SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 of 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.)
$102,669,822 as of March 18, 1998.
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 18, 1998
Common Stock, $01 par value 9,774,094
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, 1997 (Part II); and (2) Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 7, 1998 (Part
III).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Johnstown America Industries, Inc. (the "Company"), through its
subsidiaries, designs and manufactures: components and assemblies primarily for
medium and heavy-duty trucks; high quality, complex iron castings for
transportation-related and a variety of other markets; and railroad freight
cars. 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:
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 and bus industries. 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.
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 Leasing")
offers its customers freight car leasing alternatives.
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.
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.
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In January 1995, the Company through FCS acquired a freight car rebuilding and
repair facility in Danville, Illinois for $2.5 million and spent $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.
TRUCK COMPONENTS AND ASSEMBLIES OPERATIONS
GUNITE
Gunite is a 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 with QS9000 certification. 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,
Volvo and Mack Trucks. For the twelve months ended December 31, 1997,
approximately 68% 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 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.
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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, 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. 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.
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 response to growing concerns by truck fleet operators over brake
adjustment, Gunite introduced its initial automatic slack adjuster product in
1984. The use of 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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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 account managers to service OEMs and
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 1997
represented approximately 66% of Gunite's total net sales in 1997, with sales to
Navistar accounting for approximately 29% of Gunite's total net sales in 1997.
Many truck manufacturers require quality certification of their suppliers,
and Gunite undergoes periodic quality surveys by all of its major customers.
Gunite is QS9000 certified and 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'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
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. Bostrom is
ISO 9001 certified.
MARKETS
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 and bus 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 1997 net sales. Navistar accounted for approximately 30% of
such sales (including both OEM and aftermarket sales).
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MANUFACTURING
Bostrom's manufacturing facility is located in Piedmont, Alabama. For a
number of its OEM customers, Bostrom ships its seats to line-setting facilities
which it has established near certain OEM plants 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. Fabco is QS9000 certified.
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 relationships of
over 25 years. Sales during 1997 to Fabco's five largest customers accounted for
approximately 77% of Fabco's total net sales, with Navistar accounting for
approximately 46% of such sales.
MANUFACTURING
Fabco has gained a strong 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.
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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 32% of
Brillion's sales (including sales to Gunite) in 1997.
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 1997,
ductile iron castings represented approximately 58% 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 Equipment
* 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 1997 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 17% of Brillion's 1997 total net sales. Brillion
also serves as an important source of castings for Gunite, with sales to Gunite
representing approximately 15% of Brillion's total net sales in 1997. 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.
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 9002 and QS 9000 quality standards
and Brillion has received 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.
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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.
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 can be 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. In 1997, 61% of the new cars manufactured were BethGons vs. 57% in
1996.
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 in 1996 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, has been well received in the marketplace. The
Company's 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. In
1997, 35% of the new cars manufactured were open hopper cars vs. 3% in 1996.
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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. There
were no Grainporters built in 1997.
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 through mid-1997. As a result, there were a very
limited number of intermodal cars delivered in 1996 and 1997. Orders for
intermodal cars began to increase in late 1997 and a significant number of
intermodal cars are expected to be delivered industry wide in 1998. JAC did not
build any intermodal cars in 1997; however, JAC has received orders for 1,500
89-foot flat intermodal cars for delivery in 1998.
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 after 15 to 20 years in use in order to extend their life. To pursue what
the Company 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 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 manufacturers new cars and performs total rebuilds,
modifications and repairs of used freight 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 design, engineering and 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, 1997, the Company owned 643 railcars in its operating lease fleet,
representing a total investment of approximately $38.4 million, $29.2 million of
which was provided through limited-recourse borrowings.
MANUFACTURING
JAC's manufacturing operations are conducted primarily through two
facilities located in Johnstown, Pennsylvania and FCS' manufacturing operations
are conducted at its Danville, Illinois facility. JAC 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,
the Company's freight car operations 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 suppliers. Cellular manufacturing concepts have been
implemented, 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 the Company's freight car operations 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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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 the Company's freight car
operation's revenues in a given year. In 1997, the top five customers accounted
for approximately 47% of the Company's revenues from its freight car operations.
GENERAL
COMPETITION
The Company operates in highly competitive markets. 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 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 Meritor Corporation (formerly 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.
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 been granted a preliminary injunction prohibiting
Trinity from marketing, manufacturing, using, selling or leasing its infringing
Aluminator II coal gondola freight car, Trinity has competed, and JAC expects
that it will continue to compete, with JAC in the sale of coal gondolas.
BACKLOG
As of December 31, 1997, freight car operations had a backlog of firm
orders for 4,201 new and rebuilt freight cars with an aggregate sales price of
approximately $220 million, as compared to a backlog of firm orders for 774 new
and rebuilt freight cars with an aggregate sales price of approximately $35
million as of December 31, 1996. 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 significant increase in backlog from December 31, 1996 to December 31, 1997
reflects an increase in industry orders for car types produced by the Company's
freight car operations, such as coal cars and intermodal 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.
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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, 1997, the Company had approximately 3,700 employees. Of
these, approximately 650 are salaried employees and the balance are paid on an
hourly basis. Approximately 2,600 or about 70% 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 Gunite's current
three-year union contract scheduled to expire April 22, 1998. A new four year
union contract at JAC was entered into in January 1998 replacing JAC's prior
union contract which expired in October 1997. While the Company considers its
relations with its employees to be good at each of the Company's subsidiaries,
there can be no assurance that the Company will reach new agreements upon
expiration of such union contracts (including the Gunite union contract
scheduled to expire in April 1998) 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 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.
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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 1997, 1996
and 1995, TCI's capital expenditures for compliance with environmental
requirements were approximately $748,000, $371,000 and $1,037,000 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 $5.3 million, $4.1 million and $4.9 million in 1997, 1996 and
1995, respectively. TCI's subsidiaries have budgeted $2.1 million for
environmentally related capital expenditures in 1998. The Company'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, Piedmont, Alabama and Danville, Illinois are not material. Other
than for certain immaterial expenditures, the Company's subsidiaries (other than
TCI) have not budgeted funds for capital expenditures in 1998 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 a
prior owner of Gunite 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 be approximately $0.2
million, 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
remediation costs that might be incurred in connection with historical
discharges to the Rockford Pond) was approximately $0.3 million.
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 the most recent state
inspection (November 1994) found Brillion to be in compliance with all Wisconsin
air regulations, it is likely that as Brillion continues its review of its
operations, it may find that certain of its emission sources will require
further air pollution controls. In addition, further controls may be required
under the Federal Clean Air Act regulations that are currently scheduled to be
promulgated in the year 2000.
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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. With respect to claims involving 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 each 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.
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 Ground water site located in Rockford, Illinois. Gunite's connection to
the IPC, the M.I.G./Dewane and Southeast Rockford sites stem from activities
that took place prior to the acquisition of Gunite by TCI in 1987. Pursuant to
the Settlement, TCI and Gunite will not be responsible for liabilities and costs
related to these sites to the extent arising from Gunite's waste disposals prior
to the acquisition of Gunite by TCI in 1987.
As to the IPC site, the Company believes that the waste disposed of at the
IPC site was disposed of prior to the acquisition of Gunite by TCI in 1987 and,
as a result of the Settlement, TCI and Gunite will not be responsible for such
liabilities and costs.
As to the M.I.G./Dewane Landfill site, the Company believes that the waste
disposed of at the M.I.G./Dewane Landfill site was disposed of prior to the
acquisition of Gunite by TCI in 1987 and, as a result of the Settlement, TCI and
Gunite will not be responsible for such liabilities and costs.
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The EPA and the City of Rockford have reportedly incurred approximately
$11 million in response costs to date in connection with the Southeast Rockford
Groundwater NPL Site, which is alleged to be down-gradient of the IPC site, but
which Gunite believes, based on data collected during the investigation of the
IPC site, is cross- or up-gradient. Although no formal demand has been made that
Gunite participate in the funding of the cleanup of this site, other than the
Ekberg Park area described below, it is possible that Gunite will be found to be
responsible for a portion of these costs, or be required to participate
financially in the cleanup through an industrial tax or other mechanism. 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, based on
alleged trans-shipment of Gunite's waste to the Ekberg Park area. Gunite has
denied liability to the City. The Company believes that, to the extent any of
the alleged contamination at these sites is attributable to Gunite, such alleged
contamination would be attributable to operations of Gunite prior to the
acquisition of Gunite by TCI in 1987 and, as a result of the Settlement, TCI and
Gunite will not be responsible for such liabilities and costs.
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 of
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 site
remediation. The Company believes that, to the extent on-site remediation or
cleanup is required, most of the alleged contamination would be attributable to
operations of Gunite prior to the acquisition of Gunite by TCI in 1987 and, as a
result of the Settlement, TCI and Gunite will not be responsible for most of
such liabilities and costs.
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. The Company 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
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any claims for indemnification (apart from one claim for breach of
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 mid-1998. 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.
POTENTIAL COSTS. As of December 31, 1997, based on all the information
currently available, the Company had an environmental reserve in the amount of
$11.3 million for estimated future costs related to potential environmental
investigation and remediation liabilities with respect to certain currently
known matters. As a result of the Settlement and following review by the
Company's management and environmental consultants, the Company's environmental
reserve was decreased in September 1997 by $14.3 million to $11.6 million. 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 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. The Company currently anticipates
spending approximately $0.4 million per year in 1998 and 1999 and $0.5 million
per year in 2000, 2001 and 2002 for monitoring the various environmental sites
associated with the environmental reserve, including attorney and consultant
costs for 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive officers
of the Company:
NAME AGE POSITION
Thomas M. Begel 55 Chairman of the Board, President and Chief
Executive Officer of the Company
Andrew M. Weller 51 Executive Vice President and Chief Financial
Officer and Director of the Company
James D. Cirar 51 Senior Vice President of the Company and
president and Chief Executive Officer of
Johnstown America Corporation and
Freight Car Services, Inc.
Thomas W. Cook 60 Senior Vice President of the Company and
President and Chief Executive Officer of
Truck Components Inc. and President -
Gunite Corporation
David W. Riesmeyer 40 Vice President and Treasurer of the Company
Kenneth M. Tallering 36 Vice President, General Counsel and
Secretary of the Company
Timothy A. Masek 33 Vice President - Corporate Development of the
Company and President of Bostrom Seating,Inc.
Edward J. Whalen 49 Vice President of the Company and President
of JAIX Leasing Company
John D. McClain 53 President - Brillion Iron Works, Inc.
Mark A. Niemela 62 President - Fabco Automotive Corporation
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
Chairman of, and a partner in, TMB Industries ("TMB"), an investment firm which
is a partnership between himself and Mr. Weller, and is a director or officer of
certain TMB companies. Mr. Begel has served as a director of Silgan Holdings
Inc., a packaging company, since March 1997.
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, and is a director or
officer of certain TMB companies.
JAMES D. CIRAR, has served as President and Chief Executive Officer of
Johnstown America Corporation since September 1995, as Senior Vice President of
the Company since July 1997 and as President and Chief Executive Officer of
Freight Car Services, Inc. since March 1998. 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,
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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
valves and related piping products, where he became President in 1983.
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. 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, as Vice President of the Company from October 1991 until October
1995 and as President of Freight Car Services, Inc. from March 1995 until March
1998. From 1989 to 1991, he was a financial and rail car industry consultant.
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 hand tools, 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 bottom discharge 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.
19
<PAGE>
ITEM 2. FACILITIES
The Company's headquarters are located in leased offices in Chicago,
Illinois. The following table provides a summary description of the Company's
other principal facilites.
Owned/ Covered Space
FACILITIES BUSINESS FUNCTION LEASED SQ. FT.
JAC (1)
Shell Plant Freight car erection and Owned 153,000
fabrication
Franklin Plant Freight car erection and Owned 619,000
fabrication
Offices Administrative Offices Owned 87,000
(1) All JAC facilities are located in Johnstown, Pennsylvania
FCS
Danville, Illinois Freight car rebuild, repair Owned 297,000
and erection
Gunite
Rockford, Illinois Administrative Offices: Owned 619,000
Specialty Foundry, Aftermarket
Distribution Warehouse
Elkhart, Indiana Machining- Wheel End Owned 258,000
(Plant 1) Components
Elkhart, Indiana Machining and Assembling- Leased 115,000
(Plant 2) Automatic Slack Adjusters
Brillion (2)
Plant I Melting; Molding; Leased 180,000
Administrative Offices
Plant II Melting; Molding Leased 165,000
Plant III Farm Machinery Owned 150,000
Plant IV Finishing; Shipping Leased 85,000
(2) All Brillion facilities are located in Brillion, Wisconsin.
Fabco
Oakland, California Manufacturing; Warehouse; Owned 65,000
Administrative Offices
Bostrom
Piedmont, Alabama Manufacturing; Leased 196,000
Administrative Offices
The Company believes that its facilities and equipment are in good
condition and, together with scheduled capital improvements, are adequate for
its present and immediately projected needs.
20
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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 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 for
making, selling or offering to sell its infringing Aluminator II until JAC's
patent expires in November 1999. Trinity therafter 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. In January 1998, the
United States Supreme Court denied Trinity's petition for certiorari. Also in
January 1998, the District Court granted JAC a preliminary injunction
prohibiting Trinity from marketing, manufacturing, using, selling or leasing its
infringing Aluminator II coal gondola freight car or any imitation therof. JAC
expects the damage trial to occur in mid-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 the properties owned or operated by its
subsidiaries, including Brillion, Gunite and Fabco. 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. TCI added
Hunt-Wesson, Inc., a corporate successor to Beatrice that may be a successor to
Beatrice's liability in these matters, as a defendant on June 10, 1994. 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 mid-1998. In September 1997, TCI and
Gunite entered into the Settlement which settled its pending litigation against
a prior owner of Gunite and pursuant to which 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 (through a contractual undertaking by the former
owner) for certain environmental liabilities and costs resulting from Gunite's
waste disposals prior to the acquisition of Gunite by TCI in September 1987,
including at the IPC, M.I.G./Dewant and Southeast Rockford sites. See
"Environmental Matters" in Item 1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price range of Common Stock
The Company's common stock is listed and traded on the NASDAQ National
Market System under the symbol "JAII." The following table sets forth the high
and low sales prices of the common stock as reported by the NASDAQ National
Market System.
Sales Prices
1996 HIGH LOW
First Quarter $5.63 $3.25
Second Quarter 5.25 3.25
Third Quarter 3.75 2.44
Fourth Quarter 4.50 3.13
1997
First Quarter $4.75 $3.25
Second Quarter 6.63 3.00
Third Quarter 9.25 5.75
Fourth Quarter 15.50 8.50
The number of record holders of the Company's common stock on December 31,
1997 was 183.
DIVIDEND POLICY
The Company has never paid any dividends on its common stock and expects
for the foreseeable future to retain all of its earnings from operations for use
in expanding and developing its business. Any future decision as to the payment
of dividends will be at the discretion of the Company's Board of Directors and
will depend upon the company's earnings, financial position, capital
requirements and such other factors as the Board of Directors deems relevant. In
addition, the Credit Facility (as defined herein) contains covenants limiting
dividends that may be paid to holders of shares of common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the
Company for the periods and at the dates indicated. All selected financial data
is derived from financial statements which have been audited by Arthur Anderson
LLP, independent public accountants. This information should be read in
conjunction with the financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," both of which are incorporated by reference herein.
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<PAGE>
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
1993 1994 1995 (1) 1996 1997
---- ---- -------- ---- ----
INCOME STATEMENT DATA:
Total revenues $329,122 $468,525 $668,601 $559,972 $650,347
Cost of goods 301,629 442,153 608,982 474,158 556,365
------- ------- ------- ------- -------
Gross profit 27,493 26,372 59,619 85,814 93,982
Selling, general & administrative 11,340 13,144 28,117 46,605 46,187
Amortization expense 3,721 3,573 6,478 10,174 8,554
Gain on sale of leased freight cars --- --- --- (1,354) (824)
Reduction of environmental reserves --- --- --- --- (14,300)
------- ------- ------- ------- -------
Operating income 12,432 9,655 25,024 30,389 54,365
Interest expense, net 2,968 266 14,702 35,836 35,380
Provision (benefit) for
income taxes 4,083 3,692 4,737 (76) 9,511
------- ------- ------- ------- -------
Income (loss) before
extraordinary items 5,381 5,697 5,585 (5,371) 7,466
Extraordinary items, net of taxes (2,918) --- --- --- (2,008)
------- ------- ------- ------- -------
Net income (loss) $ 2,463 $ 5,697 $ 5,585 $ (5,371) $ 9,474
======= ======= ======= ======= =======
Diluted and Basic Earnings Per Share:
Income (loss) before
extraordinary items $ .66 $ .58 $ .57 $ (0.55) $ 0.96
Extraordinary items (0.36) --- --- --- (0.20)
------- ------- ------- ------- -------
Net income (loss) $ .30 $ .58 $ .57 $ (0.55) $ 0.76
------- ------- ------- -------- -------
As of December 31,
------------------
(in thousands)
BALANCE SHEET DATA:
1993 1994 1995 (1) 1996 1997
---- ---- -------- ---- ----
Total assets $107,966 $143,354 $578,825 $555,283 $578,838
Long-term debt, including
current maturities --- 7,600 329,786 304,175 312,273
Total shareholders' equity 57,235 63,234 68,874 63,537 71,020
</TABLE>
(1) Acquired Bostrom in January, 1995 and TCI in August, 1995. See Note 3
to the Consolidated Financial Statements of the Company and the notes thereto
for the year ended December 31, 1997.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 casting 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 1997, the Company's truck components
and assemblies, iron castings and freight car operations generated net sales of
$284.7 million, $130.9 million and $234.7 million, respectively. 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. The significant decline in demand experienced in 1996 and
early 1997 in freight car operations produced significant operating losses that,
coupled with the Company's significant debt service requirements, offset strong
operating income from 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
uneven demand and production overcapacity.
The Company's sales are affected to a significant degree by the freight car and
Class 8 truck markets. Both the freight and car and Class 8 truck markets are
subjected 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.
Freight car operations sales are driven principally by the number and type of
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 period may fluctuate greatly. As a result, the Company's revenues and
results of operations and cash flows from operations may fluctuate as well.
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 and its subsidiaries utilize software and related technologies
throughout its businesses that will be affected by the date change in the year
2000. In 1997, the Company initiated a comprehensive program to insure that its
various business systems continue to function properly in the year 2000. The
cost of becoming "Year 2000" compliant is not expected to be material in
relation to the consolidated financial statements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL REVENUE
Total revenue in 1997 increased 16.1% to $650.3 million from $560.0 million in
1996. The revenue increase of $90.3 million was due to an increase in truck
component revenues of $47.7 million, an increase in iron castings revenues of
$5.8 million and an increase in freight car revenues of $36.8 million. For the
year 1997, shipments of freight cars were 4,507 (including 290 cars sold to the
Company's lease fleet), compared to 3,470 freight cars (including 98 cars sold
to the Company's lease fleet) in 1996. As of December 31, 1997, the Company's
backlog of new and rebuilt cars was 4,201 compared with 774 new and rebuilt
freight cars as of December 31, 1996.
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<PAGE>
At December 31, 1997, the Company had 1,673 freight cars on lease, and the
leasing business for the year 1997 generated $7.6 million in revenue and $3.6
million in operating income before an $0.8 million gain on the sale of leased
freight cars. The 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 in the prior year.
COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1997 as a percent of manufacturing sales was
85.9%, compared with 85.0% in 1996. Related gross profits were 14.1% and 15.0%,
respectively. The decrease in gross profit margins resulted primarily from lower
gross profit margins in freight car operations due to reduced volume in the
first half of the year and pricing pressure throughout the year offset partially
by increased profit margins in the truck component operations and iron castings
business.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expense as a percentage of total revenue
were 7.1% and 8.3% in 1997 and 1996, respectively. Actual selling, general and
administrative expenses declined $0.4 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 1.3% and 1.8% for the
years 1997 and 1996. Actual amortization expense decreased by $1.6 million from
1996 levels due primarily to a decrease in amortization expense at freight car
operations of $1.5 million to certain intangible items being fully amortized in
late 1996.
OPERATING INCOME
Operating income was $54.4 million in 1997, compared with $30.4 million in 1996,
an increase of $24.0 million. The Company increased its operating income by
increasing gross profits by $8.2 million, a reduction in selling, general and
administrative expenses of $0.4 million, a reduction in amortization expense of
$1.6 million, a reduction of environmental reserves of $14.3 million offset by a
decline in gain on sale of leased freight cars of $0.5 million.
During the third quarter of 1997, the Company settled two pending lawsuits
related to indemnification of environmental cleanup costs from a former owner of
Gunite, which reduced outstanding environmental liabilities by $14.3 million
OTHER
Interest expense, net, was $35.4 million in 1997 compared to $35.8 in 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.
In conjunction with the issuance of $80 million of Senior Subordinated Notes and
to refinance $80.0 million of Tranche A term debt, the Company recorded an
extraordinary charge of $2.0 million after tax, primarily related to the
write-off of $3.4 million of deferred financing costs.
Net income and diluted earnings per share for 1997 were $7.5 million and $0.76,
respectively, compared to net loss and diluted loss per share of $5.4 million
and $0.55, for 1996.
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 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.
25
<PAGE>
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 offsetting 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, administrative and amortization 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 expenses is related to the acquisition and
the integration of TCI which has higher selling, general and administrative
expense levels as a percent of revenue compared to freight car operations, and
to 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 amortization of certain intangible
assets and the excess cost over net assets acquired in the TCI acquisition.
OPERATING INCOME
Operating income was $30.4 million in 1996, compared with $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.
OTHER
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,
which were outstanding for all of 1996 versus four months of 1995. In addition,
JAIX Leasing had increased debt levels to finance additional freight cars for
the lease fleet.
Net loss and diluted loss per share for 1996 were $5.4 million and $0.55,
respectively, compared to net income and diluted earnings per share of $5.6
million and $0.57, respectively, for 1995.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, the Company provided cash from operations
of $26.7 million compared with $36.4 million for 1996. The Company used $25.1
million of net cash in investing activities during 1997; primarily $8.2 million
used for capital expenditures, and $17.5 million used for net additions to the
leased fleet. Cash provided by financing activities was $4.7 million for 1997,
which included $82.8 million in proceeds from the issuance of additional Senior
Subordinated Notes on August 12, 1997, and increase in the JAIX Leasing debt of
$15.6 million to fund the leasing fleet additions. Offsetting this increase is
the refinancing of $80.0 million of Tranche A senior term debt, scheduled
payments of $10.2 million of debt and payment of $3.6 million of deferred
financing costs.
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
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. On
August 12, 1997, the Company issued $80 million of additional Notes, with
substantially the same terms as the original Notes. As of December 31, 1997,
there was $93.3 million of Tranche B term loan outstanding under the Senior Bank
Facilities, $182.7 million of Notes outstanding, and no borrowings under the $75
million revolving credit line under the Senior Bank Facilities. Availability
under the revolving credit line after consideration of outstanding letters of
credit of $17.0 million, was $58.0 million.
26
<PAGE>
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 $93.3 million of outstanding term tranche B
loans requires periodic principal payments through their maturities.
See Note 6 of the Consolidated Financial Statements.
At December 31, 1997, JAIX Leasing owned or leased 1,673 freight cars. JAIX
Leasing financed its 643 owned freight cars with a 10-year term loan facility,
which as of December 31, 1997, had a balance of $29.2 million outstanding. See
Note 6 of the Consolidated Financial Statements for a description of this
facility. As of December 31, 1997, there was $29.2 million outstanding under
this facility.
The Company believes that the cash flow generated from its operations, together
with amounts available under the revolving credit line, 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 December 31, 1997, the Company's balance sheet included cash of $30.9
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. As a result of the Settlement, TCI and Gunite will
not be responsible (through a contractual undertaking by the former owner) for
certain liabilities and costs resulting from Gunite's waste disposal prior to
the acquisition of Gunite by TCI in September 1987 at certain of such sites. The
Company has been notified, however, by certain other contractual indemnitors
that they will not honor claims for indemnification. Accordingly, the Company is
litigating certain 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.
27
<PAGE>
As of December 31, 1997, the Company has a $11.3 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 $0.4 million in 1998 and 1999 and $0.5 million in 2000, 2001 and
2002 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.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations.
SAFE HARBOR STATEMENT
This report contains various forward looking statements which are offered to
provide management's perspective on the year ahead and are made pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The statements included in this report which are not historical facts are
"forward looking statements" that involve certain risks and uncertainties
including changes in economic conditions, market conditions (specifically the
heavy-duty truck and freight car markets), labor relations and other factors
outside of the Company's control, including factors discussed from time to time
in the Company's filings with the Securities and Exchange Commission, that could
cause actual future results to differ materially from those stated.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this Item is incorporated by reference to pages
12-36 of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
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PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
pages 2-3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 7, 1998, except for the
information regarding the Company's executive officers which is set forth in
"Business" in Item 1 under the heading "Executive Officers of the Registrant."
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this Item is incorporated by reference to
page 12 of the Company's Proxy Statement for the Annual Meeting of Shareholders
of the Company to be held on May 7, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
pages 4-10 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 7, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
pages 11-12 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 7, 1998.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS
None
29
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) and (a)(2)LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are included in the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, pages 12 through 36,
and are incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a)(3) LIST OF EXHIBITS:
3.1 Form of Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.3 to Form S-1, Registration
Statement 33-63132 (the "Initial S-1")).
3.2 Form of Restated By-laws of the Company (incorporated by reference to
Exhibit 3.4 to the Initial S-1).
4.1 Form of certificate for the Company's common stock, par value $.01
per share (incorporated by reference to Exhibit 4.1 to the Initial
S-1).
4.2 Form of certificate for the Company's Class B common stock, par value
$.01 per share (incorporated by reference to Exhibit 4.2 to the
Initial S-1).
4.3 Indenture relating to the 11.75% Senior Subordinated Notes of the
Company due 2005, dated as of August 23, 1995, including form of note
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated August 30, 1995).
4.4 Rights Agreement, dated as of October 4, 1995, between the Company
and BancBoston State Street Investor Services, L.P. (incorporated by
reference to Exhibit 1 to the Company's Registration Statement on
Form 8-A dated October 5, 1995).
4.5 Indenture relating to the 11.75% Series C Subordinated Notes of the
Company due 2005, dated as of August 11, 1997, including form of note
(incorporated by reference to Exhibit 4.2 to Form S-4, Registration
Statement 333-35277 (the "Form S-4")).
10.1 Agreement of Purchase and Sale, dated as of May 3, 1991, as amended,
between Bethlehem Steel Corporation and Johnstown America Industries,
Inc. (incorporated by reference to Exhibit 2.1 to the Initial S-1).
10.2 Agreement and Plan of Merger, dated as of June 13, 1995, among
Johnstown America Industries, Inc., JTN Acquisition Corp. and Truck
Components Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated June 13, 1995).
10.3 Stockholders Agreement, dated as of June 13, 1995, among Johnstown
America Industries, Inc., JTN Acquisition Corp. and the stockholders
party thereto (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K dated June 13, 1995), and
Amendment No.1 to Stockholders Agreement, dated as of June 23, 1995,
among Johnstown America Industries, Inc., JTN Acquisition Corp., and
the stockholders party thereto (incorporated by reference to Exhibit
2.3 to Amendment No.1 to the Company's Current Report on Form 8-K
dated June 13, 1995).
10.4 Stock Purchase Agreement, dated as of December 21, 1994, and the
First Amendment thereto, dated as of January 13, 1995, each among the
sellers, Bostrom Seating, Inc. and Johnstown America Industries, Inc.
(incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated January 24, 1995).
10.5 Credit Agreement, dated as of August 23, 1995, among Johnstown
America Industries, Inc., the financial institutions named therein,
Chemical Bank, as Administrative Agent, Collateral Agent and
Swingline Lender, Chemical Bank Delaware, as Issuing Bank, and The
First National Bank
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of Boston and The First National Bank of Chicago, as Co-Agents
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated August 30, 1995).
10.6 Amendment to Credit Agreement, dated as of December 31, 1995, among
Johnstown America Industries, Inc., the financial institutions named
therein, Chemical Bank, as Administrative Agent, Collateral Agent and
Swingline Lender, Chemical Bank Delaware, as Issuing Bank, and The
First National Bank of Boston and The First National Bank of Chicago,
as Co-Agents (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1995 (the
"1995 Form 10-K")).
10.7 Second Amendment to Credit Agreement, dated as of December 31, 1996
among Johnstown America Industries, Inc., the financial institutions
named therein, Chemical Bank, as Administrative Agent, Collateral
Agent and Swingline Lender, Chemical Bank Delaware, as Issuing Bank,
and The First National Bank of Boston and The First National Bank of
Chicago, as Co-Agents. (incorporated by reference to Exhibit 10.7 to
the Company's Form 10-K for the fiscal year ended December 31, 1996
(the "1996 Form 10-K")).
10.8 Amendment No. 3, Consent and Waiver dated as of August 4, 1997 to
Credit Agreement, among the Company, The Chase Manhattan Bank, as
Administrative, Collateral Agent and Swingline Lender, the First
National Bank of Boston and the First National Bank of Chicago, as
Co-Agents, and the Chase Manhatten Bank of Delaware, as Issuing Bank
(incorporated by reference to Exhibit 10.22 to the Form S-4).
10.9 Term Loan Agreement, dated as of June 14, 1996, between JAIX Leasing
Company and NationsBanc Leasing Corporation of North Carolina
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for the Quarter ended June 30, 1996).
10.10 Loan Agreement, dated as of December 1, 1995, between Freight Car
Services, Inc. and the City of Danville, Vermillion County, Illinois
relating to $5.3 million of City of Danville, Illinois Variable Rate
Demand Industrial Revenue Bonds (Freight Car Services, Inc. Project),
Series 1995 (incorporated by reference to Exhibit 10.7 to the 1995
Form 10-K).
10.11 1993 Stock Option Plan (incorporated by reference to Exhibit 10.8 to
the Initial S-1).
10.12 Johnstown America Corporation Salaried Pension Plan (incorporated by
reference to Exhibit 10.11 to the Initial S-1).
10.13 Amended and Restated Stockholder and Warrantholder Agreement
(incorporated by reference to Exhibit 10.14 to the Initial S-1).
10.14 Employment Agreement of Thomas M. Begel (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K).
10.15 Employment Agreement of Andrew M. Weller (incorporated by reference
to Exhibit 10.12 to the 1995 Form 10-K).
10.16 Employment Agreement of Thomas W. Cook (incorporated by reference to
Exhibit 10.13 to the 1995 Form 10-K).
10.17 Employment Agreement of James D. Cirar (incorporated by reference to
Exhibit 10.14 to the 1995 Form 10-K).
10.18 Form of Employment Agreement (incorporated by reference to Exhibit
10.17 to the 1996 Form 10-K).
10.19 Form of Severance Agreement (incorporated by reference to Exhibit
10.15 to the 1995 Form 10- K).
10.20 Form of Stay Bonus Agreement (incorporated by reference to Exhibit
10.16 to the 1995 Form 10-K).
10.21 Form of Stock Option Agreement (incorporated by reference to Exhibit
10.17 to the 1995 Form 10-K).
10.22 Form of Supplemental Life Insurance Agreement (incorporated by
reference to Exhibit 10.21 to the 1996 Form 10-K.)
10.23 Gunite Corporation Salaried Employees Retirement Plan (incorporated
by reference to Exhibit 10.18 to the 1995 Form 10-K).
10.24 Form of Deferred Compensation Agreement.
10.25 Gunite Corporation Profit Sharing Plan (incorporated by reference to
Exhibit 10.19 to the 1995 Form 10-K).
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<PAGE>
13.1 Selected portions of the Registrant's Annual Report to Shareholders
for the fiscal year ended December 31, 1997 which are incorporated by
reference herein.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Finacial Data Schedule
(b) Financial Statement Schedules:
All schedules have been omitted since the required information is either
not significant, included in the consolidated financial statements of the
Company or the notes thereto or not applicable.
(C) Reports on Form 8-K
The Company filed the following current report on Form 8-K:
None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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/THOMAS M. BEGEL
-------------------------------------
Thomas M. Begel
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/THOMAS M. BEGEL Chairman of the Board, President March 13, 1998
- --------------------- and Chief Executive Officer
Thomas M. Begel (Principal Executive Officer)
/S/ANDREW M. WELLER Executive Vice President, Chief March 13, 1998
- --------------------- Financial Officer and Director
Andrew M. Weller (Principal Financial Officer and
Principal Accounting Officer)
/S/CAMILLO SANTOMERO Director March 13, 1998
- ---------------------
Camillo Santomero
/S/R. PHILIP SILVER Director March 13, 1998
- ---------------------
R. Philip Silver
/S/FRANCIS S. STROBLE Director March 13, 1998
- ---------------------
Francis S. Stroble
DEFERRED COMPENSATION AGREEMENT
BETWEEN
JOHNSTOWN AMERICA INDUSTRIES, INC.
AND
XXX
THIS DEFERRED COMPENSATION AGREEMENT ("AGREEMENT") is made and entered
into this 30th day of November, 1997, by and between JOHNSTOWN AMERICA
INDUSTRIES, INC., a Delaware corporation ("CORPORATION") and XXX ("EXECUTIVE").
R E C I T A L S:
A. EXECUTIVE is currently employed by CORPORATION and is considered by
CORPORATION to be a valuable and key employee of the CORPORATION.
B. It is the desire of EXECUTIVE to enter into an arrangement with
CORPORATION whereby EXECUTIVE may defer a portion of the compensation to be paid
to him under the terms of his employment with CORPORATION.
C. The parties desire to set forth the terms and conditions upon which the
CORPORATION shall pay such deferred compensation to EXECUTIVE or his designated
beneficiary under an unfunded arrangement that will be maintained primarily to
provide the deferred compensation benefits for EXECUTIVE who is a member of a
select group of management or highly compensated executives of the CORPORATION,
for purposes of the
1
<PAGE>
Employee Retirement Income Act of 1974.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and in reliance upon the recitals, set forth above and
incorporated by reference herein, the parties hereto agree as follows:
1. DEFERMENT OF COMPENSATION.
EXECUTIVE shall have the option, during the term of his employment with
CORPORATION, to elect to defer all or a portion of his compensation not yet
earned for each TERM (as defined herein) of EXECUTIVE's employment with the
CORPORATION. For purposes of this AGREEMENT, a "TERM" of employment for the
EXECUTIVE will be the 12-month period beginning on January 1st of each year
EXECUTIVE is employed by the CORPORATION and ending on December 31st. EXECUTIVE
shall exercise this option by providing CORPORATION with a written notice
indicating the percentage or dollar amount of EXECUTIVE's compensation that the
EXECUTIVE desires to defer over the following TERM, which notice must be
provided to the CORPORATION on or before December 15th of each year prior to the
subsequent TERM.
2. DEFERRED ACCOUNT.
In order to maintain an accurate record of the cumulative amounts of
compensation deferred by EXECUTIVE, the CORPORATION shall establish a
bookkeeping account in the name of EXECUTIVE ("DEFERRED ACCOUNT"). The amount of
compensation deferred by EXECUTIVE each year shall be credited to the
EXECUTIVE'S
2
<PAGE>
DEFERRED ACCOUNT.
3. ADDITIONS TO DEFERRED COMPENSATION ACCOUNT.
The balance of the EXECUTIVE'S DEFERRED ACCOUNT shall be deemed to have
been invested in an investment satisfactory to the CORPORATION and offered as a
"deemed" investment to EXECUTIVE. While any part of the EXECUTIVE'S DEFERRED
ACCOUNT is deemed to have been invested in one or more of the above described
accounts, the DEFERRED ACCOUNT shall be deemed to have received (and shall be
credited with) all interest, dividends, stock splits, unrealized gains,
unrealized losses or other property which would have been received with respect
to such investment as if the CORPORATION had actually owned such investment. Any
such amounts or property shall be deemed to have been reinvested in the DEFERRED
ACCOUNT as of the date it would have otherwise been received. The investments
described above shall be deemed to have been made on such dates as are selected
by the CORPORATION at the price then in effect, but in no event later than 60
days after the CORPORATION receives the annual election from EXECUTIVE as to the
amount of compensation to be deferred by EXECUTIVE for the upcoming 12-month
period.
4. ACTUAL INVESTMENT NOT REQUIRED.
Although the DEFERRED ACCOUNT balance that is potentially payable to
EXECUTIVE hereunder shall be measured by the value of and income on the
investments described in Paragraph 3 above, the CORPORATION need not actually
make any such investments. If the CORPORATION, in its discretion, should from
time to time make any
3
<PAGE>
similar investment, such investment shall be solely for the CORPORATION's own
account, and the EXECUTIVE shall have no right, title or interest in any such
investment. Accordingly, the EXECUTIVE is solely an unsecured creditor of the
CORPORATION with respect to any benefits payable to the EXECUTIVE under its
DEFERRED ACCOUNT or this AGREEMENT.
5. TRIGGERING EVENTS FOR PAYMENT OF DEFERRED COMPENSATION.
Any compensation amounts deferred under this AGREEMENT shall be payable to
the EXECUTIVE upon the FIRST to occur of the following ("TRIGGERING EVENT"):
5.1 RETIREMENT. Upon the EXECUTIVE's reaching his "RETIREMENT AGE," as
defined below, EXECUTIVE shall be entitled to receive the balance of his or her
DEFERRED ACCOUNT in accordance with the PAYOUT OPTION ELECTION (as defined in
Paragraph 6 below) then in effect for EXECUTIVE under the terms of Paragraph 6
below. For purposes of this AGREEMENT, the EXECUTIVE's retirement age shall be
the date upon which EXECUTIVE reaches age 65 UNLESS the EXECUTIVE provides the
CORPORATION with a written notice at least 12 MONTHS in advance that the
EXECUTIVE intends to have his or her "RETIREMENT AGE" defined as the date for
Early Retirement, as that term is defined from time to time by the CORPORATION
policy then in effect, or as the date for Late Retirement, as that term is
defined from time to time by the CORPORATION policy then in effect ("RETIREMENT
ELECTION"). Any
4
<PAGE>
RETIREMENT ELECTION by EXECUTIVE to the CORPORATION that EXECUTIVE desires to
have his or her RETIREMENT AGE defined as the Early Retirement Age or the Later
Retirement Age (as determined by Company policy from time to time), rather than
age 65, will take effect 12 MONTHS from the date of receipt thereof by the
CORPORATION. If the EXECUTIVE reaches Early Retirement Age or Later Retirement
Age prior to the expiration of 12 months from the receipt of a modification to a
RETIREMENT ELECTION, payment of any DEFERRED ACCOUNT balance hereunder will be
governed by the default definition of "RETIREMENT AGE" (the date upon which
EXECUTIVE reaches age 65).
5.2 TERMINATION OF EMPLOYMENT. In the event EXECUTIVE's employment with the
CORPORATION is terminated for any reason (other than disability, retirement or
death), the CORPORATION shall pay to the EXECUTIVE the entire balance of the
EXECUTIVE's DEFERRED ACCOUNT, payable in a single sum on the first day of the
first month following EXECUTIVE's termination from the CORPORATION.
5.3 DISABILITY. In the event of EXECUTIVE's "DISABILITY" (as defined
herein), the CORPORATION shall pay to EXECUTIVE the balance of his or her
DEFERRED ACCOUNT in accordance with the PAYOUT OPTION ELECTION (as defined in
Paragraph 6 below) then in effect for EXECUTIVE under the terms of Paragraph 6
below. For purposes of this AGREEMENT, the EXECUTIVE shall be considered to be
disabled when a duly licensed physician selected by the CORPORATION determines
that, because of ill health, accident, disability or general inability because
of age, the
5
<PAGE>
EXECUTIVE is no longer able, properly and satisfactorily, to perform his regular
duties as an EXECUTIVE of the CORPORATION ("DISABILITY").
5.4 DEATH. In the event of EXECUTIVE's death, the CORPORATION shall pay to
the beneficiary designated by EXECUTIVE the entire balance of the EXECUTIVE's
DEFERRED ACCOUNT in a single sum on the first day of the first month following
the EXECUTIVE's death.
5.5 HARDSHIP. In the event the EXECUTIVE incurs a "HARDSHIP" (as defined
herein) as a result of an unforeseeable emergency, the CORPORATION shall pay to
the EXECUTIVE such sums from the EXECUTIVE's DEFERRED ACCOUNT, payable in a
single sum, as the CORPORATION determines reasonably needed to satisfy the
emergency need. For purposes of this AGREEMENT, a "HARDSHIP" shall be defined as
a severe financial hardship to the EXECUTIVE resulting from a sudden and
unexpected illness or accident of the EXECUTIVE or of a dependent [as defined in
Internal Revenue Code Section 152(a)] of the EXECUTIVE, loss of the EXECUTIVE's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the EXECUTIVE.
The circumstances that will constitute an unforeseeable emergency will depend
upon the facts of each case, but, in any case, payment may not be made to the
extent that such hardship is or may be relieved:
(a) Through reimbursement or compensation by
insurance or otherwise,
6
<PAGE>
(b) By liquidation of the EXECUTIVE's assets, to the
extent the liquidation of such assets would not itself cause severe
financial hardship, or
(c) By cessation of deferrals under the plan.
6. PAYMENT OF DEFERRED COMPENSATION.
Upon the commencement of this AGREEMENT, the EXECUTIVE shall provide the
CORPORATION with an initial Payout Option Election which will set forth the
EXECUTIVE's desired payment option from among the options described below
("PAYOUT OPTION ELECTION"). In the event the EXECUTIVE fails to provide the
CORPORATION with a written PAYOUT OPTION ELECTION, any DEFERRED ACCOUNT balances
due to EXECUTIVE hereunder will be paid in a lump sum under subparagraph (a)
below.
Notwithstanding the foregoing, the EXECUTIVE may modify his or her PAYOUT
OPTION ELECTION by providing the CORPORATION with a written modification to his
or her previous PAYOUT OPTION ELECTION at least 12 MONTHS prior to a TRIGGERING
EVENT. Any modification to a PAYOUT OPTION ELECTION will take effect 12 MONTHS
from the date of receipt thereof by the CORPORATION. If a TRIGGERING EVENT
occurs prior to the expiration of 12 months from the receipt of a modification
to a PAYOUT OPTION ELECTION, payment of any DEFERRED ACCOUNT balance hereunder
will be governed by the PAYOUT OPTION ELECTION in effect prior to any
modifications submitted by EXECUTIVE.
7
<PAGE>
Unless otherwise provided in Paragraph 5 above, upon the occurrence of the
first "TRIGGERING EVENT" as set forth in Paragraph 5 above, the CORPORATION
shall pay to EXECUTIVE the balance of his or her DEFERRED ACCOUNT in accordance
with one of the following payout options which EXECUTIVE has selected by the
valid PAYOUT OPTION ELECTION then on file for the EXECUTIVE with the
CORPORATION. In the event there is no valid PAYOUT OPTION ELECTION on file with
the CORPORATION upon the occurrence of the first TRIGGERING EVENT, the balance
of the EXECUTIVE's DEFERRED ACCOUNT shall be paid out in a lump sum in
accordance with subparagraph (a) below.
(a) LUMP SUM. The entire balance of the EXECUTIVE's
DEFERRED ACCOUNT shall be payable in a single sum on the first day of
the first month following the TRIGGERING EVENT.
(b) INSTALLMENT WITH STATED INTEREST. The entire
balance of the EXECUTIVE's DEFERRED ACCOUNT, together with interest
from the date of the TRIGGERING EVENT on the balance of the DEFERRED
ACCOUNT remaining from time to time unpaid at the standard prime rate
as stated in the WALL STREET JOURNAL from time to time, shall be
payable in equal monthly installments over the period of time
determined by EXECUTIVE in his or her PAYOUT OPTION ELECTION (not to
exceed 15 years), commencing with the first day of the first month
following the TRIGGERING EVENT.
(c) INSTALLMENT WITH INVESTMENT INTEREST. The entire
balance of the EXECUTIVE's DEFERRED ACCOUNT, together with a credit for
all interest, dividends, stock splits, unrealized gains, unrealized
losses or other property which would have been received from the date
of the TRIGGERING EVENT on the balance of the DEFERRED ACCOUNT
remaining from time to time unpaid as if the unpaid balance of the
DEFERRED ACCOUNT was invested pursuant to the provisions of Paragraph 3
above, shall be payable in fractional monthly installments over the
period of time determined by EXECUTIVE in his or her PAYOUT OPTION
ELECTION (not to exceed 15
8
<PAGE>
years), the fraction of which shall be one (1) divided by the
difference of the total payout period minus 1 for each month that
EXECUTIVE has received a monthly payment, commencing with the first day
of the first month following the TRIGGERING EVENT. BY WAY OF EXAMPLE,
IF THE EXECUTIVE HAD SELECTED A PAYOUT PERIOD OF 5 YEARS (60 MONTHS),
THE FRACTIONAL PAYMENT FOR THE FIRST MONTH WILL BE THE DEFERRED ACCOUNT
BALANCE X 1/60TH. THE FRACTIONAL PAYMENT FOR THE SECOND MONTH WILL BE
THE DEFERRED ACCOUNT BALANCE X 1/59TH, AND SO ON.
7. UNFUNDED AND UNSECURED
All payments hereunder shall be paid in cash from the general funds of the
CORPORATION and no special or separate fund shall be established and no other
segregation of assets shall be made to assure the payment of benefits hereunder.
Nothing contained in this AGREEMENT, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between CORPORATION and EXECUTIVE or any other person,
nor shall any general assets be considered security for the performance of the
obligations of CORPORATION. Any such assets shall remain a general, unpledged,
and unrestricted asset of CORPORATION.
8. EXECUTIVE RIGHTS.
8.1 UNSECURED GENERAL CREDITOR. The rights of EXECUTIVE, or his designated
beneficiary hereunder, shall be solely those of an unsecured general creditor of
the CORPORATION. The right to receive the benefits specified under this
AGREEMENT may be satisfied only from the general assets of the CORPORATION.
Neither the EXECUTIVE nor any beneficiary designated by EXECUTIVE hereunder has
any right to look to any specific or special property separate from the
CORPORATION to satisfy a claim
9
<PAGE>
for benefit payments.
8.2 NO BENEFICIAL INTEREST. EXECUTIVE acknowledges and agrees that neither
he nor any beneficiary designated by EXECUTIVE hereunder shall have any rights
or beneficial ownership interest in any general asset the CORPORATION may
acquire or use to help support its financial obligations under this AGREEMENT.
8.3 NO INTEREST IN INVESTMENTS. EXECUTIVE shall have no right, title, or
interest whatever in or to any investments which the CORPORATION may make to aid
it in meeting its obligations under the AGREEMENT. The EXECUTIVE also
understands and agrees that his participation, in any way, in the acquisition of
any such general asset for the CORPORATION shall not constitute a representation
to the EXECUTIVE or any beneficiary designated by EXECUTIVE hereunder that any
of them has a special or beneficial interest in such general asset.
9. AMENDMENTS.
This AGREEMENT may be amended at any time and from time to time by the
mutual written consent of the parties to this AGREEMENT.
10. TERMINATION OF DEFERRED COMPENSATION PLAN.
The CORPORATION reserves the right, in its sole and absolute discretion, to
terminate this AGREEMENT at any time so long as the CORPORATION simultaneously
terminates ALL nonqualified deferred compensation plans then in place with the
CORPORATION. In the event of a termination of this AGREEMENT by the
10
<PAGE>
CORPORATION, the EXECUTIVE's DEFERRED ACCOUNT shall be paid out in a single lump
sum.
11. GOVERNING LAW.
This AGREEMENT shall be construed and enforced in accordance with the laws
of the State of Illinois.
IN WITNESS WHEREOF the parties have signed this AGREEMENT the day and year
first above written.
CORPORATION EXECUTIVE
JOHNSTOWN AMERICA INDUSTRIES, XXX
INC., a Delaware corporation
By:
------------------------------- By: --------------------------
Its President
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
gearboxes 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 1997, the Company's truck components
and assemblies, iron castings and freight car operations generated net sales of
$284.7 million, $130.9 million and $234.7 million, respectively. 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 $197.9
million, respectively. The significant decline in demand experienced in 1996 and
early 1997 in freight car operations produced significant operating losses that,
coupled with the Company's significant debt service requirements, offset strong
operating income from 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
uneven demand and production overcapacity.
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.
Freight car operations sales are driven principally by the number and type of
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 period may fluctuate greatly. As a result, the Company's revenues and
results of operations and cash flows from operations may fluctuate as well.
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
its wholly owned subsidiary Freight Car Services, Inc. ("FCS"), completed the
purchase of the Danville, Illinois facility and began operations in October
1995.
The Company and its subsidiaries utilize software and related technologies
throughout its businesses that will be affected by the date change in the year
2000. In 1997 the Company initiated a comprehensive program to ensure that its
various business systems continue to function properly in the year 2000. The
cost of becoming "Year 2000" compliant is not expected to be material in
relation to the consolidated financial statements.
1
<PAGE>
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 and 1996
TOTAL REVENUE
Total revenue in 1997 increased 16.1% to $650.3 million from $560.0 million in
1996. The revenue increase of $90.3 million was due to an increase in truck
component revenues of $47.7 million, an increase in iron castings revenues of
$5.8 million and an increase in freight car revenues of $36.8 million. For the
year 1997, shipments of freight cars were 4,507 (including 290 cars sold to the
Company's lease fleet), compared to 3,470 freight cars (including 98 cars sold
to the Company's lease fleet) in 1996. As of December 31, 1997, the Company's
backlog of new and rebuilt cars was 4,201 compared with 774 new and rebuilt
freight cars at December 31, 1996.
At December 31, 1997, the Company had 1,673 freight cars on lease, and the
leasing business for the year 1997 generated $7.6 million in revenue and $3.6
million in operating income before a $0.8 million gain on the sale of leased
freight cars. The 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 in the prior year.
COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1997 as a percent of manufacturing sales was
85.9%, compared with 85.0% in 1996. Related gross profits were 14.1% and 15.0%,
respectively. The decrease in gross profit margin resulted primarily from lower
gross profit margins in freight car operations due to reduced volume in the
first half of the year and pricing pressure throughout the year offset partially
by increased profit margins in the truck component operations and iron castings
business.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expenses as a percentage of total revenue
were 7.1% and 8.3% in 1997 and 1996, respectively. Actual selling, general and
administrative expenses declined $0.4 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 1.3% and 1.8% for the
years 1997 and 1996. Actual amortization expense decreased by $1.6 million from
1996 levels due primarily to a decrease in amortization expense at freight car
operations of $1.5 million due to certain intangible items being fully amortized
in late 1996.
OPERATING INCOME
Operating income was $54.4 million in 1997, compared with $30.4 million in 1996,
an increase of $24.0 million. The company increased its operating income by
improving gross profits by $8.2 million, a reduction in selling, general and
administrative expenses of $0.4 million, a reduction in amortization expense of
$1.6 million, a reduction of environmental reserves of $14.3 million offset by a
decline in gain on sale of leased freight cars of $0.5 million.
During the third quarter of 1997, the company settled two pending lawsuits
related to indemnification of environmental cleanup costs from a former owner of
Gunite, which reduced outstanding environmental liabilities by $14.3 million.
OTHER
Interest expense, net, was $35.4 million in 1997 compared to $35.8 in 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.
In conjunction with the issuance of $80.0 million of Senior Notes to refinance
$80.0 million of Tranche A term debt, the Company recorded an extraordinary
charge of $2.0 million after tax, primarily related to the write-off of $3.4
million of unamortized deferred financing costs.
Net income and diluted earnings per share for 1997 were $7.5 million and $0.76,
respectively, compared to net loss and diluted loss per share of $5.4 million
and $0.55, respectively, for 1996.
2
<PAGE>
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 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 with 1,204 new and rebuilt freight cars
at December 31, 1995.
At December 31, 1996, the Company had 1,067 freight cars on lease and the
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 1996 compared with $2.6 million revenue and $1.9 million operating income
in the prior year.
COST OF SALES - MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1996 as a percent of manufacturing sales was
85.0%, compared with 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 offsetting 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 expenses as a percentage of total revenue
were 8.3% and 4.2% in 1996 and 1995, respectively. The increase in selling,
general and administrative expenses is related to the acquisition and the
integration of TCI which has higher selling, general and administrative expense
levels as a percent of revenue compared to freight car operations, and to
increased MIS and product development costs at the freight car operations.
Amortization expense as a percentage of total revenue was 1.8% and 1.0% for the
years 1996 and 1995, respectively. The increase in amortization expense as a
percentage of total revenue is related to amortization of certain intangible
assets and the excess cost over net assets acquired in the TCI acquisition.
OPERATING INCOME
Operating income was $30.4 million in 1996, compared with $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.
OTHER
Interest expense, net, was $35.8 million in 1996 compared with $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,
which were outstanding for all of 1996 versus four months in 1995. In addition,
JAIX Leasing had increased debt levels to finance additional freight cars for
the lease fleet.
Net loss and diluted loss per share for 1996 were $5.4 million and $0.55,
respectively, compared to net income and diluted earnings per share of $5.6
million and $0.57, respectively, for 1995.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, the Company provided cash from operations
of $26.7 million compared with $36.4 million for 1996. The Company used $25.1
million of net cash in investing activities during 1997, primarily $8.2 million
used for capital expenditures and $17.5 million used for net additions to the
leased fleet. Cash provided by financing activities was $4.7 million for 1997,
which included $82.8 million in proceeds from the issuance of additional Senior
Subordinated Notes on August 12, 1997, and an increase in the JAIX Leasing debt
of $15.6 million to fund the leasing fleet additions. Offsetting this increase
is the refinancing of $80.0 million of Tranche A senior-term debt, scheduled
payments of $10.2 million of debt and payment of $3.6 million of deferred
financing costs.
3
<PAGE>
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
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. On
August 12, 1997 the Company issued $80 million of additional Notes, with
substantially the same terms as the original Notes. As of December 31, 1997,
there was $93.3 million of Tranche B term loan outstanding under the Senior Bank
Facilities, $182.7 million of Notes outstanding and no borrowings under the $75
million revolving credit line under the Senior Bank Facilities. Availability
under the revolving credit line after consideration of outstanding letters of
credit of $17.0 million, was $58.0 million.
Interest payments on the Notes and interest and principal payments under the
Senior Bank Facilities represent significant near-term 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 $93.3 million of outstanding Tranche B
term loans requires periodic principal payments through their maturities. See
Note 6 of the Consolidated Financial Statements.
At December 31, 1997, JAIX Leasing owned or leased 1,673 freight cars. JAIX
Leasing financed its 643 owned freight cars with a 10-year term loan facility,
which as of December 31, 1997, had a balance of $29.2 million outstanding. See
Note 6 of the Consolidated Financial Statements for a description of this
facility.
The Company believes that the cash flow generated from its operations, together
with amounts available under the revolving credit line, 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 December 31, 1997, the Company's balance sheet included cash of $30.9
million.
ENVIRONMENTAL 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 groundwater contamination has been identified.
4
<PAGE>
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. As a result of a private party settlement of
certain pending litigation with a prior owner of Gunite, TCI and Gunite will not
be responsible (through a contractual undertaking by the former owner) for
certain liabilities and costs resulting from Gunite's waste disposal prior to
the acquisition of Gunite by TCI in September 1987 at certain of such sites. The
Company has been notified, however, by certain other 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, 1997, the Company has a $11.3 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 $0.4 million per year in 1998 and 1999 and approximately $0.5
million per year in 2000, 2001 and 2002 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. 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.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations.
5
<PAGE>
<TABLE>
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
Net manufacturing sales $ 642,764 $ 555,510 $ 666,028
Leasing revenue 7,583 4,462 2,573
Total revenue 650,347 559,972 668,601
Cost of sales - manufacturing 552,360 472,054 608,328
Cost of leasing 4,005 2,104 654
Gross profit 93,982 85,814 59,619
Selling, general and administrative expenses 46,187 46,605 28,117
Amortization expense 8,554 10,174 6,478
Gain on sale of leased freight cars (824) (1,354) --
Reduction of environmental reserves (14,300) -- --
Operating income 54,365 30,389 25,024
Interest expense, net 32,991 33,015 13,782
Interest expense - leasing 2,389 2,821 920
Income (loss) before income taxes and extraordinary item 18,985 (5,447) 10,322
Provision (benefit) for income taxes 9,511 (76) 4,737
Net income (loss) before extraordinary item 9,474 (5,371) 5,585
Extraordinary item, net of income tax (2,008) -- --
- --------------------------------------------------------- --------- --------- --------
Net income (loss) $ 7,466 $ (5,371) $ 5,585
- --------------------------------------------------------- --------- --------- --------
Diluted and basic earnings per share:
Income (loss) before extraordinary item $ 0.96 $ (0.55) $ 0.57
Extraordinary item (0.20) -- --
- --------------------------------------------------------- --------- --------- --------
Net income (loss) $ 0.76 $ (0.55) $ 0.57
- --------------------------------------------------------- --------- --------- --------
Weighted average equivalents and shares outstanding 9,856 9,794 9,799
- --------------------------------------------------------- --------- --------- --------
</TABLE>
6
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
ASSETS:
Cash and cash equivalents $ 30,875 $ 24,535
Accounts receivable, net 60,484 49,346
Inventories 58,674 49,589
Deferred income tax assets 13,521 16,143
Prepaid expenses and other current assets 4,047 3,217
Total current assets 167,601 142,830
Property, plant and equipment, net 118,063 123,859
Leasing business assets, net 38,430 23,255
Restricted cash -- 578
Deferred financing costs, net 11,594 13,099
Intangible assets, net 243,150 251,662
Total assets $ 578,838 $ 555,283
- ---------------------------------------------------------- --------- ---------
LIABILITIES:
Accounts payable $ 55,246 $ 43,325
Accrued payroll and employee benefits 22,666 20,220
Other current liabilities 35,967 34,830
Current maturities of long-term debt and capital lease 4,783 17,236
Total current liabilities 118,662 115,611
Long-term debt and capital lease, less current maturities 124,799 186,939
Senior subordinated notes 182,691 100,000
Deferred income tax liabilities 36,373 29,214
Other long-term liabilities 45,293 59,982
Total liabilities 507,818 491,746
SHAREHOLDERS' EQUITY:
Preferred stock, par $.01, 20,000 shares authorized,
none outstanding
Commonstock, par $.01, 201,000 shares
authorized, 9,768 and 9,754 issued and outstanding
as of December 31, 1997 and 1996, respectively 98 98
Paid-in capital 55,066 55,049
Retained earnings 15,886 8,420
Employee receivables for stock purchase (30) (30)
Total shareholders' equity 71,020 63,537
Total liabilities and shareholders' equity $ 578,838 $ 555,283
- --------------------------------------------------------- --------- ---------
7
<PAGE>
<TABLE>
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 7,466 $ (5,371) $ 5,585
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation 15,009 14,772 7,656
Amortization 11,617 14,498 8,235
Deferred income tax expense 5,937 58 2,563
Provision for postretirement benefits 2,169 1,671 1,987
Gain on sale of leased freight cars (824) (1,354) --
Reduction of environmental reserves (14,300) -- --
Extraordinary item, net of income tax 2,008 -- --
Change in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable (11,137) 10,613 26,689
Inventories (9,085) (5,689) 34,101
Prepaid expenses and other current assets (829) 14,091 4,481
Accounts payable 11,921 3,677 (29,447)
Accrued payroll and employee benefits 758 (5,177) 18,066
Other assets and liabilities 6,038 (5,411) (27,784)
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,748 36,378 52,132
INVESTING ACTIVITIES:
Capital expenditures (8,246) (9,919) (14,954)
Leasing business asset additions (27,639) (5,438) (31,377)
Proceeds from sale of leased freight cars 10,182 18,113 --
Acquisition of TCI, less cash acquired -- -- (266,081)
Acquisition of Bostrom, less cash acquired -- -- (32,444)
Change in restricted cash/other 631 786 (1,354)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (25,072) 3,542 (346,210)
FINANCING ACTIVITIES:
Payments of term loans and capital lease (90,170) (16,812) (46)
Net (payments) borrowings of JAIX Leasing debt 15,577 (8,799) 22,381
Net (payments) borrowings under revolving loans -- -- (7,600)
Issuance of long-term debt 82,823 -- 305,300
Payment of deferred financing costs and other (3,566) (1,413) (16,072)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 4,664 (27,024) 303,963
- ---------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,340 12,896 9,885
Cash and cash equivalents, beginning of year 24,535 11,639 1,754
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 30,875 $ 24,535 $ 11,639
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Johnstown America Industries, Inc. (JAII) has three operating groups within the
transportation industry: truck components and assemblies operations, a leading
manufacturer of wheel end components, seating, steerable drive axles and
gearboxes 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.
On October 28, 1991, Johnstown America Corporation, (JAC), wholly owned by
Johnstown America Industries, Inc. , a Delaware corporation, consummated the
purchase of the former Freight Car Division of Bethlehem Steel Corporation.
JAII completed the acquisition of Truck Components Inc. (TCI) and its
subsidiaries (Gunite Corporation, Brillion Iron Works, Inc. and Fabco Automotive
Corporation) 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, the operating results of these acquired businesses
are included herein from their respective acquisition dates. Operations
commenced on October 2, 1995, at the Freight Car Services, Inc. facility.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
the following significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of JAII and its
wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in the accompanying consolidated financial
statements.
CASH EQUIVALENTS
The Company considers all short-term investments with original maturities of
three months or less when acquired to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of 60% and 53%
of the Company's inventories as of December 31, 1997 and 1996, respectively, was
determined on the first-in, first-out (FIFO) method, with the cost of the
remaining inventories, representing certain inventories at TCI and Bostrom,
determined on the last-in, first-out method (LIFO). Had all inventories been
determined on the FIFO method at December 31, 1997 and 1996, the reported value
of such inventories would have been increased by $0.7 and $1.0 million,
respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
The cost of property, plant and equipment acquired as part of a business
acquisition represents the fair market value of such assets at the acquisition
date typically as determined by independent appraisal. Depreciation is provided
using the straight-line method by making periodic charges to income over the
estimated useful lives of the assets, which are as follows:
- ------------------------------------------------------------------------------
Buildings and improvements 10-40 years
Machinery and equipment 3-12 years
- ------------------------------------------------------------------------------
Property, plant and equipment under capital leases are amortized over the
shorter of the estimated useful life of the asset
9
<PAGE>
or the term of the lease.
Maintenance and repairs are charged to expense as incurred, while major
replacements and improvements are capitalized. The cost and accumulated
depreciation of items sold or retired are removed from the property accounts and
any gain or loss is recorded currently in the consolidated statements of income.
RESEARCH AND DEVELOPMENT
Costs associated with research and development are expensed as incurred.
LEASING BUSINESS ASSETS
Leasing business assets, which primarily consist of freight cars, are stated at
cost, which is fully absorbed cost for those assets self-constructed by the
Company, less accumulated depreciation. Freight cars are being depreciated using
the straight-line method over the estimated useful life of 20-30 years.
INTANGIBLE ASSETS
The excess of purchase costs over amounts allocated to identifiable assets and
liabilities of businesses acquired (goodwill) is amortized on the straight-line
method over 40 years. Should events or circumstances occur subsequent to the
acquisition of a business which bring into question the realizable value or
impairment of the related goodwill, the Company will evaluate the remaining
useful life and balance of goodwill, and should an impairment be identified a
loss would be recognized to the extent that the carrying value exceeds the fair
value. The Company's principle considerations in determining impairment include
the strategic benefit to the Company of the particular business as measured by
undiscounted current and expected future operating cash flows of that particular
business.
Other intangible assets are amortized on the straight-line method over their
estimated useful lives, which are as follows:
- ------------------------------------------------------------------------------
Trademarks 40 years
Technologies 13-40 years
Patents 8 years
Organization costs 5 years
- ------------------------------------------------------------------------------
ENVIRONMENTAL RESERVES
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 ongoing operations, the Company is also subject to
environmental remediation liability. It is the Company's policy to provide and
accrue for the estimated cost of environmental matters, on a nondiscounted
basis, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. Such provisions and accruals exclude
claims for recoveries from insurance carriers or other third parties.
10
<PAGE>
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" was
issued in October 1996 and adopted by the Company with minimal impact in 1997.
This SOP provides authoritative guidance on specific accounting issues that are
present in the recognition, measurement and disclosure of environmental
remediation liabilities.
INCOME TAXES
The Company provides for deferred income taxes on differences that arise when
items are reported for financial statement purposes in years different from
those for income tax reporting purposes in conformance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
REVENUE RECOGNITION
Revenues on new and rebuilt freight cars are recognized when individual cars are
completed and accepted by the customer's inspector. Revenue from leasing is
recognized ratably during the lease term. All other revenue is recognized when
the products are shipped.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 128, "Earnings Per Share" was issued in February 1997 and adopted by
the Company in 1997. This new pronouncement established revised reporting
standards for earnings per share and has been retroactively applied to all
periods presented herein. Previously reported earnings per share for each such
period were not materially different than currently reported diluted earnings
per share. Additionally, application of the new standard for 1997 did not
materially impact the calculation of diluted earnings per share versus what
would have been reported under the prior standard. Diluted earnings per share
for the Company includes the impact of the assumed exercise of dilutive stock
options.
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997 and will
be adopted by the Company effective January 1, 1998. This new pronouncement
establishes standards for reporting and display of comprehensive income and its
components. Adoption of this standard will not impact 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 late 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
NOTE 3. ACQUISITIONS
BOSTROM SEATING INC.
On January 13, 1995, the Company acquired Bostrom. The total purchase price was
approximately $32.4 million and was funded by the Company's previous borrowing
facility.
TRUCK COMPONENTS, INC.
On August 23, 1995, the Company completed the acquisition of TCI, whereby the
Company acquired all outstanding shares of common stock of TCI (including shares
subject to options) for a cash purchase price of approximately $166 million. The
Company also made a tender offer for the $82 million of TCI's outstanding senior
notes and purchased such notes for $94 million. The acquisition and tender
offer, as well as the repayment of the Company's and TCI's existing bank debt
(excluding the JAIX Leasing facility) and the payment of various transaction
fees and expenses were
11
<PAGE>
financed by borrowings under the Senior Bank Facilities and the proceeds of the
issuance of the Notes (see Notes 6 and 7).
The Bostrom and TCI acquisitions were accounted for as purchases for financial
reporting purposes. Accordingly, certain assets and liabilities of the acquired
companies were recorded at estimated fair values as of the acquisition date,
based on management's best judgement and available information at the time.
Changes to the original estimates, some of which were made in 1996, were not
material.
The operating results of the acquired companies have been included in the
Company's reported results of operations from their respective acquisition
dates.
The Company's pro forma unaudited consolidated statement of income for the year
ended December 31, 1995, was prepared as though the acquisitions of Bostrom and
TCI and the related financing transactions occurred on January 1, 1995. Pro
forma data are as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------
1995
- ----------------------------------------- ---------
Total revenues $ 900,924
Gross profit 108,976
Net income 10,068
Diluted earnings per share $ 1.03
- ------------------------------------------ ---------
The pro forma operating results include each acquiree's pre-acquisition results
of operations with adjustments to reflect amortization of excess cost over net
assets acquired and other identified intangible assets, additional depreciation
on the increase to fair market value of fixed assets, interest expense on the
acquisition borrowings and the effect of income taxes thereon. The pro forma
information given above does not purport to be indicative of the results that
actually would have been obtained if the operations were combined during the
periods presented and is not intended to be a projection of future results or
trends.
NOTE 4. DETAIL OF CERTAIN ASSETS AND LIABILITIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
Year Ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
Balance at beginning of year $ 1,883 $ 1,690 $ --
Provision for doubtful accounts 1,904 538 60
Allowances for doubtful accounts from
acquired businesses -- -- 1,630
Net write-offs (1,493) (345) --
- ------------------------------------ -------- ------- -------
Balance at end of year $ 2,294 $ 1,883 $ 1,690
12
<PAGE>
INVENTORIES
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
Raw materials and purchased components $ 10,894 $ 10,289
Work in progress and finished goods 47,780 39,300
Inventories $ 58,674 $ 49,589
- --------------------------------------- -------- ---------
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
Land $ 4,683 $ 4,466
Buildings and improvements 28,615 26,310
Machinery and equipment 121,081 114,820
Construction in progress 3,969 4,722
158,348 150,318
Accumulated depreciation 40,285 26,459
Property, plant and equipment, net $ 118,063 $ 123,859
- --------------------------------------- --------- ---------
LEASING BUSINESS ASSETS
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
Leasing business assets $ 39,763 $ 23,884
Accumulated depreciation 1,333 629
Leasing business assets, net $ 38,430 $ 23,255
- --------------------------------------- --------- ----------
13
<PAGE>
INTANGIBLE ASSETS
(IN THOUSANDS)
Original Accumulated NET BALANCE
As of December 31, Cost Amortization 1997 1996
- ------------------ ---- ----------- ---- ----
Excess cost over net assets acquired $204,520 $ 13,116 $191,404 $196,565
Trademarks 26,988 1,628 25,360 26,057
Technologies 20,722 1,915 18,807 19,628
Patents 17,278 9,958 7,320 9,061
Organization costs 742 483 259 351
- ------------------------ -------- -------- -------- --------
Intangible assets $270,250 $ 27,100 $243,150 $251,662
- ------------------------ -------- -------- -------- --------
OTHER CURRENT LIABILITIES
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
Accrued interest $ 9,336 $ 7,039
Accrued workers' compensation 5,281 5,456
Current portion of postretirement
and pension benefit reserves 3,655 3,536
Accrued warranty 3,847 4,090
Other 13,848 14,709
- ------------------------------------------ -------- --------
Other current liabilities $ 35,967 $ 34,830
- ------------------------------------------ -------- --------
OTHER LONG-TERM LIABILITIES
(IN THOUSANDS)
As of December 31, 1997 1996
- ------------------ ---- ----
Postretirement and pension benefit reserves $ 29,880 $ 29,414
Environmental reserves 10,402 25,568
Other 5,011 5,000
- ------------------------------------------ --------- --------
Other long-term liabilities $ 45,293 $ 59,982
- ------------------------------------------ --------- --------
14
<PAGE>
NOTE 5. SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Paid-in Retained Employee
Stock Capital Earnings Receivables Total
- ----------------------------------- --------------------------------------------------------
Balance-December 31, 1994 $ 98 $ 55,020 $ 8,206 $ (90) $ 63,234
Collection of employee receivables -- -- -- 10 10
Options exercised -- 45 -- -- 45
Stock subscription cancellation -- (50) -- 50 --
Net income for year -- -- 5,585 -- 5,585
- ---------------------------------- -------- -------- -------- -------- --------
Balance-December 31, 1995 98 55,015 13,791 (30) 68,874
Options exercised -- 34 -- -- 34
Net loss for year -- -- (5,371) -- (5,371)
- ---------------------------------- -------- -------- -------- -------- --------
Balance-December 31, 1996 98 55,049 8,420 (30) 63,537
Options exercised -- 17 -- -- 17
Net Income for year -- -- 7,466 -- 7,466
- ---------------------------------- -------- -------- -------- -------- --------
Balance-December 31, 1997 $ 98 $ 55,066 $ 15,886 $ (30) $ 71,020
- ---------------------------------- -------- -------- -------- -------- --------
</TABLE>
COMMON AND PREFERRED STOCK
The Company authorized 200,000,000 shares of Common Stock (voting), 1,000,000
shares of Class B Common Stock (non-voting) and 20,000,000 shares of preferred
stock. No Class B Common Stock or preferred stock has been issued.
In October 1995, the Board of Directors of the Company adopted a Shareholder
Rights Plan and declared a dividend of one right ("Right") for each outstanding
share of the Company's common stock held by shareholders of record on October
16, 1995. When exercisable, each Right entitles shareholders of record to
purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $32.00, subject to certain
adjustments. The Company authorized 20,000 shares of such stock pursuant to this
plan. The Rights will become exercisable, and will trade separately from the
common stock, only if a person or group acquires 15% or more of the Company's
outstanding common stock or commences a tender or exchange offer that would
result in that person or group owning 15% or more of the Company's outstanding
common stock. Subsequently, upon the occurrence of certain events, holders of
Rights will be entitled to purchase common stock of the Company or a third-party
acquiror at an amount equal to twice the Right's exercise price. Until the
Rights become exercisable, they may be redeemed at the Company's option at a
price of one cent per Right. The Rights expire on October 4, 2005.
15
<PAGE>
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
(IN THOUSANDS)
AS OF DECEMBER 31, 1997 1996
- ----------------- ---- ----
Revolving credit line $ -- $ --
Tranche A term loan -- 86,670
Tranche B term loan 93,340 96,670
Total senior bank facilities 93,340 183,340
Industrial revenue bond 5,300 5,300
Capital lease 1,783 1,953
JAIX leasing debt 29,159 13,582
- ------------------------------------------------ --------- --------
Total debt 129,582 204,175
Current maturities (4,783) (17,236)
- ------------------------------------------------ --------- --------
Long-term debt $ 124,799 $186,939
- ------------------------------------------------ --------- --------
Maturities of long-term debt are as follows:
(IN THOUSANDS)
- ------------------------------------------------------------------------------
As of December 31, 1997
- ------------------------------------------------------------------------------
1999 $ 4,920
2000 21,741
2001 25,235
2002 28,642
Thereafter 44,261
- ------------------------------------------------------------------------------
16
<PAGE>
SENIOR BANK FACILITIES
The Company entered into a credit facility ( Senior Bank Facilities) on August
23, 1995, in conjunction with the acquisition of TCI and the related
transactions described in Note 3. The revolving credit line portion of the
Senior Bank Facilities provides for up to $75 of million outstanding borrowings
and letters of credit, limited by the level of eligible accounts receivable and
inventories. As of December 31, 1997, availability under the revolving credit
line, after consideration of outstanding letters of credit of $17.0 million, was
$58.0 million.
At the Company's election, interest rates per annum for the revolving credit
line are fluctuating rates 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) plus a borrowing margin. Such borrowing margins
range between 1.50% and 2.50% for LIBOR loans and between .50% and 1.50% for ABR
loans, fluctuating within each range in 0.25% increments based on the Company
achieving certain financial results. Interest rates per annum applicable to
Tranche B term loan are either (a) LIBOR plus a margin of 3.00% or (b) ABR plus
2.00%. Additionally, various fees related to unused commitments, letters of
credit and administration of the facility are incurred by the Company. As of
December 31, 1997 and 1996, the weighted average interest rate of all
outstanding loans under the Senior Bank Facilities was 9.01% and 9.21%,
respectively. Borrowings under the Senior Bank Facilities are guaranteed by each
of the Company's subsidiaries other than JAIX Leasing (the Guarantor
Subsidiaries) and are secured by the assets and stock of the Company and its
Guarantor Subsidiaries. The Tranche A term loan was repaid in full during 1997
in conjunction with the issuance of debt described in Note 7. Upon the early
retirement of this loan, the Company recorded a $ 3.3 million ($2.0 million
after-tax) extraordinary charge primarily representing the noncash writeoff of
unamortized deferred financing costs related to the retired debt. The revolving
credit line matures on March 31, 2002 and the Tranche B Term Loan matures on
March 31, 2003.
The Senior Bank Facilities contain various financial covenants including capital
expenditure limitations, minimum 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.
INDUSTRIAL REVENUE BOND
The Company, through its wholly owned subsidiary, Freight Car Services, Inc.,
issued an Industrial Revenue Bond for $5.3 million which bears interest at a
variable rate (4.25% as of December 31, 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 the provision, the Company would effectively refinance such bonds with
additional borrowings under the revolving credit line portion of the Senior Bank
Facilities.
JAIX LEASING DEBT
On June 14, 1996, JAIX Leasing refinanced its then existing debt with a new ten-
year term loan which bears interest at an average interest rate of 8.78%. At
December 31, 1997, the balance of this debt after scheduled and other
prepayments was $29.2 million. This debt is secured by JAIX Leasing's underlying
leases and assets, and contains various covenants. On February 2, 1998, JAIX
Leasing sold 380 of its owned freight cars and used the proceeds to repay $19.5
million of the outstanding term loan.
OTHER
During 1997 and 1996, the Company entered into various interest rate contracts
to fix a portion of 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 covering the
current period on the interest rate contracts were $75 million and $140 million
as of December 31, 1997 and 1996, respectively. The fixed rates of interest on
these contracts ranged from 5.98% to 6.32% as of December 31, 1997 and 1996. The
maturities on these contracts range through August 1998. The impact of fixed
versus variable interest rates is recorded as incurred, as a component of
interest expense. Costs associated with obtaining the Senior Bank Facilities,
the Senior Subordinated Notes described in Note 7
17
<PAGE>
and other indebtedness aggregated to $12.7 million as of December 31, 1997, and
costs associated with obtaining the $80 million additional Senior Subordinated
Notes were $2.9 million. Such costs are amortized over the term of the related
debt. Amortization of deferred financing costs amounted to $2.2 million, $3.2
million and $0.9 million for the years ended December 31, 1997, 1996, and 1995,
respectively. As of December 31, 1997 and 1996, accumulated amortization of such
costs was $4.0 million, and $4.1 million, respectively.
NOTE 7. SENIOR SUBORDINATED NOTES
In conjunction with the acquisition of TCI, the Company issued $100 million of
Senior Subordinated Notes which are due August 15, 2005. In 1997, the Company
issued $80 million of additional notes due August 15, 2005 (collectively, the
Notes) with substantially identical terms to the already outstanding notes at a
$3.6 million premium, for an effective rate of 10.8%. These Notes have an
interest rate of 11.75% per annum and are guaranteed on a unsecured, senior
subordinated joint and several basis by each of the Guarantor Subsidiaries.
Pursuant to the settlement of separate interest rate contracts in effect when
each portion of the Notes was issued, the Company realized a $0.8 million loss
and a $2.6 million gain upon the 1997 and 1995 issuances, respectively. The gain
and the loss are being amortized as an offset to interest expense over the term
of the Notes. The Notes have customary restrictive covenants including
restrictions on incurrence of additional indebtedness, payment of dividends and
redemption of capital stock. The Notes are subordinated to all indebtedness
under the Senior Bank Facilities and cross-default provisions do 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.
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.
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSIONS BENEFITS
Certain of the Company's subsidiaries have qualified, defined benefit plans
covering substantially all of their employees. Company contributions to the
plans were made based upon the minimum amounts required under the Employee
Retirement Income Security Act. The plans' assets are held by independent
trustees and consist primarily of equity and fixed income securities.
In conjunction with the purchase of the freight car business, the accrued
pension benefits for employees of the freight car business for service up to the
acquisition date remain the responsibility of Bethlehem Steel. The Company
initiated new pension plans for service subsequent to the acquisition date which
essentially provide benefits similar to the former plans. Following the
acquisition of TCI, a certain TCI plan was frozen and was replaced with a
defined contribution plan.
The following table summarizes pension expense:
(IN THOUSANDS)
Years ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
Current service cost $ 1,744 $ 2,189 $ 1,681
Interest cost on projected benefit obligation 2,371 2,173 1,714
Expected return on assets (3,725) (2,143) (1,896)
Amortization of unrecognized gains and losses 2,213 1,208 1,571
Net pension cost $ 2,603 $ 3,427 $ 3,070
- --------------------------------------------- --------- -------- --------
18
<PAGE>
The following table sets forth the plans' funded status:
(IN THOUSANDS)
AS OF DECEMBER 31, 1997 1996
- ----------------- ---- ----
Vested benefits $ 26,839 $ 20,508
Non-vested benefits 6,146 3,380
Accumulated benefits obligation 32,985 23,888
Effect of projected future compensation levels 6,835 8,256
- ------------------------------------------------------ --------- --------
Projected benefits obligation 39,820 32,144
Plan assets at fair value 27,352 20,311
- ------------------------------------------------------ --------- --------
Projected benefits obligation in excess of plan assets 12,468 11,833
Unrecognized net gain 50 2,569
Unrecognized prior service cost (4,924) (5,298)
- ------------------------------------------------------ --------- --------
Net Pension reserves $ 7,594 $ 9,104
- ------------------------------------------------------ --------- --------
Actuarial assumptions used in developing the above data were:
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
Discount rate 7.00% 7.75%
Rate of expected return on plan assets 9.00% 9.00%
Rate of increases in compensation 3.00-4.00% 3.00-4.00%
- ------------------------------------------------------------------------------
Pursuant to the union agreement ratified in January 1998, for JAC's freight car
business, the Company has offered early retirement benefits to certain union
employees who meet certain criteria and elect such benefits by the end of the
current agreement term (October 31, 2001). In addition, the Company also offered
additional early retirement benefits to a limited number of eligible employees
who elect to retire by June 30, 1998. The cost of the benefits for the first
program will be recognized over the actuarially determined estimated service
life of the eligible employees. The cost of the second program will be
recognized at the time the employee makes the election.
DEFINED CONTRIBUTION PLANS
Certain of the Company's subsidiaries also maintain qualified, defined
contribution plans which provide benefits to their employees based on employee
contributions, years of service, employee earnings or certain subsidiary
earnings, with discretionary contributions allowed. Expenses relating to these
plans were $3.2 million, $3.1 million and $2.4 million for the years 1997, 1996
and 1995, respectively.
19
<PAGE>
POSTRETIREMENT BENEFITS
The Company provides health care benefits for certain salaried and hourly
retired employees. Employees may become eligible for health care benefits if
they retire after attaining specified age and service requirements. These
benefits are subject to deductibles, co-payment provisions and other
limitations.
In connection with the purchase of the freight car business, the cost of
postretirement benefits of employees over age 43 at the purchase date remained
the responsibility of Bethlehem Steel. Costs of benefits relating to current
service are expensed currently.
The following table summarized postretirement benefit expense:
(IN THOUSANDS)
Years ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
Current service cost $ 725 $ 854 $ 1,043
Interest cost on accumulated benefit obligation 1,660 1,340 1,001
Amortization of unrecognized gains (98) (183) (57)
Net postretirement benefit costs $ 2,287 $ 2,011 $ 1,987
- ------------------------------------------------ ------- ------- --------
The following table sets forth the plans' funded status:
(IN THOUSANDS)
AS OF DECEMBER 31, 1997 1996
- ------------------ ---- ----
Retirees $ 7,589 $ 6,308
Other fully eligible plan participants 2,016 4,828
Other active plan participants 15,523 7,712
Accumulated benefits obligation 25,128 18,848
Unrecognized net gain 813 4,998
- ------------------------------------------------ -------- --------
Net postretirement benefits reserve $ 25,941 $ 23,846
- ------------------------------------------------ -------- ---------
The discount rates used in developing the above data ranged from 7.00% to 7.25%
in 1997, from 7.50% to 8.00% in 1996 and from 7.25% to 7.75% in 1995.
Medical trend rate assumptions were 4.50% to 4.75% for 1997, 5.25% to 9.00% for
1996 and 8.00% to 9.50% for 1995. Were the assumed medical trend rates to be
increased by 1% for each future year, the effect of this change would be to
increase the accumulated postretirement benefit obligation by $5.4 million and
$4.0 million at December 31, 1997 and 1996, respectively, and the aggregate
service and interest cost components by $0.7 million, $0.6 million and $0.7
million for the years 1997, 1996 and 1995, respectively.
The Company does not offer any other significant postretirement benefits.
20
<PAGE>
NOTE 9. INCOME TAXES
The provision (benefit) for income taxes before extraordinary item includes
current and deferred components as follows:
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------ ---- ---- ----
Current taxes:
Federal $ 2,741 $ -- $ 1,853
State 833 (134) 321
3,574 (134) 2,174
- --------------------------------- --------- ------- --------
Deferred taxes:
Federal 4,969 (444) 2,227
State 968 502 336
- --------------------------------------------------------------------
5,937 58 2,563
Provision (benefit) for income taxes
before extraordinary item $ 9,511 $ (76) $ 4,737
- --------------------------------- --------- -------- --------
The provision (benefit) for income taxes before extraordinary item differs from
the amounts computed by applying the federal statutory rate as follows:
(IN THOUSANDS)
- ------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Income taxes at federal statutory rate 35.0% (34.0)% 34.0%
State income taxes, net of federal benefit 6.3 (0.1) 4.2
Nondeductible amortization expense 9.5 32.7 7.2
Other, net (0.7) -- 0.5
- ------------------------------------------------------------------------------
Effective income tax rate 50.1% (1.4)% 45.9%
- ------------------------------------------------------------------------------
21
<PAGE>
Components of deferred tax benefits (obligations) consist of the follows:
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C>
1997 1996
----------------------- ------------------------
Description Benefits Obligations Benefits Obligations
Postretirement and pension benefit reserves $ 12,042 $ -- $ 13,257 $ --
Environmental reserve 4,388 -- 10,299 --
Deferred employee compensation -- -- 3,787 --
Accrued workers' compensation reserve 1,721 -- 2,128 --
Warranty reserve 1,500 -- 1,595 --
Alternative minimum tax credit carryforward 2,110 -- 4,042 --
Property, plant and equipment -- (27,674) -- (28,104)
Trademarks and technologies -- (19,061) -- (19,776)
Inventories -- (2,818) -- (2,973)
Other 7,487 (2,547) 4,182 (1,508)
- ------------------------------------------ -------- -------- -------- --------
Deferred tax benefits (obligations) $ 29,248 $ (52,100) $ 39,290 $ (52,361)
- --------------------------------- --------- -------- -------- -------- --------
</TABLE>
In the consolidated balance sheets, these deferred benefits and deferred
obligations are classified as deferred income tax assets or deferred income tax
liabilities, based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference as of the end of the year. Tax credit carryforwards
primarily consist of alternative minimum taxes, which can be carried forward
indefinitely, and certain state tax net operating losses subject to various
limitations which expire, if unused, in 1998 through 2000 under the current tax
laws.
A valuation allowance of $0.3 million and $2.1 million as of December 31, 1997
and 1996, has been recorded to offset these state tax credit carryforwards. As
of December 31, 1997 and 1996, no other valuation allowances are deemed
necessary as management expects to realize all other deferred benefits as future
tax deductions.
NOTE 10. STOCK OPTION PLANS
The Company maintains a Stock Option Plan (The Option Plan) for management and
nonaffiliated directors of the Company and has reserved 989,000 shares of common
stock for issuance under such plan. Options are granted to management at the
discretion of the Company's directors and pursuant to an option program for
nonaffiliated company directors. Options granted under the Option Plan generally
have an exercise price equal to the closing market value of the Company's common
stock as of the date of grant, and become exercisable under various vesting
periods of up to three years.
22
<PAGE>
Certain information regarding stock options issued by the Company is summarized
below:
(IN THOUSANDS EXCEPT WEIGHTED AVERAGE PRICES)
OUTSTANDING EXERCISABLE
----------- -----------
Wtd. Avg. Wtd. Avg.
Shares Exer. Price Shares Exer. Price
December 31, 1994 227 $ 11.89 210 $ 10.07
Issued 399 10.88
Exercised (18) 2.50
Canceled (25) 4.90
December 31, 1995 583 11.79 277 11.18
Issued 178 4.82
Exercised (14) 2.50
Canceled (74) 12.17
- ------------------------------------------------------------------------------
December 31, 1996 673 $ 10.10 472 $ 10.82
Issued 209 6.54
Exercised (10) 2.79
Canceled (50) 15.40
- ------------------------------------------------------------------------------
December 31, 1997 822 $ 8.94 651 $ 9.74
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE PRICES)
- ------------------------------------------------------------------------------
OUTSTANDING - DECEMBER 31, 1997 EXERCISABLE - DECEMBER 31, 1997
------------------------------- -------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Exercise Prices Shares Remaining Yrs. Exer. Price Shares Exer. Price
- -------------------------------------------------------------------------------------------------------------
$2.50 - $12.00 624 8.15 $ 6.28 453 $ 6.42
$12.00 - $25.63 198 6.85 17.31 198 17.31
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company measures compensation cost under the intrinsic value-based method.
Had compensation cost been determined on the fair market value-based accounting
method for options granted in 1997 and 1996, pro forma net income and the
diluted earnings per share for 1997 would have been $6.9 million and $0.70,
respectively, and pro forma net loss and the diluted loss per share for 1996
would have been $6.1 million and $0.62, respectively. The weighted average fair
value of options granted in 1997 and 1996 was $5.11 and $2.64 for December 31,
1997 and 1996, respectively. The fair value of each option is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: weighted average risk-free interest rate of 6.3% and 7.1%; weighted
average volatility of 64.9% and 56.6%; expected lives of 10 years and zero
dividend yield for 1997 and 1996, respectively.
NOTE 11. ENVIRONMENTAL 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,
23
<PAGE>
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 groundwater 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. As a result of a private party settlement of
certain pending litigation with a prior owner of Gunite, TCI and Gunite will not
be responsible (through a contractual undertaking by the former owner) for
certain liabilities and costs resulting from Gunite's waste disposal prior to
the acquisition of Gunite by TCI in September 1987 at certain of such sites. The
Company has been notified, however, by certain other 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, 1997, the Company has a $11.3 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 $0.4 million per year in 1998 and 1999 and approximately $0.5
million per year in year 2000, 2001 and 2002 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. 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.
NOTE 12. CONTINGENCIES
The Company is involved in certain threatened and pending legal proceedings
including workers' 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.
24
<PAGE>
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 of 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 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 noninfringement 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 judgment on damages to the District Court and filed its petition for
certiorari to the United States Supreme Court. In January 1998, the United
States Supreme Court denied Trinity's petition for certiorari. Also in January
1998, the District Court granted JAC a preliminary injunction prohibiting
Trinity from marketing, manufacturing, using, selling or leasing its infringing
Aluminator II coal gondola freight car or any imitation thereof. JAC expects the
damage trial to occur in mid-1998 and at this time cannot predict the amount of
damages that may be awarded.
Additionally, the Company is involved in various warranty and repair claims with
its customers as a normal course of business. In the opinion of management,
accrued warranty costs relating to these obligations are adequate.
25
<PAGE>
NOTE 13. COMMITMENTS
The Company leases certain real property and equipment under long-term leases
expiring at various dates through 2032. The leases generally contain specific
renewal or purchase options at the then fair market value.
Future minimum lease payments at December 31, 1997, are as follows:
(IN THOUSANDS)
Capital Lease Operating Leases
------------- ----------------
1998 $ 395 $ 6,648
1999 395 5,066
2000 395 4,602
2001 395 3,627
2002 281 2,416
Thereafter 2,127 24,504
Total minimum lease payments 3,988 $ 46,863
Less: Amount representing interest 2,205
Present value of minimum lease payments 1,783
Less: Current portion of obligation under
capital lease 190
Noncurrent obligation under capital lease $ 1,593
While the Company is liable for maintenance, insurance and similar costs under
most of its leases, such costs are not included in the future minimum lease
payments.
The Company assumed the capital lease in its acquisition of TCI. The related
asset balance of $1.9 million is included as a component of buildings and
improvements. Accumulated depreciation of this asset was $0.3 million and $0.2
million as of December 31, 1997 and 1996, respectively.
Total rental expense for the years 1997, 1996 and 1995 amounted to $6.5 million,
$3.7 million and $2.0 million, respectively.
NOTE 14. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT
In each of 1997, 1996 and 1995, a different customer accounted for 12%, 13%, and
17% of the Company's total revenue. No other customer accounted for greater than
10% of the company's total revenue during these periods.
26
<PAGE>
NOTE 15. UNAUDITED QUARTERLY INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
Total revenue $ 115.7 $ 158.2 $ 186.8 $ 189.6
Gross profit 19.0 22.4 24.7 27.8
Net income (loss) (1.9) (.05) 8.1 1.8
Net diluted income (loss) per share $ (0.19) $ (0.05) $ 0.83 $ 0.18
- -----------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------
Total revenue $ 152.4 $ 133.3 $ 140.8 $ 133.5
Gross profit 23.2 21.5 20.5 20.6
Net loss (0.7) (1.2) (1.6) (1.9)
Net diluted loss per share $ (0.07) $ (0.13) $ (0.16) $ (0.19)
- -----------------------------------------------------------------------------
The diluted earnings per share amounts reported above and computed in accordance
with SFAS No. 128 are not materially different than previously reported amounts.
NOTE 16. 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 illustrate the composition of the Parent Company,
Guarantor Subsidiaries, and JAIX Leasing. Separate complete financial statements
of the respective Guarantors 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 principal elimination entries eliminate
the Parent Company's investment in subsidiaries and intercompany balances and
transactions.
27
<PAGE>
Condensed Consolidating Balance Sheet
<TABLE>
<S> <C> <C> <C> <C> <C>
(IN MILLIONS) Parent Guarantor
as of December 31, 1997 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 25.1 $ 3.8 $ 2.0 $ -- $ 30.9
Accounts receivable, net -- 60.5 -- -- 60.5
Inventories -- 58.7 -- -- 58.7
Prepaid expenses and other 2.6 13.9 1.0 -- 17.5
Total current assets 27.7 136.9 3.0 -- 167.6
Property, plant and equipment, net 2.6 117.3 36.9 (0.3) 156.5
Other assets 124.7 242.8 0.8 (113.6) 254.7
Total assets $ 155.0 $ 497.0 $ 40.7 $ (113.9) $ 578.8
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Accounts payable $ 0.5 $ 54.7 $ -- $ -- $ 55.2
Other current liabilities 2.7 60.2 0.5 -- 63.4
Total current liabilities 3.2 114.9 0.5 -- 118.6
Noncurrent liabilities -- 78.2 3.5 -- 81.7
Long-term debt, less current
maturities and intercompany
advances (receivables) 80.8 198.8 27.9 -- 307.5
Total shareholders' equity 71.0 105.1 8.8 (113.9) 71.0
Total liabilities and
shareholders equity $ 155.0 $ 497.0 $ 40.7 $ (113.9) $ 578.8
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Condensed Consolidating Statement of Income
(IN MILLIONS) Parent Guarantor
as of December 31, 1997 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Total revenue $ 0.2 $ 642.8 $ 7.4 $ -- $ 650.4
Cost of sales -- 552.4 4.0 -- 556.4
Gross profit 0.2 90.4 3.4 -- 94.0
Selling, general, administrative
and amortization expenses 1.1 53.5 0.1 -- 54.7
Gain on sale of leased freight cars (0.4) -- (0.4) -- (0.8)
Reduction of environmental reserves -- (14.3) -- -- (14.3)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Operating income (loss) (0.5) 51.2 3.7 -- 54.4
Interest expense, net 12.3 20.9 2.2 -- 35.4
Equity (earnings) of subsidiaries (17.0) -- -- 17.0 --
Provision (benefit) for income taxes (5.3) 14.2 0.6 -- 9.5
Net income (loss) before
extraordinary item 9.5 16.1 0.9 (17.0) 9.5
Extraordinary item, net of tax 2.0 -- -- -- 2.0
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Net income (loss) $ 7.5 $ 16.1 $ 0.9 $ (17.0) $ 7.5
=================================================== ============= ============== =============== =============== ================
28
<PAGE>
Condensed Consolidating Statement of Cash Flows
(IN MILLIONS) Parent Guarantor
as of December 31, 1997 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Cash flows from
operating activities $ (5.2) $ 29.5 $ 2.4 $ -- $ 26.7
Cash flows from investing activities:
Capital expenditures (0.1) (8.2) -- -- (8.3)
Leased assets and investments -- -- (27.6) -- (27.6)
Proceeds from sale of leased assets 3.1 -- 7.1 -- 10.2
Changes in restricted
cash/ other -- 0.6 -- -- 0.6
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from
investing activities 3.0 (7.6) (20.5) -- (25.1)
Cash flows from financing activities:
Issuance of long-term debt 82.8 -- -- -- 82.8
Payments of term loans and
capital lease (90.0) (0.1) -- -- (90.1)
Net borrowings of JAIX
leasing debt -- -- 15.6 -- 15.6
Intercompany advances 19.4 (19.4) -- -- --
Payment of deferred financing
costs and other (3.0) -- (0.5) -- (3.5)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from (used for)
financing activities 9.2 (19.5) 15.1 -- 4.8
Net increase (decrease) in cash
and cash equivalents 7.0 2.4 (3.0) -- 6.4
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
beginning of year 18.1 1.4 5.0 -- 24.5
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
end of year $ 25.1 $ 3.8 $ 2.0 $ -- $ 30.9
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
29
<PAGE>
Condensed Consolidating Balance Sheet
(IN MILLIONS) Parent Guarantor
as of December 31, 1996 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 18.1 $ 1.4 $ 5.0 $ -- $ 24.5
Accounts receivable, net -- 49.2 0.1 -- 49.3
Inventories -- 49.6 -- -- 49.6
Prepaid expenses and other 3.0 16.0 0.4 -- 19.4
Total current assets 21.1 116.2 5.5 -- 142.8
Property, plant and equipment, net 7.5 123.1 17.0 (0.5) 147.1
Restricted cash -- 0.6 -- -- 0.6
Other assets 108.9 255.3 0.4 (99.8) 264.8
Total assets $ 137.5 $ 495.2 $ 22.9 $ (100.3) $ 555.3
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Accounts payable $ 0.2 $ 43.0 $ 0.1 $ -- $ 43.3
Other current liabilities 18.4 55.8 (2.1) (0.2) 71.9
Total current liabilities 18.6 98.8 (2.0) (0.2) 115.2
Noncurrent liabilities -- 85.7 3.5 -- 89.2
Long-term debt, less current
maturities and intercompany
advances (receivables) 55.4 218.4 13.6 -- 287.4
Total shareholders' equity 63.5 92.3 7.8 (100.1) 63.5
Total liabilities and
shareholders' equity $ 137.5 $ 495.2 $ 22.9 $ (100.3) $ 555.3
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Condensed Consolidating Statement of Income
(IN MILLIONS) Parent Guarantor
as of December 31, 1996 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Total revenue $ 0.1 $ 555.5 $ 4.4 $ -- $ 560.0
Cost of sales -- 472.1 2.1 -- 474.2
Gross profit 0.1 83.4 2.3 -- 85.8
Selling, general, administrative
and amortization expenses 1.1 55.6 -- -- 56.7
Gain on sale of lease freight cars -- -- (1.4) -- (1.4)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Operating income (loss) (1.0) 27.8 3.7 -- 30.5
Interest expense, net 11.5 21.7 2.7 -- 35.9
Equity (earnings) of subsidiaries (1.9) -- -- 1.9 --
Provision (benefit) for income taxes (5.2) 4.8 0.4 -- --
Net income (loss) $ (5.4) $ 1.3 $ 0.6 $ (1.9) $ (5.4)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
30
<PAGE>
Condensed Consolidating Statement of Cash Flows
(IN MILLIONS) Parent Guarantor
as of December 31, 1996 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Cash flows from
operating activities $ (5.0) $ 40.1 $ 1.3 $ -- $ 36.4
Cash flows from investing activities:
Capital expenditures (0.2) (9.7) -- -- (9.9)
Leased assets and investments (4.9) 0.3 (0.8) -- (5.4)
Proceeds from sale of leased
freight cars -- -- 18.1 -- 18.1
Changes in restricted
cash/other -- 0.8 -- -- 0.8
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from
investing activities (5.1) (8.6) 17.3 -- 3.6
Cash flows from financing activities:
Payments of term loans
and capital lease (16.6) (0.2) -- -- (16.8)
Net payments of JAIX Leasing
debt -- -- (8.8) -- (8.8)
Change in intercompany
advances 27.1 (23.7) (3.4) -- --
Dividends received/ (paid) 1.6 -- (1.6) -- --
Payment of deferred financing
costs (0.8) -- (0.7) -- (1.5)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from financing activities 11.3 (23.9) (14.5) -- (27.1)
Net increase (decrease) in cash
and cash equivalents 1.2 7.6 4.1 -- 12.9
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
beginning of year 16.9 (6.2) 0.9 -- 11.6
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
end of year $ 18.1 $ 1.4 $ 5.0 $ -- $ 24.5
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
31
<PAGE>
Condensed Consolidating Statement of Income
(IN MILLIONS) Parent Guarantor
as of December 31, 1995 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Total revenue $ 0.1 $ 666.7 $ 1.8 $ -- $ 668.6
Cost of sales -- 608.5 0.5 -- 609.0
Gross profit 0.1 58.2 1.3 -- 59.6
Selling, general, administrative
and amortization expenses 4.2 30.4 -- -- 34.6
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Operating income (loss) (4.1) 27.8 1.3 -- 25.0
Interest expense, net 2.2 11.6 0.9 -- 14.7
Equity (earnings) of subsidiaries (10.1) -- -- 10.1 --
Provision (benefit) for income taxes (1.8) 6.4 0.1 -- 4.7
Net income (loss) $ 5.6 $ 9.8 $ 0.3 $ (10.1) $ 5.6
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
32
<PAGE>
Condensed Consolidating Statement of Cash Flows
(IN MILLIONS) Parent Guarantor
as of December 31, 1995 Company Subsidiaries JAIX Leasing Eliminations Consolidated
- ----------------------- ------- ------------ ------------ ------------ ------------
Cash flows from
operating activities $ 1.5 $ 49.4 $ 1.2 $ -- $ 52.1
Cash flows from investing activities:
Capital expenditures -- (14.9) -- -- (14.9)
Leased assets and investments (1.9) 4.6 (34.0) -- (31.3)
Acquisition of TCI, less cash acquired -- (266.1) -- -- (266.1)
Acquisition of Bostrom, less cash acquired -- (32.5) -- -- (32.5)
Changes in restricted
cash/other -- (1.4) -- -- (1.4)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from investing activities (1.9) (310.3) (34.0) -- (346.2)
Cash flows from financing activities:
Revolving loan, net (7.6) -- -- -- (7.6)
Issuance of long-term debt 300.0 5.3 -- -- 305.3
Issuance of JAIX leasing debt -- -- 22.4 -- 22.4
Changes in intercompany advances (259.4) 247.8 11.6 -- --
Deferred financing costs paid/other (15.7) (0.2) (0.3) -- (16.2)
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash flows from financing activities 17.3 252.9 33.7 -- 303.9
net increase (decrease) in cash
and cash equivalents 16.9 (8.0) 0.9 -- 9.8
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
beginning of year -- 1.8 -- -- 1.8
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
Cash and cash equivalents,
end of year $ 16.9 $ (6.2) $ 0.9 $ -- $ 11.6
- --------------------------------------------------- ------------- -------------- --------------- --------------- ----------------
</TABLE>
33
<PAGE>
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Company for borrowings with
similar terms and maturities, the fair value of the Company's total debt,
including JAIX Leasing, was approximately $327 million and $297 million as of
December 31, 1997 and 1996, respectively. No quoted market value is available
except for the $182.6 million Notes which had a market value of approximately
$196 million as of December 31, 1997, and $97.5 million for the $100 million of
Notes outstanding as of December 31, 1996. Outstanding interest rate contracts,
based on current market pricing models, have an estimated discounted fair market
value of negative $0.2 million and negative $0.6 million as of December 31, 1997
and 1996, respectively. JAIX Leasing's debt has approximate fair market value of
$30.1 million and $13.6 million as of December 31, 1997 and 1996, respectively.
All other financial instruments of the Company have fair market values which
approximate carrying value as of December 31, 1997 and 1996.
NOTE 18. SUPPLEMENTAL CASH FLOWS AND NONCASH TRANSACTIONS DISCLOSURE
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
Cash paid for:
Interest $ 30,157 $ 31,487 $ 7,718
Income taxes 952 1,382 6,011
Business acquisitions:
Cash paid $ -- $ -- $ 300,624
Assets received -- -- 412,634
- ------------------------------------------------------------------------------------ -------------- ------------- -------------
Liabilities assumed $ -- $ -- $ 112,010
- ------------------------------------------------------------------------------------ -------------- ------------- -------------
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF JOHNSTOWN AMERICA INDUSTRIES,INC.:
We have audited the accompanying consolidated balance sheets of Johnstown
America Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income and cash flows for each of the
three years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Johnstown America
Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ARTHUR ANDERSEN LLP
- ---------------------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998
35
<PAGE>
REPORT OF MANAGEMENT
The management of Johnstown America Industries, Inc. is responsible for the
fairness and accuracy of the consolidated financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles, using management's best estimates and judgements where
appropriate. The financial information throughout this report is consistent with
our consolidated financial statements.
Management has established a system of internal controls that provides
reasonable assurance that assets are adequately safeguarded and transactions are
recorded accurately, in all material respects, in accordance with management's
authorization. Our internal controls provide for appropriate separation of
duties and responsibilities, and there are documented policies regarding
utilization of company assets and proper financial reporting. These formally
stated and regularly communicated policies demand highly ethical conduct from
all employees.
The Audit Committee of the Board of Directors meets regularly to determine that
managment and independent auditors are properly discharging their duties
regarding interal control and financial reporting. The independent auditors and
employees have full and free access to the Audit Committee at any time.
Arthur Andersen LLP, independent public accountants, are retained to audit the
consoidated financial statments.
/s/THOMAS M. BEGEL /S/ANDREW M. WELLER
- ------------------------ -------------------------
Thomas M. Begel Andrew M. Weller
Chairman, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
January 28, 1998
36
Subsidiaries of the Company
Name of Subsidiary State of Incorporation
------------------ ----------------------
Johnstown America Corporation Delaware
JAC Patent Corporation Delaware
JAIX Leasing Company Delaware
Freight Car Services, Inc. Delaware
Bostrom Holdings, Inc. Delaware
Bostrom Seating, Inc. Delaware
Truck Components Inc. Delaware
Gunite Corporation Delaware
Brillion Iron Works, Inc. Delaware
Fabco Automotive Corporation Delaware
JAII Management Company Delaware
* All subsidiaries are 100% owned by the specified entity
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the incorporation
of our report incorporated by reference in this Form 10-K into the Company's
previously filed Form S-8 Registration Statements, File Nos. 333-12677 and
333-12679
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906114
<NAME> Johnstown America Industries, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 30,875
<SECURITIES> 0
<RECEIVABLES> 62,778
<ALLOWANCES> 2,294
<INVENTORY> 58,674
<CURRENT-ASSETS> 167,601
<PP&E> 158,349
<DEPRECIATION> 40,286
<TOTAL-ASSETS> 578,838
<CURRENT-LIABILITIES> 118,662
<BONDS> 307,490
0
0
<COMMON> 98
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 578,838
<SALES> 642,764
<TOTAL-REVENUES> 650,347
<CGS> 552,360
<TOTAL-COSTS> 556,365
<OTHER-EXPENSES> 39,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,380
<INCOME-PRETAX> 18,985
<INCOME-TAX> 9,511
<INCOME-CONTINUING> 9,474
<DISCONTINUED> 0
<EXTRAORDINARY> 2,008
<CHANGES> 0
<NET-INCOME> 7,466
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
