;
- - The failure of project general contractors to schedule other trades in a
manner most efficient for Flour City;
- - The Company's failure to obtain or delays in awards of major projects;
- - The Company's failure to collect accounts receivable under construction
projects;
- - The cancellation or delay of major projects, including cancellations or
delays caused by job-site labor problems and jurisdictional disputes; 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.
FOREIGN EXCHANGE RISKS. Where possible, the Company generally attempts
to mitigate foreign exchange risk by entering into contracts providing for
payment in United States dollars instead of the local. Nonetheless, local
currency must be used to pay for local labor, raw materials or other local
country costs of operations. The 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. The Company maintains cash,
short-term debt (based on floating interest rates), accounts receivable, and
accounts payable in several currencies. The functional currencies in which those
accounts are maintained match the functional currencies of construction
contracts in process. Accounts are also maintained in United States dollars in
all countries in which the Company
12
<PAGE>
operates. The following table shows the January 31, 1999, United States dollar
translated balances of selected non-US dollar denominated current accounts by
the currency in which they are maintained:
<TABLE>
<CAPTION>
HONG KONG THAI PHILIPPINE
($ IN MILLIONS) DOLLARS BAHT PESOS
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and restricted cash $0.5 $1.6 $0.3
Short-term debt - - -
Accounts and claim receivable 0.8 2.1 0.4
Accounts payable and accrued expenses 0.7 0.9 0.1
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
US dollar exchange rate at January 31, 1999 7.750 36.161 38.500
</TABLE>
Materials and services to perform project contracts are procured
globally. Aluminum extrusion is typically the largest material cost and is
generally denominated in United States dollars. Glass purchases are generally
denominated in United States 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 United
States 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 United States 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 United States
dollar equivalent value of the contract. There can be no assurance that the
Company will be successful in negotiating contracts with terms that maintain a
United States dollar equivalency. As of January 31, 1999, the Company's backlog
of non-US dollar based contracts without contract provisions to ensure United
States dollar equivalency totaled approximately $15.1 million. Exchange rate
fluctuations in local currency denominated contracts that do not have a United
States dollar equivalency, and in exchange rates in general, could have a
material adverse effect on the Company's financial position, results of
operations, and cash flows.
POLITICAL UNCERTAINTIES. The Company operates in several countries
including countries in Asia and in Mexico. Economic development in countries in
which the Company operates may be limited by the imposition of measures intended
to control economic conditions and the inadequate development of an
infrastructure to support manufacturing and large-scale construction projects.
Changes in governmental policies 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information as of January 31, 1999, 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 JANUARY 31, 1999
(in thousands) (unaudited)
<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 248
Registrar and Transfer Agent fees 5
Legal fees and expenses 548
Underwriters nonaccountable expense allowance 257
Accounting fees and expenses 130
Miscellaneous 31
------------
Total expenses of issuance 2,599
------------
Net proceeds 14,545
Use of proceeds:
Direct or indirect payment to directors,
officers, 10% owners, affiliates and others -
Proceeds used for construction of plant, building,
and facilities -
Proceeds used for purchase and installation of
machinery and equipment -
Proceeds used for investment in joint ventures 334
Proceeds used as collateral for lines of credit 2,000
Proceeds used for working capital 1,087
Temporary investments in U.S. Government
securities, 1-A commercial paper, ------------
and cash deposits $ 11,124
------------
------------
</TABLE>
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1999.
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 17th day of March, 1999.
FLOUR CITY INTERNATIONAL, INC.
/s/ ROBERT O. BRUCE
----------------------------------------
Robert O. Bruce
Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 21,125
<SECURITIES> 0
<RECEIVABLES> 11,309
<ALLOWANCES> 749
<INVENTORY> 0
<CURRENT-ASSETS> 37,399
<PP&E> 2,043
<DEPRECIATION> 456
<TOTAL-ASSETS> 40,307
<CURRENT-LIABILITIES> 13,525
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,192
<TOTAL-LIABILITY-AND-EQUITY> 40,307
<SALES> 7,342
<TOTAL-REVENUES> 7,342
<CGS> 6,391
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 210
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (840)
<INCOME-TAX> (62)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (884)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
