SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-21830
JOHNSTOWN AMERICA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1672791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Michigan Avenue
Suite 1000
Chicago, Illinois 60611
(Address of principal executive offices)
(312) 280-8844
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value NASDAQ National Market System
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X___ No________
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405.)
$150,550,064 as of March 17, 1999.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 17, 1999
----- -----------------------------
Common Stock, $.01 par value 10,025,754
Portions of the following documents are incorporated by reference in Parts II
and III of this Report: (1) Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1998 (Part II); and (2) Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 6, 1999 (Part
III).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Johnstown America Industries, Inc. (the "Company") has 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. For a definition of certain terms used in this Form 10-K, see
"Glossary of Certain Terms" at the end of this Item.
TRUCK COMPONENTS SEGMENT
Gunite Corporation ("Gunite") is a leading North American supplier of
wheel-end systems and components, such as brake drums, disc wheel hubs, spoke
wheels, rotors and automatic slack adjusters to original equipment manufacturers
("OEMs") in the heavy-duty truck industry. Certain wheel-end components are used
for anti-lock braking systems ("ABS"), which have been mandated for all new
trucks since March 1997 and all new trailers since March 1998. In addition to
serving OEMs, Gunite has significant sales to the less cyclical aftermarket.
Brillion Iron Works, Inc. ("Brillion") operates one of the nation's
largest and most versatile iron foundries and is focused on providing high
quality complex castings to customers in a wide range of industries, including
the heavy-duty truck, industrial machinery, automotive and construction
equipment markets. A leader in ductile iron technology, Brillion specializes in
the production of lightweight, intricate thin wall castings. In addition to
providing an important source of high quality castings for Gunite, Brillion has
long-standing relationships with many of its over 225 customers. Generally, once
a foundry begins production of a product, it will continue to manufacture the
item for the product's life cycle. Brillion also manufactures and sells a line
of farm equipment products.
Fabco Automotive Corporation ("Fabco") is a leading supplier of
steerable drive axles, gear boxes and related parts for heavy on/off highway
trucks and utility vehicles.
Bostrom Seating, Inc. ("Bostrom") is a leading manufacturer of air
suspension and static seating systems for the medium and heavy-duty truck and
school bus industries.
FREIGHT CAR SEGMENT
Johnstown America Corporation ("JAC") and Freight Car Services, Inc.
("FCS") are leading manufacturers of railroad freight cars used principally for
hauling coal, intermodal containers (which are used on trucks and ships as well
as on freight cars), highway trailers, automobiles, agricultural and mining
products. They are recognized for their expertise in the development and
manufacture of aluminum freight cars that increase load capacity and
consequently reduce carrier costs. As part of its full-service business
strategy, the Company through JAIX Leasing Company ("JAIX Leasing"), offers its
customers freight car rebuilding services and freight car leasing alternatives.
CORPORATE HISTORY OF THE COMPANY
An investor group led by Thomas M. Begel, the Chairman, President and
Chief Executive Officer of the Company and the former Chairman, President and
Chief Executive Officer of The Pullman Company, formed the Company in 1991 as
the holding company for JAC to acquire substantially all of the assets of the
freight car manufacturing business of Bethlehem Steel Corporation ("Bethlehem"),
a business started in 1901 in Johnstown, Pennsylvania and acquired by Bethlehem
in 1923.
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In July 1993, the Company completed an initial public offering of its
common stock and in February 1994 the Company completed a secondary offering of
its common stock.
In January 1995, the Company purchased Bostrom, a leading manufacturer
of heavy-duty truck seating systems located in Piedmont, Alabama, for
approximately $32.4 million. Bostrom was founded in 1935 in Milwaukee,
Wisconsin.
In January 1995, the Company through FCS acquired a freight car
rebuilding and repair facility in Danville, Illinois for $2.5 million and spent
$2.6 million for refurbishment. FCS started operations in October 1995.
In August 1995, the Company acquired Truck Components Inc. ("TCI"), a
holding company for Gunite, Brillion and Fabco, for approximately $266.1 million
in cash, including the repayment of TCI's existing indebtedness. TCI was formed
in 1987 in order to acquire Gunite and Fabco from Fruehauf Corporation now known
as K-H Corporation ("K-H"). In 1988, TCI acquired Brillion from a group of
investors led by the Robins Group. Gunite was founded in Rockford, Illinois in
1854 as a custom manufacturer of cast iron products. Fabco was founded in 1918
in Oakland, California as a manufacturer of truck components and specialty
vehicles. Brillion was founded in 1890 as a farm equipment manufacturer and
constructed its first iron foundry in 1933.
RECENT EVENT
The Company announced on March 23, 1999 that it has signed a definitive
agreement to acquire Imperial Group, Inc. ("Imperial"), headquartered in
Portland, Tennessee, a leading Tier I and Tier II supplier of body and chassis
components for heavy-duty Class 8 truck manufacturers and transit bus
manufacturers. Imperial fabricates a broad line of nearly 5,500 high-quality
metal products, ranging from bumpers to fenders to fuel tanks. Imperial also
provides a variety of value-added services such as chrome plating, polishing and
assembly of parts and chassis. Revenues in 1998 were over $80 million and are
expected to exceed $100 million in 1999. Production facilities are located in
Tennessee, Texas and Washington, in close proximity to customers' manufacturing
operations. Terms of the agreement were not disclosed. The transaction is
expected to close in late April 1999.
TRUCK COMPONENTS SEGMENT
GUNITE
Gunite is a leading North American supplier of wheel-end components,
such as brake drums, disc wheel hubs, spoke wheels and rotors to OEMs in the
heavy-duty truck industry with QS9000 certification. Gunite also supplies such
products to the aftermarket as well as the medium-duty truck and trailer
markets.
OEMs have increasingly stressed product quality, engineering capability
and customer service, as well as price, in awarding business to suppliers.
Gunite has distinguished itself among wheel-end component manufacturers by
providing its customers with dependable design and testing support and reliable
customer service. Gunite works closely with its customers' product design,
marketing and purchasing departments, including vendor quality certification
personnel. Gunite has received top quality awards from all of its major
customers. Obtaining quality awards is a competitive advantage because a
manufacturer must first go through the OEM's quality certification process
before it can become a qualified supplier.
MARKETS
The truck components industry in which Gunite competes is composed of
two primary markets: (i) the OEM market; and (ii) the vehicle maintenance and
repair sector, also called the replacement market or aftermarket. The OEM market
served by Gunite includes truck manufacturers such as Navistar, Freightliner,
PACCAR, Volvo and Mack trucks. For the twelve months ended December 31, 1998,
approximately 73% of Gunite's total net sales were to OEMs and the remainder was
to the aftermarket.
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OEMs use independent suppliers for the production of most parts and
components. The use of independent suppliers, also known as outsourcing, is
largely a result of the ability of independent suppliers to design, engineer and
manufacture production parts and components at a more competitive cost than the
OEMs. Outsourcing also enables the OEMs to be more responsive to changes in the
marketplace and in technology and to reduce their capital investment. In
general, OEMs increasingly have turned to suppliers to design products, engineer
prototypes and manufacture parts and components for the life of their vehicles.
The OEMs also have sought to minimize the size of their supplier base in order
to improve quality, efficiency and their ability to manage their supplier
network. The success of suppliers in obtaining and maintaining supply
relationships has been a function of four factors: (i) consistent product
quality; (ii) competitive pricing; (iii) technical expertise; and (iv)
responsiveness to changes in the marketplace. The net effect of these changes
has been to increase the opportunities for, as well as the competitive pressures
faced by, independent suppliers to the OEM market.
Sales of Gunite's products to OEMs are affected, to a large extent, by
heavy-duty truck production volume which, in turn, is dependent on general
economic conditions. Historically, heavy-duty truck sales have been cyclical. In
general, Gunite's sales tend to follow the North American Class 8 truck build.
Gunite seeks to increase sales to the OEM market through the
"standardization" process. In this process, Gunite sales representatives call on
OEM purchasers and Gunite's engineers work with OEM engineering departments to
attempt to have Gunite products selected for the OEMs product lines as standard
equipment. Once a product is chosen as standard on a line of trucks, any order
of a truck in that line will come with the standard part unless the end-use
customer specifies a different type of product. If a different product is
specified by an end-user, the end-user is generally required to pay an
additional fee to the OEM. Selection of a Gunite product as standard on a line
of trucks will generally create a steady demand for that product. Because such
demand is a derivative of the sales of the particular truck line, being standard
on certain lines may be more advantageous than being standard on others. Gunite
wheel-end components are currently standard on certain Navistar, Freightliner,
PACCAR, and Mack truck lines.
Aftermarket customers include the service organizations of the OEMs,
parts manufacturers and distributors. Aftermarket sales principally consist of
the sale of brake drums. Sales of Gunite's products to the aftermarket
historically have been less adversely affected by general business conditions
since vehicle owners are more likely to repair vehicles than purchase new ones
during recessionary periods. Aftermarket sales, which are tied to the age of
vehicles in service and the need for replacement parts, have been increasing in
recent years due to Gunite's focus on the aftermarket and the fact that Gunite's
products are offered as standard on more trucks than any of its competitors'
products. Gunite's sales to the aftermarket decreased slightly in 1998 due to
very high OEM demand. Gunite's strategy is to increase sales to the aftermarket,
where margins are higher when compared to the OEM market, by capitalizing on its
reputation as a quality leader in the industry and continuing to focus on
customer service.
PRODUCTS
Gunite supplies the medium- and heavy-duty truck and trailer markets
with a full line of wheel-end components. These products are made by Gunite and
delivered to the customer either as component parts or in assemblies. Gunite
products are utilized in four basic systems: (i) Disc Wheel Hub-and-Brake Drum;
(ii) Spoke Wheel-and-Brake Drum; (iii) Spoke Wheel-and-Brake Rotor; and (iv)
Disc Wheel Hub-and-Brake Rotor. Generally, brake drums and rotors are the
braking devices that work with the vehicle's braking system to stop the vehicle.
Wheel hubs and spoke wheels are the connecting pieces between the brake system
and the axle and upon which the rim and tire are mounted.
Gunite offers a full line of brake drums and rotors for Class 6, 7 and
8 trucks and trailers. The aftermarket opportunities in this product line are
substantial as all brake drums wear with use and eventually need to be replaced.
The timing of such replacement depends on the severity of service.
Gunite manufactures a full line of spoke wheels and disc wheel hubs for
Class 6, 7 and 8 trucks and trailers. Truck builders have recently purchased a
greater percentage of disc wheel hubs in place of spoke wheels due to their
perceived better performance characteristics and ease of maintenance. However,
spoke wheels are still popular for severe duty due to their higher strength.
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Gunite's product line also includes finely-machined hubs and wheels for
ABS, which enhance vehicle safety and have been mandated for all new trucks with
air brakes since March 1997, and all new trailers with air brakes since March
1998. The production of ABS parts constitutes a value-added process, and
additional components and machining are required.
In response to growing concerns by truck fleet operators over brake
adjustment, Gunite introduced its initial automatic slack adjuster product in
1984. The use of automatic slack adjusters reduces maintenance costs, improves
braking performance and minimizes side-to-pull and stopping distance. Slack
adjusters were mandated for all new trucks in October 1994. Gunite believes it
is presently the third largest supplier of automatic slack adjusters to the
heavy-duty trucking industry.
CUSTOMERS
Gunite markets its wheel-end component and assembly products to more
than 400 customers, including most of the major North American medium- and
heavy-duty truck and trailer manufacturers, relying on account managers to
service OEMs and regional sales managers and a nationwide network of
approximately 300 independent distributors to sell to the aftermarket.
Gunite has established close relationships with many of its larger
customers, many of whom have purchased wheel-end systems and components from
Gunite for more than 25 years. Gunite's top five OEM customers in 1998
represented approximately 63% of Gunite's total net sales in 1998, with sales to
Navistar accounting for approximately 30% of Gunite's total net sales in 1998.
Many truck manufacturers require quality certification of their
suppliers, and Gunite undergoes periodic quality surveys by all of its major
customers. Gunite is QS9000 certified and has received numerous quality awards
from its customers, including Ford Motor Company's "Q1," Freightliner's "Master
of Quality" and ISO 9000 equivalent, PACCAR's "Supplier Quality Certification"
and Volvo's ISO 9000 equivalent. The primary criteria on which such quality
certifications and awards are based include quality of product, delivery
performance, inventory control, operator knowledge, condition of facility,
receiving inspection of incoming materials, record maintenance and retention and
equipment gauge controls. Quality certification requirements tend to limit the
number of suppliers which can compete in the safety intensive product lines
manufactured by Gunite and benefits high-quality suppliers such as Gunite.
MANUFACTURING
Gunite has a fully integrated manufacturing operation that combines
high-quality castings from its Rockford, Illinois foundry and from Brillion and
machining capabilities at its Elkhart, Indiana facilities. Most of the
components produced by Gunite are high-volume products that are critical to the
safe operation of the vehicle. As a result, Gunite must combine efficient
production with comprehensive product testing. Implementation of statistical
process controls ("SPC") insures strict control of the manufacturing process and
consistent quality.
The manufacturing process involves melting purchased scrap iron and
steel, adding various alloys and pouring the molten metal into molds made of
sand. After the molten metal is poured into the molds, the castings cool,
solidify and are removed. Once the rough castings have been cleaned, they are
transferred to the Elkhart, Indiana plant for machining through a variety of
automated plant techniques. Both the casting and machining operations are
subject to statistical sampling and charting techniques. Other manufacturing
processes include painting, welding and assembly.
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BRILLION
Brillion operates one of the nation's largest job casting iron
foundries, producing a wide variety of high-quality, complex iron castings for
transportation-related and a wide variety of other markets. Sales to the medium-
and heavy-duty truck and trailer industries accounted for approximately 34% of
Brillion's sales (including sales to Gunite) in 1998.
Brillion also designs, manufactures and markets a range of farm
equipment products for the "behind-the-tractor" market. These pulverizers,
seeders, mulchers, deep tillers and cultivators are marketed nationally under
the Brillion trade name through a nationwide network of 1,050 farm implement
dealers and distributors. Sales of these products were approximately 12% of
Brillion's sales in 1998.
MARKETS
Brillion markets its products on a job-by-job basis to the truck,
automotive and equipment industries. Brillion is one of the leaders in ductile
iron technology, such as complex, thin wall and near net shape castings, in the
markets it serves. In addition to being easily machinable and wear-resistant,
ductile iron has greater strength (an important factor for customers who desire
a lighter finished product) and elasticity than gray iron. As a result of these
superior properties, management expects the demand for ductile iron castings to
increase. This shift towards ductile iron products may replace other products
(such as lighter-weight aluminum products) that gray iron products could not
replace, and is not expected to adversely impact Brillion's business. Gray iron,
the oldest and most widely used cast iron, is readily formed into intricate
shapes which are easily machinable and wear-resistant. For the year 1998,
ductile iron castings represented approximately 64% of Brillion's foundry's
total tons sold, while gray iron represented the balance.
PRODUCTS
As illustrated in the table below, Brillion produces a broad range of
gray and ductile iron castings used in the manufacture of components for the
trucking, automotive and a variety of light and heavy equipment industries.
Currently, Brillion utilizes over 3,700 patterns to produce castings that range
in weight from one pound to nearly 350 pounds, with the majority below 100
pounds. Castings are made to the specific requirements of each customer. The
customer consults with Brillion to specify such important considerations as
physical properties, surface finish, dimensional accuracy and methods of
inspection for each casting.
FOUNDRY PRODUCTS
* Automotive and Truck Brackets * Hydraulic-Valve Bodies
* Bearing Caps * Manifolds
* Brake Calipers and Adapters * Pressure Plates
* Clutch Housings * Small Engine Camshafts and Crankshafts
* Farm Machinery Castings * Steering Housings
* Flywheel Housings * Transmission Cases
* Flywheels * Wheel Hubs
Brillion markets its castings, directly and indirectly, to OEMs in
various industrial markets. The table below provides a list of representative
end products in which Brillion's castings are used.
END PRODUCTS IN WHICH BRILLION CASTINGS ARE USED
* Air-Cooled Engines * Industrial Lift Trucks
* Automobiles and Light Trucks * Lawn and Garden Equipment
* Construction Equipment * Locomotive Engines
* Diesel Engines * Marine Engines
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* Farm Equipment * Medium- and Heavy-Duty Trucks
* Fluid Power Pumps and Motors * Oil and Gas Field Machinery and Equipment
* Hardware * Pumps and Pumping Equipment
* High-speed Drives and Gears * Small Tools
* Home Shop Tools
CUSTOMERS
Over 99% of Brillion's net foundry sales in 1998 were to existing
customers. Once production begins on a product, the same foundry will generally
manufacture that product for the product's life cycle.
Brillion has over 225 foundry customers, a majority of which are
located in the Midwest, East and Southeast. Brillion's top five unaffiliated
customers accounted for approximately 33% of Brillion's 1998 total net sales.
Brillion also serves as an important source of castings for Gunite, with sales
to Gunite representing approximately 15% of Brillion's total net sales in 1998.
Brillion works closely with customers in order to insure that castings meet all
required specifications, including machinability, dimensional accuracy and
overall quality. Brillion's engineers work with customers from concept to market
with respect to new products. Brillion's strategy is to focus on the market for
higher margin castings, as well as for products requiring new, innovative
castings designs. Unlike Gunite, Brillion's products are primarily designed by
its customers, and thus the product designs are proprietary to the customers.
Brillion has enjoyed long-term, stable relationships with the majority
of its customers and is certified as a preferred supplier by most of its
customers. Brillion's quality system is certified to ISO 9002 and QS 9000
quality standards and Brillion has received Caterpillar's "Certified Supplier
Status" and was approved by Ford's "Technical Service Capability Survey." The
primary criteria on which such quality certifications and awards are based
include quality of product, delivery performance, inventory control, operator
knowledge, condition of facility, receiving inspection of incoming materials,
record maintenance and retention and equipment gauge controls. A quality
certification is required by most sophisticated purchasers, thereby enhancing
the competitive advantage of suppliers like Brillion that have achieved a
quality certification.
MANUFACTURING
In general, Brillion's customers specify the properties of their
castings, such as hardness, strength and dimensions, and Brillion determines how
best to meet those specifications. Brillion engineers work with its customers to
develop an efficient manufacturing process. Brillion constantly tests and
monitors the manufacturing process in order to maintain the quality and
consistency of its castings. The manufacturing process involves melting iron
(which has been internally recycled), steel scrap and pig iron, adding various
alloys and pouring the molten metal into molds made primarily of sand. Most of
the castings manufactured by Brillion must meet strict dimensional control
requirements specified by its customers. As a result, Brillion uses SPC in every
phase of the production process, and all employees are given extensive SPC
training. The Company believes that Brillion has the most advanced core
capabilities in the industry, allowing for efficient and environmentally
superior core processes that are necessary for the production of quality,
complex thin-wall and lighter weight products. Production lines are designed to
accommodate a wide variety of products and volumes. In addition, Brillion's
multiple production lines provide flexibility to move production from line to
line to meet customer scheduling changes and requirements.
BOSTROM
Bostrom designs, manufactures and markets a full line of air suspension
and static seating systems primarily for the heavy-duty truck market. Bostrom is
ISO 9001 and QS9000 certified.
MARKETS
Bostrom is a leading manufacturer of seating systems for the heavy-duty
truck industry. Bostrom's products are sold primarily to the OEM heavy-duty
truck market as well as to the aftermarket. Bostrom also supplies its line of
seating systems to the medium-duty truck and school bus markets, as well as to a
number of specialty markets. Bostrom's seats are offered as standard or as an
option by all major North American heavy-duty truck manufacturers.
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CUSTOMERS
Bostrom's customers include all of the major North American heavy-duty
truck manufacturers. Bostrom's top five customers accounted for approximately
83% of Bostrom's 1998 net sales, with Freightliner accounting for approximately
39% of such sales.
MANUFACTURING
Bostrom's manufacturing facility is located in Piedmont, Alabama. For a
number of its OEM customers, Bostrom ships its seats to line-setting facilities
which it has established near certain OEM plants to provide just-in-time
inventory of seats to the assembly line in the order that the seats will be
used.
FABCO
Fabco designs, manufactures and markets steerable drive axles, gear
boxes and related parts for the North American on/off-road medium- and
heavy-duty truck markets. Fabco is QS9000 certified.
MARKETS
Fabco's products are sold primarily to the OEM market for use in the
construction, military, mining and municipal service markets. Fabco's axles and
gear boxes are offered as standard or as an option by all major North American
heavy-duty truck manufacturers, and Fabco is a leading supplier of these items
in the North American heavy-duty truck market.
PRODUCTS
Fabco supplies a full line of steerable drive axles for the North
American on/off-road medium- and heavy-duty truck and specialty vehicle markets.
Fabco's drive axles are rated at capacities ranging from 12,000 to 23,000 pounds
to serve Class 6, 7 and 8 trucks. End-users of Fabco's axles require ease of
steering and high speed driving for on-highway use while demanding
maneuverability and functionality for off-highway use. Fabco's axles are
designed to increase durability and maintenance accessibility. Fabco believes
that the ease of operating and servicing Fabco's products are competitive
advantages that lead to ongoing demand for steerable drive axles.
Fabco also manufactures a wide range of medium- and heavy-duty gear
boxes. Gear boxes are used by vehicles that operate auxiliary equipment in the
construction, oil and gas field services and utility industries, among others.
Fabco also sells its products in the aftermarket. It supplies
replacement parts for all of its products to OEMs and, in some cases, directly
to end users. Service parts are shipped directly from Fabco's plant in Oakland,
California to any domestic or international location directed by the customer.
Fabco's quick turnaround of parts orders minimizes the need for its customers to
maintain their own parts inventory.
CUSTOMERS
Fabco's customers include most of the major North American on/off road
medium- and heavy-duty truck and specialty vehicle manufacturers. The majority
of Fabco's sales are made to OEM customers with which it enjoys relationships of
over 25 years. Sales during 1998 to Fabco's five largest customers accounted for
approximately 74% of Fabco's total net sales, with Navistar accounting for
approximately 50% of such sales.
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MANUFACTURING
Fabco has gained a strong reputation for its engineering capabilities
in designing and manufacturing its products for the on/off road medium- and
heavy-duty truck and specialty vehicle markets. The Company believes that Fabco
is the only manufacturer which has products that are standard or available as an
option on all major OEMs Class 6, 7 and 8 all-wheel drive truck models produced
for the commercial truck market, and that, as a result, Fabco's broad range of
adaptable products are considered the industry standard due to the variety of
their configurations and tolerances. Fabco believes that the technical
backgrounds of its sales and marketing employees contribute to the successful
marketing of Fabco's products to the heavy-duty vehicle manufacturers.
FREIGHT CAR SEGMENT
The Company is a leading manufacturer of railroad freight cars used
principally for hauling coal, intermodal containers (which are used on trucks
and ships as well as on freight cars), highway trailers, automobiles,
agricultural and mining products. As part of its full-service business strategy,
the Company offers its customers freight car rebuilding services and freight car
leasing alternatives.
PRODUCTS AND SERVICES
The Company participates in the following freight car market segments:
new car manufacturing; rebuild services; sales of freight car kits and parts;
and freight car leasing.
NEW CAR MANUFACTURING. The Company's freight car operations offer a
range of car types in an effort to take advantage of industry trends and market
opportunities, particularly in the development of aluminum freight cars used in
the shipment of bulk commodities. The Company's freight car operations
manufacture the following types of freight cars:
GONDOLAS. The BethGon Coalporter(R) is a patented twin tub car
designed for the coal and utility industries. The BethGon was designed to carry
more coal with greater stability and remains the dominant type of car for
hauling coal, particularly for hauling low-sulfur coal from the western United
States. Although the BethGon can be made in either steel or aluminum, most of
the BethGons delivered in the last few years have been made of aluminum. In
1994, a new smooth-sided Aeroflo Aluminum BethGon was introduced which offers
carriers both fuel savings and added cubic carrying capacity. Since 1996,
several design variations have been developed to offer customers options for
their specific needs. In 1998, 54% of the new cars manufactured were BethGons
vs. 61% in 1997.
OPEN HOPPERS. To expand its product line to service the entire
coal market, the Company's freight car operations began manufacturing aluminum
open top hoppers in 1994. The Company's freight car operations have the
capability to produce both aluminum and steel open top hoppers and in 1996
developed and introduced an aluminum rapid discharge coal model (the AutoFlood
II(TM)) that provides 18 tons more capacity per load than conventional steel
automatic discharge cars. The aluminum AutoFlood II(TM) coal car, with its
patented automatic discharge system providing a more efficient method for the
rapid discharge of coal, has been well received in the marketplace. The
Company's freight car operations have been manufacturing an increasing quantity
of open top hopper cars and believes that demand for such cars will result in
cars representing a larger share of its product mix in the future. In 1998, 24%
of the new cars manufactured were open top hopper cars vs. 35% in 1997.
COVERED HOPPERS. Covered hopper cars are constructed of steel
or aluminum and are used to haul agricultural, chemical and mineral products. In
1994, the Company's freight car operations introduced the Grainporter 2000(TM),
the first aluminum covered hopper car in its size range available in high volume
production, that is designed primarily for high volume transportation of grain.
The Company's freight car operations' first commercial production of the
Grainporter 2000(TM) began in 1995.
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FLAT CARS. Flat cars, equipped with racks, are used to
transport automobiles and other light vehicles. A significant number of flat
cars were delivered by JAC in 1998 (19% of new cars manufactured in 1998) and
JAC expects to deliver a significant number of flat cars in 1999.
INTERMODAL CARS. Intermodal cars are primarily used for moving
intermodal containers and trailers. As a result of a substantial build-up of
intermodal cars in the early 1990s, the market for intermodal cars began
declining in 1995 and continued to decline through mid-1997. As a result, there
were a very limited number of intermodal cars delivered in 1996 and 1997. Orders
for intermodal cars began to increase in 1998 but not for the car types produced
by JAC.
SPECIALTY CARS. The Company's freight car operations
manufacture other cars for the special needs of a particular industry or
customer, including a mill gondola car, which is used to haul scrap, an open
hopper or gondola wood chip car, which is used to haul wood chips, a waste
hauling car, which is used to haul contaminated industrial sludge, and an ore
car, which is used by railroads to transport taconite pellets and iron ore.
REBUILD SERVICES. Freight cars are typically rebuilt once after 15 to
20 years in use in order to extend their life. To pursue what the Company
believes to be growing opportunities to service the aging North American freight
car fleet, the Company offers rebuild services.
CAR KITS AND PARTS. JAC sells kits containing the parts necessary to
build (or rebuild) a particular car to rebuilders and others, such as railroads
with car building but not design, engineering and fabrication capability. In
1998, a significant number of covered hopper car kits were delivered to Brazil
for final assembly and delivery to a large Brazilian railroad. JAC also markets
a variety of fabricated parts to freight car rebuilders who do not have
fabrication capabilities.
LEASING. To meet the needs of its customers, the Company entered the
freight car leasing business in 1994. Through JAIX Leasing, the Company provides
operating lease alternatives to customers on new and rebuilt cars. As of
December 31, 1998, the Company owned 1,041 railcars in its operating lease
fleet, representing a total investment of approximately $19.5 million, $9.2
million of which was provided through limited-recourse borrowings.
MANUFACTURING
JAC's manufacturing operations are conducted primarily through two
facilities located in Johnstown, Pennsylvania and FCS' manufacturing operations
are conducted at its Danville, Illinois facility.
CUSTOMERS
The Company has maintained long-term relationships with major
purchasers of freight cars. Long-term customers are particularly important in
the freight car industry given the limited number of buyers and sellers of
freight cars. Such customers include railroads, utilities, grain shippers,
leasing companies and major construction and industrial companies.
The large average size of orders often results in a small number of
customers representing a significant portion of the Company's freight car
operation's revenues in a given year. In 1998, the top five customers accounted
for approximately 48% of the Company's revenues from its freight car operations,
with TTX Company representing approximately 18% of the freight car segments 1998
revenues.
GENERAL
COMPETITION
The Company operates in highly competitive markets. No single
manufacturer competes with respect to all products manufactured and sold by the
Company in the heavy-duty truck market, and the degree of competition varies
with different products. In this market the Company competes on the basis of
price, its manufacturing and distribution capabilities and product quality.
Gunite's primary competitors in the wheel end component market for Class 6, 7
and 8 trucks and trailers are Dayton Walther Corporation and Webb Wheel
Products. Brillion's major competitors include 10 to 12 foundries operating in
the Midwest and Southern regions, including Waupaca Foundry, Inc., Grede
Foundries, Inc., Western Foundry, Neenah Foundry Company, Intermet Corporation
and Citation Corporation. Bostrom's principal competitors include National
Seating as well as a number of smaller seating manufacturers. Fabco's primary
competitor in the steerable drive axle market for the on/off-road medium- and
heavy-duty truck and specialty vehicles is Meritor Corporation (formerly
Rockwell Corporation.)
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Competition in the freight car manufacturing business is based on type
of product, reputation for quality, price, reliability of delivery and customer
service and support. The Company's freight car operation's principal competitors
in this segment are Trinity Industries, Inc. ("Trinity"), Thrall Car
Manufacturing Co. and Gunderson Inc. Although there are presently seven freight
car manufacturers in North America, two of the seven manufacture only tank cars
and plastic pellet cars, market segments in which the Company does not currently
participate. Only Trinity competes in all of the Company's freight car market
segments. Although Trinity is prohibited from marketing, manufacturing, using,
selling or leasing its infringing Aluminator II coal gondola freight car,
Trinity has competed, and JAC expects that it will continue to compete, with JAC
in the sale of coal gondolas.
BACKLOG
As of December 31, 1998, freight car operations had a backlog of firm
orders for 9,462 new and rebuilt freight cars with an aggregate sales price of
approximately $530.4 million, as compared to a backlog of firm orders for 4,201
new and rebuilt freight cars with an aggregate sales price of approximately $220
million as of December 31, 1997. Due to the large size of freight car orders and
variations in the mix of freight cars, the size of the Company's freight car
operation's backlog at the end of any given period may fluctuate significantly.
Due to short production turnaround times from order to delivery resulting from
the just-in-time inventory systems utilized by many of its customers, the
Company's truck components and other castings operations do not normally carry a
material amount of backlog orders. A number of the Company's sales contracts in
this segment are made pursuant to purchase orders and releases which are subject
to change or cancellation by the customer.
SUPPLIERS AND RAW MATERIALS
Between 70% and 80% of a freight car's costs relate to purchased
specialty components such as wheels, axles and brakes and raw materials such as
aluminum and steel. Costs for specialty components and raw materials generally
are fixed at the time a freight car order is accepted.
The major raw material for the Company's foundry operations is steel
scrap, which is purchased from various sources. The Company has no long-term
contractual commitments with any scrap suppliers, and does not anticipate any
difficulty in obtaining scrap because of the large number of potential suppliers
and its position as a major purchaser. Increases in steel scrap prices are
passed through to customers by means of a fluctuating surcharge, which is
calculated and adjusted on a monthly or quarterly basis. Other major raw
materials, such as silicon sand, binders, sand additives and coated sand, are
purchased from multiple sources. Electricity, coke and natural gas, the primary
energy sources for melting operations, are in adequate supply and reasonably
priced.
LABOR RELATIONS AND EMPLOYEES
At December 31, 1998, the Company had approximately 3,890 employees. Of
these, approximately 690 are salaried employees and the balance are paid on an
hourly basis. Approximately 2,815 or about 72% of all employees are members of
unions. The Company has collective bargaining agreements with several unions
including the United Steelworkers of America, the United Autoworkers, the
Brotherhood of Teamsters, the United Paperworkers International Union, the
Patternmakers League of North America and the International Association of
Machinists and Aerospace Workers. Each of the Company's unionized facilities has
a separate contract with the union that represents the workers employed at such
facility including the following contracts entered into in 1998 and early 1999:
(1) JAC's four-year contract with the United Steelworkers of America entered
into in January 1998 (retroactive to October 1997); (2) Gunite's three-year
contract with the United Autoworkers entered into in May 1998; and (3) FCS's
five-year contract with the United Autoworkers entered into in February 1999.
Such contracts expire at various times over the next few years, with the
following contracts expiring in 1999: (1) Brillion's contract with the United
Paperworkers International Union on July 1, 1999; (2) Fabco's contract with the
International Association of Machinists and Aerospace Workers on September 1,
1999; (3) Gunite's contract with the International Brotherhood of Teamsters,
Chaffeurs, Warehousemen and Helpers of America covering employees at Gunite's
Elkhart Plant #1 on June 27, 1999; and (4) Gunite's contract with the
International Brotherhood of Teamsters, Chaffeurs, Warehousemen and Helpers of
America covering employees at Gunite's Elkhart Plant #2 on September 26, 1999.
While the Company considers its relations with its employees to be good at each
of the Company's subsidiaries, there can be no assurance that the Company will
reach new agreements upon expiration of such union contracts or that the failure
to reach new agreements will not have a material adverse effect on the financial
condition or results of operations of the Company.
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REGULATION
The Federal Railroad Administration ("FRA") administers and enforces
federal laws and regulations relating to railroad safety. These regulations
govern equipment and safety appliance standards for freight cars and other rail
equipment used in interstate commerce. The Association of American Railroads
("AAR") also promulgates a wide variety of rules and regulations governing
safety and design of equipment, relationships among railroads with respect to
freight cars in interchange and other matters. The AAR also certifies freight
car buildings and component manufacturers that provide equipment for use on
railroads in the United States. New products generally must undergo AAR testing
and approval processes. As a result of these regulations, the Company must
maintain certain certifications with the AAR as a freight car manufacturer, and
products sold by the Company must meet AAR and FRA standards.
PATENTS AND TRADEMARKS
The Company has numerous United States and foreign patents and pending
applications, registered trademarks and trade names. While the existence of a
patent is prima facie evidence of its validity, the Company cannot assure that
any of its patents will not be challenged nor can it predict the outcome of any
such challenge.
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS
The Company's subsidiaries are subject to comprehensive and frequently
changing federal, state and local environmental laws and regulations, including
those governing emissions of air pollutants, discharges of wastewater and storm
waters, and the disposal of non-hazardous and hazardous waste. Many of these
laws authorize the imposition of civil and criminal sanctions upon corporations
that fail to comply with the statutory or regulatory requirements. In 1998, 1997
and 1996, TCI's capital expenditures for compliance with environmental
requirements were approximately $2.1 million, $0.7 million and $0.4 million,
respectively. These figures do not include routine operational compliance costs,
such as the costs for the disposal of hazardous and non-hazardous solid waste,
which were approximately $5.7 million, $5.3 million and $4.1 million in 1998,
1997 and 1996, respectively. TCI's subsidiaries have budgeted $2.0 million for
environmentally related capital expenditures in 1999. The Company's capital
expenditures for compliance with environmental requirements and for routine
operational compliance costs, such as the costs for the disposal of hazardous
and non-hazardous solid waste, for the facilities located in Johnstown,
Pennsylvania, Piedmont, Alabama and Danville, Illinois are not material. Other
than for certain immaterial expenditures, the Company's subsidiaries (other than
TCI) have not budgeted funds for capital expenditures in 1999 to comply with
environmental laws.
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Pursuant to a National Pollutant Discharge Elimination System ("NPDES")
permit, Gunite previously discharged noncontact cooling water from its Rockford
facility to a pond (the "Rockford Pond"), formerly owned by Gunite and by a
prior owner of Gunite that is adjacent to the Gunite plant. Gunite also
periodically had accidental, unpermitted discharges of process wastewater to the
Rockford Pond, which Gunite has reported to the Illinois Environmental
Protection Agency ("IEPA"). In addition, Gunite had not received express
authorization from the current or immediately preceding owner of the Rockford
Pond for any of the discharges. In order for Gunite to eliminate all discharges,
the City of Rockford obtained an easement to allow Gunite to construct a
conveyance that directs discharges of noncontact cooling water and storm water
from the Gunite facility to the Rock River, and the IEPA has issued a modified
NPDES permit to Gunite, substituting the Rock River as the outfall for Gunite's
discharge. The conveyance was completed in February 1995. The modified NPDES
permit contains a stringent limit for the discharge of total residual chlorine.
Gunite estimates that the capital cost for installing a treatment system
allowing its discharges to comply with this limit could be approximately $0.2
million, although Gunite is exploring a less expensive treatment system. Gunite
has appealed to the Illinois Pollution Control Board to remove or modify the
chlorine limit from the permit (Gunite Corp. v. Illinois Environmental
Protection Agency, PCB 94-382, filed December 12, 1994). The cost to Gunite of
constructing the conveyance to the river (not including any environmental
remediation costs that might be incurred in connection with historical
discharges to the Rockford Pond) was approximately $0.3 million.
The Wisconsin Department of Natural Resources ("WDNR") has notified
Brillion that it is deemed to be in compliance with the Wisconsin air toxics
program, pending a review of a compliance plan submitted by Brillion in
September 1993, although Brillion is currently exceeding Wisconsin air emissions
limits for benzene and other air toxic compounds. Brillion's submittal included
a plan for compliance with the emission limitations for arsenic, barium, cadmium
and formaldehyde, and a request for a variance with respect to its emissions of
benzene. The Company believes that compliance with Wisconsin's air toxics
regulations apparently is an industry-wide problem, and WDNR is developing
compliance standards for the industry as a whole. Although the most recent state
inspection (November 1994) found Brillion to be in compliance with all Wisconsin
air regulations, it is likely that as Brillion continues its review of its
operations, it may find that certain of its emission sources will require
further air pollution controls. In addition, further controls may be required
under the Federal Clean Air Act regulations that are currently scheduled to be
promulgated in the year 2000.
The Company's subsidiaries' manufacturing plants are large and complex
facilities. The environmental regulations to which these facilities are subject
are numerous, complicated, often ambiguous and constantly changing. It is
possible, therefore, that in addition to the instances of noncompliance
discussed above, there are other areas in which the facilities are not currently
in compliance with environmental laws and regulations. The Company does not
currently believe that any such noncompliance is likely to have a material
adverse effect on the Company's business or financial results. However, there
can be no guarantee that the Company will not be required to make substantial
additional expenditures to remain in or achieve compliance in the future.
REMEDIATION MATTERS
In addition to environmental laws that regulate the Company's
subsidiaries' ongoing operations, the subsidiaries also are subject to
environmental remediation liability. Under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and analogous state laws,
certain persons may be liable as a result of the release or threatened release
of hazardous substances into the environment. Such persons include the current
owner or operator of property where such release or threatened releases have
occurred, any persons who owned or operated such property during the time
hazardous substances were disposed of at such property, and persons who arranged
for the disposal of hazardous substances at such property. Liability under
CERCLA is strict and, in most cases, joint and several, meaning that any
responsible party could be held liable for all of the costs incurred or to be
incurred in investigating and remediating a release or threatened release of
hazardous substances, although liability at most CERCLA (and similar) sites is
shared among all of the solvent potentially responsible parties ("PRPs"). The
liability of PRPs is typically determined by the cost of the investigation and
remediation, the amount and toxicity of hazardous substances contributed by each
PRP and the number of solvent PRPs.
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Under CERCLA, sites may be listed for priority cleanup by being placed
on the National Priorities List ("NPL"). NPL sites are sites at which the
federal government may spend monies from the "Superfund" for long-term
remediation and then seek reimbursement from liable parties. A much more
extensive list compiled pursuant to CERCLA, known as the Comprehensive
Environmental Response, Compensation, and Liability Act Information System
("CERCLIS"), includes sites that have been, or are to be, evaluated and "scored"
by the EPA for possible future inclusion on the NPL.
GUNITE. With respect to claims involving Gunite, TCI and Gunite in
September 1997 entered into a private-party settlement (the "Settlement") of
certain pending litigation with a prior owner of Gunite, pursuant to which each
of TCI and Gunite and the prior owner withdrew their claims against each other.
As a result of the Settlement, TCI and Gunite will not be responsible for
liabilities and costs related to certain alleged contamination at Gunite's
facilities and at certain off-site properties to the extent arising out of
operations of Gunite prior to the acquisition of Gunite by TCI in September
1987.
Gunite is a PRP at three NPL sites, the Interstate Pollution Control
("IPC") site (which is adjacent to Gunite's Rockford facility), the
M.I.G./Dewane Landfill located in Boone County, Illinois and the Southeast
Rockford Groundwater site located in Rockford, Illinois. Gunite's connection to
the IPC, the M.I.G./Dewane and Southeast Rockford sites stem from activities
that took place prior to the acquisition of Gunite by TCI in 1987. Pursuant to
the Settlement, TCI and Gunite will not be responsible for liabilities and costs
related to these sites to the extent arising from Gunite's waste disposals prior
to the acquisition of Gunite by TCI in 1987.
As to the IPC site, the Company believes that the waste disposed of at
the IPC site was disposed of prior to the acquisition of Gunite by TCI in 1987
and, as a result of the Settlement, TCI and Gunite will not be responsible for
such liabilities and costs.
As to the M.I.G./Dewane Landfill site, the Company believes that the
waste disposed of at the M.I.G./Dewane Landfill site was disposed of prior to
the acquisition of Gunite by TCI in 1987 and, as a result of the Settlement, TCI
and Gunite will not be responsible for such liabilities and costs.
The EPA and the City of Rockford have reportedly incurred approximately
$11 million in response costs to date in connection with the Southeast Rockford
Groundwater NPL Site, which is alleged to be down-gradient of the IPC site, but
which Gunite believes, based on data collected during the investigation of the
IPC site, is cross- or up-gradient. In 1996, the City of Rockford demanded that
Gunite pay $1 million in response costs which the City allegedly has incurred at
the site area 7, commonly known as the Ekberg Park area, within the Southeast
Rockford Groundwater NPL Site, based on alleged trans-shipment of Gunite's waste
to the Ekberg Park area. In September 1998, Gunite and the City of Rockford
reached a settlement of the City's claims against Gunite concerning the
Southeast Rockford site, including Area 7 thereof, Ekberg Park. In exchange for
Gunite's settlement payment (funded principally by the former owner of Gunite
pursuant to the Settlement), the City released all of its claims against Gunite
at the site. Further, the City and the United States allowed Gunite to be named
as an added beneficiary of the United States' covenant not to sue the City in
connection with the Southeast Rockford site. The United States' covenant not to
sue was provided in the consent decree entered on January 25, 1999 by the
federal court in the case of UNITED STATES V. CITY OF ROCKFORD, Case No.
98-C-50026. With the recent entry of this consent decree, all pending claims
against Gunite at the Southeast Rockford site have been resolved.
Gunite also may be subject to liabilities at other NPL sites or other
locations as a result of its past disposal of hazardous substances.
As a result of historical operations at the Gunite plant in Rockford,
there are areas on-site that have been affected by the disposal or spillage of
raw materials or wastes. Gunite does not know at this time whether any cleanup
or remediation of such areas will be required by any state, local or federal
agency, although it is possible that such areas may be included in the IPC site
remediation. The Company believes that, to the extent on-site remediation or
cleanup is required, most of the alleged contamination would be attributable to
operations of Gunite prior to the acquisition of Gunite by TCI in 1987 and, as a
result of the Settlement, TCI and Gunite will not be responsible for most of
such liabilities and costs.
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BRILLION. Brillion is likely to incur investigation and/or remediation
costs in connection with two landfills that it used to dispose of foundry
wastes. These landfills are the Brillion Iron Works Landfill, where Brillion was
the operator and sole generator of waste from 1980 through 1989, and the
adjacent City of Brillion Landfill, where Brillion may be a significant
generator of waste. Brillion disposed of plant trash at the City landfill from
1970 to 1975 and also disposed of foundry wastes in this landfill from 1976 to
1980. Both of these landfills are on the CERCLIS and the Wisconsin Remedial
Response Site list, and both have been scored by the WDNR and both have been
listed on the State's Hazard Ranking List as being above the threshold for
potential State remedial action. Although it is not possible to predict the
exact timing or amount of the expenditures that will be made in future years to
remediate these sites, TCI expects that investigation and/or remediation will be
required and that such expenditures could be substantial.
Further, Brillion has already incurred cleanup costs at the Lemberger
landfill, an NPL site in Whitelaw, Wisconsin, pursuant to a consent decree
entered in 1997 in UNITED STATES V. ACE, ET AL., Case No. 96-CV-0739. Additional
remediation of areas adjacent to the Lemberger Landfill may be required by the
United States and the State of Wisconsin.
Brillion has also disposed of foundry wastes at many other sites in the
Brillion area, a few of which are on the CERCLIS and the Wisconsin Remedial
Response Site list. It is possible that Brillion will incur remedial response
costs at some or all of these sites, although at this date, Brillion is not
aware of any action by federal or state regulators or private parties to
investigate or remediate any of these other sites.
In 1992, Brillion excavated two underground diesel fuel storage tanks
which were discovered to have leaked diesel fuel into surrounding soil as a
result of a 1978 spill. Brillion has removed approximately 300 cubic yards of
contaminated fill in connection with this incident. Although the WDNR initially
indicated that a deed restriction would be sufficient for managing this issue,
Brillion has not at this date been able to reach a satisfactory arrangement with
the owners of the Brillion property. Accordingly, Brillion expects to undertake
additional soil and groundwater analysis in connection with this matter.
As the Brillion facility has been in operation for many years, it is
possible that there are areas at this facility, other than the underground
storage tanks, that have been adversely affected by the handling of foundry
process materials and wastes. Brillion does not know at this time whether any
remediation of any such areas will be required by any state, local or federal
agency.
Brillion was the Robins Group (consisting of the Robins Family Trust,
Karl F. Gabler and First City Securities) entity that acquired a Beatrice
subsidiary (also named Brillion) from Beatrice in 1984. In 1993, the Company
notified Beatrice of its claims for indemnification against Beatrice with
respect to most of its disposal sites to the extent that liabilities arise from
incidents occurring prior to December 31, 1984. Beatrice disputed this
interpretation and later notified Brillion that it will not honor any claims for
indemnification (including the one claim for breach of representation concerning
the Lemberger Landfill made within two years after the sale). In December 1997,
TCI and Brillion filed suit against Beatrice, and its parent, ConAgra, Inc., for
recovery of costs expended at the Lemberger Landfill, and for declaratory relief
with respect to the cleanup of the Lemberger Landfill and adjacent areas. In
this suit (BRILLION, ET AL. V. CONAGRA, ET AL., Case No. 97-L-15968), the court
currently has under advisement Brillion's motion for judgment on the pleadings
and defendants' motion to dismiss, with a ruling expected during the first
quarter of 1999. Brillion was also notified by the Robins Group (which sold
Brillion to TCI) that it will not honor any claims for indemnification. On May
25, 1994, TCI and Brillion filed suit against Beatrice and the Robins Group for
recovery of costs expended at sites other than the Lemberger Landfill and for
declaratory and injunctive relief with respect to various environmental matters
pursuant to the indemnification provisions of the respective stock purchase
agreements and other causes of action, including CERCLA (TRUCK COMPONENTS INC.,
ET AL. V. BEATRICE COMPANY ET AL., Northern District of Illinois). On June 10,
1994, TCI and Brillion filed a first amended complaint in this lawsuit to add
Hunt-Wesson, Inc., a corporate successor of Beatrice that may be a successor to
Beatrice's liabilities in these matters. In 1996, the district court entered
judgment against Brillion, holding that Beatrice and the Robins Group did not
owe any indemnity for Brillion's expenses at the sites (excepting the Lemberger
Landfill from this holding), and that Brillion owed Karl F. Gabler $0.2 million
pursuant to a 1987 indemnity contract. On May 7, 1998, the United States Court
of Appeals for the Seventh Circuit affirmed the 1996 judgment of the district
court and, in June 1998, denied Brillion's petition for rehearing and issued its
final mandate of affirmance. TCI and Brillion have satisfied the counterclaim
judgment of $0.2 million.
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POTENTIAL COSTS. As of December 31, 1998, based on all the information
currently available, the Company had an environmental reserve in the amount of
$10.7 million for estimated future costs related to potential environmental
investigation and remediation liabilities with respect to certain currently
known matters. The environmental reserve is principally related to potential
remediation liability at various off-site locations and, to a lesser degree, to
potential remediation liability at Gunite's, Rockford, Illinois, and Brillion's,
Brillion, Wisconsin manufacturing facilities. This reserve is based on current
cost estimates and does not reduce estimated expenditures to net present value.
Further, the estimated reserve takes into consideration the number of other PRPs
at each site, the alleged volume of waste contributed by other PRPs at each
site, and the identity and financial position of such parties in light of the
joint and several nature of the liability, but it does not take into account
possible insurance coverage or other similar indemnification or reimbursement.
Based upon all currently available information, no reserve has been established
with respect to potential environmental obligations of JAC or Bostrom and an
immaterial reserve has been established at FCS. Because many of the matters
described above, however, are at the early stages in their respective
investigations, there can be no assurance that the amounts ultimately expended
to address all of these matters or to address other matters not yet known to be
in existence will not exceed the amounts allocated in the environmental reserve.
Accordingly, it may be necessary to establish additional reserves for
environmental liabilities in the future.
Any cash expenditures required by the Company to comply with applicable
environmental laws and/or to pay for any remediation efforts will not be reduced
or otherwise affected by the existence of the environmental reserve. Management
believes, based on its evaluation of the various matters described above,
including its experience with such matters to date, the time period over which
it believes costs for such matters are likely to be incurred by the Company, and
the existence of the various indemnifications described above, that any costs
the Company ultimately will incur for such matters are not reasonably likely to
have a material adverse effect on the Company's business or financial results.
However, given the early stage of many of the matters, there can be no assurance
that one or more of these matters (or matters which have not yet been
identified) will not have such an effect. The Company currently anticipates
spending approximately $0.8 million per year in 1999 through 2003 for monitoring
the various environmental sites associated with the environmental reserve,
including attorney and consultant costs for and negotiations with regulators and
other PRPs, and payment of remedial investigation costs. The Company expects to
fund such expenditures with the cash flow generated from its operations and
amounts available under its revolving credit facility. These sites are generally
in the early investigatory stages of the remediation process and thus it is
anticipated that significant cash payments for remediation will not be incurred
for at least several years. After the evaluation and investigation period, the
investigation and remediation costs will likely increase because the actual
remediation of the various environmental sites associated with the environmental
reserve will likely be under way. In addition, it is possible that the timing of
any necessary expenditures could be accelerated.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive
officers of the Company:
NAME AGE POSITION
---- --- --------
Thomas M. Begel 56 Chairman of the Board, President and Chief
Executive Officer of the Company
Andrew M. Weller 52 Executive Vice President and Chief
Financial Officer and Director of the Company
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John E. Carroll, Jr. 57 President and Chief Executive Officer of
Johnstown America Corporation and Freight Car
Services, Inc.
James D. Cirar 52 Senior Vice President of the Company and
Chairman of Johnstown America Corporation
and Freight Car Services, Inc.
Thomas W. Cook 61 Senior Vice President of the Company and
President and Chief Executive Officer of
Truck Components Inc. and President -
Gunite Corporation
Timothy A. Masek 34 Vice President - Corporate Development of the
Company and President of Bostrom Seating, Inc.
John D. McClain 54 President - Brillion Iron Works, Inc.
Donald C. Mueller 35 Vice President and Treasurer of the Company
Mark A. Niemela 63 President - Fabco Automotive Corporation
Kenneth M. Tallering 37 Vice President, General Counsel and Secretary
of the Company
Edward J. Whalen 50 Vice President of the Company and President of
JAIX Leasing Company
Brent Williams 44 Controller of the Company
THOMAS M. BEGEL, Chairman of the Board, President and Chief Executive
Officer of the Company, has served as President since October 1991 and as
Chairman of the Board and Chief Executive Officer since May 1993. He is also
Chairman of, and a partner in, TMB Industries ("TMB"), an investment firm which
is a partnership between himself and Mr. Weller, and is a director or officer of
certain TMB companies. Mr. Begel has served as a director of Silgan Holdings
Inc., a packaging company, since March 1997.
JOHN E. CARROLL, JR., has served as President and Chief Executive
Officer of Johnstown America Corporation and Freight Car Services, Inc. since
August 1998. Prior to August 1998, he was President of Glencoe Capital, Inc., an
investment company, from April 1997 to August 1998 and President of Thrall Car
Manufacturing Company from August 1990 through April 1997.
JAMES D. CIRAR, has served as Chairman of Johnstown America Corporation
and Freight Car Services, Inc. since September 1998 and as Senior Vice President
of the Company since July 1997. From September 1995 to August 1998, he was
President and Chief Executive Officer of Johnstown America Corporation and from
March 1998 to August 1998 he was President and Chief Executive Officer of
Freight Car Services, Inc. Prior to September 1995, Mr. Cirar was the Plant
Manager of the Truck and Bus Assembly Group of General Motors Corporation in
Flint, Michigan.
THOMAS W. COOK, has been the President and Chief Executive Officer of
TCI since May 1994 and President of Gunite Corporation since 1991. Mr. Cook has
been Senior Vice President of the Company since July 1997. He was President and
Chief Executive Officer of Redlaw Industries, Inc., a holding company with
interests in foundries, stamping plants and textile industries, from 1986 to
1991. From 1967 to 1986, Mr. Cook was with ITT Grinnell Corporation, a
manufacturer and distributor of valves and related piping products, where he
became President in 1983.
TIMOTHY A. MASEK, has served as Vice President - Corporate Development
of the Company since December 1995 and President of Bostrom Seating, Inc. since
June 1996. From September 1992 to December 1995, Mr. Masek performed marketing
and corporate development functions for the Company. Prior to September 1992,
Mr. Masek was a Market Analyst for the Transportation Equipment Group of
Bombardier Corporation, a railcar and aviation manufacturer.
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JOHN D. MCCLAIN, joined Brillion as Manager of Manufacturing in 1988
and was appointed Vice President of Manufacturing in 1989. Mr. McClain was
promoted to his present position of President in 1994. Prior to joining
Brillion, Mr. McClain held metallurgical and foundry manager positions at
Owens-Illinois, a manufacturer of glass containers and television picture tubes,
Emerson Electric, a diverse manufacturing company producing power transmission
and electric motor components, pumps, valves and hand tools, and Clow Valve
Company, a manufacturer of waste and water system valves, fire hydrants and fire
protection system valves.
DONALD C. MUELLER, has served as Vice President and Treasurer since
July 1998. For the five years prior to July 1998, he held various financial
positions with Fisher Scientific International.
MARK A. NIEMELA, joined Fabco Automotive Corporation in 1966 as
Production Control Manager. He held the positions of Material Manager and Plant
Manager before his appointment to the position of General Manger in 1975 and was
appointed President in 1986.
KENNETH M. TALLERING, has served as Vice President, General Counsel and
Secretary of the Company since November 1995. From September 1987 to October
1995, Mr. Tallering was an attorney with the law firm of Skadden, Arps, Slate,
Meagher & Flom.
ANDREW M. WELLER, has served as Executive Vice President, Chief
Financial Officer and a Director of the Company since September 1994 and as
Secretary from March 1995 to November 1995. From April 1988 to September 1994,
he was Vice President and Treasurer of Bethlehem Steel Corporation and prior
thereto held various other positions with Bethlehem. He has also been Executive
Vice President of, and a partner in TMB since September 1994, and is a director
or officer of certain TMB companies.
EDWARD J. WHALEN, has served as Vice President of the Company since
January 1997. He has also served as President of JAIX Leasing since its
inception in December 1994. Mr. Whalen served as Secretary of the Company from
October 1991 until March 1995, as Treasurer of the Company from May 1993 until
March 1995, as Vice President of the Company from October 1991 until October
1995 and as President of Freight Car Services, Inc. from March 1995 until March
1998. From 1989 to 1991, he was a financial and rail car industry consultant.
BRENT WILLIAMS, has served as Controller of the Company and has served
in various financial capacities at TCI and Gunite for the past four years. Prior
to that, he was Corporate Controller of Caron International.
18
<PAGE>
GLOSSARY OF CERTAIN TERMS
The following industry terms have the meanings set forth below for
purposes of the Form 10-K:
ABS: Anti-lock brake system.
Auto-Flood(TM): The Company's product name for an
aluminum, rapid discharge open
hopper car that offers more capacity
than conventional steel automatic
discharge cars.
Automatic Slack Adjuster: A mechanism that
reacts to, and adjusts for,
variations in brake shoe-to-drum
clearance, maintains the proper
amount of space between the shoe and
drum and thereby eliminates the need
for manual adjustment.
Brake Drum: A metal cylinder to which pressure
is applied by a braking mechanism in
order to arrest rotation of the
wheel to which the cylinder is
attached.
Brake Rotor: Device which works with a vehicle's
braking system to stop the vehicle.
Covered Hopper Car: A totally contained bottom discharge
freight car used to haul
agricultural, chemical and mineral
products.
Gondola Car: Open-top freight car principally
used for hauling coal which
discharges through a rotary
dump mechanism. Non-rotary gondolas
are also used to haul products such
as ore, scrap metal and other
commodities.
Intermodal Car: Freight car used primarily for
moving containers and trailers that
can be placed on trucks and ships as
well as freight cars.
OEM: Original equipment manufacturer.
Open Hopper Car: Freight car which discharges its
load from the bottom of the car.
Quad Hopper Car: A type of open hopper car which
discharges through four doors on
the bottom of the freight car.
Spoke Wheels: Along with the wheel hub, it is the
connecting piece between the brake
system and the axle upon which the
rim and tire are mounted.
Wheel Hubs: Along with the spoke wheel, it is
the connecting piece between the
brake system and the axle upon which
the rim and tire are mounted.
19
<PAGE>
ITEM 2. FACILITIES
The Company's headquarters are located in leased offices in Chicago,
Illinois. The following table provides a summary description of the Company's
other principal facilities.
<TABLE>
OWNED/ COVERED
FACILITIES BUSINESS FUNCTION LEASED SPACE
SQ. FT.
<CAPTION>
FREIGHT CAR SEGMENT
<S> <C> <C> <C>
JAC (1)
Shell Plant Freight car erection Owned 153,000
Franklin Plant Freight car erection and Owned 619,000
fabrication
Offices Owned 87,000
Administrative Offices
(1) All JAC facilities are located in Johnstown, Pennsylvania
FCS
Danville, Illinois Freight car erection and rebuild Owned 297,000
TRUCK COMPONENTS SEGMENT
GUNITE
Rockford, Illinois Administrative Offices: Specialty Owned 619,000
Foundry, Aftermarket Distribution
Warehouse
Elkhart, Indiana (Plant 1) Machining-Wheel End Components Owned 258,000
Elkhart, Indiana (Plant 2) Machining and Assembling-Automatic Owned 115,000
Slack Adjusters
BRILLION (2)
Plant I Melting; Molding; Administrative Leased 180,000
Plant II Offices Leased 165,000
Plant III Melting; Molding Owned 150,000
Plant IV Farm Machinery Leased 85,000
Finishing; Shipping
(2) All Brillion facilities are located in Brillion, Wisconsin
FABCO
Oakland, California Manufacturing; Warehouse; Owned 65,000
Administrative Offices
BOSTROM Manufacturing; Administrative Leased 196,000
Piedmont, Alabama Offices
</TABLE>
The Company believes that its facilities and equipment are in good
condition and, together with scheduled capital improvements, are adequate for
its present and immediately projected needs.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain threatened and pending legal
proceedings, including worker's compensation claims, arising out of the conduct
of its businesses. In the opinion of management, the ultimate outcome of such
legal proceedings will not have a material adverse effect on the financial
position or results of operations of the Company.
The Company may be subject to liability as a result of the disposal of
hazardous substances on and off the properties owned or operated by its
subsidiaries, including Brillion, Gunite and Fabco. TCI and Brillion filed suit
on May 25, 1994 against Beatrice and the Robins Group for certain causes of
action, including indemnification under purchase agreements. TCI added
Hunt-Wesson, Inc., a corporate successor to Beatrice that may be a successor to
Beatrice's liability in these matters, as a defendant on June 10, 1994. In 1996,
the district court entered judgment against Brillion, holding that Beatrice and
the Robins Group did not owe any indemnity for Brillion's expenses at the sites,
and that Brillion owed Karl F. Gabler $0.2 million pursuant to a 1987 indemnity
contract. On May 7, 1998, the United States Court of Appeals for the Seventh
Circuit affirmed the 1996 judgment of the district court, and, in June 1998,
denied Brillion's petition for rehearing and issued its final mandate of
affirmance. TCI and Brillion have satisfied the counterclaim judgment of $0.2
million. In December 1997, TCI and Brillion filed suit against Beatrice, and its
parent, ConAgra, Inc., for recovery of costs expended at the Lemberger Landfill,
and for declaratory relief with respect to the cleanup of the Lemberger Landfill
and adjacent areas. In this suit (BRILLION, ET AL. V. CONAGRA, ET AL., Case No.
97-L-15968), the court currently has under advisement Brillion's motion for
judgment on the pleadings and defendants' motion to dismiss, with a ruling
expected during the first quarter of 1999. In September 1997, TCI and Gunite
entered into the Settlement which settled its pending litigation against a prior
owner of Gunite and pursuant to which TCI and Gunite and the prior owner
withdrew their claims against the other. As a result of the Settlement, TCI and
Gunite will not be responsible (through a contractual undertaking by the former
owner) for certain environmental liabilities and costs resulting from Gunite's
waste disposals prior to the acquisition of Gunite by TCI in September 1987,
including at the IPC, M.I.G./Dewane and Southeast Rockford sites. See
"Environmental Matters" in Item 1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price range of Common Stock
The Company's common stock is listed and traded on the NASDAQ National
Market System under the symbol "JAII." The following table sets forth the high
and low sales prices of the common stock as reported by the NASDAQ National
Market System.
Sales Prices
1997 HIGH LOW
---- ---- ---
First Quarter $4.75 $3.25
Second Quarter 6.63 3.00
Third Quarter 9.25 5.75
Fourth Quarter 15.50 8.50
1998
First Quarter $17.75 $9.13
Second Quarter 19.15 12.75
Third Quarter 19.94 10.25
Fourth Quarter 16.75 10.00
The number of record holders of the Company's common stock on March 17,
1999 was 128.
DIVIDEND POLICY
The Company has never paid any dividends on its common stock and
expects for the foreseeable future to retain all of its earnings from operations
for use in expanding and developing its business. Any future decision as to the
payment of dividends will be at the discretion of the Company's Board of
Directors and will depend upon the company's earnings, financial position,
capital requirements and such other factors as the Board of Directors deems
relevant. In addition, the Credit Facility (as defined herein) contains
covenants limiting dividends that may be paid to holders of shares of common
stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to
the Company for the periods and at the dates indicated. All selected financial
data is derived from the audited consolidated financial statements of the
Company and should be read in conjunction with those statements which are
incorporated by reference in this report.
22
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
- ----------------------------------- -------------- -------------- -------------- ------------- --------------
1994 1995 (1) 1996 1997 1998
---- -------- ---- ---- ----
- ----------------------------------- -------------- -------------- -------------- ------------- --------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Total revenues $468,525 $668,601 $559,972 $650,347 $966,058
Cost of goods 442,153 608,982 474,158 556,365 825,900
------- ------- ------- ------- -------
Gross profit 26,372 59,619 85,814 93,982 140,158
Selling, general & administrative 13,144 28,117 46,605 46,187 53,005
Amortization expense 3,573 6,478 10,174 8,554 8,557
Gain on sale of leased freight cars --- --- (1,354) (824) (1,223)
Pension termination gain --- --- --- --- (1,688)
Patent lawsuit settlement --- --- --- --- (16,750)
Reduction of environmental reserves --- --- --- (14,300) ---
------- ------- ------- ------- -------
Operating income 9,655 25,024 30,389 54,365 98,257
Interest expense net 266 14,702 35,836 35,380 30,323
Provision (benefit)for
income taxes 3,692 4,737 (76) 9,511 28,933
------- ------- ------- ------- -------
Income(loss) before
extraordinary items 5,697 5,585 (5,371) 9,474 39,001
Exraordinary items, net of taxes --- --- --- (2,008) (1,146)
------- ------- ------- ------- -------
Net income (loss) $5,697 $5,585 $(5,371) $7,466 $37,855
======= ======= ======= ======= =======
Diluted Earnings Per Share:
Income (loss) before
extraordinary itmes $ 0.58 $ 0.57 $ (0.55) $ 0.96 $ 3.85
Extraordinary itmes --- --- --- (0.20) (0.11)
------ ------ ------- ------ -------
Net income (loss) $ 0.58 $ 0.57 $ (0.55) $ 0.76 $ 3.74
====== ====== ======= ====== =======
- ----------------------------------- -------------------------------------------------------------------------
AS OF DECEMBER 31,
BALANCE SHEET DATA: (in thousands)
- ----------------------------------- -------------- -------------- -------------- ------------- --------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
- ----------------------------------- -------------- -------------- -------------- ------------- --------------
Total assets $143,354 $578,825 $555,283 $578,838 $584,354
Long-term debt, including
current maturities 7,600 329,786 304,175 312,273 255,046
Total shareholders' equity 63,234 68,874 63,537 71,020 110,717
- -------------------------------------------------------------------------------------------------------------
(1) Acquired Bostrom in January, 1995 and TCI in August, 1995. See Note 3 to
the Consolidated Financial Statements of the Company and the notes
thereto for the year ended December 31, 1998.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 8 through 11 of the Company's Annual Report to Shareholders for the fiscal
year ended December 31, 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated balance sheets as of December 31, 1997 and 1998 and
the consolidated statements of income and cash flows for each of the three years
in the period ended December 31, 1998 and the notes thereto, together with the
report of independent public accountants contained on pages 12 through 36 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1998 are incorporated herein by reference.
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
pages 2-3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 6, 1999, except for the
information regarding the Company's executive officers which is set forth in
"Business" in Item 1 under the heading "Executive Officers of the Registrant."
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this Item is incorporated by reference to
page 16 of the Company's Proxy Statement for the Annual Meeting of Shareholders
of the Company to be held on May 6, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
pages 4-10 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 6, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
pages 15-16 of the Company's Proxy Statement for the Annual Meeting of
Shareholders of the Company to be held on May 6, 1999.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS
None
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1)and (a)(2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are included in the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1998, pages 12 through 36,
and are incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a)(3) LIST OF EXHIBITS:
3.1 Form of Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.3 to Form S-1,
Registration Statement 33-63132 (the "Initial S-1")).
3.2 Form of Restated By-laws of the Company (incorporated by
reference to Exhibit 3.4 to the Initial S-1).
4.1 Form of certificate for the Company's common stock,
par value $.01 per share (incorporated by reference to
Exhibit 4.1 to the Initial S-1).
4.2 Form of certificate for the Company's Class B common
stock, par value $.01 per share (incorporated by
reference to Exhibit 4.2 to the Initial S-1).
4.3 Indenture relating to the 11.75% Senior Subordinated Notes
of the Company due 2005, dated as of August 23, 1995,
including form of note (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated August
30, 1995).
4.4 Rights Agreement, dated as of October 4, 1995, between the
Company and BancBoston State Street Investor Services, L.P.
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated October 5, 1995).
4.5 Indenture relating to the 11.75% Series C Subordinated Notes
of the Company due 2005, dated as of August 11, 1997,
including form of note (incorporated by reference to Exhibit
4.2 to Form S-4, Registration Statement 333-35277 (the "Form
S-4")).
10.1 Agreement of Purchase and Sale, dated as of May 3, 1991, as
amended, between Bethlehem Steel Corporation and Johnstown
America Industries, Inc. (incorporated by reference to
Exhibit 2.1 to the Initial S-1).
10.2 Agreement and Plan of Merger, dated as of June 13, 1995,
among Johnstown America Industries, Inc., JTN Acquisition
Corp. and Truck Components Inc. (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated June 13, 1995).
10.3 Stockholders Agreement, dated as of June 13, 1995, among
Johnstown America Industries, Inc., JTN Acquisition Corp.
and the stockholders party thereto (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K dated June 13, 1995), and Amendment No.1 to
Stockholders Agreement, dated as of June 23, 1995, among
Johnstown America Industries, Inc., JTN Acquisition Corp.,
and the stockholders party thereto (incorporated by
reference to Exhibit 2.3 to Amendment No.1 to the Company's
Current Report on Form 8-K dated June 13, 1995).
10.4 Stock Purchase Agreement, dated as of December 21, 1994, and
the First Amendment thereto, dated as of January 13, 1995,
each among the sellers, Bostrom Seating, Inc. and Johnstown
America Industries, Inc. (incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated
January 24, 1995).
10.5 Credit Agreement, dated as of August 23, 1995, among
Johnstown America Industries, Inc., the financial
institutions named therein, Chemical Bank, as Administrative
Agent, Collateral Agent and Swingline Lender, Chemical Bank
Delaware, as Issuing Bank, and The First National Bank of
Boston and The First National Bank of Chicago, as Co-Agents
(incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated August 30, 1995).
25
<PAGE>
10.6 Amendment to Credit Agreement, dated as of December 31,
1995, among Johnstown America Industries, Inc., the
financial institutions named therein, Chemical Bank, as
Administrative Agent, Collateral Agent and Swingline Lender,
Chemical Bank Delaware, as Issuing Bank, and The First
National Bank of Boston and The First National Bank of
Chicago, as Co-Agents (incorporated by reference to Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended
December 31, 1995 (the "1995 Form 10-K")).
10.7 Second Amendment to Credit Agreement, dated as of December
31, 1996 among Johnstown America Industries, Inc., the
financial institutions named therein, Chemical Bank, as
Administrative Agent, Collateral Agent and Swingline Lender,
Chemical Bank Delaware, as Issuing Bank, and The First
National Bank of Boston and The First National Bank of
Chicago, as Co-Agents. (incorporated by reference to Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 Form 10-K")).
10.8 Amendment No. 3, Consent and Waiver dated as of August 4,
1997 to Credit Agreement, among the Company, The Chase
Manhattan Bank, as Administrative, Collateral Agent and
Swingline Lender, the First National Bank of Boston and the
First National Bank of Chicago, as Co-Agents, and the Chase
Manhatten Bank of Delaware, as Issuing Bank (incorporated by
reference to Exhibit 10.22 to the Form S-4).
10.9 Term Loan Agreement, dated as of June 14, 1996, between JAIX
Leasing Company and NationsBanc Leasing Corporation of North
Carolina (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the Quarter ended June 30, 1996).
10.10 Loan Agreement, dated as of December 1, 1995, between
Freight Car Services, Inc. and the City of Danville,
Vermillion County, Illinois relating to $5.3 million of City
of Danville, Illinois Variable Rate Demand Industrial
Revenue Bonds (Freight Car Services, Inc. Project), Series
1995 (incorporated by reference to Exhibit 10.7 to the 1995
Form 10-K).
10.11 1993 Stock Option Plan (incorporated by reference to
Exhibit 10.8 to the Initial S-1).
10.12 Johnstown America Corporation Salaried Pension Plan
(incorporated by reference to Exhibit 10.11 to the nitial
S-1).
10.13 Amended and Restated Stockholder and Warrantholder Agreement
(incorporated by reference to Exhibit 10.14 to the Initial
S-1).
10.14 Employment Agreement of Thomas M. Begel (incorporated by
reference to Exhibit 10.11 to the 1995 Form 10-K).
10.15 Employment Agreement of Andrew M. Weller (incorporated by
reference to Exhibit 10.12 to the 1995 Form 10-K).
10.16 Employment Agreement of Thomas W. Cook (incorporated by
reference to Exhibit 10.13 to the 1995 Form 10-K).
10.17 Form of Employment Agreement (incorporated by reference
to Exhibit 10.17 to the 1996 Form 10-K). 10.18 Form of
Severance Agreement (incorporated by reference to Exhibit
10.15 to the 1995 Form 10-K). 10.19 Form of Stay Bonus
Agreement (incorporated by reference to Exhibit 10.16 to the
1995 Form 10-K). 10.20 Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the 1995 Form
10-K). 10.21 Form of Supplemental Life Insurance Agreement
(incorporated by reference to Exhibit 10.21 to the 1996 Form
10-K.)
10.22 Gunite Corporation Salaried Employees Retirement Plan
(incorporated by reference to Exhibit 10.18 to the 1995
Form 10-K).
10.23 Form of Deferred Compensation Agreement (incorporated by
reference to Exhibit 10.24 to the Company's Form 10-K for
the fiscal year ended December 31, 1997).
10.24 Gunite Corporation Profit Sharing Plan (incorporated by
reference to Exhibit 10.19 to the 1995 Form 10-K).
10.25 Form of Restricted Stock Agreement.
26
<PAGE>
13.1 Selected portions of the Registrant's Annual Report
to Shareholders for the fiscal year ended December 31, 1998
which are incorporated by reference herein.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
(b) Financial Statement Schedules:
All schedules have been omitted since the required information is
either not significant, included in the consolidated financial
statements of the Company or the notes thereto or not applicable.
(c) Reports on Form 8-K
The Company filed the following current report on Form 8-K:
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
JOHNSTOWN AMERICA INDUSTRIES, INC.
By:/S/THOMAS M. BEGEL
------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/THOMAS M. BEGEL Chairman of the Board, President March 25, 1999
- --------------------------- and Chief Executive Officer
Thomas M. Begel (Principal Executive Officer)
/S/ANDREW M. WELLER Executive Vice President, Chief March 25, 1999
- --------------------------- Financial Officer and Director
Andrew M. Weller (Principal Financial Officer and
Principal Accounting Officer)
/S/CAMILLO SANTOMERO Director March 25, 1999
- ---------------------------
Camillo Santomero
/S/R. PHILIP SILVER Director March 25, 1999
- ---------------------------
R. Philip Silver
/S/FRANCIS S. STROBLE Director March 25, 1999
- ---------------------------
Francis S. Stroble
</TABLE>
28
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (the "Agreement") is entered into as of
February 1, 1999 (the "Grant Date") by and between Johnstown America Industries,
Inc., a Delaware corporation (the "Company") and [ ] (the "Grantee").
WHEREAS, to provide long-term incentive to the Grantee as an executive
of the Company, the Company desires to grant to the Grantee restricted shares
("Restricted Stock") of Common Stock, par value $.01 per share ("Common Stock"),
of the Company, upon the terms and subject to the conditions hereinafter
contained.
1. NUMBER OF SHARES. The Grantee is hereby granted [ ] shares of
Restricted Stock and, subject to the restrictions set forth herein, shall
possess all incidents of ownership of such Restricted Stock, including the right
to receive dividends on such stock and the right to vote such stock.
2. RESTRICTIONS. Restricted Stock and any interest therein may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent, prior to the lapse of such restriction,
which shall occur on the earlier of (x) five years from the date hereof if the
Grantee has been continuously employed with the Company for such five year
period, (y) a Change in Control (as defined herein) and (z) the Grantee's death
or Disability (as defined herein). In the event that the restriction set forth
above has not lapsed and the Grantee's employment with the Company is terminated
for any reason other than termination by the Company without Cause, the
Restricted Stock shall be forfeited by the Grantee. Notwithstanding the
foregoing, any of the foregoing restrictions may be waived by the Company at any
time as provided in Section 8 hereof.
3. CERTAIN DEFINITIONS. For purposes of this Agreement:
(A) "Cause" shall have the meaning set forth in Grantee's
Employment Agreement with the Company, dated as of January 1, 1996, as amended;
(B) "Change in Control" shall have the meaning set forth in
Grantee's Employment Agreement with the Company, dated as of January 1, 1996, as
amended.
(C) "Disability" shall mean the Grantee's disability as
provided in Grantee's Employment Agreement with the Company, dated as of January
1, 1996, as amended.
4. CERTIFICATE; RESTRICTIVE LEGEND. The Grantee agrees that any
certificate issued for Restricted Stock prior to the lapse of the restrictions
set forth herein shall be inscribed with the following legend in addition to any
legend required by securities laws:
This certificate and the shares of stock represented hereby are subject
to the terms and conditions, including restrictions against transfer
(the "Restrictions"), contained in the agreement entered into between
the registered owner and the Company (the "Agreement"). Any attempt to
dispose of these shares in contravention of the Restrictions, including
by way of sale, assignment, transfer, pledge, hypothecation or
otherwise, shall be null and void and without effect.
<PAGE>
Upon the lapse of restrictions relating to the Restricted
Stock, the Company shall issue to the Grantee or the Grantee's personal
representative a stock certificate representing the Restricted Stock, free of
the restrictive legend described in this Section 4 hereof, in exchange for the
existing certificate for the Restricted Stock.
Restricted Stock forfeited pursuant to this Agreement shall be
transferred to, and reacquired by, the Company without payment of any
consideration by the Company, and neither the Grantee nor any of the Grantee's
successors, heirs, assigns or personal representatives shall thereafter have any
further rights or interests in such shares or certificates. If certificates
containing restrictive legends shall have theretofore been delivered to the
Grantee or the Grantee's personal representative, such certificates shall be
returned to the Company, complete with any necessary signatures or instruments
of transfer.
5. TAXES. The Grantee shall be responsible for all taxes required to be
paid under applicable tax laws with respect to the Restricted Stock.
6. ENTIRE AGREEMENT. This Agreement contains all the understandings
between the parties hereto pertaining to the matters referred to herein, and
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into by them with respect thereto. The Grantee represents
that, in executing this Agreement, he does not rely and has not relied upon any
representation or statement not set forth herein made by the Company with regard
to the subject matter, bases or effect of this Agreement or otherwise.
7. AMENDMENT OR MODIFICATION, WAIVER. No provision of this Agreement
may be amended or waived unless such amendment or waiver is agreed to in
writing, and is signed by both the Grantee and a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
8. NOTICES. Any notice to be given hereunder shall be in writing and
shall be deemed given hereunder shall be in writing and shall be deemed given
when delivered personally, sent by courier or telecopy or registered or
certified mail, postage prepaid, return receipt requested, addressed to the
party concerned at the address indicated below or to such other address as such
party may subsequently give notice of hereunder in writing:
To Grantee at:
[ ]
c/o Johnstown America Industries, Inc.
980 North Michigan Avenue
Suite 1000
Chicago, IL 60611
<PAGE>
To the Company at:
Johnstown America Industries, Inc.
980 North Michigan Ave., Ste. 1000
Chicago, IL 60611
Attention: Secretary
Any notice delivered personally or by courier under this
Section 8 shall be deemed given on the date delivered and any notice sent by
telecopy or registered or certified mail, postage prepaid, return receipt
requested, shall be deemed given on the date telecopied or mailed.
9. SEVERABILITY. If any provision of this Agreement or the application
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
10. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its
conflicts of laws principles.
11. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year set forth above.
JOHNSTOWN AMERICA INDUSTRIES, INC.
By:_________________________________
Name:
Title:
--------------------------------
[ ]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its business through two operating segments within the
transportation industry: the truck components segment, a leading manufacturer of
wheel-end components, seating, steerable drive axles, gearboxes and other
castings for the heavy-duty truck industry; and the freight car segment, 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 freight car and
Class 8 truck markets. Both the freight car and the Class 8 truck markets are
subject to significant fluctuations due to economic conditions, changes in the
alternative methods of transportation and other factors. There can be no
assurance that fluctuations in such markets will not have a material adverse
effect on the results of operations or financial condition of the Company.
Freight car segment sales are driven principally by the number and type of
freight cars delivered in any given period. Due to the large size of customer
orders, the specific time frame for delivery of freight cars ordered and
variations in the mix of cars ordered, the number and type of cars produced in
any given period may fluctuate greatly. As a result, the Company's revenues and
results of operations and cash flows from operations may fluctuate as well.
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL REVENUE
Total revenue in 1998 increased 48.6% to $966.1 million from $650.3 million in
1997. The revenue increase was primarily due to an increase in the freight car
segment of 126.9% from $234.7 million in 1997 to $532.5 million in 1998.
Shipments of new and rebuilt freight cars in 1998 were 9,155, compared to 4,507
freight cars in 1997. As of December 31, 1998, the Company's backlog of new and
rebuilt freight cars was 9,462, more than double the year earlier backlog of
4,201 freight cars. The truck component segment revenues increased 4.3% from
$415.6 million in 1997 to $433.6 million in 1998.
At December 31, 1998, the Company's freight car segment had 1,041 cars in its
leasing fleet, and its leasing business generated $8.3 million in revenue in
1998 and $2.5 million in operating income before a $1.2 million gain on the sale
of leased freight cars. In 1997, the leasing business generated $7.6 million in
revenue and $3.5 million in operating income before a $0.8 million gain on the
sale of leased freight cars.
COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1998 as a percent of manufacturing sales was
85.7% in 1998 compared to 85.9% in 1997. Related gross profits were 14.3% and
14.1%, respectively. The increase in gross profit margins resulted primarily
from higher gross profit margins in the freight car segment due to increased
volume, better pricing and operational improvements throughout 1998.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expenses as a percentage of total revenue
were 5.5% and 7.1% in 1998 and 1997, respectively. On a percentage of total
revenue basis, selling, general and administrative expenses in the truck
components segment were relatively unchanged, but were reduced significantly in
the freight car segment due to significantly higher revenues. Amortization
expense was $8.6 million in both 1998 and 1997.
OPERATING INCOME
Operating income was $98.3 million in 1998, compared to $54.4 million in 1997,
an increase of $43.9 million primarily due to increased gross profits of $46.2
million offset by $6.8 million of increased selling, general and administrative
expenses. Operating income was also affected in 1998 by a gain on the sale of
leased freight cars of $1.2 million, a freight car patent lawsuit settlement
gain of $16.8 million and a truck component pension termination gain of $1.7
million. Operating income in 1997 was affected by a reduction of environmental
reserves of $14.3 million in the truck component segment and a gain on the sale
of leased freight cars of $0.8 million.
1
<PAGE>
OTHER
Interest expense was $31.2 million in 1998 compared to $33.6 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 expense-leasing was $1.2 million
in 1998 compared to $2.4 million in 1997. The reduction in leasing interest
expense was due primarily to the prepayment of $19.5 million in leasing business
debt funded from the sale of 380 of its owned freight cars in February 1998.
Interest income in 1998 was $2.1 million in 1998 compared to $0.6 million in
1997. The increase in interest income is due to increased levels of cash.
In conjunction with the $35 million of senior debt prepayments, the Company
recorded an extraordinary charge of $1.1 million net of tax, related to the
write-off 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
TOTAL REVENUE
Total revenue in 1997 increased 16.1% to $650.3 million from $560.0 million in
1996. The revenue increase of $90.3 million was due to an increase at the
Company's truck components segment of $53.9 million and an increase in the
freight car segment of $36.4 million. In 1997, shipments of freight cars were
4,507 (including 290 cars sold to the Company's lease fleet), compared to 3,470
freight cars (including 98 cars sold to the Company's lease fleet) in 1996. As
of December 31, 1997, the Company's backlog of new and rebuilt cars was 4,201
compared with 774 new and rebuilt cars at December 31, 1996.
At December 31, 1997, the Company's freight car segment had 1,673 freight cars
on lease, and its leasing business generated $7.6 million in revenue and $3.5
million in operating income before a $0.8 million gain on the sale of leased
freight cars in 1997. The leasing business generated $4.5 million in revenue and
$2.4 million in operating income before a $1.4 million gain on the sale of
leased freight cars in the prior year.
COST OF SALES - MANUFACTURING AND GROSS PROFIT
Cost of sales-manufacturing for 1997 as a percent of manufacturing sales was
85.9%, compared to 85.0% in 1996. Related gross profits were 14.1% and 15.0%,
respectively. The decrease in gross profits resulted primarily from lower gross
profit margins in the freight car segment due to reduced volume in the first
half of the year and pricing pressure throughout the year offset partially by
increased profit margins in the Company's truck component segment.
SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling, general and administrative expenses as a percentage of total revenue
were 7.1% and 8.3% in 1997 and 1996, respectively. Actual selling, general and
administrative expenses declined $0.4 million from 1996 levels as a result of
cost reduction measures undertaken at the Company's freight car segment,
partially offset by the truck component segment volume related increases.
Amortization expenses as a percentage of total revenue was 1.3% and 1.8% in 1997
and 1996 respectively. Amortization expense decreased by $1.6 million from 1996
levels due primarily to a decrease in amortization expense in the freight car
segment of $1.5 million due to certain intangible items being fully amortized in
late 1996.
OPERATING INCOME
Operating income was $54.4 million in 1997, compared with $30.4 million in 1996,
an increase of $24.0 million. The Company increased its operating income by
improving gross profits by $8.2 million over 1996 levels. Selling, general and
administrative expenses declined by $0.4 million, and amortization expense
declined by $1.6 million. Additionally, a reduction of environmental reserves
for the truck components segment of $14.3 million offset by a decline in gain on
sale of leased freight cars of $0.5 million accounted for the remaining change
in operating income.
OTHER
Interest expense, net, was $35.4 million in 1997 compared to $35.8 in 1996.
Interest expense in 1997 and 1996 resulted from borrowings under the Senior Bank
Facilities and the Senior Subordinated Notes, as well as from the JAIX Leasing
loans which were used to finance the addition of freight cars for the lease
fleet.
In conjunction with the 1997 issuance of $80.0 million of Senior Notes to
refinance $80.0 million of Tranche A term debt, the Company recorded an
extraordinary charge of $2.0 million after tax, primarily related to the
write-off of $3.4 million of unamortized deferred financing costs.
Net income and diluted earnings per share for 1997 were $7.5 million and $0.76,
respectively, compared to a net loss and diluted loss per share of $5.4 million
and $0.55, respectively, for 1996.
2
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's freight car sales are characterized by large order sizes, specific
customer delivery schedules and related vendor receipts and payment schedules,
all of which can combine to create significant fluctuations in working capital
when comparing end of period balances. Such fluctuations tend to be of short
duration, and the Company considers this to be a normal part of its operating
cycle which does not significantly impact its financial flexibility and
liquidity.
For the year ended December 31, 1998, the Company provided cash from operations
of $56.7 million (including $16.8 million from the settlement of patent
lawsuits) compared with $26.7 million for 1997. The Company provided $8.0
million of net cash from investing activities during 1998, including $24.3
million provided from the sale of 380 leased freight cars , offset by $11.5
million of capital expenditures and $4.9 million of leasing asset additions.
Cash used for financing activities was $56.5 million for 1998, which included
$36.7 million in payments of Tranche B term debt and payments of JAIX Leasing
debt of $20.0 million, partially offset by proceeds from the exercise of stock
options.
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.
Interest payments on the Notes and under the Senior Bank Facilities represent
significant near-term cash requirements for the Company. The Notes require
semiannual interest payments of approximately $10.6 million. Borrowings under
the Senior Bank Facilities bear interest at floating rates and require interest
payments on varying dates depending upon the interest rate option selected by
the Company. The $56.6 million of outstanding Tranche B term loans require
periodic principal payments through their maturities.
At December 31, 1998, JAIX Leasing owned or leased 1,041 freight cars. JAIX
Leasing has a 10-year term loan facility, which as of December 31, 1998, had a
balance of $9.2 million outstanding. See Note 5 of the Consolidated Financial
Statements for a description of this facility.
The Company believes that the cash flow generated from its operations, together
with amounts available under the revolving credit line, should be sufficient to
fund its debt service requirements, working capital needs, anticipated capital
expenditures and other operating expenses (including expenditures required by
applicable environmental laws and regulations). The Company's future operating
performance and ability to service or refinance the Notes and to extend or
refinance the Senior Bank Facilities will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
As of December 31, 1998, the Company had cash of $39.1 million.
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.
3
<PAGE>
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 are
expected to be fully tested by mid 1999. Assessment of manufacturing processes
and facility management systems is underway and is expected to be substantially
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 $0.5 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 completion 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 codes, 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.
4
<PAGE>
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 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 $255.0 million. The estimated fair value of
this debt is $264.0 million. Fixed interest rate debt outstanding as of December
31, 1998 represents 76% of total debt, carries an average interest rate of 11.6%
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 $193.4 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 $5.0 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.
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net manufacturing sales $957,762 $642,764 $555,510
Leasing revenue 8,296 7,583 4,462
- ------------------------------------------------------------------------------------------------------------------------
Total revenue 966,058 650,347 559,972
Cost of sales - manufacturing 821,005 552,360 472,054
Cost of leasing 4,895 4,005 2,104
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 140,158 93,982 85,814
Selling, general and administrative expense 53,005 46,187 46,605
Amortization expense 8,557 8,554 10,174
Gain on sale of leased freight cars (1,223) (824) (1,354)
Pension termination gain (1,688) -- --
Patent lawsuit settlement (16,750) -- --
Reduction of environmental reserves -- (14,300) --
- ------------------------------------------------------------------------------------------------------------------------
Operating income 98,257 54,365 30,389
Interest income (2,094) (625) (624)
Interest expense 31,189 33,616 33,639
Interest expense - leasing 1,228 2,389 2,821
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 67,934 18,985 (5,447)
Provision (benefit) for income taxes 28,933 9,511 (76)
- ------------------------------------------------------------------------------------------------------------------------
Net 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) before extraordinary item $ 3.96 $ 0.97 $ (0.55)
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) before extraordinary item $ 3.85 $ 0.96 $ (0.55)
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
- ------------------------------------------------------------------------------------------------------------------------
6
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
ASSETS:
Cash and cash equivalents $39,112 $30,875
Accounts receivable, net 81,740 60,484
Inventories 66,678 58,674
Deferred income tax assets 13,688 13,521
Prepaid expenses and other current assets 2,514 4,047
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 203,732 167,601
Property, plant and equipment, net 115,193 118,063
Leasing business assets, net 19,523 38,430
Deferred financing costs, net 7,526 11,594
Intangible assets, net 238,380 243,150
- ------------------------------------------------------------------------------------------------------------------------
Total assets $584,354 $578,838
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable $65,583 $55,246
Accrued payroll and employee benefits 27,287 22,666
Other current liabilities 43,556 35,967
Current maturities of long-term debt and capital lease 9,511 4,783
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 145,937 118,662
Long-term debt and capital lease, less current maturities 63,197 124,799
Senior subordinated notes 182,338 182,691
Deferred income tax liabilities 34,571 36,373
Other long-term liabilities 47,594 45,293
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 473,637 507,818
- ------------------------------------------------------------------------------------------------------------------------
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 $584,354 $578,838
- ------------------------------------------------------------------------------------------------------------------------
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $37,855 $7,466 $(5,371)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation 14,947 15,009 14,772
Amortization 11,374 11,617 14,498
Deferred income tax expense 96 5,937 58
Provision for postretirement benefits 2,825 2,169 1,671
Gain on sale of leased freight cars (1,223) (824) (1,354)
Pension termination gain (1,688) -- --
Reduction of environmental reserves -- (14,300) --
Extraordinary item, net of income tax 1,146 2,008 --
Change in operating assets and liabilities:
Accounts receivable (21,256) (11,137) 10,613
Inventories (8,004) (9,085) (5,689)
Prepaid expenses and other current assets 1,698 (829) 14,091
Accounts payable 10,337 11,921 3,677
Accrued payroll and employee benefits 2,415 758 (5,177)
Other assets and liabilities 6,188 6,038 (5,411)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 56,710 26,748 36,378
INVESTING ACTIVITIES:
Capital expenditures (11,537) (8,246) (9,919)
Leasing business asset additions (4,875) (27,639) (5,438)
Proceeds from sale of leased freight cars 24,320 10,182 18,113
Change in restricted cash and other 141 631 786
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 8,049 (25,072) 3,542
FINANCING ACTIVITIES:
Payments of term loans and capital lease (36,899) (90,170) (16,812)
Net (payments) borrowings of JAIX Leasing debt (19,976) 15,577 (8,799)
Issuance of long-term debt -- 82,823 --
Payment of deferred financing costs and other 353 (3,566) (1,413)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (56,522) 4,664 (27,024)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,237 6,340 12,896
Cash and cash equivalents, beginning of year 30,875 24,535 11,639
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $39,112 $30,875 $24,535
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
- --------------------------------------------------------------------------------
Johnstown America Industries, Inc. (the Company) has 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, Johnstown America Corporation, (JAC), wholly owned by
Johnstown America Industries, Inc., a Delaware corporation, consummated
the purchase of the former Freight Car Division of Bethlehem Steel Corporation .
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. facility.
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements reflect the application of
the following significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 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 66% and 60 %
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 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.
9
<PAGE>
RESEARCH AND DEVELOPMENT
Costs associated with research and development are expensed as incurred.
LEASING BUSINESS ASSETS
Leasing business assets, which primarily consist of freight cars, are stated at
cost, which is fully absorbed cost for those assets self-constructed by the
Company, less accumulated depreciation. Freight cars are being depreciated using
the straight-line method over the estimated useful life of 20-30 years.
INTANGIBLE ASSETS
The excess of purchase costs over amounts allocated to identifiable assets and
liabilities of businesses acquired (goodwill) is amortized on the straight-line
method over 40 years. Should events or circumstances occur subsequent to the
acquisition of a business which bring into question the realizable value or
impairment of the related goodwill, the Company will evaluate the remaining
useful life and balance of goodwill, and should an impairment be identified, a
loss would be recognized to the extent that the carrying value exceeds the fair
value. The Company's principle considerations in determining impairment include
the strategic benefit to the Company of the particular business as measured by
undiscounted current and expected future operating cash flows of that particular
business.
Other intangible assets, 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
Organization costs 5 years
- ---------------------------------------------
ENVIRONMENTAL RESERVES
The Company is subject to comprehensive and frequently changing federal, state
and local environmental laws and regulations, and will incur additional capital
and operating costs in the future to comply with currently existing laws and
regulations, new regulatory requirements arising from recently enacted statutes
and possible new statutory enactments. In addition to environmental laws that
regulate the Company's ongoing operations, the Company is also subject to
environmental remediation liability. It is the Company's policy to provide and
accrue for the estimated cost of environmental matters, on a nondiscounted
basis, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. Such provisions and accruals exclude
claims for recoveries from insurance carriers or other third parties.
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" was
issued in October 1996 and adopted by the Company with minimal impact in 1997.
This SOP provides authoritative guidance on specific accounting issues that are
present in the recognition, measurement and disclosure of environmental
remediation liabilities.
INCOME TAXES
The Company provides for deferred income taxes on differences that arise when
items are reported for financial statement purposes in years different from
those for income tax reporting purposes in conformance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
REVENUE RECOGNITION
Revenues on new and rebuilt freight cars are recognized when individual cars are
completed and accepted by the customer's inspector. Revenue from leasing is
recognized ratably during the lease term. All other revenue is recognized when
the products are shipped.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 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.
10
<PAGE>
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 adopted this standard
in 1998. See Note 13 for segment information.
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.
- --------------------------------------------------------------------------------
NOTE 3. DETAIL OF CERTAIN ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,294 $1,883 $1,690
Provision for doubtful accounts 673 1,904 538
Net write-offs (1,188) (1,493) (345)
- --------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,779 $2,294 $1,883
- --------------------------------------------------------------------------------------------------------------------
INVENTORIES
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
Raw materials and purchased components $11,605 $10,894
Work in progress and finished goods 55,073 47,780
- --------------------------------------------------------------------------------------------------------------------
Inventories $66,678 $58,674
- --------------------------------------------------------------------------------------------------------------------
11
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
Land $4,975 $4,683
Buildings and improvements 30,748 28,615
Machinery and equipment 127,487 121,081
Construction in progress 5,401 3,969
- --------------------------------------------------------------------------------------------------------------------
168,611 158,348
Accumulated depreciation 53,418 40,285
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net $115,193 $118,063
- --------------------------------------------------------------------------------------------------------------------
LEASING BUSINESS ASSETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
Leasing business assets $20,747 $39,763
Accumulated depreciation 1,224 1,333
- --------------------------------------------------------------------------------------------------------------------
Leasing business assets, net $19,523 $38,430
- --------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
ORIGINAL ACCUMULATED NET BALANCE
------------------------------------------
AS OF DECEMBER 31, COST AMORTIZATION 1998 1997
---------------- ------------------- ---- ----
Excess cost over net assets acquired $204,520 $18,229 $186,291 $191,404
Trademarks 26,988 2,325 24,663 25,360
Technologies 20,722 2,735 17,987 18,807
Patents 17,278 11,718 5,560 7,320
Pension asset 3,879 -- 3,879 --
Organization costs 742 742 -- 259
- --------------------------------------------------------------------------------------------------------------------
Intangible assets $274,129 $35,749 $238,380 $243,150
- --------------------------------------------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
Accrued interest $9,166 $9,336
Accrued workers' compensation 5,458 5,281
Current portion of postretirement
and pension benefit reserves 3,000 3,655
Accrued warranty 6,198 3,847
Other 19,734 13,848
- --------------------------------------------------------------------------------------------------------------------
Other current liabilities $43,556 $35,967
- --------------------------------------------------------------------------------------------------------------------
12
<PAGE>
OTHER LONG-TERM LIABILITIES
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997
---- ----
Postretirement and pension benefit reserves $32,690 $29,880
Environmental reserves 9,904 10,402
Other 5,000 5,011
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities $47,594 $45,293
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
COMMON PAID-IN RETAINED EMPLOYEE
STOCK CAPITAL EARNINGS RECEIVABLES TOTAL
-------------- -------------- -------------- -------------- --------------
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 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.
13
<PAGE>
- --------------------------------------------------------------------------------
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
Industrial revenue bond 5,300 5,300
Capital lease 1,593 1,783
JAIX leasing debt 9,183 29,159
- ---------------------------------------------------------------------
Total debt 72,708 129,582
Current maturities (9,511) (4,783)
- ---------------------------------------------------------------------
Long-term debt $63,197 $124,799
- ---------------------------------------------------------------------
Maturities of long-term debt are as follows:
(IN THOUSANDS)
- ----------------------------------------------------
AS OF DECEMBER 31, 1998
1999 $9,511
2000 8,792
2001 12,200
2002 15,512
2003 14,418
Thereafter 12,275
- ----------------------------------------------------
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
provides for up to $75 million of outstanding 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 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 Tranche B term loan are either (a) LIBOR plus a margin of 3.00% or (b) ABR
plus 2.00%. Additionally, various fees related to unused commitments, letters of
credit and administration of the facility are incurred by the Company. As of
December 31, 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 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. 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 matures on March 31, 2002 and the Tranche B Term Loan matures on
March 31, 2003.
14
<PAGE>
The Senior Bank Facilities contain various financial covenants including capital
expenditure limitations, maximum leverage ratio, interest coverage ratio, and
minimum net worth. It also restricts the Company from paying dividends,
repurchasing common stock and making other distributions in certain
circumstances.
INDUSTRIAL REVENUE BOND
The Company, through its wholly owned subsidiary, Freight Car Services, Inc.,
issued an Industrial Revenue Bond for $5.3 million which bears interest at a
variable rate (4.3% as of December 31, 1998) 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 on December 1, 2010. The bonds are
also subject to a weekly "put" provision by the holders of the bonds. In the
event that any or all of the bonds are put to the Company under the provision,
the Company would effectively refinance such bonds with additional borrowings
under the revolving credit line portion of the Senior Bank Facilities.
JAIX LEASING DEBT
On June 14, 1996, JAIX Leasing refinanced its then existing debt with a ten year
term loan. This debt is secured by JAIX Leasing's leases and assets and contains
various covenants. During 1998, the loan was prepaid by $19.5 million from the
proceeds of the sale of 380 JAIX Leasing's freight cars. At December 31, 1998
and 1997, the average interest rate on the then outstanding balances were 9.32%
and 8.78%, respectively.
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. 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.
- --------------------------------------------------------------------------------
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 the Senior Bank Facilities will be subject
to future economic conditions and to financial, business and other factors, many
of which are beyond the Company's control.
15
<PAGE>
- --------------------------------------------------------------------------------
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.
Pension benefits for certain JAC employees which accrued as a result of
pre-acquisition service remain the responsibility of Bethlehem Steel. The
Company initiated new pension plans for such employees for service subsequent to
the acquisition date which essentially provide benefits similar to the former
plans. Following the acquisition of TCI, a certain TCI plan was frozen and was
replaced with a defined contribution plan. The Company, after consideration of
previously unrecognized amounts, recognized a $1.7 million non-cash gain on the
termination of the plan in 1998.
POSTRETIREMENT BENEFITS
The Company provides health care benefits for certain salaried and hourly
retired employees. Employees may become eligible for health care benefits if
they retire after attaining specified age and service requirements. These
benefits are subject to deductibles, co-payment provisions and other
limitations.
In connection with the purchase of JAC, the cost of postretirement benefits of
employees over age 43 at the purchase date remained the responsibility of
Bethlehem Steel. Costs of benefits relating to current service are expensed
currently.
The Company does not offer any other significant postretirement benefits.
<TABLE>
The following table sets forth the plans' funded status:
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $39,820 $32,144 $25,128 $19,732
CHANGE IN BENEFIT OBLIGATION
Service cost 2,071 1,744 1,094 725
Interest cost 2,781 2,371 1,796 1,660
Plan amendment 5,155 -- -- --
Actuarial loss 965 4,330 747 3,885
Special termination benefit loss 223 -- -- --
Settlement gain (1,688) -- -- --
Benefits paid (5,977) (769) (1,301) (874)
- --------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $43,350 $39,820 $27,464 $25,128
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $27,352 $20,311 $ -- $ --
Actual return on plan assets 3,468 3,697 -- --
Employer contribution 5,081 4,113 -- --
Benefits paid (5,977) (769) -- --
- --------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $29,924 $27,352 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997 1998 1997
---- ---- ---- ----
Benefit obligation in excess of plan assets $(13,426) $(12,468) $(27,464) $(25,128)
Unrecognized net gain (112) (50) (35) (814)
Unrecognized prior service cost 9,242 4,924 -- --
- --------------------------------------------------------------------------------------------------------------------
Net amount recognized $(4,296) $(7,594) $(27,499) $(25,942)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
ACCRUED BENEFIT OBLIGATION PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997 1998 1997
---- ---- ---- ----
Accrued benefit liability $(8,175) $(7,594) $(27,499) $(25,942)
Intangible asset 3,879 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net amount recognized $(4,296) $(7,594) $(27,499) $(25,942)
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------
AS OF DECEMBER 31, 1998 1997 1998 1997
---- ---- ---- ----
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% -- --
- --------------------------------------------------------------------------------------------------------------------
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.
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------- ------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Service cost $2,071 $1,744 $2,189 $1,094 $725 $854
Interest cost 2,781 2,371 2,173 1,796 1,660 1,340
Expected return on plan assets (2,273) (3,725) (2,143) -- -- --
Amortization of unrecognized gains and losses 63 1,824 1,208 (32) (98) (183)
Amortization of unrecognized prior service cost 675 389 -- -- -- --
Special termination benefit loss 223 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $3,540 $2,603 $3,427 $2,858 $2,287 $2,011
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to a union agreement ratified at JAC in January 1998, JAC has offered
early retirement benefits to certain freight car segment union employees who
meet certain criteria and elect such benefits by the end of the current
agreement term (October 31, 2001). The cost of the benefits for the program will
be recognized over the actuarially determined estimated service life of the
eligible employees. The Company recognized a minimum pension liability for
underfunded plans. The minimum liability is equal to the excess of the
accumulated benefit obligation over plan assets. A corresponding amount is
recognized as an intangible asset.
17
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost $680 $(592)
Effect on postretirement benefit obligation 5,661 (4,778)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
DEFINED CONTRIBUTION PLANS
Certain of the Company's subsidiaries also maintain qualified, defined
contribution plans which provide benefits to their employees based on employee
contributions, years of service, employee earnings or certain subsidiary
earnings, with discretionary contributions allowed. Expenses relating to these
plans were $4.7 million, $3.2 million and $3.1 million for the years 1998, 1997
and 1996, respectively.
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes before extraordinary item includes
current and deferred components as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $24,286 $2,741 $ --
State 4,551 833 (134)
- --------------------------------------------------------------------------------------------------------------------
28,837 3,574 (134)
- --------------------------------------------------------------------------------------------------------------------
Deferred taxes:
Federal 533 4,969 (444)
State (437) 968 502
- --------------------------------------------------------------------------------------------------------------------
96 5,937 58
- --------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes
before extraordinary item $28,933 $9,511 $(76)
- --------------------------------------------------------------------------------------------------------------------
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 4.2 6.3 (0.1)
Nondeductible amortization expense 2.6 9.5 32.7
Other, net 0.8 (0.7) --
- --------------------------------------------------------------------------------------------------------------------
Effective income tax rate 42.6% 50.1% (1.4)%
- --------------------------------------------------------------------------------------------------------------------
18
<PAGE>
Components of deferred tax benefits (obligations) consist of the following:
(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)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
In the consolidated balance sheets, these deferred benefits and deferred
obligations are classified as deferred income tax assets or deferred income tax
liabilities, based on the classification of the related 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 carryforwards, are classified according to the expected reversal date
of the temporary difference as of the end of the year. Tax credit carryforwards
primarily consist of alternative minimum taxes, which can be carried forward
indefinitely, and certain state tax net operating losses subject to various
limitations which expire, if unused, in 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 carryforwards. 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.
19
<PAGE>
Certain information regarding stock options issued by the Company is summarized
below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE PRICES)
- --------------------------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
--------------------------------------------------------------
WTD. AVG. WTD. AVG.
SHARES EXER. PRICE SHARES EXER. PRICE
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except weighted average prices)
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 Outstanding Exercisable
------------------------------------------------------------------------
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%
- ---------------------------------------------------------- ------------------ ------------------ -------------------
</TABLE>
- --------------------------------------------------------------------------------
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.
20
<PAGE>
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 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.
- --------------------------------------------------------------------------------
NOTE 11. CONTINGENCIES
- --------------------------------------------------------------------------------
In December 1992, JAC commenced a patent infringement lawsuit against Trinity
Industries, Inc. (Trinity) in the United States District Court for the Western
District of Pennsylvania alleging infringement of JAC's patent for its BethGon
Coalporter(R) freight car. The suit involved Trinity's manufacture, sale and
offering for sale of its Aluminator II coal freight car in competition with
JAC's BethGon Coalporter(R) freight car, the tubs of which are covered by JAC's
patent.
21
<PAGE>
In April 1998, JAC settled this litigation. Pursuant to the settlement
agreement, Trinity paid $16.75 million in cash as damages for Trinity's
infringement. In addition, the settlement agreement provides that Trinity will
not market, manufacture, use, sell or lease its infringing Aluminator II freight
car through the expiration of the patent in November 1999. The settlement
agreement further provides that the Company will covenant not to sue Trinity in
connection with Trinity's marketing, manufacturing, using, selling or leasing
its single tub coal gondola freight car as presently designed and manufactured.
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 at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OPERATING LEASES
--------------------- -----------------------
<S> <C> <C>>
1999 $395 $5,191
2000 395 2,814
2001 395 1,968
2002 281 1,261
2003 125 861
Thereafter 2,003 2,220
- --------------------------------------------------------------------------------------------------------------------
Total minimum lease payments 3,594 $14,315
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Accumulated depreciation of this asset was $0.4 million and $0.3 million as of
December 31, 1998 and 1997, respectively.
Total rental expense for the years 1998, 1997 and 1996 amounted to $7.4 million,
$6.5 million and $3.7 million, respectively.
22
<PAGE>
- --------------------------------------------------------------------------------
NOTE 13. BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company is engaged in the transportation industry and operates in two
business segments. Both segments operate in North America. There are no
intersegment sales.
The Company's reportable segments are its strategic business units that serve
separate markets. They are managed separately because each segment serves a
different sector in the transportation field. The freight car segment consists
of Johnstown America Corporation, Freight Car Services and JAIX Leasing. The
truck components segment consists of Gunite Corporation, Brillion Iron Works,
Bostrom Seating and Fabco Automotive.
The Company accumulates its expenses for the Corporate headquarters which
provide services to each of the operating segments. These costs are partially
allocated to the segments based primarily on the sales of each unit.
In each of 1998, 1997 and 1996 a different customer accounted for 10%, 12% and
13% of the Company's total revenue. The particular customer sales were recorded
in the freight car segment's revenues. No other customer accounted for greater
than 10% of the Company's total revenue during these periods.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performances
based on operating income or loss before interest and income taxes, and also on
operating cash flow defined as operating income or loss plus depreciation and
amortization.
<TABLE>
Segment information for the years 1998, 1997, 1996 is as follows:
<CAPTION>
(IN MILLIONS) OPERATING IDENTIFIABLE DEPRECIATION CAPITAL
NET SALES INCOME (LOSS) ASSETS AND AMORTIZATION EXPENDITURES
---------------- -------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Freight Car $532.5 $49.7(1) $125.7 $6.7 $2.5(4)
Truck Components 433.6 49.8(2) 398.9 18.2 8.9
Corporate 0.0 (1.2) 59.8 1.4 0.1
- --------------------------------------------------------------------------------------------------------------------
Total $966.1 $98.3 $584.4 $26.3 $11.5
1997
Freight Car $234.7 $(5.1) $130.8 $6.5 $1.6(4)
Truck Components 415.6 60.6(3) 406.9 18.0 6.5
Corporate 0.0 (1.1) 41.1 2.1 0.1
- --------------------------------------------------------------------------------------------------------------------
Total $650.3 $54.4 $578.8 $26.6 $8.2
1996
Freight Car $198.3 $(3.9) $104.6 $8.1 $2.9(4)
Truck Components 361.7 35.5 409.4 18.0 6.8
Corporate 0.0 (1.2) 41.3 3.2 0.2
- --------------------------------------------------------------------------------------------------------------------
Total $560.0 $30.4 $555.3 $29.3 $9.9
- --------------------------------------------------------------------------------------------------------------------
(1)Includes favorable settlement of patent lawsuit litigation of $16.8 million.
(2)Includes pension termination gain of $1.7 million from former pension plan at Gunite Corporation.
(3)Includes reduction of environmental reserves of $14.3 million as a result of a settlement of litigation.
(4)JAIX Leasing purchases of new or rebuilt freight cars for its leased fleet are excluded. Such purchases
aggregated to $4.9 million, $27.6 million and $5.4 million in 1998, 1997 and 1996, respectively.
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14. UNAUDITED QUARTERLY INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------
1998 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $231.2 $238.2 $242.8 $253.9
Gross profit 30.5 33.0 37.2 39.4
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 $115.7 $158.2 $186.8 $189.6
Gross profit 19.0 22.4 24.7 27.8
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 15. GUARANTOR SUBSIDIARIES
- --------------------------------------------------------------------------------
The Notes and the obligations under the Senior Bank Facilities are fully and
unconditionally guaranteed on an unsecured, senior subordinated, joint and
several basis by each of the Guarantor Subsidiaries. The following condensed
consolidating financial data illustrate the composition of the Parent Company,
Guarantor Subsidiaries, and JAIX Leasing. Separate complete financial statements
of the respective Guarantors Subsidiaries would not provide additional
information which would be useful in assessing the financial composition of the
Guarantor Subsidiaries and thus are not presented. Investments in subsidiaries
are accounted for by the Parent Company on the equity method for purposes of the
supplemental consolidating presentation. Earnings of subsidiaries are,
therefore, reflected in the Parent Company's investment accounts and earnings.
The principal elimination entries eliminate the Parent Company's investment in
subsidiaries and intercompany balances and transactions.
24
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 PARENT GUARANTOR JAIX
COMPANY SUBSIDIARIES LEASING ELIMINATIONS CONSOLIDATED
<S> <C> <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
- -----------------------------------------------------------------------------------------------------------------------------
25
<PAGE>
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
- -----------------------------------------------------------------------------------------------------------------------------
26
<PAGE>
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
- -----------------------------------------------------------------------------------------------------------------------------
27
<PAGE>
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
- -----------------------------------------------------------------------------------------------------------------------------
28
<PAGE>
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)
- -----------------------------------------------------------------------------------------------------------------------------
29
<PAGE>
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>
30
<PAGE>
- --------------------------------------------------------------------------------
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Based on borrowing rates currently available to the Company for borrowings with
similar terms and maturities, the fair value of the Company's total debt,
including JAIX Leasing, was approximately $264 million and $327 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. JAIX Leasing's debt
has approximate fair market value of $10.2 million and $30.1 million as of
December 31, 1998 and 1997, respectively. All other financial instruments of the
Company have fair market values which approximate carrying value as of December
31, 1998 and 1997.
- --------------------------------------------------------------------------------
NOTE 18. SUPPLEMENTAL CASH FLOWS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Cash paid for:
Interest $31,040 $30,157 $31,487
Income taxes 28,914 952 1,382
- --------------------------------------------------------------------------------
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF JOHNSTOWN AMERICA INDUSTRIES,INC.:
We have audited the accompanying consolidated balance sheets of Johnstown
America Industries, Inc. and Subsidiaries as of December 31, 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 Johnstown America
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.
/s/ARTHUR ANDERSEN LLP
- ---------------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
32
<PAGE>
REPORT OF MANAGEMENT
The management of Johnstown America Industries, Inc. is responsible for the
fairness and accuracy of the consolidated financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles, using management's best estimates and judgements where
appropriate. The financial information throughout this report is consistent with
our consolidated financial statements.
Management has established a system of internal controls that provides
reasonable assurance that assets are adequately safeguarded and transactions are
recorded accurately, in all material respects, in accordance with management's
authorization. Our internal controls provide for appropriate separation of
duties and responsibilities, and there are documented policies regarding
utilization of company assets and proper financial reporting. These formally
stated and regularly communicated policies demand highly ethical conduct from
all employees.
The Audit Committee of the Board of Directors meets regularly to determine that
management and independent auditors are properly discharging their duties
regarding internal control and financial reporting. The independent auditors and
employees have full and free access to the Audit Committee at any time.
Arthur Andersen LLP, independent public accountants, are retained to audit the
consolidated financial statements.
/s/THOMAS M. BEGEL /S/ANDREW M. WELLER
- ----------------------- -----------------------------
Thomas M. Begel Andrew M. Weller
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
January 27, 1999
Subsidiaries of the Company
Name of Subsidiary State of Incorporation
------------------ ----------------------
Johnstown America Corporation Delaware
JAC Patent Corporation Delaware
JAIX Leasing Company Delaware
Freight Car Services, Inc. Delaware
Bostrom Holdings, Inc. Delaware
Bostrom Seating, Inc. Delaware
Truck Components Inc. Delaware
Gunite Corporation Delaware
Brillion Iron Works, Inc. Delaware
Fabco Automotive Corporation Delaware
JAII Management Company Delaware
* All subsidiaries are 100% owned by the specified entity
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the incorporation
of our report incorporated by reference in this Form 10-K into the Company's
previously filed Form S-8 Registration Statements, File No. 333-12677,
File No. 333-12679 and File No. 333-62525.
/s/ Arthur Andersen LLP
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ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1999
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