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 December 31, 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 ____________
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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 incorporation (I.R.S. Employer
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
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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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 |X| No |_|
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)
December 31, June 30,
2000 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,175 $ 3,815
Customer accounts receivable, net of allowance for
doubtful accounts of $634 and $584, respectively 77,345 87,401
Inventories 59,702 56,123
Deferred income taxes 9,782 10,092
Other current assets 10,536 9,517
-------- --------
Total current assets 158,540 166,948
PROPERTY, PLANT AND EQUIPMENT, Net 134,248 135,299
INTANGIBLE ASSETS, Net 27,773 28,525
DEFERRED FINANCING COSTS, Net 896 923
OTHER ASSETS 11,768 10,728
-------- --------
TOTAL $333,225 $342,423
======== ========
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(Unaudited)
(In thousands, except share data)
December 31, June 30,
2000 2000
------------ ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,966 $ 42,867
Accrued expenses 25,150 37,432
Current maturities of long-term obligations 113,786 80,919
--------- ---------
Total current liabilities 189,902 161,218
LONG-TERM OBLIGATIONS 6,799 36,691
DEFERRED INCOME TAXES 11,269 11,912
OTHER LONG-TERM OBLIGATIONS 1,460 2,683
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS
OVER COST, Net of accumulated amortization of $3,121
and $2,298, respectively 3,665 4,843
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 9,664 9,199
MINORITY INTEREST IN SUBSIDIARIES 1,258 1,544
--------- ---------
Total liabilities 224,017 228,090
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 38,838 42,848
Accumulated other comprehensive income (loss) (5,182) (4,010)
--------- ---------
115,256 120,381
Less shares held in treasury:
Common stock, 622,702 shares, at cost (6,048) (6,048)
--------- ---------
Total stockholders' equity 109,208 114,333
--------- ---------
TOTAL $ 333,225 $ 342,423
========= =========
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
(As restated, (As restated,
see Note 13) see Note 13)
----------- -------------- ----------- -------------
NET SALES $ 105,809 $ 114,103 $ 205,017 $ 223,017
COST OF GOODS SOLD 97,758 101,810 192,966 200,307
----------- ----------- ----------- -----------
GROSS PROFIT 8,051 12,293 12,051 22,710
OPERATING EXPENSES:
Selling, general and administrative 12,228 11,477 21,657 21,466
Amortization of intangibles, net (52) (135) (120) (292)
Other income, net (10,920) (681) (10,920) (681)
----------- ----------- ----------- -----------
Total operating expenses 1,256 10,661 10,617 20,493
----------- ----------- ----------- -----------
OPERATING INCOME 6,795 1,632 1,434 2,217
INTEREST EXPENSE 2,945 2,277 5,550 4,511
MINORITY INTEREST IN NET INCOME 21 73 9 64
OF SUBSIDIARIES
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND 3,829 (718) (4,125) (2,358)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
INCOME TAX EXPENSE (BENEFIT) 1,973 284 (661) (169)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 1,856 (1,002) (3,464) (2,189)
CUMULATIVE EFFECT ON PRIOR YEARS (TO JUNE 30,
2000) OF A CHANGE IN ACCOUNTING FOR DERIVATIVE
FIANCIAL INSTRUMENTS, NET OF $364 TAX BENEFIT (546)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 1,856 ($ 1,002) ($ 4,010) ($ 2,189)
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE - BASIC AND DILUTED:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE $ 0.24 ($ 0.13) ($ 0.45) ($ 0.29)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS (0.07)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 0.24 ($ 0.13) ($ 0.52) ($ 0.29)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATION:
BASIC 7,689,347 7,644,262 7,681,390 7,640,617
=========== =========== =========== ===========
DILUTED 7,689,347 7,644,262 7,681,390 7,640,617
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
(As restated, (As restated,
see Note 13) see Note 13)
------ ------------- ------- -------------
NET INCOME (LOSS) $1,856 ($1,002) ($4,010) ($2,189)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments 1,312 (292) (1,172) 584
------ ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS) $3,168 ($1,294) ($5,182) ($1,605)
====== ======= ======= =======
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In thousands)
Six Months Ended
December 31,
2000 1999
(As restated,
see Note 13)
-------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($ 4,010) ($ 2,189)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 6,464 6,984
Minority interest in net income of subsidiaries -- 66
Loss on disposal of capital assets 265 65
Gain on termination of interest rate swap agreement -- (681)
Deferred income taxes (783) 10
Changes in assets and liabilities:
Receivables 9,839 2,854
Inventories (3,916) 6,675
Other current assets (1,114) (7,879)
Accounts payable 8,219 (2,379)
Accrued expenses (12,161) 3,769
Post retirement obligations other
than pension 465 311
Other (2,388) (1,109)
-------- --------
Cash provided by operating activities 880 6,497
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,185) (7,806)
Proceeds from sale of capital assets 1,144 97
Payments for purchase of stock in subsidiaries (247) (2,557)
-------- --------
Cash used in investing activities (6,288) (10,266)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 57 122
Proceeds from issuance of long-term obligations -- 35,000
Payments on long-term obligations (4,743) (40,129)
Capitalized financing costs paid (155) (450)
Termination of interest rate swap agreement -- 1,238
Net borrowings under revolving loan note 7,709 7,110
-------- --------
Cash provided by financing activities 2,868 2,891
-------- --------
EFFECT OF EXCHANGE RATE ON CASH (100) 3
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ($ 2,640) ($ 875)
CASH AND CASH EQUIVALENTS, Beginning of period 3,815 3,906
-------- --------
CASH AND CASH EQUIVALENTS, End of period $ 1,175 $ 3,031
======== ========
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 December 31, 1999 amounts have been reclassified to conform with
December 31, 2000 classifications.
2. Inventories
As of
----------------------------
Dec. 31, June 30,
2000 2000
---- ----
(Thousands)
Raw materials $ 8,628 $ 8,491
Work-in-process 37,787 33,656
Finished goods 10,241 11,038
Supplies 3,046 2,938
------- -------
$59,702 $56,123
======= =======
3. Income Taxes
Income tax expense (benefit) consisted of:
Six Months Ended
Dec. 31,
2000 1999
(As restated,
see Note 13)
------- -------------
(Thousands)
Current:
Domestic $(1,193) $(929)
Foreign 951 750
------- -----
(242) (179)
Deferred:
Domestic (207) (66)
Foreign (576) 76
------- -----
(783) 10
------- -----
Total $(1,025) $(169)
======= =====
4. Supplemental Cash Flow Information
Six Months Ended
Dec. 31,
2000 1999
(As restated,
see Note 13)
------ -------------
(Thousands)
Cash paid during the period for:
Interest $5,683 $4,519
====== ======
Income Taxes $ 603 $1,438
====== ======
5. Earnings Per Share
Following is a reconciliation of basic and diluted EPS for the three month
and six month periods ended December 31, 2000 and 1999, respectively.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
Weighted Earnings Per
Net Income Average Shares Share
---------- -------------- ------------
Basic EPS
Income available to
common stockholders $1,856,000 7,689,347 $0.24
Effect of Dilutive Securities:
Options
---------- --------- -----
Diluted EPS $1,856,000 7,689,347 $0.24
========== ========= =====
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
Weighted Loss Per
Net Loss Average Shares Share
-------- -------------- --------
Basic EPS
Loss available to
common stockholders $(1,002,000) 7,644,262 $(0.13)
Effect of Dilutive Securities:
Options
----------- --------- ------
Diluted EPS $(1,002,000) 7,644,262 $(0.13)
=========== ========= ======
FOR THE SIX MONTHS ENDED DECEMBER 31, 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 $(3,464,000) 7,681,390 $(0.45)
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 $(4,010,000) 7,681,390 $(0.52)
=========== ========= ======
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
Weighted Loss Per
Net Loss Average Shares Share
-------- -------------- --------
Basic EPS
Loss available to
common stockholders $(2,189,000) 7,640,617 $(0.29)
Effect of Dilutive Securities:
Options
----------- --------- ------
Diluted EPS $(2,189,000) 7,640,617 $(0.29)
=========== ========= ======
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 December 31, 2000, the Company recorded its FX contracts at their fair
value of approximately $(272,000). This resulted in a loss of
approximately $182,000 ($109,000, net of deferred income taxes).
Additionally, the translation of the foreign denominated trade receivables
resulted in an increase in the value of the receivables and the Company
recorded a currency translation gain of approximately $145,000 ($87,000,
net of deferred income taxes).
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 second quarter of fiscal 2000 and fiscal 2001,
Claremont recorded net sales of $1.1 million and $463,000, respectively,
and incurred net losses of $423,000 and $146,000, respectively. For the
first six months of fiscal 2000 and fiscal 2001, Claremont recorded net
sales of $2.6 million and $816,000, respectively, and incurred net losses
of $797,000 and $604,000, 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 second quarter of fiscal 2000 and fiscal 2001, Pennsylvania Steel
recorded net sales of $3.1 million and $1.7 million, respectively, and
incurred net losses of $1.1 million and $807,000, respectively. For the
first six months of fiscal 2000 and fiscal 2001, Pennsylvania Steel
recorded net sales of $5.9 million and $3.8 million, respectively, and
incurred net losses of $2.3 million and $1.4 million, 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 second quarter of
fiscal 2000 and fiscal 2001, PrimeCast recorded net sales of $5.9 million
and $5.6 million, respectively, and incurred net losses of $729,000 and
$683,000, respectively. For the first six months of fiscal 2000 and fiscal
2001, PrimeCast recorded net sales of $11.6 million and $10.3 million,
respectively, and incurred net losses of $1.4 million and $1.9 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 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 and six
month periods ended December 31, 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 Six Months Ended
December 31, 1999 December 31, 1999
------------------------- --------------------------
As As
Previously Previously
Reported As Restated Reported As Restated
---------- ----------- ---------- -----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS
Net sales $115,711 $ 114,103 $225,404 $ 223,017
Cost of goods sold 100,680 101,810 197,660 200,307
Operating expenses 10,373 10,661 19,984 20,493
Income (loss) before taxes 2,308 (718) 3,185 (2,358)
Income tax expense (benefit) 1,164 284 1,429 (169)
Net income (loss) 1,144 (1,002) 1,756 (2,189)
Net earnings (loss) per share:
Basic $ 0.15 $ (0.13) $ 0.23 $ (0.29)
Diluted 0.15 (0.13) 0.23 (0.29)
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 month and six month periods ended December 31, 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 second quarter of fiscal 2001 were $105.8 million,
representing a decrease of $8.3 million, or 7.3%, from net sales of $114.1
million in the second quarter of fiscal 2000. The decrease in net sales was due
primarily to decreases in net sales to the automotive, mining and military
markets, partially offset by increases in net sales to the rail market. Net
sales of Sheffield Forgemasters Group Limited ("Sheffield") for the second
quarter of fiscal 2001 decreased $1.8 million from net sales in the second
quarter of fiscal 2000.
Net sales for the first six months of fiscal 2001 were $205.0 million,
representing a decrease of $18.0 million, or 8.1%, from net sales of $223.0
million in the first six months of fiscal 2000. The decrease in net sales was
due primarily to decreases in net sales to the automotive, mining and military
markets, partially offset by increases in net sales to the rail market. Net
sales of Sheffield for the first six months of fiscal 2001 decreased by $5.1
million from net sales in the first six months 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 six months of fiscal 2001,
PrimeCast's net sales decreased $1.4 million from net sales in the first six
months of fiscal 2000. In addition, the Company closed Claremont Foundry, Inc.
("Claremont") in November 2000. Claremont's net sales in the first six months of
fiscal 2001 decreased $1.7 million from net sales in the first six months of
fiscal 2000.
Gross profit for the second quarter of fiscal 2001 decreased $4.2 million, or
34.1%, to $8.1 million, or 7.7% of net sales, compared to $12.3 million, or
10.8% of net sales, for the second quarter of fiscal 2000. Gross profit for the
first six months of fiscal 2001 decreased $10.6 million, or 46.7%, to $12.1
million, or 5.9% of net sales, compared to $22.7 million, or 10.2% of net sales,
for the first six months of fiscal 2000. The decrease in gross profit and gross
profit as a percentage of net sales for both periods was primarily due to lower
net sales and reduced absorption of overhead at the Company's subsidiaries which
primarily serve the automotive, mining and military markets. In addition,
increased fuel costs decreased gross profit by approximately $1.6 million and
$2.2 million in the second quarter and first six months, respectively, of fiscal
2001 compared to the prior year periods. Gross profit at Sheffield decreased in
the second quarter and first six months of fiscal 2002 to $2.8 million and $4.7
million, respectively, compared to $3.2 million and $6.3 million in the second
quarter and first six months of fiscal 2000, respectively.
Gross profit at Jahn Foundry Corp. ("Jahn Foundry") in the second quarter of
fiscal 2001 decreased $1.8 million, to a gross loss of $1.2 million, or 65.6% of
net sales, compared to a gross profit of $585,000, or 19.8% of net sales, in the
second quarter of fiscal 2000. Gross profit at Jahn Foundry in the first six
months of fiscal 2001 decreased $3.4 million, to a gross loss of $2.3 million,
or 59.7% of net sales, compared
to a gross profit of $1.1 million, or 21.0% of net sales, in the first six
months of fiscal 2000. The negative impact to gross profits primarily resulted
from 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 volumes 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 $375,000. The gross
loss at PrimeCast in the second quarter of fiscal 2001 increased $28,000 to
$304,000, or 5.4% of net sales, compared to a gross loss of $276,000, or 4.7% of
net sales in the second quarter of fiscal 2000. PrimeCast's gross loss in the
first six months of fiscal 2001 increased $1.0 million to a gross loss of $1.7
million, or 16.3% of net sales, compared to a gross loss of $686,000, or 5.9% of
net sales, in the first six months of fiscal 2000. PrimeCast was closed in March
2001.
Selling, general and administrative expense ("SG&A") for the second quarter of
fiscal 2001 was $12.2 million, or 11.5% of net sales, compared to $11.5 million,
or 10.1% of net sales, in the second quarter of fiscal 2000. For the first six
months of fiscal 2001, SG&A was $21.7 million, or 10.6% of net sales, compared
to $21.5 million, or 9.6% of net sales, for the first six months of fiscal 2000.
The increase in SG&A expense as a percentage of net sales in both periods is
primarily due to the decrease in net sales. Included in SG&A in the second
quarter and first six months of fiscal 2001 were expenses of approximately
$450,000 and $970,000, respectively, relating to fees and audit and appraisal
expenses incurred by the Company in pursuing various options to refinance its
bank credit facility. Also included in the second quarter and first six months
of fiscal 2001 were expenses of approximately $480,000 relating to the
investigation of the accounting irregularities at the Company's Pennsylvania
Foundry Group of operations. Offsetting these expenses in the first six months
of fiscal 2001 was a net gain of approximately $513,000 to record the Company's
foreign exchange contracts and related foreign denominated trade receivables at
fair value (see Note 6).
The Company has recorded intangible assets, consisting of goodwill, in
connection with certain of the Company's acquisitions. Amortization of these
assets for the second quarter of fiscal 2001 was expense of $337,000, or 0.3% of
net sales, as compared to $371,000, or 0.3% of net sales, in the second quarter
of fiscal 2000. Amortization of these assets for the first six months of fiscal
2001 was expense of $677,000, or 0.3% of net sales, as compared to $745,000, or
0.3% of net sales, in the first six months 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 second quarter
of fiscal 2001 of $389,000, or 0.4% net sales, as compared to $506,000, or 0.4%
of net sales, in the second quarter of fiscal 2000. Amortization of negative
goodwill was a credit to income in the first six months of fiscal 2001 of
$797,000, or 0.4% net sales, as compared to $1.0 million or 0.4% of net sales,
in the first six months of fiscal 2000. The liability recorded in connection
with the acquisition of Canadian Steel became fully amortized in the second
quarter of fiscal 2000.
Other income for the second quarter and first six months of fiscal 2001 was
$10.9 million ($6.6 million, net of tax), which is a non-recurring gain
consisting of $3.7 million and $7.2 million against the Company's business
interruption and property damage claims, respectively, relating to the
industrial accident at Jahn Foundry on February 25, 1999. 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. (See Note 10). Other income for the second quarter and first six
months of fiscal 2000 was $681,000 ($406,000, net of tax). This $681,000
reflects a net gain on the termination of interest rate swap agreements. The net
gain was triggered by the Company's early retirement of a term loan.
Interest expense for the second quarter of fiscal 2001 increased to $2.9
million, or 2.7% of net sales, from $2.3 million or 2.0% of net sales, in the
second quarter of fiscal 2000. For the first six months of fiscal 2001, interest
expense increased to $5.6 million, or 2.7% of net sales, from $4.5 million, or
2.0% of net sales, in the first six months of fiscal 2000. The increase in
interest expense primarily reflects higher average interest rates on the
Company's outstanding indebtedness.
Income tax expense for the second quarter of fiscal 2001 and 2000 was $2.0
million and $284,000, respectively. The income tax benefit for the first six
months of fiscal 2001 and fiscal 2000 was $661,000 and $169,000, respectively.
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 income tax expense and benefit
reflect the combined effective tax rates of the different federal, state and
provincial 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 income for the second quarter of fiscal
2001 was $1.9 million compared to a net loss of $1.0 million for the second
quarter of fiscal 2000. The net loss for the first six months of fiscal 2001 was
$4.0 million compared to a net loss of $2.2 million for the first six months of
fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities for the first six months of fiscal 2001
was $880,000, a decrease of $5.6 million from the first six months of fiscal
2000. This decrease was primarily attributable to the net loss incurred by the
Company, net of non-recurring gains relating to the Company's Jahn Foundry
insured claim (see below), which were previously recorded under accrued expenses
as insurance advances. Partially offsetting this was the accelerated collection
of trade receivable balances and more aggressive management of trade payable
balances.
Working capital was a negative $31.4 million at December 31, 2000, as compared
to $5.7 million at June 30, 2000. The working capital levels primarily reflect
the reclassification of $106.6 million and $72.8 million of the Company's bank
credit facility, term loan and senior notes with an insurance company as current
at December 31, 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 six months of fiscal 2001, the Company made capital
expenditures of $7.2 million, as compared to $7.8 million for the first six
months of fiscal 2000. Included in the first six months of fiscal 2001 were
capital expenditures of $3.5 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 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 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 December 31, 2000 was $120.6 million, as
compared to $117.6 million at June 30, 2000. This increase of $3.0 million
primarily reflects indebtedness incurred to fund the Company's capital
expenditures and operating losses. At December 31, 2000 the Company had fully
utilized its revolving credit facility. Available cash balances at December 31,
2000 were approximately $1.3 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 $300,000 in fiscal 2000 and the first six 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 December 31, 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 $1.7 million in fiscal 2000 and the
first six 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
10.1 Letter dated December 4, 2000 terminating Management
Agreement between the Company and Dunton Foundries, LLC
(B) Reports on Form 8-K
The Company has filed a Form 8-K dated November 7, 2000.
Items Reported
Item 5. Press releases issued regarding the investigation of
accounting irregularities at the Pennsylvania Foundry Group.
Item 7. Exhibits.
Press Release dated November 2, 2000
Press Release dated November 3, 2000
The Company has filed a Form 8-K dated November 16, 2000.
Items Reported
Item 5. Press release issued regarding the postponement of the
annual meeting of stockholders and an update on the
investigation of accounting irregularities at the
Pennsylvania Foundry Group.
Item 7. Exhibits.
Press Release dated November 16, 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