<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 1-5530
ALLIED PRODUCTS CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-0292230
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
10 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
- - - ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 454-1020
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 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 requirement for
the past 90 days. Yes x No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,847,046 common shares, $.01
par value, as of October 31,1999.
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTION
CONDENSED CONSOLIDATED BALANCE SHEETS-
September 30, 1999 and December 31, 1998
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three and Nine Months Ended September 30, 1999 and
1998
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- Nine
Months Ended September 30, 1999 and 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. NOT APPLICABLE
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
----------
EXHIBIT INDEX
--------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
INTRODUCTION
The condensed consolidated financial statements included herein (as
of September 30, 1999 and for the three and nine months ended September 30,
1999 and 1998) have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and
reflect all adjustments which are, in the opinion of management, necessary to
present fairly the condensed consolidated financial information required
therein. All such adjustments, except as otherwise may be described herein,
are of a normal, recurring nature. The information as of December 31, 1998 is
derived from the audited year end balance sheet for that year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the three and nine month periods ended
September 30, 1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Cash and cash equivalents ........................ $ 914,000 $ 727,000
------------------ -----------------
Notes and accounts receivable, less allowances of
$1,321,000 and $519,000, respectively ......... $ 73,118,000 $ 68,827,000
------------------ -----------------
Inventories:
Raw materials .................................. $ 10,193,000 $ 11,529,000
Work in process ................................ 50,201,000 68,296,000
Finished goods ................................. 12,544,000 17,019,000
------------------ -----------------
$ 72,938,000 $ 96,844,000
------------------ -----------------
Deferred tax asset ................................ $ 15,060,000 $ 15,060,000
------------------ -----------------
Prepaid expenses .................................. $ 101,000 $ 406,000
------------------ -----------------
Total current assets ........................ $ 162,131,000 $ 181,864,000
------------------ -----------------
Plant and Equipment, at cost:
Land ........................................... $ 2,412,000 $ 2,430,000
Buildings and improvements ..................... 60,050,000 57,022,000
Machinery and equipment ........................ 71,881,000 69,196,000
------------------ -----------------
$ 134,343,000 $ 128,648,000
Less-Accumulated depreciation and amortization .. 54,297,000 48,181,000
------------------ -----------------
$ 80,046,000 $ 80,467,000
------------------ -----------------
Other Assets:
Deferred tax asset ............................. $ 4,165,000 $ 4,165,000
Deferred charges (goodwill), net of amortization 5,820,000 6,154,000
Other .......................................... 5,091,000 3,154,000
------------------ -----------------
$ 15,076,000 $ 13,473,000
------------------ -----------------
$ 257,253,000 $ 275,804,000
================== =================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Revolving credit agreement ........................ $ 130,100,000 $ 119,300,000
Current portion of long-term debt ................. 627,000 627,000
Accounts payable .................................. 36,634,000 52,634,000
Accrued expenses .................................. 26,327,000 24,258,000
------------------ -----------------
Total current liabilities .................. $ 193,688,000 $ 196,819,000
------------------ -----------------
Long-term debt, less current portion shown above .... $ 1,797,000 $ 2,298,000
------------------ -----------------
Other long-term liabilities ......................... $ 4,911,000 $ 4,957,000
------------------ -----------------
Commitments and Contingencies
Shareholders' Investment:
Preferred stock:
Undesignated-authorized 1,500,000 shares
at September 30, 1999 and December 31,
1998; none issued ............................ $ -- $ --
Common Stock, par value $.01 per share; authorized
25,000,000 shares; issued 14,047,249 shares at
September 30, 1999 and December 31, 1998 ...... 140,000 140,000
Additional paid-in capital ....................... 97,971,000 98,377,000
Retained earnings ................................ 1,263,000 16,131,000
------------------ -----------------
$ 99,374,000 $ 114,648,000
Less: Treasury stock, at cost: 2,200,203 and
2,228,640 shares at September 30, 1999 and
December 31, 1998, respectively ................ (42,517,000) (42,918,000)
------------------ -----------------
Total shareholder's equity ................. $ 56,857,000 $ 71,730,000
------------------ -----------------
$ 257,253,000 $ 275,804,000
================== =================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................... $ 69,332,000 $ 77,184,000 $ 226,196,000 $ 229,000,000
Cost of products sold ............... 55,295,000 76,228,000 199,632,000 189,674,000
--------------- --------------- --------------- --------------
Gross profit ...................... $ 14,037,000 $ 956,000 $ 26,564,000 $ 39,326,000
--------------- --------------- --------------- --------------
Other costs and expenses:
Selling and administrative expenses $ 10,148,000 $ 9,571,000 $ 31,509,000 $ 28,220,000
Interest expense .................. 3,038,000 1,802,000 8,236,000 4,339,000
Other (income) expense, net ....... 311,000 379,000 270,000 (1,485,000)
--------------- --------------- --------------- --------------
$ 13,497,000 $ 11,752,000 $ 40,015,000 $ 31,074,000
--------------- --------------- ------------- --------------
Income (loss) before taxes .......... $ 540,000 $ (10,796,000) $ (13,451,000) $ 8,252,000
Provision (credit) for income taxes . -- (3,648,000) -- 2,969,000
--------------- --------------- --------------- --------------
Net income (loss) and comprehensive
income (loss) ..................... $ 540,000 $ (7,148,000) $ (13,451,000) $ 5,283,000
=============== =============== =============== ==============
Earnings (loss) per common share:
Basic ............................. $ 0.05 $ (0.60) $ (1.14) $ 0.44
=============== =============== =============== ==============
Diluted ........................... $ 0.05 $ (0.60) $ (1.14) $ 0.44
=============== =============== =============== ==============
Weighted average shares outstanding:
Basic ............................. 11,847,000 11,914,000 11,834,000 11,920,000
=============== =============== =============== ==============
Diluted ........................... 11,854,000 11,914,000 11,834,000 12,069,000
=============== =============== =============== ==============
Dividends per common share .......... $ 0.04 $ 0.04 $ 0.12 $ 0.12
=============== =============== =============== ==============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net income(loss) .................................................. $ (13,451,000) $ 5,283,000
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Gains on sales of operating and nonoperating assets ............ (79,000) (1,962,000)
Depreciation and amortization .................................. 6,489,000 4,406,000
Amortization of deferred charges ............................... 334,000 240,000
Deferred income tax provision .................................. - 2,414,000
Provision for inventory valuation .............................. 8,663,000 1,906,000
Stock option compensation ...................................... -- 1,119,000
Changes in noncash assets and liabilities,
net of noncash transactions:
(Increase) in accounts receivable ........................... (5,201,000) (7,710,000)
(Increase) decrease in inventories ......................... 15,243,000 (59,572,000)
(Increase) decrease in prepaid expenses ..................... 305,000 (107,000)
Increase (decrease) in accounts payable and accrued expenses (13,817,000) 30,143,000
Other,net ...................................................... (978,000) (713,000)
-------------- -------------
Net cash used for operating activities ............................ $ (2,492,000) $ (24,553,000)
-------------- -------------
Cash Flows from Investing Activities
Additions to plant and equipment .................................. $ (6,094,000) $ (31,411,000)
Payment for businesses acquired ................................... -- (10,953,000)
Proceeds from sales of plant and equipment ........................ 10,000 3,373,000
-------------- -------------
Net cash used for investing activities ............................ $ (6,084,000) $ (38,991,000)
-------------- -------------
Cash Flows from Financing Activities:
Borrowings under revolving credit agreement ....................... $ 100,300,000 $ 131,400,000
Payments under revolving credit agreement ......................... (89,500,000) (65,800,000)
Payments of short and long-term debt .............................. (501,000) (202,000)
Purchase of treasury stock ........................................ -- (1,171,000)
Dividends paid .................................................... (1,417,000) (955,000)
Stock options and other transactions .............................. (119,000) 91,000
-------------- -------------
Net cash provided from financing activities .......................... $ 8,763,000 $ 63,363,000
-------------- -------------
Net increase (decrease) in cash and cash equivalents ................. $ 187,000 $ (181,000)
Cash and cash equivalents at beginning of year ....................... 727,000 609,000
-------------- -------------
Cash and cash equivalents at end of period ........................... $ 914,000 $ 428,000
============== =============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of the statements.
<PAGE>
Allied Products Corporation and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements
(1) Restatement of Previously Issued Financial Statements
-----------------------------------------------------
Operating results for the three and nine month periods ended
September 30, 1998 have been restated to reflect the effect of (a)
compensation expenses which should have been recognized in relation to
certain stock option exercise transactions and (b) the correction of
gross profit margins at the Verson division. See Note 13 of Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report
for a more detailed explanation of the restatement.
The following table reconciles the amounts previously reported
to the amounts currently being reported in the Condensed Consolidated
Statement of Income (Loss) for the three and nine month periods ended
September 30, 1998:
<TABLE>
<CAPTION>
Income (Loss) Tax Earning (Loss) Earning (Loss)
Before Provision Net Per Common Per Common
Taxes (Benefit) Income (Loss) Share-Basic Share-Diluted
------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
For The Three Months
--------------------
As previously reported ........... $(15,639,000) $ (5,343,000) $(10,296,000) $(0.86) $(0.86)
Restatement associated with Verson
gross profit margin ........... 4,843,000 1,695,000 3,148,000 0.26 0.26
Restatement associated with stock
option compensation ........... -- -- -- -- --
------------ ------------ ------------ ---------- -----------
As restated ...................... $(10,796,000) $ (3,648,000) $ (7,148,000) $ (.60) $ (.60)
============ ============ ============ ========== ===========
For Nine Months Ended
---------------------
As previously reported ........... $ 4,092,000 $ 1,513,000 $ 2,579,000 $ 0.21 $ 0.21
Restatement associated with Verson
gross profit margin ........... 5,279,000 1,848,000 3,431,000 0.29 0.29
Restatement associated with stock
option compensation ........... (1,119,000) (392,000) (727,000) (0.06) (0.06)
------------ ------------ ------------ ---------- ------------
As restated ...................... $ 8,252,000 $ 2,969,000 $ 5,283,000 $ 0.44 $ 0.44
============ ============ ============ ========== ===========
</TABLE>
(2) Accrued Expenses
----------------
The Company's accrued expenses consist of the following:
<TABLE>
<CAPTION>
9/30/99 12/31/98
----------- -----------
<S> <C> <C>
Salaries and wages ............... $ 6,184,000 $ 6,573,000
Warranty ......................... 6,115,000 5,794,000
Self insurance accruals .......... 2,362,000 2,905,000
Pensions, including retiree health 4,891,000 4,644,000
Taxes, other than income taxes ... 1,184,000 888,000
Interest ......................... 1,512,000 309,000
Environmental matters ............ 1,127,000 1,225,000
Other ............................ 2,952,000 1,920,000
----------- -----------
$26,327,000 $24,258,000
=========== ===========
</TABLE>
<PAGE>
(3) Earnings Per Common Share
-------------------------
Basic earnings (loss) per common share for the periods in 1999
is based on the average number of common shares outstanding (11,847,000
and 11,834,000 for the three and nine months ended September 30, 1999,
respectively). Diluted earnings per common share for the three months
ended September 30, 1999 is based on the average number of common
shares outstanding (11,847,000) increased by the dilutive effect of
options outstanding (7,000). For the nine months ended September 30,
1999, dilutive securities (8,000 shares) were excluded from the
calculation of diluted loss per common share as their effect would have
been antidilutive. Basic earnings (loss) per common share for the same
periods in 1998 is based on the average number of common shares
outstanding (11,914,000 and 11,920,000 for the three and nine months
ended September 30, 1998, respectively). For the three months ended
September 30, 1998, dilutive securities (7,000 shares) were excluded
from the calculation of diluted loss per common share as their effect
would have been antidilutive. Diluted earnings per common share for the
nine months ended September 30, 1998 is based on the average number of
common shares outstanding (11,920,000) increased by the dilutive effect
(149,000 shares) of outstanding options.
(4) Business Purchase Option
------------------------
In August 1999, the Company acquired a conditional option to
purchase certain fixed assets and inventories of the Niagara Machine
Division (the "Niagara Assets") of CNB International, Inc. D.I.P.
("CNB") for a purchase price equal to the sum of $8,500,000 plus the
fair value of inventories as determined by the parties. The option was
subject to the acquisition of substantially all of the assets of CNB by
the grantor of the option, Emprotech Corp., which had entered into a
letter of intent with CNB regarding the acquisition. On January 14,
2000 Emprotech terminated its agreement to purchase the assets of CNB
which had the effect of terminating the Company's conditional option
to purchase the assets of CNB's Niagra's division.
(5) Joint Venture
-------------
On July 15, 1999, the Company and CC Industries, Inc., a
privately held firm headquartered in Chicago, signed a letter of intent
to form a joint venture for the ownership and operation of the
Company's Agricultural Products Group. On October 26, 1999 the Company
announced that it had signed a definitive agreement to sell 80.1% of
the Agricultural Products Group for approximately $120,000,000,
which was reduced on February 10, 2000 to approximately $112,000,000.
If the transaction is approved by the Company's shareholders, Bush
Hog L.L.C., a new joint-venture company, will acquire the business,
assets and certain liabilities of the division within the Agricultural
Products Group. Under the final agreement, the Company will sell an
80.1% interest in Bush Hog L.L.C. to an affiliate of C.C. Industries,
Inc. Final shareholder approval and closing of the transaction is not
expected to occur until the first quarter of 2000.
If this transaction is completed, the Company's remaining
operations will consist solely of the operations of the Industrial
Products Group and the 19.9% interest in Bush Hog L.L.C. To complete
these transactions, the Company must obtain the consent of its banks
under the Second Amended and Restated Credit Agreement and the release
of outstanding security interests held by the banks in the assets of
the Agricultural Products Group. The banks have consented to such
transaction and have agreed to release the security interests, subject
to the Company's repayment of its entire indebtedness owing to the
banks on the closing. Simultaneous with the closing of this
transaction, the Company expects to borrow additional funds, secured by
its 19.9% membership interest in Bush Hog L.L.C. All or a portion of
those new borrowings, together with the cash proceeds received from the
affiliate of CC Industries, net of fees and expenses, will be applied
to repay the Company's then current bank indebtedness. If the Company
terminates the purchase agreement in order to accept another third
<PAGE>
party acquisition, the Company is required to pay a termination fee of
$5,000,000.
(6) Stockholder Rights Plan
-----------------------
During the third quarter of 1999 the Company announced that its
Board of Directors approved the redemption of its current Common
Share Purchase Rights and adopted a new Stockholder Rights Plan. The
new plan is designed to continue the assurance of fair and equal
treatment of all stockholders in the event of any proposed takeover.
The plan involves the distribution of the new rights and a
redemption payment for current rights to all common shareholders of
record as of July 30, 1999. The stockholders received one purchase
right for a new series of junior preferred stock for each
outstanding share of the Company's common stock and a redemption
payment on August 10, 1999 of $0.01 per share for the Common Share
Purchase Rights declared under a 10-year rights agreement adopted in
January 1990. Each Preferred Share Purchase Right entitles the
holder to purchase from the Company under certain circumstances one
one-thousandth of a share of the new junior preferred stock. The
rights may be exercised if a person or group announces its intention
to acquire or acquires 15 percent or more of Allied Products' common
stock. However, an exception is made for certain significant
stockholders of the Company who are holding the Company's common
stock for investment purposes. They may acquire up to 20 percent of
Allied Products' common stock without triggering the Rights Plan.
Under certain circumstances, the holders of the rights will be
entitled to purchase at below market value either shares of common
stock of Allied Products Corporation or the common stock of the
acquiring company. Unless redeemed or exchanged earlier, the
Preferred Share Purchase Rights will expire in 10 years.
(7) Legal Proceedings
-----------------
During 1997, the Company sold the assets of its former Coz
division and assigned to the purchaser (the "Assignee") the lease of
the Coz facility. The lessor consented to the assignment but did not
release the Company from liability as lessee. During 1999, the Assignee
announced its intent to vacate the facility and filed a lawsuit against
the Company and the lessor seeking a declaration of the rights of the
respective parties under the lease. In particular, the Assignee has
alleged that the Company breached certain representations made in the
contract for the sale of the Coz assets, and that the lessor breached
certain provisions of the lease. The Company has denied all allegations
of misrepresentations asserted by Assignee, and asserted claims against
the Assignee for breach of the terms of the assignment and against the
lessor for breach of the lease. The lessor has asserted claims in a
lawsuit that the Company and the Assignee are in default under the
certain terms of the lease, including payment terms. Recently, the
lessor placed the Assignee and the Company on notice that it had
terminated the lease for nonpayment of rent and accelerated the rent
due for the remaining term. The lessor also filed an eviction action
against Assignee. The term of the lease runs until December 31, 2000.
Rental payments over the remaining term approximate $1,000,000. While
the risk of loss is reasonably possible, the Company believes that
should the litigation result in a judgment against the Company and in
the favor of lessor, the Company will likely be able to receive and
<PAGE>
collect a favorable a judgment against Assignee in the same amount.
In May 1999 and June 1999, the Company was served with two
complaints purporting to be class action lawsuits on behalf of
shareholders who purchased the Company's common stock between February
6, 1997 and March 11, 1999. The complaints, which were filed in the
United States District Court for the Northern District of Illinois,
appear to be virtually identical. They allege various violations of the
federal securities laws, including misrepresentations or failure to
disclose material information about the Company's results of
operations, financial condition, weakness in its financial internal
controls, accounting for long-term construction contracts and employee
stock option compensation expense. In August 1999, the District Court
ordered that the two cases be consolidated for all purposes. A
Consolidated Amended Complaint was filed on October 12, 1999. The
claims in the Consolidated Amended Complaint appear to be virtually
identical to the claims in the prior complaints filed in May 1999 and
June 1999. No estimate can currently be made as to the ultimate outcome
of this claim, however, such claim could have a material adverse effect
on the financial position and results of operations in the near term if
an unfavorable outcome were to occur.
(8) Contingent Liabilities
----------------------
In addition to the items described in Note 7, the Company is
involved in a number of legal proceedings as a defending party,
including product liability and environmental matters for which
additional liability is reasonably possible. For all these additional
matters except one, after consideration of relevant data, including
insurance coverage and accruals, management believes that the eventual
outcome of these matters will not have a material adverse effect on the
Company's financial position or its ongoing results of operations. For
one product liability claim, however, the amount of damages claimed
against all defendants exceeds the Company's liability insurance
limits. No estimate can currently be made as to whether the ultimate
outcome of this claim against the Company could exceed such limits,
therefore changes in the estimate in the near term could be material to
the financial position and results of operations if an unfavorable
outcome were to occur.
As described in Note 1 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report on Form 10-K, the Verson
division may not be able to meet delivery schedules for certain presses
currently on orders in production. Certain customers of this division
may seek to exercise remedies for alleged breach of contract by the
Company. The remedies could include partial or complete cancellation of
orders and recovery of damages for late delivery, which may include
downtime, lost sales and lost profit. The Company cannot at this time
determine the amount of any potential claim that may be asserted due to
late delivery, however, such claims could have a material adverse
effect on the financial position and results of operations in the near
term, if an unfavorable outcome were to occur.
In response to General Motors' concerns that the Company's
cash flow problems would further delay or preclude the Company from
completing four presses that were in various stages of production,
in the fourth quarter of 1999 the Company and General Motors agreed
to amend the General Motors purchase orders. The aggregate sales price
of the presses covered by these purchase orders exceeds $75 million.
Under the terms of the amended purchase orders, the Company and
General Motors agreed to revised shipping, payment and testing
schedules that allow the Company to ship components of, and receive
payments for, the first two of the four presses earlier than it
would have been able to under the terms of the original purchase
orders. Payment terms for the third and fourth presses were largely
unchanged from the original order (i.e., 90% upon completion,
testing and shipment), however, delivery dates (and related
payments) have been extended so that the last press will not be
shipped until the first quarter of 2001 and final payment will not
be received until the first quarter of 2002. Upon fulfillment of
certain conditions set forth in the amended purchase orders, General
Motors will waive and release the Company from all claims arising
from or attributable to the Company's alleged late delivery defaults
on all presses and will accept delivery of the last two (2) presses
covered by this order. Among the conditions set forth in the amended
purchase orders was the requirement that the Company complete the sale
of the Agricultural Products
<PAGE>
Group by the earlier of the expiration of the Company's financing
arrangements with its secured lenders or December 31, 1999. Final
shareholder approval and closing of the sale of the Agricultural
Products Group is not expected to occur until the first quarter of
2000. The Company has recently amended the Second Amended and
Restated Credit Agreement to extend the maturity date of this
agreement to the earlier of the termination of the Purchase
Agreement or March 7, 2000. Therefore, in the first quarter of 2000,
the Company and General Motors again amended their purchase orders to
reflect the change in the projected closing date of the sale of the
Agricultural Products Group. The amendment requires the Company to
complete the sale and establish a commitment for sufficient working
capital by March 7, 2000.
Reference is made to Note 10 of the Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report on Form 10-K
and the description of an adversary proceeding filed against the
Company in 1998 by the debtor in a bankruptcy proceeding. On November
4, 1999, the Company entered into an agreement to settle the adversary
proceeding. Under the terms of the agreement, the Company will pay
$615,000, plus interest accruing at the rate of 8% per annum on any
amount unpaid after November 12, 1999. Final payment of the entire
settlement amount, plus accrued interest, is due on or before December
1, 1999.
At September 30, 1999, the Company was contingently liable for
approximately $1,579,000 primarily relating to outstanding letters of
credit.
(9) Income Taxes
------------
The provision for income taxes in the three and nine month
periods of 1998 is based upon the Federal statutory rate adjusted for
items that are not subject to taxes. No tax benefit was recorded in the
three and nine month periods ended September 30, 1999 as the Company
had no tax benefits available to record against the pretax loss.
Temporary timing differences have remained relatively constant over
time and are of a nature that will generally reverse over a longer
period of time and are currently not subject to any expiration time
frame. However, if the sale of an 80.1% interest in the Agricultural
Products Group (see Note 5) is approved by the shareholders,
management's belief is that the likelihood of utilizing the deferred
tax asset associated with certain temporary differences is further
decreased in the near term as a result of the proposed transaction, and
that tax loss carryforwards subject to expiration will
<PAGE>
most likely arise. This will likely require an adjustment which will be
recorded upon consummation of the sale, which is the event subject to
shareholder approval that reduces the likelihood of the current
temporary differences being utilizable.
See Note 4 of Notes to Consolidated Financial Statements in
the Company's 1998 Annual Report on Form 10-K for a further discussion
related to income taxes.
(10) Operations By Industry Segment
------------------------------
During 1998, the Company adopted SFAS 131-- Disclosures about
Segments of a Business Enterprise and Related Information. The
determination of business segments is based upon the nature of the
products manufactured and current management and internal financial
reporting. The segment information for 1998 has been restated to
reflect the business segments noted below. Information relating to
operations by industry segment follows (in thousands of dollars):
<TABLE>
<CAPTION>
Agricultural Industrial
Products Products Corporate Consolidated
<S> <C> <C> <C> <C>
----
For the three months:
Net sales to unaffiliated customers $ 38,930 $ 30,402 $ -- $ 69,332
Income (loss) before taxes (a) ........ 5,471(b) 912 (c) (5,843)(e) 540
For the nine months:
Net sales to unaffiliated customers ... $ 112,965 $ 113,231 $ -- $ 226,196
Income (loss) before taxes (a) ........ 15,629(b) (12,354)(c) (16,726)(e) (13,451)
Total assets .......................... 108,791 132,123 16,339 (d) 257,253
1998
----
For the three months
Net sales to unaffiliated customers .... $ 34,068 $ 43,116 $ -- $ 77,184
Income (loss) before taxes (a) ......... 3,520(b) (9,952)(c) (4,364)(e) (10,796)
For the nine months
Net sales to unaffiliated customers .... $ 109,288 $ 119,712 $ -- $ 229,000
Income (loss) before taxes (a) ......... 18,306(b) 65 (c) (10,119)(e) 8,252
Total assets ........................... 96,985 181,348 21,045 (d) 299,378
</TABLE>
---------
(a) Segment income (loss) before taxes does not reflect an allocation
or charge for general corporate income or expenses, or interest
expense.
(b) Includes interest income of $19 in the three months and $81 in
nine months of 1999 and $22 in the three months and $82 in the
nine months of 1998.
(c) Includes interest income of $38 in the three months and $251 in
the nine months of 1999 and $0 in the three and nine months of
1998.
(d) Corporate assets consist principally of cash, deferred income
taxes, other assets, properties not used in operations and
investment in a unconsolidated joint venture.
(e) Corporate income (loss) before taxes consists of the following:
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
General corporate income and expense $(2,818) $(2,599) $ (8,545) $ (4,725)
Stock option compensation (Note 1) . -- -- -- (1,119)
Interest expense ................... (3,038) (1,802) (8,236) (4,339)
Interest income .................... 13 37 64
------- ------- -------- --------
Total ......................... $(5,843) $(4,364) $(16,726) $(10,119)
======= ======= ======== ========
</TABLE>
(11) Summary of Other (Income) Expense
Other (income) expense for the three and nine month periods
ended September 30, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
9/30/99 9/30/98 9/30/99 9/30/98
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income .............. $ (70,000) $ (59,000) $ (387,000) $ (146,000)
Goodwill amortization ........ 112,000 108,000 335,000 240,000
Loan costs amortization ...... 181,000 6,000 380,000 6,000
Net (gain) loss on sales of
operating and non-operating
assets .................... 14,000 10,000 (79,000) (1,962,000)
Loss on investment in non
consolidated subsidiary ... 2,000 16,000 208,000 97,000
Litigation
settlements/insurance
provision ................. 343,000 249,000 (46,000) 818,000
Credit for recovery of
long-term receivable ...... -- (130,000) -- (520,000)
Other miscellaneous .......... (271,000) 179,000 (141,000) (18,000)
----------- ----------- ----------- -----------
$ 311,000 $ 379,000 $ 270,000 $(1,485,000)
=========== =========== =========== ===========
</TABLE>
(12) Financial Arrangements
----------------------
During the first quarter of 1999, the Company entered into a
Second Amended and Restated Credit Agreement replacing the former
Amended and Restated Credit Agreement. This new agreement was amended
in April 1999. Effective July 31, 1999, the Company entered into a
Second Amendment and Waiver to the Second Amended and Restated Credit
<PAGE>
Agreement ("Second Amendment"). Under the terms of the Second
Amendment, the maximum indebtedness under the agreement may remain
at $135,000,000 from July 31 through November 29, 1999 rather than
decrease on specific dates to $110,000,000 as originally scheduled.
Fixed LIBOR interest rates related to amounts outstanding under this
agreement have also been increased from LIBOR plus 3.5% to LIBOR
plus 4.0%. The final maturity date of the agreement was accelerated
from February 28, 2000 to November 30, 1999 subsequently extended to
March 7, 2000. The Second Amendment specifies that termination of or
a materially adverse change in the letter of intent between CC
Industries and the Company or in any succeeding agreement will
constitute an event of default under the credit agreement. The
Second Amendment also provides for a waiver of noncompliance by the
Company as of June 30, 1999 with the minimum consolidated operating
cash flow provision of the agreement. See Note 5 of Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report
on Form 10-K for more detailed explanation on Financial Arrangements.
Effective October 15, 1999, the Company entered into a Third
Amendment and Waiver to the Second Amended and Restated Credit
Agreement ("Third Amendment"). The Third Amendment contained a waiver
of noncompliance with the Company's financial covenants as of September
30, 1999 and extended the maturity date of the Second Amended and
Restated Credit Agreement from November 30, 1999 to December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Agricultural Products Group Disposition
- ---------------------------------------
On July 15, 1999, the Company and CC Industries, Inc., a privately
held firm headquartered in Chicago, signed a letter of intent to form a joint
venture for the ownership and operation of the Company's Agricultural
Products Group. On October 26, 1999 the Company announced that it had signed
a definitive agreement to sell 80.1% of the Agricultural Products Group for
approximately $120,000,000, which was reduced on February 10, 2000 to
approximately $112,000,000. If the transaction is approved by the Company's
shareholders, Bush Hog L.L.C., a new joint-venture company, will acquire the
business, assets and certain liabilities of the Agricultural Products Group.
Under the final agreement, the Company will sell an 80.1% interest in Bush
Hog L.L.C. to an affiliate of C.C. Industries, Inc. Final shareholder
approval and closing of this transaction is not expected to occur until the
first quarter of 2000.
If this transaction is completed, the Company's remaining operations
will consist solely of the operations of the Industrial Products Group and the
19.9% interest in Bush Hog L.L.C. To complete these transactions, the Company
must obtain the consent of its banks under the Second Amended and Restated
<PAGE>
Credit Agreement and the release of outstanding security interests held by the
banks in the assets of the Agricultural Products Group. The banks have consented
to such transaction and have agreed to release the security interests, subject
to the Company's repayment of its entire indebtedness owing to the banks on the
closing. Simultaneous with the closing of this transaction, the Company expects
to borrow additional funds, secured by its 19.9% membership interest in Bush Hog
L.L.C. All or a portion of those new borrowings, together with the cash proceeds
received from the affiliate of CC Industries, Inc., net of fees and expenses,
will be applied to repay the Company's then current bank indebtedness. If the
Company terminates the purchase agreement in order to accept another third party
acquisition, the Company is required to pay a termination fee of $5,000,000.
OPERATING RESULTS
First Nine Months of 1999 Compared to First Nine Months of 1998
- ---------------------------------------------------------------
Consolidated net sales for the first nine months of 1999 were
$226,196,000 compared to consolidated net sales of $229,000,000 reported in the
first nine months of 1998. Loss before taxes in the first nine months of 1999
was $13,451,000 compared to income before taxes (on a restated basis) of
$8,252,000 in the first nine months of the prior year. Net loss for the first
nine months of 1999 was $13,451,000 ($1.14 per common share-diluted) compared to
net income (on a restated basis) of $5,283,000 ($0.44 per common share-diluted)
in the first nine months of 1998.
Subsequent to the end of 1998, the Company determined that the
accounting for certain stock option exercise transactions during the first
quarter of 1998 was incorrect. Compensation expense for certain option
exercises in the first quarter of 1998 which was not recognized in the
statement of income issued at that time is now reflected in the accompanying
restated statement of income (loss). The Company also determined that gross
profit margins at the Verson division of the Industrial Products Group were
incorrectly reported in the first, second and third quarters of 1998.
Corrected amounts are now reflected in the accompanying restated statements
of income (loss). Reference is made to Note 13 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report on Form 10-K
regarding the reconciliation of amounts previously reported in the first
three quarters of 1998 to the amounts currently being reported in the
accompanying restated statement of income (loss).
Within the Agricultural Products Group, net sales increased to
$112,965,000 in the first nine months of 1999 from $109,288,000 reported in
the first nine months of the prior year. Increases were primarily related to
turf/landscape products (approximately $6.4 million) and improved loader
sales (approximately $5.6 million). In the past few years, the Company's Bush
Hog division has concentrated on its turf and landscape product line through
the development of new products and the acquisition in April 1998 of
Universal Turf ($1.0 million). Improvements in the loader product line sales
were also associated with product development and the acquisition of the
Great Bend Manufacturing Company in April 1998 ($4.3 million). These
increases were partially offset by the effects of lower sales of cutter and
disc mower products (approximately $9.2 million) in the first nine months of
1999. External financial conditions in the U.S. agricultural sector have
weakened since the early part of 1998 and are expected to remain weak for the
remainder of 1999 and on into 2000. Commodity prices are lower for a majority
of major crops and for most livestock segments compared to twelve months ago.
Net farm cash income decreased in 1998 and is projected to decline further in
1999 and 2000. However the U.S. Senate recently passed legislation to add
$7.5 billion to the year 2000 agricultural appropriations bill for
<PAGE>
emergency purposes, which is designed to alleviate some of these issues.
Income before taxes decreased to $15,629,000 in the first nine months of 1999
compared to income before taxes of $18,306,000 reported in the first nine
months of 1998. Gross profit margins decreased by approximately 2.25
percentage points in 1999 due primarily to the effects of increased cash
discounts and decreased production levels in the current year. Additional
cash discounts have been offered to dealers in 1999 to help reduce the amount
of dealer inventory levels. Lower production levels were the result of
decreased demand by large farming operations which have been impacted most by
the overall agricultural economy described above. Increases in selling and
administrative expenses in the first nine months of 1999 (approximately
$700,000) were related to the acquisition of the Great Bend division and
Universal Turf operations ($942,000) as noted above. The increase was offset
in part by lower commission expenses at the Bush Hog division ($300,000) due
to the effects of lower sales volume and the mix of products sold.
Within the Industrial Products Group, net sales decreased to
$113,231,000 in the first nine months of 1999 compared to net sales of
$119,712,000 reported in the first nine months of the prior year. The
decrease was related to lower small press (size C and under) sales
(production) at the Verson division. Larger press (size B and higher) sales
(production) in the first nine months of 1999 increased slightly (less than
2%) from levels of the first nine months of the prior year. Production
continues on orders for four large presses to one major U.S. automobile
manufacturer. Production on another set of orders for four large presses to
another major U.S. automobile manufacturer is nearing completion at the end
of the third quarter of 1999.
The Industrial Products Group reported a loss before taxes of
$12,354,000 in the first nine months of 1999 compared to income before taxes
(on a restated basis) of $65,000 in the first nine months of 1998. In 1998,
the Industrial Products Group recorded a loss of $12,079,000 on certain jobs
in process including reserves of $8,813,000 (none in the first nine months)
for estimated future losses on those jobs. The Company indicated in its
annual report that it was reasonably possible that additional losses would
occur. In the first nine months of 1999, the Company revised its cost
estimates on these jobs and increased the reserves for future losses by
$8,663,000. The excess of costs over revenues in the first nine months of
1999 (approximately $2,100,000) compared to gross profits in the same period
in 1998 of approximately $9,100,000. The 1999 amount was negatively affected
by a charge to the reserve for future losses of $8,663,000, partially offset
by a $2,900,000 gain from a payment relating to the recovery of a claim
associated with a prior period. The 1998 amount was positively impacted in
the amount of $5,000,000 from a payment relating to the recovery of a claim
associated with a prior period. There was no charge to the reserve for future
losses in the first nine months of 1998. The Company does not expect any
additional recoveries relating to this claim associated with a prior period.
<PAGE>
Two factors described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1998 Annual
Report on Form 10-K affected the low margins reported in the first nine months
of 1999. First, the Industrial Products Group's sales backlog at December 31,
1998 included revenues of approximately $50,000,000 to be recognized in 1999
through 2001 on the loss jobs described above. No gross margins are expected to
be recognized on those revenues. The backlog also included future revenues of
approximately $95,000,000 to be recorded principally in 1999 and 2000 for which
anticipated gross margins will be lower than historical levels prior to 1998.
Second, the Industrial Products Group is reporting no gross profit on
any press manufactured during 1999 until a point in production when all
manufacturing costs can be reasonably estimated. Currently, that point is when
the press is in final assembly. This method of recognition of gross profits
adversely affected results for the first nine months of 1999.
Selling and administrative expenses increased approximately
$1,700,000 in the first nine months of 1999. Most increases were related to
salary and fringe cost increases (approximately $800,000), an additional
provision for doubtful accounts approximately ($700,000) and selling expenses
related to the joint venture (Verson Pressentechnik) (approximately $300,000)
formed in the fourth quarter of 1998 in which Verson holds a 60% stake.
The Industrial Products Group sales backlog at September 30, 1999
was approximately $73,000,000 compared to a sales backlog of approximately
$145,000,000 at December 31, 1998. The sales backlog at September 30, 1999
includes revenues to be recorded in future periods on orders received,
including press revenues of approximately $31,000,000 on orders for which
estimated losses were recorded in 1998 and 1999 and on which no gross margin
is expected to be recognized in 1999 through 2001. Uncertainties associated
with these contracts make it reasonably possible that additional losses could
occur. The September 30, 1999 backlog for the Industrial Products Group also
included future press revenues of approximately $16,000,000 to be recorded
principally in 1999 for which the group anticipates gross margins lower than
levels prior to 1998. The remaining backlog at September 30, 1999
(approximately $26,000,000) includes future press revenues as well as orders
for parts and field services with anticipated pre-1998 historical gross
margins. The backlog of low margin and no margin work in process at September
30, 1999 will have a substantial negative effect on the Industrial Products
Group earnings in 1999 and, to a lesser extent, in 2000 and 2001. In
addition, the deferral of the recognition of gross margins until the later
stages of the production of a press may result in fluctuations in
quarter-to-quarter results. The Industrial Products Group's difficulties in
completing orders during 1998 and 1999 could adversely affect its
relationship with one or more of its customers and therefore could have a
negative impact on the Industrial Products Group's ability to obtain future
business from such customers. In addition, failure to complete the sale of
the Agricultural Products Group and the resulting financial strain that it
would impose on the Company could further exacerbate problems with existing
customers of the Industrial Products Group and make it more difficult to
attract new customers. Management believes that the significant improvement
in the Company's balance sheet from the repayment of a substantial majority
of its outstanding bank debt may help provide the Industrial Products Group
flexibility to restructure and expand its operations to meet changing demands
and also may help to alleviate the concerns of customers and suppliers about
the long term viability of the Industrial Products Group.
<PAGE>
Because of the difficulties the Industrial Products Group encountered
in 1998, the group failed to meet delivery date requirements provided in several
press orders. The group reserved for penalties of approximately $1,200,000 in
the first nine months of 1998 as a result of delays in shipments and may receive
additional claims for significant penalty payments or damages in the remainder
of 1999 and 2000. Reference is made to Note 10 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report on Form 10-K.
Additional reference is made to Note 8 of Notes to Condensed Consolidated
Financial Statements.
Corporate expenses consisted primarily of administrative charges and
other (income) expense. Administrative expenses increased in the first nine
months of 1999. The majority of the increase was related to the effects of a
matching provision now provided by the Company for its 401(k) pension plans and
increased professional fees related to the extended 1998 audit and refinancing
efforts of the Company. In the first nine months of 1998, administrative
expenses included $1,119,000 of compensation expense (none in the first nine
months of 1999) related to the exercise of certain stock options previously
discussed. Reference is made to Note 11 of Notes to Condensed Consolidated
Financial Statements for an analysis of other (income) expense in the first nine
months of 1999 and 1998.
Interest expense in the first nine months of 1999 was $8,236,000
compared to interest expense of $4,339,000 reported in the first nine months of
1998. The increase was primarily associated with increased borrowings related to
greater receivable levels, fixed asset additions and the acquisition of the
Great Bend and Universal Turf operations in the second quarter of 1998. Interest
rates on borrowings outstanding have also increased under new and amended credit
agreements during the current year. Reference is made to Note 12 of Notes to
Condensed Consolidated Financial Statements in relation to increased interest
rates.
No current or deferred tax benefit was recorded in the first nine
months of 1999 as a result of the Company's pretax loss. Reference is made to
Note 9 of Notes to Condensed Consolidated Financial Statements.
THIRD QUARTER OF 1999 COMPARED TO THIRD QUARTER OF 1998
Consolidated net sales for the third quarter of 1999 were $69,332,000
compared to consolidated net sales of $77,184,000 reported in the third quarter
of 1998. Income before taxes in the third quarter of 1999 was $540,000 compared
to a loss before taxes (on a restated basis) of $10,796,000 in the third quarter
of the prior year. Net income for the third quarter of 1999 was $540,000 ($0.05
per common share-diluted) compared to a net loss (on a restated basis) of
$7,148,000 ($0.60 per common share-diluted) in the third quarter of 1998.
Within the Agricultural Products Group, net sales in the third quarter
of 1999 were $38,930,000 compared to net sales of $34,068,000 reported in the
third quarter of 1998. All major product lines (cutters, turf/landscape, loaders
and parts) recorded improved sales in the third quarter of the current year.
Approximately half of the total increase was related to the turf/landscape
product line. Much of the increase was related to new products developed in the
last 18 months. Improved loader sales in the third quarter of 1999 reflects the
impact of cross marketing these products under the Bush Hog and Great Bend brand
names and new products developed by both divisions. Income before taxes for the
Agricultural Products Group increased to $5,471,000 in the third quarter of 1999
compared to income before taxes of $3,520,000 reported in the third quarter of
the prior year. Gross profits and gross profit margins improved in the third
quarter of 1999 compared to the same quarter of the prior year. Approximately
half of the increase in gross profits was associated with the increased sales
volume as noted above. The remainder of the increase in gross profits and the
improvement in the gross profit margin was principally related to improved
manufacturing variances associated with reduced spending levels. Selling and
administrative expenses increased by approximately 3% in the third quarter of
1999 compared to the same quarter of the prior year. The majority of the
increase was related to increased commissions, the direct result of the increase
in sales noted above.
<PAGE>
Within the Industrial Products Group, net sales decreased to
$30,402,000 in the third quarter of 1999 compared to net sales of $43,116,000
reported in the third quarter of 1998. Revenues have decreased due to a
decreasing number of presses currently in production compared to the prior year.
In addition, many of the presses currently in production are nearing completion.
Orders for presses, large and small, have decreased significantly in 1999 as the
Verson division is concentrating on completing current press orders in a timely
manner to avoid late delivery penalties on certain orders. While the division is
actively seeking press orders from both automobile manufacturers and tier one
and two suppliers, orders are not being pursued which would cause delays on
presses currently in production. This decrease in obtaining production orders
has resulted in decreased revenue recognition. Income before taxes in the
third quarter of 1999 was $912,000 compared to a loss before taxes (on a
restated basis) of $9,952,000 reported for the third quarter of 1998. As
previously noted, no gross profit on any press manufactured during 1999 would
be recognized until the press reaches a point in production when all
manufacturing costs can be reasonably estimated. During the third quarter of
1999, production on orders for four large presses neared completion and
accordingly, gross profits on these jobs were recognized. Gross profit
margins in the third quarter of 1998 includes a charge of $11,180,000 for
revised cost estimates for several newly designed, automated, multi-station
transfer presses which were in production at that time. The need for revised
cost estimates was identified in the third quarter of 1998 and reflects the
impact of production bottlenecks in the assembly process as well as greater
than anticipated increases in subcontracting costs. Increases in selling and
administrative expenses in the third quarter of 1999 compared to the third
quarter of the prior year (approximately $400,000) resulted from the
realignment of the reporting of certain departments to selling expenses and
costs associated with the joint venture (Verson Pressentechnik) formed in the
fourth quarter of 1998.
As noted above, corporate expenses consisted primarily of
administrative charges and other (income) expense. Administrative expense
increases in the third quarter of 1999 were principally associated with
increased professional fees as previously discussed. Reference is made to Note
11 of Notes to Condensed Consolidated Financial Statements for an analysis of
other (income) expense in the third quarter of 1999 and 1998.
Interest expense in the third quarter of 1999 was $3,038,000 compared
to interest expense of $1,802,000 reported in the third quarter of 1998. The
increase was related to the effect of increased interest rates under loan
agreement terms in effect during each quarter and the impact of increased
borrowing levels for reasons previously discussed. Reference is made to Note 12
of Notes to Condensed Consolidated Financial Statements in relation to increased
interest rates.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Working capital at September 30, 1999 was $(31,557,000) and the
current ratio was .84 to 1.00 compared to working capital of $(14,955,000)
and a current ratio of .92 to 1.00 at December 31, 1998. Net consolidated
receivables increased by $4,291,000 since the end of 1998. Approximately
two-thirds of the increase was associated with the Agricultural Products
Group where sales in the current year increased as previously noted. The
remainder of the increase was associated with the Industrial Products Group
where receivables are a function of press shipments. Net consolidated
inventory levels decreased by $23,906,000 since the end of 1998. Over 85% of
the decrease was related to the Industrial Products Group. As noted above,
production has decreased at the Verson division, particularly in the third
quarter of 1999 as presses in production are nearing completion. Orders for
new presses have decreased in the current year resulting in additional
reductions in production and decreased inventory levels. The remainder of the
decrease in inventories was related to the Agricultural Products Group and
reflects normal seasonal decreases.
<PAGE>
Fixed asset additions in the first nine months of 1999 totaled
$6,094,000. Half of this amount represents building costs at the Verson
division, primarily associated with completing the assembly facility
addition, construction of which began in 1998. The majority of the remaining
fixed asset additions in 1999 were related to manufacturing machinery and
equipment purchases at both the Agricultural Products and Industrial Products
groups. There were no major fixed asset dispositions in the first nine months
of 1999.
The net decrease in accounts payable and accrued expenses
($13,931,000) during the first nine months of 1999 was primarily related to
customer deposits at the Verson division. Verson initially accounts for
customer deposits received against orders as a liability. As production
continues on such orders, the division reduces the amount classified as a
liability and credits the amount as a reduction in work in process inventory.
Borrowings under the Company's revolving credit agreement increased by
$10,800,000 in the first nine months of 1999.
On July 31, 1999, the Company entered into a Second Amendment and
Waiver to the Second Amended and Restated Credit Agreement ("Second
Amendment"). Under the terms of the Second Amendment, the maximum
indebtedness under the agreement may remain at $135,000,000 from July 31
through November 29, 1999 rather than decrease on specific dates to
$110,000,000 as originally scheduled. Interest rates related to amounts
outstanding under this amendment have also been increased. The final maturity
date of the agreement was accelerated from February 28, 2000 to November 30,
1999. The Second Amendment refers to the above noted letter of intent between
CC Industries, Inc. and the Company. The Second Amendment specifies that
termination of or a materially adverse change in the letter of intent or in
any succeeding agreement will constitute an event of default under the credit
agreement. The Second Amendment also provides for a waiver of noncompliance
by the Company as of June 30, 1999 with the minimum consolidated operating
cash flow provision of the agreement. Effective October 21, 1999, the Company
entered into a Third Amendment and Waiver to the Second Amended and Restated
Credit Agreement ("Third Amendment"). The Third Amendment contained a waiver
of noncompliance with the Company's financial covenants as of September 30,
1999 and extended the maturity date of the Second Amended and Restated Credit
Agreement from November 30, 1999 to December 31, 1999. Effective December 15,
1999, the Company entered into a Fourth Amendment and Waiver to the Second
Amended and Restated Credit Agreement to extend the maturity date to February
15, 2000 (subsequently extended to the earlier of the termination of the
Purchase Agreement or March 7, 2000).
<PAGE>
In response to General Motors' concerns that the Company's cash flow
problems would further delay or preclude the Company from completing four
presses that were in various stages of production, in the fourth quarter of
1999 the Company and General Motors agreed to amend the General Motors
purchase orders. The aggregate sales price of the presses covered by these
purchase orders exceeds $75 million. Under the terms of the amended purchase
orders, the Company and General Motors agreed to revised shipping, payment
and testing schedules that allow the Company to ship components of, and
receive payments for, the first two of the four presses earlier than it would
have been able to under the terms of the original purchase orders. Payment
terms for the third and fourth presses were largely unchanged from the
original order (i.e., 90% upon completion, testing and shipment), however,
delivery dates (and related payments) have been extended so that the last
press will not be shipped until the first quarter of 2001 and final payment
will not be received until the first quarter of 2002. Upon fulfillment of
certain conditions set forth in the amended purchase orders, General Motors
will waive and release the Company from all claims arising from or
attributable to the Company's alleged late delivery defaults on all presses
and will accept delivery of the last two (2) presses covered by this order.
Among the conditions set forth in the amended purchase orders was the
requirement that the Company complete the sale of the Agricultural Products
Group by the earlier of the expiration of the Company's financing
arrangements with its secured lenders or December 31, 1999. Final shareholder
approval and closing of the sale of the Agricultural Products Group is not
expected to occur until the first quarter of 2000. The Company has recently
amended the Second Amended and Restated Credit Agreement to extend the
maturity date of this agreement to the earlier of the termination of the
Purchase Agreement or March 7, 2000. Therefore, in the first quarter of 2000,
the Company and General Motors again amended their purchase orders to reflect
the change in the projected closing date of the sale of the Agricultural
Products Group. The amendment requires the Company to complete the sale and
establish a commitment for sufficient working capital by March 7, 2000.
Reference is made to Note 6 of Notes to Condensed Consolidated
Financial Statements in relation to the Company's announcement on July 29,
1999 of a New Stockholders' Right Plan and the redemption of the Common Share
Purchase Rights then outstanding. Reference is made to Note 4 of Notes to
Condensed Consolidated Financial Statements in relation to the Company
acquiring a conditional option to purchase certain fixed assets and
inventories of the Niagara Machine Division of CNB International, Inc. D.I.P.
As of September 30, 1999, the Company had cash and cash equivalents
of $914,000 and additional funds of $3,321,000 available under the Second
Amended and Restated Credit Agreement and related amendments. Absent
completion of the joint venture transaction or renegotiation of its credit
facility, the Company believes that its expected operating cash flow and
funds available under the Second Amended and Restated Credit Agreement and
related amendments may not be adequate to finance its operations and capital
expenditures beyond 1999. The joint venture transaction, if completed, should
result in the Company receiving cash proceeds which would significantly
reduce the amounts outstanding under this agreement. Additional financing
will be necessary to maintain operations of the Industrial Products Group.
The Company is exploring additional or alternate sources of financing
necessary to continue these remaining operations in a normal manufacturing
environment and to finance necessary capital expenditures. During the second
and third quarters of 1999, the Company was not in compliance with certain
provisions of the Second Amended and Restated Credit Agreement. A waiver for
noncompliance was received subsequent to September 30, 1999.
Reference is made to Note 7 of Notes to Condensed Consolidated
Financial Statements as it relates to the Company's involvement in legal
proceedings as a defending party.
The Company's market risk is the exposure to adverse changes in
interest rates. At September 30, 1999, the Company's total debt
outstanding (revolving credit agreement and capitalized leases) totaled
$132,524,000. Capitalized lease debt ($2,424,000) is represented by fixed
rate financing and is not subject to market rate fluctuations. The remaining
portion of the Company's debt at September 30, 1999 ($130,100,000) was
subject to the terms of the Amended and Restated Credit Agreement that
provides for interest rates at either a floating prime or fixed LIBOR rate,
plus 4%. The base interest rates are periodically agreed to with the lender
for fixed periods of 30 to 90 days. The balance outstanding at September
30, 1999, approximates fair market value. A hypothetical immediate 10%
increase in interest rates would adversely affect 2000 earnings and cash
flows by approximately $1,245,000, based on the composition of debt levels at
September 30, 1999.
<PAGE>
IMPACT FROM NOT YET EFFECTIVE RULES
- -----------------------------------
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 133-Accounting
for Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. This statement is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company is in the process of evaluating the impact of this statement on its
financial reporting.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of
their final two digits only. Such programs may interpret the year 2000 to
mean the year 1900 instead. If not corrected, these programs could cause
date-related transaction failures. The Company's program to address this year
2000 compliance issue is broken down into the following major categories:
1. Financial related hardware/software.
2. Manufacturing/engineering process controls.
3. Equipment manufactured for sale.
4. Outside source suppliers.
The general phases of the year 2000 compliance program common to all
of the above categories are:
1. Identifying items that are not year 2000 complaint.
2. Assigning priorities to identified items, including
the assessment of items material to the operations of
the Company.
3. Repairing or replacing material items determined not
to be year 2000 complaint.
4. Testing of material items repaired or replaced.
<PAGE>
The Company has completed the identification process in relation to
the four categories noted above. The Company recently purchased and installed
financial software which is year 2000 compliant. Outside service bureau
financial reporting software currently in place has been determined and
tested to be year 2000 compliant. Payroll services for the Company are
currently being provided by an outside service. The Company is currently in
the process of upgrading this service to year 2000 compliant software. All
locations are utilizing this new software. Compliance certificates have been
received for non personal computer systems owned/leased by the Company.
Compliance testing has also been completed. The majority of all personal
computers used within the Company (both financial and non financial
applications) have been purchased within the last two years and have been
successfully tested for compliancy. Remaining non compliant personal
computers will be replaced with year 2000 compliant units during 1999 as a
part of the Company's normal upgrade program.
Manufacturing/engineering process controls and equipment includes
equipment to manufacture and design products sold by the Company. Design
equipment used in the engineering of agricultural equipment has been tested
and determined to be year 2000 compliant. At the Verson division, year 2000
compliance certificates have been received on all major purchased hardware
and software applications for designing equipment and programs. The intent of
the division is to rely on these certificates (due to the quality of the
information received and the reputation of the vendors involved) although
some testing has been completed with no exceptions noted. The majority of
internally developed design software at Verson has been determined not to
contain date fields. Programs which do contain date fields have been
determined to be year 2000 compliant. The Company does not have a significant
amount of manufacturing equipment with embedded computer chips or
hardware/software which would present a problem at the beginning of the year
2000. Compliancy certificates have been received from the majority of
equipment manufacturers and internal tests of production machinery have been
completed with no exceptions noted. Outside consultants have also evaluated
the status of production equipment at the Verson division and have determined
that the division would be unlikely to experience year 2000 problems in the
areas reviewed.
None of the equipment manufactured by the Agricultural Products
Group include hardware/software or embedded computer chips. Stamping presses
manufactured by the Verson division contain software and embedded computer
chips. Compliance certificates have been received on all software included in
the presses sold. Some internal testing has also been performed. The Company
believes that it has little, if any, exposure related to equipment
manufactured by its divisions in relation to the year 2000 issue.
<PAGE>
The Company has identified key outside vendors which provide
services which, if not year 2000 compliant, could have an effect on the
operations of the Company. Sources include banking, investment, pension
obligations, insurance, utilities, etc. businesses. During 1999, these
service providers were asked to update the Company on the status of their
year 2000 compliance. The Company has not received any notification from any
outside service provider indicating non year 2000 compliance on behalf of the
vendor.
The total cost associated with required modifications to become year
2000 compliant (both incurred to date and to be incurred in the future) is
not expected to be material to the Company's financial position. This total
cost does not include the cost of internal efforts to complete the project.
The costs associated with the replacement of computerized systems,
substantially all of which were capitalized, are not included in the above
estimate as such replacements or upgrades were necessary to operate
efficiently and such costs would have been incurred even if year 2000
compliance was not an issue. The Company anticipates that additional amounts
will be spent in completing the year 2000 compliance project. These costs are
being funded through operating cash flow. The Company's year 2000 compliance
program is an ongoing process and the estimates of costs and completion dates
for various components of the program described above are subject to change.
Other major system projects have not been deferred due to the year 2000
compliance project.
The risk to the Company from the failure of suppliers of goods and
services (over which the Company does not have control) to attain year 2000
compliance is the same to other business enterprises generally. Failure of
information systems by financial institutions (banks, service bureaus,
insurance companies, etc.) would disrupt the flow of funds to and from the
Company until systems can be remedied or replaced by these providers. Failure
of delivery of critical components by suppliers and subcontractors resulting
from non year 2000 compliance could result in disruptions of manufacturing
processes with delays in the delivery of our products to our customers until
non- compliant conditions or components can be remedied or replaced. The
Company has identified major suppliers of goods and services and is in the
process of completing their year 2000 compliance status. Alternate suppliers
of critical components are also in the process of being identified.
Contingency plans are being developed on a case by case basis and may include
booking orders before anticipated business disruption. Even so, judgments
regarding contingency plans, such as how to develop them and to what extent,
are themselves subject to many variables and uncertainties. There can be no
assurance that the Company will correctly anticipate the level, impact or
duration of noncompliance by suppliers that provide inadequate information.
As a result, there is no certainty that the Company's contingency plans will
be sufficient to mitigate the impact of noncompliance by suppliers, and some
material adverse effect to the Company may result from one or more third
parties regardless of defensive contingency plans. The Company believes it is
taking the necessary steps to resolve year 2000 issues and that with the
completion of the year 2000 project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
<PAGE>
SAFE HARBOR STATEMENT Statements contained within the Management
Discussion and Analysis of Financial Conditions and Results of Operations
that relate to future operating periods are subject to risks and
uncertainties that could cause actual results to differ from management's
projections. Operations of the Company include the manufacturing and sale of
agricultural and industrial machinery. In relation to the Agricultural
Products Group, forward-looking statements involve certain factors that are
subject to change. These elements encompass interrelated factors that affect
farmers and cattle ranchers' confidence, including demand for agricultural
products, grain stock levels, commodity prices, weather conditions, crop and
animal diseases, crop yields, farm land values and government farm programs.
Other factors affecting all operations of the Company include actions of
competitors in the industries served by the Company, production difficulties
including capacity and supply constraints, labor relations, interest rates
and other risks and uncertainties. The Company's outlook is based upon
assumptions relating to the factors discussed above.
<PAGE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1 Legal Proceedings
-----------------
Reference is made to Notes 7 and 8 of Notes to
Condensed Consolidated Financial Statements.
Item 5 Other Information
-----------------
Reference is made to Note 12 of Notes to Condensed
Consolidated Financial Statements and Exhibit 10 for
information related to the Waiver to the Amended and Restated
Credit Agreement
</TABLE>
<TABLE>
<CAPTION>
Item 6. Exhibit and Reports on Form 8-K
-------------------------------
<S> <C> <C>
(a) EXHIBIT NO. DESCRIPTION OF EXHIBITS
2 Limited Liability Company Interest Purchase and Asset
Contribution Agreement by and between Allied Products
Corporation, Bush Hog Investors, L.L.C. and Bush Hog,
L.L.C. dated as of October 21, 1999. *
10 Material Contract--Third Amendment and Waiver dated
as of October 15, 1999 to the Credit Agreement dated
as of February 1, 1999. *
27 Financial Data Schedules *
* Previously filed
(b) Reports on Form 8-K - On July 30, 1999, the Company
filed report under Item 5 - Other Events. The report
was filed in connection with press release dated July
29, 1999 reporting that the registrant Broad of
Directors approved the redemption of its current
common share Purchase Rights and adopted a new
Stockholder Rights Plan. Reference is made to Note 6
of Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED PRODUCTS CORPORATION
------------------------------
(REGISTRANT)
February 29, 2000 /s/ Robert J. Fleck
Robert J. Fleck
Vice President- Accounting and Chief Accounting
& Administrative Officer
February 29, 2000 /s/ Mark C. Standefer
Vice President, General Counsel & Secretary
