UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended
September 30, 1999
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 September 30, 1999: 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 September 30, 1999
(unaudited) and December 31, 1998. 3 - 4
Statements of Operations for the nine
months ended September 30, 1999 (unaudited)
and September 30, 1998 (unaudited). 5
Statements of Operations for the three
months ended September 30, 1999 (unaudited)
and September 30, 1998 (unaudited). 6
Statements of Cash Flows for the nine
months ended September 30, 1999 (unaudited)
and September 30, 1998 (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
2
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<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
--------------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 180,056 $ 143,391
Accounts receivable (less allowances for doubtful accounts
of $285,600 and $285,280, for 1999 and 1998, respectively) 3,953,792 2,974,180
Inventories 16,790,411 16,466,109
Prepaid expenses 370,784 43,153
Deferred income taxes 97,489 107,489
-----------------------------------------
Total current assets 21,392,532 19,734,322
-----------------------------------------
OTHER ASSETS:
Other 2,230 2,230
-----------------------------------------
Total other assets 2,230 2,230
-----------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 47,785 47,785
Buildings and building improvements 3,940,997 3,929,722
Machinery and equipment 5,069,358 5,043,279
-----------------------------------------
9,058,140 9,020,786
Less accumulated depreciation (5,688,238) (5,421,676)
-----------------------------------------
Total property, plant and equipment net 3,369,902 3,599,110
-----------------------------------------
$ 24,764,664 $ 23,335,662
=========================================
</TABLE>
See notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 4,466,373 $ 4,391,000
Accounts payable 2,791,492 3,542,854
Employee compensation and amounts withheld 424,543 438,424
Other accrued expenses 191,072 320,733
Warranty reserve 1,658,570 1,746,166
------------- -------------
Total current liabilities 9,532,050 10,439,177
------------- -------------
NONCURRENT LIABILITIES:
Long-term borrowings 2,318,950 -
Deferred income taxes 97,489 107,489
------------- ------------
Total noncurrent liabilities 2,416,439 107,489
------------- ------------
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 (deficit) (10,514,579) (10,541,758)
Less cost of 214,851 common shares
in treasury (928,558) (928,558)
-------------- --------------
Total shareholders' equity 12,816,175 12,788,996
-------------- --------------
$ 24,764,664 $ 23,335,662
============== ==============
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, September 30,
1999 1998
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 30,123,280 $ 21,156,151
Cost of goods sold 24,954,185 21,666,561
---------------- ----------------
Gross profit (loss) 5,169,095 (510,410)
Selling, administrative and engineering expenses 4,816,792 5,338,885
---------------- ----------------
Earnings (loss) from operations 352,303 (5,849,295)
Other income 37,531 2,191,835
Other expenses 362,655 137,420
---------------- ----------------
Earnings (loss) before income tax expense 27,179 (3,794,880)
Income tax expense - 228
---------------- ----------------
NET EARNINGS (LOSS) $ 27,179 $ (3,795,108)
================ ================
NET EARNINGS (LOSS) PER SHARE $ 0.01 $ (1.00)
================ ================
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,805,608 3,805,608
================ ================
</TABLE>
See notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, September 30,
1999 1998
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 9,629,306 $ 6,063,090
Cost of goods sold 8,036,283 8,778,402
--------------- ---------------
Gross profit (loss) 1,593,023 (2,715,312)
Selling, administrative and engineering expenses 1,434,568 1,959,591
--------------- ---------------
Earnings (loss) from operations 158,455 (4,674,903)
Other income (1,224) 82,805
Other expenses 140,847 84,847
--------------- ----------------
Earnings (loss) before income tax expense 16,384 (4,676,945)
Income tax expense - 39,377
--------------- ----------------
NET EARNINGS (LOSS) $ 16,384 $ (4,716,322)
=============== ================
NET EARNINGS (LOSS) PER SHARE $ 0.00 $ (1.24)
=============== ================
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,805,608 3,805,608
=============== ================
</TABLE>
See notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
ATHEY PRODUCTS CORPORATION
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30,1999 September 30,1998
----------------------------------------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 27,179 $ (3,795,108)
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 266,562 337,497
Provision for doubtful accounts 320 25,000
Provision for deferred income tax - 230
Gain on sale of marketable securities - (2,095,965)
Changes in operating assets and liabilities:
Accounts receivable (979,932) 116,600
Inventories (324,302) 1,954,135
Prepaid expenses (327,631) 213,996
Accounts payable (751,362) (451,094)
Employee compensation and amounts withheld (13,881) 119,830
Other accrued expenses (129,661) (93,676)
Warranty reserve (87,596) 547,242
Refundable income taxes - 749,045
---------------- -------------
Net cash used in operating activities (2,320,304) (2,372,268)
---------------- -------------
INVESTING ACTIVITIES:
Purchase of plant equipment (37,354) (352,661)
Proceeds from sale of marketable securities - 3,041,716
---------------- -------------
Net cash provided by (used in) investing activities (37,354) 2,689,055
---------------- -------------
FINANCING ACTIVITIES:
Proceeds from line of credit 16,126,736 12,472,000
Repayment of line of credit (13,807,786) (8,236,000)
Short-term borrowings 75,373 -
Excess of outstanding checks over bank balance - (697,288)
Principal paid on obligations under capital lease - (14,507)
---------------- -------------
Net cash provided by financing activities 2,394,323 3,524,205
---------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS
36,665 3,840,992
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 143,391 6,880
---------------- --------------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 80,056 $ 3,847,87
================ ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 356,485 $ 115,658
================ ==============
</TABLE>
See notes to financial statements
7
<PAGE>
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, 1998.
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
3,805,608 in 1999 and 1998.
8
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ATHEY PRODUCTS CORPORATION
- --------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
---------------------------------------------------------------
The forward-looking statements included in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section, which
reflect management's best judgment based on factors currently known, involve
risks and uncertainties. Words such as "expect", "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 section. Forward-looking information provided by the Company
in such section pursuant to the safe harbor established under the Private
Securities Litigation Reform Act of 1995 should be evaluated in the context of
these factors.
RESULTS OF OPERATIONS
- ---------------------
Significant Event Affecting Comparability
The comparability of statement of operations data has been affected by the
following significant item.
[ ] In May 1998, the Company sold its marketable securities for
$3,041,716. This sale resulted in a pre-tax gain of $2,095,965. The
effect was an increase in net earnings after tax of $1,383,337 or $.36
per share.
9
<PAGE>
Nine Months Ended September 30, 1999
- ------------------------------------
as compared to
Nine Months Ended September 30, 1998
- ------------------------------------
The Company's net sales for the nine months ended September 30, 1999 were
$30,123,280, a 42.4% or $8,967,129 increase from the $21,156,151 recorded for
the same period in 1998. The sales increase reflects a 52.4% increase in the
number of units shipped during the period as compared to the same period for
1998. This volume increase was partially offset by an 8.4% decrease in
replacement parts sales. The increase in units shipments was primarily
attributable to productivity improvements.
Cost of goods sold as a percentage of net sales was 82.8% for the nine months
ended September 30, 1999 as compared to 102.4% during the same period for 1998.
Cost of goods sold in the third quarter of 1998 was negatively impacted by
charges of approximately $2,347,000. The adjustments consisted of the following:
(i) approximately $759,000 charged as a result of the Company's annual physical
inventory taken at the end of September; (ii) approximately $755,000 relating to
production inefficiencies; (iii) approximately $421,000 relating to an increase
in the reserve for obsolete inventories based on the Company's ongoing review of
future production requirements; and (iv) approximately $412,000 relating to
adjustments to net realizable value of the Company's used finished goods and
demonstration fleet.
The Company's selling, administrative and engineering expenses decreased
$522,093 from $5,338,885 or 25.2% of net sales, to $4,816,792 or 16.0% of net
sales. Selling, administrative and engineering expenses in 1999 have been
favorably impacted by cost controls and lower warranty expense.
Other income for 1999 was $37,531 as compared to $2,191,835 recorded in 1998.
Included in other income for 1998 was a gain of $2,095,965 on the sale of
marketable securities.
Other expenses for 1999 were $362,655 as compared to $137,420 recorded in 1998.
This increase in other expenses for 1999 is related to increased interest
expense associated with the borrowings on the Company's credit facility.
10
<PAGE>
Income tax expense for 1999 and 1998 varies from the customary relationship of
34% primarily due to changes in the Company's valuation reserve allowance
against recorded deferred tax assets.
The net earnings after tax for the nine months ended September 30, 1999, was
$27,179 or $.01 per share, as compared to a net loss after tax of $3,795,108 or
$1.00 per share recorded for the same period in 1998.
Three Months Ended September 30, 1999 ("Third Quarter 1999")
- ------------------------------------------------------------
as compared to
Three Months Ended September 30, 1998 ("Third Quarter 1998")
- ------------------------------------------------------------
The Company's net sales for the Third Quarter 1999 were $9,629,306, representing
a 58.8%, or $3,566,216 increase from net sales of $6,063,090 reported in the
Third Quarter 1998. This sales increase is attributable to a 54.5% increase in
number of units shipped, and a 16.1% increase in replacement parts sales. The
Third Quarter 1999 increase in units shipments was attributable to productivity
improvements.
The cost of goods sold, as a percentage of net sales, was 83.5% in the Third
Quarter 1999 compared with 144.8% in the Third Quarter 1998. The Third Quarter
1998 amount reflects manufacturing inefficiencies and the inventory adjustments
discussed above.
The Company's selling, administrative, and engineering expenses decreased
$525,023 to $1,434,568 in the Third Quarter 1999 or 14.9% of net sales, from
$1,959,591 in the Third Quarter 1998 or 32.3% of net sales. The decrease is a
result of cost controls initiated in the First Quarter of 1999.
Other income for the Third Quarter 1999 was ($1,224) as compared to $82,805
recorded in the Third Quarter 1998. Included in other income for Third Quarter
1998 was interest income earned on the proceeds from the sale of marketable
securities.
Other expenses for the Third Quarter 1999 were $140,847 as compared to $84,847
recorded in the Third Quarter 1998. This increase in other expenses for the
Third Quarter 1999 is related to increased interest expense associated with the
borrowings on the Company's line of credit.
11
<PAGE>
The income tax expense for the Third Quarter 1999 and Third Quarter 1998 varies
from the customary relationship of 34% primarily due to changes in the Company's
valuation reserve allowance against recorded deferred tax assets.
The net earnings after tax for the three months ended September 30, 1999 was
$16,384 or $.00 per share, as compared to a net loss after tax of $4,716,322 or
$1.24 per share for the three months ended September 30, 1998.
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 September 30, 1999 the Company had working capital of $11,860,482; the ratio
of current assets to current liabilities was 2.2 to 1; and the debt to equity
ratio was .93 to 1.
This compares to working capital of $9,295,145; a ratio of current assets to
current liabilities of 1.9 to 1; and a debt to equity ratio of .82 to 1 at
December 31, 1998.
The Company did not authorize any common stock repurchases during 1999 or 1998.
The Company closed on a new credit facility with Nations Credit on June 30,
1999, which was funded on July 7, 1999. The new credit facility is in the form
of a revolving and term loan credit facility secured by all of the assets and
inventory of the Company and will provide an aggregate principal amount of up to
$9 million for working capital and the repayment of its prior credit facility.
The new credit facility provides the financial flexibility needed by the Company
to continue its turnaround.
12
<PAGE>
Year 2000 Issue
- ---------------
The Company has assessed its Year 2000 exposure and determined the consequences
that any Year 2000 problems might have on the Company's business, results of
operations or financial condition, or cause the Company to incur potential
liability to third parties if its computer systems are not Year 2000 compliant.
As part of its assessment, the Company canvassed its customers and suppliers and
reviewed the Year 2000 disclosures of certain publicly-traded entities that
provide or have provided the Company with computer and financial services,
including computer equipment and software, to determine whether Year 2000 issues
will have a material effect on the Company or such third parties. Based on the
results of its assessment, the Company believes its computer software and
equipment will be Year 2000 compliant. The Company has, however, developed a
contingency plan in the event its expectations regarding the Year 2000 problem
are incorrect. Because of the uncertainly surrounding the Year 2000 problem,
however, the Company can give no assurances that its assessment or its
contingency plan will avoid potential, material effects of the Year 2000
problem.
The Company does not anticipate that any incremental expenditures it may incur
as a result of Year 2000 issues will be material. The Company uses certain
accounting, word processing and inventory management software as part of its
day-to-day operations. Although a shutdown of all its computer systems could
cause delays in production or shipments of products to customers, the Company
does not expect such an interruption. In a worst case scenario, Year 2000
problems affecting the Company, the Company's bank accounts or the business
operations of the Company's customers could materially, adversely affect the
Company's production operation or its ability to meet its obligations to third
parties.
Nevertheless, in the event that Year 2000 problems have a material effect on the
Company, its customers or service providers, the Company expects to have
sufficient cash reserves and inventory to meet its payroll and various other
obligations pending resolution of any significant Year 2000 issues.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
-----------------
On August 6, 1999, the Company filed a notice of noncompliance with
the National Highway Traffic Safety Administration ("NHTSA") regarding the
recently amended FMVSS No. 105. Specifically, the Company reported that a
certain number of its street sweepers sold by the Company were sold without an
antilock brake system required by FMVSS No. 105. The Company also reported that
it had simultaneously filed a petition with the NHTSA seeking an exemption for
the Company from the notification and remedy requirements of that regulation
because the noncompliance was inconsequential to motor vehicle safety. If any
remedial or other action is ultimately required of the Company in this regard,
the Company believes that is has adequate reserves for the cost of such actions.
Item 2. Changes in Securities. None
---------------------
Item 3. Defaults upon Senior Securities. None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None
---------------------------------------------------
Item 5. Other Information.
-----------------
On August 6, 1999, the Company announced that, due to the Company's
failure to meet the Nasdaq National Market's $5 million minimum public float
requirement, effective with the open of business on Monday, August 9, 1999, the
listing of the Company's common stock would be transferred to the Nasdaq
SmallCap Market.
On October 18, 1999, in order to comply with the requirements for the
listing on the SmallCap Market, Mr. John P. Kelly resigned from the Company's
Board of Directors and Mr. Joseph L. Dindorf was appointed by the Board to fill
the vacancy created by Mr. Kelly's resignation. Mr. Dindorf was also appointed
to the Company's Audit Committee.
On October 28, 1999, Nasdaq notified the Company that it satisfied all
of the requirements to have its common stock listed on the SmallCap Market.
Since that date, it has traded on the SmallCap Market under the symbol ATPC.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) No exhibits have been filed as part of this Report.
(b) No reports on Form 8-K have been filed during the fiscal
quarter for which this report is filed.
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
Date: November 12, 1999 /s/ Thomas N. Nelson
- --------------------------- --------------------------------------
Thomas N. Nelson
President and Chief Executive Officer
Date: November 12, 1999 /s/ William H. Warden
- --------------------------- --------------------------------------
William H. Warden
Vice President - Finance,
Chief Financial Officer, and
Corporate Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 180,056
<SECURITIES> 0
<RECEIVABLES> 4,239,392
<ALLOWANCES> 285,600
<INVENTORY> 16,790,411
<CURRENT-ASSETS> 21,392,532
<PP&E> 9,058,140
<DEPRECIATION> 5,688,238
<TOTAL-ASSETS> 24,764,664
<CURRENT-LIABILITIES> 9,532,050
<BONDS> 0
0
0
<COMMON> 8,040,918
<OTHER-SE> 4,775,257
<TOTAL-LIABILITY-AND-EQUITY> 24,764,664
<SALES> 30,123,280
<TOTAL-REVENUES> 0
<CGS> 24,954,185
<TOTAL-COSTS> 4,816,792
<OTHER-EXPENSES> 362,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356,485
<INCOME-PRETAX> 27,179
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,179
<EPS-BASIC> .01
<EPS-DILUTED> 0
</TABLE>
