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
April 30, 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 May 29, 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 6 Exhibits and Reports on Form 8-K 14
2
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 30, 1998 and July 31, 1997
(In thousands, except share and per share data)
April 30, July 31,
ASSETS 1998 1997
- ------ ----------- --------
(Unaudited)
CURRENT ASSETS:
Accounts receivable, less allowances of $1,261
and $1,006, respectively $ 55,126 $ 38,208
Inventories (Note 3) 51,986 46,580
Prepaid expenses and other current assets 3,737 1,964
Prepaid income taxes 519 963
-------- --------
Total current assets 111,368 87,715
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,927 1,927
Buildings and improvements 12,576 12,491
Machinery and equipment 87,428 84,653
Construction in progress 72,043 36,421
-------- --------
173,974 135,492
Less - Accumulated depreciation (44,186) (37,480)
-------- --------
Net property, plant and equipment 129,788 98,012
-------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 16,215 14,684
-------- --------
OTHER ASSETS - net 33,877 30,196
-------- --------
Total assets $291,248 $230,607
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 3,854 $ 2,991
Current maturities of long-term debt 2,976 3,987
Accounts payable 31,784 26,617
Accrued liabilities 19,237 11,273
-------- --------
Total current liabilities 57,851 44,868
-------- --------
LONG-TERM DEBT, less current maturities (Note 4) 139,252 95,011
-------- --------
DEFERRED INCOME TAXES 6,031 5,881
-------- --------
OTHER LONG-TERM LIABILITIES 3,997 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 April 30,
1998 and July 31, 1997, respectively 90 90
Additional paid-in capital 67,798 67,362
Retained earnings 16,229 13,044
-------- --------
Total stockholders' equity 84,117 80,496
-------- --------
Total liabilities and stockholders' equity $291,248 $230,607
======== ========
The accompanying notes to the 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 Nine Months Ended April 30, 1998 and 1997
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- -------
NET SALES $ 89,660 $ 73,817 $227,915 $185,438
COST OF SALES 78,341 67,592 201,785 165,232
-------- -------- -------- --------
Gross profit 11,319 6,225 26,130 20,206
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,785 4,411 12,461 10,405
-------- -------- -------- --------
Operating income 6,534 1,814 13,669 9,801
EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES 418 686 1,087 738
INTEREST EXPENSE 2,347 1,943 6,632 4,641
AMORTIZATION OF DEFERRED FINANCING COSTS 173 117 446 229
-------- -------- -------- --------
Income before income taxes, cumulative effect
of accounting change and extraordinary item 4,432 440 7,678 5,669
PROVISION FOR INCOME TAXES 1,954 177 3,382 2,319
-------- -------- -------- --------
Income before cumulative effect of accounting
change and extraordinary item 2,478 263 4,296 3,350
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NOTE 6) -- -- (1,111) --
EXTRAORDINARY ITEM (NOTE 4) -- (310) -- (310)
-------- -------- -------- --------
Net income (loss) $ 2,478 $ (47) $ 3,185 $ 3,040
======== ======== ======== ========
EARNINGS PER SHARE DATA (Note 5):
Basic:
Income before cumulative effect of accounting
change and extraordinary item $ 0.28 $ 0.03 $ 0.48 $ 0.38
Cumulative effect of accounting change -- -- (0.12) --
Extraordinary item -- (0.03) -- (0.03)
-------- -------- -------- --------
Net income $ 0.28 $ -- $ 0.36 $ 0.35
======== ======== ======== ========
Weighted average common shares outstanding 8,976 8,954 8,967 8,635
======== ======== ======== ========
Diluted:
Income before cumulative effect of accounting
change and extraordinary item $ 0.27 $ 0.03 $ 0.46 $ 0.38
Cumulative effect of accounting change -- -- (0.12) --
Extraordinary item -- (0.03) -- (0.03)
-------- -------- -------- --------
Net income $ 0.27 $ -- $ 0.34 $ 0.35
======== ======== ======== ========
Weighted average common and equivalent
shares outstanding 9,280 9,045 9,266 8,737
======== ======== ======== ========
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
4
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended April 30, 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 -- -- 3,040
Exercised stock options 1 1,484 --
Income tax benefit from exercised stock options -- 417 --
Shares issued in business acquisition 6 10,220 --
------- ---------- ----------
BALANCE, April 30, 1997 $ 90 $ 67,372 $ 12,102
======= ========== ==========
BALANCE, July 31, 1997 $ 90 $ 67,362 $ 13,044
Net income -- -- 3,185
Shares issued in business acquisition -- 436 --
------- ---------- ----------
BALANCE, April 30, 1998 $ 90 $ 67,798 $ 16,229
======= ========== ==========
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
5
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Nine Months Ended April 30, 1998 and 1997
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,478 $ (47) $ 3,185 $ 3,040
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Cumulative effect of accounting change (Note 6) - - 1,111 -
Extraordinary item (Note 4) - 310 - 310
Equity income of unconsolidated joint ventures (418) (686) (1,087) (738)
Depreciation and amortization 3,773 3,545 10,422 9,950
Deferred income taxes 593 167 924 473
Changes in certain assets and liabilities, net
of effect of acquired businesses:
Accounts receivable - net (6,146) (6,684) (16,330) (4,427)
Inventories (3,708) 44 (5,287) (9,312)
Prepaid expenses and other current assets (48) 1,835 (1,757) 330
Other assets - net (1,489) (693) (5,148) (1,886)
Accounts payable and accrued liabilities 4,154 (5,346) 13,100 1,981
Other long-term liabilities (69) - (354) 1
--------- --------- --------- ---------
Total adjustments (3,358) (7,508) (4,406) (3,318)
--------- --------- --------- ---------
Net cash used in operating activities (880) (7,555) (1,221) (278)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,353) (11,915) (39,712) (24,895)
Business acquisitions, less cash acquired (339) - (1,378) (2)
Investment in unconsolidated joint ventures (21) (2,050) (362) (4,971)
--------- --------- --------- ---------
Net cash used in investing activities (13,713) (13,965) (41,452) (29,868)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts (2,631) 2,010 863 349
Activity under the Credit Agreement:
Net activity under revolving line of credit 17,861 (4,611) 19,997 4,805
Repayment of acquisition facility - (2,165) - (5,193)
Draw on acquisition facility - - - 1,750
Repayment of non-amortizing term loan - (15,000) - (15,000)
Issuance of senior subordinated notes - 50,000 25,000 50,000
Issuance of other long-term debt - - 1,516 1,878
Repayment of other long-term debt (637) (6,039) (3,515) (7,182)
Payment of deferred financing costs - (2,675) (1,188) (2,746)
Exercised stock options - - - 1,485
--------- --------- --------- ---------
Net cash provided by financing activities 14,593 21,520 42,673 30,146
--------- --------- --------- ---------
Net change in cash - - - -
CASH, beginning of period - - - -
--------- --------- --------- ---------
CASH, end of period $ - $ - $ - $ -
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,090 $ 804 $ 7,501 $ 3,430
Cash paid for income taxes, net 154 900 912 1,576
NON-CASH TRANSACTIONS:
Business acquisitions:
Common stock issued $ - $ - $ 436 $ 10,226
Cash paid 339 - 1,417 2
--------- --------- --------- ---------
Total consideration 339 - 1,853 10,228
Assets acquired 339 - 2,637 17,209
--------- --------- --------- ---------
Liabilities assumed $ - $ - $ 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 railcar, 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.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, certain recorded assets and liabilities of the company 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 liabilities. Any changes to these
estimates are not expected to be material. The operating results of the
company 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.
7
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories at April 30, 1998, and July 31, 1997, consisted of the
following (in thousands):
April 30, July 31,
1998 1997
---------- --------
Raw materials $29,695 $27,734
Work in process 10,990 8,575
Finished goods 6,700 5,983
Supplies and spare parts 4,601 4,288
------- -------
$51,986 $46,580
======= =======
4. Debt
On November 15, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for the issuance of up to $100 million
of Subordinated Debt Securities and/or shares of its Common Stock. On
February 1, 1997, the Company completed an offering ("the Offering") of $50
million of 9 1/8% Senior Subordinated Notes (the "Notes"). The Company
used the $47.9 million of net proceeds of the Offering to repay certain
outstanding indebtedness under its primary and other credit facilities. A
$0.3 million extraordinary after-tax loss was recognized in the third
quarter of fiscal year 1997 upon the early retirement of this indebtedness.
The Notes 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 cost of $2.2 million was deferred in connection
with the issuance of the Notes.
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 cost of $1.2
million was deferred in connection with the issuance of the Notes - Series
B.
As of April 30, 1998 availability under the Company's bank revolving credit
facility ("Credit Agreement") was $36.9 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 April
30, 1998, $12.3 million had been drawn under this term loan.
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.
8
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 an acquired company.
6. Accounting Changes
On November 20, 1997, the FASB Emerging Issues Task Force reached a
consensus that companies 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, in the second quarter of fiscal 1998, the
Company recorded a non-cash, after-tax charge of $1.1 million to reflect
the cumulative effect of this accounting change.
In April 1998, Statement of Position No. 98-5 was issued which requires
that companies write-off previously capitalized start-up costs and expense
future start-up costs as incurred. This new accounting rule must be
adopted by the Company by fiscal 2000, but earlier adoption is permitted.
The Company had capitalized certain start-up costs in prior periods,
including $5.0 million during the nine-month period ended April 30, 1998.
As of such date, start-up costs of $9.5 million remain unamortized on the
Company's consolidated balance sheet. Such costs, and any other such new
costs capitalized before the Company adopts this new rule, will be written
off as the cumulative effect of an accounting change in the period of
adoption.
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 April 30, 1998 Compared to Three Months Ended April 30, 1997
Net Sales. Net sales increased 21.5% to $89.7 million from $73.8 million. The
increase in sales is due primarily to an increase in sales in the Wheel Services
Division ($8.8 million), principally resulting from an increased level of
activity to support customers that build new railcars and increased sales of
$5.7 million in the Track Products Division.
Gross Profit and Cost of Sales. Gross profit increased from 8.4% of revenue in
1997 to 12.6% of revenue in 1998. The increase in the gross profit is primarily
the result of improved sales volumes in all major divisions and improved
production at the Company's Calera, AL wheel plant.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million. The increase in expenses
between periods reflects additional expense required to support the Company's
new information systems (SAP's R/3 enterprise-wide software).
Other. Interest expense increased 20.8%, or $0.4 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.
Extraordinary Item. The extraordinary non-cash after-tax charge of $0.3 million
represents the write-off of unamortized deferred financing costs related to
previous indebtedness which was retired with proceeds from the Senior
Subordinated Notes issued during the third fiscal quarter of 1997.
10
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended April 30, 1998 Compared to Nine Months Ended April 30, 1997
Net Sales. Net sales increased 22.9% to $227.9 million from $185.4 million.
The increase in sales is due primarily to an increase in sales in the Wheel
Services Division ($20.8 million), principally resulting from an increased level
of activity to support customers that build new railcars, additional sales
associated with the Track Products Division and the December 1996 acquisition of
American Systems Technologies, Inc.
Gross Profit and Cost of Sales. Gross profit increased from 10.9% of revenue
in 1997 to 11.5% of revenue in 1998 primarily due to the result of improved
sales volumes in all major divisions and improved production at the Company's
Calera, AL wheel plant.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 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 customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Other. Interest expense increased 42.9%, or $2.0 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 companies must write-off previously capitalized
business process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process reengineering costs in prior fiscal
years. In accordance with this consensus, in the second quarter of fiscal 1998,
the Company recorded a non-cash, after-tax charge of $1.1 million to reflect the
cumulative effect of this accounting change.
Extraordinary Item. The extraordinary non-cash after-tax charge of $0.3 million
represents the write-off of unamortized deferred financing costs related to
previous indebtedness which was retired with proceeds from the Senior
Subordinated Notes issued during the third fiscal quarter of 1997.
11
NEW ACCOUNTING PRONOUNCEMENT
- ----------------------------
In April 1998, Statement of Position No. 98-5 was issued which requires that
companies write-off previously capitalized start-up costs and expense future
start-up costs as incurred. This new accounting rule must be adopted by the
Company by fiscal 2000, but earlier adoption is permitted. The Company had
capitalized certain start-up costs in prior periods, including $5.0 million
during the nine-month period ended April 30, 1998. As of such date, start-up
costs of $9.5 million remain unamortized on the Company's consolidated balance
sheet. Such costs, and any other such new costs capitalized before the Company
adopts this new rule, will be written off as the cumulative effect of an
accounting change in the period of adoption.
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 nine months ended April 30, 1998 and
1997, net cash used in operating activities totaled $1.2 million and $0.3
million, respectively. The decrease in operating cash flow is due primarily to
a net increase in working capital.
Capital expenditures during the first nine months of fiscal 1998 and 1997 were
$39.7 million and $24.9 million, respectively. The increase in spending between
periods is due principally to improvements at the Calera, Alabama wheel plant,
construction of the Rail Mill in Chicago Heights, Illinois, and cost associated
with the implementation of SAP's R/3 enterprise-wide software. As of April 30,
1998, the Company has $72 million of property, plant and equipment classified as
construction in process. The majority of these assets relate to expenditures
for the new Calera equipment, the Rail Mill and SAP. These assets will come on-
line during the last quarter of the current fiscal year and the first quarter of
the new fiscal year. As these assets come on-line, earnings may be negatively
impacted as a result of the increase in depreciation expense.
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
consists of technical know-how, expertise and cash. The Company has invested
$9.2 million of cash in the joint venture through April 30, 1998. The cash
funding is being used to construct a manufacturing facility which is currently
going through a start-up period and is expected to be operational by the first
quarter of fiscal year 1999.
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.
Progress payments of $1.4 million have been made on equipment for processing the
rail. Total expenditures over the next
12
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 nine months ended April 30, 1998 and 1997, net cash provided by
financing activities totaled $42.7 million and $30.1 million, respectively. The
increase in financing cash flows is due primarily to the higher level of net
borrowings during the period.
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").
As of April 30, 1998, availability under the Company's Credit Agreement was
$36.9 million.
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 to cure
the "Y2K" issues continues to be the Fall of 1998. The Company is also in the
process of reviewing other possible customer and supplier "Y2K" issues not
addressed by SAP. 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 long-term business strategy of
acquisitions; "Y2K" issues and the risks described from time to time in the
Company's SEC reports.
13
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
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. 4, dated as of December 22, 1997 to the Second
Amended and Restated Loan and Security Agreement, dated as of
January 31, 1997, by and among the Company, ABC Deco Inc. and
American System 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, Amendment
No. 2 thereto dated as of October 31, 1997, and Amendment No. 3
thereto dated as of December 8, 1997.
10.2 Amendment No. 3, dated as of April 8, 1998 to the Loan and
Letter of Credit Reimbursement Agreement, dated as of July 20,
1995, by and between the Company and Creditanstalt Corporate
Finance, Inc., as amended by amendments thereto dated as of
September 29, 1995 and September 30, 1996.
10.3 Amendment No. 5, dated April 24, 1998 to the Second Amended and
Restated Loan and Security Agreement, dated as of January 31,
1997, by and among the Company, ABC Deco Inc. and American
System 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, Amendment
No. 2 thereto dated as of October 31, 1997, Amendment No. 3
thereto dated as of December 8, 1997, and Amendment No. 4
thereto dated as of December 22, 1997.
27.1 Financial Data Schedule
(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
14
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: June 8, 1998
--------------
15