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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
-------------------------
Commission File Number 1-12541
Atchison Casting Corporation
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(Exact name of registrant as specified in its charter)
Kansas 48-1156578
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(State of other jurisdiction of (I.R.S. Employer
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
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements from the past 90 days. Yes |X| No |_|
There were 7,723,031 shares of common stock, $.01 par value per share,
outstanding on November 13, 2001
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PART I
ITEM 1. Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<Table>
<Caption>
September 30, June 30,
2001 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,561 $ 1,329
Customer accounts receivable, net of allowance for
doubtful accounts of $1,254 and $845, respectively 77,848 83,010
Inventories 59,782 58,617
Deferred income taxes 1,602 1,345
Other current assets 10,066 10,437
-------- --------
Total current assets 151,859 154,738
PROPERTY, PLANT AND EQUIPMENT, Net 111,856 113,009
INTANGIBLE ASSETS, Net 23,752 24,362
DEFERRED FINANCING COSTS, Net 1,629 721
OTHER ASSETS 13,572 13,043
-------- --------
TOTAL $302,668 $305,873
======== ========
</Table>
See Notes to Consolidated Financial Statements.
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ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(Unaudited)
(In thousands, except share data)
<Table>
<Caption>
September 30, June 30,
2001 2000
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 52,667 $ 58,392
Accrued expenses 33,044 34,377
Current maturities of long-term obligations 110,606 114,894
--------- ---------
Total current liabilities 196,317 207,663
LONG-TERM OBLIGATIONS 18,001 6,648
DEFERRED INCOME TAXES 3,370 3,460
OTHER LONG-TERM OBLIGATIONS 778 898
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS
OVER COST, Net of accumulated amortization of $4,240
and $3,577, respectively 2,312 2,543
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 10,325 10,082
MINORITY INTEREST IN SUBSIDIARIES 1,866 1,890
--------- ---------
Total liabilities 232,969 233,184
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000
authorized shares; no shares issued and outstanding -- --
Common stock, $.01 par value, 19,300,000
authorized shares; 8,312,049 shares issued 83 83
Class A common stock (non-voting), $.01 par value, 700,000
authorized shares; no shares issued and
outstanding -- --
Additional paid-in capital 81,613 81,517
Retained earnings 1,380 5,863
Accumulated other comprehensive loss (7,329) (8,726)
--------- ---------
75,747 78,737
Less shares held in treasury:
Common stock, 589,018 and 622,702 shares,respectively, at cost (6,048) (6,048)
--------- ---------
Total stockholders' equity 69,699 72,689
--------- ---------
TOTAL $ 302,668 $ 305,873
========= =========
</Table>
See Notes to Consolidated Financial Statements.
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ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
<Table>
<Caption>
Three Months Ended
September 30,
2001 2000
----------- -----------
NET SALES $ 99,614 $ 99,208
COST OF GOODS SOLD 92,189 95,208
----------- -----------
GROSS PROFIT 7,425 4,000
OPERATING EXPENSES:
Selling, general and administrative 9,187 9,429
Amortization of intangibles (94) (68)
----------- -----------
Total operating expenses 9,093 9,361
----------- -----------
OPERATING LOSS (1,668) (5,361)
INTEREST EXPENSE 2,662 2,605
MINORITY INTEREST IN NET LOSS (28) (12)
OF SUBSIDIARIES
----------- -----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (4,302) (7,954)
INCOME TAX EXPENSE (BENEFIT) 181 (2,634)
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (4,483) (5,320)
CUMULATIVE EFFECT ON PRIOR YEARS OF A
CHANGE IN ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS, NET OF $364 TAX BENEFIT (546)
----------- -----------
NET LOSS ($4,483) ($5,866)
=========== ===========
LOSS PER SHARE - BASIC AND DILUTED:
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ($0.58) ($0.69)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS -- (0.07)
----------- -----------
NET LOSS ($0.58) ($0.76)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATION:
BASIC 7,697,037 7,673,449
=========== ===========
DILUTED 7,697,037 7,673,449
=========== ===========
</Table>
See Notes to Consolidated Financial Statements.
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ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In Thousands)
<Table>
<Caption>
Three Months Ended
September 30,
2001 2000
------- -------
NET LOSS ($4,483) ($5,866)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments 1,397 (2,484)
------- -------
OTHER COMPREHENSIVE LOSS ($3,086) ($8,350)
======= =======
</Table>
See Notes to Consolidated Financial Statements.
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ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In Thousands)
<Table>
<Caption>
Three Months Ended
September 30,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($4,483) ($5,866)
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 2,624 3,071
Minority interest in net loss of subsidiaries (28) (21)
Gain on disposal of capital assets (28) (354)
Deferred income taxes (9) (571)
Changes in assets and liabilities:
Receivables 6,468 5,641
Inventories (299) 66
Other current assets 579 (1,550)
Accounts payable (6,612) 4,033
Accrued expenses (1,901) (3,570)
Postretirement obligation other
than pension 243 223
Other (333) (688)
------- -------
Cash (used in) provided by operating activities (3,779) 414
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,131) (4,644)
Proceeds from sale of capital assets 125 731
------- -------
Cash used in investing activities (1,006) (3,913)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 96 57
Payments on long-term obligations (3,072) (3,800)
Capitalized financing costs paid (1,015) (78)
Net borrowings under revolving loan notes 9,977 7,828
------- -------
Cash provided by financing activities 5,986 4,007
EFFECT OF EXCHANGE RATE ON CASH 31 (138)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,232 $ 370
CASH AND CASH EQUIVALENTS, Beginning of period 1,329 3,815
------- -------
CASH AND CASH EQUIVALENTS, End of period $ 2,561 $ 4,185
======= =======
</Table>
See Notes to Consolidated Financial Statements.
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ATCHISON CASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company for
the year ended June 30, 2001, as included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2001.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals), which, in the
opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. Results of operations for
interim periods are not necessarily indicative of results to be expected
for a full year.
2. Inventories
<Table>
<Caption>
As of
--------------------------
Sept. 30, June 30,
2001 2001
---- ----
(Thousands)
Raw materials $ 7,755 $ 7,587
Work-in-process 39,558 38,889
Finished goods 9,914 10,138
Supplies 2,555 2,003
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$59,782 $58,617
======= =======
</Table>
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3. Income Taxes
Income tax expense (benefit) consisted of:
<Table>
<Caption>
Three Months Ended
Sept. 30,
2001 2000
(Thousands)
Current:
Domestic $ -- $(2,544)
Foreign 172 117
------- -------
172 (2,427)
Deferred:
Domestic -- (472)
Foreign 9 (99)
------- -------
9 (571)
------- -------
Total $ 181 $(2,998)
======= =======
</Table>
4. Supplemental Cash Flow Information
<Table>
<Caption>
Three Months Ended
Sept. 30,
2001 2000
(Thousands)
Cash paid during the period for:
Interest $ 2,703 $ 3,453
======= =======
Income Taxes $ -- $ 196
======= =======
</Table>
<Page>
5. Earnings Per Share
Following is a reconciliation of basic and diluted EPS for the three month
period ended September 30, 2001 and 2000, respectively.
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Weighted
Average Loss Per
Net Loss Shares Share
----------- ----------- -----------
Basic EPS
Loss available to
common stockholders $(4,483,000) 7,697,037 $ (0.58)
Effect of Dilutive Securities:
Options
----------- ----------- -----------
Diluted EPS $(4,483,000) 7,697,037 $ (0.58)
=========== =========== ===========
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Weighted
Average Loss Per
Net Loss Shares Share
----------- ----------- -----------
Basic EPS
Loss before cumulative
effect of a change in accounting
principle available to common
stockholders $(5,320,000) 7,673,449 $ (0.69)
Cumulative effect on prior years (to
June 30, 2000) of a change in
accounting for derivative financial
instruments, net of $364,000 tax
benefit (546,000) (0.07)
Effect of Dilutive Securities:
Options
----------- ----------- -----------
Diluted EPS $(5,866,000) 7,673,449 $ (0.76)
=========== =========== ===========
</Table>
6. Derivative Instruments
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133." SFAS No. 133 and 138 require
companies to record derivative instruments as assets or liabilities,
measured at fair value. The recognition of gains or losses resulting from
changes in the
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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. Additionally, the translation of the foreign
denominated trade receivables resulted in the increase in value of the
receivables and the Company recorded a currency translation gain of
approximately $435,000 ($264,000 net of deferred income tax expense).
On September 30, 2000, the Company recorded its FX contracts at their fair
value of approximately ($90,000). This resulted in a gain of approximately
$820,000. 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 $270,000.
On September 30, 2001, the Company recorded its FX Contracts at their fair
value of approximately $504,000. This resulted in a gain of approximately
$1.3 million. 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
$302,000.
7. 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
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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.
8. Pending Closures, Sales and Asset Impairments
LA Die Casting
The Company is negotiating the sale of substantially all of the assets of
LA Die Casting, 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. 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. Prior to
the impairment charge, the intangible assets had a carrying value of $3.5
million. For the first quarter of fiscal years 2001 and 2002, LA Die
Casting recorded net sales of $2.5 million and $1.9 million, respectively,
and net income (loss) of $47,000 and $(24,000), respectively. Jahn Foundry
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 minority ownership position in the buyer and $1.0 million
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
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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. Prior to
the impairment charge, the fixed assets had a carrying value of $15.9
million. For the first quarter of fiscal years 2001 and 2002, Jahn Foundry
recorded net sales of $2.1 million and $1.6 million, respectively, and net
losses of $723,000 and $383,000, respectively.
Empire Steel
Following continued losses in fiscal 2001, the Company announced, on
August 31, 2001, plans to close Empire Steel Castings, Inc. ("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 $1.6
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 locations. For the first quarter of fiscal years 2001 and 2002,
Empire recorded net sales of $2.3 million and $2.2 million, respectively,
and net losses of $681,000 and $481,000, respectively.
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 $89,000 in the quarter ending December 31, 2001.
9. 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 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
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(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.
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,
<Page>
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 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
<Page>
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 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.
10. Loan Amendments
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, as amended, provides that, among other things, these lenders
will forbear from enforcing their rights with respect to certain existing
defaults through November 20, 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. At
September 30, 2001 the Company had fully utilized its revolving credit
facility under the Credit Agreement.
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, as amended, provides that, among other
things, the Noteholder will forbear from enforcing its rights with respect
to certain existing defaults through November 20, 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.
<Page>
In September 2001, ACUK and Burdale Financial Limited entered into the
Facility Agreement. This Facility Agreement provides for a facility of up
to 25 million British pounds (approximately $35 million US), subject to
certain eligibility calculations, 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%. As of September 30, 2001, ACUK had drawn $11.4 million under the
Facility Agreement, and there was approximately $600,000 available for
borrowing.
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.
11. Financial Results and Management's Plans
In fiscal 2001, the Company incurred a pre-tax loss of $34.5 million
($16.4 million excluding impairments charges of $18.1 million) and, as of
September 30, 2001, the Company was not in compliance with certain
financial covenants included in its debt agreements (See Note 10). These
conditions have continued through September 30, 2001.
To address these conditions, management has taken or is in the process of
taking the following actions:
Operations
The Company 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 pretax losses in fiscal 2001 of $17.1 million ($15.5 million
before impairment charges of $1.6 million). 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.
<Page>
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 9). Jahn Foundry had pre-tax losses of $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 2001. To improve operating results, Jahn Foundry began
focusing on 1) only one type of molding process, transferring work
requiring a different process to The G&C Foundry Company ("G & C") and La
Grange Foundry Inc. ("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 8). 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 8). If a definitive agreement is executed and
consummated, it is expected that this transaction would close during the
second quarter of fiscal 2002. LA Die Casting recorded pre-tax income of
$64,000 (excluding an impairment charge of $2.7 million) for fiscal 2001.
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 amendments, forbearances and 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 November 20,
2001. 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.
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
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(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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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Net sales for the first quarter of fiscal 2002 were $99.6 million, representing
an increase of $400,000, or 0.4%, from net sales of $99.2 million in the first
quarter of fiscal 2001. The increase in net sales was due primarily to increases
in net sales to the automotive, power generation, mining and steel markets,
partially offset by decreases in sales to the rail and construction markets. Net
sales of Sheffield Forgemasters Group Limited ("Sheffield") for the first
quarter of fiscal 2002 increased $4.1 million from net sales in the first
quarter of fiscal 2001. During fiscal 2001, the Company completed the closure of
Claremont Foundry, Inc. ("Claremont"), PrimeCast, Inc. ("PrimeCast") and
Pennsylvania Steel Foundry & Machine Company ("Pennsylvania Steel"). Net sales
for the first quarter of fiscal 2001 for Claremont, PrimeCast and Pennsylvania
Steel were $353,000, $4.6 million and $2.1 million, respectively. Much of
Claremont's and Pennsylvania Steel's net sales were transferred to other Company
locations. 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.
Gross profit for the first quarter of fiscal 2002 increased $3.4 million, or
85.6%, to $7.4 million, or 7.5% of net sales, compared to $4.0 million, or 4.0%
of net sales, for the first quarter of fiscal 2001. The increase in gross profit
and gross profit as a percentage of net sales was primarily due to the
elimination of the gross losses incurred at the operations closed during fiscal
2001, improved operations at the Company's Jahn Foundry subsidiary and increased
sales and absorption of overhead at the Company's subsidiaries primarily serving
the mining, automotive and power generation markets.
The gross losses at Claremont, PrimeCast and Pennsylvania Steel in the first
quarter of fiscal 2002 decreased by $398,000, $1.2 million and $282,000,
respectively, compared to gross losses of $398,000, $1.4 million and $352,000 in
the first quarter of fiscal 2001. The gross loss at Jahn Foundry Corp. ("Jahn
Foundry") in the first quarter of fiscal 2002 decreased $747,000, to a gross
loss of $375,000, or 23.9% of net sales, compared to a gross loss of $1.1
million, or 54.5% of net sales, in the first quarter of fiscal 2001, reflecting
improved operations following the start-up of the shell mold department, which
had been shutdown following the industrial accident there in February 1999.
Selling, general and administrative expense ("SG&A") for the first quarter of
fiscal 2002 was $9.2 million, or 9.2% of net sales, compared to $9.4 million, or
9.5% of net sales, in the first quarter of fiscal 2001. Included in SG&A in the
first quarter of fiscal 2002 was a net gain of approximately $1.0 million to
record the Company's foreign exchange contracts and related foreign denominated
trade receivables at fair value (Note 6). Offsetting this gain were expenses of
approximately $720,000 incurred by the Company in pursuing various options to
refinance its bank credit facility. Included in SG&A in the first quarter of
fiscal 2001 was a net gain of approximately $550,000 to record the Company's
foreign exchange contracts and related foreign denominated trade receivables at
fair value (Note 6). Offsetting this gain were expenses of approximately
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$520,000 incurred by the Company in pursuing various options to refinance its
bank credit facility.
The Company has recorded intangible assets, consisting of goodwill, in
connection with certain of the Company's acquisitions. Amortization of these
assets for the first quarter of fiscal 2002 was expense of $307,000, or 0.3% of
net sales, as compared to $340,000, or 0.3% of net sales, in the first quarter
of fiscal 2001. The Company has also recorded a liability, consisting of the
excess of acquired net assets over cost ("negative goodwill"), in connection
with the acquisition of Fonderie d'Autun ("Autun"). The amortization of negative
goodwill was a credit to income in the first quarter of fiscal 2002 of $401,000,
or 0.4% of net sales, as compared to $408,000, or 0.4% of net sales, in the
first quarter of fiscal 2001.
Following continued losses in fiscal 2001, the Company announced, on August 31,
2001, plans to close Empire Steel Castings, Inc. ("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 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. For the first
quarter of fiscal years 2001 and 2002, Empire recorded net sales of $2.3 million
and $2.2 million, respectively, and net losses of $681,000 and $481,000,
respectively.
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 the first quarter of fiscal years 2001 and 2002, LA Die Casting recorded net
sales of $2.5 million and $1.9 million, respectively, and net income (loss) of
$47,000, and $(24,000), respectively.
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 minority ownership position in 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
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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 the first quarter of
fiscal years 2001 and 2002, Jahn Foundry recorded net sales of $2.1 million and
$1.6 million, respectively, and net losses of $723,000 and $383,000,
respectively.
Interest expense for the first quarter of fiscal 2002 was $2.7 million, or 2.7%
of net sales, compared to $2.6 million or, 2.6% of net sales, in the first
quarter of fiscal 2001. The interest expense primarily reflects higher average
levels of outstanding indebtedness, offset by lower average interest rates.
The Company recorded income tax expense of $181,000 in the first quarter of
fiscal 2002. Due to the Company's current income tax position, no income tax
benefit was recorded in connection with the losses incurred. Income tax expense
for the first quarter of fiscal 2001 reflected the combined federal, state and
provincial statutory rate of approximately 33%.
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133." SFAS No.
133 and 138 require companies to record derivative instruments as assets or
liabilities, measured at fair value. The recognition of gains or losses
resulting from charges in the values of those derivative instruments is based on
the use of each derivative instrument and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows.
At July 1, 2000, the Company had derivatives in the form of foreign exchange
contracts ("FX contracts") to buy and sell various currencies. The Company uses
FX contracts as an economic hedge of trade receivables and payables denominated
in foreign currencies, as well as anticipated sales to foreign customers in the
customers' local currency. On July 1, 2000, the Company recorded its FX
contracts at their fair value, which resulted in a charge to income of
approximately $910,000 ($546,000 net of deferred income tax benefit). This is
presented in the Company's consolidated financial statements as the cumulative
effect of a change in accounting principle.
As a result of the foregoing, the net loss for the first quarter of fiscal 2002
was $4.5 million compared to a net loss of $5.9 million for the first quarter of
fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operating activities for the first three months of fiscal 2002 was
$3.8 million, compared to cash provided by operations of $414,000 for the first
three months
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of fiscal 2001. This change was primarily attributable to a reduction in trade
payable balances through the first quarter of fiscal 2002.
Working capital was a negative $44.5 million at September 30, 2001, as compared
to a negative $52.9 million at June 30, 2001. The change in working capital
levels primarily reflect a reduction in trade payable balances and outstanding
borrowings under the Company's revolving credit facilities. The working capital
levels also reflect the classification of $99.6 million and $105.3 million of
the Company's bank credit facility, term loan and senior notes with an insurance
company as current at September 30, 2001 and June 30, 2001, respectively. The
Company has not been in compliance with certain financial covenants under the
Credit Agreement, Note Purchase Agreement and the GE Financing, as defined
below, and, accordingly, such amounts have been classified as current
liabilities.
During the first three months of fiscal 2002, the Company made capital
expenditures of $1.1 million, as compared to $4.6 million for the first three
months of fiscal 2001. Included in the first quarter of fiscal 2001 were capital
expenditures of $2.8 million to rebuild the shell molding area and boiler room
damaged in the industrial accident on February 25, 1999 at Jahn Foundry (see
below). The balance of capital expenditures in both periods were used for
routine projects at each of the Company's facilities.
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).
At September 30, 2001, Notes with an aggregate principal amount of $11.2 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
<Page>
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, as
modified, provide that, among other things, these lenders will forbear from
enforcing their rights with respect to certain existing defaults through
November 20, 2001. These amendments also allowed ACUK to enter into the Facility
Agreement.
At September 30, 2001, the balance of the term loan under the GE Financing was
$29.2 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 facility of up to 25 million British pounds
(approximately $35 million US), subject to certain eligibility calculations, 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 provides
security for Sheffield's foreign currency exchange contracts and performance
bond commitments, repaid $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 all of Sheffield's assets in the U.K. Loans under this Facility
Agreement will bear interest at LIBOR plus 2.60%. As of September 30, 2001, ACUK
had drawn $11.4 million under the Facility Agreement. The Company is currently
in compliance with the covenants under the Facility Agreement.
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 November 20, 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 operating losses 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
<Page>
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 through September were below results
needed to achieve compliance with these covenants under the Credit Agreement,
Note Purchase Agreement and the GE Financing. Accordingly, the Company is
currently negotiating with new and existing financial institutions to extend its
current arrangements while it attempts to establish a new credit facility with
covenants that the Company believes it will be able to satisfy 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 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 September 30, 2001 was $128.6 million, as
compared to $121.5 million at June 30, 2001. This increase primarily reflects
borrowings of $11.4 million under the Facility Agreement, primarily to fund
working capital requirements at ACUK and Autun. At September 30, 2001 the
Company had fully utilized its revolving credit facility under the Credit
Agreement and there was approximately $600,000 available for borrowing under the
Facility Agreement.
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
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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.
Following the accident, OSHA conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items. Neither of
the two violations specifically addressing conditions related to the explosion
and fire were classified as serious or willful. Without admitting any
wrongdoing, Jahn Foundry entered into a settlement with OSHA that addresses the
alleged work place safety issues and agreed to pay $148,500 in fines.
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,
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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 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.
FORWARD-LOOKING STATEMENTS
The section entitled "Liquidity and Capital Resources" contains forward-looking
statements that involve a number of risks and uncertainties. Forward-looking
statements such as "expects," "intends," "contemplating" and statements
regarding quarterly fluctuations, statements regarding the adequacy of funding
for capital expenditure and working capital requirements 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
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September 11, 2001 and any related military responses 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.
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ITEM 3.
DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in Item
7A of the Company's Form 10-K for the fiscal year ended June 30, 2001.
The Company's primary interest rate exposures relate to its cash and short-term
investments, fixed and variable rate debt and interest rate swaps, which are
mainly exposed to changes in short-term interest rates (e.g. USD LIBOR). The
potential loss in fair values is based on an immediate change in the net present
values of the Company's interest rate-sensitive exposures resulting from a 10%
change in interest rates. The potential loss in cash flows and earnings is based
on the change in the net interest income/expense over a one-year period due to
an immediate 10% change in rates. A hypothetical 10% change in interest rates
would have a material impact on the Company's earnings before income tax of
approximately $300,000 and $200,000 in the first three months of fiscal 2001 and
fiscal 2002, respectively.
The Company's exposure to fluctuations in currency rates against the British
pound and Canadian dollar result from the Company's holdings in cash and
short-term investments and its utilization of foreign currency forward exchange
contracts to hedge customer receivables and firm commitments. The potential loss
in fair values is based on an immediate change in the U.S. dollar equivalent
balances of the Company's currency exposures due to a 10% shift in exchange
rates versus the British pound and Canadian dollar. The potential loss in cash
flows and earnings is based on the change in cash flow and earnings over a
one-year period resulting from an immediate 10% change in currency exchange
rates versus the British pound and Canadian dollar. Based on the Company's
holdings of financial instruments at June 30, 2001 and September 30, 2001, a
hypothetical 10% depreciation in the British pound and the Canadian dollar
versus all other currencies would have a material impact on the Company's
earnings before income tax of approximately $500,000 and $1.2 million in the
first three months of fiscal 2001 and fiscal 2002, respectively. The Company's
analysis does not include the offsetting impact from its underlying hedged
exposures (customer receivables and firm commitments). If the Company included
these underlying hedged exposures in its sensitivity analysis, these exposures
would substantially offset the financial impact of its foreign currency forward
exchange contracts due to changes in currency rates.
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PART II
ITEM 1 - Legal Proceedings
An accident, involving an explosion and fire, occurred on February 25, 1999, at
Jahn Foundry, located in Springfield, Massachusetts. Nine employees were
seriously injured and there were three fatalities. The damage was confined to
the shell molding area and boiler room. The other areas of the foundry remained
operational. Molds were being produced at other foundries, as well as Jahn
Foundry, while 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.
Following the accident, OSHA conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items. Neither of
the two violations specifically addressing conditions related to the explosion
and fire were classified as serious or willful. Without admitting any
wrongdoing, Jahn Foundry entered into a settlement with OSHA that addresses the
alleged work place safety issues and agreed to pay $148,500 in fines.
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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 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.
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The Company understands that on or about November 29, 2000 the Securities and
Exchange Commission issued a formal order of investigation as a result of the
events underlying the Company's earlier disclosure of certain accounting
irregularities. The Company is cooperating with the investigation.
In addition to these matters, from time to time, the Company is the subject of
legal proceedings, including employee matters, commercial matters, environmental
matters and similar claims. There are no other material claims pending. The
Company maintains comprehensive general liability insurance, which it believes
to be adequate for the continued operation of its business.
ITEM 2 - Changes in Securities and Use of Proceeds
Unregistered Securities Transactions
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
See Liquidity and Capital Resources above.
ITEM 4 - Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
ITEM 5 - Other Information
NOT APPLICABLE
ITEM 6 - Exhibits and Reports of Form 8-K
(A) Exhibits
(B) Reports on Form 8-K
The Company has filed a Form 8-K dated August 31, 2001. Items Reported
Item 5. Other Events
Press Release announcing the Company's plans to close Empire
Steel Castings, Inc.
Item 7. Financial Statements and Exhibits.
Press Release dated August 31, 2001.
The Company has filed a Form 8-K dated September 18, 2001. Items
Reported
<Page>
Item 5. Other Events
Press Release announcing the completion of a new financing
agreement between ACUK, a subsidiary of the Company, and
Burdale Financial Limited.
Item 7. Financial Statements and Exhibits.
Press Release dated September 18, 2001.
<Page>
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atchison Casting Corporation
----------------------------
(Registrant)
DATE: November 13, 2001 /s/ HUGH H. AIKEN
---------------------------------------------
Hugh H. Aiken, Chairman of the
Board, President and Chief
Executive Officer
DATE: November 13, 2001 /s/ KEVIN T. MCDERMED
---------------------------------------------
Kevin T. McDermed, Vice
President, Chief Financial Officer,
Treasurer and Secretary