SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
January 31, 1998 0-22906
- -------------------------- ----------------------
For the Quarter Ended Commission File Number
ABC Rail Products Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3498749
- --------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Michigan Avenue, Chicago, IL 60604-2402
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (312) 322-0360
--------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 6, 1998
- ---------------------------- -------------------------------
Common Stock, $.01 par value 8,976,304 Shares
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
Page
-------
Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7 - 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 13
Part II Other Information
Item 2 Changes in Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 14 - 15
2
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 31, 1998 and July 31, 1997
(In thousands, except share and per share data)
January 31, July 31,
ASSETS 1998 1997
- ------ ----------- --------
(unaudited)
CURRENT ASSETS:
Accounts receivable, less allowances of $1,361 and $1,006, respectively $ 48,980 $ 38,208
Inventories (Note 3) 48,278 46,580
Prepaid expenses and other current assets 3,689 1,964
Prepaid income taxes 1,012 963
----------- --------
Total current assets 101,959 87,715
----------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,927 1,927
Buildings and improvements 12,525 12,491
Machinery and equipment 86,538 84,653
Construction in progress 59,769 36,421
----------- --------
160,759 135,492
Less - Accumulated depreciation (41,842) (37,480)
----------- --------
Net property, plant and equipment 118,917 98,012
----------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 15,544 14,684
----------- --------
OTHER ASSETS - net 33,684 30,196
----------- --------
Total assets $ 270,104 $230,607
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 6,485 $ 2,991
Current maturities of long-term debt 2,996 3,987
Accounts payable 30,835 26,617
Accrued liabilities 16,144 11,273
----------- --------
Total current liabilities 56,460 44,868
----------- --------
LONG-TERM DEBT, less current maturities (Note 4) 122,008 95,011
----------- --------
DEFERRED INCOME TAXES 5,931 5,881
----------- --------
OTHER LONG-TERM LIABILITIES 4,066 4,351
----------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
8,976,304 shares and 8,954,082 shares issued and outstanding
as of January 31, 1998 and July 31, 1997, respectively 90 90
Additional paid-in capital 67,798 67,362
Retained earnings 13,751 13,044
----------- --------
Total stockholders' equity 81,639 80,496
----------- --------
Total liabilities and stockholders' equity $ 270,104 $230,607
=========== ========
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
3
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
January 31 January 31
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
NET SALES $70,370 $55,710 $138,255 $111,621
COST OF SALES 62,351 47,102 123,444 97,640
-------- ------- -------- --------
Gross profit 8,019 8,608 14,811 13,981
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,054 2,752 7,676 5,994
-------- ------- -------- --------
Operating income 3,965 5,856 7,135 7,987
EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES 268 45 669 52
INTEREST EXPENSE 2,100 1,423 4,285 2,698
AMORTIZATION OF DEFERRED FINANCING COSTS 144 59 273 112
-------- ------- -------- --------
Income before income taxes and cumulative effect of accounting
change 1,989 4,419 3,246 5,229
PROVISION FOR INCOME TAXES 876 1,811 1,428 2,142
-------- ------- -------- --------
Income before cumulative effect of accounting change 1,113 2,608 1,818 3,087
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 6) (1,111) -- (1,111) --
-------- ------- -------- --------
Net income $ 2 $ 2,608 $ 707 $ 3,087
======== ======= ======== ========
EARNINGS PER SHARE DATA (Note 5):
Basic:
Income before cumulative effect of accounting
change $ 0.12 $ 0.30 $ 0.20 $ 0.36
Cumulative effect of accounting change (0.12) -- (0.12) --
-------- ------- -------- --------
Net income -- $ 0.30 $ 0.08 $ 0.36
======== ======= ======== ========
Weighted average common shares outstanding 8,970 8,668 8,963 8,498
======== ======= ======== ========
Diluted:
Income before cumulative effect of accounting
change $ 0.12 $ 0.30 $ 0.20 $ 0.36
Cumulative effect of accounting change (0.12) -- (0.12)
-------- ------- -------- --------
Net income $ -- $ 0.30 $ 0.08 $ 0.36
======== ======= ======== ========
Weighted average common and equivalent shares outstanding 9,291 8,792 9,259 8,605
======== ======= ======== ========
The accompanying notes to unaudited consolidated financial statements are an integral part of these financial statements.
4
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands)
Additional
Common Paid-in Retained
Stock Capital Earnings
-------- ---------- --------
BALANCE, July 31, 1996 $ 83 $55,251 $ 9,062
Net income - - 3,087
Exercised stock options 1 1,484 -
Income tax benefit from exercised stock options - 417 -
Shares issued in business acquisition 6 10,220 -
-------- ------- -------
BALANCE, January 31, 1997 $ 90 $67,372 $12,149
======== ======= =======
BALANCE, July 31, 1997 $ 90 $67,362 $13,044
Net income - - 707
Shares issued in business acquisition - 436 -
-------- ------- -------
BALANCE, January 31, 1998 $ 90 $67,798 $13,751
======== ======= =======
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements.
5
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
January 31 January 31
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2 $ 2,608 $ 707 $ 3,087
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change (Note 6) 1,111 - 1,111 -
Equity income of unconsolidated joint ventures (268) (45) (669) (52)
Depreciation and amortization 3,372 3,680 6,649 6,405
Deferred income taxes 31 156 331 306
Changes in certain assets and liabilities, net of effect of acquired businesses:
Accounts receivable - net (2,938) 2,200 (10,184) 2,257
Inventories (4,849) (7,853) (1,579) (9,356)
Prepaid expenses and other current assets (666) (509) (1,709) (1,505)
Other assets - net (3,017) (476) (3,659) (1,193)
Accounts payable and accrued liabilities 7,088 7,350 8,946 7,327
Other long-term liabilities (67) 2 (285) 1
------- ------- ------- -------
Total adjustments ( 203) 4,505 (1,048) 4,190
------- ------- ------- -------
Net cash provided by (used in) operating activities (201) 7,113 (341) 7,277
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,276) (6,857) (26,359) (12,980)
Business acquisitions, less cash acquired (1,039) (2) (1,039) (2)
Investment in joint ventures (20) (650) (341) (2,921)
------- ------- ------- -------
Net cash used in investing activities (18,335) (7,509) (27,739) (15,903)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts 1,398 (2,597) 3,494 (1,661)
Activity under the Credit Agreement:
Net activity under revolving line of credit (7,905) 4,922 2,136 9,416
Repayment of acquisition facility - (1,563) - (3,028)
Draw on acquisition facility - - - 1,750
Issuance of Senior Subordinated Notes 25,000 - 25,000 -
Issuance of other long-term debt 1,516 - 1,516 1,878
Repayment of other long-term debt (285) (570) (2,878) (1,143)
Payment of deferred financing costs (1,188) (21) (1,188) (71)
Exercised stock options - 225 - 1,485
------- ------- ------- -------
Net cash provided by financing activities 18,536 396 28,080 8,626
------- ------- ------- -------
Net change in cash - - - -
CASH, beginning of period - - - -
------- ------- ------- -------
CASH, end of period $ - $ - $ - $ -
------- ------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,713 $ 1,394 $ 4,411 $ 2,626
Cash paid for income taxes, net 719 592 758 676
NON-CASH TRANSACTIONS:
Business acquisitions
Common stock issued $ 436 $10,226 $ 436 $10,226
Cash paid 1,078 2 1,078 2
------- ------- ------- -------
Total consideration 1,514 10,228 1,514 10,228
Assets acquired 2,298 17,209 2,298 17,209
------- ------- ------- -------
Liabilities assumed $ 784 $ 6,981 $ 784 $ 6,981
======= ======= ======= =======
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
6
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
ABC Rail Products Corporation (the "Company") is a leader in the
engineering, manufacturing and marketing of replacement products and
original equipment for the freight railroad and rail transit industries.
The Company's products include specialty trackwork, such as rail crossings
and switches; mechanical products, such as rail car, locomotive and idler
wheels, mounted wheel sets and metal brake shoes; classification yard
products and automation systems; and railway signal systems installation,
engineering and maintenance services.
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the results of
operations and financial condition of the Company for and as of the interim
dates. Results for the interim period are not necessarily indicative of
results for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company believes
that the disclosures contained herein are adequate to make the information
presented not misleading. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1997 Annual Report to
Stockholders and the Company's amended 1997 Form 10-K/A.
2. Business Combinations
Effective December 17, 1996, the Company acquired American Systems
Technologies, Inc. ("AST") of Verona, Wisconsin for common stock valued at
$10.2 million. AST provides railway signal system installation and
maintenance to the short line, regional, commuter and transit railroads. As
part of the purchase agreement, the prior owners will be issued additional
shares of common stock if certain earnings goals are met over the
succeeding three years.
Shortly after the beginning of the second quarter of fiscal 1998, the
Company acquired United Railway Signal Group, Inc. ("URSG") headquartered
in Jacksonville, Florida for a combination of cash and the Company's common
stock totaling $1.5 million. URSG provides independent signal engineering
services to the railroad industry. As part of the purchase agreement, the
prior owners will be issued additional shares of common stock if certain
earnings goals are met over the next three years.
These acquisitions were accounted for under the purchase method of
accounting. Accordingly, certain recorded assets and liabilities of these
companies were revalued to estimated fair values as of the acquisition
date. Management has used its best judgment and available information in
estimating the fair market value of those assets and
7
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
liabilities. Any changes to these estimates are not expected to be
material. The operating results of these companies are included in the
consolidated statement of operations from the date of acquisition.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for substantially all inventories.
Inventory costs include material, labor and manufacturing overhead.
Supplies and spare parts primarily consist of manufacturing supplies and
equipment replacement parts.
Inventories at January 31, 1998, and July 31, 1997, consisted of the
following (in thousands):
January 31, July 31,
1998 1997
---------------- ---------------
Raw materials $26,264 $27,734
Work in process 10,023 8,575
Finished goods 7,529 5,983
Supplies and spare parts 4,462 4,288
---------- ----------
$48,278 $46,580
========== ==========
4. Debt
On December 23, 1997, the Company (under the Registration Statement filed
with the SEC on November 15, 1996) completed an offering of $25.0 million,
8 3/4% Senior Subordinated Notes, Series B (the "Notes - Series B"). The
Company used the $24.1 million of net proceeds of this offering to repay
indebtedness under its primary credit facility. The Notes - Series B are
general unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior indebtedness of the Company
and other liabilities of the Company subsidiaries. Financing costs of $1.2
million were deferred in connection with the issuance of the Notes - Series
B. The Company was in compliance with all of its covenants under both its
Subordinated Note obligations as of January 31, 1998.
The Company was in compliance with the debt covenants under its Credit
Agreement as of January 31, 1998, except for the limitation on capital
expenditures, the interest coverage ratio and limitations on intercompany
loans for which waivers were obtained. As of January 31, 1998, availability
under the Credit Agreement was $25.1 million.
The Company entered into a seven-year term loan agreement on July 20, 1995,
to finance up to $12.5 million of capital expenditures for the rail mill
center located in Chicago Heights, Illinois. In December, 1997, the Company
drew an additional $1.5 million under the term loan. Through January 31,
1998, $12.3 million had been drawn under this term loan. Except for the
interest coverage ratio, the Company was in compliance with all of its
covenants under the term loan as of January 31, 1998. A waiver was obtained
from the lender for the non-compliance on the interest coverage ratio.
8
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Earnings Per Share
SFAS No. 128, "Earnings Per Share" was issued in February 1997 and adopted
by the Company in the second quarter of fiscal 1998. This new pronouncement
established revised reporting standards for earnings per share and has been
retroactively applied to all periods presented herein. Previously reported
earnings per share for each such period were not materially different than
currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been
reported under the prior standard. Diluted earnings per share for the
Company includes the impact of the assumed exercise of dilutive stock
options as well as the assumed issuance of up to 180,000 shares related to
the earn-out for AST. The assumed issuance of contingent shares (along with
the assumed earnings level) related to the earn-out for USRG would be
antidilutive to diluted earnings per share.
6. Accounting Change
On November 20, 1997, the FASB Emerging Issues Task Force reached a
consensus that all companies must write-off previously capitalized business
process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior
fiscal years. In accordance with this consensus, the Company recorded a
non-cash, after-tax charge of $1.1 million to reflect the cumulative effect
of this accounting change.
9
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the interim periods included in the accompanying unaudited
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended January 31, 1998 Compared to Three Months Ended January 31,
1997
Net Sales. Net sales increased 26.3% to $70.4 million from $55.7 million. The
increase in sales is due primarily to a general increase in sales in the Wheel
Services Division ($7.1 million) and the additional sales associated with the
December 1996 acquisition of American Systems Technologies, Inc.
Gross Profit and Cost of Sales. Gross profit decreased from 15.5% of revenue in
1997 to 11.4% of revenue in 1998. The decrease in the gross profit is primarily
due to production inefficiencies at the Calera, Alabama wheel plant while it
works on implementing process improvements in the wheel foundry and the
machining operations. Calera production is expected to increase throughout the
second half of fiscal 1998 as these improvements are implemented in stages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million. The increase in expenses between
periods reflects additional expense in the customer support area (field sales
and customer service) to meet the expanding needs of our customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Other. Equity earnings from unconsolidated joint ventures increased to $0.3
million from $0.1 million primarily due to the Anchor Brake Shoe joint venture
established on July 31, 1995. Interest expense increased 47.6%, or $0.7 million,
due primarily to an overall higher level of outstanding debt to support
acquisitions, capital projects and expanding operations, along with the
marginally higher interest rate on the new Senior Subordinated Notes.
Accounting Change. On November 20, 1997, the FASB Emerging Issues Task Force
reached a consensus that all companies must write-off previously capitalized
business process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior fiscal
years. In accordance with this consensus, the Company recorded a non-cash,
after-tax charge of $1.1 million to reflect the cumulative effect of this
accounting change.
Earnings Per Share. SFAS No. 128, "Earnings Per Share" was issued in February
1997 and adopted by the Company in the second quarter of fiscal 1998. This new
pronouncement established revised reporting standards for earnings per share and
has been retroactively applied to all periods presented herein. Previously
reported earnings per share for each such period were not materially different
than currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been reported
under the prior standard. Diluted earnings per share for the Company includes
the impact of the assumed exercise of dilutive stock options as well as the
assumed issuance of up to 180,000 shares related to the earn-out for AST. The
assumed issuance of contingent shares (along with the assumed earnings level)
related to the earn-out for USRG would be antidilutive to diluted earnings per
share.
10
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended January 31, 1998 Compared to Six Months Ended January 31, 1997
Net Sales. Net sales increased 23.9% to $138.3 million from $111.6 million. The
increase in sales is due primarily to a general increase in sales in the Wheel
Services Division ($5.8 million), and the additional sales associated with the
December 1996 acquisition of American Systems Technologies, Inc.
Gross Profit and Cost of Sales. Gross profit decreased from 12.5% of revenue in
1997 to 10.7% of revenue in 1998 due to the production inefficiencies at the
Calera wheel manufacturing plant discussed in the quarter to quarter analysis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million. The increase in expenses between
periods reflects additional expense in the customer support area (field sales
and customer service) to meet the expanding needs of our customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Other. Equity earnings from unconsolidated joint ventures increased to $0.7
million from $0.1 million primarily due to the Anchor Brake Shoe joint venture
established on July 31, 1995. Interest expense increased 58.8%, or $1.6 million,
due primarily to an overall higher level of outstanding debt to support
acquisitions, capital projects and expanding operations, along with the
marginally higher interest rate on the new Senior Subordinated Notes.
Accounting Change. On November 20, 1997, the FASB Emerging Issues Task Force
reached a consensus that all companies must write-off previously capitalized
business process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior fiscal
years. In accordance with this consensus, the Company recorded a non-cash,
after-tax charge of $1.1 million to reflect the cumulative effect of this
accounting change.
Earnings Per Share. SFAS No. 128, "Earnings Per Share" was issued in February
1997 and adopted by the Company in the second quarter of fiscal 1998. This new
pronouncement established revised reporting standards for earnings per share and
has been retroactively applied to all periods presented herein. Previously
reported earnings per share for each such period were not materially different
than currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been reported
under the prior standard. Diluted earnings per share for the Company includes
the impact of the assumed exercise of dilutive stock options as well as the
assumed issuance of up to 180,000 shares related to the earn-out for AST. The
assumed issuance of contingent shares (along with the assumed earnings level)
related to the earn-out for USRG would be antidilutive to diluted earnings per
share.
11
SEASONALITY
- -----------
The peak season for installation of specialty trackwork extends from March
through October, when weather conditions are generally favorable for
installation and, as a result, net sales of specialty trackwork have
historically been more concentrated in the period from January through June, a
period roughly corresponding to the second half of the Company's fiscal year. In
addition, a number of the Company's facilities close for regularly scheduled
maintenance in the late summer and late December, which tends to reduce
operating results during the first half of the Company's fiscal year. Transit
industry practice with respect to specialty trackwork generally involves the
periodic shipment of large quantities, which may be unevenly distributed
throughout the year. The Company does not expect any significant departure from
the historical demand patterns during the present fiscal year ending July 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Cash generated from operations, structured borrowings and debt and equity
offerings have been the major sources of funds for working capital, capital
expenditures and acquisitions. For the six months ended January 31, 1998 and
1997, net cash provided by (used in) operating activities totaled $(0.3) million
and $7.3 million, respectively. The decrease in operating cash flow is due
primarily to a net increase in working capital, along with reduced net earnings.
Capital expenditures during the first six months of fiscal 1998 and 1997 were
$26.4 million and $13.0 million, respectively. The increase in spending between
periods is due principally to improvements at the Calera, Alabama wheel plant
and construction of the Rail Mill in Chicago Heights, Illinois.
In May 1996, the Company entered into a joint venture agreement with China's
Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The
joint venture will manufacture wheels in China primarily for the Chinese railway
markets. The Company's contribution of its 40% share in the joint venture will
consist of technical know-how, expertise and cash. The Company has invested
$9.2 million of cash in the joint venture through January 31, 1998. The cash
funding is being used to construct a manufacturing facility which is expected to
be operational by mid 1998.
At the beginning of the second quarter of fiscal 1998, the Company acquired
United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville,
Florida for a combination of cash and the Company's common stock totaling $1.5
million. URSG provides independent signal engineering services to the railroad
industry. As part of the purchase agreement, the prior owners will be issued
additional shares of common stock if certain earnings goals are met over the
next three years. This acquisition was accounted for under the purchase method
of accounting.
In January, 1998, the Company purchased the exclusive rights to patents for the
manufacture and sale of heat-treated and head-hardened rail in the Americas. An
initial down payment of $0.5 million has been made on equipment for processing
the rail. Total expenditures over the next year for patent rights and production
equipment are expected to be $10 - $12 million and are expected to be financed
through the Company's Credit Agreement.
For the six months ended January 31, 1998 and 1997, net cash provided by
financing activities totaled $28.1 million and $8.6 million, respectively. The
increase in financing cash flows is due primarily to the issuance of an
additional $25.0 million of Senior Subordinated debt.
On December 23, 1997, the Company (under the Registration Statement filed with
the SEC on November 15, 1996) completed an offering of $25 million 8 3/4% Senior
Subordinated Notes, Series B (the "Notes - Series B"). The Company used the
$24.1 million of net proceeds of this Offering to repay indebtedness under its
primary credit facility. The Notes - Series B are
12
general unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company and other
liabilities of the Company subsidiaries. The Notes - Series B rank pari passu
with the 9 1/8% Notes. Financing costs of $1.2 million were deferred in
connection with the issuance of the Notes - Series B. The Notes - Series B will
mature in 2000, unless repurchased earlier at the option of the Company on or
after December 31, 1999 at 102% of face value prior to December 30, 2000 or at
100% of face value thereafter. The Notes - Series B are subject to mandatory
repurchase or redemption prior to maturity upon a change of control (as defined
in the Indenture). The Indenture under which the Notes - Series B were issued
subjects the Company to various financial covenants which are substantially
similar to the covenants relating to the 9 1/8% Notes. The Company was in
compliance with all of its covenants under its Subordinated Note obligations as
of January 31, 1998.
The Company was in compliance with the debt covenants under its Credit Agreement
as of January 31, 1998, except for the limitation on capital expenditures, the
interest coverage ratio and limitations on intercompany loans for which waivers
were obtained. As of January 31, 1998, availability under the Credit Agreement
was $25.1 million.
The Company entered into a seven-year term loan agreement on July 20, 1995, to
finance up to $12.5 million of capital expenditures for the rail mill center
located in Chicago Heights, Illinois. In December, 1997, the Company drew an
additional $1.5 million under the term loan. Through January 31, 1998, $12.3
million had been drawn under this term loan. Except for the interest coverage
ratio, the Company was in compliance with all of its covenants under the term
loan as of January 31, 1998. A waiver was obtained from the lender for the non-
compliance on the interest coverage ratio.
The Company started to address the "Y2K" or Year 2000 problem, caused by
obsolete computer programs which cannot recognize dates beyond 1999, over
two years ago. As part of that analysis, it was determined, based on recognized
industry standards, that the Company would have to incur a minimum of $2.0
million to upgrade its existing legacy systems to solve the "Y2K" problem. Based
on that analysis, the Company elected to install new software (SAP's R/3
enterprise software) which is expected to not only solve the "Y2K" computer
problem but to also fully support the Company's overall strategic growth plans.
The estimated completion date for the basic SAP R/3 software programs continues
to be the Spring of 1999. At the present time, management is unable to estimate
the potential impact on the Company of the possible failure of its customers and
suppliers to become Year 2000 compliant. If the Company's major customers and
suppliers are not and do not become Year 2000 compliant on a timely basis, the
Company's results of operations could be adversely affected.
REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------
The foregoing contains forward-looking statements that are based on current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from current expectations due to a number of
factors, including general economic conditions; competitive factors and pricing
pressures; shifts in market demand; the performance and needs of industries
served by the Company's businesses; actual future costs of operating expenses
such as rail and scrap steel, self-insurance claims and employee wages and
benefits; actual costs of continuing investments in technology; the availability
of capital to finance possible acquisitions and to refinance debt; the ability
of management to implement the Company's strategy of acquisitions, rebuilding
and process improvements; "Y2K" issues and the risks described from time to time
in the Company's SEC reports.
13
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 2 - Changes in Securities
Shortly after the beginning of the second quarter, the Company
issued 22,222 shares of common stock to the prior owners of
United Railway Signal Group, Inc. ("URSG") as part of the
consideration paid for the Company's acquisition of URSG. In
addition, pursuant to the purchase agreement, the Company agreed
to issue additional shares of common stock to the prior owners of
URSG if certain earnings goals are met over the next three years.
The Company relied upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, for such issuances.
Item 4 - Submission of Matters to a Vote of Security Holders
On November 21, 1997 the annual stockholders' meeting was held. The
following individuals were elected directors at the meeting:
Director Votes For Withheld
-------- --------- --------
Donald W. Grinter 7,811,612 3,050
Norman M. Doerr 7,812,012 2,650
Jean-Pierre M. Ergas 7,665,512 149,150
Donald R. Gant 7,811,712 2,950
Clarence E. Johnson 7,812,012 2,650
James E. Martin 7,812,012 2,650
George W. Peck IV 7,811,212 3,450
In addition, one other matter was submitted for shareholder approval at the
meeting which was the ratification of the appointment of Arthur Andersen LLP for
the fiscal year ended July 31, 1998. The votes cast for, votes cast against and
abstentions were as follows:
In Favor Against Abstain
-------- ------- -------
7,689,315 122,947 2,400
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (2)
10.1 Amendment No. 3 dated as of December 8, 1997 to the Second
Amended and Restated Loan and Security Agreement, dated as
of January 3, 1997 among the Company, ABC Deco Inc. and
American Systems Technologies, Inc., as borrowers, the
financial institutions named therein, as lenders, and
American National Bank and Trust Company of Chicago, as
agent, as amended by Amendment No. 1 thereto dated as of
August 8, 1997 and Amendment No. 2 thereto dated as of
October 31, 1997.
27.1 Financial Data Schedule.
14
(1) Incorporated by reference to the same numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 originally
filed with the Securities and Exchange Commission on April 13,
1994 (SEC File No. 33-77652).
(2) Incorporated by reference to the same numbered exhibit filed with
the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1994 (SEC File No. 0-22906).
(B) Reports on Form 8-K
None
15
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.
ABC RAIL PRODUCTS CORPORATION
/s/ Robert W. Willmschen, Jr.
-----------------------------
Robert W. Willmschen, Jr.
Executive Vice President
and Chief Financial Officer
(Duly authorized Officer)
/s/ J.P. Singsank
-----------------------------
J. P. Singsank
Corporate Controller and
Assistant Secretary
(Chief Accounting Officer)
Date: February 20, 1998
-----------------
16