- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-21830
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Johnstown America Industries, Inc.
(Exact name of registrant as specified in its charter)
Incorporated pursuant to the Laws of State of Delaware
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Internal Revenue Service - Employer Identification No. 25-1672791
980 N. Michigan Avenue
Suite 1000
Chicago, IL 60611
(Address of principal executive offices)
(312) 280-8844
Registrant's telephone number, including area code
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on November 4, 1997 was 9,762,262.
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<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION......................................... 2
Item 1 Condensed Consolidated Balance Sheets as
of September 30, 1997, and December 31, 1996.................. 3-4
Condensed Consolidated Statements of Income for
the Three and Nine Months Ended September 30, 1997 and 1996... 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996......... 6-7
Notes to Condensed Consolidated Financial Statements.......... 8-20
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 21-28
PART II OTHER INFORMATION .......................................... 29-32
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of the registrant's management, the unaudited condensed
consolidated financial statements included in this filing on Form 10-Q reflect
all adjustments (which consist of normal recurring adjustments) which are
considered necessary for a fair presentation of financial information for the
periods presented.
2
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
September 30, December 31,
(In thousands) 1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............. $ 15,701 $ 24,535
Accounts receivable, net.............. 69,598 49,346
Inventories........................... 54,528 49,589
Prepaid expenses and other............ 20,205 19,360
------------- -------------
Total current assets................ 160,032 142,830
Property, plant and equipment, net.... 117,244 123,859
Leasing business assets, net.......... 37,018 23,255
Restricted cash....................... -- 578
Deferred financing costs, net......... 12,067 13,450
Intangible assets, net................ 245,272 251,311
------------- -------------
Total assets........................ $ 571,633 $ 555,283
------------- -------------
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
<S> <C> <C>
September 30, December 31,
(In thousands) 1997 1996
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $ 53,695 $ 43,325
Accrued expenses and other payables..................................... 55,716 55,050
Current maturities of long-term debt, capital lease and
JAIX Leasing debt...................................................... 3,921 17,236
------------- -------------
Total current liabilities............................................. 113,332 115,611
Long-term debt and capital lease, less current maturities................ 97,783 173,763
JAIX Leasing debt, less current maturities............................... 29,051 13,176
Senior subordinated notes................................................ 182,823 100,000
Deferred income taxes.................................................... 33,855 29,214
Other long-term liabilities.............................................. 45,561 59,982
Shareholders' Equity:
Preferred stock, par $.01, 20,000 shares
authorized, none outstanding........................................... -- --
Common stock, par $.01, 201,000 shares
authorized, 9,762 and 9,754 issued and outstanding
as of September 30, 1997 and December 31, 1996,
respectively........................................................... 98 98
Paid-in capital......................................................... 55,054 55,049
Retained earnings....................................................... 14,106 8,420
Employee receivables for stock purchases................................ (30) (30)
------------- -------------
Total shareholders' equity ........................................ 69,228 63,537
--------- ---------
Total liabilities and shareholders' equity............................ $ 571,633 $ 555,283
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1997 1996 1997 1996
-------- -------- ------- ------
Net manufacturing sales..................... $ 184,674 $ 139,794 $ 455,534 $ 423,420
Leasing revenue............................. 2,122 1,051 5,224 3,054
------------ ------------ ------------ -----------
Total revenue.............................. 186,796 140,845 460,758 426,474
Cost of sales - manufacturing............... 160,922 119,977 391,954 360,157
Cost of leasing............................. 1,157 335 2,646 1,014
------------ ------------ ------------ -----------
Gross profit............................... 24,717 20,533 66,158 65,303
Selling, general and administrative
expenses................................... 11,140 10,774 33,203 34,583
Amortization expense........................ 2,169 2,635 6,416 7,768
Reduction of environmental reserves (14,300) -- (14,300) --
Gain on sale of leased freight cars......... (239) -- (826) --
------------- ------------ ------------- -----------
Operating income........................... 25,947 7,124 41,665 22,952
Interest expense, net....................... 8,043 8,381 24,371 24,703
Interest expense - leasing ................ 664 632 1,716 1,895
------------ ------------ ------------ -----------
Income (loss) before income
taxes.................................... 17,240 (1,889) 15,578 (3,646)
Provision (benefit)for income taxes......... 7,142 (326) 7,885 (131)
------------ ------------- ------------ ------------
Net income (loss) before
extraordinary item........................ 10,098 (1,563) 7,693 (3,515)
Extraordinary item, net of tax.............. 2,009 -- 2,009 --
------------ ------------ ------------ -----------
Net income (loss).......................... $ 8,089 $ (1,563) $ 5,684 $ (3,515)
------------ ------------ ------------ -----------
Earnings (loss) per common and common
equivalent shares outstanding:
Income (loss) before extraordinary item $ 1.03 $ (0.16) $ 0.79 $ (0.36)
Extraordinary item, net of tax.............. 0.20 -- 0.21 --
------------ ------------ ------------ ----------
Net income................................. $ 0.83 $ (0.16) $ 0.58 $ (0.36)
------------ ------------ ------------ ----------
Weighted average common and
common equivalent shares .................. 9,800 9,741 9,795 9,757
------------ ------------ ------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<S> <C> <C>
(In thousands) Nine Months Ended
September 30,
----------------------------
1997 1996
-------- -------
OPERATING ACTIVITIES:
Net income (loss)................................................ $ 5,684 $ (3,515)
Adjustments for items not affecting cash from operating activities:
Depreciation.................................................... 11,590 11,240
Amortization - other............................................ 7,317 8,502
Amortization - deferred financing costs......................... 1,631 2,243
Gain on sale of leased freight cars............................. (826) --
Deferred tax expense ........................................... 4,641 1,166
Reduction in environmental reserves............................. (14,300) --
Postretirement benefits......................................... 1,379 1,420
Changes in operating assets and liabilities:
Accounts receivable, net......................................... (20,252) 6,526
Inventories...................................................... (4,939) (791)
Accounts payable................................................. 10,370 (2,368)
Other assets and liabilities..................................... 2,286 (8,172)
----------- -----------
Net cash provided by operating activities........................ 4,581 16,251
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures............................................ (4,230) (6,554)
Leasing business asset additions................................ (25,622) (5,077)
Proceeds from sales of leased freight cars ..................... 9,932 --
Other........................................................... 578 703
----------- -----------
Net cash used for investing activities........................... (19,342) (10,928)
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
<TABLE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<S> <C> <C>
(In thousands) Nine Months Ended
September 30,
-------------
1997 1996
---- ----
FINANCING ACTIVITIES:
Issuance of senior subordinated notes .............................. 82,823 --
Payments of term loans and capital lease............................ (89,296) (12,609)
Net borrowings under JAIX Leasing loans............................. 15,876 5,083
Payment of deferred financing costs................................. (3,476) (857)
------------- -----------
Net cash provided by (used for) financing activities................ 5,927 (8,383)
------------- -----------
Net decrease in cash and cash equivalents........................... (8,834) (3,060)
CASH AND CASH EQUIVALENTS,
beginning of period................................................ 24,535 11,639
------------- -----------
CASH AND CASH EQUIVALENTS,
end of period...................................................... $ 15,701 $ 8,579
------------- -------------
SUPPLEMENTAL CASH FLOWS DISCLOSURE
(In thousands)
Cash paid for interest - other....................................... $ 25,229 $ 24,878
Cash paid for interest - JAIX Leasing................................ 1,688 1,895
Cash paid for income taxes........................................... 718 889
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The financial statements presented herein and these notes are unaudited. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the registrant believes that all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation have been made, interim periods are not necessarily indicative
of the results of operations for a full year. As such, these financial
statements should be read in conjunction with the financial statements and notes
thereto incorporated by reference in the registrant's Form 10-K for the year
ended December 31, 1996 as amended.
The consolidated financial statements include the accounts of Johnstown America
Industries, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany transactions and accounts have been eliminated in the
accompanying consolidated financial statements.
2. INVENTORIES
Inventories of the Company consist of the following (in thousands):
September 30, December 31,
1997 1996
---- ----
Raw materials and purchased
components $ 7,452 $ 10,289
Work-in-progress and finished goods 47,076 39,300
-------------- -------------
$ 54,528 $ 49,589
-------------- -------------
8
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
3. DEBT
Long-term debt of the Company (excluding JAIX Leasing Company ("JAIX Leasing"))
consisted of the following:
September 30, December 31,
1997 1996
---- ----
(in thousands)
Revolving loans $ -- $ --
Tranche A term loans -- 86,670
Tranche B term loans 94,173 96,670
-------------- ------------
Total senior bank facilities 94,173 183,340
Industrial revenue bonds 5,300 5,300
Capital lease 1,825 1,953
-------------- ------------
Total debt 101,298 190,593
Less: current maturities (3,515) (16,830)
-------------- ------------
Long-term debt $ 97,783 $ 173,763
-------------- ------------
Long term debt of JAIX Leasing consisted of the following:
Term loan $ 29,457 $ 13,582
Less: current maturities (406) (406)
-------------- ------------
Long-term debt $ 29,051 $ 13,176
-------------- ------------
9
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
Senior Bank Facilities
The Company entered into a credit facility ("Senior Bank Facilities") on August
23, 1995, in conjunction with the acquisition of Truck Components Inc. ("TCI")
and related transactions. The Revolving Loans portion of the Senior Bank
Facilities currently provides for up to $75 million of outstanding borrowings
and letters of credit (limited to $35 million), limited by the level of eligible
accounts receivable and inventories. As of September 30, 1997, availability
under the Revolving Loans, after consideration of outstanding letters of credit
of $17 million, was $48 million.
At the Company's election, the interest rates per annum applicable to the loans
under the Senior Bank Facilities are a fluctuating rate of interest measured by
reference to either (a) an adjusted London inter-bank offered rate ("LIBOR) plus
a borrowing margin or (b) an alternate base rate ("ABR") (equal to the highest
of The Chase Manhattan Bank's published prime rate, a certificate of deposit
rate plus 1% and the Federal Funds effective rate plus 1/2 of 1%) plus a
borrowing margin. The borrowing margins applicable to Revolving Loans range
between 0.50% and 1.50% for ABR loans and between 1.50% and 2.50% for LIBOR
loans, fluctuating within each range in 0.25% increments if the Company achieves
or fails to achieve certain financial results. The interest rate borrowing
margins applicable to the Tranche B Term Loans are 3.00% for LIBOR loans and
2.00% for ABR loans and are not subject to increase or decrease based on the
financial performance of the Company. Amounts under the Senior Bank Facilities
not paid when due bear interest at a default rate equal to 2.0% above the
otherwise applicable rate.
Quarterly principal payments on the term loans under the Senior Credit
Facilities began in March 1996. The Tranche A Term Loans were repaid in full in
connection with the August 1997 issuance of Senior Subordinated Notes discussed
in Note 4. This early debt extinguishment resulted in a $3.4 million ($2.0
million after tax) non-cash extraordinary charge related primarily to the write
off of related unamortized deferred financing costs. The Revolving Loans mature
on March 31, 2002 and the Tranche B Term Loans mature on March 31, 2003 and are
subject to certain mandatory prepayments. Subsequent to the prepayment of the
Tranche A Term Loans the future term loan payments are as follows: 1997 $0.8
million, 1998 $3.3 million, 1999 $3.3 million, 2000 $20.0 million, 2001 $23.3
million, 2002 $26.7 million, 2003 $16.7 million.
The Senior Bank Facilities contain various financial covenants including capital
expenditure limitations, leverage and interest coverage ratios and minimum net
worth, and also restrict the Company from paying dividends, repurchasing common
stock and making other distributions in certain circumstances. On December 31,
1995, December 31, 1996 and August 4, 1997,
10
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
the Company amended the total debt ratio, interest coverage ratio and net worth
financial covenants under the Credit Agreement to avoid anticipated future
noncompliance 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
one of its freight car subsidiaries, Johnstown America Corpration ("JAC"). The
Company is currently in compliance with all covenants under the Credit
Agreement.
JAIX Leasing Debt
On June 14, 1996, JAIX Leasing entered into a ten-year term loan facility which
bears interest at an average interest rate of 8.78%. At September 30, 1997 the
facility had debt outstanding of $29.5 million. The facility, which is
non-recourse to Johnstown America Industries, Inc., is secured by the underlying
leases and assets and contains various covenants.
Industrial Revenue Bonds
The Company, through its wholly owned subsidiary, Freight Car Services, Inc.
("FCS"), issued the Industrial Revenue Bonds for $5.3 million which bear
interest at a variable rate (3.65% as of September 30, 1997) and can be redeemed
by the Company at any time. The bonds are secured by a letter of credit issued
by Johnstown America Industries, Inc. The bonds have no amortization and mature
on December 1, 2010. The bonds are also subject to a weekly "put" provision by
the holders of the bonds. In the event that any or all of the bonds are put to
the Company under this provision, the Company would effectively refinance such
bonds with additional borrowings under the Revolving Loans portion of the Senior
Bank Facilities.
Interest Rate Contracts
The Company has entered into various interest rate contracts to fix the cost of
its variable rate Senior Bank Facilities. These contracts limit the effect of
market fluctuations on the interest cost of floating rate debt. The notional
principal amounts outstanding on the interest rate contracts covering the
current period is $100 million and the fixed rates of interest on these
contracts range from 5.98% to 6.29% plus the applicable borrowing margin. The
contracts have various maturities through August 2000.
11
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
4. SENIOR SUBORDINATED DEBT
In conjunction with the acquisition of TCI, the Company issued $100 million of
Senior Subordinated Notes ("Notes") which are due August 15, 2005 and have an
interest rate of 11.75% per annum and are guaranteed on a unsecured, senior
subordinated joint and several basis by the Guarantor Subsidiaries. The Notes
have customary restrictive covenants including restrictions on incurrence of
additional indebtedness, and payment of dividends and redemption of capital
stock. The Notes are subordinated to all indebtedness under the Senior Bank
Facilities and cross-default provisions exist. Except in certain limited
circumstances, the Notes are not subject to optional redemption by the Company
prior to August 15, 2000, and thereafter are subject to optional redemption by
the Company at declining redemption premiums. Upon the occurrence of a change in
control (as defined), the Company is required to offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof plus accrued interest.
In August 1997, the Company issued $80 million additional 11.75% Notes due
August 15, 2005 at a premium in a private placement. These Notes have
substantially the same terms and conditions as the original Notes. A $0.8
million loss from the settlement of an interest rate contract in effect when
these Notes were issued has been deferred against the outstanding debt balance
and is being amortized as additional interest expense over the term of these
notes. The net proceeds from the issuance were used to fully repay the Tranche A
Term Loans under the Senior Bank Facilities. The Company commenced an exchange
offer on November 6, 1997 and expects to exchange these $80 million of notes for
publicly-registered notes with similar terms and conditions by December 6, 1997.
5. ENVIRONMENTAL MATTERS
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. With respect to claims
involving Gunite Corporation ("Gunite"), TCI and Gunite in September 1997
entered into a private-party settlement (the "Settlement") of certain pending
litigation with a prior owner of Gunite, pursuant to which each of TCI and
Gunite and the prior owner withdrew their claims against the other. As a result
of the Settlement, TCI and Gunite will not be responsible for liabilities and
costs related to certain alleged contamination of Gunite's facilities and at
certain off-site properties to the extent arising out of operations of Gunite
prior to the acquisition of Gunite by TCI in September 1987. As of June 30,
1997, based on all of the information currently available, the Company
maintained an
12
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
environmental reserve in the amount of $26.1 million. As a result of the
Settlement, the Company's environmental reserve was decreased in September 1997
by $14.3 million. As of September 30, 1997, based on all of the information
currently available to the Company, the Company has an environmental reserve of
$11.6 million which management believes is adequate to cover future
expenditures. This reserve is based on current cost estimates and does not
reduce estimated expenditures to net present value, although the Company's
subsidiaries are not likely to incur costs for most of the reserved matters
until several years in the future. 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 potentially responsible parties
contributing to such costs. Based on all of the information presently available,
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 or the uncertainties referred to
above could result in such a material adverse effect.
6. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" was issued in February, 1997 and will be adopted by the Company effective
January 1, 1998. This new pronouncement establishes revised methods for
computing and reporting earnings per share. Adoption of this standard will not
materially impact previously reported earnings per share, including the per
share amount reported for the three and nine months ended September 30, 1997.
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997 and will
be adopted by the Company effective January 1, 1998. This new pronouncements
establishes standards for reporting and display of comprehensive income and its
components. As the standard will only effect required note disclosures, the
adoption of this standard is not expected to have an effect on the Company's
financial position or results of operations.
13
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Nine Months Ended September 30, 1997
(Unaudited)
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way that the
chief operating decision maker organizes segments within the company for making
operating decisions and assessing performance. Management of the Company is
evaluating this new pronouncement to determine its impact upon current
reporting. Adoption of this new standard is scheduled for early 1998.
7. GUARANTOR SUBSIDIARIES
The Notes and the obligations under the Senior Bank Facilities are fully and
unconditionally guaranteed on an unsecured, senior subordinated, joint and
several basis by each of the Guarantor Subsidiaries. The following condensed
consolidating financial data illustrates the composition of the Parent Company,
the Guarantor Subsidiaries, and JAIX Leasing as of and for certain dates and
periods. Separate complete financial statements of the respective Guarantor
Subsidiaries would not provide additional information which would be useful in
assessing the financial composition of the Guarantor Subsidiaries and thus, are
not presented.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Parent Company's
investment accounts and earnings. The principle elimination entries eliminate
the Parent Company's investment in subsidiaries and intercompany balances and
transactions.
14
<PAGE>
<TABLE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
as of September 30, 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
Cash and cash equivalents................. $ 14,711 $ (1,139) $ 2,129 $ -- $ 15,701
Accounts receivable, net.................. -- 68,908 690 -- 69,598
Inventories............................... -- 54,528 -- -- 54,528
Prepaid expenses and other................ 2,568 16,437 1,200 -- 20,205
---------- ---------- ----------- ---------- ----------
Total current assets................. 17,279 138,734 4,019 -- 160,032
Property, plant and equipment, net........ 2,598 116,476 35,528 (340) 154,262
Other assets.............................. 120,726 245,228 711 (109,326) 257,339
---------- ---------- ----------- ---------- ----------
Total assets......................... $ 140,603 $ 500,438 $ 40,258 $ 109,666 $ 571,633
---------- ---------- ----------- ---------- ----------
Accounts payable.......................... $ 600 $ 53,095 $ -- $ -- $ 53,695
Other current liabilities................. (1,628) 62,066 (801) -- 59,637
---------- ---------- ----------- ---------- ----------
Total current liabilities............ (1,028) 115,161 (801) -- 113,332
Noncurrent liabilities.................... -- 75,936 3,480 -- 79,416
Long-term debt and intercompany
advances, less current maturities ...... 72,403 208,203 29,051 -- 309,657
Total shareholders' equity................ 69,228 101,138 8,528 (109,666) 69,228
---------- ---------- ----------- ---------- ----------
Total liabilities and shareholders'
equity........................... $ 140,603 $ 500,438 $ 40,258 $ (109,666) $ 571,633
---------- ---------- ----------- ---------- ----------
15
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 1997
(In thousands)
(Unaudited)
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
Total revenue............................. $ 220 $ 455,534 $ 5,004 $ -- $ 460,758
Cost of sales............................. 38 391,954 2,608 -- 394,600
---------- ---------- ---------- ---------- ----------
Gross profit............................. 182 63,580 2,396 -- 66,158
Selling, general, administrative
and amortization expenses................ (130) 39,292 (369) -- 38,793
---------- ---------- ---------- ---------- ----------
Reduction of environmental
reserves................................ -- (14,300) -- -- (14,300)
Operating income........................ 312 38,588 2,765 -- 41,665
Interest expense, net..................... 8,995 15,500 1,592 -- 26,087
Equity (earnings) of subsidiaries......... (12,829) -- -- 12,829 --
Provision (benefit) for income taxes (3,547) 10,963 469 -- 7,885
---------- ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item...................... 7,693 12,125 704 (12,829) 7,693
Extraordinary item, net of tax............ 2,009 -- -- -- 2,009
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ 5,684 $ 12,125 $ 704 $ (12,829) $ 5,684
---------- ---------- ---------- ---------- ----------
16
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 1997
(In thousands)
(Unaudited)
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
CASH FLOWS FROM
OPERATING ACTIVITIES..................... $ (6,927) $ 11,129 $ 379 $ -- $ 4,581
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures................... (107) (4,123) -- -- (4,230)
Leasing business assets additions
and investments......................... 41 -- (25,663) -- (25,622)
Proceeds from sale of leased
freight cars............................ 3,024 -- 6,908 -- 9,932
Other................................... -- 578 -- -- 578
---------- ---------- ---------- -------- -----------
Cash provided by (used for)
investing activities................... 2,958 (3,545) (18,755) -- (19,342)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Senior Subordinated Note
Issuance............................... 82,823 -- -- -- 82,823
Payments of term loans and
capital lease.......................... (89,168) (128) -- -- (89,296)
Net borrowings under JAIX
Leasing loans.......................... -- -- 15,876 -- 15,876
Intercompany advances.................. 10,078 (10,078) -- -- --
Deferred financing costs .............. (3,113) -- (363) -- (3,476)
----------- ---------- ---------- -------- -----------
Cash provided by (used for)
financing activities.................. 620 (10,206) 15,513 -- 5,927
Net decrease in cash
and cash equivalents.................... (3,349) (2,622) (2,863) -- (8,834)
CASH AND CASH
EQUIVALENTS,
beginning of period..................... 18,060 1,483 4,992 -- 24,535
---------- ---------- ---------- -------- -----------
CASH AND CASH EQUIVALENTS,
end of period........................... $ 14,711 $ (1,139) $ 2,129 $ -- $ 15,701
---------- ---------- ---------- -------- -----------
17
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
as of December 31, 1996
(In thousands)
(Unaudited)
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
Cash and cash equivalents.................$ 18,060 $ 1,483 $ 4,992 $ -- $ 24,535
Accounts receivable, net.................. 28 49,162 156 -- 49,346
Inventories............................... -- 49,589 -- -- 49,589
Prepaid expenses and other................ 2,979 16,008 373 -- 19,360
----------- ------------ ----------- ----------- -----------
Total current assets................. 21,067 116,242 5,521 -- 142,830
Property, plant and equipment, net 7,577 123,128 16,960 (551) 147,114
Other assets.............................. 108,822 255,913 401 (99,797) 265,339
----------- ------------ ----------- ----------- -----------
Total assets........................$ 137,466 $ 495,283 $ 22,882 $ (100,348) $ 555,283
----------- ------------ ----------- ----------- -----------
Accounts payable.........................$ 201 $ 42,993 $ 131 $ -- $ 43,325
Other current liabilities................. 18,390 55,835 (1,728) (211) 72,286
----------- ------------ ----------- ----------- -----------
Total current liabilities............ 18,591 98,828 (1,597) (211) 115,611
Noncurrent liabilities.................... -- 85,716 3,480 -- 89,196
Long-term debt, less current
maturities and intercompany
advances (receivables).................. 55,338 218,425 13,176 -- 286,939
Total shareholders' equity................ 63,537 92,314 7,823 (100,137) 63,537
----------- ------------ ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 137,466 $ 495,283 $ 22,882 $ (100,348) $ 555,283
----------- ------------ ----------- ----------- -----------
18
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 1996
(In thousands)
(Unaudited)
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
Total revenue............................$ 71 $ 423,421 $ 2,982 $ -- $ 426,474
Cost of sales............................. (11) 360,157 1,025 -- 361,171
----------- ------------ ------------- ----------- -----------
Gross profit............................ 82 63,264 1,957 -- 65,303
Selling, general, administrative
and amortization expenses................ 550 41,801 -- -- 42,351
----------- ------------ ------------- ----------- -----------
Operating income (loss)................ (468) 21,463 1,957 -- 22,952
Interest expense, net..................... 8,980 15,806 1,812 -- 26,598
Equity (earnings) of subsidiaries......... (2,448) -- -- 2,448 --
Provision (benefit) for income taxes...... (3,485) 3,298 56 -- (131)
----------- ------------ ------------- ----------- -----------
Net income (loss).....................$ (3,515) $ 2,359 $ 89 $ (2,448) $ (3,515)
----------- ------------ ------------- ----------- -----------
19
<PAGE>
JOHNSTOWN AMERICA INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 1996
(In thousands)
(Unaudited)
Parent Guarantor
Company Subsidiaries JAIX Leasing Eliminations Consolidated
CASH FLOWS FROM
OPERATING ACTIVITIES....................$ (11,506) $ 26,452 $ 1,306 $ -- $ 16,252
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.................... (278) (6,277) -- -- (6,555)
Leased assets and investments........... (5,034) -- (43) -- (5,077)
Changes in restricted cash.............. -- 703 -- -- 703
----------- ------------ ------------- ----------- -----------
Cash provided by (used for)
investing activities................... (5,312) (5,574) (43) -- (10,929)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net payments under term loans........... (12,495) (114) -- -- (12,609)
Loan facility of leasing business....... -- -- 5,083 -- 5,083
Change in intercompany advances......... 19,025 (15,588) (3,437) -- --
Dividends received/ (paid).............. 1,600 -- (1,600) -- --
Deferred financing costs paid........... (421) (14) (437) -- (872)
Other.................................. 15 -- -- -- 15
----------- ------------ ------------- ----------- -----------
Cash provided by (used for)
financing activities................... 7,724 (15,716) (391) -- (8,383)
Net increase (decrease) in cash
and cash equivalents..................... (9,094) 5,162 872 -- (3,060)
CASH AND CASH
EQUIVALENTS,
beginning of period..................... 16,896 (6,156) 899 -- 11,639
----------- ------------ ------------- ----------- -----------
CASH AND CASH
EQUIVALENTS,
end of period..........................$ 7,802 $ (994) $ 1,771 $ -- $ 8,579
----------- ------------ ------------- ----------- -----------
</TABLE>
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended September 30, 1997
Item 2.
General
The Company conducts its business through three operating groups within the
transportation industry: truck components and assemblies operations, a leading
manufacturer of wheel end components, seating, steerable drive axles and gear
boxes for the heavy duty truck industry, iron castings operations, a major
producer of complex iron castings for a wide range of industries, and freight
car operations, a leading manufacturer and lessor of new and rebuilt freight
cars used for hauling coal, intermodal containers, highway trailers,
agricultural and mining products. During 1996, the Company's truck components
and assemblies, iron castings and freight car operations generated net sales of
$237.0 million, $125.1 million and $197.8 million, respectively. During the nine
months ended September 30, 1997, the Company's truck components and assemblies,
iron castings and freight car operations generated net sales of $214.4 million,
$98.8 million and $147.6 million, respectively. The significant decline in
demand experienced in 1996 and early 1997 by JAC produced significant operating
losses that, coupled with the Company's significant debt service requirements,
offset strong operating income for its truck components and assemblies and iron
castings operations. Although demand for freight cars has improved, the market
remains subject to pricing competitiveness in a freight car market characterized
by depressed demand and production overcapacity. Given the cyclicality of the
freight car and heavy-duty truck industries and other market factors, there can
be no assurance that the Company will achieve or sustain profitability in the
future.
The Company's sales are affected to a significant degree by the North American
Class 8 truck and freight car markets. Both the North American Class 8 truck and
the freight car 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.
JAC and FCS, the Company's freight car manufacturing subsidiaries, sales are
driven principally by the number and type of new and rebuilt freight cars
delivered in any given period. Due to the large size of customer orders, the
specific time frame for delivery of freight cars ordered and variations in the
mix of cars ordered, the number and type of cars produced in any given quarter
may fluctuate greatly. As a result, the Company's revenues and results of
operations and cash flows from operations may fluctuate as well.
21
<PAGE>
During the nine months of 1997 net income included two non-recurring items: an
extraordinary charge (net of tax) of $2.0 million and a reduction in
environmental liabilities resulting in non-cash pretax income of $14.3 million
and after tax income of $8.4 million resulting in net income for the period of
$5.7 million. The net loss for the first nine months of 1997 excluding the two
non-recurring items was $0.7 million.
The Company formed its leasing subsidiary, JAIX Leasing, in January 1995 and
currently leases 1,691 freight cars to various lessees under operating leases.
Of these freight cars, 560 are owned by JAIX Leasing, representing an investment
of $35.2 million, and the remainder are leased.
The following table sets forth for the periods indicated certain historical
financial data of the Company expressed as a percentage of total revenue:
Nine Months Ended
September 30,
1997 1996
---- ----
Total revenue.................................... 100.0% 100.0%
Gross margins.................................... 14.4 15.3
Selling, general and administrative.............. 7.2 8.1
Amortization..................................... 1.5 1.8
Gain on sale of lease freight cars............... .2 --
Reduction of environmental reserves.............. (3.1) --
------ -------
Operating income................................. 9.0% 5.4%
Results of Operations
Three Months Ended September 30, 1997 and 1996
Total Revenue
Total revenue for the three months ended September 30, 1997 increased 32.7% to
$186.8 million from $140.8 million in 1996. Revenue from the truck component
operations increased 29.9% ($16.8 million) while iron casting operations
maintained stable revenues. Revenues in the freight car operations increased
54.8% ($29.5 million). Third quarter 1997 shipments increased to 1,504 new and
rebuilt cars from 1,084 new and rebuilt cars in the same period of 1996.
Cost of Sales - Manufacturing and Gross Profits
Cost of Sales - Manufacturing for the three months ended September 30, 1997 as a
percent of manufacturing sales was 87.1%, compared to 85.8% in 1996. Related
gross profit margins were 12.9% and 14.2%, respectively. Manufacturing gross
profits increased by $3.9 million while the gross margin percent declined,
reflecting lower gross margins in the freight car business. The
22
<PAGE>
increase in gross profits of $3.9 million resulted from increased revenues and
profits in the truck components operations and improved gross profit margins in
the iron casting operation. Gross profit from leasing increased by $.3 million
during the three month period ending September 30, 1997 compared to the same
period in 1996. Overall company gross profits increased $4.2 million in the
three month period ending September 30, 1997 compared to the same period in
1996.
Selling, General, Administrative and Amortization
Selling, general, and administrative expenses as a percentage of total revenue
were 6.0% and 7.6% for the three months ended September 30, 1997 and 1996,
respectively. The decrease in selling, general, and administrative expense as a
percent of total revenue is due primarily to increased revenue. Amortization
expense as a percentage of total revenue was 1.2% and 1.9% for the three months
ended September 30, 1997 and 1996, respectively.
Operating Income
Operating income was $25.9 million in the third quarter of 1997, compared to
$7.1 million in the third quarter of 1996. The increase in operating income was
due to increased revenues of $46.0 million for the quarter resulting in a $4.2
increase in gross profits, a reduction in environmental reserves of $14.3
million, a $0.4 million decline in amortization expense, a $0.2 million gain on
the sale of leased freight cars, offset by an increase in selling, general and
administrative expenses of $0.3 million.
Other
Interest expense, net, was $8.7 million in the third quarter of 1997 compared to
$9.0 in the third quarter of 1996. Interest expense in 1997 and 1996 resulted
from borrowings under the Senior Bank Facilities and Senior Subordinated Notes.
Net income before extraordinary item and income before extraordinary item per
share for the third quarter of 1997 were $10.1 million and $1.03 respectively.
During the quarter the Company recorded an extraordinary charge of $2.0 million
after tax related to the write-off of $3.4 million of deferred financing costs
(pretax) upon the prepayment of the Company's Tranche A Term Loans. Net income
and income per share for the third quarter of 1997 were $8.1 million and $0.83
respectively, compared to a net loss and loss per share of $1.6 million and
$0.16, respectively, for the third quarter of 1996.
23
<PAGE>
Results of Operations
Nine Months Ended September 30, 1997 and 1996
Total Revenue
Total revenue for the nine months ended September 30, 1997 increased 8.0% to
$460.8 million from $426.5 million in the first nine months of 1996. The revenue
increase of $34.3 million was due to the increase in truck component operations
and iron castings offset partially by a decrease in freight car revenues.
Revenues for the nine months ended September 30, 1997 at truck component
operations increased $34.2 million (19.0%), while iron casting revenues
increased $4.2 million (4.4%) over the same period in 1996. Although, the
Company shipped 3,079 new and rebuilt freight cars in the first nine months of
1997 versus 2,716 new and rebuilt cars shipped in the same period in 1996, 1997
included 415 cars which were sold to JAIX Leasing (eliminated from consolidated
sales) resulting in a reduction of net revenues of $4.1 million from freight car
operations. As of September 30, 1997, the Company's backlog of new and rebuilt
freight cars was 2,297 as compared to 1,374 new and rebuilt freight cars on
September 30, 1996.
Cost of Sales - Manufacturing and Gross Profits
Cost of Sales - Manufacturing for the nine months ended September 30, 1997 as a
percentage of manufacturing sales was 86.0%, compared to 85.1% for the same
period in 1996. Related gross margins were 14.0% and 14.9%, respectively. The
decrease in gross profits resulted primarily from lower gross profit margins in
the freight car business offset partially by increased profit margins in the
truck components and iron castings operation.
Selling, General, Administrative and Amortization
Selling, general, and administrative expenses as a percentage of total revenue
was 7.2% and 8.1% for the nine months ended 1997 and 1996, respectively. Actual
selling, general and administrative expenses declined $1.4 million from 1996
levels as a result of cost reduction measures undertaken at the Company's
freight car operations. Amortization expense as a percentage of total revenue
was 1.4% and 1.8% for the nine months ended September 30, 1997 and 1996,
respectively.
Operating Income
Operating income was $41.7 million for the first nine months of 1997, compared
to $23.0 million in the same period of 1996 an increase of $18.7 million. The
Company increased its operating income by increasing gross profits by $0.9
million, a reduction in selling, general and administrative expenses of $1.4
million, a reduction in amortization expense of $1.4 million, reduction of
environmental reserves of $14.3 and the gain on sale of leased freight cars of
$0.8 million.
At September 30, 1997, the Company had 1,691 freight cars on lease and the
leasing business
24
<PAGE>
generated $5.2 million in revenue and $2.6 million in operating income before a
$0.8 million gain on the sale of leased freight cars for the first nine months
of 1997 compared with $3.1 million revenue and $2.1 million operating income in
the prior period.
Other
Interest expense, net, was $26.1 million for the first nine months of 1997
compared to $26.6 million in the same period of 1996. Interest expense in 1997
and 1996 resulted from borrowings under the Senior Bank Facilities and the
Senior Subordinated Notes, as well as from the JAIX Leasing loans which were
used to finance the addition of freight cars for the lease fleet.
Net income before extraordinary item and income before extraordinary item per
share for the first nine months of 1997 were $7.7 million and $0.79
respectively, and net income and income per share for the first nine months of
1997 were $5.7 million and $0.58 respectively, compared to a net loss and loss
per share of $3.5 million and $0.36, respectively, for the first nine months of
1996.
Liquidity and Capital Resources
For the nine months ended September 30, 1997, the Company provided net cash from
operations of $4.6 million compared with providing net cash of $16.3 million for
the first nine months of 1996. Due to increased business activities, accounts
receivable and inventories increased by $20.3 million and $4.9 million,
respectively, partially offset by increases in accounts payable of $10.4
million. The Company used $19.3 million of cash in investing activities, which
included net investments in the leasing fleet of $15.7 million and capital
expenditures of $4.2 million. Cash provided by financing activities was $5.9
million for the first nine months of 1997, which included an increase in the
JAIX Leasing debt of $15.9 million to fund the leasing fleet additions offset in
part by a use of cash of $9.9 million relating to long term debt. The $9.9
million is comprised of $89.3 million for payment of capital lease and term
loans, $3.5 million for deferred financing costs and $82.8 million in proceeds
from the issuance of additional Notes on August 12, 1997. The Company
anticipates that capital expenditures for the balance of 1997 will be
approximately $2.0 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 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.
As of September 30, 1997, there was $94.2 million of term loans outstanding
under the Senior Bank Facilities, $182.8 million of Notes outstanding, and no
borrowings under the $75 million revolving credit line under the Senior Bank
Facilities. Availability under the Revolving Loans,
25
<PAGE>
after consideration of outstanding letters of credit of $17 million, was $48
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 require semiannual interest payments of approximately $10.6 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 term loans under the Senior Bank Facilities
require periodic principal payments through their maturities.
The Company issued an additional $80 million of 11.75% Notes at a premium in
August 1997. This debt has substantially the same terms and conditions as the
original Notes. The proceeds were used to pay down debt outstanding under the
Senior Bank Facilities. At the time of the issuance the Company wrote off $3.3
million (pretax) or $2.0 million (after tax) of deferred financing costs. Based
on current interest rates the Company expects that it will incur additional
interest expense of approximately $1.5 million, annually.
On December 31, 1995, December 31, 1996 and August 4, 1997, the Company amended
the total debt ratio, interest coverage ratio and net worth financial covenants
under the Credit Agreement to avoid anticipated future noncompliance 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 one of its
freight car subsidiaries, JAC. The Company is currently in compliance with all
covenants under the Credit Agreement. In addition, in connection with the
issuance of the $80 million of additional Notes, the Credit Agreement was
amended to reduce the Revolving Facility from $100 million to $75 million.
The Company formed a leasing business in 1994 to provide operating lease
financing for freight cars. This leasing division was formed into a wholly owned
subsidiary, JAIX Leasing, in January 1995 and currently leases 1,691 freight
cars to various lessees under operating leases. Of these freight cars, 560 are
owned by JAIX Leasing representing an investment of $35.2 million, and the
remainder are leased. JAIX Leasing, which is not a Guarantor Subsidiary,
finances its freight car leasing activities through its own term loan and
leasing facilities. This term loan facility was entered into in June 1996 by
JAIX Leasing to finance its freight car leasing activities and repay its
existing credit facility. The term loan facility is secured by underlying leases
and assets of JAIX Leasing and the borrowings thereunder are non-recourse
against the Company. See footnote 3 of the Condensed Consolidated Financial
Statements for the nine months ended September 30, 1997, for a description of
this loan. As of September 30, 1997, there was $29.5 million outstanding under
this facility. In June 1997, JAIX Leasing entered into an operating lease
facility whereby JAIX Leasing will sell freight cars to a lessor and then lease
back the cars (on a non-recourse basis to the company) for periods of up to two
years. JAIX Leasing will then lease the freight cars to various sub-lessees.
The Company believes that the cash flow generated from its operations, together
with amounts
26
<PAGE>
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). The Company's future operating performance
and 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 September 30, 1997, the Company's balance sheet included cash of $15.7
million.
Environmental Matters
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. With respect to claims
involving Gunite, TCI and Gunite in September 1997 entered into the
private-party Settlement of certain pending litigation with a prior owner of
Gunite, pursuant to which each of TCI and Gunite and the prior owner withdrew
their claims against the other. As a result of the Settlement, TCI and Gunite
will not be responsible for liabilities and costs related to certain alleged
contamination of Gunite's facilities and at certain off-site properties to the
extent arising out of operations of Gunite prior to the acquisition of Gunite by
TCI in September 1987. As of June 30, 1997, based on all of the information
currently available, the Company maintained an environmental reserve in the
amount of $26.1 million. As a result of the Settlement, the Company's
environmental reserve was decreased in September 1997 by $14.3 million. As of
September 30, 1997, based on all of the information currently available to the
Company, the Company has an environmental reserve of $11.6 million which
management believes is adequate to cover future expenditures. This reserve is
based on current cost estimates and does not reduce estimated expenditures to
net present value, although the Company's subsidiaries are not likely to incur
costs for most of the reserved matters until several years in the future. 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 potentially responsible parties contributing to such costs. Based on all of
the information presently available, 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 or the uncertainties referred to above could result in such a
material adverse effect.
27
<PAGE>
New Accounting Pronouncements
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" was issued in February, 1997 and will be adopted by the Company effective
January 1, 1998. This new pronouncement establishes revised methods for
computing and reporting earnings per share. Adoption of this standard will not
materially impact previously reported earnings per share, including the per
share amount reported for the nine months ended September 30, 1997.
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997 and will
be adopted by the Company effective January 1, 1998. This new pronouncements
establishes standards for reporting and display of comprehensive income and its
components. As the standard will only effect required note disclosures, the
adoption of this standard is not expected to have an effect on the Company's
financial position or results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way that the
chief operating decision maker organizes segments within the company for making
operating decisions and assessing performance. Management of the Company is
evaluating this new pronouncement to determine its impact upon current
reporting. Adoption of this new standard is scheduled for early 1998.
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 and Exchange Commission reports.
Effects of Inflation
General price inflation has not had a material impact on the Company's results
of operations.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1992, Johnstown America Corporation ("JAC") commenced a patent
infringement lawsuit against Trinity Industries, Inc. ("Trinity") in the United
States District Court for the Western District of Pennsylvania alleging
infringement 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 United States District Court for the Western District of
Pennsylvania 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 judgment in favor of JAC
or, alternatively, to order a new trial, which motions were denied. JAC appealed
the case to the United States Court of Appeals for the Federal Circuit.
Following oral argument, the Court of Appeals for the Federal Circuit issued its
opinion dated May 28, 1997 in which the Court held that Trinity's Aluminator II
literally infringed JAC's patent, reversed the 1996 trial court judgment of non-
infringement and remanded the case back to the trial court for a determination
as to damages and for consideration of JAC's contention that Trinity's
infringement was willful. Following receipt of such opinion, JAC made a motion
to the trial court for a permanent injunction to prohibit Trinity from making,
selling or offering to sell its infringing Aluminator II until JAC's patent
expires in November 1999. Trinity thereafter petitioned the Court of Appeals for
a rehearing. The trial court temporarily denied JAC's motion for a permanent
injunction until the Court of Appeals decided Trinity's petition for rehearing.
The Court of Appeals issued its opinion dated July 30, 1997 and Order dated
August 11, 1997 denying Trinity's petition for rehearing and Trinity's
suggestion for a rehearing in banc. Trinity thereafter made a motion to the
Court of Appeals to stay the issuance of its mandate pending Trinity filing a
petition for certiorari to the United States Supreme Court, which was denied by
the Court of Appeals on September 2, 1997, at which time the Court of Appeals
issued its mandate. In October 1997, Trinity made a motion for partial summary
judgement on damages to the District Court and filed its petition for certiorari
to the United States Supreme Court. JAC either has or will file its responses
shortly. JAC expects the damage trial to occur in late 1997 or early 1998 and at
this time cannot predict the amount of damages that may be awarded.
The Company may be subject to liability as a result of the disposal of hazardous
substances on and off properties owned or operated by its subsidiaries,
including Brillion Iron Works, Inc. ("Brillion"), Gunite and Fabco Automotive
Corporation ("Fabco"). On May 25, 1994, TCI and Brillion filed suit against
Beatrice Company and the Robins Group for recovery of costs expended and for
declaratory and injunctive relief with respect to various environmental matters
pursuant to
29
<PAGE>
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 suit 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 judgement
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. With respect to claims involving Gunite, TCI and Gunite in September
1997 entered into the private-party Settlement of certain pending litigation
with a prior owner of Gunite, pursuant to which each of TCI and Gunite and the
prior owner withdrew their claims against the other. As a result of the
Settlement, TCI and Gunite will not be responsible for liabilities and costs
related to certain alleged contamination at Gunite's facilities and at certain
off-site properties to the extent arising out of operations of Gunite prior to
the acquisition of Gunite by TCI in September 1987.
The Company is involved in various lawsuits, including worker's compensation
claims, and warranty claims in the normal course of business.
In the opinion of management of the Company, the outcome of these lawsuits and
claims will not have a material adverse effect on the financial condition or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Securities Holders.
None
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Form of the Company's Series B 11-3/4% Senior Subordinated Note due 2005
issued on August 11, 1997 in the aggregate principal amount of
$80,000,000 (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, File No. 333-35277)
4.2 Indenture dated as of August 11, 1997 among the Company, the Guarantor
Subsidiaries and the Bank of New York, as Trustee governing $80,000,000
aggregate principal amount of the Company's 11-3/4% Senior Subordinated
Notes due 2005 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4, File No. 333-352777)
4.3 Exchange and Registration Rights Agreement dated August 11, 1997 among
the Company, the Guarantor Subsidiaries and Chase Securities Inc., as
Initial Purchaser (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-4, File No. 333- 35277)
10.1 Amendment No. 3, Consent and Waiver dated as of August 4, 1997 to Credit
Agreement, among the Company, the Chase Manhattan Bank, as
Administrative Agent, Collateral Agent and Swingline Lender, The First
National Bank of Boston and The First National Bank of Chicago, as
co-agents, and The Chase Manhattan Bank Delaware, as Issuing Bank
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-4, File No. 333-35277)
(b) Reports
The Company filed the following reports on Form 8-K during the three months
ended September 30, 1997:
None
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSTOWN AMERICA INDUSTRIES, INC.
By /s/ Andrew M. Weller
- ---------------------------------
Andrew M. Weller
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 13, 1997
32
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