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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-12541
ATCHISON CASTING CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South Fourth Street
Atchison, Kansas 66002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 367-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES / X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Common Stock, par value $.01 per share, of
the registrant held by nonaffiliates of the registrant as of October 9, 2001
was $16,490,830.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of October 9, 2001: 7,723,031
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders to be held December 6, 2001, are incorporated by reference into
Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Atchison Casting Corporation ("ACC", "Atchison" or the "Company") was
formed in 1991 with the dual objectives of acting as a consolidator in the
foundry industry and bringing new technology for casting design and manufacture
to the foundries it acquires. While Atchison in its current form has been in
operation since 1991, its operating units have been in continuous operation for
much longer, in some cases for more than 100 years. The first foundry acquired
by ACC, the steel-castings division of Rockwell International, has been in
continuous operation since 1872. The period as a semi-captive foundry, under
Rockwell, was characterized by high quality design and production, but less
emphasis on outside customers and new markets.
Atchison manufactures highly engineered metal castings and forgings that
are utilized in a wide variety of products, including cars, trucks, gas, steam
and hydroelectric turbines, mining equipment, locomotives, passenger rail cars,
pumps, valves, army tanks, navy ships, oil field equipment, reactor vessels for
plastic manufacturing, computer peripherals, office furniture, home appliances,
satellite receivers and consumer goods. Between June 1991 and February 1999,
Atchison completed nineteen acquisitions. As a result of these acquisitions, the
Company has the ability to produce castings from a wide selection of materials,
including carbon, low-alloy and stainless steel, gray and ductile iron, aluminum
and zinc as well as the ability to manufacture parts in a variety of sizes,
ranging from small die cast components for the computer industry that weigh a
few ounces to mill stands for the steel industry that weigh up to 280 tons. The
Company believes that its broad range of capabilities, which addresses the needs
of many different markets, provides a distinct competitive advantage in the
casting and forging industry.
The Company did not make any acquisitions in fiscal 2000 or 2001, and is
not currently contemplating any acquisitions in fiscal 2002. The Company's
primary focus in fiscal 2002 will continue to be on the integration and
improvement of existing operations and earnings.
Since 1991, the number of customers served by the Company has increased
from 12 to more than 600, including companies such as Caterpillar, Gardner
Denver, General Motors, General Electric, Siemens Westinghouse, General
Dynamics, Shell, British Steel, Nucor, GEC-Alstom, Ingersoll-Dresser, John
Deere, DaimlerChrysler, Corus (formerly British Steel), CICH, Parker Hannifin,
Weirton Steel, Case New Holland, Babcock & Wilcox and Meritor (formerly Rockwell
International). The Company has received supplier excellence awards for quality
from, or has been certified by, substantially all of its principal customers.
The Company's favorable industry position is attributable to several
factors, including: (i) its use of new and advanced casting technologies; (ii)
its ability to cast substantially all types of iron and steel, as well as
aluminum and zinc; (iii) the Company's emphasis on customer service and
marketing; and (iv) the Company's position as a long-term supplier to many of
its major customers.
The principal executive offices of the Company are located at 400 South
Fourth Street, Atchison, Kansas 66002-0188, and the Company's telephone number
is (913) 367-2121.
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RECENT DEVELOPMENTS
FINANCING ARRANGEMENTS
In September 2001, the Company and its revolving credit lenders entered
into the Eleventh Amendment and Forbearance Agreement to the Amended and
Restated Credit Agreement (the "Credit Agreement"). The Eleventh Amendment
provides that, among other things, these lenders will forbear from enforcing
their rights with respect to certain existing defaults through October 12, 2001.
This amendment also allowed Atchison Casting UK Limited ("ACUK"), a subsidiary
of the Company, to enter into a new financing agreement (the "Facility
Agreement") with Burdale Financial Limited ("Burdale"), an affiliate of Congress
Financial Corporation, a portion of which will reduce the lenders' commitments
thereunder.
In September, 2001, the Company and the insurance company holding the
senior notes (the "Notes") entered into the Eighth Amendment and Forbearance
Agreement to the Note Purchase Agreement (the "Note Purchase Agreement"). The
Eighth Amendment provides that, among other things, the Noteholder will forbear
from enforcing its rights with respect to certain existing defaults through
October 12, 2001. This amendment also allows ACUK to enter the Facility
Agreement, a portion of which will be used to reduce the principal amount of the
Notes.
In September 2001, ACUK and Burdale Financial Limited entered into the
Facility Agreement. This Facility Agreement provides for a 25 million British
pound (approximately $35 million US ) facility to be used to fund working
capital requirements at Sheffield, a subsidiary of ACUK, and up to $1.0 million
British pounds for working capital at Fonderie d'Autun ("Autun"), the Company's
subsidiary in France. In addition, the Facility Agreement will provide security
for Sheffield's foreign currency exchange contracts and performance bond
commitments, repay $5.0 million of intercompany working capital loans and may
provide for a loan of up to $9.0 million of additional working capital funds in
North America, subject to availability and other restrictions in the U.K. This
facility matures on September 17, 2004 and is secured by substantially all of
Sheffield's assets in the U.K. Loans under this Facility Agreement will bear
interest at LIBOR plus 2.60%.
The Company is currently negotiating with new and existing lenders to
extend its current arrangements while it attempts to establish a new credit
facility with covenants that the Company believes it will be able to satisfy and
additional borrowing capacity.
CLOSURE OF PENNSYLVANIA STEEL, PRIMECAST, INC. AND EMPIRE STEEL
SUBSIDIARIES
Following the discovery of accounting irregularities, which revealed
substantial operating losses at each of the Company's three steel foundries that
comprise the Pennsylvania Foundry Group, the Company determined that the
carrying value of certain long-lived assets of Pennsylvania Steel and Empire
Steel had been impaired. Accordingly, the Company recorded, in the fourth
quarter of fiscal 2000, a charge of $6.2 million primarily to reduce the
carrying value of the fixed assets at Pennsylvania Steel to estimated fair value
and to write-off the goodwill at Empire Steel. Subsequently, the Company
committed to a plan to consolidate the three operations into two, thereby
improving the capacity utilization of the remaining two and, on November 30,
2000, the Company announced plans to close Pennsylvania Steel. The closure was
completed by February 28, 2001. Much of the work was transferred to the
remaining two locations.
On January 23, 2001, the Company announced plans to close its PrimeCast,
Inc. ("PrimeCast") foundry unit located in Beloit, Wisconsin and South Beloit,
Illinois. The Company had previously announced a partial shutdown of the unit,
following the closure of Beloit Paper Machinery Corporation, which had been
PrimeCast's major customer and the former owner of the foundry. The closure was
completed by March 31, 2001. As PrimeCast was the Company's only foundry that
could
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produce large iron castings, only a portion of PrimeCast's work can be
transferred to other operations of the Company. PrimeCast has been merged with
and into Kramer International Inc. ("Kramer"). The Company had previously
recorded a charge of $6.9 million for the impairment of PrimeCast's fixed assets
in the fourth quarter of fiscal 2000.
Following continued losses in fiscal 2001, the Company announced, on August
31, 2001, plans to close Empire. Accordingly, the carrying values of Empire's
fixed assets were written down to the Company's estimate of fair value, which
was based on discounted future cash flows. The resulting impairment charge of
$1.6 million to reduce the carrying value of these fixed assets was recorded in
the fourth quarter ended June 30, 2001. Actual results could vary significantly
from such estimates. Prior to the impairment charge, these assets had a carrying
value of $2.6 million. The Company plans to close Empire by November 30, 2001,
and transfer as much work as possible to other Company locations.
LEGAL PROCEEDINGS
The Company, its chief executive officer, and its chief financial officer
were named as defendants in five lawsuits filed following the Company's
announcements concerning the discovery of accounting irregularities at the
Pennsylvania Foundry Group. The cases have been consolidated before the U.S.
District Court for the District of Kansas. An amended complaint filed after the
consolidation alleges, among other things, that the defendants intentionally or
recklessly issued materially false and misleading financial statements in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. That complaint seeks certification of a class of
purchasers of the Company's common stock between December 10, 1997 and November
3, 2000 and asks for damages for the class in an unspecified amount. Discovery
has been stayed pending the resolution of the defendants' anticipated motion to
dismiss the amended complaint. The Company believes the claims are without merit
and intends to defend them vigorously. There can be no assurance, however, that
an adverse outcome with respect to the case will not have a material adverse
impact on the Company's financial condition, results of operations or cash
flows.
In addition, 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.
PLANNED SALE OF LOS ANGELES DIE CASTING AND JAHN FOUNDRY CORP. ASSETS
The Company is negotiating the sale of substantially all of the assets of
Los Angeles Die Castings Inc. ("LA Die Casting"). Under the terms of the
proposed agreement, the Company would receive approximately $4.5 million in cash
in exchange for certain assets and the assumption of certain liabilities by the
buyer, subject to certain post-closing adjustments. There can be no assurance
that a definitive agreement will ultimately be executed or consummated. If
consummated, it is anticipated that this transaction would close during the
second quarter of fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $2.7 million to write-down the carrying value of the intangible assets
at LA Die Casting to the Company's estimate of fair value. The Company
considered its decision to realign its operations, resulting in its decision to
dispose of LA Die Casting as the primary indicator of impairment. Prior to the
impairment charge, the intangible assets had a carrying value of $3.5 million.
For fiscal years 1999, 2000 and 2001, LA Die Casting recorded net sales of $9.6
million, $9.5 million and $8.2 million, respectively, and net income of
$196,000, $280,000 and $61,000, respectively, excluding the impairment charge in
the fourth quarter of fiscal 2001.
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The Company is negotiating the sale of substantially all of the assets of
Jahn Foundry Corp. ("Jahn Foundry"). Under the terms of the proposed agreement,
the Company would receive approximately $500,000 in cash, $500,000 in preferred
stock of the buyer and $1.0 million principal amount over ten years in exchange
for certain assets and the assumption of up to approximately $4.0 million of
certain liabilities by the buyer, subject to certain post-closing adjustments.
There can be no assurance that a definitive agreement will ultimately be
executed or consummated. If consummated, it is anticipated that this transaction
would close during the second quarter of fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $13.9 million to write-down the carrying value of the fixed assets at
Jahn Foundry to the Company's estimate of fair value. The Company considered its
decision to realign its operations, resulting in its decision to dispose of Jahn
Foundry as the primary indicator of impairment. Prior to the impairment charge,
the fixed assets had a carrying value of $15.9 million. For fiscal years 1999,
2000 and 2001, Jahn Foundry recorded net sales of $12.0 million, $10.7 million
and $8.4 million, respectively, and net income (losses) of $124,000, $(113,000)
and $(2.4) million, respectively, excluding the impairment charge in the fourth
quarter of fiscal 2001 and a non-recurring gain of $10.9 million recorded in the
second quarter of fiscal 2001 relating to insurance claims resulting from the
industrial accident at Jahn Foundry on February 25, 1999.
COMPANY STRATEGY
Until fiscal 2000, ACC pursued growth and diversification through a
two-pronged approach of: (i) making strategic acquisitions within the widely
fragmented and consolidating foundry industry; and (ii) integrating the acquired
foundries to achieve economies of scale, while strengthening marketing and
promoting the use of new casting technology. ACC's primary focus since the
beginning of fiscal 2000 has been on the integration and improvement of existing
operations. No acquisitions are currently contemplated during fiscal 2002.
STRATEGIC ACQUISITIONS
ACQUIRE LEADERS AND BUILD CRITICAL MASS. The Company initially acquired
foundries that were considered leaders in their respective sectors. After
acquiring a leader in a new market, ACC would strive to make subsequent
acquisitions that further penetrate that market and take advantage of the
leader's technical expertise. Atchison Steel Casting & Machining is a leader in
the field of large, complex steel castings. This acquisition in 1991 provided
credibility for ACC's presence in the industry and established a base for add-on
acquisitions. Following the Atchison Steel Casting & Machining acquisition, the
Company added capacity and strengthened its base through the add-on acquisitions
of Amite Foundry and Machine, Inc. ("Amite") in 1993 and Canadian Steel
Foundries, Ltd. ("Canadian Steel") in 1994. As an additional example, Prospect
Foundry, Inc. ("Prospect") was acquired in 1994 due to its leading position in
gray and ductile iron casting production. The subsequent acquisition of La
Grange Foundry Inc. ("La Grange") in 1995 further enhanced ACC's position in
this market.
BROADEN PRODUCT OFFERINGS AND CAPABILITIES. The Company also acquired
foundries that added a new product line or customer base that can be leveraged
throughout ACC's network of foundries. For example, prior to the acquisition of
Prospect in 1994, which expanded ACC's capabilities to include gray and ductile
iron, the Company only produced carbon and low alloy steel castings. The
acquisition of Quaker Alloy, Inc. ("Quaker Alloy") expanded ACC's stainless and
high alloy steel capabilities to include a wider range of casting sizes. The
acquisition of Sheffield Forgemasters Group Limited ("Sheffield") brings to ACC
the ability to offer cast and forged rolls, larger steel castings and
centrifically cast parts. London Precision Machine & Tool Ltd. ("London
Precision") expanded ACC's capabilities in the machining of castings.
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DIVERSIFY END MARKETS. The Company attempts to lessen the cyclical exposure
at individual foundries by operating a diversified network of foundries that
serve a variety of end markets. Kramer a supplier of pump impellers, was
acquired in 1995, expanding ACC's sales to the energy and utility sectors. The
Company believes ACC's presence in these markets somewhat offsets its exposure
to the railroad and mining and construction markets, as energy and utility
cycles do not necessarily coincide with railroad investment or mining and
construction cycles. The acquisition of Prospect diversified the end markets
served by the Company by providing access to both the agricultural equipment and
trucking industries. Sheffield provided a strong position as a supplier to the
steel industry, as well as substantial enhancement of ACC's presence in the oil
and gas industry. Currently, the Company serves more than ten major end-user
markets, compared to three in 1991.
DIVERSIFY GEOGRAPHICALLY. The Company sought to acquire foundries, which
would expand the operations to other major world economies. Sheffield and Autun
provide entry into the Euromarket.
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The following table presents the Company's current operations and their
primary strategic purpose.
<Table>
<Caption>
DATE
MANUFACTURING UNIT ACQUIRED STRATEGIC PURPOSE
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Atchison Steel Casting & 06/14/91 Leader in carbon and low alloy, large, complex steel
Machining castings. Initial platform for Company strategy.
Amite 02/19/93 Increase capacity to take on new projects with customers.
Add-on to Atchison Steel Casting & Machining.
Prospect 04/01/94 Leader in gray and ductile iron castings.
Quaker Alloy 06/01/94 Develop position in stainless and high alloy steel castings.
Canadian Steel 11/30/94 Access to hydroelectric and steel mill markets. Develop
position in large castings.
Kramer 01/03/95 Leader in castings for pump industry.
La Grange 12/14/95 Build position in gray and ductile iron casting markets.
The G&C Foundry Company 03/11/96 Highly regarded in fluid power market. Build position in
gray and ductile iron casting markets
LA Die Casting 10/01/96 Leader in aluminum and zinc die casting. Proposed to be sold.
Canada Alloy Castings, Ltd. 10/26/96 Build position in existing markets. Smaller castings than
Canadian Steel, but similar markets and materials.
Jahn Foundry 02/14/97 Develop position in market for automotive castings. Add-on
iron foundry. Proposed to be sold.
Inverness Castings Group, Inc. 10/06/97 Expand in automotive and aluminum products.
Sheffield 04/06/98 Enter European marketplace and add new product lines,
including forgings. Gain strong position in steel
industry and off-shore oil and gas industry.
London Precision 09/01/98 Enhance the Company's capability to machine castings,
including finish machining.
Autun 02/25/99 Continue to expand geographically in Europe and to increase
penetration of the automotive market.
</Table>
INTEGRATION OF ACQUIRED FOUNDRIES
STRENGTHEN MARKETING FUNCTIONS. Many foundries, particularly those that
operate as captive foundries or only rely on a small number of customers, do not
have strong marketing capabilities. ACC views this industry-wide marketing
weakness as an opportunity to establish a competitive advantage. The Company
places great emphasis on maximizing new business opportunities by strengthening
marketing capabilities, adding sales people and cross-selling between foundries.
One way in which ACC builds the marketing efforts of its foundries is to
increase the number of sales personnel at its foundries. In addition to sales
people added through acquisitions, the Company
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has incrementally increased the sales force by 36%. Another element of the
Company's marketing effort is to jointly develop castings with its customers.
Joint development projects using new technology, and the resulting increased
service and flexibility provided to customers, is an important marketing tool
and has been instrumental in receiving several new orders. For example, a joint
development project between Caterpillar and ACC led to the production of the
boom tip casting for one of Caterpillar's new hydraulic excavators. Joint
development projects have also taken place with General Motors, Nordberg, John
Deere, Case New Holland, Bombardier and DaimlerChrysler, among others.
An increasingly important aspect of the Company's marketing strategy has
been to develop its ability to cross-sell among its foundries. In acquiring new
foundries and expanding into new markets, the Company has gained a significant
advantage over smaller competitors since its sales force is able to direct its
customers to foundries with different capabilities. This benefits ACC in that it
enables foundries to use the Atchison name and relationships to gain new
customers as well as helping customers to reduce their supplier base by
providing "one-stop" shopping. The Company facilitates cross-selling by
reinforcing the sales force's knowledge of Company-wide capabilities through
visits to individual plants and providing sales incentive opportunities.
INTRODUCE ADVANCED TECHNOLOGY. The Company is systematically introducing
new advanced technologies into each of its acquired foundries to enhance their
competitive position. For example, the Company's capabilities in finite element
analysis and three-dimensional solid modeling are having a beneficial impact on
sales and casting production by helping customers to design lighter and stronger
castings, shortening design cycles, lowering casting costs and, in some cases,
creating new applications. These new technologies have enhanced the Company's
ability to assist customers in the component design and engineering stages,
strengthening the Company's relationships with its customers. New techniques
involve computerized solid models that are used to simulate the casting process,
to make patterns and auxiliary tooling and to machine the finished castings. The
Company is in the process of implementing this technology in all of its
foundries. The Company has established a Fabrication-to-Casting design center at
its Atchison, Kansas facility. The focus of the design center is to help
customers design new castings, especially those which can replace existing
fabricated assemblies.
Investments by the Company in technology improvements include: (i) new
solidification software and hardware for better casting design and process
improvement; (ii) Computer Numerical Control ("CNC") machine tools,
computer-assisted, laser measurement devices and new cutting head designs for
machine tools to improve productivity and quality in the machining of castings;
(iii) Argon-Oxygen Decarburization ("AOD") refining, which is used to make
high-quality stainless steel; (iv) computer-controlled sand binder pumps to
improve mold quality and reduce cost; (v) equipment for measuring the nitrogen
content of steel, which helps in casting quality improvement; (vi) CNC pattern
making; (vii) new die casting machines; and (viii) automated testing cells using
resonate testing. ACC is one of the few foundry companies that uses its own
scanning electron microscope to analyze inclusions in cast metal. The Company
also participates in technical projects led by the Steel Founders' Society of
America and the American Foundrymen's Society, which are exploring ways to melt
and cast cleaner iron and steel, as well as U.S. government/industry specific
projects to shorten and improve the casting design cycle.
INCREASE CAPACITY UTILIZATION. A principal objective of the Company in
integrating and operating its foundries is to increase capacity utilization at
both its existing and newly acquired facilities. Many of the Company's foundries
at the time of their acquisition have been operating with underutilized
capacity. The Company seeks to improve capacity utilization by introducing more
effective marketing programs and applying advanced technologies as described
above.
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ACHIEVE PURCHASING ECONOMIES. ACC makes its volume purchasing programs
available to its foundries. ACC has realized meaningful cost savings by
achieving purchasing efficiencies for its foundries. By jointly coordinating the
purchase of raw materials, negotiation of insurance premiums and procurement of
freight services, ACC's individual foundries have, in some cases, realized
savings of 10% to 30% of these specific costs.
LEVERAGE MANAGEMENT EXPERTISE. The Company believes that improvements can
often be made in the way acquired foundries are managed, including the
implementation of new technologies, advanced employee training programs,
standardized budgeting processes and profit sharing programs and providing
access to capital. In this view, ACC enhances management teams to add technical,
marketing or production experience, if needed.
INDUSTRY TRENDS
The American Foundrymen's Society estimates that global casting production
was 64.9 million metric tons in 1999 of which steel castings accounted for
approximately 6.1 million tons, iron castings for approximately 49.3 million
tons and nonferrous castings for approximately 9.5 million tons. It is further
estimated that the top ten producing countries represent 80% of the total
production, with the U.S. representing in excess of 20% of the world market.
The U.S. casting industry is estimated to have had shipments of
approximately 13.7 million tons in 1999, of which steel castings accounted for
approximately 1.4 million tons, iron castings for approximately 9.7 million tons
and non-ferrous castings for approximately 2.6 million tons. Metal casting
shipments are forecast to grow at an annual rate of 1.4% to 16.0 million tons by
2010. The Company has been able to grow principally as a result of its strategy
and due to key trends affecting the casting industry, including the following:
INDUSTRY CONSOLIDATION
Although still highly fragmented, the U.S. foundry industry has
consolidated from approximately 465 steel foundries and 1,400 iron foundries in
1982 to approximately 400 and 700 steel and iron foundries, respectively, in
1999. This consolidation trend has been accompanied by increased outsourcing of
casting production and OEM supplier rationalization.
OUTSOURCING. Many OEMs are outsourcing the manufacture of cast components
to independent foundries in an effort to reduce their capital and labor
requirements and to focus on their core businesses. Management believes that
captive foundries are often underutilized, inefficiently operated and lack the
latest technology. Several of ACC's OEM customers, such as Caterpillar, General
Motors, General Electric, Meritor (formerly Rockwell International),
Ingersoll-Dresser, Gardner Denver, Compagnie Internationale du Chauffage and
Beloit Corporation, have closed or sold one or more of their captive foundries
during the past ten years and have outsourced the castings which they once made
to independent suppliers such as the Company. As described above, the closure of
these facilities has contributed to increased capacity utilization at the
remaining foundries.
OEM SUPPLIER RATIONALIZATION. OEMs are rationalizing their supplier base to
fewer foundries that are capable of meeting increasingly complex requirements.
For example, OEMs are asking foundries to play a larger role in the design,
engineering and development of castings. In addition, some customers have
demanded that suppliers implement new technologies, adopt quality (ISO 9000 and
QS 9000) standards and make continuous productivity improvements. As a result,
many small, privately-owned businesses have chosen to sell their foundries
because they are unwilling or unable to make investments necessary to remain
competitive. Moreover, the EPA and OSHA require compliance with increasingly
stringent environmental and governmental regulations.
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NEW CASTING TECHNOLOGY
Recent advances in casting technology and pattern-making have created new
opportunities for reducing costs while increasing efficiency and product
quality. The combination of powerful, low cost computer workstations with finite
element modeling software for stress analysis and metal solidification
simulation is helping foundries and customers to design castings that are
lighter, stronger and more easily manufactured at a competitive cost.
The Company believes new casting technologies have led to growth in casting
shipments by replacing forgings and fabrications in certain applications. In the
past, fabricated (welded) components have been used in order to reduce tooling
costs and product development lead-time. New casting technology has helped to
reduce the weight and cost, and shorten the lead-time, of castings and has
therefore increased the relative attractiveness of cast components. For example,
these improvements allowed an ACC customer to replace a fabricated steel boom
that is used in a typical mining vehicle with one that is cast. The cast steel
boom weighs 20% less than the fabricated component that it replaced, allowing an
increase in payload. Product life is increased due to greater corrosion
resistance. Another customer replaced the combination cast/fabricated body of a
rock crusher with a one-piece casting, reducing labor for cutting, welding and
machining as a result.
The Company has established a Fabrication-to-Casting Design Center at its
Atchison, Kansas facility. The focus of the design center is to help customers
design new castings, especially those which can replace existing fabricated
assemblies.
MARKETS AND PRODUCTS
STEEL INDUSTRY. The steel industry uses rolls to form cast steel into
sheets, bars, rods, beams and plates, which are then used to make end products
such as car bodies, tin cans and bridges. Rolls are consumed as steel is rolled,
so there is a steady demand for rolls. Customers in this market include Corus
(formerly British Steel) and Nucor, among others. Sheffield Forgemasters Rolls
Limited ("Forgemasters Rolls") is one of the world leaders in cast and forged
rolls for the steel-making industry. Steel products produced by the Company
accounted for approximately 18.8%, 18.5% and 20.2% of the Company's net sales in
fiscal 1999, fiscal 2000 and fiscal 2001, respectively.
MINING AND CONSTRUCTION. ACC's castings are used in tractor-crawlers,
mining trucks, excavators, drag lines, wheel-loaders, rock crushers, diesel
engines, slurry pumps, coal mining machines and ore-processing equipment. Mining
and construction equipment customers include Caterpillar, Nordberg, Meritor
(formerly Rockwell International), Gardner Denver, John Deere, Komatsu and
Euclid, among others. Products supplied to the mining and construction industry
accounted for approximately 18.0%, 16.5% and 15.9% of the Company's net sales in
fiscal 1999, fiscal 2000 and fiscal 2001, respectively.
RAILROAD. The Company supplies cast steel undercarriages for locomotives,
among other parts, for this market. GM is ACC's largest locomotive customer, and
has purchased locomotive castings from Atchison Steel Casting & Machining for
over 60 years. The Company further penetrated this market through the purchase
of London Precision. Rail products produced by the Company accounted for
approximately 11.3%, 10.5% and 10.9% of the Company's net sales in fiscal 1999,
fiscal 2000 and fiscal 2001, respectively.
AUTOMOTIVE. The automotive industry uses both iron and aluminum castings,
as well as aluminum die castings. ACC entered this market through the purchase
of Jahn Foundry in Springfield, Massachusetts and Inverness Castings Group, Inc.
("Inverness") in Dowagiac, Michigan. Customers in this market include General
Motors and DaimlerChrysler, among others.
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ENERGY. The Company's products for the energy market include pumps, valves
and compressors for transmission and refining of petrochemicals, blow-out
preventers and mud pumps for drilling and work-over of wells, lifting hooks and
shackles for offshore installation of equipment, winch components for rig
positioning, nodes for platform construction, subsea components and other oil
field castings. Shell, Amoco, Aker-Verdal, Shaffer, Rolls Royce, Hydril, Solar
Turbines, Nordstrom, Ingersoll-Dresser Pumps and Amclyde are among the Company's
many energy-related customers.
UTILITIES. Many of ACC's castings are used in products for the utility
industry, such as pumps, valves and gas compressors. ACC also makes steam, gas
and hydroelectric turbine castings, nuclear plant components, sewage treatment
parts and other castings for the utility industry. In addition, the Company
manufactures replacement products that are used when customers perform
refurbishments. Customers include Siemens Westinghouse, General Electric, Solar
Turbines, GEC-Alsthom, Sulzer, Siemens, Kvaerner, Goulds Pumps and Neles
Controls.
MASS TRANSIT. ACC began making undercarriages for passenger rail cars in
1992 and is a leading casting supplier to the mass transit market. The Company's
castings are used on the BART system in San Francisco, METRA in Chicago, NCTD in
San Diego, MARTA in Atlanta, and in Miami and Vancouver. La Grange casts
components used in subway cars in several cities, including New York City, which
is the largest user of subway cars in North America.
MILITARY. Weapons and equipment for the Army, Navy and Coast Guard employ
many different types of castings. The Company makes components for ships, battle
tanks, howitzers and other heavy weapons. The capabilities of Sheffield has
allowed ACC to bid on a wider range of work for the U.S. Navy. The military
casting market has declined sharply, but ACC has been able to replace this
volume by targeting new products such as turbines, compressors, pumps and
valves. Customers in this market include General Dynamics, Litton, Bath Iron
Works, Boeing, SEI, the U.S. Army and Avondale Shipyards, among others.
TRUCKING. The Company manufactures components used on truck engines and
suspension systems. Many of ACC's castings are used in aftermarket products to
achieve better fuel economy or to enhance ride characteristics. Customers
include Horton Industries, Detroit Diesel and others.
FARM EQUIPMENT. ACC makes a variety of castings for farm tractors, baling
equipment, harvesters, sugar cane processors and other agricultural equipment
for customers such as John Deere, Caterpillar and New Holland.
OTHER. Other markets include process equipment such as rubber mixers,
plastic extruders, dough mixers, machine tools and a variety of general
industrial applications. With the acquisition of LA Die Casting, the Company
entered the consumer market. LA Die Casting supplies components used to make
recreational vehicles, computer peripherals, direct satellite receivers,
telescopes and pool tables. Customers include California Amplifier, RC Design,
Celestron and Printronix. As discussed above, LA Die Casting may be sold.
For financial information about geographic areas, see Note 20 to the
consolidated financial statements.
SALES AND MARKETING
New foundry technologies and the new applications resulting therefrom
require a more focused and knowledgeable sales force. The Company pursues an
integrated sales and marketing approach that includes senior management,
engineering and technical professionals, production managers and others, all of
whom work closely with customers to better understand their specific
requirements and improve casting designs and manufacturing processes. The
Company supplements its direct sales
11
<Page>
effort with participation in trade shows, marketing videos, brochures,
technical papers and customer seminars on new casting designs.
The Company's engineering and technical professionals are actively involved
in marketing and customer service, often working with customers to improve
existing products and develop new casting products and applications. They
typically remain involved throughout the product development process, working
directly with the customer to design casting patterns, build the tooling needed
to manufacture the castings and sample the castings to ensure they meet
customers' specifications. The Company believes that the technical assistance in
product development, design, manufacturing and testing that it provides to its
customers gives it an advantage over its competition.
Customers tend to develop long-term relationships with foundries that can
provide high quality, machined castings delivered on a just-in-time basis that
do not require on-site inspection. Frequently, the Company is the only current
source for the castings that it produces. Maintaining duplicate tooling in
multiple locations is costly, so customers prefer to rely on one supplier for
each part number. Moving the tooling to another foundry is possible, however,
such a move entails considerable time and expense on the customer's part. In
addition, ACC is forming product development partnerships with a number of
customers to develop new applications for castings.
BACKLOG
The Company's backlog is based upon customer purchase orders that the
Company believes are firm and does not include purchase orders anticipated but
not yet placed. At June 30, 2001, the Company's backlog was approximately $206.8
million, as compared to backlog of approximately $168.6 million at June 30,
2000. The backlog is scheduled for delivery in fiscal 2002 except for
approximately $36.9 million, of which $27.8 million is scheduled for delivery in
fiscal 2003. The level of backlog at any particular time is not necessarily
indicative of the future operating performance of the Company. The Company
historically has not experienced cancellation of any significant portion of
customer orders.
COMPETITION
The Company competes with a number of foundries in one or more product
lines, although none of the Company's competitors compete with it across all
product lines. The principal competitive factors in the castings market are
quality, delivery and price; however, breadth of capabilities and customer
service have become increasingly important. The Company believes that it is able
to compete successfully in its markets by: (i) offering high quality, machined
castings; (ii) working with customers to develop and design new castings; (iii)
providing reliable delivery and short lead-times; (iv) containing its
manufacturing costs, thereby pricing competitively; and (v) offering a broad
range of cast materials.
The Company believes that the market for iron and steel castings is
attractive because of a relatively favorable competitive environment, high
barriers to entry and the opportunity to form strong relationships with
customers. New domestic competitors are unlikely to enter the foundry industry
because of the high cost of new foundry construction, the need to secure
environmental approvals at a new foundry location, the technical expertise
required and the difficulty of convincing customers to switch to a new, unproven
supplier.
ACC, and the foundry industry in general, competes with manufacturers of
fabrications in some application areas. The Company believes that the relative
advantages of castings, particularly in light of new casting design technology,
which reduces weight, cost and leadtime while improving casting quality, will
lead to increased replacement of fabrications by iron and steel castings. The
Company competes with foundries in Asia, Europe and North America.
12
<Page>
MANUFACTURING
CASTINGS. Casting is one of several methods, along with forging and
fabricating, which shape metal into desired forms. Castings are made by pouring
or introducing molten metal into a mold and allowing the metal to cool until it
solidifies, creating a monolithic component. Some castings, such as die
castings, are made with a permanent metal mold which can be used repeatedly.
Others, such as sand castings, are made in a sand mold which is used only once.
Forgings are made by shaping solid metal with pressure, usually in a die or with
hammers. Fabrications are made by welding together separate pieces of metal.
Castings may offer significant advantages over forgings and fabrications. A
well-designed casting can be lighter, stronger and more stress and corrosion
resistant than a fabricated part. Although castings and forgings are similar in
several respects, castings are generally less expensive than forgings.
CASTING PROCESS. The steel casting manufacturing process involves melting
steel scrap in electric arc or induction furnaces, adding alloys, pouring the
molten metal into molds made of sand or iron and removing the solidified casting
for cleaning, heat treating and quenching prior to machining the casting to
final specifications. The manufacture of a steel casting begins with the molding
process. Initially, a pattern constructed of wood, aluminum or plastic is
created to duplicate the shape of the desired casting. The pattern, which has
similar exterior dimensions to the final casting, is positioned in a flask and
foundry sand is packed tightly around it. After the sand mold hardens, the
pattern is removed. When the sand mold is closed, a cavity remains within it
shaped to the contours of the removed pattern. Before the mold is closed, sand
cores are inserted into the cavity to create internal passages within the
casting. For example, a core would be used to create the hollow interior of a
valve casing. With the cores in place, the mold is closed for pouring. Castings
for rolls are sometimes made by stirring the mold while the liquid steel or iron
is being poured into it.
Steel scrap and alloys are melted in an electric arc furnace at
approximately 2,900 degrees Fahrenheit, and the molten metal is poured from a
ladle into molds. After pouring and cooling, the flask undergoes a "shakeout"
procedure in which the casting is removed from the flask and vibrated to remove
sand. The casting is then moved to a blasting chamber for removal of any
remaining foundry sand and scale. Next, the casting is sent to the cleaning
room, where an extensive process removes all excess metal. Cleaned castings are
put through a heat treating process, which improves properties such as hardness
and tensile strength through controlled increases and decreases in temperature.
A quench tank to reduce temperatures rapidly is also available for use in heat
treatment. The castings are shot blasted again and checked for dimensional
accuracy. Each casting undergoes a multi-stage quality control procedure before
being transported to one of the Company's or the customer's machine shops for
any required machining.
Iron castings are processed similarly in many respects to steel castings.
Melting and pouring temperatures for molten iron are approximately 2,400 degrees
Fahrenheit, and less cleaning and finishing is required for iron castings than
is typically required for steel castings. Iron and steel scrap may both be used
in making cast iron.
Die casting, as contrasted to sand casting, uses a permanent metal mold
that is reused. Melting and pouring temperatures for aluminum and zinc are less
than half that used for steel, and die castings normally require less cleaning
than iron or steel castings.
FORGING PROCESS. The forging process applies pressure by hitting or
pressing a heated ingot or wrought steel blank. The forged piece is then
heat-treated and machined much in the same manner as a steel casting.
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MATERIALS. Steel is more difficult to cast than iron, copper or aluminum
because it melts at higher temperatures, undergoes greater shrinkage as it
solidifies, causing the casting to crack or tear if the mold is not properly
designed, and is highly reactive with oxygen, causing chemical impurities to
form as it is poured through air into the mold. Despite these challenges, cast
steel has become a vital material due to its superior strength compared to other
ferrous metals. In addition, most of the beneficial properties of steel match or
exceed those of competing ferrous metals. The Company's first foundry, which
today forms Atchison Steel Casting & Machining, produced carbon and low alloy
steel castings when it was acquired from Rockwell International in 1991. ACC
added an AOD vessel for making stainless steel in order to better supply the
pump and valve markets, which sometimes require stainless steel castings to be
made from the same patterns used for carbon steel castings. Also in 1994, ACC
purchased Quaker Alloy, which specializes in casting high alloy and stainless
steels for valves, pumps and other equipment. Sheffield, Canadian Steel and
Canada Alloy Castings, Ltd. ("Canada Alloy") also make high alloy and stainless
castings, further reinforcing ACC's market position and skill base concerning
the casting of stainless and specialty, high alloy steels.
In applications that do not require the strength, ductility and/or
weldability of steel, iron castings are generally preferred due to their lower
cost, shorter lead-times and somewhat simpler manufacturing processes. Ductile
iron is stronger and more flexible than traditional cast iron, known as gray
iron, and is easier and less expensive to cast than steel. Due to these
qualities, the demand for ductile iron is increasing faster than for either
traditional gray cast iron or cast steel. In 1994, ACC initiated manufacturing
of gray and ductile iron through the acquisition of Prospect. ACC's presence in
ductile iron was increased through the subsequent purchases of La Grange and The
G&C Foundry Company ("G&C").
Aluminum castings (including die castings) generally offer lighter weight
than iron or steel, and are usually easier to cast because aluminum melts at a
lower temperature. These advantages, coupled with low prices for aluminum during
the last decade, have led to a substantial increase in the use of aluminum
castings, especially in motor vehicles. Aluminum's relative softness, lower
tensile strength and poor weldability limit its use in many applications where
iron and steel castings are currently employed. In 1996, ACC entered the
nonferrous market with the purchase of LA Die Casting, which die casts aluminum
and zinc.
Steel, unlike iron, can be forged as well as cast. Forging compresses
steel, and is preferred for some critical applications like nuclear vessels,
turbine shafts and pressure vessels, among others.
The ability to provide cast and forged components in a broad range of
materials allows ACC to present itself as a "one-stop shop" for some customers
and simplifies purchasing for others. Since customers in general have a goal of
reducing their total number of suppliers, a broader range of materials and
casting skills gives ACC an advantage over many other foundry operations.
MACHINING. The Company machines many of its steel castings, typically to
tolerances within 30 thousandths of an inch. Some castings are machined to
tolerances of one thousandth of an inch. Machining includes drilling, threading
or cutting operations. The Company's Sheffield, St. Joe, Amite, Inverness and
London Precision machine shops have a wide variety of machine tools, including
CNC machine tools. The Company also machines some of its castings at Canadian
Steel, Quaker Alloy and Kramer. The ability to machine castings provides a
higher value-added product to the customer and improved quality. Casting
imperfections, which are typically located near the surface of the casting, are
usually discovered during machining and corrected before the casting is shipped
to the customer.
NON-DESTRUCTIVE TESTING. Customers typically specify the physical
properties, such as hardness and strength, which their castings are to possess.
The Company determines how best to meet those specifications. Regular testing
and monitoring of the manufacturing process are necessary to
14
<Page>
maintain high quality and to ensure the consistency of the castings. Electronic
testing and monitoring equipment for tensile, impact, radiography, ultrasonic,
magnetic particle, dye penetrant and spectrographic testing are used extensively
to analyze molten metal and test castings.
ENGINEERING AND DESIGN. The Company's process engineering teams assist
customers in designing castings and work with manufacturing departments to
determine the most cost effective manufacturing process. Among other
computer-aided design techniques, the Company uses three-dimensional solid
modeling and solidification software. This technology reduces the time required
to produce sample castings for customers by several weeks and improves the
casting design.
CAPACITY UTILIZATION. The following table shows the type and the
approximate amount of available capacity, in tons, for each operating foundry
and die caster. The actual number of tons that a foundry can produce annually is
dependent on product mix. Complicated castings, such as those used for military
applications or in steam turbines, require more time, effort and use of
facilities, than do simpler castings such as those for the mining and
construction market. Also, high alloy and stainless steel castings generally
require more processing time and use of facilities than do carbon and low alloy
steel castings.
<Table>
<Caption>
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 2001 UTILIZATION
------------------- ---------------- ------------------------- ------------ --------------- ------------
Atchison Steel Carbon, low Mining and construction, 30,000 23,166 77.2%
Casting & alloy and rail, military, valve,
Machining stainless turbine and compressor
steel
Amite Carbon and low Marine, mining and 14,000 3,658 26.1%
alloy steel construction
Prospect Gray and Construction, 12,500 6,613 52.9%
ductile iron agricultural, trucking,
hydraulic, power
transmission and machine
tool
Quaker Alloy Carbon, low Pump and valve 6,000 2,092 34.9%
alloy and
stainless
steel
Canadian Steel Carbon, low Hydroelectric and steel 6,000 2,518 42.0%
alloy and mill
stainless steel
Kramer Carbon, low Pump impellers and 1,450 876 60.5%
alloy and casings
stainless
steel, gray
and ductile
iron
La Grange Gray, ductile Mining and construction 14,000 10,159 72.6%
and compacted and transportation
graphite iron
G&C Gray and Fluid power (hydraulic 12,000 9,893 82.4%
ductile iron control valves)
LA Die Casting Aluminum and Communications, 1,750 861 49.2%
zinc recreation and computer
Canada Alloy Carbon, low Power generation, pulp 2,500 1,554 62.2%
alloy and and paper machinery,
stainless steel pump and valve
</Table>
15
<Page>
<Table>
<Caption>
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 2001 UTILIZATION
------------------- ---------------- ------------------------- ------------ --------------- ------------
Jahn Foundry Gray iron Automotive, air 11,000 4,241 42.4%
conditioning and
agricultural
Inverness Aluminum Automotive, furniture 12,500 8,375 67.0%
and appliances
Forgemasters Iron and Steel Steel and aluminum 31,000 23,734 76.6%
Rolls rolling
Sheffield Iron and Steel Oil and gas, ingot, 88,200 47,254 53.6%
Forgemasters petrochemical, power
Engineering generation
Limited
Autun Iron Heating , domestic 35,000 19,015 54.3%
appliance and automotive
castings
------------- --------------- ------------
Totals 277,900 164,009 59.0%
============= =============== ============
</Table>
<Table>
<Caption>
MACHINING
HOURS
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS MACHINING JUNE 30, CAPACITY
UNIT MACHINED MAJOR APPLICATIONS HOURS 2001 UTILIZATION
------------------- ---------------- ------------------------- ------------- --------------- ------------
London Precision Carbon, low Mining and 170,000 210,530 123.8%
alloy, construction, rail,
stainless military, valve,
steel, iron turbine and compressor
and aluminum
------------ --------------- ------------
Totals 170,000 210,530 123.8%
============ =============== ============
------
</Table>
* Estimated annual capacity and utilization are based upon management's
estimate of the applicable manufacturing unit's theoretical capacity
assuming a certain product mix and assuming such unit operated five days a
week, three shifts per day and assuming normal shutdown periods for
maintenance. Actual capacities will vary, and such variances may be
material, based upon a number of factors, including product mix and
maintenance requirements.
16
<Page>
RAW MATERIALS
The principal raw materials used by the Company include scrap iron and
steel, aluminum, zinc, molding sand, chemical binders and alloys, such as
manganese, nickel and chrome. The raw materials utilized by the Company are
available in adequate quantities from a variety of sources. From time to time
the Company has experienced fluctuations in the price of scrap steel, which
accounts for approximately 4% of net sales, and alloys, which account for less
than 2% of net sales. The Company has generally been able to pass on the
increased costs of raw materials and has escalation clauses for scrap with
certain of its customers. As part of its commitment to quality, the Company
issues rigid specifications for its raw materials and performs extensive
inspections of incoming raw materials.
QUALITY ASSURANCE
The Company has adopted sophisticated quality assurance techniques and
policies which govern every aspect of its operations to ensure high quality.
During and after the casting process, the Company performs many tests, including
tensile, impact, radiography, ultrasonic, magnetic particle, dye penetrant and
spectrographic tests. The Company has long utilized statistical process control
to measure and control dimensions and other process variables. Analytical
techniques such as Design of Experiments and the Taguchi Method are employed for
troubleshooting and process optimization.
As a reflection of its commitment to quality, the Company has been
certified by, or won supplier excellence awards from, substantially all of its
principal customers. Of 600 suppliers to General Motors' Electromotive Division,
the Company was the first supplier to receive the prestigious Targets of
Excellence award. Reflecting its emphasis on quality, Atchison Steel Casting &
Machining was certified to ISO 9001 in August 1995, which represents compliance
with international standards for quality assurance. Quaker Alloy, La Grange,
Canada Alloy, Jahn Foundry, G & C, Inverness, London Precision, Forgemasters
Rolls and Canadian Steel have each been certified to ISO 9002. Sheffield
Forgemasters Engineering Ltd. ("Forgemasters Engineering") has been certified to
ISO 9001. Other ACC foundries are preparing for ISO certification.
EMPLOYEE AND LABOR RELATIONS
As of June 30, 2001, the Company had approximately 3,800 full-time
employees. Since its inception, the Company has had two work stoppages. The
Company's hourly employees are covered by collective bargaining agreements with
several unions at fifteen of its locations. These agreements expire at varying
times over the next several years. The following table sets forth a summary of
the principal unions and term of the principal collective bargaining agreements
at the respective locations in operation. The labor laws of France prevent the
Company from learning the number of employees in the union at Autun.
<Table>
<Caption>
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 6/30/01)
---------------- ----------------------------------------- ---------------------- --------------------- ----------------
Atchison Steel United Steelworkers of America, Local 05/11/99 05/12/02 319
Casting & 6943
Machining
Prospect Glass, Molders, Pottery, 08/31/00 06/30/03 144
Plastics & Allied Workers
International, Local 63B
Quaker Alloy United Steelworkers of 05/15/99 07/15/03 185
America, Local 7274
</Table>
17
<Page>
<Table>
<Caption>
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 6/30/01)
---------------- ----------------------------------------- ---------------------- --------------------- ----------------
Canadian Steel Metallurgistes Unis 02/12/01 02/14/04 79
d'Amerique, Local 6859
Kramer United Steelworkers of 07/29/00 07/29/03 81
America, Local 1343
Empire United Steelworkers of 03/01/97 02/28/02 131
America, Local 3178
La Grange Glass, Molders, Pottery, 12/18/00 12/16/05 171
Plastics & Allied Workers
Union, Local 143
La Grange International Association of Machinists 12/18/00 12/21/05 15
and Aerospace Workers, Local 822
G&C United Electrical, Radio and 03/01/97 In negotiation 122
Machine Workers of America,
Local 714
LA Die Casting United Automobile, Aircraft, 12/09/00 12/12/03 37
Agricultural Implement
Workers of America, Local 509
Canada Alloy United Steelworkers of 04/04/97 04/03/02 102
America, Local 5699
Jahn Foundry Glass, Molders, Pottery, 06/01/98 12/03/01 73
Plastics and Allied Workers
International, Local 97
Inverness United Paperworker's International, 04/20/01 08/06/04 215
Local 7363
Sheffield Steel and Industrial Managers Association 01/07/01 01/01/02 4
Forgemasters
Engineering Iron and Steel Trades Confederation
Limited 01/07/01 01/01/02 58
Electrical Engineering and Plumbing 01/07/01 01/01/02 17
Trades Union
Manufacturing Science and Finance 01/07/01 01/01/02 30
Trades Associated to Steel and 01/07/01 01/01/02 4
Sheetmakers
Association of Professional and 01/07/01 01/01/02 7
Executive Staff
</Table>
18
<Page>
<Table>
<Caption>
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 6/30/01)
---------------- ----------------------------------------- ---------------------- --------------------- ----------------
General Municipal and Boilermakers 01/07/01 01/01/02 41
Allied Engineering and Electrical Union 01/07/01 01/01/02 129
Transport and General Workers Union 01/07/01 01/01/02 8
Amalgamated Metal and Steelworkers Union 01/07/01 01/01/02 10
Union of Construction, allied Trades and 01/07/01 01/01/02 3
Technicians
Forgemasters Amalgamated Engineering and Electrical
Rolls Union
- Sheffield 01/01/01 12/31/02 78
- Crewe 01/08/00 In negotiation 195
- Coatbridge 01/01/01 12/31/01 40
Iron and Steel Trades Confederation
- Sheffield 01/01/01 12/31/02 9
General and Municipal Workers Union
- Sheffield 01/01/01 12/31/02 2
Transport and General Workers Union
- Sheffield 01/01/01 12/31/02 3
19
Manufacturing Science and Finance
- Crewe 08/01/00 In negotiation 19
- Sheffield 01/01/01 12/31/02 7
London Precision United Steelworkers of America, Local 8/31/00 8/31/04 81
2699
</Table>
19
<Page>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company.
<Table>
<Caption>
NAME AGE POSITION WITH THE COMPANY
----------------------------------------- ------- ------------------------------------------------------------
Hugh H. Aiken........................... 57 Chairman of the Board, President, Chief Executive Officer
and Director
Thomas K. Armstrong, Jr................. 47 Chief Operating Officer - North America
David Fletcher.......................... 56 Vice President - Europe
John R. Kujawa.......................... 48 Vice President - Large Steel Castings
Kevin T. McDermed....................... 41 Vice President, Chief Financial Officer, Treasurer and
Secretary
James Stott............................. 60 Vice President
</Table>
HUGH H. AIKEN has been the Chairman of the Board, President, Chief
Executive Officer and a Director since June 1991. From 1989 to 1991, Mr. Aiken
served as an Associate of Riverside Partners, Inc., an investment firm located
in Boston, Massachusetts, and from 1985 to 1989, Mr. Aiken served as General
Manager for AMP Keyboard Technologies, Inc., a manufacturer of electromechanical
assemblies located in Milford, New Hampshire. Mr. Aiken previously served as a
Director and Chief Operating Officer of COMNET Incorporated and as a Director
and Chief Executive Officer of General Computer Systems, Inc., both public
companies.
THOMAS K. ARMSTRONG, JR. has been Chief Operating Officer - North America
since March 1999. From 1987 to 1999, Mr. Armstrong served as President of Texas
Steel Co., a Citation Corp. company. From 1979 to 1986, Mr. Armstrong held
positions at Texas Steel of Executive Vice President, Information Systems and
Engineering Manager. In addition, Mr. Armstrong served as Chief Executive
Officer of Southwest Steel Casting Corp., a Texas Steel subsidiary, from 1984
through 1989. Mr. Armstrong began his career as an engineer with E.I. DuPont
from 1976 through 1979. From 1997 to 1999 he has served as President of the
Steel Founders' Society of America.
DAVID FLETCHER has been Vice President and Chairman and CEO of Atchison
Casting UK Limited and the Sheffield Forgemasters Group since April 1998. Prior
to this he was Chief Executive Officer of the Sheffield Forgemasters Group in
Sheffield, England, having joined the group in 1986 as the main board director
responsible for the Engineering group of companies comprising Forgemasters Steel
& Engineering Limited, River Don Castings Limited, Forged Rolls (UK) Limited and
British Rollmakers Corporation. From 1977 to 1986, Mr. Fletcher was Managing
Director of various subsidiaries of the Aurora Group, including Darwin Alloy
Castings, Edgar Allen Foundry, Willen Metals and Aurora Steels.
JOHN R. KUJAWA has been Vice President - Large Steel Castings since August
1999. Prior to this he was Vice President - Atchison/St. Joe and Amite from
November 1996 to August 1999 and Vice President-Atchison/St. Joe from August
1994 to November 1996. He served as Executive Vice President-Operations of the
Company from July 1993 to August 1994, Vice President-Foundry of the Company
from June 1991 to July 1993, Assistant Foundry Manager of the Company from 1990
to
20
<Page>
1991 and as Senior Process Engineer of the Company from 1989 to 1990. He
served as Operations Manager for Omaha Steel Castings, a foundry in Omaha,
Nebraska, from 1984 to 1989.
KEVIN T. MCDERMED has been Vice President, Chief Financial Officer and
Treasurer of the Company since June 1991 and has served as Secretary of the
Company since May 1992. He served as the Controller of the Company from 1990 to
June 1991 and as its Finance Manager from 1986 to 1990. Mr. McDermed has been
with the Company since 1981.
JAMES STOTT has been Vice President - Kramer since May 1998. He served as
Vice President - Empire, Kramer, Pennsylvania Steel and Quaker Alloy from
November 1996 to May 1998 and Vice President - Kramer from January 1995 to
November 1996. He has served as President, Chief Executive Officer and Chief
Operating Officer of Kramer International, Inc. (the predecessor of Kramer)
since 1980.
PRODUCT WARRANTY
The Company warrants that every product will meet a set of specifications,
which is mutually agreed upon with each customer. The Company's written warranty
provides for the repair or replacement of its products and excludes contingency
costs. Often, the customer is authorized to make the repair within a dollar
limit, in order to minimize freight costs and the time associated therewith. In
fiscal 2001, warranty costs amounted to less than one percent of the Company's
net sales.
ENVIRONMENTAL REGULATIONS
Companies in the foundry industry must comply with numerous federal, state
and local (and, with respect to Canadian, France and U.K. operations, federal,
provincial and local) environmental laws and regulations relating to air
emissions, solid waste disposal, stormwater runoff, landfill operations,
workplace safety and other matters. The Clean Air Act, as amended, the Clean
Water Act, as amended, and similar provincial, state and local counterparts of
these federal laws regulate air and water emissions and discharges into the
environment. The Resource Conservation and Recovery Act, as amended, and the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
("CERCLA"), among other laws, address the generation, storage, treatment,
transportation and disposal of solid and hazardous waste and releases of
hazardous substances into the environment, respectively. The Company believes
that it is in material compliance with applicable environmental laws and
regulations, other than violations or citations, the resolution of which would
not have a material adverse effect on the Company's financial condition and
results of operations.
A Phase I environmental assessment of each of the Company's facilities has
been performed, and no significant or widespread contamination has been
identified at any Company facility. A Phase I assessment includes an historical
review, a public records review, a preliminary investigation of the site and
surrounding properties and the preparation and issuance of a written report, but
it does not include soil sampling or subsurface investigations. There can be no
assurance that these Phase I assessments have identified, or could be expected
to identify, all areas of contamination. As the Company evaluates and updates
the environmental compliance programs at foundry facilities recently acquired,
the Company may become aware of matters of noncompliance that need to be
addressed or corrected. In addition, there is a risk that material adverse
conditions could have developed at the Company's facilities since such
assessments. Groundwater testing confirmed that solvent and metals contamination
is migrating off of a property owned by Inverness. Current estimates suggest
that corrective action costs could be in excess of $400,000.
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust particles, are
handled by dust collection systems. The
21
<Page>
Company anticipates that it will incur additional capital and operating costs to
comply with the Clean Air Act Amendments of 1990 and the regulations that are in
the process of being promulgated thereunder. The Company is currently in the
process of obtaining permits under the new regulations and estimating the cost
of compliance with these requirements and the timing of such costs. Such
compliance costs, however, could have a material adverse effect on the Company's
results of operations and financial condition.
The solid waste generated by the Company's foundries generally consists
of nonhazardous foundry sand that is reclaimed for reuse in the foundries
until it becomes dust. Nonhazardous foundry dust waste is then disposed of in
landfills, two of which are owned by the Company (one in Atchison County,
Kansas, and one in Myerstown, Pennsylvania). No other parties are permitted
to use the Company's landfills, which are both in material compliance with
all applicable regulations to the Company's knowledge. Costs associated with
the future closure of the landfills according to regulatory requirements
could be material. In the event a foundry generates waste that is identified
as hazardous, then a hazardous waste permit is obtained and the Company
complies in all material respects with its provisions for the collection,
storage and disposal of hazardous waste.
The Company also operates pursuant to regulations governing work place
safety. The Company samples its interior air quality to ensure compliance
with OSHA requirements. To the Company's knowledge, it currently operates in
material compliance with all OSHA and other regulatory requirements governing
work place safety, subject to Jahn Foundry's compliance with the settlement
agreement with OSHA in connection with the industrial accident at Jahn
Foundry on February 25, 1999.
The Company continues to evaluate its manufacturing processes and
equipment (including its recently acquired facilities) to ensure compliance
with the complex and constantly changing environmental laws and regulations.
Although the Company believes it is currently in material compliance with
such laws and regulations, the operation of casting manufacturing facilities
entails environmental risks, and there can be no assurance that the Company
will not be required to make substantial additional expenditures to remain in
or achieve compliance in the future.
22
<Page>
ITEM 2. PROPERTIES
The Company's principal facilities are listed in the accompanying table,
together with information regarding their location, size and primary function.
The two landfills are used solely by the Company and contain nonhazardous
materials only, principally foundry sand. All of the Company's principal
facilities are owned.
The following table sets forth certain information with respect to the
Company's principal facilities.
<Table>
<Caption>
FLOOR SPACE IN
NAME LOCATION PRINCIPAL USE SQ. FEET
------------------------------------ ------------------- ----------------------------- -------------------
Corporate Office Atchison, KS Offices 3,907
Atchison Foundry Atchison, KS Steel foundry 451,218
Atchison Pattern Storage Atchison, KS Pattern storage 165,511
St. Joe Machine Shop St. Joseph, MO Machine shop 142,676
Atchison Casting Landfill Atchison, KS Landfill for foundry sand N/A
Amite Amite, LA Steel foundry and machine 339,000
shop
Prospect Minneapolis, MN Iron foundry 133,000
Quaker Alloy Myerstown, PA Steel foundry & landfill 301,000
for foundry sand
Canadian Steel Montreal, Quebec Steel foundry 455,335
Kramer Milwaukee, WI Steel foundry 38,000
Empire Reading, PA Iron and steel foundry 177,000
(planned to be closed)
La Grange La Grange, MO Iron foundry 189,000
G & C Sandusky, OH Iron foundry 111,000
LA Die Casting Los Angeles, CA Aluminum and zinc die 35,000
casting (proposed to be
sold)
Canada Alloy Kitchener, Ontario Steel foundry 83,000
Pennsylvania Steel Hamburg, PA Steel foundry (closed) 158,618
</Table>
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<Table>
<Caption>
FLOOR SPACE IN
NAME LOCATION PRINCIPAL USE SQ. FEET
------------------------------------ ------------------- ----------------------------- -------------------
Jahn Foundry Springfield, MA Iron foundry (proposed to 207,689
be sold)
PrimeCast South Beloit, IL Iron foundry (closed) 320,000
and Beloit, WI
Inverness Dowagiac, MI Aluminum die casting 210,900
Forgemasters Rolls Sheffield and Iron and steel foundry 694,306
Crewe, England and machine shop
and Coatbridge,
Scotland
Forgemasters Engineering Sheffield, England Iron and steel foundry, 1,181,277
forge and machine shop
Claremont Claremont, NH Steel Foundry (closed) 110,000
London Precision London, Ontario Machine Shop 63,000
Autun Autun, France Iron foundry 376,600
</Table>
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<Page>
ITEM 3. LEGAL PROCEEDINGS
An accident, involving an explosion and fire, occurred on February 25,
1999, at Jahn Foundry, located in Springfield, Massachusetts. Nine employees
were seriously injured and there 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 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 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, for (i) 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 financial 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., 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 will
aggressively defend. In addition, Jahn Foundry has brought a Third Party
Counterclaim against Borden and the independent sales representative of the
chemical compound, J.R. Oldhan Company, seeking compensation for losses
sustained in the explosion, including amounts covered by insurance.
On February 26, 2001, Borden filed a Third Party Complaint against the
Company seeking 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 will 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
25
<Page>
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 will
aggressively defend. The Company has filed a cross-claim for contribution
against Borden and J.R. Oldhan Company.
The Company, its chief executive officer, and its chief financial officer
were named as defendants in five lawsuits filed following the Company's
announcements concerning the discovery of accounting irregularities at the
Pennsylvania Foundry Group. The cases have been consolidated before the U.S.
District Court for the District of Kansas. An amended complaint filed after the
consolidation alleges, among other things, that the defendants intentionally or
recklessly issued materially false and misleading financial statements in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. That complaint seeks certification of a class of
purchasers of the Company's common stock between December 10, 1997 and November
3, 2000 and asks for damages for the class in an unspecified amount. Discovery
has been stayed pending the resolution of the defendants' motion to dismiss the
amended complaint. The Company believes the claims are without merit and intends
to defend them vigorously. There can be no assurance, however, that an adverse
outcome with respect to the case 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on June 29, 2001.
Stockholders owning 7,166,639 shares voted in favor of David D. Colburn as
a Class I director. There were 743,955 shares withheld. Stockholders owning
7,138,812 shares voted in favor of Hugh H. Aiken as a Class I director. There
were 771,781 shares withheld. Accordingly, Mr. Colburn and Mr. Aiken were
elected as Class I directors for a term of three years. Previously elected and
continuing to serve their terms are David L. Belluck, Ray H. Witt and Stuart Z.
Uram.
Stockholders owning 3,886,859 shares voted in favor of adopting the
Shareholder Rights Plan and the Rights Agreement dated as of March 28, 2000
between the Company and American Stock Transfer & Trust Company, as amended.
There were 1,891,944 shares voted against, 9,181 shares abstained and 1,901,363
broker non-votes. Accordingly, the Shareholders Rights Plan and the Rights
agreement has been adopted.
26
<Page>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the symbol
"FDY." The following table sets forth the high and low sales prices for the
shares of Common Stock on the New York Stock Exchange for the periods indicated.
<Table>
<Caption>
HIGH LOW
------ -------
FISCAL YEAR ENDING JUNE 30, 2000:
First Quarter.......................................................... 11 3/8 8 11/16
Second Quarter......................................................... 11 8 1/2
Third Quarter.......................................................... 9 1/8 6 9/16
Fourth Quarter......................................................... 8 5/16 5 11/16
FISCAL YEAR ENDING JUNE 30, 2001:
First Quarter.......................................................... 6 3/4 3
Second Quarter......................................................... 4 15/16 2 7/16
Third Quarter.......................................................... 4 2 5/8
Fourth Quarter.......................................................... 3.20 2.25
FISCAL YEAR ENDING JUNE 30, 2002:
First Quarter.......................................................... 4.05 2.55
Second Quarter (through October 9, 2001)............................... 3.00 2.10
</Table>
As of October 9, 2001, there were over 2,200 holders of the Common Stock,
including shares held in nominee or street name by brokers.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on shares of its Common
Stock. The Company does not anticipate paying any cash dividends or other
distributions on its Common Stock in the foreseeable future. The current policy
of the Company's Board of Directors is to reinvest all earnings to finance the
expansion of the Company's business. The agreements governing the Company's
credit facility and $20 million senior notes contain limitations on the
Company's ability to pay dividends. See Note 10 to the consolidated financial
statements.
UNREGISTERED SECURITIES TRANSACTIONS
In lieu of cash compensation for services rendered in their capacity, as
Directors of the Company, Mr. David Belluck, Mr. David D. Colburn, Mr. Ray Witt,
and Mr. Stuart Uram were each provided at their election 8,421 shares of common
stock on September 10, 2001, with a then-current market value of $2.85 per
share. Such transactions were exempt from registration under the Securities Act
of 1993, as amended (the "Act"), pursuant to Section 4(2) of the Act.
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<Page>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected historical consolidated
financial information and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. The information below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Annual Report on Form 10-K.
28
<Page>
<Table>
<Caption>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JUNE 30,
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net Sales....................................... $245,769 $373,107 $477,405 $461,137 $428,150
Cost of Sales................................... 205,480 322,002 417,816 419,299 400,289
-------- -------- -------- -------- --------
Gross Profit............................... 40,289 51,105 59,589 41,838 27,861
Operating Expenses:
Selling, General & Administrative.......... 21,559 28,846 45,290 44,526 44,172
Impairment Charges....................... - - - 16,414 (2) 18,139 (5)
Amortization of Intangibles.............. 632 850 544 (408) (255)
Other Income .............................. - - (2,750)(1) (606)(3) (10,920)
-------- -------- -------- -------- --------
Operating Income (Loss).................... 18,098 21,409 16,505 (18,088) (23,275)
Interest Expense............................... 3,227 3,896 8,352 9,452 11,329
Minority Interest in Net Income (Loss) of
Subsidiaries............................... 270 448 237 66 (57)
-------- -------- -------- -------- --------
Income (Loss) Before Taxes................. 14,601 17,065 7,916 (27,606) (34,547)
Income Taxes................................... 6,100 6,823 4,844 (15,927)(4) 1,892
-------- -------- -------- -------- --------
Net Income (Loss) before Cumulative Effect
of a change in Accounting Principal...... 8,501 10,242 3,072 (11,679) (36,439)
Cumulative Effect on Prior Years of a change
in Accounting for Derivative Financial
Instruments, net of tax - - - - (546)
-------- -------- -------- -------- --------
Net Income (Loss) $8,501 $10,242 $3,072 $(11,679) $(36,985)
======== ======== ======== ======== ========
Earnings (Loss) Per Share:
Basic......................................... $1.47 $1.25 $0.39 $(1.53) $(4.81)
======== ======== ======== ======== ========
Diluted....................................... $1.46 $1.25 $0.39 $(1.53) $(4.81)
======== ======== ======== ======== ========
Weighted Average Number of Common and
Equivalent Shares Outstanding
Basic.........................................5,796,281 8,167,285 7,790,781 7,648,616 7,685,339
Diluted.......................................5,830,695 8,218,686 7,790,781 7,648,616 7,685,339
SUPPLEMENTAL DATA:
Depreciation and Amortization................... $8,667 $11,695 $13,416 $14,198 $13,584
Capital Expenditures ........................... 13,852 17,868 17,899 20,531 11,182
Number of Operating Plants at Period End ....... 13 17 19 19 16
BALANCE SHEET DATA (AT PERIOD END):
Working Capital (Defiency)..................... $56,061 $73,755 $78,932 $5,730 $(52,925)
Total Assets.................................... 211,482 340,981 361,114 342,423 305,873
Long-Term Obligations........................... 27,758 87,272 104,607 36,691 6,648
Total Stockholders' Equity (7).................. 121,504 131,864 128,585 114,333 72,689
</Table>
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<Page>
(1) Other income consists of a $3.5 million gain resulting from a revision to
the flood damage reconstruction reserve, partially offset by a charge of
$750,000 recorded in connection with an industrial accident that occurred
on February 25, 1999 at Jahn Foundry.
(2) Impairment charges consist of a $3.4 million charge relating to the
Company's planned closure of Claremont Foundry, Inc. ("Claremont"), a $6.9
million charge relating to an impairment of long-lived assets at PrimeCast,
Inc., a $3.4 million charge relating to the impairment of long-lived assets
at Pennsylvania Steel Foundry & Machine Company and a $2.7 million charge
relating to an impairment of goodwill at Empire Steel Castings, Inc
("Empire Steel").
(3) Other income consists primarily of gains of $1.1 million on the termination
of interest rate swap agreements.
(4) Includes a $7.8 million deferred income tax benefit relating to the
resolution of the Company's tax treatment of certain flood insurance
proceeds received in fiscal 1995 and 1996.
(5) Impairment charges consist of a $1.6 million charge relating to the
Company's planned closure of Empire Steel, a $2.7 million charge relating
to an impairment of goodwill at Los Angeles Die Casting ("LA Die Casting"
and a $13.9 million charge relating to the impairment of long-lived assets
at Jahn Foundry Corp ("Jahn Foundry").
(6) Includes a $10.9 million gain relating to the industrial accident that
occurred on February 25, 1999 at Jahn Foundry
(7) There have been no cash dividends paid during fiscal year 1997 through
2001.
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<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Prior to fiscal 2000, the Company pursued an active acquisition program
designed to take advantage of consolidation opportunities in the widely
fragmented foundry industry. The Company has acquired nineteen foundries,
closed, or is in the process of closing, four foundries and is in the process of
selling two foundries since its inception. The Company did not make any
acquisitions in fiscal 2000 or 2001 and is not currently contemplating any
acquisitions in fiscal 2002. The Company's primary focus in fiscal 2002 will be
on the integration and improvement of existing operations.
Due to the large size of certain orders, the timing for deliveries of
orders and the number and types of castings produced, the Company's net sales
and net income may fluctuate materially from quarter to quarter. Generally, the
first fiscal quarter is seasonally weaker than the other quarters as a result of
plant shutdowns for maintenance at most of the Company's foundries as well as at
many customers' plants. See "Supplemental Quarterly Information."
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other financial information included elsewhere
in this Report.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
Net sales for fiscal 2001 were $428.2 million, representing a decrease of
$32.9 million, or 7.1%, from net sales of $461.1 million in fiscal 2000. This
7.1% decrease in net sales was due primarily to decreases in net sales to the
offshore oil and gas, military, mining, automotive and power generation markets.
Net sales of Sheffield Forgemasters Group Limited ("Sheffield") for fiscal 2001
decreased $6.6 million from net sales in 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. Through fiscal 2000, 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 fiscal 2001,
PrimeCast's net sales decreased $9.7 million from net sales in fiscal 2000. In
addition, the Company closed Claremont Foundry, Inc. ("Claremont") in November
2000. Claremont's net sales for fiscal 2001 decreased $3.1 million from net
sales in fiscal 2000.
Gross profit for fiscal 2001 decreased by $13.9 million, or 33.3%, to $27.9
million, or 6.5% of net sales, compared to $41.8 million, or 9.1% of net sales,
for 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 mining,
offshore oil and gas, automotive, power generation and military markets. In
addition, increased fuel costs decreased gross profit by approximately $7.0
million in fiscal 2001 compared to fiscal 2000.
Gross profit at Jahn Foundry Corp. ("Jahn Foundry") in fiscal 2001
decreased $4.5 million, to a gross loss of $3.3 million, or 39.4% of net sales,
compared to a gross profit of $1.2 million, or 11.2% of net sales, in 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.
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<Page>
The loss of Beloit as a major customer also had a negative effect on gross
profit. PrimeCast's gross profit for fiscal 2001 decreased by $3.8 million to a
gross loss of $4.3 million, compared to a gross loss of $582,000 for fiscal
2000. The Company completed the closure of PrimeCast by March 31, 2001. As
PrimeCast was the Company's only foundry that could produce large iron castings,
only a portion of PrimeCast's work was transferred to other operations of the
Company.
During fiscal 2001, the Company's reserve for warranty expense decreased to
$9.0 million at June 30, 2001 from $9.8 million at June 30, 2000. The decrease
in the warranty reserve during fiscal 2001 primarily related to the Company's
Sheffield subsidiary located in the United Kingdom. The Company maintains
reserves for warranty charges based on specific claims made by customers, for
which management estimates a final settlement of the claim, and for expected
claims not yet received. The estimate for claims not yet received is based on
historical results and is estimated monthly. During fiscal 2001, the Company's
warranty reserve requirement declined primarily due to better than expected
results relative to the historical estimates for cast back-up rolls.
During fiscal 2001, the Company's reserve for workers' compensation and
employee health care increased to $4.0 million at June 30, 2001 from $3.8
million at June 30, 2000. Workers' compensation and employee health care expense
was $16.8 million for fiscal 2001, compared to $17.4 million in fiscal 2000. The
increase in the reserve for workers' compensation and employee health care
primarily reflects changes in the amount and timing of actual payments.
Selling, general and administrative expense ("SG&A") for fiscal 2001 was
$44.2 million, or 10.3% of net sales, compared to $44.5 million, or 9.7% of net
sales, in 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 fiscal 2001
were expenses of approximately $1.3 million 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 fiscal 2001 were expenses
of approximately $800,000, relating to the investigation of the accounting
irregularities at the Company's Pennsylvania Foundry Group of operations.
Amortization of certain intangibles for fiscal 2001 was $1.4 million, or
0.3% of net sales, compared to $1.5 million, or 0.3% of net sales, in fiscal
2000. The intangible assets consist of goodwill recorded in connection with
certain of the Company's acquisitions. The Company has also recorded a
liability, consisting of the excess of acquired net assets over cost ("negative
goodwill"), in connection with the acquisitions of Canadian Steel Foundries Ltd.
("Canadian Steel") and Fonderie d'Autun ("Autun"). The amortization of negative
goodwill was a credit to income in fiscal 2001 of $1.6 million, or 0.4% of net
sales, as compared to $1.9 million, or 0.4% of net sales, in fiscal 2000. The
liability recorded in connection with the acquisition of Canadian Steel became
fully amortized in the second quarter of fiscal 2000.
Impairment charges for fiscal 2001 were $18.1 million, which consisted of a
$1.6 million fixed asset impairment charge relating to the Company's planned
closure of Empire Steel Castings, Inc. ("Empire Steel"), a $13.9 million fixed
asset impairment charge relating to the Company's intent to sell Jahn Foundry
Corp. ("Jahn Foundry"), and a $2.7 million intangible asset impairment charge
relating to the Company's intent to sell Los Angeles Die Casting Inc. ("LA Die
Casting"). (See below).
Following continued losses in fiscal 2001, the Company announced, on
August 31, 2001, plans to close Empire. Accordingly, the carrying values of
Empire Steel's fixed assets were written down to the Company's estimate of
fair value, which was based on discounted future cash flows. The resulting
impairment charge of $1.6 million to reduce the carrying value of these fixed
assets was recorded in the fourth quarter ended June 30, 2001. Actual
32
<Page>
results could vary significantly from such estimates. Prior to the
impairment charge, these assets had a carrying value of $2.6 million. The
Company plans to close Empire Steel by November 30, 2001, and transfer as
much work as possible to other Company locations. The Company will terminate
approximately 130 employees and will recognize a charge for severance
benefits of approximately $89,000 in the quarter ended December 31, 2001.
The Company is negotiating the sale of substantially all of the assets of
LA Die Casting. Under the terms of the proposed agreement, the Company would
receive approximately $4.5 million in cash in exchange for certain assets and
the assumption of certain liabilities by the buyer, subject to certain
post-closing adjustments. There can be no assurance that a definitive agreement
will ultimately be executed or consummated. If executed and consummated, it is
anticipated that this transaction would close during the second quarter of
fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $2.7 million to write-down the carrying value of the intangible assets
at LA Die Casting to the Company's estimate of fair value. The Company
considered its decision to realign its operations, resulting in its decision to
dispose of LA Die Casting as the primary indicator of impairment. Prior to the
impairment charge, the intangible assets had a carrying value of $3.5 million.
For fiscal years 1999, 2000 and 2001, LA Die Casting recorded net sales of $9.6
million, $9.5 million and $8.2 million, respectively, and net income of
$196,000, $280,000 and $61,000, respectively, excluding the impairment charge in
the fourth quarter of fiscal 2001.
The Company is negotiating the sale of substantially all of the assets
of Jahn Foundry. Under the terms of the proposed agreement, the Company would
receive approximately $500,000 in cash, $500,000 in preferred stock of the
buyer and $1.0 million principal amount over ten years in exchange for
certain assets and the assumption of up to approximately $4.0 million of
certain liabilities by the buyer, subject to certain post-closing
adjustments. There can be no assurance that a definitive agreement will
ultimately be executed or consummated. If executed and consummated, it is
anticipated that this transaction would close during the second quarter of
fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $13.9 million to write-down the carrying value of the fixed assets at
Jahn Foundry to the Company's estimate of fair value. The Company considered its
decision to realign its operations, resulting in its decision to dispose of Jahn
Foundry as the primary indicator of impairment. Prior to the impairment charge,
the fixed assets had a carrying value of $15.9 million. For fiscal years 1999,
2000 and 2001, Jahn Foundry recorded net sales of $12.0 million, $10.7 million
and $8.4 million, respectively, and net income (losses) of $124,000, $(113,000)
and $(2.4) million, respectively, excluding the impairment charge in the fourth
quarter of fiscal 2001 and a non-recurring gain of $10.9 million recorded in the
second quarter of fiscal 2001 relating to insurance claims resulting from the
industrial accident at Jahn Foundry on February 25, 1999.
Other income for fiscal 2001 primarily consisted of $10.9 million of
non-recurring gains relating to the Jahn Foundry industrial accident which
occurred in 1999. This gain 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 (See Note 23). See Liquidity and Capital Resources. Other
income for fiscal 2000 primarily consisted of non-recurring gains of $1.1
million on the termination of interest rate swap agreements. The net gains were
triggered by the Company's early retirement of a term loan.
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Interest expense for fiscal 2001 increased to $11.3 million, or 2.6% of net
sales, from $9.5 million, or 2.0% of net sales, in fiscal 2000. The increase in
interest expense primarily reflects higher average interest rates on the
Company's outstanding indebtedness.
The Company recorded income tax expense of $1.9 million in fiscal 2001. Due
to the Company's current income tax position, no income tax benefit was recorded
in connection with the fixed asset impairment charges discussed above. In
addition, the Company recorded a $6.1 million valuation allowance related to
certain foreign net operating loss carryforwards. This valuation allowance
reduces the deferred tax assets to the amounts that management believes are more
likely than not to be realized. Excluding the $7.8 million deferred income tax
benefit discussed below, the income tax benefit for fiscal 2000 reflected an
effective rate of approximately 29%. The effective tax rate is 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 Nos. 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, 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.
On June 30, 2001 the Company recorded its FX contracts at their fair value
of approximately ($844,000). This resulted in a gain of approximately $66,000.
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 $249,000.
As a result of the foregoing, the net loss increased to $37.0 million in
fiscal 2001 from a net loss of $11.7 million in fiscal 2000.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Net sales for fiscal 2000 were $461.1 million, representing a decrease of
$16.3 million, or 3.4%, from net sales of $477.4 million in fiscal 1999. The
operations acquired by the Company since September 1, 1998 generated net sales
of $26.4 million and $39.2 million in fiscal 1999 and fiscal 2000, respectively,
as follows:
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<Table>
<Caption>
Date FY 1999 FY 2000
Operation Acquired Net Sales Net Sales
------------------------------------------- ----------------- ----------------- ------------------
(In millions) (In millions)
London Precision......................... 09/01/98 $21.9 $21.5
Autun.................................... 02/25/99 4.5 17.7
</Table>
Excluding net sales attributable to the operations acquired since September
1, 1998, net sales for fiscal 2000 were $421.9 million, representing a decrease
of $29.1 million, or 6.5%, from net sales of $451.0 million in fiscal 1999. This
6.5% decrease in net sales was due primarily to decreases in net sales to the
offshore oil and gas, steel, mining and power generation markets, partially
offset by increases in net sales to the military markets. Net sales of Sheffield
for fiscal 2000 decreased $18.0 million from net sales in fiscal 1999. In
addition to the weak market conditions, net sales have also been impacted by the
bankruptcy and subsequent cessation of operations of a major customer at the
Company's PrimeCast subsidiary. Through fiscal 2000, PrimeCast has aggressively
worked at replacing the volume lost from Beloit Corporation, which filed for
bankruptcy in June 1999. During February 2000, Beloit was sold at auction, in
parts, and as a result, the plants to which PrimeCast supplied castings
subsequently ceased operations. For fiscal 2000, PrimeCast's net sales were
$24.5 million compared to net sales of $27.5 million in fiscal 1999. Included in
this $3.0 million decrease was a $3.8 million decrease in net sales to Beloit
Corporation.
Gross profit for fiscal 2000 decreased by $17.8 million, or 29.9%, to $41.8
million, or 9.1% of net sales, compared to $59.6 million, or 12.5% of net sales,
for fiscal 1999. The decrease in gross profit and gross profit as a percentage
of net sales was primarily due to lower net sales and reduced absorption of
overhead at the Company's subsidiaries which primarily serve the mining,
offshore oil and gas, power generation and steel markets. The largest impact of
these weak market conditions was at Sheffield, where its gross profit for fiscal
2000 decreased by $10.2 million to $10.2 million, or 8.9% of net sales, compared
to $20.4 million, or 15.4% of net sales, in fiscal 1999.
The bankruptcy of a major customer at PrimeCast and, with a lesser impact,
the loss of a major customer at Claremont have also had a negative effect on
gross profit. Lower sales volume, coupled with the costs of developing new
customers and training employees on new work has resulted in lower gross profits
at these operations. PrimeCast's gross profit for fiscal 2000 decreased by $2.4
million to a gross loss of $582,000, compared to a gross profit of $1.8 million
for fiscal 1999. Claremont's gross profit in fiscal 2000 was a loss of $1.5
million on net sales of $4.0 million, compared to a loss of $1.0 million on net
sales of $7.1 million in fiscal 1999. The Company closed Claremont, and
transferred much of the work to other Company operations. The Company completed
the closure of PrimeCast by March 31, 2001. As PrimeCast was the Company's only
foundry that could produce large iron castings, only a portion of PrimeCast's
work can be transferred to other operations of the Company.
Lower net sales to the energy and utility markets at the Company's
Pennsylvania steel foundries also had a negative effect on gross profit.
Pennsylvania Steel's gross profit for fiscal 2000 decreased by $1.0 million to a
gross loss of $3.7 million, compared to a gross loss of $2.7 million from fiscal
1999. Empire Steel's gross profit from fiscal 2000 decreased by $1.9 million to
a gross loss of $1.7 million, compared to a gross profit of $197,000 for fiscal
1999. On November 30, 2000, the Company announced plans to close Pennsylvania
Steel. The closure was completed by February 28, 2001. Much of Pennsylvania
Steel's work was transferred to the Company's other foundries.
During fiscal 2000, the Company's reserve for warranty expense decreased to
$10.2 million at June 30, 2000 from $11.8 million at June 30, 1999. Warranty
expense recorded by the Company in
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fiscal 2000 was a credit to income of $685,000 compared to a credit to income of
$1.7 million in fiscal 1999. The decrease in the warranty reserve during fiscal
2000 primarily related to the Company's Sheffield subsidiary located in the
United Kingdom. The Company maintains reserves for warranty charges based on
specific claims made by customers, for which management estimates a final
settlement of the claim, and for expected claims not yet received. The estimate
for claims not yet received is based on historical results and is estimated
monthly. During fiscal 2000, the Company's warranty reserve requirement and
related expense declined primarily due to the resolution of specific warranty
claims with three different customers whose products were replaced or determined
by the customer to be satisfactory.
During fiscal 2000, the Company's reserve for workers' compensation and
employee health care increased to $3.8 million at June 30, 2000 from $3.2
million at June 30, 1999. Workers' compensation and employee health care expense
was $17.4 million for fiscal 2000, compared to $14.6 million in fiscal 1999,
primarily reflecting higher health care costs. The increase in the reserve for
workers' compensation and employee health care primarily reflects changes in the
amount and timing of actual payments.
Selling, general and administrative expense ("SG&A") for fiscal 2000 was
$44.5 million, or 9.7% of net sales, compared to $45.3 million, or 9.5% of net
sales, in fiscal 1999. The decrease in SG&A was primarily attributable to the
consolidation of four operating units into two at Sheffield, partially offset by
expenses associated with Autun, which was acquired on February 25, 1999.
Amortization of certain intangibles for fiscal 2000 was $1.5 million, or
0.3% of net sales, compared to $1.4 million, or 0.3% of net sales, in fiscal
1999. The intangible assets consist of goodwill recorded in connection with
certain of the Company's acquisitions. The Company has also recorded a
liability, consisting of the excess of acquired net assets over cost ("negative
goodwill"), in connection with the acquisitions of Canadian Steel and Autun. The
amortization of negative goodwill was a credit to income in fiscal 2000 of $1.9
million, or 0.4% of net sales, as compared to $870,000, or 0.2% of net sales, in
fiscal 1999.
Impairment charges for fiscal 2000 were $16.4 million. This $16.4 million
reflects a $3.4 million charge relating to the Company's closure of Claremont
and a $6.9 million fixed asset impairment charge at PrimeCast, a $3.4 million
charge relating to the fixed asset impairment charge at Pennsylvania Steel and a
$2.7 million charge relating to an impairment of goodwill at Empire Steel.
Other income for fiscal 2000 primarily consisted of non-recurring gains of
$1.1 million on the termination of interest rate swap agreements. Other income
for fiscal 1999 was $2.8 million. Following the July 1993 Missouri River flood,
the Company established a reserve to repair long-term damage caused by the flood
to the Company's plant. During fiscal 1999, the Company revised this estimate
downward resulting in a non-recurring gain of $3.5 million. Partially offsetting
this 1999 gain was a charge of $750,000 related to an industrial accident at
Jahn Foundry (see Liquidity and Capital Resources).
During fiscal 2000, the Board of Directors committed to a plan for the
closure of Claremont due to continued operating losses. The Company recorded a
charge of $3.4 million primarily to reduce the carrying value of the Claremont
fixed assets to estimated fair value. The Company transferred as much work as
possible to other ACC foundries by November 30, 2000 and closed the plant. The
Company terminated approximately 45 employees and recognized a charge for
severance benefits of approximately $113,000 in the quarter ended September 30,
2000.
On July 1, 1997, a newly formed subsidiary of the Company, PrimeCast,
acquired the foundry division of Beloit for $8.2 million. Simultaneous with the
purchase, PrimeCast entered a five-year supply agreement to supply castings to
Beloit. As a captive supplier, historically over 40% of this
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operation's sales had been to Beloit. In June 1999, Beloit declared bankruptcy,
in combination with the bankruptcy of its parent, Harnischfeger Industries.
Beloit continued to operate in bankruptcy, and the court granted Beloit's
request to re-instate the five-year casting supply agreement. In February 2000,
Beloit was sold at auction, in parts. Expectations were that the new owners
would continue to operate the former Beloit business which PrimeCast primarily
served. This business consisted primarily of paper mill equipment and was
located in Beloit, Wisconsin. However, ultimately these parts of the former
Beloit were closed, resulting in the elimination of this work for PrimeCast, and
the termination of the five-year supply agreement. These events have caused
PrimeCast to operate at a substantial loss, due to much lower production volume
and a less profitable mix of work. As a result, the carrying value of
PrimeCast's long-lived assets have been determined to be impaired. The Company
recorded an impairment charge of $6.9 million relating to the fixed assets at
PrimeCast. Following continued losses in the first half of fiscal 2001, the
Company announced on January 23, 2001 plans to close PrimeCast. The closure was
completed by March 31, 2001. 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 ACC locations. The Company terminated approximately 225
employees and will recognize a charge for severance benefits of approximately
$175,000 in the quarter ended March 31, 2001.
The Company acquired Quaker Alloy, Empire Steel and Pennsylvania Steel on
June 1, 1994, February 1, 1995 and October 31, 1996, respectively. Each
primarily serves the energy and utility markets. The operations and management
of these three Pennsylvania steel foundries were subsequently combined to
achieve operating and marketing synergies. The three locations were marketed as
the Pennsylvania Foundry Group. Following the discovery of the accounting
irregularities, which revealed substantial operating losses at each of the three
operations, the Company evaluated each operation for potential impairment. As a
result, the carrying value of certain of Pennsylvania Steel's and Empire Steel's
long-lived assets have been determined to be impaired. The Company recorded, in
the fourth quarter of fiscal 2000, a charge of $6.2 million primarily to reduce
the carrying value of the fixed assets of Pennsylvania Steel to estimated fair
value and to write-off the impaired value of goodwill at Empire Steel. On
November 30, 2000, the Company announced plans to close Pennsylvania Steel. The
closure was completed by February 28, 2001. Much of the work was transferred to
the remaining two locations. The Company terminated approximately 75 employees
and will recognize a charge for severance benefits of approximately $20,000 in
the quarter ended March 31, 2001.
Interest expense for fiscal 2000 increased to $9.5 million, or 2.0% of net
sales, from $8.4 million, or 1.7% of net sales, in fiscal 1999. The increase in
interest expense primarily reflects higher average interest rates on the
Company's outstanding indebtedness.
The Company has recorded a $7.8 million deferred income tax benefit in
fiscal 2000 with respect to the reinvestment of certain flood insurance proceeds
received in 1995 and 1996. The Company recorded pretax gains of approximately
$20.1 million in 1995 and 1996 related to insurance proceeds resulting from
flood damage to the Company's Atchison, Kansas foundry in July 1993. For federal
income tax purposes, the Company treated the flood as an involuntary conversion
event under the Internal Revenue Code ("Code") and related Treasury Regulations.
The Code provides generally that if certain conditions are met, gains on
insurance proceeds from an involuntary conversion are not taxable if the
proceeds are reinvested in qualified replacement property within two years after
the close of the first taxable year in which any part of the conversion gain is
realized. The Company believed that its treatment of certain foundry subsidiary
stock acquisitions as qualified replacement property was subject to potential
challenge by the Internal Revenue Service ("Service") and, accordingly, the
Company recorded income tax expense on the insurance gains in 1996 pending
review of its position by the Service or the expiration of the statute
37
<Page>
of limitations under the Code for the Service to assess income taxes with
respect to the Company's position.
The Company's treatment of certain foundry subsidiary stock acquisitions as
qualified replacement property creates differing basis in the foundry subsidiary
stock for financial statement and tax purposes. These differences have not been
recognized as taxable temporary differences under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," since the
subsidiary basis differences can be permanently deferred through subsidiary
mergers or tax-free liquidations. On March 15, 2000, the statute of limitations
for the Service to assess taxes with respect to the Company's position expired.
The deferred taxes recorded in the consolidated financial statements in prior
years were no longer required.
Excluding this $7.8 million deferred income tax benefit, the income tax
benefit for fiscal 2000 reflected an effective rate of approximately 29%, which
is lower than the combined federal, state and provincial statutory rate
primarily due to the impact of nondeductible goodwill and foreign dividends.
Income tax expense for fiscal 1999 reflected an effective rate of approximately
59%. The Company's combined effective tax rate reflects the different federal,
state and provincial statutory rates of the various jurisdictions in which the
Company operates, and the proportion of taxable income earned in each of those
tax jurisdictions.
As a result of the foregoing, net income decreased from $3.1 million in
fiscal 1999 to a net loss of $11.7 million in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed operations with internally generated
funds, proceeds from the sale of senior notes and available borrowings under its
bank credit facilities. Cash provided by operating activities for fiscal 2001
was $3.3 million, a decrease of $11.7 million from fiscal 2000. This decrease
was primarily attributable to the net loss incurred by the Company. Partially
offsetting this was the accelerated collection of trade receivable balances and
more aggressive management of trade payable balances.
Working capital was a negative $52.9 million at June 30, 2001, as compared
to $5.7 million at June 30, 2000. The working capital levels primarily reflect
the reclassification of $105.3 million and $72.8 million of the Company's bank
credit facility, term loan and senior notes with an insurance company as current
at June 30, 2001 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 fiscal 2001, the Company made capital expenditures of $11.2 million,
as compared to $20.5 million for fiscal 2000. Included in fiscal 2001 and fiscal
2000 were capital expenditures of $4.1 million and $7.7 million, respectively,
to rebuild the shell molding area and boiler room damaged in the industrial
accident in 1999 at Jahn Foundry. (see below) Fiscal 2000 also included $2.7
million to expand Autun's product line capabilities in the manufacture of gray
and ductile iron castings. The balance of capital expenditures in both periods
were used for routine projects at each of the Company's facilities. The Company
currently expects to make approximately $10.0 million of capital expenditures
during fiscal 2002.
As described above, the Company has closed Pennsylvania Steel and PrimeCast
and is in the process of closing Empire Steel. Much of the work at Pennsylvania
Steel and Empire was transferred to Quaker Alloy. As PrimeCast was the Company's
only foundry that could make large iron castings, only a portion of PrimeCast's
work was transferred to other Company operations.
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As discussed above, the Company is also in the process of selling
substantially all of the assets of LA Die Casting and Jahn Foundry. If
definitive agreements are executed and consummated, the Company currently
expects the sales will be completed during the second quarter of fiscal 2002.
The Company has four primary credit facilities: a revolving credit facility
with Harris Trust and Savings Bank, as agent for several lenders (the "Credit
Agreement"); senior notes (the "Notes") with an insurance company issued under a
note purchase agreement (the "Note Purchase Agreement"); a term loan with
General Electric Capital Corporation (the "GE Financing"); and a receivables
program combined with a revolving credit facility with Burdale Financial Limited
pursuant to a facility agreement (the "Facility Agreement"). Each of these
facilities require compliance with various covenants, including, but not limited
to, financial covenants related to equity levels, cash flow requirements, fixed
charge coverage ratios and ratios of debt to equity.
The Credit Agreement, as amended, currently consists of a $75.5 million
revolving credit facility, which is secured by substantially all of the
Company's North American assets. In addition to the financial covenants, the
Credit Agreement contains customary restrictions on, among other things,
acquisitions, additional indebtedness, further investments in Autun and the use
of net proceeds from the sale of assets (other than inventory), insurance
settlements and other non-recurring items . Loans under this revolving credit
facility 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%.
At June 30, 2001, Notes with an aggregate principal amount of $11.4 million
were outstanding with interest accruing at 10.19% per year. The Note Purchase
Agreement provides for annual principal payments of $2.9 million, the most
recent of which has not been paid. The Notes are secured by the same assets that
secure the Credit Agreement and contain similar restrictions to those described
above under the Credit Agreement.
In September 2001, the Company entered into the Eleventh Amendment and
Forbearance Agreement to the Credit Agreement and the Eighth Amendment and
Forbearance Agreement to the Note Purchase Agreement. These amendments provide
that, among other things, these lenders will forbear from enforcing their rights
with respect to certain existing defaults through October 12, 2001. These
amendments also allowed ACUK to enter into the Facility Agreement.
At June 30, 2001, the balance of the term loan under the GE Financing was
$29.8 million. This loan provides for monthly principal payments of $291,667
plus accrued interest. The GE Financing is secured by certain of the Company's
fixed assets, real estate, equipment, furniture and fixtures located in
Atchison, Kansas and St. Joseph, Missouri, matures in December 2004 and bears
interest at a fixed rate of 9.05% per year. General Electric Capital Corporation
has agreed to forbear from enforcing its rights with respect to certain events
of default under the GE Financing through September 30, 2001.
In September 2001, ACUK, a subsidiary of the Company and its subsidiaries,
and Burdale Financial Limited entered into the Facility Agreement This Facility
Agreement provides for a 25 million British pound facility (approximately $35
million US) to be used to fund working capital requirements at Sheffield, a
subsidiary of ACUK, and up to $1.0 million British pounds for working capital at
Autun, the Company's subsidiary in France. In addition, the Facility Agreement
will provide security for Sheffield's foreign currency exchange contracts and
performance bond commitments, repay $5.0 million of an intercompany working
capital loan ($1.1 million of which was paid to certain of the lenders as
principal payments) and may provide for a loan of up to $9.0 million of some
additional working capital funds in North America, subject to availability and
other restrictions in the U.K. This facility matures on September 17, 2004 and
is secured by substantially
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all of Sheffield's assets in the U.K. Loans under this Facility Agreement will
bear interest at LIBOR plus 2.60%. The Company is currently in compliance with
the covenants under the Facility Agreement.
Cash requirements for fiscal 2001 have been negatively affected by (1)
significantly higher fuel costs (approximately $7.0 million higher than 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 (approximately $800,000 through June 30, 2001), and (3) nonrecurring
fees and appraisal and audit expenses (approximately $1.3 million through June
30, 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 under the Credit Agreement
and the Note Purchase Agreement have foregone their rights to accelerate their
debt and foreclose on their collateral through October 12, 2001. 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 and to date in fiscal 2002, the Company borrowed the
full amount of the revolving credit facility under the Credit Agreement and
managed its cash position accordingly. To date, the Company has been able to
meet its cash needs by traditional cash management procedures in addition to:
(1) the collection of tax refunds resulting from 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, (3) the reduction of expenses after
closing locations operating with a negative cash flow, and (4) recently, funds
available through the Facility Agreement, particularly for its operations in the
U.K. and France. The Company is also seeking the recovery under various
insurance policies for losses due to the accounting irregularities at the
Pennsylvania Foundry Group and the industrial accident at Jahn Foundry. In
addition, the Company is pursuing other responsible parties. There can be no
assurance that such actions will be successful in recovering funds or that they
will allow the Company to operate without additional borrowing capacity.
Compliance with certain financial covenants under the Credit Agreement,
Note Purchase Agreement and the GE Financing is determined on a
"trailing-twelve-month" basis. The results for fiscal 2001 were below results
needed to achieve compliance with these covenants under the Credit Agreement,
Note Purchase Agreement and the GE Financing. Accordingly, the Company is
currently negotiating with new and existing financial institutions to extend its
current arrangements while it attempts to establish a new credit facility with
covenants that the Company believes it will be able to satisfy and 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 and the
Facility Agreement will be adequate to fund its capital expenditure and working
capital requirements through June 2002. 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 could recur. In addition, future revenue may be negatively
affected if the markets that the Company serves weaken as a result of terrorist
activities on and after September 11, 2001 and any related military responses.
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. If the lenders accelerate
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<Page>
their indebtedness, there can be no assurance that the Company would be able to
locate alternative sources of financing.
Total indebtedness of the Company at June 30, 2001 was $121.5 million, as
compared to $117.6 million at June 30, 2000. This increase of $3.9 million
primarily reflects indebtedness incurred to fund the Company's capital
expenditures and operating losses. At June 30, 2001 the Company had fully
utilized its revolving credit facility.
An accident, involving an explosion and fire, occurred on February 25,
1999, at Jahn Foundry, located in Springfield, Massachusetts. Nine employees
were seriously injured and there 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 fully 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 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, for (i) 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 financial 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.
Following the accident, OSHA conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items. Neither of
the two violations specifically addressing conditions related to the explosion
and fire were classified as serious or willful. Without admitting any
wrongdoing, Jahn Foundry entered into a
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settlement with OSHA that addresses the alleged work place safety issues and
agreed to pay $148,500 in fines.
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., 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 will
aggressively defend. In addition, Jahn Foundry has brought a Third Party
Counterclaim against Borden and the independent sales representative of the
chemical compound, J. R. Oldhan Company, seeking compensation for losses
sustained in the explosion, including amounts covered by insurance.
On February 26, 2001, Borden filed a Third Party Complaint against the
Company seeking 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 will aggressively defend.
On March 30, 2001, the plaintiffs amended their complaint by adding the
Company as a 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 will aggressively
defend. The Company has filed a cross-claim for contribution against Borden and
J.R. Oldhan Company.
The Company, its chief executive officer, and its chief financial officer
were named as defendants in five lawsuits filed following the Company's
announcements concerning the discovery of accounting irregularities at the
Pennsylvania Foundry Group. The cases have been consolidated before the U.S.
District Court for the District of Kansas. An amended complaint filed after the
consolidation alleges, among other things, that the defendants intentionally or
recklessly issued materially false and misleading financial statements in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. That complaint seeks certification of a class of
purchasers of the Company's common stock between December 10, 1997 and November
3, 2000 and asks for damages for the class in an unspecified amount. Discovery
has been stayed pending the resolution of the defendants' motion to dismiss the
amended complaint. The Company believes the claims are without merit and intends
to defend them vigorously. There can be no assurance, however, that an adverse
outcome with respect to the case will not have a material adverse impact on the
Company's financial condition, results of operations, or cash flows.
MARKET RISK
The Company operates manufacturing facilities in the U.S., Canada and
Europe and utilizes fixed and floating rate debt to finance its global
operations. As a result, the Company is subject to business risks inherent in
non-U.S. activities, including political and economic uncertainty, import and
export limitations, and market risk related to changes in interest rates and
foreign currency exchange rates. The Company believes the political and economic
risks related to its foreign operations are mitigated
42
<Page>
due to the stability of the countries in which its largest foreign operations
are located.
In the normal course of business, the Company uses derivative financial
instruments including interest rate swaps and foreign currency forward exchange
contracts to manage its market risks, although, at June 30, 2001, the Company
had no outstanding interest rate swap agreements. Additional information
regarding the Company's financial instruments is contained in Note 12 to the
Company's consolidated financial statements. The Company's objective in managing
its exposure to changes in interest rates is to limit the impact of such changes
on earnings and cash flow and to lower its overall borrowing costs. The
Company's objective in managing its exposure to changes in foreign currency
exchange rates is to reduce volatility on earnings and cash flow associated with
such changes. The Company's principal currency exposures are in the major
European currencies and the Canadian dollar. The Company does not hold
derivatives for trading purposes.
For 2001 and 2000, the Company's exposure to market risk has been estimated
using sensitivity analysis, which is defined as the change in the fair value of
a derivative or financial instrument assuming a hypothetical 10% adverse change
in market rates or prices. The Company used current market rates on its debt and
derivative portfolio to perform the sensitivity analysis. Certain items such as
lease contracts, insurance contracts, and obligations for pension and other
post-retirement benefits were not included in the analysis. The results of the
sensitivity analyses are summarized below. Actual changes in interest rates or
market prices may differ from the hypothetical changes.
The Company's primary interest rate exposures relate to its cash and
short-term investments and fixed and variable rate debt. The potential loss in
fair values is based on an immediate change in the net present values of the
Company's interest rate-sensitive exposures resulting from a 10% change in
interest rates. The potential change 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
impact the Company's earnings by approximately $900,000 and $500,000 in fiscal
2001 and 2000, respectively.
The Company's exposure to fluctuations in currency rates against the
British pound sterling and Canadian dollar result from the Company's holdings in
cash and short-term investments and its utilization of foreign currency forward
exchange contracts to hedge customer receivables and firm commitments. The
potential loss in fair values is based on an immediate change in the U.S. dollar
equivalent balances of the Company's currency exposures due to a 10% shift in
exchange rates versus the British pound sterling and Canadian dollar. The
potential loss in cash flows and earnings is based on the change in cash flow
and earnings over a one-year period resulting from an immediate 10% change in
currency exchange rates versus the British pound sterling and Canadian dollar.
Based on the Company's holdings of financial instruments at June 30, 2001 and
2000, a hypothetical 10% depreciation in the pound sterling and the Canadian
dollar versus all other currencies would impact the Company's earnings by
approximately $3.7 million and $1.7 million in fiscal 2001 and 2000,
respectively. This analysis does not include the offsetting impact from the
Company's underlying hedged exposures (customer receivables and firm
commitments). If the Company included these underlying hedged exposures in its
sensitivity analysis, these exposures would substantially offset the financial
impact of its foreign currency forward exchange contracts due to changes in
currency rates.
INFLATION
Management does not believe that the Company's operations have been
materially adversely affected by inflation or changing prices.
43
<Page>
FORWARD-LOOKING STATEMENTS
Statements above in the subsections entitled "General," "Legal
Proceedings," "Liquidity and Capital Resources" and "Market Risk," and in the
Letter to Stockholders, 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: costs of closing foundries, success in selling
Jahn Foundry and LA Die Casting, the impact that terrorist activities on and
after September 11, 2001 may have on the markets served by the Company, 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, 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.
NEW ACCOUNTING STANDARDS
For a discussion of new accounting standards, see Note 1 of the Company's
Notes to Consolidated Financial Statements.
SUPPLEMENTAL QUARTERLY INFORMATION
The Company's business is characterized by large unit and dollar volume
customer orders. As a result, the Company has experienced and may continue to
experience fluctuations in its net sales and net income from quarter to quarter.
Generally, the first fiscal quarter is seasonally weaker than the other quarters
as a result of plant shutdowns for maintenance at most of the Company's
foundries as well as at many customers' plants. In addition, the Company's
operating results may be adversely affected in fiscal quarters immediately
following the consummation of an acquisition while the operations of the
acquired business are integrated into the operations of the Company.
The selected unaudited supplemental quarterly results for fiscal 2000 and
fiscal 2001 are included in Note 15 to the consolidated financial statements.
44
<Page>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference
to the section entitled "Market Risk" in the Company's Management's Discussion
and Analysis of Financial Condition and Results of Operations in this Annual
Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this
Item, beginning on page F-1 of this Report. The financial statement schedule
required to be filed under Regulation S-X. is filed on page 49 of this report.
Selected quarterly financial data required under this item is included in
Note 15 to the consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
45
<Page>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Registrant's Proxy Statement for the
2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. The
required information as to executive officers is set forth in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
46
<Page>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<Table>
<Caption>
PAGE
NUMBER
------
(a) DOCUMENTS LIST
(1) The following financial statements are included in Part II Item 8:
Independent Auditors' Report F-1
Consolidated Balance Sheets -- June 30, 2000 and 2001 F-2
Consolidated Statements of Operations -- Years Ended June 30,
1999, 2000 and 2001 F-4
Consolidated Statements of Comprehensive Income (Loss) -- Years
Ended June 30, 1999, 2000 and 2001 F-5
Consolidated Statements of Stockholders' Equity -- Years Ended
June 30, 1999, 2000 and 2001 F-6
Consolidated Statements of Cash Flows -- Years Ended June 30,
1999, 2000 and 2001 F-7
Notes to Consolidated Financial Statements F-8
(2) Financial Statement Schedules
Valuation and Qualifying Accounts Schedules 49
(3) List of Exhibits:
Exhibits required by Item 601 of Regulation S-K are
listed in the Exhibit Index which is incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K dated April 24, 2001.
Items Reported:
Item 5. Other Events - Press Release dated April 24, 2001
announcing that the Company would be filing an amended annual
report on Form 10-K/A containing restated financial results
for the fiscal years 1998-2000, describing organizational
changes
47
<Page>
and loan amendments, discussing other developments and
announcing the rescheduled annual meeting of stockholders.
Item 7. Exhibits
(1) Press Release dated April 24, 2001
The Company filed a Form 8-K dated May 11, 2001.
Items Reported:
Item 5. The Company issued a press release announcing results for
the first three quarters and nine months of 2001 and restated
results for prior periods.
Item 7. Financial Statements and Exhibits
(1) Press Release dated May 11, 2001
The Company filed a Form 8-K dated June 8, 2001.
Items Reported:
Item 5. The Company issued a press release revising earnings
guidance included in its press release of May 11, 2001.
Item 7. Financial Statements and Exhibits
(1) Press Release dated June 8, 2001
The Company filed a Form 8-K dated June 29, 2001.
Items Reported:
Item 5. The Company issued a press release announcing backlog
improvements and other matters to be discussed at the Annual
Meeting.
Item 7. Financial Statements and Exhibits
(1) Press Release dated June 29, 2001
(c) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section to this report.
(d) FINANCIAL STATEMENTS SCHEDULES
The consolidated financial statement schedules required by this Item
are listed under Item 14(a)(2).
</Table>
48
<Page>
Financial Statement Schedules - Valuation and Qualifying Accounts Schedule
(in thousands)
ACCOUNTS RECEIVABLE ALLOWANCE
<Table>
<Caption>
BEGINNING ADDITIONS TO DEDUCTION FROM ENDING
BALANCE (EXPENSE) (WRITEOFFS) BALANCE
--------- ------------ -------------- -------
Fiscal 2001 $ 584 $ 1,089 $828 $845
Fiscal 2000 259 855 530 584
Fiscal 1999 197 282 220 259
</Table>
RESERVE FOR FLOOD REPAIRS
<Table>
<Caption>
DEDUCTIONS FROM
BEGINNING ADDITIONS TO ------------------------- ENDING
BALANCE (EXPENSE) PAYMENTS ADJUSTMENTS BALANCE
--------- ------------ -------- ----------- -------
Fiscal 2001 $ 645 - $ 48 $ - $ 597
Fiscal 2000 1,197 - 552 - 645
Fiscal 1999 5,932 - 1,235 3,500 1,197
</Table>
49
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATCHISON CASTING CORPORATION
(Registrant)
By: /s/ Hugh H. Aiken
---------------------------
Hugh H. Aiken
Principal Executive Officer
Dated: October 9, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Hugh H. Aiken Chairman of the Board, October 9, 2001
--------------------------- President, Chief Executive
Hugh H. Aiken Officer and Director
(Principal Executive Officer)
/s/ Stuart Z. Uram Director October 9, 2001
---------------------------
Stuart Z. Uram
/s/ David L. Belluck Director October 12, 2001
---------------------------
David L. Belluck
/s/ Ray H. Witt Director October 9, 2001
--------------------------- -
Ray H. Witt
/s/ Kevin T. McDermed Vice President, Chief October 10, 2001
--------------------------- Financial Officer, Treasurer
Kevin T. McDermed and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
</Table>
50
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
-------
3.1 Articles of Incorporation of Atchison Casting Corporation, a
Kansas corporation (incorporated by reference to Exhibit 4.1
of the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994)
3.2 Amended and Restated By-Laws of Atchison Casting Corporation,
a Kansas corporation (incorporated by reference to Exhibit 3.2
of the Company's Current Report on Form 8-K filed May 19,
2000)
4.0 Long-term debt instruments of the Company in amounts not
exceeding 10% of the total assets of the Company and its
subsidiaries on a consolidated basis will be furnished to the
Commission upon request
4.1(a) The Amended and Restated Credit Agreement dated as of April 3,
1998, among the Company, the Banks party thereto and Harris
Trust and Savings Bank, as Agent (incorporated by reference to
Exhibit 4.1(a) of the Company's Current Report on Form 8-K
filed April 16, 1998)
4.1(b) Pledge and Security Agreement dated as of April 3, 1998,
between the Company and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.1(b) of Form 8-K
filed April 16, 1998)
4.1(c) First Amendment to Amended and Restated Credit Agreement dated
as of October 7, 1998, among the Company, the Banks party
thereto and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1998)
4.1(d) Second Amendment to the Amended and Restated Credit Agreement
dated as of April 23, 1999, among the Company, the Banks party
thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999)
4.1(e) Third Amendment to the Amended and Restated Credit Agreement
dated as of August 20, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1(e) of the Company's
Form 10-K for the year ended June 30, 1999)
4.1(f) Fourth Amendment to the Amended and Restated Credit Agreement
dated as of November 5, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999)
4.1(g) Fifth Amendment to the Amended and Restated Credit Agreement
dated as of December 21, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999)
</Table>
51
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
-------
4.1(h) Sixth Amendment to the Amended and Restated Credit Agreement
dated as of February 15, 1999, among the Company, the Banks
party thereto, and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000)
4.1(i) Seventh Amendment and Waiver to the Amended and Restated
Credit Agreement dated as of May 1, 2000, among the Company,
the Banks party thereto, and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000)
4.1(j) Eighth Amendment and Waiver to the Amended and Restated Credit
Agreement dated as of June 30, 2000, among the Company, the
Banks party thereto, and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.1(j) of the
Company's Annual Report on Form 10-K for the year ended June
30, 2000)
4.1(k) Ninth Amendment and Waiver to the Amended and Restated Credit
Agreement dated as of July 31, 2000, among the Company, the
Banks party thereto, and Harris Trust and Savings Bank, as
Agent (incorporated by reference to Exhibit 4.1(k) of the
Company's Annual Report on Form 10-K for the year ended June
30, 2000)
4.1(l) Tenth Amendment and Forbearance Agreement dated as of April
13, 2001 (the "Tenth Amendment"), among the Company, the Banks
party thereto and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 (l) of the Company's
Amended Report on Form 10-K/A filed on April 24, 2001)
4.1(m) Letter Agreement dated July 30, 2001 modifying the Tenth
Amendment
4.1(n) Letter Agreement dated August 20, 2001 further modifying the
Tenth Amendment
4.1(o) Eleventh Amendment and Forbearance Agreement dated as of
September 12, 2001 (the "Eleventh Amendment"), among the
Company, the Banks party thereto and Harris Trust and Savings
Bank, as agent.
4.1(p) Letter Agreement dated September 20, 2001 modifying the
Eleventh Amendment
4.2 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 of Amendment No. 2 to Form S-2
Registration Statement No. 333-25157 filed May 19, 1997)
4.3(a) Rights Agreement, dated as of March 28, 2000 between Atchison
Casting Corporation and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1 of the Company's Form 8-A Registration Statement filed March
28, 2000)
4.3(b) Amendment No. 1 to Rights Agreement dated as of
November 17, 2000 between the Company and American Stock
Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 4.3(b) of the Company's Amended Annual
Report on Form 10-K/A filed on April 24, 2001)
</Table>
52
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
-------
4.4(a) Facility Agreement dated as of September 17, 2001, among
Atchison Casting UK Limited, Sheffield Forgemasters Rolls
Limited, Sheffield Forgemasters Engineering Limited and
Burdale Financial Limited
4.4(b) Deed of Debenture dated as of September 17, 2001, among
Atchison Casting UK Limited, its subsidiaries and Burdale
Financial Limited
10.1(a)* Employment Agreement between the Company and Hugh H. Aiken
dated as of June 14,1991 (incorporated by reference to Exhibit
10.1 of Form S-1 Registration Statement No. 33-67774 filed
August 23, 1993)
10.1(b)* Amendment No. 1 dated as of September 27, 1993 to Employment
Agreement between the Company and Hugh H. Aiken (incorporated
by reference to Exhibit 10.1(b) of Amendment No. 1 to Form S-1
Registration Statement No. 33-67774 filed September 27, 1993)
10.1(c)* Amendment No.2 dated as of September 10, 1998 to Employment
Agreement between the Company and Hugh H. Aiken (incorporated
by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998)
10.2* Atchison Casting 1993 Incentive Stock Plan (incorporated by
reference to Exhibit 10.7 of Form S-1 Registration Statement
No. 33-67774 filed August 23, 1993)
10.3 Confidentiality and Noncompetition Agreements by and among the
Company and executive officers of the Company (incorporated by
reference to Exhibit 10.8 of Form S-1 Registration Statement
No. 33-67774 filed August 23, 1993)
10.4* Atchison Casting Non-Employee Director Option Plan
(incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the year ended June 30, 1994)
10.5* Plan for conversion of subsidiary stock to Atchison Casting
Corporation stock (incorporated by reference to Exhibit 10.3
of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994)
10.6 The Share Exchange Agreement dated April 6, 1998 in respect of
the ordinary shares of Sheffield by and among David Fletcher
and others, ACUK and the Company (incorporated by reference to
Exhibit 10.1 of Form 8-K filed April 16, 1998)
10.7(a)* Service Agreement between Sheffield and David Fletcher dated
November 1, 1988 (incorporated by reference to Exhibit
10.10(a) of the Company's Annual Report on Form 10-K for the
year ended June 30, 1998)
10.7(b)* Novation Agreement between Sheffield and David Fletcher dated
May 2, 1996. (incorporated by reference to Exhibit 10.10(b) of
the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
</Table>
53
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
-------
10.7(c)* Letter Agreement between Sheffield and David Fletcher dated
May 2, 1996. (incorporated by reference to Exhibit 10.10(c) of
the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP and Report on Schedules
</Table>
* Represents a management contract or a compensatory plan or arrangement.
54
<Page>
ATCHISON CASTING
CORPORATION AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 2001 AND 2000, AND FOR EACH OF THE THREE
YEARS IN THE PERIOD ENDED JUNE 30, 2001, AND
INDEPENDENT AUDITORS' REPORT
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2000 and 2001 F-2-F-3
Consolidated Statements of Operations - Years Ended June 30, 1999, 2000 and 2001 F-4
Consolidated Statements of Comprehensive Income (Loss) - Years Ended
June 30, 1999, 2000 and 2001 F-5
Consolidated Statements of Stockholders' Equity - Years Ended
June 30, 1999, 2000 and 2001 F-6
Consolidated Statements of Cash Flows - Years Ended June 30, 1999, 2000 and 2001 F-7
Notes to Consolidated Financial Statements F-8-F-43
</Table>
<Page>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Atchison Casting Corporation and Subsidiaries
Atchison, Kansas
We have audited the accompanying consolidated balance sheets of Atchison Casting
Corporation and subsidiaries (the "Company") as of June 30, 2001 and 2000 and
the related consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2001 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, at June 30, 2001, the Company was not in
compliance with certain covenants of its loan agreements and has entered into
various amendments and forbearance agreements with its lenders. The Company is
attempting to renegotiate the terms and covenants of the loan agreements and
also is seeking other sources of long-term financing. The Company's difficulties
in meeting its loan covenants and financing needs, its recurring losses from
operations and its negative working capital position discussed in Note 24 raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 24. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
September 28, 2001
Kansas City, Missouri
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
------------------------------------------------------------------------------------------------------------
ASSETS 2000 2001
CURRENT ASSETS:
Cash and cash equivalents $ 3,815 $ 1,329
Customer accounts receivable, net of allowance for doubtful
accounts of $584 and $845 at June 30, 2000 and 2001, respectively 87,401 83,010
Inventories 56,123 58,617
Deferred income taxes 10,092 1,345
Other current assets 9,517 10,437
-------- -------
Total current assets 166,948 154,738
PROPERTY, PLANT AND EQUIPMENT, Net 135,299 113,009
INTANGIBLE ASSETS, Net 28,525 24,362
DEFERRED FINANCING COSTS, Net 923 721
OTHER ASSETS 10,728 13,043
-------- --------
TOTAL $342,423 $305,873
======== ========
(Continued)
</Table>
-F-2-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
-------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2001
CURRENT LIABILITIES:
Accounts payable $ 42,867 $ 58,392
Accrued expenses 37,432 34,377
Current maturities of long-term obligations 80,919 114,894
-------- --------
Total current liabilities 161,218 207,663
LONG-TERM OBLIGATIONS 36,691 6,648
DEFERRED INCOME TAXES 11,912 3,460
OTHER LONG-TERM OBLIGATIONS 2,683 898
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS OVER
COST, Net of accumulated amortization of $2,298 and $3,577
at June 30, 2000 and 2001, respectively 4,843 2,543
POSTRETIREMENT OBLIGATION OTHER
THAN PENSION 9,199 10,082
MINORITY INTEREST IN SUBSIDIARIES 1,544 1,890
-------- --------
Total liabilities 228,090 233,184
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, participating, cumulative, 2,000,000
authorized shares; no shares issued and outstanding
Common stock, $.01 par value, 19,300,000 authorized shares; 8,295,974 and
8,312,049 shares issued at June 30, 2000
and 2001, 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 81,460 81,517
Retained earnings 42,848 5,863
Accumulated other comprehensive income (loss) (4,010) (8,726)
Less common stock held in treasury, 622,702 shares at June 30, 2000
and 2001, at cost (6,048) (6,048)
-------- --------
Total stockholders' equity 114,333 72,689
-------- --------
TOTAL $342,423 $305,873
======== ========
See notes to consolidated financial statements. (Concluded)
</Table>
-F-3-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------------------------------------------------------------------------------------
1999 2000 2001
NET SALES $ 477,405 $ 461,137 $ 428,150
COST OF GOODS SOLD 417,816 419,299 400,289
---------- ---------- ---------
GROSS PROFIT 59,589 41,838 27,861
OPERATING EXPENSES:
Selling, general and administrative 45,290 44,526 44,172
Impairment charges 16,414 18,139
Amortization of intangibles 544 (408) (255)
Other income, net (2,750) (606) (10,920)
---------- ---------- ---------
Total operating expenses, net 43,084 59,926 51,136
---------- ---------- ---------
OPERATING INCOME (LOSS) 16,505 (18,088) (23,275)
INTEREST EXPENSE 8,352 9,452 11,329
MINORITY INTEREST IN NET INCOME (LOSS) OF
SUBSIDIARIES 237 66 (57)
---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 7,916 (27,606) (34,547)
INCOME TAX EXPENSE (BENEFIT) 4,844 (15,927) 1,892
---------- ---------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 3,072 (11,679) (36,439)
---------- ---------- ---------
CUMULATIVE EFFECT ON PRIOR YEARS
OF A CHANGE IN ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS,
NET OF $364 TAX BENEFIT (546)
---------- ---------- ---------
NET INCOME (LOSS) $ 3,072 $ (11,679) $ (36,985)
========== ========== ==========
NET EARNINGS (LOSS) PER COMMON AND
EQUIVALENT SHARES:
BASIC:
Earnings (loss) before cumulative effect of a change
in accounting principle $ 0.39 $ (1.53) $ (4.74)
========== ========== ==========
Cumulative effect of a change in accounting for
derivative financial instruments $ $ $ (0.07)
========== ========== ==========
Net earnings (loss) $ 0.39 $ (1.53) $ (4.81)
========== ========== ==========
DILUTED:
Earnings (loss) before cumulative effect of a change
in accounting principle $ 0.39 $ (1.53) $ (4.74)
========== ========== ==========
Cumulative effect of a change in accounting for
derivative financial instruments $ $ $ (0.07)
========== ========== ==========
Net earnings (loss) $ 0.39 $ (1.53) $ (4.81)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND EQUIVALENT SHARES OUTSTANDING:
BASIC 7,790,781 7,648,616 7,685,339
========== ========== ==========
DILUTED 7,790,781 7,648,616 7,685,339
========== ========== ==========
</Table>
See notes to consolidated financial statements.
-F-4-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
1999 2000 2001
NET INCOME (LOSS) $3,072 $(11,679) $(36,985)
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustments (563) (2,817) (4,716)
------ -------- --------
COMPREHENSIVE INCOME (LOSS) $2,509 $(14,496) $(41,701)
====== ======== ========
</Table>
See notes to consolidated financial statements.
-F-5-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED COMPREHENSIVE HELD IN
STOCK CAPITAL EARNINGS INCOME (LOSS) TREASURY TOTAL
--------- ----------- ---------- ------------- --------- ---------
Balance, June 30, 1998 $ 82 $ 80,957 $ 51,455 $ (630) $131,864
Issuance of 33,033 shares 1 259 260
Purchase of 586,700 shares under Stock
Repurchase Plan $ (6,048) (6,048)
Foreign currency translation
adjustment of investment in subsidiaries (563) (563)
Net income 3,072 3,072
--------- ---------- -------- --------- -------- --------
Balance, June 30, 1999 83 81,216 54,527 (1,193) (6,048) 128,585
Issuance of 36,371 shares 244 244
Foreign currency translation
adjustment of investment in subsidiaries (2,817) (2,817)
Net loss (11,679) (11,679)
--------- ---------- -------- --------- -------- --------
Balance, June 30, 2000 83 81,460 42,848 (4,010) (6,048) 114,333
Issuance of 16,075 shares 57 57
Foreign currency translation
adjustment of investment in subsidiaries (4,716) (4,716)
Net loss (36,985) (36,985)
--------- ---------- -------- --------- -------- --------
Balance, June 30, 2001 $ 83 $ 81,517 $ 5,863 $ (8,726) $ (6,048) $ 72,689
========= ========== ======== ========= ======== ========
</Table>
See notes to consolidated financial statements.
-F-6-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
<Table>
<Caption>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,072 $(11,679) $(36,985)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 13,416 14,198 13,584
Minority interest in net income (loss) of subsidiaries 237 66 (57)
Asset impairment charges 16,414 18,139
Loss (gain) on disposal of capital assets (190) (486) 588
Gain on termination of interest rate swap agreements (1,083)
Deferred income tax expense (benefit) 2,761 (12,852) 1,364
Changes in assets and liabilities (exclusive of effects of acquisitions):
Customer accounts receivable 6,573 (5,848) 1,915
Inventories 1,434 8,292 (4,423)
Other current assets (6,230) 6,902 (1,324)
Accounts payable 2,008 2,119 17,133
Accrued expenses (16,904) (1,887) (3,742)
Postretirement obligation other than pension 682 921 883
Other (1,436) (81) (3,808)
-------- -------- --------
Cash provided by operating activities 5,423 14,996 3,267
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,899) (20,531) (11,182)
Proceeds from sale of capital assets 1,829 3,408 2,228
Payment for purchase of net assets of subsidiaries,
net of cash acquired (7,494)
Payments for purchase of minority interest in subsidiaries (728) (2,737) (617)
Payment for investments in unconsolidated subsidiaries (150)
-------- -------- --------
Cash used in investing activities (24,442) (19,860) (9,571)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 260 244 57
Payments for repurchase of common stock (6,048)
Proceeds from issuance of long-term obligations 35,000 1,065
Payments on long-term obligations (6,528) (42,010) (6,636)
Capitalized financing costs paid (108) (620) (155)
Termination of interest rate swap agreements 1,083
Net borrowings under revolving loan note 26,675 11,285 9,668
-------- -------- --------
Cash provided by financing activities 14,251 4,982 3,999
-------- -------- --------
EFFECT OF EXCHANGE RATE ON CASH (503) (209) (181)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,271) (91) (2,486)
CASH AND CASH EQUIVALENTS, Beginning of period 9,177 3,906 3,815
======== ======== ========
CASH AND CASH EQUIVALENTS, End of period $ 3,906 $ 3,815 $ 1,329
======== ======== ========
</Table>
See notes to consolidated financial statements.
-F-7-
<Page>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Atchison Casting Corporation and subsidiaries ("ACC"
or the "Company") was organized in 1991 for the purpose of becoming a
broad-based manufacturer of metal castings, producing iron, steel and
non-ferrous castings ranging in size from a few ounces to 280 tons. A
majority of the Company's sales are to U.S. customers, however, the Company
also has sales to Canadian, European and other foreign customers.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION - The consolidated financial statements present the
financial position of the Company and its subsidiaries, Amite Foundry and
Machine, Inc. ("AFM"), Prospect Foundry, Inc. ("Prospect Foundry"), Quaker
Alloy, Inc. ("Quaker"), Canadian Steel Foundries, Ltd. ("Canadian Steel"),
Kramer International, Inc. ("Kramer"), Empire Steel Castings, Inc.
("Empire"), La Grange Foundry Inc. ("La Grange Foundry"), The G&C Foundry
Company ("G&C"), Los Angeles Die Casting Inc. ("LA Die Casting"), Canada
Alloy Castings, Ltd. ("Canada Alloy"), Pennsylvania Steel Foundry & Machine
Company ("Pennsylvania Steel"), Jahn Foundry Corp. ("Jahn Foundry"),
PrimeCast, Inc. ("PrimeCast"), Inverness Castings Group, Inc.
("Inverness"), Atchison Casting UK Limited ("ACUK"), Claremont Foundry,
Inc. ("Claremont"), London Precision Machine & Tool Ltd. ("London
Precision") and Fonderie d'Autun SA ("Autun"). AFM, Quaker, Canadian Steel,
Kramer, Empire, La Grange Foundry, Canada Alloy, Pennsylvania Steel, Jahn
Foundry, PrimeCast, Claremont, London Precision and Autun are wholly owned
subsidiaries. The Company owns 96.0%, 98.9%, 95.0%, 96.7% and 95.5% of the
outstanding capital stock of Prospect Foundry, G&C, LA Die Casting,
Inverness and ACUK, respectively. Sheffield Forgemasters Group, Ltd.
("Sheffield") is a wholly-owned subsidiary of ACUK. All significant
intercompany accounts and balances have been eliminated.
STATEMENT OF CASH FLOWS - Cash and cash equivalents include cash on hand,
amounts due from banks and temporary investments with original maturities
of 90 days or less at the date of purchase.
REVENUE RECOGNITION - Sales and related cost of sales are recognized upon
shipment of products. The Company provides for estimated product warranty
costs based on historical experience at the time the product is sold and
accrues for specific items at the time their existence is known and the
amounts are determinable.
-F-8-
<Page>
CUSTOMER ACCOUNTS RECEIVABLE - Approximately 16%, 16%, and 17% of the
Company's revenue in 1999, 2000 and 2001, respectively, was with two major
customers who operate in the automotive, locomotive and general industrial
markets. As of June 30, 2000 and 2001, 8% of accounts receivable were with
these two major customers. The Company generally does not require
collateral or other security on accounts receivable. Credit risk is
controlled through credit approvals, limits and monitoring procedures.
INVENTORIES - Approximately 18% of the Company's inventory is valued at the
lower of cost, determined on the last-in, first-out ("LIFO") method, or
market. The remaining inventory is valued at the lower of cost, determined
on the first-in, first-out ("FIFO") method, or market.
PRE-PRODUCTION COSTS - The Company's long-term supply arrangements
typically provide for specific reimbursement of pre-production costs, which
include tooling, dies, fixtures, patterns and drawings, among other items,
by the customer. As of June 30, 2000 and 2001, the Company had $8,038 and
$7,136 of capitalized pre-production costs recorded within other current
assets within the consolidated balance sheets. Generally, the supply
arrangements entered into by ACC provide the Company the noncancelable
right to use the tooling during the supply arrangement even though the
customer owns the tooling.
PROPERTY, PLANT AND EQUIPMENT - Major renewals and betterments are
capitalized while replacements, maintenance and repairs which do not
improve or extend the life of the respective assets are charged to expense
as incurred. Upon sale or retirement of assets, the cost and related
accumulated depreciation applicable to such assets are removed from the
accounts and any resulting gain or loss is reflected in operations.
Property, plant and equipment is carried at cost less accumulated
depreciation. Plant and equipment is depreciated over the estimated useful
lives of the assets using the straight-line method.
Applicable interest charges incurred during the construction of new
property, plant and equipment are capitalized as one of the elements of
cost and are amortized over the assets' estimated useful lives. There was
no interest capitalized during fiscal year 1999, while $82 and $411 was
capitalized in fiscal years 2000 and 2001.
INTANGIBLE ASSETS - Intangible assets acquired, primarily goodwill, are
being amortized over their estimated lives of 25 years using the
straight-line method.
DEFERRED FINANCING COSTS - Costs incurred in connection with obtaining or
amending financing are capitalized and amortized over the remaining term of
the related debt instrument on a method approximating the interest method.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at the rate of exchange at
the balance sheet date. Revenues and expenses are translated into U.S.
dollars at average monthly exchange rates prevailing during the year.
Resulting translation adjustments are recorded in the accumulated foreign
currency translation adjustment account, which is a component of other
comprehensive income and a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in the results
of operations as incurred.
LONG-LIVED ASSETS - The Company periodically evaluates the carrying value
of long-lived assets to be held and used, including goodwill and other
intangible assets, when events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In
-F-9-
<Page>
that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair market value of the long-lived asset.
ACCRUED INSURANCE EXPENSE - The accrual for employee medical benefits and
casualty insurance programs includes estimates for claims incurred but not
reported.
At June 30, 2001, the Company had letters of credit aggregating $1,870 and
a certificate of deposit of $200 which support claims for workers'
compensation benefits.
INCOME TAXES - Deferred income taxes are provided on temporary differences
between the financial statement and tax basis of the Company's assets and
liabilities in accordance with the liability method. SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES," requires a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not
be realized.
STOCK OPTION PLANS - The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," in October 1995. SFAS No. 123
allows companies to continue under the approach set forth in Accounting
Principles Board Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," for recognizing stock-based compensation expense in the
financial statements, but encourages companies to adopt provisions of SFAS
No. 123 based on the estimated fair value of employee stock options.
Companies electing to retain the approach under APB No. 25 are required to
disclose pro forma net income and net income per share in the notes to the
financial statements, as if they had adopted the fair value accounting
method under SFAS No. 123. The Company has elected to retain its current
accounting approach under APB No. 25.
EARNINGS PER SHARE - Basic earnings per share ("EPS") is computed by
dividing net income by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution that
could occur if dilutive securities, such as stock options, were exercised.
DERIVATIVE INSTRUMENTS - The Company adopted SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended effective July
1, 2000 to record derivative instruments. 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). This resulted in a
charge to income of approximately $910 ($546 net of deferred income tax
benefit). Additionally, the translation of the foreign denominated trade
receivables resulted in the increase in value of the receivables and the
Company recorded a currency translation gain of approximately $435. The
impact of the adoption of SFAS No. 133 is presented in the Company's fiscal
year 2001 consolidated financial statements as the cumulative effect of a
change in accounting principle.
On June 30, 2001, the Company recorded its FX contracts at their fair value
of approximately ($844). This resulted in a gain of approximately $66.
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 $249.
-F-10-
<Page>
NEW ACCOUNTING STANDARDS - The FASB has recently issued SFAS No. 141,
"BUSINESS COMBINATIONS", SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE
ASSETS", SFAS No. 143 "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS" and
SFAS No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS". SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and that
the use of the pooling-of-interest method is no longer allowed. SFAS No.
142 requires that upon adoption, amortization of goodwill will cease and
instead, the carrying value of goodwill will be evaluated for impairment on
an annual basis. Identifiable intangible assets will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF". SFAS No. 143 establishes
accounting standards for recognition and measurement of a liability for an
asset retirement obligation and the associated asset retirement cost. SFAS
No. 144 supercedes SFAS No. 121 and establishes accounting standards for
long-lived assets and long-lived assets to be disposed of. SFAS Nos. 142
and 144 are effective for fiscal years beginning after December 15, 2001
and SFAS No. 143 is effective for fiscal years beginning after June 15,
2002, so the Company will adopt these standards as of July 1, 2002. The
Company is evaluating the impact of the adoption of these standards and has
not yet determined the effect of adoption on its financial position and
results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1999
and 2000 financial statements to conform with current year presentation.
2. PLANT CLOSURES AND ASSET IMPAIRMENTS
CLAREMONT
During fiscal year 2000, the Company recorded an impairment loss associated
with the planned closure of the Claremont foundry. The resulting impairment
charge of $3,373 to reduce the carrying value of these fixed assets was
recorded in the fourth quarter ended June 30, 2000. During the fourth
quarter of fiscal year 2000, the Company's Board of Directors committed to
a plan for the closure of Claremont as a result of continued operating
losses. As such, the carrying values of Claremont's fixed assets were
written down to the Company's estimates of fair value, which was based on
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. Prior to the impairment charge, these
assets had a carrying value of $3,534. The Company transferred as much work
as possible to other ACC foundries, and closed the foundry by November 30,
2000. For fiscal years 1999, 2000, and 2001, Claremont recorded net sales
of $7,068, $3,958, and $816, respectively, and incurred net losses of
$1,554, $1,819, and $519, respectively, excluding the impairment charge in
the fourth quarter of fiscal year 2000.
In addition to the long-lived asset impairment, in the first half of fiscal
year 2001 the Company recognized approximately $113 in severance benefits
when such benefit arrangements were communicated to the approximately 45
affected employees related to the Claremont closure.
PENNSYLVANIA STEEL
Following the discovery of accounting irregularities which revealed
substantial operating losses at the Company's three Pennsylvania foundry
operations, the Company recognized an impairment loss as the future
undiscounted cash flows of Pennsylvania Steel were estimated to be
insufficient to recover the carrying value of the fixed assets.
Accordingly, in 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,
-F-11-
<Page>
which was based on discounted future cash flows. The resulting impairment
charge of $3,450 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 $4,774. Subsequently, on February 28,
2001 the Company closed Pennsylvania Steel and transferred work to the
other two Pennsylvania foundries. For fiscal years 1999, 2000 and 2001,
Pennsylvania Steel recorded net sales of $12,269, $11,582, and $4,916,
respectively, and incurred net losses of $3,525, $4,080, and $2,821,
respectively, excluding the impairment charge in the fourth quarter of
fiscal year 2000.
In addition to the long-lived asset impairment, the Company recognized
certain other exit costs associated with the closure of Pennsylvania Steel
in fiscal 2001 related to employee termination costs. The Company
terminated approximately 75 employees and recognized a charge for severance
benefits of approximately $20 in the quarter ended March 31, 2001.
PRIMECAST
The Company recognized an impairment charge of $6,883 to reduce the
carrying value of fixed assets at its PrimeCast foundry 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 estimates of fair value, which was based upon
discounted future cash flows of PrimeCast. Following continued losses in
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 $8,248. For fiscal
years 1999, 2000, and 2001, PrimeCast recorded net sales of $27,531,
$24,464, and $14,835, respectively, and incurred net losses of $644,
$2,188, and $4,137, respectively, excluding the impairment charge in the
fourth quarter of fiscal year 2000.
In addition to the long-lived asset impairment, the Company recognized
certain other exit costs associated with the closure of PrimeCast in fiscal
year 2001 related to employee termination costs. The Company terminated
approximately 225 employees and recognized a charge for severance benefits
of approximately $175 in the quarter ended March 31, 2001.
EMPIRE
In the fourth quarter of fiscal 2000, following discovery of accounting
irregularities which revealed substantial operating losses at the Company's
three Pennsylvania foundry operations, the Company recognized an impairment
charge of $2,708 to write-off the intangible assets (goodwill) at its
Empire Steel foundry. An impairment loss was recognized as the estimated
future undiscounted cash flows of Empire Steel were insufficient to recover
the carrying value of the intangible assets.
Following continued losses in fiscal 2001, the Company announced, on August
31, 2001, plans to close Empire. Accordingly, the carrying values of
Empire'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 $1,610 to reduce the carrying value of these fixed
assets was recorded in the fourth quarter ended June 30, 2001. Actual
results could vary significantly from such estimates. Prior to the
impairment charge, these assets had a carrying value of $2,610. The Company
plans to close Empire by
-F-12-
<Page>
November 30, 2001, and transfer as much work as possible to other
locations. For fiscal years 1999, 2000 and 2001, Empire recorded net sales
of $10,414, $9,935 and $10,086, respectively, and incurred net losses of
$1,204, $2,726 and $2,583, respectively, excluding the impairment charges
in the fourth quarter of fiscal 2000 and the fourth quarter of fiscal 2001.
In addition to the long-lived asset impairment, the Company will recognize
certain other exit costs associated with the closure of Empire in fiscal
2002 related to employee termination costs. The Company will terminate
approximately 130 employees and will recognize a charge for severance
benefits of approximately $89 in the quarter ending December 31, 2001.
Other costs directly related to the closure of Claremont, Pennsylvania
Steel, PrimeCast and Empire which are not yet eligible for recognition will
be expensed as incurred under EITF 94-3, "LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)."
3. PENDING SALES AND ASSET IMPAIRMENTS
LA DIE CASTING
The Company is negotiating the sale of substantially all of the assets of
LA Die Casting. Under the terms of the proposed agreement, the Company
would receive approximately $4,500 in cash in exchange for certain assets
and the assumption of certain liabilities by the buyer, subject to certain
post-closing adjustments. There can be no assurance that a definitive
agreement will ultimately be executed. If executed and consummated, it is
anticipated that this transaction would close during the second quarter of
fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $2,658 to write-down the carrying value of the intangible assets
at LA Die Casting to the Company's estimate of fair value. The Company
considered its decision to realign its operations, resulting in its intent
to dispose of LA Die Casting as the primary indicator of impairment. Prior
to the impairment charge, the intangible assets had a carrying value of
$3,512. For fiscal years 1999, 2000 and 2001, LA Die Casting recorded net
sales of $9,557, $9,483 and $8,233, respectively, and net income of $196,
$280 and $61, respectively, excluding the impairment charge in the fourth
quarter of fiscal 2001.
JAHN FOUNDRY
In September, 2001, the Company entered into a non-binding letter of intent
with a third party to sell substantially all of the assets of Jahn Foundry.
Under the terms of the proposed agreement, the Company would receive
approximately $500 in cash, $500 in preferred stock of the buyer and $1,000
principal amount over ten years in exchange for certain assets and the
assumption of certain liabilities by the buyer, subject to certain
post-closing adjustments. There can be no assurance that a definitive
agreement will ultimately be executed. If executed and consummated, it is
anticipated that this transaction would close during the second quarter of
fiscal 2002.
In the fourth quarter of fiscal 2001, the Company recognized an impairment
charge of $13,871 to write-down the carrying value of the fixed assets at
Jahn Foundry to the Company's estimate of fair value. The Company
considered its decision to realign its operations, resulting in its intent
to dispose of Jahn Foundry as the primary indicator of impairment. Prior to
the impairment charge, the fixed assets had a carrying value of $15,936.
For fiscal years 1999, 2000 and 2001, Jahn Foundry recorded net sales of
-F-13-
<Page>
$11,988, $10,697 and $8,364, respectively, and net income (losses) of $124,
$(113) and $(2,412), respectively, excluding the impairment charge in the
fourth quarter of fiscal 2001 and a non-recurring gain of $10,920 recorded
in the second quarter of fiscal 2001 relating to insurance claims resulting
from the industrial accident at Jahn Foundry on February 25, 1999.
4. ACQUISITIONS
Effective September 1, 1998, the Company purchased 90% of the outstanding
shares of London Precision for $13,663 in cash and $124 of related
expenses. On June 16, 1999, the Company purchased the remaining 10% of the
outstanding shares of London Precision for $1,847 in cash. London
Precision, located in London, Ontario, Canada, is an industrial machine
shop which serves the locomotive, mining and construction, pulp and paper
markets, among others. The Company financed this transaction with funds
available under its revolving credit facility.
On February 25, 1999, Autun purchased the foundry division assets of
Compagnie Internationale du Chauffage ("CICH") located in Autun, France.
Autun received certain assets of the foundry, including $5,847 in cash and
$5,505 in inventory, in exchange for the assumption of potential
environmental and employment liabilities if the facility is ever closed.
CICH is a subsidiary of Blue Circle Industries plc, headquartered in
London, England. Autun specialized in the manufacture of cast iron
radiators and boiler castings.
The acquisitions have been accounted for by the purchase method of
accounting, and accordingly, the purchase price including the related
acquisition expenses has been allocated to the assets acquired based on the
estimated fair values at the date of the acquisitions. For the London
Precision acquisition, the excess of purchase price over estimated fair
values of the net assets acquired has been included in "Intangible Assets"
on the Consolidated Balance Sheets. For the Autun acquisition, the fair
value of the net assets acquired exceeded the purchase price. Accordingly,
the excess fair value was subtracted from identifiable long-term assets
ratably based on their relative fair values as a percentage of total
long-term assets. The purchase of Autun resulted in remaining excess fair
value after allocation to long-term assets, which was recorded as negative
goodwill and included in "Excess of Fair Value of Acquired Net Assets Over
Cost" on the Consolidated Balance Sheets.
<Table>
<Caption>
LIVES
(IN YEARS) 2000 2001
Excess of fair value of acquired net assets over cost 4 $7,141 $6,120
Less accumulated amortization 2,298 3,577
------ ------
$4,843 $2,543
====== ======
</Table>
Amortization of negative goodwill was $870, $1,897, and $1,607 for the
years ended June 30, 1999, 2000, and 2001, respectively.
-F-14-
<Page>
The estimated fair values of assets and liabilities acquired in the 1999
acquisitions are summarized as follows:
<Table>
<Caption>
1999
Cash $ 6,501
Customer accounts receivable 2,748
Inventories 7,117
Property, plant and equipment 7,705
Intangible assets, primarily goodwill 8,427
Other assets 15
Accounts payable and accrued expenses (7,489)
Deferred income taxes (1,269)
Excess of fair value of acquired net assets over cost (7,872)
Other long-term obligations (1,888)
-------
13,995
Cash acquired (6,501)
-------
Cash used in acquisitions $ 7,494
=======
</Table>
The operating results of the acquired companies are included in ACC's
consolidated statements of operations from the dates of acquisition. The
following unaudited pro forma summary presents the 1999 consolidated
results of operations as if the acquisitions occurred at July 1, 1998,
after giving effect to certain adjustments, including amortization of
goodwill, interest expense on the acquisition debt and related income tax
effects: net sales - $496,426; net income - $5,849; basic and diluted net
earnings per common and equivalent share - $0.75. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made as of
that date or of results which may occur in the future.
5. INVENTORIES
<Table>
<Caption>
2000 2001
Raw materials $ 8,491 $ 7,587
Work-in-process 33,656 38,889
Finished goods 11,038 10,138
Supplies 2,938 2,003
------- -------
$56,123 $58,617
======= =======
</Table>
Inventories as of June 30, 2000 and 2001 would have been higher by $416 and
$710, respectively, had the Company used the FIFO method of valuing those
inventories valued using the LIFO method.
-F-15-
<Page>
6. PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
LIVES
(IN YEARS) 2000 2001
Land $ 14,868 $ 13,332
Improvements to land 12-15 4,807 2,587
Buildings and improvements 35 30,033 31,258
Machinery and equipment 5-14 123,550 122,819
Automobiles and trucks 3 1,688 1,200
Office furniture, fixtures and equipment 5-10 5,691 5,996
Tooling and patterns 1.5-6 4,367 4,376
-------- --------
185,004 181,568
Less accumulated depreciation 61,104 72,220
-------- --------
123,900 109,348
Construction in progress 11,399 3,661
-------- --------
$135,299 $113,009
======== ========
</Table>
Depreciation expense was $12,663, $14,345, and $13,489 for the years ended
June 30, 1999, 2000 and 2001, respectively.
As of June 30, 2001, property, plant and equipment with a remaining net
carrying value of $7,724 are related to the foundries discussed in Notes 2
and 3 and are included in the amounts above.
7. INTANGIBLE ASSETS
<Table>
<Caption>
LIVES
(IN YEARS) 2000 2001
Goodwill 25 $33,850 $31,021
Less accumulated amortization 5,325 6,659
------- -------
$28,525 $24,362
======= =======
</Table>
Amortization expense was $1,429, $1,489, and $1,345 for the years ended
June 30, 1999, 2000 and 2001, respectively.
8. DEFERRED FINANCING COSTS
<Table>
<Caption>
LIVES
(IN YEARS) 2000 2001
Deferred financing costs 3 to 10 $1,355 $1,510
Less accumulated amortization 432 789
------ ------
$ 923 $ 721
====== ======
</Table>
-F-16-
<Page>
Amortization of such costs, included in interest expense, was $194, $261,
and $357 for the years ended June 30, 1999, 2000 and 2001, respectively.
9. ACCRUED EXPENSES
<Table>
<Caption>
2000 2001
Accrued warranty $ 9,786 $ 9,001
Payroll, vacation and other compensation 8,205 7,978
Accrued pension liability 2,481 1,993
Advances from customers 3,426 7,849
Reserve for flood repairs (Note 22) 645 597
Reserve for workers' compensation and employee
health care 3,846 4,009
Taxes other than income 477 826
Interest payable 1,036 1,030
Insurance advances for Jahn Foundry industrial accident (Note 23) 5,998
Other 1,532 1,094
------- -------
$37,432 $34,377
======= =======
</Table>
-F-17-
<Page>
10. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following as of June 30, 2000 and
2001:
<Table>
<Caption>
2000 2001
Senior notes with an insurance company, secured by certain assets of the
Company, maturing on June 30, 2004, subject to acceleration due to covenant
violations, bearing interest at a fixed rate of 8.44% and 10.19% at
June 30, 2000 and June 30, 2001, respectively $ 14,286 $ 11,429
Revolving credit facility with Harris, secured by certain assets of the
Company, maturing on April 3, 2003, subject to acceleration due to covenant
violations, bearing interest at:
LIBOR plus 2.50%, $50,000 at 9.15% at June 30, 2000
Prime plus 0.75%, $11,385 at 10.25% at June 30, 2000
Prime plus 1.75%, $63,220 at 8.50% at June 30, 2001
Prime plus 1.25%, $7,272 at 8.00% at June 30, 2001 61,385 70,492
Term loan between the Company and GECC, secured by certain
assets of the Company, maturing on December 29, 2004, subject to
acceleration due to covenant violations, bearing interest at 9.05% 33,250 29,750
Term loan between G&C and OES Capital, Incorporated (assignee
of loan agreement with Ohio Air Quality Development Authority), secured by
certain assets of G&C, maturing on December 31, 2006,
bearing interest at 6.50% 2,119 1,840
Term loan between La Grange Foundry and the Missouri Development
Finance Board, secured by a letter of credit of approximately $5,200,
maturing on November 1, 2011, bearing interest at 4.87% and 3.22%
at June 30, 2000 and 2001, respectively 5,100 5,100
Revolving credit facility between Autun and Societe Generale, secured
by trade receivables of Autun, maturing on April 17, 2007, bearing interest at
EURIBOR plus 0.8%, 5.21% and 4.50% at June 30, 2000 and
June 30, 2001, respectively 1,470 1,866
Term loan between the Company and Cananwill, Inc. secured by certain
prepaid and unearned insurance premiums, maturing on March 14, 2002,
bearing interest at 7.50% 1,065
-------- --------
117,610 121,542
Less amounts classified as current 80,919 114,894
-------- --------
Total long-term obligations $ 36,691 $ 6,648
======== ========
</Table>
The Company has three primary credit facilities: a revolving credit
facility with Harris Trust and Savings Bank, as agent for several lenders
(referred to as the Credit Agreement with Harris or merely the Credit
Agreement); senior notes with an insurance company (referred to as the
Senior Notes or the Note Purchase Agreement); and a term loan with General
Electric Capital Corporation (referred to as the Master Security Agreement
with GECC). Each of these credit facilities require compliance with various
covenants, including, but not limited to, financial covenants related to
equity levels, cash flow requirements, fixed charge coverage ratios and
ratios of debt to equity.
-F-18-
<Page>
The Credit Agreement and the Note Purchase Agreement, including certain of
the financial and other covenants, have been amended at various times since
their originations and waivers of compliance with certain financial
covenants have been granted by the lenders. At June 30, 2000, absent the
waivers obtained from the lenders, the Company would not have been in
compliance with various financial covenants contained in the Credit
Agreement and the Note Purchase Agreement. Accordingly, amounts due under
such agreements have been classified as current in the fiscal 2000
financial statements.
In fiscal 2001, the Company has continued to be in violation of virtually
all of the financial covenants of the Credit Agreement and the Note
Purchase Agreement. At various dates throughout and subsequent to fiscal
2001, the Company and these lenders have entered into amendments and
forbearance agreements wherein the lenders have agreed to forbear from
enforcing their rights with respect to certain events of default under the
debt agreements. These forbearance agreements currently expire on October
12, 2001, after which the lenders could exercise their rights to demand
payment of the amounts due under the debt agreements. The Company was also
in violation of certain financial covenants contained in the Master
Security Agreement with GECC. GECC agreed to forbear from enforcing its
rights with respect to certain events of default under the Master Security
Agreement through September 30, 2001. Accordingly, all of the debt under
these agreements is classified as current in the accompanying consolidated
financial statements.
Virtually all assets of the Company in North America are pledged as
collateral under the various debt agreements and proceeds from the sales of
assets other than inventory, insurance settlements and other non-recurring
items may only be used by Atchison for purposes approved by these secured
lenders. Terms of the Credit Agreement, the Note Purchase Agreement and the
Master Security Agreement, as amended, prohibit the Company from paying
dividends and incurring additional debt, except for the new debt as
discussed below. As of June 30, 2001 the Company has no available borrowing
capacity under the Credit Agreement.
In September 2001, ACUK, a subsidiary of the Company, and its subsidiaries,
and Burdale Financial Limited, an affiliate of Congress Financial
Corporation, entered into a Facility Agreement ("Facility Agreement"). This
Facility Agreement provides for a 25 million British pound (approximately
$35 million US) facility to be used to fund working capital requirements at
Sheffield, a subsidiary of ACUK, and up to $1.0 million British pounds for
working capital at Autun, the Company's subsidiary in France. In addition,
the Facility Agreement will provide security for Sheffield's foreign
currency exchange contracts and performance bond commitments, repay $5.0
million of an intercompany working capital loan and may provide for some
additional working capital funds in North America, subject to availability
and other restrictions in the U.K. This facility matures on September 17,
2004 and is secured by substantially all of Sheffield's assets in the U.K.
Loans under this Facility Agreement will bear interest at LIBOR plus 2.60%.
To date, $5.0 million has been made available to the Company in the United
States as a repayment of an intercompany working capital loan, $1.1 million
of which was paid to certain of the lenders as principal payments.
-F-19-
<Page>
The amounts of long-term obligations outstanding as of June 30, 2001 are
payable as follows, after giving effect to reclassification due to covenant
violations:
<Table>
2002 $114,894
2003 307
2004 329
2005 350
2006 373
Thereafter 5,289
</Table>
The amounts of interest expense for the years ended June 30, 1999, 2000 and
2001 consisted of the following:
<Table>
<Caption>
1999 2000 2001
Senior notes with an insurance company $ 1,467 $1,224 $ 1,076
Credit facility with Harris 6,194 6,071 6,851
Term loan with GECC 1,520 2,951
Amortization of deferred financing costs 194 261 357
Other 497 376 94
------- ------ -------
$ 8,352 $9,452 $11,329
======= ====== =======
</Table>
11. INCOME TAXES
Income (loss) before income taxes is comprised of the following:
<Table>
<Caption>
1999 2000 2001
Domestic $ (126) $(28,533) $(35,946)
Foreign 8,042 927 489
------ -------- --------
$7,916 $(27,606) $(35,457)
====== ======== ========
</Table>
-F-20-
<Page>
Income taxes for the years ended June 30, 1999, 2000 and 2001 are comprised
of the following:
<Table>
<Caption>
1999 2000 2001
Current expense (benefit):
Federal $ 175 $ (3,329) $ 0
State and local 253 (201) 173
Foreign 1,655 455 (9)
------ -------- -------
2,083 (3,075) 164
Deferred expense (benefit):
Federal (105) (10,654) (4,881)
State and local 397 (1,558) (558)
Foreign 2,469 (640) 6,803
------ -------- -------
2,761 (12,852) 1,364
------ -------- -------
$4,844 $(15,927) $ 1,528
====== ======== =======
</Table>
<Table>
<Caption>
1999 2000 2001
Items giving rise to the deferred income
tax provision (benefit):
Deferred gain on flood proceeds $ 975 $ (7,786)
Impairment reserve (5,589) $(5,516)
Depreciation and amortization 935 1,623 3,427
Net operating loss carryforwards 754 (916) (9,789)
Missappropriation (55) (695) 695
Flood wall capitalization 429
Postretirement (benefits) costs (97) (419) (408)
Pension costs (163) 267 163
Inventories 112 245 (304)
Accrued expenses 282 4 (279)
Valuation allowance 56 4 13,427
Other, net (38) (19) (52)
------ -------- -------
$2,761 $(12,852) $ 1,364
====== ======== =======
</Table>
-F-21-
<Page>
Following is a reconciliation between total income taxes and the amount
computed by multiplying income (loss) before income taxes (including the
cumulative effect of the change in accounting) plus the minority interest
in net income of subsidiaries by the statutory federal income tax rate:
<Table>
<Caption>
1999 2000 2001
------------------------ ---------------------- -------------------------
Amount % Amount % Amount %
Computed expected
federal income tax
expense (benefit) $ 2,854 35.0 $ (9,639) (35.0) $(12,410) (35.0)
State income tax
expense (benefit),
net of federal benefit 527 6.4 (389) (1.4) (765) (2.1)
Non - U.S. taxes 156 0.6 504 1.4
Foreign dividends 1,238 15.2 780 2.8 828 2.3
Goodwill 340 4.2 709 2.6 (272) (0.8)
Revision of estimate
for deferred taxes
associated with flood
proceeds (7,786) (28.3)
Other, net (171) (2.1) 238 0.9 216 0.6
Valuation Allowance 56 0.7 4 13,427 37.9
-------- ----- -------- ------ -------- ----
$ 4,844 59.4 $(15,927) (57.8) $ 1,528 4.3
======== ===== ======== ====== ======== ====
</Table>
-F-22-
<Page>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. The 2000 deferred tax
asset balances for net operating loss carryforwards, foreign tax credit and
AMT credit have been adjusted with an offsetting adjustment to the
valuation allowance. These adjustments have no net affect on the net
deferred tax asset at June 30, 2000. Deferred income taxes as of
June 30, 2000 and 2001 are comprised of the following:
<Table>
<Caption>
2000 2001
Deferred tax assets:
Net operating loss carryforwards $ 19,978 $ 30,838
Impairment reserve 5,589 11,104
Postretirement benefits 3,524 3,932
Accrued expenses 2,708 2,987
Pension costs 1,282 1,119
General business tax credits 588 529
Foreign tax credit 1,873 1,873
AMT credit 918 918
Missappropriations 695 0
Other 120 497
-------- --------
37,275 53,797
Valuation allowance (17,152) (30,579)
-------- --------
Net deferred tax assets 20,123 23,218
-------- --------
Deferred tax liabilities:
Depreciation and amortization (19,619) (23,046)
Inventories (1,520) (1,216)
Discharge of indebtedness (422) (422)
Other (382) (649)
-------- --------
(21,943) (25,333)
-------- --------
Total $ (1,820) $ (2,115)
======== ========
</Table>
In general, it is the practice and intention of the Company to reinvest the
earnings of its non - U.S. subsidiaries in those operations on a permanent
basis. Applicable U.S. federal taxes are provided only on amounts actually
or deemed to be remitted to the Company as dividends. U.S. income taxes
have not been provided on $1,850 and $1,468 of cumulative undistributed
earnings from United Kingdom operations for 2000 and 2001, respectively.
U.S. income taxes on such earnings, if ultimately remitted to the U.S., may
be recoverable as foreign tax credits.
The Company has federal net operating loss carryforwards that were acquired
during previous years totaling approximately $7,225 at June 30, 2001, which
expire in the years 2007 through 2012. These federal net operating loss
carryforwards that were acquired during previous years are subject to the
ownership change rules defined by section 382 of the Internal Revenue Code
(the "Code"). As a result of this event, the Company will be limited in its
ability to use such net operating loss carryforwards. The amount of taxable
income that can be offset by pre-change tax attributes in any annual period
is limited to approximately $500.
-F-23-
<Page>
The Company has additional federal net operating loss carryforwards
totaling approximately $23,452 at June 30, 2001 which will expire in the
year 2021. The utilization of such net operating loss carryforwards is
restricted to the earnings of the U.S. consolidated group. The Company also
has foreign net operating loss carryforwards totaling approximately $53,323
at June 30, 2001, which have no expiration date. The utilization of such
net operating loss carryforwards are restricted to the earnings of specific
foreign subsidiaries. As a result of such restrictions, the Company has
established a valuation allowance of $17,152 and $30,579 in 2000 and 2001,
respectively, related to the federal, state and foreign net operating loss
carryforwards to reduce the deferred tax assets to the amounts that
management believe are more likely than not to be realized.
The Company has recorded a $7,786 deferred income tax benefit in fiscal
year 2000 with respect to the reinvestment of certain flood insurance
proceeds received in 1995 and 1996. The Company recorded pretax gains of
approximately $20,100 in 1995 and 1996 related to insurance proceeds
resulting from flood damage to the Company's Atchison, Kansas foundry in
July 1993. For federal income tax purposes, the Company treated the flood
as an involuntary conversion event under the Code and related Treasury
Regulations.
The Code provides generally that if certain conditions are met, gains on
insurance proceeds from an involuntary conversion are not taxable if the
proceeds are reinvested in qualified replacement property within two years
after the close of the first taxable year in which any part of the
conversion gain is realized. The Company believed that its treatment of
certain foundry subsidiary stock acquisitions as qualified replacement
property was subject to potential challenge by the Internal Revenue Service
(the "Service") in 1996 (the first year in which involuntary conversion
gain was deferred for federal income tax purposes). The Company recorded
income tax expense on the insurance gains in 1996 pending review of its
position by the Service or the expiration of the statute of limitations
under the Code for the Service to assess income taxes with respect to the
Company's position.
The Company's treatment of certain foundry subsidiary stock acquisitions as
qualified replacement property creates differing basis in the foundry
subsidiary stock for financial statement and tax purposes. These
differences have not been recognized as taxable temporary differences under
SFAS No. 109 since the subsidiary basis differences can be permanently
deferred through subsidiary mergers or tax-free liquidations. On March 15,
2000, the statute of limitations for the Service to assess taxes with
respect to the Company's position expired. The deferred taxes recorded in
the consolidated financial statements in prior years were no longer
required.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
customer accounts receivable, accounts payable, debt obligations, and
derivative financial instruments, including interest rate swap agreements,
forward foreign exchange contracts and a foreign currency swap agreement.
The derivative financial instruments are used by the Company to manage its
exposure to interest rate and foreign currency risk. The Company does not
intend to use such instruments for trading or speculative purposes. The
counterparties to these instruments are major financial institutions with
which the Company has other financial relationships. The Company is exposed
to credit loss in the event of nonperformance by these counterparties.
However, the Company does not anticipate nonperformance by the counter
parties, and no material loss would be expected from their nonperformance.
The Company's financial instruments also expose it to certain additional
market risks as discussed below.
-F-24-
<Page>
INTEREST RATE RISK - The Company's floating rate debt obligations (Note 10)
expose the Company to interest rate risk, such that when LIBOR, EURIBOR or
Prime rates increase or decrease, so will the Company's interest expense.
To manage this potential risk, the Company may use interest rate swap
agreements to limit the effect of increases in interest rates on any of the
Company's U.S. dollar floating rate debt by fixing the rate without the
exchange of the underlying principal or notional amount. Net amounts paid
or received are added to or deducted from interest expense in the period
accrued.
At June 30, 2000 and 2001, the Company had $62,855 and $72,359,
respectively, of floating rate debt tied to LIBOR, EURIBOR or Prime rates.
In April 1998, the Company entered into a $15,000 notional amount interest
rate swap agreement under which the Company paid a fixed rate of 5.92% and
received a LIBOR floating rate (5.0% at June 30, 1999). This agreement was
a hedge against $15,000 of the $88,817 outstanding on the Company's
revolving credit facility as of June 30, 1999. At June 30, 1999, the fair
value of this agreement based on a quote received from the counterparty,
indicating the amount the Company would pay or receive to terminate the
agreement, was a payment of $67. This agreement was terminated on June 23,
2000, with the Company receiving $402 upon termination. Such amount is
included within other income on the accompanying consolidated statements of
income for fiscal year 2000.
In September 1998, the Company entered into a $40 million notional amount
interest rate swap agreement under which the Company paid a fixed rate of
5.00% and received a LIBOR floating rate (5.3275% at June 30, 1999). Under
this agreement, the notional amount was amortized at $1,429 per quarter
beginning March 31, 1999. At June 30, 1999, this agreement was a hedge
against $37,142 of the $88,817 outstanding on the Company's revolving
credit facility. At June 30, 1999, the fair value of this agreement based
on a quote received from the counterparty, indicating the amount the
Company would pay or receive to terminate the agreement, was a receipt of
$965. This agreement was terminated on December 29, 1999, with the Company
receiving $1,238 upon termination. Such amount is included within other
income on the accompanying consolidated statements of income for fiscal
year 2000.
FOREIGN CURRENCY RISK - The Company's British subsidiary, Sheffield,
generates significant sales to customers outside of Great Britain whereby
Sheffield invoices and receives payment from those customers in their local
currencies. This creates foreign currency risk for Sheffield as the value
of such currencies in British Pounds may be higher or lower when such
transactions are actually settled. To manage this risk, Sheffield uses
forward foreign exchange contracts to hedge receipts and payments of
foreign currencies related to sales to its customers and purchases from its
vendors outside of Great Britain. When Sheffield accepts an order from a
customer that will be invoiced in a currency other than British Pounds
(anticipated sales), it enters into a forward foreign exchange contract to
sell such currency and receive British Pounds at a fixed rate during some
specified future period that is expected to approximate the customer's
payment date. Upon shipment of the product to the customer, the sale and
receivable are recorded in British Pounds in the amount of the contract.
When Sheffield purchases materials or equipment from a vendor that bills it
in foreign currency, Sheffield will also enter into a forward foreign
exchange contract to sell British Pounds and purchase that foreign currency
to settle the payable.
-F-25-
<Page>
At June 30, 2000 and 2001, the Company's foreign subsidiaries, primarily
Sheffield, have the following net contracts to sell the following
currencies and has no significant un-hedged foreign currency exposure
related to sales and purchase transactions:
<Table>
<Caption>
JUNE 30, 2000 JUNE 30, 2001
---------------------------- ----------------------------
LOCAL APPROXIMATE LOCAL APPROXIMATE
CURRENCY VALUE(1) CURRENCY VALUE(1)
U.S. Dollars 17,860 $17,851 45,734 $45,758
Deutsche Marks 8,165 3,968 7,605 3,306
French Francs 19,022 2,757 5,244 680
Swiss Francs 64 39 64 36
Italian Lira 2,229,242 1,095 550,154 242
Canadian Dollars 1,344 905 5,482 3,624
Dutch Guilder 91 35
Swedish Krona 4,000 452 14,728 1,358
Spanish Pesetas 65,980 377 57,563 294
Austrian Schilling 3,978 367
Japanese Yen 757 7 757 6
Danish Krona 6,454 735
Finish Marka 106 17 426 61
Euro 4,134 3,930 15,721 13,367
------- -------
Total $31,398 $69,869
======= =======
</Table>
(1) The approximate value is the value of the local currencies
translated first into the foreign subsidiaries' functional
currency, at the June 30, 2000 and 2001 spot rates, respectively,
and then translated to U.S. dollars at the June 30, 2000 and 2001
spot rates.
The Company also has foreign currency exposure with respect to its net
investment in Sheffield. This exposure is to changes in the British Pound
and affects the translation of the investment into U.S. Dollars in
consolidation. To manage a portion of this exposure, the Company entered
into a combined interest rate currency swap ("CIRCUS") in April 1998. The
CIRCUS was an amortizing principal swap that fixed the exchange rate on the
periodic and final principal cash exchanges and initially required the
payment of interest on 24,002 British Pounds by the Company at a fixed rate
of 6.82% and the receipt of interest on 40,000 U.S. Dollars at a floating
rate tied to LIBOR rates. The currency portion of the CIRCUS was designated
as an effective hedge of a portion of the Company's net investment in
Sheffield. The interest portion of the CIRCUS was also effective and was
designated as a hedge of the 40,000 U.S. Dollars LIBOR debt.
In September 1998, the Company terminated the CIRCUS and entered into a
separate interest rate swap (described in INTEREST RATE RISK above) and a
separate amortizing principal currency swap. The termination of the CIRCUS
resulted in a loss of $900 on the interest portion, which was deferred and
amortized to interest expense over the remaining term of the underlying
debt obligation to which it was originally designated until such debt was
retired on December 29, 1999. The retirement of this debt triggered the
recognition of the remaining $557 of deferred loss. This loss was recorded
as a reduction of other income in fiscal year 2000.
-F-26-
<Page>
This currency swap entered into in September 1998, like the currency
portion of the CIRCUS, was an amortizing principal swap that fixed the
exchange rate on the periodic and final principal cash exchanges. The
currency swap initially required the payment of interest on 24,002 British
Pounds by the Company at a fixed rate of 6.82% and the receipt of interest
by the Company on 40,000 U.S. Dollars at a fixed rate of 5.00%. The
currency swap was designated as an effective hedge of a portion of the
Company's net investment in Sheffield and was recorded as an adjustment to
the accumulated foreign currency translation adjustment account and as a
component of other assets. At June 30, 1999, the currency swap had a
carrying value of $1,513 and a fair value, based on amounts that would be
paid or received by the Company to terminate the swap, of $(188). On June
23, 2000, the Company terminated the currency swap, with the Company
receiving $1,549 upon termination. This payment was recorded as a deferred
gain within the accumulated foreign currency translation adjustment
account. This deferred gain will only be recognized within operations if
and when the Company sells the Sheffield subsidiary.
FAIR VALUE OF FINANCIAL INSTRUMENTS - As of June 30, 2000 and 2001, the
carrying value of cash and cash equivalents approximates fair value of
those instruments due to their liquidity and short-term nature.
Based on borrowing rates currently available to the Company and the
remaining terms, the carrying value of debt obligations as of June 30, 2000
and 2001 approximates fair value.
The estimated fair values of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgement is
required in interpreting market data to develop estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
13. STOCKHOLDERS' EQUITY
In fiscal year 2000, the Company's Board of Directors established a
Stockholder Rights Plan and distributed to stockholders, one preferred
stock purchase right for each outstanding share of common stock. Under
certain circumstances, a right may be exercised to purchase one
one-thousandth of a share of Series A Participating Cumulative Preferred
Stock at an exercise price of $30 per share, subject to adjustment. The
rights become exercisable on the business day following the tenth business
day after the commencement of a tender offer for at least 20% of the
Company's common stock or a public announcement that a party or group has
acquired at least 20% of the Company's common stock. Generally, after the
rights become exercisable, the holders may purchase that number of
preferred shares having a market value equal to twice the exercise price,
for an amount in cash equal to the exercise price. If the Company's Board
of Directors elects, it may exchange all of the outstanding rights for
shares of common stock on a one-for-one basis. If the Company is a party to
certain merger or business combination transactions, or transfers 50% or
more of its assets or earnings power, and certain other events occur, each
right will entitle its holders, other than the acquiring person, to buy for
the exercise price a number of shares of common stock of the Company, or of
the other party to the transaction, having a value equal to twice the
exercise price of the right. The rights expire on March 28, 2010, and may
be redeemed by the Company for $.01 per right at any time until ten
business days following the date of the public announcement of the
acquisition of 20% or more of the Company's common stock or the
commencement date of a tender offer for at least 20% of the Company's
common stock. The Company is authorized by the Board of Directors to issue
2,000,000 shares of preferred stock, none of which have been issued. The
Company has designated 10,000 shares of the preferred stock as Series A
Participating
-F-27-
<Page>
Cumulative Preferred Stock for the purpose of the Stockholder Rights Plan.
The Stockholder Rights Plan was ratified by stockholders at the Company's
annual meeting on June 29, 2001.
In August 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to 1,200,000 shares of the
Company's common stock. During the remainder of fiscal year 1999, the
Company repurchased 586,700 shares under this program for $6,048. The
Company accounts for these shares as treasury stock and has recorded them
at cost. On February 18, 2000, the Board of Directors terminated the stock
repurchase program. The Company's Credit Agreement and the Note Purchase
Agreement (Note 10) each restrict certain payments by the Company, such as
stock repurchases, from exceeding certain limits.
The 1993 Atchison Casting Corporation Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors on August 10, 1993
and approved by the Company's stockholders on September 27, 1993. An
aggregate of 400,000 shares of common stock were initially made available
for purchase by employees upon the exercise of options under the Purchase
Plan. On the first day of every option period (option periods are
three-month periods beginning on January 1, April 1, July 1 or October 1
and ending on the next March 31, June 30, September 30 or December 31,
respectively), each eligible employee is granted a nontransferable option
to purchase common stock from the Company on the last day of the option
period. As of the last day of an option period, employee contributions
(authorized payroll deductions) during such option period will be used to
purchase full and partial shares of common stock. The price for stock
purchased under each option is 90% of the stock's fair market value on the
first day or the last day of the option period, whichever is lower. During
the years ended June 30, 1999, 2000, and 2001 33,033, 36,371 and 16,075
common shares, respectively, were purchased by employees under the Purchase
Plan. At June 30, 2001, 237,594 shares remained available for grant. After
accounting irregularities were discovered in the second quarter of fiscal
2001, purchases of shares under the Purchase Plan were temporarily
suspended. The Purchase Plan was still frozen as of June 30, 2001.
-F-28-
<Page>
The Atchison Casting 1993 Incentive Stock Plan (the "Incentive Plan") was
adopted by the Board of Directors on August 10, 1993 and approved by the
Company's stockholders on September 27, 1993. At the annual meeting in
November 1997, the Company's stockholders approved increasing the number of
options available for grant under the Incentive Plan by 400,000. The
Incentive Plan allows the Company to grant stock options to employees to
purchase up to 700,000 shares of common stock at prices that are not less
than the fair market value at the date of grant. The options vest equally
over a three year period from the date of grant and remain exercisable for
a term of not more than 10 years after the date of grant. The Incentive
Plan provides that no options may be granted more than 10 years after the
date of approval by the stockholders. Activity in the Incentive Plan for
the three years ended June 30, 2001, is summarized in the following table:
<Table>
<Caption>
WEIGHTED
AVERAGE
SHARES PRICE RANGE PRICE PER
UNDER OPTION PER SHARE SHARE
Outstanding, June 30, 1998 233,399 $12.88-19.13 $ 14.54
Issued 119,000 8.50-18.00 11.01
Surrendered (24,366) 9.88-18.63 14.95
-------
Outstanding, June 30, 1999 328,033 8.50-19.13 13.23
Issued 66,500 7.06-10.38 9.39
Surrendered (12,300) 10.38-14.13 13.01
-------
Outstanding, June 30, 2000 382,233 7.06-19.13 12.57
Issued 133,500 2.30-6.25 6.03
Surrendered (10,000) 6.25-10.38 8.33
-------
Outstanding June 30, 2001 505,733 2.30-19.13 10.92
=======
</Table>
As of June 30, 1999, 2000 and 2001, there were 191,633, 235,067 and 266,733
options, respectively, exercisable under the Incentive Plan. The
weighted-average exercise price for options exercisable at June 30, 1999,
2000 and 2001 were $14.09, $13.91 and $13.25, respectively.
At June 30, 2001, options to purchase 168,607 shares were authorized but
not granted. The weighted average remaining contractual life of options
outstanding under the Incentive Plan at June 30, 1999, 2000 and 2001 was
7.1 years, 6.7 years and 6.5 years, respectively.
-F-29-
<Page>
On November 18, 1994, the Company's stockholders approved the Atchison
Casting Non-Employee Director Option Plan (the "Director Option Plan"). The
Director Option Plan provides that each non-employee director of the
Company who served in such capacity on April 15, 1994 and each non-employee
director upon election or appointment to the Board of Directors thereafter
shall automatically be granted an option to purchase 10,000 shares of the
Company's common stock. No person shall be granted more than one such
option pursuant to the Director Option Plan. An aggregate of 100,000 shares
were reserved for purchase under the plan. The price for stock purchased
under the plan is the fair market value at the date of grant. The options
under this plan have a 6 month vesting period from the date of grant and
remain exercisable for a term of not more than 10 years after the date of
grant. Activity in the Director Option Plan for the three years ended June
30, 2001, is summarized in the following table:
<Table>
<Caption>
WEIGHTED
AVERAGE
SHARES PRICE PRICE PER
UNDER OPTION PER SHARE SHARE
Outstanding, June 30, 1998 40,000 $13.38-19.13 $ 14.81
Issued 10,000 19.13 19.13
Exercised (10,000) 13.38 13.38
------
Outstanding, June 30, 1999 40,000 13.38-19.13 14.81
Issued 10,000 8.75 8.75
------
Outstanding, June 30, 2000 50,000 8.75-19.13 13.60
Outstanding June 30, 2001 50,000 8.75-19.13 13.60
======
</Table>
As of June 30, 1999, 2000 and 2001, there were 40,000, 40,000 and 50,000
options exercisable, respectively, under the Director Option Plan. The
weighted-average exercise price for options exercisable at June 30, 1999,
2000 and 2001 was $14.81, $13.60 and $13.60, respectively.
At June 30, 2001, options to purchase 30,000 shares were authorized but not
granted. The weighted average remaining contractual life of options
outstanding under the Director Option Plan at June 30, 1999, 2000 and 2001
was 5.6 years, 5.6 years and 4.6 years, respectively.
-F-30-
<Page>
The following table illustrates the range of exercise prices and the
weighted average remaining contractual lives for options outstanding under
both the Incentive Plan and Director Option Plan as of June 30, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 6/30/01 CONTRACTUAL LIFE PRICE AT 6/30/01 PRICE
$13.38 125,533 3 years $ 13.38 125,533 $ 13.38
14.13-14.75 51,000 4 years 14.39 51,000 14.39
12.86-15.75 28,000 5 years 14.93 28,000 14.93
16.63-19.13 40,200 6 years 17.68 40,200 17.68
9.88-18.06 38,000 7 years 14.18 25,332 14.19
8.50-10.38 123,000 8 years 9.61 64,166 9.54
5.75-8.75 145,000 9 years 6.41 13,333 8.33
2.30 5,000 10 years 2.30 0.00
------- -------
555,733 347,564
======= =======
</Table>
The Company applies APB No. 25 in accounting for its stock option and stock
purchase plans, under which no compensation cost has been recognized for
such awards. Had compensation cost for the stock option and stock purchase
plans been determined in accordance with the fair value accounting method
prescribed under SFAS No. 123, the Company's net income (loss) and net
earnings (loss) per share on a pro forma basis would have been as follows:
<Table>
<Caption>
1999 2000 2001
Net income (loss):
As reported $ 3,072 $(11,679) $(36,985)
Pro forma 2,896 (12,004) (37,325)
Net income (loss) and net earnings (loss) per share:
As reported:
Basic 0.39 (1.53) (4.81)
Diluted 0.39 (1.53) (4.81)
Pro forma:
Basic 0.37 (1.57) (4.85)
Diluted 0.37 (1.57) (4.85)
</Table>
The SFAS No. 123 fair value method of accounting is not required to be
applied to options granted prior to July 1, 1995, therefore, the pro forma
compensation cost may not be representative of that to be expected in
future years.
-F-31-
<Page>
For the purpose of computing the pro forma effects of stock option grants
under the fair value accounting method, the fair value of each stock option
grant was estimated on the date of the grant using the Black Scholes option
pricing model. For the Incentive Plan, the weighted average grant-date fair
value of stock options granted during fiscal year 1999, 2000 and 2001 was
$6.87, $5.92 and $5.23 per share, respectively. For the Director Option
Plan, the weighted average grant-date fair value of stock options granted
during fiscal year 2000 was $5.66 per share, respectively. No options were
issued under the Director Option Plan in fiscal year 2001. The following
weighted average assumptions were used for grants under both option plans
during the years ended June 30, 1999, 2000 and 2001:
<Table>
<Caption>
1999 2000 2001
Risk-free interest rate 5.3% 5.9% 6.0 %
Expected life 10 years 10 years 10 years
Expected volatility 36% 41% 85%
Dividend yield Nil Nil Nil
</Table>
For the Purchase Plan, the weighted average grant-date fair value of
options granted under the plan was $1.81, $1.57 and $1.47, respectively,
for the years ended June 30, 1999, 2000 and 2001. The following weighted
average assumptions were used for grants under the Purchase Plan during the
years ended June 30, 1999, 2000 and 2001:
<Table>
<Caption>
1999 2000 2001
Risk-free interest rate 4.4% 5.2% 6.0%
Expected life 3 months 3 months 3 months
Expected volatility 36% 41% 85%
Dividend yield Nil Nil Nil
</Table>
14. EARNINGS PER SHARE
Following is a reconciliation of basic and diluted EPS for the years ended
June 30, 1999, 2000 and 2001, respectively.
<Table>
<Caption>
1999 2000 2001
------------------------------- ------------------------------ -----------------------------
WEIGHTED EARNINGS WEIGHTED LOSS WEIGHTED LOSS
NET AVERAGE PER NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE LOSS SHARES SHARE LOSS SHARES SHARE
Basic EPS $ 3,072 7,790,781 $ 0.39 $ (11,679) 7,648,616 $ (1.53) $(36,985) 7,685,339 $ (4.81)
Effect of dilutive
securities -
stock options
------- --------- ------ --------- --------- ------- -------- --------- --------
Diluted EPS $ 3,072 7,790,781 $ 0.39 $ (11,679) 7,648,616 $ (1.53) $(36,985) 7,685,339 $ (4.81)
======= ========= ====== ========= ========= ======= ======== ========= =======
</Table>
-F-32-
<Page>
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 30 JUNE 30
------------------------ ------------------------ ------------------------ ------------------------
1999 2000 1999 (1) 2000 (4) 2000 (2) 2001 2000 (3) 2001 (5)
Net sales $ 108,914 $ 99,208 $ 114,103 $ 105,809 $ 121,765 $ 116,924 $ 116,355 $ 106,209
Gross profit 10,417 4,000 12,293 8,051 10,247 8,039 8,881 7,771
Operating income (loss) 585 (5,361) 1,632 6,795 (1,040) (4,155) (19,265) (20,554)
Net income (loss) (1,187) (5,866) (1,002) 1,856 5,198 (5,004) (14,688) (27,971)
Earnings (loss)
per common share):
Basic (0.16) (0.76) (0.13) 0.24 0.68 (0.65) (1.92) (3.64)
Diluted (0.16) (0.76) (0.13) 0.24 0.68 (0.65) (1.92) (3.64)
</Table>
(1) The second quarter of fiscal 2000 contains a $681 gain on the
termination of an interest rate swap agreement, which increased net
income by $412 or $.05 per share (Note 12).
(2) The third quarter of fiscal 2000 contains a $7,786 deferred income tax
benefit relating to the resolution of the Company's tax treatment of
certain flood insurance proceeds received in 1995 and 1996, which
increased net income by $7,786, or $1.02 per share (Note 11).
(3) The fourth quarter of fiscal 2000 contains the following charges: a) a
$3,373 impairment charge and $227 of other costs recorded in
connection with the closure of Claremont, which decreased net income
by $2,268 or $.30 per share (Note 2); b) a $6,883 impairment charge
recorded in connection with the write-down of PrimeCast fixed assets,
which decreased net income by $4,336 or $.57 per share (Note 2); c) a
$3,450 impairment charge and $400 of other costs recorded in
connection with the closure of Pennsylvania Steel, which decreased net
income by $2,348 or $0.31 per share (Note 2); d) a $2,708 impairment
charge recorded in connection with the write-off of Empire Steel
goodwill, which decreased net income by $2,708 or $0.35 per share
(Note 2). In addition, the fourth quarter contains a $402 gain on the
termination of an interest rate swap agreement, which increased net
income by $243 or $.03 per share (Note 12).
(4) The second quarter of fiscal 2001 contains a $10,920 insurance gain
recorded in connection with an industrial accident that occurred on
February 25, 1999 at the Company's subsidiary, Jahn Foundry, which
increased net income by $6,552 or $0.87 per share (Notes 3 and 23).
(5) The fourth quarter of fiscal 2001 contains the following charges: a) a
$13,871 impairment charge recorded in connection with the planned sale
of Jahn Foundry, which decreased net income by $1.80 per share (Note
3) ; b) a $1,610 impairment charge recorded in connection with the
closure of Empire, which decreased net income by $0.21 per share (Note
2); c) a $2,658 impairment charge recorded in connection with the
planned sale of LA Die Casting, which decreased net income by $0.35
per share (Note 3).
-F-33-
<Page>
16. EMPLOYEE BENEFIT PLANS
The Company sponsors separate defined benefit pension plans for certain of
its salaried and hourly employees. Employees are eligible to participate on
the date of employment with vesting after five years of service. Benefits
for hourly employees are determined based on years of credited service and
employee earnings.
Pension expense for the defined benefit plans is presented below:
<Table>
<Caption>
1999 2000 2001
Service costs $ 7,734 $ 6,824 $ 6,055
Interest costs 14,980 15,376 15,579
Actual return on net assets (15,272) (40,543) 21,265
Net deferral items (3,012) 22,269 (41,172)
------- -------- --------
$ 4,430 $ 3,926 $ 1,727
======= ======= =======
</Table>
-F-34-
<Page>
The pension plans' assets (primarily U.S. Government securities, common
stock and corporate bonds) are deposited with a bank. A comparison of
the projected benefit obligation and plan assets at fair value as of
June 30, 2000 and 2001 is presented below.
<Table>
<Caption>
2000 2001
-------------------------------- ----------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at
beginning of year $(230,530) $(10,983) $(224,295) $(27,938)
Service cost (6,496) (328) (5,519) (536)
Interest cost (14,613) (763) (13,439) (2,140)
Curtailments 934
Actuarial (loss) gain (3,196) 1,116 21,439 (1,912)
Plan amendments
Foreign currency exchange rate
changes 8,093 8 13,049 26
Participant contributions (1,739) (1,559)
Benefits paid 6,707 491 6,968 1,522
--------- -------- --------- --------
Projected benefit obligation at end
of year (241,774) (10,459) (203,356) (30,044)
--------- -------- --------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 235,859 8,323 249,374 25,031
Actual return on plan assets 39,967 576 (22,329) 1,064
Participant contributions 1,739 1,559
Employer contribution 3,750 389 2,869 1,702
Foreign currency exchange rate
changes (8,993) (7) (14,893) (23)
Benefits paid (6,707) (491) (6,968) (1,522)
--------- -------- --------- --------
Fair value of plan assets at end of
year 265,615 8,790 209,612 26,252
Plan assets in excess (deficiency) of
projected benefit obligation 23,841 (1,669) 6,256 (3,792)
Unrecognized prior service costs 426 600 403 452
Unrecognized net obligation 132 (161) 57 (100)
Unrecognized net (gain)/loss (17,015) (663) 3,775 1,204
Additional liability (122) (887)
--------- -------- --------- --------
Accrued pension asset (liability) $ 7,384 $ (2,015) $ 10,491 $ (3,123)
========= ======== ======== ========
THE ACTUARIAL VALUATION WAS PREPARED
ASSUMING:
Discount rate 7.75 % 7.25 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 %
Salary increases per year 5.00 % 5.00 %
</Table>
-F-35-
<Page>
In accordance with SFAS No. 87, "EMPLOYERS' ACCOUNTING FOR PENSIONS", the
Company has recorded an additional minimum pension liability for
underfunded plans of $122 and $887 at June 30, 2000 and 2001, respectively,
representing the excess of unfunded accumulated benefit obligations over
previously recorded pension cost liabilities. A corresponding amount is
recognized as an intangible asset except to the extent that these
additional liabilities exceed related unrecognized prior service cost and
net transition obligation, in which case the increase in liabilities is
charged directly to stockholders' equity as a component of other
comprehensive income.
In addition, the Company sponsors a defined contribution 401(k) benefit
plan covering certain of its employees who have attained age 21 and have
completed one year of service. The Company matches 75% of employee
contributions up to 8% of an employee's salary. Employees vest in the
Company matching contributions after five years. The Company's contribution
was $519, $1,387 and $1,230 for the years ended June 30, 1999, 2000 and
2001, respectively.
The Company's subsidiaries, Prospect Foundry, LA Die Casting and Jahn
Foundry contributed $302, $320 and $256 for the years ended June 30, 1999,
2000 and 2001, respectively, to multiemployer pension plans for employees
covered by a collective bargaining agreement. These plans are not
administered by the Company and contributions are determined in accordance
with provisions of negotiated labor contracts. Information with respect to
the Company's proportionate share of the excess of the actuarially computed
value of vested benefits over the total of the pension plans' net assets is
not available from the plans' administrators. The Multiemployer Pension
Plan Amendments Act of 1980 (the "Act") significantly increased the pension
responsibilities of participating employers. Under the provisions of the
Act, if the plans terminate or the Company withdraws, the Company may be
subject to a substantial "withdrawal liability". As of the date of the most
current unaudited information submitted by the plan's administrators
(December 31, 2000), no withdrawal liabilities exist.
The Company also has various other profit sharing plans. Costs of such
plans charged against earnings were $1,234, $907 and $862 for the years
ended June 30, 1999, 2000 and 2001, respectively.
-F-36-
<Page>
17. POSTRETIREMENT OBLIGATION OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits to
certain of its retired employees. SFAS No. 106, "EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS," requires the Company to
accrue the estimated cost of retiree benefit payments during the years the
employee provides services. The Company funds these benefits on a
pay-as-you-go basis. The accumulated postretirement benefit obligation and
fair value of plan assets as of June 30, 2000 and 2001 are as follows:
<Table>
<Caption>
2000 2001
CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION
Accumulated postretirement benefit obligation
at beginning of year $ 9,864 $11,171
Service cost 516 552
Interest cost 744 876
Actuarial loss 371 1,892
Benefits paid (324) (529)
------- -------
Accumulated postretirement benefit obligation 11,171 13,962
Plan assets
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets 11,171 13,962
Unrecognized net loss (2,555) (4,331)
Unrecognized prior service cost 583 451
------- -------
Accrued postretirement obligation $ 9,199 $10,082
======= =======
</Table>
Net postretirement benefit cost for the years ended June 30, 1999, 2000 and
2001 consisted of the following components:
<Table>
<Caption>
1999 2000 2001
Service cost - benefits earned during the year $ 480 $ 516 $ 552
Interest cost on accumulated benefit obligation 643 744 876
Amortization of prior service cost (132) (132) (132)
Amortization of loss 138 116 116
------ ------ ------
$1,129 $1,244 $1,412
====== ====== ======
</Table>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for pre-age 65 and post-age 65 benefits
as of June 30, 2001 was 9.14% decreasing each successive year until it
reaches 5.25% in 2021, after which it remains constant. A
one-percentage-point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit
obligation as of June 30, 2001 by approximately $2,064 (14.8%) and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for the year then ended by approximately $239
(16.7%). A one-percentage-point decrease in the assumed health care cost
trend rate for each year would decrease the accumulated postretirement
benefit obligation as of June 30,
-F-37-
<Page>
2001 by approximately $1,662 (11.9%) and the aggregate of the service and
interest cost components of the net periodic postretirement benefit cost
for the year then ended by approximately $190 (13.3%). The assumed discount
rates used in determining the accumulated postretirement benefit
obligation, the service costs and interest costs as of and for the years
ended June 30, 1999, 2000 and 2001 were 7.5%, 8.0% and 7.25%, respectively.
18. OPERATING LEASES
The Company leases certain buildings, equipment, automobiles and trucks,
all accounted for as operating leases, on an as needed basis to fulfill
general purposes. Total rental expense was $1,675, $3,862 and $5,462 for
the years ended June 30, 1999, 2000 and 2001, respectively. Long-term,
noncancellable operating leases having an initial or remaining term in
excess of one year require minimum rental payments as follows:
<Table>
2002 $5,943
2003 5,359
2004 4,594
2005 4,117
2006 3,086
Thereafter 2,646
</Table>
19. MAJOR CUSTOMERS
Net sales to and customer accounts receivable from major customers are as
follows:
<Table>
<Caption>
AMOUNT OF NET SALES
1999 2000 2001
Customer A $25,219 $24,826 $23,507
Customer B 53,276 46,677 49,626
------- ------- -------
$78,495 $71,503 $73,133
======= ======= =======
</Table>
<Table>
<Caption>
CUSTOMER
ACCOUNTS
RECEIVABLE
---------------------
2000 2001
Customer A $ 2,916 $ 970
Customer B 4,191 5,418
------- ------
$ 7,107 $6,388
======= ======
</Table>
20. SEGMENT AND GEOGRAPHIC INFORMATION
Each of the Company's subsidiaries and its Atchison Steel Casting &
Machining division is a separate operating segment. Due to the similarity
of the Company's products and services, its production processes, the type
or class of customer for its products and services, and the methods used to
distribute products and provide services, the Company has aggregated these
operating segments into a single
-F-38-
<Page>
reportable segment for reporting purposes. Due to the many casting products
produced by the Company, it is not practicable to disclose revenues by
casting or forging product.
The Company operates in four countries, the United States, Great Britain,
Canada and France. Revenues from external customers derived from operations
in each of these countries for the years ended June 30, 1999, 2000 and 2001
are as follows and long-lived assets located in each of these countries as
of June 30, 2000 and 2001 are as follows:
<Table>
<Caption>
REVENUES
--------------------------------------------------------------------------
UNITED GREAT
STATES BRITAIN CANADA FRANCE TOTAL
1999 $295,537 $132,154 $45,178 $ 4,536 $477,405
2000 289,010 114,183 40,238 17,706 461,137
2001 261,895 107,596 41,258 17,401 428,150
</Table>
<Table>
<Caption>
LONG-LIVED ASSETS
--------------------------------------------------------------------------
UNITED GREAT
STATES BRITAIN CANADA FRANCE TOTAL
2000 $122,994 $29,854 $21,026 $ 678 $174,552
2001 99,903 29,474 19,989 1,048 150,414
</Table>
21. ADDITIONAL CASH FLOWS INFORMATION
<Table>
<Caption>
1999 2000 2001
Cash paid during the year for:
Interest $8,235 $9,398 $11,562
Income taxes 5,751 56
Supplemental schedule of noncash investing and financing
activities:
Recording of other asset related to pension liability 421 706 (765)
Recording of additional pension liability (421) (706) 765
</Table>
22. FLOOD RESERVE
In 1996, the Company received an insurance settlement for losses incurred
as a result of the July 1993 Missouri River flood. At that time the Company
established a reserve to be used for future repairs due to long-term flood
damage to the Company's foundry. Since that time the Company has been
charging the reserve balance for costs incurred resulting from those
repairs.
During 1999, management updated its analysis of the required repairs by
performing its periodic re-evaluation of the effects of the flood based on
current information. As a result, management committed to a revised repair
plan, which included several remaining projects. These projects and their
final estimated costs to complete represent the remaining flood reserve
balance that is considered necessary. The amount of the reserve balance,
over and above the estimated costs of such identified projects, was
considered to be excess and was reversed. Such excess amounted to $3,500
and was included in other income in the fourth quarter of fiscal year 1999.
Any future repairs outside the scope of the projects identified, if any,
will be
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<Page>
charged to repairs and maintenance as incurred. As of June 30, 2000 and
2001, the Company has $645 and $597 recorded, respectively, as reserves for
future flood repairs, which have been classified as accrued expenses.
23. CONTINGENCIES
An accident, involving an explosion and fire, occurred on February 25, 1999
at Jahn Foundry, located in Springfield, Massachusetts. Nine employees were
seriously injured and there were three fatalities. The damage was confined
to the shell molding area and the 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 are 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 ($450 after tax) during
the third quarter of fiscal year 1999, primarily reflecting the deductibles
under the Company's various insurance policies. At this time, there can be
no assurance that the Company's ultimate costs and expenses resulting from
the accident will not exceed available insurance coverage by an amount
which could be material to its consolidated financial statements.
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, for (i) 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 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 financial 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 $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 commenced in the Massachusetts Superior State Court on
behalf of the estates of deceased workers, their families, injured workers
and their families, against the supplier of a chemical compound used in
Jahn Foundry's manufacturing process. The supplier of the chemical
compound, Borden Chemical, Inc., filed a Third Party Complaint against Jahn
Foundry in the Massachusetts Superior State Court on February 2, 2000
seeking indemnity for any liability it has to the plaintiffs in the civil
action. The Company's comprehensive general liability insurance carrier has
retained counsel on behalf of Jahn Foundry and the Company and is
aggressively defending Jahn Foundry in the Third Party Complaint. It is too
early to assess the potential liability to Jahn Foundry for the Third Party
Complaint, which in any event the Jahn Foundry would aggressively defend.
In addition, Jahn Foundry has brought a
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Third Party Counterclaim against Borden and the independent sales
representative of the chemical compound, J.R. Oldhan Company, seeking
compensation for losses sustained in the explosion, including amounts
covered by insurance.
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 and J.R. Oldhan.
The Company, its chief executive officer, and its chief financial officer
were named as defendants in five lawsuits filed following the Company's
announcements concerning the discovery of accounting irregularities at the
Pennsylvania Foundry Group. The cases have been consolidated before the
U.S. District Court for the District of Kansas. An amended complaint filed
after the consolidation alleges, among other things, that the defendants
intentionally or recklessly issued materially false and misleading
financial statements in violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. That complaint
seeks certification of a class of purchasers of the company's common stock
between December 10, 1997 and November 3, 2000 and asks for damages for the
class in an unspecified amount. Discovery has been stayed pending the
resolution of the defendant's motion to dismiss the amended complaint. The
Company believes the claims are without merit and intends to defend them
vigorously. There can be no assurance, however, that an adverse outcome
with respect to the case 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 in the normal course of business.
In the opinion of management, the resolution of these matters will not have
a material effect on the Company's consolidated financial statements.
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24. FINANCIAL RESULTS AND MANAGEMENT PLANS
In fiscal 2000 and fiscal 2001, the Company incurred pre-tax losses of
$27.6 million ($11.2 million excluding impairment charges of $16.4 million)
and $34.5 million ($16.4 million excluding impairment charges of $18.1
million), respectively, and, has not been in compliance with certain
financial covenants included in its debt agreements (See Note 10). At June
30, 2001, the Company had a deficiency in working capital of $52,925. These
conditions have continued subsequent to June 30, 2001.
To address these conditions, management has taken or is in the process of
taking the following actions:
OPERATIONS
As discussed in Note 2, the Company has closed three unprofitable foundries
during fiscal 2001 and is in the process of closing a fourth. Operations
from these four foundries have been a major factor in the Company's pre-tax
losses, producing combined pre-tax losses of $32.7 million ($16.3 million
before impairment charges of $16.4 million) and $17.1 million ($15.5
million before impairment charges of $1.6 million) in fiscal 2000 and
fiscal 2001, respectively. Management believes it can continue to transfer
a significant portion of the work previously performed by these locations
to other foundries, thereby increasing the utilization and profitability of
these other foundries.
PLANNED SALE OF OPERATIONS
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 23). Jahn Foundry had pre-tax losses of $187 (after
insurance payments) and $7.0 million ($4.0 million excluding an impairment
charge of $13.9 million and a non-recurring gain of $10.9 million relating
to insurance claims resulting from the industrial accident at Jahn Foundry
on February 25, 1999) in fiscal 2000 and fiscal 2001, respectively. To
improve operating results, Jahn Foundry began focusing on 1) only one type
of molding process, transferring work requiring a different process to G&C
and La Grange and 2) a smaller number of key customers, with a
significantly reduced workforce. While Jahn Foundry has made some gradual
improvement as a result of these actions, the Company has decided to try to
sell Jahn Foundry. The Company is negotiating the sale of substantially all
of the assets of Jahn Foundry (Note 3). If a definitive agreement is
executed and consummated, it is expected this transaction would close
during the second quarter of fiscal 2002.
The Company is negotiating the sale of substantially all of the assets of
LA Die Casting (Note 3). If consummated, it is expected that this
transaction would close during the second quarter of fiscal 2002. LA Die
Casting recorded pre-tax income of $488 and $64 (excluding an impairment
charge of $2.7 million) for fiscal 2000 and fiscal 2001, respectively.
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. As
discussed in Note 10, over the past few years the Company has successfully
negotiated with its lenders to obtain waivers 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, and the Company currently has
forbearance agreements which expire September 30, 2001 and October 12,
2001. The Company believes that its operating cash flow and amounts
available for borrowing under its existing credit facility and the
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Facility Agreement will be adequate to fund its capital expenditure and
working capital requirements through June 2002.
On September 17, 2001, the Company's 95% owned U.K. subsidiary, ACUK,
entered into a new financing agreement with Burdale Financial Limited, an
affiliate of Congress Financial Corporation (Note 10). This 25 million
British pound (approximately $35 million U.S.) facility will provide
additional working capital to fund future growth. The purpose of the
facility is to fund working capital requirements at Sheffield, a subsidiary
of ACUK, as well as up to 1.0 million British pounds in working capital
funds at the Company's subsidiary in France, Autun. It also provided for up
to $9 million additional working capital funds in North America if certain
conditions are met.
Management believes, however, that certain of the existing loan
arrangements will need to be revised or replaced to provide the Company
with additional borrowing capacity and with financial covenants within such
arrangements that are achievable by the Company. Management is currently in
negotiations with various financial institutions to extend, renegotiate or
replace the current credit agreements with a long-term credit facility, but
there can be no assurance that management will be successful in these
negotiations.
* * * * * *
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