<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 of 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended October 2, 1999
Commission File Number 333-88759
WOODS EQUIPMENT COMPANY
(Exact name of registrant as specified in its character)
DELAWARE 36-3868249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6944 Newburg Road
Rockford, IL 61108
(Address of principal executive offices)
(Zip Code)
(815) 732-2141
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
Yes / / No /X/
Number of shares of Common Stock outstanding
as of November 13, 1999: 1,065,996.46
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WOODS EQUIPMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ - $ 1,352
Accounts receivable, net 34,630 24,160
Inventories, net 36,290 21,362
Deferred income taxes 3,154 3,083
Prepaid expense and other 3,185 2,309
---------------------------------
TOTAL CURRENT ASSETS $ 77,259 $ 52,266
Property, plant and equipment, net 31,730 25,945
Excess of cost over fair value of net assets acquired, net 76,872 23,817
Other assets, net 8,205 6,637
---------------------------------
TOTAL ASSETS $ 194,066 $ 108,665
=================================
October 2, January 2,
1999 1999
---- ----
LIABILITIES AND
STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 737 $ 2,128
Accounts payable 10,393 4,938
Accrued Expenses 9,433 5,521
---------------------------------
TOTAL CURRENT LIABILITIES $ 20,563 $ 12,587
LONG-TERM DEBT 171,573 117,033
DEFERRED INCOME TAXES 3,133 3,083
OTHER LONG-TERM LIABILITIES 76 76
REDEEMABLE PREFERRED STOCK
AND ACCRUED DIVIDENDS 50,777 30,110
STOCKHOLDERS' EQUITY
Common stock - authorized shares,
15.0 million at $0.01 par value;
Outstanding shares:
1999 1,065,996.46 shares 11 6
1998 657,963.00 shares
Additional paid in capital 22,270 14,897
Treasury stock, at cost (110) -
Notes receivable from stockholders (668) (581)
Accumulated deficit (73,559) (68,546)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY $ (52,056) $ (54,224)
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 194,066 $ 108,665
=================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
WOODS EQUIPMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Oct 2, Sept 26, Oct 2, Sept 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 49,274 $ 37,559 $ 135,071 $ 121,252
Cost of Goods Sold 36,292 27,535 97,881 87,211
--------- --------- --------- ---------
Gross Profit 12,982 10,024 37,190 34,041
Selling 6,575 3,809 13,675 10,827
General and administrative 3,201 1,611 8,190 5,205
Engineering 1,012 834 2,684 2,820
Noncash stock option compensation charge - 4,310 - 4,310
Management fee paid to affiliate 375 1,030 375 1,204
Amortization 1,112 613 2,382 1,909
Other operating (income) expenses, net 176 137 20 (150)
--------- --------- --------- ---------
Operating Income (loss) $ 531 $ (2,320) $ 9,864 $ 7,916
Other Expense, net 4,685 2,404 10,269 6,369
--------- --------- --------- ---------
Income (loss) Before Tax; provision (benefit) & extraordinary loss (4,154) (4,724) (405) 1,547
Provision (benefit) for Income Tax (1,574) (1,668) 553 994
--------- --------- --------- ---------
Net Income (loss) Before
Extraordinary Item (2,580) (3,056) (958) 553
Extraordinary loss: Early Extinguishment of Debt (net of income 2,041 795 2,041 795
tax benefit of $1,305 & $588, respectively)
--------- --------- --------- ---------
Net Loss $ (4,621) $ (3,851) $ (2,999) $ (242)
========= ========= ========= =========
</TABLE>
3
<PAGE>
WOODS EQUIPMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
OCT 2, SEPT 26,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Income (loss) before extraordinary items $ (958) $ 553
Adjustments to reconcile income (loss) before extraordinary items to net
cash provided by operating activities:
Depreciation 3,110 2,557
Amortization 2,800 2,081
Noncash stock option compensation charge - 4,310
Bad debt expense 21 17
Deferred income taxes - 663
Equity in loss (income) of joint venture 81 (146)
(Gain) loss on sale of property, plant and equipment (17) 19
Changes in operating assets and liabilities; net of effects of acquisitions
Trade accounts receivables 1,799 (3,019)
Inventories 624 (861)
Prepaid expenses and other assets (2,024) (1,271)
Accounts payable and accrued liabilities 2,905 (615)
---------- ----------
Net cash provided by operating activities 8,341 4,288
INVESTING ACTIVITIES
Acquisition of TISCO (38,340) -
Acquisition of Central Fabricators, net of cash acquired of $504 (28,464) -
Acquisition of Alitec, net of cash acquired of $18 (10,862) -
Purchases of equipment, net (4,760) (2,344)
---------- ----------
Net cash used in investing activities (82,426) (2,344)
FINANCING ACTIVITIES
Payments for deferred financing costs (5,417) (3,147)
Proceeds from issuance of 12% senior notes 130,000 -
Proceeds from issuance of 15% senior discount
debentures 24,269 -
Net payments of old revolving loans - (20,700)
Payments on old term loans and other notes (349) (50,893)
Payments on old term loan (84,850) -
Proceeds from new term loans - 85,000
Proceeds from new revolver, net 8,250 -
Issuance of subordinated loan to controlling
stockholder - 25,000
Proceeds from exercise of stock options - 439
Proceeds from sale of common stock 7,378 8,561
Proceeds from sale of preferred stock 18,649 27,179
Payment of promissory note to controlling stockholder (25,000) (5,080)
Preferred stock dividends - (992)
Redemption of common stock (33) (66,311)
Redemption of preferred stock (77) (4,015)
Net change in notes receivable from stockholders (87) 299
---------- ----------
Net cash provided by (used in) financing activities 72,733 (4,660)
---------- ----------
Net decrease in cash (1,352) (2,716)
Cash at beginning of period 1,352 2,716
---------- ----------
Cash at end of period $ - $ -
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
WOODS EQUIPMENT COMPANY
Condensed Consolidated Statement of Changes in Stockholders' Equity
(unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
Note
Number of Additional Receivable
Common Common Paid-in (Accumulated Treasury From
Shares Stock Capital Deficit) Stock Stockholders Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2, 1999 657,963 $ 6 $ 14,897 $ (68,546) $ - $ (581) $ (54,224)
Sale of common stock 410,097 5 7,373 (90) 7,288
Purchase of common stock (2,064) (110) (110)
Payments by stockholders 3 3
Net loss (2,999) (2,999)
Preferred stock dividends accrued (2,014) (2,014)
------------------------------------------------------------------------------------------------
Balance at October 2, 1999 1,065,996 $ 11 $ 22,270 $ (73,559) $ (110) $ (668) $ (52,056)
================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
WOODS EQUIPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1999 and September 26, 1998
(unaudited, in thousands)
1. Formation and Basis of Presentation
Woods Equipment Company (Woods or the Company) is a leading
manufacturer of attachments for a variety of mowing, cutting, clearing,
construction, material handling, landscaping, and grounds maintenance
applications. The Company's products include mowing attachments, front end
loaders, backhoes, coupler systems, buckets, scrapers, and other
implements, in addition to a full line of replacement parts. The average
lifespan of the products range from one to five years due to the severe and
wearing nature of the application for which they are used. The Company's
products are sold through approximately 3,900 dealers throughout the United
States, with no one dealer accounting form more than 2% of total sales.
In July 1999, the Company purchased substantially all the assets of
Tru-Part Manufacturing Corporation (TISCO), and all the outstanding stock
of Central Fabricators, Inc. (Central Fabricators) and the attachments
division of Alitec Corporation, (Alitec Attachments Division) for $38,551,
$28,464, and $10,862 in cash, respectively. In conjunction with the
acquisitions, the Company recorded $52,725 in cost in excess of net assets
acquired.
TISCO - one of the leading independent distributors of
replacement parts in the United States primarily for tractors
over ten years old;
Central Fabricators - one of the leading independent
manufacturers of pin-on excavator buckets for the U.S.
construction industry; and
Alitec Attachments Division- a manufacturer of patented hydraulic
powered attachments for the rapidly growing U.S. skid steer
market.
The transactions were financed primarily from net proceeds of $24,188
from the sale of 15% senior discount debentures and $126,100 from the sale
of 12% senior notes.
In related transactions, the Company entered into non-compete
agreements with former management of Central Fabricators and Alitec
Attachments Division. The three-year non-compete agreements, with an
imputed interest rate of 9%, had a collective net present value of $815 on
date of acquisition.
In addition, the Company entered into lease agreements of nine
existing facilities with the former owners of TISCO, Central Fabricators,
and Alitec Attachments Division. The leases range from terms of two to
seven years, and have an initial annual rent expense of $1,320.
The acquisitions were accounted for as purchases and accordingly, the
condensed consolidated statement of operations for nine months ended,
October 2, 1999, includes the results of the acquisition from their
respective date of acquisition. The following unaudited pro forma
statements of operations data for the nine months ended October 2, 1999 and
September 26, 1998, are based on certain amounts derived from the unaudited
statements of operations of acquisitions for the periods indicated, and
assumes that the acquisition of the assets of TISCO, Alitec Attachment
Division, and Central Fabricators, occurred as of the beginning of the
periods presented.
The following unaudited pro forma results of operations assumes that
the acquisition occurred as of the beginning of the periods presented.
1999 1998
-------- --------
Net Sales $195,824 $199,609
======== ========
6
<PAGE>
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instruction to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month periods ended October 2, 1999 and September 26, 1998 are not
necessarily indicative of the results that may be expected for the fiscal
year ending January 1, 2000. These financial statements should be read in
conjunction with the financial statements, including the notes thereto, for
the fiscal year ended January 2, 1999.
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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Related Party Expenses
The Company purchases manufactured finished goods at cost from its
joint venture investment, which amounted to $4,107 and $6,848 for the nine
month periods ended October 2, 1999 and September 26, 1998, respectively.
3. Segment and Related Information
The Company's products are sold primarily by construction, commercial,
agricultural, and outdoor power equipment dealers that sell prime movers
and other equipment produced by the major OEMs. The Company distribution
network includes dealers that have affiliations with all of the principal
OEMs of prime movers, such as Case/New Holland (CNH), Deere, AGCO
(manufacturer of the Massey Ferguson brand of prime mover), Ingersoll
(manufacturer of Bobcat brand of prime mover) Caterpillar, and Kubota. The
Company also sells it products through a substantial number of independent
dealers that are not affiliated with the major prime mover OEMs. Most
dealers offer tractor and prime mover attachments from independent
manufacturers which complement or compete with attachments sold by the
major tractor and prime mover manufacturers.
Business units represent market segments in which they share certain
characteristics, such as technology, marketing, and product application
that create long-term synergies. The principal activities of the Company's
operating segments are as follows:
Grounds Maintenance
This product category includes attachments used to maintain the ground
surrounding industrial and office parks, large estates, resort complexes,
universities, golf courses, and individual homes. In general, the demand
for these products is dependent upon a variety of conditions, including
general economic conditions, consumer spending patterns, weather
conditions, as well as state and municipal government spending.
Construction
The end-users in this product category generally include construction
companies and utility contractors. Demand for these products is closely
correlated to the overall demand for construction equipment, which is
driven by several factors, including general economic conditions, interest
rates, weather conditions, and government spending.
7
<PAGE>
Other
The end-users in this product category are farmers and ranchers, who
use these products principally in the planting, cultivating, and harvesting
of their crops. The demand for these products closely correlates to the
demand for agricultural equipment in general, which is influenced by a
number of factors, including total farm cash receipts, acreage under crop
or livestock, crop yields, government programs, general economic
conditions, interest rates, weather, and technological trends in
agriculture.
Net sales by operating segment reflects sales of products and services
to external customers, as reported in the Company's consolidated statements
of operations. The Company evaluates performance based on operating income
of the respective segment. Operating income includes all revenues, costs,
and expenses directly related to the segment involved. In determining
operating income, neither corporate nor interest expenses are included.
Operating segment depreciation expense, identifiable assets, and capital
expenditures relate to those assets that are utilized by the respective
operating segment. Corporate assets consist principally of cash, other
receivables, and intangible assets.
The accounting policies of each operating segment are the same as
those described in the summary of significant accounting policies.
A summary of the Company's operations by segment for the three-month
and nine-month period ended October 2, 1999 and September 26, 1998 is as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Oct 2, Sept 26, Oct 2, Sept 26,
Net Sales 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Grounds maintenance $ 37,218 $ 27,329 $ 102,167 $ 87,131
Construction 11,250 8,943 29,001 27,503
Other 806 1,287 3,903 6,618
-------------------------- -------------------------
Total Net Sales $ 49,274 $ 37,559 $ 135,071 $ 121,252
========================== =========================
Operating income (loss)
Grounds maintenance 2,960 3,109 14,070 14,064
Construction 521 1,031 3,160 4,070
Other 77 125 371 640
Corporate (3,027) (6,585) (7,737) (10,858)
-------------------------- -------------------------
Total operating income (loss) $ 531 $ (2,320) $ 9,864 $ 7,916
Interest Expense 4,685 2,404 10,269 6,369
-------------------------- -------------------------
Income (loss) before income taxes
and extraordinary loss $ (4,154) $ (4,724) $ (405) $ 1,547
========================== =========================
<CAPTION>
Oct 2, Jan 2,
1999 1999
---- ----
<S> <C> <C>
Assets
Grounds maintenance $ 75,813 $ 47,655
Construction 24,811 18,030
Other 3,134 3,808
Corporate 90,308 39,172
--------------------------
Total assets $ 194,066 $ 108,665
==========================
</TABLE>
The investment in joint venture is included in the other segment for
all years presented.
8
<PAGE>
Oct 2, Sept 26,
1999 1998
---- ----
Additions to long-lived assets
Grounds maintenance $ 3,682 $ 1,940
Construction 1,013 270
Other 30 0
Corporate 35 134
--------- ---------
Total additions to long-lived assets $ 4,760 $ 2,344
========= =========
The Company had no significant amounts of sales to or any long-lived
assets in an individual country outside the United States.
4. Inventories
Inventories consist of the following:
October 2,
1999
----
Raw Materials $ 6,948
Work in Process 2,129
Finished goods 28,695
---------
Total inventories at FIFO $ 37,772
LIFO adjustment (1,482)
---------
Total inventories at LIFO $ 36,290
=========
5. WEC Company Condensed Financial Information
Summary balance sheet information for WEC Company is as follows:
October 2,
1999
----
Current Assets $ 76,585
Non Current Assets 116,659
---------
Total Assets $ 193,244
=========
Current Liabilities 31,985
Non Current Liabilities 133,792
---------
Total Liabilities $ 165,777
=========
Summary results of operations for WEC Company is as follows:
October 2,
1999
----
Net Sales $ 135,071
Gross profit 97,881
---------
Operating income 37,190
Income before income tax provision
and extraordinary item 587
Net income (Loss) $ (2,798)
=========
9
<PAGE>
WEC Company, a wholly owned subsidiary of Woods Equipment Company,
issued a $130.0 million in aggregate principal amount of 12.0% senior notes
on July 28, 1999. Woods Equipment Company has fully and unconditionally
guaranteed the 12.0% senior notes. Complete financial statements and other
disclosure concerning WEC Company are not presented because management has
determined they are not meaningful to investors.
6. Revolving Loan and Other Long-Term Obligations
On July 28, 1999, Woods Equipment Company issued $51,927 in aggregate
principal amount at maturity of 15% senior discount debentures, due July
15, 2011, and WEC Company issued $130,000 in aggregate principal amount of
12% senior notes, due July 15, 2009. In addition, on July 28, 1999, WEC
Company entered into a bank agreement that provides for a $40,000 revolving
credit facility, and sold $25,000 of common and preferred stock to the
controlling shareholder of Woods Equipment Company.
The net proceeds on July 28, 1999 from the senior discount debentures,
senior notes, revolving credit facility, and stock sales were used to
purchase the entities of TISCO, Central Fabricators, and Alitec Attachments
Division (see footnote 1), and to retire $84,550 of bank term debt and
$25,000 of subordinated promissory notes held by the controlling
shareholder. Accrued interest paid in conjunction with the retirement of
the bank term debt and subordinated promissory notes was $547 and $2,609,
respectively.
Total borrowings under the revolving credit facility were $12,000 at
October 2, 1999 and are not to exceed $40,000. The Company is subject to a
fee of .50% per annum applied to the amount of unused borrowings available
on the revolving credit facility. The revolving credit facility expires on
July 28, 2004. Interest on the revolving credit facility is payable
quarterly either at a specified bank base rate plus margins ranging from
.50% to 1.50%, or at a Eurodollar rate plus Eurodollar margins ranging from
1.50% to 2.50%. Additional borrowing capacity under the revolving credit
facility was $26,943 at October 2, 1999. Letters of credit of $1,057 were
outstanding at October 2, 1999.
Long-term obligations at October 2, 1999 consist of the following:
------------------------------------------------------------------
Revolving Loans 7.63% to 9.75% $ 12,000
Senior discount debentures 15.0% 24,269
Senior notes 12.0% 130,000
Seller promissory note 7.5% 4,720
Other obligations 8.0% to 9.0% 1,321
--------
$172,310
Less: current maturities (737)
--------
Total long-term $171,573
========
The Company's revolving loan is subject to restrictive covenants,
including minimum levels of net earnings and limitations on capital
expenditures and dividends.
Interest on the senior discount debentures accretes at a rate of 15%
per annum. The Company is not required to make any cash payments of
interest on the debentures prior to October 15, 2004. Commencing October
15, 2004, the Company will pay interest quarterly at a rate of 15%. The
senior notes will pay interest semi-annually at a rate of 12%, commencing
January 15, 2000. The senior discount debentures and the senior notes are
each governed by indentures which limit the ability of Woods Equipment
Company and WEC Company, respectively, to incur additional indebtedness,
pay dividends, make investments, or sell assets.
The seller promissory note was issued in connection with an
acquisition. The note is payable in monthly installments of principal and
interest of $35, with the final payment due in July 2009, and bears annual
interest at 7.5%.
Included in other obligations are three noncompete agreements with key
members of the management of acquired entities.
Substantially all assets of the Company are collateralized by the
above debt.
10
<PAGE>
Future annual maturities of long-term debt obligations, excluding the
revolving credit facility, subsequent to October 2, 1999, are as follows:
1999 $ 536
2000 346
2001 389
2002 285
2003 85
Thereafter 158,669
---------
$ 160,310
=========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Woods is a leading manufacturer of attachments for a variety of
mowing, cutting and clearing, construction, material handling, landscaping
and grounds maintenance applications. During July 1999, Woods acquired
TISCO, Central Fabricators and the Alitec Attachments Division. As a result
of the acquisitions, Woods enhanced its position as one of the largest
independent attachment manufacturers in the United States, as well as,
gained a new platform in the replacement parts business for tractors.
On a proforma basis giving effect to these acquisitions, the Company
would have had net sales of approximately $248.2 million and adjusted
EBITDA of $26.5 million for the last twelve months ended October 2, 1999.
Adjusted EBITDA is defined as operating income plus depreciation,
amortization, non-recurring costs of $1.7 million relating to a failed
acquisition, non-cash stock option compensation charge of $4.3 million in
connection with the August 7, 1998, recapitalization, and full year impact
of day one synergies as the result of the July, 1999 acquisitions of $2.5
million.
The acquisitions were accounted for using the purchase method of
accounting. As a result, the acquisitions will prospectively affect our
results of operations in certain significant respects. The aggregate
acquisitions costs (including the assumption of liabilities and estimated
transaction expenses) of approximately $77.8 million has been allocated to
the tangible and intangible assets acquired and liabilities assumed by us
base on their respective fair values as of the date of the acquisitions.
The allocation of the purchase price, to the assets acquired in the
acquisitions, resulted in a significant increase in our annual depreciation
and amortization expense. In addition, due to the effects of the increased
borrowings of Woods to finance the recapitalization and the acquisitions,
our interest expense has increased significantly.
11
<PAGE>
Results of Operations
The following table sets forth for the periods indicated items from
the Condensed Consolidated Statements of Operations as a percentage of
sales, as well as, in thousands.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Oct 2, Sept 26, Oct 2, Sept 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 49,274 100.0% $ 37,559 100.0% $135,071 100.0% $121,252 100.0%
Cost of Goods Sold 36,292 73.7% 27,535 73.3% 97,881 72.5% 87,211 71.9%
-------- -------- -------- --------
Gross Profit 12,982 26.3% 10,024 26.7% 37,190 27.5% 34,041 28.1%
Operating Expenses 12,451 25.3% 12,344 32.9% 27,326 20.2% 26,125 21.5%
-------- -------- -------- --------
Operating Income 531 1.1% (2,320) -6.2% 9,864 7.3% 7,916 6.5%
Other Expense (Income) 4,685 9.5% 2,404 6.4% 10,269 7.6% 6,369 5.3%
-------- -------- -------- --------
Income Before Tax (4,154) -8.4% (4,724) -12.6% (405) -0.3% 1,547 1.3%
Provision for Income Tax (1,574) -3.2% (1,668) -4.4% 553 0.4% 994 0.8%
-------- -------- -------- --------
Net Income Before (2,580) -5.2% (3,056) -8.1% (958) -0.7% 553 0.5%
Extraordinary Item
Early Extinguishment of 2,041 4.1% 795 2.1% 2,041 1.5% 795 0.7%
Debt
--------- -------- -------- --------
Net Income $ (4,621) -9.4% $ (3,851) -10.3% $ (2,999) -2.2% $ (242) -0.2%
========= ======== ======== ========
</TABLE>
Three Months Ended October 2, 1999 Compared to Three Months Ended September
26, 1998.
Net sales for the three months ended October 2, 1999 ("third quarter")
were $49.3 million, representing an increase of $11.7 million or 31.2% from
$37.6 million in the comparable quarter of 1998. The overall increase in net
sales was primarily attributable to the acquisitions of TISCO (acquired July
28, 1999), Central Fabricators (acquired July 28, 1999), Alitec Attachments
Division (acquired July 30, 1999) partially offset by a 9.7% decline in
Woods' core business, which the Company defines as those business that the
Company has owned for two years. Net sales for each of the Company's
segments (and the primary reasons for the increase or decrease) were as
follows, in thousands:
Segment 1999 1998 % Change
------------------- ---- ---- --------
Grounds Maintenance $37,218 $27,328 36.2%
Construction 11,250 8,943 25.8%
Other 806 1,288 -37.4%
------- -------
Total Net Sales $49,274 $37,559 31.2%
======= =======
12
<PAGE>
The 36.2% increase in the grounds maintenance segment was due to
acquisition of TISCO. Woods' core business in this segment decreased by
approximately 1%. The 25.8% increase in the construction segment was due to
acquisition of Central Fabricators and Alitec Attachments Division. Woods'
core business in this segment was down approximately $3.0 million or 31.5%
due to the decline in demand stemming from the equipment rental market as
rental fleet liquidations is also negatively impacting purchases of new
equipment. The 37.4% decline in the Company's "other" category was due to
the market conditions of the sugar beet industry.
Gross profit as a percentage of net sales in the third quarter of 1999
was 26.3% or $13.0 million compared 26.7% or $10.0 million in the
comparable quarter of 1998. The decline in margin percentage was due to
product mix due to a decline in sales for our higher margin construction
products, partially offset by an increase in sales for lower margin turf
products.
Operating expenses in the third quarter of 1999 were 25.3% of net
sales or $12.4 million versus 32.9% or $12.3 million in the comparable
quarter of 1998. The increase in operating expenses due to normal operating
expenses related to the newly acquired companies in 1999 of approximately
$3.9 million, and increased goodwill amortization expense of approximately
$0.5 million. These increases are not apparent when comparing to the same
period in the prior year due to the recognition of $4.3 million non-cash,
stock option compensation charge during the third quarter of 1998. The
charge was the result of the August 7, 1998 recapitalization.
Operating income in the third quarter of 1999 was 1.1% of net sales or
$0.5 million compared to an operating loss of (6.2%) or ($2.3) million in
the comparable quarter of 1998. The increase in operating income is due to
the non-recurring non-cash stock option charge of 1998 offset by volume
decline in Woods core business and increased goodwill amortization expense.
Other expenses in the third quarter of 1999 were 9.5% of net sales or
$4.7 million compared to 6.4% or $2.4 million in the comparable quarter of
1998. The increase in other expenses is primarily due to increased interest
expense attributable to an increase in debt to fund Woods' recent
acquisitions.
On July 28, 1999, the Company fully extinguished certain debt totaling
approximately $109.5 million, and refinanced such debt in connection with
the offering. As a result of the early retirement, the Company accelerated
amortization of unamortized deferred finance costs totaling approximately
$3.3 million, which has been presented as an extraordinary item in the
condensed consolidated statement of operations for the nine and three
months ended October 2, 1999, with associated tax benefits of approximately
$1.3 million. In connection with the August 7, 1998 recapitalization, the
Company fully extinguished certain debt totaling approximately $72 million,
and refinanced such debt with another lender. As a result of the early
retirement, the Company accelerated amortization of unamortized deferred
finance costs totaling approximately $1.4 million, which has been presented
as an extraordinary item in the condensed consolidated statement of
operations for the nine and three months ended September 26, 1998, with
associated tax benefits of approximately $0.6 million.
Net income (loss) as a percentage of net sales in the third quarter of
1999 was (9.4%) or ($4.6) million versus (10.3%) or ($3.9) million in the
comparable quarter of 1998. Net income in the third quarter of 1999 was
negatively impacted by the decline in Woods' core sales volume, increased
goodwill amortization expense, increase in interest costs due to additional
debt to fund acquisitions and the acceleration of deferred financing fees
due to the early extinguishment of debt. These events are offset when
comparing to the same period in the prior year by the $4.3 million non-cash
stock-option compensation charge.
13
<PAGE>
Nine Months Ended October 2, 1999 Compared to Nine Months Ended September 26,
1998
Net sales for the nine months ended October 2, 1999 were $135.1 million,
representing an increase of $13.8 million or 11.4% from $121.3 million in the
comparable period of 1998. The overall increase in net sales was primarily
attributable to contributions from TISCO (acquired July 28, 1999), Central
Fabricators (acquired July 28, 1999), and Alitec Attachment Division (acquired
July 30, 1999). Net sales for each of the Company's segments (and the primary
reasons for the increase or decrease) were as follows, in thousands:
Segment 1999 1998 % Change
- ------------------- ---- ---- --------
Grounds Maintenance $ 103,022 $ 88,961 15.8%
Construction 29,001 27,503 5.4%
Other 3,048 4,788 -36.3%
--------- ---------
Total Net Sales $ 135,071 $ 121,252 11.4%
========= =========
The 15.8% increase in the grounds maintenance segment was due to
acquisition of TISCO. Woods' core business in this segment increased by
approximately $6 million, or 6.7%. The 5.4% increase in the construction segment
is due to acquisition of Central Fabricators and Alitec Attachments Division.
Woods' core business in this segment was decreased by approximately $3.0
million, or 10.9%, due to the decline in demand stemming from the equipment
rental market as rental fleet liquidations also negatively impacted purchases of
new equipment. The 36.3% decline in the Company's "other" product category was
due to the market conditions of the sugar beet industry.
Gross profit as a percentage of net sales for the nine-month period of 1999
was 27.5% or $37.2 million compared to 28.1% or $34.0 million in the comparable
period of 1998. The decline in margin percentage was due to product mix due to a
decline in sales for our higher margin construction products, partially offset
by an increase in sales for lower margin turf products.
Operating expenses for the nine-month period of 1999 were 20.2% of net
sales or $27.3 million compared to 21.5% or $26.2 million in the comparable
period of 1998. The increase in operating expenses was due to normal operating
expenses related to the newly acquired companies in 1999 of approximately $3.9
million, increased goodwill amortization expense of approximately $0.5 million,
and failed acquisition costs $1.1 million. These increases are not apparent when
comparing to the same period in the prior year due to the recognition of $4.3
million non-cash, stock option compensation charge during the third quarter of
1998. The charge was the result of the August 7, 1998 recapitalization.
Operating income for the nine-month period of 1999 was 7.3% of net sales or
$9.9 million compared to 6.5% or $7.9 million in the comparable period of 1998.
The increase in operating income is due to the non-recurring non-cash stock-
option charge of 1998 offset by volume decline in Woods core business and
increased goodwill amortization expense.
Other expenses for the nine-month period of 1999 were 7.6% of net sales or
$10.3 million versus 5.3% or $6.4 million in the comparable period of 1998. The
increase in other expenses is due to increased interest expense attributable to
an increase in debt to fund Woods recent acquisitions.
On July 28, 1999, the Company fully extinguished certain debt totaling
approximately $109.5 million, and refinanced such debt in connection with the
offering. As a result of the early retirement, the Company accelerated
amortization of unamortized deferred finance costs totaling approximately $3.3
million, which has been presented as an extraordinary item in the condensed
consolidated statement of operations for the nine and three months ended October
2, 1999, with associated tax benefits of approximately $1.3 million. In
connection with the August 7, 1998 recapitalization, the Company fully
extinguished certain debt totaling approximately $72 million, and refinanced
such debt with another lender. As a result of the early retirement, the Company
accelerated amortization of unamortized deferred finance costs totaling
approximately $1.4 million, which has been presented as an extraordinary item in
the condensed consolidated statement of operations for the nine and three months
ended September 26, 1998, with associated tax benefits of approximately $0.6
million.
14
<PAGE>
Net income (loss) as a percentage of net sales for the nine-month period of
1999 was (2.2%) or ($3.0) million compared to (0.2%) or ($0.3) million in the
comparable nine-month period of 1998. Events impacting net income for the nine
month period of 1999 include a decline in core Woods' sales volume, increased
goodwill amortization expense, increase in interest costs due to additional debt
to fund acquisitions, the acceleration of deferred financing fees due to the
early extinguishment of debt and failed acquisition costs. These events are
offset when comparing to the same period in the prior year by the non-cash stock
option charge.
Liquidity and Capital Resources
Woods' principal sources of cash during the nine months ended October 2,
1999, and the prior nine-month period were from operations and borrowings under
existing credit facilities. Cash generated from operating activities during both
periods were $8.3 million and $4.3 million.
Capital expenditures for the nine months ended October 2, 1999 and
September 26, 1998, amounted to $4.7 million and $2.3 million, respectively.
Capital expenditures for these periods were used to purchase additional
equipment, tooling and information technology upgrades. Woods intends to make
capital expenditures of $5.0 million in the remainder of 1999 primarily for
capacity expansion at certain facilities and information technology upgrades.
On July 28, 1999, Woods Equipment Company issued $51.9 million in aggregate
principal amount at maturity of 15% senior discount debentures due 2011 and WEC
Company issued $130.0 million in aggregate principal amount of 12% senior notes
due 2009. Woods used the proceeds from these offerings, together with the new
equity investment of $25.0 million by Madison Dearborn Capital Partners II, L.
P., borrowings under the revolving credit facility of $12.0 and cash on hand of
approximately $3.0 million, to repay approximately $109.5 million of its
existing indebtedness, to finance the acquisitions of TISCO, Central Fabricators
and Alitec Attachments Division and to pay the related fees and expenses.
In connection with the debt offerings, WEC Company amended and restated its
existing senior credit facility. The new senior facility provides a $40.0
million revolving line of credit, of which $26.9 million was available as of
October 2, 1999. The senior credit facility matures on July 31, 2004. Interest
on revolving loans under the senior credit facility will bear interest at rates
based upon federal of Eurodollar rates plus an applicable margin. All borrowings
under the senior credit facility are guaranteed by Woods and are secured by
substantially all of the assets of WEC.
As of October 2, 1999, Woods had $12.0 million in outstanding credit
borrowings, seller notes of $6.0 million, 12% senior notes of $130.0 million,
and 15% senior discount debentures of $24.3 million (accreted value).
Woods anticipates that its principal use of cash will be working capital
requirements, debt service requirements and capital expenditures. Based upon
current and anticipated levels of operations, Woods believes that its cash flow
from operations, together with amounts available under the senior credit
facility, will be adequate to meet its anticipated requirements. Woods cannot
make any assurances that its business will continue to generate sufficient cash
flow from operations in the future to service its debt, and Woods may be
required to refinance all or a portion of its existing debt or to obtain
additional financing. These increased borrowings may result in higher interest
payments. In addition, there can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained. The inability to
obtain additional financing could have a negative impact on Woods business.
Market Risk
Woods is exposed to market risks relating to changes in interest rates.
Woods does not enter into derivatives or other financial instruments for trading
or speculative purposes. Woods enters into financial instruments to manage and
reduce the impact of changes in interest rates. The counterparties are major
financial institutions.
15
<PAGE>
Woods manages its interest rate risk by balancing the amount of its fixed
and variable debt. For fixed rate debt, interest rate changes affect the fair
market value of such debt but do not affect the fair market value of such debt
but do impact future earnings and cash flows, assuming other factors are held
constant. At October 2, 1999, Woods had variable rate debt of $12.0 million.
Inflation
Woods believes that inflation generally has not had a material impact on
its operations or liquidity for the periods disclosed.
Year 2000 Compliance
Introduction. Over the next few months, most large companies will face a
potentially serious information systems problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the year 2000. This problem could force
information systems to either shut down or provide incorrect data or
information. Woods began the process of identifying the necessary changes to its
computer programs and hardware as well as assessing the progress of its
significant vendors in their remediation efforts in 1998. The discussion below
details the efforts of Woods to ensure Year 2000 compliance.
State of Readiness. Woods has identified and evaluated the readiness of its
internal and third party information technology and non-information technology
systems which, if not Year 2000 compliant, could have a direct major impact to
Woods. This evaluation focused on the following areas: (1) Woods' accounting and
financial reporting system, (2) Woods' systems used in its manufacturing and
engineering activities, (3) the systems of third party vendors which supply raw
materials to Woods, and (4) the systems of its dealers used for tracking
inventory levels.
Woods' accounting and financial reporting system has already been upgraded
with the provider's latest release which is certified to Year 2000 compliant. In
addition, Woods believes that its systems used in its manufacturing and
engineering activities are Year 2000 compliant.
Woods has also assessed the state of readiness of its major servers and
shared hardware devices. It has determined that its hardware systems are either
already Year 2000 compliant or can be made so through upgrades of operating
system software. Where necessary these upgrades have been completed.
Based on its assessment and its vendors' representations, Woods believes
that the systems of its significant third party vendors are already Year 2000
compliant.
Year 2000 Costs. In fiscal 1998, Woods expensed approximately $130
thousand on the assessment and evaluation phase of its Year 2000 initiatives and
estimates that it will expense approximately $150 thousand in fiscal 1999 to
complete the remediation efforts. These efforts have been, and are expected to
continue to be, funded through cash from operations. The Year 2000 compliance
project has not resulted in the deferral of any significant information systems
initiatives by Woods.
Risks from Year 2000 Issues. Woods believes the greatest Year 2000
compliance risk, in terms of magnitude of risk, is that the computer systems of
its third party vendors could be interrupted for a period of time. Other than
representations made by the vendors, the Company is unable to predict the
likelihood of this risk occurring. Any significant interruption of raw materials
as a result of a Year 2000 problem could have a material adverse effect on
Woods' results of operations, liquidity or financial condition.
Contingency Plans. At this time, Woods fully expects to be Year 2000
compliant and is satisfied that its significant vendors are already compliant.
As such, Woods has not developed any specific contingency plan in the event it
fails to complete its Year 2000 projects.
16
<PAGE>
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and for Hedging Activities
("Statement 133"). Statement 133 is effective for years beginning after June 15,
1999. Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Management
does not anticipate that the adoption of Statement 133 will have a material
impact on its financial position or the results of its operations.
Forward Looking Statements
Forward-looking statements in this report are made in reliance upon the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may relate to, but are not limited to, such
matters as sales, income, earnings per share, return on equity, capital
expenditures, capital structure, free cash flow, debt to capitalization ratios,
interest rates, internal growth rates, the Year 2000 plan and related risks,
pending legal proceedings and claims (including environmental matters), future
economic performance, management's plans, goals and objectives for future
operations and growth or the assumptions relating to any of the forward-looking
information. The Company cautions that forward-looking statements are not
guarantees since there are inherit difficulties in predicting future results,
and that actual results could differ materially from those expressed or implied
in the forward-looking statements. Factors that could cause actual results to
differ include, but are not limited to, the following:
(1) changes in general economic conditions in the United States;
(2) decreases in the current or planned levels of government spending;
(3) increased competition in the attachments and replacement parts
markets;
(4) continued consolidation among attachment dealers;
(5) the inability of the Company to successfully integrate the
operations of newly acquired companies as planned or achieve the
anticipated cost savings from such integration ;
(6) the inability of the Company to successfully introduce continuous
flow manufacturing and total quality management techniques at the
acquired facilities;
(7) adverse weather conditions during the spring and summer months;
(8) the failure of the Company to develop or successfully introduce
new products;
(9) changes in the regulatory environment;
(10) the inability of the Company to successfully complete
acquisitions; and
(11) various other factors beyond the Company's control.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is incorporated herein by reference
to the section entitled "Market Risk" in the Company's Management Discussion and
Analysis of Results of Operations and Financial Condition (Part I, Item 2).
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
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.
WOODS EQUIPMENT COMPANY
Registrant
Date: November 18, 1999 /s/ Thomas J. Laird
-----------------------------------------------------------------------
Thomas J. Laird
President and Chief
Executive Officer
Date: November 18, 1999 /s/ D. Stephen Crider
------------------------------------------------------------------------
D. Stephen Crider
Chief Financial Officer
18
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