-----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, UyZfaaaZdogUd2OinYxfPtM+Q/5oLjSMgN9s5NVhwEcVU2BwhFC43ag/AVh72SsH ZzBFhh2F5iHSAFgzsZZ4hg== 0000950168-00-000903.txt : 20000403 0000950168-00-000903.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950168-00-000903 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 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-K SEC ACT: SEC FILE NUMBER: 000-12649 FILM NUMBER: 591725 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-K 1 FORM 10-K 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, 1999 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 PAR VALUE PER SHARE ------------------------------------ (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 [ ]. On March 20, 2000, there were 3,805,608 shares of common stock outstanding. On March 20, 2000, the aggregate market value of voting stock held by nonaffiliates (based upon the average bid and ask price of such stock) was approximately $4,235,828. Documents Incorporated by Reference - Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III. 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 I 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 contractors, municipalities, 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. MOBILE STREET SWEEPER (A) MECHANICAL STREET SWEEPER. The mechanical 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 is diesel 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. (B) HIGH SPEED RUNWAY SWEEPER. The Mobile high-speed vacuum airport sweeper, AV445, utilizes an exclusive blow-suction system to provide a versatile cleaner for airports. Its one of a kind design provides six sweepers in a single machine: FOD removal, glycol recovery, curb line sweeping, jet blasting large areas, magnetic sweeping and catch basin cleaning. Mounted on a variety of commercial chassis the wide choice of options makes the AV445 one of the most versatile sweepers in the industry. (C) REGENERATIVE AIR SWEEPER. The Company's RA730B regenerative air sweeper offers additional features beyond those previously available to the industry. Using a powerful vacuum system, its sweeping function is accomplished by a closed loop air system. Features such as quiet single engine designs, variable high dump, large hopper capacity and stainless steed designs on selected high wear components, provide an alternative to mechanical sweeper needs. 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, windrow or any flowable material from the roadside, and drop it into a trailing truck. 2 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) 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 1999 1998 1997 ---------------- ---- ---- ---- Mobile Street Sweepers 77% 70% 70% Replacement Parts 15% 23% 22% 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. 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. CUSTOMERS. In 1999, the Company's largest customer was Nixon-Egli, a dealer selling to a local government entity. This customer accounted for approximately 24% 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. 3 BACKLOG. The dollar amount of the backlog of orders believed to be firm as of December 31, 1999 and December 31, 1998 was approximately $10,145,756 and $12,714,507, respectively. Mobil street sweepers accounted for 95% and 97%, respectively, of the backlogs as of such dates. The Registrant expects to complete all orders related to the December 31, 1999 backlog during the current fiscal year. GOVERNMENT CONTRACTS. The Registrant has no material contracts with the federal government. COMPETITION. The Registrant competes in the street sweeper, airport sweeper and force-feed loader 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. The Company's RA730B regenerative air sweeper offers additional features beyond those previously available to the industry. Using a powerful vacuum system, its sweeping function is accomplished by a closed loop air system. Features such as quiet single engine designs, variable high dump, large hopper capacity and stainless steel designs on selected high wear components, provide an alternative to mechanical sweeper needs. 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. RESEARCH AND DEVELOPMENT. The Registrant spent approximately $44,000 in 1999, $98,000 in 1998, and $78,000 in 1997, to improve existing products and to consider new product lines. 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 expenditure for environmental compliance during the next fiscal year. EMPLOYEES. As of December 31, 1999, the Registrant employed 211 persons, of which 133 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 $3,237,500 in 1999, $3,710,500 in 1998 and $1,356,000 in 1997. During 1999, 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. 4 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. On August 6, 1999 the Company filed a notice of noncompliance with the National Highway Traffic Safety Administration ("NHTSA) regarding the recently amended FMVSS No. 105. Specifically, the Company reported that a certain number of its street sweepers sold by the Company were sold without an antilock brake system required by FMVSS No. 105. The Company also reported that it had simultaneously filed a petition with the NHTSA seeking an exemption for the Company from the notification and remedy requirements of that regulation because the noncompliance was inconsequential to motor vehicle safety. The public comment period relating to the Company's exemption request has terminated, and the Company is awaiting a final determination by NHTSA. If any remedial or other action is ultimately required of the Company in this regard, the Company believes that it has adequate reserves for the cost of such action; however, no assurance may be given in this regard. 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 fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. No cash dividends have been paid to stockholders during the last five years.
1999 1998 1997 ---- ---- ---- QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW - ------------- ---- --- ---- --- ---- --- March 31 3 2 1/16. 4 3/8 4 4 1/2 4 June 30 3 1/4 2 1/8 5 1/2 3 13/16 4 3/8 4 September 30 2 1/4 1 1/8 5 1/4 3 3/4 4 1/2 4 1/8 December 31 2 1 1/32 3 15/16 2 1/2 4 1/2 4 1/8
The Company's common shares are traded on the NASDAQ SmallCap Market under the symbol "ATPC". The common shares were transferred from the NASDAQ National Market to the NASDAQ SmallCap Market, and began being traded on the NASDAQ SmallCap Market, on October 28, 1999. The above quotations were received from the NASDAQ SmallCap and National Market. The number of registered stockholders of the Company's common stock (the "Common Stock") as of March 20, 2000 was 385. On March 20, 2000, the last price of the Company's Common Stock on the NASDAQ Small Caps Market was $2.125 per share. 5 ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31, ------------------------ OPERATING DATA 1999 1998 1997 1996 1995 - -------------- ---- ---- ---- ---- ---- Net Sales.................. $38,469,506 $ 28,042,117 $ 29,410,863 $ 30,046,068 $ 30,424,588 Net Earnings (Loss) ....... 390,659 (9,806,960) (1,969,312) 45,155 2,743 Net Earnings (Loss) Per Share 0.10 (2.58) (0.52) 0.01 -- BALANCE SHEET DATA - ------------------ Total Assets............... $25,292,824 $ 23,335,661 $ 27,664,993 $ 29,927,231 $ 29,325,917 Long-Term Obligations ..... 1,809,016 -- -- 14,507 57,419
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS SIGNIFICANT EVENTS AFFECTING 1999 TO 1998 COMPARABILITY The comparability of statement of operations data has been affected by the following significant items that occurred in 1999 and 1998. [] In May 1998, the Company sold its marketable securities for $3,041,716. This sale resulted in a pre-tax gain of $2,095,965. The effect was an increase in net earnings after tax of $1,383,337 or $.36 per share. 1999 COMPARED WITH 1998 The Company's net sales were $38,469,506, a 37.2% or $10,427,389 increase from the $28,042,117 recorded in 1998. The sales increase reflects a 45.8% increase in the number of sweepers shipped in 1999 as compared to 1998. This volume increase in sweeper shipments was partially offset by an 11.9% decline in replacement parts sales. The increase in units shipped was primarily attributable to productivity improvements. Cost of goods sold, as a percentage of net sales was 83.6% for 1999 as compared to 112.3% for 1998. Cost of goods sold in 1998 was significantly impacted by the production inefficiencies noted above and various inventory-related adjustments as the Company's new management team continued its review of current inventory levels in relation to future production requirements. Such inventory related adjustments consisted of the following: (i) approximately $759,000 charged in the third quarter of 1998 as a result of the Company's annual physical inventory taken at the end of September; (ii) approximately $2,111,000 relating to the production inefficiencies experienced throughout 1998 noted above; (iii) approximately $850,000 relating to the loss on obsolete inventory, primarily in the discontinued Composter product line, disposed of in the fourth quarter of 1998 at scrap value; (iv) approximately $210,000 relating to a net increase in the reserve for obsolete inventories based on the Company's ongoing review of future production requirements; and (v) approximately $830,000 relating to reductions to net realizable value of the Company's used finished goods and demonstration fleet, as the Company has implemented a more aggressive plan to reduce the size of this fleet. The Company's selling, administrative and engineering expenses decreased by $2,889,170 to $5,434,060 (14.1% of net sales) in 1999 from $8,323,230 (29.7% of net sales) in 1998. Selling, administrative and engineering expenses in 1999 have been favorably impacted by cost controls and lower warranty expenses. 6 Other income for 1999 was $50,520 as compared to $2,312,853 for 1998. Included in other income for 1998 was a gain of $2,095,965 on the sale of marketable securities. The remaining decrease compared to 1998 is primarily due to additional interest income earned in 1998 on the proceeds from the sale of the marketable securities. Other expenses for 1999 was $530,174 as compared to $348,492 for 1998. This increase in other expenses for 1999 is due to increased interest expense associated with larger borrowings under the Company's line of credit. Income tax expense (benefit) for both 1999 and 1998 varies from the customary relationship of 34% primarily due to changes in the Company's valuation reserve allowance against recorded deferred tax assets. The net gain after income tax expense (benefit) for 1999 was $390,659 or $0.10 per share, as compared to a net loss after income tax (benefit) of $9,806,960 or $(2.58) per share for 1998, primarily as a result of the factors noted above. SIGNIFICANT EVENTS AFFECTING 1998 TO 1997 COMPARABILITY The comparability of statement of operations data has been affected by the following significant items that occurred in 1998 and 1997. [] In June, 1997, the Company recognized pretax net periodic pension income under FASB No. 88 of $1,308,200 on the reversion of assets due to the termination of the pension plan. Approximately $565,227 of this amount resulted in a reduction in cost of goods sold and approximately $742,973 of this amount resulted in a reduction in selling, administrative and engineering expenses. However, this favorable impact on selling, administrative and engineering expenses was offset by a $369,044 increase in excise tax expense associated with the termination of the pension plan. The effect was a decrease in 1997 net loss after tax of $619,843 or $.16 per share. 1998 COMPARED WITH 1997 The Company's net sales were $28,042,117 in 1998, a 4.7% or $1,368,746 decrease from the $29,410,863 recorded in 1997. The sales decline reflects a 14.1% decrease in the number of units shipped during the period as compared to the prior year. This volume decline in sweeper shipments was partially offset by higher than average sales prices for certain foreign units shipped and by a 7.0% increase in replacement parts sales. The decline in the number of sweeper shipments in 1998 from 1997 was primarily attributable to production inefficiencies resulting from delays in receiving manufacturing parts, supplier changes, engineering changes related to new product development and engine and electrical systems redesign, and production schedule adjustments for smaller lot sizes. The cost of goods sold, as a percentage of net sales was 112.3% for 1998 as compared to 85.5% in 1997. Cost of goods sold in 1998 was significantly impacted by the production inefficiencies and various inventory-related adjustments as the Company's new management team continued its review of current inventory levels in relation to future production requirements. Such inventory related adjustments consisted of the following: (i) approximately $759,000 charged in the third quarter of 1998 as a result of the Company's annual physical inventory taken at the end of September; (ii) approximately $2,111,000 relating to production inefficiencies experienced throughout 1998; (iii) approximately $850,000 relating to the loss on obsolete inventory, primarily in the discontinued Composter product line, disposed of in the fourth quarter of 1998 at scrap value; (iv) approximately $210,000 relating to a net increase in the reserve for obsolete inventories based on the Company's ongoing review of future production requirements; and (v) approximately $830,000 relating to reductions to net realizable value of the Company's used finished 7 goods and demonstration fleet, as the Company has implemented a more aggressive plan to reduce the size of this fleet. The cost of goods sold in 1997 was favorably impacted by the $565,227 pre-tax net periodic pension income relating to the termination of the pension plan. Excluding this item, cost of goods sold in 1997 would have been $25,713,394 or 87.4%. The Company's selling, administrative and engineering expenses increased by $1,894,197 to $8,323,230 (29.7% of net sales) in 1998 from $6,429,033 (21.8% of net sales) in 1997. Selling, administrative and engineering expenses in 1997 had been favorably impacted by the $742,973 pre-tax net periodic pension income relating to the termination of the pension plan. However, this favorable impact was partially offset by a $369,044 increase in excise tax expense associated with the termination of the pension plan. Excluding these items, selling, administrative and engineering expenses would have been $6,802,962 or 23.1% of net sales for 1997. The 1998 increase in selling, administrative and engineering expenses was primarily attributable to an increase in sales and engineering salaries of approximately $200,000, as well as an increase in warranty costs of approximately $386,000 as the Company provided additional reserves for both its regular warranty and campaign warranty programs based upon its claims experience. In addition, bad debt expense increased in 1998 by approximately $225,000 as the Company increased its allowance for doubtful accounts after a decrease in this allowance during 1997. The Company also experienced increased sales and marketing costs, which included a $185,000 charge related to a performance bond in connection with the shipment of units to a foreign country. The Company also experienced other increases in its selling, administrative and engineering expenses related to insurance and legal costs, which were approximately $225,000. Other income for 1998 was $2,312,853 as compared to $38,109 in 1997. Included in other income for 1998 was a gain of $2,095,965 on the sale of marketable securities. The remaining increase in 1998 was primarily due to additional interest income earned on the proceeds from the sale of the marketable securities. Other expenses for 1998 were $348,492 as compared to the $114,907 for 1997. The increase in other expenses for 1998 was due to (i) approximately $97,000 of increased interest expense associated with larger borrowings under the Company's line of credit and (ii) approximately $156,000 of losses related to the disposal of obsolete computer equipment in connection with the Company's upgrade of its computer systems. Income tax expense (benefit) for both 1998 and 1997 varies from the customary relationship of 34% primarily due to changes in the Company's valuation reserve allowance against recorded deferred tax assets. The net loss after income tax expense (benefit) for 1998 was $9,806,960 or $2.58 per share, as compared to a net loss after income tax (benefit) of $1,969,312 or $0.52 per share for 1997, primarily as a result of the factors noted above. 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. 8 YEAR 2000 ISSUE The Company conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue and implemented a remediation plan to resolve this issue. The Company did not experience any significant problems associated with the Year 2000 issue. The Company did not incur any material costs related to the Year 2000 issue. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999 the Company had working capital of $11,703,743; the ratio of current assets to current liabilities was 2.2 to 1; and the debt to equity ratio was .92 to 1. This compares to working capital of $9,295,146; a ratio of current assets to current liabilities of 1.9 to 1; and a debt to equity ratio of .82 to 1 at December 31, 1998. At December 31, 1999, cash and cash equivalents were $33,211, as compared to $143,391 at December 31, 1998. During 1999, the Company experienced a significantly higher level of usage of its line of credit in order to support the Company's cash flow requirements. The Company did not authorize stock repurchases in 1999 or 1998. The Company generally relies upon internally generated funds and short-term and long-term bank borrowings to satisfy working capital requirements and to fund capital expenditures. At December 31, 1999, the Company had available a secured line of credit with a financial institution of $9,000,000 of which $5,688,062 had been utilized. At December 31, 1998, the Company had outstanding borrowings under a previous line of credit with another financial institution of $4,391,000. The Company's new credit facility, which was obtained in July 1999, is in the form of a revolving and term loan agreement secured by all of the Company's assets, whether or not eligible for lending purposes. This facility has an initial maturity date of June 30, 2002 and bears an interest rate of 3/4% above the prime rate as quoted in the Wall Street Journal. In connection with the new credit facility, the Company has agreed, among other things, not to: (i) incur a pre-tax cumulative loss of $850,000 for the period from June 30, 1999 through the end of the initial term and (ii) permit the ratio of its total liabilities to its net worth to be greater than 2.0 to 1. The Company also has restrictions on the disposal of assets and the payment of dividends. At December 31, 1999, the Company had complied with all financial covenants. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, the Company has in place a line of credit, which bears interest at variable rates. At December 31, 1999, the Company had $5,688,062 outstanding under a secured line of credit. Borrowings under the credit facility bear interest at the prime rate of the lender plus 3/4%. At December 31, 1999, the interest rate was 9.25%. While changes in the prime rate could affect the cost of funds borrowed in the future, the Company believes the effect, if any, of reasonably near-term changes in interest rates on the Company's financial position, results of operations and cash flows would not be material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Financial Statements and Financial Statement Schedules Index commencing on page 15 hereof. 9 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the name, principal occupation, age, length of service and ownership of Common Stock of the Company (by number of shares and as a percentage of the total outstanding) of each of the Company's current executive officers and directors as a group.
COMMON SHARES BENEFICIALLY DIRECTOR OWNED AS OF PERCENT NAME AND PRINCIPAL OCCUPATION (1) AGE SINCE MARCH 20, 2000(2) OF CLASS - --------------------------------- --- --------- ---------------- ---------- John F. McCullough(3)................................ 74 1975 1,597,726 41.98% Chairman of Board of the Company and Chairman of Orton/McCullough Crane Company, Inc. Oak Brook, Illinois Martin W. McCullough(3).............................. 42 1985 12,632 * Director of the Company and President of Orton/McCullough Crane Company, Inc. Huntington, Indiana Richard A. Rosenthal................................. 67 1977 5,691 * Director of the Company Retired Director of Athletics University of Notre Dame South Bend, Indiana Thomas N. Nelson...................................... 62 1998 2,325 * Director of the Company Chief Executive Officer and President of the Company Joseph L. Dindorf .................................... 59 1999 1,000 * Director of the Company Retired President and CEO of Hein-Werner Corporation Brookfield, Wisconsin William H. Warden...................................... 56 - - * Chief Financial Officer, VP - Finance, Treasurer and Corporate Secretary Executive officers and directors as a group (6 persons).................................. 1,619,374 42.55%
* Less than one percent. (1) Each executive officer's and director's principal occupation and employment for the last five years has been listed above, except for: Mr. John F. McCullough, Mr. Martin W. McCullough, Mr. Thomas N. Nelson and Mr. William H. Warden. Prior to May 1997, Mr. John F. McCullough was Chairman & President, and Mr. Martin W. McCullough was Vice-President and General Manager of, Orton/McCullough Crane Company, Inc. In May 1997, Mr. Martin W. McCullough became President of Orton/McCullough Crane Company, Inc. and Mr. John F. McCullough continued as Chairman. Prior to June 10 1996, Mr. Nelson was Product Sales Manager for Bucyrus-Erie Company, South Milwaukee, Wisconsin. From June 1996 to May 1998, Mr. Nelson was Director of Sales & Marketing for the Company. Mr. Nelson was elected as Vice-President, Sales & Marketing of the Company on May 11, 1998, and was elected President and Treasurer on December 16, 1998. On June 3, 1999, Mr. Nelson was elected Chief Executive Officer and President. Mr. Rosenthal is a director of the following companies: Advanced Drainage Systems, Inc., Columbus, Ohio; Beck Corporation, Elkhart, Indiana; CID Equity Partners, Indianapolis, Indiana; LaCrosse Footwear, Inc., LaCrosse, Wisconsin; RFE Investment Partners, New Canaan, Connecticut; St. Joseph Capital Corporation, Mishawaka, Indiana. Joseph L. Dindorf is the retired President and Chief Executive Officer of Hein-Werner Corporation. Prior to December 21, 1998, Mr. Warden was CFO and VP-Administration for Touch Scientific Inc. (2) Except as otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. (3) Common shares shown as owned by Mr. John F. McCullough are owned of record by Orton/McCullough Crane Company, Inc., of which Mr. John F. McCullough is an officer and principal shareholder (see "Security Ownership of Certain Beneficial Owners and Management " (Item 12) below. Mr. John F. McCullough disclaims beneficial ownership of such shares. Mr. John F. McCullough is the father of Mr. Martin W. McCullough. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Management of the Company has the understanding that none of its officers, directors and persons holding more than 10% of the Company's Common Shares has failed to file required reports of their ownership of the Company's Common Shares and any changes in that ownership with the U.S. Securities and Exchange Commission (the "Commission"), except that Mr. Dindorf inadvertently filed late his Form 3 initial statement of beneficial ownership of securities showing his election as a director of the Company. In making this statement, the Company has relied on the written representations of its officers, directors and holders of more than 10% of its common stock and copies of the reports that they have filed with the Commission. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth the aggregate compensation paid by the Company for services rendered in all capacities to the Company during the Company's last three fiscal years to all those individuals serving the Company as President during 1999. No other executive officer of the Company was paid compensation for 1999 in excess of $100,000.
NAME AND PRINCIPAL POSITIONS ANNUAL COMPENSATION --------------------------- ------------------- OTHER ANNUAL SALARY BONUS COMPENSATION YEAR $ $ $ ------------ Thomas N. Nelson (1) CEO, President, and Director 1999 100,692 10,000 (2) 3,021 (3) 1998 83,206 -- 2,496 (4) 1997 80,000 -- 2,400 (5)
(1) Prior to being elected President and Chief Executive Officer on June 3, 1999, Mr. Nelson was President of the Company. Prior to December 16, 1998, Mr. Nelson served as the Company's Vice-President of Sales and Marketing. (2) Bonus earned in 1999, and paid in March 2000. (3) Payments included in this amount for the fiscal year ended December 31, 1999 consist of: (a) Company contributions of $3,021 to the Athey Products Corporation Employees 401(k) Plan (the "401(k) Plan"), which is a defined contribution salary reduction 401(k) Plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended. 11 (4) Payments included in this amount for the fiscal year ended December 31, 1998 consist of: (a) Company contributions of $2,496 to the Athey Products Corporation Employees 401(k) Plan (the "401(k) Plan"), which is a defined contribution salary reduction 401(k) Plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended. (5) Payments included in this amount for the fiscal year ended December 31, 1998 consist of: (a) Company contributions of $2,400 to the Athey Products Corporation Employees 401(k) Plan (the "401(k) Plan"), which is a defined contribution salary reduction 401(k) Plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended. DIRECTOR COMPENSATION Directors who are employees of the Company do not receive fees for attendance at director's meetings. Mr. John F. McCullough is paid $100,000 annually for serving as Chairman of the Board of Directors. Directors who are not employees of the Company are paid $18,000 a year for serving as directors. No other remuneration was paid as director's fees. No directors were paid additional compensation for committee participation or special assignments. Directors are reimbursed for their out-of-pocket expenses incurred in attending meetings of directors or shareholders. CUMULATIVE TOTAL SHAREHOLDER RETURN The line-graph presentation comparing the cumulative shareholder return of the Company's common stock is incorporated by reference from the Proxy Statement for the 2000 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as of March 20, 2000 regarding each person who was known by the Company to own beneficially more than 5% of the outstanding Common Shares of the Company:
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP NAME AND ADDRESS OF OF COMMON PERCENT BENEFICIAL OWNER STOCK (3) OF CLASS ------------------- ----------- -------- Orton/McCullough Crane Company, Inc. (1)..................................... 1,597,726 41.98% 1244 East Market Street Huntington, Indiana 46750 Isometrics, Inc. (2)........................................................ 247,372 6.50% 1266 North Scales Street Post Office Box 660 Reidsville, North Carolina 27320 Franklin Resources, Inc..................................................... 198,000 5.20% 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, California 94403-7777
12 (1) Mr. John F. McCullough, an officer and principal shareholder of Orton/McCullough Crane Company, Inc., may be deemed to share beneficial ownership of the shares shown as beneficially owned by Orton/McCullough Crane Company, Inc., although he disclaims beneficial ownership of such shares. (2) Mr. Dennis M. Bracy, the president, director and majority shareholder, with approximately 98% of the outstanding common shares of Isometrics, Inc., may be deemed to share beneficial ownership of the shares shown as beneficially owned by Isometrics, Inc. (3) Shares shown as owned by Orton/McCullough Crane Company, Inc., Isometrics, Inc. and Franklin Resources, Inc. are as reported on the latest Schedule 13D or 13G filings by such entities, respectively. The Common Stock is the only class of outstanding voting securities of the Company. See "Directors and Executive Officers of the Registrant" above for information concerning beneficial ownership of the Company's voting securities by management. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See "Directors and Executive Officers of the Registrant" and "Security Ownership of Certain Beneficial Owners and Management" for a discussion of Mr. John F. McCullough's relationship with the Company and Mr. Martin W. McCullough. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. ITEM 14(A)(1). FINANCIAL STATEMENTS. See Financial Statements and Financial Statement Schedules Index commencing on Page 15. ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES. See Financial Statements and Financial Statement Schedules Index commencing on Page 15. ITEM 14(A)(3). EXHIBITS.
EXHIBIT NUMBER DESCRIPTION -------------- ----------- *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). 10.1 Loan and Security Agreement entered into on June 30, 1999 between the Company and NationsCredit Commercial Corporation through its NationsCredit Commercial Funding Division [incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999]. 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. ITEM 14(B). REPORTS ON FORM 8-K. None. 13 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/ Thomas N. Nelson ------------------------------------ Thomas N. Nelson Chief Executive Officer and President By: /s/ William H. Warden ------------------------------------- William H. Warden Chief Financial Officer, Vice-President - Finance, Treasurer, and Corporate Secretary Date: March 30, 2000 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/ Joseph L. Dindorf /s/John F.McCullough --------------------- -------------------- Joseph L. Dindorf, Director John F. McCullough March 30, 2000 Chairman of the Board of Directors March 30, 2000 /s/ Martin W. McCullough /s/ Thomas N. Nelson ------------------------ -------------------- Martin W. McCullough, Director Tomas N. Nelson, Director March 30, 2000 March 30, 2000 /s/ Richard A. Rosenthal ------------------------ Richard A. Rosenthal, Director March 30, 2000 14 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES Independent Auditor's Report.............................................16 Balance Sheets at December 31, 1999 and 1998.............................17 Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................................18 Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997.......................................18 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................................19 Notes to Financial Statements.......................................20 to 26 Financial Statements Schedules: Subsidiaries of the Registrant .......................................27 Schedule II - Valuation and Qualifying Accounts.......................28 15 McGladrey & Pullen, LLP Certified Public Accountants & Consultants INDEPENDENT AUDITOR'S REPORT To the 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, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Raleigh, North Carolina February 21, 2000 16 ATHEY PRODUCTS CORPORATION BALANCE SHEETS
December 31, 1999 December 31, 1998 ------------------ ------------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 33,211 $ 143,391 Certificate of deposit, restricted 190,408 - Accounts receivable (less allowances for doubtful accounts of $157,031 and $285,280 for 1999 and 1998, respectively) (Notes 2 and 4) 3,376,826 2,974,180 Inventories (Notes 3, 4, and 12) 17,458,679 16,466,109 Prepaid expenses 202,506 43,153 Deferred income taxes (Note 6) 373,133 107,489 --------------- ---------------- Total current assets 21,634,763 19,734,322 --------------- ---------------- OTHER ASSETS: Other 98,230 2,230 --------------- ---------------- Total other assets 98,230 2,230 --------------- ---------------- PROPERTY, PLANT AND EQUIPMENT (Notes 4 and 5): Land and land improvements 47,785 47,785 Buildings and building improvements 4,081,658 3,929,722 Machinery and equipment 5,121,620 5,043,278 --------------- ---------------- 9,251,063 9,020,785 Less accumulated depreciation (5,691,232) (5,421,676) --------------- ---------------- Total property, plant and equipment, net 3,559,831 3,599,109 --------------- ---------------- $ 25,292,824 $ 23,335,661 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Short-term borrowings (Note 4) $ 3,938,679 $ 4,391,000 Current portion of obligations under financing agreements (Note 5) 17,732 - Accounts payable 4,231,834 3,542,854 Accrued salaries, wages, and payroll withheld 398,618 438,424 Other accrued expenses 244,157 320,732 Warranty reserve (Note 13) 1,100,000 1,746,166 --------------- ---------------- Total current liabilities 9,931,020 10,439,176 --------------- ---------------- NONCURRENT LIABILITIES: Obligations under financing agreements (Note 5) 59,633 - Long-term borrowings (Note 4) 1,749,383 - Deferred income taxes (Note 6) 373,133 107,489 --------------- ---------------- Total noncurrent liabilities 2,182,149 107,489 --------------- ---------------- SHAREHOLDERS' EQUITY (Note 10): Common stock, par value $2 per share: Authorized 10,000,000 shares; Issued 4,020,459 shares 8,040,918 8,040,918 Additional paid-in capital 16,218,394 16,218,394 Retained earnings (deficit) (10,151,099) (10,541,758) Less cost of 214,851 common shares in treasury (Note 10) (928,558) (928,558) --------------- ---------------- Total shareholders' equity 13,179,655 12,788,996 --------------- ---------------- $ 25,292,824 $ 23,335,661 =============== ================
See notes to financial statements. 17 ATHEY PRODUCTS CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 --------------------------------------------------------- 1999 1998 1997 ------------------ ----------------- ----------------- NET SALES (Notes 2 and 15) $ 38,469,506 $ 28,042,117 $ 29,410,863 Cost of goods sold (Note 12) 32,165,133 31,490,208 25,148,167 ------------------ ----------------- ----------------- Gross profit (loss) 6,304,373 (3,448,091) 4,262,696 Selling, administrative and engineering expenses (Notes 8,9,13, and 14) 5,434,060 8,323,230 6,429,033 ------------------ ----------------- ----------------- Earnings (loss) from operations 870,313 (11,771,321) (2,166,337) Other income (Note 7) 50,520 2,312,853 38,109 Other expenses (Note 4) (530,174) (348,492) (114,907) ------------------ ----------------- ----------------- Earnings (loss) before income tax expense (benefit) 390,659 (9,806,960) (2,243,135) Income tax expense (benefit) (Note 6) - - (273,823) ------------------ ----------------- ----------------- NET EARNINGS (LOSS) $ 390,659 $(9,806,960) $(1,969,312) ================== ================= ================= NET EARNINGS (LOSS) PER SHARE $ 0.10 $ (2.58) $ (0.52) ================== ================= ================= WEIGHTED AVERAGE SHARES OUTSTANDING 3,805,608 3,805,608 3,808,159 ================== ================= =================
STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Accumulated Common Stock Additional Retained Other Treasury Stock ----------------------- Paid-in Earnings Comprehensive Comprehensive ------------------ Shares Par Value Capital (Deficit) Income Income (Loss) Shares Cost ----------- ---------- ------------ ------------ ----------- -------------- ------ ------ BALANCE, January 1,1997 4,020,459 $8,040,918 $ 16,218,394 $ 1,234,514 $ 333,233 158,751 $(690,814) Comprehensive income: Net loss for 1997 - - - (1,969,312) - $ (1,969,312) - - Unrealized gain on marketable securites, net of tax (Note 7) - - - - 152,178 152,178 - - ============ Total comprehensive loss $ (1,817,134) ============= Purchase of common stock for treasury (Note 10) - - - - - 56,100 (237,744) ----------- ---------- ------------ ------------ ------------ --------- ---------- BALANCE, December 31,1997 4,020,459 8,040,918 16,218,394 (734,798) 485,411 214,851 (928,558) Comprehensive income: Net loss for 1998 - - - (9,806,960) - $ (9,806,960) - - Unrealized gain on marketable securitites, net of reclassification adjustment (Note 7) - - - - (485,411) (485,411) - - ------------ Total comprehensive loss $ (10,292,371) ----------- ---------- ------------ ------------ ------------ ============ --------- ---------- BALANCE, December 31,1998 4,020,459 8,040,918 16,218,394 (10,541,758) - 214,851 (928,558) Comprehensive income: Net earnings for 1999 - - - 390,659 $ 390,659 - - ============ Total comprehensive income $ 390,659 ----------- ---------- ------------ ------------ ------------ ----------- --------- ---------- BALANCE, December 31,1999 4,020,459 $8,040,918 $ 16,218,394 $(10,151,099) $ - 214,851 $(928,558) =========== ========== ============ ============= =========== ========= ==========
See notes to financial statements. 18
ATHEY PRODUCTS CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 ---------------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- OPERATING ACTIVITIES: Net earnings (loss) $ 390,659 $ (9,806,960) $ (1,969,312) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 269,556 417,396 461,573 Provision for doubtful acounts (128,249) 85,280 (149,982) Provision for deferred income tax - - 48,397 Loss on sale of equipment - - 1,512 Gain on sale of marketable securities - (2,095,965) - Book value of assets disposed - 156,701 - Changes in operating assets and liabilities: Accounts receivable (274,397) (193,589) 1,586,593 Inventories (992,570) 1,642,436 841,023 Prepaid expenses (159,353) 314,675 365,706 Refundable income taxes - 749,045 (204,588) Other assets (96,000) 24,356 88,637 Accounts payable 688,980 2,024,111 (1,056,461) Accrued salaries, wages, and payroll withheld (39,806) 220,669 (139,886) Other accrued expenses (76,575) 190,816 (150,462) Warranty reserve (646,166) 470,166 586,000 ------------- -------------- ------------- Net cash provided by (used in) operating activities (1,063,921) (5,800,863) 308,750 ------------- -------------- ------------- INVESTING ACTIVITIES: Purchase of certificate of deposit (190,408) - - Purchase of property and equipment (148,719) (531,035) (606,259) Proceeds from disposal of assets - - 4,564 Proceeds from sale of marketable securities - 3,041,716 - ------------- -------------- ------------- Net cash provided by (used in) investing activities (339,127) 2,510,681 (601,695) ------------- -------------- ------------- FINANCING ACTIVITIES: Proceeds from line of credit 27,630,465 17,750,000 14,692,000 Repayments of line of credit (26,333,403) (13,359,000) (14,692,000) Excess of outstanding checks over bank balance - (949,800) 573,497 Principal paid on obligations under financing agreements (4,194) (14,507) (42,912) Purchase of common stock for treasury - - (237,744) ------------- -------------- ------------- Net cash provided by financing activities 1,292,868 3,426,693 292,841 ------------- -------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (110,180) 136,511 (104) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 143,391 6,880 6,984 ------------- -------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 33,211 $ 143,391 $ 6,880 ============= ============== ============= SUPPLEMENTAL CASH FLOW DISCLOSURES: Equipment acquired under financing agreements $ 81,559 $ - $ - ============= ============== ============= Income tax recoveries $ - $ (749,045) $ (117,632) ============= ============== ============= Interest paid $ 488,663 $ 175,416 $ 107,599 ============= ============== =============
See notes to financial statements. 19 NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Athey Products Corporation (the "Company") 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 and Canada. 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. At times, the company places temporary cash investments with high quality financial institutions in amounts that may be in excess of FDIC insured limits. 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. MARKETABLE SECURITIES - Prior to its sale in 1998, marketable securities consisted of an investment in equity securities which the Company had designated as available-for-sale. Such securities, while readily marketable, were not held solely in anticipation of short-term market gains. The securities were reported at fair value, with unrealized holding gains and losses, net of the related deferred tax effect, as accumulated other comprehensive income in shareholders' equity. e. 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. f. TREASURY STOCK - Treasury stock is stated at cost. g. EARNINGS (LOSS) PER SHARE - Earnings (loss) per share amounts are computed on the basis of the weighted average number of shares outstanding during the year. h. 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. 20 i. 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. Short-term and long-term borrowings - The carrying amount of the short-term and long-term borrowings approximate fair value because of the relatively short maturity and the variable interest rate adjustments based upon market conditions. j. REVENUE RECOGNITION - The Company recognizes operating revenues upon shipment of finished goods or parts to customers. k. RECLASSIFICATIONS - Certain previously reported amounts have been reclassified to conform with the year-end 1999 presentation with no effect on net loss or shareholders' equity. 2. MAJOR CUSTOMERS Net sales for the years ended December 31, 1999, 1998 and 1997 include sales to the following major customer (which accounted for 10% or more of the total net sales of the Company for those years): 1999 1998 1997 ------------- ------------ ------------- Nixon-Egli $9,618,215 $ 5,233,927 $ 7,568,795 There were outstanding receivables from this customer of $1,133,463, $1,005,763 and $533,993, as of December 31, 1999, 1998 and 1997, respectively. 3. INVENTORIES Inventories are summarized below: December 31, ----------------------------------- 1999 1998 ---------------- --------------- Finished goods $ 1,782,445 $ 2,371,325 Work-in-process 5,390,735 8,032,123 Raw materials 10,285,499 6,062,661 ---------------- --------------- $ 17,458,679 $ 16,466,109 ================ =============== 4. LINE OF CREDIT At December 31, 1999, the Company had available a secured line of credit with a financial institution of $9,000,000, of which $5,688,062 had been utilized. At December 31, 1998, the Company had outstanding borrowings under a previous line of credit with another financial institution of $4,391,000. The Company's new credit facility, which was obtained in July 1999, is in the form of a revolving and term loan agreement secured by all of the Company's assets, whether or not eligible for lending purposes. This facility has an initial maturity date of June 30, 2002 and bears an interest rate of 3/4% above the prime rate as quoted in the Wall Street Journal. In connection with the new credit facility, the Company has agreed, among other things, not to: (1) incur a pre-tax cumulative loss of $850,000 for the period from June 30, 1999 through the end of the initial term (2) permit the ratio of its total liabilities to its net worth to be greater than 2.0 to 1. The Company 21 also has restrictions on the disposal of assets and the payment of dividends. At December 31, 1999, the Company had complied with all financial covenants. Aggregate maturities required on the term loan portion of the credit facility are due in future years as follows: YEAR Amount ---- ------------ 2000 $ 488,200 2001 488,200 2002 1,261,183 ------------ $ 2,237,583 ============ During 1999, 1998 and 1997, the Company incurred interest expense of $519,572, $204,825 and $107,599, respectively. 5. FINANCING ARRANGEMENTS AND LEASE COMMITMENTS The Company has acquired certain office equipment and vehicles under financing arrangements, which started in 1999 and expire in 2003. These financing arrangements are due in monthly installments of $2,025 and bear interest at interest rates from 7.82% to 9.75%. The future principal repayments due in each of the next four years are: YEAR Amount ---- -------- 2000 $ 17,732 2001 19,776 2002 21,602 2003 18,255 ---------- $ 77,365 ========== Beginning in 1998, the Company entered into various operating lease agreements for its computer equipment and certain other office equipment, which expire at various times through 2003. Rent expense under these operating leases was $109,169 and $54,448 for 1999 and 1998, respectively. At December 31, 1999, the future minimum lease commitments under the non-cancelable operating leases are as follows: YEAR Amount ----- ------- 2000 $ 126,062 2001 109,262 2002 78,465 2003 48,703 --------- $ 362,492 ========= 6. INCOME TAXES At December 31, 1999, the Company has available federal net operating loss carryforwards of approximately $9,258,000 expiring as follows: YEAR OF ------------------------------------ ORIGINATION EXPIRATION ----------------- ---------- 1998 2013 $ 8,729,000 1999 2019 529,000 ------------ TOTAL $ 9,258,000 ============ 22 At December 31, 1999, the Company has available state net economic loss carryforwards of approximately $6,046,000 expiring as follows: YEAR OF ------------------------------------ ORIGINATION EXPIRATION ----------------- ---------- 1995 2000 $ 376,000 1996 2001 333,000 1997 2002 670,000 1998 2003 4,402,000 1999 2004 265,000 ------------- TOTAL $ 6,046,000 ============= Components of the income tax expense (benefit) for 1999, 1998 and 1997 are as follows: 1999 1998 1997 ------------- -------------- ------------------ Current: Federal $ -- $ -- $ (325,186) State -- -- 2,966 ------------- -------------- ------------------ Total current -- -- (322,220) ------------- -------------- ------------------ Deferred: Federal -- -- 48,397 State -- -- -- ------------- -------------- ------------------ Total deferred -- -- 48,397 ------------- -------------- TOTAL $ -- $ -- $ (273,823) ============= ============== ================== Net deferred tax assets consist of the following components at December 31, 1999 and 1998: 1999 1998 ------------- --------------- Deferred tax assets: Accounts receivable $ 53,000 $ 160,000 Inventory allowance 482,000 458,000 Accrued vacation 113,000 124,000 Warranty reserve 374,000 594,000 Accrued litigation 5,000 17,000 Net economic loss and tax carryforwards 3,691,000 3,492,000 Other 11,000 11,000 --------------- ----------------- 4,729,000 4,856,000 Less valuation allowance (4,356,000) (4,481,000) -------------- ---------------- 373,000 375,000 -------------- --------------- Deferred tax liabilities: Property and equipment (373,000) (375,000) --------------- ---------------- Net deferred tax assets (liabilities) $ - $ - =============== ================ 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, 1999 and 1998 as follows: 1999 1998 -------------- ------------ Current assets $ 373,133 $ 107,489 Noncurrent liabilities (373,133) (107,489) --------- ----------- Net deferred tax assets (liabilities) $ - $ - ========== ============ 23 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 $4,356,000 and $4,481,000 for certain deferred tax assets as of December 31, 1999 and 1998, 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:
1999 1998 1997 ----------------------- ------------------------- --------------------- Amount % Amount % Amount % ------ ----- ------ ----- ------- ----- Tax expense (benefit) computed at statutory rate $ 136,731 35.0% $ (3,432,436) (35.0)% $ (785,097) (35.0)% Change in valuation allowance (125,000) (32.0) 3,514,000 35.8% 436,000 19.4 Other (11,731) (3.0) (81,564) (0.8) 75,274 3.4 ---------- ---- ------------ ----- ---------- ------ TOTAL $ - - % $ - -% $ (273,823) (12.2)% ========== ===== ============ ===== ========== ======
7. OTHER COMPREHENSIVE INCOME The following is a summary of the tax effects of the components of other comprehensive income, consisting solely of unrealized gains on marketable securities, reported in the statements of shareholders' equity for the years ended December 31, 1999, 1998, and 1997:
Tax Pre-Tax (Expense) Net-of-Tax Amount Benefit Amount -------- -------- ---------- Year Ended December 31, 1999: Total other comprehensive income $ - $ - $ - =========== =========== =========== Year Ended December 31, 1998: Unrealized gains on marketable securities $ 1,360,492 $ (462,566) $ 897,926 Reclassification adjustments for gain realized in net income (2,095,965) 712,628 (1,383,337) ----------- ----------- ----------- Total other comprehensive loss $ (735,473) $ (250,062) $ (485,411) =========== =========== =========== Year Ended December 31, 1997: Unrealized gains on marketable securities included in other comprehensive income $ 230,574 $ (78,396) $ 152,178 =========== =========== ===========
8. 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 1999, 1998 and 1997 were approximately $44,000, $98,000 and $78,000, respectively. 24 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 benefits pension plans and replaced them with a 401(k) plan, which took 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. In the second quarter of 1997, the Company also recognized a pretax settlement gain of $432,036 on the reversion to the Company of the plan assets. The effect of this settlement gain was a decrease in the net loss after tax for 1997 of $285,144 or $.07 per share. The net periodic pension cost for the plans is computed as follows: 1999 1998 1997 ---- ---- ---- Service cost $ - $ - $ - Interest cost - - 469,825 Actual return on plan assets - - (830,354) Net amortization and deferral - - (515,635) Settlement and curtailment gain - - (432,036) -------- -------- ------------ Net periodic pension income $ - $ - $(1,308,200) ======== ======== ============ 10. STOCK TRANSACTIONS In December 1996, the Board of Directors approved a resolution authorizing the Company to repurchase of up to 200,000 shares of the Company's common stock in 1997. During 1997, the Company repurchased a total of 56,100 shares of common stock under this authorization which expired on December 31, 1997. During 1998 and 1999, the Company did not repurchase any of its common stock. 11. 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. 12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1997, the Company charged to cost of good sold approximately $1,525,000 relating to various inventory adjustments. Approximately $1,103,000 of this amount was attributable to 25 adjustments in connection with the physical inventory, approximately $262,000 related to the scrapping of additional items, and approximately $160,000 related to an increase in the reserves for obsolete inventories. The effect of these adjustments was to decrease the fourth quarter 1997 gross profit and increase the net loss after tax benefit by $1,525,000 and $1,006,500, respectively, and to increase the fourth quarter net loss per share by $ .26 There were no significant fourth quarter adjustments in 1999 or 1998. 13. ESTIMATED WARRANTY CLAIMS The Company generally sells its principal products with a warranty that provides for repairs or replacements of any defective parts and associated labor for a one year period after the sale. At the time of the sale, the Company accrues an estimate of providing the warranty based on prior claims experience. Actual warranty costs incurred are charged against the warranty accrual when paid. The estimated warranty liability totaled $1,100,000 and $1,746,166, as of December 31, 1999 and 1998, respectively. 14. EMPLOYEE 401(K) PLAN The Company has established the Athey Products Corporation Employees' 401(k) Plan that covers substantially all of the Company's employees. The plan provides for tax deferred employee contributions of up to 10% of compensation and an employer matching contribution of $.50 for each $1.00 contributed to the 401(k) Plan by the employee, with a maximum company contribution of 3% of the employee's compensation. The Company's contribution amounted to $115,553 and $123,907 in 1999 and 1998, respectively. 15. GEOGRAPHIC INFORMATION Sales to foreign countries during 1999, 1998, and 1997 were as follows: 1999 1998 1997 ------------- ------------- ------------- Egypt $ 1,854,000 $ 2,534,000 $ - Canada 826,100 94,000 692,000 Japan 61,800 - 107,000 Russia 50,000 85,000 78,000 Guam 2,100 - 145,000 Oman 1,100 262,000 - Puerto Rico 1,000 207,000 - Other 441,400 528,500 334,000 ------------- ------------- ------------- TOTAL $ 3,237,500 $ 3,710,500 $ 1,356,000 ============= =========== =========== 26 EX-21 2 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION - ----------------------------------- ---------------------- Athey Products International, Inc. Barbados 27 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charges Deductions Balance at Beginning to Profit from End of Description of Year and Loss Reserves Year - ----------- ------- -------- -------- ---- Year Ended December 31, 1999: - ----------------------------- Allowance for doubtful $ 285,280 $ (64,219) $ 64,030 (a) $ 157,031 accounts-trade Provision for obsolete and slow moving inventory 970,373 129,627 - 1,100,000 Provision for lower of cost or market 910,633 - 160,633 750,000 Provision for warranty costs 1,746,166 621,563 1,267,729 (c) 1,100,000 YEAR ENDED DECEMBER 31, 1998: - ----------------------------- Allowance for doubtful $ 200,000 $ 117,194 $ 31,914 (a) $ 285,280 accounts-trade Provision for obsolete and slow moving inventory 760,000 1,050,104 839,731 (b) 970,373 Provision for lower of cost or market 80,775 829,858 - 910,633 Provision for warranty costs 1,276,000 2,481,389 2,011,223 (c) 1,746,166 YEAR ENDED DECEMBER 31, 1997: - ----------------------------- Allowance for doubtful $ 350,000 $ - $ 150,000 $ 200,000 accounts-trade Provision for obsolete and slow moving inventory 500,000 513,784 253,784 (b) 760,000 Provision for lower of cost or market - 80,775 - 80,775 Provision for warranty costs 690,000 2,263,565 1,677,565 (c) 1,276,000
(a) Uncollected trade receivables written off. (b) Deduction for obsolete inventory scrapped or sold at reduced selling price. (c) Warranty expenses incurred. 28 EX-27 3 FDS
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 33,211 190,408 3,533,857 157,031 17,458,679 21,634,763 9,251,063 5,691,232 25,292,824 9,931,020 0 0 0 8,040,918 5,138,737 25,292,824 38,469,506 0 32,165,133 5,434,060 530,174 0 488,663 390,659 0 390,659 0 0 0 390,659 .10 0
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