U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 00-22690
CONSOLIDATED STAINLESS, INC.
State of Incorporation: Delaware
IRS Employer Identification Number: 59-1669166
2170 West State Road 434; Suite 330
Longwood, Florida 32779
(407) 682-4999
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
As of May 10, 1996, Consolidated Stainless, Inc. had outstanding
4,305,881 shares of Common Stock, par value $.01 per share.
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TABLE OF CONTENTS
ITEM PAGE (S)
Part I
Financial Information
1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................... 1 - 2
Consolidated Statements of Income............................. 3
Consolidated Statements of Cash Flows......................... 4
Notes to Consolidated Financial Statements.................... 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 6 - 11
Part II
Other Information
6. EXHIBITS AND REPORTS ON FORM 8-K ........................... 12
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PART I
Financial Information
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STAINLESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
03/31/96
(Unaudited) 12/31/95
===================================
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 459,914 $ 94,319
Accounts Receivable:
Trade, less allowance for possible losses
of $ 73,615 and $100,000 7,871,021 5,584,943
Other 61,201 55,202
Insurance proceeds receivable 713,366 804,366
Due from stockholders 195,913 193,806
Inventories 25,549,331 22,281,240
Refundable income taxes 151,059 151,059
Prepaid expenses 288,333 300,681
Deferred income taxes 235,500 235,500
-----------------------------------
TOTAL CURRENT ASSETS 35,525,638 29,701,116
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization 14,443,532 11,526,318
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization $ 15,045 and $33,271 189,303 85,938
Deposits on property and equipment 581,216 599,127
Goodwill, less accumulated amortization 3,282,299 0
Other 308,964 350,520
-----------------------------------
TOTAL OTHER ASSETS 4,361,782 1,035,585
-----------------------------------
TOTAL ASSETS $54,330,952 $42,263,019
===================================
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See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
03/31/96
(Unaudited) 12/31/95
===================================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $7,051,720 $6,346,754
Book overdrafts 759,450 3,181,657
Accrued expenses:
Payroll and related taxes 608,452 494,509
Interest 159,202 270,765
Income taxes 194,302 194,302
Other 325,681 28,837
Current maturities of long-term debt 1,145,992 481,550
Current portion of capital lease obligations 771,905 778,631
-----------------------------------
TOTAL CURRENT LIABILITIES 11,016,704 11,777,005
LONG-TERM DEBT, less current maturities 28,872,689 17,097,544
LONG-TERM CAPITAL LEASE OBLIGATIONS,
less current portion 1,883,649 2,293,192
DEFERRED RENT 78,238 0
DEFERRED INCOME TAXES 909,720 570,800
-----------------------------------
TOTAL LIABILITIES 42,761,000 31,738,541
COMMITMENTS AND CONTIGENCIES 0 0
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par - shares authorized
1,000,000; none issued 0 0
Common stock $.01 par - shares authorized
15,000,000; issued and outstanding 4,302,881
and 4,212,181 43,029 42,122
Additional paid-in capital 6,986,295 6,300,708
Retained earnings 4,540,628 4,181,648
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,569,952 10,524,478
===================================
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $54,330,952 $42,263,019
===================================
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See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
03/31/96 03/31/95
(UNAUDITED)
================================
SALES $14,427,228 $11,763,988
COST OF SALES 11,263,155 8,219,063
---------------------------------
Gross profit 3,164,073 3,544,925
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,865,386 1,563,859
---------------------------------
Income from operations 1,298,687 1,981,066
OTHER INCOME (EXPENSES):
Interest (740,240) (314,294)
Other 39,853 32,205
---------------------------------
(700,387) (282,089)
---------------------------------
Income before taxes on income 598,300 1,698,977
TAXES ON INCOME 239,320 679,590
=================================
NET INCOME $358,980 $1,019,387
=================================
EARNINGS PER COMMON SHARE:
Primary $ 0.08 $ 0.23
Fully diluted $ 0.08 $ 0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND SHARE EQUIVALENTS OUTSTANDING:
Primary 4,718,752 4,344,132
Fully diluted 4,734,508 4,357,326
See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
03/31/96 03/31/95
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $358,980 $1,019,387
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 329,892 218,274
Loss on disposal of property and equipment 0 113
Deferred income taxes 133,920 218,652
Cash provided by (used for):
Accounts receivable (639,579) (2,442,934)
Insurance proceeds receivable 91,000 0
Due from stockholders (2,107) (18,407)
Inventories (37,294) 530,785
Refundable income taxes 0 466,165
Prepaid expenses 72,425 (66,196)
Accounts payable (1,091,162) (1,392,258)
Due to stockholders 0 (45,000)
Deferred rent 78,238 0
Accruals 9,510 68,729
----------------------------
Net cash used for operating activities (696,177) (1,442,690)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,391,791) (259,434)
Proceeds from the sale of property and equipment 0 6,000
Acquisition of Flow Components (4,093,101) 0
Increase in other assets (158,539) (9,158)
----------------------------
Net cash used for investing activities (5,643,431) (262,592)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in book overdrafts (2,422,207) 0
Net proceeds under revolving lines of credit 3,005,688 0
Net proceeds of long-term debt 8,847,211 1,940,307
Repayment of capital lease obligations (848,671) (121,991)
Deferred financing costs (116,458) (20,375)
Proceeds from exercise of stock options 91,494 0
Payment of notes payable (1,851,854) 0
Repayments of notes payable to stockholder 0 (6,346)
----------------------------
Net cash provided by financing activities 6,705,203 1,791,595
----------------------------
Net increase in cash 365,595 86,313
CASH, beginning of period 94,319 18,456
============================
CASH, end of period $459,914 $104,769
============================
[/TABLE]
See the accompanying notes to the financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q, and do not include
all of the information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-KSB for
the year ended December 31, 1995. The accompanying consolidated financial
statements have not been examined by an independent accountant in accordance
with generally accepted auditing standards, but in the opinion of management,
such consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments and accruals, to fairly report the Company's
financial position and consolidated results of operations. The consolidated
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year.
In May 1995, the Company announced a 3 for 2 stock split for shareholders of
record on May 31, 1995, payable on June 2, 1995. The earnings per share
calculations and all share information included in these financial statements
have been retroactively adjusted to give effect to the stock split.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred long-term debt and capital lease obligations of $409,983
and $326,638 in connection with the purchase of property and equipment during
the three months ended March 31, 1996 and 1995, respectively.
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Consolidated Stainless, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales for the quarter ended March 31, 1996 were $14,427,228, reflecting an
increase of 22.6% from the comparable period in 1995. This increase is primarily
a result of the acquisition of Flow Components, Inc. (a Houston-based
manufacturer of stainless steel forged flanges) which became effective as of
January 1, 1996.
Gross profit as a percentage of sales for the first quarter of 1996 decreased to
21.9%, as compared to 30.1% for the first quarter of 1995. This resulted from a
period of declining stainless steel prices, whereas the corresponding period in
1995 was a period of increasing stainless steel prices. As stainless steel
prices decline, the Company's profit margin narrows as relatively higher cost
inventory is sold. The opposite is true as stainless steel prices increase,
which occurred in the first quarter of 1995.
Selling, general and administrative expenses as a percentage of sales remained
relatively consistent in the first quarter of 1996 with the comparable period in
1995 as it declined to 12.9% from 13.3%, respectively. Selling, general and
administrative expenses increased 19.3% in the first three months of 1996, as
compared with the first three months of 1995 due to general business growth.
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Interest expense as a percentage of sales increased to 5.1% for the first
quarter of 1996 as compared with 2.7% for the first quarter in 1995. This was
primarily due to an increase in the level of indebtedness resulting from the
financing of the Flow Components' acquisition, and capital improvement projects
such as the buttweld fitting operation, the ornamental tubing operation and
expansion of the Auburndale manufacturing facility.
Net income decreased to $358,980 for the first quarter of 1996, as compared with
$1,019,387 generated during the first quarter of 1995. This decrease is largely
attributable to narrower gross profit margins for the first quarter of 1996 as
compared to the comparable period in 1995.
Liquidity and Capital Resources
- -------------------------------
Pursuant to the terms of a Stock Purchase Agreement, dated as of September 30,
1995, as subsequently amended (the "Purchase Agreement"), by and among the
Company, as Buyer, and James Read Boles, James T. Callier, Jr., William H.
Blaney, Jr. and Thomas Reinhart (collectively, the "Stockholders"), on January
23, 1996 (to be effective January 1, 1996) all of the outstanding shares of
capital stock of Flow Components, Inc. ("Flow") were sold to the Company.
Messrs. Boles, Callier, Blaney, and Reinhart were the only holders of capital
stock Flow prior to consummation of the Purchase Agreement. Flow Components is a
manufacturer of stainless steel forged flanges, which are used as pipe
connectors and are distributed to users of stainless steel pipe.
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<PAGE>
The Purchase Price for the Flow Components capital stock was $3,650,000 in cash
paid to the Stockholders at closing, and the distribution of 70,000 unregistered
shares of Company common stock to one of the Stockholders, Mr. Boles, (who was
the sole officer and director of Flow Components prior to the closing), certain
of which shares he assigned to certain employees of Flow Components at the
closing (the "Purchase Price"). Simultaneous with the closing, certain
obligations of Flow to the Stockholders, to a corporation affiliated with the
Stockholders, or on behalf of such affiliated corporation were paid by the
Company with the proceeds of a financing consummated by the Company in order to
provide the funds necessary to consummate the Purchase Agreement. At the closing
of the Purchase Agreement, in addition to the Purchase Price, the Company paid
an aggregate of approximately $2,900,000 to repay certain outstanding Flow
Components indebtedness and to purchase certain assets of a corporation
affiliated with the Stockholders ("Scarab Trading Corporation"). On April 22,
1996, the Flow Components subsidiary along with the Performance Metals
subsidiary were merged into the Company.
On January 22, 1996, the Company and its subsidiaries completed several
financing transactions, both to refinance existing revolving credit and leasing
line financings, as well as to provide specific financing for the acquisition of
Flow Components on January 23, 1996. With respect to such financings, the
Company entered into a Revolving Line of Credit and Term Loan Agreement, dated
January 22, 1996 (the "Loan Agreement") among the Company, as borrower, and
SunTrust Bank, Central Florida, National
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Association ("SunTrust"), and SouthTrust Bank of Alabama, National Association
("SouthTrust"), as lenders (collectively, the "Lenders"). Pursuant to the Loan
Agreement, the Company is able to borrow up to $17,000,000 as a revolving credit
line and $4,500,000 on a term loan basis from the Lenders. The borrowing base
for all loans under the Loan Agreement is 85% of qualified accounts receivable
and 65% of eligible inventory (subject to a $15,000,000 cap on the value of
eligible inventory). Under the Loan Agreement, the maturity date for the term
loan shall be the earlier of December 31,1997, or the completion of a public
equity offering by the Company. The maturity date for borrowings under the
revolving loan is May 31, 1998. The interest rates on all borrowings under the
Loan Agreement are variable margins over either the fluctuating prime rate of
interest or the fluctuating LIBOR rate. The Loan Agreement contains certain
negative covenants to be observed by the Company, as well as certain financial
ratios which the Company must maintain.
Borrowings under the Loan Agreement are secured by all of the assets of the
Company and its subsidiaries, other than real property and specified equipment
already subject to liens in favor of other lenders.
At March 31, 1996, approximately $16.3 million was outstanding under the line of
credit owed to the Lenders with an additional $0.3 million reserved for an
outstanding letter of credit.
- 9 -
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The Company is currently negotiating to amend its revolving credit line under
the Loan Agreement by the end of May 1996, to increase its borrowing base and
increase the inventory cap.
In addition, on January 22, 1996 the Company also entered into a Loan Agreement
with SunTrust (the "Equipment Loan") pursuant to which the Company borrowed
approximately $3.9 million on a term loan basis. The proceeds of the Equipment
Loan were used to refinance specific items of equipment leased by the Company
and Flow Components and for general working capital purposes. The maturity date
of the Equipment Loan is February 1, 2001, and the loan is subject to a fixed
11.44% rate of interest. The Equipment Loan is secured by liens on specific
items of equipment owned by the Company.
Under the terms of a Master Finance Lease Agreement with SunTrust, dated as of
March 13, 1996, the Company financed the approximately $800,000 purchase price
of coil slitting machinery which is expected to be fully operational in the
third quarter of 1996.
In January 1996, the Company acquired a 78,382 square foot facility on an
approximately ten acre site located approximately 10 miles from the Auburndale
Facility, in Eaton Park, Florida. Machinery used to manufacture ornamental and
structural stainless steel tubing will be operated at this facility. The Eaton
Park facility is expected to begin production by June 1996 and become
fully-operational in the third quarter of
- 10 -
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1996. The Company financed 100% of the $750,000 purchase price of this facility
with SouthTrust Bank of Florida, N.A. The 15 year mortgage bears interest at a
fixed rate of 225 basis points in excess of the United States Treasury Note on
the date the interest rate was initially set, and is re-set every five years.
On April 24, 1996, the Company acquired a 10,000 square foot distribution
facility located in Acworth, Georgia, a suburb of Atlanta, in which it currently
conducts operations for approximately $300,000. The acquisition resulted from
the Company's exercise of its purchase option on this previously leased
property. The property was financed for $232,800 over a five year period under
the terms of a 15 year amortization with a balloon payment through SunTrust
Bank, Central Florida, National Association. The interest rate on this mortgage
is fixed at 9% per annum.
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Consolidated Stainless, Inc.
Part II: Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8 - K
The Company filed a Form 8-K and a Form 8-K/A, dated February 5, 1996 and
March 22, 1996, respectively, with respect to its acquisition of Flow Components
on January 23, 1996.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONSOLIDATED STAINLESS, INC.
----------------------------
(Registrant)
Date: May 15, 1996 By: /s/ Ronald J. Adams
---------------- ------------------------
Ronald J. Adams,
President
Chief Operating Officer
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