SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File No. 0-21830
Johnstown America Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 25-1672791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Michigan Avenue
Suite 1000
Chicago, Illinois 60611
(Address of principal executive offices)
(312) 280-8844
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value NASDAQ National Market System
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No________
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
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State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405.)
$38,576,291 as of March 12, 1997.
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 March 12, 1997
Common Stock, $.01 par value 9,755,062
Portions of the following documents are incorporated by reference in Parts II
and III of this Report: (1) Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1996 (Part II); and (2) Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 1, 1997 (Part
III).
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EXPLANATORY NOTE
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, the
undersigned Registrant hereby amends Items 1, 3, 7 and 13 of its Annual Report
on Form 10-K for the year ended December 31, 1996 by restating such items in
their entirety.
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PART I
Item 1. Business
The Company
Johnstown America Industries, Inc. (the "Company"), through its
subsidiaries, designs and manufactures railroad freight cars, components and
assemblies primarily for medium and heavy-duty trucks and high quality, complex
iron castings for transportation-related and a variety of other markets. For a
definition of certain terms used in this Form 10-K, see "Glossary of Certain
Terms" at the end of this Item. The Company's principal business operations are:
Railroad Freight Cars. Johnstown America Corporation ("JAC") is a leading
manufacturer of railroad freight cars used principally for hauling coal,
agricultural and mining products, intermodal containers (which are used on
trucks and ships as well as on freight cars) and highway trailers. JAC is
recognized for its expertise in the development and manufacture of aluminum
freight cars that increase load capacity and consequently reduce carrier costs.
In addition to manufacturing aluminum coal cars, the Company has introduced an
aluminum covered hopper car designed for high volume grain transport. As part of
its full-service business strategy, the Company through Freight Car Services,
Inc. ("FCS") has established a presence in the growing market for freight car
repair and rebuilding services and through JAIX Leasing Company ("JAIX") offers
its customers freight car leasing alternatives.
Truck Components and Assemblies. Gunite Corporation ("Gunite") is a leading
North American supplier of wheel-end systems and components, such as brake
drums, disc wheel hubs, spoke wheels and rotors to original equipment
manufacturers ("OEMs") in the heavy-duty truck industry. Gunite is a market
leader in the production of automatic slack adjusters (braking devices mandated
for all new trucks produced with air brakes since October 1994) and wheel-end
components for anti-lock braking systems ("ABS"), which have been mandated for
all new trucks beginning in March 1997 and all new trailers beginning in March
1998. In addition to serving OEMs, Gunite has significant sales to the less
cyclical aftermarket. Bostrom Seating, Inc. ("Bostrom") is a leading
manufacturer of air suspension and static seating systems for the medium and
heavy-duty truck industry. Fabco Automotive Corporation ("Fabco") is a leading
supplier of steerable drive axles, gear boxes and related parts for heavy on/off
highway trucks and utility vehicles.
Iron Castings. Brillion Iron Works, Inc. ("Brillion") operates one of the
nation's largest and most versatile iron foundries and is focused on providing
high quality complex castings to customers in a wide range of industries,
including the truck, industrial machinery, automotive and construction equipment
markets. A leader in ductile iron technology, Brillion specializes in the
production of lightweight, intricate thin wall castings. In addition to
providing an important source of high quality castings for Gunite, Brillion has
long-standing relationships with many of its over 225 customers. Generally, once
a foundry begins production of a product, it will continue to manufacture the
item for the product's life cycle. Brillion also manufactures and sells a line
of farm equipment products.
Corporate History of the Company
An investor group led by Thomas M. Begel, the Chairman, President and Chief
Executive Officer of the Company and the former Chairman, President and Chief
Executive Officer of The Pullman Company, formed the Company in 1991 as the
holding company for JAC to acquire substantially all of the assets of the
freight car manufacturing business of Bethlehem Steel Corporation ("Bethlehem"),
a business started in 1901 in Johnstown, Pennsylvania and acquired by Bethlehem
in 1923. JAC acquired the freight car manufacturing business from Bethlehem in
October 1991 for approximately $53.3 million.
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In July 1993, the Company completed an initial public offering of its
common stock and in February 1994 the Company completed a secondary offering of
its common stock.
In January 1995, the Company purchased Bostrom, a leading manufacturer of
heavy-duty truck seating systems located in Piedmont, Alabama, for approximately
$32.4 million. Bostrom was founded in 1935 in Milwaukee, Wisconsin.
In January 1995, the Company through FCS acquired a freight car rebuilding
and repair facility in Danville, Illinois for $2.5 million and through 1996 has
spent capital of $2.6 million for refurbishment. FCS started operations in
October 1995.
In August 1995, the Company acquired Truck Components, Inc. ("TCI"), a
holding company for Gunite, Brillion and Fabco, for approximately $266.1 million
in cash, including the repayment of TCI's existing indebtedness. TCI was formed
in 1987 in order to acquire Gunite and Fabco from Fruehauf Corporation now known
as K-H Corporation ("K-H"). In 1988, TCI acquired Brillion from a group of
investors led by the Robins Group. Gunite was founded in Rockford, Illinois in
1854 as a custom manufacturer of cast iron products. Fabco was founded in 1918
in Oakland, California as a manufacturer of truck components and specialty
vehicles. Brillion was founded in 1890 as a farm equipment manufacturer and
constructed its first iron foundry in 1933.
Freight Car Operations
The Company is a leading manufacturer of railroad freight cars used
principally for hauling coal, agricultural and mining products, intermodal
containers (which are used on trucks and ships as well as on freight cars) and
highway trailers. As part of its full-service business strategy, the Company has
expanded its presence in the growing market for freight car repair and
rebuilding services and offers its customers freight car leasing alternatives.
Products and Services
The Company participates in the following freight car market segments: new
car manufacturing; rebuilds, repairs and modifications; sales of freight car
kits and parts; and freight car leasing.
New Car Manufacturing. The Company's freight car operations offer a range
of car types in an effort to take advantage of industry trends and market
opportunities, particularly in the development of aluminum freight cars used in
the shipment of bulk commodities. The Company's freight car operations
manufacture the following types of freight cars:
Gondolas. The BethGon Coalporter(R) is a patented twin tub car designed for
the coal and utility industries. The BethGon was designed to carry more coal
with greater stability and remains the dominant type of car for hauling coal,
particularly for hauling low-sulfur coal from the western United States.
Although the BethGon is made in either steel or aluminum, most of the BethGons
delivered in the last few years have been made of aluminum. In 1994, a new
smooth-sided Aeroflo Aluminum BethGon was introduced which offers carriers both
fuel savings and added cubic carrying capacity. In 1996, a new lighter weight
BethGon was introduced which weighs approximately 3,500 pounds less than a
standard BethGon, thereby enabling the car to carry significantly more coal per
trip. This new car has been received by the marketplace with significant
interest.
Open Hoppers. To expand its product line to service the entire coal market,
the Company's freight car operations began manufacturing aluminum open hoppers
in 1994. The Company's freight car operations have the capability to produce
both aluminum and steel open hoppers and recently developed and introduced an
aluminum rapid discharge coal car (the AutoFlood II(TM)) that provides 18 tons
more capacity per load than conventional steel automatic discharge freight cars.
The aluminum AutoFlood II(TM) coal car, with its patented automatic discharge
system providing a more efficient method for the rapid discharge of coal, is
being well received in the marketplace. The Company's
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freight car operations have been manufacturing an increasing quantity of open
hopper cars and believes that demand for such cars will result in open hopper
cars representing a larger share of its product mix in the future.
Covered Hoppers. Covered hopper cars are used to haul agricultural,
chemical and mineral products. In 1994, the Company's freight car operations
introduced the Grainporter 2000(TM), the first aluminum covered hopper car in
its size range available in high volume production, that is designed primarily
for high volume transportation of grain. The Company's freight car operations'
first commercial production of the Grainporter 2000(TM) began in 1995.
Intermodal Cars. Intermodal cars are primarily used for moving intermodal
containers and trailers. As a result of a substantial build-up of intermodal
cars in the early 1990s, the market for intermodal cars began declining in 1995
and continued to decline in 1996. As a result, there were no sales of intermodal
cars in 1996 and none are expected in 1997. Moreover, the mix of intermodal
freight cars expected to be delivered by the freight car industry in the
foreseeable future has predominantly shifted towards deep well car designs that
JAC does not manufacture. JAC has retained the capability, however, to
manufacture articulated intermodal cars to meet any customer demand that may
arise in the future.
Specialty Cars. The Company's freight car operations manufacture other cars
for the special needs of a particular industry or customer, including a mill
gondola car, which is used to haul steel slabs, coils or scrap, an open hopper
or gondola wood chip car, which is used to haul wood chips, a waste hauling car,
which is used to haul industrial sludge, and an ore car, which is used by
railroads to transport taconite pellets and iron ore.
Rebuilds, Modifications and Repairs. Freight cars are typically rebuilt
once between 15 and 20 years to extend their life. To pursue what it believes to
be growing opportunities to service the aging North American freight car fleet,
and further expand its presence in the generally fragmented market for freight
car rebuilding, maintenance and repair, FCS purchased a freight car repair and
rebuilding facility in Danville, Illinois in January 1995. Operations at this
new facility, which is advantageously located in the Midwest, commenced in
October of 1995. FCS performs total rebuilds, modifications and repairs of used
freight cars and manufactures certain new cars.
Car Kits and Parts. JAC sells kits containing the parts necessary to build
(or rebuild) a particular car to rebuilders and others including FCS, such as
railroads with car building but not fabrication capability. JAC also markets a
variety of fabricated parts to freight car rebuilders who do not have
fabrication capabilities.
Leasing. To meet the needs of its customers, the Company entered the
freight car leasing business in 1994. Through JAIX Leasing, the Company provides
operating lease alternatives to customers on new and rebuilt cars. As of
December 31, 1996, the Company owned or had under management 1,067 railcars in
its operating lease fleet, representing a total investment of approximately
$22.6 million, $13.6 million of which was provided through limited-recourse
borrowings.
Manufacturing
JAC's manufacturing operations are conducted primarily through two
facilities located in Johnstown, Pennsylvania. JAC has reduced the number of
freight car erection lines at its facilities during 1996 as demand for freight
cars declined. This has resulted in significant cost reductions. In addition,
JAC has focused on making its manufacturing facilities and processes more
flexible while at the same time reducing change-over times and inventories and
improving product quality. Many of these improvements were developed by
involving the participation of manufacturing employees, management and
customers. JAC has implemented cellular manufacturing concepts, whereby various
manufacturing steps are accomplished in one location within the facility, to
eliminate unnecessary movement of parts within the facility, improve production
rates and reduce inventories. These improvements are intended to provide JAC
with increased flexibility in scheduling the production of orders and to
minimize down-time resulting from car type change-overs, thereby increasing the
efficiency of its manufacturing operations.
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FCS' rebuilding and repair operations are conducted at its Danville,
Illinois facility.
Customers
The Company has maintained long-term relationships with major purchasers of
freight cars. Long-term customers are particularly important in the freight car
industry given the limited number of buyers and sellers of freight cars. Such
customers include railroads, utilities, grain shippers, leasing companies and
major construction and industrial companies.
The large average size of orders often results in a small number of
customers representing a significant portion of JAC's revenues in a given year.
In 1996, the top five customers accounted for approximately 52% of the Company's
revenues from its freight car operations.
Truck Components and Assemblies Operations
Gunite
Gunite is the leading North American supplier of wheel-end components, such
as brake drums, disc wheel hubs, spoke wheels and rotors to OEMs in the
heavy-duty truck industry. Gunite also supplies such products to the aftermarket
as well as the medium-duty truck and trailer markets.
OEMs have increasingly stressed product quality, engineering capability and
customer service, as well as price, in awarding business to suppliers. Gunite
has distinguished itself among wheel-end component manufacturers by providing
its customers with dependable design and testing support and reliable customer
service. Gunite works closely with its customers' product design, marketing and
purchasing departments, including vendor quality certification personnel. Gunite
has received top quality awards from all of its major customers. Obtaining
quality awards is a competitive advantage because a manufacturer must first go
through the OEM's quality certification process before it can become a qualified
supplier.
Markets
The truck components industry in which Gunite competes is composed of two
primary markets: (i) the OEM market; and (ii) the vehicle maintenance and repair
sector, also called the replacement market or aftermarket. The OEM market served
by Gunite includes truck manufacturers such as Navistar, Freightliner, PACCAR,
Ford, Volvo GM and Mack Trucks. For the twelve months ended December 31, 1996,
approximately 66% of Gunite's total net sales were to OEMs and the remainder was
to the aftermarket.
OEMs use independent suppliers for the production of most parts and
components. The use of independent suppliers, also known as outsourcing, is
largely a result of the ability of independent suppliers to design, engineer and
manufacture production parts and components at a more competitive cost than the
OEMs. Outsourcing also enables the OEMs to be more responsive to changes in the
marketplace and in technology and to reduce their capital investment. In
general, OEMs increasingly have turned to suppliers to design products, engineer
prototypes and manufacture parts and components for the life of their vehicles.
The OEMs also have sought to minimize the size of their supplier base in order
to improve quality, efficiency and their ability to manage their supplier
network. The success of suppliers in obtaining and maintaining supply
relationships has been a function of four factors: (i) consistent product
quality; (ii) competitive pricing; (iii) technical expertise; and (iv)
responsiveness to changes in the marketplace. The net effect of these changes
has been to increase the opportunities for, as well as the competitive pressures
faced by, independent suppliers to the OEM market.
Sales of Gunite's products to OEMs are affected, to a large extent, by
heavy-duty truck production volume
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which, in turn, is dependent on general economic conditions. Historically,
heavy-duty truck sales have been cyclical. In general, Gunite's sales tend to
follow the North American Class 8 truck build.
Gunite seeks to increase sales to the OEM market through the
"standardization" process. In this process, Gunite sales representatives call on
OEM purchasers and Gunite's engineers work with OEM engineering departments to
attempt to have Gunite products selected for the OEMs product lines as standard
equipment. Once a product is chosen as standard on a line of trucks, any order
of a truck in that line will come with the standard part unless the end-use
customer specifies a different type of product. If a different product is
specified by an end-user, the end-user is generally required to pay an
additional fee to the OEM. Selection of a Gunite product as standard on a line
of trucks will generally create a steady demand for that product. Because such
demand is a derivative of the sales of the particular truck line, being standard
on certain lines may be more advantageous than being standard on others. Gunite
wheel-end components are currently standard on certain Navistar, Freightliner,
PACCAR, Ford and Mack Truck lines.
Aftermarket customers include the service organizations of the OEMs, parts
manufacturers and distributors. Aftermarket sales principally consist of the
sale of brake drums. Sales of Gunite's products to the aftermarket historically
have been less adversely affected by general business conditions since vehicle
owners are more likely to repair vehicles than purchase new ones during
recessionary periods. Aftermarket sales, which are tied to the age of vehicles
in service and the need for replacement parts, have been increasing in recent
years due to Gunite's focus on the aftermarket and the fact that Gunite's
products are offered as standard on more trucks than any of its competitors'
products. Gunite's strategy is to increase sales to the aftermarket, where
margins are higher when compared to the OEM market, by capitalizing on its
reputation as a quality leader in the industry and continuing to focus on
customer service.
Products
Gunite supplies the medium- and heavy-duty truck and trailer markets with a
full line of wheel-end components. These products are made by Gunite and
delivered to the customer either as component parts or in assemblies which have
been pre-balanced by Gunite. Gunite products are utilized in four basic systems:
(i) Disc Wheel Hub-and-Brake Drum; (ii) Spoke Wheel-and-Brake Drum; (iii) Spoke
Wheel-and-Brake Rotor; and (iv) Disc Wheel Hub-and-Brake Rotor. Generally, brake
drums and rotors are the braking devices that work with the vehicle's braking
system to stop the vehicle. Wheel hubs and spoke wheels are the connecting
pieces between the brake system and the axle and upon which the rim and tire are
mounted.
Gunite offers a full line of brake drums and rotors for Class 6, 7 and 8
trucks and trailers. The aftermarket opportunities in this product line are
substantial as all brake drums wear with use and eventually need to be replaced.
The timing of such replacement depends on the severity of service.
Gunite manufactures a full line of spoke wheels and disc wheel hubs for
Class 6, 7 and 8 trucks and trailers. Truck builders have recently purchased a
greater percentage of disc wheel hubs in place of spoke wheels due to their
perceived better performance characteristics and ease of maintenance. However,
spoke wheels are still popular for severe duty due to their higher strength.
In response to growing concerns by truck fleet operators over brake
adjustment, Gunite introduced its initial automatic slack adjuster product in
1984. Brake adjustment is vital to the operation of a truck for several reasons.
During use, the brake shoe and drum wear down, causing changes in the gap
between the brake shoe and drum. These changes lessen the effectiveness and
therefore the safety of the brakes. Gunite's approach to "clearance-sensing"
technology allows its slack adjuster to react to and adjust for variations in
shoe-to-drum clearance automatically, as compared to manual slack adjusters. The
use of Gunite's automatic slack adjusters reduces maintenance costs, improves
braking performance and minimizes side-to-pull and stopping distance. Slack
adjusters were mandated for all new trucks in October 1994. Gunite believes it
is presently the second largest supplier of automatic slack adjusters to the
heavy-duty trucking industry.
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Gunite's product line also includes finely-machined hubs and wheels for
ABS, which enhance vehicle safety and have been mandated for all new trucks with
air brakes, beginning in March 1997, and all new trailers with air brakes
beginning in March 1998. The production of ABS parts constitutes a value-added
process, and additional components and machining are required. As ABS becomes
more prevalent in the trucking industry, Gunite, through its production,
engineering and machining capabilities, is positioned to take advantage of
increasing demand for ABS.
In July 1994, Gunite introduced a new lightweight brake drum, a product
which Gunite did not previously produce. This product has generated substantial
customer interest because its reduced weight enables carriers to increase load
capacity. Commercial production of this product began in 1996.
Customers
Gunite markets its wheel-end component and assembly products to more than
400 customers, including most of the major North American medium- and heavy-duty
truck and trailer manufacturers, relying on three account managers to service
OEMs and nine regional sales managers and a nationwide network of approximately
300 independent distributors to sell to the aftermarket.
Gunite has established close relationships with many of its larger
customers, many of whom have purchased wheel-end systems and components from
Gunite for more than 25 years. Gunite's top five OEM customers in 1996
represented approximately 64% of Gunite's total net sales in 1996, with sales to
Navistar accounting for approximately 29% of Gunite's total net sales in 1996.
Many truck manufacturers require quality certification of their supplies,
and Gunite undergoes periodic quality surveys by all of its major customers.
Gunite has received numerous quality awards from its customers, including Ford
Motor Company's "Q1," Freightliner's "Master of Quality" and ISO 9000
equivalent, PACCAR's "Supplier Quality Certification" and Volvo GM's ISO 9000
equivalent. The primary criteria on which such quality certifications and awards
are based include quality of product, delivery performance, inventory control,
operator knowledge, condition of facility, receiving inspection of incoming
materials, record maintenance and retention and equipment gauge controls.
Quality certification requirements tend to limit the number of suppliers which
can compete in the safety intensive product lines manufactured by Gunite and
benefits high-quality suppliers such as Gunite.
Manufacturing
Gunite has a fully integrated manufacturing operation that combines
high-quality castings from its Rockford, Illinois foundry and from Brillion and
machining capabilities at its Elkhart, Indiana facilities. Most of the
components produced by Gunite are high-volume products that are critical to the
safe operation of the vehicle. As a result, Gunite must combine efficient
production with comprehensive product testing. Implementation of statistical
process controls ("SPC") insures strict control of the manufacturing process and
is important in ensuring consistent quality.
The manufacturing process involves melting purchased scrap iron and steel,
adding various alloys, and pouring the molten metal into molds made of sand.
After the molten metal is poured into the molds, the castings cool, solidify and
are removed. Once the rough castings have been cleaned, they are transferred to
the Elkhart, Indiana plant for machining through a variety of automated plant
techniques. Both the casting and machining operations are subject to statistical
sampling and charting techniques. Other manufacturing processes include
painting, welding and assembly.
Bostrom
Bostrom designs, manufactures and markets a full line of air suspension and
static seating systems primarily for the heavy-duty truck market.
Markets
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Bostrom is a leading manufacturer of seating systems for the heavy-duty
truck industry. Bostrom's products are sold primarily to the OEM heavy-duty
truck market as well as to the aftermarket. Bostrom also supplies its line of
seating systems to the medium-duty truck markets. Bostrom's seats are offered as
standard or as an option by all major North American heavy-duty truck
manufacturers.
Customers
Bostrom's customers include all of the major North American heavy-duty
truck manufacturers. Bostrom's top five customers accounted for approximately
83% of Bostrom's 1996 net sales, with Navistar accounting for approximately 31%
of such sales including both OEM and aftermarket sales.
Manufacturing
Bostrom's manufacturing facility is located in Piedmont, Alabama. For a
number of its OEM customers, Bostrom ships its seats to a line-setting facility
which it has established near the OEM's plant to provide just-in-time inventory
of seats to the assembly line in the order that the seats will be used.
Fabco
Fabco designs, manufactures and markets steerable drive axles, gear boxes
and related parts for the North American on/off-road medium- and heavy-duty
truck markets.
Markets
Fabco's products are sold primarily to the OEM market for use in the
construction, military, mining and municipal service markets. Fabco's axles and
gear boxes are offered as standard or as an option by all major North American
heavy-duty truck manufacturers, and Fabco is a leading supplier of these items
in the North American heavy-duty truck market.
Products
Fabco supplies a full line of steerable drive axles for the North American
on/off-road medium- and heavy-duty truck and specialty vehicle markets. Fabco's
drive axles are rated at capacities ranging from 12,000 to 23,000 pounds to
serve Class 6, 7 and 8 trucks. End users of Fabco's axles require ease of
steering and high speed driving for on- highway use while demanding
maneuverability and functionality for off-highway use. Fabco's axles are
designed to increase durability and maintenance accessibility. Fabco believes
that the ease of operating and servicing Fabco's products are competitive
advantages that lead to ongoing demand for steerable drive axles.
Fabco also manufactures a wide range of medium- and heavy-duty gear boxes.
Gear boxes are used by vehicles that operate auxiliary equipment in the
construction, oil and gas field services and utility industries, among others.
Fabco also sells its products in the aftermarket. It supplies replacement
parts for all of its products to OEMs and, in some cases, directly to end users.
Service parts are shipped directly from Fabco's plant in Oakland, California to
any domestic or international location directed by the customer. Fabco's quick
turnaround of parts orders minimizes the need for its customers to maintain
their own parts inventory.
Customers
Fabco's customers include most of the major North American on/off road
medium- and heavy-duty truck and specialty vehicle manufacturers. The majority
of Fabco's sales are made to OEM customers with which it enjoys
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relationships of over 25 years. Sales during 1996 to Fabco's five largest
customers accounted for approximately 85% of Fabco's total net sales, with
Navistar accounting for approximately 47% of such sales.
Manufacturing
Fabco has gained a positive reputation for its engineering capabilities in
designing and manufacturing its products for the on/off road medium- and
heavy-duty truck and specialty vehicle markets. The Company believes that Fabco
is the only manufacturer which has products that are standard or available as an
option on all major OEMs Class 6, 7 and 8 all-wheel drive truck models produced
for the commercial truck market, and that, as a result, Fabco's broad range of
adaptable products are considered the industry standard due to the variety of
their configurations and tolerances. Fabco believes that the technical
backgrounds of its sales and marketing employees contribute to the successful
marketing of Fabco's products to the heavy-duty vehicle manufacturers.
Iron Castings Operations
Brillion
Brillion operates one of the nation's largest job casting iron foundries,
producing a wide variety of high-quality, complex iron castings for
transportation-related and a wide variety of other markets. Sales to the medium-
and heavy-duty truck and trailer industries accounted for approximately 33% of
Brillion's sales (including sales to Gunite) in 1996, while sales to the
automotive industry accounted for approximately 11% of Brillion's sales in 1996.
Brillion also designs, manufactures and markets a range of farm equipment
products for the "behind-the-tractor" market. These pulverizers, seeders,
mulchers, deep tillers and cultivators are marketed nationally under the
Brillion trade name through a nationwide network of 1,050 farm implement dealers
and distributors.
Markets
Brillion markets its products on a job-by-job basis to the truck,
automotive and equipment industries. Brillion is one of the leaders in ductile
iron technology, such as complex, thin wall and near net shape castings, in the
markets it serves. In addition to being easily machinable and wear-resistant,
ductile iron has greater strength (an important factor for customers who desire
a lighter finished product) and elasticity than gray iron. As a result of these
superior properties, management expects the demand for ductile iron castings to
increase. This shift towards ductile iron products may replace other products
(such as lighter-weight aluminum products) that gray iron products could not
replace, and is not expected to adversely impact Brillion's business. Gray iron,
the oldest and most widely used cast iron, is readily formed into intricate
shapes which are easily machinable and wear-resistant. For the year 1996,
ductile iron castings represented approximately 60% of Brillion's foundry's
total tons sold, while gray iron represented the balance.
Products
As illustrated in the table below, Brillion produces a broad range of gray
and ductile iron castings used in the manufacture of components for the
trucking, automotive and a variety of light and heavy equipment industries.
Currently, Brillion utilizes over 3,700 patterns to produce castings that range
in weight from one pound to nearly 350 pounds, with the majority below 100
pounds. Castings are made to the specific requirements of each customer. The
customer consults with Brillion to specify such important considerations as
physical properties, surface finish, dimensional accuracy and methods of
inspection for each casting.
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Foundry Products
* Automotive and Truck Brackets * Hydraulic-Valve Bodies
* Bearing Caps * Manifolds
* Brake Calipers and Adapters * Pressure Plates
* Clutch Housings * Small Engine Camshafts and Crankshafts
* Farm Machinery Castings * Steering Housings
* Flywheel Housings * Transmission Cases
* Flywheels * Wheel Hubs
Brillion markets its castings, directly and indirectly, to OEMs in various
industrial markets. the table below provides a list of representative end
products in which Brillion's castings are used.
End Products in Which Brillion Castings Are Used
* Air-Cooled Engines * Industrial Lift Trucks
* Automobiles and Light Trucks * Lawn and Garden Equipment
* Construction Equipment * Locomotive Engines
* Diesel Engines * Marine Engines
* Farm Equipment * Medium- and Heavy-Duty Trucks
* Fluid Power Pumps and Motors * Oil and Gas Field Machinery and Equip.
* Hardware * Pumps and Pumping Equipment
* High-speed Drives and Gears * Small Tools
* Home Shop Tools
Customers
Over 95% of Brillion's net foundry sales in 1996 were to existing
customers, with the balance coming from new customers. Once production begins on
a product, the same foundry will generally manufacture that product for the
product's life cycle.
Brillion has over 225 foundry customers, a majority of which are located in
the Midwest, East and Southeast. Brillion's top five unaffiliated customers
accounted for approximately 20% of Brillion's 1996 total net sales. Brillion
also serves as an important source of castings for Gunite, with sales to Gunite
representing approximately 12.6% of Brillion's total net sales in 1996. Brillion
works closely with customers in order to insure that castings meet all required
specifications, including machinability, dimensional accuracy and overall
quality. Brillion's engineers work with customers from concept to market with
respect to new products. Brillion's strategy is to focus on the market for
higher margin castings, as well as for products requiring new, innovative
castings designs. Unlike Gunite, Brillion's products are primarily designed by
its customers, and thus the product designs are proprietary to the customers.
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Brillion has enjoyed long-term, stable relationships with the majority of
its customers and is certified as a preferred supplier by most of its customers.
Brillion's quality system is certified to ISO 9000 and QS 9000 quality standards
and Brillion has received General Motors' "Targets for Excellence Award in
Quality, Management and Technology Disciplines," Caterpillar's "Certified
Supplier Status" and was approved by Ford's "Technical Service Capability
Survey." The primary criteria on which such quality certifications and awards
are based include quality of product, delivery performance, inventory control,
operator knowledge, condition of facility, receiving inspection of incoming
materials, record maintenance and retention and equipment gauge controls. A
quality certification is required by most sophisticated purchasers, thereby
enhancing the competitive advantage of suppliers like Brillion that have
achieved a quality certification.
Manufacturing
In general, Brillion's customers specify the properties of their castings,
such as hardness, strength and dimensions, and Brillion determines how best to
meet those specifications. Brillion engineers work with its customers to develop
an efficient manufacturing process. Brillion constantly tests and monitors the
manufacturing process in order to maintain the quality and consistency of its
castings. The manufacturing process involves melting iron (which has been
internally recycled), steel scrap and pig iron, adding various alloys and
pouring the molten metal into molds made primarily of sand. Most of the castings
manufactured by Brillion must meet strict dimensional control requirements
specified by its customers. As a result, Brillion uses SPC in every phase of the
production process, and all employees are given extensive SPC training. The
Company believes that Brillion has the most advanced core capabilities in the
industry, allowing for efficient and environmentally superior core processes
that are necessary for the production of quality, complex thin-wall and lighter
weight products. Production lines are designed to accommodate a wide variety of
products and volumes. In addition, Brillion's multiple production lines provide
flexibility to move production from line to line to meet customer scheduling
changes and requirements.
General
Competition
The Company operates in highly competitive markets. Competition in the
freight car manufacturing business is based on type of product, reputation for
quality, price, reliability of delivery and customer service and support. The
Company's freight car operation's principal competitors in this segment are
Trinity Industries, Inc. ("Trinity"), Thrall Car Manufacturing Co. and Gunderson
Inc. Although there are presently seven freight car manufacturers in North
America, two of the seven manufacture only tank cars and plastic pellet cars,
market segments in which the Company does not currently participate. Only
Trinity competes in all of the Company's freight car market segments. Although
JAC has filed suit against Trinity for infringement of its BethGon Coalporter(R)
patent, Trinity has competed, and JAC expects that it will continue to compete,
with JAC in the sale of coal gondolas.
No single manufacturer competes with respect to all products manufactured
and sold by the Company in the heavy-duty truck market, and the degree of
competition varies with different products. In this market the Company competes
on the basis of price, its manufacturing and distribution capabilities and
product quality. Gunite's primary competitors in the wheel end component market
for Class 6, 7 and 8 trucks and trailers are Dayton Walther Corporation and Webb
Wheel Products. Bostrom's principal competitors include National Seating, Sears
Manufacturing and Seats, Inc. as well as a number of smaller seating
manufacturers. Fabco's primary competitor in the steerable drive axle market for
the on/off-road medium- and heavy-duty truck and specialty vehicles is Rockwell
Corporation.
Brillion's major competitors include 10 to 12 foundries operating in the
Midwest and Southern regions, including Waupaca Foundry, Inc., Grede Foundries,
Inc., Western Foundry, Neenah Foundry Company, Intermet Corporation and Citation
Corporation.
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Backlog
As of December 31, 1996, freight car operations had a backlog of firm
orders for 774 new and rebuilt freight cars with an aggregate sales price of
approximately $35 million, as compared to a backlog of firm orders for 1,204 new
and rebuilt freight cars with an aggregate sales price of approximately $63
million as of December 31, 1995. Due to the large size of freight car orders and
variations in the mix of freight cars, the size of the Company's freight car
operation's backlog at the end of any given period may fluctuate significantly.
The decline in backlog reflects a decrease in industry orders generally and a
sharper decrease in industry orders for car types produced by the freight car
operations, such as coal cars. The Company expects sales of intermodal and other
flat cars to continue to represent a relatively small percentage of its freight
car shipments as the Company's freight car operations continue to focus its
product development and marketing efforts on gondolas, open hopper cars and
covered hopper cars. Due to short production turnaround times from order to
delivery resulting from the just-in-time inventory systems utilized by many of
its customers, the Company's truck components and castings operations do not
normally carry a material amount of backlog orders. A number of the Company's
sales contracts in this segment are made pursuant to purchase orders and
releases which are subject to change or cancellation by the customer.
Suppliers and Raw Materials
Between 70% and 80% of a freight car's costs relate to purchased specialty
components such as wheels, axles and brakes and raw materials such as aluminum
and steel. Costs for specialty components and raw materials generally are fixed
at the time a freight car order is accepted.
The major raw material for the Company's foundry operations is steel scrap,
which is purchased from various sources. The Company has no long-term
contractual commitments with any scrap suppliers, and does not anticipate any
difficulty in obtaining scrap because of the large number of potential suppliers
and its position as a major purchaser. Increases in steel scrap prices are
passed through to customers by means of a fluctuating surcharge, which is
calculated and adjusted on a monthly or quarterly basis. Other major raw
materials, such as silicon sand, binders, sand additives and coated sand, are
purchased from multiple sources. Electricity, coke and natural gas, the primary
energy sources for melting operations, are in adequate supply and reasonably
priced.
Labor Relations and Employees
At December 31, 1996, the Company had approximately 3,300 employees. Of
these, approximately 650 are salaried employees and the balance are paid on an
hourly basis. Approximately 2,260 or about 68% of all employees, are members of
unions. The Company has collective bargaining agreements with several unions
including the United Steelworkers of America, the United Autoworkers, the
Brotherhood of Teamsters, the United Paperworkers International Union, the
Patternmakers League of North America and the International Association of
Machinists. Each of the Company's unionized facilities has a separate contract
with the union which represents the workers employed at such facility. Such
contracts expire at various times over the next few years, with JAC's current
three-year union contract scheduled to expire in October 1997. While the Company
considers its relations with its employees to be good at each of the Company's
subsidiaries other than JAC and fair at JAC, there can be no assurance that the
Company will reach new agreements upon expiration of such union contracts
(including the JAC union contract scheduled to expire in October 1997) or that
the failure to reach new agreements will not have a material adverse effect on
the financial condition or results of operations of the Company.
Regulation
The Federal Railroad Administration ("FRA") administers and enforces
federal laws and regulations relating to railroad safety. These regulations
govern equipment and safety appliance standards for freight cars and other rail
equipment used in interstate commerce. The Association of American Railroads
("AAR") also promulgates a wide
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variety of rules and regulations governing safety and design of equipment,
relationships among railroads with respect to freight cars in interchange and
other matters. The AAR also certifies freight car buildings and component
manufacturers that provide equipment for use on railroads in the United States.
New products generally must undergo AAR testing and approval processes. As a
result of these regulations, the Company must maintain certain certifications
with the AAR as a freight car manufacturer, and products sold by the Company
must meet AAR and FRA standards.
Patents and Trademarks
The Company has numerous United States and foreign patents and pending
applications, registered trademarks and trade names. While the existence of a
patent is prima facie evidence of its validity, the Company cannot assure that
any of its patents will not be challenged nor can it predict the outcome of any
such challenge. The Company is presently involved in litigation concerning its
patent on the BethGon Coalporter(R). See " Legal Proceedings" in Item 3.
Environmental Matters
Compliance Matters
The Company's subsidiaries are subject to comprehensive and frequently
changing federal, state and local environmental laws and regulations, including
those governing emissions of air pollutants, discharges of wastewater and storm
waters, and the disposal of non-hazardous and hazardous waste. Many of these
laws authorize the imposition of civil and criminal sanctions upon corporations
that fail to comply with the statutory or regulatory requirements. In 1996, 1995
and 1994, TCI's capital expenditures for compliance with environmental
requirements were approximately $371,000, $1,037,000 and $1,428,000
respectively. These figures do not include routine operational compliance costs,
such as the costs for the disposal of hazardous and non-hazardous solid waste,
which were approximately $4.1 million, $4.9 million and $3.1 million in 1996,
1995 and 1994, respectively. TCI's subsidiaries have budgeted $0.5 million for
environmentally related capital expenditures in 1996. The Company acquired its
Piedmont, Alabama and Danville, Illinois facilities in January 1995 and
therefore did not incur capital expenditures for compliance with environmental
requirements and for routine operational compliance costs, such as the costs for
the disposal of hazardous and non-hazardous solid waste, prior to 1995. The
Company's investigation of the Piedmont, Alabama and Danville, Illinois
facilities' historic capital expenditures and routine operational compliance
costs concluded that such expenditures and costs were not material. JAC's
capital expenditures for compliance with environmental requirements and for
routine operational compliance costs, such as the costs for the disposal of
hazardous and non-hazardous solid waste, for the facilities located in
Johnstown, Pennsylvania are not material. Other than for certain immaterial
expenditures, the Company's subsidiaries (other than TCI) have not budgeted
funds for capital expenditures in 1996 to comply with environmental laws.
Pursuant to a National Pollutant Discharge Elimination System ("NPDES")
permit, Gunite previously discharged noncontact cooling water from its Rockford
facility to a pond (the "Rockford Pond"), formerly owned by Gunite and by
Gunite's prior owner, K-H Corporation ("K-H"), a subsidiary of Varity Corp.,
that is adjacent to the Gunite plant. Gunite also periodically had accidental,
unpermitted discharges of process wastewater to the Rockford Pond, which Gunite
has reported to the Illinois Environmental Protection Agency ("IEPA"). In
addition, Gunite had not received express authorization from the current or
immediately preceding owner of the Rockford Pond for any of the discharges. In
order for Gunite to eliminate all discharges, the City of Rockford obtained an
easement to allow Gunite to construct a conveyance that directs discharges of
noncontact cooling water and storm water from the Gunite facility to the Rock
River, and the IEPA has issued a modified NPDES permit to Gunite, substituting
the Rock River as the outfall for Gunite's discharge. The conveyance was
completed in February 1995. The modified NPDES permit contains a stringent limit
for the discharge of total residual chlorine. Gunite estimates that the capital
cost for installing a treatment system allowing its discharges to comply with
this limit could exceed $200,000, although Gunite is exploring a less expensive
treatment system. Gunite has appealed to the Illinois Pollution Control Board to
remove or modify the chlorine limit from the permit (Gunite Corp. v. Illinois
Environmental Protection Agency, PCB 94-382, filed December 12, 1994). The cost
to Gunite of constructing the conveyance to the river (not including any
environmental
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remediation costs that might be incurred in connection with historical
discharges to the Rockford Pond) was approximately $300,000.
The Wisconsin Department of Natural Resources ("WDNR") has notified
Brillion that it is deemed to be in compliance with the Wisconsin air toxics
program, pending a review of a compliance plan submitted by Brillion in
September 1993, although Brillion is currently exceeding Wisconsin air emissions
limits for benzene and other air toxic compounds. Brillion's submittal included
a plan for compliance with the emission limitations for arsenic, barium, cadmium
and formaldehyde, and a request for a variance with respect to its emissions of
benzene. The Company believes that compliance with Wisconsin's air toxics
regulations apparently is an industry-wide problem, and WDNR is developing
compliance standards for the industry as a whole. Although a recent state
inspection found Brillion to be in compliance with all Wisconsin air
regulations, it is likely that as Brillion continues its review of its
operations, it will find that certain of its emission sources will require
further air pollution controls.
The Company's subsidiaries' manufacturing plants are large and complex
facilities. The environmental regulations to which these facilities are subject
are numerous, complicated, often ambiguous and constantly changing. It is
possible, therefore, that in addition to the instances of noncompliance
discussed above, there are other areas in which the facilities are not currently
in compliance with environmental laws and regulations. The Company does not
currently believe that any such noncompliance is likely to have a material
adverse effect on the Company's business or financial results. However, there
can be no guarantee that the Company will not be required to make substantial
additional expenditures to remain in or achieve compliance in the future.
Remediation Matters
In addition to environmental laws that regulate the Company's subsidiaries'
ongoing operations, the subsidiaries also are subject to environmental
remediation liability. Under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and analogous state laws, certain
persons may be liable as a result of the release or threatened release of
hazardous substances into the environment. Such persons include the current
owner or operator of property where such release or threatened releases have
occurred, any persons who owned or operated such property during the time
hazardous substances were disposed of at such property, and persons who arranged
for the disposal of hazardous substances at such property. Liability under
CERCLA is strict and, in most cases, joint and several, meaning that any
responsible party could be held liable for all of the costs incurred or to be
incurred in investigating and remediating a release or threatened release of
hazardous substances, although liability at most CERCLA (and similar) sites is
shared among all of the solvent potentially responsible parties ("PRPs"). The
liability of PRPs is typically determined by the cost of the investigation and
remediation, the amount and toxicity of hazardous substances contributed by each
PRP and the number of solvent PRPs.
Under CERCLA, sites may be listed for priority cleanup by being placed on
the National Priorities List ("NPL"). NPL sites are sites at which the federal
government may spend monies from the "Superfund" for long-term remediation and
then seek reimbursement from liable parties. A much more extensive list compiled
pursuant to CERCLA, known as the Comprehensive Environmental Response,
Compensation, and Liability Act Information System ("CERCLIS"), includes sites
that have been, or are to be, evaluated and "scored" by the EPA for possible
future inclusion on the NPL.
Gunite. Gunite is a PRP at three NPL sites, the Interstate Pollution
Control ("IPC") site (which is adjacent to Gunite's Rockford facility), the
M.I.G./Dewane Landfill located in Boone County, Illinois, and the Southeast
Rockford Groundwater site located in Rockford, Illinois. Gunite's connection to
the IPC, M.I.G./Dewane and Southeast Rockford sites stem primarily from
activities that took place during the period that Gunite was a division of K-H.
As to the IPC site, K-H, on behalf of Gunite, entered into a partial
consent decree with the IEPA in 1991 (State of Illinois v. Interstate Pollution
Control, Inc., et al., Northern District of Illinois, filed in 1991). K-H
entered into this partial consent decree pursuant to an indemnification
agreement contained in the purchase and sale agreement between
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K-H and TCI, dated September 4, 1987 (the "K-H Sale"). The consent decree covers
an ongoing remedial investigation/feasibility study ("RI/FS") for the site. In
connection with the consent decree and an emergency removal order, K-H agreed to
pay approximately 14% of such RI/FS and removal costs, which is expected to
total approximately $1.0 million. K-H has not agreed to indemnify Gunite for
remediation costs to be incurred at this site and, as discussed below,
remediation costs that would be payable by K-H or Gunite with respect to the IPC
site have not yet been determined.
The RI/FS for the IPC site includes the Rockford Pond, which is adjacent to
the Gunite Property, was transferred to K-H at the time of the K-H Sale, and was
used by Gunite both before and after the K-H Sale for the disposal of foundry
process wastewater and possibly other wastes; a landfill (the "Rockford
Landfill") transferred to K-H at the time of the K-H Sale, which was used as a
landfill by K-H prior to the K-H Sale, and certain portions of the Gunite
property itself. The results of the RI/FS may lead to the inclusion of some or
all of these areas within the IPC site boundaries for the purpose of
remediation. Any such redefinition of the boundaries of the IPC site could
result in a reallocation of responsibility for remediation costs among the
entities that are PRP's with respect to the larger site and could also result in
an increase in K-H's and/or Gunite's share of any such costs. Although it is not
possible to predict the exact timing or amount of the expenditures that will be
made in future years to remediate the IPC site, it is possible that Gunite will
be required to contribute substantial funds to remediate the IPC site.
As to the M.I.G./Dewane Landfill site, Gunite was added in 1994 as a
third-party defendant in a private cost recovery action filed by the companies
comprising the MIG/Dewane Landfill Task Force, the steering committee of PRPs
for this site (Browning-Ferris Industries of Illinois, Inc., et al. v. Richard
Ter Maat, et al, Northern District of Illinois). The plaintiffs have alleged
that the Gunite division of K-H arranged for the disposal of waste at this site
from approximately 1972 to 1987. Approximately $10 million has been expended to
conduct an RI/FS at this site. A remedy has not yet been proposed for the site.
Gunite filed a motion to dismiss this matter, which was granted, in part, by the
district court; the remainder of the action is still pending against Gunite,
however. Although it is not possible to predict the exact timing or amount of
expenditures that will be made in future years to remediate the M.I.G./Dewane
Landfill site, it is possible that Gunite will be required to contribute
substantial funds towards the investigation and remediation of this site if
Gunite is judged to have disposed of materials at this site. K-H has denied a
claim for indemnification with respect to this site.
The Southeast Rockford Groundwater NPL Site is reportedly down gradient
from the IPC site. The EPA and the City of Rockford have reportedly incurred
approximately $11 million in response costs to date in connection with this
site. In 1996, the City of Rockford demanded that Gunite pay $1 million in
response costs which the City allegedly has incurred at the site area 7,
commonly known as the Ekberg Park area within the Southeast Rockford Groundwater
NPL site. Gunite has denied that it is liable to the City for these costs of $1
million. K-H has also denied a claim for indemnification with respect to this
site. Gunite believes that the EPA will also seek to recover some or all of its
costs at the site from Gunite, although Gunite has not to date received a formal
request for reimbursement from the EPA for this matter.
Gunite also may be subject to liabilities at other NPL sites or other
locations as a result of its past disposal of hazardous substances.
As a result of historical operations at the Gunite plant in Rockford, there
are areas on-site that have been affected by the disposal or spillage or raw
materials or wastes. Gunite does not know at this time whether any cleanup or
remediation of such areas will be required by any state, local or federal
agency, although it is possible that such areas may be included in the IPC
remediation.
The Company believes that Gunite has valid claims for contractual
indemnification against K-H with respect to most of the matters described above,
subject to an aggregate deductible for certain matters which, under various
theories, could range from $300,000 to $1.8 million, and other limitations. As
of October 28, 1993, however, K-H has formally denied all claims for
indemnification for environmental matters on, appurtenant to, or emanating from
the
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Gunite foundry plant site in Rockford, Illinois. The specific scope of K-H's
denial is ambiguous, but it might be interpreted to include all pending and
future claims from Gunite for indemnity. In 1994, K-H filed a declaratory
judgment action against TCI and Gunite for certain specific matters in dispute,
including any costs related to the construction of the conveyance structure to
the Rock River, reducing particulate emissions from the cupola charge doors, and
remediating conditions related to certain underground storage tanks on the
Gunite property (K-H Corp. v. Truck Components, Inc., et al. Circuit Court for
the County of Wayne, Michigan). K-H's complaint also included a claim for
trespass (for unspecified damages) related to Gunite's post-December 31, 1990
discharges to the Rockford Pond. On August 5, 1994, TCI and Gunite filed suit
against K-H and certain of its affiliates for the recovery of costs and for
declaratory and injunctive relief with respect to various environmental matters
pursuant to the indemnification provisions of the K-H Sale purchase agreement
and other causes of action, including CERCLA (Truck Components, Inc., et al. v.
K-H Corp., et al., Northern District of Illinois). No trial dates have been set
in either of the actions. There can be no assurance concerning the amounts, if
any, that Gunite will be able to recover on its indemnity claims against K-H nor
any assurance as to the timing of any such recoveries. It is also probable that
Gunite has incurred some liability for activities following the K-H Sale for
which it would not be covered by the K-H indemnity.
Brillion. Brillion is likely to incur investigation and/or remediation
costs in connection with two landfills that it used to dispose of foundry
wastes. These landfills are the Brillion Iron Works Landfill, where Brillion was
the operator and sole generator of waste from 1980 through 1989, and the
adjacent City of Brillion Landfill, where Brillion may be a significant
generator of waste. Brillion disposed of plant trash at the City landfill from
1970 to 1975 and also disposed of foundry wastes in this landfill from 1976 to
1980. Both of these landfills are on the CERCLIS and the Wisconsin Remedial
Response Site list, and both have been scored by the WDNR and both have been
listed on the State's Hazard Ranking List as being above the threshold for
potential State remedial action. Although it is not possible to predict the
exact timing or amount of the expenditures that will be made in future years to
remediate these sites, TCI expects that investigation and/or remediation will be
required and that such expenditures could be substantial.
Brillion has also disposed of foundry wastes at many other sites in the
Brillion area, a few of which are on the CERCLIS and the Wisconsin Remedial
Response Site list. It is possible that Brillion will incur remedial response
costs at some or all of these sites, although at this date, Brillion is not
aware of any action by federal or state regulators or private parties to
investigate or remediate any of these other sites.
In 1992, Brillion excavated two underground diesel fuel storage tanks which
were discovered to have leaked diesel fuel into surrounding soil as a result of
a 1978 spill. Brillion has removed approximately 300 cubic yards of contaminated
fill in connection with this incident. Although the WDNR initially indicated
that a deed restriction would be sufficient for managing this issue, Brillion
has not at this date been able to reach a satisfactory arrangement with the
owners of the Brillion property. Accordingly, Brillion expects to undertake
additional soil and groundwater analysis in connection with this matter.
As the Brillion facility has been in operation for many years, it is
possible that there are areas at this facility, other than the underground
storage tanks, that have been adversely affected by the handling of foundry
process materials and wastes. Brillion does not know at this time whether any
remediation of any such areas will be required by any state, local or federal
agency.
Brillion was the Robins Group (consisting of the Robins Family Trust, Karl
F. Gabler and First City Securities) entity that acquired a Beatrice subsidiary
(also named Brillion) from Beatrice in 1984. That purchase and sale agreement
obligates Beatrice to indemnify Brillion for any and all claims, liabilities,
losses and expenses resulting from loss of life, bodily injury or property
damage which arise out of accidents or injury causing incidents occurring prior
to December 31, 1984, for which Brillion may be liable, regardless of when the
claims alleging such liability may be filed, but excluding obligations arising
from the design, formulation, manufacture or sale of a product prior to December
31, 1984. TCI believes that it has valid claims for indemnification against
Beatrice with respect to most of its disposal sites to the extent that
liabilities arise from incidents occurring prior to December 31, 1984. Beatrice
has disputed this interpretation and notified Brillion that it will not honor
any claims for indemnification (apart from one claim for breach of
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representation made within two years after the sale). Brillion has also been
notified by the Robins Group (which sold Brillion to TCI) that it will not honor
any claims for indemnification. On May 25, 1994, TCI and Brillion filed suit
against Beatrice and the Robins Group for recovery of costs expended and for
declaratory and injunctive relief with respect to various environmental matters
pursuant to the indemnification provisions of the respective stock purchase
agreements and other causes of action, including CERCLA (Truck Components, Inc.,
et al. v. Beatrice Company et al., Northern District of Illinois). On June 10,
1994, TCI and Brillion filed a first amended complaint in this lawsuit to add
Hunt-Wesson, Inc., a corporate successor of Beatrice that may be a successor to
Beatrice's liabilities in these matters. In 1996, the district court entered
judgment against Brillion, holding that Beatrice and the Robins Group did not
owe any indemnity for Brillion's expenses at the sites, and that Brillion owed
Karl F. Gabler $0.2 million pursuant to a 1987 indemnity contract. Brillion has
appealed this adverse judgment; the appellate court is expected to rule on
Brillion's appeal in late 1997. Given the adverse judgment and the pending
appeal therefrom, there can be no assurance concerning the amounts, if any, that
Brillion will be able to recover on its indemnity or other claims against
Beatrice or the Robins Group, nor any assurances as to the timing of any such
recoveries.
JAC. Pursuant to an indemnification agreement between JAC and Bethlehem,
Bethlehem conducted investigations and remediations at several areas of JAC's
plants in Johnstown, Pennsylvania. In addition, under the purchase agreement
with Bethlehem, Bethlehem has indemnified JAC against certain environmental
liabilities relating to periods prior to the acquisition in October 1991.
Bostrom. Subsurface investigations at Bostrom's Piedmont, Alabama facility
detected low concentrations of certain contaminants in the soil in a limited
area around a formerly used waste water underground storage tank. The Alabama
Department of Environmental Management ("ADEM") requested that Bostrom install a
monitoring well to obtain monitoring results on a semi-annual basis for a two
year period. Bostrom installed the well in March 1995 and will submit
semi-annual monitoring results to ADEM until March 1997. It is not known what
remediation, if any, ADEM will require after March 1997. In addition, Bostrom is
a PRP at the Muskego Landfill site in Wisconsin and the PRPs have signed an
allocation agreement pursuant to which Bostrom's allocated share of the costs
are not material.
Freight Car Services. FCS has reached an agreement in principle with its
adjacent property owner for each party to share in the costs of completing an
investigation and implementing a corrective action plan to remediate diesel fuel
contamination detected in the soil and groundwater on the affected properties
located in Danville, Illinois. The investigation and corrective action plan were
implemented on a voluntary basis and not pursuant to any regulatory requirement,
and FCS' share of the costs was not material.
Potential Costs. As of December 31, 1996, based on all the information
currently available, the Company maintained its environmental reserve in the
amount of $26.4 million for estimated future costs related to potential
environmental investigation and remediation liabilities with respect to certain
currently known matters. Management of the Company established the environmental
reserve in connection with the August 1995 acquisition of TCI in consultation
with the Company's outside environmental consultants and legal and accounting
advisors. In assessing and ultimately approving the acquisition of TCI, the
Company's Board of Directors paid particular attention to environmental matters,
including the potential environmental reserve. The Audit Committee of the
Company's Board regularly meets with the Company's principal accounting officers
and its outside auditors to discuss significant accounting policies and issues,
including the adequacy of the environmental reserve. The Audit Committee's
findings are, in turn, reported to the entire Board.
The environmental reserve is principally related to potential remediation
liability at various off-site locations and, to a lesser degree, to potential
remediation liability at Gunite's, Rockford, Illinois, and Brillion's, Brillion,
Wisconsin manufacturing facilities. This reserve is based on current cost
estimates and does not reduce estimated expenditures to net present value.
Further, the estimated reserve takes into consideration the number of other PRPs
at each site, the alleged volume of waste contributed by other PRPs at each
site, and the identity and financial position of such parties in light of the
joint and several nature of the liability, but it does not take into account
possible insurance coverage or other similar indemnification or reimbursement.
Based upon all currently available information, no reserve has been
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established with respect to potential environmental obligations of JAC or
Bostrom and an immaterial reserve has been established at FCS. Because many of
the matters described above, however, are at the early stages in their
respective investigations, there can be no assurance that the amounts ultimately
expended to address all of these matters or to address other matters not yet
known to be in existence will not exceed the amounts allocated in the
environmental reserve. Accordingly, it may be necessary to establish additional
reserves for environmental liabilities in the future.
Any cash expenditures required by the Company to comply with applicable
environmental laws and/or to pay for any remediation efforts will not be reduced
or otherwise affected by the existence of the environmental reserve. Management
believes, based on its evaluation of the various matters described above,
including its experience with such matters to date, the time period over which
it believes costs for such matters are likely to be incurred by the Company, and
the existence of the various indemnifications described above, that any costs
the Company ultimately will incur for such matters are not reasonably likely to
have a material adverse effect on the Company's business or financial results.
However, given the early stage of many of the matters, there can be no assurance
that one or more of these matters (or matters which have not yet been
identified) will not have such an effect. See Note 11 to the Consolidated
Financial Statements of the Company. The Company currently anticipates spending
approximately $500,000 per year for the next three years and $1 million per year
in years 2000 and 2001 for monitoring the various environmental sites associated
with the environmental reserve, including attorney and consultant costs for
strategic planning and negotiations with regulators and other PRPs, and payment
of remedial investigation costs. The Company expects to fund such expenditures
with the cash flow generated from its operations and amounts available under its
revolving credit facility. These sites are generally in the early investigatory
stages of the remediation process and thus it is anticipated that significant
cash payments for remediation will not be incurred for at least several years.
After the evaluation and investigation period, the investigation and remediation
costs will likely increase because the actual remediation of the various
environmental sites associated with the environmental reserve will likely be
under way. In addition, it is possible that the timing of any necessary
expenditures could be accelerated.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of
the Company:
Name Age Position
Thomas M. Begel 54 Chairman of the Board, President and
Chief Executive Officer of the Company
Andrew M. Weller 50 Executive Vice President and Chief
Financial Officer and Director of the Company
David W. Riesmeyer 39 Vice President and Treasurer of the Company
Kenneth M. Tallering 35 Vice President, General Counsel and Secretary
of the Company
Timothy A. Masek 31 Vice President - Corporate Development of the
Company and President of Bostrom Seating,Inc.
Edward J. Whalen 48 Vice President of the Company and President
of Freight Car Services, Inc. and
JAIX Leasing Company
James D. Cirar 50 President and Chief Executive Officer of
Johnstown America Corporation
Thomas W. Cook 59 President and Chief Executive Officer of
Truck Components, Inc. and President -
Gunite Corporation
John D. McClain 52 President - Brillion Iron Works, Inc.
Mark A. Niemela 61 President - Fabco Automotive Corporation
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Thomas M. Begel, Chairman of the Board, President and Chief Executive
Officer of the Company, has served as President since October 1991 and as
Chairman of the Board and Chief Executive Officer since May 1993. He is also
President of, and a partner in, TMB Industries ("TMB"), an investment firm which
is a partnership between himself and Mr. Weller. Mr. Begel has served as a
director of Silgan Holdings Inc., a packaging company, since March 1997 and was
a director of Uniroyal Chemical Corporation from 1990 to 1996.
Andrew M. Weller, has served as Executive Vice President, Chief Financial
Officer and a Director of the Company since September 1994 and as Secretary from
March 1995 to November 1995. From April 1988 to September 1994, he was Vice
President and Treasurer of Bethlehem Steel Corporation and prior thereto held
various other positions with Bethlehem. He has also been Executive Vice
President of, and a partner in TMB since September 1994.
David W. Riesmeyer, has served as Vice President and Treasurer since
September 1995 and previously as Treasurer and Controller of the Company since
March 1995. Mr. Riesmeyer served as Director of Financial Reporting and Planning
from January 1994 through March 1995. From 1991 to 1993, Mr. Riesmeyer was Vice
President of Corporate Development at the Park Corporation, a private label food
manufacturer, and from 1988 to August 1992, he was Vice President of Finance of
the Park Corporation.
Kenneth M. Tallering, has served as Vice President, General Counsel and
Secretary of the Company since November 1995. From September 1987 to October
1995, Mr. Tallering was an attorney with the law firm of Skadden, Arps, Slate,
Meagher & Flom.
Timothy A. Masek, has served as Vice President - Corporate Development of
the Company since December 1995 and President of Bostrom Seating, Inc. since
June 1996. From September 1992 to December 1995, Mr. Masek performed marketing
and corporate development functions for the Company. Prior to September 1992,
Mr. Masek was a Market Analyst for the Transportation Equipment Group of
Bombardier Corporation, a railcar and aviation manufacturer.
Edward J. Whalen, has served as Vice President of the Company since January
1997. He has also served as President of JAIX Leasing since its inception in
December 1994 and as President of Freight Car Services, Inc. since March 1995.
Mr. Whalen served as Secretary of the Company from October 1991 until March
1995, as Treasurer of the Company from May 1993 until March 1995 and as Vice
President of the Company from October 1991 until October 1995. From 1989 to
1991, he was a financial and rail car industry consultant.
James D. Cirar, has served as President and Chief Executive Officer of
Johnstown America Corporation since September 1995. Prior to September 1995, Mr.
Cirar was the Plant Manager of the Truck and Bus Assembly Group of General
Motors Corporation in Flint, Michigan.
Thomas W. Cook, has been the President and Chief Executive Officer of TCI
since May 1994 and President of Gunite Corporation since 1991. Mr. Cook has been
Senior Vice President of the Company since July 1997. He was President and Chief
Executive Officer of Redlaw Industries, Inc., a holding company with interests
in foundries, stamping plants and textile industries, from 1986 to 1991. From
1967 to 1986, Mr. Cook was with ITT Grinnell Corporation, a manufacturer and
distributor of values and related piping products, where he became President in
1983.
John D. McClain, joined Brillion as Manager of Manufacturing in 1988 and
was appointed Vice President of Manufacturing in 1989. Mr. McClain was promoted
to his present position of President in 1994. Prior to joining Brillion, Mr.
McClain held metallurgical and foundry manager positions at Owens-Illinois, a
manufacturer of glass containers and television picture tubes, Emerson Electric,
a diverse manufacturing company producing power transmission and electric motor
components, pumps, valves and handtools, and Clow Valve Company, a manufacturer
of waste and water system valves, fire hydrants and fire protection system
valves.
Mark A. Niemela, joined Fabco Automotive Corporation in 1966 as Production
Control Manager. He held the positions of Material Manager and Plant Manager
before his appointment to the position of General Manger in 1975 and was
appointed President in 1986.
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GLOSSARY OF CERTAIN TERMS
The following industry terms have the meanings set forth below for purposes
of the Form 10-K
ABS: Anti-lock brake system.
Auto-Flood(TM): The Company's product name for an aluminum, rapid
discharge open hopper car that offers more capacity
than conventional steel automatic discharge cars.
Automatic Slack Adjuster: A mechanism that reacts to, and
adjusts for, variations in brake shoe-to-drum
clearance, maintains the proper amount of space
between the shoe and drum and thereby eliminates the
need for manual adjustment.
Brake Drum: A metal cylinder to which pressure is applied
by a braking mechanism in order to arrest rotation
of the wheel to which the cylinder is attached.
Brake Rotor: Device which works with a vehicle's braking
system to stop the vehicle.
Covered Hopper Car: A totally contained freight car used to
haul agricultural, chemical and mineral products.
Gondola Car: Open-top freight car principally used
for hauling coal which discharges through a
rotary dump mechanism. Gondolas are also
used to haul products such as ore, scrap
metal and other items.
Intermodal Car: Freight car used primarily for moving
containers and trailers that can be placed on trucks
and ships as well as freight cars.
OEM: Original equipment manufacturer.
Open Hopper Car: Freight car which discharges its load
from the bottom of the car.
Quad Hopper Car: A type of open hopper car which
discharges through four doors on the bottom of the
freight car.
Spoke Wheels: Along with the wheel hub, it is the
connecting piece between the brake system and the
axle upon which the rim and tire are mounted.
Wheel Hubs: Along with the spoke wheel, it is the
connecting piece between the brake system and the
axle upon which the rim and tire are mounted.
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Item 3. Legal Proceedings
The Company is involved in certain threatened and pending legal proceedings
including worker's compensation claims arising out of the conduct of its
businesses. In the opinion of management, the ultimate outcome of such legal
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.
In December 1992, JAC commenced a patent infringement lawsuit against
Trinity Industries, Inc. ("Trinity") in the United States District Court for the
Western District of Pennsylvania, alleging infringements of JAC's patent for its
BethGon Coalporter(R) freight car. The suit involved Trinity's manufacture, sale
and offering for sale of its Aluminator II coal freight car in competition with
JAC's BethGon Coalporter(R) freight car, the tubs of which are covered by JAC's
patent. In such suit, JAC seeks monetary damages and an injunction against
Trinity to prohibit Trinity from making, using, selling or offering for sale the
Aluminator II. The lawsuit was tried in 1996 with the trial court entering an
order upholding a jury verdict that the patent, though valid, was not infringed
by Trinity's Aluminator II freight car. In addition, JAC was not held to be
liable for any of the counterclaims alleged by Trinity. JAC thereafter made
motions to the trial court to set aside the verdict as not being consistent with
the facts or the law and enter judgement in favor of JAC or, alternatively, to
order a new trial, which motions were denied. JAC has appealed the case to the
United States Court of Appeals for the Federal Circuit. JAC expects the appeal
to be decided in mid to late 1997. Although neither the outcome of the action
nor the effect of such outcome can be predicted with certainty, in the opinion
of management of the Company, the outcome of the action will not have a material
adverse effect on the financial condition or results of operations of the
Company.
The Company may be subject to liability as a result of the disposal of
hazardous substances on and off the properties owned or operated by its
subsidiaries, including Brillion, Gunite and Fabco. See "Business-Environmental
Matters." TCI and Brillion filed suit on May 25, 1994 against Beatrice and the
Robins Group for certain causes of action, including indemnification under
purchase agreements. See "Business-Environmental Matters." TCI added
Hunt-Wesson, Inc., a corporate successor to Beatrice that may be a successor to
Beatrice's liability in theses matters, as a defendant on June 10, 1994. TCI and
Gunite filed suit on August 5, 1994 against K-H and certain of its affiliates
for certain causes of action, including claims related to the indemnification
provisions of the K-H sale stock purchase agreement. See "Business-Environmental
Matters." K-H filed a separate declaratory judgement action against TCI and
Gunite asserting that it had no indemnification obligation for certain disputed
environmental matters. See "Business-Environmental Matters" in Item 1.
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Item 7. Management's Discussion and Analysis of
Financial condition and Results of Operations
GENERAL
The Company completed the acquisition of Truck Components Inc. ("TCI") on August
23, 1995 and Bostrom Seating, Inc. ("Bostrom") on January 13, 1995. Both
acquisitions were accounted for under the purchase method of accounting and,
accordingly, their operating results were included in the Company's reported
results from their respective acquisition dates. Such results have a significant
impact on the comparative discussions below. Additionally, the Company through
it's wholly owned subsidiary Freight Car Services, Inc. ("FCS") completed the
purchase of the Danville, Illinois facility and began operations in October
1995.
The Company's sales are affected to a significant degree by the freight car and
Class 8 truck markets. Both the freight car and the Class 8 truck markets are
subject to significant fluctuations due to economic conditions, changes in the
alternative methods of transportation and other factors. There can be no
assurance that fluctuations in such markets will not have a material adverse
effect on the results of operations or financial condition of the Company.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
Total Revenue Total revenue in 1996 decreased 16.2% to $560.0 million from
$668.6 million in 1995. The total revenue decrease of $108.6 million was
primarily due to the decrease in freight car sales of $294.7 million (3,470 new
and rebuilt cars in 1996 vs 9,157 new and rebuilt cars in 1995) and a $9.6
million decrease in truck related sales volume at Bostrom. The decreases were
offset in part by the inclusion of TCI for all of 1996 versus inclusion for the
partial year of 1995, an increase of $195.7 million. As of December 31, 1996,
the Company's backlog of new and rebuilt freight cars was 774 compared to 1,204
new and rebuilt freight cars at December 31, 1995.
COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1996 as a percent of manufacturing sales was
85.0%, compared to 91.3% in 1995. Related gross profits were 15.0% and 8.7%,
respectively. The improvement in gross profit resulted primarily from the
acquisition of TCI in August 1995. TCI has historically generated higher gross
profits than the freight car business. Partially mitigating this increase was
the decrease of gross profit at JAC. JAC's gross profit percentage for 1996 was
down from the prior year approximately 1 percentage point, and the aggregate
dollar gross profit was down due to the significant decrease in freight car
revenues mentioned above.
SELLING, GENERAL, ADMINISTRATIVE AND
AMORTIZATION EXPENSES
Selling, general and administrative expense as a percentage of total revenue was
8.3% and 4.2% in 1996 and 1995, respectively. The increase in selling, general
and administrative expense as a percent of revenues is principally attributable
to spreading such expenses over a significantly lower sales base at the
Company's freight car business and is also related to the acquisition and the
integration of TCI which, at 8% of its sales in 1996, has higher selling,
general and administrative levels as a percent of revenue compared to the
historical levels of the Company's freight car business, and to a $2.0 million
increased MIS and product development cost at the freight car operations.
Amortization expense as a percentage of total revenue was 1.8% and 1.0% for the
years ended 1996 and 1995, respectively. The increase in amortization expense as
a percentage of total revenue is related to certain intangible assets of TCI and
the excess cost over net assets acquired in the acquisition.
OPERATING INCOME
Operating income was $30.4 million in 1996, compared to $25.0 million in 1995.
The increase was primarily due to including the operating income of TCI for all
of 1996 versus inclusion for the partial year of 1995 more than offsetting the
drop in operating income at JAC.
At December 31, 1996 the Company had 1,067 freight cars on lease and leasing
business generated $4.5 million in revenue and $2.4 million in operating income
before a $1.4 million gain on the sale of leased freight cars for the year ended
1996 as compared to $2.6 million revenue and $1.9 million operating income in
the prior year.
INTEREST EXPENSE
Interest expense, net was $35.8 million in 1996 compared to $14.7 million in
1995. Higher interest expense in 1996 resulted from borrowings under the Senior
Bank Facilities and the issuance of Notes to finance the acquisition of TCI,
1995. In addition, JAIX Leasing had increased debt levels to finance the
additional freight cars for the lease fleet.
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Net loss and loss per share for 1996 were $5.4 million and $.55, respectively,
compared to net income and earnings per share of $5.6 million and $.57,
respectively, for 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
TOTAL REVENUE
Total revenue in 1995 increased 42.7% to $668.6 million from $468.5 million in
1994. The total revenue increase of $200.1 million was primarily related to the
acquisition of TCI in August 1995 (58% of the increase), and the acquisition of
Bostrom in January 1995 (30% of the increase), while revenue from JAC and FCS
account for 12% of the increase, collectively. This increase resulted from the
start-up of operations of FCS and a change in product mix at JAC to cars with
higher selling values, offsetting lower production (9,157 new and rebuilt
freight cars in 1995 versus 10,707 new freight cars in 1994). As of December 31,
1995, the Company's backlog of new freight cars was 1,204 as compared with 7,180
on December 31, 1994.
At December 31, 1995 the Company had 600 freight cars on lease, and the leasing
business generated $2.6 million in revenue and $1.9 million in operating income
for the year ended 1995 compared with $.5 million revenue and $.3 million in
operating income in the prior year.
COST OF SALES-MANUFACTURING AND GROSS PROFT
Cost of sales-manufacturing for 1995 as a percent of manufacturing sales was
91.3%, compared to 94.4% in 1994. Related gross profits were 8.7% and 5.6%,
respectively. The improvement in gross profit resulted primarily from the
acquisitions of Bostrom in January 1995 and TCI in August 1995, which
historically have generated higher gross profits than the freight car business.
Gross profits percentages were slightly lower at JAC in 1995 compared to 1994.
SELLING, GENERAL, ADMINISTRATIVE AND
AMORTIZATION EXPENSES
Selling, general and administrative expense as a percentage of total revenue
were 4.2% and 2.8% in 1995 and 1994, respectively. The increase in selling,
general and administrative expenses is related to the acquisition and the
integration of Bostrom and TCI, which have higher selling, general and
administrative levels as a percent of revenue compared to JAC. The increase in
amortization expense as a percentage of total revenue is related to certain
intangible assets of TCI and Bostrom and excess cost over net assets acquired in
those acquisitions.
OPERATING INCOME
Operating income was $25.0 million in 1995, compared with $9.7 million in 1994.
The increase was primarily due to the acquisition of TCI in August 1995, while
operating income at JAC in 1995 remained approximately the same as in 1994.
INTEREST EXPENSE
Interest expense, net was $14.7 million in 1995 compared with $.3 million in
1994. Interest expense in 1995 resulted from increased borrowings to finance the
acquisition of Bostrom in January 1995, from increased borrowings under the
Senior Bank Facilities and the issuance of Notes to finance the acquisition of
TCI and the refinancing of its debt in August 1995, as well as from JAIX Leasing
debt which was used to finance the addition of freight cars for the lease fleet.
Net income and earnings per share for 1995 were $5.6 million and $.57,
respectively, compared with net income and earnings per share of $5.7 million
and $.58, respectively for 1994.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, the Company provided cash from operations
of $36.4 million compared with $52.1 million for 1995. The Company generated
$3.5 million of net cash from investing activities during 1996; $18.1 million
from the sale of leased freight cars offset by $9.9 million used for capital
expenditures and other, $5.4 million used for leased asset additions. Cash used
for financing activities was $27.0 million for 1996 primarily related to
payments on term debt of $16.8 million and net decreases on in the JAIX Leasing
debt of $8.8 million.
The Company's freight car sales are characterized by large order sizes, specific
customer delivery schedules, and related vendor receipts and payment schedules,
all of which can combine to create significant fluctuations in
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working capital accounts when comparing end of period balances. Such
fluctuations tend to be of short duration, and the Company considers this to be
a normal part of its operating cycle which does not significantly impact its
financial flexibility and liquidity.
On August 23, 1995, in conjunction with the acquisition of TCI and the
refinancing of the existing debt of the Company, the Company and the Guarantor
Subsidiaries entered into the $300 million Senior Bank Facilities and issued
$100 million of Notes. See Notes 6 and 7 of the Consolidated Financial
Statements for a description of the Senior Bank Facilities and the Notes.
As of December 31, 1996, there was $183.3 million of term loans outstanding
under the Senior Bank Facilities, $100 million of Notes outstanding and no
borrowings under the $100 million revolving credit line under the Senior Bank
Facilities. Availability under the Revolving Loan after consideration of
outstanding letters of credit of $17.6 million was $44.9 million after giving
effect to the applicable borrowing base.
Interest payments on the Notes and interest and principal payments under the
Senior Bank Facilities represent significant cash requirements for the Company.
The Notes will require semiannual interest payments of approximately $6 million.
Borrowings under the Senior Bank Facilities bear interest at floating rates and
require interest payments on varying dates depending upon the interest rate
option selected by the Company. The $183.3 million of outstanding term loans
will require periodic principal payments through their maturities. See Note 6 of
the Consolidated Financial Statements.
On December 31, 1995 and December 31, 1996, the Company amended the total debt
ratio, interest coverage ratio and net worth financial covenants under the
Senior Bank Facilities to avoid anticipated future defaults and to address
changes in the Company's business, particularly the effect on the Company's
financial position and results of operation of losses at its freight car
subsidiary, JAC. The Company is currently in compliance with all covenants under
the Senior Bank Facilities.
The Company formed a leasing business in 1994 to lease freight cars. This
leasing division was formed into a wholly owned subsidiary JAIX Leasing in
January 1995 and currently owns and has under management 1,067 freight cars. In
May 1995, JAIX Leasing entered into a loan facility to finance its freight car
leasing activities. In June 1996, this debt was refinanced with a $27.7 million
ten-year term loan. See Note 6 of the Consolidated Financial Statements for a
description of this facility. As of December 31, 1996, there was $13.6 million
outstanding under this facility. In January 1997, JAIX Leasing sold 85 freight
cars generating $4.5 million in cash and further reducing JAIX Leasing debt by
$3.6 million.
The Company believes that the cash flow generated from its operations, together
with amounts available under the Revolving Loans, should be sufficient to fund
its debt service requirements, working capital needs, anticipated capital
expenditures and other operating expenses (including expenditures required by
applicable environmental laws and regulations over the next 18 months). The
Company's future operating performance and, therefore, its long-term ability to
service or refinance the Notes and to extend or refinance the Senior Bank
Facilities will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.
As of December 31, 1996, the Company's balance sheet included cash of $24.5
million.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to comprehensive and frequently changing federal, state
and local environmental laws and regulations, and will incur additional capital
and operating costs in the future to comply with currently existing laws and
regulations, new regulatory requirements arising from recently enacted statutes
and possible new statutory enactments. In addition to environmental laws that
regulate the Company's subsidiaries' ongoing operations, the subsidiaries also
are subject to environmental remediation liability. Under the federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and analogous state laws, the Company's subsidiaries may be liable as a result
of the release or threatened release of hazardous substances into the
environment. The Company's subsidiaries are currently involved in several
matters relating to the investigation and/or remediation of locations where the
subsidiaries have arranged for the disposal of foundry and other wastes.
Such matters include five situations in which the Company, through its TCI
subsidiaries and their predecessors, have been named or are believed to be
potentially responsible parties (PRPs) in the contamination of the sites.
Additionally, environmental remediation may be required at two of the TCI
facilities at which soil and ground water contamination has been identified. The
Company believes that it has valid claims for contractual indemnification
against prior owners for certain of the investigatory and remedial costs at each
of the above mentioned sites.
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The Company has been notified, however, by all contractual indemnitors that they
will not honor future claims for indemnification. Accordingly, the Company is
litigating indemnification claims and there is no assurance that even if
successful in any such claims, any judgments against the indemnitors will
ultimately be recoverable. In addition, the Company believes it is likely that
it has incurred some liability at various sites for activities and disposal
following acquisition which would not in any event be covered by indemnification
by prior owners.
As of December 31, 1996, the Company has a $26.4 million environmental reserve.
This reserve is based on current cost estimates and does not reduce estimated
expenditures to net present value. The Company currently anticipates spending
approximately $500,000 per year for the next three years and approximately $1
million per year in years 2000 and 2001 for monitoring the various environmental
sites associated with the environmental reserve, including attorney and
consultant costs for strategic planning and negotiations with regulators and
other PRPs, and payment of remedial investigation costs. The Company expects to
fund such expenditures with the cash flow generated from its operations and
amounts available under its Revolving Loans. These sites are generally in the
early investigatory stages of the remediation process and thus it is anticipated
that significant cash payments for remediation will not be incurred for at least
several years. After the evaluation and investigation period, the investigation
and remediation costs will likely increase because the actual remediation of the
various environmental sites associated with the environmental reserve will
likely be under way. Any cash expenditures required by the Company or its
subsidiaries to comply with applicable environmental laws and/or to pay for any
remediation efforts will not be reduced or otherwise affected by the existence
of the environmental reserve. Due to the early stage of investigation of many of
the sites and potential remediations referred to above, there are significant
uncertainties as to waste quantities involved, the extent and timing of the
remediation which will be required, the range of acceptable solutions, costs of
remediation and the number of PRPs contributing to such costs. Based on all of
the information presently available to it, the Company believes that the
environmental reserve will be adequate to cover its future costs related to the
sites associated with the environmental reserve, and that any additional costs
will not have a material adverse effect on the financial condition or results of
operations of the Company. However, the discovery of additional sites, the
modification of existing laws or regulations, the imposition of joint and
several liability under CERCLA or the uncertainties referred to above could
result in such a material adverse effect.
FORWARD-LOOKING STATEMENTS
The foregoing outlook 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; and the risks described from time
to time in the Company's Securities & Exchange Commission reports.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations.
Item 13. Certain Transactions and Related Transactions
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
JOHNSTOWN AMERICA INDUSTRIES, INC.
/s/ Andrew M. Weller
- ----------------------------------------------
ANDREW M. WELLER
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 4, 1997
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