-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RGO6NOeFsX8X/JjBHxW1bDKLvWI4HNgvtZhc0Xlr/Cg+Idz3K7QHXDW+EDSDer7z Txvo6usGzKQne0n/baVfIA== 0000950168-97-000816.txt : 19970401 0000950168-97-000816.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950168-97-000816 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATHEY PRODUCTS CORP CENTRAL INDEX KEY: 0000008109 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 360753480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12649 FILM NUMBER: 97571057 BUSINESS ADDRESS: STREET 1: RTE 1A NORTH STREET 2: P O BOX 669 CITY: RALEIGH STATE: NC ZIP: 27602 BUSINESS PHONE: 9195565171 MAIL ADDRESS: STREET 1: ROUTE 1A NORTH STREET 2: P O BOX 669 CITY: RALEIGH STATE: NC ZIP: 27602 10-K405 1 ATHEY PRODUCTS CO. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31,1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to ____________. Commission File No. 1-2723 ATHEY PRODUCTS CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Delaware 36-0753480 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1839 South Main Street, Wake Forest, North Carolina 27587-9289 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: 919-556-5171 Securities registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2 value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. On March 17, 1997, there were 3,805,608 shares of common stock outstanding. On March 17, 1997, the aggregate market value of voting stock held by nonaffiliates (based upon the average bid and ask price of such stock) was approximately $9,471,302. Exhibit Index located at Sequential Page 11. DOCUMENTS INCORPORATED BY REFERENCE Part I None Part II Item 5 - Market for Registrant's Common Equity Page 7 of the Annual Report to the and Related Stockholder Matters Shareholders for the year ended December 31, 1996 Item 6 - Selected Financial Data Page 6 of the Annual Report to Shareholders for the year ended December 31, 1996 Item 7 - Management's Discussion & Analysis of Pages 4 - 7 of the Annual Report to Financial Condition and Results of Shareholders for the year ended December Operations 31, 1996 Item 8 - Financial Statements and Supplementary Pages 8 - 13 and 16 of the Annual Report Data to Shareholders for the year ended December 31, 1996 Part III Item 10 - Directors and Executive Officers of the Registrant's Proxy Statement to be filed Registrant in connection with its Annual Meeting to be held May 15, 1997 Item 11 - Executive Compensation Registrant's Proxy Statement to be filed in connection with its Annual Meeting to be held May 15, 1997 Item 12 - Security Ownership of Certain Beneficial Registrant's Proxy Statement to be filed Owners and Management in connection with its Annual Meeting to be held May 15, 1997 Item 13 - Certain Relationships and Related Registrant's Proxy Statement to be filed Transactions in connection with its Annual Meeting to be held May 15, 1997 Part IV Exhibits as specified in Item 14 of this Report
2 ATHEY PRODUCTS CORPORATION Forward-Looking Statements The forward-looking statements included in the "Business", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Words such as "expects", "anticipates", "believes", "intends", and "hopes", variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to, the factors discussed in such sections. Forward-looking information provided by the Company in such sections pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. PART 1 Item 1. Business General Development of Business. Athey Products Corporation ("Registrant" or the "Company") was incorporated in the State of Illinois on September 29, 1922. In May, 1988, the Registrant's corporate domicile was changed from Illinois by reincorporating the Registrant in Delaware. The Registrant is a manufacturer of heavy duty equipment and parts. Its principal products include street sweepers and force-feed loaders. The Registrant also manufactures other equipment and replacement parts for its products. The principal users of the Registrant's products are municipalities, contractors, other governmental bodies or agencies and others who have need of heavy duty, large capacity equipment. The following is a brief description of the principal products manufactured by the Registrant. Mobil Street Sweepers. The Mobil street sweepers are of the four-wheel mechanical bottom dump and high-lift type and of the three-wheel mechanical high-lift type which offers flexibility in the street cleaning operation. The four-wheel type may be gasoline, diesel, or compressed natural gas powered with an automatic transmission. The three-wheel type is diesel powered with hydrostatic drive. All units have variable speed, hydraulically driven brooms and elevators for cleaner pickup of hard-to-sweep material. Conveyors and Systems. The Registrant manufactures a broad range of different types and sizes of conveyors, vibrating screens and pug mill mixing plants. Types of conveyors include portable belt loader conveyors, stationary and portable conveyors, folding stacker conveyors, wash plants and rotary stacking conveyors for use in mining, quarries and material processing plants. In December, 1996, the Company sold its Kolman Aggregate Product Line consisting of conveyors, vibrating screens, pugmills, and ash blenders, as well as the Kolman trademark. 3 Other Products (a) Force-feed loaders. Force-feed loaders combine the continuous flow capabilities of a belt conveyor with wheel loader mobility, and are produced with either gasoline or diesel engines. They are used to pick up or load dirt, snow or any flowable material from windrow or roadside and drop it into a trailing truck. Force-feed loaders can also be used for loading sand, coal, salt, top soil and gravel from stockpiles; assisting in cleanup jobs or paving projects; picking up windrows on road shoulders and ditch trimming; or clearing snow-choked roads. Optional attachments include a swivel discharge conveyor and right angle side discharge to either side. (b) Graders. The grader, called the "Maintenance Master, Model 600", is a small, maneuverable maintenance machine designed to handle jobs where larger, less efficient equipment is not required. This unit can be used for site preparation on small jobs such as parking lots and driveways. Graders are produced with diesel engines, hydrostatic transmission and a wide range of attachments. (c) Replacement Parts. The Registrant also manufactures and distributes replacement parts for its product lines. The Registrant's products are distributed through an equipment dealer network that covers the entire United States and certain foreign countries. Agreements with its dealers are terminable, by either party, upon 30 days written notice, except as otherwise limited by applicable law. As is common in the industry, almost all such dealers also sell complementary products produced by other manufacturers, and all of them operate as independent contractors. Set forth below, for each of the Registrant's last three years, is the percentage of total sales contributed by each class of similar products which contributed 10% or more of total sales during any of the last three years: Year Ended December, 31 Class of Product 1996 1995 1994 ---------------- ---- ---- ---- Mobil Street Sweepers 93% 84% 89% Raw Materials and Component Parts. The principal materials and components used by the Registrant in its manufacturing operations are steel, paint, castings, axles, tires, hydraulic parts, engines, transmissions, small parts and welding supplies. These materials and components are available from and are purchased from many suppliers, none of whom the Registrant is substantially dependent upon and none of whom receive a disproportionate amount of the Registrant's business. In the experience of the Registrant, it has been generally able to receive its supplies as required, though delays in deliveries have occurred. Patents, Trademarks, Licenses. Although the Registrant owns certain patents, trademarks and licenses, none is of material importance to its business, with the exception of the trademark "Mobil Sweeper" owned by the Registrant and used in connection with its mobil street sweepers. 4 Seasonality. With respect to sales of products manufactured by the Registrant, it has been the experience of the Registrant that its heavy shipping period begins in the spring of the year and continues through the late fall of the year. Working Capital. The Registrant generates working capital from operations and borrowings under a bank line of credit. The Registrant does not generally provide extended payment terms to its customers, however, the Company may, on occasion, provide certain customers with alternative payment arrangements. The Company's business, as a whole, is not generally subject to seasonal variations in demand, working capital requirements are not subject to material fluctuation. Customers. In 1996, the Company's largest customer, a dealer selling to a local government entity, accounted for approximately 25% of the Company's net sales. No other customer accounted for more than 10% of the Company's net sales. The Company believes that the loss of any customer that accounts for 10% or more of the Company's net sales would have a material adverse effect on its business. As is customary in the industry, the Company does not have a significant amount of long term sales agreements with its customers. However, it believes that it enjoys excellent relationships with its customers. The Company follows customary industry practices regarding terms of sale; however, the Company does, on occasion, provide extended payment terms to certain customers. Backlog. The dollar amount of the backlog of orders believed to be firm as of December 31, 1996 and December 31, 1995 was approximately $4,675,524 and $7,452,000, respectively. Mobil street sweepers accounted for 92% and 100%, respectively, of the backlogs as of such dates. The Registrant expects to complete all orders related to the December 31, 1996 backlog during the current year. Government Contracts. The Registrant has no material contracts with the Federal Government. Competition. The Registrant competes in the street sweeper, force-feed loader and grader markets with a number of other companies which are larger and have greater financial resources than the Registrant. To the knowledge of the Registrant, it is one of the largest manufacturers of four-wheel street sweepers; however, there is substantial competition from other manufacturers in the functional sweeper market, which includes three wheel and vacuum type sweepers. To the knowledge of the Registrant, it is one of the primary manufacturers of force-feed loaders. However, front-end loaders, which are manufactured by many other companies, provide substantial functional competition. The Registrant is not a significant manufacturer of graders. Research and Development. The Registrant spent approximately $110,000 in 1996, $418,000 in 1995, and $485,000 in 1994, to improve existing products and to consider new product lines. 5 Environment. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had no material effects upon the capital expenditures, results of operations, and competitive position of the Registrant. Due to the nature of its business, the Registrant does not anticipate any material capital expenditures for environmental control facilities for the next fiscal year. Employees. As of December 31, 1996, the Registrant employed 254 persons, of which 175 employees are subject to a collective bargaining agreement. The Registrant considers its relationship with its employees to be excellent. Export Sales. Sales to customers in foreign countries approximated $1,355,199 in 1996, $984,500 in 1995 and $1,393,800 in 1994. During 1996, such customers were located in North America, the Middle East and the Pacific Rim. Item 2. Properties. The Registrant owns one manufacturing plant which, in the Registrant's opinion, is suitable and adequate for the manufacture of its products. The Registrant's plant is located in Wake Forest, North Carolina. The plant, which was completed in 1965, is situated on approximately 39 acres, and is of prestressed concrete construction with steel crane ways and supports. The plant is believed to be one of the finest heavy duty plants of its type in the southeastern part of the United States. During 1985, the Company completed an addition of approximately 29,000 square feet to the assembly area of the plant. During 1989, the Company completed an additional building as its new paint shop. This paint shop is 4,800 square feet, and is designed to be environmentally state-of-the-art. It uses filtered air both in and out of the paint room, and substantially reduces the possibility of contaminants in the painting process. During 1995, the Company added a 1,755 square foot Inspection Building. Of the approximately 206,935 square feet in the plant, approximately 186,415 square feet is devoted to manufacturing and assembly facilities, and to stockroom, shipping, and receiving facilities; approximately 16,360 square feet is used for general and executive offices; and approximately 4,160 square feet is an engineering department balcony area. The equipment in the plant includes various boring, drilling and milling machines, lathes, grinders, punches, shears, press brakes and other presses, hydraulic testing equipment, saws, machine shop equipment, layout equipment, heavy duty metal working and robotic welding equipment and appropriately large material handling cranes. Item 3. Legal Proceedings. Certain proceedings are pending against the Company, involving ordinary and routine claims incidental to the business of the Company. The ultimate legal and financial liability of the Company with respect to these proceedings cannot be estimated with certainty. However, the Company believes, based on its examination of these matters and its experience to date, that the ultimate disposition of these matters will not materially affect the financial position or results of operations of the Company. 6 Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 1996. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The stock price and trading data on page 7 of the Registrant's 1996 Annual Report to Shareholders are hereby incorporated by reference as Item 5 of this report on Form 10-K. No cash dividends have been paid to shareholders during the last five years. Item 6. Selected Financial Data. The selected financial data for the years 1992 through 1996 on page 6 of the Registrant's 1996 Annual Report to Shareholders is hereby incorporated by reference as Item 6 of this report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis on pages 4 through 7 of the Registrant's 1996 Annual Report to Shareholders is hereby incorporated by reference as Item 7 of this report on Form 10-K. Item 8. Financial Statements and Supplementary Data. The Financial Statements and Supplementary Data on pages 8 through 13 and the Independent Auditor's Report on page 16 of the Registrant's 1996 Annual Report to Shareholders are hereby incorporated by reference as Item 8 of this report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 7 PART III Item 10. Directors and Executive Officers of the Registrant. (a) Information required by this item concerning the Registrant's directors and persons to be nominated for election as directors of the Registrant and compliance by the Registrant's directors, executive officers and certain beneficial owners of the Registrant's common stock with Section 16 of the Securities and Exchange Act of 1934 will be set forth in the Registrant's Proxy Statement (the "Proxy Statement") for its annual meeting to be held May 15, 1997, which Proxy Statement will be filed with the Commission no later than April 30, 1997, and is hereby incorporated herein by reference. (b) Set forth below are the names and ages of all of the executive officers of the Registrant, none of whom has any family relationship with any other executive officer or any director of the Registrant, and all positions and offices with the Registrant presently held by such persons, together with a brief account of business experience during the past 5 years of each person:
Business Experience for the Positions and Offices Held for the Past 5 Years ---------------------------------------------------------------------------- Name Age James H. Stumpo 58 In May, 1995, Mr. Stumpo was elected President and Chief Executive Officer and Director of the Company. From May, 1992 to May, 1995, he was Vice President Finance with Benton Harbor Engineering, Benton Harbor, Michigan. From May, 1987 to May, 1992, Mr. Stumpo served as Chief Financial Officer for Koehring Cranes & Excavators, Waverly, Iowa, a Division of Terex Corporation. Franz M. Ahting 49 In May, 1996, Mr. Ahting was elected Corporate Secretary of the Company. In May, 1995, Mr. Ahting was elected Vice President Finance, Chief Financial Officer and Director of the Company. In May, 1994, Mr. Ahting became Treasurer and Assistant Secretary of the Company. From November, 1993 to May, 1995, Mr. Ahting also served as Controller of the Company. From 1991 to November, 1993, prior to joining the Company, Mr. Ahting practiced public accounting.
Officers are elected annually by the Registrant's Board of Directors at the first meeting of the Board of Directors held after each Annual Meeting of Shareholders. The terms of all of the foregoing officers are from May 16, 1996 to May 15, 1997. 8 Item 11. Executive Compensation. Information required by this item concerning executive compensation will be set forth in the Registrant's Proxy Statement for its Annual Meeting to be held May 15, 1997, which Proxy Statement will be filed with the Commission no later than April 30, 1997 and is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a)-(b) Information required by this item concerning security ownership of certain beneficial owners and management will be set forth in the Registrant's Proxy Statement for its Annual Meeting to be held May 15, 1997, which Proxy Statement will be filed with the Commission no later than April 30, 1997 and is hereby incorporated herein by reference. (c) The Registrant knows of no arrangements which may at a subsequent date result in a change in control of the Registrant. Item 13. Certain Relationships and Related Transactions. Information required by this item concerning certain relationships and related transactions will be set forth in the Registrant's Proxy Statement for its Annual Meeting to be held May 15, 1997 which Proxy Statement will be filed no later than April 30, 1997 and is hereby incorporated herein by reference. 9 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. (a) 1. FINANCIAL STATEMENTS The following Financial Statements of the Registrant are included in its Annual Report to Shareholders for the year ended December 31, 1996, which statements are incorporated herein by reference: Independent Auditor's Report Balance Sheets - December 31, 1996 and 1995 Statements of Operations - years ended December 31, 1996, 1995, and 1994 Statements of Shareholders' Equity - years ended December 31, 1996, 1995, and 1994 Statements of Cash Flows - years ended December 31, 1996, 1995, and 1994 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES The following schedules are included in Part IV of this Report: Independent Auditors' Report, located at sequential page 13 of this report. Schedule II - Valuation and qualifying accounts located at sequential page 15 of this report. Schedules not listed above have been omitted because they are either not applicable or the required information has been included in the financial statements or the notes thereto. (b) REPORTS ON FORM 8-K. None. 10 (c) EXHIBITS . Exhibit Number: *3.1 Articles of Incorporation of the Registrant (Incorporated by reference to Exhibit 3 to the Registrant's 1980 Form 10-K, File No. 1-2723). *3.2 By-Laws of the Registrant (Incorporated by reference to Exhibit 3 to the Registrant's 1980 Form 10-K, File No. 1-2723). *4.1 Specimen certificate of Common Stock of the Registrant (Incorporated by reference to Exhibit 7 to the Registrant's 1970 Form 10-K File No. 1-2723). 13.1 1996 Annual Report to Shareholders of Athey Products Corporation. 21.1 Subsidiaries of the Registrant. 27.1 Financial Data Schedule. - -------------------------------------------------------------------------------- * Certain of the exhibits in this Annual Report on Form 10-K are indicated by an asterisk, and hereby incorporated by reference to other documents on file with the Commission with which they are physically filed, to be part hereof, as of their respective dates. 11 SIGNATURES - ----------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATHEY PRODUCTS CORPORATION (Registrant) By: /s/ James H. Stumpo -------------------------------------- James H. Stumpo President and Chief Executive Officer By: /s/ Franz M. Ahting -------------------------------------- Franz M. Ahting Vice President Finance and Chief Financial Officer Date: March 28, 1997. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ John F. McCullough /s/ Martin W. McCullough - ------------------------------ --------------------------------- John F. McCullough, Chairman Martin W. McCullough, Director of the Board of Directors March 28, 1997 March 28, 1997 /s/ Henry W. Gron, Jr. /s/Richard A. Rosenthal - ------------------------------ --------------------------------- Henry W. Gron, Jr., Director Richard A. Rosenthal, Director March 28, 1997 March 28, 1997 /s/ James H. Stumpo /s/ Franz M. Ahting James H. Stumpo, Director Franz M. Ahting , Director March 28, 1997 March 28, 1997 12 (Logo of McGladrey & Pullen, LLP. appears here) McGladrey & Pullen, LLP Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE Board of Directors Athey Products Corporation Our audits were made for the purpose of forming an opinion on the basic statements taken as a whole. Supplemental Schedule II - Valuation and Qualifying Accounts, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ McGladrey & Pullen, LLP Raleigh, North Carolina February 28, 1997 EX-13 2 EXHIBIT 13.1 ATHEY PRODUCTS CORPORATION 1996 ANNUAL REPORT CONTENTS Letter to Shareholders ...........................................2 Management's Discussion and Analysis .............................4 Balance Sheets ...................................................8 Statements of Operations .........................................9 Statements of Shareholders' Equity ...............................9 Statements of Cash Flows ........................................10 Notes to Financial Statements ...................................11 Independent Auditor's Report ....................................16 Corporate Information ...........................................17 (Three Photographs appear on this page and it has a caption which reads as follows:) Athey's M 9D continues to set new standards in the mechanical sweeper industry for single engine economy, sweeping performance and serviceability. The variable high lift model, shown above, allows debris to be dumped directly into a roll-off container or adjacent truck. -1- TO OUR SHAREHOLDERS Nineteen ninety-six was a year of restructuring, revitalization and refocusing the Company's resources. We made good progress in many areas, nevertheless, from a financial standpoint, 1996 was a disappointment. Net sales of $30 million and net earnings of $45,155 or $.01 per share in 1996 were relatively unchanged from the prior year. Our restructuring plan initially formulated in 1995 continued in 1996 with the Company incurring additional restructuring charges which decreased net earnings after tax by $413,351 or $.10 per share. In connection with this plan, the Kolman manufacturing facility in Sioux Falls, South Dakota and the Kolman Aggregate Product Line were sold. We will continue to evaluate and phase-out the manufacture of nonstrategic or unprofitable product lines. A more detailed comparison of our financial results can be found in the Management's Discussion and Analysis section of this Annual Report. Our restructuring effort over the past two years was a necessary step taken to enable us to operate more efficiently in a very competitive market environment. As a result, we have focused the Company more strategically on our core business, expanded our distribution network, introduced new product enhancements, initiated a new quality control program and launched an aggressive international marketing campaign. Despite a sluggish year, the Company continued to invest in new manufacturing equipment in 1996 which was used to expand production capacity, improve productivity and provide a foundation for future growth. During 1996, we initiated our dealer demonstration program to showcase our product offerings throughout the United States. This program was used to familiarize our customers and dealer network with our newly introduced RA730 regenerative air sweeper, our redesigned three wheel H10C street sweeper and the newly improved M9D four wheel mechanical sweeper with load sense hydraulic systems. Recently, the AV445 high speed runway sweeper completed the six month U.S. Air Force Mobile Equipment Evaluation Program to qualify our unit for Air Force use. We believe that we have the best runway sweeper on the market and, once received, this certification should create new market opportunities for us, both domestically and internationally. We expect 1997 to be a challenging year and look forward to the opportunities that will be presented from the strategies we have implemented. James H. Stumpo /s/ James H. Stumpo President and Chief Executive Officer -2- (A photograph appears on the left side of page and reads as follows:) Contractors and municipalities find the 7-12 Force Feed Loader a valuable tool in the handling of loose, bulk materials. The 7-12 can economically load free flowing materials, such as snow, sand or sod, into adjacent piles or waiting trucks. (A photograph appears on the bottom of the page and reads as follows:) With increased visibility and user friendly improvements, today's M 8A continues to be the twin engine mechanical sweeper of choice in the street sweeper industry. -3- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Significant Events Affecting Comparability The comparability of statement of operations data has been affected by the following significant items that occurred in 1996. [ ] In September, 1996, the Company incurred substantial damage to its manufacturing facility as a result of Hurricane Fran. The Company settled with its insurance carrier for $664,380. As a result of the settlement, the Company recognized a pretax gain on the involuntary conversion of damaged assets of $434,683. Approximately $406,600 of the gain had a favorable impact on the cost of goods sold, approximately $12,740 of the gain had a favorable impact on selling, administrative and engineering expenses and the remaining $15,343 is included in other income. The effect was an increase in net earnings after tax of $286,891 or $ .07 per share. [ ] In late 1996, the Company's Board of Directors adopted a resolution to terminate the Company's two defined benefit pension plans and replace them with a 401(k) plan which will take effect January 1, 1997. Under the provisions of Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", the Company recognized a pretax curtailment gain of $1,016,651 in the fourth quarter of 1996 due to benefit freezes. Approximately $770,160 of this amount resulted in a reduction in cost of goods sold, and approximately $246,491 of this amount resulted in a reduction in selling, administrative and engineering expenses. The effect was an increase in net earnings after tax of $670,990 or $ .17 per share. [ ] During 1996, as a continuation of its restructuring plan, the Company incurred approximately $553,701 of additional charges. Approximately $326,294 of this amount related to the disposal and write-down to net realizable values of certain assets. Approximately $227,407 of this amount is primarily attributable to the additional expenses which were incurred during 1996 relating to the closure of operations of the manufacturing facility in Sioux Falls, South Dakota. The effect was a decrease in net earnings after tax of $365,443 or $ .09 per share. [ ] In February, 1996, the Company sold its South Dakota land, building and certain inventory and manufacturing equipment. The statement of operations for 1996 includes in other income a pretax gain of $234,355 in connection with this sale. The effect was an increase in net earnings after tax of $154,674 or $ .04 per share. $ In December, 1996, the Company sold its Kolman Aggregate Product Line consisting of vibrating screens, pugmills, ash blenders and conveyors. The sale resulted in an inventory loss of approximately $306,943 which is included in the cost of goods sold. This sale reduced net earnings after tax by $202,582, or $ .05 per share. As part of the sale, the Company sold its Kolman trademark for the stated book value of $200,000. The remaining product lines previously manufactured in Sioux Falls, South Dakota, consisting of the Force-Feed Loader, Maintenance Master and Composter continue to be manufactured by the Company. 1996 Compared with 1995 Net sales in 1996 declined $378,520 or 1.2% to $30,046,068. The Company experienced a $2,707,760 reduction in sales volume primarily attributable to phasing out the manufacture of certain product lines and the transfer of product lines from the Company's South Dakota facility to its Wake Forest, North Carolina plant. The Company also experienced a decline in replacement part sales during this period. These sales declines were partially offset by an 8.0% increase in the number of sweepers shipped and slightly higher average unit selling prices. Cost of goods sold as a percentage of net sales remained relatively unchanged, increasing slightly from 81.4% in 1995 to 81.5% in 1996. The cost of goods sold was favorably impacted by the $770,160 curtailment gain relating to the pension plans and the $406,600 insurance settlement. This favorable impact was reduced by an inventory loss of approximately $306,943 in connection with the sale of the Kolman Aggregate Product Line. Cost of goods sold in 1996 also reflected approximately $326,294 in expenditures associated with the disposal and write-down to net realizable values of certain assets. Excluding these items, cost of goods sold would have increased by $543,523 to $25,027,414 or 83.3% of net sales. The increase in the cost of goods sold was primarily due to manufacturing inefficiencies resulting from the introduction of the new regenerative air sweeper and M-9D Mobil Street Sweeper product lines and commencement of the production of certain products in the Company's Wake Forest, North Carolina facility that were transferred from the former South Dakota facility. -4- The Company's selling, administrative and engineering expenses decreased from $6,061,601 in 1995 to $5,821,235 in 1996, representing 19.9% and 19.4% of net sales, respectively. Selling, administrative and engineering expenses were favorably impacted by the $246,491 curtailment gain relating to the pension plans and the $12,740 insurance settlement. Approximately $227,407 of additional expenses were incurred during 1996 relating to the closure of operations of the manufacturing facility in Sioux Falls, South Dakota. Excluding these items, selling, administrative and engineering expenses would have increased by $31,824 to $5,853,059 or 19.5% of net sales. By comparison to 1995, selling, administrative and engineering expenses in 1996 included higher warranty expenses due to increases in the number of sweeper shipments during the year and increases in extended service warranty plan reserves. In addition, the Company expanded its domestic and international marketing initiatives and increased its sales and field service personnel. As a result, salaries, related employee benefits and travel expenditures were higher in 1996. These increases were partially offset by lower research and development costs resulting from the Company's phase-out of the manufacture of nonstrategic product lines. Other income in 1996 was $470,696 as compared to $350,591 in 1995. Included in other income was $234,355 which represents the gain from the Company's sale in February, 1996 of its South Dakota land, building and certain related inventory and manufacturing equipment. The Company also received $85,343 in 1996 representing a prorata distribution of reorganization proceeds in a bankruptcy case in which the Company was a creditor. Interest income declined from $286,405 in 1995 to $90,802 in 1996 due primarily to lower average rates of return realized on the Company's investment portfolio. In addition, the Company experienced a decrease in the average investment portfolio of cash and cash equivalents, reflecting in part the Company's extended terms on certain accounts receivable and higher inventory levels. The effective income tax expense rate was 75.2% in 1996 which reflects an increase in the Company's valuation reserve allowance of $43,000 against recorded deferred tax assets and a $53,611 adjustment resulting from a tax examination related to prior years. The 102.7% income tax benefit rate for 1995 includes a 13.6% research and development credit and a 35.6% credit from the reduction in the valuation allowance. Net earnings after tax for 1996 was $45,155 or $.01 per share, as compared to $2,743 for 1995. Organizational Restructuring During 1995, plans were developed to significantly reduce the Company's cost structure and to improve productivity. This restructuring plan involved reductions in the number of employees, consolidation of manufacturing facilities, and disposition of assets that were no longer productive. The Company also phased-out the manufacture of nonstrategic product lines, including Trailers, Track Assemblies and Refuse Collection Products. The restructuring plan is expected to enable the Company to improve its competitive position in its core business, reduce costs, increase efficiency and improve profitability. The statement of operations for 1995 includes approximately $1,135,000 of pretax charges relating to the restructuring plan. Approximately $119,000 of this amount related to severance and associated benefits for staff reductions, approximately $452,000 of this amount related to the disposal and write-down of certain assets, and approximately $564,000 of this amount related to the streamlining of operations and administrative functions and the closing of the production facility in Sioux Falls, South Dakota. The effect of these expenditures was a decrease in net earnings after tax of $749,000 or $.19 per common share. 1995 Compared with 1994 The Company generated net sales of $30,424,588 in 1995, as compared to $39,894,940 in 1994. This $9,470,352 or 23.7% decrease in sales was primarily attributable to a decline in the number of units shipped during the year. The lower sales volume was partially offset by slightly higher average unit selling prices. The higher volume in the number of units sold in 1994 stemmed from a major contract originally executed with the City of New York in 1993 that expired in late 1994. Cost of goods sold as a percentage of net sales was 81.4% in 1995 as compared to 78.2% experienced in 1994. The increase in cost of goods sold was primarily due to manufacturing inefficiencies resulting from lower unit volume, the transfer of certain product lines from Sioux Falls to Wake Forest, introduction of a new regenerative air sweeper product line, removal and installation of equipment and rearrangement of the plant layout in Wake Forest to facilitate a diverse product flow. Operating inefficiencies were also incurred between the October 9, -5- 1995 announcement of the Sioux Falls closing and December 31, 1995, as product lines and assets were transferred from the Sioux Falls plant to Wake Forest, North Carolina. In addition, cost of goods sold in 1995 reflected expenditures associated with the disposal and write-down to net realizable values of certain assets. The Company's selling, administrative and engineering expenses increased from 17.8% to 19.9% of net sales, while in dollar terms they decreased $1,049,792 to $6,061,601. In addition to savings from the Company's cost reduction program, this decline reflects lower legal and professional fees and a decrease in warranty reserves stemming from a lower sales volume. These decreases were partially offset by higher advertising and sales incentive programs and an increase in the allowance for doubtful accounts. Other income for 1995 was $350,591 as compared to $524,768 in 1994. Interest income increased from $126,968 in 1994 to $286,405 in 1995 due primarily to rising interest rates and higher average investment in cash and cash equivalents. Included in other income for the year ended December 31, 1994 was $150,000 which represented the final payment of the Company's insurance claim in a litigation settlement reached in a product liability case in which the insurance company has been placed in rehabilitation. The Company also received $210,000 in 1994 as full and final payment from the Company's insurance carrier in a separate product liability claim. Other expenses were $37,282 for 1995 as compared to $114,732 recorded in 1994. Other expenses in 1994 included the effect of the early termination, and associated write-down, of the unamortized portion of a licensing and distributor agreement. The 102.7% income tax benefit rate for 1995 includes a 13.6% research and development credit and a 35.6% credit from the reduction in the valuation allowance. The 30.9% income tax expense rate for 1994 reflects a 1.6% research and development credit and a 3.6% income tax benefit associated with a reduction in the valuation allowance. Net earnings for 1995 were $2,743 as compared to net earnings of $1,388,194 or $.35 per share for 1994. SELECTED FINANCIAL DATA Years Ended December 31,
1996 1995 1994 1993 1992 Net Sales $30,046,068 $30,424,588 $39,894,940 $32,640,257 $21,838,601 Earnings (Loss) before cumulative effect of accounting change 45,155 2,743 1,388,194 (285,349) (2,211,156) Net Earnings (Loss) 45,155 2,743 1,388,194 (285,349) (2,275,314) Earnings (Loss) Per Share before cumulative effect of accounting change 0.01 -- 0.35 (.08) (.58) Net Earnings (Loss) Per Share 0.01 -- 0.35 (.08) (.60) At Year-End: Total Assets $29,927,231 $29,325,917 $30,422,767 $28,013,857 $27,653,732 Long-Term Obligations 14,507 57,419 99,431 240,156 199,595 -6- Effects of Inflation The Company attempts to minimize the impact of inflation on production and operating costs through cost control programs and productivity improvements. Over the past three years, the rate of inflation has not had a significant impact on the Company's operations. Prices paid for raw materials and other manufacturing inputs have remained fairly stable throughout this period. On a longer-term basis, the Company has demonstrated an ability to adjust the selling prices of its products in reaction to changing costs. Liquidity and Capital Resources At December 31, 1996 the Company had working capital of $20,535,588; the ratio of current assets to current liabilities was 5.8 to 1; and the debt to equity ratio was .19 to 1. This compares to working capital of $20,451,939; a ratio of current assets to current liabilities of 6.8 to 1; and a debt to equity ratio of .16 to 1 at December 31, 1995. At December 31, 1996, cash and cash equivalents were $6,984, down $3,065,104 from $3,072,088 at December 31, 1995. This decrease was primarily due to the granting of extended credit terms on certain sales and higher inventory levels. Other than utilizing the available line of credit as needed, the Company does not presently plan to borrow long-term funds or sell securities. As part of its authorized stock repurchase program, the Company used $486,252 for financing activities in 1996 to repurchase its common stock. Capital expenditures were $483,592 in 1996 as compared to $445,149 in 1995 and were primarily used to further upgrade the Company's management information system and machinery and equipment. The Company expects capital expenditures in 1997 to approximate $500,000. In 1997, the Company expects to continue its capital expenditure program by improving or expanding existing facilities and upgrading equipment. The timing of capital expenditures is anticipated to coincide generally with its operating cash flow. At December 31, 1996, the Company had available an unsecured line of credit of $5,000,000. The Company believes that existing working capital, cash flow from future operations, and the available bank line of credit provide adequate resources to finance the cash requirements of future capital expenditures. MARKET PRICE DATA 1996 1995 1994 Quarter Ended High Low High Low High Low March 31 4 3/4 3 3/4 6 1/2 5 1/2 8 3/4 5 3/4 June 30 4 5/8 3 3/4 6 1/4 5 1/2 8 1/4 7 1/4 September 30 4 1/4 3 1/2 6 1/8 4 7/8 8 5/8 7 December 31 4 3/4 3 7/8 5 1/2 4 9 1/2 5 1/4 The Company's common shares are traded in the over-the-counter market on the NASDAQ National Market under the symbol "ATPC". The above quotations were received from the NASDAQ National Market. The number of shareholders of the Company's common shares as of March 19, 1997 was 481. -7- BALANCE SHEETS
December 31, 1996 December 31, 1995 ----------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,984 $ 3,072,088 Accounts receivable (less allowances for doubtful accounts of $350,000 and $300,000 in 1996 and 1995, respectively) (Note 2) 3,738,103 2,369,107 Insurance settlement receivable (Note 3) 564,380 -- Inventories (Note 4) 18,949,568 17,022,201 Prepaid expenses (Note 9) 723,535 179,054 Refundable income taxes 544,457 531,517 Deferred income taxes (Note 7) 331,000 834,100 ------------ Total current assets 24,858,027 24,008,067 ------------ OTHER ASSETS: Marketable securities (Note 8) 1,450,650 951,450 Goodwill -- 200,000 Other 115,223 24,358 ------------ Total other assets 1,565,873 1,175,808 ------------ PROPERTY, PLANT AND EQUIPMENT (Note 6): Land and land improvements 47,785 319,769 Buildings 3,574,941 4,017,505 Machinery and equipment 5,270,958 6,359,255 ------------ 8,893,684 10,696,529 Less accumulated depreciation (5,390,353) (6,554,487) ------------ Total property, plant and equipment, net 3,503,331 4,142,042 $ 29,927,231 $ 29,325,917 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of obligations under capital lease (Note 6) $ 42,912 $ 42,012 Accounts payable 2,951,507 1,890,865 Employee compensation and amounts withheld 357,641 444,116 Accrued pension and other expenses (Note 9) 280,379 543,635 Warranty reserve 690,000 635,500 Total current liabilities 4,322,439 3,556,128 NONCURRENT LIABILITIES: Obligations under capital lease (Note 6) 14,507 57,419 Deferred income taxes (Note 7) 454,040 464,500 Total noncurrent liabilities 468,547 521,919 SHAREHOLDERS' EQUITY (Note 11): Common stock, par value $2 per share: Authorized 10,000,000 shares; Issued 4,020,459 shares 8,040,918 8,040,918 Additional paid-in capital 16,218,394 16,218,394 Retained earnings 1,234,514 1,189,359 Unrealized gain on marketable securities available-for-sale, net of related tax effect (Note 8) 333,233 3,761 Less cost of 158,751 and 47,000 common shares in treasury in 1996 and 1995, respectively (Note 11) (690,814) (204,562) Total shareholders' equity 25,136,245 25,247,870 $ 29,927,231 $ 29,325,917 See notes to financial statements. -8- STATEMENTS OF OPERATIONS Years Ended December 31, 1996 1995 1994 NET SALES (Note 2) $ 30,046,068 $ 30,424,588 $ 39,894,940 Cost of goods sold (Notes 3 and 13) 24,483,891 24,777,557 31,184,555 Gross profit 5,562,177 5,647,031 8,710,385 Selling, administrative and engineering expenses (Notes 9, 10 and 13) 5,821,235 6,061,601 7,111,393 Earnings (loss) from operations (259,058) (414,570) 1,598,992 Other income 470,696 350,591 524,768 Other expenses (29,546) (37,282) (114,732) Earnings (loss) before income taxes 182,092 (101,261) 2,009,028 Income tax expense (benefit) (Note 7) 136,937 (104,004) 620,834 NET EARNINGS $ 45,155 $ 2,743 $1,388,194 NET EARNINGS PER SHARE $ 0.01 $ -- $ 0.35 WEIGHTED AVERAGE SHARES OUTSTANDING 3,956,135 3,973,459 3,973,459 STATEMENTS OF SHAREHOLDERS' EQUITY Unrealized Additional Gains/(Loss)on Common Stock Paid-In Retained Treasury Stock Marketable Shares Par Value Capital Earnings Shares Cost Securities BALANCE, January 1, 1994 3,831,503 $ 7,663,006 $ 15,273,614 $ 1,121,110 47,000 $ (204,562) $(126,497) 5% Stock dividend (Note 11) 188,956 377,912 944,780 (1,322,688) -- -- -- Unrealized gain on marketable securities (Note 8) -- -- -- -- -- -- 157,704 Net earnings for 1994 -- -- -- 1,388,194 -- -- -- BALANCE, December 31, 1994 4,020,459 8,040,918 16,218,394 1,186,616 47,000 (204,562) 31,207 Unrealized loss on marketable securities (Note 8) -- -- -- -- -- -- (27,446) Net earnings for 1995 -- -- -- 2,743 -- -- -- BALANCE, December 31, 1995 4,020,459 8,040,918 16,218,394 1,189,359 47,000 (204,562) 3,761 Unrealized gain on marketable securities (Note 8) -- -- -- -- -- -- 329,472 Purchase of common stock for treasury (Note 11) -- -- -- -- 111,751 (486,252) -- Net earnings for 1996 -- -- -- 45,155 -- -- -- BALANCE, December 31, 1996 4,020,459 $ 8,040,918 $ 16,218,394 $ 1,234,514 158,751 $ (690,814) $ 333,233 See notes to financial statements. -9- STATEMENTS OF CASH FLOWS Years Ended December 31, 1996 1995 1994 OPERATING ACTIVITIES: Net earnings $ 45,155 $ 2,743 $ 1,388,194 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 420,580 495,135 528,298 Provision for doubtful accounts 50,000 53,244 25,000 Provision for deferred income taxes 322,912 210,564 (316,077) (Gain) loss on sale of equipment (249,215) 22,276 12,749 Changes in operating assets and liabilities: Accounts receivable (1,983,376) 4,056,496 (4,081,360) Inventories (1,927,367) (2,266,279) 1,002,368 Prepaid expenses (544,481) 26,861 (79,181) Refundable income taxes (12,940) (531,517) 1,740,328 Other assets (90,865) 2,295 68,444 Accounts payable 1,060,642 (522,019) 72,747 Employee compensation and amounts withheld (86,475) (191,539) 86,647 Accrued pension and other expenses (263,256) (88,389) 274,381 Warranty reserve 54,500 (144,500) 410,000 Income taxes payable -- (113,500) 113,500 Net cash provided by (used in) operating activities (3,204,186) 1,011,871 1,246,038 INVESTING ACTIVITIES: Purchase of plant and equipment (483,592) (445,149) (542,386) Proceeds from disposal of assets 950,938 450 4,087 Proceeds from sale of goodwill 200,000 -- -- Net cash provided by (used in) investing activities 667,346 (444,699) (538,299) FINANCING ACTIVITIES: Proceeds from line of credit -- -- 1,600,000 Repayment of line of credit -- -- (1,600,000) Principal paid on obligations under capital lease (42,012) (41,130) (74,506) Principal paid on debt -- (99,595) (100,000) Purchase of common stock for treasury (486,252) -- -- Net cash used in financing activities (528,264) (140,725) (174,506) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,065,104) 426,447 533,233 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,072,088 2,645,641 2,112,408 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,984 $ 3,072,088 $ 2,645,641 SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid (recoveries) $ (173,035) $ 329,680 $ (916,917) Interest paid $ 11,445 $ 7,761 $ 30,870 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Capital lease obligations incurred for use of equipment $ -- $ -- $ 34,238 See notes to financial statements. -10- NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations -- Athey Products Corporation is a manufacturer whose principal products are mobil street sweepers and force-feed loaders. The Company also manufactures other equipment and replacement parts. The primary users of the Company's products are contractors, municipalities, and other governmental agencies. Significantly all of the Company's sales are throughout the United States. Significant Accounting Policies - The significant accounting policies of the Company are summarized below: a. Statements of Cash Flows - For the purpose of the statements of cash flows, the Company considers all short-term investments with an original maturity of three months or less at the time of purchase to be cash equivalents. b. Inventories - Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. Obsolete and possible excess quantities of inventory are reduced to estimated net realizable values. c. Property and Depreciation - Property, plant and equipment are carried at cost. Depreciation is computed over estimated useful lives using the straight-line method in the financial statements and accelerated methods for income tax purposes. d. Amortization of Other Assets - Goodwill arose in a purchase transaction prior to November 1, 1970 and had not been amortized as, in the opinion of management, there was no diminution in value. During 1996 all goodwill was sold. e. Marketable Securities - Marketable securities consist of an investment in equity securities which the Company has designated as available-for-sale. Such securities, while readily marketable, are not held solely in anticipation of short-term market gains. The securities are reported at fair value, with unrealized holding gains and losses, net of the related deferred tax effect, reported as a separate component of shareholders' equity. f. Income Taxes - Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for effects of changes in tax laws and rates on the date of enactment. g. Treasury Stock - Treasury stock is stated at cost. h. Earnings Per Share - Earnings per share amounts are computed on the basis of the weighted average number of shares outstanding during the year. i. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. j. Fair Value of Financial Instruments - The following summarizes the major methods and assumptions used in estimating the fair values of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value due to the relatively short term period to maturity of these instruments. Marketable equity securities - The fair value of marketable equity securities are estimated based on quoted market prices. k. Reclassifications - Certain previously reported amounts have been reclassified to conform with the year-end 1996 presentation with no effect on net income. 2. Major Customers Net sales for the years ended December 31, 1996, 1995 and 1994 include sales to the following major customers (each of which accounted for 10% or more of the total net sales of the Company for those years): 1996 1995 1994 Nixon-Egli $ 7,493,960 $ 7,602,597 * City of New York * * $ 16,953,844 ----------- ----------- ------------ *The net sales to this customer was less than 10% of the total net sales for the year ended. Because of the nature of the Company's business, the major customers will vary between years. There were outstanding receivables from these customers of $557,901, $555,213, and $2,382,719, as of December 31, 1996, 1995, and 1994, respectively. 3. Insurance Settlement In September, 1996, the Company incurred substantial damage to its manufacturing facility as a result of a hurricane. The Company settled with its insurance carrier for $664,380. At December 31, 1996, $100,000 of this settlement had been received. As a result of the settlement, the Company recognized a pretax gain on the involuntary conversion of damaged assets of $434,683. Approximately $406,600 of the gain is included in the cost of goods sold, approximately $12,740 of the gain is included in selling, administrative and engineering expenses and the remaining $15,343 is included in other income. The effect was an increase in net earnings after tax of $286,891 or $ .07 per share. 4. Inventories Inventories are summarized below: December 31, 1996 1995 Finished goods $ 4,629,236 $ 3,231,129 Work-in-process 5,765,464 6,510,302 Raw materials 8,554,868 7,280,770 ------------- ------------- $ 18,949,568 $ 17,022,201 ============= ============= 5. Financing Arrangements At December 31, 1996, the Company had available an unsecured line of credit of $5,000,000. There were no outstanding borrowings under the line at December 31, 1996 or 1995. In addition, no amounts were borrowed during 1996 or 1995. During 1996, 1995, and 1994, the Company incurred interest expense of $11,445, $7,761, and $30,870, respectively. 6. Lease Commitments The Company is the lessee of computer equipment under a capital lease which started in 1993 and expires in 1998. The assets and liabilities under the capital lease were recorded at the present value of net minimum lease payments at inception, approximately $207,000. The assets are depreciated over their estimated productive lives. Depreciation of assets under the capital lease is included in depreciation expense for 1996, 1995 and 1994. Depreciation of assets under capital leases charged to expense was $41,441 for each of the last three years. -11- Minimum future lease payments under the capital lease as of December 31, 1996 for each of the next two years are: Year Ended December 31, Amount 1997 $ 43,637 1998 14,545 ------------- Total minimum lease payments 58,182 Less: Imputed interest 763 ------------- Present value of net minimum lease payments 57,419 Less: Current portion 42,912 ------------- Obligations under capital lease $ 14,507 ============= The interest rate on the capitalized lease is 6.6% and is imputed based on the lessor's implicit rate of return. 7. Income Taxes At December 31, 1996, the Company has available State net economic loss carryforwards of approximately $2,101,000 expiring as follows: Year of - ---------------------------- Origination Expiration - ----------- ---------- 1992 1997 $ 1,274,000 1993 1998 118,000 1995 2000 374,000 1996 2001 335,000 ----------- TOTAL $ 2,101,000 =========== Components of the income tax expense (benefit) for 1996, 1995 and 1994 are as follows: 1996 1995 1994 Current: Federal $ (185,975) $ (314,568) $ 936,911 State -- -- -- ------------ ------------ ----------- Total current (185,975) (314,568) 936,911 Deferred: Federal 322,912 210,564 (316,077) State -- -- -- ------------ ------------ ------------ Total deferred 322,912 210,564 (316,077) TOTAL $ 136,937 $ (104,004) $ 620,834 ============ ============ ============ Net deferred tax assets consist of the following components at December 31, 1996 and 1995: 1996 1995 ---------- ------------ Deferred tax assets: Accounts receivable $ 119,000 $ 102,000 Inventory allowance 274,000 434,000 Accrued vacation 96,000 118,000 Accrued pension -- 67,000 Warranty reserve 235,000 216,000 Allowance for marketable securities 89,000 87,000 Accrued litigation 17,000 17,000 Net economic loss carryforwards 163,000 148,000 Other 44,000 30,100 ----------- ----------- 1,037,000 1,219,100 Less valuation allowance (428,000) (385,000) ---------- ---------- 609,000 834,100 Deferred tax liabilities: Property and equipment (377,040) (464,500) Prepaid pension (183,000) -- Marketable securities (172,000) -- --------- ---------- (732,040) (464,500) --------- ---------- Net deferred tax assets (liabilities) $ (123,040) $ 369,600 ========== ============ The components giving rise to the net deferred tax assets (liabilities) described above have been included in the accompanying balance sheets as of December 31, 1996 and 1995 as follows: 1996 1995 --------- ----------- Current assets $ 331,000 $ 834,100 Noncurrent liabilities (454,040) (464,500) ------------ ----------- Net deferred tax assets (liabilities) $ (123,040) $ 369,600 ============ =========== A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company has established a valuation allowance totaling $428,000 and $385,000 for certain deferred tax assets as of December 31, 1996 and 1995, respectively, which management feels meet this criteria. A reconciliation of the provision for income taxes to income tax expense (benefit), computed by applying the statutory federal income tax rate to pretax income (loss), is as follows: 1996 1995 1994 Amount % Amount % Amount % Tax expense (benefit) computed at statutory rate $61,911 34.0% $(34,429) (34.0)% $683,070 34.0% Research and development credit (2,336) (1.3) (13,807) (13.6)% (32,033)(1.6)% Change in valuation allowance 43,000 23.6 (36,000) (35.6)% (72,000)(3.6)% Other 34,362 18.9% (19,768) (19.5)% 41,797 2.1 % ------ ---- ------- ----- ------- ---- TOTAL $ 136,937 75.2% $(104,004)(102.7)% $ 620,834 30.9% ======== ==== ========= ====== ======= ==== During 1994, the Company realized approximately a $103,000 tax benefit from the utilization of State net economic loss carryforwards. 8. Marketable Securities The cost, estimated market value and gross unrealized gain of the Company's investment in available-for-sale marketable equity securities at December 31, 1996 and 1995 are as follows: 1996 1995 ----------- ----------- Cost $ 945,751 $ 945,751 Gross unrealized gain 504,899 5,699 ----------- ----------- Estimated market value $1,450,650 $ 951,450 =========== =========== There were no sales of marketable securities during 1996, 1995 or 1994. The change in net unrealized gains and losses reported as a separate component of equity for the years ended December 31, 1996, 1995 and 1994 is shown below: 1996 1995 1994 ---------- ---------- ---------- Balance in equity component, beginning $ 3,761 $ 31,207 $ (126,497) Change in net unrealized gains (losses) 499,200 (41,585) 173,781 Change in deferred income taxes (169,728) 14,139 (16,077) --------- --------- ---------- Balance in equity component, ending $333,233 $ 3,761 $ 31,207 ======== ======== ========== -12- 9. Pension Plans The Company had two noncontributory defined benefit pension plans for its hourly and salaried employees. All employees were covered by the plans upon completion of twelve months of service with 1,000 or more hours of service, subject to a minimum age of twenty-one. The Company's contributions to the plans were designed to annually fund service cost derived by the plans' actuaries using the frozen entry-age method. In late 1996, the Company's Board of Directors adopted a resolution to terminate the Company's two defined benefit pension plans and replace them with a 401(k) plan which will take effect January 1, 1997. Under the provisions of Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", the Company recognized a pretax curtailment gain of $1,016,651 in the fourth quarter of 1996 due to benefit freezes. The effect was an increase in net earnings after tax of $670,990 or $ .17 per share. The net periodic pension cost for the plans is computed as follows: 1996 1995 1994 --------- --------- --------- Service cost $ 355,953 $ 452,636 $ 408,200 Interest cost 697,753 679,492 621,581 Actual return on plan assets (1,325,342) (872,472) 220,000 Net amortization and deferral 555,479 226,231 (927,800) Curtailment gain (1,016,651) -- -- --------- -------- -------- Net periodic pension cost (income) $ (732,808) $ 485,887 $ 321,981 ========= ======== ========== The funded status of the Company's pension plans is as follows: 1996 1995 ------ ------- Actuarial present value of benefit obligations: Vested benefits $ 8,843,772 $ 8,112,575 Nonvested benefits -- 78,931 --------- ---------- Accumulated benefit obligation 8,843,772 8,191,506 Effect of assumed increase in compensation levels -- 1,796,558 --------- ---------- Projected benefit obligation 8,843,772 9,988,064 Plan assets at fair value 11,212,666 9,870,424 ---------- ---------- Fair value of assets less (greater) than projected benefit obligation (2,368,894) 117,640 Unrecognized net gain 1,831,872 422,788 Unrecognized transition obligation -- (194,707) Unrecognized prior service costs -- (149,935) Accrued (prepaid) pension cost (asset) $ (537,022) $ 195,786 ========= ========= Major assumptions: Discount rate 7.5% 7.5% Rate of increase in compensation levels 5.0% 5.0% Expected long-term rate of return on plan assets 8.0% 8.0% Plan assets consist principally of investments in United States government securities and common stock. 10. Research and Development Expenditures relating to the development of new products, including significant improvements to existing products are charged to selling, administrative and engineering expenses as incurred. The amounts charged in 1996, 1995 and 1994 were approximately $110,000, $418,000 and $485,000 respectively. 11. Stock Transactions On May 19, 1994, the Board of Directors declared a five percent common stock dividend payable on July 22, 1994 to shareholders of record as of the close of business on July 8, 1994. In November, 1995, the Board of Directors approved a resolution authorizing the Company to repurchase up to 200,000 shares of the Company's common stock. As of December 31, 1995, the Company had not repurchased any shares. During 1996, the Company repurchased a total of 111,751 shares under the November, 1995 authorization which expired on December 31, 1996. In December, 1996, the Board of Directors approved a resolution authorizing the Company to repurchase up to 200,000 shares of the Company's stock in 1997. This authorization will expire on December 31, 1997. 12. Contingencies Certain proceedings are pending against the Company, involving ordinary and routine claims incidental to the business of the Company. The ultimate legal and financial liability of the Company with respect to these proceedings cannot be estimated with certainty. However, the Company believes, based on its examination of these matters and its experience to date, that the ultimate disposition of these matters will not materially affect the financial position or results of operations of the Company. 13. Organizational Restructuring During 1995, plans were developed to significantly reduce the Company's cost structure and to improve productivity. This restructuring plan involved reductions in the number of employees, consolidation of manufacturing facilities, and disposition of assets that were no longer productive. The Company also phased-out the manufacture of nonstrategic product lines, including Trailers, Track Assemblies and Refuse Collection Products. The restructuring plan is expected to enable the Company to improve its competitive position in its core business, reduce costs, increase efficiency and improve profitability. The statement of operations for 1995 includes approximately $1,135,000 of pretax charges relating to the restructuring plan. Approximately $119,000 of this amount related to severance and associated benefits for staff reductions, approximately $452,000 of this amount related to the disposal and write-down of certain assets, and approximately $564,000 of this amount related to the streamlining of operations and administrative functions and the closing of the production facility in Sioux Falls, South Dakota. The effect of these expenditures was a decrease in net earnings after tax of $749,000 or $.19 per common share. During 1996, as a continuation of its restructuring plan, the Company incurred approximately $553,701 of additional charges. Approximately $326,294 of this amount related to the disposal and write-down to net realizable values of certain assets. Approximately $227,407 of this amount is primarily attributable to the additional expenses which were incurred during 1996 relating to the closure of operations of the manufacturing facility in Sioux Falls, South Dakota. The effect was a decrease in net earnings after tax of $365,443 or $ .09 per share. In addition, in February 1996, the Company sold its South Dakota land, building and certain inventory and manufacturing equipment. The statement of operations for 1996 includes a pretax gain of $234,355 in connection with this sale. The remaining inventory and equipment were transferred to the Company's Wake Forest, North Carolina manufacturing plant. The effect was an increase in net earnings after tax of $154,674 or $ .04 per share. In December, 1996, the Company sold its Kolman Aggregate Product Line consisting of vibrating screens, pugmills, ash blenders and conveyors. The sale resulted in an inventory loss of approximately $306,943 which is included in the cost of goods sold. This sale reduced net earnings after tax by $202,582, or $ .05 per share. As part of the sale, the Company sold its Kolman trademark for the stated book value of $200,000. -13- (Photograph appears in the upper left corner and its caption reads as follows:) The Athey Airport Sweeper, the AV 445, is the world's most powerful air sweeper in the industry today, and is found in military and civilian airports around the world. (Photograph appears in the middle left side of page and its caption reads as follows:) Athey's 3 wheel sweeper series is built with the industry's road- proven mechanical sweeping system, and is excellent for urban leaf pickup. (Photograph appear along the right side of this page showing the back end of a Air Boss Sweeper) ATHEY: A GLOBAL COMPETITOR With Sweepers in practically every corner of the world, the Athey Mobil Sweeper is a global competitor. Whether our customer's needs are in Saudi Arabia, Japan, Canada or other locations worldwide, Athey offers a machine for virtually every sweeping situation they will encounter. -14- (Photograph appears at the top of the page and its caption reads as follows:) The RA 730 is the only single engine recirculating vacuum air sweeper in the world with variable high dump capabilities that offers optional stainless steel major components. (Photograph appeas at the bottom of the page and its capition reads as follows:) This Compressed Natural Gas powered and mechanical sweeper is serving as a positive force to increase Athey's presence in the global sweeper market. Athey's M 9CNG meets all current federal emission laws going into the 21st centry. -15- INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders Athey Products Corporation Wake Forest, North Carolina We have audited the accompanying balance sheets of Athey Products Corporation as of December 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Athey Products Corporation as of December 31, 1996, and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Raleigh, North Carolina February 28, 1997 -16- Corporate Information Athey Products Corporation 1839 South Main Street Wake Forest, NC 27587 Telephone: 919-556-5171 Fax: 919-556-9503 Annual Meeting of Shareholders The Annual Meeting of the Shareholders of the Company is scheduled to be held at 11:00 A.M., May 15, 1997, at the corporate offices of the Company. Common Stock Athey Products Corporation common stock is traded under the symbol "ATPC" on the NASDAQ National Market. Stock Transfer Agent The First National Bank of Chicago Chicago, Illinois Inquiries Communications concerning stock transfer requirements should be directed to the transfer agent. Reports Available Copies of the Company's 1996 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q to the Securities and Exchange Com- mission, and this Annual Report are available to shareholders upon written request to the Secretary at the Company's principal office or by calling 919-556-5171. Attorneys Parker, Poe, Adams & Bernstein L.L.P. Raleigh, NC Auditors McGladrey & Pullen, LLP Raleigh, NC Directors John F. McCullough Chairman of the Company President of Orton/McCullough Crane Co., Inc. Oak Brook, Illinois Martin W. McCullough Vice President and General Manager of Orton/McCullough Crane Co., Inc. Huntington, Indiana Richard A. Rosenthal Retired Director of Athletics University of Notre Dame South Bend, Indiana Henry W. Gron, Jr. Senior Manager, International Tax Motorola, Inc. Schaumburg, Illinois James H. Stumpo President and Chief Executive Officer of the Company Franz M. Ahting Vice President - Finance Chief Financial Officer Treasurer and Secretary Officer of the Company OFFICERS James H. Stumpo President and Chief Executive Officer Franz M. Ahting Vice President - Finance Chief Financial Officer Treasurer and Secretary -17-
EX-21 3 EXHIBIT 21.1 EXHIBIT 21.1 ATHEY PRODUCTS CORPORATION SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation Athey Export Corporation Illinois Athey Products International, Inc. Barbados Athey International Sales Corporation Illinois 14
ATHEY PRODUCTS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance at Charged to Deduction from Balance at Beginning of Profit and Reserves End of Year Year Loss Year Ended December 31, 1996: Allowance for doubtful accounts-trade $300,000 $ 50,000 $ - (a) $350,000 Allowance for doubtful receivable-other 110,954 - 110,954 (b) - Provision for obsolete and slow moving inventory 650,000 450,689 300,689 (c) 500,000 Provisions for warranty costs 635,500 976,019 921,519 (d) 690,000 Year Ended December 31, 1995: Allowance for doubtful accounts-trade $250,000 $ 52,966 $ 2,966 (a) $300,000 Allowance for doubtful receivable-other 110,954 - - (b) 110,954 Provision for obsolete and slow moving inventory 950,000 286,610 586,610 (c) 650,000 Provisions for warranty costs 780,000 705,553 850,053 (d) 635,500 Year Ended December 31, 1994: Allowance for doubtful accounts-trade $225,000 50,095 $ 25,095 (a) 250,000 Allowance for doubtful receivable-other 150,000 60,954 100,000 (b) 110,954 Provision for obsolete and slow moving inventory 796,396 193,811 40,207 (c) 950,000 Provisions for warranty costs 370,000 1,303,078 893,078 (d) 780,000
(a) Uncollected trade receivables written-off. (b) Uncollected other receivables written-off. (c) Deductions for obsolete inventory scrapped and obsolete inventory sold at reduced selling price. (d) Warranty expenses incurred 15 EX-27 4 EXHIBIT 27.1
5 12-MOS DEC-31-1996 DEC-31-1996 6,984 0 3,738,103 350,000 18,949,568 24,858,027 8,893,684 5,390,353 29,927,231 4,322,439 0 0 0 8,040,918 17,095,327 29,927,231 30,046,068 0 24,483,891 5,821,235 29,546 0 11,445 182,092 136,937 45,155 0 0 0 45,155 .01 0
-----END PRIVACY-ENHANCED MESSAGE-----