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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 APRIL 30, 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
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 June 10, 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
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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 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998 1999 1998
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Revenues $ 12,306 $ 6,930 $ 19,648 $ 13,391
Cost of revenues (9,794) (4,569) (16,185) (7,910)
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Gross profit 2,512 2,361 3,463 5,481
Selling, general and administrative expenses (2,497) (1,573) (4,625) (2,953)
Amortization, net 84 91 168 183
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Operating profit (loss) 99 879 (994) 2,711
Foreign currency transaction gain (loss) (127) 517 (127) (357)
Equity in net gain (loss) of unconsolidated affiliates - 3 - (65)
Other income (expense), net 248 37 501 242
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Income (loss) before income taxes and minority interests 220 1,436 (620) 2,531
Income taxes (116) (103) (54) (389)
Minority interests in income of consolidated subsidiaries (363) - (469) -
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (259) $ 1,333 $ (1,143) $ 2,142
============================================================================================================================
Net income (loss) per share:
Basic $ (0.04) $ 0.35 $ (0.19) $ 0.55
Diluted $ (0.04) $ 0.31 $ (0.18) $ 0.50
============================================================================================================================
Weighted average shares outstanding:
Basic 6,104 3,853 6,104 3,862
Diluted 6,268 4,252 6,268 4,261
============================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands except shares and per share amounts)
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APRIL 30, 1999 OCTOBER 31, 1998
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(UNAUDITED)
ASSETS
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Cash and cash equivalents $ 13,456 $ 19,297
Restricted cash 4,004 3,887
Accounts receivable, net 8,496 8,124
Claims receivable 427 970
Notes receivable 1,395 1,395
Costs and estimated earnings in excess of
Billings on uncompleted contracts 2,189 3,314
Deferred income taxes 204 204
Other current assets 3,122 2,244
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Total current assets 33,293 39,435
Plant and equipment, net 1,868 1,454
Other assets 1,540 1,362
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Total assets $ 36,701 $ 42,251
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 2,835 $ 1,282
Accounts payable and accrued expenses 4,560 4,119
Accounts payable to related parties - 79
Billings in excess of cost and estimated earnings
on uncompleted contacts 2,796 8,543
Other current liabilities 369 485
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Total current liabilities 10,560 14,508
Negative goodwill, net 1,165 1,384
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Total liabilities and deferred credits 11,725 15,892
Commitments and contingencies - -
Minority interests in equity of consolidated subsidiaries 641 207
Stockholders' equity:
Preferred stock par value $.0001; authorized 5,000,000
shares; no shares issued - -
Common stock par value $.0001; authorized 50,000,000
shares; issued and outstanding 6,267,539 shares
at April 30, 1999 and October 31,1998 - -
Additional paid-in capital 14,788 14,788
Retained earnings 9,655 10,798
Accumulated other comprehensive income 2 697
Other stockholders' equity (110) (131)
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Stockholders' equity 24,335 26,152
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Total liabilities and stockholders' equity $ 36,701 $ 42,251
===============================================================================================================
</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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SIX MONTHS ENDED APRIL 30, 1999 1998
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Cash flows from operating activities:
Net income (loss) $ (1,143) $ 2,142
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization (15) 63
Non-cash stock compensation 21 (35)
Deferred income taxes - 200
Equity in loss of joint ventures (65)
Changes in assets and liabilities net of effects of
acquisitions of businesses:
Restricted deposits (117) 503
Accounts receivable (372) 3,375
Claims receivable 543 (3,790)
Costs, estimated earnings and billings, net (4,622) (362)
Other current assets (878)
Other assets (178)
Receivable from joint venture - (275)
Accounts payable and accrued expenses 441 (847)
Income taxes payable (71) (118)
Other current liabilities (45) (409)
Accounts payable to related parties (79) (104)
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Net cash provided by (used in) operating activities (6,515) 278
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Cash flows from investing activities:
Purchase of property, plant and equipment (618) (139)
Investment in joint venture corporations - (269)
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Net cash used in investing activities (618) (408)
Cash flows from financing activities:
Proceeds (payments) on bank borrowings 1,553 (75)
Changes in minority interest 434 -
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Net cash used in financing activities 1,987 (75)
Effect of exchange rate changes on cash (695) (4)
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Net increase (decrease) in cash and cash equivalents (5,841) (209)
Cash and cash equivalents, beginning of year 19,297 342
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Cash and cash equivalents, end of year $ 13,456 $ 133
============================================================================================================
Supplemental cash flow information:
Interest paid in cash 37 23
Income taxes paid in cash 173 396
============================================================================================================
</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-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 $737 and $539 at April 30, 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 April 30, 1999, and October 31, 1998, are
$3,901 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 SIX MONTHS ENDED
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APRIL 30, APRIL 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest income $ 211 $ 55 $ 467 $ 63
Interest expense (17) (5) (35) (22)
Other income (expense), net 54 (13) 69 201
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Other income (expense), net $ 248 $ 37 $ 501 $ 242
==================================================================================================================
</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 SIX MONTHS ENDED
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APRIL 30, APRIL 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues
Revenues from external customers:
North America $4,439 $ 4,575 $7,353 $8,305
Pacific 7,867 2,355 12,295 5,086
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total revenues from external customers 12,306 6,930 19,648 13,391
Intersegment revenues:
North America - - 441 -
Pacific - - - -
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Total intersegment revenues - - 441 -
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Total revenues for reportable segments 12,306 6,930 20,089 13,391
Elimination of intersegment revenues - - (441) -
- -------------------------------------------------------------------------------------------------------------
Consolidated revenues $12,306 $ 6,930 $19,648 $13,391
=============================================================================================================
Profit or (loss):
North America $ 69 $ 219 $ (97) $ 605
Pacific (282) 1,114 (1,024) 1,537
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Profit (loss) for reportable segments (213) 1,333 (1,121) 2,142
Unallocated corporate income and (expenses), net (46) - (22) -
=============================================================================================================
Consolidated net income $ (259) $1,333 $ (1,143) $2,142
=============================================================================================================
</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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AT APRIL 30, 1999 AND OCTOBER 31, 1998 1999 1998
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Assets
North America $ 10,331 $ 10,914
Pacific 12,553 17,349
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Total assets for reportable segments 22,884 28,263
Unallocated corporate assets 13,817 13,988
================================================================================================
Consolidated total assets $ 36,701 $ 42,251
================================================================================================
</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 April 30, 1999 and 1998, was
$351 and $325 respectively. Comprehensive income for the six months ended April
30, 1999 and 1998, was $(446) and $1,842 respectively.
7. COMMITMENTS AND CONTINGENCIES
(in thousands)
As of April 30, 1999, the Company had a total of $5,988 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 provided for 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.
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 30, 1999 COMPARED TO QUARTER ENDED APRIL 30, 1998
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. Total revenues increased 78% or $5,376 over the same quarter
a year ago. Revenues for the second quarter ended April 30, 1999 were $12,306
compared to $6,930 for the quarter ended April 30, 1998. Revenues from projects
in the Pacific-Rim totaled $7,867 in the second quarter; an increase of 234% or
$5,512 over the same quarter last year. Two projects in the Philippines and one
in Hong Kong were responsible for the significant increase in revenues.
Project revenues in North America were $4,439, a decrease of 3% from
the same period last year. This was however a $1,525 increase over the first
quarter of this year. The US has experience significant delays on three of
its projects this quarter. John F. Kennedy Airport Terminal #4 in New York,
and 33 Arch Street, in Boston have both experienced construction delays.
Chapultepec Towers in Mexico City was delayed and removed from the Company's
backlog. There are now indications that the Chapultepec project may commence
but with little impact on the current year. The increase or decrease 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.
9
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GROSS PROFIT/MARGIN. Gross profit for the quarter ended April 30, 1999,
was $2.5 million, or 20% of revenues, compared to $2.4 million, or 34% of
revenues, for the same period of 1998. The decline in gross margin rate was the
result of lower profit margin projects in the Pacific-Rim in contrast to working
projects there at the same time last year.
North America gross margin was $1.1 million, or 25% of revenues, for
the quarter ended April 30, 1999, compared to $1.3 million, or 28% of revenues,
for the same period in 1998.
Pacific-Rim gross margin was $1.4 million, or 18% of revenues, for the
quarter ended April 30, 1999, compared to $1.1 million, or 47% of revenues, for
the same period in 1998. This represents an increase in gross profits of 28%
over a year ago.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2.5 million for the quarter ended April 30, 1999,
compared to $1.6 million for the same quarter of 1998. The 58% increase in
selling, general and administrative expense was in support of the 78% increased
volume of revenue. Also contributing to the increase was a strong effort on the
part of the Company to staff for and actively pursue projects in European, the
Peoples Republic of China and Taiwan markets. As a percent of revenue, selling
general and administrative expense declined to 20% of sales in the quarter ended
April 30, 1999 compared to 23% in the same quarter of 1998.
North America selling, general and administrative expenses were $1.4
million for the quarter ended April 30, 1999, or 30% of revenues, compared to
$1.1 million, or 24% of revenues, for the same period in 1998.
Pacific-Rim selling, general and administration expenses were $1.1
million, or 15% of revenues, compared to $0.5 million, or 21% of revenues, for
the 1998 period. The increase in expense is attributable to increased selling
activities, particularly in Europe.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. There was a $0.1 million
foreign currency transaction loss recorded in the quarter ended April 30, 1999.
This is in comparison to a $ 0.5 million gain in the same period in 1998. These
foreign currency gains and losses are primarily due to the Thai baht denominated
transactions recorded in the 1998 period. With the near 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.
NET INCOME (LOSS). The net loss for the quarter ending April 30,
1999 was $259 or $0.04 per share compared to a net income of $1.3 million or
$0.35 per share for the same quarter a year ago. This is due to the fact that
the 78% increase in revenues was obtained at a lower profit margin due to the
mix of projects during the two quarters. Also, the increase in SG&A expenses,
as a result of the Company's increased revenue volume and expansion into the
European market, negatively effected net income. The effect of foreign
currency gains and losses accounted for $0.6 million of the decline in net
income in the quarter ended April 30, 1999 compared to the same quarter last
year.
BACKLOG. The Company's backlog totaled $82.0 million at April 30, 1999,
of which $48.7 million was from North America and $33.3 was from the Pacific-Rim
area. The North America backlog excludes the Chapultepec Tower project, whose
continuation is now in question although there have been recent indications that
this project will proceed. Pacific-Rim backlog includes $9.3 million related to
projects in Hong Kong and $24.0 million related to projects in the Philippines.
Bids outstanding at April 30, 1999 totaled $227 million, $66 million in North
America and $161 million in the Pacific-Rim and Europe.
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
REVENUES. Revenues increased by 47% from $13,391 to $19,648 in the
six-month period ended April 30, 1999, compared to the same period of 1998 due
to increased project activity. Revenues generated by projects in North America
decreased by 11% from $8.3 million to $7.4 million in the six-month period ended
April 30, 1999 compared to the same period of 1998. Revenues generated by
projects in the Pacific-Rim increased by 142% from $5.1 million to $12.3 million
in the six-month period ended April 30, 1999 compared to the same period of
1998.
10
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GROSS PROFIT. Gross profit declined from $5.5 million to $3.5 million
in the six-month period ended April 30, 1999, compared to the same period of
1998. The decline in gross margin rate was the result of lower profit margins on
the mix of projects in both North America and the Pacific-Rim.
Although management anticipated a much lower gross margin percentage in
the first six-months ended April 30, 1999, versus the same period of 1998,
operating results for the six months ended April 30, 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.
Gross profit margin as a percent of revenues decreased from 41% to 18%
in the six-month period ended April 30, 1999, compared to the same period of
1998. Excluding the Empire Tower impact in 1999, the gross profit margin would
have been 23%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $3.0 million to $4.6 million in the
six-month period ended April 30, 1999 compared to the same period of 1998 due to
increased costs associated with increased current and anticipated levels of
business. Selling, general and administrative expenses as a percent of revenues
were 24% in the six-month period ended April 30, 1999 compared to 22% in the
previous year.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. Foreign exchange losses
were $.01 million for the six-month period ended April 30, 1999 compared to a
loss of $0.4 in 1998. Losses were primarily 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.
NET INCOME (LOSS). The net loss for the six-months ended April 30,
1999 of $1.1 million compares to net income last year for the comparable
period of $2.1 million. The $1.0 million Empire revenue adjustment in the
first quarter of the current fiscal year and a $0.1 foreign currency
transaction loss accounted for the majority of the loss this current fiscal
year. The reduction in the gross margin rates on current year projects,
primarily in Asia, in comparison to last year, resulted in a decline in net
income of approximately $2.4 million.
BACKLOG. The Company's backlog totaled $82.0 million at April 30,
1999, of which $48.7 million was from North America and $33.3 million was
from the Pacific-Rim area. The North America backlog excludes the Chapultepec
Tower project, whose continuation is now in question although there have been
recent indications that this project will proceed. Pacific-Rim backlog
includes $9.3 million related to projects in Hong Kong and $24.0 million
related to projects in the Philippines. Bids outstanding at April 30, 1999
totaled $227 million, $66 million in North America and $161 million in the
Pacific-Rim and Europe.
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.
11
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OPERATING ACTIVITIES. $6.5 million in cash was used in operating
activities for the six months ended April 30, 1999, compared to a contribution
of $0.3 million for the same period of 1998. The loss in the current six-month
period was due to the $1.0 million loss on Empire Towers, and a reduced level of
cash in-flows on contracts in process in both the Pacific-Rim and 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. A significant
use of cash during the current period was attributable to a $4.6 million decline
in the net billings in excess of cost and estimated earnings on uncompleted
contracts in the Pacific-Rim. Other uses of cash during the six-month period
included a $0.4 increase in accounts receivable and an increase in other current
assets of $0.9.
INVESTING ACTIVITIES. Capital expenditures used $0.6 million of cash
during the six-month period ended April 30, 1999, compared to $0.1 million in
the same quarter of 1998. The expenditures were used to equip a new fabrication
plant in the Philippines for two major projects in progress there. No
investments in joint ventures or equity contributions were recorded during the
current six-month period of 1999.
FINANCING ACTIVITIES. The Company increased short-term borrowings,
principally with import loans associated with projects in progress in the
Philippines, by $1.6 million during the quarter and six-month period ended April
30, 1999. The short term import loans, used for material purchases, bear
interest at the prevailing interest rate which approximates 16% and are due and
payable between June 1999 and August 1999. This compares to short-term debt
repayment of $0.1 million during the 1998 period. Minority interest in the
equity of the Company's Philippines joint venture increased by $.4 million
during the six-months ended April 30, 1999.
EFFECT OF EXCHANGE RATES ON CASH. Exchange rate fluctuations had an
adverse effect of $0.7 million to cash flows during the quarter ended April 30,
1999, compared to a loss of $0.1 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 April 30, 1999, the Company
had working capital in excess of $22 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 now 100% 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 also 100% complete. The
survey results received so far indicate that approximately 75% 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.
Phase II has also been completed. Operating system and software patches
have been received from developers. The Company has used the technical services
of IBM to conduct a Y2K upgrade to one computer system. Company personnel are
handling all other Y2K upgrades. Replacements for non-compliant hardware have
taken place.
12
<PAGE>
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 operates. The following table shows the April
30, 1999, United States dollar translated balances of selected non-US dollar
denominated current accounts by the currency in which they are maintained:
13
<PAGE>
<TABLE>
<CAPTION>
HONG KONG THAI PHILIPPINE
($ IN MILLIONS) DOLLARS BAHT PESOS
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and restricted cash $ 0.7 $ 1.5 $ -
Short-term debt 1.5 - -
Accounts and claim receivable 1.1 1.9 0.2
Accounts payable and accrued expenses 1.5 0.3 0.3
===============================================================================================
US dollar exchange rate at January 31, 1999 7.740 36.92 38.68
</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 April 30, 1999, the Company's backlog of
non-US dollar based contracts without contract provisions to ensure United
States dollar equivalency totaled approximately $18.0 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information as of April 30, 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 APRIL 30, 1999
(in thousands) (unaudited)
<TABLE>
<CAPTION>
<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 1,154
Temporary investments in U.S. Government
securities, 1-A commercial paper,
===============
and cash deposits $ 11,057
===============
</TABLE>
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Flour City International, Inc. was
held on March 30, 1999 for the purpose of considering and voting on the
following matters:
a) Election of Directors
b Ratification of the appointment of Deloitte & Touch LLP as the
Company's independent auditors for the year ending October 31, 1999.
The total number of shares (the "Shares") of $0.0001 par value of the Company
outstanding and entitled to vote as of the close of business on February 15,
1999, the record date for the Meeting, was 6,267,539. The number of Shares
represented in person or by valid proxy at the Meeting was 5,988,324.
The number of Shares voted at the Meeting was as follows with respect to the
proposals listed below:
In respect of the proposal to elect John W. Tang, Johnson Fong, Eugene M.
Armstrong, Paul D. Lynam and Mabel Chan as directors to serve until the next
Annual Meeting of Stockholders and until their successors are elected and
qualified:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Shares in favor Shares against Shares abstaining
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
John W. Tang 5,978,164 0 10,160
Johnson K. Fong 5,978,164 0 10,160
Eugene M. Armstrong 5,978,164 0 10,160
Paul D. Lynam 5,978,164 0 10,160
Mabel Chan 5,978,164 0 10,160
</TABLE>
In respect of the proposal to approve the ratification of the selection of the
Board of Directors of Deloitte & Touche LLP as the independent accountants for
the Company for the fiscal year ending October 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Shares in favor Shares against Shares abstaining
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deloitte & Touche LLP 5,978,164 0 10,160
</TABLE>
ITEM 5. OTHER INFORMATION
On April 26, 1999 the Company was informed by its independent auditors,
Deloitte & Touche LLP ("D&T"), of D&T's resignation, effective as of that date.
The reports of D&T on the financial statements of the Company for each of the
two fiscal years ended October 31, 1998 did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During each of the two fiscal years ended October 31, 1998, and the
subsequent interim period preceding D&T's resignation, there were no
disagreements with D&T on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of D&T, would have caused D&T
to make reference to the subject matter of the disagreements in connection with
their reports. During these periods, there were no "reportable events" as that
term is defined in Item 304(a)(1)(v) of Regulation S-K.
The Audit Committee of the Board of Directors did not recommend a change in
independent accountants and did not request that D&T resign the account.
The Company has authorized D&T to respond fully to the inquiries of the
Company's successor accountant and has requested that D&T provide the Company
with a letter addressed to the Securities and Exchange
16
<PAGE>
Commission stating whether it agrees with the above statements. A copy of that
letter, dated April 30,1999, is filed as exhibit 16.1 to the Form 8-K as filed
by the Company on April 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 16.1 to the Form 8-K
(b) REPORTS ON FORM 8-K
The Company filed Form 8-K on April 30, 1999 pursuant to Section 13 or
15(d) of the Securities and Exchange Act of 1934 addressing "Changes in
Registrant's Certifying Accounts.
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 June, 1999.
FLOUR CITY INTERNATIONAL, INC.
/s/ JOHN W. TANG
-----------------------------------------
John W. Tang
Chairman of the Board, Secretary
/s/ JAMES F. LAWLER
------------------------------------------
James F. Lawler
Interim Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 17,406
<SECURITIES> 0
<RECEIVABLES> 11,055
<ALLOWANCES> 737
<INVENTORY> 0
<CURRENT-ASSETS> 33,293
<PP&E> 2,424
<DEPRECIATION> 556
<TOTAL-ASSETS> 36,701
<CURRENT-LIABILITIES> 10,560
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,335
<TOTAL-LIABILITY-AND-EQUITY> 36,701
<SALES> 0
<TOTAL-REVENUES> 19,648
<CGS> 0
<TOTAL-COSTS> 16,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 210
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (620)
<INCOME-TAX> 54
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,143)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.18)
</TABLE>
