<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, 1999
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)
<TABLE>
<S> <C>
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
</TABLE>
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 10, 1999 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 $4.68.
Registrant had 3,686,823 shares of Common Stock, $.01 par value, outstanding as
of August 10, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement to be filed with the commission on or
before August 31, 1999 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 fabricating machinery, metal forming equipment 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")
and The Lockformer Company ("Lockformer"). 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
The Company is nearing completion of the liquidation of its joint
venture in Japan. The balance of the investment in the joint venture on the
Company's books as of May 31, 1999 was approximately $100,000. Management
believes the carrying value of the Company's investment approximates net
realizable value. In conjunction with the liquidation, the Company's
international department has expanded its dealer/distributor network in the Asia
Pacific markets. The Company is now providing sales and service directly from
Shanghai, Singapore and Korea.
In January 1999 the Company reacquired a parcel of land that is
adjacent to the Lockformer subsidiary, The land was previously sold in fiscal
year 1997. The original Real Estate Sales Contract Agreement contained an
environmental indemnification clause to provide for the Company to reacquire the
land in certain circumstances. A remediation plan which is being funded by
proceeds of a settlement with a third party, is currently being implemented. The
Company plans to market the land after the remediation has been satisfactorily
completed. See "Financial Statement Schedules" included in Part IV, Item 14 and
"Item 13, Certain Relationships and Related Transactions" of this Form 10-K.
In July 1999 the Company successfully obtained a new $12.2 million
credit facility. The Company borrowed proceeds of $6.9 million to payoff its
senior notes, a revolving line of credit and the remainder of an obligation
under a litigation settlement. The structure of the new financing arrangement
includes a new revolving note and three term notes. See "Financial Statement
Schedules" included in Part IV, Item 14 hereof and herein incorporated by
reference thereto.
In August 1999, the Company completed its application process for
listing on the NASDAQ SmallCap Market. We have subsequently been notified that
the Company is in compliance with all criteria for inclusion is now traded on
the NASDAQ Small Cap Market under the trading symbol METS.
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 designs, engineers and manufactures coil sheet metal
processing equipment and large, integrated systems for producing slit, roll
formed, punched, notched and sheared blanks from sheet metal coils for end
users, steel service centers and contractors in domestic and international
markets. Iowa Precision is a major manufacturer of heating, ventilation and air
conditioning ("HVAC") manufacturing machinery and automated systems. IPI offers
automated blanking systems, cut-to-length slitting and sheeting lines, precision
feed tables, shears and pivot shears for sheet metal processing companies. In
addition, Iowa Precision is one of the few manufacturers of coil processing
equipment that designs and produces its own microprocessor computer numerical
controls.
<PAGE> 3
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 plasma cutting machines 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"(TM)) System which
connects air-conditioning ductwork and provides enhanced sealing. Lockformer
also manufactures quick-change reprogrammable products, such as duplex
rollforming machines with moveable heads that fit into flexible fabrication
systems.
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 main
responsibility of the direct sales organization is to train the Company's
dealer/distributor network on the key selling and operating features of Iowa
Precision's and Lockformer's systems and support these organizations in their
selling efforts. 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. Met-Coil's direct
sales force works with dealer/distributors and customers in developing the
specifications for systems that Met-Coil can custom engineer and build for the
customer. 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 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 89%, 80% and 75% of consolidated
revenues during fiscal years 1999, 1998, and 1997, 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%, 69%, and 67% of the Company's sales
during fiscal 1999, 1998 and 1997, respectively. Sales to one customer
represented 11%, 12% and 13% of consolidated revenues during fiscal 1999, 1998
and 1997, respectively. Another customer represented 14% of consolidated
revenues during fiscal 1999.
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 1999, 1998 and 1997, the
Company spent approximately $1,005,000, $924,000 and $822,000, respectively, in
the aggregate for the three categories described above.
<PAGE> 4
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.
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, 1999 was approximately
$21.2 million, compared to approximately $19.8 million at July 31, 1998. 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 substantially all of
the present backlog will be shipped within the balance of the fiscal year ending
May 31, 2000 (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, 1999, the Company employed approximately 273 persons, of
whom approximately 141 were production employees, 24 were engineering personnel,
36 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 141 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 75 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 59 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 46 Vice President and Corporate Controller of Met-Coil since
June 1995. Controller of Iowa Precision since June 1985.
John J. Toben 49 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, 1999 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
term loans and revolving loan. 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, cash flows 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 1999.
<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 NASDAQ Small Cap Market. 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
10, 1999, as reported by the Dow Jones Historical Stock Quote Reporter Service,
was $4.68.
<TABLE>
<CAPTION>
BID PRICES
HIGH LOW
----------------------------------
<S> <C> <C>
Fiscal 1999
Fourth Quarter $ 5.38 $ 2.75
Third Quarter 5.50 3.56
Second Quarter 5.75 3.63
First Quarter 4.00 3.25
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
</TABLE>
As of August 10, 1999, there were approximately 1,500 stockholders of
record of Met-Coil Common Stock, par value $.01 per share, excluding
approximately 236 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
The Company is subject to market risk exposure related to changes in
interest rates on its revolving loan. Interest on borrowings under the revolving
loan accrues at a variable rate at the Lender's Corporate Base Rate minus 0.25%
(7.75% at July 19, 1999). Due to the limited borrowings under the revolving loan
interest rate risk exposure, assuming a ten percent increase from the average
variable rate, would be less than $25,000 per year.
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 1999 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 1999 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 1999 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 1999 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 1999.
(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: Randall J. Stodola/s/
----------------------------------
Randall J. Stodola
Vice President, Controller
and Chief Accounting Officer
Date: August 26, 1999
---------------
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Raymond H. Blakeman/s/ Director, Chairman of the Board August 26, 1999
- ---------------------------------
Raymond H. Blakeman
James D. Heitt/s/ Director, President and August 26, 1999
- --------------------------------- Chief Operating Officer
James D. Heitt
Randall J. Stodola/s/ Vice President, Controller and August 26, 1999
- --------------------------------- Chief Accounting Officer
Randall J. Stodola
E. Keith Moore/s/ Director August 26, 1999
- ---------------------------------
E. Keith Moore
Gary M. Neal/s/ Director August 26, 1999
- ---------------------------------
Gary M. Neal
Roy J. Carver Jr./s/ Director August 26, 1999
- ---------------------------------
Roy J. Carver Jr.
Michael J. Nonnenmann/s/ Director August 26, 1999
- ---------------------------------
Michael J. Nonnenmann
</TABLE>
<PAGE> 9
DEAR SHAREHOLDER:
There have been a number of successes that have contributed to this year's
profitability and to opportunities for future growth and progress at Met-Coil.
Our operating units, Iowa Precision Industries and The Lockformer Company, have
partnered extensively this year to combine their technology, marketing and
engineering expertise to improve our product lines and maintain the promotional
alliances that are important to the Company as a whole.
Our long-term objective is to gain market share in all the markets we serve
and to apply our technology to related, but new and different, product
offerings. In 1999 we continued to meet this objective. This is evidenced by the
recent success of the Screen Express(TM), a machine that automates the process
of installing screens into window screen frames. The success of this product has
created new opportunities for Met-Coil in other areas of the window fabrication
industry. In addition, recent technological advances in our slitting and
shearing lines for the steel service center market have positioned us for future
global growth and opportunity.
We have continued to enhance our long-standing presence in domestic and
international markets with distributors covering all 50 states and located in
more than 50 countries. Our broad base of international and domestic customers
serves the Company well when there is a fluctuation in either market. This year
our sales and marketing staff worked to realign our dealer/distributor network
in the Pacific Rim, which has reduced overhead and direct sales costs.
Important strides have been made in the Company's financial condition this
year to create positive shareholder value. We made several strategic equipment
acquisitions and facilities changes to improve efficiency in both of our plants.
Gross profits, earnings and cash flow from operations continue to improve. These
improvements allowed us to repay long-term debt of $2.6 million and increase
stockholders' equity by $4.7 million.
In July 1999, the Company refinanced its long-term debt with a new
lender, resulting in a significantly lower interest rate. The proceeds were used
to retire senior notes, a revolving line of credit and the remainder of an
obligation in respect of a settlement agreement, which originated in 1992. This
new debt structure will reduce the Company's overall debt costs, reduce debt
payments over the next three years by $2.3 million and allow for greater
financial and operating flexibility.
Order entry remains strong and at July 31, 1999 the Company had order
backlog of $ 21.2 million, compared to a backlog of $19.8 million at July 31,
1998.
In August 1999, the Company completed its application process for
listing on the NASDAQ Small Cap Market. We have subsequently been notified that
the Company is in compliance with all criteria for inclusion and is now traded
on the NASDAQ Small Cap Market under the trading symbol METS.
In closing, the year 2000 will find us value analyzing our core
products to keep us competitive and to continue allowing us to grow our market
share. Met-Coil's greatest asset is its employees and their skills, hard work
and dedication. Thank you all. I also want to thank our shareholders and
directors for their continued interest and support. We continue to believe that
your Company's future looks promising.
James D. Heitt
President and Chief Operating Officer
<PAGE> 10
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 Auditor's Reports F-5
Consolidated Statements of Operations, Three Years Ended May 31, 1999 F-7
Consolidated Balance Sheets, May 31, 1999 and 1998 F-8
Consolidated Statements of Cash Flows, Three Years Ended May 31, 1999 F-9
Consolidated Statements of Stockholders' Equity, Three Years Ended May 31, 1999 F-10
Consolidated Condensed Statements of Comprehensive Income, Three Years Ended May 31, 1999 F-11
Notes to Consolidated Financial Statements F-12
</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.
<PAGE> 11
FIVE YEAR SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended May 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $ 45,306 $ 44,811 $ 36,844 $ 41,554 $ 43,775
Gross profit 10,821 10,196 8,321 7,414 8,043
Operating expenses 6,252 6,513 5,953 7,640 9,495
Operating income (loss) 4,569 3,683 2,368 (226) (1,452)
Interest expense, net 1,329 1,516 1,748 2,340 2,532
Other (income) expense, net 1,025 316 42 (1,962) 336
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,215 1,851 578 (604) (4,320)
Income tax credits 1,010 1,129 -- 300 --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,225 $ 2,980 $ 578 $ (304) $ (4,320)
=============================================================================================================================
Earnings (loss) per share:
Basic $ 0.80 $ 0.75 $ 0.01 $ (0.26) $ (1.61)
Diluted $ 0.74 $ 0.69 $ 0.01 $ (0.26) $ (1.61)
FINANCIAL DATA:
Working capital (deficiency) $ 8,376 $ 4,472 $ 1,971 $ 1,754 $ (6,686)
Property and equipment, net 4,057 3,448 3,093 5,507 7,953
Total assets 26,122 21,462 23,525 24,663 37,319
=============================================================================================================================
Debt:
Debt outstanding $ 7,838 $ 9,077 $ 13,608 $ 15,515 $ 22,283
Less: Cash restricted for debt payment -- -- -- -- (986)
- -----------------------------------------------------------------------------------------------------------------------------
Net debt outstanding 7,838 9,077 13,608 15,515 21,297
Preferred stock, convertible and redeemable 3,469 4,456 4,036 3,709 3,457
Stockholders' equity (deficit) 5,387 643 (1,598) (1,912) (1,020)
=============================================================================================================================
SHARE DATA:
Dividend per common share $ -- $ -- $ -- $ -- $ --
Book value per common share $ 1.50 $ 0.20 $ (0.51) $ (0.61) $ (0.35)
=============================================================================================================================
</TABLE>
F-1
<PAGE> 12
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 which may cause the
actual results or performance of the Company to be materially different from any
future results or performance expressed or implied by such forward-looking
statements. Such risks and uncertainties include, among other things, 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.
FISCAL 1999 COMPARED TO FISCAL 1998
Net income for fiscal 1999 was $3.2 million, or $.74 diluted earnings per
share, compared with $3.0 million in fiscal 1998, or $.69 diluted earnings per
share. In fiscal 1999, net income included $1.0 million in income tax credits
which relate to a reduction in the Company's deferred tax asset valuation
allowance, compared to $1.1 million in income tax credits in fiscal 1998.
In fiscal 1999, the Company increased market share in its Steel Service
Center, Fabrication Lines and Special Rollformer markets to increase revenues
above the level attained last year. In fiscal 1998, approximately $3.0 million
of revenues were generated from an opportunity for a surge of sales of plasma
cutting machines when a previous competitor discontinued selling the machines.
Sales of that machine returned to historic levels this year and the Company
improved market share for other customers.
The cost of products sold declined in fiscal 1999 to 76.1% of net revenues
from 77.2% in fiscal 1998. Gross margin improved from 22.8% to 23.8% of net
revenues due to the mix of products sold. Selling, general and administrative
expenses for fiscal 1999 were $6.2 million or 14% of net revenues, compared to
$6.5 million, or 15% of net revenues last year. Operating income in fiscal 1999
increased 24% to $4.6 million from $3.7 million the previous year.
Due to the improved operating results of the Lockformer subsidiary, the
scheduled future payment obligations under a 1992 litigation settlement have
been revised by management to reflect the anticipated timing of the payments. A
one-time expense of $523,000 for the change in estimate, is included in other
expenses for the fourth quarter. Interest expense decreased to $1.3 million in
fiscal 1999 compared to $1.5 million in fiscal 1998 due to lower borrowing
levels.
Backlog at July 31, 1999 was $21.2 million compared to $19.8 million at the
same time last year and $16.0 million two years ago. New orders for fiscal 1999
remained the same as fiscal 1998, at $49.0 million.
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net revenues in fiscal 1998 of $44.8 million represented a 22%
increase over 1997 revenues of $36.8 million. Met-Coil reported $3.0 million in
net income for fiscal 1998, which included $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 in fiscal 1998 over the previous
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. The increase in plasma cutting sales in fiscal 1998
over fiscal 1997 was approximately $3.0 million.
Operations remained highly consistent, as the Company realized a gross
margin of 23% for both fiscal years. Operating expenses, as a percentage of net
revenues, decreased from 16% to 15%. Interest expense was reduced by 13%, from
$1.7 million in fiscal 1997 to $1.5 million in fiscal 1998 due to the lower
level of borrowing on the Company's revolving credit line and payments on
long-term debt.
F-2
<PAGE> 13
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.
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 systems applications and manufacturing
applications, the Company expects to be compliant by the end of 1999. In the
third party area, the Company has contacted most of its suppliers and customers,
most of whom state that they intend to be Year 2000 compliant by the Year 2000.
The Company has assessed the risk of noncompliance and anticipates that
past and future expenditures to ensure that its computer systems are Year 2000
compliant, including review of contingency plans by an independent consultant,
will not exceed $75,000.
In the event that the Company and material third parties such as suppliers
and/or customers fail to become Year 2000 compliant, a likely worst case
scenario could bring about possible system failure or other interruption of
operations such as an inability to process transactions or engage in normal
business activities for a short time.
The Company is establishing contingency plans to address the consequences
of possible failure and will conduct orderly shutdown or scale back of
operations accordingly if a loss of certain services is experienced. This is
essentially the same process currently used for non-Year 2000 failures that
could occur.
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
1999 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. The Company has actively continued its ongoing product
development over the past year as well.
In conjunction with the liquidation of the Company's joint venture
investment in Japan, a distributor network has been developed for that region
and the Company is now providing sales and service directly in the Asia Pacific
market.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations have improved each of the past three years. Cash
provided by operations in 1999, 1998 and 1997 was $5.0, $4.2 and $2.7 million,
respectively. During fiscal 1999, the Company repaid $2.6 million in long-term
debt under its previous lending arrangement. In July 1999 the Company obtained a
$12.2 million credit facility with a new lender. The Company borrowed proceeds
of $6.9 million to payoff its senior notes, a revolving line of credit and the
remainder of an obligation under a litigation settlement. The new debt, which
decreases interest rates by approximately three percent, consists of a revolving
loan and three term loans. The Company may prepay the long-term debt from
operating cash flow at anytime.
Capital expenditures in 1999 were $1.6 million, and were incurred primarily
for more efficient plant equipment. The Company expects capital expenditures in
fiscal 2000 to approximate those for fiscal 1999.
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.
F-3
<PAGE> 14
In September 1998 and March 1999 the Company paid dividends of 6% on the
cumulative preferred stock. As described in the private placement memorandum for
the preferred stock, the Company's 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 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.
During fiscal 1999, 90,660 shares of preferred stock were converted to
271,980 shares of the Company's common stock and 4,500 shares of preferred stock
have been redeemed for cash totaling $58,500. The Company plans to finance the
additional potential cash outflow, if any, through cash flow from operations
and, if required, additional debt financing.
The Company believes that amounts available from operating cash flows and
funds available under its revolving loan will be sufficient to meet its expected
cash needs and planned capital expenditures for fiscal 2000.
CONTINGENCIES AND OTHER MATTERS
The Company is engaged in various legal and other proceedings incident to
its business (see Note 10).
F-4
<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 sheets of Met-Coil Systems
Corporation and Subsidiaries as of May 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, comprehensive
income and cash flows for the years 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 audits. The consolidated
statements of operations, stockholders' equity and cash flows of Met-Coil
Systems Corporation and Subsidiaries for the year ended May 31, 1997 were
audited by other auditors whose report dated August 27, 1997 expressed an
unqualified opinion on those statements.
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
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 audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 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, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Cedar Rapids, Iowa
July 19, 1999
F-5
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended May 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Notes 3 and 9) $ 45,756 $ 45,009 $ 36,776
Equity in affiliate (Note 3) (450) (198) 68
- ----------------------------------------------------------------------------------------------------
Net revenues 45,306 44,811 36,844
Cost of goods sold 34,485 34,615 28,523
- ----------------------------------------------------------------------------------------------------
Gross profit 10,821 10,196 8,321
Operating expenses 6,252 6,513 5,953
- ----------------------------------------------------------------------------------------------------
Operating income 4,569 3,683 2,368
Nonoperating (income) expense:
Interest expense, net 1,329 1,516 1,748
Other expense, net (Note 10) 1,025 316 42
- ----------------------------------------------------------------------------------------------------
Income before income taxes 2,215 1,851 578
Income tax credits (Note 5) 1,010 1,129 --
- ----------------------------------------------------------------------------------------------------
Net income (Note 1) 3,225 2,980 578
Preferred stock dividends (Note 8) 214 217 217
Preferred stock accretion (Note 8) 250 420 327
- ----------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 2,761 $ 2,343 $ 34
- ----------------------------------------------------------------------------------------------------
Earnings per common share (Note 11):
Basic $ 0.80 $ 0.75 $ 0.01
Diluted $ 0.74 $ 0.69 $ 0.01
Weighted average common shares (Note 11):
Basic $ 3,434 3,122 3,132
Diluted $ 4,342 4,295 3,145
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 17
Consolidated Balance Sheets
(In thousands, except shares)
<TABLE>
<CAPTION>
May 31, 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash $ 516 $ 24
Trade receivables, net (Note 2) 5,767 4,574
Inventories (Note 2) 9,545 8,283
Prepaid expenses and other 946 1,254
Deferred income taxes (Note 5) 2,139 1,129
- ------------------------------------------------------------------------------------------------------
Total current assets 18,913 15,264
Property and Equipment
Land 520 520
Buildings and building improvements 4,708 4,420
Machinery and equipment 8,553 7,905
Furniture and equipment 3,595 3,115
- ------------------------------------------------------------------------------------------------------
17,376 15,960
Less accumulated depreciation 13,319 12,512
- ------------------------------------------------------------------------------------------------------
Property and equipment, net 4,057 3,448
Property held for sale (Note 13) 1,154 --
Investments and other assets (Notes 3 and 6) 225 650
License fee (Notes 2 and 10) 808 1,038
Intangibles, net (Note 2) 709 1,022
Deferred income taxes (Note 5) 256 40
======================================================================================================
TOTAL ASSETS (NOTE 4) $ 26,122 $ 21,462
======================================================================================================
Current Liabilities
Revolving line of credit (Note 4) $ 1,211 $ 1,689
Current maturities of long-term debt (Note 4) 589 2,464
Accounts payable 1,615 1,532
Accrued vacation 650 520
Other accrued liabilities 1,915 1,901
Customer deposits 4,557 2,686
- ------------------------------------------------------------------------------------------------------
Total current liabilities 10,537 10,792
Long-term debt (Note 4) 6,038 4,924
Other 691 647
Commitments and contingencies (Notes 8 and 10)
Preferred stock, convertible and redeemable (Note 8) 3,469 4,456
Stockholders' Equity (Note 7)
Common stock, $.01 par value, authorized 10,000,000 shares; 37 32
1999 issued 3,681,873; 1998 issued 3,196,447
Additional paid-in capital 18,225 16,312
Accumulated deficit (12,621) (15,382)
Foreign currency translation adjustment (Note 12) 0 (65)
Cost of common stock reacquired for treasury (254) (254)
- ------------------------------------------------------------------------------------------------------
Stockholders' equity $ 5,387 643
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,122 $ 21,462
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended May 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,225 $ 2,980 $ 578
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 1,064 893 1,154
Amortization of intangibles and deferred finance charges, net 435 356 413
Accretion of discount on debt 983 391 424
Gain on sale of assets -- -- (496)
Write-off of intangibles 129 -- 273
Write-down of property held for sale -- 80 242
Write-off of foreign currency translation adjustment -- -- 384
Undistributed (earnings) loss of affiliate 385 198 (68)
Deferred income taxes (1,226) (1,309) --
---------------------------------------------------------------------------------------------------------------------------
4,995 3,589 2,904
Changes in assets and liabilities:
Trade receivables (1,193) 352 (88)
Inventories (1,262) 510 (786)
Accounts payable and accrued liabilities 336 92 (744)
Customer deposits 1,871 (145) 872
Prepaid expenses and other 348 (164) 613
---------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 5,095 4,234 2,771
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,673) (1,248) (634)
Proceeds from sale of investments and other assets -- 920 398
Purchase of property held for sale (1,154) -- --
Proceeds from sale of land held for sale -- -- --
Note receivable-related party -- 750 --
---------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (2,827) 422 (236)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving line of credit 397 (682) (344)
Repayments of long-term debt (2,619) (4,740) (2,390)
Proceeds from issuance of long-term debt -- 500 403
Deferred finance charges (21) -- (353)
Redemption of preferred stock (59) -- --
Repurchase of treasury stock -- (152) --
Dividends on preferred stock (214) (217) (217)
Issuance of common stock 740 65 70
---------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (1,776) (5,226) (2,831)
---------------------------------------------------------------------------------------------------------------------------
CASH
Increase (decrease) 492 (570) (296)
Beginning balance 24 594 890
---------------------------------------------------------------------------------------------------------------------------
Ending balance $ 516 $ 24 $ 594
===========================================================================================================================
</TABLE>
Supplementary Information (Note 12)
See Notes to Consolidated Financial Statements
F-9
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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, 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
Net income -- -- 3,225 -- -- 3,225
Issuance of 485,426
shares of common stock (Note 7) 5 1,913 -- -- -- 1,918
Preferred stock dividends and accretion -- -- (464) -- (464)
Adjustment from foreign currency translation -- -- -- 65 -- 65
- -------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 $ 37 $18,225 $(12,621) $ -- $ (254) $ 5,387
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-10
<PAGE> 20
MET-COIL SYSTEMS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OS COMPREHENSIVE INCOME
(IN THOUSANDS)
Years Ended May 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Net income 3,225 2,980 578
Other comprehensive income,
net of tax:
Foreign currency translation adjustment 65 (15) 210
- -----------------------------------------------------------------------------
Comprehensive income 3,290 2,965 788
=============================================================================
See Notes to Consolidated Financial Statements
F-11
<PAGE> 21
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, 1999, 1998 and 1997, sales to one
customer represented 11%, 12% and 13% of net revenues, respectively. Another
customer represented 14% of consolidated revenues during fiscal 1999.
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.
PROPERTY AND EQUIPMENT AND PROPERTY HELD FOR SALE:
These assets are carried at cost. 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
F-12
<PAGE> 22
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 1999, 1998, and 1997, the Company spent approximately $1,005,000,
$924,000 and $822,000, 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 (See Note 6).
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 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.
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 were refinanced
subsequent to year end.
F-13
<PAGE> 23
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.
RECLASSIFICATIONS:
Certain amounts for prior years have been reclassified to conform with the
current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement must be adopted no later than May 31, 2002,
although earlier application is permitted. The Company is currently evaluating
the impact of adopting SFAS No. 133.
NOTE 2. SUPPLEMENTAL ASSET DATA
TRADE RECEIVABLES:
Amounts shown for trade receivables are net of an allowance of $70,000 and
$50,000 for 1999 and 1998 respectively.
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) 1999 1998
-------------- -------------
<S> <C> <C>
Raw materials and parts $ 6,283 $ 6,558
Work in process 3,926 2,734
Finished goods and supplies 205 378
-------------- -------------
10,414 9,670
Reduction to LIFO basis 869 1,387
-------------- -------------
$ 9,545 $ 8,283
============== =============
</TABLE>
LICENSE FEE AND INTANGIBLES:
Amounts shown for the license fee are net of accumulated amortization of
$1,692,000 and $1,462,000 for 1999 and 1998 respectively, and the amounts shown
for intangibles are net of accumulated amortization of $1,355,000 and $1,375,000
for 1999 and 1998, respectively.
NOTE 3. SUBSIDIARIES AND AFFILIATE
WHOLLY-OWNED SUBSIDIARIES:
The Company has two wholly-owned active subsidiaries at May 31, 1999:
Iowa Precision Industries, Inc. and The Lockformer Company.
LIQUIDATION OF JOINT VENTURE:
The Company is nearing completion of the liquidation of its joint venture
in Japan. The balance of the investment in the joint venture on the Company's
books as of May 31, 1999 is approximately $100,000. Management believes the
carrying value of the Company's investment approximates net realizable value.
The Company's accumulated deficit includes approximately $65,000, $515,000 and
$713,000 of equity in net income of the joint venture at May 31, 1999, 1998, and
1997, respectively.
F-14
<PAGE> 24
EUROPEAN OPERATIONS:
In February 1997, the Company completed the process of dissolving its
European operations. Liquidation of this investment resulted in a loss of
approximately $500,000 in fiscal 1997, $384,000 of which was 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.
NOTE 4. DEBT
REVOLVING LINE OF CREDIT (TERMS AND CONDITIONS):
At May 31, 1999, the Company had a revolving credit agreement with two
insurance companies under which it could borrow up to $3,500,000. Borrowings
were 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, 1999, there was $3,500,000 available to be borrowed
under the borrowing base formula, of which $2,086,000 in borrowings were
outstanding.
On July 19, 1999, the Company's revolving credit balance of $875,000 was
refinanced with long-term debt, therefore, $1,211,000 has been presented as a
current liability as of May 31, 1999. Also, on July 19, 1999, the Company
entered into a new revolving credit agreement with a bank under which it could
borrow up to $5,500,000. Borrowings are also limited to a borrowing base formula
(certain percentages of eligible trade receivables and inventories) and bear
interest at the lender's Corporate Base Rate minus 0.25% (7.75% at July 19,
1999). This line expires in July 2000.
LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt as of May 31 consisted of the following:
(in thousands) 1999 1998
-------------- --------------
<S> <C> <C>
Long-term debt refinanced subsequent to year end:
Senior Notes (A) $ 2,231 $ 3,794
Litigation settlement (Note 10) 3,521 3,314
Revolving line of credit 875
Note payable, installments through January 2000
with interest of 11% --- 280
-------------- --------------
6,627 7,388
Less current maturities 589 2,464
-------------- --------------
$ 6,038 $ 4,924
============== ==============
</TABLE>
(A) The Company had $2,231,000 of senior notes with two insurance
companies due in December, 2000. The notes were due in monthly
principal payments of $110,000 plus interest at 11.5%.
In addition to the new revolving note discussed above, the Company also
obtained new term notes under which it borrowed $6,986,000. The Company's
total credit facility with the new lender is $12.2 million. The proceeds
were used to payoff the senior notes, the remainder of an obligation under
a litigation settlement and $875,000 of revolving line of credit debt. In
addition, $400,000 was loaned to an unrelated supplier as discussed in Note
10. The new notes are due in monthly principal payments of $43,536 plus
interest at 8.85%, with a final payment in July 2004. The Company has the
right to prepay the long-term debt at anytime, from operating cash flow.
F-15
<PAGE> 25
The aggregate maturities of the long-term debt after the refinancing
discussed above for years ending May 31 are as follows:
(in thousands) 2000 $ 589
2001 522
2002 522
2003 522
2004 4,472
=========
$ 6,627
=========
REVOLVING LOAN AND TERM LOANS (TERMS AND CONDITIONS):
The covenants and other provisions of the revolving loan and term loans
(described above) are similar to those that were in place on May 31, 1999.
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 common stock dividends and require the maintenance of
certain financial ratios and amounts. The Company was in compliance with all
debt covenants at May 31, 1999.
NOTE 5. INCOME TAXES
Net deferred taxes consist of the following components as of May 31:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
-------------- --------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 754 $ 1,978
Accruals and reserves not currently deductible 900 768
Settlement loss 795 675
Tax credit carryforwards 721 653
Other 21 45
-------------- --------------
3,191 4,119
Less valuation allowance --- 1,964
-------------- --------------
3,191 $ 2,155
-------------- --------------
DEFERRED TAX LIABILITIES:
Property and equipment 162 260
Basis difference of inventory 531 531
Undistributed earnings of affiliate --- 161
Other 103 34
-------------- --------------
796 986
-------------- --------------
$ 2,395 $ 1,169
============== ==============
</TABLE>
Net deferred income taxes are presented on the balance sheet at May 31 as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
(in thousands)
Current assets $ 2,139 $ 1,129
Noncurrent assets 256 40
-------------- --------------
$ 2,395 $ 1,169
============== ==============
</TABLE>
F-16
<PAGE> 26
At May 31, 1999, the Company has eliminated the valuation allowance as
management believes that it is more likely than not that the Company will
generate sufficient taxable income to fully realize the benefit of the loss
carryforwards and the tax credits prior to their expiration.
Income tax credits are made up of the following components for the years
ended May 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Current tax (expense) $ (216) $ (180) $ 0
Deferred taxes 1,226 1,309 0
========== =========== ===========
$ 1,010 $ 1,129 $ 0
========== =========== ===========
</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>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
(in thousands)
Computed "expected" tax $ 775 $ 648 $ 202
Increase (decrease) in income taxes
resulting from:
Change in valuation allowance (1,964) (1,821) (508)
Nondeductible amortization of intangibles 25 25 25
Other 154 19 281
----------- ------------ ------------
$ (1,010) $ (1,129) $ 0
=========== ============ ============
</TABLE>
At May 31, 1999, the Company has net operating loss carryforwards of
$2,150,000 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, 1999, the Company also has approximately $266,000 of
alternative minimum tax (AMT) credit carryforwards 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 $450,000 of
general business credit carryforwards which expire through May 31, 2001.
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, 1999, 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 $15,387, $4,100 and $1,348 for the
years ended May 31, 1999, 1998, and 1997, 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 zero
for the years ended May 31, 1999 and 1998 and $54,000 for the year ended May 31,
1997.
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, 1999, 1998, and 1997 was $413,900,
$379,400 and $332,000, respectively.
F-17
<PAGE> 27
DEFINED BENEFIT PLANS:
The Company has one defined benefit pension plan which covers substantially
all employees of Lockformer and the bargaining unit of Iowa Precision
subsidiaries. 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) 1999 1998
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning 3,169 2,777
Service cost --- 52
Interest cost 255 240
Actuarial loss 607 380
Benefits paid (328) (280)
-------------- --------------
Benefit obligation, ending 3,703 3,169
-------------- --------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning $ 4,146 $ 4,009
Actual return on plan assets 116 340
Employer contribution 26 77
Benefits paid (328) (280)
-------------- --------------
Fair value of plan assets, ending 3,960 4,146
--------------- --------------
Funded status 257 977
Unrecognized net actuarial (gain) loss 288 (569)
Unrecognized prior service cost 38 42
Unrecognized transition cost (50) (58)
--------------- --------------
Prepaid benefit cost $ 533 $ 392
============== ==============
Components of net periodic benefit cost:
Service cost $ --- $ 52
Interest cost 255 240
Expected return on plan assets (365) (326)
Amortization of prior service cost --- ---
and transition obligation (5) (6)
-------------- --------------
Net periodic benefit cost $ (115) $ (40)
============== ==============
WEIGHTED-AVERAGE ASSUMPTIONS AS OF MAY 31:
1999 1998
Discount rate 7.25% 7.25%
Expected return on plan assets 9.00% 9.00%
</TABLE>
F-18
<PAGE> 28
NOTE 7. STOCK-BASED COMPENSATION PLANS
At May 31, 1999, 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.
NON-EMPLOYEE DIRECTORS STOCK OPTIONS:
Effective March 1, 1997, the Company adopted the 1997 Non-employee
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 non-employee directors of the Company. Stock options are
granted at the discretion of the Board of Directors, but in general practice
have been granted as part of the annual retainer and regular meeting fees. 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 as of May 31:
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
non-employee director stock options vest immediately; stock volatility of 62% in
1999, 42% in 1998 and 86% in 1997; risk-free interest rate of 4.6% in 1999, 5.3%
in 1998 and 7.0% in 1997; 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.
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income
As reported $ 3,225 $ 2,980 $ 578
Pro forma 3,210 2,964 293
Net income (loss) applicable to common stock:
As reported $ 2,761 $ 2,343 $ 34
Pro forma 2,746 2,327 (251)
Basic earnings per share:
As reported $ 0.80 $ 0.75 $ 0.01
Pro forma 0.80 0.75 (0.08)
Diluted earnings per share:
As reported $ 0.74 $ 0.69 $ 0.01
Pro forma 0.74 0.69 (0.08)
</TABLE>
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, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
-------------------------------
<S> <C> <C>
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
Granted 6,553 4.21
Exercised (11,250) 2.06
Cancelled or expired (3,000) 6.70
----------
Outstanding 5/31/99 264,778 2.42
==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------
Number of Options
-------------------------------------------------------
<S> <C> <C> <C>
Exercisable, end of year 171,028 110,045 54,000
=======================================================
Weighted-average fair value per option of
options granted during the year $ 4.21 $ 2.72 $ 2.06
=======================================================
</TABLE>
Other pertinent information related to the options outstanding at May 31, 1999
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 (Years) Price Exercisable Price
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 To $2.06 188,750 8.0 $ 2.01 95,000 $ 2.01
$2.72 8,775 8.5 2.72 8,775 2.72
$3.33 60,700 5.0 3.33 60,700 3.33
$4.21 6,553 9.5 4.21 6,553 4.21
------------------------------------------------------------------------------------
264,778 7.4 $ 2.42 171,028 $ 2.59
====================================================================================
</TABLE>
F-20
<PAGE> 30
NON-EMPLOYEE DIRECTORS DEFERRED COMPENSATION PERFORMANCE UNIT PLAN:
Effective January 1, 1997, the Company adopted a Deferred Compensation
Performance Unit Plan to provide non-employee 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.
The Deferred Compensation and Performance Unit Plan was terminated on
October 31, 1998. In accordance with the terms of the Plan, 56,322 shares, which
were previously earned by the directors, were issued in the year ended May 31,
1999.
NON-EMPLOYEE DIRECTORS STOCK PURCHASE PLAN:
Effective November 1, 1998, the Company adopted a Stock Purchase Plan to
facilitate stock ownership by all non-employee Directors of the Company and its
subsidiaries. Pursuant to this plan, 100,000 shares of common stock have been
reserved. Stock is granted at the discretion of the Board, but in general
practice has been granted as part of the annual retainer and regular meeting
fees. Grants are based upon the closing price of the Company's common stock on
the date of the directors meetings and are immediately available to the
participant. Under this plan, a director's rights terminate when a director
ceases to serve as such.
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. As of May 31, 1999 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.
As of December 31, 1998, the carrying amount of the preferred stock was
equal to the redemption amount of $4,706,000. During fiscal 1999, 90,660 shares
of preferred stock were converted to 271,980 shares of the Company's common
stock and 4,500 shares of preferred have been redeemed. At May 31, 1999 there
were 266,840 shares of preferred stock remaining which are convertible into
800,520 shares of common stock or redeemable for $13 per share. The Company
plans to finance the additional potential cash outflow, if any, through cash
flow from operations and, if required, additional debt financing
F-21
<PAGE> 31
NOTE 9. EXPORT SALES
Export sales by geographical area for the years ended May 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
AMOUNT %* Amount %* Amount %*
---------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Canada $ 317 1% $ 908 2% $ 847 2%
Europe 1,144 3% 1,059 2% 3,707 10%
Far East 1,084 2% 1,202 3% 1,531 4%
Australia 723 2% 635 1% 1,066 3%
Central/South America 1,544 3% 2,409 5% 1,414 4%
Other 924 2% 693 2% 553 2%
------------ ------ ----------- ------------
$ 5,736 13% $ 6,906 15% $ 9,118 25%
============ ====== =========== ====== ============ ======
</TABLE>
* Percent to net sales
NOTE 10. LITIGATION AND CONTINGENT LIABILITIES
SETTLEMENT AGREEMENT AND SUBSEQUENT EVENT:
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
accordance with the Settlement Agreement, Lockformer has the right to prepay at
any time. 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.
In accordance with the Settlement Agreement, Lockformer was required to
prepay amounts on the settlement if their annual adjusted pre-tax profits
reached certain levels. Due to the improved operating results of Lockformer, the
scheduled future payment obligations under the litigation settlement were
revised by management during fiscal 1999 to reflect the anticipated timing of
the expected payments. This expense of $523,000 is included in other expenses.
On July 19, 1999, Lockformer exercised its right to prepay the Settlement
Agreement for $3,521,000. As part of the prepayment, the Company was required to
prepay an unrelated suppliers obligation, which it had guaranteed under the
Settlement Agreement, of $400,000. The Company obtained a $400,000 note
receivable from this supplier.
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-22
<PAGE> 32
NOTE 11. 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) 1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common
stockholders - basic $ 2,761 $ 2,343 $ 34
========== ========== ==========
Weighted average shares
outstanding - basic 3,434 3,122 3,132
========== ========== ==========
Basic earnings per share $ 0.80 $ 0.75 $ 0.01
========== ========== ==========
Diluted earnings per share:
Net income available to common
stockholders - basic $ 2,761 $ 2,343 $ 34
Effect of preferred stock dividends
and accretion 464 637 0
---------- ---------- ----------
Net income available to common
stockholders - diluted 3,225 2,980 34
========== ========== ==========
Weighted average shares outstanding-basic 3,434 3,122 3,132
Effect of dilutive securities:
Stock options granted 107 87 13
Convertible preferred stock 801 1,086 0
---------- ---------- ----------
Weighted average shares
outstanding - diluted 4,342 4,295 3,145
========== ========== ==========
Diluted earnings per share $ 0.74 $ 0.69 $ 0.01
========== ========== ==========
Number of antidilutive shares excluded
from the calculation above:
Options 7 111 117
========== ========== ==========
Redeemable preferred stock --- --- 1,086
========== ========== ==========
</TABLE>
F-23
<PAGE> 33
NOTE 12. SUPPLEMENTAL CASH FLOW DATA
Supplemental cash flow data for the year ended May 31 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Cash payment for:
Interest $ 888 $ 1,052 $ 1,667
Income tax $ 186 $ 40 $ 0
</TABLE>
Supplemental data of noncash operating, investing and financing activities
is as follows:
During the year ended May 31, 1999, 90,660 shares of preferred stock were
converted to 271,980 shares of the Company's common stock. This resulted in a
reclassification of $1,179,000 from preferred stock to stockholders' equity.
During the years ended May 31, 1999, 1998 and 1997, the Company's foreign
currency translation adjustments increased (decreased) stockholders' equity by
($65,000), ($15,000) and ($174,000) respectively.
During the years ended May 31, 1999, 1998 and 1997, the Company accreted
its preferred stock by $250,000, $420,000 and $327,000, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
In January 1999 the Company reacquired a parcel of land that is adjacent to
the Lockformer subsidiary. The land was previously sold in fiscal year 1997 to a
director of the Company for $1.0 million and was reacquired for $1,154,000. The
original Real Estate Sales Contract Agreement contained an environmental
indemnification clause to allow for the Company to reacquire the land in certain
circumstances. A remediation plan, which is being funded by proceeds of a
settlement with a third party, is currently being implemented. The Company plans
to market the land after the remediation has been satisfactorily completed.
F-24
<PAGE> 34
CORPORATE INFORMATION
BOARD OF DIRECTORS
<TABLE>
<S> <C>
RAYMOND H. BLAKEMAN E. KEITH MOORE
Met-Coil Systems Corporation President, Hurco International Inc., a
subsidiary of Hurco Companies, Inc.
JAMES D. HEITT
President and Chief Operating Officer, GARY M. NEAL
Met-Coil Systems Corporation President and Chief Executive Officer,
Watlow Electric Manufacturing Co.
ROY J. CARVER, JR.
Chairman, Carver Pump Co. DR. MICHAEL J. NONNENMANN
President, Michael J. Nonnenmann
DDS, MS, LTD Orthodontic
EXECUTIVE OFFICERS
RAYMOND H. BLAKEMAN JOHN J. TOBEN
Chairman of the Board Vice President International
JAMES D. HEITT CARROLL J. REASONER
President and Chief Operating Officer Secretary
RANDALL J. STODOLA TAMMY A. HUBACEK
Vice President and Corporate Controller Treasurer and Assistant Secretary
</TABLE>
PRICE RANGE OF COMMON SHARES:
Met-Coil's common stock is quoted on the NASDAQ Small Cap Market System.
The range of high and low bid prices for the common stock, as reported by the
Dow Jones Historical Stock Quote Reporter Service, are shown below. Prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES
HIGH LOW
<S> <C> <C>
FISCAL 1999
Fourth Quarter ............... $ 5.38 $ 2.75
Third Quarter ............... 5.50 3.56
Second Quarter ............... 5.75 3.63
First Quarter ............... 4.00 3.25
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
</TABLE>
As of August 17, 1998, there were approximately 1,500 stockholders of
record of Met-Coil Common Stock, par value $0.01 per share, excluding
approximately 236 employees with vested rights in the Company's ESOP (some of
whom otherwise hold shares in the Company).
See Note 4 to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations for
discussions regarding dividend restrictions.
F-25
<PAGE> 35
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of Met-Coil Systems Corporation shareholders will be held at
10:00 a.m. Tuesday, October 6, 1999 at the Crowne Plaza in Cedar Rapids, Iowa.
Proxy materials and a formal notice of the meeting will be sent to shareholders
beforehand.
STOCK EXCHANGE/SYMBOL
Met-Coil's stock is traded on the NASDAQ Small Cap Market System under the
symbol METS.
WORLD WIDE WEB ADDRESS - http://www.metcoil.com
FORM 10-K REPORT
Copies of Met-Coil's Form 10-K report, as filed with the Securities and Exchange
Commission, are available to shareholders without charge upon
written request to:
Investor Relations
Met-Coil Systems Corporation
5486 6th Street SW
Cedar Rapids, IA 52404
GENERAL COUNSEL
Shuttleworth & Ingersoll
Cedar Rapids, IA
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP
Cedar Rapids, IA
TRANSFER AGENT AND REGISTRAR
Harris Trust & Savings Bank
311 W. Monroe Street
P.O. Box 755
Chicago, IL 60690
F-26
<PAGE> 36
INDEX TO EXHIBITS
FORM 10-K FOR YEAR ENDED MAY 31, 1999
Exhibit No. Description
- ----------- -----------
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, 1988--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 12, 1998, between The Lockformer
Company and District Lodge No. 8, International Association of
Machinists and Aerospace Workers. (2)
10.8 Agreement, dated June 1, 1998, between Iowa Precision
Industries, Inc. and Local Union 263, Sheet Metal Workers
International Association. (2)
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)
10.39 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).
*10.43 Loan and Security Agreement among Met-Coil Systems Corporation,
Iowa Precision Industries, Inc., The Lockformer Company and
American National Bank and Trust Company of Chicago.
*10.44 Met-Coil Systems 1999 Non-Employee Directors Stock Purchase
Plan.
<PAGE> 37
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule
99 Press Release dated August 16, 1999
(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, 1999.
(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.
* Exhibit filed with this Form 10-K but not included herein.
Available upon request.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF MET-COIL SYSTEMS CORPORATION
AS OF MAY 31, 1999
NAME STATE OF INCORPORATION
- --------------------------------------------------------------------------------
Iowa Precision Industries, Inc. Delaware
The Lockformer Company Illinois
Fen-Pro Inc. Illinois (1)
Met-Coil - Texas Texas (2)
All Subsidiaries do business under their own names or under the name of Met-Coil
Systems Corporation.
(1) F/K/A Roper Whitney Company, F/K/A Met-Coil-RWC, Inc., F/K/A Fenestra, Inc.
(2) 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
19, 1999, appearing in this Annual Report on Form 10-K of Met-Coil Systems
Corporation for the years ended May 31, 1999 and 1998.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
July 19, 1999
<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, 1999.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
August 18, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-START> JUN-01-1999
<PERIOD-END> MAY-31-1999
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0
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<SALES> 45,756
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<PAGE> 1
EXHIBIT 99
IMMEDIATELY TAMMY HUBACEK
MET-COIL SYSTEMS CORPORATION REPORTS:
- NET INCOME OF $3.2 MILLION
- NASDAQ SMALL CAP MARKET INCLUSION
- REFINANCE ARRANGEMENT WITH NEW LENDER
CEDAR RAPIDS, IA - August 23, 1999 - Met-Coil Systems Corporation (METS), a
supplier of advanced sheet metal forming equipment, fabricating equipment and
glass processing technologies for the global market, announces net income of
$3.2 million for fiscal year ended May 31, 1999.
"Order entry has been solid for the entire year, and continues to be
strong", reports James D. Heitt, President and Chief Operating Officer of
Met-Coil. "Over the past year our steel service center, custom fabrication lines
and special rollformer markets have taken on increased importance. Our new
product introductions have expanded our sales to a broader base of industries."
In July 1999, the Company refinanced its long-term debt with American
National Bank and Trust Company of Chicago, a subsidiary of Bank One, which
decreased interest rates on bank debt by approximately three percent. The
proceeds were used to retire senior notes, a revolving line of credit and the
remainder of a settlement agreement obligation from 1992. The Company exercised
its right to prepay the settlement agreement obligation. "Our new financing is a
very positive step toward reducing the Company's overall debt costs, improving
cash flow on an annual basis and allowing for greater financial and operating
flexibility", reports Mr. Heitt.
In August 1999, the Company was notified that its application for
listing on the NASDAQ SmallCap Market has been approved and it is now traded on
that market under the trading symbol METS.
FOURTH QUARTER RESULTS AND TWELVE-MONTH PERFORMANCE
Net revenues of $45.3 million for fiscal 1999 compares favorably to
$44.8 million for fiscal 1998. Last year's revenues included approximately $3.0
million of revenues from a one-time surge of sales when a previous competitor
discontinued selling plasma cutting machines. This year, the Company improved
market share on other product lines to increase revenues above the 1998 level.
Fourth quarter revenues for fiscal 1999 were $13.0 million compared to $10.9
million a year ago.
Operating income for the year increased to $4.6 million from $3.7
million in fiscal 1998. This increase was due to improved margins and lower
operating costs. Operating income for the fourth quarter of fiscal 1999 was $1.5
million compared to $842,000 in the fourth quarter of fiscal 1998.
Net income for fiscal 1999 was $3.2 million, or $.74 diluted earnings
per share, which included income before tax of $2.2 million plus $1.0 million of
income tax credits. Net income for fiscal 1999 also included a one-time expense
of $523,000 during the fourth quarter to reflect a change in the timing of
payments under a 1992 settlement obligation, which is included in other expense.
This compares favorably with 1998 net income of $3.0 million or $.69 diluted
earnings per share, which included income before tax of $1.9 million plus $1.1
million of income tax credits.
Due to the 1999 fourth quarter one-time expense of $523,000 and the
1998 fourth quarter income tax credits of $1.1 million, the Company's 1999
fourth quarter net income was $486,000 or $.11 diluted earnings per share
compared to $1.7 million, or .48 diluted earnings per share in the fourth
quarter of fiscal 1998. (See Table to Follow.)
Order entry remains strong and at July 31, 1999 the Company had order
backlog of $21.2 million, compared to $19.8 million at July 31, 1998.
Met-Coil is headquartered in Cedar Rapids, Iowa. Its operating units
include Iowa Precision Industries, Inc. also in Cedar Rapids and The Lockformer
Company in Lisle, Illinois. The Company markets its machinery and metal
fabrication systems primarily through a worldwide distributor network.
# # #
Table to Follow
<PAGE> 2
MET-COIL SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
May 31, May 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net Revenues $ 12,972 $ 10,880 $ 45,306 $ 44,811
=========== =========== =========== ===========
Operating Income 1,545 842 4,569 3,683
Interest expense, net (527) (312) (1,329) (1,516)
Other income (expense), net (732) 45 (1,025) (316)
----------- ----------- ----------- -----------
Income before taxes 286 575 2,215 1,851
Income tax credits 200 1,129 1,010 1,129
----------- ----------- ----------- -----------
Net income 486 1,704 3,225 2,980
Preferred stock dividends and accretion (109) (160) (464) (637)
----------- ----------- ----------- -----------
Net income applicable to common stock $ 377 $ 1,544 $ 2,761 $ 2,343
=========== =========== =========== ===========
Diluted Earnings per common share $ 0.11 $ 0.48 $ 0.74 $ 0.69
=========== =========== =========== ===========
</TABLE>
