UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended
June 30, 1997
Commission File Number 1-2723
ATHEY PRODUCTS CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 36-0753480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Not Applicable
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities 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
----. ----.
Number of Common Shares Outstanding as of June 30, 1997: 3,805,608
------------- ----------
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ATHEY PRODUCTS CORPORATION
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996. 3-4
Statements of Operations for the six
months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited). 5
Statements of Operations for the three
months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited). 6
Statements of Cash Flows for the six
months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited). 7
Notes to Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION 14-15
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<CAPTION>
ATHEY PRODUCTS CORPORATION
BALANCE SHEETS
- - ----------------------------------------------------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,880 $ 6,984
Accounts receivable (less allowances for doubtful accounts
of $350,000) 2,718,828 3,738,103
Insurance settlement receivable -- 564,380
Inventories 22,706,478 18,949,568
Prepaid expenses 347,244 723,535
Refundable income taxes -- 544,457
Deferred income taxes 476,484 331,000
------------ ------------
Total current assets 26,255,914 24,858,027
------------ ------------
OTHER ASSETS:
Marketable securities 1,839,288 1,450,650
Other 109,800 115,223
------------ ------------
Total other assets 1,949,088 1,565,873
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 47,785 47,785
Buildings 3,715,554 3,574,941
Machinery and equipment 5,367,862 5,270,958
------------ ------------
9,131,201 8,893,684
Less accumulated depreciation (5,622,815) (5,390,353)
------------ ------------
Total property, plant and equipment net 3,508,386 3,503,331
------------ ------------
$ 31,713,388 $ 29,927,231
============ ============
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See notes to financial statements.
- 3 -
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<CAPTION>
ATHEY PRODUCTS CORPORATION
BALANCE SHEETS
- - -------------------------------------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 1,431,000 $ --
Checks issued in excess of bank balance 439,309 --
Current portion of obligations under capital lease 21,570 42,912
Accounts payable 2,361,776 2,951,507
Employee compensation and amounts withheld 324,810 357,641
Other accrued expenses 184,118 280,379
Warranty reserve 1,706,378 690,000
Income taxes payable 15,952 --
------------ ------------
Total current liabilities 6,484,913 4,322,439
------------ ------------
NONCURRENT LIABILITIES:
Obligations under capital lease 14,507 14,507
Deferred income taxes 564,730 454,040
------------ ------------
Total noncurrent liabilities 579,237 468,547
------------ ------------
SHAREHOLDERS' EQUITY:
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 725,270 1,234,514
Unrealized gain on marketable securities
available-for-sale, net of related tax effect 593,213 333,233
Less cost of 214,851 and 158,751 common shares
in treasury in 1997 and 1996, respectively (928,557) (690,814)
------------ ------------
Total shareholders' equity 24,649,238 25,136,245
------------ ------------
$ 31,713,388 $ 29,927,231
============ ============
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See notes to financial statements.
- 4 -
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<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 13,969,758 $ 17,075,229
Cost of goods sold 10,507,392 14,293,838
------------ ------------
Gross profit 3,462,366 2,781,391
Selling, administrative and engineering expenses 3,671,882 3,146,549
------------ ------------
Loss from operations (209,516) (365,158)
Other income 15,117 381,030
Other expenses (35,519) (8,150)
------------ ------------
Earnings (loss) before income taxes (229,918) 7,722
Income tax expense (benefit) 279,326 (74,031)
------------ ------------
NET LOSS $ (509,244) $ 81,153
============ ============
NET LOSS PER SHARE $ (0.13) $ 0.02
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,811,221 3,973,459
============ ============
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See notes to financial statements.
- 5 -
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<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 6,197,383 $ 8,054,196
Cost of goods sold 4,071,012 6,736,349
----------- -----------
Gross profit 2,126,371 1,317,847
Selling, administrative and engineering expenses 2,061,447 1,607,850
----------- -----------
Earnings (loss) from operations 64,924 (290,003)
Other income 9,866 13,624
Other expenses (24,678) (3,648)
----------- -----------
Earnings (loss) before income taxes 50,112 (280,027)
Income tax expense (benefit) 310,526 (90,741)
----------- -----------
NET LOSS $ (260,414) $ (189,286)
=========== ===========
NET LOSS PER SHARE $ (0.07) $ (0.05)
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,805,608 3,973,459
=========== ===========
</TABLE>
See notes to financial statements.
- 6 -
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<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30,1997 June 30,1996
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ (509,244) $ 81,753
Adjustments to reconcile net earnings
(loss) to net cash provided by operating activities:
Depreciation and amortization 232,462 215,243
Provision for doubtful accounts -- 10,266
Provision for deferred income tax (163,452) (234,673)
Gain on sale of equipment -- (237,142)
Changes in operating assets and liabilities:
Accounts receivable 1,019,275 (4,050,133)
Insurance settlement receivable 564,380 --
Inventories (3,756,910) 809,272
Prepaid expenses 376,291 37,444
Refundable income taxes 544,457 531,517
Other assets 5,423 --
Accounts payable (589,731) (732,369)
Employee compensation and amounts withheld (32,831) 18,935
Other accrued expenses (96,261) 121,898
Warranty reserves 1,016,378 20,692
Income taxes payable 15,952 160,151
----------- -----------
Net cash used in operating activities (1,373,811) (3,247,146)
----------- -----------
INVESTING ACTIVITIES:
Purchase of plant and equipment (237,517) (197,026)
Proceeds from disposal of assets -- 928,231
------------- -----------
Net cash provided by (used in) investing activities (237,517) 731,205
----------- -----------
FINANCING ACTIVITIES:
Proceeds from line of credit 7,033,000 --
Repayment of line of credit (5,602,000) --
Checks issued in excess of bank balance 439,309 --
Principal paid on obligations under capital lease (21,342) (20,895)
Purchase of common stock for treasury (237,743) --
------------ -----------
Net cash provided by (used in) financing activities 1,611,224 (20,895)
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (104) (2,536,836)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,984 3,072,088
----------- -----------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 6,880 $ 535,252
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 27,263 $ 7,278
=========== ===========
Income taxes paid (recoveries) $ (117,826) $ (531,000)
=========== ===========
</TABLE>
See notes to financial statements.
- 7 -
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ATHEY PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
I. The condensed financial statements included herein have been prepared by
Athey Products Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report on Form 10-K for the year ended December 31, 1996.
II. The financial information reflects all adjustments which are, in the
opinion of Management, necessary to a fair presentation of the results for
the interim period presented.
III. Earnings (loss) per share amounts are computed on the basis of the weighted
average number of shares outstanding during the period, which were
3,811,221 and 3,973,459 in 1997 and 1996, respectively. Certain 1996
financial statement amounts have been reclassified to conform with the 1997
presentation with no effect on net income.
8
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ATHEY PRODUCTS CORPORATION
Item 2. 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.
[ ] 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 took effect January 1, 1997. Under the provision of
Statement of Financial Accounting Standards No. 88, "Employers' Accounting for
Settlements and Curtailment of Defined Benefit Pension Plans and for Termination
of Benefits", the Company recognized a pretax curtailment gain of $1,016,651 in
the fourth quarter of 1996 due to benefit freezes.
In June 1997, the Company recognized a pretax settlement gain of $1,308,200 on
the reversion of assets due to the termination of the pension plan.
Approximately $565,227 of this amount resulted in a reduction in cost of goods
sold and approximately $742,973 of this amount resulted in a reduction in
selling, administrative and engineering expenses. However, this favorable impact
on selling, administrative and engineering expenses was offset by a $369,044
increase in excise tax expense associated with the termination of the pension
plan. The effect was a decrease in net loss after tax of $619,843 or $ .16 per
share.
[ ] During late 1995 and early 1996, plans were developed to significantly
reduce the Company's cost structure and to improve productivity. This
restructuring program 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
non-strategic 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.
During the first six months of 1996, as a part of this restructuring plan, the
Company incurred approximately $471,902 of expenses. Approximately $284,579 of
this amount related to the disposal and write-down to net realizable values of
certain assets. Approximately $187,323 of this amount was primarily attributable
to the additional expenses which were incurred during 1996 relating to the
closure of operations of the
9
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manufacturing facility in Sioux Falls, South Dakota. The effect was a decrease
in net earnings after tax of $311,455 or $ .08 per share.
[ ] In February 1996, the Company sold its South Dakota land, building and
certain inventory and manufacturing equipment. The statement of operations for
the six month period ended June 30, 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.
Six Months Ended June 30, 1997 ( "First Half 1997")
as compared to
Six Months Ended June 30, 1996 ("First Half 1996")
The Company's net sales for the six months ended June 30, 1997 were $13,969,758,
a 18.2% or $3,105,471 decrease from the $17,075,229 recorded for the same period
in 1996. The sales decline reflects a 29.9% decrease in the number of sweepers
shipped during the period as compared to the prior year. This volume decline was
partially offset by slightly higher average unit selling prices and a 17.8%
increase in replacement part sales.
The decline in sweeper sales was attributable to several factors, including the
severe winter weather followed by floods affecting the Company's dealers located
in the upper midwest markets. Recently approved legislation in Southern
California, an important market for the Company's products, which now requires
all cities and counties in the region to improve their street sweeping and to
control dust on improved roads, caused local governments to delay their budgeted
purchases until these regulations could be clarified. In addition, a recently
passed tire tread weight law in the state of Washington caused some unexpected
delays in bids for orders. The Company also continues to experience competitive
pricing pressures in certain product lines.
Cost of goods sold as a percentage of net sales was 75.2% in the six months
ended June 30, 1997 as compared to 83.7% during the same period in 1996. The
cost of goods sold was favorably impacted in the Second Quarter 1997 by the
$565,227 settlement gain relating to the pension plan. The cost of goods sold in
1996 included approximately $284,579 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 to $11,072,619 or 79.3% of
net sales in 1997 and decreased to $14,009,259 or 82.0% of net sales in 1996.
The higher level of cost of goods sold in the First Half 1996 was primarily due
to manufacturing inefficiencies resulting from lower unit volume, introduction
of the new regenerative air sweeper and M-9D Mobil Street Sweeper product lines
and
10
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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. The cost of goods sold in the First Half 1997 was adversely impacted
by manufacturing inefficiencies stemming from a substantially lower volume of
shipments.
The Company's selling, administrative and engineering expenses increased from
18.4% to 26.3% of net sales, while in dollar terms increasing $525,333 to
$3,671,882. Selling, administrative and engineering expenses were favorably
impacted in the Second Quarter 1997 by the $742,973 settlement gain relating to
the pension plan. However, this favorable impact was offset by a $369,044
increase in excise tax expense associated with the termination of the pension
plan and an approximately $1,016,000 increase in warranty reserves.
Approximately $786,000 of the increase in warranty reserves related to charges
for future field service campaigns and approximately $230,000 related to an
increase in the Company's warranty experience. In addition, the Company
continued to expand 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. These increases were
partially offset by lower insurance premiums.
Also, approximately $187,323 of expenses were incurred during the first six
months of 1996 relating to the closure of operations of the manufacturing
facility in Sioux Falls, South Dakota.
Other income for the six months ended June 30, 1997 was $15,117 as compared to
$381,030 recorded in the first six months of 1996. Included in other income for
1996 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 $45,994 in 1996 to $9,377 in 1997. 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 increase in inventory
reflects an increase in the Company's field demonstration fleet as well as
delays in municipal purchases as discussed above.
The income tax expense for the six month period ended June 30, 1997 varies from
the customary relationship of 34% primarily due to an increase of $337,749 in
the Company's valuation reserve allowance against recorded deferred tax assets.
The income tax benefit for the six month period ended June 30, 1996 varies from
the customary relationship of a 34% income tax expense primarily because of an
approximately $77,000 credit from a reduction in the deferred tax asset
valuation allowance.
11
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The net loss after tax for the six months ended June 30, 1997, was $509,244 or
$.13 per share, as compared to net earnings after tax of $81,753 or $.02 per
share recorded in 1996.
Three Months Ended June 30, 1997 ("Second Quarter 1997")
as compared to
Three Months Ended June 30, 1996 ("Second Quarter 1996")
The Company's net sales for the Second Quarter 1997 were $6,197,383,
representing a 23.1% or $1,856,813 decline from net sales of $8,054,196 achieved
in the Second Quarter 1996. The reduction in sales volume was primarily
attributable to a 34.2% unit volume decrease and continuing competitive price
pressures on certain product lines.
The cost of goods sold as a percentage of net sales was 65.7% in the Second
Quarter 1997 compared with 83.6% in the Second Quarter 1997. The cost of goods
sold was favorably impacted in the Second Quarter 1997 by the $565,227
settlement gain relating to the pension plan. The cost of goods sold in 1996
included approximately $177,996 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 to $4,636,239 or 74.8% of net sales in
1997, and decreased to $6,558,353 or 81.4% of net sales in 1996.
The higher level of cost of goods sold in the Second Quarter 1996 was primarily
due to manufacturing inefficiencies resulting from lower unit volume,
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 factory that were transferred from the
former South Dakota factory.
The Company's selling, administrative, and engineering expenses increased from
20.0% to 33.3% of net sales, while in dollar terms they increased $453,597 to
$2,061,447. Selling, administrative and engineering expenses were favorably
impacted in the Second Quarter 1997 by the $742,973 settlement gain relating to
the pension plan. This favorable impact was partially offset by a $369,044
increase in excise tax expense associated with the termination of the pension
plan and an approximately $960,000 increase in warranty reserves.
The income tax expense for the three month period ended June 30, 1997 varies
from the customary relationship of 34% primarily due to an increase of $273,749
in the Company's valuation reserve allowance against recorded deferred tax
assets.
The net loss after tax for the three months ended June 30, 1997 was $260,414 or
$.07 per share, as compared to a net loss of $189,286 or $.05 per share for the
three months ended June 30, 1996.
12
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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 June 30, 1997 the Company had working capital of $19,771,001; the ratio of
current assets to current liabilities was 4.0 to 1; and the debt to equity ratio
was .29 to 1.
This compares to working capital of $20,535,588; a ratio of current assets to
current liabilities of 5.8 to 1; and a debt to equity ratio of .19 to 1 at
December 31, 1996.
As part of its authorized stock repurchase program the Company used $237,743 for
financing activities in 1997 to repurchase its common stock.
The Company generally relies upon internally generated funds to satisfy working
capital requirements and to fund capital expenditures. Other than utilizing the
available line of credit as needed, the Company does not presently plan to
borrow long-term funds or sell securities.
The Company had available an unsecured line of credit of $5,000,000 of which
$1,431,000 had been utilized at June 30, 1997. 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.
13
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on May 15,
1997, at which meeting the following matters were voted on by the
shareholders:
(i) Election of Directors
Name Votes For Votes Against
- - ---- --------- or Withheld
-----------
John F. McCullough 3,435,164 58,068
Martin W. McCullough 3,435,164 58,068
Richard A. Rosenthal 3,434,114 59,118
Henry W. Gron, Jr. 3,431,485 61,747
James H. Stumpo 3,437,683 55,549
Franz M. Ahting 3,439,683 53,549
(ii) Ratification of the Appointment of Auditors
Votes For Votes Against Votes Abstaining
- - --------- ------------- and Broker Non-Votes
--------------------
3,425,336 67,198 698
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
The following is included as an exhibit to this report:
27. Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATHEY PRODUCTS CORPORATION
ATHEY PRODUCTS CORPORATION
Date: August 14, 1997 /s/ James H. Stumpo
- - ------------------------- --------------------------------
James H. Stumpo
President and Chief Executive Officer
Date: August 14, 1997 /s/ Franz M. Ahting
- - ------------------------- --------------------------------
Franz M. Ahting
Vice President Finance and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,880
<SECURITIES> 0
<RECEIVABLES> 2,718,828
<ALLOWANCES> 350,000
<INVENTORY> 22,706,478
<CURRENT-ASSETS> 26,255,914
<PP&E> 9,131,201
<DEPRECIATION> 5,622,815
<TOTAL-ASSETS> 31,713,388
<CURRENT-LIABILITIES> 6,484,913
<BONDS> 0
0
0
<COMMON> 8,040,918
<OTHER-SE> 16,218,394
<TOTAL-LIABILITY-AND-EQUITY> 31,713,388
<SALES> 13,969,758
<TOTAL-REVENUES> 0
<CGS> 10,507,392
<TOTAL-COSTS> 3,671,882
<OTHER-EXPENSES> 35,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,263
<INCOME-PRETAX> (229,918)
<INCOME-TAX> 279,326
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (509,244)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
