1 PAGE 1 OF 16 INDEX TO EXHIBITS - PAGE 14 OF 16 ----- ----- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 29, 1996 ---------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ---------------- Commission file number 0-14057 --------- MET-COIL SYSTEMS CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 42-1027215 - --------------------------------------------- --------------------- (State or Other Jurisdiction of Incorporation) (I.R.S. Employer No.) 5486 SIXTH STREET SW, CEDAR RAPIDS, IOWA 52404 - --------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (319) 363-6566 NOT APPLICABLE ---------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) 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 ------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No -------- --------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date 3,118,294 ----------- 2 Page 2 of 16 MET-COIL SYSTEMS CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS Consolidated condensed balance sheets, February 29, 1996 (unaudited) and May 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated condensed statements of operations, three months and nine months ended February 29, 1996 and February 28, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated condensed statements of cash flows, nine months ended February 29, 1996 and February 28, 1995 (unaudited) . . . . . . . . . . . . . . . . . . 5 Notes to consolidated financial statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Exhibit 11 - Computation of income (loss) per common and common equivalent shares. . . . . . . . . . . . 15 Exhibit 27 - Financial data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3 Page 3 of 16 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MET-COIL SYSTEMS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share data) February 29, May 31, 1996 1995* (Unaudited) - -------------------------------------------------------------------------------------------- Current assets Cash $ 839 $ 159 Cash, restricted for debt repayment 20 750 Trade receivables, net 5,101 8,436 Notes and other receivables 1,696 968 Inventories 11,315 13,265 Prepaid expenses 716 1,413 - -------------------------------------------------------------------------------------------- Total current assets 19,687 24,991 Property and equipment, net 6,180 7,953 Cash, restricted for debt repayment --- 236 Investments and other assets 2,321 2,471 Intangibles, net 2,585 3,084 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 30,773 $ 38,735 ============================================================================================ Current liabilities Notes payable to banks and current maturities of long-term debt $ 17,297 $ 18,445 Accounts payable and accrued liabilities 5,883 9,449 Customer deposits and progress billings 2,080 2,367 - -------------------------------------------------------------------------------------------- Total current liabilities 25,260 30,261 Long-term debt --- 3,838 Other 493 783 Preferred stock, convertible and redeemable at $13 per share 3,646 3,457 Stockholders' Equity: Common stock, $.01 par value, authorized 10,000,000 shares; 1996 issued 3,146,371; 1995 issued 2,932,573 31 29 Additional paid-in capital 16,204 15,809 Retained earnings (deficit) (15,021) (15,570) Foreign currency translation 289 257 Common stock in treasury, at cost, 28,077 shares (129) (129) - -------------------------------------------------------------------------------------------- Net equity 1,374 396 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,773 $ 38,735 ============================================================================================ *Condensed from audited financial statements See notes to consolidated financial statements 4 Page 4 of 16 MET-COIL SYSTEMS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data) Three Months Ended Nine Months Ended Feb. 29, Feb. 28, Feb. 29, Feb. 28, 1996 1995 1996 1995 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------ Net revenues $11,010 $ 10,863 $31,825 $ 31,370 Cost of goods sold 8,578 8,332 25,320 23,562 Operating Expenses 1,759 2,340 6,120 7,067 Gain on business sold 2,148 --- 2,148 --- Interest expense, net 655 631 2,046 1,823 Other (income) expense, net 90 (2) 130 (90) - ------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 2,076 (438) 357 (992) Income taxes 300 --- 300 --- - ------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 2,376 $ (438) $ 657 $ (992) Preferred stock dividends 54 28 162 76 - ------------------------------------------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 2,322 $ (466) $ 495 $ (1,068) ================================================================================================================== Weighted average common and common equivalent shares 3,058 2,897 3,011 2,855 ================================================================================================================== Net income (loss) per common and common equivalent share $ 0.76 $ (0.16) $ 0.16 $ (0.37) ================================================================================================================== 5 Page 5 of 16 MET-COIL SYSTEMS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine Months Ended February 29, 1996 1995 (Restated) - -------------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 657 $ (992) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation 1,193 1,241 Amortization 499 330 Accretion of discount on debt and preferred stock 517 427 Undistributed (earnings) loss of affiliate 7 (128) Gain on sale of business (2,148) --- - -------------------------------------------------------------------------------------------------------------------------- 725 878 Changes in assets and liabilities (net of sale of business): Trade receivables 2,579 (1,868) Notes and other receivables (133) (291) Inventories (280) (1,760) Accounts payable and accrued liabilities (2,385) 1,083 Customer deposits and progress billings 375 295 Prepaid expenses and other 682 (917) - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 1,563 (2,580) - -------------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment, net (141) (584) Other, net (60) 516 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (201) (68) - -------------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES Net repayments under revolving credit agreements (977) 410 Repayments of long-term debt (1,337) (1,780) Use of restricted cash for debt repayment 1,235 750 Reduction in Employee Stock Ownership Plan debt guarantee --- 167 Dividends on preferred stock --- (53) Issuance of common stock 397 356 Issuance of preferred stock --- 1,828 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities (682) 1,678 - -------------------------------------------------------------------------------------------------------------------------- CASH Increase (decrease) 680 (970) Beginning balance 159 1,304 - -------------------------------------------------------------------------------------------------------------------------- Ending balance $ 839 $ 334 ========================================================================================================================== See notes to consolidated financial statements 6 Page 6 of 16 MET-COIL SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. PRESENTATION OF FINANCIAL INFORMATION The condensed unaudited consolidated financial statements have been prepared by the Company in accordance with the instructions for Securities and Exchange Commission's Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. The condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany items and transactions have been eliminated in the consolidation. In the preparation of the unaudited amounts, all adjustments (consisting solely of normal recurring adjustments) have been made which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. It is suggested that the condensed unaudited consolidated financial statements contained herein be read in conjunction with the consolidated statements and notes included in the Company's Annual Report on Form 10-K for the year ended May 31, 1995. NOTE 2. PRIOR PERIOD ADJUSTMENT The Company has restated its previously issued fiscal 1994 financial statements and its previously issued fiscal 1995 quarterly financial statements to increase cost of goods sold and decrease work-in- process inventory at May 31, 1994 and at February 28, 1995, as a result of improperly relieving inventory for the cost of items shipped to customers. In addition, the second quarter of fiscal 1995 reflected an adjustment to increase a reserve for an environmental matter that had previously been reduced. These adjustments reduced previously reported February 28, 1995 retained earnings by $1,958,000 and reduced previously reported income for the three month and nine month periods ended February 28, 1995 by $459,000 or $.18 per common share and $1,380,000 or $.51 per common share respectively. NOTE 3. INVENTORIES The composition of the inventories, using the FIFO method, which ap- proximates replacement cost, is as follows: (in thousands) February 29, May 31, 1996 1995 ------------- ----------- Raw materials & parts ..... $7,412 $9,840 Work in process ........... 2,753 2,507 Finished goods ............ 670 827 ------- ------- $10,835 $13,174 Increase to LIFO basis .... 480 91 ------- ------- $11,315 $13,265 ======= ======= 7 Page 7 of 16 NOTE 4. INVESTMENT IN AFFILIATE The Company is accounting for its investment in Met-Coil Ltd. (50% owned) by the equity method of accounting. Selected financial information of the investment in affiliate is as follows (in thousands): Three Months Ended Nine Months Ended Feb. 29 Feb. 28 Feb. 29 Feb. 28 1996 1995 1996 1995 ---------------------- -------------------- Net revenues ...................... $ 2,007 $ 2,795 $ 7,530 $ 5,403 Gross profit ...................... 544 954 1,907 1,946 Operating income (loss) .......... (124) 267 (191) 525 Net income ........................ (16) 136 (17) 256 ========= ========= ========= ======== Income from equity investments, included in net revenues ... $ (8) $ 68 $ (7) $ 128 ========= ========= ========= ======== NOTE 5. DEBT Revolving lines of credit: At May 31, 1995 the Company had revolving credit agreements with two banks under which it could borrow up to $2,000,000 from each bank in current notes payable. Borrowings, which can be utilized in the form of a letter of credit facility, are limited pursuant to a borrowing base formula (primarily a certain percentage of eligible trade receivables), bear interest at the banks' prime rate plus 1.5%, require compensating balances of 5% of the committed revolving lines of credit and require the payment of certain fees. The credit agreements originally expired on September 30, 1995. As of May 31, 1995 and February 29, 1996, the Company was not in compliance with various debt covenants of the revolving lines of credit. The Company has been obtaining monthly extensions from the banks and currently the credit agreements expire on April 17, 1996. In connection with the extensions each bank has reduced its lending availability to the Company to $1,050,000. The Company has borrowings of $2,039,000 under these revolving credit agreements at February 29, 1996. Senior debt: The Company has $9,234,000 of senior notes with two insurance companies. Interest is at 11% payable quarterly. The notes are due in annual payments of $1,000,000 in October, each year with the remaining principal due in October, 2001. As of May 31, 1995 and February 29, 1996, the Company was not in compliance with various covenants of the senior notes. Since waivers of these covenants have not been obtained, the total amount of the senior notes have been classified as current. For additional information concerning the Company's loan agreements and accompanying terms and restrictions see Note 5 to Financial Statements in the Company's Annual Report on Form 10-K for the year ended May 31, 1995 herein incorporated by reference thereto. 8 Page 8 of 16 NOTE 6. 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 any time 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 accumulated but unpaid dividends. The Company is increasing the carrying amount of the preferred stock, using the interest method, so that the carrying amount will equal the redemption amount of $4,706,000 at December 31, 1998. NOTE 7. LITIGATION SETTLEMENT On January 27, 1996 a payment of $675,000 was due to Construction Technology Inc. ("CTI"). This payment was not made and thus the total amount due under the settlement agreement ($4.4 million) has been classified as current. For further information concerning the 1992 litigation settlement see Note 12 to Financial Statements in the Company's Annual Report on Form 10-K for the year ended May 31, 1995 herein incorporated by reference thereto. NOTE 8. SALE OF ROWE MACHINERY On February 5, 1996, the Company sold certain assets related to two product lines manufactured at the Rowe facility to Mestex, Inc. The sale included the "Rowe" name the technical know how to produce the "Press Feed" and "Cut-to-length" product lines and certain working capital accounts related to these product lines. The Company received $3,000,000 in cash at closing and a note receivable for $600,000. The Company recognized a gain from this transaction of $2,148,000 during the quarter ended February 29, 1996. NOTE 9. SUPPLEMENTAL CASH FLOW DATA Cash paid for Interest ....................... $ 1,498 $ 1,423 ========= ========= Income tax refunds ............................ $ --- $ 187 ========= ========= 9 Page 9 of 16 Supplemental schedule of non-cash investing and financing activities: During the third quarter the Company sold certain assets and liabilities of Rowe for cash (to reduce debt) and a note receivable. The amounts involved were as follows: (Assets sold) liabilities assumed by buyer: Accounts receivable ........................................ (761) Inventory .................................................. (2,230) Property, plant and equipment, net ......................... (236) Other assets ............................................... (16) Accounts Payable ........................................... 1,080 Accrued liabilities ........................................ 101 Customer deposits .......................................... 662 Expenses incurred ................................................... (52) Debt reduced ........................................................ 3,000 Note receivable ..................................................... 600 ------ Net gain on sale ................................... $2,148 ====== 10 Page 10 of 16 MET-COIL SYSTEMS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THIRD QUARTER AND NINE MONTH RESULTS OF OPERATIONS Revenues of $11.0 million for the third quarter increased 1% from $10.9 million in the third quarter of fiscal year 1995. The 1996 third quarter margin of 22% was down slightly from the 1995 third quarter margin. Third quarter 1996 operating expenses of $1.8 million decreased from the prior year third quarter of $2.3 million reflecting the Company's effort to trim costs and eliminate duplicity in operations. The increase in interest expense from the prior third quarter reflects the accretion of interest on preferred stock issued in fiscal 1995. The third quarter 1996 net income of $2,376,000 or $0.76 per common share increased significantly from the 1995 third quarter net loss of $438,000 or $0.16 loss per common share due primarily to a gain recognized on the sale of two product lines at Rowe as well as a reduction in operating expenses. For the first three quarters of fiscal 1996 and 1995 reported revenues were $31.8 million and $31.4 million respectively. The 1996 year to date margin of 20% was down from the 1995 year to date margin of 25% due primarily to lower margins recognized by the Lockformer subsidiary during the first quarter of fiscal 1996 as a result of low margin orders on hand at the end of the prior fiscal year. These low margin orders were due to the pricing formula for large distributors implemented in the prior year which decreased margins and which went undetected until the significant 1995 year end inventory write-down. Operating expenses decreased by almost $950,000 from the prior year due to cost cutting measures implemented, and interest expense increased due to preferred stock interest accretion. As discussed in Note 2 to the consolidated financial statements, the financial results for the three month and nine month periods ended February 28, 1995 have been restated. LIQUIDITY AND CAPITAL RESOURCES An operating working capital deficit of $5.6 million at February 29, 1996 was caused by the classification of $9.2 million of senior notes and $4.4 million of litigation settlement as current (see discussion below) that would have been reflected as long-term had the Company been in compliance with loan covenants and made the $675,000 payment due January 27, 1996. The operating working capital deficit was $5.3 million at May 31, 1995. The Company generated cash from operating activities of $1.6 million for the first nine months of 1996 compared to a use of $2.6 million for the corresponding period last year. Backlog was $13.4 million at February 29, 1996, an increase of 4% over the February 28, 1995 level of $13 million for ongoing operations. As a result of the net loss for the year ended May 31, 1995, the Company was in violation of various covenants of the revolving credit agreements and senior notes. Noncompliance with loan covenants permit the lenders to declare the Company in default of its loan agreements and demand repayment of the loans in full. The revolving credit agreements originally expired on September 30, 1995. While the revolving credit agreements have been amended and extended to April 17, 1996 the various covenant violations have not been waived therefore $9.2 million of senior notes have been classified as current at February 29, 1996. 11 Page 11 of 16 Additionally, the Company did not make the scheduled January 27, 1996 payment of $675,000 to Construction Technologies, Inc. ("CTI") and therefore the entire litigation settlement of $4.4 million is classified as current at February 29, 1996. Currently, the Company is negotiating an agreement with its debt holders to restructure the revolving lines of credit, senior debt and litigation settlement. Management believes this restructuring will take place in the fourth quarter. Assuming the current revolving credit agreements are either replaced or further extended or cash flows from on hand balances and from operations are expected to meet the Company's operating and debt service requirements through the remainder of the current fiscal year. In the event the revolving credit agreements are not extended or replaced, the Company would need to raise additional capital in order to continue to meet operating and debt service requirements. There are no assurances that the Company would be able to raise additional capital. If the Company is unable to extend or replace the revolving credit agreement or raise additional capital, the Company would not be able to continue as a going concern without effecting a reorganization or restructuring. Dividends of 6% were not paid on the preferred stock when scheduled to be paid on March 31, 1996 due to restrictions as a result of the loan covenant violations, however, it is the Company's intent to pay these dividends when either compliance is achieved or new loan agreements are obtained. The Company continues to omit quarterly common stock dividends due to loan covenants, which prohibit the payment of common stock dividends. It is uncertain when, and if, the Company will pay common stock dividends in the future. 12 Page 12 of 16 MET-COIL SYSTEMS CORPORATION PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On March 26, 1996, the loan agreements with the Company's lenders were amended as described in Note 5 to the Financial Statements included in Part 1, Item 1 of this Quarterly Report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At February 29, 1996, the Company was in violation of certain financial covenants contained in its loan agreements. Since waivers of these violations have not been obtained, $9,234,000 of Senior notes have been classified as current in the Financial Statements in Part 1, Item 1 of this Quarterly Report. Additionally a payment due January 27, 1996 for $675,000 was not made to CTI under a litigation settlement agreement. The total amount due to CTI, $4,400,000, has also been classified as current. For further information see "Liquidity and Capital Resources" in Part 1, Item 2 of this Quarterly Report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS -- See Index to Exhibits included elsewhere herein. (b) FORM 8-K - A report on Form 8-K was filed on February 5, 1996 regarding the sale of certain assets. 13 Page 13 of 16 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 15 , 1996 Met-Coil Systems Corporation ---- Joseph H. Ceryanec Vice President Finance, Chief Financial Officer and Chief Accounting Officer Joseph H. Ceryanec/s/ ----------------------------- 14 Page 14 of 16 MET-COIL SYSTEMS CORPORATION INDEX TO EXHIBITS Page EXHIBIT 11 Computation of Income (Loss) Per Common and Common Equivalent Shares . . . . . . . . . . . . . . . . . . 15 EXHIBIT 27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . 16