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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31,1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File No. 1-2723
ATHEY PRODUCTS CORPORATION
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(Exact Name of Registrant as Specified in Charter)
Delaware 36-0753480
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1839 South Main Street, Wake Forest, North Carolina 27587-9289
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: 919-556-5171
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2 value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
On March 17, 1997, there were 3,805,608 shares of common stock outstanding.
On March 17, 1997, the aggregate market value of voting stock held by
nonaffiliates (based upon the average bid and ask price of such stock) was
approximately $9,471,302.
Exhibit Index located at Sequential Page 11.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C> <C> <C>
Part I None
Part II
Item 5 - Market for Registrant's Common Equity Page 7 of the Annual Report to the
and Related Stockholder Matters Shareholders for the year ended December
31, 1996
Item 6 - Selected Financial Data Page 6 of the Annual Report to
Shareholders for the year ended December
31, 1996
Item 7 - Management's Discussion & Analysis of Pages 4 - 7 of the Annual Report to
Financial Condition and Results of Shareholders for the year ended December
Operations 31, 1996
Item 8 - Financial Statements and Supplementary Pages 8 - 13 and 16 of the Annual Report
Data to Shareholders for the year ended
December 31, 1996
Part III
Item 10 - Directors and Executive Officers of the Registrant's Proxy Statement to be filed
Registrant in connection with its Annual Meeting to
be held May 15, 1997
Item 11 - Executive Compensation Registrant's Proxy Statement to be filed
in connection with its Annual Meeting to
be held May 15, 1997
Item 12 - Security Ownership of Certain Beneficial Registrant's Proxy Statement to be filed
Owners and Management in connection with its Annual Meeting to
be held May 15, 1997
Item 13 - Certain Relationships and Related Registrant's Proxy Statement to be filed
Transactions in connection with its Annual Meeting to
be held May 15, 1997
Part IV Exhibits as specified in Item 14 of this
Report
</TABLE>
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ATHEY PRODUCTS CORPORATION
Forward-Looking Statements
The forward-looking statements included in the "Business", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections, which reflect management's best judgment
based on factors currently known, involve risks and uncertainties. Words such as
"expects", "anticipates", "believes", "intends", and "hopes", variations of such
words and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to, the factors discussed in such sections. Forward-looking
information provided by the Company in such sections pursuant to the safe harbor
established under the Private Securities Litigation Reform Act of 1995 should be
evaluated in the context of these factors.
PART 1
Item 1. Business
General Development of Business. Athey Products Corporation ("Registrant" or the
"Company") was incorporated in the State of Illinois on September 29, 1922. In
May, 1988, the Registrant's corporate domicile was changed from Illinois by
reincorporating the Registrant in Delaware. The Registrant is a manufacturer of
heavy duty equipment and parts. Its principal products include street sweepers
and force-feed loaders. The Registrant also manufactures other equipment and
replacement parts for its products. The principal users of the Registrant's
products are municipalities, contractors, other governmental bodies or agencies
and others who have need of heavy duty, large capacity equipment.
The following is a brief description of the principal products manufactured by
the Registrant.
Mobil Street Sweepers. The Mobil street sweepers are of the four-wheel
mechanical bottom dump and high-lift type and of the three-wheel mechanical
high-lift type which offers flexibility in the street cleaning operation. The
four-wheel type may be gasoline, diesel, or compressed natural gas powered with
an automatic transmission. The three-wheel type is diesel powered with
hydrostatic drive. All units have variable speed, hydraulically driven brooms
and elevators for cleaner pickup of hard-to-sweep material.
Conveyors and Systems. The Registrant manufactures a broad range of different
types and sizes of conveyors, vibrating screens and pug mill mixing plants.
Types of conveyors include portable belt loader conveyors, stationary and
portable conveyors, folding stacker conveyors, wash plants and rotary stacking
conveyors for use in mining, quarries and material processing plants. In
December, 1996, the Company sold its Kolman Aggregate Product Line consisting of
conveyors, vibrating screens, pugmills, and ash blenders, as well as the Kolman
trademark.
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Other Products
(a) Force-feed loaders. Force-feed loaders combine the continuous flow
capabilities of a belt conveyor with wheel loader mobility, and are produced
with either gasoline or diesel engines. They are used to pick up or load dirt,
snow or any flowable material from windrow or roadside and drop it into a
trailing truck.
Force-feed loaders can also be used for loading sand, coal, salt, top soil and
gravel from stockpiles; assisting in cleanup jobs or paving projects; picking up
windrows on road shoulders and ditch trimming; or clearing snow-choked roads.
Optional attachments include a swivel discharge conveyor and right angle side
discharge to either side.
(b) Graders. The grader, called the "Maintenance Master, Model 600", is
a small, maneuverable maintenance machine designed to handle jobs where larger,
less efficient equipment is not required. This unit can be used for site
preparation on small jobs such as parking lots and driveways. Graders are
produced with diesel engines, hydrostatic transmission and a wide range of
attachments.
(c) Replacement Parts. The Registrant also manufactures and distributes
replacement parts for its product lines.
The Registrant's products are distributed through an equipment dealer network
that covers the entire United States and certain foreign countries. Agreements
with its dealers are terminable, by either party, upon 30 days written notice,
except as otherwise limited by applicable law. As is common in the industry,
almost all such dealers also sell complementary products produced by other
manufacturers, and all of them operate as independent contractors.
Set forth below, for each of the Registrant's last three years, is the
percentage of total sales contributed by each class of similar products which
contributed 10% or more of total sales during any of the last three years:
Year Ended December, 31
Class of Product 1996 1995 1994
---------------- ---- ---- ----
Mobil Street Sweepers 93% 84% 89%
Raw Materials and Component Parts. The principal materials and components used
by the Registrant in its manufacturing operations are steel, paint, castings,
axles, tires, hydraulic parts, engines, transmissions, small parts and welding
supplies. These materials and components are available from and are purchased
from many suppliers, none of whom the Registrant is substantially dependent upon
and none of whom receive a disproportionate amount of the Registrant's business.
In the experience of the Registrant, it has been generally able to receive its
supplies as required, though delays in deliveries have occurred.
Patents, Trademarks, Licenses. Although the Registrant owns certain patents,
trademarks and licenses, none is of material importance to its business, with
the exception of the trademark "Mobil Sweeper" owned by the Registrant and used
in connection with its mobil street sweepers.
4
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Seasonality. With respect to sales of products manufactured by the Registrant,
it has been the experience of the Registrant that its heavy shipping period
begins in the spring of the year and continues through the late fall of the
year.
Working Capital. The Registrant generates working capital from operations and
borrowings under a bank line of credit. The Registrant does not generally
provide extended payment terms to its customers, however, the Company may, on
occasion, provide certain customers with alternative payment arrangements. The
Company's business, as a whole, is not generally subject to seasonal variations
in demand, working capital requirements are not subject to material fluctuation.
Customers. In 1996, the Company's largest customer, a dealer selling to a local
government entity, accounted for approximately 25% of the Company's net sales.
No other customer accounted for more than 10% of the Company's net sales.
The Company believes that the loss of any customer that accounts for 10% or more
of the Company's net sales would have a material adverse effect on its business.
As is customary in the industry, the Company does not have a significant amount
of long term sales agreements with its customers. However, it believes that it
enjoys excellent relationships with its customers. The Company follows customary
industry practices regarding terms of sale; however, the Company does, on
occasion, provide extended payment terms to certain customers.
Backlog. The dollar amount of the backlog of orders believed to be firm as of
December 31, 1996 and December 31, 1995 was approximately $4,675,524 and
$7,452,000, respectively. Mobil street sweepers accounted for 92% and 100%,
respectively, of the backlogs as of such dates. The Registrant expects to
complete all orders related to the December 31, 1996 backlog during the current
year.
Government Contracts. The Registrant has no material contracts with the Federal
Government.
Competition. The Registrant competes in the street sweeper, force-feed loader
and grader markets with a number of other companies which are larger and have
greater financial resources than the Registrant.
To the knowledge of the Registrant, it is one of the largest manufacturers of
four-wheel street sweepers; however, there is substantial competition from other
manufacturers in the functional sweeper market, which includes three wheel and
vacuum type sweepers.
To the knowledge of the Registrant, it is one of the primary manufacturers of
force-feed loaders. However, front-end loaders, which are manufactured by many
other companies, provide substantial functional competition. The Registrant is
not a significant manufacturer of graders.
Research and Development. The Registrant spent approximately $110,000 in 1996,
$418,000 in 1995, and $485,000 in 1994, to improve existing products and to
consider new product lines.
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Environment. Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, have had no material
effects upon the capital expenditures, results of operations, and competitive
position of the Registrant. Due to the nature of its business, the Registrant
does not anticipate any material capital expenditures for environmental control
facilities for the next fiscal year.
Employees. As of December 31, 1996, the Registrant employed 254 persons, of
which 175 employees are subject to a collective bargaining agreement. The
Registrant considers its relationship with its employees to be excellent.
Export Sales. Sales to customers in foreign countries approximated $1,355,199 in
1996, $984,500 in 1995 and $1,393,800 in 1994. During 1996, such customers were
located in North America, the Middle East and the Pacific Rim.
Item 2. Properties.
The Registrant owns one manufacturing plant which, in the Registrant's opinion,
is suitable and adequate for the manufacture of its products.
The Registrant's plant is located in Wake Forest, North Carolina. The plant,
which was completed in 1965, is situated on approximately 39 acres, and is of
prestressed concrete construction with steel crane ways and supports. The plant
is believed to be one of the finest heavy duty plants of its type in the
southeastern part of the United States. During 1985, the Company completed an
addition of approximately 29,000 square feet to the assembly area of the plant.
During 1989, the Company completed an additional building as its new paint shop.
This paint shop is 4,800 square feet, and is designed to be environmentally
state-of-the-art. It uses filtered air both in and out of the paint room, and
substantially reduces the possibility of contaminants in the painting process.
During 1995, the Company added a 1,755 square foot Inspection Building. Of the
approximately 206,935 square feet in the plant, approximately 186,415 square
feet is devoted to manufacturing and assembly facilities, and to stockroom,
shipping, and receiving facilities; approximately 16,360 square feet is used for
general and executive offices; and approximately 4,160 square feet is an
engineering department balcony area.
The equipment in the plant includes various boring, drilling and milling
machines, lathes, grinders, punches, shears, press brakes and other presses,
hydraulic testing equipment, saws, machine shop equipment, layout equipment,
heavy duty metal working and robotic welding equipment and appropriately large
material handling cranes.
Item 3. Legal Proceedings.
Certain proceedings are pending against the Company, involving ordinary and
routine claims incidental to the business of the Company. The ultimate legal and
financial liability of the Company with respect to these proceedings cannot be
estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company.
6
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Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders, through the solicitation of
proxies or otherwise, during the fourth quarter of the year ended December 31,
1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
The stock price and trading data on page 7 of the Registrant's 1996 Annual
Report to Shareholders are hereby incorporated by reference as Item 5 of this
report on Form 10-K. No cash dividends have been paid to shareholders during the
last five years.
Item 6. Selected Financial Data.
The selected financial data for the years 1992 through 1996 on page 6 of the
Registrant's 1996 Annual Report to Shareholders is hereby incorporated by
reference as Item 6 of this report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's discussion and analysis on pages 4 through 7 of the Registrant's
1996 Annual Report to Shareholders is hereby incorporated by reference as Item 7
of this report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data on pages 8 through 13 and the
Independent Auditor's Report on page 16 of the Registrant's 1996 Annual Report
to Shareholders are hereby incorporated by reference as Item 8 of this report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
7
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Information required by this item concerning the
Registrant's directors and persons to be nominated for election as directors of
the Registrant and compliance by the Registrant's directors, executive officers
and certain beneficial owners of the Registrant's common stock with Section 16
of the Securities and Exchange Act of 1934 will be set forth in the Registrant's
Proxy Statement (the "Proxy Statement") for its annual meeting to be held May
15, 1997, which Proxy Statement will be filed with the Commission no later than
April 30, 1997, and is hereby incorporated herein by reference.
(b) Set forth below are the names and ages of all of the
executive officers of the Registrant, none of whom has any family relationship
with any other executive officer or any director of the Registrant, and all
positions and offices with the Registrant presently held by such persons,
together with a brief account of business experience during the past 5 years of
each person:
<TABLE>
<CAPTION>
Business Experience for the Positions
and Offices Held for the Past 5 Years
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Name Age
<S> <C> <C>
James H. Stumpo 58 In May, 1995, Mr. Stumpo was elected President and Chief Executive Officer
and Director of the Company. From May, 1992 to May, 1995, he was Vice
President Finance with Benton Harbor Engineering, Benton Harbor,
Michigan. From May, 1987 to May, 1992, Mr. Stumpo served as Chief
Financial Officer for Koehring Cranes & Excavators, Waverly, Iowa, a
Division of Terex Corporation.
Franz M. Ahting 49 In May, 1996, Mr. Ahting was elected Corporate Secretary of the Company.
In May, 1995, Mr. Ahting was elected Vice President Finance, Chief
Financial Officer and Director of the Company. In May, 1994, Mr. Ahting
became Treasurer and Assistant Secretary of the Company. From November,
1993 to May, 1995, Mr. Ahting also served as Controller of the Company.
From 1991 to November, 1993, prior to joining the Company, Mr. Ahting
practiced public accounting.
</TABLE>
Officers are elected annually by the Registrant's Board of Directors at the
first meeting of the Board of Directors held after each Annual Meeting of
Shareholders. The terms of all of the foregoing officers are from May 16, 1996
to May 15, 1997.
8
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Item 11. Executive Compensation.
Information required by this item concerning executive compensation
will be set forth in the Registrant's Proxy Statement for its Annual Meeting to
be held May 15, 1997, which Proxy Statement will be filed with the Commission no
later than April 30, 1997 and is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a)-(b) Information required by this item concerning security ownership
of certain beneficial owners and management will be set forth in the
Registrant's Proxy Statement for its Annual Meeting to be held May 15, 1997,
which Proxy Statement will be filed with the Commission no later than April 30,
1997 and is hereby incorporated herein by reference.
(c) The Registrant knows of no arrangements which may at a subsequent
date result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions.
Information required by this item concerning certain relationships and
related transactions will be set forth in the Registrant's Proxy Statement for
its Annual Meeting to be held May 15, 1997 which Proxy Statement will be filed
no later than April 30, 1997 and is hereby incorporated herein by reference.
9
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PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. FINANCIAL STATEMENTS
The following Financial Statements of the
Registrant are included in its Annual Report to Shareholders
for the year ended December 31, 1996, which statements are
incorporated herein by reference:
Independent Auditor's Report
Balance Sheets - December 31, 1996 and 1995
Statements of Operations - years ended
December 31, 1996, 1995, and 1994
Statements of Shareholders' Equity - years ended
December 31, 1996, 1995, and 1994
Statements of Cash Flows - years ended
December 31, 1996, 1995, and 1994
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following schedules are included in Part IV of this
Report:
Independent Auditors' Report, located at sequential page 13
of this report.
Schedule II - Valuation and qualifying accounts located at
sequential page 15 of this report.
Schedules not listed above have been omitted because they are either not
applicable or the required information has been included in the financial
statements or the notes thereto.
(b) REPORTS ON FORM 8-K.
None.
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(c) EXHIBITS .
Exhibit Number:
*3.1 Articles of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3 to the
Registrant's 1980 Form 10-K, File No. 1-2723).
*3.2 By-Laws of the Registrant (Incorporated by reference
to Exhibit 3 to the Registrant's 1980 Form 10-K, File
No. 1-2723).
*4.1 Specimen certificate of Common Stock of the Registrant
(Incorporated by reference to Exhibit 7 to the
Registrant's 1970 Form 10-K File No. 1-2723).
13.1 1996 Annual Report to Shareholders of Athey Products
Corporation.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
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* Certain of the exhibits in this Annual Report on Form
10-K are indicated by an asterisk, and hereby
incorporated by reference to other documents on file
with the Commission with which they are physically
filed, to be part hereof, as of their respective
dates.
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SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ATHEY PRODUCTS CORPORATION
(Registrant)
By: /s/ James H. Stumpo
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James H. Stumpo
President and Chief Executive Officer
By: /s/ Franz M. Ahting
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Franz M. Ahting
Vice President Finance and Chief Financial Officer
Date: March 28, 1997.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ John F. McCullough /s/ Martin W. McCullough
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John F. McCullough, Chairman Martin W. McCullough, Director
of the Board of Directors March 28, 1997
March 28, 1997
/s/ Henry W. Gron, Jr. /s/Richard A. Rosenthal
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Henry W. Gron, Jr., Director Richard A. Rosenthal, Director
March 28, 1997 March 28, 1997
/s/ James H. Stumpo /s/ Franz M. Ahting
James H. Stumpo, Director Franz M. Ahting , Director
March 28, 1997 March 28, 1997
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(Logo of McGladrey & Pullen, LLP. appears here)
McGladrey & Pullen, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Athey Products Corporation
Our audits were made for the purpose of forming an opinion on the basic
statements taken as a whole. Supplemental Schedule II - Valuation and
Qualifying Accounts, is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
February 28, 1997
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ATHEY PRODUCTS
CORPORATION
1996
ANNUAL REPORT
<PAGE>
CONTENTS
Letter to Shareholders ...........................................2
Management's Discussion and Analysis .............................4
Balance Sheets ...................................................8
Statements of Operations .........................................9
Statements of Shareholders' Equity ...............................9
Statements of Cash Flows ........................................10
Notes to Financial Statements ...................................11
Independent Auditor's Report ....................................16
Corporate Information ...........................................17
<PAGE>
(Three Photographs appear on this page
and it has a caption which reads as follows:)
Athey's M 9D continues to set new standards
in the mechanical sweeper industry for single
engine economy, sweeping performance and
serviceability. The variable high lift model, shown
above, allows debris to be dumped directly into
a roll-off container or adjacent truck.
-1-
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TO OUR SHAREHOLDERS
Nineteen ninety-six was a year of restructuring, revitalization and refocusing
the Company's resources. We made good progress in many areas, nevertheless, from
a financial standpoint, 1996 was a disappointment. Net sales of $30 million and
net earnings of $45,155 or $.01 per share in 1996 were relatively unchanged from
the prior year. Our restructuring plan initially formulated in 1995 continued
in 1996 with the Company incurring additional restructuring charges which
decreased net earnings after tax by $413,351 or $.10 per share. In connection
with this plan, the Kolman manufacturing facility in Sioux Falls, South Dakota
and the Kolman Aggregate Product Line were sold. We will continue to evaluate
and phase-out the manufacture of nonstrategic or unprofitable product lines.
A more detailed comparison of our financial results can be found in the
Management's Discussion and Analysis section of this Annual Report.
Our restructuring effort over the past two years was a necessary step taken to
enable us to operate more efficiently in a very competitive market environment.
As a result, we have focused the Company more strategically on our core
business, expanded our distribution network, introduced new product
enhancements, initiated a new quality control program and launched an
aggressive international marketing campaign. Despite a sluggish year, the
Company continued to invest in new manufacturing equipment in 1996 which was
used to expand production capacity, improve productivity and provide a
foundation for future growth.
During 1996, we initiated our dealer demonstration program to showcase our
product offerings throughout the United States. This program was used to
familiarize our customers and dealer network with our newly introduced RA730
regenerative air sweeper, our redesigned three wheel H10C street sweeper and
the newly improved M9D four wheel mechanical sweeper with load sense hydraulic
systems.
Recently, the AV445 high speed runway sweeper completed the six month U.S.
Air Force Mobile Equipment Evaluation Program to qualify our unit for Air
Force use. We believe that we have the best runway sweeper on the market and,
once received, this certification should create new market opportunities for
us, both domestically and internationally.
We expect 1997 to be a challenging year and look forward to the opportunities
that will be presented from the strategies we have implemented.
James H. Stumpo
/s/ James H. Stumpo
President and
Chief Executive Officer
-2-
<PAGE>
(A photograph appears on the left
side of page and reads as follows:)
Contractors and municipalities
find the 7-12 Force Feed Loader
a valuable tool in the handling of
loose, bulk materials. The 7-12
can economically load free
flowing materials, such as snow,
sand or sod, into adjacent piles
or waiting trucks.
(A photograph appears on the bottom
of the page and reads as follows:)
With increased visibility and user friendly
improvements, today's M 8A continues to be
the twin engine mechanical sweeper of choice
in the street sweeper industry.
-3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Significant Events Affecting Comparability
The comparability of statement of operations data has been affected by the
following significant items that occurred in 1996.
[ ] In September, 1996, the Company incurred substantial damage to its
manufacturing facility as a result of Hurricane Fran. The Company settled with
its insurance carrier for $664,380. As a result of the settlement, the Company
recognized a pretax gain on the involuntary conversion of damaged assets of
$434,683. Approximately $406,600 of the gain had a favorable impact on the cost
of goods sold, approximately $12,740 of the gain had a favorable impact on
selling, administrative and engineering expenses and the remaining $15,343 is
included in other income. The effect was an increase in net earnings after tax
of $286,891 or $ .07 per share.
[ ] In late 1996, the Company's Board of Directors adopted a resolution to
terminate the Company's two defined benefit pension plans and replace them with
a 401(k) plan which will take effect January 1, 1997. Under the provisions of
Statement of Financial Accounting Standards No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", the Company recognized a pretax curtailment gain of
$1,016,651 in the fourth quarter of 1996 due to benefit freezes. Approximately
$770,160 of this amount resulted in a reduction in cost of goods sold, and
approximately $246,491 of this amount resulted in a reduction in selling,
administrative and engineering expenses. The effect was an increase in net
earnings after tax of $670,990 or $ .17 per share.
[ ] During 1996, as a continuation of its restructuring plan, the Company
incurred approximately $553,701 of additional charges. Approximately $326,294 of
this amount related to the disposal and write-down to net realizable values of
certain assets. Approximately $227,407 of this amount is primarily attributable
to the additional expenses which were incurred during 1996 relating to the
closure of operations of the manufacturing facility in Sioux Falls, South
Dakota. The effect was a decrease in net earnings after tax of $365,443 or $ .09
per share.
[ ] In February, 1996, the Company sold its South Dakota land, building and
certain inventory and manufacturing equipment. The statement of operations for
1996 includes in other income a pretax gain of $234,355 in connection with this
sale. The effect was an increase in net earnings after tax of $154,674 or $ .04
per share. $ In December, 1996, the Company sold its Kolman Aggregate Product
Line consisting of vibrating screens, pugmills, ash blenders and conveyors. The
sale resulted in an inventory loss of approximately $306,943 which is included
in the cost of goods sold. This sale reduced net earnings after tax by $202,582,
or $ .05 per share. As part of the sale, the Company sold its Kolman trademark
for the stated book value of $200,000. The remaining product lines previously
manufactured in Sioux Falls, South Dakota, consisting of the Force-Feed Loader,
Maintenance Master and Composter continue to be manufactured by the Company.
1996 Compared with 1995
Net sales in 1996 declined $378,520 or 1.2% to $30,046,068. The Company
experienced a $2,707,760 reduction in sales volume primarily attributable to
phasing out the manufacture of certain product lines and the transfer of product
lines from the Company's South Dakota facility to its Wake Forest, North
Carolina plant. The Company also experienced a decline in replacement part sales
during this period. These sales declines were partially offset by an 8.0%
increase in the number of sweepers shipped and slightly higher average unit
selling prices.
Cost of goods sold as a percentage of net sales remained relatively unchanged,
increasing slightly from 81.4% in 1995 to 81.5% in 1996. The cost of goods sold
was favorably impacted by the $770,160 curtailment gain relating to the pension
plans and the $406,600 insurance settlement. This favorable impact was reduced
by an inventory loss of approximately $306,943 in connection with the sale of
the Kolman Aggregate Product Line. Cost of goods sold in 1996 also reflected
approximately $326,294 in expenditures associated with the disposal and
write-down to net realizable values of certain assets. Excluding these items,
cost of goods sold would have increased by $543,523 to $25,027,414 or 83.3% of
net sales.
The increase in the cost of goods sold was primarily due to manufacturing
inefficiencies resulting from the introduction of the new regenerative air
sweeper and M-9D Mobil Street Sweeper product lines and commencement of the
production of certain products in the Company's Wake Forest, North Carolina
facility that were transferred from the former South Dakota facility.
-4-
<PAGE>
The Company's selling, administrative and engineering expenses decreased from
$6,061,601 in 1995 to $5,821,235 in 1996, representing 19.9% and 19.4% of net
sales, respectively. Selling, administrative and engineering expenses were
favorably impacted by the $246,491 curtailment gain relating to the pension
plans and the $12,740 insurance settlement. Approximately $227,407 of additional
expenses were incurred during 1996 relating to the closure of operations of the
manufacturing facility in Sioux Falls, South Dakota. Excluding these items,
selling, administrative and engineering expenses would have increased by $31,824
to $5,853,059 or 19.5% of net sales.
By comparison to 1995, selling, administrative and engineering expenses in 1996
included higher warranty expenses due to increases in the number of sweeper
shipments during the year and increases in extended service warranty plan
reserves. In addition, the Company expanded its domestic and international
marketing initiatives and increased its sales and field service personnel. As a
result, salaries, related employee benefits and travel expenditures were higher
in 1996. These increases were partially offset by lower research and development
costs resulting from the Company's phase-out of the manufacture of nonstrategic
product lines.
Other income in 1996 was $470,696 as compared to $350,591 in 1995. Included in
other income was $234,355 which represents the gain from the Company's sale in
February, 1996 of its South Dakota land, building and certain related inventory
and manufacturing equipment.
The Company also received $85,343 in 1996 representing a prorata distribution of
reorganization proceeds in a bankruptcy case in which the Company was a
creditor. Interest income declined from $286,405 in 1995 to $90,802 in 1996 due
primarily to lower average rates of return realized on the Company's investment
portfolio. In addition, the Company experienced a decrease in the average
investment portfolio of cash and cash equivalents, reflecting in part the
Company's extended terms on certain accounts receivable and higher inventory
levels.
The effective income tax expense rate was 75.2% in 1996 which reflects an
increase in the Company's valuation reserve allowance of $43,000 against
recorded deferred tax assets and a $53,611 adjustment resulting from a tax
examination related to prior years. The 102.7% income tax benefit rate for 1995
includes a 13.6% research and development credit and a 35.6% credit from the
reduction in the valuation allowance.
Net earnings after tax for 1996 was $45,155 or $.01 per share, as compared to
$2,743 for 1995.
Organizational Restructuring
During 1995, plans were developed to significantly reduce the Company's cost
structure and to improve productivity. This restructuring plan involved
reductions in the number of employees, consolidation of manufacturing
facilities, and disposition of assets that were no longer productive. The
Company also phased-out the manufacture of nonstrategic product lines, including
Trailers, Track Assemblies and Refuse Collection Products.
The restructuring plan is expected to enable the Company to improve its
competitive position in its core business, reduce costs, increase efficiency and
improve profitability. The statement of operations for 1995 includes
approximately $1,135,000 of pretax charges relating to the restructuring plan.
Approximately $119,000 of this amount related to severance and associated
benefits for staff reductions, approximately $452,000 of this amount related to
the disposal and write-down of certain assets, and approximately $564,000 of
this amount related to the streamlining of operations and administrative
functions and the closing of the production facility in Sioux Falls, South
Dakota. The effect of these expenditures was a decrease in net earnings after
tax of $749,000 or $.19 per common share.
1995 Compared with 1994
The Company generated net sales of $30,424,588 in 1995, as compared to
$39,894,940 in 1994. This $9,470,352 or 23.7% decrease in sales was primarily
attributable to a decline in the number of units shipped during the year. The
lower sales volume was partially offset by slightly higher average unit selling
prices. The higher volume in the number of units sold in 1994 stemmed from a
major contract originally executed with the City of New York in 1993 that
expired in late 1994.
Cost of goods sold as a percentage of net sales was 81.4% in 1995 as compared to
78.2% experienced in 1994. The increase in cost of goods sold was primarily due
to manufacturing inefficiencies resulting from lower unit volume, the transfer
of certain product lines from Sioux Falls to Wake Forest, introduction of a new
regenerative air sweeper product line, removal and installation of equipment and
rearrangement of the plant layout in Wake Forest to facilitate a diverse product
flow. Operating inefficiencies were also incurred between the October 9,
-5-
<PAGE>
1995 announcement of the Sioux Falls closing and December 31, 1995, as product
lines and assets were transferred from the Sioux Falls plant to Wake Forest,
North Carolina. In addition, cost of goods sold in 1995 reflected expenditures
associated with the disposal and write-down to net realizable values of certain
assets.
The Company's selling, administrative and engineering expenses increased from
17.8% to 19.9% of net sales, while in dollar terms they decreased $1,049,792 to
$6,061,601. In addition to savings from the Company's cost reduction program,
this decline reflects lower legal and professional fees and a decrease in
warranty reserves stemming from a lower sales volume. These decreases were
partially offset by higher advertising and sales incentive programs and an
increase in the allowance for doubtful accounts.
Other income for 1995 was $350,591 as compared to $524,768 in 1994. Interest
income increased from $126,968 in 1994 to $286,405 in 1995 due primarily to
rising interest rates and higher average investment in cash and cash
equivalents. Included in other income for the year ended December 31, 1994 was
$150,000 which represented the final payment of the Company's insurance claim in
a litigation settlement reached in a product liability case in which the
insurance company has been placed in rehabilitation. The Company also received
$210,000 in 1994 as full and final payment from the Company's insurance carrier
in a separate product liability claim.
Other expenses were $37,282 for 1995 as compared to $114,732 recorded in 1994.
Other expenses in 1994 included the effect of the early termination, and
associated write-down, of the unamortized portion of a licensing and distributor
agreement.
The 102.7% income tax benefit rate for 1995 includes a 13.6% research and
development credit and a 35.6% credit from the reduction in the valuation
allowance. The 30.9% income tax expense rate for 1994 reflects a 1.6% research
and development credit and a 3.6% income tax benefit associated with a reduction
in the valuation allowance.
Net earnings for 1995 were $2,743 as compared to net earnings of $1,388,194 or
$.35 per share for 1994.
SELECTED FINANCIAL DATA
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Sales $30,046,068 $30,424,588 $39,894,940 $32,640,257 $21,838,601
Earnings (Loss) before cumulative
effect of accounting change 45,155 2,743 1,388,194 (285,349) (2,211,156)
Net Earnings (Loss) 45,155 2,743 1,388,194 (285,349) (2,275,314)
Earnings (Loss) Per Share
before cumulative effect
of accounting change 0.01 -- 0.35 (.08) (.58)
Net Earnings (Loss) Per Share 0.01 -- 0.35 (.08) (.60)
At Year-End:
Total Assets $29,927,231 $29,325,917 $30,422,767 $28,013,857 $27,653,732
Long-Term Obligations 14,507 57,419 99,431 240,156 199,595
-6-
<PAGE>
Effects of Inflation
The Company attempts to minimize the impact of inflation on production and
operating costs through cost control programs and productivity improvements.
Over the past three years, the rate of inflation has not had a significant
impact on the Company's operations. Prices paid for raw materials and other
manufacturing inputs have remained fairly stable throughout this period. On a
longer-term basis, the Company has demonstrated an ability to adjust the selling
prices of its products in reaction to changing costs.
Liquidity and Capital Resources
At December 31, 1996 the Company had working capital of $20,535,588; the ratio
of current assets to current liabilities was 5.8 to 1; and the debt to equity
ratio was .19 to 1.
This compares to working capital of $20,451,939; a ratio of current assets to
current liabilities of 6.8 to 1; and a debt to equity ratio of .16 to 1 at
December 31, 1995.
At December 31, 1996, cash and cash equivalents were $6,984, down $3,065,104
from $3,072,088 at December 31, 1995. This decrease was primarily due to the
granting of extended credit terms on certain sales and higher inventory levels.
Other than utilizing the available line of credit as needed, the Company does
not presently plan to borrow long-term funds or sell securities.
As part of its authorized stock repurchase program, the Company used $486,252
for financing activities in 1996 to repurchase its common stock.
Capital expenditures were $483,592 in 1996 as compared to $445,149 in 1995 and
were primarily used to further upgrade the Company's management information
system and machinery and equipment.
The Company expects capital expenditures in 1997 to approximate $500,000. In
1997, the Company expects to continue its capital expenditure program by
improving or expanding existing facilities and upgrading equipment. The timing
of capital expenditures is anticipated to coincide generally with its operating
cash flow.
At December 31, 1996, the Company had available an unsecured line of credit of
$5,000,000. The Company believes that existing working capital, cash flow from
future operations, and the available bank line of credit provide adequate
resources to finance the cash requirements of future capital expenditures.
MARKET PRICE DATA
1996 1995 1994
Quarter Ended High Low High Low High Low
March 31 4 3/4 3 3/4 6 1/2 5 1/2 8 3/4 5 3/4
June 30 4 5/8 3 3/4 6 1/4 5 1/2 8 1/4 7 1/4
September 30 4 1/4 3 1/2 6 1/8 4 7/8 8 5/8 7
December 31 4 3/4 3 7/8 5 1/2 4 9 1/2 5 1/4
The Company's common shares are traded in the over-the-counter market on the
NASDAQ National Market under the symbol "ATPC". The above quotations were
received from the NASDAQ National Market. The number of shareholders of the
Company's common shares as of March 19, 1997 was 481.
-7-
<PAGE>
BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,984 $ 3,072,088
Accounts receivable (less allowances for doubtful accounts
of $350,000 and $300,000 in 1996 and 1995, respectively)
(Note 2) 3,738,103 2,369,107
Insurance settlement receivable (Note 3) 564,380 --
Inventories (Note 4) 18,949,568 17,022,201
Prepaid expenses (Note 9) 723,535 179,054
Refundable income taxes 544,457 531,517
Deferred income taxes (Note 7) 331,000 834,100
------------
Total current assets 24,858,027 24,008,067
------------
OTHER ASSETS:
Marketable securities (Note 8) 1,450,650 951,450
Goodwill -- 200,000
Other 115,223 24,358
------------
Total other assets 1,565,873 1,175,808
------------
PROPERTY, PLANT AND EQUIPMENT (Note 6):
Land and land improvements 47,785 319,769
Buildings 3,574,941 4,017,505
Machinery and equipment 5,270,958 6,359,255
------------
8,893,684 10,696,529
Less accumulated depreciation (5,390,353) (6,554,487)
------------
Total property, plant and equipment, net 3,503,331 4,142,042
$ 29,927,231 $ 29,325,917
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations under capital lease (Note 6) $ 42,912 $ 42,012
Accounts payable 2,951,507 1,890,865
Employee compensation and amounts withheld 357,641 444,116
Accrued pension and other expenses (Note 9) 280,379 543,635
Warranty reserve 690,000 635,500
Total current liabilities 4,322,439 3,556,128
NONCURRENT LIABILITIES:
Obligations under capital lease (Note 6) 14,507 57,419
Deferred income taxes (Note 7) 454,040 464,500
Total noncurrent liabilities 468,547 521,919
SHAREHOLDERS' EQUITY (Note 11):
Common stock, par value $2 per share:
Authorized 10,000,000 shares;
Issued 4,020,459 shares 8,040,918 8,040,918
Additional paid-in capital 16,218,394 16,218,394
Retained earnings 1,234,514 1,189,359
Unrealized gain on marketable securities
available-for-sale, net of related tax effect (Note 8) 333,233 3,761
Less cost of 158,751 and 47,000 common shares
in treasury in 1996 and 1995, respectively (Note 11) (690,814) (204,562)
Total shareholders' equity 25,136,245 25,247,870
$ 29,927,231 $ 29,325,917
See notes to financial statements.
-8-
<PAGE>
STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995 1994
NET SALES (Note 2) $ 30,046,068 $ 30,424,588 $ 39,894,940
Cost of goods sold (Notes 3 and 13) 24,483,891 24,777,557 31,184,555
Gross profit 5,562,177 5,647,031 8,710,385
Selling, administrative and
engineering expenses (Notes 9, 10 and 13) 5,821,235 6,061,601 7,111,393
Earnings (loss) from operations (259,058) (414,570) 1,598,992
Other income 470,696 350,591 524,768
Other expenses (29,546) (37,282) (114,732)
Earnings (loss) before income taxes 182,092 (101,261) 2,009,028
Income tax expense (benefit) (Note 7) 136,937 (104,004) 620,834
NET EARNINGS $ 45,155 $ 2,743 $1,388,194
NET EARNINGS PER SHARE $ 0.01 $ -- $ 0.35
WEIGHTED AVERAGE SHARES OUTSTANDING 3,956,135 3,973,459 3,973,459
STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Additional Gains/(Loss)on
Common Stock Paid-In Retained Treasury Stock Marketable
Shares Par Value Capital Earnings Shares Cost Securities
BALANCE, January 1, 1994 3,831,503 $ 7,663,006 $ 15,273,614 $ 1,121,110 47,000 $ (204,562) $(126,497)
5% Stock dividend (Note 11) 188,956 377,912 944,780 (1,322,688) -- -- --
Unrealized gain on marketable
securities (Note 8) -- -- --
-- -- -- 157,704
Net earnings for 1994 -- -- --
1,388,194 -- -- --
BALANCE, December 31, 1994 4,020,459 8,040,918 16,218,394 1,186,616 47,000 (204,562)
31,207
Unrealized loss on marketable
securities (Note 8) -- -- --
-- -- -- (27,446)
Net earnings for 1995 -- -- --
2,743 -- -- --
BALANCE, December 31, 1995 4,020,459 8,040,918 16,218,394 1,189,359 47,000 (204,562) 3,761
Unrealized gain on marketable
securities (Note 8) -- -- --
-- -- -- 329,472
Purchase of common stock
for treasury (Note 11) -- -- -- -- 111,751 (486,252) --
Net earnings for 1996 -- -- --
45,155 -- -- --
BALANCE, December 31, 1996 4,020,459 $ 8,040,918 $ 16,218,394 $ 1,234,514 158,751 $ (690,814) $ 333,233
See notes to financial statements.
-9-
<PAGE>
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995 1994
OPERATING ACTIVITIES:
Net earnings $ 45,155 $ 2,743 $ 1,388,194
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization 420,580 495,135 528,298
Provision for doubtful accounts 50,000 53,244 25,000
Provision for deferred income taxes 322,912 210,564
(316,077)
(Gain) loss on sale of equipment
(249,215) 22,276 12,749
Changes in operating assets and liabilities:
Accounts receivable (1,983,376) 4,056,496 (4,081,360)
Inventories (1,927,367) (2,266,279) 1,002,368
Prepaid expenses (544,481) 26,861 (79,181)
Refundable income taxes (12,940) (531,517) 1,740,328
Other assets (90,865) 2,295 68,444
Accounts payable 1,060,642 (522,019) 72,747
Employee compensation and amounts withheld (86,475) (191,539) 86,647
Accrued pension and other expenses (263,256) (88,389) 274,381
Warranty reserve 54,500 (144,500) 410,000
Income taxes payable -- (113,500) 113,500
Net cash provided by (used in) operating activities (3,204,186) 1,011,871 1,246,038
INVESTING ACTIVITIES:
Purchase of plant and equipment (483,592) (445,149) (542,386)
Proceeds from disposal of assets 950,938 450 4,087
Proceeds from sale of goodwill 200,000 -- --
Net cash provided by (used in) investing activities 667,346 (444,699) (538,299)
FINANCING ACTIVITIES:
Proceeds from line of credit -- -- 1,600,000
Repayment of line of credit
-- -- (1,600,000)
Principal paid on obligations under capital lease (42,012) (41,130) (74,506)
Principal paid on debt -- (99,595) (100,000)
Purchase of common stock for treasury (486,252) -- --
Net cash used in financing activities (528,264) (140,725) (174,506)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,065,104) 426,447 533,233
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,072,088 2,645,641 2,112,408
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,984 $ 3,072,088 $ 2,645,641
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (recoveries) $ (173,035) $ 329,680 $ (916,917)
Interest paid $ 11,445 $ 7,761 $ 30,870
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING ACTIVITIES:
Capital lease obligations incurred
for use of equipment $ -- $ -- $ 34,238
See notes to financial statements.
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations -- Athey Products Corporation is a manufacturer whose
principal products are mobil street sweepers and force-feed loaders. The Company
also manufactures other equipment and replacement parts. The primary users of
the Company's products are contractors, municipalities, and other governmental
agencies. Significantly all of the Company's sales are throughout the United
States.
Significant Accounting Policies - The significant accounting policies of the
Company are summarized below:
a. Statements of Cash Flows - For the purpose of the statements of cash
flows, the Company considers all short-term investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
b. Inventories - Inventories are stated at the lower of cost,
determined on the first-in, first-out basis, or market. Obsolete and possible
excess quantities of inventory are reduced to estimated net realizable values.
c. Property and Depreciation - Property, plant and equipment are
carried at cost. Depreciation is computed over estimated useful lives using the
straight-line method in the financial statements and accelerated methods for
income tax purposes.
d. Amortization of Other Assets - Goodwill arose in a purchase
transaction prior to November 1, 1970 and had not been amortized as, in the
opinion of management, there was no diminution in value. During 1996 all
goodwill was sold.
e. Marketable Securities - Marketable securities consist of an
investment in equity securities which the Company has designated as
available-for-sale. Such securities, while readily marketable, are not held
solely in anticipation of short-term market gains. The securities are reported
at fair value, with unrealized holding gains and losses, net of the related
deferred tax effect, reported as a separate component of shareholders' equity.
f. Income Taxes - Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for effects of changes in tax laws and rates on the
date of enactment.
g. Treasury Stock - Treasury stock is stated at cost.
h. Earnings Per Share - Earnings per share amounts are computed on the
basis of the weighted average number of shares outstanding during the year.
i. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
j. Fair Value of Financial Instruments - The following summarizes the
major methods and assumptions used in estimating the fair values of financial
instruments:
Cash and cash equivalents - The carrying amount approximates fair
value due to the relatively short term period to maturity of these
instruments.
Marketable equity securities - The fair value of marketable equity
securities are estimated based on quoted market prices.
k. Reclassifications - Certain previously reported amounts have been
reclassified to conform with the year-end 1996 presentation with no effect on
net income.
2. Major Customers
Net sales for the years ended December 31, 1996, 1995 and 1994 include sales to
the following major customers (each of which accounted for 10% or more of the
total net sales of the Company for those years):
1996 1995 1994
Nixon-Egli $ 7,493,960 $ 7,602,597 *
City of New York * * $ 16,953,844
----------- ----------- ------------
*The net sales to this customer was less than 10% of the total net sales for the
year ended. Because of the nature of the Company's business, the major customers
will vary between years.
There were outstanding receivables from these customers of $557,901, $555,213,
and $2,382,719, as of December 31, 1996, 1995, and 1994, respectively.
3. Insurance Settlement
In September, 1996, the Company incurred substantial damage to its manufacturing
facility as a result of a hurricane. The Company settled with its insurance
carrier for $664,380. At December 31, 1996, $100,000 of this settlement had been
received. As a result of the settlement, the Company recognized a pretax gain on
the involuntary conversion of damaged assets of $434,683. Approximately $406,600
of the gain is included in the cost of goods sold, approximately $12,740 of the
gain is included in selling, administrative and engineering expenses and the
remaining $15,343 is included in other income. The effect was an increase in net
earnings after tax of $286,891 or $ .07 per share.
4. Inventories
Inventories are summarized below:
December 31,
1996 1995
Finished goods $ 4,629,236 $ 3,231,129
Work-in-process 5,765,464 6,510,302
Raw materials 8,554,868 7,280,770
------------- -------------
$ 18,949,568 $ 17,022,201
============= =============
5. Financing Arrangements
At December 31, 1996, the Company had available an unsecured line of credit of
$5,000,000. There were no outstanding borrowings under the line at December 31,
1996 or 1995. In addition, no amounts were borrowed during 1996 or 1995.
During 1996, 1995, and 1994, the Company incurred interest expense of $11,445,
$7,761, and $30,870, respectively.
6. Lease Commitments
The Company is the lessee of computer equipment under a capital lease which
started in 1993 and expires in 1998. The assets and liabilities under the
capital lease were recorded at the present value of net minimum lease payments
at inception, approximately $207,000. The assets are depreciated over their
estimated productive lives. Depreciation of assets under the capital lease is
included in depreciation expense for 1996, 1995 and 1994.
Depreciation of assets under capital leases charged to expense was $41,441 for
each of the last three years.
-11-
<PAGE>
Minimum future lease payments under the capital lease as of December 31, 1996
for each of the next two years are:
Year Ended December 31, Amount
1997 $ 43,637
1998 14,545
-------------
Total minimum lease payments 58,182
Less: Imputed interest 763
-------------
Present value of net minimum
lease payments 57,419
Less: Current portion 42,912
-------------
Obligations under capital lease $ 14,507
=============
The interest rate on the capitalized lease is 6.6% and is imputed based on the
lessor's implicit rate of return.
7. Income Taxes
At December 31, 1996, the Company has available State net economic loss
carryforwards of approximately $2,101,000 expiring as follows:
Year of
- ----------------------------
Origination Expiration
- ----------- ----------
1992 1997 $ 1,274,000
1993 1998 118,000
1995 2000 374,000
1996 2001 335,000
-----------
TOTAL $ 2,101,000
===========
Components of the income tax expense (benefit) for 1996, 1995 and 1994 are as
follows:
1996 1995 1994
Current:
Federal $ (185,975) $ (314,568) $ 936,911
State -- -- --
------------ ------------ -----------
Total current (185,975) (314,568) 936,911
Deferred:
Federal 322,912 210,564 (316,077)
State -- -- --
------------ ------------ ------------
Total deferred 322,912 210,564 (316,077)
TOTAL $ 136,937 $ (104,004) $ 620,834
============ ============ ============
Net deferred tax assets consist of the following components at December 31, 1996
and 1995:
1996 1995
---------- ------------
Deferred tax assets:
Accounts receivable $ 119,000 $ 102,000
Inventory allowance 274,000 434,000
Accrued vacation 96,000 118,000
Accrued pension -- 67,000
Warranty reserve 235,000 216,000
Allowance for marketable securities 89,000 87,000
Accrued litigation 17,000 17,000
Net economic loss carryforwards 163,000 148,000
Other 44,000 30,100
----------- -----------
1,037,000 1,219,100
Less valuation allowance (428,000) (385,000)
---------- ----------
609,000 834,100
Deferred tax liabilities:
Property and equipment (377,040) (464,500)
Prepaid pension (183,000) --
Marketable securities (172,000) --
--------- ----------
(732,040) (464,500)
--------- ----------
Net deferred tax assets (liabilities) $ (123,040) $ 369,600
========== ============
The components giving rise to the net deferred tax assets (liabilities)
described above have been included in the accompanying balance sheets as of
December 31, 1996 and 1995 as follows:
1996 1995
--------- -----------
Current assets $ 331,000 $ 834,100
Noncurrent liabilities (454,040) (464,500)
------------ -----------
Net deferred tax assets (liabilities) $ (123,040) $ 369,600
============ ===========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance totaling $428,000 and $385,000 for certain
deferred tax assets as of December 31, 1996 and 1995, respectively, which
management feels meet this criteria.
A reconciliation of the provision for income taxes to income tax expense
(benefit), computed by applying the statutory federal income tax rate to pretax
income (loss), is as follows:
1996 1995 1994
Amount % Amount % Amount %
Tax expense
(benefit)
computed at
statutory rate $61,911 34.0% $(34,429) (34.0)% $683,070 34.0%
Research and
development
credit (2,336) (1.3) (13,807) (13.6)% (32,033)(1.6)%
Change in
valuation
allowance 43,000 23.6 (36,000) (35.6)% (72,000)(3.6)%
Other 34,362 18.9% (19,768) (19.5)% 41,797 2.1 %
------ ---- ------- ----- ------- ----
TOTAL $ 136,937 75.2% $(104,004)(102.7)% $ 620,834 30.9%
======== ==== ========= ====== ======= ====
During 1994, the Company realized approximately a $103,000 tax benefit from the
utilization of State net economic loss carryforwards.
8. Marketable Securities
The cost, estimated market value and gross unrealized gain of the Company's
investment in available-for-sale marketable equity securities at December 31,
1996 and 1995 are as follows:
1996 1995
----------- -----------
Cost $ 945,751 $ 945,751
Gross unrealized gain 504,899 5,699
----------- -----------
Estimated market value $1,450,650 $ 951,450
=========== ===========
There were no sales of marketable securities during 1996, 1995 or 1994.
The change in net unrealized gains and losses reported as a separate component
of equity for the years ended December 31, 1996, 1995 and 1994 is shown below:
1996 1995 1994
---------- ---------- ----------
Balance in equity
component, beginning $ 3,761 $ 31,207 $ (126,497)
Change in net unrealized
gains (losses) 499,200 (41,585) 173,781
Change in deferred
income taxes (169,728) 14,139 (16,077)
--------- --------- ----------
Balance in equity
component, ending $333,233 $ 3,761 $ 31,207
======== ======== ==========
-12-
<PAGE>
9. Pension Plans
The Company had two noncontributory defined benefit pension plans for its hourly
and salaried employees. All employees were covered by the plans upon completion
of twelve months of service with 1,000 or more hours of service, subject to a
minimum age of twenty-one. The Company's contributions to the plans were
designed to annually fund service cost derived by the plans' actuaries using the
frozen entry-age method.
In late 1996, the Company's Board of Directors adopted a resolution to terminate
the Company's two defined benefit pension plans and replace them with a 401(k)
plan which will take effect January 1, 1997. Under the provisions of Statement
of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits",
the Company recognized a pretax curtailment gain of $1,016,651 in the fourth
quarter of 1996 due to benefit freezes. The effect was an increase in net
earnings after tax of $670,990 or $ .17 per share.
The net periodic pension cost for the plans is computed as follows:
1996 1995 1994
--------- --------- ---------
Service cost $ 355,953 $ 452,636 $ 408,200
Interest cost 697,753 679,492 621,581
Actual return on
plan assets (1,325,342) (872,472) 220,000
Net amortization
and deferral 555,479 226,231 (927,800)
Curtailment gain (1,016,651) -- --
--------- -------- --------
Net periodic
pension cost (income) $ (732,808) $ 485,887 $ 321,981
========= ======== ==========
The funded status of the Company's pension plans is as follows:
1996 1995
------ -------
Actuarial present value of benefit obligations:
Vested benefits $ 8,843,772 $ 8,112,575
Nonvested benefits -- 78,931
--------- ----------
Accumulated benefit obligation 8,843,772 8,191,506
Effect of assumed increase
in compensation levels -- 1,796,558
--------- ----------
Projected benefit obligation 8,843,772 9,988,064
Plan assets at fair value 11,212,666 9,870,424
---------- ----------
Fair value of assets less (greater)
than projected benefit obligation (2,368,894) 117,640
Unrecognized net gain 1,831,872 422,788
Unrecognized transition obligation -- (194,707)
Unrecognized prior service costs -- (149,935)
Accrued (prepaid) pension cost
(asset) $ (537,022) $ 195,786
========= =========
Major assumptions:
Discount rate 7.5% 7.5%
Rate of increase in
compensation levels 5.0% 5.0%
Expected long-term rate of return
on plan assets 8.0% 8.0%
Plan assets consist principally of investments in United States government
securities and common stock.
10. Research and Development
Expenditures relating to the development of new products, including significant
improvements to existing products are charged to selling, administrative and
engineering expenses as incurred. The amounts charged in 1996, 1995 and 1994
were approximately $110,000, $418,000 and $485,000 respectively.
11. Stock Transactions
On May 19, 1994, the Board of Directors declared a five percent common stock
dividend payable on July 22, 1994 to shareholders of record as of the close of
business on July 8, 1994.
In November, 1995, the Board of Directors approved a resolution authorizing the
Company to repurchase up to 200,000 shares of the Company's common stock. As of
December 31, 1995, the Company had not repurchased any shares. During 1996, the
Company repurchased a total of 111,751 shares under the November, 1995
authorization which expired on December 31, 1996.
In December, 1996, the Board of Directors approved a resolution authorizing the
Company to repurchase up to 200,000 shares of the Company's stock in 1997. This
authorization will expire on December 31, 1997.
12. Contingencies
Certain proceedings are pending against the Company, involving ordinary and
routine claims incidental to the business of the Company. The ultimate legal and
financial liability of the Company with respect to these proceedings cannot be
estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company.
13. Organizational Restructuring
During 1995, plans were developed to significantly reduce the Company's cost
structure and to improve productivity. This restructuring plan involved
reductions in the number of employees, consolidation of manufacturing
facilities, and disposition of assets that were no longer productive. The
Company also phased-out the manufacture of nonstrategic product lines, including
Trailers, Track Assemblies and Refuse Collection Products. The restructuring
plan is expected to enable the Company to improve its competitive position in
its core business, reduce costs, increase efficiency and improve profitability.
The statement of operations for 1995 includes approximately $1,135,000 of pretax
charges relating to the restructuring plan. Approximately $119,000 of this
amount related to severance and associated benefits for staff reductions,
approximately $452,000 of this amount related to the disposal and write-down of
certain assets, and approximately $564,000 of this amount related to the
streamlining of operations and administrative functions and the closing of the
production facility in Sioux Falls, South Dakota. The effect of these
expenditures was a decrease in net earnings after tax of $749,000 or $.19 per
common share.
During 1996, as a continuation of its restructuring plan, the Company incurred
approximately $553,701 of additional charges. Approximately $326,294 of this
amount related to the disposal and write-down to net realizable values of
certain assets. Approximately $227,407 of this amount is primarily attributable
to the additional expenses which were incurred during 1996 relating to the
closure of operations of the manufacturing facility in Sioux Falls, South
Dakota. The effect was a decrease in net earnings after tax of $365,443 or $ .09
per share.
In addition, in February 1996, the Company sold its South Dakota land, building
and certain inventory and manufacturing equipment. The statement of operations
for 1996 includes a pretax gain of $234,355 in connection with this sale. The
remaining inventory and equipment were transferred to the Company's Wake Forest,
North Carolina manufacturing plant. The effect was an increase in net earnings
after tax of $154,674 or $ .04 per share.
In December, 1996, the Company sold its Kolman Aggregate Product Line consisting
of vibrating screens, pugmills, ash blenders and conveyors. The sale resulted in
an inventory loss of approximately $306,943 which is included in the cost of
goods sold. This sale reduced net earnings after tax by $202,582, or $ .05 per
share. As part of the sale, the Company sold its Kolman trademark for the stated
book value of $200,000.
-13-
<PAGE>
(Photograph appears in the upper left corner and its caption reads as follows:)
The Athey Airport Sweeper, the AV 445, is
the world's most powerful air sweeper in the
industry today, and is found in military and
civilian airports around the world.
(Photograph appears in the middle left
side of page and its caption reads as follows:)
Athey's 3 wheel
sweeper series is
built with the
industry's road-
proven mechanical
sweeping system,
and is excellent for
urban leaf pickup.
(Photograph appear along the right side
of this page showing the back end of a Air Boss Sweeper)
ATHEY:
A GLOBAL COMPETITOR
With Sweepers in practically every corner of the world, the Athey Mobil Sweeper
is a global competitor. Whether our customer's needs are in Saudi Arabia, Japan,
Canada or other locations worldwide, Athey offers a machine for virtually every
sweeping situation they will encounter.
-14-
<PAGE>
(Photograph appears at the top of the page and its caption reads as follows:)
The RA 730 is the only single engine recirculating vacuum air
sweeper in the world with variable high dump capabilities that
offers optional stainless steel major components.
(Photograph appeas at the bottom of the page and its capition reads as follows:)
This Compressed Natural
Gas powered and mechanical
sweeper is serving as a
positive force to increase
Athey's presence in the
global sweeper market.
Athey's M 9CNG meets all
current federal emission
laws going into the 21st centry.
-15-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Athey Products Corporation
Wake Forest, North Carolina
We have audited the accompanying balance sheets of Athey Products Corporation as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Athey Products Corporation as
of December 31, 1996, and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
February 28, 1997
-16-
<PAGE>
Corporate Information
Athey Products Corporation
1839 South Main Street
Wake Forest, NC 27587
Telephone: 919-556-5171
Fax: 919-556-9503
Annual Meeting of Shareholders
The Annual Meeting of the
Shareholders of the Company is
scheduled to be held at 11:00 A.M.,
May 15, 1997, at the corporate
offices of the Company.
Common Stock
Athey Products Corporation
common stock is traded under
the symbol "ATPC" on the
NASDAQ National Market.
Stock Transfer Agent
The First National Bank of Chicago
Chicago, Illinois
Inquiries
Communications concerning stock
transfer requirements should be
directed to the transfer agent.
Reports Available
Copies of the Company's 1996
Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q to
the Securities and Exchange Com-
mission, and this Annual Report are
available to shareholders upon written
request to the Secretary at the
Company's principal office or by
calling 919-556-5171.
Attorneys
Parker, Poe, Adams & Bernstein L.L.P.
Raleigh, NC
Auditors
McGladrey & Pullen, LLP
Raleigh, NC
Directors
John F. McCullough
Chairman of the Company
President of
Orton/McCullough Crane Co., Inc.
Oak Brook, Illinois
Martin W. McCullough
Vice President and
General Manager of
Orton/McCullough Crane Co., Inc.
Huntington, Indiana
Richard A. Rosenthal
Retired Director of Athletics
University of Notre Dame
South Bend, Indiana
Henry W. Gron, Jr.
Senior Manager, International Tax
Motorola, Inc.
Schaumburg, Illinois
James H. Stumpo
President and Chief Executive
Officer of the Company
Franz M. Ahting
Vice President - Finance
Chief Financial Officer
Treasurer and Secretary
Officer of the Company
OFFICERS
James H. Stumpo
President and Chief Executive Officer
Franz M. Ahting
Vice President - Finance
Chief Financial Officer
Treasurer and Secretary
-17-
<PAGE>
</TABLE>
EXHIBIT 21.1
ATHEY PRODUCTS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
Athey Export Corporation Illinois
Athey Products International, Inc. Barbados
Athey International Sales Corporation Illinois
14
<PAGE>
<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance at Charged to Deduction from Balance at
Beginning of Profit and Reserves End of Year
Year Loss
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for doubtful
accounts-trade $300,000 $ 50,000 $ - (a) $350,000
Allowance for doubtful
receivable-other 110,954 - 110,954 (b) -
Provision for obsolete and slow
moving inventory 650,000 450,689 300,689 (c) 500,000
Provisions for warranty costs 635,500 976,019 921,519 (d) 690,000
Year Ended December 31, 1995:
Allowance for doubtful
accounts-trade $250,000 $ 52,966 $ 2,966 (a) $300,000
Allowance for doubtful
receivable-other 110,954 - - (b) 110,954
Provision for obsolete and slow
moving inventory 950,000 286,610 586,610 (c) 650,000
Provisions for warranty costs 780,000 705,553 850,053 (d) 635,500
Year Ended December 31, 1994:
Allowance for doubtful
accounts-trade $225,000 50,095 $ 25,095 (a) 250,000
Allowance for doubtful
receivable-other 150,000 60,954 100,000 (b) 110,954
Provision for obsolete and slow
moving inventory 796,396 193,811 40,207 (c) 950,000
Provisions for warranty costs 370,000 1,303,078 893,078 (d) 780,000
</TABLE>
(a) Uncollected trade receivables written-off.
(b) Uncollected other receivables written-off.
(c) Deductions for obsolete inventory scrapped and obsolete inventory sold at
reduced selling price.
(d) Warranty expenses incurred
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,984
<SECURITIES> 0
<RECEIVABLES> 3,738,103
<ALLOWANCES> 350,000
<INVENTORY> 18,949,568
<CURRENT-ASSETS> 24,858,027
<PP&E> 8,893,684
<DEPRECIATION> 5,390,353
<TOTAL-ASSETS> 29,927,231
<CURRENT-LIABILITIES> 4,322,439
<BONDS> 0
0
0
<COMMON> 8,040,918
<OTHER-SE> 17,095,327
<TOTAL-LIABILITY-AND-EQUITY> 29,927,231
<SALES> 30,046,068
<TOTAL-REVENUES> 0
<CGS> 24,483,891
<TOTAL-COSTS> 5,821,235
<OTHER-EXPENSES> 29,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,445
<INCOME-PRETAX> 182,092
<INCOME-TAX> 136,937
<INCOME-CONTINUING> 45,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,155
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
