FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
August 12, 1999
- --------------------------------------------------------------------------------
(Date of earliest event reported)
- --------------------------------------------------------------------------------
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 0-21830 25-1672791
(State or other (Commission (IRS Employer
juurisdiction of File Number Identification No.)
incorporation)
- --------------------------------------------------------------------------------
980 North Michigan Avenue, Suite 1000, Chicago, Illinois 60611
(Address of Principal executive offices)
- --------------------------------------------------------------------------------
312-280-8844
(Registrant's telephone number, including area code)
JOHNSTOWN AMERICA INDUSTRIES, INC.
(Former name, if changed since last report)
1
<PAGE>
ITEM 5. OTHER EVENTS.
On June 3, 1999, Transportation Technologies Industries, Inc. (formerly,
Johnstown America Industries, Inc. (the "Company") completed the sale of its
freight car operations (the "Railcar Business"), including Johnstown America
Corporation ("JAC"), Freight Car Services, Inc. and JAIX Leasing Company, to a
newly-formed company (the "Buyer") that will operate under the JAC name,
pursuant to a previously announced Share Purchase Agreement dated May 10, 1999,
as amended on June 3, 1999. The Company received consideration consisting of
approximately $101.3 million in cash, contingent additional consideration of
$20.0 million and a 20 percent equity interest in the Buyer. In addition, the
Buyer assumed substantially all of the liabilities of the freight car
operations, including $14.4 million of debt. The cash consideration received by
the Company is subject to working capital adjustments.
Ownership of the Buyer includes preexisting senior management of freight
car operations and Camillo M. Santomero, III, a director of the Company; certain
of Buyer's financing sources; and the Company.
Attached herein are the following financial information of the Company
reflecting the Railcar Business as discontinued operations:
PAGE
PART I AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants..................... 4
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996.......................... 5
Consolidated Balance Sheets as of December 31, 1998 and 1997. 6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996.......................... 7-8
Notes to Condensed Consolidated Financial Statements......... 9-34
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 35-41
PART II UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998....................... 42
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998...................................... 43
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998................. 44
Note to Condensed Consolidated Financial Statements.......... 45-56
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 57-63
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Transportation Technologies Industries, Inc.
Date: August 12, 1999 By:/s/ Kenneth M. Tallering
----------------------------------------
Kenneth M. Tallering
Vice President, Secretary and
General Counsel
3
<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 Transportation
Technologies Industries, Inc. (formerly Johnstown America Industries, Inc.) and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1998. 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 Transportation
Technologies Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 15, 1999
4
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31, 1998 1997 1996
Net sales $433,563 $415,866 $361,825
Cost of sales 343,852 329,678 288,756
- -----------------------------------------------------------------------------------------------------
Gross profit 89,711 86,188 73,069
Selling, general and administrative expense 38,434 35,719 33,857
Amortization expense 6,773 6,798 6,970
Pension termination gain (1,688) -- --
Reduction of environmental reserves -- (14,300) --
- -----------------------------------------------------------------------------------------------------
Operating income 46,192 57,971 32,242
Interest income (1,558) (439) (481)
Interest expense 28,704 29,986 31,984
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and extraordinary item 19,046 28,424 739
Provision for income taxes 10,853 12,881 2,116
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary item 8,193 15,543 (1,377)
Income (loss) from discontinued operations
(less applicable income tax (benefit) provision of $18,080 30,808
($3,370) and ($2,192), respectively) (6,069) (3,994)
- -----------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 39,001 9,474 (5,371)
Extraordinary item, net of income taxes (1,146) (2,008) --
- -----------------------------------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) $ 37,855 $ 7,466 $ (5,371)
- -----------------------------------------------------------------------------------------------------
Basic earnings per share:
Income (loss) from continuing operations before
extraordinary item $ 0.83 $ 1.59 $ (0.15)
Income (loss) from discontinued operations 3.13 (0.62) (0.40)
Extraordinary item (0.11) (0.21) --
- -----------------------------------------------------------------------------------------------------
Net income (loss) per share $ 3.85 $ 0.76 $ (0.55)
- -----------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 9,838 9,761 9,790
- -----------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income (loss) from continuing operations before
extraordinary item $ 0.81 $ 1.58 $ (0.14)
Income (loss) from discontinued operations 3.04 (0.62) (0.41)
Extraordinary item (0.11) (0.20) --
- -----------------------------------------------------------------------------------------------------
Net income (loss) per share $ 3.74 $ 0.76 $ (0.55)
- -----------------------------------------------------------------------------------------------------
Diluted weighted average equivalents and shares
outstanding 10,122 9,856 9,794
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(IN THOUSANDS EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
ASSETS:
<S> <C> <C>
Cash and cash equivalents $33,382 $27,884
Accounts receivable, net 55,550 54,722
Inventories 29,566 30,992
Deferred income tax assets 13,688 13,521
Prepaid expenses and other current assets 2,643 2,776
Net assets of discontinued operations 37,555 --
- -----------------------------------------------------------------------------------------------------
Total current assets 172,384 129,895
Property, plant and equipment, net 82,402 84,043
Deferred financing costs and other, net 8,809 12,555
Intangible assets, net 229,408 233,760
Net assets of discontinued operations -- $26,848
- -----------------------------------------------------------------------------------------------------
Total assets $493,003 $487,101
- -----------------------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable $19,601 $22,250
Accrued payroll and employee benefits 19,281 16,932
Other current liabilities 32,381 27,337
Current maturities of long-term debt and capital lease 9,039 3,520
- -----------------------------------------------------------------------------------------------------
Total current liabilities 80,302 70,039
Long-term debt and capital lease, less current maturities 49,186 91,603
Senior subordinated notes 182,338 182,691
Deferred income tax liabilities 34,571 36,373
Other long-term liabilities 35,889 35,375
- -----------------------------------------------------------------------------------------------------
Total liabilities 382,286 416,081
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, par $.01, 20,000 shares authorized, none outstanding -- --
Common stock, par $.01, 201,000 shares authorized, 9,900 and 9,768
Issued and outstanding as of December 31, 1998 and 1997, respectively 99 98
Paid-in capital 56,892 55,066
Retained earnings 53,741 15,886
Employee receivables for stock purchase (15) (30)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 110,717 71,020
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $493,003 $487,101
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of the balance sheets.
6
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $37,855 $7,466 $(5,371)
(Income) loss from discontinued operations (30,808) 6,069 3,994
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 7,047 13,535 (1,377)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation 10,579 10,318 10,309
Amortization 9,032 9,810 10,816
Deferred income tax expense (benefit) 3,023 5,451 (180)
Provision for postretirement benefits 1,558 1,266 918
Pension termination gain (1,688) -- --
Reduction of environmental reserves -- (14,300) --
Extraordinary item, net of income tax 1,146 2,008 --
Change in continuing operating assets and liabilities:
Accounts receivable (828) (9,128) 4,470
Inventories 1,425 (2,046) 2,982
Prepaid expenses and other current assets 507 (359) 9,460
Accounts payable (2,649) 2,664 5,676
Accrued payroll and employee benefits 558 408 (2,429)
Other assets and liabilities 2,893 7,991 (5,938)
- -----------------------------------------------------------------------------------------------------
Cash provided by continuing operations 32,603 27,618 34,707
INVESTING ACTIVITIES:
Capital expenditures (8,941) (6,636) (11,730)
Change in restricted cash and other 141 53 128
- -----------------------------------------------------------------------------------------------------
Cash used in continuing operations (8,800) (6,583) (11,602)
The accompanying notes to consolidated financial statements are integral to
these statements.
7
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
FINANCING ACTIVITIES:
Payments of term loans and capital lease (36,899) (90,170) (16,812)
Issuance of long-term debt -- 82,823 --
Payment of deferred financing costs and other 521 (3,102) (747)
- -----------------------------------------------------------------------------------------------------
Cash used in continuing operations (36,378) (10,449) (17,559)
- -----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents from 10,586
continuing operations (12,575) 5,546
Net cash (provided to) received from discontinued (584)
operation 18,073 (1,007)
Cash and cash equivalents, beginning of year 27,884 18,305 13,343
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $33,382 $27,884 $18,305
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
8
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Effective June 14, 1999, the name of the Company was changed from Johnstown
America Industries, Inc. to Transportation Technologies Industries, Inc., a
Delaware company (the Company).
The Company has historically had two operating segments within the
transportation industry: truck components, a leading manufacturer of wheel end
components, seating, steerable drive axles, gearboxes and other castings for the
heavy-duty truck industry; and freight cars, a leading manufacturer and lessor
of new and rebuilt freight cars used for hauling coal, intermodal containers,
highway trailers, automobiles, agricultural and mining products.
On October 28, 1991, the Company through its wholly owned subsidiary Johnstown
America Corporation, (JAC), consummated the purchase of the former Freight Car
Division of Bethlehem Steel Corporation . In 1994, the Company began leasing new
and used freight cars through its JAIX Leasing Company (JAIX Leasing)
subsidiary. The Company 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. Operations commenced on October 2, 1995, at the Freight Car
Services, Inc. (FCS) facility. In April and May of 1999, the Company made two
additional truck component acquisitions, Imperial Group and EMI, respectively
(see Note 17).
On June 3, 1999, the Company completed the sale of its freight car operations
comprised of three wholly owned subsidiaries - JAC, FCS, and JAIX Leasing to
Rabbit Hill Holdings, Inc. (the Buyer). The Company received consideration
consisting of approximately $103.9 million in cash, contingent additional
consideration of $20 million and a 20 percent equity interest in the Buyer. In
addition, the Buyer assumed substantially all of the liabilities of the freight
car operations, including $14.4 million of debt. The 20 percent equity interest
in the Buyer is comprised of common and preferred stock, some of which is
non-voting. Further, the Company's rights with respect to voting and
transferability of its equity interest are limited and, in particular, the
Company granted a proxy to vote its equity interest to another shareholder of
Buyer under certain circumstances. The sale resulted in an estimated pretax gain
of $46.8 million after consideration of estimated transaction costs of $4.2
million and a related pension curtailment loss of $0.3 million. The after-tax
gain on the disposition of the railcar business of $29.8 million was recorded in
the Company's results for the second quarter of 1999. Approximately $2.5 million
of additional gain was deferred due to the Company's continuing interest in the
Railcar Business. Proceeds from the $20.0 million contingent additional
consideration will be recorded as a gain, if and when collected. Also as a
result of the sale, approximately $80.0 million of senior bank debt was paid
subsequent to the acquisition which resulted in the after-tax write off of $2.2
million of unamortized deferred financing costs.
Revenues of the Railcar Business in 1998, 1997 and 1996 were $532.2 million,
$234.3 million and $198.1 million, respectively. Net assets of discontinued
operations as of December 31, 1997 included
9
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
$12.1 million net current liabilities and 38.9 million net long-term assets.
Included within the income (loss) from discontinued operations is an allocation
of consolidated interest which is not attributable to other operations of the
Company. The interest included was $2.1 million, $3.3 million and $1.4 million
in 1998, 1997 and 1996, respectively.
The accompanying consolidated financial statements have been recast to reflect
the Railcar Business as a discontinued operation. For historical business
segment reporting purposes, the Company's financial data related to its Railcar
Business was previously reported as the segment, "Freight Car."
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 the Company 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 26% and 25 %
of the Company's inventories as of December 31, 1998 and 1997, respectively, was
determined on the first-in, first-out (FIFO) method, with the cost of the
remaining inventories, representing certain inventories in the truck components
segment, determined on the last-in, first-out method (LIFO). Had all inventories
been determined on the FIFO method at December 31, 1998 and 1997, the reported
value of such inventories would have been increased by $1.1 million and $0.7
million, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
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 or the term of the lease.
Maintenance and repairs are charged to expense as incurred, while major
replacements and
10
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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.
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, except pension 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
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.
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
11
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Income Taxes."
REVENUE RECOGNITION
Revenue from the continuing operations 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. 130, "Reporting Comprehensive Income" was issued in July 1997. This new
pronouncement establishes standards for reporting and display of comprehensive
income and its components. There were no other comprehensive income items to
report other than net income for 1998, 1997 and 1996.
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. The Company's continuing
operations comprise a single reporting segment
SFAS No. 132, "Employers' Disclosure about Pensions and other Postretirement
Benefits" was issued in February 1998 and was adopted by the Company during
1998. This new pronouncement requires the Company to standardize disclosure for
pension and other postretirement benefits. See Note 7.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998 and must be adopted by the Company by the year 2000. This
new pronouncement will require the Company to record derivatives on the balance
sheet as assets or liabilities, measured at fair value and gains or losses
resulting from the changes in the values of those derivatives to be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company is evaluating the standard and does not expect it to
have a material impact on the financial results or condition of the Company
because the use of derivatives at the Company is not significant.
SOP 98-5, "Reporting on Costs of Start-Up Activities" was issued in April 1998
and was adopted by the Company in late 1998. The new pronouncement requires that
companies expense the costs of start-up activities as those costs are incurred.
Previously, such costs could have been capitalized and amortized and any such
unamortized capitalized costs must be expensed upon adoption of the new
standard. The adoption of this standard did not have a material impact on the
Company's financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
12
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 3. DETAIL OF CERTAIN ASSETS AND LIABILITIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
- ------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
Balance at beginning of year $2,244 $1,883 $1,690
Provision for doubtful accounts 673 1,854 331
Net write-offs (1,188) (1,493) (138)
- ------------------------------------------------------------------------------
Balance at end of year $1,729 $2,244 $1,883
- ------------------------------------------------------------------------------
INVENTORIES
(IN THOUSANDS)
- ------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
Raw materials and purchased components $8,575 $9,723
Work in progress and finished goods 20,991 21,269
- ------------------------------------------------------------------------------
Inventories $29,566 $30,992
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
- ------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
Land $3,254 $2,962
Buildings and improvements 19,831 18,872
Machinery and equipment 88,728 82,142
Construction in progress 4,841 3,941
- ------------------------------------------------------------------------------
116,654 107,917
Accumulated depreciation 34,252 23,874
- ------------------------------------------------------------------------------
Property, plant and equipment, net $82,402 $84,043
- ------------------------------------------------------------------------------
<TABLE>
INTANGIBLE ASSETS
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
ORIGINAL ACCUMULATED NET BALANCE
-----------------------------
AS OF DECEMBER 31, COST AMORTIZATION 1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Excess cost over net assets acquired $196,813 $16,848 $179,965 $184,885
Trademarks 26,988 2,326 24,662 25,360
Technologies 20,722 2,735 17,987 18,807
Patents 5,878 1,505 4,373 4,708
Pension asset 2,421 -- 2,421 --
- -----------------------------------------------------------------------------------------------------
Intangible assets $252,822 $23,414 $229,408 $233,760
</TABLE>
13
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
OTHER CURRENT LIABILITIES
(IN THOUSANDS)
- -----------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
Accrued interest $8,489 $9,011
Accrued workers' compensation 2,626 2074
Current portion of postretirement
and pension benefit reserves 3,000 3655
Accrued warranty 818 667
Other 17,448 11,930
- -----------------------------------------------------------------------------
Other current liabilities $32,381 $27,337
- -----------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES
(IN THOUSANDS)
- -----------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
Postretirement and pension benefit reserves $20,985 $19,962
Environmental reserves 9,904 10,402
Other 5,000 5,011
- -----------------------------------------------------------------------------
Other long-term liabilities $35,889 $35,375
- -----------------------------------------------------------------------------
<TABLE>
NOTE 4. SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
COMMON PAID-IN RETAINED EMPLOYEE
STOCK CAPITAL EARNINGS RECEIVABLES TOTAL
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
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
Collection of employee receivables -- -- -- 15 15
Options exercised 1 1,512 -- -- 1,513
Common stock issued -- 314 -- -- 314
Net income for year -- -- 37,855 -- 37,855
- -----------------------------------------------------------------------------------------------------
Balance-December 31, 1998 $99 $56,892 $53,741 $(15) $110,717
- -----------------------------------------------------------------------------------------------------
</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
14
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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.
NOTE 5. LONG-TERM DEBT Long-term debt consisted of the following:
(IN THOUSANDS)
- ------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
Revolving credit line $ -- $ --
Tranche B term loan 56,632 93,340
Capital lease 1,593 1,783
- ------------------------------------------------------------------------------
Total debt 58,225 95,123
Current maturities (9,039) (3,520)
- ------------------------------------------------------------------------------
Long-term debt $49,186 $91,603
- ------------------------------------------------------------------------------
Maturities of long-term debt, before the bank refinancing described below, was
as follows:
(IN THOUSANDS)
- ------------------------------------------------------------
AS OF DECEMBER 31, 1998
1999 $9,039
2000 8,274
2001 11,632
2002 14,888
2003 13,734
Thereafter 658
- ------------------------------------------------------------
SENIOR BANK FACILITIES
The Company entered into a credit facility (Senior Bank Facilities) on August
23, 1995. The revolving credit line portion of the Senior Bank Facilities
provided for up to $75 million of outstanding
15
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
borrowings and letters of credit, limited by the level of eligible accounts
receivable and inventories. As of December 31, 1998, availability under the
revolving credit line, after consideration of outstanding letters of credit of
$14.1 million, was $60.9 million.
At the Company's election, interest rates per annum for the revolving credit
line were 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
ranged between 1.50% and 2.50% for LIBOR loans and between 0.50% 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 were 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 were incurred by the Company. As of
December 31, 1998 and 1997, the weighted average interest rate of all
outstanding loans under the Senior Bank Facilities was 8.84% and 9.01%,
respectively. Borrowings under the Senior Bank Facilities were guaranteed by
each of the Company's subsidiaries other than JAIX Leasing (the Guarantor
Subsidiaries) and were secured by the assets and stock of the Company and its
Guarantor Subsidiaries. During 1998, the Company prepaid $35 million of the
Tranche B loan and during 1997, the Company retired the Tranche A loan in
conjunction with the issuance of debt described in Note 6. As a result of these
prepayments, the Company recorded extraordinary charges, net of income taxes, of
$1.1 million and $2.0 million in 1998 and 1997, respectively, representing the
non-cash writeoff of related unamortized deferred financing costs. The revolving
credit line was scheduled to mature on March 31, 2002 and the Tranche B Term
Loan was scheduled to mature on March 31, 2003.
The Senior Bank Facilities contained various financial covenants including
capital expenditure limitations, maximum leverage ratio, interest coverage
ratio, and minimum net worth. It also restricted the Company from paying
dividends, repurchasing common stock and making other distributions in certain
circumstances.
On April 29, 1999, the then outstanding balance of the Tranche B term loan was
repaid and the facility was terminated in connection with the new Senior Bank
Credit Facility entered into in conjunction with a subsequent acquisition (see
Note 17).
OTHER
During 1997, 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 $25 million and $75 million as of December 31,
1998 and 1997, respectively. The fixed rates of interest on these contracts were
6.14% as of December 31, 1998 and ranged from 5.98% to 6.32% as of December 31,
1997. The remaining contract matures in August 2000. 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 6 and other indebtedness aggregated to $8.7
million as of December 31, 1998.
16
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Such costs are amortized over the term of the related debt. Amortization of
deferred financing costs amounted to $1.9 million, $2.2 million and $3.2 million
for the years ended December 31, 1998, 1997, and 1996, respectively. As of
December 31, 1998 and 1997, accumulated amortization of such costs was $4.3
million and $4.0 million, respectively. Additional deferred financing costs were
incurred and some were written off when the Senior Bank Facilities were
refinanced (see Note 17).
NOTE 6. 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 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 its bank credit 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 7. EMPLOYEE BENEFIT PLANS
PENSION 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.
Following the acquisition of TCI, a certain TCI plan was frozen and was replaced
with a defined contribution plan. The Company, after consideration of previously
unrecognized amounts, recognized a $1.7 million non-cash gain on the termination
of the plan in 1998.
17
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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.
The Company does not offer any other significant postretirement benefits. The
following table sets forth the plans' funded status:
<TABLE>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------------------
AS OF DECEMBER 31, 1998 1997 1998 1997
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $12,165 $ 9,997 $14,647 $14,275
Service cost 418 325 425 365
Interest cost 620 674 1,135 1,081
Plan amendment 878 -- -- --
Actuarial loss 217 587 1,873 (200)
Settlement gain (1,688) -- -- --
Benefits paid (4,943) (318) (1,301) (874)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $7,667 $11,265 $16,779 $14,647
- ---------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $8,220 $ 6,571 $ -- $ --
Actual return on plan assets 675 1,197 -- --
Employer contribution 1,938 768 -- --
Benefits paid (4,943) (318) -- --
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $5,890 $ 8,218 $ -- $ --
- ---------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets $(1,777) $(3,047) $(16,779) $ (14,647)
Unrecognized net gain (272) (647) 1,279 (560)
Unrecognized prior service cost 686 -- -- --
- ---------------------------------------------------------------------------------------------------------
Net amount recognized $(1,363) $(3,694) $(15,482) $ (15,207)
- ---------------------------------------------------------------------------------------------------------
RECOGNIZED IN BALANCE SHEET
Accrued benefit obligation $(1,777) $(3,694) $(15,482) $(15,207)
Intangible asset 414 -- -- --
- ---------------------------------------------------------------------------------------------------------
Net amount recognized $(1,363) $(3,694) $(15,482) $(15,207)
- ---------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.75% 7.00% 6.85% 7.10%
Expected return on plan assets 9.00% 9.00% -- --
Rate of compensation increase 3.00-4.00% 3.00-4.00% -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
For measurement purposes, a 7.50% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 decreasing gradually to an
ultimate rate of 4.25% by the year 2004.
The Company recognized a minimum pension liability for underfunded plans. The
minimum liability is equal to the excess of the accumulated benefit obligation
over the fair market value of plan assets. A corresponding amount is recognized
as an intangible asset. In addition to the above, the Company retained certain
pension and related postretirement obligations of the Railcar Business
aggregating to $6.7 million (with a $2.0 million intangible asset) as of the
Railcar Business sales date.
<TABLE>
COMPONENTS OF NET PERIODIC BENEFIT COST
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------- -----------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost $418 $325 $473 $425 $365 $854
Interest cost 620 674 623 1,135 1,081 1,340
Expected return on plan assets (605) (2,433) (483) -- -- --
Amortization of unrecognized gains and
losses -- 1,807 (27) 16 -- (183)
Amortization of unrecognized prior service
cost 31 14 -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $464 $387 $586 $1,576 $1,446 $2,011
- -----------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
----------------------------------------
Effect on total of service and interest cost $304 $(257)
Effect on postretirement benefit obligation 2,705 (2,341)
- --------------------------------------------------------------------------------------------------------
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, excluding the Railcar Business were $3.1 million, $2.9 million and $2.8
million for the years 1998, 1997 and 1996, respectively.
19
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 8. INCOME TAXES
The provision for income taxes from continuing operations before extraordinary
item includes current and deferred components as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
Current taxes:
Federal $5,054 $6,172 2,120
State 2,776 1,258 176
- --------------------------------------------------------------------------------------------------------
7,830 7,430 2,296
- --------------------------------------------------------------------------------------------------------
Deferred taxes 3,023 5,451 (180)
- --------------------------------------------------------------------------------------------------------
Provision for income taxes from continuing
operations before extraordinary item $10,853 $12,881 $2,116
- --------------------------------------------------------------------------------------------------------
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, 1998 1997 1996
Income taxes at federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal benefit 10.3 5.2 20.9
Nondeductible amortization expense 9.0 6.1 231.8
Other, net 2.7 (1.0) 0.1
- --------------------------------------------------------------------------------------------------------
Effective income tax rate 57.0% 45.3% 286.4%
- --------------------------------------------------------------------------------------------------------
Components of deferred tax benefits (obligations) consist of the following and
include components related to the Railcar Business because the Company retained
such balances upon the Railcar Business sale:
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
-------------------------------------------------------
BENEFITS OBLIGATIONS BENEFITS OBLIGATIONS
-------------------------------------------------------
Postretirement and pension benefit reserves $12,458 $ -- $12,042 $ --
Environmental reserve 4,155 -- 4,388 --
Accrued workers' compensation reserve 1,862 -- 1,721 --
Warranty reserve 2,924 -- 1,500 --
Alternative minimum tax credit carryforward -- -- 2,110 --
Property, plant and equipment -- (26,487) -- (27,674)
Trademarks and technologies -- (18,339) -- (19,061)
Inventories -- (2,412) -- (2,818)
Other 8,375 (3,419) 7,487 (2,547)
- ---------------------------------------------------------------------------------------------------------
Deferred tax benefits (obligations) $29,774 $(50,657) $29,248 $(52,100)
- ---------------------------------------------------------------------------------------------------------
20
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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 liability or asset for
financial reporting. A deferred tax asset or liability that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carry forwards, are classified according to the expected reversal
date of the temporary difference as of the end of the year. Tax credit carry
forwards primarily consist of alternative minimum taxes, which can be carried
forward indefinitely, and certain state tax net operating losses which all
relate to the Railcar Business subject to various limitations which expire, if
unused, in 1999 through 2007 under the current tax laws. A valuation allowance
of $1.0 million and $0.3 million as of December 31, 1998 and 1997, has been
recorded to offset these state tax credit carry forwards. As of December 31,
1998 and 1997, no other valuation allowances are deemed necessary as management
expects to realize all other deferred benefits as future tax deductions.
NOTE 9. 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.
Certain information regarding stock options issued by the Company is summarized
below:
(SHARES IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
---------------------------------------------------------
WTD. AVG. WTD. AVG.
SHARES EXER. PRICE SHARES EXER. PRICE
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
Issued 72 15.35
Exercised (102) 6.57
- ---------------------------------------------------------------------------------------------------------
December 31, 1998 792 $9.79 670 $9.62
- ---------------------------------------------------------------------------------------------------------
21
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
(SHARES IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, Outstanding Exercisable
1998
--------------------------------------------------------------------
Wtd. Avg Wtd. Avg. Wtd. Avg.
Range of Exercise Prices Shares Remaining Years Exer. Price Shares Exer. Price
- ---------------------------- ---------- ---------------------- ------------- ------------- --------------
$2.50 - $11.13 543 7.42 $ 6.41 469 $ 6.25
12.13 - 25.63 249 6.71 17.18 201 17.47
- -------------------------------------------------------------------------------------------------------------
The Company measures compensation cost under the intrinsic value based method.
Had compensation expense been determined under the fair value based method pro
forma net income and diluted earnings per share would have been as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
Pro forma net income (loss) $ 37.7 $ 6.9 $ (6.1)
Pro forma diluted earnings (loss) per share 3.73 0.70 (0.62)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes pricing model assuming an expected life of 10 years, a zero
dividend yield and the following weighted average assumptions:
- --------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
Risk free interest rate 5.3% 6.3% 7.1%
Volatility rate 60.9% 64.9% 56.6%
- --------------------------------------------------------------------------------------------------------------
NOTE 10. 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 certain of
its truck components segment businesses and their predecessors, have been named
or are believed to be Potentially Responsible Parties (PRPs) in the
contamination of the sites. Additionally, environmental remediation
22
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
may be required at two of the truck components segment 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, 1998, the Company has a $10.7 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 $0.8 million per year in 1999 through 2003 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.
23
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 11. 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.
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.
NOTE 12. 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 excluding those payments related to the Railcar
Business at December 31, 1998, are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
CAPITAL LEASE OPERATING LEASES
--------------------- ---------------------
1999 $395 $4,888
2000 395 2,579
2001 395 1,742
2002 281 1,192
2003 125 819
Thereafter 2,003 2,215
- --------------------------------------------------------------------------------------------------------
Total minimum lease payments 3,594 $13,435
Less: Amount representing interest 2,001
- --------------------------------------------------------------------------------------------------------
Present value of minimum lease payments 1,593
Less: Current portion of obligation under capital lease 212
- --------------------------------------------------------------------------------------------------------
Noncurrent obligation under capital lease $1,381
- --------------------------------------------------------------------------------------------------------
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 $0.4 million and $0.3
million as of December 31, 1998 and 1997, respectively.
24
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Total rental expense, of continuing operations, for the years 1998, 1997 and
1996 amounted to $3.6 million, $3.2 million and $0.7 million, respectively.
NOTE 13. UNAUDITED QUARTERLY INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
1998 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------
Total revenue $113.8 $109.0 $105.7 $105.0
Gross profit 22.9 21.9 22.7 22.2
Income from continuing operations 1.0 1.9 2.3 2.4
after extraordinary item
Net income 14.0 6.2 8.0 9.7
Diluted earnings per share 1.40 0.61 0.78 0.96
- ---------------------------------------------------------------------------------------------------------
1997 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------
Total revenue $101.4 $109.3 $102.7 $102.5
Gross profit 20.5 21.7 21.3 22.7
Income from continuing operations
after extraordinary item 1.5 1.5 8.2 1.8
Net income (loss) (1.9) (0.5) 8.1 1.8
Diluted earnings (loss) per share (0.19) (0.05) 0.83 0.18
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14. GUARANTOR SUBSIDIARIES
The Notes 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.
As described in Note 1, the Company sold its Railcar Business effective June 3,
1999. The non- guarantor subsidiary, JAIX Leasing, along with two guarantor
subsidiaries JAC and FCS, were part of the Railcar Business. The operations of
the Railcar Business have been reflected as discontinued operations in the
accompanying consolidated financial statements for all years presented: however,
the following data, for clarity, has not been restated.
25
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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.
26
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Cash and cash equivalents $47.4 $(13.5) $5.2 $ -- $39.1
Accounts receivable, net -- 81.3 0.4 -- 81.7
Inventories -- 66.7 -- -- 66.7
Prepaid expenses and other 3.1 12.0 1.1 -- 16.2
- ------------------------------------------------------------------------------------------------------------
Total current assets 50.5 146.5 6.7 -- 203.7
Property, plant and equipment, net 2.4 114.4 18.2 (0.3) 134.7
Other assets 168.1 238.5 0.3 (160.9) 246.0
- ------------------------------------------------------------------------------------------------------------
Total assets $221.0 $499.4 $25.2 $(161.2) $584.4
- ------------------------------------------------------------------------------------------------------------
Accounts payable $ -- $65.4 $0.2 $ -- $ 65.6
Other current liabilities (16.0) 93.9 2.4 -- 80.3
- ------------------------------------------------------------------------------------------------------------
Total current liabilities (16.0) 159.3 2.6 -- 145.9
Noncurrent liabilities -- 78.8 3.5 -- 82.3
Long-term debt, less
current maturities and intercompany
advances (receivables) 126.3 110.5 8.7 -- 245.5
Total shareholders' equity 110.7 150.8 10.4 (161.2) 110.7
- ------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $221.0 $499.4 $25.2 $(161.2) $584.4
- ------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Total revenue $ -- $957.8 $8.3 $ -- $966.1
Cost of sales -- 821.0 4.9 -- 825.9
- ------------------------------------------------------------------------------------------------------------
Gross profit -- 136.8 3.4 -- 140.2
Selling, general, administrative
and amortization expenses 1.2 59.5 0.9 -- 61.6
Gain on sale of leased freight cars -- -- (1.2) -- (1.2)
Patent lawsuit settlement -- (1.7) -- -- (1.7)
Pension termination gain -- (16.8) -- -- (16.8)
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) (1.2) 95.8 3.7 -- 98.3
Interest expense, net 12.6 16.9 0.9 -- 30.4
Equity (earnings) of subsidiaries (47.4) -- -- 47.4 --
Provision (benefit) for income taxes (5.4) 33.2 1.1 -- 28.9
- ------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item 39.0 45.7 1.7 (47.4) 39.0
Extraordinary item, net of tax (1.1) -- -- -- (1.1)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 37.9 $ 45.7 $1.7 $(47.4) $37.9
- ------------------------------------------------------------------------------------------------------------
27
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Cash flows from (used for)
operating activities $(29.6) $82.4 $3.9 $ -- $56.7
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for) investing activities:
Capital expenditures (0.1) (11.4) -- -- (11.5)
Leasing business asset additions -- -- (4.9) -- (4.9)
Proceeds from sale of leased assets -- -- 24.3 -- 24.3
Changes in restricted
cash/other 0.2 (0.1) -- -- 0.1
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for)
investing activities 0.1 (11.5) 19.4 -- 8.0
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for)
financing activities:
Payments of term loans and
capital lease (36.7) (0.2) -- -- (36.9)
Net payments of JAIX
Leasing debt -- -- (20.0) -- (20.0)
Intercompany advances 88.0 (88.0) -- -- --
Payment of deferred financing
costs and other 0.5 -- (0.1) -- 0.4
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for)
financing activities 51.8 (88.2) (20.1) -- (56.5)
Net increase (decrease) in cash
and cash equivalents 22.3 (17.3) 3.2 -- 8.2
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
beginning of year 25.1 3.8 2.0 -- 30.9
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $47.4 $(13.5) $5.2$ $ -- $39.1
- ------------------------------------------------------------------------------------------------------------
28
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
- ------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES 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)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Total revenue $ -- $642.8 $7.6 $ -- $650.4
Cost of sales -- 552.4 4.0 -- 556.4
- ------------------------------------------------------------------------------------------------------------
Gross profit -- 90.4 3.6 -- 94.0
Selling, general, administrative
and amortization expenses 1.1 53.5 0.1 -- 54.7
Gain on sale of leased freight cars -- -- (0.8) -- (0.8)
Reduction of environmental reserves -- (14.3) -- -- (14.3)
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) (1.1) 51.2 4.3 -- 54.4
Interest expense, net 12.3 20.9 2.2 -- 35.4
Equity (earnings) of subsidiaries (17.6) -- -- 17.6 --
Provision (benefit) for income taxes (5.3) 14.2 0.6 -- 9.5
- ------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item 9.5 16.1 1.5 (17.6) 9.5
Extraordinary item, net of tax (2.0) -- -- -- (2.0)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $7.5 $16.1 $1.5 $(17.6) $7.5
- ------------------------------------------------------------------------------------------------------------
29
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Cash flows from (used for)
operating activities $(5.2) $29.5 $2.4 $ -- $26.7
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for) investing activities:
Capital expenditures (0.1) (8.2) -- -- (8.3)
Leasing business asset additions -- -- (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 (used for)
investing activities 3.0 (7.6) (20.5) -- (25.1)
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for) 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 proceeds from 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
- ------------------------------------------------------------------------------------------------------------
30
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Total revenue $ -- $555.6 $4.4 $ -- $560.0
Cost of sales -- 472.1 2.1 -- 474.2
- ------------------------------------------------------------------------------------------------------------
Gross profit -- 83.5 2.3 -- 85.8
Selling, general, administrative
and amortization expenses 1.2 55.6 -- -- 56.8
Gain on sale of leased freight cars -- -- (1.4) -- (1.4)
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) (1.2) 27.9 3.7 -- 30.4
Interest expense, net 11.4 21.7 2.7 -- 35.8
Equity (earnings) of subsidiaries (2.0) -- -- 2.0 --
Provision (benefit) for income taxes (5.2) 4.8 0.4 -- --
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (5.4) $1.4 $0.6 $ (2.0) $(5.4)
- ------------------------------------------------------------------------------------------------------------
31
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
Cash flows from (used for)
operating activities $(5.0) $40.1 $1.3 $ -- $36.4
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for) investing activities:
Capital expenditures (0.2) (9.7) -- -- (9.9)
Leasing business asset additions (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 (used for)
investing activities (5.1) (8.6) 17.3 -- 3.6
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used for) 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)
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 (used for)
financing activities 11.3 (23.9) (14.5) -- (27.1)
Net increase 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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 15. 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 was
approximately $248.5 million and $291.6 million as of December 31, 1998 and
1997, respectively. No quoted market value is available except for the Notes
which had a market value of approximately $190 million and $196 million as of
December 31, 1998, and 1997, respectively. Outstanding interest rate contracts,
based on current market pricing models, have an estimated discounted fair market
value of negative $0.4 million and negative $0.2 million as of December 31, 1998
and 1997, respectively. All other financial instruments of the continuing
Company have fair market values which approximate carrying value as of December
31, 1998 and 1997.
NOTE 16. SUPPLEMENTAL CASH FLOWS
(IN THOUSANDS)
- ----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
Cash paid for:
Interest $ 30,038 $ 27,906 $ 29,144
Income taxes 28,914 952 1,382
- ----------------------------------------------------------------------------
NOTE 17. SUBSEQUENT EVENTS
Effective April 29, 1999, the Company acquired the assets of Imperial Group,
Inc. (Imperial). Imperial is a leading Tier I and Tier II supplier of body and
chassis components for heavy-duty Class 8 truck manufacturers and transit bus
manufacturers. The purchase price for Imperial was approximately $60.1 million
consisting of $57.4 million in cash and 156,740 shares of the Company's common
stock. The acquisition was accounted for under the purchase method of
accounting. The acquisition is subject to a future working capital adjustment.
The purchase price is also subject to a contingent ear out of up to $4.0
million, based on the results of Imperial's Washington plant for the 24 months
ended April 2000. The Company also incurred transaction costs of $0.7 million
and issued 36,500 shares of restricted stock to two Imperial employees valued at
$0.6 million, which vest ratably over three years if employment continues.
In conjunction with the acquisition of Imperial, the Company, on April 29,1999
entered into a new Senior Bank Credit Facility. The new facility is comprised of
a $50 million Term A Loan, a $50 million Term B Loan and an undrawn $75 million
Revolving Credit Facility. Proceeds were used to finance the Imperial
acquisition, to refinance the Company's outstanding senior bank debt of $36.6
million (resulting in an extraordinary non-cash after tax charge of $1.7
million), and for working capital and other general corporate purposes. The
Company incurred and deferred $2.2 million of costs in obtaining the new
financing which will be deferred and amortized over the term of the related debt
(5-6 years).
33
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
At the Company's election, interest rates per annum on the new Term A loan and
the new Revolving Credit Facility 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
0.50% 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 the Term B loan are either (a) LIBOR plus a margin of 2.75%
or (b) ABR plus a margin of 1.75%. Additionally, various fees related to unused
commitments, letters of credit and administration of the facility are incurred
by the Company. Borrowings under the new Senior Bank Credit Facility 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 Term A Loan and the Revolving Credit
Facility mature on April 29, 2004 and the Term B Loan matures on April 29, 2005.
The new Senior Bank Credit Facility contains various financial covenants
including capital expenditure limitations, minimum leverage and interest
coverage ratios, and minimum net worth. The agreement also restricts the Company
from paying dividends and making other distributions in certain circumstances,
and limits the ability to repurchase common stock and prepay the Senior
Subordinated Notes.
On April 1, 1999, the Company, through its wholly owned subsidiary, Bostrom
Seating, Inc., issued Industrial Revenue Bonds for $3.1 million which bear
interest at a variable rate (3.35% as of April 1, 1999) and can be redeemed by
the Company at any time. The bonds are secured by a letter of credit issued by
the Company. The bonds have no amortization and mature in 2014. The bonds are
also subject to a weekly "put" provision by the holders of the bonds. In the
event that any or all of the bonds are put to the Company under this provision,
the Company would either refinance such bonds with additional borrowings under
the new Revolving Credit Facility or use available cash on hand.
Effective May 17, 1999, the Company acquired certain assets and liabilities of
EMI Company (EMI), an iron foundry and machining company located in Erie,
Pennsylvania. The Company paid $16.5 million in cash for property, plant and
equipment and $2.2 million for working capital. The acquisition was accounted
for under the purchase method of accounting.
34
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its continuing business in the truck components segment of
the transportation industry and is a leading manufacturer of wheel-end
components, seating, steerable drive axles, gearboxes and other castings for the
heavy-duty truck industry. The Company's discontinued operations were in the
freight car segment and included a leading manufacturer and lessor of new and
rebuilt freight cars used for hauling coal, intermodal containers, highway
trailers, automobiles, agricultural and mining products.
The Company's sales are affected to a significant degree by the Class 8 truck
markets which are subject to significant fluctuations due to economic
conditions, changes in the alternative methods of transportation and other
factors. There can be no assurance that fluctuations in such markets will not
have a material adverse effect on the results of operations or financial
condition of the Company.
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL REVENUE
Total revenue in 1998 increased 4.3% to $433.6 million from $415.9 million in
1997 due to stronger product demand in the Class 8 truck market.
COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1998 as a percent of manufacturing sales was
79.3% in 1998 compared to 79.3% in 1997. Related gross profit was 20.7% in both
years.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expenses as a percentage of net revenue were
8.9% and 8.6% in 1998 and 1997, respectively, primarily due to increased
incentive plan expenses in 1998. Amortization expense was $6.8 million in both
1998 and 1997.
OPERATING INCOME
Operating income was $46.2 million in 1998, compared to $58.0 million in 1997, a
decrease of $11.8 million. The decrease was primarily a result of a $14.3
million reduction in environmental reserves in 1997, higher selling, general and
administrative expenses of $2.7 million in 1998, increased gross profits of $3.5
million during 1998 and a pension termination gain of $1.7 million also in 1998.
OTHER
Interest expense was $28.7 million in 1998 compared to $30.0 million in 1997.
Interest expense in 1998 was lower than 1997 due primarily to the prepayment of
$35.0 million of Tranche B term debt. Interest income in 1998 was $1.6 million
in 1998 compared to $0.4 million in 1997. The increase in interest income was
due to increased levels of cash.
35
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
In conjunction with the $35 million of senior debt prepayments in 1998, the
Company recorded an extraordinary charge of $1.1 million net of tax, related to
the write-off of unamortized deferred financing costs.
In conjunction with the 1997 issuance of $80.0 million of Senior Subordinated
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 1998 were $37.9 million and $3.74,
respectively, compared to net income and diluted earnings per share of $7.5
million and $0.76, respectively, for 1997.
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUE
Net revenue in 1997 increased 14.9% to $415.9 million from $361.8 million in
1996. The revenue increase of $54.1 million was due to strong product demand in
the Class 8 truck market.
COST OF SALES AND GROSS PROFIT
Cost of sales for 1997 as a percent of manufacturing sales was 79.3%, compared
to 79.8% in 1996. Related gross profits were 20.7% and 20.2%, respectively.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expenses as a percentage of net revenue were
8.6% and 9.4% in 1997 and 1996, respectively, primarily due to reduced
discretionary spending in 1997. Amortization expenses as a percentage of net
revenue was 1.6% and 1.9% in 1997 and 1996 respectively. Actual amortization
expense was relatively unchanged from 1997 to 1996.
OPERATING INCOME
Operating income was $58.0 million in 1997, compared with $32.2 million in 1996,
an increase of $25.8 million. The Company increased its operating income by
improving gross profits by $13.1 million over 1996 levels. Selling, general and
administrative expenses increased by $1.9 million, and amortization expense
declined by $0.2 million. Additionally, a reduction of environmental reserves in
1997 of $14.3 million accounted for the remaining change in operating income.
OTHER
Interest expense was $30.0 million in 1997 compared to $32.0 in 1996. Interest
expense in 1997 and 1996 resulted from borrowings under the Senior Bank
Facilities and the Senior Subordinated Notes and decreased primarily due to
scheduled term loan payments.
In conjunction with the 1997 issuance of $80.0 million of Senior Subordinated
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.
36
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Net income and diluted earnings per share for 1997 were $7.5 million and $0.76,
respectively, compared to a net loss and diluted loss per share of $5.4 million
and $0.55, respectively, for 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, the continuing Company provided cash from
operations of $32.6 million compared with $27.6 million for 1997. The increase
is primarily due to higher 1998 earnings after non-cash impacts. The Company
used $8.8 million and $6.6 million of net cash from investing activities during
1998 and 1997, respectively, primarily for capital expenditures. Cash used for
financing activities was $36.4 million for 1998, primarily for payments of
Tranche B term debt, partially offset by proceeds from the exercise of stock
options. In 1997, cash flows from financing activities were an outflow of $10.4
million due to debt payouts of $90.2 million offset by new debt issuances, net
of related deferred financing costs, of $79.8 million.
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 5 and 6 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, 1998,
there was $56.6 million of Tranche B term loan outstanding under the Senior Bank
Facilities, $182.3 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 $14.1 million, was $60.9 million. The Senior Bank Facilities were
refinanced on April 29, 1999 in conjunction with the acquisition of Imperial.
Interest payments on the Notes and under the new 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 new 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 $56.6 million of outstanding Tranche B term loans were
completely paid off by April, 1999 and $80.0 million of the originally
outstanding debt ($100.0 million) under the new bank facilities were repaid in
June and July of 1999 with proceeds from the sale of the Railcar Business.
The Company believes that the cash flow generated from its continuing
operations, together with amounts available under its new 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 new 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, 1998, the continuing Company had cash of $33.4 million.
37
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Effective April 29, 1999, the Company acquired the assets of Imperial Group,
Inc. (Imperial). Imperial is a leading Tier I and Tier II supplier of body and
chassis components for heavy-duty Class 8 truck manufacturers and transit bus
manufacturers. The purchase price for Imperial was approximately $60.1 million
consisting of $57.4 million in cash and 156,740 shares of the Company's common
stock. The acquisition was accounted for under the purchase method of
accounting. The acquisition is subject to a future working capital adjustment.
The purchase price is also subject to a contingent earn out of up to $4.0
million, based on the results of Imperial's Washington plant for the 24 months
ended April 2000. The Company also incurred transaction costs of $0.7 million
and issued 36,500 shares of restricted stock to two Imperial employees valued at
$0.6 million, which vest ratably over three years if employment continues.
In conjunction with the acquisition of Imperial, the Company, on April 29,1999
entered into a new Senior Bank Credit Facility. The new facility is comprised of
a $50 million Term A Loan, a $50 million Term B Loan and an undrawn $75 million
Revolving Credit Facility. Proceeds were used to finance the Imperial
acquisition, to refinance the Company's outstanding senior bank debt of $36.6
million (resulting in an extraordinary non-cash after tax charge of $1.7
million), and for working capital and other general corporate purposes. The
Company incurred and deferred $2.2 million of costs in obtaining the new
financing which will be deferred and amortized over the term of the related debt
(5-6 years).
Effective May 17, 1999, the Company acquired certain assets and liabilities of
EMI Company (EMI), an iron foundry and machining company located in Erie,
Pennsylvania. The Company paid $16.5 million in cash for property, plant and
equipment and $2.2 million for working capital. The acquisition was accounted
for under the purchase method of accounting.
On June 3, 1999, the Company completed the sale of its freight car operations
comprised of three wholly owned subsidiaries - JAC, FCS, and JAIX Leasing to
Rabbit Hill Holdings, Inc. (the Buyer). The Company received consideration
consisting of approximately $101.3 million in cash, contingent additional
consideration of $20.0 million and a 20 percent equity interest in the Buyer. In
addition, the Buyer assumed substantially all of the liabilities of the freight
car operations, including $14.4 million of debt. The 20 percent equity interest
in the Buyer is comprised of common and preferred stock, some of which is
non-voting. Further, the Company's rights with respect to voting and
transferability of its equity interest are limited and, in particular, the
Company granted a proxy to vote its equity interest to another shareholder of
Buyer under certain circumstances. The sale resulted in an estimated pretax gain
of $46.8 million after consideration of estimated transaction costs of $4.2
million and a related pension curtailment loss of $0.3 million. The after-tax
gain on the disposition of the railcar business of $29.8 million was recorded in
the Company's results for the second quarter of 1999. Approximately $2.5 million
of additional gain was deferred due to the Company's continuing interest in the
Railcar Business. Proceeds from the $20.0 million contingent additional
consideration will be recorded as a gain, if and when collected. Also as a
result of the sale, approximately $80.0 million of senior bank debt was paid
subsequent to the acquisition which resulted in the after-tax write off of $2.2
million of unamortized deferred financing costs. When the final working capital
adjustment is determined, the
38
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Company will be required to use any additional after-tax proceeds to pay down
additional senior bank debt.
YEAR 2000
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such technology may recognize a year containing "00" as
the year 1900 rather than the year 2000. This issue could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
In 1996, the Company initiated a comprehensive program to ensure that its
various business systems continue to function properly in the year 2000. By the
end of 1998, all critical business systems at each operating unit had been
reviewed, modified if necessary, and tested. Many non-critical business systems
had also been reviewed, modified and tested. All non-critical systems were fully
tested and modified by mid 1999. Assessment of manufacturing processes and
facility management systems was completed by mid 1999.
Additionally, the Company is currently assessing readiness for the year 2000 by
key suppliers and other third parties with whom it has significant business
relationships. Information requests have been distributed and replies have been
received. If the risk is deemed material, the Company is performing onsite
visits to verify the adequacy of the information received.
Based upon the accomplishments to date, no contingency plans are expected to be
needed and therefore none have been developed. However, because of the
substantial progress to date, we believe adequate time will be available to
insure alternatives can be developed, assessed and implemented if necessary,
prior to the Year 2000 issue having a material impact on the Company's
operations. If however, systems of the Company or its key suppliers or other
third parties with whom it has significant business relationships are not Year
2000 compliant on a timely basis and a contingency plan is not developed on a
timely basis, the Year 2000 issue could have a material adverse effect on the
Company's operations and financial condition.
Beginning in 1996, as part of the Company's ongoing information system
improvement process, its enterprise systems were upgraded, which partially
mitigated the impact of the Year 2000 problem. Excluding the cost of upgrading
the enterprise systems, the pretax cost incurred to date of becoming "Year 2000"
compliant has been approximately $0.6 million and is not expected to be more
than $0.7 million for the total project. Such costs are being funded through
operating cash flows.
The cost of the project and expected outcomes are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this
39
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
area, the ability to locate and correct all relevant computer code, and similar
uncertainties. Additionally, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
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 certain truck
components segment businesses 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
truck components segment 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, 1998, the Company has a $10.7 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 $0.8 million per year in 1999 through 2003 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
40
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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 underway. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's market risk sensitive instruments do not subject the Company to
material market risk exposures except as such risks relate to interest rate
fluctuations. As of December 31, 1998, the Company has long-term debt
outstanding with a carrying value of $240.6 million. The estimated fair value of
this debt is $248.5 million. Fixed interest rate debt outstanding as of December
31, 1998, represents 77% of total debt, carries an average interest rate of
11.7% and matures as follows: $0.5 million in fiscal 1999, $0.5 million in
fiscal 2000, $0.6 million in fiscal 2001, $0.6 million in fiscal 2002, $0.7
million in fiscal 2003 and $181.2 million thereafter. Variable interest rate
debt outstanding as of December 31, 1998 had an average interest rate at that
date of 8.2% and matures as follows: $8.8 million in fiscal 1999, $8.0 million
in fiscal 2000, $11.4 million in fiscal 2001, $14.7 million in fiscal 2002,
$13.7 million in fiscal 2003 and $0.7 million thereafter.
The Company has an interest rate protection agreement to fix a portion of its
variable rate Senior Bank debt. At December 31, 1998, the notional principal
amount of this contract was $25 million at a 6.14% fixed rate of interest plus
the applicable borrowing margins. The contract matures in August 2000 and has a
market value of $(0.4) million.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations.
FORWARD LOOKING STATEMENTS
The foregoing outlook contains forward-looking statements that are based on
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from current expectations due to a number
of factors, including general economic conditions; competitive factors and
pricing pressures; shifts in market demand, the performance and needs of
industries served by the Company's businesses; and the risks described from time
to time in the Company's Securities and Exchange Commission reports.
41
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1999 1998
<S> <C> <C>
Net sales $ 117,300 $ 113,817
Cost of sales 92,648 90,886
- ----------------------------------------------------------------------------------------------------------
Gross profit 24,652 22,931
Selling, general and administrative expenses 10,117 9,881
Amortization expense 1,693 1,693
- ----------------------------------------------------------------------------------------------------------
Operating income 12,842 11,357
Interest income (130) (124)
Interest expense 6,961 7,414
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
extraordinary item 6,011 4,067
Provision for income taxes 2,858 3,107
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary item 3,153 960
Income from discontinued operations , net of income taxes
of $7,727 and $7,445, respectively 11,763 13,083
Extraordinary item, net of income taxes (299) --
- ----------------------------------------------------------------------------------------------------------
Net income and comprehensive income $ 14,617 $ 14,043
- ----------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income from continuing operations before extraordinary item $ 0.32 $ 0.10
Income from operations of discontinued operations 1.18 1.34
Extraordinary item (0.03) --
- ----------------------------------------------------------------------------------------------------------
Net income per share $ 1.47 $ 1.44
- ----------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 9,913 9,767
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income from continuing operations before extraordinary item $ 0.31 $ 0.10
Income from operations of discontinued operations 1.16 1.30
Extraordinary item (0.03) --
- ----------------------------------------------------------------------------------------------------------
Net income per share $ 1.44 $ 1.40
- ----------------------------------------------------------------------------------------------------------
Diluted weighted average equivalents and shares outstanding 10,148 10,072
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
42
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
MARCH 31, 1999 DEC. 31, 1998
ASSETS
Cash and cash equivalents $ 29,075 $ 33,382
Accounts receivable, net 64,948 55,550
Inventories 26,922 29,566
Prepaid expenses and other current assets 16,594 16,331
Net assets of discontinued operations 35,261 37,555
- -----------------------------------------------------------------------------------------------------
Total current assets 172,800 172,384
Property, plant and equipment, net 80,672 82,402
Deferred financing costs and other 7,928 8,809
Intangible assets, net 227,298 229,408
- -----------------------------------------------------------------------------------------------------
Total assets $ 488,698 $ 493,003
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 20,741 $ 19,601
Accrued expenses and other payables 52,120 51,662
Current maturities of long-term debt and capital lease 218 9,039
- -----------------------------------------------------------------------------------------------------
Total current liabilities 73,079 80,302
Long-term debt and capital lease, less current maturities 37,954 49,186
Senior subordinated notes 182,250 182,338
Deferred income tax liabilities 34,259 34,571
Other long-term liabilities 35,586 35,889
- -----------------------------------------------------------------------------------------------------
Total liabilities 363,128 382,286
Shareholders' Equity:
Preferred stock, par $.01, 20,000 shares
authorized, none outstanding -- --
Common stock, par $.01, 201,000 shares
authorized, 10,023 and 9,900 issued and outstanding
as of March 31, 1999 and December 31, 1998,
respectively 100 99
Paid-in capital 58,655 56,892
Unearned compensation (1,522) --
Retained earnings 68,347 53,741
Employee receivables for stock purchases (10) (15)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 125,570 110,717
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 488,698 $ 493,003
- -----------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
43
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999 1998
OPERATING ACTIVITIES:
Net income $ 14,617 $ 14,043
Income from discontinued operations (11,763) (13,083)
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations 2,854 960
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation 2,942 2,752
Amortization 2,108 2,286
Provision for postretirement benefits 408 396
Deferred income tax benefit (312) (273)
Changes in operating assets and liabilities (5,347) (19,814)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,654 (13,693)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (1,212) (1,001)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,212) (1,001)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments of term loans and capital lease (20,053) (880)
Payment of deferred financing costs 246 19
- ----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (19,807) (861)
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents for continuing operations (18,366) (15,555)
Net cash received from discontinued operations 14,059 2,101
Cash and cash equivalents, beginning of period 33,382 27,884
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 29,075 $ 14,430
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOWS DISCLOSURE
Cash paid for interest $ 12,056 $ 13,081
Cash paid for income taxes $ 738 $ 1,075
</TABLE>
See accompanying notes to condensed consolidated financial statements
44
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements presented herein and these notes are unaudited. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the registrant believes that all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation have been made, interim periods are not necessarily indicative
of the results of operations for a full year. As such, these financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the years ended December 31, 1998, 1997 and
1996 included herein.
The condensed consolidated financial statements include the accounts of
Transportation Technologies Industries, Inc. (formerly Johnstown America
Industries, Inc.) and its wholly owned subsidiaries (the "Company"). All
significant intercompany transactions and accounts have been eliminated.
2. SUBSEQUENT EVENTS
SALE OF FREIGHT CAR OPERATIONS
On June 3, 1999, the Company completed the sale of its freight car operations
comprised of three wholly owned subsidiaries - JAC, FCS, and JAIX Leasing to
Rabbit Hill Holdings, Inc. (the Buyer). The Company received consideration
consisting of approximately $101.3 million in cash, contingent additional
consideration of $20 million and a 20 percent equity interest in the Buyer. In
addition, the Buyer assumed substantially all of the liabilities of the freight
car operations, including $14.4 million of debt. The 20 percent equity interest
in the Buyer is comprised of common and preferred stock, some of which is
non-voting. Further, the Company's rights with respect to voting and
transferability of its equity interest are limited and, in particular, the
Company granted a proxy to vote its equity interest to another shareholder of
Buyer under certain circumstances. The sale resulted in an estimated pretax gain
of $46.8 million after consideration of estimated transaction costs of $4.2
million and a related pension curtailment loss of $0.3 million. The after-tax
gain on the disposition of the Railcar Business of $29.8 million was recorded in
the Company's results for the second quarter of 1999. Approximately $2.5 million
of additional gain was deferred due to the Company's continuing interest in the
Railcar Business. Proceeds from the $20.0 million contingent additional
consideration will be recorded as a gain, if and when collected. Also as a
result of the sale, approximately $80.0 million of senior bank debt was paid
subsequent to the acquisition which resulted in the after-tax write off of $2.2
million of unamortized deferred financing costs.
45
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
In connection with the sale of the freight car operations, net proceeds were
used to pay down $40.0 million of the Term A Loan and $40.0 million of the Term
B Loan, resulting in an extraordinary non-cash after tax charge of $0.5 million.
As of June 30, 1999, availability under the revolving credit line, after
consideration of outstanding letters of credit of $11.2 million, was $63.8
million and the weighted average interest rate of all outstanding loans under
the Senior Bank Credit Facility was 8.6%.
The accompanying consolidated financial statements have been recast to reflect
the Railcar Business as a discontinued operation. For historical business
reporting segment purposes, the Company's financial data related to its Railcar
Business was previously reported as the segment, "Freight Car."
IMPERIAL GROUP ACQUISITION
Effective April 29, 1999, the Company acquired the assets of Imperial Group,
Inc. (Imperial). Imperial is a leading Tier I and Tier II supplier of body and
chassis components for heavy-duty Class 8 truck manufacturers and transit bus
manufacturers. The purchase price for Imperial was approximately $60.1 million
consisting of $57.4 million in cash and 156,740 shares of the Company's common
stock. The acquisition was accounted for under the purchase method of
accounting. The acquisition is subject to a future working capital adjustment.
The purchase price is also subject to a contingent earn-out of up to $4.0
million, based on the results of Imperial's Washington plant for the 24 months
ended April 2000. The Company also incurred transaction costs of $0.7 million
and issued 36,500 shares of restricted stock to two Imperial employees valued at
$0.6 million, which vest ratably over three years if employment continues.
NEW SENIOR BANK CREDIT FACILITY
The Company entered into a credit facility (Senior Bank Facilities) on August
23, 1995, in conjunction with the acquisition of Truck Components Inc. (TCI) and
the related transactions. The revolving credit line portion of the Senior Bank
Facilities provided for up to $75 million of outstanding borrowings and letters
of credit, limited by the level of eligible accounts receivable and inventories.
The Company used $20.0 million of cash from operations during the first quarter
of 1999 to prepay obligations under the Tranche B term loan. An extraordinary
non-cash after tax charge of $0.3 million was incurred from the write off of
unamortized deferred costs associated with this debt repayment
In conjunction with the acquisition of Imperial, the Company, on April 29,1999
entered into a new Senior Bank Credit Facility. The new facility is comprised of
a $50 million Term A Loan, a $50 million Term B Loan and an undrawn $75 million
Revolving Credit Facility. Proceeds were used to finance the Imperial
acquisition, to refinance the Company's outstanding senior bank debt of $36.6
million (resulting in an extraordinary non-cash after tax charge of $1.7
million), and for working capital and other general corporate purposes. The
Company incurred and deferred $2.2 million of costs in obtaining the new
financing which will be deferred and amortized over the term of the related debt
(5-6 years).
At the Company's election, interest rates per annum on the new Term A loan and
the new Revolving Credit Facility are fluctuating rates of interest measured by
reference to either (a) an adjusted London
46
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
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 0.50% 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 the Term B loan are
either (a) LIBOR plus a margin of 2.75% or (b) ABR plus a margin of 1.75%.
Additionally, various fees related to unused commitments, letters of credit and
administration of the facility are incurred by the Company. Borrowings under the
new Senior Bank Credit Facility are guaranteed by each of the Company's
continuing subsidiaries (the Guarantor Subsidiaries) and are secured by the
assets and stock of the Company and its Guarantor Subsidiaries. The Term A Loan
and the Revolving Credit Facility mature on April 29, 2004 and the Term B Loan
matures on April 29, 2005.
The new Senior Bank Credit Facility contains various financial covenants
including capital expenditure limitations, minimum leverage and interest
coverage ratios, and minimum net worth. The agreement also restricts the Company
from paying dividends and making other distributions in certain circumstances,
and limits the ability to repurchase common stock and prepay the Senior
Subordinated Notes.
EMI COMPANY ACQUISITION
Effective May 17, 1999, the Company acquired certain assets and liabilities of
EMI Company (EMI), an iron foundry and machining company located in Erie,
Pennsylvania. The Company paid $16.5 million in cash for property, plant and
equipment and $2.2 million for working capital. The acquisition was accounted
for under the purchase method of accounting.
INDUSTRIAL REVENUE BOND
On April 1, 1999, the Company, through its wholly owned subsidiary, Bostrom
Seating, Inc., issued Industrial Revenue Bonds for $3.1 million which bear
interest at a variable rate (3.35% as of April 1, 1999) and can be redeemed by
the Company at any time. The bonds are secured by a letter of credit issued by
the Company. The bonds have no amortization and mature in 2014. The bonds are
also
subject to a weekly "put" provision by the holders of the bonds. In the event
that any or all of the bonds are put to the Company under this provision, the
Company would either refinance such bonds with additional borrowings under the
new Revolving Credit Facility or use available cash on hand.
47
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
3. INVENTORIES
Inventories of the Company consist of the following (in thousands):
March 31, December 31,
1999 1998
------------ ------------
Raw materials and purchased
components $ 6,360 $ 8,575
Work-in-progress and finished goods 20,562 20,991
------------ ------------
$ 26,922 $ 29,566
============ ============
4. DEBT
Long-term debt of the Company consists of the following (in thousands):
March 31, December 31,
1999 1998
------------- ------------
Revolving loan -- --
Tranche B term loan 36,632 56,632
Capital lease 1,540 1,593
------------- ------------
Total debt 38,172 58,225
Less -
Current maturities (218) (9,039)
------------- -------------
Long-term debt $ 37,954 $ 49,186
============= ============
SENIOR BANK FACILITIES
The Company entered into a credit facility (Senior Bank Facilities) on August
23, 1995, in conjunction with the acquisition of Truck Components Inc. (TCI) and
the related transactions. The revolving credit line portion of the Senior Bank
Facilities provided for up to $75 million of outstanding borrowings and letters
of credit, limited by the level of eligible accounts receivable and inventories.
As of March 31, 1999, availability under the revolving credit line, after
consideration of outstanding letters of credit of $13.5 million, was $ 61.5
million and the weighted average interest rate of all outstanding loans under
the Senior Bank Facilities was 8.76%.
The Company used $20.0 million of cash from operations during the first quarter
of 1999 to prepay obligations under the Tranche B term loan. An extraordinary
non-cash after tax charge of $0.3 million was incurred from the write off of
unamortized deferred costs associated with this debt repayment. On
48
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
April 29, 1999, the remaining balance of $36.6 million in Tranche B loans was
repaid and the facility was terminated in connection with the establishment of a
new Senior Bank Credit Facility (see Note 2).
5. SENIOR SUBORDINATED NOTES
In conjunction with the acquisition of TCI in 1995, 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 an
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 Credit Facility 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 debt will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
6. ENVIRONMENTAL MATTERS
The Company's subsidiaries are currently involved in several matters relating to
the investigation and/or remediation of locations where the subsidiaries have
arranged for the disposal of foundry and other wastes. Such matters include five
situations in which the Company, through its TCI subsidiaries and their
predecessors, have been named or are believed to be potentially responsible
parties ("PRP") in the contamination of the sites. With respect to claims
involving Gunite Corporation ("Gunite"), TCI and Gunite in September 1997
entered into a private-party settlement (the "Settlement") of certain pending
litigation with a prior owner of Gunite, pursuant to which each of TCI and
Gunite and the prior owner withdrew their claims against the other. As a result
of the Settlement, TCI and Gunite will not be responsible for liabilities and
costs related to certain alleged contamination of Gunite's facilities and at
certain off-site properties to the extent arising out of operations of Gunite
prior to the acquisition of Gunite by TCI in September 1987.
49
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
As of March 31, 1999, based on all of the information currently available to the
Company, the Company has an environmental reserve of $10.7 million which
management believes is adequate to cover future expenditures. This reserve is
based on current cost estimates and does not reduce estimated expenditures to
net present value, although the Company's subsidiaries are not likely to incur
costs for most of the reserved matters until several years in the future. Any
cash expenditures required by the Company or its subsidiaries to comply with
applicable environmental laws and/or to pay for any remediation efforts will not
be reduced or otherwise affected by the existence of the environmental reserve.
Due to the early stage of investigation of many of the sites and potential
remediations referred to above, there are
significant uncertainties as to waste quantities involved, the extent and timing
of the remediation which will be required, the range of acceptable solutions,
costs of remediation and the number of potentially responsible parties
contributing to such costs. Based on all of the information presently available,
the Company believes that the environmental reserve will be adequate to cover
its future costs related to the sites associated with the environmental reserve,
and that any additional costs will not have a material adverse effect on the
financial condition or results of operations of the Company. However, the
discovery of additional sites, the modification of existing laws or regulations,
the imposition of joint and several liability or the uncertainties referred to
above could result in such a material adverse effect.
7. GUARANTOR SUBSIDIARIES
The Notes and the obligations under the senior bank debt are fully and
unconditionally guaranteed on an unsecured, senior subordinated, joint and
several basis by each of the Guarantor Subsidiaries. The following condensed
consolidating financial data illustrates the composition of the Parent Company,
the Guarantor Subsidiaries, and JAIX Leasing as of and for certain dates and
periods. Separate complete financial statements of the respective Guarantor
Subsidiaries would not provide additional information which would be useful in
assessing the financial composition of the Guarantor Subsidiaries and thus, are
not presented.
As described in Note 2, the Company sold its Railcar Business effective June 3,
1999. The non- guarantor subsidiary, JAIX Leasing, along with two guarantor
subsidiaries, JAC and FCS, were part of the Railcar Business. The operations of
the Railcar Business have been reflected as discontinued operations on the
statements of income for all periods presented: however, the following data, for
clarity, has not been restated.
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.
50
<PAGE>
<TABLE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
as of March 31, 1999
(In millions)
(Unaudited)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 40.9 $ (10.9) $ 6.5 $ -- $ 36.5
Accounts receivable, net.................... -- 96.9 0.4 -- 97.3
Inventories................................. -- 63.5 -- -- 63.5
Prepaid expenses and other.................. 1.6 15.1 (0.4) -- 16.3
------------- ------------ ------------- ------------- ------------
Total current assets................... 42.5 164.6 6.5 -- 213.6
Property, plant and equipment, net.......... 2.4 112.3 19.3 (0.3) 133.7
Other assets................................ 159.7 236.6 0.4 (153.6) 243.1
------------- ------------ ------------- ------------- ------------
Total assets........................... $ 204.6 $ 513.5 $ 26.2 $ (153.9) $ 590.4
============= ============ ============= ============= ============
Accounts payable............................ $ -- $ 72.6 $ -- $ -- $ 72.6
Other current liabilities................... (33.8) 105.7 3.2 -- 75.1
------------- ------------ ------------- ------------- ------------
Total current liabilities.............. (33.8) 178.3 3.2 -- 147.7
Noncurrent liabilities...................... -- 79.5 3.5 -- 83.0
Long-term debt, less current
maturities and intercompany
advances ................................. 112.8 112.7 8.6 -- 234.1
Total shareholders' equity.................. 125.6 143.0 10.9 (153.9) 125.6
------------- ------------ ------------- ------------- ------------
Total liabilities and shareholders'
equity............................. $ 204.6 $ 513.5 $ 26.2 $ (153.9) $ 590.4
============= ============ ============= ============= ============
51
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 1999
(In millions)
(Unaudited)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
Total revenue............................... $ -- $ 295.9 $ 2.5 $ -- $ 298.4
Cost of sales............................... -- 248.1 1.4 -- 249.5
------------- ------------ ------------- ------------- ------------
Gross profit.............................. -- 47.8 1.1 -- 48.9
Selling, general, administrative
and amortization expenses.................. 0.5 15.8 0.2 -- 16.5
------------- ------------ ------------- ------------- ------------
Operating income ........................ (0.5) 32.0 0.9 -- 32.4
Interest expense, net....................... 3.8 2.9 0.2 -- 6.9
Equity (earnings) of subsidiaries........... (17.5) -- -- (17.5) --
Provision (benefit) for income taxes........ (1.7) 12.0 0.3 -- 10.6
------------- ------------ ------------- ------------- ------------
Net income (loss) before
extraordinary item....................... 14.9 17.1 0.4 (17.5) 14.9
Extraordinary item net of
income tax............................... (0.3) -- -- -- (0.3)
------------- ------------ ------------- ------------- ------------
Net income (loss)........................... $ 14.6 $ 17.1 $ 0.4 $ (17.5)$ 14.6
============= ============ ============= ============= ============
52
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 1999
(In millions)
(Unaudited)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
CASH FLOWS FROM
OPERATING ACTIVITIES....................... $ (9.5)$ 27.3 $ 2.8 $ -- $ 20.6
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures...................... -- (1.8) -- -- (1.8)
Leasing business asset additions.......... -- -- (1.2) -- (1.2)
------------- ------------ ------------- ------------- ------------
Cash provided by (used for)
investing activities..................... -- (1.8) (1.2) -- (3.0)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments of term loans
and capital lease........................ (20.0) (0.1) -- -- (20.1)
Payments of JAIX Leasing debt............. -- -- (0.1) -- (0.1)
Intercompany advances..................... (2.2) 2.2 -- -- --
Payment of deferred financing
costs and other......................... 0.2 -- (0.2) -- --
Dividends received (paid)................. 25.0 (25.0) -- -- --
------------- ------------ ------------- ------------- ------------
Cash provided by (used for)
financing activities.................... 3.0 (22.9) (0.3) -- (20.2)
Net increase (decrease) in cash
and cash equivalents....................... (6.5) 2.6 1.3 -- (2.6)
CASH AND CASH
EQUIVALENTS,
beginning of period....................... 47.4 (13.5) 5.2 -- 39.1
------------- ------------ ------------- ------------- ------------
CASH AND CASH
EQUIVALENTS,
end of period............................. $ 40.9 $ (10.9) $ 6.5 $ -- $ 36.5
============= ============ ============= ============= ============
53
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
as of December 31, 1998
(In millions)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
Cash and cash equivalents................... $ 47.4 $ (13.5) $ 5.2 $ -- $ 39.1
Accounts receivable, net.................... -- 81.3 0.4 -- 81.7
Inventories................................. -- 66.7 -- -- 66.7
Prepaid expenses and other.................. 3.1 12.0 1.1 -- 16.2
------------- ------------ ------------- ------------- ------------
Total current assets................... 50.5 146.5 6.7 -- 203.7
Property, plant and equipment, net.......... 2.4 114.4 18.2 (0.3) 134.7
Other assets................................ 168.1 238.5 0.3 (160.9) 246.0
------------- ------------ ------------- ------------- ------------
Total assets........................... $ 221.0 $ 499.4 $ 25.2 $ (161.2)$ 584.4
============= ============ ============= ============= ============
Accounts payable............................ $ -- $ 65.4 $ 0.2 $ -- $ 65.6
Other current liabilities................... (16.0) 93.9 2.4 -- 80.3
------------- ------------ ------------- ------------- ------------
Total current liabilities.............. (16.0) 159.3 2.6 -- 145.9
Noncurrent liabilities...................... -- 78.8 3.5 -- 82.3
Long-term debt, less current
maturities and intercompany
advances (receivables).................... 126.3 110.5 8.7 -- 245.5
Total shareholders' equity.................. 110.7 150.8 10.4 (161.2) 110.7
------------- ------------ ------------- ------------- ------------
Total liabilities and shareholders'
equity............................ $ 221.0 $ 499.4 $ 25.2 $ (161.2)$ 584.4
============= ============ ============= ============= ============
54
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 1998
(In millions)
(Unaudited)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
Total revenue............................... $ -- $ 228.8 $ 2.4 $ -- $ 231.2
Cost of sales............................... -- 199.2 1.5 -- 200.7
------------- ------------ ------------- ------------- ------------
Gross profit ............................. -- 29.6 0.9 -- 30.5
Selling, general, administrative
and amortization expenses.................. 0.4 14.9 -- -- 15.3
------------- ------------ ------------- ------------- ------------
Gain on sale of leased freight cars......... -- -- (1.2) -- (1.2)
Patent litigation settlement................ -- (16.8) -- -- (16.8)
------------- ------------ ------------- ------------- ------------
Operating income ......................... (0.4) 31.5 2.1 -- 33.2
Interest expense, net....................... 3.4 4.7 0.5 -- 8.6
Equity (earnings) of subsidiaries........... (16.3) -- -- 16.3 --
Provision (benefit) for income
taxes..................................... (1.5) 11.5 0.6 -- 10.6
------------- ------------ ------------- ------------- ------------
Net income (loss)......................... $ 14.0 $ 15.3 $ 1.0 $ (16.3)$ 14.0
============= ============ ============= ============= ============
55
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 1998
(millions)
(Unaudited)
Parent Guarantor
COMPANY SUBSIDIARIES JAIX LEASING ELIMINATIONS CONSOLIDATED
CASH FLOWS FROM
OPERATING ACTIVITIES....................... $ (8.9)$ (1.9) $ (0.1)$ -- $ (10.9)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures ..................... -- (1.8) -- -- (1.8)
Leasing business asset additions.......... -- -- (2.2) -- (2.2)
Proceeds from sale of leased
freight cars.............................. -- -- 24.3 -- 24.3
------------- ------------ ------------- ------------- ------------
Cash provided by (used for)
investing activities...................... -- (1.8) 22.1 -- 20.3
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments of term loans and
capital leases........................... (0.8) (0.1) -- -- (0.9)
Net Borrowings under
JAIX Leasing debt........................ -- -- (19.7) -- (19.7)
Intercompany advances..................... (2.0) 2.0 -- -- --
------------- ------------ ------------- ------------- ------------
Cash provided by (used for)
financing activities..................... (2.8) 1.9 (19.7) -- (20.6)
Net increase (decrease) in cash
and cash equivalents....................... (11.7) (1.8) 2.3 -- (11.2)
CASH AND CASH
EQUIVALENTS,
beginning of period....................... 25.1 3.8 2.0 -- 30.9
------------- ------------ ------------- ------------- ------------
CASH AND CASH
EQUIVALENTS,
end of period............................. $ 13.4 $ 2.0 $ 4.3 $ -- $ 19.7
============= ============ ============= ============= ============
</TABLE>
56
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its continuing business in the truck components segment of
the transportation industry and is a leading manufacturer of wheel-end
components, seating, steerable drive axles, gearboxes and other castings for the
heavy-duty truck industry. The Company's discontinued operations were in the
freight car segment and included a leading manufacturer and lessor of new and
rebuilt freight cars used for hauling coal, intermodal containers, highway
trailers, automobiles, agricultural and mining products.
The Company's sales are affected to a significant degree by the Class 8 truck
markets which are subject to significant fluctuations due to economic
conditions, changes in the alternative methods of transportation and other
factors. There can be no assurance that fluctuations in such markets will not
have a material adverse effect on the results of operations or financial
condition of the Company.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET SALES
Net sales for the three months ended March 31, 1999 increased 3.1% to $117.3
million from $113.8 million in the first quarter of 1998.
COST OF SALES AND GROSS PROFITS
Cost of sales for the first quarter as a percent of net sales was 79.0% in 1999
compared to 79.9% in 1998. Related gross profits were 21.0% and 20.1%,
respectively. The increase in gross profit margins was due primarily to
increased manufacturing efficiency.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION
Selling, general and administrative expenses as a percentage of net sales were
8.6% and 8.7% in the first quarter of 1999 and 1998, respectively. Amortization
expense was $1.7 million in both the first quarter of 1999 and 1998.
OPERATING INCOME
Operating income was $12.8 million in the first quarter of 1999, compared to
$11.3 million in the first quarter of 1998. During the first quarter of 1999,
increased sales and margins accounted for $1.7 million
57
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
of the increase, while selling, general and administrative expense increased in
the first quarter of 1999 by $0.2 million over first quarter 1998 levels.
OTHER
Interest expense, net, was $6.8 million in the first quarter of 1999, compared
to $7.3 million in the first quarter of 1998. The reduced interest expense was
due to lower levels of the Company's term debt.
The Company recorded an extraordinary item, net of income tax, of $0.3 million
in the first quarter of 1999 due to the early repayment of $20.0 of Tranche B
Term debt.
Net income and diluted earnings per share for the first quarter of 1999 were
$14.6 million and $1.44, respectively, compared to net income and diluted
earnings per share of $14.0 million and $1.40, respectively, for the first
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company provided cash from
operations of $2.7 million compared with a use of cash of $13.7 million for the
first three months of 1998. The Company used $1.2 million and $1.0 million of
cash in the first three months of 1999 and 1998, respectively, for investing
activities for capital expenditures. Cash used by financing activities was $19.8
million for the first three months of 1999, due mainly to the pay down of $20.1
million of term loan principal payments and capital lease. For the first three
months of 1998, cash used in financing activities was $0.9 million representing
the scheduled pay down of debt.
As of March 31, 1999, there was $36.6 million of term loans outstanding under
the Senior Bank Facilities, $182.3 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 $13.5 million, was $61.5 million. The Senior
Bank Facilities were refinanced on April 29, 1999 in conjunction with the
acquisition of Imperial. Interest payments on the Notes and interest and
principal payments under the Senior Bank Facility represent significant
liquidity requirements for the Company. The Notes require semiannual interest
payments of approximately $10.6 million. Borrowings under the new 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 $56.6 million of outstanding Tranche B term loans were completely paid off
by April, 1999 and $80.0 million of the originally outstanding debt ($100
million) under the new bank facilities were repaid in June and July of 1999 with
proceeds from the sale of the Railcar Business.
The Company believes that the cash flow generated from its continuing
operations, together with amounts available under its 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
58
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
new Senior Bank Credit 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 March 31, 1999, the Company's balance sheet included cash of $29.1
million.
IMPERIAL GROUP ACQUISITION
Effective April 29, 1999, the Company acquired the assets of Imperial Group,
Inc. (Imperial). Imperial is a leading Tier I and Tier II supplier of body and
chassis components for heavy-duty Class 8 truck manufacturers and transit bus
manufacturers. The purchase price for Imperial was approximately $60.1 million
consisting of $57.4 million in cash and 156,740 shares of the Company's common
stock. The acquisition was accounted for under the purchase method of
accounting. The acquisition is subject to a
future working capital adjustment. The purchase price is also subject to a
contingent earn out of up to $4.0 million, based on the results of Imperial's
Washington plant for the 24 months ended April 2000. The Company also incurred
transaction costs of $0.7 million and issued 36,500 shares of restricted stock
to two Imperial employees valued at $0.6 million, which vest ratably over three
years if employment continues.
NEW SENIOR BANK CREDIT FACILITY
In conjunction with the acquisition of Imperial, the Company, on April 29,1999
entered into a new Senior Bank Credit Facility. The new facility is comprised of
a $50 million Term A Loan, a $50 million Term B Loan and an undrawn $75 million
Revolving Credit Facility. Proceeds were used to finance the Imperial
acquisition, to refinance the Company's outstanding senior bank debt of $36.6
million (resulting in an extraordinary non-cash after tax charge of $1.7
million), and for working capital and other general corporate purposes. The
Company incurred and deferred $2.2 million of costs in obtaining the new
financing which will be deferred and amortized over the term of the related debt
(5-6 years).
At the Company's election, interest rates per annum on the new Term A loan and
the new Revolving Credit Facility 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
0.50% 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 the Term B loan are either (a) LIBOR plus a margin of 2.75%
or (b) ABR plus a margin of 1.75%. Additionally, various fees related to unused
commitments, letters of credit and administration of the facility are incurred
by the Company. Borrowings under the new Senior Bank Credit Facility are
guaranteed by each of the Company's subsidiaries and are secured by the assets
and stock of the Company and its subsidiaries. The Term A Loan and the Revolving
Credit Facility mature on April 29, 2004 and the Term B Loan matures on April
29, 2005.
The new Senior Bank Credit Facility contains various financial covenants
including capital expenditure limitations, minimum leverage and interest
coverage ratios, and minimum net worth. The agreement
59
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
also restricts the Company from paying dividends and making other distributions
in certain circumstances, and limits the ability to repurchase common stock and
prepay the Senior Subordinated Notes.
On April 1, 1999, the Company, through its wholly owned subsidiary, Bostrom
Seating, Inc., issued Industrial Revenue Bonds for $3.1 million which bear
interest at a variable rate (3.35% as of April 1, 1999) and can be redeemed by
the Company at any time. The bonds are secured by a letter of credit issued by
the Company. The bonds have no amortization and mature in 2014. The bonds are
also subject to a weekly "put" provision by the holders of the bonds. In the
event that any or all of the bonds are put to the Company under this provision,
the Company would either refinance such bonds with additional borrowings under
the new Revolving Credit Facility or use available cash on hand.
RAILCAR BUSINESS DISPOSITION
On June 3, 1999, the Company completed the sale of its freight car operations
comprised of three wholly owned subsidiaries - JAC, FCS, and JAIX Leasing to
Rabbit Hill Holdings, Inc. (the Buyer). The Company received consideration
consisting of approximately $101.3 million in cash, contingent additional
consideration of $20 million and a 20 percent equity interest in the Buyer. In
addition, the Buyer assumed substantially all of the liabilities of the freight
car operations, including $14.4 million of debt. The 20 percent equity interest
in the Buyer is comprised of common and preferred stock, some of which is
non-voting. Further, the Company's rights with respect to voting and
transferability of its equity interest are limited and, in particular, the
Company granted a proxy to vote its equity interest to another shareholder of
Buyer under certain circumstances. The sale resulted in an estimated pretax gain
of $46.8 million after consideration of estimated transaction costs of $4.2
million and a related pension curtailment loss of $0.3 million. The after-tax
gain on the disposition of the railcar business of 29.8 million was recorded in
the Company's results for the second quarter of 1999. Approximately $2.5 million
of additional gain was deferred due to the Company's continuing interest in the
Railcar Business. Proceeds from the $20.0 million contingent additional
consideration will be recorded as a gain, if and when collected. Also as a
result of the sale, approximately $80.0 million of senior bank debt was paid
subsequent to the acquisition which resulted in the after-tax write off of $2.2
million of unamortized deferred financing costs.
Effective May 17, 1999, the Company acquired certain assets and liabilities of
EMI Company (EMI), an iron foundry and machining company located in Erie,
Pennsylvania. The Company paid $16.5 million in cash for property, plant and
equipment and a working capital adjustment of approximately $2.2 million. The
acquisition was accounted for under the purchase method of accounting.
60
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
YEAR 2000
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such technology may recognize a year containing "00" as
the year 1900 rather than the year 2000. This issue could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
In 1996, the Company initiated a comprehensive program to ensure that its
various business systems continue to function properly in the year 2000. By the
end of 1998, all critical business systems at each operating unit had been
reviewed, modified if necessary, and tested. Many non-critical business systems
had also been reviewed, modified and tested. All non-critical systems were fully
tested and modified by mid 1999. Assessment of manufacturing processes and
facility management systems was completed by mid 1999.
Additionally, the Company has assessed readiness for the year 2000 key suppliers
and other third parties with whom it has significant business relationships.
Information requests have been distributed and replies have been received. No
material risks have been identified at this time. An ongoing monitoring process
is in place and will continue for the remainder of 1999.
Based upon the accomplishments to date, appropriate contingency plans are being
developed. If however, systems of the Company or its key suppliers or other
third parties with whom it has significant business relationships are not Year
2000 compliant on a timely basis and a contingency plan is not developed on a
timely basis, the Year 2000 issue could have a material adverse effect on the
Company's operations and financial condition.
Beginning in 1996, as part of the Company's ongoing information system
improvement process, its enterprise systems were upgraded, which partially
mitigated the impact of the Year 2000 problem. Excluding the cost of upgrading
the enterprise systems, the pretax cost incurred to date of becoming "Year 2000"
compliant has been approximately $0.6 million and is not expected to be more
than $0.7 million for the total project. Such costs are being funded through
operating cash flows.
The cost of the project and expected outcomes are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer code, and similar uncertainties. Additionally,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
61
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
ENVIRONMENTAL MATTERS
The Company's subsidiaries are currently involved in several matters relating to
the investigation and/or remediation of locations where the subsidiaries have
arranged for the disposal of foundry and other wastes. Such matters include five
situations in which the Company, through its TCI subsidiaries and their
predecessors, have been named or are believed to be potentially responsible
parties ("PRP") in the contamination of the sites. With respect to claims
involving Gunite Corporation ("Gunite"), TCI and Gunite in September 1997
entered into a private-party settlement (the "Settlement") of certain pending
litigation with a prior owner of Gunite, pursuant to which each of TCI and
Gunite and the prior owner withdrew their claims against the other. As of result
of the Settlement, TCI and Gunite will not be responsible for liabilities and
costs related to certain alleged contamination of Gunite's facilities and at
certain off-site properties to the extent arising out of operations of Gunite
prior to the acquisition of Gunite by TCI in September 1987. As of March 31,
1999, based on all of the information currently available to the Company, the
Company has an environmental reserve of $10.7 million which management believes
its adequate to cover future expenditures. This reserve is based on current cost
estimates and does not reduce estimated expenditures to net present value,
although the Company's subsidiaries are not likely to incur costs for most of
the reserved matters until several years in the future. Any cash expenditures
required by the Company or its subsidiaries to comply with applicable
environmental laws and/or to pay for any remediation efforts will not be reduced
or otherwise affected by the existence of the environmental reserve. Due to the
early stage of investigation of many of the sites and potential remediations
referred to above, there are significant uncertainties as to waste quantities
involved, the extent and timing of the remediation which will be required, the
range of acceptable solutions, costs of remediation and the number of
potentially responsible parties contributing to such costs. Based on all of the
information presently available, the Company believes that the environmental
reserve will be adequate to cover its future costs related to the sites
associated with the environmental reserve, and that any additional costs will
not have a material adverse effect on the financial condition or results of
operations of the Company. However, the discovery of additional sites, the
modification of existing laws or regulations, the imposition of joint and
several liability or the uncertainties referred to above could result in such a
material adverse effect.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998 and must be adopted by the Company by the year 2000. This
new pronouncement will require the Company to record derivatives on the balance
sheet as assets or liabilities, measured at fair value and gains or losses
resulting from the changes in the values of those derivatives to be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company is evaluating the standard and does not expect it to
have a material impact on the financial results or condition of the Company
because the use of derivatives at the Company is not significant.
62
<PAGE>
TRANSPORTATION TECHNOLOGIES INDUSTRIES, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
The foregoing outlook contains forward-looking statements that are based on
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from current expectations due to a number
of factors, including general economic conditions; competitive factors and
pricing pressures; shifts in market demand, the performance and needs of
industries served by the Company's businesses; and the risks described from time
to time in the Company's Securities and Exchange Commission reports.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations.
63
