-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ai/pBYoTQNRha3TSr1mizRdgFXY4EBO5ygRf2yWKjckCOPmPlk7D1TQ6E1YQxJZM +a+mOxwb2ihWquX6yF+xfg== 0000909012-00-000022.txt : 20000202 0000909012-00-000022.hdr.sgml : 20000202 ACCESSION NUMBER: 0000909012-00-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 20000118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METAL ARTS CO INC CENTRAL INDEX KEY: 0000320303 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 060945588 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09998 FILM NUMBER: 508716 BUSINESS ADDRESS: STREET 1: 1 AMERICAN CENTER CITY: GENEVA STATE: NY ZIP: 14456-1188 BUSINESS PHONE: 3157892200 MAIL ADDRESS: STREET 1: 1 AMERICAN CTR CITY: GENEVA STATE: NY ZIP: 14456-1188 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended 6/30/99 or -------- ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ________ to ________ Commission file number 0-9998 ------- THE METAL ARTS COMPANY, INC. (Exact name of - -------------------------------------------------------------------------------- registrant as specified in its charter) NEW YORK 06-0945588 - -------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1 AMERICAN CENTER, GENEVA, NEW YORK 14456-1188 - ---------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (315) 789-2200 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ------------------- NONE Securities registered pursuant to Section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) 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 ----- ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $1,484,892 (4,242,551 at $.35 Per share) Note. If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this form. APPLICABLE ONLY TO REGISTRANTS 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 REGISTRANTS: Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 7,520,802 SHARES OF COMMON STOCK PAR VALUE $.01 PER SHARE Page 2 of 43 Exhibit Page Appears on Page 42 PART I ITEM 1. BUSINESS Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to financial results and plans for future business development activities, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, economic conditions, competition and other uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. GENERAL Metal Arts Company, Inc. established in 1913 ("Metal Arts" or the "Company"), has operated as a holding company. Except where specific reference is made in this Part I to the individual operations of Metal Arts or its 70 percent owned subsidiary Coating Technology, Inc., references in the Part I to the "Company" are intended to be a reference to the collective operations of Metal Arts and Coating Technology. Coating Technology engages in contract electroless nickel, aluminum anodizing, electroless nickel and gold plating of circuit boards and other surface coating and enhancement operations. Metal Arts had outstanding liabilities of $1,548,583 as of the close of Fiscal 1999. A detailed description of these liabilities is set forth in the Financial Statements and Supplementary Data annexed as Item 8 to this Form 10-K. Specific reference is made to Notes 1 and 5 of these Financial Statements for information concerning specific liabilities. The Company's proprietary specialty chemicals consist of Microsmooth(R), a patented aluminum activator solution used in conjunction with a proprietary electroless-nickel bath for plating on aluminum. Both the products and process are proprietary, rendering a smoother surface with enhanced corrosion protection, elimination of several toxic chemicals, while reducing plating and waste treatment costs. Marketing efforts to the computer memory disk and aluminum wheel markets continue now. If successful in the U.S., it is the company's intention to market the technology or license it internationally. Compliance with environmental laws and regulations has a material and on-going impact on the Company. The Company must comply and the costs are both capital and operational. It has a positive impact in that certain companies that cannot comply are at a disadvantage, operationally. It has a negative impact in that the costs of compliance affects capital resources and cash flow. During the fiscal year 1999, Coating Technology spent approximately $145,000 on various compliance requirements, including the cost of closure at its former metal finishing facility. As new technologies and methods are available to the company, additional capital and operational costs will be incurred to comply with and/or reduce on-going expenses of waste treatment. -3- THE COMPANY'S MARKETS During the past three fiscal years, substantially all of the company's sales were attributable to the operations of Coating Technology. Coating Technology provides surface coating services for various regional industries. FISCAL YEARS (ENDING JUNE 30) ---------------------------- 1999 1998 1997 ---- ---- ---- Metal Arts $ 10,000 $ 82,000 $ 44,000 Coating Technology 1,420,000 1,790,000 1,613,000 ---------- ---------- ---------- $1,430,000 $1,872,000 $1,657,000 ========== ========== ========== THE COMPANY'S PRODUCTS Metal Arts is entering the Specialty chemical business, marketing its new process for plating electroless nickel on aluminum. The process consists of Microsmooth (R), a patented activator and a proprietary high-phosphorus electroless nickel formulation, initially to manufacturers of computer hard disks and aluminum wheels. Coating Technology is engaged in contract electroless and brite nickel and aluminum anodizing operations. Coating Technology services the office products industry through large, medium and small metal fabricating companies who in turn supply subassemblies and individual component parts to major office product manufacturers such as Xerox, Kodak, IBM, Cannon and others. In addition, Coating Technology provides electroless nickel and gold plating for the circuit board industry. It also provides other surface finishes to various contract customers. MANUFACTURING OPERATIONS Metal Arts' specialty chemical mixing operations will initially be conducted with existing equipment at Coating Technology. SURFACE COATING OPERATIONS Coating Technology engages in the Surface Coatings and Enhancements business. It is a leading regional Electroless Nickel Plater, a plating technique that deposits nickel on metal without the use of an applied electrical current. The process is used to prevent corrosion, enhance smoothness and improve overall surface quality on various metals including aluminum, copper and steel. It is now a leading regional anodizer. All surface finishing operations are conducted at its facility at 800 St. Paul Street, Rochester, NY. COMPLIANCE WITH GOVERNMENTAL REGULATIONS The company believes that its present operations are in compliance with the current requirements of OSHA, EPA and all applicable local and state regulations, utilizing an up-to-date waste treatment system. -4- COMPETITION Metal Arts will be competing initially in the computer memory disk and aluminum wheel markets where established, substantially larger companies dominate. There are approximately 20 companies that sell plating chemicals to these markets. Metal Arts will compete on the basis of an improved technology that will save its potential customers material, labor and waste treatment costs. Coating Technology competes with several regional plating firms including two that are larger and several of the same or smaller size. The company competes on the basis of superior service and, in certain instances, on the basis of proprietary technology or equipment. CUSTOMERS During the fiscal year ended June 30, 1999, Coating Technology had one customer which accounted for 18 percent of its sales. INVENTORY REQUIREMENTS Coating Technology does not maintain an inventory other than its normal chemical plating and surface finishing solutions which are sourced as needed and are readily available. SOURCES OF RAW MATERIALS Metal Arts will be able to source all components for its proprietary process, readily, from multiple sources at competitive prices. The company can accommodate raw material requirements out of current working capital during the initial stages of commercialization. It will be necessary to enhance its working capital either out of cash flow or other external means if sales increase substantially. Coating Technology sources its raw materials on regular trade terms and has the working capital required to sustain current operations and continue to grow. There are no rights of return, or extended payment terms for Coating Technology, nor are any anticipated for Metal Arts. Coating Technology sources all chemicals and related supplies from local and national companies at competitive prices. EMPLOYEES The company employs one executive in its Metal Arts operations and 25 in its Coating Technology operations, none of whom are union members. ITEM 2. PROPERTIES Coating Technology has signed a ten year lease for approximately 40,000 square feet of factory and office space in a superior building initially at $2.00 per square foot with responsibility for utilities. The plant includes surface finishing machinery and equipment which the company believes are adequate to satisfy the requirements of Metal Arts' and Coating Technology's present business. -5- ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings at the present time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fiscal year ended June 30, 1999, no annual meeting was held and no shareholder votes took place. It is anticipated that the next annual meeting will take place in the next few months. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED STOCKHOLDER MATTERS The common shares of Metal Arts have been traded in the over-the-counter market since its initial public offering on January 22, 1981, and are now traded on the NASDAQ "Bulletin Board" under the symbol MTRT. The following table sets forth, for the calendar quarters indicated, the range of high and low bid quotations on the NASDAQ National Market System, as reported by the National Quotation Bureau, Inc. HIGH LOW ---- --- FISCAL YEAR ENDED JUNE 30, 1998 - ------------------------------- First Quarter (July - September 1997) 7/8 1/2 Second Quarter (October - December 1997) 9/16 1/4 Third Quarter (January - March 1998) 1/4 3/16 Fourth Quarter (April - June 1998) 1/4 3/16 FISCAL YEAR ENDED JUNE 30, 1999 - ------------------------------- First Quarter (July - September 1998) 1/4 3/16 Second Quarter (October - December 1998) 1/4 3/16 Third Quarter (January - March 1999) 1/4 3/16 Fourth Quarter (April - June 1999) 5/8 1/4 FISCAL YEAR ENDED JUNE 30, 2000 - ------------------------------- First Quarter (July - September 1999) 5/8 1/4 For a recent reported quotation for the company's common shares, see the cover page of this Form 10-K. The quotations listed above reflect inter-dealer prices, without retail markup, markdown, or commissions and may not necessarily represent actual transactions. To date, the company has not paid a dividend on its common shares. The payment of future dividends is subject to the company's earnings and financial position and such other factors, including contractual restrictions, as the Board of Directors may deem relevant and it is unlikely that dividends will be paid in the foreseeable future. -6- As of October 1, 1999, there were approximately 980 holders of record of the common shares of Metal Arts and eleven holders of record of the June 30, 1994 Debentures, which are potentially convertible into a total of 366,663 common shares of the company. In June, 1995, the Board of Directors of The Metal Arts Company, Inc. (the "Company"), voted to distribute to the Company's shareholders, pro rata, the Company's holdings of the common shares of its then subsidiary, Bastian Company, Inc. ("Bastian"). As of June, 1995, the Company held approximately 356,000 of the then outstanding 400,000 common shares of Bastian, or approximately 89% of the then issued and outstanding common shares of Bastian. Bastian has advised the Company that Bastian believes it has an aggregate of approximately 260 holders of its common shares. The Company has approximately 990 holders of its own common shares. The Company's management believes that the value of the Bastian common shares then owned by the Company, both as of the date of the decision to distribute those shares, and as of the date of this Report, was negligible both in the aggregate and on a per share basis. Bastian has advised the Company that Bastian has not filed a registration statement with the Securities and Exchange Commission to register the Bastian common shares pursuant to The Securities Exchange Act of 1934, as amended (the "1934 Act"), and has not taken any other steps to comply with federal or state securities statutes. As such, since the Company believes that such registration under the 1934 Act, and other actions under federal and state securities statutes, may be required prior to the time that the Bastian common shares are distributed to the Company's shareholders, the Company has not completed the pro rata distribution of the Bastian common shares which was declared in June 1995. Management of the Company is unable to determine when, or if Bastian will register the Bastian common shares pursuant to the 1934 Act, but will further advise the Company's shareholders at the time that any further determination is made with regard to the distribution of the Bastian common shares. At this time, management of the Company believes that all of the Company's shareholders have a right to receive their pro rata distribution of the Bastian common shares, subject, however, to the completion of the necessary 1934 Act registration being filed and becoming effective and certain other securities requirements being fulfilled. -7- ITEM 6. SELECTED FINANCIAL DATA
June 30, June 30, June 30, June 30, June 30, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Results of operations: Net sales $ 1,429,561 $ 1,871,896 $ 1,656,961 $ 1,629,538 $ 1,573,276 Net loss $ (233,134) $ (156,988) $ (126,307) $ (147,294) $ (400,722) Per share: Net loss $ (.03) $ (.02) $ (.02) $ (.02) $ (.05) Weighted average number of common shares outstanding 7,520,802 7,464,116 7,357,402 7,307,402 7,294,002 Cash dividends paid per common share - No dividends have been paid in the past June 30, June 30, June 30, June 30, June 30, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance sheet data: Total assets $ 1,286,222 $ 1,276,061 $ 1,064,636 $ 1,179,263 $ 1,202,988 Total liabilities 1,548,583 $ 1,405,749 $ 1,090,267 $ 1,128,587 $ 1,005,018 Long-term obligations 455,474 $ 433,706 $ 606,354 $ 660,168 $ 646,180 Minority interest 100,461 $ 135,901 $ 142,181 $ 129,898 $ 125,002 Working capital (819,284) $ (468,611) $ 5,627 $ 59,777 $ 172,843 Stockholders' equity (deficiency) (362,822) $ (129,688) $ (25,631) $ 50,676 $ 197,970
The following table illustrates the major components of consolidated net sales and net loss:
1999 1998 1997 ---- ---- ---- CONSOLIDATED NET SALES: Metal Arts $ 10,000 $ 82,000 $ 44,000 Coating Technology 1,420,000 1,790,000 1,613,000 ----------- ----------- ----------- $ 1,430,000 $ 1,872,000 $ 1,657,000 =========== =========== =========== CONSOLIDATED NET LOSS: Metal Arts $ (150,000) $ (143,000) $ (155,000) Coating Technology (118,000) (20,000) 41,000 Minority Interest 35,000 6,000 (12,000) ----------- ----------- ----------- $ (233,000) $ (157,000) $ (126,000) =========== =========== ===========
-8- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management Discussion and Analysis should be read in conjunction with this entire Form 10-K 1999 Annual Report. Except where specific reference is made in this Item 7 to the individual operations of Metal Arts or its 70 percent owned subsidiary, Coating Technology, references in this Item 7 to the "Company" are intended to be a reference to the joint operations of all of Metal Arts, and Coating Technology. LIQUIDITY AND CAPITAL RESOURCES PRIVATE PLACEMENT OF DEBENTURES The company sold, as of September 30, 1994, eleven debentures for a total of $275,000. The purpose of the private placement was to acquire the technology for plating electroless nickel on aluminum, complete all research and development, conduct test trials with potential customers leading up to commercialization. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY AND U.S. DEPARTMENT OF ENERGY FUNDING The company signed an agreement with the New York State Energy Research and Development Authority (NYSERDA) dated June 22, 1995 for funding of $325,000 for its new technology. This was done as a part of NYSERDA's Industrial Waste Minimization Program. The purpose of the funding was to provide money for the completion of research and development, test trials, commercial demonstrations and commercialization of the technology. To date, the company has received a total of $325,000 on this contract. On June 30, 1998, the company signed a new agreement with NYSERDA to demonstrate the use of Microsmooth(R) for hard anodizing in the amount of $55,000. To date, the Company has received at total of $50,000 on this contract. On August 12, 1998, the company signed an additional agreement with NYSERDA to demonstrate the Microsmooth(R) process on aluminum automobile wheels. This contract also includes funding from the US Department of Energy with the Aluminum Company of America (ALCOA) as a strategic partner in the effort. The funding from NYSERDA and US DOE totals $640,000. In addition, ALCOA has pledged $100,000 of in-kind material, services and cash. To date, the Company has received $88,470 from NYSERDA/DOE and $10,000 from ALCOA, on this contract. OPERATING ACTIVITIES After 9 years of steady growth, Coating Technology has shown a significant drop in sales and a drop in operating earnings. Cash flow, along with capital leases, was adequate to provide for the acquisition of capital equipment and provide the working capital necessary to run the business. Through the first quarter of fiscal year 2000, Coating Technology operated profitably with sufficient resources to sustain operations. -9- MICROSMOOTH(R) The Company initially applied for a patent on Microsmooth(R), its proprietary activator for plating electroless nickel on aluminum in March, 1994. That application was then split into three separate applications; the chemical formula; the process and; the resulting product. Subsequently, and as a result of significant chemical formula modifications, the original formula application was abandoned and a new patent application was filed in December 1997. On May 19, 1998, the United Stated Patent office issued patent number 5,753,304 covering the Microsmooth(R) formula and the Microsmooth(R) process. A trademark was issued on the name, Microsmooth(R), on June 30, 1998. On July 30, 1997 the Company entered into an exclusive license agreement with Alyn Corporation, Inc. for Alyn to use the Microsmooth(R) process on Alyn's Boralyn (R) alternate computer memory disks. To date, the Company has received no royalties under the agreement. On May 3, 1999, the Company entered into a Subcontract and Exclusive License Agreement with Alcoa, Inc., the largest aluminum company in the world. The subcontract section relates to the U.S. Department of Energy Award and the license section relates to the use of the Microsmooth(R) process for the chrome plating of certain aluminum truck and automobile wheels. If Metal Arts is successful in commercializing its new technology it will be necessary to raise additional capital. The amount of capital required will depend on how rapidly market acceptance might occur. If this does occur it could result in growth in the company's sales and earnings over the next few years. The company will seek, if commercial sales commence, to raise additional capital in the form of receivables financing, warrant conversion or other investment mechanisms to sustain operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -10- INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Independent Auditors' Report ................................................1 Consolidated Balance Sheets at June 30, 1999 and 1998 ...................2 - 3 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 ....................................4 Consolidated Statements of Changes In Stockholders' Equity (Deficiency) for the years ended June 30, 1999, 1998 and 1997 ......................................5 - 6 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 ................................7 - 8 Notes to Consolidated Financial Statements .............................9 - 19 Financial Schedules II - Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties .................................20 V - Property, Plant and Equipment ..............................21 VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment ..............................22 VII - Valuation and Qualifying Accounts and Reserves .............23 X - Supplementary Income Statement Information .................24 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. -11- INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders The Metal Arts Company, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of The Metal Arts Company, Inc. and Subsidiary as of June 30, 1999 and 1998, and the related consolidated financial statements listed in the accompanying index for each of the years in the three-year period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. As described in Notes 1 and 2 to the financial statements, the Company has elected not to consolidate its Bastian and Ocean State subsidiaries as required by generally accepted accounting principles. In our opinion, except for the effects of not consolidating its Bastian and Ocean State subsidiaries as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Metal Arts Company, Inc. and Subsidiary as of June 30, 1999 and 1998, and the results of their operations, changes in their stockholders' equity (deficiency) and their cash flows for each of the years in the three-year period ended June 30, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial schedules listed in the accompanying index are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. November 19, 1999 -12- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Consolidated Balance Sheets June 30, 1999 and 1998 ASSETS ------
1999 1998 ---- ---- CURRENT ASSETS Cash $ 17,656 $ 35,374 Accounts receivable, trade - less allowance for uncollectible accounts of $10,000 in 1999 and 1998 195,433 262,683 Due from NYSERDA, current portion 30,049 -- Due from unconsolidated subsidiary, less allowance for uncollectible amount of $100,000 in 1999 and 1998 -- -- Stock subscription receivable 7,500 7,500 Prepaid expenses and other current assets 15,787 26,974 Deferred tax asset - less valuation allowance of $9,000 in 1999 and $22,800 in 1998 7,400 35,000 ---------- ---------- 273,825 367,531 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 1,480,603 1,251,623 Less: Accumulated depreciation and amortization 713,147 576,918 ---------- ---------- 767,456 674,705 ---------- ---------- OTHER ASSETS Due from shareholder 1,554 19,734 Due from NYSERDA, long-term portion 14,108 -- Cash value of life insurance 11,034 7,893 Operating rights, net of accumulated amortization of $6,030 in 1999 and $4,690 in 1998 14,070 15,410 Debt issuance costs, net of accumulated amortization of $26,554 in 1999 and $21,243 in 1998 -- 5,311 Other assets 37,075 37,677 Deferred tax asset - less valuation allowance of $206,600 in 1999 and $130,300 in 1998 167,100 147,800 ---------- ---------- 244,941 233,825 ---------- ---------- $1,286,222 $1,276,061 ========== ==========
The accompanying Notes to Financial Statements are an integral part of these statements. -13-
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ------------------------------------------------- 1999 1998 ---- ---- CURRENT LIABILITIES Current portion of long-term debt $ 414,081 $ 402,012 Accounts payable, trade 548,868 329,114 Accrued expenses 8,158 10,049 Accrued payroll and related taxes 97,922 47,377 Accrued commissions 580 34,590 Due to shareholder 23,500 13,000 ----------- ----------- 1,093,109 836,142 ----------- ----------- LONG-TERM LIABILITIES Long-term debt, net of current portion 212,252 183,784 Other long-term liability 243,222 243,222 Deferred tax liability -- 6,700 ----------- ----------- 455,474 433,706 ----------- ----------- MINORITY INTEREST IN SUBSIDIARY 100,461 135,901 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIENCY) Common stock - $.01 par value, 15,000,000 shares authorized; 7,520,802 shares issued and outstanding in 1999 and 1998 75,208 75,208 Paid-in capital in excess of par value 2,458,984 2,458,984 Accumulated deficit (2,897,014) (2,663,880) ----------- ----------- (362,822) (129,688) ----------- ----------- $ 1,286,222 $ 1,276,061 =========== ===========
-14- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Consolidated Statements of Operations For the Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- NET SALES $ 1,429,561 $ 1,871,897 $ 1,656,961 COST OF GOODS SOLD 1,259,476 1,504,840 1,322,482 ----------- ----------- ----------- GROSS PROFIT 170,085 367,057 334,479 ----------- ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 348,292 465,258 389,006 RESEARCH AND DEVELOPMENT 7,626 3,572 25,063 ----------- ----------- ----------- 355,918 468,830 414,069 ----------- ----------- ----------- LOSS FROM OPERATIONS (185,833) (101,773) (79,590) ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (80,573) (47,589) (36,947) Interest income 82 745 1,046 Minority interest in income of subsidiary 35,440 6,280 (12,283) ----------- ----------- ----------- (45,051) (40,564) (48,184) ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (230,884) (142,337) (127,774) PROVISION FOR INCOME TAXES 2,250 14,650 (1,467) ----------- ----------- ----------- NET LOSS FOR THE YEAR $ (233,134) $ (156,987) $ (126,307) =========== =========== =========== EARNINGS PER SHARE OF COMMON STOCK $ (.03) $ (.02) $ (.02) =========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of these statements. -15- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Consolidated Statements of Changes in Stockholders' Equity (Deficiency) For the Years Ended June 30, 1999, 1998 and 1997
COMMON STOCK ------------------------- NUMBER OF SHARES AMOUNT ------ ------ Balance at June 30, 1996 7,307,402 $ 73,074 Shares issued in payment of liabilities 100,000 1,000 Net loss for the year -- -- --------- --------- Balance at June 30, 1997 7,407,402 74,074 Shares issued in payment of liabilities 113,400 1,134 Net loss for the year -- -- --------- --------- Balance at June 30, 1998 7,520,802 75,208 Net loss for the year -- -- --------- --------- Balance at June 30, 1999 7,520,802 $ 75,208 ========= =========
The accompanying Notes to Financial Statements are an integral part of these statements. -16-
PAID-IN TOTAL CAPITAL IN STOCKHOLDERS' EXCESS OF ACCUMULATED EQUITY PAR VALUE DEFICIT (DEFICIENCY) --------- ------- ------------ $ 2,358,188 $(2,380,586) $ 50,676 49,000 -- 50,000 -- (126,307) (126,307) ----------- ----------- ----------- 2,407,188 (2,506,893) (25,631) 51,796 -- 52,930 -- (156,987) (156,987) ----------- ----------- ----------- 2,458,984 (2,663,880) (129,688) -- (233,134) (233,134) ----------- ----------- ----------- $ 2,458,984 $(2,897,014) $ (362,822) =========== =========== ===========
-17- THE METAL ARTS COMPANY, INC AND SUBSIDIARY ------------------------------------------ Consolidated Statements of Cash Flows For the Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year $(233,134) $(156,987) $(126,307) Adjustments to reconcile net loss to net cash provided by (used for) operating activities Rent expense offset against advances to unconsolidated subsidiary -- 3,000 6,000 Depreciation and amortization 142,880 114,100 100,230 Deferred income taxes 1,600 14,000 (8,900) Minority interest in income of subsidiary (35,440) (6,280) 12,283 Change in operating accounts Accounts receivable 23,093 (6,391) (1,625) Prepaid expenses 11,187 (8,440) 21,155 Other assets 602 (7,134) (64) Accounts payable 219,754 143,565 56,596 Accrued expenses (1,891) 1,842 (1,205) Accrued payroll and related taxes 50,545 25,675 1,977 Accrued commissions (34,010) 189 (91) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 145,186 117,139 60,049 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in cash value of life insurance (3,141) -- -- Repayments from (advances to) unconsolidated subsidiary -- (138) 138 Capital expenditures (129,433) (123,863) (45,472) Advances to shareholder 18,180 (6,725) (13,009) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (114,394) (130,726) (58,343) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock -- -- 6,000 Advances from shareholder 10,500 13,000 -- Proceeds from long-term debt -- 50,000 -- Payments on long-term debt (59,010) (67,280) (66,680) --------- --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (48,510) (4,280) (60,680) --------- --------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements. -18-
1999 1998 1997 ---- ---- ---- NET DECREASE IN CASH (17,718) (17,867) (58,974) CASH AT BEGINNING OF YEAR 35,374 53,241 112,215 --------- --------- --------- CASH AT END OF YEAR $ 17,656 $ 35,374 $ 53,241 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 82,464 $ 45,739 $ 38,076 ========= ========= ========= Cash paid during the year for income taxes $ 325 $ 6,809 $ 1,849 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock $ -- $ 52,930 $ 50,000 Payment of liabilities -- (35,260) (44,000) Payment of prepaid expenses -- (10,170) -- Stock subscription receivable -- (7,500) -- --------- --------- --------- Cash received from issuance of common stock $ -- $ -- $ 6,000 ========= ========= ========= Acquisition of property and equipment by issuance of long-term debt $ 99,547 $ 198,131 $ -- ========= ========= =========
-19- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 1. BUSINESS DESCRIPTION -------------------- The Company and its 70% owned subsidiary, Coating Technology, Inc., are primarily engaged in the surface coatings and enhancements business. Customers, substantially all of whom are manufacturers, are located primarily in Western, New York. Prior to June 30, 1995, the Company owned 89% of The Bastian Company, Inc. (Bastian) and 100% of Ocean State Enameling, Inc. (Ocean State). On June 7, 1995, the Company's Board of Directors approved the sale of the Company's interest in Ocean State at its original investment amount of $500 to Bastian. In addition, the spin-off of Bastian in the form of a stock dividend to the Company's stockholders of record as of June 30, 1995 was approved. As of October 9, 1998, Bastian has not filed a registration statement with the Securities and Exchange Commission to register the Bastian common shares pursuant to the Securities Exchange Act of 1934. Therefore, the Company has not completed the pro rata distribution of the Bastian common shares and, as such, Bastian and Ocean State are still technically subsidiaries of the Company (see Note 2). As of June 30, 1999, the Company was owed $100,000 from Bastian for advances. The Company has a second security interest in virtually all of the assets in Bastian. Due to the financial condition of Bastian, the Company reserved $100,000 for possible uncollectibility. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of the Company and its 70% owned subsidiary, Coating Technology, Inc. All material intercompany items have been eliminated in consolidation. The consolidated financial statements do not include the accounts of its 89% owned subsidiary, The Bastian Company, Inc. and its 100% owned subsidiary, Ocean State Enameling, Inc., as required by generally accepted accounting principles. The Company believes that not consolidating these subsidiaries provides for a more meaningful presentation of continuing operations (see Note 1). USE OF ESTIMATES ---------------- The preparation of 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. REVENUE RECOGNITION ------------------- The Company records its revenues and expenses on the accrual basis of accounting. Revenues are recognized on the date goods are shipped. -20- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------ PROPERTY, PLANT AND EQUIPMENT ----------------------------- Property, plant and equipment are carried at cost. Depreciation is computed on the straight-line method over a period of 5 to 39 years. Accelerated methods are used for tax purposes by Coating Technology, Inc. OPERATING RIGHTS ---------------- During 1995, the Company acquired the rights to a new technology, which is a new process for plating electroless nickel on aluminum. These operating rights are being amortized using the straight-line method over 15 years. DEBT ISSUANCE COSTS ------------------- Debt issuance costs are being amortized using the straight-line method over the term of the related debt instrument, five years. INCOME TAXES ------------ Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be taxable when the assets and liabilities are recovered or settled. EARNINGS PER SHARE ------------------ Earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Options to purchase common stock have a negligible effect on earnings per share. 3. DUE FROM NYSERDA ---------------- On August 12, 1998, the Company entered into an agreement with the New York State Energy Research and Development Authority (NYSERDA). Under the terms of the agreement, NYSERDA will share in the cost to test a new process by paying up to $265,939, which represents 68% of the actual development costs. NYSERDA shall pay the Company 90% of its 68% share upon receipt of an invoice for a progress payment, and final payment shall be made after completion of work and receipt of the final report. In another term of the agreement, the Company will be reimbursed by the United States Department of Energy (USDE) for purchases of equipment of up to $366,000 which represents 97.6% of actual equipment purchases. Through June 30, 1999, the Company has recorded $142,689 of reimbursements from NYSERDA and $10,336 from USDE. -21- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 3. DUE FROM NYSERDA (Continued) ---------------- In accordance with a previous agreement, the Company is obligated to pay to NYSERDA 2% of sales of new technology to New York State manufacturers and 4% of sales to non-New York State manufacturers. The Company's obligation to make payments to NYSERDA shall commence upon the earlier of the two following events; 1) sales exceed $500,000; 2) two years after the Company's receipt of final payment under the contract. NYSERDA possesses certain rights to contract data and certain liquidation or dissolution preferences pursuant to the contract. 4. PROPERTY, PLANT AND EQUIPMENT - -- ----------------------------- Property, plant and equipment consists of the following: 1999 1998 ---- ---- Leasehold improvements $ 36,061 $ 36,061 Machinery and equipment 1,366,856 1,139,632 Furniture and fixtures 77,686 75,930 ------------ ------------- $ 1,480,603 $ 1,251,623 ============ ============ Depreciation and amortization expense for each of the three years in the period ended June 30, 1999 was $136,229, $107,449 and $93,579, respectively. 5. LONG-TERM DEBT -------------- Long-term debt consists of the following: 1999 1998 ---- ---- 8% convertible subordinated debentures due and payable on June 30, 1999. The debentures are subordinated to the Company's senior indebtedness. See Note 8 for conversion provisions. The Company is currently in the process of refinancing this debt. $ 275,000 $ 275,000 Unsecured note payable. Interest accrues at 8% and is payable monthly. Principal was due in full on April 30, 1999. During 1999, the note was refinanced and the principal is now payable on demand. 50,000 50,000 Capital lease payable. Due in 60 monthly payments of $1,168, including interest at 15.5%, through July, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 41,545 -- -22- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 5. LONG-TERM DEBT (Continued) -------------- 1999 1998 ---- ---- Capital lease payable. Due in 58 monthly payments of $929, including interest at 14.6%, through January, 2004. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 37,041 -- Capital lease payable. Due in 59 monthly payments of $310, including interest at 17.0%, through July, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 12,298 -- Note payable secured by specific equipment. Interest accrued at 5% and principal, in the amount of $26,667, plus interest was payable each December through 1998. This note was refinanced during 1999. The note now accrues interest at 6% and principal, in the amount of $8,889, plus interest is payable December, 1999, June, 2000 and December, 2000. 26,666 26,666 Installment note payable in monthly payments of $1,667, plus interest at prime plus 1.5%, through October, 2000. The note is secured by a general lien on equipment, accounts receivable and inventory and is guaranteed by the stockholders of Coating Technology, Inc. 26,667 46,667 Capital lease payable. Due in 60 monthly payments of $1,738, including interest at 14.5%, through January, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 58,042 69,567 Capital lease payable. Due in 60 monthly payments of $1,405, including interest at 14.5%, through January, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 46,917 56,233 Capital lease payable. Due in 60 monthly payments of $1,478, including interest at 16.9%, through February, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 48,241 57,013 Capital lease payable. Due in 60 monthly payments of $118, including interest at 17.7%, through February, 2003. The lease is secured by specific equipment and is personally guaranteed by the minority shareholder of Coating Technology. 3,916 4,650 ------- ------- 626,333 585,796 -23- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 5. LONG-TERM DEBT (Continued) -------------- 1999 1998 ---- ---- Less: Current portion 414,081 402,012 ----------- ----------- Long-term debt, net of current portion $ 212,252 $ 183,784 =========== =========== The aggregate maturities for all long-term borrowings as of June 30, 1999 are as follows: YEAR AMOUNT ---- ------ 2000 $ 414,081 2001 75,735 2002 70,007 2003 58,833 2004 7,677 ----------- $ 626,333 =========== 6. OTHER LONG-TERM LIABILITY ------------------------- The Company entered into a partnership (Sunshine Bullion Co.) on September 1, 1981. The Company incurred a liability to certain vendors relating to silver price fluctuations during the period of time that Sunshine Bullion Co. was operating. The Company has denied responsibility for these amounts. The vendors obtained a judgement against the Company in 1983, but no collection effort has been made since that time. 7. INCENTIVE STOCK OPTION PLAN --------------------------- The Company has an incentive stock option plan for key employees, reserving 850,000 shares of common stock for issuance upon the exercise of options granted under the plan. The options expire 10 years from date of grant (5 years for grantees who hold 10% or more of the Company voting power) and are exercisable one year from the date of the grant on a cumulative basis at the rate of 25% of the total number of shares covered by the grant. As of June 30, 1999, options on 435,000 shares have been exercised at $.06 per share; options on 150,000 shares at $.06 per share are outstanding and exercisable and expire in December, 2002; leaving options on 265,000 shares available under the plan. -24- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 8. COMMON STOCK AND STOCK WARRANTS ------------------------------- In December, 1988, the Company sold 575,000 $.01 par value common shares and warrants to purchase 575,000 additional common shares. The selling price was $.50 per newly issued share. The warrants were exercisable for two years at $.60 per common share. The sale of common stock and warrants was made by means of a private placement. The 575,000 newly issued shares constituted the minimum offering under terms of the private placement. 552,000 warrants were outstanding as of June 30, 1999. The Company has extended the exercise period for these warrants to December 31, 1999. During the year ended June 30, 1995, the Company issued convertible subordinated debentures. These debentures are redeemable by the Company upon at least 30 days notice at any time after December 30, 1995, and will be convertible into common shares of the Company. The holders of the debentures may convert the debentures into common shares of the Company at any time prior to 5:00 pm on June 30, 1999. The terms of the convertible debentures are being restructured to allow certain bondholders to extend the conversion date to December 31, 2001 or accept a plan for repayment. Accompanying each $25,000 debenture is a non-detachable warrant. Each non-detachable warrant enables the holder to purchase up to an additional 33,333 shares at an exercise price of $.85 per share. The warrants can only be exercised coincidentally with the conversion of the debenture. The Company has an outstanding warrant to purchase 60,000 common shares at $.40 per share. The warrant was issued in connection with the purchase of equipment in 1994 and expires December 31, 2000. The Company also has an outstanding warrant to purchase 30,000 common shares at $.40 per share. The warrant was issued in connection with the refinancing of debt in 1999 and expires October 22, 2002. During the year ended June 30, 1995, the Company acquired the operating rights to a new chemical process. As part of the purchase price, the Company was obligated to issue 100,000 common shares upon the transfer of clear title to certain patent pending rights and receipt of $.06 per share. An additional 100,000 common shares must be issued when the patent is accepted. Also, 300,000 common shares must be issued based upon the Company attaining certain sales levels of the new chemical process. All common shares issued under this agreement require payment of $.06 per share. 9. MINORITY INTEREST ----------------- Coating Technology, Inc. is in the business of electroless nickel and aluminum anodizing operations. The accounts of Coating Technology, Inc. for the years ended June 30, 1999 and 1998 are included in the consolidated financial statements of the Company with recognition of a minority interest representing the 30% interest owned by another party. -25- 15 THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 9. MINORITY INTEREST (Continued) ----------------- Summarized balance sheet data of Coating Technology, Inc. as of June 30, 1999 and 1998 is as follows: 1999 1998 ---- ---- Current assets $ 203,000 $ 283,000 Property and equipment, net 762,000 668,000 Other assets 134,000 69,000 ---------- ---------- $1,099,000 $1,020,000 ========== ========== 1999 1998 ---- ---- Current liabilities $ 555,000 $ 379,000 Long-term liabilities 212,000 191,000 ---------- ---------- 767,000 570,000 Shareholders' equity 332,000 450,000 ---------- ---------- $1,099,000 $1,020,000 ========== ========== Summarized income statement data of Coating Technology, Inc. for the years ended June 30, 1999, 1998 and 1997 is as follows: 1999 1998 1997 ---- ---- ---- Revenues $1,420,000 $1,790,000 $1,613,000 Costs and expenses 1,538,000 1,810,000 1,572,000 ---------- ---------- ---------- Net income (loss) $ (118,000) $ (20,000) $ 41,000 ========== ========== ========== Depreciation expense for Coating Technology, Inc. for the years ended June 30, 1999, 1998 and 1997 amounted to $135,067, $105,820 and $91,303, respectively. Capital expenditures for Coating Technology, Inc. for the years ended June 30, 1999, 1998 and 1997 amounted to $228,980, $321,994 and $45,472, respectively. 10. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK ------------------------------------------------------ During the year ended June 30, 1999, Coating Technology, Inc. had one customer who accounted for 18% of consolidated sales. During the year ended June 30, 1998, Coating Technology, Inc. had two customers who, in the aggregate, accounted for 24% of consolidated sales. During the year ended June 30, 1997, Coating Technology, Inc. had two customers who, in the aggregate, accounted for 26% of consolidated sales. -26- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 10. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Continued) ------------------------------------------------------ The Company grants credit to its customers, substantially all of whom are manufacturers located in Western New York. Two Coating Technology, Inc. customers comprised 22% of accounts receivable at June 30, 1999 and 1998, respectively. One Metal Arts customer comprised 11% of accounts receivable at June 30, 1998. 11. INCOME TAXES ------------ Provision for income taxes was determined as follows:
1999 1998 1997 ---- ---- ---- Loss before income taxes $(230,884) $(142,337) $(127,774) Excess tax depreciation (18,439) 2,190 (1,565) State income tax (650) (650) (2,833) Minority interest in income of subsidiary (35,440) (6,280) 12,283 Net operating loss carryforward 269,740 109,107 124,588 Other 15,673 39,975 53,337 --------- --------- --------- Federal taxable income $ -- $ 2,005 $ 58,036 ========= ========= ========= Federal statutory income tax $ -- $ 301 $ 9,509 Federal alternative minimum tax credit -- (301) (4,901) State income tax 650 650 2,833 Other -- -- (8) Deferred 1,600 14,000 (8,900) --------- --------- --------- Provision for income taxes $ 2,250 $ 14,650 $ (1,467) ========= ========= =========
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 (FASB 109), "Accounting for Income Taxes" requires that an asset be recorded for the expected realizable value of net operating loss carryforwards and tax credits and a corresponding valuation allowance for the amount of tax benefits not expected to be realized. The Company has recorded a deferred tax asset of $174,500 reflecting the benefit of net operating loss carryforwards and investment tax credit carryforwards. Realization is dependent on generating sufficient taxable income prior to expiration of the net operating loss and investment tax credit carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At June 30, 1999, the Company has the following net operating loss deduction carryforwards available for federal income tax purposes: -27- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 11. INCOME TAXES (Continued) ------------ YEAR OF EXPIRATION AMOUNT ---------- ------ 2001 $ 8,000 2003 160,000 2009 8,000 2010 206,000 2011 152,000 2012 124,000 2013 109,000 2019 269,000 ---------- $1,036,000 Coating Technology, Inc. has approximately $98,800 of New York State investment tax credit carryforwards that expire in various years from 2004 to 2014 and federal and New York State alternative minimum tax credit carryforwards of approximately $5,300. Deferred income taxes consist of: 1999 1998 ---- ---- Assets NOL carryforward $ 346,100 $ 291,500 Federal tax credit carryforwards 1,000 1,000 NYS tax credit carryforwards 103,100 92,800 Allowance for doubtful accounts 2,200 2,200 Valuation allowance (215,600) (153,100) ----------- ----------- Net deferred tax assets 236,800 234,400 Liabilities Accelerated depreciation 62,300 58,300 ----------- ----------- $ 174,500 $ 176,100 =========== =========== Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The net deferred tax asset is presented on the balance sheet as follows: -28- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 11. INCOME TAXES (Continued) ------------ 1999 1998 ---- ---- Net current deferred tax asset - Metal Arts $ 7,400 $ 35,000 Net long-term deferred tax asset - Metal Arts 167,100 147,800 Net long-term deferred tax liability - Coating Technology -- (6,700) ----------- ---------- $ 174,500 $ 176,100 =========== ========== 12. COMMITMENTS Coating Technology has entered into a ten-year lease agreement for its new manufacturing and office space. The lease requires monthly rental payments of $5,958 from September 1, 1997 until December 31, 1999. The annual rent as of January 1, 2000, and each January 1st thereafter, shall be increased by the percentage increase in the consumer price index for the previous calendar year, but in no event, more than three percent in any year. In addition, the Company is also responsible for its own utilities. Consolidated rent expense for each of the years ended June 30, 1999, 1998 and 1997 was approximately $141,982, $166,122 and $111,000, respectively. During the year ended June 30, 1995, the Company entered into a royalty agreement in conjunction with the purchase of the operating rights to a new chemical process. The agreement requires royalty payments of 2% of gross sales of the new chemical process throughout the former owner's lifetime. As of June 30, 1999, no royalties were due under this agreement. In addition, the Company entered into a licensing agreement for an existing chemical process. The agreement requires licensing fees equal to 50% of the Company's net profit on sales of this process. As of June 30, 1999, no fees were due under this agreement. 13. CONTINGENCIES ------------- The Company is the guarantor of debt owed to the City of Geneva, N.Y. by its unconsolidated subsidiary, Bastian, in the approximate amount of $280,000. Bastian is currently in default on its debt payments to the City of Geneva. Bastian has incurred substantial losses in recent years and has a deficiency of stockholders' equity. Although Bastian has taken steps to return to profitability, it is at least reasonably possible that Bastian will not become profitable in the near future. If not, the Company may become responsible for repayment of at least a portion of the amount owed to the City of Geneva. As of June 30, 1999, the Company has not recorded a liability relating to this contingency in its financial statements. -29- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 14. BENEFIT PLAN ------------ Coating Technology, Inc. has a salary reduction plan pursuant to Section 401(k) of the Internal Revenue Code that covers all eligible employees. Employees are eligible for participation in the plan after the completion of six months of service and attainment of age twenty-one. Under terms of the plan, the Company contributes up to 1.25% of each participant's compensation. Also, Coating may make additional contributions to the plan at its discretion. Coating's contributions to the plan amounted to $2,659 in 1999, $3,328 in 1998 and $3,135 in 1997. 15. TRANSACTIONS WITH RELATED PARTIES --------------------------------- Amounts due to/from shareholder do not bear interest, are unsecured and have no fixed repayment terms. 16. CAPITAL LEASES -------------- Assets held under capital leases are as follows: 1999 1998 ---- ---- Machinery and equipment $ 297,678 $ 198,131 Less: Accumulated depreciation 35,452 8,255 ----------- ----------- $ 262,226 $ 189,876 =========== =========== Minimum lease payments for all capital leases as of June 30, 1999 are as follows: YEAR AMOUNT ---- ------ 2000 $ 85,219 2001 86,052 2002 86,052 2003 63,949 2004 8,003 -------------- Total minimum lease payments 329,275 Less: Amount representing interest and sales tax 81,275 ----------- Present value of net minimum lease payments $ 248,000 =========== -30- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES For the Years Ended June 30, 1999, 1998 and 1997
BALANCE AT BALANCE BEGINNING AMOUNTS AMOUNTS AT END NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED WRITTEN OFF OF YEAR - -------------- ------- --------- --------- ----------- ------- June 30, 1999 N/A $ - $ - $ - $ - $ - ======= ======= ======= ======= ======= June 30, 1998 N/A $ - $ - $ - $ - $ - ======= ======= ======= ======= ======= June 30, 1997 N/A $ - $ - $ - $ - $ - ======= ======= ======= ======= =======
-31- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT For the Years Ended June 30, 1999, 1998 and 1997
BALANCE AT BALANCE BEGINNING ADDITIONS AT END CLASSIFICATION OF YEAR AT COST RETIREMENTS OF YEAR - -------------- ------- ------- ----------- ------- June 30, 1999 Leasehold improvements $ 36,061 $ -- $ -- $ 36,061 Machinery and equipment 1,139,632 227,224 -- 1,366,856 Furniture and fixtures 75,930 1,756 -- 77,686 ---------- ---------- ---------- ---------- $1,251,623 $ 228,980 $ -- $1,480,603 ========== ========== ========== ========== June 30, 1998 Leasehold improvements $ 28,784 $ 7,277 $ -- $ 36,061 Machinery and equipment 827,891 311,741 -- 1,139,632 Furniture and fixtures 72,954 2,976 -- 75,930 ---------- ---------- ---------- ---------- $ 929,629 $ 321,994 $ -- $1,251,623 ========== ========== ========== ========== June 30, 1997 Leasehold improvements $ 28,784 $ -- $ -- $ 28,784 Machinery and equipment 794,998 32,893 -- 827,891 Furniture and fixtures 60,375 12,579 -- 72,954 ---------- ---------- ---------- ---------- $ 884,157 $ 45,472 $ -- $ 929,629 ========== ========== ========== ==========
-32- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT For the Years Ended June 30, 1999, 1998 and 1997
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END CLASSIFICATION OF YEAR EXPENSES RETIREMENTS OF YEAR - -------------- ------- -------- ----------- ------- June 30, 1999 Leasehold improvements $ 17,617 $ 3,710 $ -- $ 21,327 Machinery and equipment 510,068 122,142 -- 632,210 Furniture and fixtures 49,233 10,377 -- 59,610 -------- -------- -------- -------- $576,918 $136,229 $ -- $713,147 ======== ======== ======== ======== June 30, 1998 Leasehold improvements $ 14,331 $ 3,286 $ -- $ 17,617 Machinery and equipment 416,231 93,837 -- 510,068 Furniture and fixtures 38,907 10,326 -- 49,233 -------- -------- -------- -------- $469,469 $107,449 $ -- $576,918 ======== ======== ======== ======== June 30, 1997 Leasehold improvements $ 11,348 $ 2,983 $ -- $ 14,331 Machinery and equipment 336,107 80,124 -- 416,231 Furniture and fixtures 28,435 10,472 -- 38,907 -------- -------- -------- -------- $375,890 $ 93,579 $ -- $469,469 ======== ======== ======== ========
-33- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended June 30, 1999, 1998 and 1997 ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR - ----------- ------- -------- ---------- ------- Allowance for doubtful accounts - deducted from accounts and notes receivable in the balance sheet June 30, 1999 $110,000 $ - $ - $110,000 ======== ========= ======== ======== June 30, 1998 $110,000 $ - $ - $110,000 ======== ========= ======== ======== June 30, 1997 $110,000 $ - $ - $110,000 ======== ========= ======== ======== -34- THE METAL ARTS COMPANY, INC. AND SUBSIDIARY ------------------------------------------- SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Years Ended June 30, 1999, 1998 and 1997
ITEM CHARGED TO COSTS AND EXPENSES ---------------------------------- 1999 1998 1997 ---- ---- ---- Maintenance and repairs $ 52,726 $ 86,719 $ 71,181 ========= ========= ========= Depreciation and amortization of intangible assets, pre-operating costs and similar deferrals $ * $ * $ * ========= ========= ========= Taxes, other than payroll and income taxes $ * $ * $ * ========= ========= ========= Royalties $ * $ * $ * ========= ========= ========= Advertising costs $ * $ * $ * ========= ========= =========
* Less than 1% of total sales -35- ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the two most recent fiscal years, there have been no changes in, or disagreements with, accountants on accounting and financial disclosures. PART II ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of Metal Arts are listed below, followed by a brief description of their business experience for at least the last five years. These persons also hold officer and director positions with Coating Technology. NAME AGE POSITIONS WITH METAL ARTS - ---- --- ------------------------- Stanley J. Dahle 62 President, Chief Executive Officer and Director Albert A. Cauwels 65 Secretary and Director Geoffrey A. Rich 50 Director STANLEY J. DAHLE has been President of Metal Arts since October, 1981 and Chairman since 1990. He was Executive Vice President of Metal Arts since its inception in June, 1976, until October, 1981. Mr. Dahle has also served in various other offices for Metal Arts since its inception. He is a director of Coating Technology. ALBERT A. CAUWELS became a director of Metal Arts in June, 1984 and serves as Secretary. He is a director of Coating Technology, Inc. GEOFFREY A. RICH has been President of Coating Technology since its inception in 1989 and Chief Executive Officer since 1995. He has been a director of Metal Arts since December, 1990. None of Metal Arts' Directors is a Director of any company with a class of securities registered pursuant to Section 12 of the Securities & Exchange Act of 1934, as amended, or of any company registered under the Investment Company Act of 1940, as amended. There is no family relationship among any members of the Board of Directors or the Executive Officers or significant employees of Metal Arts. The Board of Directors met 4 times during the fiscal year ended June 30, 1999. At the present time, the company has no Audit, Compensation or Nominating Committees. All Directors and Executive Officers have been elected to serve as Directors and Executive Officers until the next annual meeting of shareholders of Metal Arts or until their successors have been elected and qualified. There are no arrangements or understandings between any Director or Executive Officer and any other persons pursuant to which any such Directors or Executive Officers was or is to be selected as a Director or nominee for Director. -36- ITEM 11. EXECUTIVE COMPENSATION The aggregate direct remuneration accrued and paid by Metal Arts and Coating Technology, during the fiscal year ended June 30, 1999, to each of Metal Arts' Officers and Directors whose aggregate remuneration exceeded $50,000, and to all Directors and Officers of Metal Arts as a group, is set forth in the following table. CASH AND CASH-EQUIVALENT FORM OF REIMBURSEMENT ----------------------------- SALARIES, FEES, SECURITIES OR DIRECTOR'S PROPERTY, FEES, INSURANCE NAME OF INDIVIDUAL COMMISSIONS BENEFITS OR OR NUMBER OF CAPACITIES IN AND REIMBURSEMENTS, PERSONS IN GROUP WHICH SERVED (1) BONUSES PERSONAL BENEFITS - ---------------- ---------------- ------- ----------------- Stanley J. Dahle President, $ 95,000 $ 5,000 CEO, and Director Albert A. Cauwels Secretary and $ -0- $ -0- Director Geoffrey A. Rich Director $ 80,000 $ 5,000 All Officers and All Officers $175,000 $10,000 Directors as a and Directors group (3) persons as a group OTHER COMPENSATION There was no other compensation of any kind paid to the officers and directors during fiscal year 1999. No executive earned more than $100,000 of total compensation. There is no executive committee and all compensation decisions are made by the Board of Directors. There were no loans made to officers, no directors fees and no long term compensation arrangements. There were no outstanding stock option grants to officers at year end. There are no employment agreements. -37- OPTION EXERCISE AND VALUE TABLE
NUMBER OF SECURITIES IN-THE-MONEY UNDERLYING OPTIONS/SARS SHARES UNEXERCISED AT FISCAL ACQUIRED VALUE OPTIONS/SARS YEAR-END ($)*** ON EXERCISE REALIZED*** AT FISCAL EXERCISABLE (E) / NAME (#) ($) YEAR-END (#) UNEXERCISABLE (U) EXERCISABLE (E) / UNEXERCISABLE (U) - --------------------------------------------------------------------------------------------- Stanley J. Dahle -0- -0- -0- -0- Albert A. Cauwels -0- -0- -0- -0- Geoffrey A. Rich -0- -0- -0- -0- (1) These capacities include the capacities in which each such individual served Metal Arts and Coating Technology as officers and directors as set forth in the preceding table in Item 10 of this Form 10-K.
Non-Management directors are paid a fee of $250 per meeting attended. There are no such directors at this time. During the past fiscal year, fees aggregating $-0- were paid. Directors who are also full time employees are not paid director's fees. OFFICER COMPENSATION FOR THE PRECEDING THREE FISCAL YEARS
SECURITIES OR PROPERTY, INSURANCE BENEFITS OR FISCAL DIRECTORS FEES, REIMBURSEMENTS NAME YEAR COMMISSIONS & BUSINESS PERSONAL BENEFITS - ---- ---- ---------------------- ----------------- Stanley J. Dahle 1999 $95,000 $5,000 1998 95,000 5,000 1997 85,650 5,000 Albert A. Cauwels 1999 -0- -0- 1998 -0- -0- 1997 -0- -0- Geoffrey A. Rich 1999 80,000 5,000 1998 80,000 5,000 1997 80,000 5,000
STOCK OPTION PLAN On March 3, 1982, Metal Arts adopted an incentive stock option plan (the "Plan" or the "Stock Option Plan") pursuant to Section 422A of the Internal Revenue Code. Under the Plan, as amended, Metal Arts' Board of Directors may grant options to key employees (including executive officers of Metal Arts) to purchase up to an aggregate 850,000 common shares. -38- Such options expire 10 years from the date of the grant (but must be exercised within 5 years of the date of grant for grantees who hold 10 percent or more of the common shares) and are exercisable one year from the date of the grant on a cumulative basis at the rate of 25 percent of the total number of common shares subject to the option granted. Options must be granted at no less than fair market value (but not less than 110 percent of fair market value for grantees who hold 10 percent or more of the common shares). During the Fiscal Year ended June 30, 1999, no options were exercised. There are currently available under the plan 415,000 common shares for future grants. Metal Arts' management believes that the availability of the Plan, and the grants of the options, will enable the Company to attract and hold valuable employees by providing them with incentives to foster growth. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of October 1, 1999, with respect to all directors, officers, and persons who are known by Metal Arts to be the beneficial owners of more than five percent (5%) of the common shares of Metal Arts. The common shares are the only voting securities of Metal Arts. All persons listed below have sole voting and investment power with respect to their common shares unless otherwise indicated. NAME AND ADDRESS OF AMOUNT BENEFICIALLY PERCENT BENEFICIAL OWNER OWNED OF CLASS --------------------- ---------------------- -------- Stanley J. Dahle 1,419,000(a) 20 81 Country Club Drive Rochester, New York Clifford W. Charlson 598,000 8 997 East Avenue Rochester, New York Albert A. Cauwels 486,551 6.8 28 Franklin Street Phelps, New York Geoffrey A. Rich 225,000 3.2 2856 Gildersleeve Road Walworth, New York All officers and directors as a group (3) persons 2,130,551 30 (a) Includes 195,000 shares owned by Mr. Dahle's wife and children of which Mr. Dahle disclaims any beneficial ownership. As noted, Metal Arts owns 70 percent of Coating Technology, and therefore, Coating Technology is considered to be a subsidiary of Metal Arts. No member of management of Metal Arts owns any common shares of Coating Technology. No one person other than Metal Arts owns in the aggregate in excess of 5 percent of the common shares of Coating Technology, except Geoffrey A. Rich, who owns 30 percent of the common shares of Coating Technology. -39- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Form 10-K 1999 Annual Report: 1 and 2. Consolidated Financial Statements and Schedules. (See "INDEX TO FINANCIAL STATEMENTS AND SCHEDULES.") 3. (See "INDEX TO EXHIBITS.") -40- SIGNATURE 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. THE METAL ARTS COMPANY, INC. Date: 11-19-99 By: STANLEY J. DAHLE ---------------- Stanley J. Dahle President and Chief Executive Officer Date: 11-19-99 By: ALBERT A. CAUWELS ----------------- Albert A. Cauwels Secretary and Director Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE Chairman, President Chief Executive Officer 11-19-99 STANLEY J. DAHLE and Director - ----------------- Stanley J. Dahle ALBERT A. CAUWELS Secretary and Director 11-19-99 - ------------------ Albert A. Cauwels GEOFFREY A. RICH Director 11-19-99 - ----------------- Geoffrey A. Rich -41- EXHIBITS 3(a) Certificate of Incorporation of Registrant and Amendments thereto. (Filed as Exhibits 2 (a-c, e) to Registration Statement No. 2-69789-NY (the "Registration Statement") and incorporated herein by reference.) 3(a)(1) Certificate of Amendment to the Certificate of Incorporation of Registrant as approved at the 1989 Annual Meeting. 3(b) By-laws of Registrant. (Filed as Exhibit 2(d) to the Registration Statement and incorporated herein by reference.) 4(a) Secured Promissory Note dated November 30, 1992, between Coating Technology and M&T Bank. (Filed as Exhibit 4(i) to the company's Form 10-K for the year ended June 30, 1993 and incorporated herein by reference.) 4(b) Secured Promissory Note dated December 10, 1993, between Coating Technology and M&T Bank. (Filed as Exhibit 4(j) to the company's Form 10-K for the year ended June 30, 1994 and incorporated herein by reference.) 10(a) The company's Stock Option Plan, as approved by the company's shareholders on March 3, 1982. (Filed as Exhibit 10(a) to the company's Form 10-K for the year ended July 3, 1982, and incorporated herein by reference.) 10(b) First amendment to the Incentive Stock Option Plan of the Metal Arts Company, Inc., approved at the 1989 Annual Meeting of shareholders. 10(c) Asset purchase agreement between Coating Technology and Rochester Steel Treating Works, Inc. dated December 22, 1993. (Filed as Exhibit 10(c) to the company's 10-K for the year ended June 30, 1994 and incorporated herein by reference.) 10(d) Option Agreement between the company and LeKem Inc., and Richard Feagins dated February 28, 1994. (Filed as Exhibit 10(d) to the company's Form 10-K for the year ended June 30, 1994 and incorporated herein by reference.) 10(e) Agreement between Metal Arts Company and the New York State Energy Research and Development Authority, dated June 22, 1995. (Filed as Exhibit 10(e) to the company's Form 10-K for the year ended June 30, 1995, and incorporated herein by reference.) 10(f) Lease agreement dated February 19, 1998 between O'Brien and Gere Property Development, Inc. as Landlord and Coating Technology, Inc. as Tenant relating to its facility at 800 St. Paul St., Rochester, New York. (Filed as exhibit (f) to the Company's Form 10-K for the year ended June 30, 1999, and incorporated herein by reference.) 11 Description of computation of per share earnings. (See Note 2 of Notes to Consolidated Financial Statements of the Metal Arts Company, Inc.) -42- 22. Subsidiaries. The subsidiaries of the company and the state of incorporation are as follows: a. Coating Technology incorporated in the State of New York. b. Metal Arts Acquisitions, Inc. incorporated in the State of New York. (b) Reports on Form 8-K: 8-K dated November 23, 1994 8-K dated June 9, 1995 (c) See Item 14(a) (3), above. (d) See Item 14(a) (2), above. -43- EX-27 2 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1 12-MOS JUN-30-1999 JUN-30-1998 JUN-30-1999 17,700 0 195,400 0 0 273,800 1,480,600 713,100 1,286,200 1,093,100 0 0 75,200 0 0 1,286,200 1,430,000 1,430,000 1,259,500 1,615,400 0 0 80,600 (230,900) 2,250 (233,100) 0 0 0 (233,100) 0 0
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