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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 JULY 31, 2000
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.)
1044 FORDTOWN ROAD, KINGSPORT TN 37663
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(Address of principal executive offices, zip code)
(423) 349-8692
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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
-- --
Common stock 5,315,477 shares outstanding at September 8, 2000
1
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FLOUR CITY INTERNATIONAL, INC.
INDEX
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Three months ended July 31, 2000 and 1999 and
Nine months ended July 31, 2000 and 1999
Condensed Consolidated Balance Sheets 4
July 31, 2000 and October 31, 1999
Condensed Consolidated Statements of Cash Flows 5
Nine months ended July 31, 2000 and 1999
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
Item 3. Quantitative and Qualitative disclosures about market risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 14
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues $20,382 $10,969 $47,433 $30,617
Cost of revenues (17,232) (8,567) (38,584) (24,752)
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Gross margin 3,150 2,402 8,849 5,865
Selling, general and administrative expenses (2,581) (4,460) (7,278) (9,085)
Amortization, net 98 235 279 403
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Operating income (loss) 667 (1,823) 1,850 (2,817)
Foreign currency transaction gains(losses) (31) 83 (23) (44)
Other income 184 207 640 708
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Income(loss) before income taxes and minority interests 820 (1,533) 2,467 (2,153)
Income Taxes-benefit(expense) (64) (68) (131) (122)
Minority interests in (losses)of consolidated subs. (94) (203) (694) (672)
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Net income (loss) $ 662 $ (1,804) $1,642 $ (2,947)
=================================================================================================================
Net income(loss) per share
Basic $ 0.12 $ (0.30) $ 0.31 $ (0.48)
Diluted $ 0.11 $ (0.29) $ 0.28 $ (0.48)
Weighted average shares outstanding:
Basic 5,315 6,104 5,315 6,104
Diluted 5,852 6,104 5,852 6,268
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands )
<TABLE>
<CAPTION>
July 31, 2000 October 31, 1999
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(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $5,628 $9,557
Restricted cash 8,038 4,134
Accounts receivables, net 13,333 6,345
Tax refund receivable - 227
Note receivable - 2,169
Costs and estimated earnings in excess
of billings on uncompleted contracts 11,126 7,125
Deferred income taxes 616 616
Other current assets 3,223 2,335
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Total current assets 41,964 32,508
Plant and equipment, net 3,727 2,547
Other assets - 854
Investments in affiliates 190 -
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Total assets $45,881 $35,909
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $6,655 $3,291
Accounts payable and accrued expenses 11,316 6,843
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,560 1,509
Other current liabilities 834 1,003
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Total current liabilities 22,365 12,646
Other liabilities 342 70
Negative goodwill, net 619 947
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Total liabilities and deferred credits 23,326 13,663
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Minority interests in equity of consolidated subsidiaries 1,249 190
Stockholders' equity:
Preferred stock, par value $0.0001; authorized - -
5,000 shares;no shares issued
Common stock, par value $0.0001; authorized - -
50,000 shares;issued 6,268 shares
5,315 and 5,375 shares outstanding at July 31,2000
and October 31, 1999
Additional paid-in-capital 14,788 14,788
Less 951 and 893 shares of common stock in
treasury,at cost, at July 31, 2000 and October 31, 1999, respectively (1,667) (1,461)
Retained earnings 10,211 8,569
Accumulated other comprehensive income (loss) (1,974) 249
Other stockholders' equity (52) (89)
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Total stockholders' equity 21,306 22,056
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Total liabilities and stockholders' equity $45,881 $35,909
=======================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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FLOUR CITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2000 JULY 31, 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,642 $ (2,947)
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation and amortization 103 30
Non-cash stock compensation 37 31
Changes in assets and liabilities:
Restricted deposits (3,904) 299
Accounts receivable, net (6,988) 2,722
Tax refund receivable 227 -
Claims receivable - 970
Note receivable 2,169 -
Costs, estimated earnings and billings, net (1,950) (6,824)
Other current assets (888) (301)
Other assets 654 (554)
Accounts payable and accrued expenses 4,473 668
Income taxes payable - 104
Other current liabilities (169) 384
Other liabilities 272 -
Accounts payable to related parties - (79)
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Net cash provided by (used in) operating activities (4,322) (5,497)
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Cash flows from investing activities:
Purchase of property, plant and equipment (1,601) (954)
Investment in joint venture corporations - (52)
Net cash used in investing activities (1,607) (1,006)
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Cash flows from financing activities:
Proceeds (payments) on bank borrowings 3,364 1,732
Changes in minority interest 1,059 671
Purchase of treasury shares (206)
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Net cash provided by financing activities 4,217 2,403
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Changes in accumulated other comprehensive income (2,223) (1,192)
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Net decrease in cash and cash equivalents (3,929) (5,292)
Cash and cash equivalents,beginning of period 9,557 19,297
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Cash and cash equivalents,end of period $5,628 $ 14,005
=============================================================================================================================
Supplemental cash flow information:
Interest paid in cash $ 178 60
Income taxes paid in cash $ 302 180
=============================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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FLOUR CITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Flour City International, Inc. and its wholly owned and
majority owned subsidiary companies (the "Company") 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 our Annual Report on Form 10-K for the year ended October
31, 1999.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP") for interim
financial information and with the instructions to form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by US GAAP for complete financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Our construction
projects are awarded in a competitive bidding process. Due to the nature of
the process we 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. NET INCOME PER SHARE
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common shares and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of shares issuable upon the exercise of stock
options (using the treasury stock method). A total of approximately 512
shares, which are being vested over a maximum of four years, were issuable
upon the exercise of outstanding stock options as of July 31, 2000 and no
shares were issuable upon the exercise of outstanding stock options as of
July 31, 1999 have been excluded from the diluted earnings per share
calculation, as the inclusion would be anti-dilutive.
3. SIGNIFICANT ACCOUNTING PRINCIPLES
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In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities which
defines derivatives, requires that all derivatives be carried at fair value
and provides for hedge accounting when certain conditions are met. SFAS No.
133, as amended by SFAS No. 137, is effective for the Company in fiscal 2002.
Although we have not fully assessed the implication of SFAS No. 133 as
amended, we do not believe that the adoption of this statement will have a
material effect on financial conditions or results of operations.
4. ACCOUNTS AND NOTE RECEIVABLE, NET
(in thousands)
Accounts and note receivable are net of allowance for doubtful
accounts of $438 and $1,442 at July 31, 2000, and October 31, 1999,
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 July 31, 2000, and
October 31, 1999, are $5,614 and $4,416, respectively. In conformity with
trade practice, however, the full amount of accounts receivable has been
included in current assets. Notes receivable as of October 31, 1999 consisted
of a $1,395 note from AK Steel Corporation related to contracts assumed when
we acquired Flour City Architectural Metals, Inc. (FCAM) from Armco, a
subsidiary of AK Steel Corporation, which was executed during the current
nine-month period.
5. OTHER INCOME
(in thousands)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
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JULY 31, JULY 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Interest income $155 $207 $ 480 $676
Interest expense
(82) (25) (188) (60)
Other income , net
111 (23) 345 92
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Other income , net $184 $207 $640 $708
==================================================================================================================
</TABLE>
6. SEGMENT INFORMATION
We are engaged in one industry segment: the design, engineering,
manufacture, and installation of custom curtainwall systems for the
construction industry. We manage our 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 consolidated 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.
7
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SEGMENT REVENUES AND PROFIT
(in thousands)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
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JULY 31, JULY 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues
Revenues from external customers:
North America $11,312 $ 3,592 $24,016 $10,945
Pacific 9,070 7,377 23,417 19,672
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Total revenues from external customers 20,382 10,969 47,433 30,617
Intersegment revenues: - - - -
North America - 22 - 463
Pacific - - - -
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Total intersegment revenues - 22 - 463
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Total revenues for reportable segments 20,382 10,991 47,433 31,080
Elimination of intersegment revenues (22) (463)
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Consolidated revenues $20,382 $10,969 $47,433 $30,617
========================================================================================================================
Profit or (loss):
North America ($297) ($241) ($974) ($338)
Pacific 959 (1,585) 2,616 (2,609)
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Profit (loss) for reportable segments 662 (1,826) 1,642 (2,947)
Unallocated corporate income and (expenses), net - 22 - -
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Consolidated net income (loss) $ 662 ($1,804) $ 1,642 ($2,947)
========================================================================================================================
</TABLE>
Segment assets are the total assets of the segments. Unallocated corporate
assets consist primarily of cash and certificates of deposit.
SEGMENT ASSETS
(in thousands)
<TABLE>
<CAPTION>
AT JULY 31, 2000 AND OCTOBER 31, 1999 2000 1999
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<S> <C> <C>
ASSETS
North America $15,725 $10,043
Pacific 20,258 13,626
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Total assets for reportable segments 35,983 23,669
Unallocated corporate assets 9,898 12,240
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Consolidated total assets $45,881 $35,909
====================================================================================================
</TABLE>
7. OTHER COMPREHENSIVE INCOME(LOSS)
(in thousands)
Other comprehensive income loss is comprised solely of the change in
foreign currency translation adjustments, net of tax. The foreign currency
translation adjustment occurs as a result of translating the financial
statements of the Company's foreign operations into United States dollars.
Since operations that give rise to the 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. Other
8
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comprehensive income (loss) for the three months ended July 31, 2000 and
1999, was $1,397 and $(1,307), respectively. Other comprehensive income
(loss) for the nine months ended July 31, 2000 and 1999, was $2,223 and
$(1,753), respectively.
8. COMMITMENTS AND CONTINGENCIES
(in thousands)
As of July 31, 2000, we had a total of $10.2 million in performance
guarantees outstanding in relation to construction contracts in progress in
the Pacific-Rim.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Flour City International, Inc. (the "Company"), a Nevada corporation
incorporated 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; THE 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 JULY 31, 2000 COMPARED TO QUARTER ENDED JULY 31, 1999
REVENUES. Total revenues increased 85.8% or $ 9.4 million over the same quarter
a year ago. Revenues for the third quarter ended July 31, 2000 were $ 20.4
million compared to $11.0 million for the quarter ended July 31, 1999.
Project revenues in the Pacific-Rim totaled $9.1 million in the
third quarter, an increase of 22.9% or $1.7 million over the same quarter
last year.
9
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Project revenues in North America were $11.3 million an increase of
214.9 from the $3.6 million revenues reported in the same period last year.
The increase in revenues is primarily due to an increase in manufacturing and
installation activities for several of the North American projects.
The increase or decrease in revenues is typical of the cyclical
nature of our business, reflecting the simultaneous completion phase of a
number of older projects and start-up phases of newer projects.
GROSS MARGIN. Gross margin for the quarter ended July 31, 2000, was
$ 3.2 million, or 15.4% of revenues, compared to $2.4 million, or 21.8% of
revenues, for the same period of 1999. The decline in gross margin
contribution and rate was the result of a lower profit margin for one of the
projects in North America.
North America gross margin was $1.0 million or 8.9% of revenues for
the quarter ended July 31, 2000, compared to a profit of $0.9 million, or
23.9% of revenues, for the same period in 1999.The decrease in margin is
primarily due to substantial overruns on a New York project in field
installation and shop assembly and fabrication, which is caused by
significant delays in raw material shipments from an overseas vendor. There
can be no assurance that further overruns and other costs still to be
incurred will not cause further margin deterioration.
Pacific-Rim gross margin was $2.1 million, or 23.6% of revenues, for
the quarter ended July 31, 2000, compared to $1.5 million, or 20.9% of
revenues, for the same period in 1999. This represents an increase in gross
margins of 2.7 % over a year ago.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $ 2.6 million for the quarter ended July 31,
2000, compared to $4.5 million for the same quarter of 1999. The decrease in
expenses in the quarter ended July 31, 2000 is primarily due to the
recognition of nonrecurring reserve in1999 of $2.0 million as a result of the
uncertainty in the collectibility of retention receivables and costs in
excess of billings on the Empire Towers project located in Thailand. This
subject was discussed in more detail in the Form 10Q for the period July
31,1999. Exclusive of the decision to write off the Empire Tower Project
assets in 1999, selling, general and administrative expenses increased $0.3
million or 1% in 2000 as compared to the same quarter in 1999. The increase
in primarily in support of the growth and research and development activities.
NORTH AMERICA SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AMOUNTED
TO $1.6 MILLION FOR THE QUARTER ENDED JULY 31, 2000 AS COMPARED TO $1.5
MILLION FOR THE SAME PERIOD IN 1999. THE INCREASE IS ATTRIBUTABLE TO THE
EXPENSES INCURRED BY THE CORPORATE GROUP WHICH IS PARTIALLY OFFSET BY THE
REDUCTION OF CERTAIN NON RECURRING SEVERANCE COSTS WHICH WERE RECOGNIZED IN
1999. INCLUDED IN THE CORPORATE GROUP EXPENSES ARE THE COSTS OF THE RESEARCH
AND DEVELOPMENT ACTIVITIES INVOLVING THE IMPLEMENTATION OF A PATENT PENDING
WIRELESS ENERGY TRANSMISSION DEVICE AND THE INTEGRATION OF PHOTOVOLTAIC
PANELS (BIPV) INTO ITS CURTAIN WALLS.
Pacific-Rim selling, general and administration expenses in 2000
were $0.9 million compared to $3.0 million for the third quarter in the 1999
period. The decrease in 2000 or compared to 1999 is due to the write off of
$2.0 million related to the Empire Towers project in Thailand.
NET INCOME (LOSS). THE NET INCOME FOR THE QUARTER ENDED JULY 31,
2000 WAS $0.7 MILLION OR $0.13 PER SHARE COMPARED TO A NET LOSS OF $1.8
MILLION OR $0.30 PER SHARE FOR THE SAME QUARTER A YEAR AGO. INCREASE IN 2000
AS COMPARED TO THE SAME QUARTER IN 1999 IS PRIMARILY ATTRIBUTABLE TO THE
NONRECURRING WRITE OFF MADE IN CONNECTION WITH THE EMPIRE TOWERS PROJECT IN
1999. THE INCREASE IF PARTIALLY OFFSET BY THE LOWER PROFIT MARGIN OF A
CERTAIN PROJECT IN NORTH AMERICA AND RESEARCH AND DEVELOPMENT INCLUDING COSTS
ASSOCIATED WITH THE DEVELOPMENT OF PHOTOVOLTAIC PANELS.
BACKLOG AND BIDS OUTSTANDING. Our backlog totaled $141 million at
July 31, 2000, of which $74.3 million was from North America, $45.1 million
was from the Pacific-Rim and $21 million was from Europe. Pacific-Rim backlog
includes $34 million related to projects in Hong Kong and China and $10.5
million related to projects in the Philippines. Bids outstanding at July 31,
2000 totaled $348 million, of which $143 million was in North America, $188
million in the Pacific Rim and $17 million in Europe.
10
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NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
REVENUES. Revenues increased by 54.9% or $16.8 million, from $30.6
million in the nine-month period ended July 31, 1999 to $47.4 million in the
same period in 2000. The increase is primarily due to increased project
activity in North America. Revenues generated by projects in North America
increased by 119.4% or $13.1 million from $10.9 million in the nine-month
period ended July 31, 1999 to $24.0 million in the same period of 2000.
Revenues generated by projects in the Pacific-Rim increased by 19.0% or $3.7
million from $19.7 million, in the nine-month period ended July 31, 1999 to
$23.4 million in the same period of 2000.
GROSS MARGIN. Gross margin increased from $5.9 million in the
nine-month period ended July 31, 1999, to $8.8 million in the same period of
2000. The increase in gross margin was the result of the mix of projects in
both North America and the Pacific-Rim which was partially offset by the
decline in gross margin of the New York Project in the current quarter as
indicated in prior discussions.
Gross profit margin as a percent of revenues decreased to 18.6% in
2000 from 19.1% in the nine-month period ended July 31, 1999. Excluding the
Empire Tower impact in 1999, the gross margin in 1999 would have been 22.4%
compared to 18.6% in 2000. The decline in the gross margin rate is due to the
mix of construction projects underway this year in comparison to those of
last year and the impact of cost overruns on the New York Project as
discussed earlier.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $7.3 million for the nine-month period ended
July 31, 2000 compared to $9.1 million for the same period of 1999. The
decrease of $1.8 million in 2000 as compared to the same period in 1999 was
the result of the $2 million nonrecurring write off made in 1999 related to
the Empire Tower and the increase in expenses in 2000 to support the
nine-month growth rate in revenues of 54.9%, research and development in the
photovoltaic panels, and the anticipated future growth levels of the
business. Exclusive of the Empire Towers write off in 1999, selling, general
and administrative expenses as a percent of revenues decreased from 23% in
the nine-month period ended July 31, 1999 to 15.3% in 2000.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES. Foreign exchange losses
were $0.02 million for the nine-month period ended July 31, 2000 compared to
a loss of $0.04 million in 1999. Gains and 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 income for the nine-month period ended
July 31, 2000 was $1.6 million as compared to a net loss of $2.9 million for
the same period in 1999. The $1.0 million Empire revenue adjustment in the
first quarter of 1999 and the $2 million write off recognized in the third
quarter accounted for a substantial portion of the loss recognized in the
nine-month period early July 31, 1999. Revenues have increased 54.9% in 2000
as compared to the same periodic in 1999; however, the mix of construction
projects this year compared to last year, and the cost overruns as discussed
previously, have resulted in lower gross margins as a percentage of revenues.
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 facilities, and cash and cash
equivalents.
11
<PAGE>
OPERATING ACTIVITIES. $4.3 million in cash was used in operating and
research and development activities for the nine-months ended July 31, 2000,
compared to usage of $5.5 million for the same period of 1999. Although the
net income recognized in the current nine-month period was $1.6 million, the
level of cash flows on contracts in process was reduced 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 receives substantial cash advances for certain projects
located in the Pacific-Rim. A significant use of cash during the 2000 period
was attributable to an increase in accounts receivable of $7.0 and an increase
in net cost in excess of billings of $2.0 million as a result of increased
project activities and the increase in restricted cash deposits. Other uses
of cash during the nine-month period included an increase in other current
assets of $0.9 million and decrease of other assets of $0.9 million. A source
of operating funds was provided by an increase in the accounts payable of
$4.5 million and a decrease in note receivable of $2.2 million.
INVESTING ACTIVITIES. Capital expenditures used $1.5 million of cash
during the nine-month period ended July 31, 2000, compared to $1.0 million in
the same period of 1999. The capital expenditures in 2000 were primarily due
to the Company's effort of consolidating its office and plant facilities into
one location in Kingsport, TN. In addition, as authorized by the Board of
Directors, the Company used $0.2 million to purchase sixty thousand shares of
company stock in open market.
FINANCING ACTIVITIES. The Company increased short-term borrowing
principally through line of credits facilities with certain banks in North
America and Hong Kong.
Effect of exchange rates on cash. Exchange rate fluctuations had an
adverse effect of $2.2 million to cash flows during the quarter ended
July 31, 2000, compared to an adverse effect of $1.2 million in 1999.
GENERAL. The Company attempts to structure payment arrangements with
its customers to match costs incurred under projects. To the extent the
Company is not able to match costs, it relies on its cash reserves and its
credit facility to meet its working capital needs. As of July 31, 2000, the
Company had working capital in approximating $19.6 million and a working
capital ratio of 1.87 to 1.
(NEED TO INSERT DESCRIPTION OF CREDIT FACILITIES AND COLLATERAL-SEE 10-K)
The Company believes that it has sufficient liquidity through its present
resources and the existence of its bank credit facility to meet its near-term
operating needs.
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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.
- The company's continuous funding of research and development activities
in Photovoltaic panels.
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 currency.
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 , Philippine
peso, and Great Britain pound. 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 July
31, 2000, 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 $ 1.7 $ 0.2 $ 1.3
Short-term debt 3.5 - 0.3
Accounts and claim receivable 1.5 - 1.9
Accounts payable and accrued expenses 3.0 - 1.4
===================================================== ============== ============ =============
US dollar exchange rate at July 31, 2000 $ 7.799 $ 41.305 $ 44.900
</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.
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<PAGE>
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 July 31,
2000, the Company's backlog of non-US dollar based contracts without contract
provisions to ensure United States dollar equivalency totaled approximately
$63 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.
Fluctuating Quarterly Results of Operations. The Company has
experienced, and in the future is expected to continue to experience,
substantial variations in its results of operations because of a number of
factors, many of which are outside the Company's control. In particular, the
Company's operating results may vary because of downturns in one or more
segments of the building construction industry, changes in economic
conditions, the Company's failure to obtain, or delays in awards of, major
projects, the cancellation of major projects, changes in construction
schedules for major projects or the Company's failure to timely replace
projects that have been completed or are nearing completion. Any of these
factors could result in the periodic inefficient or underutilization of the
Company's resources and could cause the Company's operating results to
fluctuate significantly from period to period, including on a quarterly basis.
Fixed Price Contracts. Of the company's $139 million backlog
at July 31, 2000, most consisted of projects being performed on a fixed price
basis. In bidding on projects, the Company estimates its costs, including
projected increases in costs of labor, material and services. Despite these
estimates, costs and gross profit realized on a fixed price contract may vary
from estimated amounts because of unforeseen conditions or changes in job
conditions, variations in labor and equipment productivity over the terms of
contracts, higher than expected increases in labor or material costs and
other factors. These variations could have a material adverse effect on the
Company's business, financial condition and results of operations for any
period.
Variations in Backlog; Dependence on Large Contracts. The Company's
backlog can be significantly affected by the receipt, or loss, of individual
contracts. For example, approximately $ __________ million, representing
________% of the company's backlog at July 31, 2000 is attributable to _____
contractors. In the event one or more large contracts were terminated or
their scope reduced, the Company's backlog could decrease substantially. The
Company's future business and results of operations may be adversely affected
if it is unable to replace significant contracts when lost or completed, or
if it otherwise fails to maintain a sufficient level of backlog. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations".
Dependence on Construction Industry. The Company earns virtually all
of its revenues in the building construction industry, which is subject to
local, regional and national economic cycles. The Company's revenues and cash
flows depend to a significant degree on major construction projects. These
projects maybe adversely affected by general or specific economic conditions.
If construction activity declines significantly in the Company's principal
markets, the Company's business, financial condition and results of
operations would be adversely affected.
Capacity Constraints; Dependence on Subcontractors. The Company
routinely relies on subcontractors to perform a significant portion of its
fabrication, erection and project detailing to fulfill projects that the
Company cannot fulfill in-house due to capacity constraints or that are in
markets in which the Company has not established a strong local presence.
With respect to these projects, the Company's success depends on its ability
to retain and successfully manage these subcontractors. Any difficulty in
attracting and retaining qualified subcontractors on terms and conditions
favorable to the Company could have an adverse effect on the Company's
ability to complete these projects in a timely and cost effective manner.
Union Contractors. The Company currently is a party to a number of
collective bargaining agreements with various unions representing some of the
company's fabrication and erection employees. These contracts expire or are
subject to expiration at various times in the future. The inability of the
Company to renew such
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<PAGE>
contracts could result in work stoppages and other labor disturbances, which
could disrupt the Company's business and adversely affect the Company's
results of operations.
Revenue Recognition Estimates. The Company recognizes revenues using
the percentage of completion accounting method. Under this method, revenues
are recognized based on the ratio that costs incurred to date bear to the
total estimated costs to complete the project. Estimated losses on contracts
are recognized in full when the Company determines that a loss will be
incurred. The Company frequently reviews and revises revenues and total cost
estimates as work progresses on a contract and as contracts are modified.
Accordingly, revenue adjustments based upon the revised completion percentage
are reflected in the period that estimates are revised. Although revenue
estimates are based upon management assumptions supported by historical
experience, these estimates could vary materially from actual results. To the
extent percentage of completion adjustments reduce previously reported
revenues, the Company would recognize a charge against operating results,
which could have a material adverse effect on the Company's results of
operations for the applicable period.
Competition. Many small and various large companies offer
fabrication, erection and related services that compete with those provided
by the Company. Local and regional companies offer competition in one or more
of the Company's geographic markets or product segments. Out of state or
international companies may provide competition in any market. The Company
competes for every project it obtains. Although the company believes
customers consider, among other things, the availability and technical
capabilities of equipment and personnel, efficiency, safety record and
reputation, price competition usually is the primary factor in determining
which qualified contractor is awarded a contract. Competition may result in
pressure on pricing and operation margins, and the effects of competitive
pressure in the industry could continue indefinitely. Some of the Company's
competitors may have greater capital and other resources than the Company and
are well established in their respective markets. There can be no assurance
that the Company's competitors will not substantially increase their
commitment of resources devoted to competing aggressively with the Company or
that the Company will be able to compete profitably with its competitors.
Substantially Liquidity Requirements. The Company's operations
require significant amounts of working capital to procure materials for
contracts to be performed over relatively long periods, and for purchases and
modifications of heavy-duty and specialized fabrication equipment. In
addition, the Company's contract arrangements with customers sometimes
require the Company to provide payment and performance bonds to partially
secure the Company's obligations under its contracts, which may require the
Company to incur significant expenditures prior to receipt of payments.
Furthermore, the Company's customers often will retain a portion of amounts
otherwise payable to the Company during the course of a project as a
guarantee of completion of that project. To the extent the Company is unable
to receive progress payments in the early stages of a project, the Company's
cash flow could be reduced, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence Upon Key Personnel. The Company's success depends on the
continued services of the Company's senior management and key employees as
well as the Company's ability to attract additional members to its management
team with experience in the steel fabrication and erection industry. The
unexpected loss of the services of any of the Company's management of other
key personnel, or its inability to attract new management when necessary,
could have a material adverse affect upon the Company.
Governmental Regulation. Many aspects of the Company's operations
are subject to governmental regulations in the United States and in other
countries in which the Company operates, including regulations relating to
occupational health and workplace safety, principally the Occupational Safety
and Health Act and regulations thereunder. In addition, the Company is
subject to licensure and holds or has applied for licenses in each of the
states in the United States in which it operates and in certain local
jurisdictions within such states. Although the Company believes that it is in
material compliance with applicable laws and permitting requirements, there
can be no assurance that it will be able to maintain this status. Further,
the Company cannot determine to what extent future operations and earnings of
the Company may be affected by new legislation, new regulations or changes in
or new interpretations of existing regulations.
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
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<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of July 31,2000 and October 31,1999 the Company had no holdings of
commodity-based instruments, long-term debt instruments, forward contracts,
futures contracts, firmly committed foreign sales contracts, interest rate
swaps, or other items in the nature of derivative financial instruments. The
Company does maintain cash, short-term debt(based on floating interest
rates),accounts receivable and accounts payable in several currencies.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
None
(b.) Reports on Form 8-K
None
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 13th day of September, 2000.
FLOUR CITY INTERNATIONAL, INC.
/s/ EDWARD M. BOYLE, III
------------------------------
Edward M. Boyle, III
President
/s/ JOHNSON K. FONG
------------------------------
Johnson K. Fong
Principal Accounting Officer
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