FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
-------------------------
Commission File Number 1-12541
Atchison Casting Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 South Fourth Street, Atchison, Kansas 66002
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 367-2121
Not Applicable
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(Former name, former address and former fiscal year, if changed since last report.)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 from the past 90 days. Yes _ No X
There were 7,723,031 shares of common stock, $.01 par value per share,
outstanding on November 14, 2002
1
PART I
ITEM 1. Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, June 30,
2002 2002
--------- ---------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,118 $ 1,583
Customer accounts receivable, net of allowance for
doubtful accounts of $930 and $1,317, respectively 61,168 68,245
Income tax refund receivable 1,604 1,604
Inventories 49,976 50,715
Deferred income taxes 2,202 2,250
Other current assets 12,154 10,243
-------- --------
Total current assets 128,222 134,640
PROPERTY, PLANT AND EQUIPMENT, Net 92,727 94,178
GOODWILL, Net 20,436 22,310
DEFERRED FINANCING COSTS, Net 1,044 1,209
OTHER ASSETS 16,463 17,110
-------- --------
TOTAL ASSETS $258,892 $269,447
======== ========
See Notes to Consolidated Financial Statements.
2
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share data)
September 30, June 30,
2002 2002
------------- --------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 46,335 $ 44,424
Accrued expenses 40,124 44,137
Current maturities of long-term debt 111,598 97,958
--------- ---------
Total current liabilities 198,057 186,519
--------- ---------
LONG-TERM DEBT 6,405 20,662
DEFERRED INCOME TAXES 3,139 3,443
OTHER LONG-TERM OBLIGATIONS 971 264
POSTRETIREMENT OBLIGATIONS OTHER THAN PENSION 11,480 11,183
MINORITY INTEREST IN SUBSIDIARIES 410 516
--------- ---------
Total liabilities 220,462 222,587
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000
authorized shares; no shares issued -- --
Common stock, $.01 par value, 19,300,000
authorized shares; 8,312,049 shares issued 83 83
Class A common stock (non-voting), $.01 par value,
700,000 authorized shares; no shares issued -- --
Additional paid-in capital 81,613 81,613
Accumulated deficit (31,083) (22,217)
Accumulated other comprehensive loss (6,135) (6,571)
Less shares held in treasury:
Common stock, 589,018 shares, at cost (6,048) (6,048)
--------- ---------
Total stockholders' equity 38,430 46,860
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 258,892 $ 269,447
========= =========
See Notes to Consolidated Financial Statements.
3
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
Three Months Ended
September 30,
2002 2001
----------- -----------
NET SALES $ 80,582 $ 99,614
COST OF GOODS SOLD 75,101 92,189
----------- -----------
GROSS PROFIT 5,481 7,425
OPERATING EXPENSES:
Selling, general and administrative 8,751 9,187
Impairment and restructuring charges 3,111 --
Amortization of intangibles -- (94)
----------- -----------
Total operating expenses 11,862 9,093
----------- -----------
OPERATING LOSS (6,381) (1,668)
INTEREST EXPENSE 2,489 2,662
MINORITY INTEREST IN NET LOSS
OF SUBSIDIARIES (33) (28)
----------- -----------
LOSS BEFORE INCOME TAXES (8,837) (4,302)
INCOME TAX EXPENSE 29 181
----------- -----------
NET LOSS ($ 8,866) ($ 4,483)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED ($ 1.15) ($ 0.58)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN CALCULATION - BASIC AND DILUTED 7,723,031 7,697,037
=========== ===========
See Notes to Consolidated Financial Statements.
4
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
Three Months Ended
September 30,
2002 2001
--------- ----------
NET LOSS ($8,866) ($4,483)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 436 1,397
------- -------
COMPREHENSIVE LOSS ($8,430) ($3,086)
======= =======
See Notes to Consolidated Financial Statements.
5
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
September 30,
2002 2001
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($8,866) ($4,483)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,854 2,624
Minority interest in net loss of subsidiaries (33) (28)
Impairment and restructuring charges 3,111 --
Gain on disposal of capital assets -- (28)
Deferred income tax expense (benefit) 3 (9)
Changes in assets and liabilities:
Customer accounts receivable 7,276 6,468
Inventories 829 (299)
Other current assets (1,837) 579
Accounts payable 1,493 (6,612)
Accrued expenses (4,203) (1,901)
Postretirement obligations other
than pension 297 243
Other 544 (237)
------- -------
Cash provided by (used in) operating activities 1,468 (3,683)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,271) (1,131)
Proceeds from sale of capital assets 12 125
Payments for purchase of stock in subsidiaries (71) --
------- -------
Cash used in investing activities (1,330) (1,006)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (52) (3,072)
Capitalized financing costs paid -- (1,015)
Net (repayments) borrowings under revolving credit facilities (565) 9,977
------- -------
Cash (used in) provided by financing activities (617) 5,890
EFFECT OF EXCHANGE RATE ON CASH 14 31
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (465) 1,232
CASH AND CASH EQUIVALENTS, Beginning of period $ 1,583 $ 1,329
------- -------
CASH AND CASH EQUIVALENTS, End of period $ 1,118 $ 2,561
======= =======
See Notes to Consolidated Financial Statements
6
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements of
Atchison Casting Corporation and subsidiaries (the "Company")
for the year ended June 30, 2002, as included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
2002.
The accompanying unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring
accruals), which, in the opinion of management, are necessary
for a fair presentation of financial position, results of
operations and cash flows. Results of operations for interim
periods are not necessarily indicative of results to be
expected for a full year.
Certain September 30, 2001 amounts have been reclassified to
conform with September 30, 2002 classifications.
2. Inventories
As of
--------------------------------------
Sept. 30, June 30,
2002 2002
---- ----
(Thousands)
Raw materials $ 6,363 $ 6,403
Work-in-process 32,744 31,572
Finished goods 9,151 10,758
Supplies 1,718 1,982
----------------- -----------------
$ 49,976 $ 50,715
================= =================
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3. Income Taxes
Income tax expense (benefit) consisted of:
Three Months Ended
September 30, 2002 2001
2002 2001
---- ----
(Thousands)
Current:
Domestic $-- $--
Foreign 26 190
----- -----
26 190
Deferred:
Domestic -- --
Foreign 3 (9)
----- -----
3 (9)
----- -----
Total $ 29 $ 181
===== =====
4. Supplemental Cash Flow Information
Three Months Ended
September 30,
2002 2001
---- ----
(Thousands)
Cash paid (received) during the period for:
Interest $ 2,001 $ 2,703
======= =======
Income Taxes $ (434) $(2,565)
======= =======
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5. Earnings Per Share
Following is a reconciliation of basic and diluted EPS.
For the three months ended September 30, 2002
- ---------------------------------------------
Weighted
Average Loss Per
Net Loss Shares Share
-------- ------ -----
Basic EPS
Loss available to
common stockholders $(8,866,000) 7,723,031 $ (1.15)
Effect of Dilutive Securities:
Options -- -- --
----------- ----------- ---------
Diluted EPS $(8,866,000) 7,723,031 $ (1.15)
=========== =========== =========
For the three months ended September 30, 2001
- ---------------------------------------------
Weighted
Average Loss Per
Net Loss Shares Share
-------- ------ -----
Basic EPS
Loss available to
common stockholders $(4,483,000) 7,697,037 $ (0.58)
Effect of Dilutive Securities:
Options -- -- --
----------- ----------- --------
Diluted EPS $(4,483,000) 7,697,037 $ (0.58)
=========== =========== ========
6. Sale of LA Die Casting, Inc. and Jahn Foundry Corp.
LA Die Casting
On February 20, 2002, the Company completed the sale of
substantially all of the net assets of LA Die Casting, Inc.
("LA Die Casting"). For the first quarter of fiscal year 2002,
LA Die Casting recorded a net loss of $42,000 on net sales of
$1.9 million.
9
Jahn Foundry
On December 20, 2001, the Company completed the sale of
substantially all of the net assets of Jahn Foundry Corp.
("Jahn Foundry"). After post-closing adjustments, the Company
received approximately $300,000 in cash, a minority ownership
position in New England Iron LLC ("New England Iron"), the
buyer, valued at $325,000 and a note (bearing interest at 6.0%
per year) for the principal amount of $475,000 amortizing over
10 years (the "New England Iron Note") in exchange for assets
and the assumption of liabilities by the buyer. The Company
recognized a loss on the sale of approximately $40,000.
For the first quarter of fiscal year 2002, Jahn Foundry
recorded a net loss of $639,000 on net sales of $1.6 million.
In October 2002, the principal owner of New England Iron
notified the Company that it planned to liquidate New England
Iron.
In the first quarter of fiscal 2003, the Company recorded
additional impairment and restructuring charges of
approximately $1.5 million in connection with the liquidation
of New England Iron. These charges include: $325,000 to write
off the Company's minority ownership position in New England
Iron, $286,000 to write-down the value of the New England Iron
Note to the Company's estimate of fair value and $900,000
relating to the guarantee of Jahn Foundry's obligations under
certain equipment lease agreements that had been sublet to New
England Iron.
7. Closure of Empire Steel Castings, Inc. and Downsizing of
LaGrange Foundry, Inc.
Empire Steel
The Company substantially completed the closure of Empire
Steel, Inc. ("Empire") by December 31, 2001, and transferred
as much work as possible to other locations. Empire was closed
as to commercial work but continues to produce one product for
the U.S. Government on an as-needed basis. For the first
quarter of fiscal years 2002 and 2003, Empire recorded net
sales of $2.2 million and $217,000, respectively, and net
losses of $687,000 and $279,000, respectively.
10
The Company terminated approximately 106 employees at Empire
and recognized a charge for severance benefits of
approximately $50,000 in fiscal 2002.
LaGrange Foundry
Following losses in fiscal 2002, the Company's Board of
Directors committed to a plan to downsize LaGrange Foundry,
Inc. ("LaGrange Foundry") to a pattern repair, maintenance and
storage operation. The Company plans to complete the
downsizing of La Grange Foundry during the second quarter of
fiscal 2003. For the first quarter of fiscal years 2002 and
2003, LaGrange recorded net sales of $4.1 million and $2.3
million, respectively, and net losses of $420,000 and
$592,000, respectively.
The Company will recognize certain other exit costs associated
with the downsizing of La Grange Foundry in fiscal 2003
related to employee termination costs. The Company will
terminate approximately 130 employees and estimates it will
recognize a charge for severance benefits of approximately
$50,000 in fiscal 2003.
8. Liquidation of Fonderie d'Autun
On April 9, 2002, the Company's French subsidiary, Fonderie
d'Autun ("Autun"), filed a voluntary petition for
reorganization with the local court in Chalons, France.
On September 19, 2002, the court appointed a liquidator to
begin the liquidation of Autun. During the fourth quarter of
fiscal 2002, the Company recorded a charge of $567,000 to
write off its remaining net investment in Autun and a charge
of $3.5 million relating to the Company's guarantee of Autun's
obligations under certain lease agreements. Effective April 1,
2002, the Company is no longer consolidating Autun's results
into its consolidated financial statements.
As a result of the court's recent decision to liquidate the
assets of Autun, it is estimated that charges for site cleanup
could total up to $8 million. Should Autun not be able to meet
the cleanup obligations, the French government might be able
to make a claim against the prior owner. The Company
guaranteed payment of certain contingent liabilities of up to
100 million French francs (currently US$15.0 million) when it
purchased
11
Autun, for the cost of environmental restoration, if
any, in the event Autun were closed and a claim was
successfully made against the prior owner. Such amount has not
been recorded in the accompanying financial statements. These
potential contingent liabilities may adversely impact the
Company's ability to proceed with its plans to achieve its
financial objectives if they become liabilities of the
Company.
For the first quarter of fiscal 2002, Autun recorded net sales
of $3.7 million and a net loss of $657,000.
9. Pending Sale of Kramer International, Inc.
The Company is negotiating the sale of substantially all of
the assets, excluding the land and buildings, of Kramer
International, Inc. ("Kramer"). There can no assurance that a
definitive agreement will ultimately be executed. If executed
and consummated, it is anticipated that this transaction will
close during the second quarter of fiscal 2003.
If the first quarter of fiscal 2003, the Company recognized an
impairment charge of $1.6 million to write-down the carrying
amount of the goodwill at Kramer to the Company's estimate of
fair value. The Company considered its decision to realign its
operations, resulting in its intent to dispose of Kramer as
the primary indicator of impairment. Prior to the impairment
charge, the goodwill had a carrying value of $3.2 million. For
the first quarter of fiscal years 2002 and 2003, Kramer
recorded net sales of $2.7 million and $2.2 million,
respectively, and net income of $335,000 and $157,000,
respectively.
As of September 30, 2002, Kramer had total assets of
approximately $5.9 million, consisting of approximately $1.6
million of accounts receivable; $865,000 of inventory;
approximately $1.7 million of property, plant and equipment,
net; and approximately $1.6 million of goodwill; and total
liabilities of approximately $1.3 million, consisting of
approximately $831,000 of accounts payable and approximately
$500,000 of accrued expenses.
10. New Accounting Standards
The FASB recently issued SFAS No. 142 "Goodwill and Other
Intangible Assets;" SFAS No. 143 "Accounting for Asset
Retirement Obligations;" SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets;" SFAS No. 145
12
"Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections;" and SFAS
No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 142 requires that, upon
adoption, amortization of goodwill will cease and instead, the
carrying value of goodwill will be evaluated for impairment on
an annual basis. Pro forma net income for the first quarter of
fiscal 2002 excluding the amortization of goodwill was not
significantly different. Identifiable intangible assets will
continue to be amortized over their useful lives and
periodically reviewed for impairment. SFAS No. 143 establishes
accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the
associated asset retirement cost. SFAS No. 144 supercedes SFAS
No 121 and establishes accounting standards for long-lived
assets and long-lived assets to be disposed of. SFAS No. 145
rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt" and an amendment of that
statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also
rescinds FASB Statement No. 44. SFAS No. 145 amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue 94-3,
"Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", and requires that
a liability for a cost associated with an exit or disposal
activity be recognized when a liability is incurred rather
than be recognized at the date of an entity's commitment to an
exit plan under EITF Issue 94-3.
The Company adopted SFAS Nos. 142, 143, 144 and 145 effective
July 1, 2002, and will adopt SFAS No. 146 on January 1, 2003.
The adoption of SFAS Nos. 143 and 145 did not have a
significant effect on the Company's financial statements, and
the Company believes that the adoption of SFAS No. 146 will
not have a significant effect on the Company's financial
statements. SFAS No. 142 requires that an impairment analysis
must be completed within six months of adoption. The Company
must complete the analysis by December 31, 2002. If the
analysis
13
indicates that the goodwill is impaired, writedowns will be
necessary once the amount can be determined, but no later than
June 30, 2003. The adoption of SFAS No. 144 did not affect the
Company's financial statements for the first quarter. However,
the pending sale of Kramer (see note 9) and the sale or
reclassification as held for sale of other facilities may
affect the second quarter and future periods. Among other
things, the Company's statements of operations will be recast
to reflect the operations of facilities sold or held for sale
as discontinued operations. In addition, facilities meeting
the held for sale criteria of SFAS No. 144 must be recorded at
the lower of cost or fair value, net of costs of disposal.
11. Financing Arrangements
In September 2001, Atchison Casting UK Limited ("ACUK"), a
subsidiary of the Company, ACUK's subsidiaries, and Burdale
Financial Limited ("Burdale") entered into the Facility
Agreement. This Facility Agreement provides for a facility of
up to 25,000,000 British pounds (approximately $39.0 million
US), subject to certain eligibility calculations, to be used
to fund working capital requirements at Sheffield Forgemasters
Group Limited ("Sheffield"), a subsidiary of ACUK. In
addition, the Facility Agreement provides security for
Sheffield's foreign currency exchange contracts and
performance bond commitments. This facility matures on
September 17, 2004 and is secured by substantially all of
Sheffield's assets in the U.K. Loans under this Facility
Agreement bear interest at LIBOR plus 2.60% (7.19% at
September 30, 2002). As of September 30, 2002, ACUK had drawn
approximately $15.4 million under the Facility Agreement. The
Facility Agreement contains several covenants, which, among
other things, require ACUK to maintain balances under certain
eligibility levels.
On October 29, 2002, ACUK entered into an amendment of its
Facility Agreement to, among other things (a) impose a limit
of 10,750,000 British pounds (approximately $16.8 million US)
on the aggregate sum at any time of (i) outstanding revolving
loans from Burdale to ACUK plus (ii) accounts receivable
purchased from ACUK by Burdale that are not collected (there
had previously been no collective limit, though outstanding
loans and uncollected receivables each were, and continue to
be, subject to independent maximum amounts) and (b) add
minimum monthly cash flow and net income covenants and a
minimum tangible net worth covenant.
14
Management believes ACUK will not be in compliance with those
covenants based on results of operations for October and
accordingly, has classified the outstanding borrowings as
current in the accompanying consolidated balance sheet as of
September 30, 2002.
On July 31, 2002, the Company entered into the Thirteenth
Amendment and Forbearance Agreement to the Company's revolving
credit facility with Harris Trust and Savings Bank, as agent
for several lenders (the "Credit Agreement"), and the Tenth
Amendment and Forbearance Agreement to a note purchase
agreement under which the Company issued senior notes to an
insurance company (the "Note Purchase Agreement"). These
amendments, as modified, provided that these lenders would
forbear from enforcing their rights with respect to certain
existing defaults through October 17, 2002. Among other
things, these amendments provided that the Company would
solicit offers for purchase or develop disposition plans for
certain subsidiaries and will engage a consulting firm to
prepare a valuation analysis and recommended disposition
strategy for the Company's U.K. subsidiaries. In addition, new
covenants regarding minimum cumulative earnings before
interest, taxes, depreciation and amortization, capital
expenditures and operating cash flow were added.
On October 17, 2002, the Company entered into the Fourteenth
Amendment and Forbearance Agreement to the Credit Agreement
and the Eleventh Amendment and Forbearance Agreement to the
Note Purchase Agreement. These amendments provide that these
lenders (such lenders, collectively, the "Harris Lenders")
will forbear from enforcing their rights with respect to
certain existing defaults through April 3, 2003, subject to
certain events that could cause an earlier termination of this
forbearance period. In exchange, the Company agreed, among
other things, (i) to engage an investment banker to solicit
offers on Inverness Castings Group, Inc. ("Inverness"); and
(ii) to prepay the Harris Lenders' loans in amounts equal to
$4.0 million by January 31, 2003 and an additional $7.0
million by February 28, 2003, which the Company is striving to
satisfy out of the net proceeds from asset sales (other than
inventory and Inverness) and tax refunds. In addition, if new
financial covenants are not agreed upon by November 30, 2002,
the forbearance period may be terminated.
On October 17, 2002, the Company entered into a Forbearance
Agreement and Second Amendment to the Master Security
15
Agreement and Note with General Electric Capital Corporation,
as agent for certain participant lenders (such lenders,
collectively, the "GE Lenders"). This amendment provides that
the GE lenders will forbear from enforcing their rights with
respect to certain existing defaults through June 29, 2003,
subject to earlier termination upon the occurrence of certain
defaults. If minimum financial performance levels are achieved
as of June 30, 2003, the forbearance period will be extended
an additional three months. The forbearance period will be
extended another three months, until December 29, 2003, if the
Company achieves minimum financial performance levels as of
September 30, 2003. The GE Lenders also agreed to allow the
Company to make only interest payments through the end of the
forbearance period. In exchange, the Company has agreed to
increase the interest rate 25 basis points to 9.30% per year.
The termination of the forbearance period in any of the Credit
Agreement, Note Purchase Agreement or the Master Security
Agreement can result in the termination of the other
agreements. In addition, default under the Facility Agreement
could result in the termination of the Credit Agreement and
the Note Purchase Agreement, and in turn, the GE Financing.
The Company is currently negotiating with new and existing
lenders to extend its current arrangements while it attempts
to establish a new credit facility with covenants that the
Company believes it will be able to satisfy and with
additional borrowing capacity. There are no assurances the
Company will be able to establish a new facility.
12. Contingencies
An accident involving an explosion and fire occurred on
February 25, 1999 at Jahn Foundry, located in Springfield,
Massachusetts. Nine employees were seriously injured and there
were three fatalities.
A civil action has commenced in the Massachusetts Superior
State Court on behalf of the estates of deceased workers,
their families, injured workers, and their families against
the supplier of a chemical compound used in Jahn Foundry's
manufacturing process. The supplier of the chemical compound,
Borden Chemical, Inc., filed a Third Party Complaint against
Jahn Foundry in the Massachusetts Superior State Court on
February 2, 2000 seeking indemnity for any liability it has to
the plaintiffs in the civil action. The Company's
comprehensive
16
general liability insurance carrier has retained counsel on
behalf of Jahn Foundry and the Company and is aggressively
defending Jahn Foundry in the Third Party Complaint. It is too
early to assess the potential liability to Jahn Foundry for
the Third Party Complaint, which in any event the Jahn Foundry
would aggressively defend. In addition, Jahn Foundry has
brought a Third Party Counterclaim against Borden and the
independent sales representative of the chemical compound,
J.R. Oldhan Company, seeking compensation for losses sustained
in the explosion, including amounts covered by insurance.
The Company dismissed Deloitte & Touche LLP as its auditor on
April 16, 2002. On July 26, 2002, the Company filed a
complaint against Deloitte in Philadelphia County,
Pennsylvania for negligence, professional malpractice,
negligent misrepresentation and breach of contract. The
Company believes that Deloitte breached its duties to perform
audit and consulting services by failing to act with
reasonable and ordinary care, with the ordinary skill and
diligence of the accounting profession, and in the conformity
with the professional standards such as generally accepted
auditing standards and generally accepted accounting
principles. Deloitte filed a counterclaim against the Company
on September 13, 2002 alleging that the Company was aware of
information related to improper activities of certain
employees at the Pennsylvania Foundry Group and failed to
disclose such information to Deloitte. On September 24, 2002,
Deloitte filed a third party claim against certain officers
and employees of the Company and others alleging, among other
things, that such officers and employees withheld material
information in connection with such improper activities. The
Company believes that Deloitte's claims against it and the
Company's officers and employees have no merit and will
vigorously defend itself.
The Occupational Safety and Health Administration (OSHA) cited
the Company on September 26, 2002 for 95 alleged violations of
Federal Safety and Health regulations at its Atchison, Kansas
foundry. OSHA sought penalties totaling $250,000 in connection
with the alleged violations. At OSHA's invitation, the Company
engaged in settlement negotiations with the agency over the
alleged violations. During the course of settlement
discussions, OSHA withdrew some citations it had classified as
"serious," reclassified some "serious" citations to the
category "other-than-serious," and declined to withdraw or
modify other citations. The parties entered into two Informal
17
Settlement Agreements with OSHA whereby OSHA reduced its
proposed penalty to $50,000 and the Company agreed to
undertake, within one year, abatement of certain conditions
relating to the remaining citations. By entering into the
Informal Settlement Agreements, the Company did not admit that
it violated the cited standards for any litigation or purpose
other than a subsequent proceeding under the Occupational
Safety and Health Act. No subsequent proceeding is pending or
anticipated by the Company at this time. The Company is not
able to accurately predict the cost of abatement, but believes
it may be as low as approximately $400,000 and as high as
approximately $1.0 million.
13. Financial Results and Management's Plans
In fiscal 2002, the Company incurred pretax losses of $35.0
million ($29.8 million excluding an impairment charge related
to LaGrange Foundry of $5.2 million), and as of September 30,
2002, the Company has not been in compliance with certain
financial covenants included in its debt agreements.
To address these conditions, management has taken or is in the
process of taking the following actions:
OPERATIONS
The Company closed four unprofitable foundries since the
beginning of fiscal 2001 and is in the process of downsizing
LaGrange Foundry. Operations from these five foundries have
been a significant factor in the Company's pretax losses,
producing a combined pretax loss of $12.2 million ($7.0
million before impairment charges of $5.2 million) in fiscal
2002. Management has transferred or expects to transfer a
portion of the work previously performed by these foundries to
other foundries, thereby increasing the utilization and
profitability of these other foundries.
SOLICITATION OF OFFERS ON FOUR SUBSIDIARY OPERATIONS
The Company is currently soliciting offers for the purchase of
four subsidiary operations. ACC is marketing directly or has
engaged investment bankers to obtain offers on the following
subsidiaries:
o Kramer International, Inc. (see Note 9)
o The G&C Foundry Company
18
o Canada Alloy Castings, Ltd.
o Inverness Casting Group, Inc.
If acceptable offers are made, the Company expects that the
sales of the operations could be completed by the end of
fiscal 2003. Any net proceeds will be used primarily to retire
outstanding indebtedness.
To effect the business model discussed below, the Company must
improve its financial condition. Part of the effort includes
assessing various opportunities to reduce indebtedness. While
each of these four subsidiaries brings certain strengths or
capabilities to the Company, they either do not fit well with
the new business model or are not ones in which the Company
has elected to direct its resources at this time. However, if
acceptable offers are not made, the Company will continue to
work on improving these and all of the Company's operations,
and renegotiating outstanding indebtedness.
NEW BUSINESS MODEL
To continue as a going concern, attain profitability, and
increase market share, management has refined the Company's
business model, consisting of the following key components:
o Narrow the customer focus to industrial manufacturers, who
desire to outsource more manufacturing every year, and the
product focus to complex, highly engineered castings.
o Grow through more value-added business, such as machining
and assembly.
o More effectively use casting design and simulation
technology throughout the Company.
o Expand ACC Global, a recently formed division devoted to
foreign sourcing of castings for customers seeking lower cost
global suppliers. ACC Global can provide a customer service by
managing this process.
The Company believes the success of this new business model
depends on improving its financial condition. To accomplish
this, the Company must (1) restructure its debt with current
or new lenders, and (2) assess each location as to its
contribution and develop a plan of disposition or closure if
acceptable results in the near term are not feasible.
The Company expects that any future growth will result
primarily through increasing value-added capability. The
Company also
19
hopes to grow through ACC Global as well. For instance, joint
ventures with companies identified by ACC Global in low labor
cost countries could give rise to a blended source of metal
components to industrial manufacturers.
While the Company believes this new business model represents
a viable plan to achieve its financial objectives, there are
no assurances that such plans can be executed as designed or
that execution thereof will result in achievement of the
Company's financial objectives. In addition, the Company's
potential contingent liabilities, may adversely impact the
Company's ability to proceed with its plans if they become
liabilities of the Company.
DOWNSIZING OF LA GRANGE FOUNDRY INC.
Following losses in fiscal 2002, the Company's Board of
Directors committed to a plan to downsize La Grange Foundry to
a pattern repair, maintenance, and storage operation. The
Company plans to complete the downsizing of La Grange Foundry
during the second quarter of fiscal 2003.
OTHER ACTIONS
Certain of the existing loan arrangements will need to be
revised or replaced to provide the Company with additional
borrowing capacity and with financial covenants that are
achievable by the Company. Management is currently in
negotiations with various financial institutions to extend,
renegotiate or replace the current credit agreements with a
long-term credit facility, but there can be no assurance that
management will be successful in these negotiations.
20
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations:
Net sales for the first quarter of fiscal 2003 were $80.6 million, representing
a decrease of $19.0 million, or 19.1%, from net sales of $99.6 million in the
first quarter of fiscal 2002. Since the beginning of fiscal 2002, Atchison
Casting Corporation (the "Company") has completed the closure of one operation,
the sale of two operations, placed one operation into liquidation, and is in the
process of downsizing one operation. These operations generated net sales of
$13.5 million and $2.5 million in the first quarter of fiscal 2002 and fiscal
2003, respectively, as follows:
FY02 1st Qtr FY03 1st Qtr
Operation Net Sales Net Sales
--------- --------- ---------
Sale of Jahn Foundry Corp. $1.6 million --
Closure of Empire Steel Castings, Inc. 2.2 million $0.2 million
Sale of Los Angeles Die Casting, Inc. 1.9 million --
Liquidation of Fonderie d'Autun 3.7 million --
Downsizing of LaGrange Foundry, Inc. 4.1 million 2.3 million
------------ ------------
$13.5 million $2.5 million
============ ============
Excluding net sales generated by the above operations, net sales for the first
quarter of fiscal 2003 were $78.1 million, representing a decrease of $8.0
million, or 9.3%, from net sales of $86.1 million in the first quarter of fiscal
2002. This 9.3% decrease in net sales was due primarily to decreases in net
sales to the mining, power generation and steel markets partially offset by
increases in net sales to the military market. Sheffield Forgemasters Group
Limited's ("Sheffield") net sales for the first quarter of fiscal 2003 decreased
$4.5 million from net sales in the first quarter of fiscal 2002, reflecting
lower net sales to the steel market.
Gross profit for the first quarter of fiscal 2003 decreased $1.9 million, or
25.7%, to $5.5 million, or 6.8% of net sales, compared to $7.4 million, or 7.5%
of net sales, for the first quarter of fiscal 2002. The decrease in gross profit
and gross profit as a percentage of net sales was primarily due to a change in
product mix toward products which have a lower gross profit as a percentage of
net sales at the Company's subsidiaries serving the automotive and rail markets
and reduced gross profits at Sheffield and La Grange Foundry Inc. ("LaGrange").
Partially offsetting these factors was the reduction of gross losses incurred at
the operations closed, sold or liquidated since the beginning of fiscal 2002. In
addition, decreased fuel costs increased gross profit by approximately $842,000
in the first quarter of fiscal 2003 compared to the prior year period.
The gross profit at Sheffield in the first quarter of fiscal 2003 decreased $1.1
million, to a gross profit of $971,000, or 4.1% of net sales, compared to a
gross profit of $2.1 million,
21
or 7.3% of net sales, in the first quarter of fiscal 2002, primarily reflecting
the impact of the strong British pound and the competitive environment of the
markets served by Sheffield on quoted margins. The gross loss at La Grange in
the first quarter of fiscal 2003 increased $319,000, to a gross loss of
$355,000, or 15.7% of net sales, compared to a gross loss of $36,000, or 0.9% of
net sales, in the first quarter of fiscal 2002, reflecting the lower absorption
of overhead resulting from reduced volumes from LaGrange's primary customer,
Gardner Denver Machinery, Inc. Offsetting these factors was a decrease in the
gross losses at the operations closed, sold or liquidated since the beginning of
fiscal 2002 by an aggregate of $416,000 from the gross losses at these locations
in the first quarter of fiscal 2002.
Selling, general and administrative expense ("SG&A") for the first quarter of
fiscal 2003 was $8.8 million, or 10.9% of net sales, compared to $9.2 million,
or 9.2% of net sales, in the first quarter of fiscal 2002. SG&A expense in the
first quarter of fiscal 2003 at the facilities the Company has closed, sold or
liquidated since the beginning of fiscal 2002 decreased by an aggregate of
approximately $1.2 million from SG&A expenses in the first quarter of fiscal
2002. Included in the first quarter of fiscal 2002 was a net gain of
approximately $1.0 million to record the Company's foreign exchange contracts
and related foreign denominated receivables at fair value. Also included in the
first quarter of fiscal 2002 and fiscal 2003 were expenses of approximately
$720,000 and $935,000, respectively, incurred by the Company in pursuing various
options to refinance its bank credit facility.
The Company has recorded intangible assets, consisting of goodwill, in
connection with certain of the Company's acquisitions. The Company adopted SFAS
No. 142 "Goodwill and Other Intangible Assets" as of July 1, 2002. SFAS No. 142
requires that, upon adoption, amortization of goodwill cease and instead, the
carrying value of goodwill be evaluated for impairment on an annual basis.
Accordingly, there was no amortization of goodwill in the first quarter of
fiscal 2003. Amortization of goodwill for the first quarter of fiscal 2002 was
$307,000, or 0.3% of net sales. The Company had also recorded a liability,
consisting of the excess of acquired net assets over cost ("negative goodwill"),
in connection with the acquisition of Fonderie d'Autun ("Autun"). The
amortization of negative goodwill was a credit to income in the first quarter of
fiscal 2002 of $401,000, or 0.4% of net sales. Pro forma net income for the
first quarter of fiscal 2002 excluding the amortization of goodwill was not
significantly different.
The Company substantially completed the closure of Empire by in 2001, and
transferred as much work as possible to other locations. Empire was closed as to
commercial work, but continues to produce one product for the U.S. Government on
an as-needed basis. For the first quarter of fiscal years 2002 and 2003, Empire
recorded net sales of $2.2 million and $217,000, respectively, and net losses of
$687,000 and $279,000, respectively.
On February 20, 2002, the Company completed the sale of substantially all of the
net assets of LA Die Casting, Inc. ("LA Die Casting"). After post-closing
adjustments, the Company received approximately $3.5 million in cash and a note
for the principal
22
amount of $259,000 due in two years in exchange for assets and the assumption of
liabilities by the buyer. The note bears interest at the rate of 6.0% per year
and requires quarterly payments of interest only during the two-year period. The
Company recognized a loss on the sale of approximately $169,000. For the first
quarter of fiscal year 2002, LA Die Casting recorded net sales of $1.9 million,
and a net loss of $42,000.
On December 20, 2001, the Company completed the sale of substantially all of the
net assets of Jahn Foundry. After post-closing adjustments, the Company received
approximately $300,000 in cash, a minority ownership position in the New England
Iron LLC ("New England Iron"), the buyer, valued at $325,000 and a note (bearing
interest at 6.0% per year) for the principal amount of $475,000 amortizing over
ten years in exchange for assets and the assumption of liabilities by the buyer.
The Company recognized a loss of the sale of approximately $40,000. For the
first quarter of fiscal year 2002, Jahn Foundry recorded net sales of $1.6
million, and a net loss of $639,000.
In October 2002, the principal owner of New England Iron notified the Company
that it planned to liquidate New England Iron.
In the first quarter of fiscal 2003, the Company recorded charges of
approximately $1.5 million in connection with the liquidation of New England
Iron. These charges include: $325,000 to write off the Company's minority
ownership position in New England Iron, $286,000 to write-down the value of the
New England Iron promissory note to the Company's estimate of fair value and
$900,000 relating to the guarantee of Jahn Foundry's obligations under certain
equipment lease agreements that had been sublet to New England Iron.
If the first quarter of fiscal 2003, the Company recognized an impairment charge
of $1.6 million to write-down the carrying amount of the goodwill at Kramer to
the Company's estimate of fair value. The Company considered its decision to
realign its operations, resulting in its intent to dispose of Kramer as the
primary indicator of impairment. Prior to the impairment charge, the goodwill
had a carrying value of $3.2 million. For the first quarter of fiscal years 2002
and 2003, Kramer recorded net sales of $2.7 million and $2.2 million,
respectively, and net income of $335,000 and $157,000, respectively.
Interest expense for the first quarter of fiscal 2003 was $2.5 million, or 3.1%
of net sales, compared to $2.7 million, or 2.7% of net sales, in the first
quarter of fiscal 2002. The decrease in interest expense primarily reflects
lower average levels of outstanding indebtedness.
The Company recorded income tax expense of $181,000 and $29,000 in the first
quarter fiscal 2002 and fiscal 2003, respectively. Due to the Company's current
income tax position, no income tax benefit was recorded in connection with the
losses incurred by the Company in the United States and Europe.
As a result of the foregoing, the net loss for the first quarter of fiscal 2003
was $8.9 million compared to a net loss of $4.5 million for the first quarter of
fiscal 2002.
23
Liquidity and Capital Resources:
Cash provided by operating activities for the first quarter of fiscal 2003 was
$1.5 million, compared to cash used in operations of $3.7 million for the first
quarter of fiscal 2002. This increase was primarily attributable to changes in
trade payable balances.
Working capital was a negative $69.8 million at September 30, 2002, as compared
to a negative $51.9 million at June 30, 2002. The change in working capital
levels primarily reflects a decrease in trade receivable balances and the
reclassification of $15.4 million in debt under the Facility Agreement as
current at September 30, 2002. The working capital levels also reflect the
classification of $84.1 million and $89.5 million of the Company's bank credit
facility, term loan and senior notes as current at September 30, 2002 and June
30, 2002, respectively. The Company is not in compliance with certain financial
covenants under the Credit Agreement, Note Purchase Agreement, Facility
Agreement and the GE Financing, as defined below, and, accordingly, such amounts
have been classified as current liabilities.
During the first three months of fiscal 2003, the Company made capital
expenditures of $1.3 million, as compared to $1.1 million for the first three
months of fiscal 2002. The capital expenditures in both periods were used for
routine projects at the Company's facilities.
As discussed above, the Company has sold substantially all of the net assets of
Jahn Foundry and LA Die Casting. The Company is currently marketing directly or
has engaged investment bankers to obtain offers on the following subsidiaries:
o Kramer International, Inc.
o The G&C Foundry Company
o Canada Alloy Castings, Ltd.
o Inverness Castings Group, Inc.
Should acceptable offers be made, the Company expects that the sales of the
operations could be completed by the end of fiscal 2003. Any net proceeds will
be used primarily to retire outstanding indebtedness.
Kramer International, located in Milwaukee, Wisconsin, specializes in the
casting of iron, steel and non-ferrous pump impellers. Kramer currently employs
approximately 90 people, and generated net sales of approximately $10.3 million
in fiscal 2002.
The G&C Foundry Company, located in Sandusky, Ohio, manufactures gray and
ductile iron castings for hydraulic applications. G&C currently employs
approximately 150 people, and generated net sales of approximately $13.6 million
in fiscal 2002.
Canada Alloy, located in Kitchener, Ontario, Canada, manufactures stainless,
carbon and alloy castings for a variety of markets. Canada Alloy currently
employs
24
approximately 130 people, and generated net sales of approximately $13.6
million in fiscal 2002.
Inverness Castings Group, located in Dowagiac, Michigan, manufactures aluminum
die castings for the automotive, furniture and appliance markets. Inverness
currently employs approximately 270 people, and generated net sales of
approximately $51.3 million in fiscal 2002.
The Company has four primary credit facilities: a revolving credit facility with
Harris Trust and Savings Bank, as agent for several lenders (the "Credit
Agreement"); senior notes (the "Notes") with an insurance company issued under a
note purchase agreement (the "Note Purchase Agreement"); a term loan with
General Electric Capital Corporation (the "GE Financing"); and a receivables
program combined with a revolving credit facility with Burdale Financial Limited
pursuant to a facility agreement (the "Facility Agreement"). Each of these
facilities require compliance with various covenants, including, but not limited
to, financial covenants related to equity levels, cash flow requirements, fixed
charge coverage ratios and ratios of debt to equity.
The Credit Agreement, as amended, currently consists of a $69.1 million
revolving credit facility. Asset sales and tax refunds have been used to reduce
indebtedness. In addition to financial covenants, the Credit Agreement contains
restrictions on, among other things, acquisitions, additional indebtedness and
the use of net proceeds from the sale of assets (other than inventory),
insurance settlements and other non-recurring items. Secured by substantially
all of the Company's North American assets and a pledge of ACUK's stock, loans
under this revolving credit facility bear interest at fluctuating rate of the
agent bank's corporate base rate plus 2.0% (6.75% at September 30, 2002).
At September 30, 2002, Notes with an aggregate principal amount of $10.2 million
were outstanding with interest accruing at 10.44% per year. The Note Purchase
Agreement provides for annual principal payments of $2.9 million. The Company
did not make principal payments due on July 31, 2001 and July 31, 2002. The
Notes are secured by the same assets that secure the Credit Agreement and
contain similar restrictions to those described above under the Credit
Agreement.
On July 31, 2002, the Company entered into the Thirteenth Amendment and
Forbearance Agreement to the Credit Agreement and the Tenth Amendment and
Forbearance Agreement to the Note Purchase Agreement. These amendments, as
modified, provided that these lenders would forbear from enforcing their rights
with respect to certain existing defaults through October 17, 2002. Among other
things, these amendments provided that the Company will solicit offers for
purchase or develop disposition plans for certain subsidiaries and will engage a
consulting firm to prepare a valuation analysis and recommended disposition
strategy for the Company's U.K. subsidiaries. New covenants regarding minimum
cumulative earnings before interest, taxes, depreciation and amortization,
capital expenditures and operating cash flow were added.
25
On October 17, 2002, the Company entered into the Fourteenth Amendment and
Forbearance Agreement to the Credit Agreement and the Eleventh Amendment and
Forbearance Agreement to the Note Purchase Agreement. These amendments provide
that these lenders (such lenders, collectively, the "Harris Lenders") will
forbear from enforcing their rights with respect to certain existing defaults
through April 3, 2003, subject to certain events that could cause an earlier
termination of this forbearance period. In exchange, the Company agreed, among
other things, (i) to engage an investment banker to solicit offers on Inverness;
and (ii) to prepay the Harris Lenders' loans in amounts equal to $4.0 million by
January 31, 2003 and an additional $7.0 million by February 28, 2003, which the
Company is striving to satisfy out of the net proceeds from asset sales (other
than inventory and Inverness) and tax refunds. In addition, if new financial
covenants are not agreed upon by November 30, 2002, the forbearance period may
be terminated.
At September 30, 2002, the balance of the term loan under the GE Financing was
$26.5 million. The GE Financing is secured by certain of the Company's fixed
assets, real estate, equipment, furniture and fixtures located in Atchison,
Kansas and St. Joseph, Missouri, matures in December 2004 and currently bears
interest at a fixed rate of 9.30% per year.
On October 17, 2002, the Company entered into the Second Amendment to the Master
Security Agreement and Note with the GE Lenders. This amendment provides that
the GE Lenders will forbear from enforcing their rights with respect to certain
existing defaults through June 29, 2003, subject to earlier termination upon the
occurrence of certain defaults. If minimum financial performance levels are
achieved as of June 30, 2003, the forbearance period will be extended an
additional three months. The forbearance period will be extended another three
months, until December 29, 2003, if the Company achieves minimum financial
performance levels as of September 30, 2003. The GE Lenders also agreed to allow
the Company to make only interest payments through the end of the forbearance
period. In exchange, the Company has agreed to increase the interest rate 25
basis points to 9.30% per year.
The termination of the forbearance period in any of the Credit Agreement, Note
Purchase Agreement or the Master Security Agreement can result in the
termination of the other agreements.
In September 2001, ACUK, a subsidiary of the Company, ACUK's subsidiaries, and
Burdale Financial Limited ("Burdale") entered into the Facility Agreement. This
Facility Agreement provides for a facility of up to 25,000,000 British pounds
(approximately $39.0 million US), subject to certain eligibility calculations,
to be used to fund working capital requirements at Sheffield, a subsidiary of
ACUK. In addition, the Facility Agreement provides security for Sheffield's
foreign currency exchange contracts and performance bond commitments. This
facility matures on September 17, 2004 and is secured by substantially all of
Sheffield's assets in the U.K. Loans under this Facility Agreement bear interest
at LIBOR plus 2.60% (7.19% at September 30, 2002). As of
26
September 30, 2002, ACUK had drawn approximately $15.4 million under the
Facility Agreement. The Facility Agreement contains several covenants, which,
among other things, require ACUK to maintain balances under certain eligibility
levels.
On October 29, 2002, ACUK entered into an amendment of its Facility Agreement
to, among other things, (a) impose a limit of 10,750,000 British pounds
(approximately $16.8 million US) on the aggregate sum at any time of (i)
outstanding revolving loans from Burdale to ACUK plus (ii) accounts receivable
purchased from ACUK by Burdale that are not collected (there had previously been
no collective limit, though outstanding loans and uncollected receivables each
were, and continue to be, subject to independent maximum amounts) and (b) add
minimum monthly cash flow and net income covenants and a minimum tangible net
worth covenant.
Management believes ACUK will not be in compliance with those covenants based on
results of operations for October and accordingly, has classified the
outstanding borrowings as current in the accompanying consolidated balance sheet
as of September 30, 2002.
The Company is in default under the Credit Agreement, Note Purchase Agreement
and the GE Financing. To date, the lenders have not enforced their rights with
respect to certain events of default, but there can be no assurance that they
will not do so in the future. During much of fiscal 2001, fiscal 2002 and to
date in fiscal 2003, the Company borrowed the full amount of the revolving
credit facility under the Credit Agreement and managed its cash position
accordingly. To date, the Company has been able to meet its cash needs by
traditional cash management procedures in addition to: (1) the collection of tax
refunds resulting from operating losses at U.S. operations, (2) accelerated
collections of receivables from certain longstanding customers from time to
time, (3) the reduction of expenses after closing, selling and downsizing
locations operating with a negative cash flow, (4) the reduction of
discretionary capital expenditures, and (5) funds available through the Facility
Agreement, particularly for its operations in the U.K. The Company is also
seeking the recovery under various insurance policies for losses due to the
accounting irregularities at the Pennsylvania Foundry Group and the industrial
accident at Jahn Foundry. In addition, the Company is pursuing other responsible
parties. There can be no assurance that such actions will be successful in
recovering funds or that they will allow the Company to operate without
additional borrowing capacity.
Compliance with certain financial covenants under the Credit Agreement, Note
Purchase Agreement and the GE Financing is determined on a
"trailing-twelve-month" basis. The results through September were below results
needed to achieve compliance with these covenants under the Credit Agreement,
Note Purchase Agreement and the GE Financing. Accordingly, the Company is
currently negotiating with new and existing financial institutions to extend its
current arrangements while it attempts to establish a new credit facility with
covenants that the Company believes it will be able to satisfy with additional
borrowing capacity. During the past several years, the Company has been able to
negotiate operating flexibility with its lenders, although
27
future success in achieving any such renegotiations or refinancings, or the
specific terms thereof, including interest rates, capital expenditure limits or
borrowing capacity, cannot be assured. The Company believes that its operating
cash flow and amounts available for borrowing under its existing credit facility
will be adequate to fund its capital expenditure and working capital
requirements in North America through April 3, 2003, the maturity date of the
current forbearance agreements under the Credit Agreement and Note Purchase
Agreement. The Company will need to refinance or extend these agreements to
satisfy its liquidity needs. However, the level of capital expenditure and
working capital requirements may be greater than currently anticipated as a
result of unforeseen expenditures such as compliance with environmental laws and
the accident at Jahn Foundry. If the Company fails to amend its financial
covenants on terms favorable to the Company, the Company will continue to be in
default under such covenants. Accordingly, the lenders could accelerate the debt
under the Credit Agreement, which, in turn, would permit acceleration of the
Notes under the Note Purchase Agreement and the indebtedness under the GE
Financing. If the lenders accelerate their indebtedness and the Company is
unable to locate alternative sources of financing, the Company may be forced to
seek protection under the federal bankruptcy laws.
The liquidity position of Sheffield in the U.K. is tighter than the Company's
liquidity in North America. Management of Sheffield does not believe that
results of operations in October will satisfy the covenants under the Facility
Agreement. If Sheffield is unable to amend the financial covenants or convince
Burdale to forbear from enforcing its rights with respect to this default,
Burdale could accelerate the debt under the Facility Agreement, in which case,
Sheffield would be forced to consider all available strategic alternatives,
including selling all or portions of Sheffield, protection under the bankruptcy
laws of the U.K, or an orderly wind-down or liquidation, in which case the
Company's investment in Sheffield would likely be lost. At September 30, 2002,
the Company's net investment in Sheffield was approximately $63.7 million. Based
on the Company's valuation analysis, management of Sheffield does not believe
that it would be able to sell all or portions of the business on terms that
would satisfy all of its creditors. A default under the Facility Agreement could
result in acceleration of indebtedness under the Credit Agreement and Note
Purchase Agreement and, in turn, the GE Financing.
Total indebtedness of the Company at September 30, 2002 was $118.0 million, as
compared to $118.6 million at June 30, 2002. This decrease primarily reflects a
reduction in outstanding balances under the Company's revolving credit facility.
At September 30, 2002, the Company had approximately $1.8 million available for
borrowing under its revolving credit facility under the Credit Agreement and the
Facility Agreement was fully borrowed.
At September 30, 2002, the Company had the following contractual cash
obligations and other commitments:
28
(in millions) Fiscal Fiscal Fiscal Fiscal Fiscal
Total 2003 2004 2005 2006 2007 Thereafter
------------ ----------- ----------- ------------ ----------- ----------- -------------
Long-term debt $118.0 $111.5 $.3 $.4 $.4 $.3 $5.1
Operating leases 19.3 5.3 4.9 4.0 2.7 1.5 .9
Lease guarantees 3.5 3.5 - - - - -
------------ ----------- ----------- ------------ ----------- ----------- -------------
Total $140.8 $120.3 $5.2 $4.4 $3.1 $1.8 $6.0
============ =========== =========== ============ =========== =========== =============
In addition, the Company had $4.0 million of outstanding letters of credit as of
September 30, 2002.
As described above the Company is in violation of various financial covenants of
certain of its indebtedness. The Company has entered into amendments and
forbearance agreements, which expire in the near term, and, accordingly, such
borrowings have been classified as current liabilities in the consolidated
financial statements and the table above. In addition, the Company guaranteed
certain operating lease obligations of Autun and Jahn Foundry. The guarantees
related to Autun may be called by the lessors and, accordingly, are included in
the 2003 column above.
For a description of material legal proceedings, see Note 12 to the Consolidated
Financial Statements above, and Part II, Item 1 "Legal Proceedings" below.
Deloitte & Touche LLP ("Deloitte") has withdrawn its report dated September 28,
2001 covering the Company's consolidated financial statements as of June 30,
2001 and 2000 and for the years in the three year period ended June 30, 2002. As
a result, information presented herein as of June 30, 2001 is marked as
unaudited. Management believes that the consolidated financial statements
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as of June 30, 2001 and 2000, and the results of operations
and cash flows for each of the years in the three year period ended June 30,
2001. The Company is considering its options with respect to re-auditing the
fiscal years in question.
Critical Accounting Policies
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company believes its critical accounting policies are as follows:
o Valuation of long-lived assets and goodwill
o Estimation of potential warranty claims
o Workers' compensation and health insurance reserves
o Pension cost and prepaid pension cost
o Accounting for income taxes
29
Valuation of Long-lived Assets and Goodwill
The Company assesses the impairment of identifiable long-lived assets and
goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which
could trigger an impairment review include the following:
o significant changes in the strategy of the Company's overall business;
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the sales levels with the key customers served
by any subsidiary; and
o significant negative industry or economic trends.
When it is determined that the carrying value of long-lived assets and
goodwill may not be recoverable based upon the existence of one or more of
the above indicators of impairment, the Company projects the undiscounted
cash flow expected to be derived from such asset. The carrying value of a
long-lived asset or goodwill is considered impaired when the anticipated
undiscounted cash flow from such asset is less than its carrying value. The
impairment is measured based on a projected discounted cash flow method
using a discount rate which approximates the Company's incremental
borrowing rate. Net long-lived assets and goodwill amounted to $92.7
million and $20.4 million, respectively, as of September 30, 2002. A change
in events or circumstances resulting in an impairment to long-lived assets
or goodwill could have a material impact on the Company's results of
operations and financial position.
On July 1, 2002, Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" will become effective for the
Company. As a result, the Company ceased amortizing approximately $20.4
million of goodwill. Amortization of this goodwill for the first quarter of
fiscal 2002 was $307,000, or 0.3% of net sales. In lieu of amortization,
the Company is required to perform an initial impairment review of goodwill
in fiscal 2003 and an annual impairment review thereafter. The Company
expects to complete its initial review during the first half of fiscal
2003.
Estimation of Potential Warranty Claims
The Company warrants that every product will meet a set of specifications,
which is mutually agreed upon with each customer. The Company's warranty
policy provides for the repair or replacement of its products and excludes
contingency costs. The Company maintains reserves for warranty charges
based on specific claims made by customers, for which management estimates
a final settlement of the claim, and
30
for expected claims not yet received based on historical results, which
management believes provides a reasonable indicator and basis for claims
not yet received. Significant management judgments must be made and used in
connection with establishing warranty reserves. Unforeseen circumstances
could result in revisions to these estimates that are material to the
Company's financial statements. The provision for warranty expense was $7.4
million and $8.0 million at September 30, 2002 and June 30, 2002,
respectively.
Workers' Compensation and Employee Health Care Reserves
The Company's U.S. operations primarily self-insure for workers'
compensation and employee health care expense. The Company bases its
reserves for workers' compensation expense primarily on estimates provided
by third-party administrators and its reserves for health care expense on
historical claims experience. Significant management judgments and
estimates are made in establishing these reserves. The Company's reserve
for workers' compensation and employee health care was $5.7 million and
$5.9 million at September 30, 2002 and June 30, 2002, respectively. At
September 30, 2002, the Company had letters of credit aggregating $4.0
million and a certificate of deposit of $500,000 which support claims for
workers' compensation benefits.
Pension Cost and Prepaid Pension Cost
The Company's pension cost and prepaid pension cost are dependent on
assumptions used in calculating such amounts. These assumptions include
discount rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates and other factors. In
accordance with accounting principles generally accepted in the United
States, actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect recognized
expense and the recorded asset or obligation in future periods. While the
Company believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may have a material impact on
the Company's results of operations and financial position.
Accounting for Income Taxes
As part of the process of preparing the Company's consolidated financial
statements, the Company is required to estimate its income taxes in each of
the jurisdictions in which it operates. This process involves estimating
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within the Company's consolidated balance sheet. The
Company must then assess the likelihood that its deferred tax assets will
be recovered from future taxable income and to the extent the Company
believes that recovery is not likely, the Company must establish a
31
valuation allowance. To the extent the valuation allowance is established
or increased, an expense must be included within the tax provision in the
statement of operations.
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The Company has recorded a
valuation allowance against its net deferred tax assets of approximately
$38.0 million and $35.2 million as of September 30, 2002 and June 30, 2002,
respectively, due to uncertainties related to the Company's ability to
utilize some of its deferred tax assets, primarily consisting of certain
net operating losses carried forward and foreign tax credits, before they
expire. The valuation allowance is based on the Company's estimates of
taxable income by jurisdiction in which it operates and the period over
which the deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or the Company adjusts these estimates
in future periods, the Company may need to establish an additional
valuation allowance, which could materially impact the Company's financial
position and results of operations.
The net deferred tax liability as of September 30, 2002 and June 30, 2002
was approximately $937,000 and $1.2 million, net of a valuation allowance
of $38.0 million and $35.2 million, respectively.
Forward-Looking Statements
The sections entitled "Liquidity and Capital Resources," "Critical Accounting
Policies" and "Market Risk" contains forward-looking statements that involve a
number of risks and uncertainties. Forward-looking statements such as "expects,"
"intends," "contemplating" and statements regarding quarterly fluctuations,
statements regarding the adequacy of funding for capital expenditure and working
capital requirements and similar expressions that are not historical are
forward-looking statements that involve risks and uncertainties. Such statements
include the Company's expectations as to future performance. Among the factors
that could cause actual results to differ materially from such forward-looking
statements are the following: the results of the litigation with Deloitte and
Touche LLP, the re-audit of any financial statements, successful sale of
subsidiaries for which offers are being solicited, costs of closing or selling
foundries, the results of the liquidation of the Company's wholly-owned
subsidiary Fonderie d'Autun, the amount of any claims made against Fonderie
d'Autun's prior owner which are the subject of certain guarantees, business
conditions and the state of the general economy in Europe and the US,
particularly the capital goods industry, the strength of the U.S. dollar,
British pound sterling and the Euro, interest rates, the Company's ability to
renegotiate or refinance its lending arrangements, continued compliance with the
terms of various forbearance agreements with the Company's lenders, utility
rates, the availability of labor, the successful conclusion of union contract
negotiations, the results of any litigation arising out of the accident at Jahn
Foundry, results of any litigation or regulatory proceedings arising from the
accounting irregularities at the Pennsylvania Foundry Group, the competitive
32
environment in the casting industry and changes in laws and regulations that
govern the Company's business, particularly environmental regulations.
33
ITEM 3.
DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in Item
7A of the Company's Form 10-K for the fiscal year ended June 30, 2002.
The Company's primary interest rate exposures relate to its cash and short-term
investments, fixed and variable rate debt and interest rate swaps, which are
mainly exposed to changes in short-term interest rates (e.g. USD LIBOR). The
potential loss in fair values is based on an immediate change in the net present
values of the Company's interest rate-sensitive exposures resulting from a 10%
change in interest rates. The potential loss in cash flows and earnings is based
on the change in the net interest income/expense over a one-year period due to
an immediate 10% change in rates. A hypothetical 10% change in interest rates
would have an impact on the Company's earnings before income tax of
approximately $206,000 and $168,000 in the first quarter of fiscal 2002 and
fiscal 2003, respectively.
The Company's exposure to fluctuations in currency rates against the British
pound, Euro, and Canadian dollar result from the Company's holdings in cash and
short-term investments and its historical utilization of foreign currency
forward exchange contracts to hedge customer receivables and firm commitments.
The potential loss in fair values is based on an immediate change in the U.S.
dollar equivalent balances of the Company's currency exposures due to a 10%
shift in exchange rates versus the British pound and Canadian dollar. The
potential loss in cash flows and earnings is based on the change in cash flow
and earnings over a one-year period resulting from an immediate 10% change in
currency exchange rates versus the British pound, Euro and Canadian dollar.
Based on the Company's holdings of financial instruments at September 30, 2002
and September 30, 2001, a hypothetical 10% depreciation in the British pound,
Euro and the Canadian dollar versus all other currencies would have an impact on
the Company's earnings before income tax of approximately $1.2 million and
$5,000 in the first quarter of fiscal 2002 and fiscal 2003, respectively. The
Company's analysis does not include the offsetting impact from its underlying
hedged exposures (customer receivables and firm commitments). If the Company had
included these underlying hedged exposures in its sensitivity analysis as of
September 30, 2001, these exposures would substantially offset the financial
impact of its foreign currency forward exchange contracts due to changes in
currency rates for the three month period ending September 30, 2001.
34
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the filing date of this report, the Company's
Chief Executive Officer and Chief Financial Officer completed an
evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14
of the Securities Exchange Act of 1934 (the "Exchange Act"). Based
upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer believe that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their most recent evaluation.
The Company operates in a decentralized management and operating
structure, including financial reporting. To further enhance internal
controls, the Company is currently in the process of centralizing its
North American payroll processing. In addition, the Company is
assessing various software systems to further improve its financial
management and reporting functions in the Company's ongoing efforts to
refine its internal control procedures.
35
PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings as described in "Part I, Item 3.
Legal Proceedings" of the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002. Since the end of fiscal 2002, there have been no
material developments in previously reported legal proceedings, except as set
forth below.
The Occupational Safety and Health Administration (OSHA) cited the Company on
September 26, 2002 for 95 alleged violations of Federal Safety and Health
regulations at its Atchison, Kansas foundry. OSHA sought penalties totaling
$250,000 in connection with the alleged violations. At OSHA's invitation, the
Company engaged in settlement negotiations with the agency over the alleged
violations. During the course of settlement discussions, OSHA withdrew some
citations it had classified as "serious," reclassified some "serious" citations
to the category "other-than-serious," and declined to withdraw or modify other
citations. The parties entered into two Informal Settlement Agreements with OSHA
whereby OSHA reduced its proposed penalty to $50,000 and the Company agreed to
undertake, within one year, abatement of certain conditions relating to the
remaining citations. By entering into the Informal Settlement Agreements, the
Company did not admit that it violated the cited standards for any litigation or
purpose other than a subsequent proceeding under the Occupational Safety and
Health Act. No subsequent proceeding is pending or anticipated by the Company at
this time. The Company is not able to accurately predict the cost of abatement,
but believes it may be as low as approximately $400,000 and as high as
approximately $1.0 million.
In addition to these matters, from time to time, the Company is the subject of
legal proceedings, including employee matters, commercial matters, environmental
matters and similar claims. There are no other material claims pending other
than those described here and in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002. The Company maintains comprehensive general
liability insurance, which it believes to be adequate for the continued
operation of its business.
ITEM 2 - Changes in Securities and Use of Proceeds
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
See Liquidity and Capital Resources above.
ITEM 4 - Submission of Matters to a Vote of Security Holders
36
NOT APPLICABLE
ITEM 5 - Other Information
NOT APPLICABLE
ITEM 6 - Exhibits and Reports of Form 8-K
(A) Exhibits
4.1 Fourteenth Amendment and Forbearance Agreement dated as of
October 17, 2002 (the "Fourteenth Amendment") among the Company,
the Banks party thereto and Harris Trust and Savings Bank, as
agent (incorporated by reference to Exhibit 4 of the Company's
Form 8-K filed October 23, 2002).
4.2 Supplemental Agreement to the Facility Agreement dated as of
October 29, 2002, among Atchison Casting UK Limited, Sheffield
Forgemasters Rolls Limited, Sheffield Forgemasters Engineering
Limited and Burdale Financial Limited.
99.1(a) Certification of Chief Executive Officer
99.1(b) Certification of Chief Financial Officer
(B) Reports on Form 8-K
The Company filed a Form 8-K dated July 2, 2002.
Items Reported
Item 5. Other Events
The Company announced an amendment to the Twelfth Amendment
and Forebearance Agreement in which, among other things, a
date to reduce outstanding loan commitments was extended
from June 30, 2002 to July 31, 2002.
Item 7. Financial Statements and Exhibits
Letter agreement dated June 30, 2002 modifying the Twelfth
Amendment and Forebearance Agreement.
The Company filed a Form 8-K dated August 8, 2002.
Items Reported
37
Item 5. Other Events
The Company announced the execution of the Thirteenth
Amendment and Forbearance Agreement in which, among other
things, a date to reduce outstanding loan commitments was
extended from July 31, 2002 to October 15, 2002.
Item 7. Financial Statements and Exhibits
Thirteenth Amendment and Forebearance Agreement to the
Credit Agreement dated as of July 31, 2002.
The Company filed a Form 8-K/A dated August 9, 2002.
Items Reported
Item 5. Other Events
The Company announced the execution of the Thirteenth
Amendment and Forbearance Agreement in which, among other
things, a date to reduce outstanding loan commitments was
extended from July 31, 2002 to October 15, 2002.
Item 7. Financial Statements and Exhibits
Thirteenth Amendment and Forebearance Agreement to the
Credit Agreement dated as of July 31, 2002.
The Company filed a Form 8-K dated September 13, 2002.
Items Reported
Item 5. Other Events
The Company announced that Vladimir Rada and Stanley Atkins
have joined its Board of Directors.
Item 7. Financial Statements and Exhibits
Press release dated September 12, 2002.
The Company filed a Form 8-K dated September 16, 2002.
Items Reported
38
Item 5. Other Events
The Company announced its plans to downsize its LaGrange
Foundry facility.
Item 7. Financial Statements and Exhibits
Press release dated September 16, 2002.
The Company filed a Form 8-K dated October 22, 2002.
Items Reported
Item 5. Other Events
The Company issued a pres release announcing the extension
of its North American credit facilities.
Item 7. Financial Statements and Exhibits
Fourteenth Amendment and Forebearance Agreement to the
Credit Agreement dated as of October 17, 2002.
Press release dated September 16, 2002.
39
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atchison Casting Corporation
----------------------------
(Registrant)
DATE: November 14, 2002 /s/ Thomas K. Armstrong, Jr.
----------------------------------------------
Thomas K. Armstrong, Jr., Chairman of the
Board, President and Chief Executive Officer
DATE: November 14, 2002 /s/ Kevin T. McDermed
----------------------------------------------
Kevin T. McDermed,
Vice President, Chief Financial Officer,
Treasurer and Secretary
40
CERTIFICATIONS
I, Thomas K. Armstrong, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atchison Casting
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
41
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas K. Armstrong Jr.
--------------------------------------------
Thomas K. Armstrong, Jr.
Chief Executive Officer
(Principal Executive Officer)
42
I, Kevin T. McDermed, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atchison Casting
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
43
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Kevin T. McDermed
--------------------------------------------
Kevin T. McDermed
Chief Financial Officer
(Principal Financial Officer
44
