UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000 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 number 1-12541
ATCHISON CASTING CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South Fourth Street
Atchison, Kansas 66002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 367-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
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 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. / /
The aggregate market value of the Common Stock, par value $.01 per share, of the
registrant held by. nonaffiliates of the registrant as of September 25, 2000 was
$31,496,112.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of September 25, 2000: 7,673,272
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders to be held November 17, 2000, are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Atchison Casting Corporation ("ACC", "Atchison" or the "Company") was
formed in 1991 with the dual objectives of acting as a consolidator in the
foundry industry and bringing new technology for casting design and
manufacture to the foundries it acquires. While Atchison in its current form
has been in operation since 1991, its operating units have been in
continuous operation for much longer, in some cases for more than 100 years.
The first foundry acquired by ACC, the steel-castings division of Rockwell
International, has been in continuous operation since 1872. The period as a
semi-captive foundry, under Rockwell, was characterized by high quality
design and production, but less emphasis on outside customers and new
markets.
Atchison manufactures highly engineered metal castings and forgings
that are utilized in a wide variety of products, including cars, trucks,
gas, steam and hydroelectric turbines, mining equipment, locomotives,
passenger rail cars, pumps, valves, army tanks, navy ships, paper-making
machinery, oil field equipment, reactor vessels for plastic manufacturing,
computer peripherals, office furniture, home appliances, satellite receivers
and consumer goods. Having completed nineteen acquisitions since 1991, the
Company has established itself as a leading consolidator in the casting
industry. As a result of these acquisitions, the Company has the ability to
produce castings from a wide selection of materials, including carbon,
low-alloy and stainless steel, gray and ductile iron, aluminum and zinc as
well as the ability to manufacture parts in a variety of sizes, ranging from
small die cast components for the computer industry that weigh a few ounces
to mill stands for the steel industry that weigh up to 280 tons. The Company
believes that its broad range of capabilities, which addresses the needs of
many different markets, provides a distinct competitive advantage in the
casting and forging industry.
The Company was founded to make acquisitions in the highly fragmented
foundry industry and to implement new casting design technology to make the
foundries more competitive. Following the initial acquisition of the steel
casting operations of Rockwell International in 1991, the Company has
continued to acquire foundries in the U.S., Canada and Europe. As a result
of these acquisitions, as well as internal growth, ACC's net sales have
increased from approximately $54.7 million in its first fiscal year ended
June 30, 1992, to $468.3 million for the fiscal year ended June 30, 2000,
resulting in a compound annual growth rate of 30.8%. The Company did not
make any acquisitions in fiscal 2000, and is not currently contemplating any
major acquisitions in fiscal 2001. The Company's primary focus in fiscal
2001 will continue to be on the integration and improvement of existing
operations.
Since 1991, the number of customers served by the Company has increased
from 12 to more than 600, including companies such as Caterpillar, Gardner
Denver, General Motors, General Electric, Siemens Westinghouse, General
Dynamics, Shell, British Steel, Nucor, GEC-Alstom, Ingersoll-Dresser, John
Deere, DaimlerChrysler, Corus, CICH, Parker Hannifin, Weirton Steel and
Meritor (formerly Rockwell International). The Company has received supplier
excellence awards for quality from, or has been certified by, substantially
all of its principal customers.
The Company's favorable industry position is attributable to several
factors, including: (i) its use of new and advanced casting technologies;
(ii) its ability to cast substantially all types of iron and steel, as well
as aluminum and zinc; (iii) the Company's emphasis on customer service and
marketing; and (iv) the Company's position as a long-term supplier to many
of its major customers.
The principal executive offices of the Company are located at 400 South
Fourth Street, Atchison, Kansas 66002-0188, and the Company's telephone
number is (913) 367-2121.
1
COMPANY STRATEGY
Until recently, ACC pursued growth and diversification through a
two-pronged approach of: (i) making strategic acquisitions within the widely
fragmented and consolidating foundry industry; and (ii) integrating the
acquired foundries to achieve economies of scale, while strengthening
marketing and promoting the use of new casting technology. ACC's primary
focus since the beginning of fiscal 2000 has been on the integration and
improvement of existing operations. No major acquisitions are currently
contemplated during fiscal 2001.
STRATEGIC ACQUISITIONS
ACQUIRE LEADERS AND BUILD CRITICAL MASS. The Company initially acquired
foundries that were considered leaders in their respective sectors. After
acquiring a leader in a new market, ACC strives to make subsequent
acquisitions that further penetrate that market and take advantage of the
leader's technical expertise. The Atchison/St. Joe Division is a leader in
the field of large, complex steel castings. This acquisition in 1991
provided credibility for ACC's presence in the industry and established a
base for add-on acquisitions. Following the Atchison/St. Joe Division
acquisition, the Company added capacity and strengthened its base through
the add-on acquisitions of Amite Foundry and Machine, Inc. ("Amite") in 1993
and Canadian Steel Foundries, Ltd. ("Canadian Steel") in 1994. As an
additional example, Prospect Foundry, Inc. ("Prospect") was acquired in 1994
due to its leading position in gray and ductile iron casting production. The
subsequent acquisition of La Grange Foundry Inc. ("La Grange") in 1995
further enhanced ACC's position in this market.
BROADEN PRODUCT OFFERINGS AND CAPABILITIES. The Company also acquired
foundries that added a new product line or customer base that can be
leveraged throughout ACC's network of foundries. For example, prior to the
acquisition of Prospect in 1994, which expanded ACC's capabilities to
include gray and ductile iron, the Company only produced carbon and low
alloy steel castings. The acquisition of Quaker Alloy, Inc. ("Quaker Alloy")
expanded ACC's stainless and high alloy steel capabilities to include a
wider range of casting sizes. Los Angeles Die Casting Inc. ("LA Die
Casting"), a leading die caster of aluminum and zinc components for the
computer and recreation markets, provides ACC with an entry into the
aluminum and zinc die casting markets. PrimeCast, Inc. ("PrimeCast")
(formerly the Beloit Castings Division of Beloit Corporation) expanded ACC's
capabilities to produce large iron castings. The acquisition of Sheffield
Forgemasters Group Limited ("Sheffield") brings to ACC the ability to offer
cast and forged rolls, larger steel castings and centrifically cast parts.
London Precision Machine & Tool Ltd. ("London Precision") expanded ACC's
capabilities in the machining of castings.
DIVERSIFY END MARKETS. The Company attempts to lessen the cyclical
exposure at individual foundries by creating a diversified network of
foundries that serve a variety of end markets. Kramer International, Inc.
("Kramer"), a supplier of pump impellers, was acquired in 1995, expanding
ACC's sales to the energy and utility sectors. The Company believes ACC's
presence in these markets somewhat offsets its exposure to the railroad and
mining and construction markets, as energy and utility cycles do not
necessarily coincide with railroad investment or mining and construction
cycles. The acquisition of Prospect diversified the end markets served by
the Company by providing access to both the agricultural equipment and
trucking industries. Sheffield provided a strong position as a supplier to
the steel industry, as well as substantial enhancement of ACC's presence in
the oil and gas industry. Currently, the Company serves more than ten major
end-user markets, compared to three in 1991.
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DIVERSIFY GEOGRAPHICALLY. The Company also seeks to acquire foundries,
which would expand the operations to other major world economies. Sheffield
and Fonderie d'Autun ("Autun") provide entry into the Euromarket.
The following table presents the Company's nineteen acquisitions and
their primary strategic purpose.
DATE
MANUFACTURING UNIT ACQUIRED STRATEGIC PURPOSE
- -------------------------------- ------------ --------------------------------------------------------------
Atchison/St. Joe Division 06/14/91 Leader in carbon and low alloy, large, complex steel castings.
Initial platform for Company strategy.
Amite 02/19/93 Increase capacity to take on new projects with customers.
Add-on to Atchison/St. Joe Division.
Prospect 04/01/94 Leader in gray and ductile iron castings.
Quaker Alloy 06/01/94 Develop position in stainless and high alloy steel castings.
Canadian Steel 11/30/94 Access to hydroelectric and steel mill markets. Develop
position in large castings.
Kramer 01/03/95 Leader in castings for pump industry.
Empire Steel Castings, Inc. 02/01/95 Build position in pump and valve markets. Add-on to Quaker
Alloy.
La Grange 12/14/95 Build position in gray and ductile iron casting markets.
The G&C Foundry Company 03/11/96 Highly regarded in fluid power market. Build position in
gray and ductile iron casting markets.
LA Die Casting 10/01/96 Leader in aluminum and zinc die casting.
Canada Alloy Castings, Ltd. 10/26/96 Build position in existing markets. Smaller castings than
Canadian Steel, but similar markets and materials.
Pennsylvania Steel Foundry 10/31/96 Build position in power generation, pump and valve markets.
& Machine Company Add-on to Quaker Alloy and Empire.
Jahn Foundry Corp. 02/14/97 Develop position in market for automotive castings. Add-on
iron foundry.
PrimeCast 07/01/97 Build position in gray and ductile iron casting markets. Enter
paper-machinery market, acquire capability for large iron
castings and expandability to cast bronze.
Inverness Castings Group, Inc. 10/06/97 Expand in automotive and aluminum products.
Sheffield 04/06/98 Enter European marketplace and add new product lines,
including forgings. Gain strong position in steel
industry and off-shore oil and gas industry.
Claremont Foundry, Inc. 05/01/98 Company's first automatic molding line for steel castings
made in green sand molds. Penetrate more deeply into
mass transit market.
London Precision 09/01/98 Enhance the Company's capability to machine castings,
including finish machining.
Autun 02/25/99 Establish operations in Europe.
3
INTEGRATION OF ACQUIRED FOUNDRIES
STRENGTHEN MARKETING FUNCTIONS. Many foundries, particularly those that
operate as captive foundries or only rely on a small number of customers, do
not have strong marketing capabilities. ACC views this industry-wide
marketing weakness as an opportunity to establish a competitive advantage.
The Company places great emphasis on maximizing new business opportunities
by strengthening marketing capabilities, adding sales people and
cross-selling between foundries.
One way in which ACC builds the marketing efforts of its foundries is
to increase the number of sales personnel at its foundries. In addition to
sales people added through acquisitions, the Company has incrementally
increased the sales force by 36%. ACC has established a central marketing
organization to assist the decentralized foundry sales teams. The central
marketing group is headed up by industry veteran Charles Armor, who joined
ACC in April 2000. Another element of the Company's marketing effort is to
jointly develop castings with its customers. Joint development projects
using new technology, and the resulting increased service and flexibility
provided to customers, is an important marketing tool and has been
instrumental in receiving several new orders. For example, a joint
development project between Caterpillar and ACC led to the production of the
boom tip casting for one of Caterpillar's new hydraulic excavators. Joint
development projects have also taken place with General Motors, Nordberg,
John Deere, Case New Holland, Timberjack and DaimlerChrysler, among others.
An increasingly important aspect of the Company's marketing strategy
has been to develop its ability to cross-sell among its foundries. In
acquiring new foundries and expanding into new markets, the Company has
gained a significant advantage over smaller competitors since its sales
force is able to direct its customers to foundries with different
capabilities. This benefits ACC in that it enables foundries to use the
Atchison name and relationships to gain new customers as well as helping
customers to reduce their supplier base by providing "one-stop" shopping.
The Company facilitates cross-selling by reinforcing the sales force's
knowledge of Company-wide capabilities through visits to individual plants
and providing sales incentive opportunities.
INTRODUCE ADVANCED TECHNOLOGY. The Company is systematically
introducing new advanced technologies into each of its acquired foundries to
enhance their competitive position. For example, the Company's capabilities
in finite element analysis and three-dimensional solid modeling are having a
beneficial impact on sales and casting production by helping customers to
design lighter and stronger castings, shortening design cycles, lowering
casting costs and, in some cases, creating new applications. These new
technologies have enhanced the Company's ability to assist customers in the
component design and engineering stages, strengthening the Company's
relationships with its customers. New techniques involve computerized solid
models that are used to simulate the casting process, to make patterns and
auxiliary tooling and to machine the finished castings. The Company is in
the process of implementing this technology in all of its foundries. The
Company has established a Fabrication-to-Casting design center at its
Atchison, Kansas facility. The focus of the design center is to help
customers design new castings, especially those which can replace existing
fabricated assemblies.
Investments by the Company in technology improvements include: (i) new
solidification software and hardware for better casting design and process
improvement; (ii) Computer Numerical Control ("CNC") machine tools,
computer-assisted, laser measurement devices and new cutting head designs
for machine tools to improve productivity and quality in the machining of
castings; (iii) Argon-Oxygen Decarburization ("AOD") refining, which is used
to make high-quality stainless steel; (iv) computer-controlled sand binder
pumps to improve mold quality and reduce cost; (v) equipment for measuring
the nitrogen content of steel, which helps in casting quality improvement;
(vi) CNC pattern making;
4
(vii) new die casting machines; and (viii) automated testing cells using
resonate testing. ACC is one of the few foundry companies that uses its own
scanning electron microscope to analyze inclusions in cast metal. The
Company also participates in technical projects led by the Steel Founders'
Society of America and the American Foundrymen's Society, which are
exploring ways to melt and cast cleaner iron and steel, as well as U.S.
government/industry specific projects to shorten and improve the casting
design cycle.
INCREASE CAPACITY UTILIZATION. A principal objective of the Company in
integrating and operating its foundries is to increase capacity utilization
at both its existing and newly acquired facilities. Many of the Company's
foundries at the time of their acquisition have been operating with
underutilized capacity. The Company seeks to improve capacity utilization by
introducing more effective marketing programs and applying advanced
technologies as described above.
ACHIEVE PURCHASING ECONOMIES. ACC makes its volume purchasing programs
available to its foundries. ACC has realized meaningful cost savings by
achieving purchasing efficiencies for its foundries. By jointly coordinating
the purchase of raw materials, negotiation of insurance premiums and
procurement of freight services, ACC's individual foundries have, in some
cases, realized savings of 10% to 30% of these specific costs.
LEVERAGE MANAGEMENT EXPERTISE. The Company believes that improvements
can often be made in the way acquired foundries are managed, including the
implementation of new technologies, advanced employee training programs,
standardized budgeting processes and profit sharing programs and providing
access to capital. In this view, ACC enhances management teams to add
technical, marketing or production experience, if needed. For example, ACC
was able to significantly improve the profitability of Canadian Steel by
adding new members to management, entering new markets, installing finite
element solidification modeling and providing capital.
Under ACC ownership, La Grange was able to negotiate a new labor
agreement, create profit sharing for all employees, broaden its customer
base and install solidification modeling. Amite captured one of the largest
steel casting orders of the last decade by combining proven management
from the Atchison/St. Joe Division with casting design assistance from the
Atchison/St. Joe Division fab-to-cast design center and a strong customer
orientation.
INDUSTRY TRENDS
The American Foundrymen's Society estimates that global casting
production was 63.3 million metric tons in 1998 of which steel castings
accounted for approximately 6.4 million tons, iron castings for
approximately 47.9 million tons and nonferrous castings for approximately
9.0 million tons. It is further estimated that the top ten producing
countries represent 80% of the total production, with the U.S. representing
in excess of 20% of the world market.
The U.S. casting industry is estimated to have had shipments of
approximately 14.6 million tons in 1999, of which steel castings accounted
for approximately 1.4 million tons, iron castings for approximately 10.4
million tons and non-ferrous castings for approximately 2.8 million tons. .
Metal casting shipments are forecast to grow at an annual rate of 1.5% to
17.1 million tons by 2009. The Company has been able to grow at a rate
substantially in excess of the overall industry principally as a result of
its strategy and due to key trends affecting the casting industry, including
the following:
5
INDUSTRY CONSOLIDATION
Although still highly fragmented, the U.S. foundry industry has
consolidated from approximately 465 steel foundries and 1,400 iron
foundries in 1982 to approximately 400 and 700 steel and iron foundries,
respectively, in 1998. This consolidation trend has been accompanied by
increased outsourcing of casting production and OEM supplier
rationalization.
OUTSOURCING. Many OEMs are outsourcing the manufacture of cast
components to independent foundries in an effort to reduce their capital
and labor requirements and to focus on their core businesses. Management
believes that captive foundries are often underutilized, inefficiently
operated and lack the latest technology. Several of ACC's OEM customers,
such as Caterpillar, General Motors, General Electric, Meritor (formerly
Rockwell International), Ingersoll-Dresser, Gardner Denver, Compagnie
Internationale du Chauffage and Beloit Corporation, have closed or sold one
or more of their captive foundries during the past ten years and have
outsourced the castings which they once made to independent suppliers such
as the Company. As described above, the closure of these facilities has
contributed to increased capacity utilization at the remaining foundries.
OEM SUPPLIER RATIONALIZATION. OEMs are rationalizing their supplier
base to fewer foundries that are capable of meeting increasingly complex
requirements. For example, OEMs are asking foundries to play a larger role
in the design, engineering and development of castings. In addition, some
customers have demanded that suppliers implement new technologies, adopt
quality (ISO 9000 and QS 9000) standards and make continuous productivity
improvements. As a result, many small, privately-owned businesses have
chosen to sell their foundries because they are unwilling or unable to make
investments necessary to remain competitive. Moreover, the EPA and OSHA
require compliance with increasingly stringent environmental and
governmental regulations.
NEW CASTING TECHNOLOGY
Recent advances in casting technology and pattern-making have created
new opportunities for reducing costs while increasing efficiency and
product quality. The combination of powerful, low cost computer
workstations with finite element modeling software for stress analysis and
metal solidification simulation is helping foundries and customers to
design castings that are lighter, stronger and more easily manufactured at
a competitive cost.
The Company believes new casting technologies have led to growth in
casting shipments by replacing forgings and fabrications in certain
applications. In the past, fabricated (welded) components have been used in
order to reduce tooling costs and product development lead-time. New
casting technology has helped to reduce the weight and cost, and shorten
the lead-time, of castings and has therefore increased the relative
attractiveness of cast components. For example, these improvements allowed
an ACC customer to replace a fabricated steel boom that is used in a
typical mining vehicle with one that is cast. The cast steel boom weighs
20% less than the fabricated component that it replaced, allowing an
increase in payload. Product life is increased due to greater corrosion
resistance. Another customer replaced the combination cast/fabricated body
of a rock crusher with a one-piece casting, reducing labor for cutting,
welding and machining as a result.
The Company has established a Fabrication-to-Casting Design Center at
its Atchison, Kansas facility. The focus of the design center is to help
customers design new castings, especially those which can replace existing
fabricated assemblies.
6
MARKETS AND PRODUCTS
STEEL INDUSTRY. The steel industry uses rolls to form cast steel into
sheets, bars, rods, beams and plates, which are then used to make end
products such as car bodies, tin cans and bridges. Rolls are consumed as
steel is rolled, so there is a steady demand for rolls. Customers in this
market include British Steel and Nucor, among others. Sheffield
Forgemasters Rolls Limited ("Forgemasters Rolls") is one of the world
leaders in cast and forged rolls for the steel-making industry. Steel
products produced by the Company accounted for 7.0%, 18.7% and 18.2% of the
Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000,
respectively.
MINING AND CONSTRUCTION. ACC's castings are used in tractor-crawlers,
mining trucks, excavators, drag lines, wheel-loaders, rock crushers, diesel
engines, slurry pumps, coal mining machines and ore-processing equipment.
Mining and construction equipment customers include Caterpillar, Nordberg,
Meritor (formerly Rockwell International), Gardner Denver, John Deere,
Komatsu and Euclid, among others. Products supplied to the mining and
construction industry accounted for 23.1%, 18.0% and 16.3% of the Company's
net sales in fiscal 1998, fiscal 1999 and fiscal 2000, respectively.
RAILROAD. The Company supplies cast steel undercarriages for
locomotives, among other parts, for this market. GM is ACC's largest
locomotive customer, and has purchased locomotive castings from the
Atchison/St. Joe Division for over 60 years. The Company further penetrated
this market through the purchase of London Precision. Rail products
produced by the Company accounted for 6.6%, 11.4% and 10.3% of the
Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000,
respectively.
AUTOMOTIVE. The automotive industry uses both iron and aluminum
castings, as well as aluminum die castings. ACC entered this market through
the purchase of Jahn Foundry Corp. ("Jahn Foundry") in Springfield,
Massachusetts and Inverness Castings Group, Inc. ("Inverness") in Dowagiac,
Michigan. Customers in this market include General Motors and
DaimlerChrysler, among others. Automotive products produced by the Company
accounted for 10.4%, 8.7% and 8.8% of the Company's net sales in fiscal
1998, fiscal 1999 and fiscal 2000, respectively.
ENERGY. The Company's products for the energy market include pumps,
valves and compressors for transmission and refining of petrochemicals,
blow-out preventers and mud pumps for drilling and work-over of wells,
lifting hooks and shackles for offshore installation of equipment, winch
components for rig positioning, nodes for platform construction, subsea
components and other oil field castings. Shell, Amoco, Aker-Verdal,
Shaffer, Rolls Royce, Hydril, Solar Turbines, Nordstrom, Ingersoll-Dresser
Pumps and Amclyde are among the Company's many energy-related customers.
UTILITIES. Many of ACC's castings are used in products for the utility
industry, such as pumps, valves and gas compressors. ACC also makes steam,
gas and hydroelectric turbine castings, nuclear plant components, sewage
treatment parts and other castings for the utility industry. In addition,
the Company manufactures replacement products that are used when customers
perform refurbishments. Customers include Siemens Westinghouse, General
Electric, Solar Turbines, GEC-Alsthom, Sulzer, Siemens, Kvaerner, Goulds
Pumps and Neles Controls.
MILITARY. Weapons and equipment for the Army, Navy and Coast Guard
employ many different types of castings. The Company makes components for
ships, battle tanks, howitzers and other heavy weapons. The capabilities of
Sheffield has allowed ACC to bid on a wider range of work for the U.S.
Navy. The military casting market has declined sharply, but ACC has been
able to replace this
7
volume by targeting new products such as turbines, compressors, pumps and
valves. Customers in this market include General Dynamics, Litton, Bath
Iron Works, Boeing, SEI, the U.S. Army and Avondale Shipyards, among
others.
TRUCKING. The Company manufactures components used on truck engines
and suspension systems. Many of ACC's castings are used in aftermarket
products to achieve better fuel economy or to enhance ride characteristics.
Customers include Horton Industries, Detroit Diesel and others.
FARM EQUIPMENT. ACC makes a variety of castings for farm tractors,
baling equipment, harvesters, sugar cane processors and other agricultural
equipment for customers such as John Deere, Caterpillar and New Holland.
PAPER-MAKING MACHINERY. The paper-making machinery industry uses a
variety of iron, steel and non-ferrous castings, both in original equipment
and for the aftermarket.
MASS TRANSIT. ACC began making undercarriages for passenger rail cars
in 1992 and is a leading casting supplier to the mass transit market. The
Company's castings are used on the BART system in San Francisco, METRA in
Chicago, NCTD in San Diego, MARTA in Atlanta, and in Miami and Vancouver.
La Grange casts components used in subway cars in several cities, including
New York City, which is the largest user of subway cars in North America.
OTHER. Other markets include process equipment such as rubber mixers,
plastic extruders, dough mixers, machine tools and a variety of general
industrial applications. With the acquisition of LA Die Casting, the
Company entered the consumer market. LA Die Casting supplies components
used to make recreational vehicles, computer peripherals, direct satellite
receivers, telescopes and pool tables. Customers include California
Amplifier, RC Design, Celestron and Printronix.
For financial information about geographic areas, see footnote 20 of
the notes to the Company's Consolidated Financial Statements.
SALES AND MARKETING
New foundry technologies and the new applications resulting therefrom
require a more focused and knowledgeable sales force. The Company pursues
an integrated sales and marketing approach that includes senior management,
engineering and technical professionals, production managers and others,
all of whom work closely with customers to better understand their specific
requirements and improve casting designs and manufacturing processes. The
Company supplements its direct sales effort with participation in trade
shows, marketing videos, brochures, technical papers and customer seminars
on new casting designs.
The Company's engineering and technical professionals are actively
involved in marketing and customer service, often working with customers to
improve existing products and develop new casting products and
applications. They typically remain involved throughout the product
development process, working directly with the customer to design casting
patterns, build the tooling needed to manufacture the castings and sample
the castings to ensure they meet customers' specifications. The Company
believes that the technical assistance in product development, design,
manufacturing and testing that it provides to its customers gives it an
advantage over its competition.
Customers tend to develop long-term relationships with foundries that
can provide high quality, machined castings delivered on a just-in-time
basis that do not require on-site inspection. Frequently,
8
the Company is the only current source for the castings that it produces.
Maintaining duplicate tooling in multiple locations is costly, so customers
prefer to rely on one supplier for each part number. Moving the tooling to
another foundry is possible, however, such a move entails considerable time
and expense on the customer's part. In addition, ACC is forming product
development partnerships with a number of customers to develop new
applications for castings.
BACKLOG
The Company's backlog is based upon customer purchase orders that the
Company believes are firm and does not include purchase orders anticipated
but not yet placed. At June 30, 2000, the Company's backlog was
approximately $168.6 million, as compared to backlog of approximately
$178.9 million at June 30, 1999. The backlog is scheduled for delivery in
fiscal 2001 except for approximately $20.8 million, of which $11.5 million
is scheduled for delivery in fiscal 2002. The level of backlog at any
particular time is not necessarily indicative of the future operating
performance of the Company. The Company historically has not experienced
cancellation of any significant portion of customer orders.
COMPETITION
The Company competes with a number of foundries in one or more product
lines, although none of the Company's competitors compete with it across
all product lines. The principal competitive factors in the castings market
are quality, delivery and price; however, breadth of capabilities and
customer service have become increasingly important. The Company believes
that it is able to compete successfully in its markets by: (i) offering
high quality, machined castings; (ii) working with customers to develop and
design new castings; (iii) providing reliable delivery and short
lead-times; (iv) containing its manufacturing costs, thereby pricing
competitively; and (v) offering a broad range of cast materials.
The Company believes that the market for iron and steel castings is
attractive because of a relatively favorable competitive environment, high
barriers to entry and the opportunity to form strong relationships with
customers. New domestic competitors are unlikely to enter the foundry
industry because of the high cost of new foundry construction, the need to
secure environmental approvals at a new foundry location, the technical
expertise required and the difficulty of convincing customers to switch to
a new, unproven supplier.
ACC, and the foundry industry in general, competes with manufacturers
of fabrications in some application areas. The Company believes that the
relative advantages of castings, particularly in light of new casting
design technology, which reduces weight, cost and leadtime while improving
casting quality, will lead to increased replacement of fabrications by iron
and steel castings. The Company competes with foundries in Asia, Europe and
North America.
MANUFACTURING
CASTINGS. Casting is one of several methods, along with forging and
fabricating, which shape metal into desired forms. Castings are made by
pouring or introducing molten metal into a mold and allowing the metal to
cool until it solidifies, creating a monolithic component. Some castings,
such as die castings, are made with a permanent metal mold which can be
used repeatedly. Others, such as sand castings, are made in a sand mold
which is used only once. Forgings are made by shaping solid metal with
pressure, usually in a die or with hammers. Fabrications are made by
welding together separate pieces of metal. Castings may offer significant
advantages over forgings and fabrications. A well-designed casting can be
lighter, stronger and more stress and corrosion resistant than a fabricated
9
part. Although castings and forgings are similar in several respects,
castings are generally less expensive than forgings.
CASTING PROCESS. The steel casting manufacturing process involves
melting steel scrap in electric arc or induction furnaces, adding alloys,
pouring the molten metal into molds made of sand or iron and removing the
solidified casting for cleaning, heat treating and quenching prior to
machining the casting to final specifications. The manufacture of a steel
casting begins with the molding process. Initially, a pattern constructed
of wood, aluminum or plastic is created to duplicate the shape of the
desired casting. The pattern, which has similar exterior dimensions to the
final casting, is positioned in a flask and foundry sand is packed tightly
around it. After the sand mold hardens, the pattern is removed. When the
sand mold is closed, a cavity remains within it shaped to the contours of
the removed pattern. Before the mold is closed, sand cores are inserted
into the cavity to create internal passages within the casting. For
example, a core would be used to create the hollow interior of a valve
casing. With the cores in place, the mold is closed for pouring. Castings
for rolls are sometimes made by stirring the mold while the liquid steel or
iron is being poured into it.
Steel scrap and alloys are melted in an electric arc furnace at
approximately 2,900 degrees Fahrenheit, and the molten metal is poured from
a ladle into molds. After pouring and cooling, the flask undergoes a
"shakeout" procedure in which the casting is removed from the flask and
vibrated to remove sand. The casting is then moved to a blasting chamber
for removal of any remaining foundry sand and scale. Next, the casting is
sent to the cleaning room, where an extensive process removes all excess
metal. Cleaned castings are put through a heat treating process, which
improves properties such as hardness and tensile strength through
controlled increases and decreases in temperature. A quench tank to reduce
temperatures rapidly is also available for use in heat treatment. The
castings are shot blasted again and checked for dimensional accuracy. Each
casting undergoes a multi-stage quality control procedure before being
transported to one of the Company's or the customer's machine shops for any
required machining.
Iron castings are processed similarly in many respects to steel
castings. Melting and pouring temperatures for molten iron are
approximately 2,400 degrees Fahrenheit, and less cleaning and finishing is
required for iron castings than is typically required for steel castings.
Iron and steel scrap may both be used in making cast iron.
Die casting, as contrasted to sand casting, uses a permanent metal mold
that is reused. Melting and pouring temperatures for aluminum and zinc are
less than half that used for steel, and die castings normally require less
cleaning than iron or steel castings.
FORGING PROCESS. The forging process applies pressure by hitting or
pressing a heated ingot or wrought steel blank. The forged piece is then
heat-treated and machined much in the same manner as a steel casting.
MATERIALS. Steel is more difficult to cast than iron, copper or
aluminum because it melts at higher temperatures, undergoes greater
shrinkage as it solidifies, causing the casting to crack or tear if the
mold is not properly designed, and is highly reactive with oxygen, causing
chemical impurities to form as it is poured through air into the mold.
Despite these challenges, cast steel has become a vital material due to its
superior strength compared to other ferrous metals. In addition, most of
the beneficial properties of steel match or exceed those of competing
ferrous metals. The Company's first foundry, which today forms the
Atchison/St. Joe Division, produced carbon and low alloy steel castings
when it was acquired from Rockwell International in 1991. ACC added an AOD
vessel for making stainless steel in order to better supply the pump and
valve markets, which sometimes require stainless steel castings to be made
from the same patterns used for carbon steel castings. Also in 1994,
10
ACC purchased Quaker Alloy, which specializes in casting high alloy and
stainless steels for valves, pumps and other equipment. Sheffield, Canadian
Steel and Canada Alloy Castings, Ltd. ("Canada Alloy") also make high alloy
and stainless castings, further reinforcing ACC's market position and skill
base concerning the casting of stainless and specialty, high alloy steels.
In applications that do not require the strength, ductility and/or
weldability of steel, iron castings are generally preferred due to their
lower cost, shorter lead-times and somewhat simpler manufacturing
processes. Ductile iron is stronger and more flexible than traditional cast
iron, known as gray iron, and is easier and less expensive to cast than
steel. Due to these qualities, the demand for ductile iron is increasing
faster than for either traditional gray cast iron or cast steel. In 1994,
ACC initiated manufacturing of gray and ductile iron through the
acquisition of Prospect. ACC's presence in ductile iron was increased
through the subsequent purchases of La Grange, The G&C Foundry Company
("G&C") and PrimeCast.
Aluminum castings (including die castings) generally offer lighter
weight than iron or steel, and are usually easier to cast because aluminum
melts at a lower temperature. These advantages, coupled with low prices for
aluminum during the last decade, have led to a substantial increase in the
use of aluminum castings, especially in motor vehicles. Aluminum's relative
softness, lower tensile strength and poor weldability limit its use in many
applications where iron and steel castings are currently employed. In 1996,
ACC entered the nonferrous market with the purchase of LA Die Casting,
which die casts aluminum and zinc.
Steel, unlike iron, can be forged as well as cast. Forging compresses
steel, and is preferred for some critical applications like nuclear
vessels, turbine shafts and pressure vessels, among others.
The ability to provide cast and forged components in a broad range of
materials allows ACC to present itself as a "one-stop shop" for some
customers and simplifies purchasing for others. Since customers in general
have a goal of reducing their total number of suppliers, a broader range of
materials and casting skills gives ACC an advantage over many other foundry
operations.
MACHINING. The Company machines many of its steel castings, typically
to tolerances within 30 thousandths of an inch. Some castings are machined
to tolerances of one thousandth of an inch. Machining includes drilling,
threading or cutting operations. The Company's Sheffield, St. Joe, Amite,
Inverness and London Precision machine shops have a wide variety of machine
tools, including CNC machine tools. The Company also machines some of its
castings at Canadian Steel, Quaker Alloy, Empire Steel Castings, Inc.
("Empire") and Kramer. The ability to machine castings provides a higher
value-added product to the customer and improved quality. Casting
imperfections, which are typically located near the surface of the casting,
are usually discovered during machining and corrected before the casting is
shipped to the customer.
NON-DESTRUCTIVE TESTING. Customers typically specify the physical
properties, such as hardness and strength, which their castings are to
possess. The Company determines how best to meet those specifications.
Regular testing and monitoring of the manufacturing process are necessary
to maintain high quality and to ensure the consistency of the castings.
Electronic testing and monitoring equipment for tensile, impact,
radiography, ultrasonic, magnetic particle, dye penetrant and
spectrographic testing are used extensively to analyze molten metal and
test castings.
ENGINEERING AND DESIGN. The Company's process engineering teams assist
customers in designing castings and work with manufacturing departments to
determine the most cost effective manufacturing process. Among other
computer-aided design techniques, the Company uses three-
11
dimensional solid modeling and solidification software. This technology
reduces the time required to produce sample castings for customers by
several weeks and improves the casting design.
CAPACITY UTILIZATION. The following table shows the type and the
approximate amount of available capacity, in tons, for each foundry and die
caster. The actual number of tons that a foundry can produce annually is
dependent on product mix. Complicated castings, such as those used for
military applications or in steam turbines, require more time, effort and
use of facilities, than do simpler castings such as those for the mining
and construction market. Also, high alloy and stainless steel castings
generally require more processing time and use of facilities than do carbon
and low alloy steel castings.
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 2000 UTILIZATION
- ----------------- ---------------- ------------------------- ------------ --------------- ------------
Atchison/St. Joe Carbon, low Mining and construction, 30,000 22,277 74.3%
Division alloy and rail, military, valve,
stainless turbine and compressor
steel
Amite Carbon and low Marine, mining and
alloy steel construction 14,000 4,850 34.6%
Prospect Gray and Construction,
ductile iron agricultural, trucking, 12,500 8,115 64.9%
hydraulic, power
transmission and machine
tool
Quaker Alloy Carbon, low Pump and valve
alloy and 6,000 1,897 31.6%
stainless
steel
Canadian Steel Carbon, low Hydroelectric and steel
alloy and mill 6,000 1,995 33.3%
stainless steel
Kramer Carbon, low Pump impellers and
alloy and casings 1,450 858 59.2%
stainless
steel, gray
and ductile
iron
Empire Carbon and low Pump and valve
alloy steel 4,800 1,285 26.8%
and gray,
ductile and
nickel
resistant
iron
La Grange Gray, ductile Mining and construction
and compacted and transportation 14,000 9,879 70.6%
graphite iron
G&C Gray and Fluid power (hydraulic
ductile iron control valves) 12,000 8,592 71.6%
12
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 2000 UTILIZATION
- ----------------- ---------------- ------------------------- ------------ --------------- ------------
LA Die Casting Aluminum and Communications,
zinc recreation and computer 1,750 1,062 60.7%
Canada Alloy Carbon, low Power generation, pulp
alloy and and paper machinery, 2,500 1,360 54.4%
stainless steel pump and valve
Pennsylvania Carbon and Power generation, pump
Steel Foundry stainless and valve 3,700 1,373 37.1%
and Machine steel
Company
Jahn Gray iron Automotive, air
conditioning and 11,000 5,643 51.3%
agricultural
PrimeCast Gray and Paper-making machinery
ductile iron 19,840 10,525 53.0%
and stainless
steel
Inverness Aluminum Automotive, furniture
and appliances 12,500 8,680 69.4%
Forgemasters Iron and Steel Steel and aluminum
Rolls rolling 31,000 25,197 81.3%
Sheffield Iron and Steel Oil and gas, ingot,
Forgemasters petrochemical, power 113,000 30,266 26.8%
Engineering generation
Limited
Claremont Steel Mining and construction
Foundry, Inc. and mass transit 6,000 1,162 19.4%
Autun Iron Heating , domestic
appliance and automotive 30,000 19,229 64.1%
castings
------------- --------------- ------------
Totals 332,040 164,245 49.5%
============= =============== ============
MACHINING
HOURS
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS MACHINING JUNE 30, CAPACITY
UNIT MACHINED MAJOR APPLICATIONS HOURS 2000 UTILIZATION
- ------------------- ---------------- ------------------------- ------------- --------------- ------------
London Precision Carbon, low Mining and 170,000 201,223 118.4%
alloy, construction, rail,
stainless military, valve,
steel, iron turbine and compressor
and aluminum
------------ --------------- ------------
Totals 170,000 201,223 118.4%
============ =============== ============
- -------
13
* Estimated annual capacity and utilization are based upon management's
estimate of the applicable manufacturing unit's theoretical capacity
assuming a certain product mix and assuming such unit operated five days a
week, three shifts per day and assuming normal shutdown periods for
maintenance. Actual capacities will vary, and such variances may be
material, based upon a number of factors, including product mix and
maintenance requirements.
RAW MATERIALS
The principal raw materials used by the Company include scrap iron and
steel, aluminum, zinc, molding sand, chemical binders and alloys, such as
manganese, nickel and chrome. The raw materials utilized by the Company are
available in adequate quantities from a variety of sources. From time to
time the Company has experienced fluctuations in the price of scrap steel,
which accounts for approximately 4% of net sales, and alloys, which account
for less than 2% of net sales. The Company has generally been able to pass
on the increased costs of raw materials and has escalation clauses for
scrap with certain of its customers. As part of its commitment to quality,
the Company issues rigid specifications for its raw materials and performs
extensive inspections of incoming raw materials.
QUALITY ASSURANCE
The Company has adopted sophisticated quality assurance techniques and
policies which govern every aspect of its operations to ensure high
quality. During and after the casting process, the Company performs many
tests, including tensile, impact, radiography, ultrasonic, magnetic
particle, dye penetrant and spectrographic tests. The Company has long
utilized statistical process control to measure and control dimensions and
other process variables. Analytical techniques such as Design of
Experiments and the Taguchi Method are employed for troubleshooting and
process optimization.
As a reflection of its commitment to quality, the Company has been
certified by, or won supplier excellence awards from, substantially all of
its principal customers. Of 600 suppliers to General Motors' Electromotive
Division, the Company was the first supplier to receive the prestigious
Targets of Excellence award. Reflecting its emphasis on quality, the
Atchison/St. Joe Division was certified to ISO 9001 in August 1995, which
represents compliance with international standards for quality assurance.
Quaker Alloy, La Grange, Canada Alloy, Jahn Foundry, Pennsylvania Steel
Foundry & Machine Company ("Pennsylvania Steel"), G & C, Inverness, London
Precision, Forgemasters Rolls and Canadian Steel have each been certified
to ISO 9002. Sheffield Forgemasters Engineering Ltd. ("Forgemasters
Engineering") has been certified to ISO 9001. Other ACC foundries are
preparing for ISO certification.
EMPLOYEE AND LABOR RELATIONS
As of June 30, 2000, the Company had approximately 4,200 full-time
employees. Since its inception, the Company has had two work stoppages. The
Company is currently in negotiations with newly formed unions at PrimeCast
and London Precision. There is currently a work stoppage at PrimeCast
resulting from these on-going negotiations. The PrimeCast operation has
continued to operate during this work stoppage. The Company's hourly
employees are covered by collective bargaining agreements with several
unions at seventeen of its locations. These agreements expire at varying
times over the next several years. The following table sets forth a summary
of the principal unions and term of the principal collective bargaining
agreements at the respective locations. The labor laws of France prevent
the Company from learning the number of employees in the union at Autun.
14
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 06/30/00)
- -------------------- ----------------------------------------- -------------- ---------- ------------
Atchison/St. Joe United Steelworkers of America, Local 05/11/99 05/12/02 335
6943
Prospect Glass, Molders, Pottery, 08/31/00 06/30/03 170
Plastics & Allied Workers
International, Local 63B
Quaker Alloy United Steelworkers of 05/15/99 07/15/03 138
America, Local 7274
Canadian Steel Metallurgistes Unis 02/12/96 02/12/01 85
d'Amerique, Local 6859
Kramer United Steelworkers of 07/29/00 07/29/03 80
America, Local 1343
Empire United Steelworkers of 03/01/97 02/28/02 87
America, Local 3178
La Grange Glass, Molders, Pottery, 12/14/95 12/16/00 180
Plastics & Allied Workers
Union, Local 143
G&C United Electrical, Radio and 03/01/97 06/30/01 110
Machine Workers of America,
Local 714
LA Die Casting United Automobile, Aircraft, 12/13/97 12/08/00 45
Agricultural Implement
Workers of America, Local 509
Canada Alloy United Steelworkers of 04/04/97 04/03/02 47
America, Local 5699
Pennsylvania United Steelworkers of 10/24/98 10/24/01 115
Steel America, Local 6541
Jahn Glass, Molders, Pottery, 06/01/98 06/03/01 106
Plastics and Allied Workers
International, Local 97
PrimeCast Glass, Molders, Pottery, 08/22/00 07/31/04 112
Plastics and Allied Workers
International, Local 320
United Steelworkers of America, Under negotiation To be
Local 1533-2 determined
Inverness United Paperworker's International, 02/05/97 08/05/01 220
Local 7363
15
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 06/30/00)
- -------------------- ----------------------------------------- -------------- ---------- ------------
Sheffield Steel and Industrial Managers Association 1/1/00 12/31/00 4
Forgemasters
Engineering Iron and Steel Trades Confederation
Limited 1/1/00 12/31/00 60
Electrical Engineering and plumbing 1/1/00 12/31/00 17
Trades Union
Manufacturing Science and Finance 1/1/00 12/31/00 30
Trades Associated to Steel and 1/1/00 12/31/00 4
Sheetmakers
Association of Professional and 1/1/00 12/31/00 7
Executive Staff
General Municipal and Boilermakers 1/1/00 12/31/00 42
Allied Engineering and Electrical Union 1/1/00 12/31/00 129
Transport and General Workers Union 1/1/00 12/31/00 8
Amalgamated Metal and Steelworkers Union 1/1/00 12/31/00 10
Union of Construction, allied Trades and 1/1/00 12/31/00 3
Technicians
Forgemasters Amalgamated Engineering and Electrical
Rolls Union
- Sheffield 1/1/00 12/31/00 79
- Crewe 8/1/00 7/31/01 196
- Coatbridge 1/1/98 12/31/99 39
Iron and Steel Trades Confederation
- Sheffield 1/1/00 12/31/00 10
General and Municipal Workers Union
- Sheffield 1/1/00 12/31/00 3
Transport and General Workers Union
- Sheffield 1/1/00 12/31/00 4
Manufacturing Science and Finance
- Crewe 8/1/00 7/31/01 19
- Sheffield 1/1/00 12/31/00 7
London Precision United Steelworkers of America, Local Under negotiation To be
2699 determined
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------------- ------- ------------------------------------------------------------
Hugh H. Aiken........................... 56 Chairman of the Board, President, Chief Executive Officer
and Director
Thomas K. Armstrong, Jr................. 46 Chief Operating Officer - North America
David Fletcher.......................... 54 Vice President - Europe
John R. Kujawa.......................... 45 Vice President - Large Steel Castings
Donald J. Marlborough................... 64 Vice President - Corporate Development
Kevin T. McDermed....................... 40 Vice President, Chief Financial Officer, Treasurer and
Secretary
James Stott............................. 58 Vice President
HUGH H. AIKEN has been the Chairman of the Board, President, Chief
Executive Officer and a Director since June 1991. From 1989 to 1991, Mr.
Aiken served as an Associate of Riverside Partners, Inc., an investment
firm located in Boston, Massachusetts, and from 1985 to 1989, Mr. Aiken
served as General Manager for AMP Keyboard Technologies, Inc., a
manufacturer of electromechanical assemblies located in Milford, New
Hampshire. Mr. Aiken previously served as a Director and Chief Operating
Officer of COMNET Incorporated and as a Director and Chief Executive
Officer of General Computer Systems, Inc., both public companies.
THOMAS K. ARMSTRONG, JR. has been Chief Operating Officer - North
America since March 1999. From 1987 to 1999, Mr. Armstrong served as
President of Texas Steel Co., a Citation Corp. company. From 1979 to 1986,
Mr. Armstrong held positions at Texas Steel of Executive Vice President,
Information Systems and Engineering Manager. In addition, Mr. Armstrong
served as Chief Executive Officer of Southwest Steel Casting Corp., a Texas
Steel subsidiary, from 1984 through 1989. Mr. Armstrong began his career as
an engineer with E.I. DuPont from 1976 through 1979. From 1997 to 1999 he
has served as President of the Steel Founders' Society of America.
DAVID FLETCHER has been Vice President and Chairman and CEO of Atchison
Casting UK Limited and the Sheffield Forgemasters Group since April 1998.
Prior to this he was Chief Executive Officer of the Sheffield Forgemasters
Group in Sheffield, England, having joined the group in 1986 as the main
board director responsible for the Engineering group of companies
comprising Forgemasters Steel & Engineering Limited, River Don Castings
Limited, Forged Rolls (UK) Limited and British Rollmakers Corporation. From
1977 to 1986, Mr. Fletcher was Managing Director of various subsidiaries of
the Aurora Group, including Darwin Alloy Castings, Edgar Allen Foundry,
Willen Metals and Aurora Steels.
17
JOHN R. KUJAWA has been Vice President - Large Steel Castings since
August 1999. Prior to this he was Vice President - Atchison/St. Joe and
Amite from November 1996 to August 1999 and Vice President-Atchison/St. Joe
from August 1994 to November 1996. He served as Executive Vice
President-Operations of the Company from July 1993 to August 1994, Vice
President-Foundry of the Company from June 1991 to July 1993, Assistant
Foundry Manager of the Company from 1990 to 1991 and as Senior Process
Engineer of the Company from 1989 to 1990. He served as Operations Manager
for Omaha Steel Castings, a foundry in Omaha, Nebraska, from 1984 to 1989.
DONALD J. MARLBOROUGH has been Vice President - Corporate Development
since September 2000. Prior to this he was Vice President - Iron Castings
from August 1999 to August 2000, Vice President-Canadian Steel, La Grange,
Canada Alloy and London Precision from November 1996 to August 1999, Vice
President-Corporate Development and Canadian Steel from December 1994 to
November 1996 and Vice President-La Grange from December 1995 to November
1996. From May 1991 to October 1994, Mr. Marlborough served as Vice
President-Manufacturing and Plant Manager for American Steel Foundries, a
foundry in Chicago, Illinois, and served as President and Director of
Manufacturing for Racine Steel Castings, a foundry in Racine, Wisconsin,
from 1985 to June 1990.
KEVIN T. MCDERMED has been Vice President, Chief Financial Officer and
Treasurer of the Company since June 1991 and has served as Secretary of the
Company since May 1992. He served as the Controller of the Company from
1990 to June 1991 and as its Finance Manager from 1986 to 1990. Mr.
McDermed has been with the Company since 1981.
JAMES STOTT has been Vice President - Kramer since May 1998. He served
as Vice President - Empire, Kramer, Pennsylvania Steel and Quaker Alloy
from November 1996 to May 1998 and Vice President - Kramer from January
1995 to November 1996. He has served as President, Chief Executive Officer
and Chief Operating Officer of Kramer International, Inc. (the predecessor
of Kramer) since 1980.
PRODUCT WARRANTY
The Company warrants that every product will meet a set of
specifications, which is mutually agreed upon with each customer. The
Company's written warranty provides for the repair or replacement of its
products and excludes contingency costs. Often, the customer is authorized
to make the repair within a dollar limit, in order to minimize freight
costs and the time associated therewith. Although the warranty period is 90
days, this time limit is not strictly enforced if there is a defect in the
casting. In fiscal 2000, warranty costs amounted to less than one percent
of the Company's net sales.
ENVIRONMENTAL REGULATIONS
Companies in the foundry industry must comply with numerous federal,
state and local (and, with respect to Canadian, France and U.K. operations,
federal, provincial and local) environmental laws and regulations relating
to air emissions, solid waste disposal, stormwater runoff, landfill
operations, workplace safety and other matters. The Clean Air Act, as
amended, the Clean Water Act, as amended, and similar provincial, state and
local counterparts of these federal laws regulate air and water emissions
and discharges into the environment. The Resource Conservation and Recovery
Act, as amended, and the Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), among other laws, address the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste and releases of hazardous substances into the environment,
respectively. The Company believes that it is in material compliance with
applicable environmental
18
laws and regulations, other than violations or citations, the resolution of
which would not have a material adverse effect on the Company's financial
condition and results of operations.
A Phase I environmental assessment of each of the Company's facilities
has been performed, and no significant or widespread contamination has been
identified at any Company facility. A Phase I assessment includes an
historical review, a public records review, a preliminary investigation of
the site and surrounding properties and the preparation and issuance of a
written report, but it does not include soil sampling or subsurface
investigations. There can be no assurance that these Phase I assessments
have identified, or could be expected to identify, all areas of
contamination. As the Company evaluates and updates the environmental
compliance programs at foundry facilities recently acquired, the Company
may become aware of matters of noncompliance that need to be addressed or
corrected. In addition, there is a risk that material adverse conditions
could have developed at the Company's facilities since such assessments.
Within the last ten months, groundwater testing confirmed that solvent and
metals contamination is migrating off of a property owned by Inverness.
Current estimates suggest that corrective action costs could be
approximately $400,000.
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust
particles, are handled by dust collection systems. The Company anticipates
that it will incur additional capital and operating costs to comply with
the Clean Air Act Amendments of 1990 and the regulations that are in the
process of being promulgated thereunder. The Company is currently in the
process of obtaining permits under the new regulations and estimating the
cost of compliance with these requirements and the timing of such costs.
Such compliance costs, however, could have a material adverse effect on the
Company's results of operations and financial condition. The Company has
recently entered into an Administrative Consent Order with the
Massachusetts Department of Environmental Protection to design and install
new air handling equipment at Jahn Foundry over the next 2-3 years.
The solid waste generated by the Company's foundries generally consists
of nonhazardous foundry sand that is reclaimed for reuse in the foundries
until it becomes dust. Nonhazardous foundry dust waste is then disposed of
in landfills, two of which are owned by the Company (one in Atchison
County, Kansas, and one in Myerstown, Pennsylvania). No other parties are
permitted to use the Company's landfills, which are both in material
compliance with all applicable regulations to the Company's knowledge.
Costs associated with the future closure of the landfills according to
regulatory requirements could be material. In the event a foundry generates
waste that is identified as hazardous, then a hazardous waste permit is
obtained and the Company complies in all material respects with its
provisions for the collection, storage and disposal of hazardous waste.
The Company also operates pursuant to regulations governing work place
safety. The Company samples its interior air quality to ensure compliance
with OSHA requirements. To the Company's knowledge, it currently operates
in material compliance with all OSHA and other regulatory requirements
governing work place safety, subject to Jahn Foundry's compliance with the
settlement agreement with OSHA in connection with the industrial accident
at Jahn Foundry on February 25, 1999.
The Company continues to evaluate its manufacturing processes and
equipment (including its recently acquired facilities) to ensure compliance
with the complex and constantly changing environmental laws and
regulations. Although the Company believes it is currently in material
compliance with such laws and regulations, the operation of casting
manufacturing facilities entails environmental risks, and there can be no
assurance that the Company will not be required to make substantial
additional expenditures to remain in or achieve compliance in the future.
19
ITEM 2. PROPERTIES
The Company's principal facilities are listed in the accompanying
table, together with information regarding their location, size and primary
function. The two landfills are used solely by the Company and contain
nonhazardous materials only, principally foundry sand. All of the Company's
principal facilities are owned.
The following table sets forth certain information with respect to the
Company's principal facilities.
FLOOR SPACE IN
NAME LOCATION PRINCIPAL USE SQ. FEET
- ------------------------------------ ------------------- ----------------------------- -------------------
Corporate Office Atchison, KS Offices 3,907
Atchison Foundry Atchison, KS Steel foundry 451,218
Atchison Pattern Storage Atchison, KS Pattern storage 159,711
St. Joe Machine Shop St. Joseph, MO Machine shop 142,676
Atchison Casting Landfill Atchison, KS Landfill for foundry sand N/A
Amite Amite, LA Steel foundry and machine 339,000
shop
Prospect Minneapolis, MN Iron foundry 133,000
Quaker Alloy Myerstown, PA Steel foundry & landfill 301,000
for foundry sand
Canadian Steel Montreal, Quebec Steel foundry 455,335
Kramer Milwaukee, WI Steel foundry 23,000
Empire Reading, PA Iron and steel foundry 177,000
La Grange La Grange, MO Iron foundry 189,000
G & C Sandusky, OH Iron foundry 111,000
LA Die Casting Los Angeles, CA Aluminum and zinc die 35,000
casting
Canada Alloy Kitchener, Ontario Steel foundry 83,000
Pennsylvania Steel Hamburg, PA Steel foundry 158,618
20
FLOOR SPACE IN
NAME LOCATION PRINCIPAL USE SQ. FEET
- ------------------------------------ ------------------- ----------------------------- -------------------
Jahn Foundry Springfield, MA Iron foundry 207,689
PrimeCast South Beloit, IL Iron foundry 325,000
and Beloit, WI
Inverness Dowagiac, MI Aluminum die casting 210,900
Forgemasters Rolls Sheffield and Iron and steel foundry 694,306
Crewe, England and machine shop
and Coatbridge,
Scotland
Forgemasters Engineering Sheffield, England Iron and steel foundry, 1,181,277
forge and machine shop
Claremont Claremont, NH Steel Foundry 110,000
London Precision London, Ontario Machine Shop 63,000
Autun Autun, France Iron foundry 376,600
21
ITEM 3. LEGAL PROCEEDINGS
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 have been three fatalities. The damage was
confined to the shell molding area and boiler room. The other areas of the
foundry are operational. Molds are currently being produced at other foundries
as well as Jahn Foundry while the repairs are made. The new shell molding
department is scheduled to be in operation this fall.
The Company carries insurance for property and casualty damages (over $475
million of coverage), business interruption (approximately $115 million of
coverage), general liability ($51 million of coverage) and workers' compensation
(up to full statutory liability) for itself and its subsidiaries. The Company
recorded charges of $450,000 ($750,000 before tax) during the third quarter of
fiscal 1999, primarily reflecting the deductibles under the Company's various
insurance policies. At this time there can be no assurance that the Company's
ultimate costs and expenses resulting from the accident will not exceed
available insurance coverage by an amount which could be material to its
financial condition or results of operations and cash flows.
A civil action has been commenced in Massachusetts 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. Counsel for the plaintiffs informally have indicated a
desire to explore whether any facts would support adding the Company to that
litigation as a jointly and severally liable defendant. The supplier of the
chemical compound, Borden Chemical, Inc., filed a Third Party Complaint against
Jahn Foundry in Massachusetts State Court on February 2, 2000 seeking indemnity
for any liability it has to the plaintiffs in the civil action. The Company's
comprehensive 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, as well as monitoring the situation on behalf of the
Company. It is too early to assess the potential liability to Jahn Foundry for
the Third Party Complaint and the potential liability to the Company for any
claim, which in any event the Company would aggressively defend. Plaintiff's
counsel has informally raised the possibility of seeking to make a double
recovery under the workers' compensation policy in force for Jahn Foundry,
contending that there was willful misconduct on Jahn Foundry's part leading to
the accident. Such recovery, if pursued and made, would be of a material nature.
It is too early to assess the potential liability for such a claim, which in any
event Jahn Foundry would aggressively defend.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the
symbol "FDY." The following table sets forth the high and low sales prices
for the shares of Common Stock on the New York Stock Exchange for the
periods indicated.
HIGH LOW
---- ---
Fiscal Year Ending June 30, 1999:
First Quarter............................... 18 1/2 9 1/2
Second Quarter.............................. 10 8 3/8
Third Quarter............................... 10 15/16 7 7/8
Fourth Quarter.............................. 12 1/8 7 1/2
Fiscal Year Ending June 30, 2000:
First Quarter............................... 11 3/8 8 11/16
Second Quarter.............................. 11 8 1/2
Third Quarter............................... 9 1/8 6 9/16
Fourth Quarter.............................. 8 5/16 5 11/16
Fiscal Year Ending June 30, 2001:
First Quarter (through September 25, 2000) 7 3/16 4 11/16
As of September 25, 2000, there were over 2,200 holders of the Common
Stock, including shares held in nominee or street name by brokers.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on shares of its
Common Stock. The Company does not anticipate paying any cash dividends or
other distributions on its Common Stock in the foreseeable future. The
current policy of the Company's Board of Directors is to reinvest all
earnings to finance the expansion of the Company's business. The agreements
governing the Company's credit facility and $20 million senior notes
contain limitations on the Company's ability to pay dividends. See Note 10
of Notes to Consolidated Financial Statements.
23
UNREGISTERED SECURITIES TRANSACTIONS
In lieu of cash compensation for services rendered in their capacity,
as Directors of the Company, Mr. David Belluck, Mr. Ray Witt, Mr. John
Whitney and Mr. Stuart Uram were each provided at their election 2,314
shares of common stock on August 3, 1999, with a then-current market value
of $9.91 per share. Mr. David D. Colburn and Messrs. Belluck, Witt and Uram
were each provided at their election 5,545, 2,783, 4,174, 4,174 shares,
respectively, of common stock on August 9, 2000, with a then-current market
value of $5.99 per share. Such transactions were exempt from registration
under the Securities Act of 1993, as amended (the "Act"), pursuant to
Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected historical consolidated
financial information and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial information for
the fiscal years ended June 30, 1996, 1997, 1998, 1999 and 2000 has been
derived from audited consolidated financial statements. The information
below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K.
24
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Net Sales............................................ $185,081 $245,769 $373,768 $475,559 $468,301
Cost of Sales........................................ 156,612 203,386 318,280 407,787 414,748
-------- -------- -------- -------- --------
Gross Profit.................................... 28,469 42,383 55,488 67,772 53,553
Operating Expenses:
Selling, General & Administrative............... 15,459 21,559 28,798 44,682 43,089
Impairment Charges.............................. - - - - 10,256 (3)
Amortization of Intangibles..................... 1,508 632 850 544 (408)
Other Income ................................... (26,957) (1) - - (2,750)(2) (606)(4)
-------- -------- -------- -------- --------
Operating Income................................ 38,459 20,192 25,840 25,296 1,222
Interest Expense.................................... 2,845 3,227 3,896 8,352 9,452
Minority Interest in Net Income of Subsidiaries..... 225 270 448 237 66
-------- -------- -------- -------- --------
Income (Loss) Before Taxes...................... 35,389 16,695 21,496 16,707 (8,296)
Income Taxes........................................ 14,063 6,967 8,731 6,901 (10,752)(5)
-------- -------- -------- -------- --------
Net Income...................................... $21,326 $9,728 $12,765 $9,806 $2,456
======== ======== ======== ======== ========
Earnings Per Share:
Basic............................................. $3.87 $1.68 $1.56 $1.26 $0.32
======== ======== ======== ======== ========
Diluted........................................... $3.87 $1.67 $1.55 $1.26 $0.32
======== ======== ======== ======== ========
Weighted Average Number of Common and Equivalent
Shares Outstanding
Basic............................................. 5,510,410 5,796,281 8,167,285 7,790,781 7,648,616
Diluted........................................... 5,516,597 5,830,695 8,218,686 7,790,781 7,650,311
SUPPLEMENTAL DATA:
Depreciation and Amortization....................... $7,411 $8,667 $11,695 $13,400 $14,218
Capital Expenditures ............................... 12,740 13,852 18,495 20,038 21,387
Number of Operating Plants at Period End ........... 9 13 17 19 19
BALANCE SHEET DATA (AT PERIOD END):
Working Capital..................................... $36,419 $57,231 $76,782 $77,522 $11,794
Total Assets........................................ 162,184 213,408 346,139 373,778 377,265
Long-Term Obligations............................... 34,655 27,758 87,272 104,607 36,691
Total Stockholders' Equity (6)......................
74,654 122,731 135,614 139,069 138,952
25
(1) Other income consists of $27.0 million ($16.2 million, net of tax or $2.95
per share), consisting primarily of insurance proceeds related to the July
1993 Missouri River flood.
(2) Other income consists of a $3.5 million ($2.1 million, net of tax or $0.27
per share) gain resulting from a revision to the flood damage
reconstruction reserve, partially offset by a charge of $750,000 ($450,000,
net of tax or $0.06 per share) recorded in connection with an industrial
accident that occurred on February 25, 1999 at Jahn Foundry.
(3) Impairment charges consists of a $3.4 million ($2.1 million, net of tax or
$0.28 per share) charge relating to the Company's planned closure of
Claremont Foundry, Inc. ("Claremont") and a $6.9 million ($4.3 million, net
of tax or $0.56 per share) charge relating to an impairment of long-lived
assets at PrimeCast.
(4) Other income consists primarily of gains of $1.1 million ($650,000, net of
tax) on the termination of interest rate swap agreements.
(5) Includes a $7.8 million, or $1.02 per share, deferred income tax benefit
relating to the resolution of the Company's tax treatment of certain flood
insurance proceeds received in fiscal 1995 and 1996.
(6) There have been no cash dividends paid during fiscal year 1996 through
2000.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Prior to fiscal 2000, the Company pursued an active acquisition program
designed to take advantage of consolidation opportunities in the widely
fragmented foundry industry. The Company has acquired nineteen foundries
since its inception. As a result of these completed transactions as well as
internal growth, the Company's net sales have increased from approximately
$54.7 million for its first full fiscal year ended June 30, 1992 to $468.3
million for the fiscal year ended June 30, 2000.
The Company did not make any acquisitions in fiscal 2000 and is not
currently contemplating any major acquisitions in fiscal 2001. The
Company's primary focus in fiscal 2001 will be on the integration and
improvement of existing operations.
Due to the large size of certain orders, the timing for deliveries of
orders and the number and types of castings produced, the Company's net
sales and net income may fluctuate materially from quarter to quarter.
Generally, the first fiscal quarter is seasonally weaker than the other
quarters as a result of plant shutdowns for maintenance at most of the
Company's foundries as well as at many customers' plants. See "Supplemental
Quarterly Information."
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information
included elsewhere in this Report.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Net sales for fiscal 2000 were $468.3 million, representing a decrease
of $7.3 million, or 1.5%, from net sales of $475.6 million in fiscal 1999.
The operations acquired by the Company since September 1, 1998 generated
net sales of $26.4 million and $39.2 million in fiscal 1999 and fiscal
2000, respectively, as follows:
Date Acquired FY 1999 FY 2000
Operation Net Sales Net Sales
------------------------------------------- ----------------- ----------------- ------------------
(In millions) (In millions)
London Precision......................... 09/01/98 21.9 21.5
Autun.................................... 02/25/99 4.5 17.7
Excluding net sales attributable to the operations acquired since
September 1, 1998, net sales for fiscal 2000 were $429.1 million,
representing a decrease of $20.1 million, or 4.5%, from net sales of $449.2
million in fiscal 1999. This 4.5% decrease in net sales was due primarily
to decreases in net sales to the offshore oil and gas, steel, mining and
power generation markets, partially offset by increases in net sales to the
rail and military markets. Net sales of Sheffield Forgemasters Group
Limited ("Sheffield") for fiscal 2000 decreased $18.0 million from net
sales in fiscal 1999. In addition to the weak market conditions, net sales
have also been impacted by the bankruptcy and subsequent cessation of
operations of a major customer at the Company's PrimeCast, Inc.
("PrimeCast") subsidiary. Through fiscal 2000, PrimeCast has aggressively
worked at replacing the volume lost from Beloit Corporation, which filed
for bankruptcy in June 1999. During February
27
2000, Beloit was sold at auction, in parts, and as a result, the plants
to which PrimeCast supplied castings subsequently ceased operations. For
fiscal 2000, PrimeCast's net sales were $24.5 million compared to net
sales of $27.5 million in fiscal 1999. Included in this $3.0 million
decrease was a $3.8 million decrease in net sales to Beloit Corporation.
Gross profit for fiscal 2000 decreased by $14.2 million, or 20.9%, to
$53.6 million, or 11.4% of net sales, compared to $67.8 million, or 14.3%
of net sales, for fiscal 1999. The decrease in gross profit and gross
profit as a percentage of net sales was primarily due to lower net sales
and reduced absorption of overhead at the Company's subsidiaries which
primarily serve the mining, offshore oil and gas, power generation and
steel markets. The largest impact of these weak market conditions was at
Sheffield, where its gross profit for fiscal 2000 decreased by $10.2
million to $10.2 million, or 8.9% of net sales, compared to $20.4 million,
or 15.4% of net sales, in fiscal 1999.
The bankruptcy of a major customer at PrimeCast and, with a lesser
impact, the loss of a major customer at Claremont Foundry, Inc.
("Claremont") have also had a negative effect on gross profit. Lower sales
volume, coupled with the costs of developing new customers and training
employees on new work has resulted in lower gross profits at these
operations. PrimeCast's gross profit for fiscal 2000 decreased by $2.0
million to a gross loss of $185,000, compared to a gross profit of $1.8
million for fiscal 1999. Claremont's gross profit in fiscal 2000 was a loss
of $1.5 million on net sales of $4.0 million, compared to a loss of $1.0
million on net sales of $7.1 million in fiscal 1999. The Company is in the
process of closing Claremont, and transferring much of the work to other
Company operations.
During fiscal 2000, the Company's reserve for warranty expense
decreased to $9.8 million at June 30, 2000 from $11.8 million at June 30,
1999. Warranty expense recorded by the Company in fiscal 2000 was a credit
to income of $685,000 compared to a credit to income of $1.7 million in
fiscal 1999. The decrease in the warranty reserve during fiscal 2000
primarily related to the Company's Sheffield subsidiary located in the
United Kingdom. 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 for expected claims not yet received.
The estimate for claims not yet received is based on historical results and
is estimated monthly. During fiscal 2000, the Company's warranty reserve
requirement and related expense declined primarily due to the resolution of
specific warranty claims with three different customers whose products were
replaced or determined by the customer to be satisfactory.
During fiscal 2000, the Company's reserve for workers' compensation and
employee health care increased to $2.8 million at June 30, 2000 from $2.6
million at June 30, 1999. Workers' compensation and employee health care
expense was $17.0 million for fiscal 2000, compared to $14.5 million in
fiscal 1999, primarily reflecting higher health care costs. The increase in
the reserve for workers' compensation and employee health care primarily
reflects changes in the amount and timing of actual payments.
Selling, general and administrative expense ("SG&A") for fiscal 2000
was $43.1 million, or 9.2% of net sales, compared to $44.7 million, or 9.4%
of net sales, in fiscal 1999. The decrease in SG&A was primarily
attributable to the consolidation of four operating units into two at
Sheffield, partially offset by expenses associated with Fonderie d'Autun
("Autun"), which was acquired on February 25, 1999.
Amortization of certain intangibles for fiscal 2000 was $1.5 million or
0.3% of net sales, compared to $1.4 million, or 0.3% of net sales, in
fiscal 1999. The intangible assets consist of goodwill recorded in
connection with certain of the Company's acquisitions. The Company has also
28
recorded a liability, consisting of the excess of acquired net assets over
cost ("negative goodwill"), in connection with the acquisitions of Canadian
Steel Foundries Ltd. ("Canadian Steel") and Autun. The amortization of
negative goodwill was a credit to income in fiscal 2000 of $1.9 million, or
0.4% of net sales, as compared to $870,000, or 0.2% of net sales, in fiscal
1999.
Impairment charges for fiscal 2000 were $10.3 million ($6.4 million,
net of tax). This $10.3 million reflects a $3.4 million ($2.1 million, net
of tax) charge relating to the Company's planned closure of Claremont and a
$6.9 million ($4.3 million, net of tax) fixed asset impairment charge at
PrimeCast.
Other income for fiscal 2000 primarily consisted of non-recurring gains
of $1.1 million ($650,000, net of tax) on the termination of interest rate
swap agreements. Other income for fiscal 1999 was $2.8 million ($1.6
million, net of tax). Following the July 1993 Missouri River flood, the
Company established a reserve to repair long-term damage caused by the
flood to the Company's plant. During fiscal 1999, the Company revised this
estimate downward resulting in a non-recurring gain of $3.5 million ($2.1
million, net of tax). Partially offsetting this gain was a charge of
$750,000 ($450,000, net of tax) related to an industrial accident at Jahn
Foundry Corp. ("Jahn Foundry") (see Liquidity and Capital Resources).
During 2000, the Board of Directors committed to a plan for the closure
of Claremont due to continued operating losses. The Company recorded a
charge of $3.6 million primarily to reduce the carrying value of the
Claremont fixed assets to estimated fair value. The Company intends to
transfer as much work as possible to other ACC foundries by November 30,
2000 and close the plant. The Company will terminate approximately 45
employees and will recognize a charge for severance benefits of
approximately $90,000 in the quarter ended September 30, 2000.
On July 1, 1997, a newly formed subsidiary of the Company, PrimeCast,
acquired the foundry division of Beloit Corporation ("Beloit") for $8.2
million. Simultaneous with the purchase, PrimeCast entered a five-year
supply agreement to supply castings to Beloit. As a captive supplier,
historically over 40% of this operation's sales had been to Beloit. In June
1999, Beloit declared bankruptcy, in combination with the bankruptcy of its
parent, Harnischfeger Industries. Beloit continued to operate in
bankruptcy, and the court granted Beloit's request to re-instate the
five-year casting supply agreement. In February 2000, Beloit was sold at
auction, in parts. Expectations were that the new owners would continue to
operate the former Beloit business which PrimeCast primarily served. This
business consisted primarily of paper mill equipment and was located in
Beloit, Wisconsin. However, ultimately these parts of the former Beloit
were closed, resulting in the elimination of this work for PrimeCast, and
the termination of the five-year supply agreement. These events have caused
PrimeCast to operate at a substantial loss, due to much lower production
volume and a less profitable mix of work. As a result, the carrying value
of PrimeCast's long-lived assets have been determined to be impaired. The
Company recorded an impairment charge of $6.9 million ($4.3 million, net of
tax) relating to the fixed assets at PrimeCast.
Interest expense for fiscal 2000 increased to $9.5 million, or 2.0% of
net sales, from $8.4 million, or 1.8% of net sales, in fiscal 1999. The
increase in interest expense primarily reflects higher average interest
rates on the Company's outstanding indebtedness.
The Company has recorded a $7.8 million deferred income tax benefit in
fiscal 2000 with respect to the reinvestment of certain flood insurance
proceeds received in 1995 and 1996. The Company recorded pretax gains of
approximately $20.1 million in 1995 and 1996 related to insurance proceeds
resulting from flood damage to the Company's Atchison, Kansas foundry in
July 1993. For federal
29
income tax purposes, the Company treated the flood as an involuntary
conversion event under the Internal Revenue Code ("Code") and related
Treasury Regulations.
The Code provides generally that if certain conditions are met, gains
on insurance proceeds from an involuntary conversion are not taxable if the
proceeds are reinvested in qualified replacement property within two years
after the close of the first taxable year in which any part of the
conversion gain is realized. The Company believed that its treatment of
certain foundry subsidiary stock acquisitions as qualified replacement
property was subject to potential challenge by the Internal Revenue Service
("Service") in 1996 (the first year in which involuntary conversion gain
was realized for federal income tax purposes). The Company recorded income
tax expense on the insurance gains in 1996 pending review of its position
by the Service or the expiration of the statute of limitations under the
Code for the Service to assess income taxes with respect to the Company's
position.
The Company's treatment of certain foundry subsidiary stock
acquisitions as qualified replacement property creates differing basis in
the foundry subsidiary stock for financial statement and tax purposes.
These differences have not been recognized as taxable temporary differences
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," since the subsidiary basis differences can be permanently
deferred through subsidiary mergers or tax-free liquidations. On March 15,
2000, the statute of limitations for the Service to assess taxes with
respect to the Company's position expired. The deferred taxes recorded in
the consolidated financial statements in prior years were no longer
required.
Excluding this $7.8 million deferred income tax benefit, the income tax
benefit for fiscal 2000 reflected an effective rate of approximately 31%,
which is lower than the combined federal, state and provincial statutory
rate because of the provision for tax benefits at lower effective rates on
losses at certain subsidiaries. Income tax expense for fiscal 1999
reflected an effective rate of approximately 41%. The Company's combined
effective tax rate reflects the different federal, state and provincial
statutory rates of the various jurisdictions in which the Company operates,
and the proportion of taxable income earned in each of those tax
jurisdictions.
As a result of the foregoing, net income decreased from $9.8 million in
fiscal 1999 to $2.5 million in fiscal 2000.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Net sales for fiscal 1999 were $475.6 million, representing an increase
of $101.8 million, or 27.2%, over net sales of $373.8 million in fiscal
1998. The operations acquired by the Company since October 6, 1997
generated net sales of $80.8 million and $213.8 million in fiscal 1998 and
fiscal 1999, respectively, as follows:
Date Acquired FY 1998 FY 1999
Operation Net Sales Net Sales
----------------------------------------------- ---------------- ----------------- ----------------
(In millions) (In millions)
Inverness.................................... 10/06/97 $41.9 $48.1
Sheffield.................................... 04/06/98 37.6 132.2
Claremont.................................... 05/01/98 1.3 7.1
London Precision............................. 09/01/98 -- 21.9
Autun........................................ 02/25/99 -- 4.5
30
Excluding net sales attributable to the operations acquired since
October 6, 1997, net sales for fiscal 1999 were $261.8 million,
representing a decrease of $31.2 million, or 10.6%, over net sales of
$293.0 million in fiscal 1998. This 10.6% decrease in net sales was due
primarily to decreases in net sales to the offshore oil and gas, steel,
mining, power generation, agriculture and petrochemical markets, partially
offset by an increase in net sales to the rail market.
Gross profit for fiscal 1999 increased by $12.3 million, or 22.2%, to
$67.8 million, or 14.3% of net sales, compared to $55.5 million, or 14.9%
of net sales, for fiscal 1998. The increase in gross profit was primarily
due to increased sales volume levels resulting from the acquisitions of
Sheffield and London Precision Machine and Tool Ltd. ("London Precision").
The contribution from London Precision and improved results at Amite
Foundry and Machine, Inc. ("Amite") due to increased sales volume levels,
improved productivity and reduced employee turnover and training positively
impacted gross profit as a percentage of net sales.
Offsetting these factors were: (i) decreased absorption of overhead
resulting from lower net sales to the offshore oil and gas, mining, steel,
power generation, petrochemical and agricultural markets, (ii) delays in
the scheduled delivery of orders by customers in the mining, construction
and rail markets, (iii) continued productivity and scrap problems at
Inverness Castings Group, Inc. ("Inverness") and Claremont, (iv) increased
warranty costs at Canada Alloy Castings, Ltd. ("Canada Alloy") and (v)
increased training costs, higher employee turnover and increased overtime
due to the generally tight labor markets. In addition, gross profit as a
percentage of net sales was impacted by (i) reduced productivity and
excessive overtime due to power curtailments under the Company's
interruptible electricity contracts resulting from the extreme heat during
the first quarter and (ii) higher plant maintenance shutdown costs at
Atchison/St. Joe and Prospect Foundry, Inc. ("Prospect").
During fiscal 1999, the Company's reserve for warranty expense
decreased to $11.8 million at June 30, 1999 from $16.3 million at June 30,
1998. Warranty expense recorded by the Company was a credit to income of
$1.7 million in fiscal 1999 compared to expense of $900,000 in fiscal 1998.
The decrease in both the warranty reserve and warranty expense during
fiscal 1999 primarily related to the Company's Sheffield subsidiary located
in the United Kingdom. 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 for expected claims not yet received.
The estimate for claims not yet received is based on historical results and
is estimated monthly. During fiscal 1999, the Company's estimated reserve
requirement and related expense declined primarily due to 1) an overall
improvement in Sheffield's claim experience over the prior year and 2) a
decline in sales volume resulting in a reduced estimate of claims not yet
received. Sheffield's customer claims experience as a percentage of sales
declined from 2.9% in fiscal 1998 to 2.2% in fiscal 1999. Sheffield's net
sales for fiscal 1999 were $132.2 million, representing a decrease of $24.0
million, or 15.4%, from net sales of $156.2 million for the twelve months
ended June 30, 1998. In addition, two specific customer claims included in
the reserve at June 30, 1998 were withdrawn by the customer in fiscal 1999,
as the products were determined to be satisfactory. This resulted in an
adjustment to the reserve, and a reduction in warranty expense, of
approximately $800,000.
During fiscal 1999, the Company's reserve for workers' compensation and
employee health care decreased to $2.6 million at June 30, 1999 from $3.6
million at June 30, 1998. Workers' compensation and employee health care
expense was $14.5 million for fiscal 1999, compared to $12.6 million in
fiscal 1998, of which $1.2 million of the increase was associated with
operations acquired by the Company since October 1997. The decrease in the
reserve for workers' compensation and employee health care primarily
reflects changes in the amount and timing of actual payments.
31
SG&A for fiscal 1999 was $44.7 million, or 9.4% of net sales, compared
to $28.8 million, or 7.7% of net sales, in fiscal 1998. The increase in
SG&A was primarily attributable to expenses associated with the operations
acquired by the Company in fiscal 1998 and fiscal 1999. The increase in
SG&A as a percentage of net sales was primarily due to higher average SG&A
as a percentage of net sales at Sheffield.
Other income for fiscal 1999 was $2.8 million ($1.6 million, net of
tax). Following the July 1993 Missouri River flood, insurance proceeds
related to property damage were reserved for estimated future repairs to
the plant. During the fourth quarter, the Company revised this estimate
downward resulting in a non-recurring gain of $3.5 million ($2.1 million,
net of tax). Partially offsetting this gain was a charge of $750,000
($450,000, net of tax) related to an industrial accident at the Company's
subsidiary, Jahn Foundry (see Liquidity and Capital Resources).
Amortization of certain intangibles for fiscal 1999 was $1.6 million or
0.2% of net sales, compared to $1.2 million, or 0.3% of net sales, in fiscal
1998. The intangible assets consist of goodwill recorded in connection with
certain of the Company's acquisitions. The Company has also recorded a
liability, consisting of the excess of acquired net assets over cost
("negative goodwill"), in connection with the acquisitions of Canadian Steel
and Autun. The amortization of negative goodwill was a credit to income in
fiscal 1999 of $870,000, or 0.2% of net sales, as compared to $257,000, or
0.1% of net sales, in fiscal 1998.
Interest expense for fiscal 1999 increased to $8.4 million, or 1.8% of
net sales, from $3.9 million, or 1.0% of net sales, in fiscal 1998. The
increase in interest expense primarily reflects an increase in the average
amount of outstanding indebtedness during fiscal 1999 primarily incurred to
finance the Company's acquisitions.
Income tax expense for fiscal 1999 and fiscal 1998 reflected the
combined federal, state and provincial statutory rate of approximately 41%
and 40%, respectively, which is higher than the combined federal, state and
provincial statutory rate because of the provision for the tax benefits at
lower effective rates on losses at certain subsidiaries. The Company's
combined effective tax rate reflects the different federal, state and
provincial statutory rates of the various jurisdictions in which the
Company operates, and the proportion of taxable income earned in each of
those tax jurisdictions.
As a result of the foregoing, net income decreased from $12.8 million
in fiscal 1998 to $9.8 million in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed operations with internally
generated funds, proceeds from the sale of senior notes and available
borrowings under its bank credit facilities. Cash provided by operating
activities for fiscal 2000 was $18.0 million, an increase of $10.3 million
from fiscal 1999. This increase was primarily attributable to advances by
the Company's insurance carrier against the claim relating to the
industrial accident at Jahn Foundry. (See below)
Working capital was $11.8 million at June 30, 2000, as compared to
$77.5 million at June 30, 1999. The decrease in working capital primarily
reflects the classification of the Company's bank credit facility and
senior notes with an insurance company as current at June 30, 2000. As
described below, the Company obtained a waiver of compliance with certain
financial covenants through September 30, 2000 from its bank lenders and an
insurance company holding the Company's senior notes. Absent another
waiver, the Company does not believe it will be in compliance with such
32
covenants. The agreements with the Company's bank lenders and the insurance
company contain cross acceleration/default provisions which would allow the
debt to be accelerated. Accordingly, the outstanding balances under these
agreements have been classified as current at June 30, 2000.
During fiscal 2000, the Company made capital expenditures of $21.4
million, as compared to $20.0 million for fiscal 1999. Included in fiscal
2000 were capital expenditures of $7.7 million to rebuild the shell molding
area and boiler room damaged in the industrial accident on February 25,
1999 at Jahn Foundry (see below) and $2.7 million to expand Autun's product
line capabilities in the manufacture of gray and ductile iron castings.
Included in fiscal 1999 were capital expenditures of $2.1 million on
upgrading the 1,500 ton forging press to 2,500 tons at Sheffield. The
balance of capital expenditures in both periods were used for routine
projects at each of the Company's facilities. The Company expects to make
approximately $18.0 million of capital expenditures during fiscal 2001.
On October 7, 1998, the Company and its lenders entered into the First
Amendment to the Amended and Restated Credit Agreement (the "Credit
Agreement"). The Credit Agreement consists of a $40 million term loan and a
$70 million revolving credit facility. This amendment permits the Company
to repurchase up to $24 million of its common stock, subject to a
limitation of $10 million in any fiscal year unless certain financial
ratios are met, and provides for an option to increase the revolving
portion of the credit facility to $100 million if the Company issues senior
subordinated notes. Proceeds from the issuance of any senior subordinated
notes must be used to permanently pre-pay the $40 million term loan portion
of the credit facility.
On April 23, 1999, the Company and its lenders entered into the Second
Amendment to the Credit Agreement. This amendment provides that the Company
maintain a ratio of earnings before interest, taxes and amortization to
fixed charges ("Fixed Charge Coverage Ratio") of at least 1.10 increasing
to 1.25 on March 31, 2000 and 1.50 on March 31, 2001. The amendment also
provides that the Company must maintain a ratio of total senior debt to
earnings before interest, taxes, amortization and depreciation of not more
than 3.2 prior to the issuance by the Company of any subordinated debt, and
not more than 3.0 after the issuance of any subordinated debt. In addition,
this amendment provides that the Company may not make acquisitions prior to
May 1, 2000 and, from and after May 1, 2000, the Company may not make
acquisitions unless the Fixed Charge Coverage Ratio is at least 1.50, among
other existing restrictions. Loans under this revolving credit facility
will bear interest at fluctuating rates of either: (i) the agent bank's
corporate base rate or (ii) LIBOR plus 1.85% subject, in the case of the
LIBOR rate option, to a reduction of up to 0.50% (50 basis points) if
certain financial ratios are met. Loans under this revolving credit
facility may be used for general corporate purposes, permitted acquisitions
and approved investments. Absent the Amendment, the Company would not have
been in compliance with the Fixed Charge Coverage Ratio.
On August 20, 1999, the Company and its lenders entered into the Third
Amendment to the Amended and Restated Credit Agreement (the "Credit
Agreement"). This amendment provides that the Company's subsidiary, Autun,
is not subject to the provisions governing subsidiary indebtedness. It
further provides that the Company and its subsidiaries may not make any
investment in Autun and the Company must exclude Autun's results in the
calculation of various financial covenants.
On October 20, 1999, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior notes
(the "Notes") entered into the Fourth Amendment to the Note Purchase
Agreement. This amendment provides that the Company's subsidiary, Autun, is
not subject to the provisions governing subsidiary indebtedness. It further
33
provides that the Company and its subsidiaries may not make any investment
in Autun and the Company must exclude Autun's results in the calculation of
various financial covenants.
On November 5, 1999, the Company and its lenders entered into the
Fourth Amendment and Waiver (the "Fourth Amendment") to the Credit
Agreement. The Fourth Amendment provided, among other things, that the
Company maintain a ratio of earnings before interest, taxes and
amortization to fixed charges ("Fixed Charge Coverage Ratio") of at least
1.10 on December 31, 1999, increasing to 1.25 on July 1, 2000, if the
Company incurs at least $20 million of subordinated debt by January 31,
2000. If the Company did not obtain a commitment for the private placement
of at least $20 million of subordinated debt by December 15, 1999, the
Fourth Amendment provided that (1) the Company maintain a Fixed Charge
Coverage Ratio of at least 1.10 on December 31, 1999, increasing to 1.25 on
March 31, 2000 and 1.50 on March 31, 2001, (2) the fixed charges used in
calculating the Fixed Charge Coverage Ratio will include 15% of the
aggregate principal amount outstanding under the revolving credit facility
after October 1, 1999 rather than after July 1, 2000, and (3) the Company
will grant the lenders under the Credit Agreement liens on the Company's
assets by February 14, 2000. The Company was unable to obtain such a
commitment by December 15, 1999. The Fourth Amendment also provided that
the Company must maintain a ratio of consolidated total debt to total
capitalization of not more than 55%. Absent the Waiver, the Company would
not have been in compliance with the Fixed Charge Coverage Ratio.
On December 21, 1999, the Company and its lenders entered into the
Fifth Amendment (The "Fifth Amendment") to the Credit Agreement. The Fifth
Amendment provided that the Company may incur up to $35 million of
indebtedness from General Electric Capital Corporation or its assignees
(the "GE Financing"). In addition, the Fifth Amendment provided that (1)
the bank revolving credit facility will be increased from $70.0 million to
$80.0 million through April 30, 2000, (2) the fixed charges used in
calculating the Fixed Charge Coverage Ratio will not include 15% of the
aggregate principal amount outstanding under the revolving credit facility
through June 30, 2000 and (3) the Company will grant the lenders under the
Credit Agreement liens in certain of the Company's assets. Absent the
Amendment, the Company would not have been in compliance with the Fixed
Charge Coverage Ratio.
On December 21, 1999, the Company and the insurance company holding the
Notes entered into the Fifth Amendment to the Note Purchase Agreement. This
amendment provided that the Company may incur indebtedness through the GE
Financing. This amendment further provided that (1) the Company must
maintain a ratio of consolidated total debt to total capitalization of not
more than 55%, (2) the Company maintain a Fixed Charge Coverage Ratio of at
least 1.10 on December 31, 1999, increasing to 1.25 on March 31, 2000 and
1.50 on March 31, 2001 and (3) the fixed charges used in calculating the
Fixed Charge Coverage Ratio will not include 15% of the aggregate principal
amount outstanding under the revolving credit facility through June 30,
2000.
On December 29, 1999, the Company entered into a Master Security
Agreement with General Electric Capital Corporation ("GECC") and its
assigns providing for a term loan of $35.0 million. The term loan 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 bears interest at a fixed rate of
9.05%. On December 29, 1999 the proceeds of the term loan, together with
borrowings under the Company's revolving credit facility, were used to
retire the $35.7 million of outstanding indebtedness under the Company's
term loan under its bank credit facility.
34
On February 15, 2000, the Company, its lenders and the holder of the
Notes entered into the Sixth Amendments (the "Sixth Amendments") to the
Credit Agreement and the Note Purchase Agreement. Together with the GECC
term loan, the Sixth Amendments provided for the perfection of a security
interest in favor of GECC, the lenders under the Credit Agreement and the
holder of the Notes in substantially all of the Company's assets other than
real estate.
On May 1, 2000, the Company and its lenders entered into the Seventh
Amendment and Waiver (the "Seventh Amendment") to the Credit Agreement. The
Seventh Amendment provides, among other things, for a waiver of compliance
by the Company with the Cash Flow Leverage Ratio covenant through July 1,
2000. The Cash Flow Leverage Ratio covenant requires the Company to
maintain a ratio of total debt to earnings before interest, taxes,
depreciation and amortization of no greater than 3.2. Loans under this
credit facility will bear interest at fluctuating rates of either: (1)
Harris's corporate base rate plus 0.75% or (2) LIBOR plus 2.25%, increasing
to LIBOR plus 2.50% on June 1, 2000. Absent the waiver, the Company would
not have been in compliance with the Cash Flow Leverage Ratio.
On June 30, 2000, the Company and its lenders entered into the Eighth
Amendment and Waiver (the "Eighth Amendment") to the Credit Agreement. The
Eight Amendment provides, among other things, for a waiver of compliance by
the Company with the Cash Flow Leverage Ratio and Fixed Charge Coverage
Ratio covenants through July 31, 2000, and that the bank credit facility
will be decreased from $80.0 million to $77.3 million through July 31,
2000. Loans under this Credit Agreement will bear interest at Harris's
corporate base rate plus 1.25%. Absent the waiver, the Company would not
have been in compliance with the Cash Flow Leverage and Fixed Charged
Coverage Ratio Covenants.
Effective June 30, 2000, the insurance company holding the Notes
granted a limited waiver of compliance with the Fixed Charge Coverage Ratio
covenant through September 30, 2000. Absent the waiver, the Company would
not have been in compliance with the Fixed Charge Coverage Ratio covenant.
On July 31, 2000, the Company and its lenders entered into the Ninth
Amendment and Waiver (the "Ninth Amendment") to the Credit Agreement. The
Ninth Amendment provides, among other things, for a waiver of compliance by
the Company with the Cash Flow Leverage Ratio and Fixed Charge Leverage
Ratio covenants through September 30, 2000, and that the bank facility will
be maintained at $77.3 million through September 30, 2000. Loans under the
Credit Agreement will bear interest at fluctuating rates of either (1)
Harris' corporate base rate plus 1.75% or (2) LIBOR plus 3.00%. Absent the
waiver, the Company would not have been in compliance with the Cash Flow
Leverage Ratio and Fixed Charge Coverage Ratio covenants.
Compliance with the financial covenants under the Credit
Agreement and Note Purchase Agreement is determined on a
"rolling-four-quarter" basis. The results for fiscal 2000 are, and expected
results for fiscal 2001 will likely continue to be, below results
needed to achieve compliance with these covenants under the Credit
Agreement and Note Purchase Agreement. Accordingly, the Company is
currently (a) negotiating forbearance agreements to its Credit Agreement
and Note Purchase Agreement in which the parties would agree not to
enforce their rights with respect to defaults in connection with (i)
covenants relating to the Cash Flow Leverage Ratios, Fixed Charge
Coverage Ratio and Current Ratio, and (ii) extensions of additional
credit due to noncompliance of the covenants described above and other
provisions, and (b) negotiating with other financial institutions to
establish a new credit facility with covenants that the Company believes
it will be able to satisfy. During the past several years, the Company
has been able to negotiate operating flexibility with its lenders,
although 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 the new credit facility, when established, or its
existing credit facility, assuming forbearances are obtained, will be
adequate to fund its capital expenditure and working capital
requirements for the next 12 months. 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 or the accident at Jahn Foundry. If the
Company fails to achieve compliance with the terms of its Credit Agreement
or, in the absence of such compliance, if the Company fails to amend such
financial covenants on terms favorable to the Company, the Company may be
in default under such covenants. If such default occurred, it would permit
acceleration of its debt under its Credit Agreement which, in turn,
would permit acceleration of the Notes under the Note Purchase
Agreement, and vice versa.
35
Total indebtedness of the Company at June 30, 2000 was $117.6 million,
as compared to $113.4 million at June 30, 1999. This increase of $4.2
million primarily reflects indebtedness incurred of $2.7 million to
purchase common stock in certain of the Company's subsidiaries. At June 30,
2000, $11.4 million was available for borrowing under the Company's
revolving credit facility.
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 have been three fatalities. The
damage was confined to the shell molding area and boiler room. The other
areas of the foundry are operational. Molds are currently being produced at
other foundries as well as Jahn Foundry while the repairs are made. The new
shell molding department is scheduled to be in operation this fall.
The Company carries insurance for property and casualty damages (over
$475 million of coverage), business interruption (approximately $115
million of coverage), general liability ($51 million of coverage) and
workers' compensation (up to full statutory liability) for itself and its
subsidiaries. The Company recorded charges of $450,000 ($750,000 before
tax) during the third quarter of fiscal 1999, primarily reflecting the
deductibles under the Company's various insurance policies. At this time
there can be no assurance that the Company's ultimate costs and expenses
resulting from the accident will not exceed available insurance coverage by
an amount which could be material to its financial condition or results of
operations and cash flows.
A civil action has been commenced in Massachusetts 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. Counsel for the plaintiffs informally
have indicated a desire to explore whether any facts would support adding
the Company to that litigation as a jointly and severally liable defendant.
The supplier of the chemical compound, Borden Chemical, Inc., filed a Third
Party Complaint against Jahn Foundry in Massachusetts State Court on
February 2, 2000 seeking indemnity for any liability it has to the
plaintiffs in the civil action. The Company's comprehensive 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, as well as monitoring the situation on behalf of the
Company. It is too early to assess the potential liability to Jahn Foundry
for the Third Party Complaint and the potential liability to the Company
for any claim, which in any event the Company would aggressively defend.
Plaintiff's counsel has informally raised the possibility of seeking to
make a double recovery under the workers' compensation policy in force for
Jahn Foundry, contending that there was willful misconduct on Jahn
Foundry's part leading to the accident. Such recovery, if pursued and made,
would be of a material nature. It is too early to assess the potential
liability for such a claim, which in any event Jahn Foundry would
aggressively defend.
The Company, its property insurance carrier and its insurance broker
dispute the amount of property insurance available for property damages
suffered in this accident. It is too early in the
36
process of calculating the loss to estimate the amount in dispute.
Management believes that the probability of any loss resulting from the
disputed property insurance coverage is remote. The Company currently
believes this dispute will be resolved during fiscal 2001. If this dispute
cannot be resolved amicably, the Company would vigorously pursue its
remedies against both parties.
Following the accident, OSHA conducted an investigation of the
accident. On August 24, 1999, OSHA issued a citation describing violations
of the Occupational Safety and Health Act of 1970, which primarily related
to housekeeping, maintenance and other specific, miscellaneous items.
Neither of the two violations specifically addressing conditions related to
the explosion and fire were classified as serious or willful. Without
admitting any wrongdoing, Jahn Foundry entered into a settlement with OSHA
that addresses the alleged work place safety issues and agreed to pay
$148,500 in fines.
MARKET RISK
The Company operates manufacturing facilities in the U.S., Canada and
Europe and utilizes fixed and floating rate debt to finance its global
operations. As a result, the Company is subject to business risks inherent
in non-U.S. activities, including political and economic uncertainty,
import and export limitations, and market risk related to changes in
interest rates and foreign currency exchange rates. The Company believes
the political and economic risks related to its foreign operations are
mitigated due to the stability of the countries in which its largest
foreign operations are located.
In the normal course of business, the company uses derivative financial
instruments including interest rate swaps and foreign currency forward
exchange contracts to manage its market risks, although, at June 30, 2000,
the Company had no outstanding interest rate swap agreements. Additional
information regarding the Company's financial instruments is contained in
Note 12 to the Company's consolidated financial statements. The Company's
objective in managing its exposure to changes in interest rates is to limit
the impact of such changes on earnings and cash flow and to lower its
overall borrowing costs. The Company's objective in managing its exposure
to changes in foreign currency exchange rates is to reduce volatility on
earnings and cash flow associated with such changes. The Company's
principal currency exposures are in the major European currencies and the
Canadian dollar. The Company does not hold derivatives for trading
purposes.
For 2000 and 1999, the Company's exposure to market risk has been
estimated using sensitivity analysis, which is defined as the change in the
fair value of a derivative or financial instrument assuming a hypothetical
10% adverse change in market rates or prices. The Company used current
market rates on its debt and derivative portfolio to perform the
sensitivity analysis. Certain items such as lease contracts, insurance
contracts, and obligations for pension and other post-retirement benefits
were not included in the analysis. The results of the sensitivity analyses
are summarized below. Actual changes in interest rates or market prices may
differ from the hypothetical changes.
The Company's primary interest rate exposures relate to its cash and
short-term investments and fixed and variable rate debt. 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 a material impact on the Company's earnings of
approximately $500,000 and $200,000 in fiscal 2000 and 1999, respectively.
The Company's exposure to fluctuations in currency rates against the
British pound sterling and Canadian dollar result from the Company's
holdings in cash and short-term investments and its
37
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 sterling 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 sterling and Canadian
dollar. Based on the Company's holdings of financial instruments at June
30, 2000 and 1999, a hypothetical 10% depreciation in the pound sterling
and the Canadian dollar versus all other currencies would have a material
impact on the Company's earnings of approximately $1.7 million and $2.7
million in fiscal 2000 and 1999, respectively. The Company's analysis does
not include the offsetting impact from its underlying hedged exposures
(customer receivables and firm commitments). If the Company included these
underlying hedged exposures in its sensitivity analysis, these exposures
would substantially offset the financial impact of its foreign currency
forward exchange contracts due to changes in currency rates.
INFLATION
Management believes that the Company's operations have not been
materially adversely affected by inflation or changing prices.
FORWARD-LOOKING STATEMENTS
Statements above in the subsections entitled "General," "Liquidity and
Capital Resources" and "Market Risk," such as "expects," "intends,"
"contemplating" and statements regarding quarterly fluctuations, statements
regarding the adequacy of funding for capital expenditure and working
capital requirements for the next twelve months 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 size and timing of future acquisitions, business conditions and the
state of the general economy, particularly the capital goods industry, the
strength of the U.S. dollar, British pound sterling and the Euro, interest
rates, the availability of labor, the successful conclusion of contract
negotiations, the results of any litigation arising out of the accident at
Jahn Foundry, the competitive environment in the casting industry and
changes in laws and regulations that govern the Company's business,
particularly environmental regulations.
NEW ACCOUNTING STANDARDS
For a discussion of new accounting standards, see Note 1 of the
Company's Notes to Consolidated Financial Statements.
38
SUPPLEMENTAL QUARTERLY INFORMATION
The Company's business is characterized by large unit and dollar volume
customer orders. As a result, the Company has experienced and may continue
to experience fluctuations in its net sales and net income from quarter to
quarter. Generally, the first fiscal quarter is seasonally weaker than the
other quarters as a result of plant shutdowns for maintenance at most of
the Company's foundries as well as at many customers' plants. In addition,
the Company's operating results may be adversely affected in fiscal
quarters immediately following the consummation of an acquisition while the
operations of the acquired business are integrated into the operations of
the Company.
The following table presents selected unaudited supplemental quarterly
results for fiscal 1999 and fiscal 2000.
FISCAL 1999 FISCAL 2000
QUARTERS ENDED QUARTERS ENDED
------------------------------------------ ----------------------------------------------
SEPT. DEC. MAR.(1) JUNE(2) SEPT. DEC.(3) MAR.(4) JUNE(5)
----------- -------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
(In thousands, except per share data)
Net Sales............. $116,576 $122,955 $119,533 $116,495 $109,693 $115,711 $124,745 $118,152
Gross Profit.......... 13,921 18,747 17,535 17,569 12,713 15,031 13,692 12,117
Operating
Income (Loss)....... 2,701 6,810 4,590 11,195 3,102 4,658 2,730 (9,268)
Net Income (Loss)..... $337 $2,708 $1,265 $5,496 $612 $1,144 $7,845 $(7,145)
======== ======== ======== ======== ======== ======== ======== ========
Net Income (Loss) Per
Share..............
Basic.............. $ 0.04 $ 0.35 $ 0.17 $ 0.72 $.08 $0.15 $1.03 $(0.93)
======== ======== ======== ======== ======== ======== ======== ========
Diluted............ $ 0.04 $ 0.35 $ 0.17 $ 0.72 $.08 $0.15 $1.03 $(0.93)
======== ======== ======== ======== ======== ======== ======== ========
(1) The third quarter contains a $750 charge recorded in connection with an
industrial accident that occurred on February 25, 1999 at Jahn Foundry,
which decreased net income by $450,000, or $.06 per share.
(2) The fourth quarter contains a $3,500 revision to the flood damage
reconstruction reserve which increased net income by $2,086, or $.27
per share. The flood damage reconstruction reserve related to the July
1993 Missouri River flood.
(3) The second quarter contains a $681 gain on the termination of an
interest rate swap agreement, which increased net income by $412 or
$.05 per share.
(4) The third quarter contains a $7,786 deferred income tax benefit
relating to the resolution of the Company's tax treatment of certain
flood insurance proceeds received in fiscal 1995 and 1996, which
increased net income by $7,786, or $1.02 per share.
(5) The fourth quarter contains a $3,373 impairment charge and $227 of
other costs recorded in connection with the closure of Claremont
foundry, which decreased net income $2,268 or $0.30 per share. In
addition, the fourth quarter also contains a $6,883 impairment charge
recorded in connection with the write-down of PrimeCast fixed assets,
which decreased net income $4,336 or $0.56 per share. In addition, the
fourth quarter contains a $402 gain on the termination of an interest
rate swap agreement, which increased net income by $243 or $.03 per
share.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in the Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under
this Item, beginning on page F-1 of this Report. No financial statement
schedules are required to be filed under Regulation S-X.
Selected quarterly financial data required under this item is included
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Registrant's Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A. The required information as to executive officers is set forth in Part
I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Page
Number
------
(a) DOCUMENTS LIST
(1) The following financial statements are included in Part II Item 8:
Independent Auditors' Report F-1
Consolidated Balance Sheets at June 30, 1999 and 2000 F-2
Consolidated Statements of Income For the Years F-4
Ended June 30, 1998, 1999 and 2000
Consolidated Statements of Comprehensive Income F-5
For the Years Ended June 30, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity F-6
For the Years Ended June 30, 1998, 1999 and 2000
Consolidated Statements of Cash Flows For the Years F-7
Ended June 30, 1998, 1999 and 2000
Notes to Consolidated Financial Statements For the Years F-8
Ended June 30, 1998, 1999 and 2000
(2) Financial Statement Schedules
Valuation and Qualifying Accounts Schedule 44
(3) List of Exhibits:
Exhibits required by Item 601 of Regulation S-K are listed in
the Exhibit Index which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The Company has filed a Form 8-K dated May 19, 2000.
Items Reported:
Item 5. Other Events (Description of By-Law amendments)
Item 7. Exhibits
42
(1) Amendments to By-Laws of the Company
(2) Amended and Restated By-Laws of the Company
(c) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section to this report.
(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
43
Financial Statement Schedules - Valuation and Qualifying Accounts Schedule
ACCOUNTS RECEIVABLE ALLOWANCE
BEGINNING BALANCE ADDITIONS TO DEDUCTION FROM ENDING
BALANCE ACQUIRED (EXPENSE) (WRITEOFFS) BALANCE
--------- -------- ------------ -------------- -------
Fiscal 2000 $591 $ - $855 $862 $584
Fiscal 1999 508 21 282 220 591
Fiscal 1998 381 311 120 304 508
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
By: /s/ Hugh H. Aiken
------------------------------------
Hugh H. Aiken
Principal Executive Officer
Dated: Sept 25, 2000
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dated indicated:
Signature Title Date
--------- ----- ----
/s/ Hugh H. Aiken Chairman of the Board, Sept. 25, 2000
-------------------------- President, Chief Executive --------------
Hugh H. Aiken Officer and Director
(Principal Executive Officer)
/s/ Stuart Z. Uram Director Sept. 25, 2000
--------------------------- --------------
Stuart Z. Uram
/s/ David L. Belluck Director Sept. 27, 2000
--------------------------- --------------
David L. Belluck
/s/ Ray H. Witt Director Sept. 27, 2000
--------------------------- --------------
Ray H. Witt
/s/ David D. Colburn Director Sept. 27, 2000
--------------------------- --------------
David D. Colburn
/s/ Kevin T. McDermed Vice President, Chief Sept. 25, 2000
--------------------------- Financial Officer, Treasurer --------------
Kevin T. McDermed and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
45
ATCHISON CASTING
CORPORATION AND
SUBSIDIARIES
Consolidated Financial Statements as of
June 30, 1999 and 2000, and for Each of the Three
Years in the Period Ended June 30, 2000, and
Independent Auditors' Report
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 2000:
Consolidated Balance Sheets - June 30, 1999 and 2000 F-2 - F-3
Consolidated Statements of Income - Years Ended June 30, 1998,
1999 and 2000 F-4
Consolidated Statements of Comprehensive Income - Years Ended
June 30, 1998, 1999 and 2000 F-5
Consolidated Statements of Stockholders Equity - Years Ended
June 30, 1998, 1999 and 2000 F-6
Consolidated Statements of Cash Flows - Years Ended June 30, 1998,
1999 and 2000 F-7
Notes to Consolidated Financial Statements F-8 - F-41
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Atchison Casting Corporation and Subsidiaries
Atchison, Kansas
We have auditied the accompanying consolidated balance sheets of Atchison
Casting Corporation and subsidiaries (the "Company") as of June 30, 1999 and
2000 and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 of our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1999
and 2000, and the results of its operations and its cash flows for each of
the the three years in the period ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes 10 and 24 to the consolidated financial statements, the
Company has classified approximately $72.8 million of debt as current due to
expected debt covenant violations. The Company is seeking to extend,
renegotiate or replace its current credit facilities.
/s/ Deloitte & Touche LLP
September 1, 2000
Kansas City, Missouri
-F-1-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS 1999 2000
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 4,222 $ 5,932
Customer accounts receivable, net of allowance for doubtful
accounts of $591 and $584 at June 30, 1999 and 2000, respectively 83,235 94,988
Inventories 68,777 61,804
Deferred income taxes 816
Other current assets 18,829 26,096
-------- --------
Total current assets 175,063 189,636
PROPERTY, PLANT AND EQUIPMENT, Net 150,056 142,367
INTANGIBLE ASSETS, Net 32,846 31,233
DEFERRED FINANCING COSTS, Net 660 923
OTHER ASSETS 15,153 13,106
-------- --------
TOTAL $373,778 $377,265
======== ========
(Continued)
-F-2-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 39,452 $ 40,607
Accrued expenses 43,130 56,316
Current maturities of long-term obligations 8,833 80,919
Deferred income taxes 6,126
-------- --------
Total current liabilities 97,541 177,842
LONG-TERM OBLIGATIONS 104,607 36,691
DEFERRED INCOME TAXES 9,220 5,511
OTHER LONG-TERM OBLIGATIONS 3,969 2,683
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS OVER COST, Net of accumulated
amortization of $1,776 and $2,298 at June 30, 1999 and 2000, respectively 6,889 4,843
POSTRETIREMENT OBLIGATION OTHER
THAN PENSION 8,278 9,199
MINORITY INTEREST IN SUBSIDIARIES 4,205 1,544
-------- --------
Total liabilities 234,709 238,313
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, participating, cumulative, 2,000,000
authorized shares; no shares issued and outstanding
Common stock, $.01 par value, 19,300,000 authorized shares; 8,259,603 and
8,295,974 shares issued at June 30, 1999
and 2000, respectively 83 83
Class A common stock (non-voting), $.01 par value, 700,000 authorized shares;
no shares issued and outstanding
Additional paid-in capital 81,216 81,460
Retained earnings 65,011 67,467
Accumulated foreign currency translation adjustment (1,193) (4,010)
Less common stock held in treasury, 622,702 shares at June 30, 1999
and 2000, at cost (6,048) (6,048)
--------- -----------
Total stockholders' equity 139,069 138,952
--------- -----------
TOTAL $ 373,778 $ 377,265
========= ===========
See notes to consolidated financial statements (Concluded)
-F-3-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1998 1999 2000
------ ------ ------
NET SALES $ 373,768 $ 475,559 $ 468,301
COST OF GOODS SOLD 318,280 407,787 414,748
----------- ----------- -----------
GROSS PROFIT 55,488 67,772 53,553
OPERATING EXPENSES:
Selling, general and administrative 28,798 44,682 43,089
Impairment charges 10,256
Amortization of intangibles 850 544 (408)
Other income, net (2,750) (606)
----------- ----------- -----------
Total operating expenses, net 29,648 42,476 52,331
----------- ----------- -----------
OPERATING INCOME 25,840 25,296 1,222
INTEREST EXPENSE 3,896 8,352 9,452
MINORITY INTEREST IN NET INCOME OF
SUBSIDIARIES 448 237 66
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 21,496 16,707 (8,296)
INCOME TAXES 8,731 6,901 (10,752)
----------- ----------- -----------
NET INCOME $ 12,765 $ 9,806 $ 2,456
=========== =========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARES:
BASIC $ 1.56 $ 1.26 $ 0.32
=========== =========== ===========
DILUTED $ 1.55 $ 1.26 $ 0.32
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND EQUIVALENT SHARES OUTSTANDING:
BASIC 8,167,285 7,790,781 7,648,616
=========== =========== ===========
DILUTED 8,218,686 7,790,781 7,650,311
=========== =========== ===========
See notes to consolidated financial statements.
-F-4-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1998 1999 2000
------ ------ ------
NET INCOME $ 12,765 $ 9,806 $ 2,456
OTHER COMPREHENSIVE INCOME -
Foreign currency translation adjustments (498) (563) (2,817)
-------- -------- --------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 12,267 $ 9,243 $ (361)
======== ======== ========
See notes to consolidated financial statements.
-F-5-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ACCUMULATED
FOREIGN COMMON
ADDITIONAL CURRENCY STOCK
COMMON PAID-IN RETAINED TRANSLATION HELD IN
STOCK CAPITAL EARNINGS ADJUSTMENT TREASURY TOTAL
--------- ----------- ---------- -------------- ---------- ---------
Balance, July 1, 1997 $ 81 $80,342 $42,440 $ (132) $122,731
Issuance of 15,793 shares 227 227
Exercise of stock options (28,060 shares) 1 388 389
Foreign currency translation
adjustment of investment in subsidiaries (498) (498)
Net income 12,765 12,765
--------- ----------- ---------- -------------- ----------
Balance, June 30, 1998 82 80,957 55,205 (630) 135,614
Issuance of 33,033 shares 1 259 260
Purchase of 586,700 shares under Stock
Repurchase Plan $(6,048) (6,048)
Foreign currency translation
adjustment of investment in subsidiaries (563) (563)
Net income 9,806 9,806
--------- ----------- ---------- -------------- ---------- ---------
Balance, June 30, 1999 83 81,216 65,011 (1,193) (6,048) 139,069
Issuance of 36,371 shares 244 244
Foreign currency translation
adjustment of investment in subsidiaries (2,817) (2,817)
Net income 2,456 2,456
--------- ----------- ---------- -------------- ---------- ---------
Balance, June 30, 2000 $ 83 $81,460 $67,467 $(4,010) $(6,048) $138,952
========= =========== ========== ============== ========== =========
See notes to consolidated financial statements.
-F-6-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,765 $ 9,806 $ 2,456
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 11,695 13,400 14,218
Minority interest in net income of subsidiaries 448 237 66
Provision for loss on closure of Claremont foundry 3,373
Impairment charge related to PrimeCast facility 6,883
Loss (gain) on disposal of capital assets 176 (190) (486)
Gain on termination of interest rate swap agreements (1,083)
Deferred income tax expense (benefit) 1,394 4,151 (10,486)
Changes in assets and liabilities (exclusive of effects of acquired
companies):
Receivables 13,071 6,375 (10,878)
Inventories (374) (1,017) 5,979
Other current assets (719) (9,685) (7,493)
Accounts payable (6,854) 979 1,393
Accrued expenses (16,472) (14,423) 13,991
Postretirement obligation other than pension 467 682 921
Other 265 (2,596) (1,201)
-------- -------- --------
Cash provided by operating activities 15,862 7,719 17,653
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,495) (20,038) (21,387)
Proceeds from sale of capital assets 1,219 1,829 3,408
Payment for purchase of net assets of subsidiaries,
net of cash acquired (74,299) (7,494)
Payments for purchase of minority interest in subsidiaries (64) (728) (2,737)
Repayments of subordinated note receivable 800
Payment for investments in unconsolidated subsidiaries (150)
-------- -------- --------
Cash used in investing activities (90,839) (26,581) (20,716)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 616 260 244
Payments for repurchase of common stock (6,048)
Proceeds from issuance of long-term obligations 35,000
Payments on long-term obligations (979) (6,528) (42,010)
Capitalized financing costs paid (409) (108) (620)
Termination of interest rate swap agreements 1,083
Net borrowings under revolving loan note 65,519 26,675 11,285
-------- -------- --------
Cash provided by financing activities 64,747 14,251 4,982
-------- -------- --------
EFFECT OF EXCHANGE RATE ON CASH (253) (503) (209)
NET INCREASE (DECREASE ) IN CASH AND CASH
EQUIVALENTS (10,483) (5,114) 1,710
CASH AND CASH EQUIVALENTS, Beginning of period 19,819 9,336 4,222
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of period $ 9,336 $ 4,222 $ 5,932
======== ======== ========
See notes to consolidated financial statements.
-F-7-
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Atchison Casting Corporation and subsidiaries
("ACC" or the "Company") was organized in 1991 for the purpose of becoming
a broad-based manufacturer of metal castings, producing iron, steel and
non-ferrous castings ranging in size from a few ounces to 280 tons. A
majority of the Company's sales are to U.S. customers, however, the
Company also has sales to Canadian, European and other foreign customers.
PERVASIVENESS OF ESTIMATES - The preparation of 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 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.
BASIS OF PRESENTATION - The consolidated financial statements present the
financial position of the Company and its subsidiaries, Amite Foundry and
Machine, Inc. ("AFM"), Prospect Foundry, Inc. ("Prospect Foundry"), Quaker
Alloy, Inc. ("Quaker"), Canadian Steel Foundries, Ltd. ("Canadian Steel"),
Kramer International, Inc. ("Kramer"), Empire Steel Castings, Inc.
("Empire"), La Grange Foundry Inc. ("La Grange Foundry"), The G&C Foundry
Company ("G&C"), Los Angeles Die Casting Inc. ("LA Die Casting"), Canada
Alloy Castings, Ltd. ("Canada Alloy"), Pennsylvania Steel Foundry &
Machine Company ("Pennsylvania Steel"), Jahn Foundry Corp. ("Jahn
Foundry"), PrimeCast, Inc. ("PrimeCast"), Inverness Castings Group, Inc.
("Inverness"), Atchison Casting UK Limited ("ACUK"), Claremont Foundry,
Inc. ("Claremont"), London Precision Machine & Tool Ltd. ("London
Precision") and Fonderie d'Autun SA ("Autun"). AFM, Quaker, Canadian
Steel, Kramer, Empire, La Grange Foundry, Canada Alloy, Pennsylvania
Steel, Jahn Foundry, PrimeCast, Claremont and London Precision are wholly
owned subsidiaries. The Company owns 96.0%, 93.9%, 90.6%, 96.7%, 95.5% and
73.8% of the outstanding capital stock of Prospect Foundry, G&C, LA Die
Casting, Inverness, ACUK and Autun, respectively. Sheffield Forgemasters
Group, Ltd. ("Sheffield") is a wholly-owned subsidiary of ACUK. In August
2000, ACC acquired the remaining 26% of Autun for $150. All significant
intercompany accounts and balances have been eliminated.
STATEMENT OF CASH FLOWS - For purposes of cash flow reporting, cash and
cash equivalents include cash on hand, amounts due from banks and
temporary investments with original maturities of 90 days or less at the
date of purchase.
-F-8-
REVENUE RECOGNITION - Sales and related cost of sales are recognized upon
shipment of products. The Company provides for estimated product warranty
costs based on historical experience at the time the product is sold and
accrues for specific items at the time their existence is known and the
amounts are determinable.
CUSTOMER ACCOUNTS RECEIVABLE - Approximately 18%, 17% and 15% of the
Company's business in 1998, 1999 and 2000, respectively, was with two
major customers who operate in the automotive, locomotive and general
industrial markets. As of June 30, 1999 and 2000, 12% and 7%,
respectively, of accounts receivable were with these two major customers.
The Company generally does not require collateral or other security on
accounts receivable. Credit risk is controlled through credit approvals,
limits and monitoring procedures.
INVENTORIES - Approximately 10% of the Company's inventory is valued at
the lower of cost, determined on the last-in, first-out ("LIFO") method,
or market. The remaining inventory is valued at the lower of cost,
determined on the first-in, first-out ("FIFO") method, or market.
PRE-PRODUCTION COSTS - In September 1999, the Emerging Issues Task Force
("EITF") of the American Institute of Certified Public Accountants issued
EITF 99-5, "ACCOUNTING FOR PRE-PRODUCTION COSTS RELATED TO LONG-TERM
SUPPLY ARRANGEMENTS." The guidance in EITF 99-5 is effective for
pre-production costs, which include tooling, dies, fixtures, patterns and
drawings, among other items, incurred after December 31, 1999. The
Company's long-term supply arrangements typically provide for specific
reimbursement of such pre-production costs by the customer. As of June 30,
1999 and 2000, the Company had $10,215 and $8,774 of capitalized
pre-production costs recorded within other current assets within the
consolidated balance sheets. Generally, the supply arrangements entered
into by ACC provide the Company the noncancelable right to use the tooling
during the supply arrangement even though the customer owns the tooling.
As such, the adoption of EITF 99-5 has not had a material effect upon the
Company's consolidated financial statements.
PROPERTY, PLANT AND EQUIPMENT - Major renewals and betterments are
capitalized while replacements, maintenance and repairs which do not
improve or extend the life of the respective assets are charged to expense
as incurred. Upon sale or retirement of assets, the cost and related
accumulated depreciation applicable to such assets are removed from the
accounts and any resulting gain or loss is reflected in operations.
Property, plant and equipment is carried at cost less accumulated
depreciation. Plant and equipment is depreciated over the estimated useful
lives of the assets using the straight-line method.
Applicable interest charges incurred during the construction of new
machinery and equipment are capitalized as one of the elements of cost and
are amortized over the assets' estimated useful lives. There was no
interest capitalized during fiscal years 1998 and 1999, while $82 was
capitalized in fiscal year 2000.
-F-9-
INTANGIBLE ASSETS - Intangible assets acquired, primarily goodwill, are
being amortized over their estimated lives of 25 years using the
straight-line method.
DEFERRED FINANCING COSTS - Costs incurred in connection with obtaining or
amending financing are capitalized and amortized over the remaining term
of the related debt instrument on a method approximating the interest
method.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at the rate of exchange at
the balance sheet date. Revenues and expenses are translated into U.S.
dollars at average monthly exchange rates prevailing during the year.
Resulting translation adjustments are recorded in the accumulated foreign
currency translation adjustment account, which is a component of other
comprehensive income and a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in the results
of operations as incurred.
LONG-LIVED ASSETS - The Company periodically evaluates the carrying value
of long-lived assets to be held and used, including goodwill and other
intangible assets, when events and circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset (Notes 2 and 3).
ACCRUED INSURANCE EXPENSE - Costs estimated to be incurred in the future
for employee medical benefits and casualty insurance programs resulting
from claims which have occurred are accrued currently.
At June 30, 2000, the Company had letters of credit aggregating $1,850 and
a certificate of deposit of $200 which support claims for workers'
compensation benefits.
INCOME TAXES - Deferred income taxes are provided on temporary differences
between the financial statement and tax basis of the Company's assets and
liabilities in accordance with the liability method. SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES," requires a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not
be realized.
STOCK OPTION PLANS - The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," in October 1995. SFAS No. 123
allows companies to continue under the approach set forth in Accounting
Principles Board Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," for recognizing stock-based compensation expense in the
financial statements, but encourages companies to adopt provisions of SFAS
No. 123 based on the estimated fair value of employee stock options.
Companies electing to retain the approach under APB No. 25 are required to
disclose pro forma net income and net income per share in the notes to the
financial statements, as if they had adopted the fair value accounting
method under SFAS No. 123. The Company has elected to retain its current
accounting approach under APB No. 25.
EARNINGS PER SHARE - Basic earnings per share ("EPS") is computed by
dividing net income by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution that
could occur if dilutive securities, such as stock options, were exercised.
-F-10-
NEW ACCOUNTING STANDARDS - In June 1998, the FASB issued SFAS No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No.
133 requires companies to record derivative instruments as assets or
liabilities, measured at fair value. The recognition of gains or losses
resulting from changes in the values of those derivative instruments is
based on the use of each derivative instrument and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. In June 2000, the FASB issued SFAS
No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133," which amends
certain provisions of SFAS No. 133. SFAS Nos. 133 and 138 are effective
for fiscal years beginning after June 15, 2000.
At July 1, 2000, the Company had derivatives in the form of foreign
exchange contracts ("FX contracts") to buy and sell various currencies.
The Company uses FX contracts as an economic hedge of trade receivables
and payables denominated in foreign currencies, as well as anticipated
sales to foreign customers in the customers' local currency. On July 1,
2000, the Company adopted SFAS Nos. 133 and 138, and as required, recorded
its FX contracts at their fair value of approximately $(920). This
resulted in a charge to income of approximately $920 ($560 net of deferred
income tax benefit). Additionally, the translation of the foreign
denominated trade receivables resulted in the increase in value of the
receivables and the Company recorded a currency translation gain of
approximately $440 ($270 net of deferred income tax expense). The impact
of the adoption of SFAS Nos. 133 and 138 will be presented in the
Company's fiscal year 2001 consolidated financial statements as the
cumulative effect of a change in accounting principle.
In December 1999, Staff Accounting Bulletin ("SAB") No. 101, "REVENUE
RECOGNITION IN FINANCIAL STATEMENTS," was issued. SAB No. 101 summarizes
the Securities and Exchange Commission's view on applying accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. Due to the issuance of SAB No. 101B,
SAB No. 101 must be implemented no later than the fourth fiscal quarter of
the Company's fiscal year ending June 30, 2001. The Company does not
believe that the implementation of SAB No. 101 will have a material effect
on the Company's consolidated financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1998
and 1999 financial statements to conform with current year presentation.
2. CLOSURE OF CLAREMONT
During fiscal year 2000, the Company recorded an impairment loss
associated with the planned closure of the Claremont foundry. The
resulting impairment charge of $3,373 ($2,125, net of tax) to reduce the
carrying value of these fixed assets was recorded in the fourth quarter
ended June 30, 2000. During the fourth quarter of fiscal year 2000, the
Company's Board of Directors committed to a plan for the closure of
Claremont as a result of continued operating losses. As such, the carrying
values of Claremont's fixed assets were written down to the Company's
estimates of fair value, which was based on discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
Prior to the impairment charge, these assets had a carrying value of
$3,534. The Company intends to transfer as much work as possible to other
ACC foundries by November 30, 2000, and close the foundry by such date.
For fiscal years 1998, 1999, and 2000, Claremont recorded net sales of
$1,297, $7,068, and $3,958, respectively, and incurred net losses of $97,
$1,554, and $1,819, respectively, excluding the impairment charge in the
fourth quarter of fiscal year 2000.
-F-11-
In addition to the long-lived asset impairment, the Company will recognize
certain other exit costs associated with the closure of Claremont in
fiscal year 2001 related to employee termination costs. Such costs are
recognized when benefit arrangements are communicated to affected
employees in sufficient detail to enable the employees to determine the
amount of benefits to be received upon termination. As of June 30, 2000,
the planned closure of Claremont had not been communicated to the
Claremont employees. The number of employees to be terminated in the
process will approximate 45. As such, in the first quarter of fiscal year
2001, the Company will recognize approximately $90 in severance benefits
related to the Claremont closure.
Other costs directly related to the closure of Claremont which are not
eligible for recognition at the commitment date will be expensed as
incurred under EITF 94-3, "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE
TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING)".
3. WRITE-DOWN OF PRIMECAST ASSETS
The Company recognized an impairment charge of $6,883 ($4,336, net of tax)
to reduce the carrying value of fixed assets at its PrimeCast foundry in
the fourth quarter ended June 30, 2000. The Company considers continued
operating losses, caused primarily by the bankruptcy of PrimeCast's major
customer and subsequent closure of facilities to which PrimeCast supplied
a significant amount of castings, as the primary indicator of impairment.
An impairment loss was recognized as the future undiscounted cash flows of
PrimeCast were estimated to be insufficient to recover the carrying values
of the fixed assets. As such, the carrying values of these assets were
written down to the Company's estimates of fair value, which was based
upon discounted future cash flows of PrimeCast. Accordingly, actual
results could vary significantly from such estimates. Prior to the
impairment charge, these assets had a remaining carrying amount of $8,248.
For fiscal years 1998, 1999, and 2000, PrimeCast recorded net sales of
$33,861, $27,531, and $24,464, respectively, and incurred net income
(losses) of $609, $(644), and $(2,033), respectively, excluding the
impairment charge in the fourth quarter of fiscal year 2000.
4. ACQUISITIONS
On July 1, 1997, the Company purchased the Beloit Castings Division
("BCD") of Beloit Corporation for $8,209 in cash and $102 of related
expenses. BCD now operates under the name PrimeCast, as a subsidiary of
ACC. PrimeCast is a group of four foundries in Beloit, Wisconsin and South
Beloit, Illinois, including two iron foundries, a steel foundry and a
non-ferrous foundry, that produce castings for the paper-machinery, pump,
valve, mining and construction markets. The Company financed this
acquisition with available cash balances (Note 3).
On October 6, 1997, the Company acquired approximately 91.5% of the
outstanding capital stock of Inverness, a Delaware corporation, for $5,882
in cash and $202 of related expenses, in addition to the assumption of
$587 of outstanding indebtedness. Contemporaneous with the consummation of
this acquisition, the Company retired approximately $11,602 of Inverness'
outstanding indebtedness. The remaining 8.5% of Inverness capital stock
was retained by Inverness management. During fiscal year 1999, the Company
purchased additional shares from Inverness management. Inverness, located
in Dowagiac, Michigan, produces aluminum die castings for the automotive,
furniture and appliance markets. The Company financed this transaction
with available cash balances and funds available under its revolving
credit facility.
-F-12-
On April 6, 1998, ACUK, a subsidiary of the Company, acquired all of the
outstanding capital stock, consisting of 76,987,733 ordinary shares of
capital stock, of Sheffield, incorporated in England and Wales, from the
stockholders of Sheffield for approximately $54,931 in cash, 1,040,000
shares of ACUK valued at $915 and $226 of related expenses. The 1,040,000
ordinary shares, consisting of 5.0% of the outstanding stock, of ACUK were
issued to Sheffield management in exchange for 1,267,477 shares of
Sheffield instead of cash consideration. Sheffield includes Forgemasters
Steel & Engineering Limited, River Don Castings Limited, Forged Rolls (UK)
Limited and British Rollmakers Limited, among other operating units. The
companies' products serve a variety of markets and end users, including
steel rolling mills, paper and plastic processing, oil and gas exploration
and production, fossil and nuclear electricity generation and forging
ingots. The Company financed this transaction with funds available under
its bank credit facility.
On May 31, 1996, the Company purchased approximately 21.0% of the
outstanding shares of capital stock of Claremont for $330 in cash and $17
of related expenses. On November 29, 1996, the Company purchased an
additional 4.5% of the outstanding capital stock of Claremont for $40 in
cash. On May 1, 1998, the Company purchased the balance of Claremont's
outstanding capital stock for $1 in cash, the contribution of equipment
with a fair market value of $300, the forgiveness of a subordinated note
payable to the Company of $2,924 and related expenses of $7.
Contemporaneous with the consummation of this acquisition, the Company
retired $165 of Claremont's outstanding indebtness. Claremont, located in
Claremont, New Hampshire, is a foundry that produces steel castings for
the mining and mass transit industries, among others. The Company financed
this transaction with funds available under its revolving credit facility
(Note 2).
Effective September 1, 1998, the Company purchased 90% of the outstanding
shares of London Precision for U.S. $13,663 in cash and $124 of related
expenses. On June 16, 1999, the Company purchased the remaining 10% of the
outstanding shares of London Precision for U.S. $1,847 in cash. London
Precision, located in London, Ontario, Canada, is an industrial machine
shop which serves the locomotive, mining and construction, pulp and paper
markets, among others. The Company financed this transaction with funds
available under its revolving credit facility.
On February 25, 1999, Autun purchased the foundry division assets of
Compagnie Internationale du Chauffage ("CICH") located in Autun, France.
Autun received U.S. $5,847 in cash and U.S. $5,505 in inventory in
exchange for the assumption of potential environmental and employment
liabilities if the facility is ever closed. CICH is a subsidiary of Blue
Circle Industries plc, headquartered in London, England. Autun specializes
in the manufacture of cast iron radiators and boiler castings.
The acquisitions have been accounted for by the purchase method of
accounting, and accordingly, the purchase price including the related
acquisition expenses has been allocated to the assets acquired based on
the estimated fair values at the date of the acquisitions. For the
Inverness and London Precision acquisitions, the excess of purchase price
over estimated fair values of the net assets acquired has been included in
"Intangible Assets" on the Consolidated Balance Sheets. For the PrimeCast,
Sheffield, Claremont and Autun acquisitions, the fair value of the net
assets acquired exceeded the purchase price. Accordingly, the excess fair
value was subtracted from identifiable long-term assets ratably based on
their relative fair values as a percentage of total long-term assets with
any remaining excess recorded as negative goodwill and included in "Excess
of Fair Value of Acquired Net Assets Over Cost" on the Consolidated
Balance Sheets.
-F-13
LIVES
(IN YEARS) 1999 2000
----------- ------ ------
Excess of fair value of acquired net assets over cost 4 $8,665 $7,141
Less accumulated amortization 1,776 2,298
------ ------
$6,889 $4,843
====== ======
Amoritization of negative goodwill was $257, $870, and $1,897 for the
years ended June 30, 1998, 1999 and 2000, respectively. The increase in
negative goodwill from fiscal year 1999 to fiscal year 2000 relates to the
purchase of Autun.
The estimated fair values of assets and liabilities acquired in the 1998
and 1999 acquisitions are summarized as follows:
1998 1999
---------- ---------
Cash $ 10,244 $ 6,501
Customer accounts receivable 61,669 2,748
Inventories 31,231 7,117
Property, plant and equipment 38,164 7,705
Intangible assets, primarily goodwill 4,666 8,427
Other assets 14,670 15
Accounts payable and accrued expenses (75,775) (7,489)
Deferred income taxes 6,731 (1,269)
Excess of fair value of acquired net assets over cost (7,872)
Other long-term obligations (6,470) (1,888)
Long-term obligations (587)
---------- ---------
84,543 13,995
Cash acquired (10,244) (6,501)
---------- ---------
Cash used in acquisitions $ 74,299 $ 7,494
========== =========
The operating results of the acquired companies are included in ACC's
consolidated statements of income from the dates of acquisition. The
following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions occurred at July 1, 1997, after giving
effect to certain adjustments, including amortization of goodwill,
interest expense on the acquisition debt and related income tax effects.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the
acquisitions been made as of that date or of results which may occur in
the future.
-F-14-
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales $549,011 $494,580
Net income 17,021 12,583
Net income per common and equivalent shares:
Basic 2.08 1.62
Diluted 2.07 1.62
5. INVENTORIES
1999 2000
------- -------
Raw materials $10,414 $ 9,552
Work-in-process 41,431 36,680
Finished goods 12,736 11,587
Deferred supplies 4,196 3,985
------- -------
$68,777 $61,804
======= ========
Inventories as of June 30, 1999 and 2000 would have been higher by $381
and $416, respectively, had the Company used the FIFO method of valuing
those inventories valued using the LIFO method.
6. PROPERTY, PLANT AND EQUIPMENT
LIVES
(IN YEARS) 1999 2000
---------- ---------- --------
Land $ 15,686 $ 14,868
Improvements to land 12-15 4,781 4,807
Buildings and improvements 35 31,817 31,029
Machinery and equipment 5-14 124,567 125,707
Automobiles and trucks 3 1,784 1,688
Office furniture, fixtures and equipment 5-10 5,675 6,358
Tooling and patterns 1.5-6 4,445 4,367
---------- --------
188,755 188,824
Less accumulated depreciation 47,496 61,108
---------- --------
141,259 127,716
Construction in progress 8,797 14,651
---------- --------
$150,056 $142,367
========== ========
Depreciation expense was $10,656, $12,647 and $14,365 for the years ended
June 30, 1998, 1999 and 2000, respectively.
-F-15-
7. INTANGIBLE ASSETS
LIVES
(IN YEARS) 1999 2000
---------- ---------- --------
Goodwill 25 $37,440 $37,310
Less accumulated amortization 4,594 6,077
---------- --------
$32,846 $31,233
========== ========
Amortization expense was $1,108, $1,429 and $1,489 for the years ended
June 30, 1998, 1999 and 2000, respectively.
8. DEFERRED FINANCING COSTS
LIVES
(IN YEARS) 1999 2000
---------- ---------- --------
Deferred financing costs 3 to 10 $ 1,045 $ 1,355
Less accumulated amortization 385 432
---------- --------
$ 660 $ 923
========== ========
Amortization of such costs, included in interest expense, was $188, $194
and $261 for the years ended June 30, 1998, 1999 and 2000, respectively.
9. ACCRUED EXPENSES
1999 2000
---------- ---------
Accrued warranty $ 11,785 $ 9,786
Payroll, vacation and other compensation 8,688 7,721
Accrued pension liability 3,089 2,383
Advances from customers 4,509 3,426
Reserve for flood repairs 1,197 645
Reserve for workers' compensation and employee
health care 2,570 2,837
Taxes other than income 395 477
Interest payable 1,145 1,036
Insurance advances for Jahn Foundry industrial accident (Note 23) 2,250 20,141
Other 7,502 7,864
---------- ---------
$ 43,130 $ 56,316
========== =========
10. LONG-TERM OBLIGATIONS
On April 3, 1998, the Company and the insurance company holding the
Company's $20,000 aggregate principal amount of unsecured, senior notes
entered into the Third Amendment to the Note Purchase Agreement providing
for an increase in permitted subsidiary indebtedness from $3,500 to
$8,000.
-F-16-
On April 3, 1998, the Company and Harris Trust and Savings Bank
("Harris"), as agent for the lenders, entered into the Amended and
Restated Credit Agreement (the "Credit Agreement") providing for an
increase in unsecured loans from $60,000 to $110,000 and an extension of
the maturity date to April 3, 2003. This Credit Agreement consists of a
$40,000 term loan and a $70,000 revolving credit facility. The term loan
began amortizing on March 31, 1999, with a final maturity of April 3,
2003. Loans under the Credit Agreement will bear interest at fluctuating
rates of either: (i) the agent bank's corporate base rate subject to a
reduction of 0.25% (25 basis points) if certain financial ratios are met
or (ii) LIBOR plus 1.50% subject, in the case of the LIBOR rate option, to
a reduction of up to 0.50% (50 basis points) if certain financial ratios
are met. Loans under this revolving credit facility may be used for
general corporate purposes, acquisitions and approved investments.
On October 7, 1998, the Company and Harris entered into the First
Amendment to the Credit Agreement. This amendment permits the Company to
repurchase up to $24,000 of its common stock, subject to a limitation of
$10,000 in any fiscal year unless certain financial ratios are met, and
provides for an option to increase the revolving portion of the credit
facility to $100,000 if the Company issues senior subordinated notes.
Proceeds from the issuance of any senior subordinated notes must be used
to permanently pre-pay the $40,000 term loan portion of the credit
facility.
As of April 23, 1999, the Company and Harris entered into the Second
Amendment to the Credit Agreement. This amendment provides that the
Company maintain a ratio of earnings before interest, taxes and
amortization to fixed charges ("Fixed Charge Coverage Ratio") of at least
1.10, increasing to 1.25 on March 31, 2000 and 1.50 on March 31, 2001. The
amendment also provides that the Company must maintain a ratio of total
senior debt to earnings before interest, taxes, amortization and
depreciation of not more that 3.2 prior to the issuance by the Company of
any subordinated debt, and not more than 3.0 after the issuance of any
subordinated debt. In addition, this amendment provides that the Company
may not make acquisitions prior to May 1, 2000 and, from and after May 1,
2000, the Company may not make acquisitions unless the Fixed Charge
Coverage Ratio is at least 1.50, among other existing restrictions. Loans
under this revolving credit facility will bear interest at fluctuating
rates of either: (i) Harris' corporate base rate subject to a reduction of
0.25% (25 basis points) if certain financial ratios are met or (ii) LIBOR
plus 1.85% subject, in the case of the LIBOR rate option, to a reduction
of up to 0.50% (50 basis points) if certain financial ratios are met.
Loans under this revolving credit facility may be used for general
corporate purposes, permitted acquisitions and approved investments.
On August 20, 1999, the Company and Harris entered into the Third
Amendment to the Credit Agreement. This amendment provides that the
Company's subsidiary, Autun, is not subject to the provisions governing
subsidiary indebtedness. It further provides that the Company and its
subsidiaries may not make any investment in Autun and the Company must
exclude Autun's results in the calculation of various financial covenants.
On October 20, 1999, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior
notes (the "Notes") entered into the Fourth Amendment to the Note Purchase
Agreement. This amendment provides that the Company's subsidiary, Autun,
is not subject to the provisions governing subsidiary indebtedness. It
further provides that the Company and its subsidiaries may not make any
investment in Autun and the Company must exclude Autun's results in the
calculation of various financial covenants.
-F-17-
On November 5, 1999, the Company and Hrris entered into the Fourth
Amendment and Waiver (the "Fourth Amendment") to the Credit Agreement. The
Fourth Amendment provided, among other things, that the Company maintain a
Fixed Charge Coverage Ratio of at least 1.10 on December 31, 1999,
increasing to 1.25 on July 1, 2000, if the Company incurs at least $20
million of subordinated debt by January 31, 2000. If the Company did not
obtain a commitment for the private placement of at least $20 million of
subordinated debt by December 15, 1999, the Fourth Amendment provided that
(1) the Company maintain a Fixed Charge Coverage Ratio of at least 1.10 on
December 31, 1999, increasing to 1.25 on March 31, 2000 and 1.50 on March
31, 2001, (2) the fixed charges used in calculating the Fixed Charge
Coverage Ratio will include 15% of the aggregate principal amount
outstanding under the revolving credit facility after October 1, 1999
rather than after July 1, 2000, and (3) the Company will grant the lenders
under the Credit Agreement liens on the Company's assets by February 14,
2000. The Company was unable to obtain such a commitment by December 15,
1999. The Fourth Amendment also provided that the Company must maintain a
ratio of consolidated total debt to total capitalization of not more than
55%. Absent the waiver within the Fourth Amendment, the Company would not
have been in compliance with the Fixed Charge Coverage Ratio. Loans under
this credit facility will bear interest at fluctuating rates of either:
(1) Harris' corporate base rate plus 0.25%, subject to a reduction of
0.25% (25 basis points) if certain financial ratios are met or (2) LIBOR
plus 2.10%, subject to a reduction of up to 0.50% (50 basis points) if
certain financial ratios are met.
On December 21, 1999, the Company and Harris entered into the Fifth
Amendment (The "Fifth Amendment") to the Credit Agreement. The Fifth
Amendment provided that the Company may incur up to $35 million of
indebtedness from General Electric Capital Corporation or its assignees
(the "GE Financing"). In addition, the Fifth Amendment provided that (1)
the bank revolving credit facility will be increased from $70 million to
$80 million through April 30, 2000, (2) the fixed charges used in
calculating the Fixed Charge Coverage Ratio will not include 15% of the
aggregate principal amount outstanding under the revolving credit facility
through June 30, 2000 and (3) the Company will grant the lenders under the
Credit Agreement liens in certain of the Company's assets. Absent the
Fifth Amendment, the Company would not have been in compliance with the
Fixed Charge Coverage Ratio.
On December 21, 1999, the Company and the insurance company holding the
Notes entered into the Fifth Amendment to the Note Purchase Agreement.
This amendment provided that the Company may incur indebtedness through
the GE Financing. This amendment further provided that (1) the Company
must maintain a ratio of consolidated total debt to total capitalization
of not more than 55%, (2) the Company maintain a Fixed Charge Coverage
Ratio of at least 1.10 on December 31, 1999, increasing to 1.25 on March
31, 2000 and 1.50 on March 31, 2001 and (3) the fixed charges used in
calculating the Fixed Charge Coverage Ratio will not include 15% of the
aggregate principal amount outstanding under the revolving credit facility
through June 30, 2000.
On December 29, 1999, the Company entered into a Master Security Agreement
with General Electric Capital Corporation ("GECC") and its assigns
providing for a term loan of $35 million. The term loan 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 bears interest at a fixed rate of 9.05%. On December
29, 1999, the proceeds of the term loan, together with borrowings under
the Company's revolving credit facility, were used to retire the $35.7
million of outstanding indebtedness under the Company's term loan under
its bank credit facility.
-F-18-
On February 15, 2000, the Company, its lenders and the holder of the Notes
entered into the Sixth Amendments (the "Sixth Amendments") to the Credit
Agreement and the Note Purchase Agreement. Together with the GECC term
loan, the Sixth Amendments provided for the perfection of a security
interest in favor of GECC, the lenders under the Credit Agreement and the
holder of the Notes in substantially all of the Company's assets other
than real estate.
On May 1, 2000, the Company and Harris entered into the Seventh Amendment
and Waiver (the "Seventh Amendment") to the Credit Agreement. The Seventh
Amendment provided, among other things, for a waiver of compliance by the
Company with the Cash Flow Leverage Ratio covenant through July 1, 2000
and that the bank credit facility will be maintained at $80.0 million
through June 30, 2000. The Cash Flow Leverage Ratio covenant requires the
Company to maintain a ratio of total debt to earnings before interest,
taxes, depreciation and amortization of no greater than 3.2. Absent the
waiver, the Company would not have been in compliance with the Cash Flow
Leverage Ratio. Loans under this credit facility will bear interest at
fluctuating rates of either: (1) Harris' corporate base rate plus 0.75% or
(2) LIBOR plus 2.25%, increasing to LIBOR plus 2.50% on June 1, 2000.
On June 30, 2000, the Company and Harris entered into the Eighth Amendment
and Waiver (the "Eighth Amendment") to the Credit Agreement. The Eighth
Amendment provides, among other things, for a waiver of compliance by the
Company with the Cash Flow Leverage Ratio and Fixed Charge Coverage Ratio
covenants through July 31, 2000, and that the bank credit facility will be
decreased from $80.0 million to $77.3 million through July 31, 2000. Loans
under this Credit Agreement will bear interest at Harris' corporate base
rate plus 1.25%. Absent the waiver, the Company would not have been in
compliance with the Cash Flow Leverage Ratio and Fixed Charge Coverage
Ratio covenants. At June 30, 1999 and 2000, $9,866 and $11,367,
respectively, was available for borrowing under this facility after
consideration of outstanding advances of $88,817 and $61,385 and letters
of credit of $8,460 and $7,248, respectively (Note 12).
Effective June 30, 2000, the insurance company holding the Notes granted a
limited waiver of compliance with the Fixed Charge Coverage Ratio covenant
through September 30, 2000. Absent the waiver, the Company would not have
been in compliance with the Fixed Charge Coverage Ratio covenant.
On July 31, 2000, the Company and Harris entered into the Ninth Amendment
and Waiver (the "Ninth Amendment") to the Credit Agreement. The Ninth
Amendment provides, among other things, for a waiver of compliance by the
Company with the Cash Flow Leverage Ratio and Fixed Charge Coverage Ratio
covenants through September 30, 2000, and that the bank facility will be
maintained at $77.3 million through September 30, 2000. Loans under the
Credit Agreement will bear interest at fluctuating rates of either (1)
Harris' corporate base rate plus 1.75% or (2) LIBOR plus 3.00%. Absent the
waiver, the Company would not have been in compliance with the Cash Flow
Leverage Ratio and Fixed Charge Coverage Ratio covenants.
As described previously and in Note 24, the Company has obtained a waiver
of compliance of the covenants related to the Cash Flow Leverage Ratio and
Fixed Charge Coverage Ratio through September 30, 2000 from Harris. In
addition, the Company has obtained a waiver of compliance of the convenant
related to the Fixed Charge Coverage Ratio through September 30, 2000 from
the insurance company. Absent another waiver from each of these creditors,
management does not believe that it will be in compliance with such
covenants subsequent to September 30, 2000, and accordingly, has
classified the Harris revolving credit facility and the senior notes with
the insurance company as current at June 30, 2000.
-F-19-
Long-term obligations consist of the following as of June 30, 1999 and
2000:
1999 2000
---------- ---------
Unsecured, senior notes with an insurance company, maturing on July 30, 2004,
subject to acceleration due to covenant violations
(Note 10), and bearing interest at a fixed rate of 8.44% per year $ 17,143 $ 14,286
Revolving credit facility with Harris, secured by certain assets of the
Company, maturing on April 3, 2003, subject to acceleration due to covenant
violations (Note 10), bearing interest at:
LIBOR plus 1.50%, $40,000 at a weighted average rate of 6.47% at June 30, 1999
LIBOR plus 1.85%, $37,142 at 7.18% at June 30, 1999
LIBOR plus 2.50%, $15,000 at 9.15% at June 30, 2000
LIBOR plus 2.50%, $35,000 at 9.15% at June 30, 2000
Prime, $11,675 at 7.75% at June 30, 1999
Prime plus 0.75%, $11,385 at 10.25% at June 30, 2000 88,817 61,385
Term loan between the Company and GECC, secured by certain
assets of the Company, maturing on December 29, 2004,
bearing interest at 9.05% 33,250
Term loan between G&C and OES Capital, Incorporated (assignee
of loan agreement with Ohio Air Quality Development Authority), secured by
certain assets of G&C, maturing on December 31, 2006,
bearing interest at 6.50% 2,380 2,119
Term loan between La Grange Foundry and the Missouri Development Finance Board,
secured by a letter of credit, maturing on November 1, 2011, bearing interest
at 3.87% and 4.87% at June 30, 1999 and 2000, respectively 5,100 5,100
Revolving credit facility between Autun and Societe Generale, secured by trade
receivables of Autun, maturing on April 17, 2007, bearing
interest at EURIBOR plus 0.8% (5.21%) at June 30, 2000 1,470
---------- ---------
113,440 117,610
Less current maturities 8,833 80,919
---------- ---------
Total long-term obligations $ 104,607 $ 36,691
========= =========
The Credit Agreement with Harris, the Note Purchase Agreement with an
insurance company and the Master Security Agreement with GECC limit the
Company's ability to pay dividends in any fiscal year to an amount not more
than 25% of net earnings in the preceding fiscal year.
The amounts of long-term obligations outstanding as of June 30, 2000
mature as follows:
2001 $ 80,919
2002 3,798
2003 3,817
2004 3,840
2005 19,610
Thereafter 5,626
- F-20 -
The amounts of interest expense for the years ended June 30, 1998, 1999
and 2000 consisted of the following:
1998 1999 2000
------ ------ ------
Senior notes with an insurance company $1,688 $1,467 $1,224
Credit facility with Harris 2,020 6,194 6,071
Term loan with GECC 1,520
Amortization of deferred financing costs 188 194 261
Other 497 376
------ ------ ------
$3,896 $8,352 $9,452
====== ====== ======
11. INCOME TAXES
Income taxes for the years ended June 30, 1998, 1999 and 2000 are
comprised of the following:
1998 1999 2000
------ ------ --------
Current expense (benefit):
Federal $4,298 $1,002 $ (629)
State and local 1,410 410 73
Foreign 913 1,578 455
------ ------ --------
6,621 2,990 (101)
Deferred expense (benefit) 2,110 3,911 (10,651)
------ ------ --------
$8,731 $6,901 $(10,752)
====== ====== =========
1998 1999 2000
------ ------ --------
Items giving rise to the deferred income
tax provision (benefit):
Deferred gain on flood proceeds $ 975 $ (7,786)
Impairment reserve (4,088)
Depreciation and amortization $1,776 2,006 1,548
Net operating loss carryforwards 313 754 (916)
Flood wall capitalization 429
Postretirement (benefits) costs 10 (97) (419)
Pension costs (397) (163) 267
Inventories (430) 179 171
Accrued expenses 555 294 158
Valuation allowance 128 56 4
Other, net 155 (93) (19)
------ ------ --------
$2,110 $3,911 $(10,651)
====== ====== ========
- F-21 -
Following is a reconciliation between total income taxes and the amount
computed by multiplying income (loss) before income taxes plus the
minority interest in net income of subsidiaries by the statutory federal
income tax rate:
1998 1999 2000
----------------------- -------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
Computed expected
federal income tax
expense (benefit) $ 7,680 35.0 $ 5,930 3.5 $ (2,881) (35.0)
State income tax
expense (benefit),
net of federal benefit 1,139 5.2 743 4.4 (256) (3.1)
Non - U.S. taxes (75) (0.3) 156 1.9
Permanent differences 344 1.6 475 2.8 10 0.1
Deferred tax benefit
associated with flood
proceeds
(7,786) (94.6)
Other, net (357) (1.7) (247) (1.5) 5 0.1
-------- ------ -------- ------ -------- ------
$ 8,731 3.9 $ 6,901 40.7 $(10,752) (130.6)
======== ====== ======== ====== ======== ======
- F-22 -
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Deferred income taxes as of
June 30, 1999 and 2000 are comprised of the following:
1999 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 18,115 $ 19,031
Impairment reserve 4,088
Postretirement benefits 3,105 3,524
Accrued expenses 2,368 2,210
Pension costs 1,549 1,282
General business tax credits 574 588
Flood wall capitalization 429
Other 206 120
-------- --------
26,346 30,843
Valuation allowance (13,410) (13,414)
-------- --------
Net deferred tax assets 12,936 17,429
-------- --------
Deferred tax liabilities:
Depreciation and amortization (18,258) (19,806)
Deferred gain on flood proceeds (7,786)
Inventories (1,343) (1,514)
Discharge of indebtedness (422) (422)
Other (473) (382)
-------- --------
(28,282) (22,124)
-------- --------
Total $(15,346) $ (4,695)
======== ========
- F-23 -
In general, it is the practice and intention of the Company to reinvest
the earnings of its non - U.S. subsidiaries in those operations on a
permanent basis. Applicable U.S. federal taxes are provided only on
amounts actually or deemed to be remitted to the Company as dividends.
U.S. income taxes have not been provided on $3,074 and $1,850 of
cumulative undistributed earnings from United Kingdom operations for
1999 and 2000, respectively. U.S. income taxes on such earnings, if
ultimately remitted to the U.S., may be recoverable as foreign tax
credits.
The Company has federal net operating loss carryforwards totaling
approximately $6,880 at June 30, 2000, which expire in the years 2007
through 2012. The federal net operating loss carryforwards were
acquired during previous years and are subject to the ownership change
rules defined by section 382 of the Internal Revenue Code (the "Code").
As a result of this event, the Company will be limited in its ability
to use such net operating loss carryforwards. The amount of taxable
income that can be offset by pre-change tax attributes in any annual
period is limited to approximately $500.
The Company has foreign net operating loss carryforwards totaling
approximately $43,157 at June 30, 2000, which have no expiration date.
The utilization of such net operating loss carryforwards are restricted
to the earnings of specific foreign subsidiaries.
The Company has recorded a $7,786 deferred income tax benefit in fiscal
year 2000 with respect to the reinvestment of certain flood insurance
proceeds received in 1995 and 1996. The Company recorded pretax gains
of approximately $20,100 in 1995 and 1996 related to insurance proceeds
resulting from flood damage to the Company's Atchison, Kansas foundry
in July 1993. For federal income tax purposes, the Company treated the
flood as an involuntary conversion event under the Code and related
Treasury Regulations.
The Code provides generally that if certain conditions are met, gains
on insurance proceeds from an involuntary conversion are not taxable if
the proceeds are reinvested in qualified replacement property within
two years after the close of the first taxable year in which any part
of the conversion gain is realized. The Company believed that its
treatment of certain foundry subsidiary stock acquisitions as qualified
replacement property was subject to potential challenge by the Internal
Revenue Service (the "Service") in 1996 (the first year in which
involuntary conversion gain was realized for federal income tax
purposes). The Company recorded income tax expense on the insurance
gains in 1996 pending review of its position by the Service or the
expiration of the statute of limitations under the Code for the Service
to assess income taxes with respect to the Company's position.
The Company's treatment of certain foundry subsidiary stock
acquisitions as qualified replacement property creates differing basis
in the foundry subsidiary stock for financial statement and tax
purposes. These differences have not been recognized as taxable
temporary differences under SFAS No. 109 since the subsidiary basis
differences can be permanently deferred through subsidiary mergers or
tax-free liquidations. On March 15, 2000, the statute of limitations
for the Service to assess taxes with respect to the Company's position
expired. The deferred taxes recorded in the consolidated financial
statements in prior years were no longer required.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
customer accounts receivable, accounts payable, debt obligations, and
derivative financial instruments, including interest rate swap agreements,
forward foreign exchange contracts and a foreign currency swap agreement.
- F-24 -
The derivative financial instruments are used by the Company to manage its
exposure to interest rate and foreign currency risk. The Company does not
intend to use such instruments for trading or speculative purposes. The
counterparties to these instruments are major financial institutions with
which the Company has other financial relationships. The Company is
exposed to credit loss in the event of nonperformance by these
counterparties. However, the Company does not anticipate nonperformance by
the counter parties, and no material loss would be expected from their
nonperformance. The Company's financial instruments also expose it to
certain additional market risks as discussed below.
INTEREST RATE RISK - The Company's floating rate debt obligations (Note
10) expose the Company to interest rate risk, such that when LIBOR,
EURIBOR or Prime rates increase or decrease, so will the Company's
interest expense. To manage this potential risk, the Company may use
interest rate swap agreements to limit the effect of increases in interest
rates on any of the Company's U.S. dollar floating rate debt by fixing the
rate without the exchange of the underlying principal or notional amount.
Net amounts paid or received are added to or deducted from interest
expense in the period accrued.
At June 30, 1999 and 2000, the Company had $88,817 and $62,855,
respectively, of floating rate debt tied to LIBOR, EURIBOR or Prime rates.
In April 1998, the Company entered into a $15,000 notional amount interest
rate swap agreement under which the Company paid a fixed rate of 5.92% and
received a LIBOR floating rate (5.0% at June 30, 1999). This agreement was
a hedge against $15,000 of the $88,817 outstanding on the Company's
revolving credit facility as of June 30, 1999. At June 30, 1999, the fair
value of this agreement based on a quote received from the counterparty,
indicating the amount the Company would pay or receive to terminate the
agreement, is a payment of $67. This agreement was terminated on June 23,
2000, with the Company receiving $402 upon termination. Such amount is
included within other income on the accompanying consolidated statements
of income.
In September 1998, the Company entered into a $40 million notional amount
interest rate swap agreement under which the Company paid a fixed rate of
5.00% and received a LIBOR floating rate (5.3275% at June 30, 1999). Under
this agreement, the notional amount was amortized at $1,429 per quarter
beginning March 31, 1999. At June 30, 1999, this agreement was a hedge
against $37,142 of the $88,817 outstanding on the Company's revolving
credit facility. At June 30, 1999, the fair value of this agreement based
on a quote received from the counterparty, indicating the amount the
Company would pay or receive to terminate the agreement, was a receipt of
$965. This agreement was terminated on December 29, 1999, with the Company
receiving $1,238 upon termination. Such amount is included within other
income on the accompanying consolidated statements of income.
FOREIGN CURRENCY RISK - The Company's British subsidiary, Sheffield,
generates significant sales to customers outside of Great Britain whereby
Sheffield invoices and receives payment from those customers in their
local currencies. This creates foreign currency risk for Sheffield as the
value of such currencies in British Pounds may be higher or lower when
such transactions are actually settled. To manage this risk, Sheffield
uses forward foreign exchange contracts to hedge receipts and payments of
foreign currencies related to sales to its customers and purchases from
its vendors outside of Great Britain. When Sheffield accepts an order from
a customer that will be invoiced in a currency other than British Pounds
(anticipated sales), it enters into a forward foreign exchange contract to
sell such currency and receive British Pounds at a fixed rate during some
specified future period that is expected to approximate the customer's
payment date. Upon shipment of the product to the customer, the sale and
receivable are recorded in British Pounds in the amount of the contract.
When Sheffield purchases materials or equipment from a vendor that bills
it in foreign currency, Sheffield will also enter into a
- F-25 -
forward foreign exchange contract to sell British Pounds and purchase that
foreign currency to settle the payable.
At June 30, 1999 and 2000, the Company's foreign subsidiaries, primarily
Sheffield, have the following net contracts to sell the following
currencies and has no significant un-hedged foreign currency exposure
related to sales and purchase transactions:
JUNE 30, 1999 JUNE 30, 2000
---------------------------------- ------------------------------
LOCAL APPROXIMATE LOCAL APPROXIMATE
CURRENCY VALUE(1) CURRENCY VALUE(1)
------------ ------------ ---------- ------------
U.S. Dollars 25,740 $ 25,060 17,860 $ 17,851
Deutsche Marks 15,975 8,877 8,165 3,968
French Francs 38,225 6,133 19,022 2,757
Swiss Francs 496 320 64 39
Italian Lira 3,564,490 1,959 2,229,242 1,095
Canadian Dollars 560 362 1,344 905
Dutch Guilder 1,854 897
Swedish Krona 6,018 718 4,000 452
Spanish Pesata 72,463 464 65,980 377
Austrian Schilling 5,204 425
Japanese Yen 9,807 80 757 7
Danish Krona 1,519 216
Belgian Franc 8,601 231
Finish Marka 21 4 106 17
Norwegian Kroner 3,609 451
Euro 653 712 4,134 3,930
---------- ---------
Total $ 46,909 $ 31,398
========== =========
(1) The approximate value is the value of the local currencies
translated first into the foreign subsidiaries' functional
currency, at the June 30, 1999 and 2000 spot rates, respectively,
and then translated to U.S. dollars at the June 30, 1999 and 2000
spot rates.
The Company also has foreign currency exposure with respect to its net
investment in Sheffield. This exposure is to changes in the British Pound
and affects the translation of the investment into U.S. Dollars in
consolidation. To manage a portion of this exposure, the Company entered
into a combined interest rate currency swap ("CIRCUS") in April 1998. The
CIRCUS was an amortizing principal swap that fixed the exchange rate on
the periodic and final principal cash exchanges and initially required the
payment of interest on 24,002 British Pounds by the Company at a fixed
rate of 6.82% and the receipt of interest on 40,000 U.S. Dollars at a
floating rate tied to LIBOR rates. The currency portion of the CIRCUS was
designated as an effective hedge of a portion of the Company's net
investment in Sheffield. The interest portion of the CIRCUS was also
effective and was designated as a hedge of the 40,000 U.S. Dollars LIBOR
debt.
In September 1998, the Company terminated the CIRCUS and entered into a
separate interest rate swap (described in INTEREST RATE RISK above) and a
separate amortizing principal currency swap. The termination of the CIRCUS
resulted in a loss of $900 on the interest portion, which was deferred and
amortized to interest expense over the remaining term of the underlying
debt obligation to which it was
- F-26 -
originally designated until such debt was retired on December 29, 1999.
The retirement of this debt triggered the recognition of the remaining
$557 of deferred loss. This loss was recorded as a reduction of other
income.
This currency swap entered into in September 1998, like the currency
portion of the CIRCUS, was an amortizing principal swap that fixed the
exchange rate on the periodic and final principal cash exchanges. The
currency swap initially required the payment of interest on 24,002 British
Pounds by the Company at a fixed rate of 6.82% and the receipt of interest
by the Company on 40,000 U.S. Dollars at a fixed rate of 5.00%. The
currency swap was designated as an effective hedge of a portion of the
Company's net investment in Sheffield and was recorded as an adjustment to
the accumulated foreign currency translation adjustment account and as a
component of other assets. At June 30, 1999, the currency swap had a
carrying value of $1,513 and a fair value, based on amounts that would be
paid or received by the Company to terminate the swap, of $(188). On June
23, 2000, the Company terminated the currency swap, with the Company
receiving $1,549 upon termination. Based upon this receipt and the
currency swap's carrying value of $3,283 upon termination, a deferred gain
of $1,549 is recorded within the accumulated foreign currency translation
adjustment account. This deferred gain will only be recognized within
operations if and when the Company sells the Sheffield subsidiary.
FAIR VALUE OF FINANCIAL INSTRUMENTS - As of June 30, 1999 and 2000, the
carrying value of cash and cash equivalents approximates fair value of
those instruments due to their liquidity and short-term nature.
Based on borrowing rates currently available to the Company and the
remaining terms, the carrying value of debt obligations as of June 30,
1999 and 2000 approximates fair value.
The estimated fair values of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
13. STOCKHOLDERS' EQUITY
In fiscal year 2000, the Company's Board of Directors established a
Stockholder Rights Plan and distributed to stockholders, one preferred
stock purchase right for each outstanding share of common stock. Under
certain circumstances, a right may be exercised to purchase one
one-thousandth of a share of Series A Participating Cumulative Preferred
Stock at an exercise price of $30, subject to adjustment. The rights
become exercisable on the business day following the tenth business day
after the commencement of a tender offer for at least 20% of the Company's
common stock or a public announcement that a party or group has acquired
at least 20% of the Company's common stock. Generally, after the rights
become exercisable, the holders may purchase that number of shares having
a market value equal to twice the exercise price, for an amount in cash
equal to the exercise price. If the Company's Board of Directors elects,
it may exchange all of the outstanding rights for shares of common stock
on a one-for-one basis. If the Company is a party to certain merger or
business combination transactions, or transfers 50% or more of its assets
or earnings power, and certain other events occur, each right will entitle
its holders, other than the acquiring person, to buy for the exercise
price a number of shares of common stock of the Company, or of the other
party to the transaction, having a value equal to twice the exercise price
of the right. The rights expire on March 28, 2010, and may be redeemed by
the Company for $.01 per right at any time
- F-27 -
until ten business days following the date of the public announcement
of the acquisition of 20% or more o fthe Company's common stock or the
commencement date of a tender offer for at least 20% of the Company's
common stock. The Company is authorized by the Board of Directors to
issue 2,000,000 shares of preferred stock, none of which have been
issued. The Company has designated 10,000 shares of the preferred stock
as Series A Participating Cumulative Preferred Stock for the purpose of
the Stockholder Rights Plan. The Stockholder Rights Plan is subject to
stockholder ratification at the Company's fiscal year 2000 annual
meeting, which is scheduled for November 17, 2000.
In August 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to 1,200,000 shares of the
Company's common stock. During the remainder of fiscal year 1999, the
Company repurchased 586,700 shares under this program for $6,048. The
Company accounts for these shares as treasury stock and has recorded them
at cost. On February 18, 2000, the Board of Directors terminated the stock
repurchase program. The Company's Credit Agreement and the Note Purchase
Agreement (Note 10) each restrict certain payments by the Company, such as
stock repurchases, from exceeding certain limits.
The 1993 Atchison Casting Corporation Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors on August 10, 1993
and approved by the Company's stockholders on September 27, 1993. An
aggregate of 400,000 shares of common stock were initially made available
for purchase by employees upon the exercise of options under the Purchase
Plan. On the first day of every option period (option periods are
three-month periods beginning on January 1, April 1, July 1 or October 1
and ending on the next March 31, June 30, September 30 or December 31,
respectively), each eligible employee is granted a nontransferable option
to purchase common stock from the Company on the last day of the option
period. As of the last day of an option period, employee contributions
(authorized payroll deductions) during such option period will be used to
purchase full and partial shares of common stock. The price for stock
purchased under each option is 90% of the stock's fair market value on the
first day or the last day of the option period, whichever is lower. During
the years ended June 30, 1998, 1999 and 2000, 15,793, 33,033 and 36,371
common shares, respectively, were purchased by employees under the
Purchase Plan. At June 30, 2000, 253,669 shares remained available for
grant.
- F-28 -
The Atchison Casting 1993 Incentive Stock Plan (the "Incentive Plan") was
adopted by the Board of Directors on August 10, 1993 and approved by the
Company's stockholders on September 27, 1993. At the annual meeting in
November 1997, the Company's stockholders approved increasing the number
of options available for grant under the Incentive Plan by 400,000. The
Incentive Plan allows the Company to grant stock options to employees to
purchase up to 700,000 shares of common stock at prices that are not less
than the fair market value at the date of grant. The options vest equally
over a three year period from the date of grant and remain exercisable for
a term of not more than 10 years after the date of grant. The Incentive
Plan provides that no options may be granted more than 10 years after the
date of approval by the stockholders. Activity in the Incentive Plan for
the three years ended June 30, 2000, is summarized in the following table:
WEIGHTED
AVERAGE
SHARES PRICE RANGE PRICE PER
UNDER OPTION PER SHARE SHARE
Outstanding, July 1, 1997 229,999 $12.88-19.13 $ 14.13
Issued 33,333 15.75-18.63 16.56
Exercised (18,060) 12.88-14.50 13.58
Surrendered (11,873) 13.38-14.50 13.70
----------
Outstanding, June 30, 1998 233,399 12.88-19.13 14.54
Issued 119,000 8.50-18.00 11.01
Surrendered (24,366) 9.88-18.63 14.95
----------
Outstanding, June 30, 1999 328,033 8.50-19.1 13.23
Issued 66,500 7.06-10.38 9.39
Surrendered (12,300) 10.38-14.13 13.01
---------
Outstanding, June 30, 2000 382,233 7.06-19.13 12.57
---------
of June 30, 1998, 1999 and 2000, there were 164,044, 191,633 and 235,067
options, respectively, exercisable under the Incentive Plan. The
weighted-average exercise price for options exercisable at June 30, 1998,
1999 and 2000 are $13.88, $14.09 and $13.91, respectively.
At June 30, 2000, options to purchase 292,107 shares were authorized but
not granted. The weighted average remaining contractual life of options
outstanding under the Incentive Plan at June 30, 1998, 1999 and 2000 is
7.0 years, 7.1 years, and 6.7 years, respectively.
- F-29 -
On November 18, 1994, the Company's stockholders approved the Atchison
Casting Non-Employee Director Option Plan (the "Director Option Plan").
The Director Option Plan provides that each non-employee director of the
Company who served in such capacity on April 15, 1994 and each
non-employee director upon election or appointment to the Board of
Directors thereafter shall automatically be granted an option to purchase
10,000 shares of the Company's common stock. No person shall be granted
more than one such option pursuant to the Director Option Plan. An
aggregate of 100,000 shares were reserved for purchase under the plan. The
price for stock purchased under the plan is the fair market value at the
date of grant. The options under this plan have a 6 month vesting period
from the date of grant and remain exercisable for a term of not more than
10 years after the date of grant. Activity in the Director Option Plan for
the three years ended June 30, 2000, is summarized in the following table:
WEIGHTED
AVERAGE
SHARES PRICE PRICE PER
UNDER OPTION PER SHARE SHARE
Outstanding, July 1, 1997 40,000 $13.38 $13.38
Issued 10,000 19.13 19.13
Exercised (10,000) 13.38 13.38
---------
Outstanding, June 30, 1998 40,000 13.38-19.13 14.81
---------
Outstanding, June 30, 1999 40,000 13.38-19.13 14.81
---------
Issued 10,000 8.75 8.75
---------
Outstanding, June 30, 2000 50,000 8.75-19.13 13.60
=========
As of June 30, 1998, 1999 and 2000, there were 40,000 options exercisable
under the Director Option Plan. The weighted-average exercise price for
options exercisable at June 30, 1998, 1999 and 2000 is $14.81.
At June 30, 2000, options to purchase 30,000 shares were authorized but
not granted. The weighted average remaining contractual life of options
outstanding under the Director Option Plan at June 30, 1998, 1999 and 2000
is 6.6 years, 5.6 years, and 5.6 years, respectively.
- F-30 -
The following table illustrates the range of exercise prices and the weighted
average remaining contractual lives for options outstanding under both the
Incentive Plan and Director Option Plan as of June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 6/30/00 CONTRACTUAL LIFE PRICE AT 6/30/00 PRICE
$13.38 125,533 4 years $ 13.38 125,533 $ 13.38
14.13-14.75 51,000 5 years 14.39 51,000 14.39
12.88-15.75 28,000 6 years 14.93 28,000 14.93
16.63-19.13 40,200 7 years 17.68 33,533 17.76
9.88 20,000 8 years 9.88 6,667 9.88
18.06 20,000 8 years 18.06 6,667 18.06
8.50-10.38 127,500 9 years 9.61 23,667 9.45
8.75-8.88 20,000 10 years 7.91 - -
-------- -------
432,233 275,067
======== =======
The Company applies APB No. 25 in accounting for its stock option plans,
under which no compensation cost has been recognized for stock option awards.
Had compensation cost for the stock option plans been determined in
accordance with the fair value accounting method prescribed under SFAS No.
123, the Company's net income per share on a pro forma basis would have been
as follows:
1998 1999 2000
Net income:
As reported $ 12,765 $ 9,806 $ 2,456
Pro forma 12,578 9,630 2,132
Net income per share:
As reported:
Basic 1.56 1.26 0.32
Diluted 1.55 1.26 0.32
Pro forma:
Basic 1.54 1.24 0.28
Diluted 1.53 1.24 0.28
The SFAS No. 123 fair value method of accounting is not required to be
applied to options granted prior to July 1, 1995, therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years.
- F - 31 -
For the purpose of computing the pro forma effects of stock option grants
under the fair value accounting method, the fair value of each stock option
grant was estimated on the date of the grant using the Black Scholes option
pricing model. For the Incentive Plan, the weighted average grant-date fair
value of stock options granted during fiscal year 1998, 1999 and 2000 was
$10.07, $6.87 and $5.92 per share, respectively. For the Director Option
Plan, the weighted average grant-date fair value of stock options granted
during fiscal year 1998 and 2000 was $11.55 and $5.66 per share,
respectively. No options were issued under the Director Option Plan in fiscal
year 1999. The following weighted average assumptions were used for grants
under both option plans during the years ended June 30, 1998, 1999 and 2000:
1998 1999 2000
Risk-free interest rate 5.2% 5.3% 5.9%
Expected life 10 years 10 years 10 years
Expected volatility 36% 36% 41%
Dividend yield Nil Nil Nil
For the Purchase Plan, the weighted average grant-date fair value of options
granted under the plan was $2.99, $1.81 and $1.57, respectively, for the
years ended June 30, 1998, 1999 and 2000. The following weighted average
assumptions were used for grants under the Purchase Plan during the years
ended June 30, 1998, 1999 and 2000:
1998 1999 2000
Risk-free interest rate 5.1 % 4.4 % 5.2 %
Expected life 3 months 3 months 3 months
Expected volatility 36% 36% 41%
Dividend yield Nil Nil Nil
14. EARNINGS PER SHARE
Following is a reconciliation of basic and diluted EPS for the years ended
June 30, 1998, 1999 and 2000, respectively.
1998 1999 2000
---------------------------- ----------------------------- -----------------------------
WEIGHTED EARNINGS WEIGHTED EARNINGS WEIGHTED EARNINGS
NET AVERAGE PER NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
Basic EPS $12,765 8,167,285 $1.56 $9,806 7,790,781 $1.26 $2,456 7,648,616 $0.32
Effect of dilutive
securities-stock options 51,401 (0.01) 1,695
------- --------- ----- ------ --------- ----- ------ -------- -----
Diluted EPS $12,765 8,218,686 $1.55 $9,806 7,790,781 $1.26 $2,456 7,650,311 $0.32
======= ========= ===== ====== ========= ===== ====== ========= =====
- F - 32 -
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the periods ended June 30, 2000 and
1999 are as follows:
YEAR ENDED JUNE 30, 1999
-------------------------------------------------------
FIRST SECOND THIRD (1) FOURTH (2)
Net sales $ 116,576 $ 122,955 $ 119,533 $116,495
Gross profit 13,921 18,747 17,535 17,569
Operating income 2,701 6,810 4,590 11,195
Net income 337 2,708 1,265 5,496
Earnings per common share:
Basic 0.04 0.35 0.17 0.72
Diluted 0.04 0.35 0.17 0.72
YEAR ENDED JUNE 30, 2000
-----------------------------------------------------
FIRST SECOND (3) THIRD (4) FOURTH (5)
Net sales $ 109,693 $ 115,711 $ 124,745 $118,152
Gross profit 12,713 15,031 13,692 12,117
Operating income 3,102 4,658 2,730 (9,268)
Net income 612 1,144 7,845 (7,145)
Earnings per common share:
Basic 0.08 0.15 1.03 (0.93)
Diluted 0.08 0.15 1.03 (0.93)
(1) The third quarter contains a $750 charge recorded in connection with an
industrial accident that occurred on February 25, 1999 at the Company's
subsidiary, Jahn Foundry, which decreased net income by $450 or $0.06
per share (Note 23).
(2) The fourth quarter contains a $3,500 revision to the flood damage
reconstruction reserve which increased net income by $2,086 or $0.27
per share. The flood damage reconstruction reserve relates to the July
1993 Missouri River Flood (Note 22).
(3) The second quarter contains a $681 gain on the termination of an
interest rate swap agreement, which increased net income by $412 or
$.05 per share (Note 12).
(4) The third quarter contains a $7,786 deferred income tax benefit
relating to the resolution of the Company's tax treatment of certain
flood insurance proceeds received in 1995 and 1996, which increased net
income by $7,786, or $1.02 per share (Note 11).
(5) The fourth quarter contains a $3,373 impairment charge and $227 of
other costs recorded in connection with the closure of Claremont, which
decreased net income by $2,268 or $.30 per share (Note 2). The fourth
quarter also contains a $6,883 impairment charge recorded in connection
with the write-down of PrimeCast fixed assets, which decreased net
income by $4,336 or $.56 per share (Note 3). In addition, the fourth
quarter contains a $402 gain on the termination of an interest rate
swap agreement, which increased net income by $243 or $.03 per share
(Note 12).
The aggregate total of the individual quarterly amounts may not equal the
amount reported for the fiscal year due to rounding.
- F - 33 -
16. EMPLOYEE BENEFIT PLANS
The Company sponsors separate defined benefit pension plans for certain of
its salaried and hourly employees. Employees are eligible to participate
on the date of employment with vesting after five years of service.
Benefits for hourly employees are determined based on years of credited
service and employee earnings.
Pension expense for the defined benefit plans is presented below:
1998 1999 2000
Service costs $ 1,018 $ 7,734 $ 6,824
Interest costs 14,980 2,851 15,376
Actual return on net assets (8,263) (15,272) (40,543)
Net deferral items 5,141 (3,012) 22,269
------- -------- --------
$ 747 $ 4,430 $ 3,926
======= ======== ========
The pension plans' assets (primarily U.S. Government securities, common stock
and corporate bonds) are deposited with a bank. A comparison of the projected
benefit obligation and plan assets at fair value as of June 30, 1999 and 2000 is
presented below.
- F - 34 -
1999 2000
--------------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at $ (217,524) $ (24,379) $(230,530) $(10,983)
beginning of year
Service cost (7,066) (668) (6,496) (328)
Interest cost (13,334) (1,646) (14,613) (763)
Actuarial (loss) gain 583 (107) (3,196) 1,116
Plan amendments (305) (673)
Foreign currency exchange rate 11,101 38 8,093 8
changes
Participant contributions (1,739)
Benefits paid 10,250 2,217 6,707 491
---------- -------- -------- -------
Projected benefit obligation at end
of year (216,295) (25,218) (241,774) (10,459)
---------- -------- -------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at 228,851 19,910 235,859 8,323
beginning of year
Actual return on plan assets 15,803 (531) 39,967 576
Participant contributions 1,739
Employer contribution 3,698 599 3,750 463
Foreign currency exchange rate (11,644) (37) (8,993) (7)
changes
Benefits paid (10,250) (2,217) (6,707) (491)
---------- -------- -------- -------
Fair value of plan assets at end of 226,458 17,724 265,615 8,864
year
Plan assets in excess (deficiency) of 10,163 (7,494) 23,841 (1,595)
projected benefit obligation
Unrecognized prior service costs 422 699 426 600
Unrecognized net obligation 102 (113) 132 (161)
Unrecognized net (gain)/loss (1,570) 3,355 (17,015) (663)
Additional liability (828) (122)
---------- -------- -------- -------
Accrued pension asset (liability) $ 9,117 $ (4,381) $ 7,384 $(1,941)
========== ======== ======== ========
THE ACTUARIAL VALUATION WAS PREPARED
ASSUMING:
Discount rate 7.00% 7.75%
Expected long-term rate of return
on plan assets 9.00% 9.00%
Salary increases per year 5.00% 5.00%
- F - 35 -
In accordance with SFAS No. 87, "EMPLOYERS' ACCOUNTING FOR PENSIONS", the
Company has recorded an additional minimum pension liability for
underfunded plans of $828 and $122 at June 30, 1999 and 2000,
respectively, representing the excess of unfunded accumulated benefit
obligations over previously recorded pension cost liabilities. A
corresponding amount is recognized as an intangible asset except to the
extent that these additional liabilities exceed related unrecognized prior
service cost and net transition obligation, in which case the increase in
liabilities is charged directly to stockholders' equity as a component of
other comprehensive income.
In addition, the Company sponsors a defined contribution 401(k) benefit
plan covering certain of its employees who have attained age 21 and have
completed one year of service. The Company matches 75% of employee
contributions up to 8% of an employee's salary. Employees vest in the
Company matching contributions after five years. The Company's
contribution was $535, $519 and $1,387 for the years ended June 30, 1998,
1999 and 2000, respectively.
The Company's subsidiaries, Prospect Foundry, LA Die Casting and Jahn
Foundry contributed $345, $302 and $320 for the years ended June 30, 1998,
1999 and 2000, respectively, to multiemployer pension plans for employees
covered by a collective bargaining agreement. These plans are not
administered by the Company and contributions are determined in accordance
with provisions of negotiated labor contracts. Information with respect to
the Company's proportionate share of the excess of the actuarially
computed value of vested benefits over the total of the pension plans' net
assets is not available from the plans' administrators. The Multiemployer
Pension Plan Amendments Act of 1980 (the "Act") significantly increased
the pension responsibilities of participating employers. Under the
provisions of the Act, if the plans terminate or the Company withdraws,
the Company may be subject to a substantial "withdrawal liability". As of
the date of the most current unaudited information submitted by the plan's
administrators (December 31, 1999), no withdrawal liabilities exist.
The Company also has various other profit sharing plans. Costs of such
plans charged against earnings were $913, $1,234 and $907 for the years
ended June 30, 1998, 1999 and 2000, respectively.
- F - 36 -
17. POSTRETIREMENT OBLIGATION OTHER THAN PENSION
The Company provides certain health care and life insurance benefits to
certain of its retired employees. SFAS No. 106, "EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS," requires the Company to
accrue the estimated cost of retiree benefit payments during the years the
employee provides services. The Company funds these benefits on a
pay-as-you-go basis. The accumulated postretirement benefit obligation and
fair value of plan assets as of June 30, 1999 and 2000 are as follows:
1999 2000
CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION
Accumulated postretirement benefit obligation
at beginning of year $ 9,643 $ 9,864
Service cost 480 516
Interest cost 643 744
Actuarial (gain) loss (455) 371
Benefits paid (447) (324)
Accumulated postretirement benefit obligation
at end of year 9,864 11,171
------- -------
Fair value of plan assets at end of year
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets 9,864 11,171
Unrecognized net loss (2,301) (2,555)
Unrecognized prior service cost 715 583
------- -------
Accrued pension liability $ 8,278 $ 9,199
======= =======
Net postretirement benefit cost for the years ended June 30, 1998, 1999 and
2000 consisted of the following components:
1998 1999 2000
Service cost - benefits earned during the year $ 386 $ 480 $ 516
Interest cost on accumulated benefit obligation 599 643 744
Amortization of prior service cost (132) (132) (132)
Amortization of loss 69 138 116
----- ------ ------
$ 922 $1,129 $1,244
===== ====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for pre-age 65 and post-age 65 benefits
as of June 30, 2000 was 9.1% decreasing each successive year until it
reaches 6.0% in 2020, after which it remains constant. A
one-percentage-point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit
obligation as of June 30, 2000 by approximately $1,616 (14.5%) and the
aggregate
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of the service and interest cost components of the net periodic
postretirement benefit cost for the year then ended by approximately $213
(16.9%). A one-percentage-point decrease in the assumed health care cost
trend rate for each year would decrease the accumulated postretirement
benefit obligation as of June 30, 2000 by approximately $1,306 (11.7%) and
the aggregate of the service and interest cost components of the net
periodic postretirement benefit cost for the year then ended by
approximately $169 (13.4%). The assumed discount rate used in determining
the accumulated postretirement benefit obligation as of June 30, 1998,
1999 and 2000 was 6.75%, 7.5% and 8.0%, respectively, and the assumed
discount rate used in determining the service cost and interest cost for
the years ended June 30, 1998, 1999 and 2000 was 7.75%, 7.5% and 8.0%,
respectively.
18. OPERATING LEASES
The Company leases certain buildings, equipment, automobiles and trucks,
all accounted for as operating leases, on an as needed basis to fulfill
general purposes. Total rental expense was $1,006, $1,675 and $3,862 for
the years ended June 30, 1998, 1999 and 2000, respectively. Long-term,
noncancelable operating leases having an initial or remaining term in
excess of one year require minimum rental payments as follows:
2001 $ 4,664
2002 4,572
2003 4,125
2004 3,745
2005 3,477
19. MAJOR CUSTOMERS
Net sales to and customer accounts receivable from major customers are as
follows:
AMOUNT OF NET SALES
-----------------------------------------------------
1998 1999 2000
Customer A $ 27,713 $ 25,219 $ 24,826
Customer B 39,999 53,276 46,677
--------- --------- ---------
$ 67,712 $ 78,495 $ 71,503
-======== ========= =========
CUSTOMER
ACCOUNTS
RECEIVABLE
-------------------------------
1999 2000
Customer A $ 2,912 $ 2,916
Customer B 7,189 4,191
-------- --------
$ 10,101 $ 7,107
======== ========
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20. SEGMENT AND GEOGRAPHIC INFORMATION
Due to the nature of the Company's products and services, its production
processes, the type or class of customer for its products and services,
and the methods used to distribute products and provide services, the
Company is considered to have a single operating segment for reporting
purposes. Due to the many casting products produced by the Company, it is
not practicable to disclose revenues by casting or forging product.
The Company operates in four countries, the United States, Great Britain,
Canada and France. Revenues from external customers derived from
operations in each of these countries for the years ended June 30, 1998,
1999 and 2000 are as follows and long-lived assets located in each of
these countries as of June 30, 1999 and 2000 are as follows:
REVENUES
---------------------------------------------------------------------------
UNITED GREAT
STATES BRITAIN CANADA FRANCE TOTAL
1998 $ 310,235 $ 37,607 $ 25,926 $ $ 373,768
1999 293,691 132,154 45,178 4,536 475,559
2000 296,174 114,183 17,706 40,238 468,301
LONG-LIVED ASSETS
---------------------------------------------------------------------------
UNITED GREAT
STATES BRITAIN CANADA FRANCE TOTAL
1999 $ 145,877 $ 29,045 $ 22,952 $ 181 $ 198,055
2000 135,148 29,854 21,026 678 186,706
21. ADDITIONAL CASH FLOWS INFORMATION
1998 1999 2000
Cash paid during the year for:
Interest $ 3,915 $ 8,235 $ 9,398
Income taxes 7,731 5,751 56
Supplemental schedule of noncash investing and financing
activities:
Recording of other asset related to pension liability 365 421 706
Recording of additional pension liability (365) (421) (706)
Unexpended bond funds (519)
22. FLOOD RESERVE
In 1996, the Company received an insurance settlement for losses incurred
as a result of the July 1993 Missouri River flood. At that time the
Company established a reserve to be used for future repairs due to
long-term flood damage to the Company's foundry. Since that time the
Company has been charging the reserve balance for costs incurred resulting
from those repairs.
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During 1999, management updated its analysis of the required repairs by
performing its periodic re-evaluation of the effects of the flood based
on current information. As a result, management committed to a revised
repair plan, which included several remaining projects. These projects
and their final estimated costs to complete represent the remaining
flood reserve balance that is considered necessary. The amount of the
reserve balance, over and above the estimated costs of such identified
projects, was considered to be excess and was reversed. Such excess
amounted to $3,500 and was included in other income in the fourth
quarter of fiscal year 1999. Any future repairs outside the scope of
the projects identified, if any, will be charged to repairs and
maintenance as incurred. As of June 30, 1999 and 2000, the Company has
$1,197 and $645 recorded, respectively, as reserved for future flood
repairs, which have been classified as accrued expenses.
23. CONTINGENCIES
An accident, involving an explosion and fire, occurred on February 25,
1999 at Jahn Foundry, located in Springfield, Massachusetts. Nine
employees were injured and there have been three fatalities. The damage
was confined to the shell molding area and the boiler room. The other
areas of the foundry are operational. Molds are currently being
produced at other foundries, as well as Jahn Foundry, while the repairs
are made. The new shell molding department is scheduled to be in
operation this fall.
The Company carries insurance for property and casualty damages (over
$475 million of coverage), business interruption (approximately $115
million of coverage), general liability ($51 million of coverage) and
workers' compensation (up to full statutory liability) for itself and
its subsidiaries. The Company recorded charges of $450 ($750 before
tax) during the third quarter of fiscal year 1999, primarily reflecting
the deductibles under the Company's various insurance policies. At this
time, there can be no assurance that the Company's ultimate costs and
expenses resulting from the accident will not exceed available
insurance coverage by an amount which could be material to its
consolidated financial statements.
A civil action has commenced in the Massachusetts 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. Counsel for the plaintiffs
informally have indicated a desire to explore whether any facts would
support adding the Company to that litigation as a jointly and
severally liable defendant. The supplier of the chemical compound,
Borden Chemical, Inc., filed a Third Party Complaint against Jahn
Foundry in the Massachusetts State Court on February 2, 2000. The
Company's comprehensive general liability insurance carrier has
retained counsel on behalf of Jahn Foundry and the Company and is
monitoring the situation on behalf of the Company. It is too early to
assess the potential liability for such a claim, which in any event the
Company would aggressively defend. The plaintiff's counsel has
informally raised the possibility of seeking to make a double recovery
under the workers' compensation policy in force for Jahn Foundry,
contending that there was willful misconduct on Jahn Foundry's part
leading to the accident. Such recovery, if pursued and made, would be
of a material nature. It is too early to assess the potential liability
for such a claim, which in any event Jahn Foundry would aggressively
defend.
The Company, its property insurance carrier and its insurance broker
dispute the amount of property insurance available for property damages
suffered in this accident. It is too early in the process of
calculating the loss to estimate the amount in dispute. Management
believes that the probability of any loss resulting from the dispute
property insurance coverage is remote. The Company currently believes
this dispute will be resolved during fiscal year 2001. If this dispute
cannot be resolved amicably, the
- F - 40 -
Company would vigorously pursue its remedies against both parties. As
of June 30, 2000, the Company has received approximately $20,000 of
insurance advances and has incurred charges approximating $14,000
related to the explosion and fire related damages, which are recorded
in accrued expenses and other current assets, respectively, within the
consolidated balance sheets.
Following the accident, the Occupational Safety and Health
Administration ("OSHA") conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items.
Neither of the two violations, specifically addressing conditions
related to the explosion and fire, were classified as serious or
willful. Without admitting any wrongdoing, Jahn Foundry entered into a
settlement with OSHA that addresses the alleged work place safety
issues and agreed to pay $149 in fines.
In addition, the Company is a defendant in various matters and is
exposed to claims encountered in the normal course of business. In the
opinion of management, the resolution of these matters will not have a
material effect on the Company's consolidated financial statements.
24. CREDIT AGREEMENT NEGOTIATIONS
As described in Note 10, the Company has obtained a waiver of
compliance of the covenants related to the Cash Flow Leverage Ratio and
Fixed Charge Coverage Ratio through September 30, 2000 from Harris and
a waiver of compliance of the covenant related to the Fixed Charge
Coverage Ratio through September 30, 2000 from the insurance company.
Absent another waiver from each of these creditors, management does not
believe that the Company will be in compliance with such covenants
subsequent to September 30, 2000, and accordingly, has classified as
current the Harris revolving credit facility and the senior notes with
the insurance company as of June 20, 2000. Management is currently in
negotiations with Harris and two other financial institutions to
extend, renegotiate or replace the current credit agreements on a
long-term basis. The Company has received nonbinding commitments to
provide long-term financing from each of these three financial
institutions and is currently evaluating such commitments. Management
believes that it will be successful in obtaining a long-term credit
facility after September 30, 2000, but prior to December 31, 2000;
however, no assurance can be given that management will be successful
in these negotiations.
******
- F - 41 -
EXHIBIT INDEX
Exhibit
-------
3.1 Articles of Incorporation of Atchison Casting Corporation, a
Kansas corporation (incorporated by reference to Exhibit 4.1
of the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994)
3.2 Amended and Restated By-Laws of Atchison Casting Corporation,
a Kansas corporation (incorporated by reference to Exhibit 3.2
of the Company's Current Report on Form 8-K filed May 19,
2000)
4.0 Long-term debt instruments of the Company in amounts not
exceeding 10% of the total assets of the Company and its
subsidiaries on a consolidated basis will be furnished to the
Commission upon request
4.1(a) The Amended and Restated Credit Agreement dated as of April 3,
1998, among the Company, the Banks party thereto and Harris
Trust and Savings Bank, as Agent (incorporated by reference to
Exhibit 4.1(a) of the Company's Current Report on Form 8-K
filed April 16, 1998)
4.1(b) Pledge and Security Agreement dated as of April 3, 1998,
between the Company and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.1(b) of Form 8-K
filed April 16, 1998)
4.1(c) First Amendment to Amended and Restated Credit Agreement dated
as of October 7, 1998, among the Company, the Banks party
thereto and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1998)
4.1(d) Second Amendment to the Amended and Restated Credit Agreement
dated as of April 23, 1999, 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
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999)
4.1(e) Third Amendment to the Amended and Restated Credit Agreement
dated as of August 20, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1(e) of the Company's
Form 10-K for the year ended June 30, 1999)
4.1(f) Fourth Amendment and Waiver to the Amended and Restated Credit
Agreement dated as of November 5, 1999, among the Company, the
Banks party thereto, and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
4.1(g) Fifth Amendment to the Amended and Restated Credit Agreement
dated as of December 21, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999)
EXHIBIT INDEX
Exhibit
-------
4.1(h) Sixth Amendment to the Amended and Restated Credit Agreement
dated as of February 15, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000)
4.1(i) Seventh Amendment to the Amended and Restated Credit Agreement
dated as of May 1, 2000, among the Company, the Banks party
thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000)
4.1(j) Eighth Amendment to the Amended and Restated Credit Agreement
dated as of June 30, 2000, among the Company, the Banks party
thereto, and Harris Trust and Savings Bank, as Agent
4.1(k) Ninth Amendment to the Amended and Restated Credit Agreement
dated as of July 31, 2000, among the Company, the Banks party
thereto, and Harris Trust and Savings Bank, as Agent
4.2 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 of Amendment No. 2 to Form S-2 Registration
Statement No. 333-25157 filed May 19, 1997)
4.3 Rights Agreement, dated as of March 28, 2000 between Atchison
Casting Corporation and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to
Exhibit 1 of the Company's Form 8-A Registration Statement
filed March 28, 2000)
10.1(a)* Employment Agreement between the Company and Hugh H. Aiken
dated as of June 14, 1991 (incorporated by reference to
Exhibit 10.1 of Form S-1 Registration Statement No. 33-67774
filed August 23, 1993)
10.1(b)* Amendment No. 1 dated as of September 27, 1993 to Employment
Agreement between the Company and Hugh H. Aiken (incorporated
by reference to Exhibit 10.1(b) of Amendment No. 1 to Form S-1
Registration Statement No. 33-67774 filed September 27, 1993)
10.1(c)* Amendment No.2 dated as of September 10, 1998 to Employment
Agreement between the Company and Hugh H. Aiken (incorporated
by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998)
10.2* Atchison Casting 1993 Incentive Stock Plan (incorporated by
reference to Exhibit 10.7 of Form S-1 Registration Statement
No. 33-67774 filed August 23, 1993)
10.3 Confidentiality and Noncompetition Agreements by and among the
Company and executive officers of the Company (incorporated by
reference to Exhibit 10.8 of Form S-1 Registration Statement
No. 33-67774 filed August 23, 1993)
EXHIBIT INDEX
Exhibit
-------
10.4* Atchison Casting Non-Employee Director Option Plan
(incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the year ended June 30, 1994)
10.5* Plan for conversion of subsidiary stock to Atchison Casting
Corporation stock (incorporated by reference to Exhibit 10.3
of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994)
10.6 The Share Exchange Agreement dated April 6, 1998 in respect of
the ordinary shares of Sheffield by and among David Fletcher
and others, ACUK and the Company (incorporated by reference to
Exhibit 10.1 of Form 8-K filed April 16, 1998)
10.7(a)* Service Agreement between Sheffield and David Fletcher dated
November 1, 1988 (incorporated by reference to Exhibit
10.10(a) of the Company's Annual Report on Form 10-K for the
year ended June 30, 1998)
10.7(b)* Novation Agreement between Sheffield and David Fletcher dated
May 2, 1996. (incorporated by reference to Exhibit 10.10(b) of
the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
10.7(c)* Letter Agreement between Sheffield and David Fletcher dated
May 2, 1996. (incorporated by reference to Exhibit 10.10(c) of
the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule - Fiscal year ended FY 2000
27.2 Restated Financial Data Schedule - Fiscal year ended FY 1999
* Represents a management contract or a compensatory plan or arrangement.