<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended 30 September 1998
or
( ) TRANSITION REPORT PURSUANT OT SECTION 13 OR 15 (d) OF
THE SECRUITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1 - 1997
THE MONARCH MACHINE TOOL COMPANY
--------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-43407810
- --------------------------------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2600 Kettering Tower, Dayton, Ohio 45423
----------------------------------------
(Address of principal executive offices, zip code)
(937) 910-9300
--------------
(Registrant's telephone number including area code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The number of common shares outstanding as of October 23, 1998 was 3,769,427.
<PAGE> 2
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART 1. FINANCIAL INFORMATION:
ITEM 1. - Condensed Financial Statements:
Balance Sheets - 30 September 1998 and 31 December 1997 2
Statements of Operations and Comprehensive Income -
Three Quarters and Quarter ended 30 September 1998 and 1997 3
Statements of Cash Flow -
Three Quarters ended 30 September 1998 and 1997 4
Notes to Condensed Financial Statements 5-6
ITEM 2. - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7-8
PART II. OTHER INFORMATION:
ITEMS 1- 5 Inapplicable 9
ITEM 6 Exhibits and Reports on Form 8-K 9
</TABLE>
1
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
30 September 31 December
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 2,149 $ 5,022
Accounts receivable 23,462 26,762
Costs and estimated earnings in excess of
billings on uncompleted contracts 736 337
Inventories 8,942 11,142
Prepaid expenses 36 540
Deferred income taxes 2,312 3,102
---------- ----------
Current assets 37,637 46,905
PROPERTY, PLANT & EQUIPMENT - NET 9,772 8,649
PREPAID PENSION COSTS 18,281 15,723
DEFERRED INCOME TAXES 1,153 1,153
OTHER ASSETS 3,150 3,439
---------- ----------
$ 69,993 $ 75,869
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 6,119 $ 10,138
Accrued liabilities 11,190 16,016
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,052 5,096
Current maturities of long-term debt 46 577
---------- ----------
Current liabilities 22,407 31,827
LONG-TERM DEBT 4,101 1,598
OTHER ACCRUED LIABILITIES 1,212 1,175
SHAREHOLDERS' EQUITY:
Preferred stock 14 14
Common stock 5,815 5,741
Unearned compensation, restricted stock (68) (77)
Retained earnings 36,754 35,739
Translation adjustment (242) (148)
---------- ----------
42,273 41,269
---------- ----------
$ 69,993 $ 75,869
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 4
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended 30 September Quarter Ended 30 September
--------------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 60,427 $ 81,066 $ 18,168 $ 25,523
Operating costs and expenses:
Cost of sales 48,335 68,370 14,441 21,317
Selling, general and administrative 9,471 11,275 3,015 3,502
---------- ---------- ---------- ----------
Operating income 2,621 1,421 712
704
Other income (expense):
Interest expense (252) (891) (72) (187)
Interest income 125 212 12
96
Other income (expense) (102) (530) 13 (932)
---------- ---------- ---------- ----------
Income (loss) before income taxes 2,392 212 665 (319)
Income tax provision (benefit) 791 (73) 226 (143)
---------- ---------- ---------- ----------
Net income (loss) 1,601 285 439 (176)
Other comprehensive (income), loss
net of tax - foreign
currency translation
adjustments (62) (265) 52 (51)
---------- ---------- ---------- ----------
Comprehensive income $ 1,539 $ 20 $ 491
$ (227)
========== ========== ========== ==========
Average common shares outstanding 3,768 3,762 3,769 3,762
========== ========== ========== ==========
Net income per common share, $ .42 $ .08 $ .12 $ (.05)
basic and diluted ========== ========== ========== ==========
Dividends per share:
Preferred $ 1.35 $ 1.35 $ .45 $ .45
Common $ .15 $ .15 $ .05 $ .05
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 5
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended 30 September
---------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,601 $ 285
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 716 1,170
Pension income (2,420) (1,318)
Deferred tax provision 791
Changes in assets and liabilities:
Accounts receivable 2,901 14,336
Inventories 2,200 4,483
Other assets 793 (457)
Accounts payable (4,018) (5,664)
Accrued liabilities (4,789) (80)
Advance payments on contracts (44) 4,471
Accrued income taxes (176)
---------- ----------
Net cash provided by (used in) operating activities (2,269) 17,050
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,877) (356)
Proceeds from sale of fixed assets 1,996
---------- ----------
Net cash provided by (used in) investing activities (1,877) 1,640
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (585) (584)
Repayments of short-term borrowings, net (15,766)
Proceeds from long-term borrowings 6,971
Repayments of long-term borrowings (5,000)
Issuance of restricted stock 19
---------- ----------
Net cash provided by (used in) financing activities 1,386 (16,331)
EFFECT OF EXCHANGE RATES ON CASH (113) (404)
---------- ----------
INCREASE (DECREASE) IN CASH (2,873) 1,955
CASH - BEGINNING OF PERIOD 5,022 4,848
---------- ----------
CASH - END OF PERIOD $ 2,149 $ 6,803
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE> 6
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE QUARTERS ENDED 30 SEPTEMBER 1998 AND 1997
1. FINANCIAL STATEMENTS
--------------------
The balance sheet at 31 December 1997 presents condensed financial
information taken from the audited financial statements. The interim
financial statements are unaudited. In the opinion of management, all
adjustments, which consist of normal recurring adjustments necessary to
present fairly the financial position and results of operations for the
interim periods presented, have been made. The results shown for the
periods presented in 1998 are not necessarily indicative of the results
that may be expected for the entire year.
The Accounting Standards Executive Committee ("AcSEC") of the AICPA has
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" effective for
financial statements for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The Company
has chosen earlier application of SOP 98-1, effective for 1998, in
conjunction with the Company's implementation of its Enterprise
Resource Planning system.
The Company has adopted SFAS No. 129 "Disclosure of Information about
Capital Structure", which was effective for financial statements for
periods ending after December 15, 1997 and established standards for
disclosing information about an entity's capital structure. The
adoption of SFAS No. 129 had no significant effect on the Company's
disclosures about its capital structure.
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which was effective for financial statements for periods beginning
after December 15, 1997 and established standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements. The only non-owner source of change in equity in 1997 and
1998 is the Company's translation adjustment related to its investment
in foreign subsidiaries.
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which was effective for fiscal
years beginning after December 15, 1997 and established standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company's adoption
of FASB No. 131 has not had a material impact on its financial
statement presentation or related disclosures.
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes standards for derivative instruments, including
certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the effect
of SFAS No. 133 on its financial statements to be significant.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's 31
December 1997 annual report to shareholders.
5
<PAGE> 7
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE QUARTERS ENDED 30 SEPTEMBER 1998 AND 1997
2. EARNINGS PER SHARE
------------------
Basic earnings per common share is computed by dividing net income
(loss), after adjustment for the preferred stock dividend requirement,
by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by adding the dilutive
effect of common stock equivalents, such as the convertible preferred
shares and any stock options outstanding, to the weighted average
number of common shares outstanding.
3. INVENTORIES
-----------
The Company's inventories consist of the following balances (in
thousands):
<TABLE>
<CAPTION>
30 September 31 December
1998 1997
<S> <C> <C>
Finished goods $ 1,915 $ 2,729
Work-in process and parts $ 10,495 12,381
Raw materials 874 320
Less LIFO reserve (4,342) (4,288)
---------- ----------
Net inventories $ 8,942 $ 11,142
========== ==========
</TABLE>
4. INDEBTEDNESS
------------
In May 1998, the Company executed a $15 million revolving credit
facility. The amount available under the credit facility is based on
eligible accounts receivable and inventory. The Company had $14.2
million available under the revolving credit facility of which $4
million was borrowed at 30 September 1998.
This facility can be converted to a term loan on May 29, 2001 and is
payable in eight quarterly installments beginning June 30, 2001.
5. OPTION TO SELL REAL ESTATE
--------------------------
In August, the Company executed on option to sell 39 acres of land. The
option price is $1.56 million and the option requires various
conditions to be satisfied and stipulates closing of the sale by
February 15, 1999. A six month extension beyond February 15, 1999 is
available to the buyer at a revised purchase price of $1.6 million. The
Company's carrying value of the land is $82,000.
6
<PAGE> 8
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE QUARTERS ENDED 30 SEPTEMBER 1998 AND 1997
RESULTS OF OPERATIONS
---------------------
During the last half of 1997 the Company sold or decided to close its
Sidney and German operations. To facilitate comparison to the periods
presented for this year, all references in the following discussion to
the periods in 1997 are adjusted to eliminate the impact of these
operations.
Net earnings for the three quarters and quarter ended 30 September 1998
were $1,601,000, or $.42 per share, and $439,000, or $.12 per share,
respectively compared to net earnings of $638,000, or $.17 per share,
and a loss of $13,000 or ($.03) per share, respectively, from ongoing
operations for the same periods of 1997. The increase in earnings was
principally the result of a strong first three quarters at the coil
processing operation and improved profit margins on contracts in
process. A reduction in interest expense associated with lower
borrowing levels during the first three quarters of 1998 also
contributed to increased earnings. The coating and laminating operation
has operated at a loss in 1998 due to limited sales during its start up
phase. The machine tool division has been negatively impacted by
increased competition and a lower demand for its products. This
situation has affected this division's selling prices and gross margins
and has resulted in lower income in 1998 compared to 1997. Backlog at
30 September 1998 for the Company was $32.9 million compared to $49.9
million at 30 September 1997.
Net sales for the three quarters and quarter ended 30 September 1998
were $60.4 and $18.2 million, respectively, compared to $67.2 and $22.2
million for the same periods in 1997. The decrease was primarily due to
the Company entering 1998 with a lower backlog than it had in the
beginning of 1997 as well as increased competition in the machine tool
segment, particularly from Japan, along with lower demand for its
products. Cost of sales as a percentage of sales was 80% and 79.5% for
the three quarters and quarter ended 30 September 1998 compared to
83.7% and 82.6% for the same periods in 1997. The improvement occurred
mainly in the coil processing operations, as a result of better margins
on equipment presently being produced.
Selling, general and administrative expenses were $9.5 million and $3.0
million for the three quarters and quarter ended 30 September 1998,
respectively, compared to $8.2 million and $2.8 million during the same
periods in 1997. The Company has incurred higher expenses in 1998 due
to increased sales and marketing activities and to position itself for
future growth.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the first three quarters of 1998, the Company's operating
activities required $2.3 million of cash, which was used to reduce
accounts payable ($4.0 million) and accrued liabilities ($4.8 million).
A reduction in accounts receivable and inventories provided $5.1
million of cash in 1998. Capital expenditures required $1.9 million in
cash while dividends paid were $585,000 in the first nine months of
1998. The remaining cash requirement was funded from the Company's cash
balances and from additional net borrowings of $2.0 million under the
Company's revolving credit facility. The requirement for cash during
the first three quarters of 1998 was primarily due to the Company's
ability to collect advance payments from customers of its coil
processing operation in 1997, while cash was used to pay manufacturing
costs during 1998. The Company forecasts that its operating activities
will provide cash during the remainder of 1998.
7
<PAGE> 9
THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE QUARTERS ENDED 30 SEPTEMBER 1998 AND 1997
In May 1998, the Company executed a $15,000,000 revolving credit
facility, with the amount available under the credit facility based on
eligible accounts receivable and inventory. The Company had $15 million
available under the revolving credit facility, of which $4 million was
borrowed at 30 September 1998. This facility can be converted to a term
loan on May 29, 2001 and is payable in eight quarterly installments
beginning June 30, 2001.
YEAR 2000
---------
Year 2000 Issues arise because of the inability of many existing
computer systems and software, which utilize a two-digit conversion for
recording years, to properly recognize and process information relating
to a year that begins with "20" instead of "19". In early 1998, the
Company began a Company-wide program to replace its internal
information processing systems for reasons unrelated to Year 2000
Issues. It expects to complete this program during the third quarter of
1999, which should result in its internal information processing
systems being Year 2000 compliant. The cost to the Company to fully
implement this new system is estimated at approximately $2.5 million.
Funds for this program are expected to be available to the Company from
its internal operations and, if necessary, from its lines of credit. As
part of a comprehensive Year 2000 compliance project, the Company is
also assessing other key aspects of its operating and administrative
processes which, if they would become inoperable due to Year 2000
issues, would have a material impact on the Company's ability to
continue its normal operations. This program includes a plan to
identify the extent to which key vendors and consultants are addressing
this same issue and an assessment of the Company's products. The
Company will monitor and evaluate the progress of its vendors and
consultants on this matter. The Company is also reviewing its
non-information technology systems to determine the extent of any
changes that may be necessary and presently believes that there will be
minimal changes necessary for compliance. Although the Company cannot
assess the result of this evaluation until it has obtained further
information, based upon the work it has performed to date, it is not
presently aware of any Year 2000 issues which would have a disruptive
impact on its operations or a material adverse impact upon its
financial condition or results of operation.
The Company believes it is diligently addressing Year 2000 issues and
that it will satisfactorily resolve any significant Year 2000 problems.
The Company anticipates completing substantially all of its Year 2000
projects during 1999, with major completion milestones being targeted
for the first, second and third quarters. In the event the Company
falls short of these milestones, additional internal resources will be
focused on completing these projects or implementing contingency plans.
FORWARD LOOKING STATEMENTS
--------------------------
In addition to historical information, this document contains various
forward-looking statements, involving risks and uncertainties, which
could cause actual results to differ materially from these statements.
These risks include, but are not limited to, changes in economic
conditions, interest rates, price and product offering competition from
domestic and foreign entities, customer purchasing patterns, labor
costs, product liability issues and other legal claims and governmental
regulatory issues.
8
<PAGE> 10
PART II - OTHER INFORMATION
Items 1-5 - Inapplicable
Item 6 - Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended 30
September 1998.
9
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE MONARCH MACHINE TOOL COMPANY
(Registrant)
DATE: 6 November 1998 By /s/ Karl A. Frydryk
--------------------------- ------------------------------
Karl A. Frydryk
Vice President & Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,149
<SECURITIES> 0
<RECEIVABLES> 24,830
<ALLOWANCES> 1,368
<INVENTORY> 8,942
<CURRENT-ASSETS> 37,637
<PP&E> 34,453
<DEPRECIATION> 24,681
<TOTAL-ASSETS> 69,993
<CURRENT-LIABILITIES> 22,407
<BONDS> 4,101
0
14
<COMMON> 5,815
<OTHER-SE> 36,444
<TOTAL-LIABILITY-AND-EQUITY> 69,993
<SALES> 60,427
<TOTAL-REVENUES> 60,427
<CGS> 48,335
<TOTAL-COSTS> 57,806
<OTHER-EXPENSES> 102
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 2,392
<INCOME-TAX> 791
<INCOME-CONTINUING> 1,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,601
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
