FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
-------------------------
Commission File Number 1-12541
Atchison Casting Corporation
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
- ------------------------------------- ----------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 South Fourth Street, Atchison, Kansas 66002
- --------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 367-2121
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements from the past 90 days. Yes No X
--- ---
There were 7,689,347 shares of common stock, $.01 par value per share,
outstanding on May 11, 2001
PART I
ITEM 1. Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
September 30, June 30,
2000 2000
----------------- -----------------
ASSETS
------------
CURRENT ASSETS:
Cash and cash equivalents $4,185 $3,815
Customer accounts receivable, net of allowance for
doubtful accounts of $634 and $584, respectively 80,536 87,401
Inventories 54,928 56,123
Deferred income taxes 9,544 10,092
Other current assets 10,852 9,517
----------------- -----------------
Total current assets 160,045 166,948
PROPERTY, PLANT AND EQUIPMENT, Net 135,574 135,299
INTANGIBLE ASSETS, Net 28,098 28,525
DEFERRED FINANCING COSTS, Net 918 923
OTHER ASSETS 10,870 10,728
----------------- -----------------
TOTAL $335,505 $342,423
================= =================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(Unaudited)
(In thousands, except share data)
September 30, June 30,
2000 2000
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $46,130 $42,867
Accrued expenses 33,268 37,432
Current maturities of long-term obligations 114,683 80,919
----------------- -----------------
Total current liabilities 194,081 161,218
LONG-TERM OBLIGATIONS 6,867 36,691
DEFERRED INCOME TAXES 11,362 11,912
OTHER LONG-TERM OBLIGATIONS 2,441 2,683
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS
OVER COST, Net of accumulated amortization of $2,518
and $2,298, respectively 3,814 4,843
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 9,422 9,199
MINORITY INTEREST IN SUBSIDIARIES 1,478 1,544
----------------- -----------------
Total liabilities 229,465 228,090
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000
authorized shares; no shares issued and outstanding - -
Common stock, $.01 par value, 19,300,000
authorized shares; 8,312,049 and 8,295,974
shares issued, 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 81,517 81,460
Retained earnings 36,982 42,848
Accumulated other comprehensive income (loss) (6,494) (4,010)
----------------- -----------------
112,088 120,381
Less shares held in treasury:
Common stock, 622,702 shares, at cost (6,048) (6,048)
----------------- -----------------
Total stockholders' equity 106,040 114,333
----------------- -----------------
TOTAL $335,505 $342,423
================= =================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
Three Months Ended
September 30,
2000 1999
(As restated,
see Note 13)
----------------- -----------------
NET SALES $99,208 $108,914
COST OF GOODS SOLD 95,208 98,497
----------------- -----------------
GROSS PROFIT 4,000 10,417
OPERATING EXPENSES:
Selling, general and administrative 9,429 9,989
Amortization of intangibles, net (68) (157)
----------------- -----------------
Total operating expenses 9,361 9,832
----------------- -----------------
OPERATING INCOME (LOSS) (5,361) 585
INTEREST EXPENSE 2,605 2,234
MINORITY INTEREST IN NET LOSS (12) (9)
OF SUBSIDIARIES
----------------- -----------------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (7,954) (1,640)
INCOME TAX BENEFIT (2,634) (453)
----------------- -----------------
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (5,320) (1,187)
CUMULATIVE EFFECT ON PRIOR YEARS (TO JUNE 30,
2000) OF A CHANGE IN ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS, NET OF $364 TAX BENEFIT (546) --
----------------- -----------------
NET LOSS ($5,866) ($1,187)
================= =================
LOSS PER SHARE - BASIC AND DILUTED:
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ($0.69) ($0.16)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS ($0.07) --
----------------- -----------------
NET LOSS ($0.76) ($0.16)
================= =================
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATION:
BASIC 7,673,449 7,636,981
================= =================
DILUTED 7,673,449 7,636,981
================= =================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Three Months Ended
September 30,
2000 1999
(As restated,
see Note 13 )
----------------- -----------------
NET LOSS ($5,866) ($1,187)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (2,484) 876
----------------- -----------------
OTHER COMPREHENSIVE INCOME (LOSS) ($8,350) ($311)
================= =================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In thousands)
Three Months Ended
September 30,
2000 1999
(As restated,
see Note 13)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($5,866) ($1,187)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 3,071 3,385
Minority interest in net loss of subsidiaries (21) (8)
(Gain) loss on disposal of capital assets (354) 50
Deferred income taxes (571) (65)
Changes in assets and liabilities:
Receivables 5,641 1,905
Inventories 66 4,633
Other current assets (1,550) (4,234)
Accounts payable 4,033 (170)
Accrued expenses (3,570) (2,753)
Postretirement obligation other
than pension 223 153
Other (688) 314
----------------- -----------------
Cash provided by operating activities 414 2,023
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,644) (3,219)
Proceeds from sale of capital assets 731 26
Payment for purchase of minority interest in subsidiaries - (2,408)
----------------- -----------------
Cash used in investing activities (3,913) (5,601)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 57 60
Payments on long-term obligations (3,800) (4,349)
Capitalized financing costs paid (78) -
Net borrowings under revolving loan note 7,828 6,060
----------------- -----------------
Cash provided by financing activities 4,007 1,771
EFFECT OF EXCHANGE RATE ON CASH (138) 141
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $370 ($1,666)
CASH AND CASH EQUIVALENTS, Beginning of period 3,815 3,906
----------------- -----------------
CASH AND CASH EQUIVALENTS, End of period $4,185 $2,240
================= =================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the
Company for the year ended June 30, 2000, as included in the
Company's amended Annual Report on Form 10-K/A for the fiscal
year ended June 30, 2000.
The accompanying unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring
accruals), which, in the opinion of management, are necessary for
a fair presentation of financial position, results of operations
and cash flows. Results of operations for interim periods are not
necessarily indicative of results to be expected for a full year.
Certain September 30, 1999 amounts have been reclassified to
conform with September 30, 2000 classifications.
2. Inventories
As of
-------------------------------
Sept. 30, June 30,
2000 2000
---- ----
(Thousands)
Raw materials $ 8,542 $ 8,491
Work-in-process 34,049 33,656
Finished goods 9,662 11,038
Supplies 2,675 2,938
-------------- --------------
$ 54,928 $ 56,123
============== ==============
3. Income Taxes
Income tax expense (benefit) consisted of:
Three Months Ended
Sept. 30,
2000 1999
(As restated,
see Note 13)
-------------- --------------
(Thousands)
Current:
Domestic $ (2,544) $ (756)
Foreign 117 368
-------------- --------------
(2,427) (388)
Deferred:
Domestic (472) (325)
Foreign (99) 260
-------------- --------------
(571) (65)
-------------- --------------
Total $ (2,998) $ (453)
============== ==============
4. Supplemental Cash Flow Information
Three Months Ended
Sept. 30,
2000 1999
(As restated,
see Note 13)
--------------- ----------------
(Thousands)
Cash paid during the period for:
Interest $ 3,453 $ 2,480
=============== ================
Income Taxes $ 196 $ 869
=============== ================
5. Earnings Per Share
Following is a reconciliation of basic and diluted EPS for the
three month period ended September 30, 2000 and 1999,
respectively.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Weighted Loss Per
Net Loss Average Shares Share
---------------- ----------------- -------------
Basic EPS
Loss before cumulative
effect of a change in accounting
principle available to common
stockholders $ (5,320,000) 7,673,449 $ (0.69)
Cumulative effect on prior years (to
June 30, 2000) of a change in
accounting for derivative financial
instruments, net of $364,000 tax
benefit (546,000) (0.07)
Effect of Dilutive Securities:
Options
---------------- ---------------- --------------
Diluted EPS $ (5,866,000) 7,673,449 $ (0.76)
================ ================ ==============
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Weighted Loss Per
Net Loss Average Shares Share
---------------- ----------------- -------------
Basic EPS
Loss available to
common stockholders $ (1,187,000) 7,636,981 $ (0.16)
Effect of Dilutive Securities:
Options
---------------- ---------------- --------------
Diluted EPS $ (1,187,000) 7,636,981 $ (0.16)
================ ================ ==============
6. New Accounting Standards
Effective July 1, 2000, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133." SFAS
No. 133 and 138 require 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.
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
recorded its FX contracts at their fair value of approximately
($910,000). This resulted in a charge to income of approximately
$910,000 ($546,000 net of deferred income tax benefit). This is
presented in the Company's consolidated financial statements as
the cumulative effect of a change in accounting principle.
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 $435,000 ($264,000 net of deferred income tax
expense).
On September 30, the Company recorded its FX contracts at their
fair value of approximately ($90,000). This resulted in a gain of
approximately $820,000 ($492,000 net of deferred income tax
expense). Additionally, the translation of the foreign
denominated trade receivables resulted in a decrease in the value
of the receivables and the Company recorded a currency
translation loss of approximately $270,000 ($162,000 net of
deferred income tax benefit).
7. Impairment at and Closure of Claremont Foundry, Inc.
During fiscal year 2000, the Company recorded an impairment loss
associated with the planned closure of Claremont Foundry, Inc.
("Claremont"). The resulting impairment charge of $3.4 million
($2.1 million, 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 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 $3.5
million. The Company transferred as much work as possible to its
other foundries, and closed the foundry by November 30, 2000. For
the first quarter of fiscal 2000 and fiscal 2001, Claremont
recorded net sales of $1.5 million and $353,000, respectively,
and incurred net losses of $374,000 and $458,000, respectively.
In addition to the long-lived asset impairment, the Company
recognized certain other exit costs associated with the closure
of Claremont in fiscal year 2001 related to employee termination
costs. The number of employees terminated in the process was
approximately 45. As such, in the second quarter of fiscal year
2001, the Company recognized approximately $113,000 in severance
benefits related to the Claremont closure.
8. Impairment at and Closure of Pennsylvania Steel Foundry & Machine
Company
Following the discovery of accounting irregularities as discussed
in Note 13, which revealed substantial operating losses at the
Company's three Pennsylvania foundry operations, the Company
considered the now known losses as a primary indicator of
impairment. An impairment loss was recognized as the future
undiscounted cash flows of Pennsylvania Steel Foundry & Machine
Company ("Pennsylvania Steel") were estimated to be insufficient
to recover the carrying value of the fixed assets. Accordingly,
in connection with the restatement of the fiscal year 2000
financial statements, the carrying values of Pennsylvania Steel's
fixed assets were written down to the Company's estimates of fair
value, which was based on discounted future cash flows. The
resulting impairment charge of $3.5 million ($2.1 million, net of
tax) to reduce the carrying value of these fixed assets was
recorded in the fourth quarter ended June 30, 2000. Actual
results could vary significantly from such estimates. Prior to
the impairment charge, these assets had a carrying value of $4.8
million. Subsequently, on February 28, 2001 the Company closed
Pennsylvania Steel and intends to transfer as much work as
possible to the other two Pennsylvania foundries. For the first
quarter of fiscal 2000 and fiscal 2001, Pennsylvania Steel
recorded net sales of $2.9 million and $2.1 million,
respectively, and incurred net losses of $1.2 million and
$623,000, respectively.
In addition to the long-lived asset impairment, the Company will
recognize other exit costs associated with the closure of
Pennsylvania Steel in fiscal 2001 related to the employee
termination costs. The Company terminated approximately 75
employees and will recognize a charge for severance benefits of
approximately $20,000 in the third quarter ended March 31, 2001.
Other costs directly related to the closure of Pennsylvania Steel
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 Benefit and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)."
9. Impairment at and Closure of PrimeCast, Inc.
The Company recognized an impairment charge of $6.9 million ($4.3
million, net of tax) to reduce the carrying value of fixed assets
at PrimeCast, Inc. ("PrimeCast") in the fourth quarter ended June
30, 2000. The Company considered continued operating losses,
caused primarily by the bankruptcy of PrimeCast's major customer
in June 1999 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 estimate of fair value, which
was based upon discounted future cash flows of PrimeCast.
Following continued losses in fiscal 2001, the Company announced,
on January 23, 2001, plans to close PrimeCast. The closure was
completed by March 31, 2001. Prior to the impairment charge,
these assets had a remaining carrying amount of $8.2 million. For
the first quarter of fiscal 2000 and fiscal 2001, PrimeCast
recorded net sales of $5.8 million and $4.6 million,
respectively, and incurred net losses of $665,000 and $1.2
million, respectively.
In addition to the long-lived asset impairment, the Company
recognized certain other exit costs associated with the closure
of PrimeCast in fiscal 2001 related to employee termination
costs. The Company terminated approximately 225 employees and
recognized a charge for severance benefits of approximately
$175,000 in the quarter ended March 31, 2001.
Other costs directly related to the closure of PrimeCast 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 Benefit and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
10. Contingencies
An accident, involving an explosion and fire, occurred on
February 25, 1999 at Jahn Foundry Corp. ("Jahn Foundry"), located
in Springfield, Massachusetts. Nine employees were seriously
injured and there were three fatalities. The damage was confined
to the shell molding area and boiler room. The other areas of the
foundry remained operational. Molds were being produced at other
foundries, as well as Jahn Foundry, while the repairs were made.
The new shell molding department became operational in November
2000.
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 $750,000 ($450,000 after 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.
In November 2000, the Company and its insurance carrier settled
the Jahn Foundry property portion of the Company's claim. The
settlement provided, among other things, (i) for additional
payments from the carrier in the amount of $2.6 million, (ii)
that of the payments received to date, totaling $26.8 million,
the insurance carrier will allocate no more than $9.5 million for
property damage, (iii) that the remaining proceeds of $17.3
million will be allocated to business interruption losses and
will not be subject to recovery by the insurance carrier and (iv)
that the Company shall not be entitled to any additional payments
unless it is determined by reference, appraisal, arbitration,
litigation or otherwise that the Company's business interruption
losses exceed $17.3 million. The Company disagrees with the
insurance carrier regarding the duration and amount of the
business interruption losses. The Company plans to seek
additional insurance payments through arbitration. There can be
no assurance that the Company will ultimately receive any
additional insurance payments or that the excess of the Company's
costs and expenses resulting from the accident over the insurance
payments received will not be material to its financials
condition or results of operations and cash flows. As of
September 30, 2000, the Company has received approximately $24.2
million of insurance advances and has incurred charges of
approximately $14.4 million related to the explosion and
fire-related damages.
The excess advances over expenses incurred is recorded in accrued
expenses within the consolidated balance sheet.
As a result of the above settlement, the Company recorded a
non-recurring gain of $10.9 million in the second quarter of
fiscal 2001, which consisted of a $3.7 million business
interruption insurance gain and a $7.2 million property insurance
gain. The property insurance gain primarily represents the
difference between the net proceeds received for the property
damage and the property's net book value immediately before the
accident. These net proceeds were used to rebuild the damaged
property and were accounted for as capital expenditures.
A civil action has been commenced in Massachusetts Superior State
Court on behalf of the estates of deceased workers, their
families, injured workers and their families, against the
supplier of a chemical compound used in Jahn Foundry's
manufacturing process. The supplier of the chemical compound,
Borden Chemical, Inc. ("Borden"), filed a Third Party Complaint
against Jahn Foundry in Massachusetts Superior State Court on
February 2, 2000 seeking indemnity for any liability it has to
the plaintiffs in the civil action. The Company's comprehensive
general liability insurance carrier has retained counsel on
behalf of Jahn Foundry and the Company and is aggressively
defending Jahn Foundry in the Third Party Complaint. It is too
early to assess the potential liability to Jahn Foundry for the
Third Party Complaint, which in any event Jahn Foundry would
aggressively defend. In addition, Jahn Foundry has brought a
Third Party Counterclaim against Borden seeking compensation for
losses sustained in the explosion, including amounts covered by
insurance.
On February 26, 2001, Borden filed a Third Party Complaint
against the Company seeking a contribution, under Massachusetts
law, from the Company in the event that the plaintiffs prevail
against Borden. The Third Party Complaint alleges that the
Company undertook a duty to oversee industrial hygiene, safety
and maintenance at Jahn Foundry and that the Company designed,
installed and maintained equipment and machinery at Jahn Foundry,
and that the Company's carelessness, negligence or gross
negligence caused the explosion and resulting injuries. It is too
early to assess the potential liability for such a claim, which
in any event the Company would aggressively defend.
On March 30, 2001, the plaintiffs amended their complaint by
adding the Company as a third party defendant. The plaintiffs
allege that the Company undertook a duty to oversee industrial
hygiene, safety and maintenance at Jahn Foundry and that the
Company's carelessness, negligence or gross negligence
caused the explosion and resulting injuries. The plaintiffs seek
an unspecified amount of damages and punitive damages. It is too
early to assess the potential liability to the Company for such
claims, which in any event the Company would aggressively defend.
The Company has filed a cross-claim for contribution against
Borden.
Following the Company announcements related to accounting
irregularities at the Pennsylvania Foundry Group as discussed in
Note 13, the Company, its Chief Executive Officer and its Chief
Financial Officer were named as defendants in five complaints
filed between January 8, 2001 and February 15, 2001 in the U.S.
District Court for the District of Kansas. The complaints allege,
among other things, that certain of the Company's previously
issued financial statements were materially false and misleading
in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the
"Securities Actions"). The Securities Actions purport to have
been brought on behalf of a class consisting of purchasers of the
Company's common stock between January 8, 1998 and November 3,
2000. The Securities Actions seek damages in unspecified
amounts. The Company believes that the claims alleged in the
Securities Actions have no merit and intends to defend them
vigorously. There can be no assurance that an adverse outcome
with respect to the Securities Actions will not have a
material adverse impact on the Company's financial condition,
results of operations or cash flows.
The Company understands that on or about November 29, 2000 the
Securities and Exchange Commission issued a formal order of
investigation as a result of the events underlying the Company's
earlier disclosure of certain accounting irregularities. The
Company is cooperating with the investigation.
In addition to these matters, from time to time, the Company is
the subject of legal proceedings, including employee matters,
commercial matters, environmental matters and similar claims.
There are no other material claims pending. The Company maintains
comprehensive general liability insurance, which it believes to
be adequate for the continued operation of its business.
11. Loan Amendments
On September 29, 2000, the Company and certain of its lenders
entered into a Forbearance Agreement to the Amended and Restated
Credit Agreement (the "Credit Agreement"). This Forbearance
Agreement provided that, among other things, the Company's
lenders would forbear from enforcing their rights with
respect to certain existing defaults through December 15, 2000.
However, a condition to the effectiveness of this Forbearance
Agreement was never met. The Company borrowed the maximum amount
available under its revolving credit facility in order to meet
its cash needs on an ongoing basis while it has been in technical
default under its Credit Agreement.
On April 13, 2001, the Company and certain of its lenders entered
into the Tenth Amendment and Forbearance Agreement to the Credit
Agreement. The Tenth Amendment provides that, among other things,
these lenders will forbear from enforcing their rights with
respect to certain existing defaults through July 30, 2001. This
amendment also provides that loans under this revolving credit
facility will bear interest at fluctuating rates of (1) the agent
bank's corporate base rate plus 1.75% (for loans up to $70
million less outstanding letters of credit) and the agent bank's
corporate base rate plus 1.25% (for loans in excess of such
amount); or (2) LIBOR plus 4.25%. The domestic rate spread of
1.25% and the LIBOR spread of 4.25% described in the preceding
sentence will be reduced by .25% (25 basis points) after the
Company has satisfied the agent bank (which acts as collateral
agent for the lenders under the Credit Agreement as well as for
the holder of the Company's senior notes ("the Notes")) that it
has delivered the documents and satisfied related requirements
set forth in the Tenth Amendment required to grant the lenders
valid first mortgages on the Company's Canadian real estate. This
amendment also requires the Company to maintain minimum
cumulative earnings before interest, taxes, depreciation and
amortization (without giving effect to Fonderie d'Autun and
subject to certain other adjustments) ("EBITDA").
On April 13, 2001, the Company and the insurance company holding
the Notes entered into the Seventh Amendment and Forbearance
Agreement to the Note Purchase Agreement. The Seventh Amendment
provides, among other things, that the Noteholder will forbear
from enforcing its rights with respect to certain existing
defaults through July 30, 2001. This amendment also provides that
the Notes will bear interest at the rate of 10.44% per year. The
interest rate will be reduced by .25% after the Company has
satisfied the Noteholder that it has delivered the documents and
satisfied related requirements set forth in the Seventh Amendment
required to grant the collateral agent valid first mortgages on
the Company's Canadian real estate. The Seventh Amendment
contains the same minimum EBITDA requirements as the Tenth
Amendment to the Credit Agreement.
On April 19, 2001, the Company and the lenders under the Master
Security Agreement with General Electric Capital Corporation (the
"GE Financing") entered into an agreement,
which provides, among other things, that these lenders will
forbear from enforcing their rights with respect to certain
existing defaults through the earlier of September 30, 2001 or
any date on which the Tenth Amendment to the Credit Agreement is
breached.
The Company has not been in compliance with certain financial
covenants under the Credit Agreement, Note Purchase Agreement and
the GE Financing, and, accordingly, such amounts have been
classified as current liabilities.
12. Financial Results and Management's Plans
In fiscal 2000, the Company incurred a pre-tax loss of $27.6
million ($11.2 million excluding impairment charges of $16.4
million) and, as of June 30, 2000, the Company was not in
compliance with certain financial covenants included in its debt
agreements (See Note 11). These conditions have continued
subsequent to June 30, 2000.
To address these conditions, management has taken or is in the
process of taking the following actions:
Operations
As discussed in Notes 7, 8 and 9, the Company has closed three
unprofitable foundries during the period from November 2000 to
March 2001. Operations from these foundries have been a major
factor in the Company's pre-tax losses, producing combined
pre-tax losses of $26.2 million ($12.5 million before impairment
charges of $13.7 million) for fiscal 2000. Management believes
that it will be able to transfer a significant portion of the
work previously performed by Claremont and Pennsylvania Steel to
other foundries, thereby increasing the utilization and
profitability of these other foundries.
Jahn Foundry has been unable to achieve the productivity and
earnings levels experienced prior to the industrial accident that
occurred there on February 25, 1999 (Note 10). During fiscal
2000, Jahn Foundry had pre-tax losses of $187,000 (after
insurance payments). Excluding non-recurring insurance gains of
$10.9 million, Jahn Foundry has had pre-tax losses of $3.9
million for the first nine months of fiscal 2001. To improve
operating results, Jahn Foundry 1) has focused on only one type
of molding process, transferring work requiring a different
process to The G&C Foundry Company and La Grange Foundry Inc. and
2) is focusing on a smaller number of key customers, with a
significantly reduced workforce.
To enhance the Company's sales and marketing efforts, the Company
had previously established four corporate sales director
positions that represent all locations in certain markets and has
increased sales efforts at operating locations. As a result,
backlog has increased since June 30, 2000.
Other Actions
Management continues to pursue new or revised long-term debt
arrangements with terms and covenants acceptable to the Company
and to the lenders. Over the past few years the Company has
successfully negotiated with its lenders to obtain amendments,
waivers and forbearances for violations of various covenants of
its loan agreements, and the lenders have demonstrated a history
of working with the Company in providing an adequate credit
facility to meet its ongoing needs. The Company currently has
forbearance agreements in place through at least July 2001.
Management believes, however, that certain of the existing loan
arrangements will need to be revised or replaced to provide the
Company with the additional borrowing capacity and with financial
covenants within such agreements that are achievable by the
Company. Management is currently in negotiations with various
financial institutions to extend, renegotiate or replace the
current credit agreements on a long-term basis. Although
management believes that it will be successful in obtaining an
acceptable long-term credit facility, there can be no assurance
that management will be successful in these negotiations.
13. Restatement of Financial Statements
Subsequent to the issuance of the Company's 2000 financial
statements, the Company's management determined that there were
various accounting irregularities at its Quaker Alloy, Inc.,
Empire Steel Castings, Inc. and Pennsylvania Steel subsidiaries
(collectively referred to as the "Pennsylvania Foundry Group" or
"PFG"). The Board of Directors authorized the Company's Audit
Committee (the "Committee") to conduct an independent
investigation, with the assistance of special counsel and other
professionals retained by the Committee. The Committee retained
special counsel, which engaged an independent consulting firm to
assist in the investigation. As a result of the investigation, it
was determined that certain balance sheet and income statement
accounts at PFG were misstated. The Company believes the
irregularities were limited to PFG.
As a result of that investigation, the Company has concluded that
a small number of PFG employees violated Company policies and
procedures and used improper accounting practices, resulting in
the overstatement of revenue, income and assets and the
understatement of liabilities and expenses. The Company believes
that certain of these same personnel also misappropriated Company
funds. The direct benefit to the former employees as a result of
such activities is currently believed to be approximately $2.2
million. The Company believes the accounting irregularities
primarily resulted from a scheme to cover up such benefits and
the actual operating results at these subsidiaries. The
Company intends to pursue recovery of economic losses from
insurance coverage, income tax refunds and other responsible
parties, but no provision has been included herein for any
potential recoveries.
In conjunction with the restatement of consolidated financial
statements related to the items discussed above, management also
made adjustments for other errors in previously issued financial
statements which had not been recorded previously because they
were not material. As a result, the accompanying consolidated
financial statements for the three month period ended September
30, 1999 have been restated from amounts previously reported to
correct the misstatements discussed above. A summary of the
significant effects of the restatement to the statement of
operations follows:
Three Months Ended
September 30, 1999
--------------------------------------
As
Previously
Reported As Restated
---------------- ----------------
(In thousands, except
per share data)
STATEMENT OF OPERATIONS
Net sales $ 109,693 $ 108,914
Cost of goods sold 96,980 98,497
Operating expenses 9,611 9,832
Income (loss) before taxes 877 (1,640)
Income tax expense (benefit) 265 (453)
Net income (loss) 612 (1,187)
Net earnings (loss) per share:
Basic $ 0.08 $ (0.16)
Diluted 0.08 (0.16)
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESTATEMENT OF FINANCIAL RESULTS
The Company previously announced that it had discovered accounting
irregularities at its Quaker Alloy, Inc. ("Quaker Alloy"), Empire Steel
Castings, Inc. ("Empire Steel") and Pennsylvania Steel Foundry & Machine Company
("Pennsylvania Steel") subsidiaries (collectively referred to as the
"Pennsylvania Foundry Group"). The Board of Directors authorized the Company's
Audit Committee (the "Committee") to conduct an independent investigation, with
the assistance of special counsel and other professionals retained by the
Committee. The Committee retained Jenner & Block, LLC as special counsel, and
Jenner & Block engaged PricewaterhouseCoopers LLP to assist in the
investigation. As a result of the investigation, it was determined that certain
balance sheet and income statement accounts at the Pennsylvania Foundry Group
were affected. The Company believes the irregularities were limited to the
Pennsylvania Foundry Group.
As a result of that investigation, the Company has concluded that a small number
of PFG employees violated Company policies and procedures and used improper
accounting practices, resulting in the overstatement of revenue, income and
assets and the understatement of liabilities and expenses. The Company believes
that certain of these same personnel also misappropriated Company funds. The
direct benefit to the former employees as a result of such activities is
currently believed to be approximately $2.2 million. The Company believes that
$25.9 million ($18.2 million after tax) of the restatement, which relates to the
accounting irregularities at PFG, primarily resulted from a scheme to cover-up
such benefits and the actual operating results over four years at these three
subsidiaries by manipulating many accounts incrementally, which increased and
accumulated over time. The Company intends to pursue recovery of economic losses
from insurance coverage, income tax refunds and other responsible parties.
In conjunction with the restatement of consolidated financial statements related
to the items discussed above, management also made adjustments for other errors
in previously issued financial statements which had not been recorded previously
because they were not material. As a result, the consolidated financial
statements for the three months ended September 30, 1999 have been restated from
amounts previously reported to correct the items discussed above. A summary of
the significant effects of the restatement is included in Note 13 to the
consolidated financial statements. Additionally, Management's Discussion and
Analysis of Financial Condition and Results of Operations has been revised for
the effects of the restatement.
RESULTS OF OPERATIONS:
Net sales for the first quarter of fiscal 2001 were $99.2 million, representing
a decrease of $9.7 million, or 8.9%, from net sales of $108.9 million in the
first quarter of fiscal 2000. The decrease in net sales was due primarily to
decreases in net sales to the rail, mining and military markets. Net sales of
Sheffield Forgemasters Group Limited
("Sheffield") for the first quarter of fiscal 2001 decreased $3.3 million from
net sales in the first quarter of fiscal 2000. 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. PrimeCast aggressively worked at replacing the volume
lost from Beloit Corporation ("Beloit"), which filed for bankruptcy in June
1999. During February 2000, Beloit was sold at auction, in parts, and as a
result, the plants to which PrimeCast supplied castings subsequently ceased
operations. For the first quarter of fiscal 2001, PrimeCast's net sales
decreased $1.1 million from net sales in the first quarter of fiscal 2000. In
addition, the Company closed Claremont Foundry, Inc. ("Claremont") in November
2000. Claremont's net sales in the first quarter of fiscal 2001 decreased $1.1
million from net sales in the first quarter of fiscal 2000.
Gross profit for the first quarter of fiscal 2001 decreased $6.4 million, or
61.5%, to $4.0 million, or 4.0 % of net sales, compared to $10.4 million, or
9.6% of net sales, for the first quarter of fiscal 2000. 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 rail, mining and military markets. The largest impact of
these weak market conditions was at Sheffield, where its gross profit for the
first quarter of fiscal 2001 decreased by $1.1 million to $1.9 million, or 7.9%
of net sales, compared to $3.0 million, or 11.0% of net sales, in the first
quarter of fiscal 2000.
Gross profit at Jahn Foundry Corp. ("Jahn Foundry") in the first quarter of
fiscal 2001 decreased $1.7 million, to a gross loss of $1.1 million, or 54.5% of
net sales, compared to a gross profit of $564,000, or 22.6% of net sales, in the
first quarter of fiscal 2000, primarily as a result of the industrial accident
in February 1999 that shut down the shell mold department until the second
quarter of fiscal 2001.
In addition to the lower sales volume after the loss of Beloit as a major
customer, PrimeCast's results were impacted by a labor strike that was settled
on September 29, 2000 and by a serious injury to an employee that resulted in
increased workers' compensation expense of approximately of $375,000. The gross
loss at PrimeCast in the first quarter of fiscal 2001 increased $1.0 million to
$1.4 million, or 29.5% of net sales, compared to a gross loss of $410,000, or
7.1% of net sales in the first quarter of fiscal 2000.
Selling, general and administrative expense ("SG&A") for the first quarter of
fiscal 2001 was $9.4 million, or 9.5% of net sales, compared to $10.0 million,
or 9.2% of net sales, in the first quarter of fiscal 2000. The increase in SG&A
expense as a percentage of net sales is primarily due to the decrease in net
sales. Included in SG&A in the first quarter of fiscal 2001 was a net gain of
approximately $550,000 ($380,000, net of tax) to record the Company's foreign
exchange contracts and related foreign denominated trade receivables at fair
value (see Note 6). Offsetting this gain were expenses of approximately $520,000
($312,000, net of tax) of fees and audit and appraisal expenses incurred by the
Company in pursuing various options to refinance its bank credit facility.
Included in SG&A in the first quarter of fiscal 2000 was a charge of $148,500
($89,000 net of tax) relating to fines levied by the Occupational Safety and
Health Administration ("OSHA") concerning an industrial accident at Jahn Foundry
(see "Liquidity and Capital Resources").
The Company has recorded intangible assets, consisting of goodwill, in
connection with certain of the Company's acquisitions. Amortization of these
assets for the first quarter of fiscal 2001 was expense of $340,000, or 0.3% of
net sales, as compared to $374,000, or 0.3% of net sales, in the first quarter
of fiscal 2000. 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 Foundries Ltd. ("Canadian Steel") and
Fonderie d'Autun ("Autun"). The amortization of negative goodwill was a credit
to income in the first quarter of fiscal 2001 of $408,000, or 0.4% of net sales,
as compared to $531,000, or 0.5% of net sales, in the first quarter of fiscal
2000. The liability recorded in connection with the acquisition of Canadian
Steel became fully amortized in the second quarter of fiscal 2000.
Interest expense for the first quarter of fiscal 2001 increased to $2.6 million,
or 2.6% of net sales, from $2.2 million or 2.0% of net sales, in the first
quarter of fiscal 2000. The increase in interest expense primarily reflects
higher average interest rates on the Company's outstanding indebtedness.
The income tax benefit for the first quarter of fiscal 2001 reflected the
combined federal, state and provincial statutory rate of approximately 33%.
Income tax expense for the first quarter of fiscal 2000 reflected a rate of
approximately 22%. In addition, the Company recorded an $87,000 tax refund at
its Sheffield subsidiary in the first quarter of fiscal 2000. The effective tax
rates are lower than the combined federal, state and provincial statutory rates
primarily due to the impact of non-deductible goodwill and foreign dividends.
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.
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133." SFAS No.
133 and 138 require companies to record derivative instruments as assets or
liabilities, measured at fair value. The recognition of gains or losses
resulting from charges 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.
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 recorded its FX
contracts at their fair value, which resulted in a charge to income of
approximately $910,000 ($546,000 net of deferred income tax benefit). This is
presented in the Company's consolidated financial statements as the cumulative
effect of a change in accounting principle.
As a result of the foregoing, the net loss for the first quarter of fiscal 2001
was $5.9 million compared to a net loss of $1.2 million for the first quarter of
fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities for the first three months of fiscal 2001
was $414,000, a decrease of $1.6 million from the first three months of fiscal
2000. This decrease was primarily attributable to the net loss incurred by the
Company, partially offset by reduced inventory balances, the accelerated
collection of trade receivables and more aggressive management of trade payable
balances.
Working capital was a negative $34.0 million at September 30, 2000, as compared
to $5.7 million at June 30, 2000. The working capital levels primarily reflect
the classification of $107.4 million and $72.8 million of the Company's bank
credit facility, term loan and senior notes with an insurance company as current
at September 30, 2000 and June 30, 2000, respectively. The Company has not been
in compliance with certain financial covenants under the Credit Agreement, Note
Purchase Agreement and the GE Financing, as defined below, and, accordingly,
such amounts have been classified as current liabilities.
During the first three months of fiscal 2001, the Company made capital
expenditures of $4.6 million, as compared to $3.2 million for the first three
months of fiscal 2000. Included in the first quarter of fiscal 2001 were capital
expenditures of $2.8 million to rebuild the shell molding area and boiler room
damaged in the industrial accident on February 25, 1999 at Jahn Foundry (see
below). The balance of capital expenditures were used for routine projects at
each of the Company's facilities.
As described in Note 7 to the consolidated financial statements, the Company
closed Claremont. Much of Claremont's work was transferred to other foundries of
the Company.
As described in Note 8 to the consolidated financial statements, the Company
closed Pennsylvania Steel. Much of Pennsylvania Steel's work was transferred to
the remaining two locations of the Pennsylvania Foundry Group.
As described in Note 9 to the consolidated financial statements, the Company has
also closed PrimeCast. As PrimeCast was the Company's only foundry that could
make large iron castings, only a portion of PrimeCast's work can be transferred
to other Company operations.
On September 29, 2000, the Company and certain of its lenders entered into a
Forbearance Agreement to the Amended and Restated Credit Agreement (the "Credit
Agreement"). This Forbearance Agreement provided that, among other things, the
Company's lenders would forbear from enforcing their rights with respect to
certain existing defaults through December 15, 2000. However, a condition to the
effectiveness of this Forbearance Agreement was never met. The Company borrowed
the maximum amount available under its revolving credit facility in order to
meet its cash needs on an ongoing basis while it has been in technical default
under its Credit Agreement.
On April 13, 2001, the Company and its lenders entered into the Tenth Amendment
and Forbearance Agreement to the Credit Agreement. The Tenth Amendment provides
that, among other things, these lenders will forbear from enforcing their rights
with respect to certain existing defaults through July 30, 2001. This amendment
also provides that loans under this revolving credit facility will bear interest
at fluctuating rates of (1) the agent bank's corporate base rate plus 1.75% (for
loans up to $70 million less outstanding letters of credit) and the agent bank's
corporate base rate plus 1.25% (for loans in excess of such amount); or (2)
LIBOR plus 4.25%. The domestic rate spread of 1.25% and the LIBOR spread of
4.25% described in the preceding sentence will be reduced by .25% (25 basis
points) after the Company has satisfied the agent bank (which acts as collateral
agent for the lenders under the Credit Agreement as well as for the holder of
the Notes) that it has delivered the documents and satisfied related
requirements set forth in the Tenth Amendment required to grant the lenders
valid first mortgages on the Company's Canadian real estate. This amendment also
requires the Company to maintain minimum cumulative earnings before interest,
taxes, depreciation and amortization (without giving effect to Fonderie d'Autun
and subject to certain other adjustments) ("EBITDA").
On April 13, 2001, the Company and the insurance company holding the Notes
entered into the Seventh Amendment and Forbearance Agreement to the Note
Purchase Agreement. The Seventh Amendment provides, among other things, that the
Noteholder will forbear from enforcing its rights with respect to certain
existing defaults through July 30, 2001. This amendment also provides that the
Notes will bear interest at the rate of 10.44% per year. The interest rate will
be reduced by .25% after the Company has satisfied the Noteholder that it has
delivered the documents and satisfied related requirements set forth in the
Seventh Amendment required to grant the collateral agent valid first mortgages
on the Company's Canadian real estate. The Seventh Amendment contains the same
minimum EBITDA requirements as the Tenth Amendment to the Credit Agreement.
On April 19, 2001, the Company and the lenders under the Master Security
Agreement with General Electric Capital Corporation (the "GE Financing") entered
into an agreement, which provides, among other things, that these lenders will
forbear from enforcing their rights with respect to certain existing defaults
through the earlier of September 30, 2001 or any date on which the Tenth
Amendment to the Credit Agreement is breached.
Cash requirements for fiscal 2001 have been negatively affected by (1)
significantly higher fuel costs (approximately $5.5 million higher than the
first nine months of fiscal 2000), (2) the fees and expenses related to the
investigation of the accounting irregularities discovered at the Pennsylvania
Foundry Group and the related litigation ($870,000 through March 31, 2001), and
(3) nonrecurring fees and appraisal and audit expenses (approximately $600,000
through March 31, 2001) paid by the Company in pursuing various options to
refinance its bank credit facility.
The Company has been in default under the Credit Agreement, Note Purchase
Agreement and the GE Financing. To date the lenders have foregone their right to
accelerate their debt and foreclose on their collateral. Although the lenders
have agreed not to accelerate their debt to date, there can be no assurance that
they will not do so in the future if future defaults occur. During much of
fiscal 2001, the Company
has borrowed the full amount of the revolving credit facility under the Credit
Agreement and manages its cash position accordingly. To date, the Company has
been able to meet its cash needs by traditional cash management procedures in
addition to: (1) the collection of income tax refunds resulting from the
restatement of its financial statements related to the accounting irregularities
at the Pennsylvania Foundry Group, (2) accelerated payments of receivables from
certain longstanding customers from time to time, and (3) the reduction of
expenses after closing locations operating with a negative cash flow. The
Company is also seeking the recovery under various insurance policies for losses
due to the accounting irregularities at the Pennsylvania Foundry Group and the
industrial accident at Jahn Foundry. In addition, the Company intends to pursue
other responsible parties. There can be no assurance that such actions will
allow the Company to operate without additional borrowing capacity.
Compliance with certain financial covenants under the Credit Agreement, Note
Purchase Agreement and the GE Financing is determined on a
"trailing-twelve-month" basis. The results for fiscal 2001 have been and
expected results for the remainder of fiscal 2001 will likely continue to be,
below results needed to achieve compliance with these covenants under the
Credit Agreement, Note Purchase Agreement and the GE Financing. Accordingly,
the Company is currently negotiating with new and existing financial
institutions to establish a new credit facility with covenants that the
Company believes it will be able to satisfy and to obtain additional
borrowing capacity. 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 its existing credit facility
will be adequate to fund its capital expenditure and working capital
requirements through July 31, 2001. 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, the accident at Jahn Foundry, the investigation and related litigation
in connection with the accounting irregularities at the Pennsylvania Foundry
Group and substantially higher fuel costs that arose during this past winter,
which may continue. 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 will continue to be in default under such covenants. Accordingly,
the lenders could accelerate the debt under the Credit Agreement, which, in
turn, would permit acceleration of the Notes under the Note Purchase
Agreement and the indebtedness under the GE Financing.
Total indebtedness of the Company at September 30, 2000 was $121.6 million, as
compared to $117.6 million at June 30, 2000. This increase of $4.0 million
primarily reflects indebtedness incurred to fund the Company's capital
expenditures and operating losses. At September 30, 2000 the Company had fully
utilized its revolving credit facility. Available cash balances at September 30,
2000 were approximately $4.3 million. Since September 29, 2000, the Company has
borrowed the maximum amount available for borrowing under its revolving credit
facility. Available cash balances at March 31, 2001 were approximately $1.0
million.
An accident, involving an explosion and fire, occurred on February 25, 1999 at
Jahn Foundry, located in Springfield, Massachusetts. Nine employees were
seriously injured
and there were three fatalities. The damage was confined to the shell molding
area and boiler room. The other areas of the foundry remained operational. Molds
were being produced at other foundries, as well as Jahn Foundry, while the
repairs were made. The new shell molding department became operational in
November 2000.
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 $750,000 ($450,000 after 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.
In November 2000, the Company and its insurance carrier settled the Jahn Foundry
property portion of the Company's claim. The settlement provided, among other
things, (i) for additional payments from the carrier in the amount of $2.6
million, (ii) that of the payments received to date, totaling $26.8 million, the
insurance carrier will allocate no more than $9.5 million for property damage,
(iii) that the remaining proceeds of $17.3 million will be allocated to business
interruption losses and will not be subject to recovery by the insurance carrier
and (iv) that the Company shall not be entitled to any additional payments
unless it is determined by reference, appraisal, arbitration, litigation or
otherwise that the Company's business interruption losses exceed $17.3 million.
The Company disagrees with the insurance carrier regarding the duration and
amount of the business interruption losses. The Company plans to seek additional
insurance payments through arbitration. There can be no assurance that the
Company will ultimately receive any additional insurance payments or that the
excess of the Company's costs and expenses resulting from the accident over the
insurance payments received will not be material to its financials condition or
results of operations and cash flows.
As a result of the above settlement, the Company recorded a non-recurring gain
of $10.9 million in the second quarter of fiscal 2001, which consisted of a $3.7
million business interruption insurance gain and a $7.2 million property
insurance gain. The property insurance gain primarily represents the difference
between the net proceeds received for the property damage and the property's net
book value immediately before the accident. These net proceeds were used to
rebuild the damaged property and were accounted for as capital expenditures.
A civil action has been commenced in Massachusetts Superior State Court on
behalf of the estates of deceased workers, their families, injured workers and
their families, against the supplier of a chemical compound used in Jahn
Foundry's manufacturing process. The supplier of the chemical compound, Borden
Chemical, Inc. ("Borden"), filed a Third Party Complaint against Jahn Foundry in
Massachusetts Superior State Court on February 2, 2000 seeking indemnity for any
liability it has to the plaintiffs in the civil action. The Company's
comprehensive general liability insurance carrier has retained counsel on behalf
of Jahn Foundry and the Company and is aggressively defending Jahn Foundry in
the Third Party Complaint. It is too early to assess the potential liability to
Jahn Foundry for the Third Party Complaint, which in any event Jahn
Foundry would aggressively defend. In addition, Jahn Foundry has brought a Third
Party Counterclaim against Borden seeking compensation for losses sustained in
the explosion, including amounts covered by insurance.
On February 26, 2001, Borden filed a Third Party Complaint against the Company
seeking a contribution, under Massachusetts law, from the Company in the event
that the plaintiffs prevail against Borden. The Third Party Complaint alleges
that the Company undertook a duty to oversee industrial hygiene, safety and
maintenance at Jahn Foundry and that the Company designed, installed and
maintained equipment and machinery at Jahn Foundry, and that the Company's
carelessness, negligence or gross negligence caused the explosion and resulting
injuries. It is too early to assess the potential liability for such a claim,
which in any event the Company would aggressively defend.
On March 30, 2001, the plaintiffs amended their complaint by adding the Company
as a third party defendant. The plaintiffs allege that the Company undertook a
duty to oversee industrial hygiene, safety and maintenance at Jahn Foundry and
that the Company's carelessness, negligence or gross negligence caused the
explosion and resulting injuries. The plaintiffs seek an unspecified amount of
damages and punitive damages. It is too early to assess the potential liability
to the Company for such claims, which in any event the Company would
aggressively defend. The Company has filed a cross-claim for contribution
against Borden.
Following the Company announcements related to accounting irregularities at
the Pennsylvania Foundry Group, the Company, its Chief Executive Officer and
its Chief Financial Officer were named as defendants in five complaints filed
between January 8, 2001 and February 15, 2001 in the U.S. District Court for
the District of Kansas. The complaints allege, among other things, that
certain of the Company's previously issued financial statements were
materially false and misleading in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
(the "Securities Actions"). The Securities Actions purport to have been
brought on behalf of a class consisting of purchasers of the Company's common
stock between January 8, 1998 and November 3, 2000. The Securities Actions
seek damages in unspecified amounts. The Company believes that the claims
alleged in the Securities Actions have no merit and intends to defend them
vigorously. There can be no assurance that an adverse outcome with respect to
the Securities Actions will not have a material adverse impact on the
Company's financial condition, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
The sections entitled "Liquidity and Capital Resources" contain
forward-looking statements that involve a number of risks and uncertainties.
Forward-looking statements such as "expects," "intends," "contemplating" and
statements regarding quarterly fluctuations, statements regarding the
adequacy of funding for capital expenditure and working capital requirements
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 Company's ability to
renegotiate or refinance its lending arrangements, utility rates, the
availability of labor, the successful conclusion of union contract
negotiations, the results of any litigation arising out of the accident at
Jahn Foundry, the results of any litigation or regulatory proceedings arising
from the accounting irregularities at the Pennsylvania Foundry Group, the
competitive environment in the casting industry and changes in laws and
regulations that govern the Company's business, particularly environmental
regulations.
ITEM 3.
DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in
Item 7A of the Company's Form 10-K/A for the fiscal year ended June 30, 2000.
The Company's primary interest rate exposures relate to its cash and
short-term investments, fixed and variable rate debt and interest rate swaps,
which are mainly exposed to changes in short-term interest rates (e.g. USD
LIBOR). The potential loss in fair values is based on an immediate change in
the net present values of the Company's interest rate-sensitive exposures
resulting from a 10% change in interest rates. The potential loss in cash
flows and earnings is based on the change in the net interest income/expense
over a one-year period due to an immediate 10% change in rates. A
hypothetical 10% change in interest rates would have a material impact on the
Company's earnings of approximately $500,000 and $200,000 in fiscal 2000 and
the first three months of fiscal 2001, respectively.
The Company's exposure to fluctuations in currency rates against the British
pound and Canadian dollar result from the Company's holdings in cash and
short-term investments and its utilization of foreign currency forward
exchange contracts to hedge customer receivables and firm commitments. The
potential loss in fair values is based on an immediate change in the U.S.
dollar equivalent balances of the Company's currency exposures due to a 10%
shift in exchange rates versus the British pound and Canadian dollar. The
potential loss in cash flows and earnings is based on the change in cash flow
and earnings over a one-year period resulting from an immediate 10% change in
currency exchange rates versus the British pound and Canadian dollar. Based
on the Company's holdings of financial instruments at June 30, 2000 and
September 30, 2000, a hypothetical 10% depreciation in the British pound and
the Canadian dollar versus all other currencies would have a material impact
on the Company's earnings of approximately $1.7 million and $300,000 in
fiscal 2000 and the first three months of fiscal 2001, 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.
PART II
ITEM 1 - 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 were three fatalities. The damage was confined to
the shell molding area and boiler room. The other areas of the foundry
remained operational. Molds were being produced at other foundries, as well
as Jahn Foundry, while the repairs were made. The new shell molding
department became operational in November 2000.
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 $750,000 ($450,000 after 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.
In November 2000, the Company and its insurance carrier settled the Jahn
Foundry property portion of the Company's claim. The settlement provided,
among other things, (i) for additional payments from the carrier in the
amount of $2.6 million, (ii) that of the payments received to date, totaling
$26.8 million, the insurance carrier will allocate no more than $9.5 million
for property damage, (iii) that the remaining proceeds of $17.3 million will
be allocated to business interruption losses and will not be subject to
recovery by the insurance carrier and (iv) that the Company shall not be
entitled to any additional payments unless it is determined by reference,
appraisal, arbitration, litigation or otherwise that the Company's business
interruption losses exceed $17.3 million. The Company disagrees with the
insurance carrier regarding the duration and amount of the business
interruption losses. The Company plans to seek additional insurance payments
through arbitration. There can be no assurance that the Company will
ultimately receive any additional insurance payments or that the excess of
the Company's costs and expenses resulting from the accident over the
insurance payments received will not be material to its financials condition
or results of operations and cash flows.
A civil action has been commenced in Massachusetts Superior State Court on
behalf of the estates of deceased workers, their families, injured workers
and their families, against the supplier of a chemical compound used in Jahn
Foundry's manufacturing process. The supplier of the chemical compound,
Borden Chemical, Inc.("Borden"), filed a Third Party Complaint against Jahn
Foundry in Massachusetts Superior State Court on February 2, 2000 seeking
indemnity for any liability it has to the plaintiffs in the civil action. The
Company's comprehensive general liability insurance carrier has retained
counsel on behalf of Jahn Foundry and the Company and is aggressively
defending Jahn Foundry in the Third Party Complaint. It is too early to
assess the potential liability to Jahn Foundry for the Third Party Complaint,
which in any event Jahn Foundry would aggressively defend. In addition, Jahn
Foundry has brought a Third Party Counterclaim
against Borden seeking compensation for losses sustained in the explosion,
including amounts covered by insurance.
On February 26, 2001, Borden filed a Third Party Complaint against the
Company seeking a contribution, under Massachusetts law, from the Company in
the event that the plaintiffs prevail against Borden. The Third Party
Complaint alleges that the Company undertook a duty to oversee industrial
hygiene, safety and maintenance at Jahn Foundry and that the Company
designed, installed and maintained equipment and machinery at Jahn Foundry,
and that the Company's carelessness, negligence or gross negligence caused
the explosion and resulting injuries. It is too early to assess the potential
liability for such a claim, which in any event the Company would aggressively
defend.
On March 30, 2001, the plaintiffs amended their complaint by adding the
Company as a third party defendant. The plaintiffs allege that the Company
undertook a duty to oversee industrial hygiene, safety and maintenance at
Jahn Foundry and that the Company's carelessness, negligence or gross
negligence caused the explosion and resulting injuries. The plaintiffs seek
an unspecified amount of damages and punitive damages. It is too early to
assess the potential liability to the Company for such claims, which in any
event the Company would aggressively defend. The Company has filed a
cross-claim for contribution against Borden.
Following the Company announcements related to accounting irregularities at
the Pennsylvania Foundry Group, the Company, its Chief Executive Officer and
its Chief Financial Officer were named as defendants in five complaints filed
between January 8, 2001 and February 15, 2001 in the U.S. District Court for
the District of Kansas. The complaints allege, among other things, that
certain of the Company's previously issued financial statements were
materially false and misleading in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
(the "Securities Actions"). The Securities Actions purport to have been
brought on behalf of a class consisting of purchasers of the Company's common
stock between January 8, 1998 and November 3, 2000. The Securities Actions
seek damages in unspecified amounts. The Company believes that the claims
alleged in the Securities Actions have no merit and intends to defend them
vigorously. There can be no assurance that an adverse outcome with respect to
the Securities Actions will not have a material adverse impact on the
Company's financial condition, results of operations or cash flows.
The Company understands that on or about November 29, 2000 the Securities and
Exchange Commission issued a formal order of investigation as a result of the
events underlying the Company's earlier disclosure of certain accounting
irregularities. The Company is cooperating with the investigation.
In addition to these matters, from time to time, the Company is the subject
of legal proceedings, including employee matters, commercial matters,
environmental matters and similar claims. There are no other material claims
pending. The Company maintains comprehensive general liability insurance,
which it believes to be adequate for the continued operation of its business.
ITEM 2 - Changes in Securities and Use of Proceeds
Unregistered Securities Transactions
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
See Liquidity and Capital Resources above.
ITEM 4 - Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
ITEM 5 - Other Information
NOT APPLICABLE
ITEM 6 - Exhibits and Reports of Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K
The Company has filed a Form 8-K dated August 31, 2000.
Items Reported
Item 5. Press Release issued regarding 4th quarter and
fiscal 2000 results and the planned closure of
Claremont Foundry.
Item 7. Exhibits.
Press Release dated August 31, 2000
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATCHISON CASTING CORPORATION
----------------------------
(Registrant)
DATE: May 11, 2001 /s/ HUGH H. AIKEN
--------------------------------------
Hugh H. Aiken, Chairman of the
Board, President and Chief
Executive Officer
DATE: May 11, 2001 /s/ KEVIN T. MCDERMED
--------------------------------------
Kevin T. McDermed, Vice President,
Chief Financial Officer, Treasurer
and Secretary