<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14057
MET-COIL SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 42-1027215
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5486 SIXTH STREET SW, CEDAR RAPIDS, IA 52404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
319-363-6566
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock, $.01 par value, held by
non-affiliates of the registrant on August 17, 1998 based upon the average of
the closing bid and asked prices on that date as reported by the Dow Jones
Historical Stock Quote Reporter Service was $3.81.
Registrant had 3,197,807shares of Common Stock, $.01 par value, outstanding as
of August 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement to be filed with the commission on or
before September 4, 1998 are incorporated by reference into Part III hereof.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Met-Coil Systems Corporation ("Met-Coil"), a holding company, and its
operating units (collectively referred to as the "Company") design and
manufacture metal forming equipment, fabricating machinery and
computer-controlled fabrication systems which produce a wide variety of products
from metal coils and sheets. The Company's operating units include two
wholly-owned subsidiaries--Iowa Precision Industries, Inc. ("Iowa Precision"),
The Lockformer Company ("Lockformer") and a joint venture -- Met-Coil Limited
("MCL"). See "Description of Operations" below. Met-Coil was organized under
Delaware law in 1973 and its present operating units were acquired thereafter.
Met-Coil's principal assets are the shares of stock of its subsidiaries and
affiliate.
RECENT DEVELOPMENTS
In fiscal 1998, cash provided by operations generated $4.2 million. The
sale of land and a building generated proceeds of $920,000 and proceeds from a
note receivable generated $750,000. These factors enabled the Company to make
scheduled principal payments on long-term debt of $4.7 million and to reduce the
revolving line of credit by $682,000. Capital expenditures for fiscal 1998 were
$1.2 million, which included a building expansion at one operating unit for
additional assembly space.
In fiscal 1999, the Company expects to enter the market place with
three completely new computer-controlled material handling machines, all of
which are being developed internally.
DESCRIPTION OF OPERATIONS
The Company's sheet metal machinery and fabrication systems are
designed to process parts from metal coils and blanks in thicknesses up to
one-quarter inch. Fabrication systems manufactured by the Company integrate
various pieces of equipment which process coils and blanks into a broad range of
finished metal products, including ductwork for heating, ventilation, and
air-conditioning systems; metal cabinetry for home appliances; electronic
components and metal furniture and shelving. Generally, the equipment operates
in an automated, computer-controlled environment and includes high-speed roll
forming, slitting, shearing and material handling equipment.
Iowa Precision Industries, Inc.
Iowa Precision manufactures integrated systems for producing slit, roll
formed, punched, notched and sheared blanks from sheet metal coils. It is a
major manufacturer of heating, ventilation, and air conditioning ("HVAC")
manufacturing machinery and automated systems. Iowa Precision's Adjustable Elbow
Machine and its Fabriduct system combine Lockformer's roll forming technology
with Iowa Precision's equipment to provide unique systems for converting sheet
metal into finished ductwork with improved sealing characteristics. In addition,
Iowa Precision is one of the few manufacturers of coil processing equipment that
designs and produces its own microprocessor computer numerical controls.
The Lockformer Company
Lockformer designs and manufactures roll forming and cutting machinery
and systems utilized by HVAC contractors as well as other industries such as
metal furniture, appliance, sign and glass. Lockformer's
microprocessor-controlled cutting systems utilize high precision plasma arc
torch heads to cut a wide range of materials, thicknesses and shapes. The
advanced software in Lockformer's Vulcan Plasma Cutting Machine allows the
operator to design, preview, and produce ductwork fittings. In addition,
Lockformer markets its Transverse Duct Connector ("TDC") System which connects
air-conditioning ductwork and provides enhanced sealing. Lockformer also
manufactures quick-change reprogrammable products, such as duplex machines with
moveable heads that fit into flexible fabrication systems.
Met-Coil Ltd.
MCL was formed as a 50% owned joint venture in September 1985 with a
Japanese capital goods manufacturer. MCL sells and services Met-Coil products in
Japan and the Asia-pacific markets. (See Note 3 of the Consolidated Financial
Statements included in Part IV, Item 14 of this Form 10-K.)
<PAGE> 3
MARKETING, CUSTOMERS AND SUPPLIERS
The Company markets its machinery and fabrication systems primarily
through a worldwide distributor network. Each of the Company's operating units
has management personnel responsible for sales and marketing. The Company also
has an international department that is responsible for the coordination of
overseas sales and for maintaining and developing the Company's international
distributor network. For information concerning the Company's export sales, see
Notes to Consolidated Financial Statements included in Part IV, Item 14 of this
Form 10-K.
The Company's operating units rely primarily on independent
distributors for their domestic and international sales. Iowa Precision and
Lockformer have approximately 39 domestic distributors each and 30 and 24
international distributors, respectively. Many of these distributors represent
both of the Company's subsidiaries.
The Company's employees provide installation, training and full service
for its machinery and systems. The Company's products carry standard warranty
terms for one year. The Company services the computer components of the
machinery and systems that it designs and manufactures.
The Company's customers consist primarily of fabricators of heating,
ventilation and air conditioning (HVAC) ductwork; metal service centers, which
serve as intermediate processors of coils between the mill and the final
manufacturer; as well as a wide range of manufacturers of sheet metal products
in the appliance, metal furniture, automotive, electronics, electrical, and
other industries.
A majority of the Company's revenues are currently generated from
domestic sources, such sales representing 80%, 75% and 76% of consolidated
revenues during fiscal years 1998, 1997, and 1996, respectively. Several of the
Company's principal product lines (including its TDC, Vulcan systems, tools,
bending and punching machinery) are used for the production of HVAC ductwork for
industrial, commercial and residential buildings and therefore are subject to
economic conditions affecting the construction industry. Domestic sales of these
product lines represented approximately 69%, 67%, and 56% of the Company's sales
during fiscal 1998, 1997 and 1996, respectively. Sales to one customer
represented 12%, 13% and 12% of consolidated revenues during fiscal 1998, 1997
and 1996, respectively.
The Company's principal raw materials are steel and electronic
components, which it can obtain from a variety of sources. The Company has not
experienced, and does not anticipate, any significant difficulties in obtaining
adequate supplies of raw materials.
PRODUCT DEVELOPMENT
The Company's policy is to develop and manufacture only those products
for which the Company believes it is positioned to obtain and hold substantial
market share. The Company's product development, which results from individual
subsidiary effort or from the combined effort of its subsidiaries, involves: a)
creation of new products; b) improvements to existing products; and c) design of
specific products or modifications of existing products at the request of a
customer. Such products or modifications are frequently incorporated into the
Company's standard equipment. During fiscal years 1998, 1997 and 1996, the
Company spent approximately $924,000, $822,000 and $1,476,000, respectively, in
the aggregate for the three categories described above.
Although the Company is currently emphasizing internal growth and plans
to continue to do so in the foreseeable future, from time to time, it may
consider acquisitions of patents, product lines or companies, or investments in
joint ventures with companies that have compatible product lines, that would
complement the Company's existing capabilities to supply fabrication systems for
sheet metal processing applications. However, the Company is not currently
considering any such acquisitions or investments, and it is uncertain whether
such considerations in the future will result in definitive agreements for, or
the consummation of, any such acquisitions or investments. The Company cannot
predict the impact that any such transactions might have on its stockholders.
<PAGE> 4
PATENTS, TRADEMARKS AND LICENSES
The Company holds a variety of patents and trademarks relating to the
designs, uses and names of its products and to the names of its subsidiaries. It
is the Company's policy to obtain patent protection for as many of its new and
developmental products as possible and to enforce all such patent rights. The
Company does not believe, however, that the loss of any of these patents or
trademarks would have a material adverse effect on the Company's overall
competitive position. As a result of the Settlement Agreement with Construction
Technology, Inc. ("CTI") in January, 1992, the Company purchased from CTI a
license to manufacture and sell the Vulcan Plasma-Cutting Machine for $2.5
million (see Notes to Consolidated Financial Statements included in Part IV,
Item 14 of this Form 10-K).
BACKLOG
The Company's backlog of orders at July 31, 1998 was approximately
$19.8 million, compared to approximately $16.0 million at July 31, 1997. The
increase is primarily attributable to positive economic factors and demand for
the Company's labor-saving products.
All orders for machinery and systems not shipped at the end of each
period are included in backlog. The Company estimates that all of the present
backlog will be shipped within the balance of the fiscal year ending May 31,
1999 (see Management's Discussion and Analysis of Financial Condition and
Results of Operations, Part II, Item 7 of this Form 10-K).
COMPETITION
The Company's markets are competitive, with the principal competitive
factors being product technology, quality, customer service and price. The
Company competes with a number of manufacturers which produce equipment similar
to some of the Company's products or product lines. While the Company's products
are generally in the higher range of quality and price, it believes that it is a
significant competitive force in most of the market segments of its principal
product lines. To date, the Company has not been subject to significant foreign
competition in its domestic markets.
The Company believes that the Iowa Precision and Lockformer names are
well known in the sheet metal processing and fabricating industry and that the
reputation of the Company for quality products and service provides the Company
with a significant competitive advantage. In addition, the Company's ability to
design systems that perform most, if not all, of the sheet metal processing and
fabricating functions for any given application and the Company's ability to
design, build and service most of the computer needs of the Company's systems
provides the Company with advantages over its competition.
ENVIRONMENTAL
In 1994, the Company settled a claim regarding an environmental matter
on the land at one operating unit, which was caused by the other party to the
claim. Under the terms of the settlement, the Company received cash and a letter
of credit to cover potential future expenses if incurred. Based on ongoing
evaluation and site-testing performed by an independent environmental
consultant, management continues to assess the likelihood of any future
liability in excess of the settlement as remote.
EMPLOYEES
At July 31, 1998, the Company employed approximately 268 persons, of
whom approximately 137 were production employees, 30 were engineering personnel,
27 were sales personnel and the remainder were management and administrative
employees . There are currently two three-year collective bargaining agreements
covering the production employees at the Lockformer and Iowa Precision operating
units (totaling approximately 137 employees). These agreements were successfully
renegotiated in fiscal 1998. The Company believes its relations with its
employees are satisfactory.
<PAGE> 5
EXECUTIVE OFFICERS OF MET-COIL SYSTEMS CORPORATION
<TABLE>
<CAPTION>
Name Age Position with the Company and five-year background (1)
---- --- ------------------------------------------------------
<S> <C> <C>
Raymond H. Blakeman 74 Chairman of the Board of Met-Coil since July 1986.
Chief Executive Officer of Met-Coil from July 1986 to
December 1988, from June 1990 to May 1994 and from
May 1995 to December 1996.
James D. Heitt 58 Director, President and Chief Operating Officer of Met-Coil
since August 1997. Executive Vice President Operations of
Met-Coil October 1996 to August 1997. Vice President of
Met-Coil June 1990 to October 1996. Executive Vice President
of Lockformer since October 1996. President of Iowa
Precision since July 1986.
Randall J. Stodola 45 Vice President and Corporate Controller of Met-Coil since
June 1985. Controller of Iowa Precision since June 1985.
John J. Toben 48 Vice President International of Met-Coil since
February 1992. International Marketing Manager
June 1988 to February 1992.
</TABLE>
(1) Officers of the Company are elected annually by the Board of Directors and
hold office until their successors are elected.
ITEM 2. PROPERTIES
The principal corporate and subsidiary facilities of the Company, both
owned and leased, at May 31, 1998 are as follows:
<TABLE>
<CAPTION>
Approx. Area Owned/
Location Primary Function in square feet Leased
-------- ---------------- -------------- ------
<S> <C> <C> <C>
Lisle, Illinois Lockformer manufacturing and offices 85,000 Owned
Cedar Rapids, Iowa Iowa Precision manufacturing and offices 74,000 Owned
Cedar Rapids, Iowa Iowa Precision manufacturing 5,000 Leased (1)
</TABLE>
(1) Leased on a month-to-month basis. Ninety (90) day notice of intent
to vacate premises required.
The owned properties listed above serve as collateral under the Company's senior
notes payable and revolving credit agreements. In the opinion of management, the
Company's properties are maintained in good operating condition and operate at
capacities which range from approximately 90% - 95%.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various other legal actions, governmental
investigations and proceedings relating to various matters incidental to its
business including, but not limited to, product liability claims. The Company
intends to vigorously defend these matters. While the outcome of such matters
cannot be predicted with certainty, in the opinion of management, after
reviewing such matters and consulting with the Company's counsel and insurers,
any liability which may ultimately be incurred is not expected to materially
affect the consolidated financial position and results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of fiscal 1998.
<PAGE> 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Met-Coil's common stock is quoted on the OTC Electronic Bulletin Board. The
range of high and low bid prices for the common stock, as reported by the Dow
Jones Historical Stock Quote Reporter Service, is shown below. Prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The closing price (based upon the
average of the closing bid and asked prices) of Met-Coil Common Stock on August
17, 1998, as reported by the Dow Jones Historical Stock Quote Reporter Service,
was $3.81.
<TABLE>
<CAPTION>
BID PRICES
HIGH LOW
-------------------------
<S> <C> <C>
Fiscal 1998
Fourth Quarter $ 3.43 $ 3.06
Third Quarter 3.37 2.75
Second Quarter 3.31 3.00
First Quarter 3.62 2.00
Fiscal 1997
Fourth Quarter $ 2.18 $ 1.75
Third Quarter 2.43 1.37
Second Quarter 2.63 1.25
First Quarter 2.87 1.88
</TABLE>
As of August 17, 1998, there were approximately 1,500 stockholders of
record of Met-Coil Common Stock, par value $.01 per share, excluding
approximately 260 employees with vested rights in the Company's ESOP (some of
whom otherwise hold shares in the Company).
No cash dividends were declared on the Company's Common Stock during the
last two fiscal years. See Notes to the Consolidated Financial Statements in
Part IV, Item 14 and Management's Discussion and Analysis of Financial Condition
and Results of Operations in Part II, Item 7 of this Form 10-K for discussions
regarding dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA
See "Financial Statements and Financial Statement Schedules" included in
Part IV, Item 14 hereof and herein incorporated by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See "Financial Statements and Financial Statement Schedules" included in
Part IV, Item 14 hereof and herein incorporated by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information for this item is not required until the year ending May 31,
1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Financial Statements and Financial Statement Schedules" included in
Part IV, Item 14 hereof and herein incorporated by reference thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Changes:
A report on Form 8-K, filed on December 22, 1998, regarding a
change of independent auditors is herein incorporated by reference
thereto.
(b) Disagreements:
None
<PAGE> 7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to executive officers of Met-Coil
is contained in Part I, Item 1 hereof under the caption "Executive Officers of
Met-Coil". The information required by this item as to directors is included
under the caption "Board of Directors" in Met-Coil's definitive proxy statement
for its 1998 Annual Meeting, and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the captions
"Compensation of Executive Officers" and "Summary Compensation Table" in
Met-Coil's definitive proxy statement for its 1998 Annual Meeting, and is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Officer and Director Ownership of Shares" in Met-Coil's definitive proxy
statement for its 1998 Annual Meeting, and is incorporated herein by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the captions
"Director Compensation" and "Shares Held by Others" in Met-Coil's definitive
proxy statement for its 1998 Annual Meeting, and is incorporated herein by
reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
(1)&(2) See the Index to Financial Statements included elsewhere
herein for a list of financial statements and financial
statement schedules included or incorporated herein by
reference.
(3) List of Exhibits required by Item 601 of Regulation S-K:
See Index to Exhibits included elsewhere herein.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant
during the fourth quarter of fiscal 1998.
(c) Exhibits required by Item 601 of Regulation S-K: See Index
to Exhibits included elsewhere herein.
(d) Financial Statement Schedules:
See the Index to Financial Statements included elsewhere
herein for a list of financial statements and financial
statement schedules included or incorporated herein by
reference.
<PAGE> 8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MET-COIL SYSTEMS CORPORATION
By: /s/ Randall J. Stodola
------------------------------
Randall J. Stodola
Vice President, Controller
and Chief Accounting Officer
Date: August 20, 1998
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Raymond H. Blakeman/s/ Director, Chairman of the Board August 20, 1998
- ------------------------
Raymond H. Blakeman
James D. Heitt/s/ Director, President and August 20, 1998
- ------------------------ Chief Operating Officer
James D. Heitt
Randall J. Stodola/s/ Vice President, Controller and August 20, 1998
- ------------------------ Chief Accounting Officer
Randall J. Stodola
E. Keith Moore/s/ Director August 20, 1998
- ------------------------
E. Keith Moore
Gary M. Neal/s/ Director August 20, 1998
- ------------------------
Gary M. Neal
Roy J. Carver Jr./s/ Director August 20, 1998
- ------------------------
Roy J. Carver Jr.
Michael J. Nonnenmann/s/ Director August 20, 1998
- ------------------------
Michael J. Nonnenmann
<PAGE> 9
INDEX TO FINANCIAL STATEMENTS
PART IV, ITEM 14
(continued)
<TABLE>
<CAPTION>
Financial Statements PAGE NO.
- -------------------- --------
<S> <C>
Five Year Summary F-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations F-2
Independent Auditors' Reports F-5
Consolidated Statements of Operations, Three Years Ended May 31, 1998 F-7
Consolidated Balance Sheets, May 31, 1998 and 1997 F-8
Consolidated Statements of Cash Flows, Three Years Ended May 31, 1998 F-9
Consolidated Statements of Stockholders' Equity (Deficit), Three Years Ended May 31, 1998 F-10
Notes to Consolidated Financial Statements F-11
</TABLE>
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Individual financial statements for the Company's equity method investee
have been omitted because it is not a significant subsidiary.
F-1 THROUGH F-25
<PAGE> 10
FIVE YEAR SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended May 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $ 44,811 $ 36,844 $ 41,554 $ 43,775 $ 42,594
Gross profit 10,196 8,321 7,414 8,043 8,762
Operating expenses 6,513 5,953 7,640 9,495 9,382
Operating income (loss) 3,683 2,368 (226) (1,452) (620)
Interest expense, net 1,516 1,748 2,340 2,532 2,435
Other (income) expense, net 316 42(a) (1,962)(a) 336 672
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,851 578 (604) (4,320) (3,727)
Income tax credits 1,129 --- 300 --- 565
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,980 $ 578 $ (304) $ (4,320) $ (3,162)
==============================================================================================================================
Earnings (loss) per share:
Basic $ 0.75 $ 0.01 $ (0.26) $ (1.61) $ (1.16)
Diluted $ 0.69 $ 0.01 $ (0.26) $ (1.61) $ (1.16)
FINANCIAL DATA:
Working capital (deficiency) $ 4,472 $ 1,971 $ 1,754 $ (6,686) $ 5,892
Property and equipment, net 3,448 3,093 5,507 7,953 8,751
Total assets 21,462 23,525 24,663 37,319 37,099
==============================================================================================================================
Debt:
Debt outstanding $ 9,077 $ 13,608 $ 15,515 $ 22,283 $ 23,816
Less: Cash restricted for debt payment --- --- --- (986) (1,959)
- ------------------------------------------------------------------------------------------------------------------------------
Net debt outstanding 9,077 13,608 15,515 21,297 21,857
Preferred stock, convertible and redeemable 4,456 4,036 3,709 3,457 1,472
Stockholders' equity (deficit) 643 (1,598) (1,912) (1,020) 2,841
==============================================================================================================================
SHARE DATA:
Dividend per common share $ --- $ --- $ --- $ --- $ ---
Book value per common share $ 0.20 $ (0.51) $ (0.61) $ (0.35) $ 1.02
==============================================================================================================================
</TABLE>
(a) Note 3 - Subsidiaries and Affiliate
F-1
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in connection with the Company's
Consolidated Financial Statements and Notes thereto, to which references are
made elsewhere herein. The statements under Management's Discussion and Analysis
of Financial Condition and Results of Operations and the other statements in
this report which are not historical facts are forward-looking statements. These
forward-looking statements involve risks and uncertainties that could render
them materially different, including but not limited to, the effect of economic
conditions, the impact of competition, availability and costs of inventory, the
rate of technology change, the availability of capital, supply constraints or
difficulties, the effect of the Company's accounting policies, the effect of
regulatory and legal developments, and other risks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items bear to net revenues:
<TABLE>
<CAPTION>
Percentage of Net Revenues
------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Net revenues 100% 100% 100 %
Gross profit 23% 23% 18 %
Operating expenses 15% 16% 18 %
Interest expense, net 3% 5% 6 %
Other (income) expense, net 1% 0% (4)%
------------------------------------------------------------------------------------
Income (loss) before income taxes 4% 2% (2)%
Income tax credits 3% 0% 1 %
------------------------------------------------------------------------------------
Net income (loss) 7% 2% (1)%
------------------------------------------------------------------------------------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated revenues in fiscal 1998 of $44.8 million represented a 22%
increase over 1997 revenues of $36.8 million. Met-Coil is reporting $2.9 million
in net income for fiscal 1998, which includes $1.1 million in income tax credits
recorded in the fourth quarter of fiscal 1998. The income tax credits relate to
a reduction in the Company's deferred tax asset valuation allowance. Net income
for fiscal 1997 was $578,000.
Revenues at both operating units increased over last year. As a whole, the
increase resulted primarily from the Company's ability to increase market share
for domestic sales of plasma cutting machines. This was due in part to the
decision of a previous competitor to discontinue selling plasma cutting
machines. It should be recognized, however, that the Company anticipates a
return to historic shipment levels for that product in fiscal 1999. The increase
in plasma cutting sales in fiscal 1998 over fiscal 1997 was approximately $3.0
million.
Operations remained highly consistent, reporting gross margin of 23% for
both fiscal years. Operating expenses increased by 9% over 1997, but as a
percent of net revenues decreased from 16% to 15%. Interest expense was reduced
by 13%, from $1.7 million last year to $1.5 million this year due to the lower
level of borrowing on the Company's revolving credit line and payments on
long-term debt.
Backlog at July 31, 1998 was $19.8 million, compared to backlog of $16.0
million at July 31, 1997. Worldwide, new orders taken in fiscal 1998 were $49.0
million compared to $37.0 million in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Met-Coil reported fiscal 1997 earnings of $578,000 which, after deducting
preferred stock dividends and accretion, resulted in net income applicable to
the common shareholders of $34,000 compared to a net loss of $304,000 in fiscal
1996. Total fiscal 1997 revenues were $36.8 million compared to fiscal 1996
revenues of $41.6 million, which included $5.8 million attributable to a former
subsidiary that was sold in fiscal 1996.
F-2
<PAGE> 12
The sale of the former subsidiary resulted in a gain in fiscal 1996 of $2.1
million. Excluding the former subsidiary, when comparing fiscal 1997 to fiscal
1996, net revenue increased $1.0 million, cost of goods decreased by $600,000,
operating expenses decreased $500,000 and interest decreased nearly $600,000.
The increase in net revenue was due primarily to Iowa Precision, which had
increases in both domestic and export sales. The reduction in cost of goods sold
and operating expenses is due to tighter cost controls at Lockformer and
consolidation of responsibility functions between the two operating units.
Interest expense reduced due to the lower level of borrowings on the revolving
credit line and the reduction in term debt by the Company throughout 1997.
Other income and expense included a lawsuit settlement recorded in the
first quarter of $450,000, special charges in the third quarter of $900,000, a
gain on the sale of excess land of $465,000 and a write-down of property held
for sale of $242,000 in the fourth quarter.
The Company's backlog was nearly $16.0 million at July 31, 1997 due
primarily to increased demand for the Company's Vulcan Plasma Cutting Machines
and Fabrication Systems and positive economic factors.
YEAR 2000 ISSUE
The Company has assessed and continues to assess the impact of the Year
2000 Issue on its reporting systems and operations. The Year 2000 issue is the
result of computer programs which were written using two digits (rather than
four) to define the application year. As the Year 2000 approaches,
date-sensitive software could fail to process critical financial and operational
information correctly.
The Company has identified three major areas determined to be critical for
successful Year 2000 compliance: (1) financial and information system
applications; (2) manufacturing applications; and (3) third-party relationships.
In the financial and information system applications and manufacturing
applications, the Company is not aware of any Year 2000 Issues that will not be
compliant by early 1999. In the third party area, the Company has contacted most
of its major third parties. Most of these parties state that they intend to be
Year 2000 compliant by the year 2000.
The Company does not anticipate that expenditures to ensure that its
computer systems are Year 2000 compliant will have a material impact on its
financial position, results of operations or cash flows.
MARKETS AND TRENDS
The Company is engaged in highly competitive markets with a significant
portion of its business related to the HVAC and construction industries. Fiscal
1998 proved to be a strong year for metal cutting and metal forming purchases.
Low unemployment, in conjunction with low inflation, and interest rates is
largely responsible for the growth in U.S. purchases. In addition, the Company
continues to expand its market and geographic diversity, thereby reducing
dependencies on the U.S. economy and enhancing its scope of business
opportunities.
As mentioned above, the Company manufactured and shipped higher than normal
levels of its plasma cutting machines in fiscal 1998. This was due in part to
the decision of a previous competitor to discontinue selling plasma cutting
machines. While the level of new orders for that product is expected to return
to historic levels over the course of fiscal 1999, market share for other
customers is expected to improve due to the planned introduction of three new
material-handling products.
Due to declining sales by the Company's joint venture located in Japan, a
mutual agreement has been reached to liquidate the formal joint venture over the
next fiscal year and expand Met-Coil's international distributor network
slightly to provide continued service to existing customers and sell and service
the Company's products directly in the Pacific Rim. Management believes the
carrying value of the Company's investment approximates the net realizable
value.
The Company has two collective bargaining agreements covering production
employees at its main operating units, both of which were successfully
renegotiated in fiscal 1998 for a three-year period.
F-3
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Financial Review
At the end of fiscal 1998, working capital was $4.4 million, compared to
$1.9 million last year. During fiscal 1998, the Company reduced the line of
credit to $1.7 million, leaving $1.8 million available under its revolving
credit agreement.
Cash Flows and Commitments
Cash flows from operations have improved each of the past three years. Cash
provided by operations in 1998 was $4.2 million. The sale of land and a building
generated proceeds of $920,000 and proceeds from a note receivable generated
$750,000. These factors enabled the Company to make scheduled principal payments
on long-term debt of $4.7 million and to reduce the revolving line of credit by
$682,000.
Capital expenditures in 1998 were $1.2 million. This included a building
expansion at one operating unit for additional assembly space. The Company
expects capital expenditures in fiscal 1999 to be approximately $800,000.
The Company continues to omit quarterly dividends on common stock due to
loan covenants, which prohibit the payment of common stock dividends. It is
uncertain when, and if, the Company will pay dividends on common stock in the
future.
In September 1997 and March 1998 the Company paid dividends of 6% on the
cumulative preferred stock. The Company's preferred stock is convertible into
three shares of common stock at anytime at the option of the holder or may be
redeemed after December 31, 1998. Either the Company or the holder of the
Company's preferred stock may redeem the stock at a redemption price of $13 per
share, plus any accumulated unpaid dividends. Once redeemed, the Company has the
option to make cash payments equal to 10% of the value and 12 equal monthly
payments, including 10% annual interest. These payments may be deferred if the
payments would cause the Company to be in default under the terms of its senior
indebtedness.
Based on the market value of the Company's common stock at or around
December 31, 1998, the Company expects that a portion of preferred stockholders
will convert their shares into three shares of common stock and another portion
will redeem their shares. The Company plans to finance this potential cash
outflow, if any, through cash flow from operations and, if required, additional
debt financing.
The Company may also be required to make prepayments under a January 1992
Settlement Agreement (see Note 10). It is anticipated that funding of any such
prepayment would be from operating cash flows.
The Company believes that amounts available from operating cash flows and
funds available under its revolving credit agreement will be sufficient to meet
its expected cash needs and planned capital expenditures for fiscal 1999.
CONTINGENCIES AND OTHER MATTERS
The Company is engaged in various legal and other proceedings incident to
its business (see Note 10).
F-4
<PAGE> 14
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors
Met-Coil Systems Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheet of Met-Coil Systems
Corporation and Subsidiaries as of May 31, 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated balance sheet of
Met-Coil Systems Corporation and Subsidiaries as of May 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the two years then ended were audited by other auditors whose report
dated August 27, 1997 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Met-Coil
Systems Corporation and Subsidiaries at May 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
July 15, 1998
F-5
<PAGE> 15
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors
Met-Coil Systems Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheet of Met-Coil Systems
Corporation and Subsidiaries as of May 31, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended May 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express a
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards Require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
he amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1997 and 1996 consolidated financial statements present
fairly, in all material Respects, the financial position of Met-Coil Systems
Corporation and Subsidiaries at May 31, 1997, and the results of their
operations and their cash flows for the years ended May 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
August 27, 1997
F-6
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended May 31, 1998 1997 1996
=============================================================================================
<S> <C> <C> <C>
Net sales (Notes 3 and 9) $ 45,009 $36,776 $41,654
Equity in affiliate (Note 3) (198) 68 (100)
- ---------------------------------------------------------------------------------------------
Net revenues 44,811 36,844 41,554
Cost of goods sold 34,615 28,523 34,140
- ---------------------------------------------------------------------------------------------
Gross profit 10,196 8,321 7,414
Operating expenses 6,513 5,953 7,640
- ---------------------------------------------------------------------------------------------
Operating income (loss) 3,683 2,368 (226)
Nonoperating (income) expense:
Interest expense, net 1,516 1,748 2,340
(Gain) on business sold, net (Note 3) --- --- (2,148)
Other expense, net (Note 3) 316 42 186
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,851 578 (604)
Income tax credits (Note 5) 1,129 --- 300
- ---------------------------------------------------------------------------------------------
Net income (loss) (Note 1) 2,980 578 (304)
Preferred stock dividends (Note 8) 217 217 217
Preferred stock accretion (Note 8) 420 327 252
- ---------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 2,343 $ 34 $ (773)
- ---------------------------------------------------------------------------------------------
Earnings (loss) per common share (Note 11):
Basic $ 0.75 $ 0.01 $ (0.26)
Diluted $ 0.69 $ 0.01 $ (0.26)
Weighted average common shares (Note 11):
Basic 3,122 3,132 3,031
Diluted 4,295 3,145 3,031
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
May 31, 1998 1997
========================================================================================
<S> <C> <C>
Current assets
Cash $ 24 $ 594
Trade receivables, net (Note 2) 4,574 4,926
Note receivable-related party (Note 4) --- 750
Inventories (Note 2) 8,283 8,793
Prepaid expenses and other 1,254 955
Deferred income taxes (Note 5) 1,129 ---
- ----------------------------------------------------------------------------------------
Total current assets 15,264 16,018
Property and equipment
Land 520 520
Buildings and building improvements 4,420 4,073
Machinery and equipment 7,905 8,825
Furniture and equipment 3,115 3,018
- ----------------------------------------------------------------------------------------
15,960 16,436
Less accumulated depreciation 12,512 13,343
- ----------------------------------------------------------------------------------------
Property and equipment, net 3,448 3,093
Property held for sale --- 1,000
Investments and other assets (Notes 3 and 6) 650 998
License fee (Notes 2 and 10) 1,038 1,269
Intangibles, net (Note 2) 1,022 1,147
Deferred income taxes (Note 5) 40 ---
- ----------------------------------------------------------------------------------------
TOTAL ASSETS (NOTE 4) $ 21,462 $ 23,525
========================================================================================
Current liabilities
Revolving line of credit (Note 4) $ 1,689 $ 2,371
Current maturities of long-term debt (Note 4) 2,464 4,620
Accounts payable 1,532 1,876
Accrued liabilities 2,421 2,349
Customer deposits 2,686 2,831
- ----------------------------------------------------------------------------------------
Total current liabilities 10,792 14,047
Long-term debt (Note 4) 4,924 6,617
Deferred income taxes, net (Note 5) --- 140
Other 647 283
Commitments and contingencies (Notes 8 and 10)
Preferred stock, convertible and redeemable (Note 8) 4,456 4,036
Stockholders' Equity (Deficit) (Note 7)
Common stock, $.01 par value, authorized 10,000,000 shares; 32 31
1998 issued 3,196,447; 1997 issued 3,171,824
Additional paid-in capital 16,312 16,248
Accumulated deficit (15,382) (17,725)
Foreign currency translation adjustment (Note 12) (65) (50)
Cost of common stock reacquired for treasury (254) (102)
- ----------------------------------------------------------------------------------------
Stockholders' equity (deficit) 643 (1,598)
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 21,462 $ 23,525
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended May 31, 1998 1997 1996
======================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,980 $ 578 $ (304)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation 893 1,154 1,498
Amortization of intangibles and deferred finance charges, net 356 413 441
Accretion of discount on debt 391 424 544
Gain on sale of assets --- (496) (2,148)
Write-off of intangibles --- 273 ---
Write-down of property held for sale 80 242 ---
Write-off of foreign currency translation adjustment --- 384 ---
Undistributed earnings of affiliate 198 (68) 100
Deferred income taxes (1,309) --- (300)
- ------------------------------------------------------------------------------------------------------
3,589 2,904 (169)
Changes in assets and liabilities:
Trade receivables 352 (341) 3,064
Notes and other receivables --- 253 245
Inventories 510 (786) 1,506
Accounts payable and accrued liabilities 92 (744) (3,334)
Customer deposits (145) 872 253
Prepaid expenses and other (164) 613 200
- ------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 4,234 2,771 1,765
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Dividends received from affiliate --- --- 11
Purchases of property and equipment (1,248) (634) (251)
Proceeds from sale of investments and other assets 920 398 ---
Note receivable-related party 750 --- ---
Other, net --- --- 52
- ------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 422 (236) (188)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving line of credit (682) (344) (340)
Repayments of long-term debt (4,740) (2,390) (1,381)
Proceeds from issuance of long-term debt 500 403 ---
Deferred finance charges --- (353) (292)
Decrease in cash restricted for debt repayment --- --- 986
Repurchase of treasury stock (152) --- ---
Dividends on preferred stock (217) (217) (217)
Issuance of common stock 65 70 398
- ------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (5,226) (2,831) (846)
- ------------------------------------------------------------------------------------------------------
CASH
Increase (decrease) (570) (296) 731
Beginning balance 594 890 159
- ------------------------------------------------------------------------------------------------------
Ending balance $ 24 $ 594 $ 890
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-9
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except shares)
<TABLE>
<CAPTION> Foreign
Additional Currency
Common Paid-In Accumulated Translation Treasury
Stock Capital Deficit Adjustment Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 $29 $15,809 ($16,986) $257 ($129) ($1,020)
Net loss --- --- (304) --- --- (304)
Issuance of 213,948
shares of common stock (Note 7) 2 396 --- --- --- 398
Preferred stock dividends and accretion --- --- (469) --- --- (469)
Adjustment from foreign currency translation --- --- --- (517) --- (517)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 $31 $16,205 ($17,759) ($260) ($129) ($1,912)
Net income --- --- 578 --- --- 578
Issuance of 21,443
shares of common stock (Note 7) --- 43 --- --- --- 43
Reissuance of common shares --- --- --- --- 27 27
Preferred stock dividends and accretion --- --- (544) --- --- (544)
Write-off of foreign currency translation (Note 4) --- --- --- 384 --- 384
Adjustment from foreign currency translation --- --- --- (174) --- (174)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1997 $31 $16,248 ($17,725) ($50) ($102) ($1,598)
Net income --- --- 2,980 --- --- 2,980
Issuance of 24,623
shares of common stock (Note 7) 1 64 --- --- --- 65
Repurchase of treasury shares --- --- --- --- (152) (152)
Preferred stock dividends and accretion --- --- (637) --- --- (637)
Adjustment from foreign currency translation --- --- --- (15) --- (15)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 $32 $16,312 ($15,382) ($65) ($254) $643
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-10
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company designs, engineers and manufactures metal processing machinery
and computer-controlled fabrication systems. The Company sells primarily to
customers that manufacture products from sheet metal coils and sheets throughout
the world. For the years ended May 31, 1998, 1997 and 1996, sales to one
customer represented 12%, 13% and 12% of net revenues, respectively.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Met-Coil
Systems Corporation and its subsidiaries, all of which are wholly owned. All
material intercompany transactions have been eliminated.
REVENUE RECOGNITION:
Revenues are recognized upon shipment. The Company's products carry
standard warranty terms for one year for which a warranty accrual is recorded.
RISKS AND UNCERTAINTIES:
The preparation of the Company's consolidated 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 and 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.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, the Company considers all cash
accounts, which are not subject to withdrawal restrictions or penalties, and all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method.
INVESTMENT IN AFFILIATE:
The Company has a 50% equity interest in Met-Coil Limited (Japan) ("MCL")
for which it uses the equity method of accounting. MCL sells and services the
Company's products. The Company continually evaluates this investment to
determine whether any impairment has occurred.
PROPERTY AND EQUIPMENT:
Property and equipment is carried at cost less accumulated depreciation.
Depreciation is computed primarily by the straight-line method over the
following estimated useful lives.
YEARS
-----
Buildings and building improvements 10-25
Machinery and equipment 3-10
Furniture and equipment 4-10
In fiscal 1998 the Company sold the land and building which was previously
classified as property held for sale. The proceeds were approximately equal to
the net realizable value recorded.
F-11
<PAGE> 21
LICENSE FEE AND INTANGIBLES:
The Company is amortizing a license fee over the life of the related
patent. Intangibles consist primarily of the excess of purchase price over fair
market value of net assets acquired and deferred finance charges. Intangibles
are being amortized by the straight-line method over periods ranging from 10 to
40 years. The Company evaluates the license fee and intangibles continually to
determine whether any impairment has occurred. This review takes into
consideration the recoverability of the unamortized amount based on the
estimated undiscounted cash flows of the related product lines. Deferred finance
charges are amortized over the life of the related note agreement using the
interest method. The Company includes amortization of finance charges with
interest expense.
PRODUCT DEVELOPMENT EXPENSES:
The Company's policy is to develop and produce only those products for
which the Company believes it is positioned to obtain and hold a substantial
market share. The Company's product development involves: a) creation of new
products; b) improvements to existing products; and c) design of specific
products or modifications of existing products at the request of a customer.
Such products or modifications are frequently incorporated into the Company's
standard equipment. Product development expenses for Company-sponsored projects
are expensed as incurred. From time to time, costs are deferred, to be amortized
over the anticipated benefit period, if the future benefits are certain due to a
contractual arrangement for a customer-requested product prototype. During the
fiscal years 1998, 1997, and 1996, the Company spent approximately $924,000,
$822,000 and $1,476,000, respectively, in the aggregate for the three categories
of product development described above.
PENSION PLANS:
The Company's funding policy is to make the minimum annual contributions
that are required by applicable regulations.
ENVIRONMENTAL:
Expenditures that relate to current operations are expensed or capitalized
as appropriate. Expenditures that relate to an existing condition caused by past
operations, and which do not contribute to current or future revenue generation,
are expensed. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the costs can be reasonably estimated.
Generally, the timing of these accruals coincides with completion of a
feasibility study or the Company's commitment to a formal plan of action.
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
STOCK OPTIONS ISSUED TO EMPLOYEES:
In fiscal year 1997, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", which establishes a fair value based
method for the financial reporting of its stock-based employee compensation
plans. However, as allowed by the new standard, the Company has elected to
continue to apply the intrinsic value based method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Under this elected method, compensation is measured as the difference between
the market value of the stock on the grant date, less the amount required to be
paid for the stock. The difference, if any, is charged to expense over the
period of service.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Asset and liability accounts of the foreign equity-method investee are
translated to U.S. dollars using rates of exchange in effect at the balance
sheet date. Income statements are translated at average exchange rates during
the year. Accumulated adjustments arising from translation of the balance sheets
to U.S. dollars are included in stockholders' equity (deficit).
F-12
<PAGE> 22
FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, customer trade
receivables and accounts payable approximates fair value because of the relative
short maturity of these instruments. The carrying amount of the current and
long-term debt approximates fair value because these instruments bear interest
at approximately current rates available to the Company for similar borrowing
arrangements.
EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share". SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share is computed
by dividing net income available to common stockholders by the weighted average
number of shares outstanding. In computing diluted earnings per share, the
dilutive effect of stock options during the periods presented, as well as the
effect of contingently issuable shares, increase the weighted average number of
shares.
The Company initially applied SFAS No. 128 for the year ended May 31, 1998
and has restated all per share information for prior years to conform to SFAS
No. 128.
RECLASSIFICATIONS:
Certain amounts for prior years have been reclassified to conform with the
current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period, resulting from transactions and other
events and circumstances from nonowner sources. The impact of adopting SFAS No.
130, which is effective for the Company in fiscal 1999, has not been determined.
In July 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in fiscal 1999. The Company operates in one business
segment.
NOTE 2. SUPPLEMENTAL ASSET DATA
TRADE RECEIVABLES:
Amounts shown for trade receivables are net of an allowance of $50,000 for
1998 and 1997.
INVENTORIES:
The composition of inventories at May 31, using the first-in, first-out
(FIFO) method, which approximates replacement cost, is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------------- ---------------
<S> <C> <C>
Raw materials and parts $ 6,558 $ 6,779
Work in process 2,734 2,425
Finished goods and supplies 378 292
-------------- ---------------
9,670 9,496
Reduction to LIFO basis 1,387 703
-------------- ---------------
$ 8,283 $ 8,793
============== ===============
</TABLE>
F-13
<PAGE> 23
LICENSE FEE AND INTANGIBLES:
Amounts shown for the license fee are net of accumulated amortization of
$1,462,000 and $1,231,000 for 1998 and 1997 respectively, and the amounts shown
for intangibles are net of accumulated amortization of $1,375,000 and $1,351,000
for 1998 and 1997, respectively.
NOTE 3. SUBSIDIARIES AND AFFILIATE
WHOLLY-OWNED SUBSIDIARIES:
The Company has two wholly-owned subsidiaries at May 31, 1998: Iowa
Precision Industries, Inc. and The Lockformer Company.
SALE OF SUBSIDIARY:
On February 5, 1996, the Company sold certain assets related to two product
lines manufactured at the Rowe Machinery and Automation subsidiary. The sale
included the "Rowe" name, the technical know-how to produce the "Press Feed" and
"Cut-to-Length" product lines, and certain working capital accounts related to
these product lines. The Company received proceeds of $3.6 million in total and
recognized a gain from the transaction of $2.1 million. The net sales for this
subsidiary were approximately $5,850,000 for the year ended May 31, 1996.
AFFILIATE:
A summary of financial information of MCL is set forth below:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Current assets $ 2,241 $ 4,220 $ 4,316
Noncurrent assets 121 375 351
-------------- -------------- --------------
Total assets $ 2,362 $ 4,595 $ 4,667
Current liabilities $ 1,400 $ 3,204 $ 3,148
Stockholders' equity 962 1,391 1,519
-------------- -------------- --------------
Total liabilities and stockholders' equity $ 2,362 $ 4,595 $ 4,667
Net sales $ 5,591 $ 7,155 $ 9,839
Gross profit 1,409 2,045 2,599
Net income (loss) (397) 137 (200)
</TABLE>
The Company's accumulated deficit includes approximately $515,000, $713,000
and $645,000 of equity in net income of MCL at May 31, 1998, 1997, and 1996,
respectively.
Due to declining sales of the joint venture entity, the Company has reached
a mutual agreement to liquidate the joint venture over the next fiscal year.
Met-Coil's international distributor network will be expanded slightly to market
the Company's products in the Pacific Rim and to service existing customers.
Management believes the carrying value of the Company's investment approximates
net realizable value.
EUROPEAN OPERATIONS:
In February, 1997, the Company completed the process of dissolving its
European operations. In lieu of incurring the overhead costs of a formal sales
and service facility in Europe, a Licensee Agreement was executed with a former
dealer whereby the dealer would manufacture and sell various Met-Coil products
and remit royalties to the Company. Liquidation of this investment resulted in a
loss of approximately $500,000 in fiscal 1997, $384,000 of which is attributable
to recognition of the accumulated effect of foreign currency translation. This
amount was reflected in other expense, net in the Company's fiscal 1997
Consolidated Statements of Operations.
F-14
<PAGE> 24
NOTE 4. DEBT
REVOLVING LINE OF CREDIT:
At May 31, 1998 the Company had a revolving credit agreement with two
insurance companies under which it could borrow up to $3,500,000. Borrowings are
limited to a borrowing base formula (certain percentages of eligible trade
receivables and inventories), bear interest at 11.5% and require the payment of
certain fees. As of May 31, 1998, there was $3,500,000 available to be borrowed
under the borrowing base formula of which $1,689,000 in borrowings were
outstanding. This line expires on April 30, 1999.
LONG-TERM DEBT:
Long-term debt as of May 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
--------------- ---------------
<S> <C> <C>
Senior Notes (A) $ 3,794 $ 5,970
Litigation settlement (Note 10) 3,314 3,598
First mortgage on unimproved land (B) 0 1,300
Note payable, installments through January 2000
with interest of 11% (Note 10) 280 369
--------------- ---------------
7,388 11,237
Less current maturities 2,464 4,620
--------------- ---------------
$ 4,924 $ 6,617
=============== ===============
</TABLE>
(A) The Company has $3,794,000 of senior notes with two insurance companies due
in December 2000. Interest is at 11.5% payable monthly. The notes are due
in monthly principal payments of $141,250 plus interest.
(B) The Company had a first mortgage on unimproved land adjacent to the
Lockformer plant. The mortgage was held by a trust of which the trustee is
a director of the Company. In fiscal 1997 the Company sold the land to the
director for $250,000 cash and a note receivable of $750,000, that resulted
in a gain of $465,000 (included in other expense, net). Proceeds from the
downpayment and the note receivable were paid to the trust in June and
August 1997, respectively. In August 1997, the Company executed an
unsecured promissory note to the trust for the remaining $300,000. The note
called for monthly payments of interest only at 15% through February 28,
1998, when such rate was to become 20%. The note was repaid in February
1998.
The aggregate maturities of the long-term debt for years ending May 31 are
as follows: (in thousands)
1999 $ 2,464
2000 2,053
2001 1,388
2002 494
2003 445
Thereafter 544
-----------
$ 7,388
===========
REVOLVING LINE OF CREDIT AND SENIOR DEBT (TERMS AND CONDITIONS):
The covenants and other provisions of the senior note agreement and
revolving credit agreement (described above) are the same. Borrowings are
collateralized by substantially all of the Company's assets. The agreements
contain various restrictive covenants which, among other things, prohibit the
payment of dividends, specify the application of proceeds from significant asset
sales (primarily to the reduction of the senior notes), and require the
maintenance of certain financial ratios and amounts. The Company was in
compliance with all debt covenants at May 31, 1998.
F-15
<PAGE> 25
NOTE 5. INCOME TAXES
Net deferred taxes consist of the following components as of May 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
DEFERRED TAX ASSET: (in thousands)
Net operating loss carryforwards $ 2,485 $ 3,947
Accruals and reserves not currently deductible 768 511
Settlement loss 675 750
Tax credit carryforwards 653 724
Other 45 19
-------------- --------------
4,626 5,951
Less valuation allowance 2,471 4,292
-------------- --------------
$ 2,155 $ 1,659
-------------- --------------
DEFERRED TAX LIABILITIES:
Property and equipment 260 1,000
Basis difference of inventory 531 532
Undistributed earnings of affiliate 161 267
Other 34 0
-------------- --------------
986 1,799
-------------- --------------
$ 1,169 $ (140)
============== ==============
</TABLE>
Net deferred income taxes are presented on the balance sheet at May 31,
1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
(in thousands)
Current assets $ 1,129 $ 0
Noncurrent assets 40 0
Noncurrent (liabilities) 0 (140)
-------------- --------------
$ 1,169 $ (140)
============== ==============
</TABLE>
At May 31, 1998, the Company has reduced recorded deferred tax assets by a
valuation allowance of $2,471,000. While management believes that the Company
will generate sufficient taxable income to fully realize the benefit of the loss
carryforwards prior to their expiration, management also recognized that strong
positive evidence of probable realization is necessary to overcome the negative
evidence inherent in the Company's historical operating results. Due to the
inherent uncertainty in forecasts of future operating results, management has
elected to establish a valuation allowance equal to the amount by which the
gross deferred tax assets exceed deferred tax liabilities and the tax benefits
of net operating losses expected to be realized during the next fiscal year.
F-16
<PAGE> 26
Income tax credits are made up of the following components for the years
ended May 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Current tax expense $ 0 $ 0 $ 0
Deferred taxes 1,129 0 300
============= ============= =============
$ 1,129 $ 0 $ 300
============= ============= =============
</TABLE>
The income tax (credits) differ from the amount of income tax determined by
applying the U.S. Federal income tax rate (35%) to income (loss) before income
tax credits due to the following for the years ended May 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax (benefit) $ 648 $ 202 $ (212)
Increase (decrease) in income taxes resulting from:
Change in valuation allowance (1,821) (508) 0
Nondeductible amortization of intangibles 25 25 0
Other 19 281 (120)
------------ ------------ -------------
$ (1,129) $ 0 $ (332)
============= ============= =============
</TABLE>
At May 31, 1998, the Company has net operating loss carryforwards of
$7,000,000 available under provisions of the Internal Revenue Code to be applied
against future federal taxable income. These carryforwards expire through May
31, 2011. At May 31, 1998, the Company also has approximately $173,000 of
alternative minimum tax (AMT) credit carryfowards available to offset regular
tax in future years to the extent that the regular tax exceeds AMT. The credits
do not have expiration dates. The Company also has approximately $480,000 of
general business credit carryfowards which expire through May 31, 2000.
NOTE 6. RETIREMENT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an Employee Stock Ownership Plan ("Plan") for the benefit
of employees who meet the eligibility requirements. The Plan holds 168,847
shares of common stock at May 31, 1998, which have been allocated to the
participants. The Company makes cash contributions in an amount sufficient for
it to satisfy ongoing Plan requirements.
Cash contributions to the Plan were $4,100, $1,348 and $2,000 for the years
ended May 31, 1998, 1997, and 1996, respectively. For financial statement
purposes, expense for the Plan is determined based on the percentage of shares
allocated to participants each period. The amount charged to expense was none,
$54,000 and $295,000 for the years ended May 31, 1998, 1997, and 1996,
respectively.
PROFIT-SHARING 401(K) PLAN:
The Company has a qualified profit-sharing plan under Internal Revenue Code
Section 401(k) for those employees who meet certain eligibility requirements set
forth in the plan. The Company makes contributions to the plan based upon
predetermined percentages of the employees' compensation. Additional amounts may
be contributed at the option of the Company's Board of Directors. The retirement
expense for the fiscal years ended May 31, 1998, 1997, and 1996 was $379,400,
$332,000 and $335,000, respectively.
F-17
<PAGE> 27
DEFINED BENEFIT PLANS:
The Company's Lockformer subsidiary has two defined benefit pension plans
covering substantially all of its employees. The following table includes
aggregate amounts for the plans' funded status and amounts recognized in the
accompanying financial statements as of May 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefits
1998 ($2,607); 1997 ($2,437) $ (2,669) $ (2,494)
--------------- ---------------
Projected benefit obligation (2,669) (2,494)
Plan assets at fair value (consisting primarily of fixed income obligations) 3,637 3,061
--------------- ---------------
Plan assets in excess of projected benefit obligation 968 567
Unrecognized net gain (599) (287)
Unrecognized prior service cost 42 45
Unrecognized transition asset (58) (120)
--------------- ---------------
Prepaid pension asset $ 353 $ 205
=============== ===============
</TABLE>
Net pension cost (credit) includes the following components for the years ended
May 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Service cost $ 52 $ 52 $ 39
Interest cost on projected benefit obligation 200 200 181
Actual return on plan assets (671) (275) (344)
Net amortization and deferral 382 (13) 96
-------------- -------------- --------------
$ (37) $ (36) $ (28)
============== ============== ==============
</TABLE>
Assumptions used by the Company in determination of pension plan information
consisted of the following as of May 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Discount rate 7.25% 8.00% 8.00%
Expected long-term rate of return 9.00% 9.00% 9.00%
Long-term inflation rate 5.50% 5.50% 5.50%
</TABLE>
NOTE 7. STOCK-BASED COMPENSATION PLANS
At May 31, 1998, the Company had various stock-based compensation plans,
which are described below. Grants under the Company's stock option plans are
accounted for in accordance with Accounting Principles Board (APB) Opinion No.
25 and related Interpretations.
EMPLOYEE STOCK OPTIONS:
Effective June 4, 1993, the Company adopted the 1993 Employee Stock Option
Plan. Under the terms of the plan, options to purchase 300,000 shares of the
Company's common stock at fair market value at the date of grant were reserved
for grants to employees of the Company. Stock options are granted at the
discretion of the Board of Directors. Under this plan, stock options have a
ten-year life and vest over a four-year period.
F-18
<PAGE> 28
NONEMPLOYEE DIRECTORS STOCK OPTIONS:
Effective March 1, 1997, the Company adopted the 1997 Nonemployee Directors
Stock Option Plan. Under the terms of the plan, options to purchase 100,000
shares of the Company's common stock at fair market value at the date of grant
may be granted to nonemployee directors of the Company. Stock options are
granted at the discretion of the Board of Directors. Under this plan, stock
options have a ten-year life and vest immediately.
STOCK BASED COMPENSATION:
The Company accounts for stock option grants and awards under its stock
based compensation plans using the intrinsic value based method. If compensation
cost for stock option grants and awards had been determined based on fair value
at the grant dates consistent with the method prescribed by SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net income (loss)
applicable to the common stock and income (loss) per common share would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ 2,980 $ 578 $ (304)
Pro forma 2,964 293 (318)
Net income (loss) applicable to common stock:
As reported $ 2,343 $ 34 $ (773)
Pro forma 2,327 (251) (787)
Basic earnings (loss) per share:
As reported $ 0.75 $ 0.01 $ (0.26)
Pro forma 0.75 (0.08) (0.27)
Diluted earnings (loss) per share:
As reported $ 0.69 $ 0.01 $ (0.26)
Pro forma 0.69 (0.08) (0.27)
</TABLE>
The fair values of each grant are estimated at the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions: four years expected life to vesting for employee stock options and
nonemployee director stock options vest immediately; stock volatility of 42% in
1998, 86% in 1997 and 89% in 1996; risk-free interest rate of 5.3% in 1998 and
7.0% in 1997 and 1996; and no dividends during the expected term. During the
initial phase-in period, as required by SFAS No. 123, the pro forma amounts were
determined based on stock option grants and awards since 1996. The pro forma
amounts for compensation cost may not be indicative of the effects on net income
(loss) and net income (loss) per common share for future years.
F-19
<PAGE> 29
A summary of the status of the Company's stock option plans as of and for
the years ended May 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------------------
<S> <C> <C>
Outstanding 5/31/95 293,000 $ 3.16
Granted 10,000 2.00
Exercised 0 0.00
Cancelled or expired (151,400) 2.59
--------
Outstanding 5/31/96 151,600 3.65
Granted 195,000 2.06
Exercised 0 0.00
Cancelled or expired (58,600) 3.98
--------
Outstanding 5/31/97 288,000 2.52
Granted 8,775 2.72
Exercised (3,000) 1.63
Cancelled or expired (21,300) 4.05
--------
Outstanding 5/31/98 272,475 2.41
========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
Number of Options
-----------------------------------------------------------
<S> <C> <C> <C>
Exercisable, end of year 110,045 54,000 88,450
===========================================================
Weighted-average fair value per option of
Options granted during the year $ 2.72 $ 2.06 $ 2.00
===========================================================
</TABLE>
Other pertinent information related to the options outstanding at May 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.33 269,475 8.00 $ 2.40 107,045 $ 2.76
$6.44 to $6.75 3,000 1.20 6.70 3,000 6.70
-------------------------------------------------------------------------------------
272,475 7.90 $ 2.41 110,045 $ 2.77
=====================================================================================
</TABLE>
F-20
<PAGE> 30
NONEMPLOYEE DIRECTORS DEFERRED COMPENSATION PERFORMANCE UNIT PLAN:
Effective January 1, 1997, the Company adopted a Deferred Compensation
Performance Unit Plan to provide nonemployee directors the opportunity to elect
to defer all or a portion of their annual fees. Pursuant to this plan, 160,000
shares of common stock have been reserved. Compensation deferred is credited in
awards of performance units, which are each equal to the value of one share of
the Company's common stock at all times. Distributions are at the earlier of the
date services as a director end, a change in control of the Company occurs, or
the plan is terminated. Distributions are made in either a single sum cash
payment equal to the number of performance units multiplied by the common stock
value or in whole shares of the Company's common stock. As of May 31, 1998, the
number of performance units awarded is 46,646. Director fee expense for 1998
attributable to this plan was $128,800.
EMPLOYEE STOCK TRUST:
The Company has a grantor trust, established May 31, 1993, to which it is
authorized to contribute up to 400,000 common shares. In January 1996, the
Company issued an additional 50,000 shares to the Trust. The proceeds from the
market sale of the shares over time, at expected appreciated values, will be
used to fund various employee benefits. During the year ended May 31, 1997,
1,194 common shares were issued to fund other benefits. During the year ended
May 31, 1996, 189,020 common shares were issued to the Company's 401(k) plan and
24,928 common shares were issued to fund other benefits. As of May 31, 1998 the
Company held 4,529 shares in the trust.
NOTE 8. PREFERRED STOCK - REDEEMABLE, CONVERTIBLE
The Company has authorized 1,000,000 shares of $1 par value preferred
stock. During the years ended May 31, 1995 and 1994 the Company issued 200,000
and 162,000 shares of preferred stock, respectively at $10 per share ($10
liquidation value per share). The preferred stock provides for cumulative annual
dividends of 6% payable semi-annually. The preferred stock is convertible into
three shares of common stock at anytime at the option of the holder. After
December 31, 1998, either the Company or the holder may redeem the preferred
stock at a redemption price of $13 per share, plus any accumulated unpaid
dividends. Once redeemed the Company has the option to make cash payments equal
to 10% of the value and 12 equal monthly payments, including 10% annual
interest. These payments may be deferred if the payments would cause the Company
to be in default under the terms of its senior indebtedness.
Based on the market value of the Company's common stock at or around
December 31, 1998, the Company expects that a portion of preferred stockholders
will convert their shares into three shares of common stock and another portion
will redeem their shares. The Company plans to finance this potential cash
outflow, if any, through cash flow from operations, and, if required, additional
debt financing.
The Company is increasing the carrying amount of the preferred stock, using
the interest method, so that the carrying amount will equal the redemption
amount of $4,706,000 at December 31, 1998.
F-21
<PAGE> 31
NOTE 9. EXPORT SALES
Export sales by geographical area for the years ended May 31 are:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
AMOUNT %* Amount %* Amount %*
-------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Canada $ 908 2% $ 847 2% $ 392 1%
Europe 1,059 2% 3,707 10% 1,960 5%
Far East 1,202 3% 1,531 4% 3,792 9%
Australia 635 1% 1,066 3% 584 1%
Central/South America 2,409 5% 1,414 4% 2,097 5%
Other 693 2% 553 2% 1,433 3%
----------- ------ ------------ ------- ------------- ------
$ 6,906 15% $ 9,118 25% $ 10,258 24%
=========== ====== ============ ======= ============= ======
</TABLE>
* Percent to net sales
NOTE 10. LITIGATION AND CONTINGENT LIABILITIES
SETTLEMENT AGREEMENT:
In January 1992 the Company and its Lockformer subsidiary reached a
Settlement Agreement to settle lawsuits filed against the companies by
Construction Technologies, Inc. ("CTI"). The suits alleged patent infringement,
among other things, against Lockformer's Vulcan cutting system. Under the terms
of the Settlement Agreement, Lockformer agreed to pay CTI $7.3 million
(discounted at 11%) over a 15-year period in amounts of $675,000 annually
through January 2005 with a final payment of $175,000 due January 27, 2006.
In return for the settlement, CTI granted Lockformer a royalty-bearing
license. Based on net sales, royalties are paid by the Company under the license
and are included in cost of goods sold.
The agreement also requires prepayments equal to (i) 25% of Lockformer's
pre-tax profits exceeding $600,000 up to $1.0 million in any single fiscal year;
(ii) 35% of its pre-tax profits exceeding $1.0 million in any single fiscal
year; (iii) 50% of the profits of any sale of its capital assets other than
trade-ins of capital assets for upgrades or replacements; and (iv) 30% of any
non-recurring gains of Lockformer other than those resulting from trade-ins of
capital assets for upgrades or replacements. In accordance with the Settlement
Agreement, Lockformer has the right to prepay at any time. Any prepayments are
to be applied against fixed payment obligations by crediting the last due
payment first and proceeding in reverse time order.
To collateralize these obligations, Lockformer has granted CTI a second
lien on all of its assets. Under the terms of the Settlement Agreement, an
unrelated supplier also agreed to pay CTI $50,000 each year through January
2007.
The Company guaranteed Lockformer's and the unrelated supplier's
obligations under the Settlement Agreement and issued CTI 200,000 unregistered
shares of common stock pursuant to a Shareholders Agreement which restricts
CTI's resale of these shares, grants CTI limited registration and preemptive
rights with respect to newly issued common stock, restricts the Company's
payment of cash dividends or other distributions above $.12 per share per year
and restricts the creation of new liens on the Company's assets without CTI's
approval. The Shareholders Agreement terminates upon the payment of all
obligations under the Settlement Agreement.
F-22
<PAGE> 32
OTHER:
The Company is subject to various legal actions, governmental
investigations, and proceedings relating to various matters incidental to its
business including, but not limited to, product liability and environmental
claims. The Company intends to vigorously defend these matters. While the
outcome of such matters cannot be predicted with certainty, in the opinion of
management, after reviewing such matters and consulting with the Company's
counsel and insurers, any liability which may ultimately be incurred, is not
expected to materially affect the consolidated financial position and results of
the operations of the Company.
F-23
<PAGE> 33
NOTE 11. EARNINGS (LOSS) PER SHARE
In compliance with SFAS No. 128, "Earnings per Share", issued in February
1997, the Company has changed its method of computing earnings per share
effective with the fourth quarter of fiscal 1998. All prior periods have been
restated to conform with the new requirements which exclude contingently
issuable shares and the dilutive effect of stock options from the number of
weighted average shares used in the computation of basic earnings per share. The
effect of SFAS No. 128 on diluted earnings per share is immaterial compared to
previously disclosed fully diluted earnings per share. Basic and diluted
earnings per share are calculated as follows for the years ended May 31:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
----------- --------------- -------------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) available to common
stockholders - basic $ 2,343 $ 34 $ (773)
=========== =============== ==============
Weighted average shares
outstanding - basic 3,122 3,132 3,030
=========== =============== ==============
Basic earnings (loss) per share $ 0.75 $ 0.01 $ (0.26)
=========== =============== ==============
Diluted earnings (loss) per share:
Net income (loss) available to common
stockholders - basic $ 2,343 $ 34 $ (773)
Effect of preferred stock dividends
and accretion 637 0 0
----------- --------------- --------------
Net income (loss) available to common
stockholders - diluted 2,980 34 (773)
=========== =============== ==============
Weighted average shares outstanding-basic 3,122 3,132 3,030
Effect of dilutive securities:
Stock options granted 87 13 0
Convertible preferred stock 1,086 0 0
----------- --------------- --------------
Weighted average shares
outstanding - diluted 4,295 3,145 3,030
=========== =============== ==============
Diluted earnings (loss) per share $ 0.69 $ 0.01 $ (0.26)
=========== =============== ==============
Number of antidilutive shares excluded
from the calculation above:
Options 110,699 116,750 177,850
=========== =============== ==============
Redeemable preferred stock - - - 1,086,000 1,086,000
=========== =============== ==============
</TABLE>
F-24
<PAGE> 34
NOTE 12. SUPPLEMENTAL CASH FLOW DATA
Supplemental cash flow data for the year ended May 31 are:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash payment for:
Interest $ 1,052 $ 1,667 $ 1,913
Income tax $ 40 $ 0 $ 0
</TABLE>
Supplemental data of noncash operating, investing and financing activities:
During the years ended May 31, 1998, 1997 and 1996, the Company's foreign
currency translation adjustments increased (decreased) stockholders' equity
(deficit) by ($15,000), ($174,000) and ($517,000), respectively.
During the years ended May 31, 1998, 1997 and 1996, the Company accreted
its preferred stock by $420,000, $327,000 and $252,000, respectively.
During the year ended May 31, 1996, the Company sold certain assets and
liabilities of Rowe and recognized a gain on the sale of $2,148,000. The assets
sold were: inventories $2,230,000; accounts receivable $761,000; plant and
equipment, net $236,000; and other assets of $16,000. Liabilities assumed by the
buyer were: accounts payable $1,080,000; customer deposits $662,000; and accrued
liabilities of $101,000. The proceeds of $3.6 million from this sale were paid
directly to the Company's lenders to retire debt.
Additionally, during the year ended May 31, 1996 the Company restructured
its debt and in connection therewith received a discount of $516,000 from its
prior lenders. However, the Company also collected a note receivable for
$709,000 in advance of its maturity and recognized a discount of $179,000 and
sold non-operating assets with a net book value of $493,000 for $400,000. The
Company also received insurance proceeds of $485,000 related to a fire at the
Rowe facility and these funds were paid directly to the Company's lenders to
reduce debt.
F-25
<PAGE> 35
INDEX TO EXHIBITS
FORM 10-K FOR YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant, as
amended--incorporated by reference to Exhibit 3.2 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1987.
3.2 Amended and Restated Bylaws of the Registrant--incorporated by
reference to Exhibit 3.4 of Registrant's Quarterly Report on Form
10-Q for the quarter ended November 30, 1987.
4.1 Article IV of the Registrant's Restated Certificate of
Incorporation (included in Exhibit 3.2 above).
4.2 The Registrant's $15 million Senior Notes due 2001, dated October
1, 1989--incorporated by reference to Exhibit 4.2 of the
Registrant's Annual Report of Form 10-K for the fiscal year ended
May 31, 1990.
10.3 The Lockformer Company Employees Retirement Plan (as amended and
restated effective as of August 1, 1989). (1)
10.4 Met-Coil Systems Corporation Employee Stock Ownership Plan and
Trust--incorporated by reference to Exhibit 10.9 of Amendment No.
1 to the Registrant's Registration Statement on Form S-1 filed
with the Commission on October 21, 1985 (Registration No.
2-99971).
10.7 Agreement, dated January 29, 1995, between The Lockformer Company
and District Lodge No. 8, International Association of Machinists
and Aerospace Workers. (2)
10.8 Agreement, dated June 1, 1995, between Iowa Precision Industries,
Inc. and Local Union 263, Sheet Metal Workers International
Association. (2)
10.9 Building Lease Agreement, dated April 11, 1988, by and between
Roper Whitney Corporation and Industrial Machinery, Systems and
Supply, Inc. - - incorporated by reference to Exhibit 2 of the
Registrant's Current Report on Form 8-K, dated May 1,1989 (as
filed with the Commission on May 16, 1989).
10.27 Settlement Agreement among Construction Technology, Inc.,
Met-Coil Systems Corporation, the Lockformer Company, Inc., and
Mechanical Data, Inc., dated as of January 27, 1992 - -
incorporated by reference to similarly numbered exhibit of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1993.
10.31 Met-Coil Systems Corporation Retirement Plan as amended and
restated effective September 16, 1992 - - incorporated by
reference to similarly numbered exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31,
1994.
10.32 The Registrant's 1993 Employee Stock Option Plan. (1)
10.33 Mortgage Note Agreement dated February 28,1994 between
Registrant and the John A. Carver 1983 Trust. (1)
10.39 The Lockformer Company Employees Pension Plan as amended and
restated effective June 28, 1987. (2)
10.40 Amended and Restated Note Agreement dated April 18, 1996 by and
between Met-Coil Systems Corporation, Iowa Precision Industries,
The Lockformer Company, Principal Mutual Life Insurance Company,
and Modern Woodmen of America -incorporated by reference to
Registrant's current report on Form 8-K dated April 18, 1996 (as
filed with the Commission on April 29, 1996).
10.41 Met-Coil Systems Corporation Non-Employee Directors Deferred
Compensation and Performance Unit Plan - Effective January 1,
1997 - incorporated by reference to similarly numbered exhibit of
the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1997.
</TABLE>
<PAGE> 36
<TABLE>
<S> <C>
10.42 Met-Coil Systems 1997 Non-Employee Directors Stock Option Plan -
incorporated by reference to similarly numbered 10.42 exhibit of
the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1997.
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule
99 Press Release dated August 7, 1998
(1) Exhibit is incorporated by reference to similarly numbered
exhibit of the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1995.
(2) Exhibit is incorporated by reference to similarly numbered
exhibit of the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1996.
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF MET-COIL SYSTEMS CORPORATION
AS OF MAY 31, 1998
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- --------------------------------------------------------------------------------
<S> <C>
Iowa Precision Industries, Inc. Delaware
The Lockformer Company Illinois
Met-Coil Limited (1)
Fen-Pro Inc. Illinois (2)
Met-Coil - Texas Texas (3)
</TABLE>
All Subsidiaries do business under their own names or under the name of Met-Coil
Systems Corporation.
(1) International joint venture, 50% owned by Met-Coil Systems Corporation,
based in Japan.
(2) F/K/A Roper Whitney Company, F/K/A Met-Coil-RWC, Inc., F/K/A Fenestra, Inc.
(3) F/K/A Rowe Machinery & Automation, Inc.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-318087 of Met-Coil Systems Corporation on Form S-8, of our report dated July
15, 1998, appearing in this Annual Report on Form 10-K of Met-Coil Systems
Corporation for the year ended May 31, 1998.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
July 15, 1998
<PAGE> 2
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-318087 of Met-Coil Systems Corporation on Form S-8, of our report dated
August 27,1997, appearing in this Annual Report on Form 10-K of Met-Coil Systems
Corporation for the year ended May 31, 1998.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
August 27, 1998
<TABLE> <S> <C>
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EXHIBIT 99.1
MET-COIL SYSTEMS CORPORATION REPORTS:
-------------------------------------
- 22% INCREASE IN REVENUES
- NET INCOME OF $2.9 MILLION
CEDAR RAPIDS, IA - AUGUST 7, 1998 - Met-Coil Systems Corporation (METS), a
supplier of advanced sheet metal forming equipment, fabricating equipment and
glass processing technologies for the global market, announced a 22% increase in
revenues for its fiscal year ended May 31, 1998, to $44.8 million and total net
income of $2.9 million.
"We are very pleased with the performance of our operating units this year, both
units increased revenue and net income over last year", reported Jim Heitt,
President and Chief Operating Officer of Met-Coil.
FOURTH QUARTER AND FISCAL YEAR RESULTS
Net income for fiscal 1998 was $2.9 million ($.69 in diluted earnings per share
applicable to common stock) which included income before taxes of $1.8 million
and $1.1 million in income tax credits. The income tax credits relate to a
reduction in the Company's deferred tax asset valuation allowance. The reduction
in the valuation allowance was recorded in the fourth quarter of fiscal year
1998. Net income for fiscal 1997 was $578,000 ($.01 in diluted earnings per
share applicable to common stock).
Net income for the fourth quarter was $1.7 million, which included $1.1 million
in income tax credits ($.48 in diluted earnings per share) compared to $1.2
million ($.29 in diluted earnings per share) for the fourth quarter a year ago.
The fourth quarter a year ago included a $465,000 gain on the sale of land.
Total revenues of $44.8 million compares to $36.8 million for fiscal 1997.
Fourth quarter revenues for fiscal 1998 were $10.8 million compared to $10.4
million last year.
Order backlog at July 31, 1998 was $19.8 million, compared to $16 million in
1997. Worldwide, new orders taken in fiscal 1998 were $49 million compared to
$37 million in fiscal 1997.
Met-Coil is headquartered in Cedar Rapids, Iowa. Its operating units and
affiliates include Iowa Precision Industries, Inc. also in Cedar Rapids;
Met-Coil Ltd., Ayase, Japan; and The Lockformer Company and Met-Coil Ltd.USA,
both in Lisle, Illinois. The Company markets its machinery and metal
fabrications systems primarily through a worldwide distributor network.
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