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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 1-12541
ATCHISON CASTING CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South Fourth Street
Atchison, Kansas 66002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 367-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES / X / NO / /
Indicate by check mark 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
The aggregate market value of the Common Stock, par value $.01 per share, of
the registrant held by nonaffiliates of the registrant as of September 3,
1997 was $155,776,118.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of September 3, 1997: 8,148,808
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders to be held November 21, 1997, are incorporated by reference into
Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Atchison Casting Corporation (the "Company" or "ACC") manufactures
highly engineered metal castings that are utilized in a wide variety of
products, such as tractor-crawlers, excavators, wheel-loaders, gas, steam
and hydroelectric turbines, pumps, valves, locomotives, subway cars,
automobiles, army tanks, navy ships, paper-making machinery, oil field
equipment, computer peripherals and consumer goods. Having completed
fourteen acquisitions since its inception in 1991, the Company has
established itself as a leading consolidator in the casting industry. As a
result of these acquisitions, the Company has the ability to produce
castings from a wide selection of materials, including carbon, low-alloy and
stainless steel, gray and ductile iron, aluminum and zinc, as well as the
ability to manufacture parts in a variety of sizes, ranging from small die
cast components for the computer industry that weigh a few ounces to large
hydroelectric turbine housings that weigh over sixty tons. Moreover, ACC has
extensive tooling and machining operations. The Company believes that its
broad range of capabilities, which addresses the needs of many different
markets, provides a distinct competitive advantage in the casting industry.
The Company was founded to pursue a strategy of growth and diversification
through acquisitions in the highly fragmented foundry industry. Following the
initial acquisition of the steel casting operations of Rockwell International
in 1991, the Company has continued to acquire foundries in the U.S. and
Canada. As a result of these acquisitions, as well as internal growth, ACC's
net sales have increased from approximately $54.7 million in its first fiscal
year ended June 30, 1992, to $245.8 million for the fiscal year ended June 30,
1997, resulting in a compound annual growth rate of 35%.
Since 1991, the number of customers served by the Company has increased
from 12 to more than 400, including companies such as Caterpillar, Gardner
Denver, General Motors, General Electric, Westinghouse, General Dynamics,
Ingersoll-Dresser, John Deere, Beloit Corporation and Rockwell International.
The Company has received supplier excellence awards for quality from, or has
been certified by, substantially all of its principal customers. In addition
to its presence in the domestic market, a substantial amount of ACC's castings
enter the international marketplace as components in its customers' exported
products.
The Company's favorable industry position is attributable to several
factors, including: (i) its use of new and advanced casting technologies;
(ii) its ability to cast substantially all types of iron and steel, as well as
aluminum and zinc; (iii) the Company's emphasis on customer service and
marketing; and (iv) the Company's position as a long-term supplier to many of
its major customers.
The principal executive offices of the Company are located at 400 South
Fourth Street, Atchison, Kansas 66002-0188, and the Company's telephone number
is (913) 367-2121.
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COMPANY STRATEGY
ACC is pursuing growth and diversification through a two-pronged approach
of: (i) making strategic acquisitions within the widely fragmented and
consolidating foundry industry; and (ii) integrating the acquired foundries to
achieve economies of scale, while strengthening marketing and promoting the
use of new casting technology.
STRATEGIC ACQUISITIONS
ACQUIRE LEADERS AND BUILD CRITICAL MASS. The Company initially seeks
to acquire foundries that are considered leaders in their respective sectors.
After acquiring a leader in a new market, ACC strives to make subsequent
acquisitions that further penetrate that market and take advantage of the
leader's technical expertise. The Atchison/St. Joe Division is a leader in the
field of large, complex steel castings. This acquisition in 1991 provided
credibility for ACC's presence in the industry and established a base for
add-on acquisitions. Following the Atchison/St. Joe Division acquisition, the
Company added capacity and strengthened its base through the add-on
acquisitions of Amite Foundry and Machine, Inc. ("Amite") in 1993 and Canadian
Steel Foundries, Ltd. ("Canadian Steel") in 1994. As an additional example,
Prospect Foundry, Inc. ("Prospect Foundry") was acquired in 1994 due to its
leading position in gray and ductile iron casting production. The
subsequent acquisition of La Grange Foundry Inc. ("La Grange Foundry") in
1995 further enhanced ACC's position in this market.
BROADEN PRODUCT OFFERINGS AND CAPABILITIES. The Company also seeks to
acquire foundries that add a new product line or customer base that can be
leveraged throughout ACC's network of foundries. For example, prior to the
acquisition of Prospect Foundry in 1994, which expanded ACC's capabilities to
include gray and ductile iron, the Company only produced carbon and low alloy
steel castings. The acquisition of Quaker Alloy, Inc. ("Quaker Alloy")
expanded ACC's stainless and high alloy steel capabilities to include a wider
range of casting sizes. Los Angeles Die Casting Inc. ("LA Die Casting"), a
leading die caster of aluminum and zinc components for the computer and
recreation markets, provides ACC with an entry into the aluminum and zinc die
casting markets. PrimeCast, Inc. ("PrimeCast") (formerly the Beloit Castings
Division of Beloit Corporation) expanded ACC's capabilities to produce large
iron castings.
DIVERSIFY END MARKETS. The Company attempts to lessen the cyclical
exposure at individual foundries by creating a diversified network of
foundries that serve a variety of end markets. Kramer International, Inc.
("Kramer"), a supplier of pump impellers, was acquired in 1995, expanding
ACC's sales to the energy and utility sectors. The Company believes ACC's
presence in these markets somewhat offsets its exposure to the railroad and
mining and construction markets, as energy and utility cycles do not
necessarily coincide with railroad investment or mining and construction
cycles. The acquisition of Prospect Foundry diversified the end markets served
by the Company by providing access to both the agricultural equipment and
trucking industries. Two of Prospect Foundry's largest customers are John
Deere, a manufacturer of farming equipment, and Horton Industries, a producer
of fan clutches and suspension components for the trucking market. ACC
recently acquired Jahn Foundry Corp. ("Jahn Foundry"), providing ACC with its
first entry into the automotive market. The acquisition of PrimeCast provided
entry into the paper machinery market.
In its pursuit of new markets, the Company conducts market studies,
evaluates the casting skills of its various foundries, selects the foundries
most capable of efficiently producing targeted new products and invites
potential customers to visit the designated foundries with the goal of being
certified and placed on the customers' approved bidder's lists. The Company
has successfully entered several new
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markets through this practice. For example, ACC entered the turbine casting
market in 1991 after conducting a market study, hosting quality certification
visits, quoting prices on new projects and providing customers with prototype
castings.
As part of its acquisition strategy, the Company has also purchased
non-controlling interests in other foundries, with the option to acquire
control following the initial acquisition. These foundries represent potential
opportunities for the Company to add capacity and increase market share.
The following table presents the Company's fourteen acquisitions and their
primary strategic purpose.
MANUFACTURING DATE
UNIT ACQUIRED STRATEGIC PURPOSE
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Atchison/
St. Joe Division 06/14/91 Leader in carbon and low alloy, large,
complex steel castings. Initial platform
for Company strategy.
Amite 02/19/93 Increase capacity to take on new projects
with customers. Add-on to Atchison/St. Joe.
Prospect Foundry 04/01/94 Leader in gray and ductile iron castings.
Quaker Alloy 06/01/94 Develop position in stainless and high alloy
steel castings.
Canadian Steel 11/30/94 Access to hydroelectric and steel mill
markets. Develop position in large castings.
Kramer 01/03/95 Leader in castings for pump industry.
Empire Steel
Castings, Inc. 02/01/95 Build position in pump and valve markets.
Add-on to Quaker Alloy.
La Grange Foundry 12/14/95 Build position in gray and ductile iron
casting markets.
The G&C Foundry
Company 03/11/96 Highly regarded in fluid power market. Build
position in gray and ductile iron casting
markets.
LA Die Casting 10/01/96 Leader in aluminum and zinc die casting.
Canada Alloy
Castings, Ltd. 10/26/96 Build position in existing markets. Smaller
castings than Canadian Steel, but similar
markets and materials.
Pennsylvania
Steel Foundry
& Machine Company 10/31/96 Well regarded in turbine industry. Build
position in power generation, pump and valve
markets. Add-on to Quaker Alloy and Empire.
Jahn Foundry 02/14/97 Develop position in market for automotive
castings. Add-on iron foundry.
PrimeCast 07/01/97 Build position in gray and ductile iron
casting markets. Enter paper-machinery
market, acquire capability for large iron
castings and expand ability to cast bronze.
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INTEGRATION OF ACQUIRED FOUNDRIES
STRENGTHEN MARKETING FUNCTIONS. The Company places great emphasis on
maximizing new business opportunities by strengthening marketing functions
and cross-selling across its network of foundries. Many foundries,
particularly those that operate as captive foundries or only rely on a small
number of customers, do not have strong marketing capabilities. ACC views
this industry-wide marketing weakness as an opportunity to establish a
competitive advantage. In recognizing this opportunity, the Company has
strengthened the marketing capabilities of its individual foundries and
introduced cross-selling between foundries.
One way in which ACC builds the marketing efforts of its foundries is to
increase the number of sales personnel at both existing and acquired
foundries. In addition to sales people added through acquisitions, the
Company has incrementally increased the sales force by 43%. Another element
of the Company's marketing effort is to jointly develop castings with its
customers. Joint development projects using new technology, and the resulting
increased service and flexibility provided to customers, is an important
marketing tool and has been instrumental in receiving several new orders. For
example, a joint development project between Caterpillar and ACC led to the
production of the boom tip casting for one of Caterpillar's new hydraulic
excavators.
An increasingly important aspect of the Company's marketing strategy has
been to develop its ability to cross-sell among its foundries. In acquiring
new foundries and expanding into new markets, the Company has gained a
significant advantage over smaller competitors since its sales force is able
to direct its customers to foundries with different capabilities. This
benefits ACC in that it enables foundries to use the Atchison name and
relationships to gain new customers as well as helping customers to reduce
their supplier base by providing "one-stop" shopping. The Company facilitates
cross-selling by reinforcing the sales force's knowledge of Company-wide
capabilities through visits to individual facilities. For example, a sales
person from the Atchison foundry, which makes steel castings, recently
referred a customer that needed a mid-size iron casting for a motor
housing to La Grange Foundry, which had the necessary capabilities,
subsequently resulting in a large order. Management believes that as ACC
continues to grow through acquisitions, its marketing competitive advantage
through cross-selling will also continue to grow.
INTRODUCE ADVANCED TECHNOLOGY. As part of its acquisition strategy, the
Company is systematically introducing advanced new technologies into each of
its acquired foundries to enhance their competitive position. For example,
the Company's capabilities in finite element analysis and three-dimensional
solid modeling are having a beneficial impact on sales and casting production
by helping customers to design lighter and stronger castings, shortening
design cycles, lowering casting costs and in some cases creating new
applications. These new technologies have enhanced the Company's ability to
assist customers in the component design and engineering stages. New
techniques involve computerized solid models that are used to simulate the
casting process, to make patterns and auxiliary tooling and to machine the
finished castings. The Company intends to implement this new technology in
all of its foundries and, to date, nine of ACC's foundries have implemented
or are in the process of implementing this technology.
Investments by the Company in technology improvements include: (i) new
solidification software and hardware for better casting design and process
improvement; (ii) Computer Numerical Control ("CNC") machine tools,
computer-assisted, laser measurement devices and new cutting head designs for
machine tools to improve productivity and quality in the machining of
castings; (iii) Argon-Oxygen Decarburization ("AOD") refining, which is used
to make high-quality stainless steel;
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(iv) computer-controlled sand binder pumps to improve mold quality and reduce
cost; and (v) equipment for measuring the nitrogen content of steel, which
helps in casting quality improvement. ACC is one of the few foundry companies
that uses its own scanning electron microscope to analyze inclusions in cast
metal. The Company also participates in technical projects led by the Steel
Founders' Society of America and the American Foundrymen's Society, which are
exploring ways to melt and cast cleaner iron and steel, as well as U.S.
government/industry specific projects to shorten and improve the casting design
cycle.
INCREASE CAPACITY UTILIZATION. A principal objective of the Company in
integrating and operating its foundries is to increase capacity utilization
at both its existing and newly acquired facilities. Many of the Company's
foundries at the time of their acquisition have been operating with
underutilized capacity. The Company seeks to improve capacity utilization by
introducing more effective marketing programs and applying advanced
technologies as described above.
ACHIEVE PURCHASING ECONOMIES. Once an acquisition has been completed, ACC
makes its volume purchasing programs available to the newly acquired foundry.
ACC has realized meaningful cost savings by achieving purchasing efficiencies
for acquired foundries. By jointly coordinating the purchase of raw
materials, negotiation of insurance premiums and procurement of freight
services, ACC's individual foundries have, in some cases, realized savings of
10% to 30% of these specific costs.
LEVERAGE MANAGEMENT EXPERTISE. The Company believes that improvements can
often be made in the way acquired foundries are managed, including the
implementation of new technologies, advanced employee training programs,
standardized budgeting processes and profit sharing programs and providing
access to capital. To this effect, ACC enhances management teams to add
technical, marketing or production experience, if needed. For example, ACC
was able to significantly improve the profitability of Canadian Steel by
adding new members to management, entering new markets, installing finite
element solidification modeling and providing capital. As another example,
under ACC ownership, La Grange Foundry was able to negotiate a new labor
agreement, create profit sharing for all employees, broaden its customer base
and install solidification modeling.
INDUSTRY TRENDS
The American Foundrymen's Society estimates that the U.S. casting industry
had shipments of approximately $22.6 billion in 1996, of which steel castings
accounted for approximately $3.3 billion, iron castings for approximately
$10.3 billion and non-ferrous castings for approximately $9.0 billion.
Approximately 14.5 and 14.0 million tons of castings were shipped in 1995 and
1996, respectively. Recent estimates forecast approximately 3% growth in
shipments in each of 1997 and 1998. The Company has been able to grow at a
rate substantially in excess of the overall industry principally as a result
of its position to benefit from key trends affecting the casting industry,
including the following:
INDUSTRY CONSOLIDATION
Although still highly fragmented, the foundry industry has consolidated
from approximately 465 steel foundries and 1,400 iron foundries in 1982 to
approximately 290 and 700 foundries, respectively, in 1995. As the industry
has consolidated, capacity utilization has increased from approximately 45%
in 1982 to more than 79% in 1996. This consolidation trend has been
accompanied by increased outsourcing of casting production and OEM supplier
rationalization.
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OUTSOURCING. Many OEMs are outsourcing the manufacture of cast components
to independent foundries in an effort to reduce their capital and labor
requirements and to focus on their core businesses. Management believes that
captive foundries are often underutilized, inefficiently operated and lack
the latest technology. Several of ACC's OEM customers, such as Caterpillar,
General Motors, General Electric, Rockwell International, Ingersoll-Dresser,
Gardner Denver and Beloit Corporation, have closed or sold one or more of
their captive foundries during the past ten years and have outsourced the
castings which they once made to independent suppliers such as the Company.
As described above, the closure of these facilities has contributed to
increased capacity utilization at the remaining foundries.
OEM SUPPLIER RATIONALIZATION. OEMs are rationalizing their supplier base
to fewer foundries that are capable of meeting increasingly complex
requirements. For example, OEMs are asking foundries to play a larger role in
the design, engineering and development of castings. In addition, some
customers have demanded that suppliers implement new technologies, adopt
quality (ISO 9000 and QS 9000) standards and make continuous productivity
improvements. As a result, many small, privately-owned businesses have chosen
to sell their foundries because they are unwilling or unable to make
investments necessary to remain competitive. Moreover, the EPA and OSHA
require compliance with increasingly stringent environmental and governmental
regulations.
NEW CASTING TECHNOLOGY
Recent advances in casting technology and pattern-making have created new
opportunities for reducing costs while increasing efficiency and product
quality. The combination of powerful, low cost computer workstations with
finite element modeling software for stress analysis and metal solidification
simulation is helping foundries and customers to design castings that are
lighter, stronger and more easily manufactured at a competitive cost.
The Company believes new casting technologies have led to growth in casting
shipments by replacing forgings and fabrications in certain applications. In
the past, fabricated (welded) components have been used in order to reduce
tooling costs and product development lead-time. New casting technology has
helped to reduce the weight and cost, and shorten the lead-time, of castings
and has therefore increased the relative attractiveness of cast components.
For example, these improvements allowed an ACC customer to replace a
fabricated steel boom that is used in a typical mining vehicle with one that
is cast. The cast steel boom weighs 20% less than the fabricated component
that it replaced, allowing an increase in payload. Product life is increased
due to greater corrosion resistance. Another customer replaced the
combination cast/fabricated body of a rock crusher with a one-piece casting,
reducing labor for cutting, welding and machining as a result. An example of
an application in which castings have replaced forged products is the
blow-out preventer that is used to control a well "blow-out" during drilling.
These products are required to comply with stringent safety standards because
blow-out preventers must be able to contain pressures of 15,000 pounds
per-square-inch. Due to lower costs and equally stringent safety features
made possible by new casting technologies, castings have substantially
replaced forgings for blow-out preventer bodies.
MARKETS AND PRODUCTS
MINING AND CONSTRUCTION. ACC's castings are used in tractor-crawlers,
mining trucks, excavators, drag lines, wheel-loaders, rock crushers, diesel
engines, slurry pumps, coal mining machines and ore-processing equipment.
Mining and construction equipment customers include Caterpillar, Nordberg,
Rockwell International, Gardner Denver, John Deere and Komatsu, among others.
Products
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supplied to the mining and construction industry, including Caterpillar,
accounted for 25.6%, 31.1% and 31.4%, respectively, of the Company's net
sales in fiscal 1995, fiscal 1996 and fiscal 1997. In fiscal 1997,
Caterpillar accounted for more than 10% of net sales.
All of the Company's major customers sell their end products to worldwide
markets, which allows ACC to participate indirectly in the growth in
construction in Asia, and in large mining projects in Indonesia, Africa and
South America. This helps reduce the Company's dependence on the domestic
capital goods spending cycle.
ENERGY. The Company's products for the energy market include pumps, valves
and compressors for transmission and refining of petrochemicals, blow-out
preventers and mud pumps for drilling and workover of wells, lifting hooks
and shackles for offshore installation of equipment, winch components for rig
positioning, sub-sea components and other oil field castings. Shaffer, Cooper
Energy, Hydril, Solar, Nordstrom, Ingersoll-Dresser Pumps and Amclyde are
among the Company's many energy-related customers. Energy products produced
by the Company accounted for 12.1%, 12.2% and 14.3%, respectively, of the
Company's net sales in fiscal 1995, fiscal 1996 and fiscal 1997.
UTILITIES. Many of ACC's castings are used in products for the utility
industry, such as pumps, valves and gas compressors. ACC also makes steam,
gas and hydroelectric turbine castings, nuclear plant components, sewage
treatment parts and other castings for the utility industry. In addition, the
Company manufactures replacement products that are used when customers
perform refurbishments. Customers include Westinghouse, General Electric,
Siemens, Kvaerner, Goulds Pumps, and Neles-Jamesbury. Utility products
produced by the Company accounted for 8.9%, 21.5% and 13.1%,
respectively, of the Company's net sales in fiscal 1995, fiscal 1996 and
fiscal 1997.
RAILROAD. The Company supplies cast steel undercarriages for locomotives,
among other parts, for this market. GM is the largest customer, and has
purchased locomotive castings from the Atchison/St. Joe division for over 50
years. Net sales of locomotive undercarriages accounted for 19.2%, 7.5% and
5.0%, respectively, of the Company's net sales in fiscal 1995, fiscal 1996
and fiscal 1997.
MILITARY. Weapons and equipment for the Army, Navy and Coast Guard employ
many different types of castings. The Company makes components for ships,
battle tanks, howitzers and other heavy weapons. The military casting market
has declined sharply, but ACC has been able to replace this volume by
targeting new products such as turbines, compressors, pumps and valves.
Customers in this market include General Dynamics, Litton, Bath Iron Works,
Boeing, the U.S. Army and Avondale Shipyards.
FARM EQUIPMENT. ACC makes a variety of castings for farm tractors, baling
equipment, harvesters, sugar cane processors and other agricultural equipment
for customers such as John Deere, Caterpillar and New Holland.
MASS TRANSIT. ACC began making undercarriages for passenger rail cars in
1992 and is now one of the main casting suppliers to the mass transit market.
The Company's castings are used on the BART system in San Francisco, METRA in
Chicago, NCTD in San Diego, MARTA in Atlanta, and in Miami and Vancouver.
ACC's La Grange Foundry recently began casting iron housings for traction
motors to be used in the refurbishment of subway cars for New York City,
which is the largest user of subway cars in North America.
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AUTOMOTIVE. The automotive industry uses both iron and aluminum castings,
as well as aluminum die castings. ACC recently entered this market through
the purchase of Jahn Foundry in Springfield, Massachusetts. Jahn Foundry
produces cast iron cylinder liners used by General Motors in cast aluminum
engine blocks for Saturn automobiles.
TRUCKING. The Company manufactures components used primarily on truck
engines and suspension systems, such as fan clutch components, manifolds,
roll pins and gears. Many of ACC's castings are used in aftermarket products
to achieve better fuel economy or to enhance ride characteristics. Customers
include Horton Industries, Detroit Diesel and others.
PAPER-MAKING MACHINERY. The paper-making machinery industry uses a variety
of iron, steel and non-ferrous castings, both in original equipment and for
the aftermarket. ACC has been a minor supplier to this market since 1992. The
acquisition of the castings division of Beloit Corporation in July 1997 makes
ACC a major supplier of castings to this market.
OTHER. Other markets include process equipment such as rubber
mixers, plastic extruders, dough mixers, steel mill rolls, machine tools and
a variety of general industrial applications. With the acquisition of LA Die
Casting, the Company entered several new markets, including the consumer
market. LA Die Casting supplies components used to make recreational
vehicles, computer peripherals, direct satellite receivers, pool tables and
golf equipment. Customers include California Amplifier, RC Design, Care Free
of Colorado, Callaway and Printronix.
SALES AND MARKETING
New foundry technologies and the new applications resulting therefrom
require a more focused and knowledgeable sales force. The Company pursues an
integrated sales and marketing approach that includes senior management,
engineering and technical professionals, production managers and others, all
of whom work closely with customers to better understand their specific
requirements and improve casting designs and manufacturing processes. The
Company supplements its direct sales effort with participation in trade
shows, marketing videos, brochures, technical papers and customer seminars on
new casting designs.
The Company's engineering and technical professionals are actively involved
in marketing and customer service, often working with customers to improve
existing products and develop new casting products and applications. They
typically remain involved throughout the product development process, working
directly with the customer to design casting patterns, build the tooling
needed to manufacture the castings and sample the castings to ensure they
meet customers' specifications. The Company believes that the technical
assistance in product development, design, manufacturing and testing that it
provides to its customers gives it an advantage over its competition.
Customers tend to develop long-term relationships with foundries that can
provide high quality, machined castings delivered on a just-in-time basis
that do not require on-site inspection. Frequently, the Company is the only
current source for the castings that it produces. Maintaining duplicate
tooling in multiple locations is costly, so customers prefer to rely on one
supplier for each part number. Moving the tooling to another foundry is
possible, however, such a move entails considerable time and expense on the
customer's part. In addition, ACC is forming product development partnerships
with a number of customers to develop new applications for castings.
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BACKLOG
The Company's backlog is based upon customer purchase orders that the
Company believes are firm and does not include purchase orders anticipated
but not yet placed. At June 30, 1997, the Company's backlog was approximately
$80.8, as compared to backlog of approximately $65.1 million at June 30,
1996. The backlog is scheduled for delivery in fiscal 1998 except for
approximately $2.5 million, of which $2.0 million is scheduled for delivery
in fiscal 1999. The level of backlog at any particular time is not
necessarily indicative of the future operating performance of the Company.
The Company historically has not experienced cancellation of any significant
portion of customer orders.
COMPETITION
The Company competes with a number of foundries in one or more product
lines, although none of the Company's competitors compete with it across all
product lines. The principal competitive factors in the castings market are
quality, delivery and price; however, breadth of capabilities and customer
service have become increasingly important. The Company believes that it is
able to compete successfully in its markets by: (i) offering high quality,
machined castings; (ii) working with customers to develop and design new
castings; (iii) providing reliable delivery and short lead-times;
(iv) containing its manufacturing costs, thereby pricing competitively; and
(v) offering a broad range of cast materials.
The Company believes that the market for iron and steel castings is
attractive because of a relatively favorable competitive environment, high
barriers to entry and the opportunity to form strong relationships with
customers. New domestic competitors are unlikely to enter the foundry
industry because of the high cost of new foundry construction, the need to
secure environmental approvals at a new foundry location, the technical
expertise required and the difficulty of convincing customers to switch to a
new, unproven supplier.
ACC, and the foundry industry in general, competes with manufacturers
of forgings and fabrications in some application areas. The Company believes
that the relative advantages of castings compared to forgings and
fabrications, particularly in light of new casting design technology, which
reduces weight, cost and lead-time while improving casting quality, will lead
to increased replacement of forgings and fabrications by iron and steel
castings.
MANUFACTURING
CASTINGS. Casting is one of several methods, along with forging and
fabricating, which shape metal into desired forms. Castings are made by
pouring or introducing molten metal into a mold and allowing the metal to
cool until it solidifies, creating a monolithic component. Some castings,
such as die castings, are made with a permanent metal mold which can be used
repeatedly. Others, such as sand castings, are made in a sand mold which is
used only once. Forgings are made by shaping solid metal with pressure,
usually in a die or with hammers. Fabrications are made by welding together
separate pieces of metal. Castings can offer significant advantages over
forgings and fabrications. A well-designed casting can be lighter, stronger
and more stress and corrosion resistant than a fabricated part. Although
castings and forgings are similar in several respects, castings are generally
less expensive than forgings.
CASTING PROCESS. The steel casting manufacturing process involves melting
steel scrap in electric arc or induction furnaces, adding alloys, pouring the
molten metal into molds made primarily of sand
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and removing the solidified casting for cleaning, heat treating and quenching
prior to machining the casting to final specifications. The manufacture of a
steel casting begins with the molding process. Initially, a pattern constructed
of wood, aluminum or plastic is created to duplicate the shape of the desired
casting. The pattern, which has similar exterior dimensions to the final
casting, is positioned in a flask and foundry sand is packed tightly around it.
After the sand mold hardens, the pattern is removed. When the sand mold is
closed, a cavity remains within it shaped to the contours of the removed
pattern. Before the mold is closed, sand cores are inserted into the cavity to
create internal passages within the casting. For example, a core would be used
to create the hollow interior of a valve casing. With the cores in place, the
mold is closed for pouring.
Steel scrap and alloys are melted in an electric arc furnace at
approximately 2,900 degrees Fahrenheit, and the molten metal is poured from a
ladle into molds. After pouring and cooling, the flask undergoes a
"shake-out" procedure in which the casting is removed from the flask and
vibrated to remove sand. The casting is then moved to a blasting chamber for
removal of any remaining foundry sand and scale. Next, the casting is sent to
the cleaning room, where an extensive process removes all excess metal.
Cleaned castings are put through a heat treating process, which improves
properties such as hardness and tensile strength through controlled increases
and decreases in temperature. A quench tank to reduce temperatures rapidly is
also available for use in heat treatment. The castings are shot blasted again
and checked for dimensional accuracy. Each casting undergoes a multi-stage
quality control procedure before being transported to one of the Company's or
the customer's machine shops for any required machining.
Iron castings are processed similarly in many respects to steel castings.
Melting and pouring temperatures for molten iron are approximately 2,400
degrees Fahrenheit, and less cleaning and finishing is required for iron
castings than is typically required for steel castings. Iron and steel scrap
may both be used in making cast iron.
Die casting, as contrasted to sand casting, uses a permanent metal mold
that is reused. Melting and pouring temperatures for aluminum are less than
half that used for steel, and die castings normally require less cleaning
than iron or steel castings.
MATERIALS. Steel is more difficult to cast than iron, copper or aluminum
because it melts at higher temperatures, undergoes greater shrinkage as it
solidifies, causing the casting to crack or tear if the mold is not properly
designed, and is highly reactive with oxygen, causing chemical impurities to
form as it is poured through air into the mold. Despite these challenges,
cast steel has become a vital material due to its superior strength compared
to other ferrous metals. In addition, most of the beneficial properties of
steel match or exceed those of competing ferrous metals. The Company's first
foundry, which today forms the Atchison/St. Joe Division, produced carbon and
low alloy steel castings when it was acquired from Rockwell International in
1991. ACC added an AOD vessel for making stainless steel in order to better
supply the pump and valve markets, which sometimes require stainless steel
castings to be made from the same patterns used for carbon steel castings.
Also in 1994, ACC purchased Quaker Alloy, which specialized in casting high
alloy and stainless steels for valves, pumps and other equipment. Canadian
Steel and Canada Alloy Castings, Ltd. ("Canada Alloy") also make high alloy
and stainless castings, further reinforcing ACC's market position and skill
base concerning the casting of stainless and specialty, high alloy steels.
In applications that do not require the strength, ductility and/or
weldability of steel, iron castings are generally preferred due to their
lower cost, shorter lead-times and somewhat simpler manufacturing processes.
Ductile iron is especially popular because it exhibits a good combination of
the qualities of
11
<PAGE>
both iron and steel. Ductile iron is stronger and more flexible than traditional
cast iron-known as gray iron-but is easier and less expensive to cast than
steel. In 1994 ACC began making gray and ductile iron castings when it
acquired Prospect Foundry. Ductile iron is a popular new material, whose
utilization is increasing faster than either traditional gray cast iron or
cast steel. ACC's position in ductile iron increased through the subsequent
purchases of La Grange Foundry, The G&C Foundry Company ("G&C") and PrimeCast.
Aluminum castings (including die castings) generally offer lighter weight
than iron or steel, and are usually easier to cast because aluminum melts at
a lower temperature. These advantages, coupled with low prices for aluminum
during the last decade, have led to a substantial increase in the use of
aluminum castings, especially in motor vehicles. Aluminum's relative
softness, lower tensile strength and poor weldability limit its use in many
applications where iron and steel castings are currently employed. In 1996,
ACC entered the non-ferrous market with the purchase of LA Die Casting, which
die casts aluminum and zinc.
The ability to provide cast components in a broad range of materials allows
ACC to present itself as a "one-stop shop" for some customers and simplifies
purchasing for others. Since customers in general have a goal of reducing
their total number of suppliers, a broader range of materials and casting
skills gives ACC an advantage over many other foundry operations.
MACHINING. The Company machines many of its steel castings, typically to
tolerances within 30 thousandths of an inch. Some castings are machined to
tolerances of five thousandths of an inch. Machining includes drilling,
threading or cutting operations. The Company's St. Joe and Amite machine
shops have a wide variety of machine tools, including ten CNC machine tools.
The Company also machines some of its castings at Canadian Steel, Quaker
Alloy, Empire Steel Castings, Inc. ("Empire") and Kramer. The ability to
machine castings provides a higher value-added product to the customer and
improved quality. Casting imperfections, which are typically located near the
surface of the casting, are usually discovered during machining and corrected
before the casting is shipped to the customer.
NON-DESTRUCTIVE TESTING. Customers typically specify the physical
properties, such as hardness and strength, which their castings are to
possess. The Company determines how best to meet those specifications.
Constant testing and monitoring of the manufacturing process are necessary to
maintain high quality and to ensure the consistency of the castings.
Electronic testing and monitoring equipment for tensile, impact, radiography,
ultrasonic, magnetic particle, dye penetrant and spectrographic testing are
used extensively to analyze molten metal and test castings.
ENGINEERING AND DESIGN. The Company's process engineering department
assists the customer in designing the product and works with manufacturing
departments to determine the most cost effective way to produce the casting.
Among other computer-aided design techniques, the Company uses
three-dimensional solid modeling and solidification software. This equipment
reduces the time required to produce sample castings for customers by several
weeks and improves the casting design.
CAPACITY UTILIZATION. The following table shows the type and the
approximate amount of available capacity, in tons, for each foundry and die
caster. The actual number of tons that a foundry can produce annually is
dependent on product mix. Complicated castings, such as those used for
military applications or in steam turbines, require more time, effort and use
of facilities, than do simpler castings such as those for the mining and
construction market. Also, high alloy and stainless steel castings generally
require more processing time and use of facilities than do carbon and low
alloy steel castings.
12
<PAGE>
<TABLE>
<CAPTION>
TONS
ESTIMATED* SHIPPED
ANNUAL 12 MONTHS ESTIMATED*
MANUFACTURING CAPACITY ENDED CAPACITY
UNIT METALS CAST MAJOR APPLICATIONS IN NET TONS JUNE 30, 1997 UTILIZATION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atchison/St. Joe Carbon, low Mining and construction, 29,000 25,394 88%
Division alloy and stainless rail, military, valve,
steel turbine and compressor
Amite Carbon and Marine, mining 14,000 4,949 35%
low alloy and construction
steel
Prospect Gray and Construction, 12,500 10,187 81%
Foundry ductile agricultural,
iron trucking, hydraulic,
power transmission and
machine tool
Quaker Alloy Carbon, low Pump and valve 6,000 1,929 32%
alloy and
stainless steel
Canadian Steel Carbon, low Hydroelectric 6,000 2,802 47%
alloy and and steel mill
stainless steel
Kramer Carbon, low Pump impellers 1,000 1,079 108%
alloy and and casings
stainless steel,
gray and ductile iron
Empire Carbon and Pump and valve 4,800 1,761 37%
low alloy
steel and
gray, ductile
and nickel
resistant iron
La Grange Gray, ductile Mining and 14,800 11,595 78%
Foundry and compacted construction
graphite iron and transportation
G&C Gray and Fluid power (hydraulic 10,500 8,077 77%
ductile iron control valves)
LA Die Casting Aluminum and Communications, 2,400 1,439 60%
zinc recreation and computer
Canada Alloy Carbon, low Power generation, 2,500 1,320 53%
alloy and pulp and paper machinery,
stainless steel pump and valve
Pennsylvania Carbon and Power generation, 3,700 3,390 92%
Steel stainless steel pump and valve
Jahn Foundry Gray iron Automotive, air 11,000 7,391 67%
conditioning and
agricultural
PrimeCast Gray and ductile Paper-making machinery 19,840 11,933 60%
iron and stainl
steel
-------- ------- -----
Totals 138,040 93,246 68%
======== ======= =====
</TABLE>
___________
* Estimated annual capacity and utilization are based upon management's
estimate of the applicable manufacturing unit's theoretical capacity assuming
a certain product mix and assuming such unit operated five days a week, three
shifts per day and assuming normal shutdown periods for maintenance. Actual
capacities will vary, and such variances may be material, based upon a number
of factors, including product mix and maintenance requirements.
13
<PAGE>
RAW MATERIALS
The principal raw materials used by the Company include scrap iron and
steel, aluminum, zinc, molding sand, chemical binders and alloys, such as
manganese, nickel and chrome. The raw materials utilized by the Company are
available in adequate quantities from a variety of domestic sources. From
time to time the Company has experienced fluctuations in the price of scrap
steel, which accounts for 4% of net sales, and alloys, which account for less
than 2% of net sales. The Company has generally been able to pass on the
increased costs of raw materials and has escalation clauses for scrap with
certain of its customers. As part of its commitment to quality, the Company
issues rigid specifications for its raw materials and performs extensive
inspections of incoming raw materials.
QUALITY ASSURANCE
The Company has adopted sophisticated quality assurance techniques and
policies which govern every aspect of its operations to ensure high quality.
During and after the casting process, the Company performs many tests,
including tensile, impact, radiography, ultrasonic, magnetic particle, dye
penetrant and spectrographic tests. The Company has long utilized statistical
process control to measure and control dimensions and other process
variables. Analytical techniques such as Design of Experiments and the
Taguchi Method are employed for trouble-shooting and process optimization.
As a reflection of its commitment to quality, the Company has been
certified by, or won supplier excellence awards from, substantially all of
its principal customers. Of 600 suppliers to General Motors' Electromotive
Division, the Company was the first supplier to receive the prestigious
Targets of Excellence award. Reflecting its emphasis on quality, the
Atchison/St. Joe Division was certified to ISO 9001 in August 1995, which
represents compliance with international standards for quality assurance.
Quaker Alloy, La Grange Foundry, Canada Alloy, Pennsylvania Steel Foundry &
Machine Company ("Pennsylvania Steel") and Canadian Steel have each been
certified to ISO 9002. Other ACC foundries are preparing for ISO
certification.
14
<PAGE>
EMPLOYEE AND LABOR RELATIONS
As of June 30, 1997, the Company had approximately 2,800 full-time
employees. In the last five years, the Company has had one work stoppage,
which occurred in May 1993 at the Atchison/St. Joe Division and lasted for
nine days. The Company's hourly employees are covered by collective
bargaining agreements with several unions at twelve of its locations. These
agreements expire at varying times over the next several years. The following
table sets forth a summary of the principal unions and term of each
collective bargaining agreement at the respective locations.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
MANUFACTURING EFFECTIVE DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION DATE EXPIRATION OF 06/30/97)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atchison/St. Joe United Steelworkers of 03/04/96 05/09/99 382
America, Local 6943
Prospect Foundry Glass, Molders, Pottery, 03/18/95 06/01/99 195
Plastics & Allied Workers
International, Local 63B
Quaker Alloy United Steelworkers of 07/15/95 07/15/99 165
America, Local 7274
Canadian Steel Metallurgistes Unis 02/12/96 02/12/01 120
d'Amerique, Local 6859
Empire United Steelworkers of 03/01/97 02/28/02 113
America, Local 3178
La Grange Glass, Molders, Pottery, 12/14/95 12/16/00 242
Foundry Plastics & Allied Workers
Union, Local 143
G&C United Electrical, Radio and 03/01/97 06/30/01 147
Machine Workers of America,
Local 714
LA Die Casting United Automobile, Aircraft, 12/10/94 12/12/97 59
Agricultural Implement
Workers of America,
Local 509
Canada Alloy United Steelworkers of 04/04/97 04/03/02 77
America, Local 5699
Pennsylvania United Steelworkers of 10/23/95 10/24/98 230
Steel America, Local 6541
Jahn Foundry Glass, Molders, Pottery, 04/24/95 04/26/98 99
Plastics and Allied Workers
International, Local 97
PrimeCast Glass, Molders, Pottery, 08/04/96 08/04/00 132
Plastics and Allied Workers
International, Local 320
</TABLE>
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
- --------------------- ---- --------------------------
Hugh H. Aiken........ 53 Chairman of the Board, President,
Chief Executive Officer and
Director
Charles T. Carroll... 47 Vice President
Edward J. Crowley.... 59 Vice President
John R. Kujawa....... 43 Group Vice President
Donald J. Marlborough 61 Group Vice President
Kevin T. McDermed.... 37 Vice President, Chief Financial
Officer, Treasurer and
Secretary
Richard J. Sitarz.... 56 Vice President
James Stott.......... 55 Group Vice President
HUGH H. AIKEN has been the Chairman of the Board, President, Chief
Executive Officer and a Director since June 1991. From 1989 to 1991,
Mr. Aiken served as an Associate of Riverside Partners, Inc., an investment
firm located in Boston, Massachusetts, and from 1985 to 1989, Mr. Aiken
served as General Manager for AMP Keyboard Technologies, Inc., a manufacturer
of electromechanical assemblies located in Milford, New Hampshire. Mr. Aiken
previously served as a Director and Chief Operating Officer of COMNET
Incorporated and as a Director and Chief Executive Officer of General
Computer Systems, Inc., both public companies.
CHARLES T. CARROLL has been Vice President-G&C since September 1996 and has
additionally served as President of G&C since June 1980. He was Plant Manager
of G&C from June 1978 to June 1980. Mr. Carroll has been with G&C since 1973.
EDWARD J. CROWLEY has been Vice President-Empire since February 1995. Prior
thereto, he had served as President and Chief Executive Officer of Empire
Steel Castings, Inc. (the predecessor of Empire) since 1985.
JOHN R. KUJAWA has been Group Vice President-Atchison/St. Joe and Amite
since November 1996 and Vice President-Atchison/St. Joe from August 1994 to
November 1996. He served as Executive Vice President-Operations of the
Company from July 1993 to August 1994, Vice President-Foundry of the Company
from June 1991 to July 1993, Assistant Foundry Manager of the Company from
1990 to 1991 and as Senior Process Engineer of the Company from 1989 to 1990.
He served as Operations Manager for Omaha Steel Castings, a foundry in Omaha,
Nebraska from 1984 to 1989.
DONALD J. MARLBOROUGH has been Group Vice President-Canadian Steel, La
Grange Foundry and Canada Alloy since November 1996, Vice President-Corporate
Development and Canadian Steel from
16
<PAGE>
December 1994 to November 1996 and Vice President-La Grange Foundry from
December 1995 to November 1996. From May 1991 to October 1994, Mr.
Marlborough served as Vice President-Manufacturing and Plant Manager for
American Steel Foundries, a foundry in Chicago, Illinois, and served as
President and Director of Manufacturing for Racine Steel Castings, a foundry
in Racine, Wisconsin, from 1985 to June 1990.
KEVIN T. MCDERMED has been Vice President, Chief Financial Officer and
Treasurer of the Company since June 1991 and has served as Secretary of the
Company since May 1992. He served as the Controller of the Company from 1990
to June 1991 and as its Finance Manager from 1986 to 1990. Mr. McDermed has
been with the Company since 1981.
RICHARD J. SITARZ has been Vice President-Prospect since September 1994 and
has served as President of Prospect Foundry since July 1992. He served as
Executive Vice President of Prospect Foundry since 1985. Mr. Sitarz has been
with Prospect Foundry since 1967.
JAMES STOTT has been Group Vice President-Empire, Kramer, Pennsylvania
Steel and Quaker Alloy since November 1996 and Vice President-Kramer from
January 1995 to November 1996. He served as President, Chief Executive
Officer and Chief Operating Officer of Kramer International, Inc. (the
predecessor of Kramer) since 1980.
PRODUCT WARRANTY
The Company warrants that every product will meet a set of specifications,
which is mutually agreed upon with each customer. The Company's written
warranty provides for the repair or replacement of its products and excludes
contingency costs. Often, the customer is authorized to make the repair
within a dollar limit, in order to minimize freight costs and the time
associated therewith. Although the warranty period is 90 days, this time
limit is not strictly enforced if there is a defect in the casting. In fiscal
1997, warranty costs amounted to less than one percent of the Company's net
sales.
ENVIRONMENTAL REGULATIONS
Companies in the foundry industry must comply with numerous federal, state
and local (and, with respect to Canadian operations, provincial and local)
environmental laws and regulations relating to air emissions, solid waste
disposal, stormwater run-off, landfill operations, workplace safety and other
matters. The Clean Air Act, as amended, the Clean Water Act, as amended, and
similar provincial, state and local counterparts of these federal laws
regulate air and water emissions and discharges into the environment. The
Resource Conservation and Recovery Act, as amended, and the Comprehensive
Environmental Response, Compensation and Liability Act, as amended
("CERCLA"), among other laws, address the generation, storage, treatment,
transportation and disposal of solid and hazardous waste and releases of
hazardous substances into the environment, respectively. The Company believes
that it is in material compliance with applicable environmental laws and
regulations and is not aware of any outstanding violations or citations with
respect thereto at any of its facilities.
A Phase I environmental assessment of each of the Company's facilities has
been performed, and no significant or widespread contamination has been
identified at any Company facility. A Phase I assessment includes an
historical review, a public records review, a preliminary investigation of
the site and surrounding properties and the preparation and issuance of a
written report, but it does not include soil sampling or subsurface
investigations. There can be no assurance that these Phase I assessments have
identified, or could be expected to identify, all areas of contamination. As
the Company evaluates
17
<PAGE>
and updates the environmental compliance programs at foundry facilities
recently acquired, the Company may become aware of matters of non-compliance
that need to be addressed or corrected. In addition, there is a risk that
material adverse conditions could have developed at the Company's facilities
since such assessments.
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust particles,
are handled by dust collection systems. The Company anticipates that it will
incur additional capital and operating costs to comply with the Clean Air Act
Amendments of 1990 and the regulations thereunder. The Company is currently
in the process of obtaining permits under the new regulations and estimating
the cost of compliance with these requirements and the timing of such costs.
Such compliance costs, however, could have a material adverse effect on the
Company's results of operations and financial condition.
The solid waste generated by the Company's foundries generally consists of
non-hazardous foundry sand that is reclaimed for reuse in the foundries until
it becomes dust. The non-hazardous foundry dust waste is then disposed of in
landfills, two of which are owned by the Company (one in Atchison County,
Kansas, and one in Myerstown, Pennsylvania). No other parties are permitted
to use the Company's landfills, which are both in material compliance with
all applicable regulations to the Company's knowledge. Costs associated with
the future closure of the landfills according to regulatory requirements
could be material.
While under prior ownership, Kramer was identified as a potentially
responsible party ("PRP") with respect to clean-up of a waste disposal site
located in Franklin, Wisconsin, which was used by one of Kramer's former
subcontractors. The $6 million clean-up of this site has been completed.
Kramer's insurance carriers paid $300,000 toward clean-up. The performing PRP
has sued a group of nonperforming PRPs, including Kramer, for contribution.
ACME PRINTING INK COMPANY V. MENARD, ET AL., Case No 89-C-834 (E.D. Wis.).
Because of alleged unexpected clean-up costs, the performing PRP is demanding
additional contribution from Kramer beyond the $300,000 already paid.
Management believes that the resolution of this matter will not result in a
material adverse effect on the Company's results of operations or financial
condition. To date, all litigation costs related to this matter, including
attorneys' fees, have been paid by Kramer's insurance carriers.
The Company also operates pursuant to regulations governing workplace
safety. The Company samples its interior air quality to ensure compliance
with OSHA requirements. To the Company's knowledge, it currently operates in
material compliance with all OSHA and other regulatory requirements governing
workplace safety.
The Company continues to evaluate its manufacturing processes and equipment
(including its recently acquired facilities) to ensure compliance with the
complex and constantly changing environmental laws and regulations. Although
the Company believes it is currently in material compliance with such laws
and regulations, the operation of casting manufacturing facilities entails
environmental risks, and there can be no assurance that the Company will not
be required to make substantial additional expenditures to remain in or
achieve compliance in the future.
18
<PAGE>
ITEM 2. PROPERTIES
The Company's principal facilities are listed in the accompanying table,
together with information regarding their location, size and primary
function. The foundries that are located in Atchison, Kansas, Montreal,
Quebec and Amite, Louisiana include on-site pattern shops that construct
patterns used for mold making. The two landfills are used solely by the
Company and contain non-hazardous materials only, principally foundry sand.
All of the Company's principal facilities are owned.
The following table sets forth certain information with respect to the
Company's principal facilities.
FLOOR SPACE
NAME LOCATION PRINCIPAL USE IN SQ. FEET
- -------------------------------------------------------------------------------
Corporate Office Atchison, KS Offices 3,000
Atchison Foundry Atchison, KS Steel foundry 449,703
Atchison Pattern Atchison, KS Pattern storage 159,711
Storage
St. Joe Machine Shop St. Joseph, MO Machine shop 142,676
Atchison Casting Atchison, KS Landfill for N/A
foundry sand
Amite Foundry & Amite, LA Steel foundry 282,000
Machine Shop and machine shop
Prospect Foundry Minneapolis, MN Iron foundry 133,000
Quaker Alloy Myerstown, PA Steel foundry & 301,000
landfill for foundry
sand
Canadian Steel Montreal, Quebec Steel foundry 455,335
Kramer Milwaukee, WI Steel foundry 23,000
Empire Reading, PA Iron and steel 177,000
foundry
La Grange Foundry La Grange, MO Iron foundry 189,000
G & C Sandusky, OH Iron foundry 80,000
LA Die Casting Los Angeles, CA Aluminum and 35,000
zinc die
casting
Canada Alloy Kitchener, Ontario Steel foundry 83,000
Pennsylvania Steel Hamburg, PA Steel foundry 158,618
Jahn Foundry Springfield, MA Iron foundry 207,689
PrimeCast South Beloit, IL Iron foundry 500,000
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Except as otherwise provided herein, the Company is not a party to any
material legal proceedings involving claims against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Common Stock was traded in the Nasdaq National Market under the symbol
"ACCX" from October 4, 1993 until December 11, 1996 when it began trading on
the New York Stock Exchange under the symbol "FDY." Prior to October 4, 1993
there was no trading market for the Common Stock. The following table sets
forth the high and low sales prices for the shares of Common Stock on the
Nasdaq National Market and New York Stock Exchange for the periods indicated.
HIGH LOW
Fiscal Year ending June 30, 1996:
First Quarter . . . . . . . . . . . . 18 1/4 14 1/8
Second Quarter . . . . . . . . . . . 17 11
Third Quarter . . . . . . . . . . . . 13 1/4 10 3/4
Fourth Quarter . . . . . . . . . . . 15 3/4 12 7/16
Fiscal Year Ending June 30, 1997:
First Quarter . . . . . . . . . . . 16 1/4 13
Second Quarter . . . . . . . . . . . 18 1/8 15 1/4
Third Quarter . . . . . . . . . . . 20 1/2 16 3/4
Fourth Quarter . . . . . . . . . . . 19 3/8 15 11/16
Fiscal Year Ending June 30, 1998:
First Quarter (through September 3, 1997) 20 9/16 16 3/4
As of September 3, 1997, there were over 2,200 holders of the Common
Stock, including shares held in nominee or street name by brokers.
20
<PAGE>
DIVIDEND POLICY
The Company has not declared or paid cash dividends on shares of its Common
Stock. The Company does not anticipate paying any cash dividends or other
distributions on its Common Stock in the foreseeable future. The current
policy of the Company's Board of Directors is to reinvest all earnings to
finance the expansion of the Company's business. The agreements governing the
Company's credit facility and $20 million senior notes contain limitations on
the Company's ability to pay dividends. See Note 8 of Notes to Consolidated
Financial Statements.
UNREGISTERED SECURITIES TRANSACTIONS
In lieu of cash compensation for services rendered in their capacity as
Directors of the Company, Mr. Ray Witt and Mr. John Whitney were each
provided at their election 592 shares of common stock on July 25, 1996, with
a then-current market value of $13.50 per share and Mr. Ray Witt was provided
at his election an additional 533 shares of common stock on August 21, 1996,
with a then-current market value of $15.00 per share. Such transactions were
exempt from registration under the Securities Act of 1933, as amended (the
"Act"), pursuant to Section4(2) of the Act.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected historical consolidated
financial information and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial information for the
fiscal years ended June 30, 1993, 1994, 1995, 1996 and 1997 has been derived
from audited consolidated financial statements. The information below should
be read in conjunction with Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
22
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . $66,591 $82,519 $141,579 $185,081 $245,769
Cost of Sales . . . . . . . . . . . . . . . . 54,321 66,304 115,458 156,612 203,386
------- ------- ------- -------- -------
Gross Profit . . . . . . . . . . . . . . 12,270 16,215 26,121 28,469 42,383
Operating Expenses:
Selling, General & Administrative . . . . 5,986 6,581 13,058 15,459 21,559
Amortization of Intangibles . . . . . . . 1,143 1,209 1,392 1,508 632
Other Income(1) . . . . . . . . . . . . - - 6,370 26,957 -
------- ------- ------- -------- -------
Operating Income . . . . . . . . . . . 5,141 8,425 18,041 38,459 20,192
Interest Expense . . . . . . . . . . . . 3,926 1,223 2,326 2,845 3,227
Minority Interest in Net Income
of Subsidiaries - 62 280 225 270
------- ------- ------- -------- -------
Income Before Taxes and
Extraordinary Item. . . . . . . . . 1,215 7,140 15,435* 35,389* 16,695
Income Taxes . . . . . . . . . . . . . - 2,494 5,971 14,063 6,967
------- ------- ------- -------- -------
Income Before Extraordinary Item. . 1,215 4,646 9,464 21,326 9,728
Extraordinary Item, net of tax(2). . . - 1,230 - - -
------- ------- ------- -------- -------
Net Income . . . . . . . . . . . . $1,215 $3,416 $9,464 $21,326 $9,728
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Net Income Per Share . . . . . . . . . $0.40 $0.72 $1.73 $3.87 $1.67
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Net Income Per Share Excluding
Extraordinary Item and
Other Income(1)(2). . . . . . . . . $0.40 $0.98 $1.02 $0.92 $1.67
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Weighted Average Common Shares
Outstanding . . . . . . . . . . . . 3,026,866 4,757,607 5,477,881 5,516,597 5,830,695
SUPPLEMENTAL DATA:
Depreciation and Amortization . . $5,130 $4,541 $6,067 $7,411 $8,667
Capital Expenditures(3) . . . . . . 4,841 7,524 12,837 12,740 13,852
Number of Foundries at Period End . 1 3 7 9 13
BALANCE SHEET DATA (AT PERIOD END):
Working Capital . . . . . . . . . . $2,074 $19,240 $27,727 $36,419 $57,231
Total Assets. . . . . . . . . . . . 52,004 87,217 130,287 162,184 $213,408
Long-Term Obligations . . . . . . . 19,934 22,549 34,920 34,655 27,758
Total Stockholders' Equity . . . . 13,851 42,683 52,698 74,654 122,731
</TABLE>
* Includes other income of $6.4 million and $27.0 million for fiscal 1995
and fiscal 1996, respectively, consisting primarily of insurance proceeds
related to the July 1993 Missouri River flood.
23
<PAGE>
(1) Other income consists of $6.4 million and $27.0 million ($3.9 million and
$16.2 million net of tax or $0.71 and $2.95 per share), for fiscal 1995 and
fiscal 1996, respectively, consisting primarily of insurance proceeds
related to the July 1993 Missouri River flood. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-
General."
(2) In connection with the repayment in October 1993 of substantially all of
the Company's interest-bearing indebtedness with the net proceeds of the
Company's initial public offering of Common Stock, the Company recorded an
extraordinary charge to income in the amount of approximately $1.2 million
(net of related income tax benefit of $787,000), relating to the early
retirement of debt and the write-off of deferred financing charges.
(3) During fiscal 1994, fiscal 1995, fiscal 1996 and fiscal 1997, the Company
made capital expenditures of $4.7 million, $8.1 million, $1.8 million and
$1.4 million, respectively, in connection with the refurbishment of Amite.
This 282,000 square foot facility was acquired in February 1993 and had
been inactive for several years.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has pursued an active acquisition program designed to take
advantage of consolidation opportunities in the widely fragmented foundry
industry. The Company has acquired fourteen foundries since its inception. As
a result of these completed transactions as well as internal growth, the
Company's net sales have increased from approximately $54.7 million for its
first full fiscal year ended June 30, 1992 to $245.8 million for the fiscal
year ended June 30, 1997.
As an important part of the Company's growth strategy, the Company
evaluates on an ongoing basis potential industry-related acquisitions. While
the Company has not at the present time entered into any definitive agreement
contemplating any such acquisition, the Company is currently in various
stages of negotiations with potential acquisition candidates. There can be no
assurance as to whether or when any such negotiations will ultimately
culminate in a definitive agreement or, if a definitive agreement is reached,
whether any such acquisition will ultimately be consummated. To complete any
such acquisition, the Company may use its revolving credit facility. In the
event that no further borrowings are available under the revolving credit
facility, the Company would consider other financing alternatives available
at that time.
Due to the large size of certain orders, the timing for deliveries of
orders and the number and types of castings produced, the Company's net sales
and net income may fluctuate materially from quarter to quarter. Generally, the
first fiscal quarter is seasonally weaker than the other quarters as a result of
plant shutdowns for maintenance at most of the Company's foundries as well as at
many customers' plants. See "-Supplemental Quarterly Information."
During July 1993, flooding of the Missouri River halted production of the
Company's Atchison, Kansas foundry for four weeks, negatively impacting
operating results. Although the Company was able to resume production at the
Atchison facility without a significant loss of existing orders, the 1993 flood
has had a continuing negative effect on productivity and sales due to increased
equipment maintenance, production downtime and employee overtime. The Company
constructed a flood wall surrounding the Atchison facility that the Company
believes has significantly reduced the risk of future flood damage. Following
the flood, the Company was unable to renew its flood insurance coverage at
reasonable rates for this facility.
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other financial information included elsewhere
in this Report.
25
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Net sales for fiscal 1997 were $245.8 million, representing an increase
of $60.7 million, or 32.8%, over net sales of $185.1 million in fiscal 1996.
The operations acquired by the Company since the beginning of fiscal 1996
generated net sales of $14.8 million and $71.9 million in fiscal 1996 and
fiscal 1997, respectively, as follows:
FY 1996 FY 1997
OPERATION DATE ACQUIRED NET SALES NET SALES
- ------------------------------------------------------------------------------
(In millions)
La Grange Foundry . . . . . 12/14/95 $10.9 $23.5
G&C. . . . . . . . . . . . . 03/11/96 3.9 14.6
La Die Casting . . . . . . . 10/01/96 - 7.1
Canada Alloy . . . . . . . . 10/26/96 - 6.4
Pennsylvania Steel . . . . . 10/31/96 - 14.9
Jahn Foundry . . . . . . . . 02/14/97 - 5.4
Excluding net sales attributable to the operations acquired in fiscal
1996 and fiscal 1997, net sales for fiscal 1997 were $173.9 million,
representing an increase of $3.6 million, or 2.1%, over net sales of $170.3
million in fiscal 1996. This 2.1% increase in net sales was due primarily to
increases in net sales to the mining and construction and energy markets,
partially offset by decreases in net sales to the utility and military
markets.
Gross profit for fiscal 1997 increased by $14.0 million, or 49.3%, to $42.4
million, or 17.2% of net sales, compared to $28.4 million, or 15.4% of net
sales, for fiscal 1996. The increase in gross profit was primarily
attributable to the increase in net sales. The increase in gross profit as a
percentage of net sales was primarily attributable to the inclusion in the
prior year period of: (i) the completion, at Canadian Steel, of several
negative margin orders which were accepted prior to the acquisition of
Canadian Steel by the Company; (ii) costs associated with the start-up of the
Company's Amite facility in Louisiana and non-recurring costs associated with
the transfer to that facility of production from another foundry in May 1995;
(iii) above average training expenses associated with the start-up of new
products; and (iv) higher maintenance costs associated with deferred
maintenance expense on two newly acquired foundries and increased maintenance
costs related to regularly scheduled July shut-downs at the Company's other
facilities. Partially offsetting these factors were lost production and
expenses associated with the conversion from cupola to electric melting at
G&C and costs associated with the addition of iron casting capability at
Empire.
Selling, general and administrative expense ("SG&A") for fiscal 1997 was
$21.6 million, or 8.8% of net sales, compared to $15.5 million, or 8.4% of
net sales, in fiscal 1996. The increase in SG&A was primarily attributable to
expenses associated with the operations acquired by the Company in fiscal
1996 and fiscal 1997. The increase in SG&A as a percentage of net sales was
primarily attributable to increased expenses related to the Company's
management incentive bonus plans and increased expenses related to
identifying and completing the Company's acquisitions.
26
<PAGE>
Amortization of certain intangibles for fiscal 1997 was $632,000, or 0.3%
of net sales, compared to $1.5 million, or 0.8% of net sales, in fiscal 1996.
The intangible assets consist of goodwill recorded in connection with the
acquisitions of Prospect Foundry, Kramer, Empire, G&C and LA Die Casting.
During fiscal 1996, the intangible assets included the capitalized value of a
non-compete agreement with Rockwell International, which became fully
amortized in June 1996. Partially offsetting the expense relating to the
amortization of these assets is the amortization of the excess of acquired
net assets over cost (negative goodwill) recorded by the Company in
connection with the acquisition of Canadian Steel.
Other income for fiscal 1996 was $27.0 million ($16.2 million, net of
related income tax expense of $10.8 million), consisting primarily of
insurance payments for business interruption and property damage. The
Company's insurance claim was filed as a result of the July 1993 Missouri
River flood.
Interest expense for fiscal 1997 increased to $3.2 million, or 1.3% of net
sales, from $2.8 million, or 1.5% of net sales, in fiscal 1996. The increase
in interest expense was primarily the result of an increase in the average
amount of indebtedness outstanding as a result of the Company's acquisitions.
Income tax expense for fiscal 1997 and fiscal 1996 reflected the combined
federal and state statutory rate of approximately 41% and 40%, respectively.
As a result of the foregoing factors, net income for fiscal 1997 was $9.7
million, compared to net income of $21.3 million for fiscal 1996. Excluding
other income resulting from flood insurance payments, net income increased
from $5.1 million in fiscal 1996 to $9.7 million in fiscal 1997.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Net sales for fiscal 1996 were $185.1 million, representing an increase of
$43.5 million, or 30.7%, over net sales of $141.6 million in fiscal 1995. The
operations acquired by the Company in fiscal 1995 and fiscal 1996 generated
net sales of $16.5 million and $59.3 million, respectively, as follows:
FY 1995 FY 1996
OPERATION DATE ACQUIRED NET SALES NET SALES
- ------------------------- ------------- ----------- -----------
(In millions)
Canadian Steel . . . . . . 11/30/94 $7.2 $18.3
Kramer . . . . . . . . . . 01/03/95 5.3 12.8
Empire . . . . . . . . . . 02/01/95 4.0 13.4
La Grange Foundry. . . . . 12/14/95 _ 10.9
G&C . . . . . . . . . . . 03/11/96 _ 3.9
Excluding net sales attributable to the operations acquired in fiscal 1995
and fiscal 1996, net sales for fiscal 1996 were $125.8 million, representing
an increase of $700,000, or 0.6%, over net sales of $125.1 million in fiscal
1995. This 0.6% increase in net sales was due primarily to increases in net
sales to the mining and construction, energy and utility markets, offset by
decreases in net sales to the locomotive, mass transit and trucking markets.
In addition, the Company recorded, in the first quarter of fiscal 1995, a
non-recurring sale of casting technology to Indian Railways of $746,000.
27
<PAGE>
Gross profit for fiscal 1996 increased by $2.3 million, or 9.0%, to $28.4
million, or 15.4% of net sales, compared to $26.1 million, or 18.4% of net
sales for fiscal 1995. The increase in gross profit was primarily due to the
increase in net sales. The decrease in gross profit as a percentage of net
sales was attributable to: (i) the continuing start-up of the Company's Amite
facility in Louisiana and non-recurring costs associated with the transfer to
that facility of production from another foundry in May 1995; (ii) the
completion, at Canadian Steel, of several negative margin orders which were
accepted prior to the acquisition of Canadian Steel by the Company; (iii) a
change in product mix toward products which have a lower gross profit as a
percentage of net sales; (iv) higher maintenance costs associated with
deferred maintenance expense on two newly acquired foundries and increased
maintenance costs related to regularly scheduled July shutdowns at the
Company's other foundries; (v) above average training expenses associated
with the start-up of new products; and (vi) a non-recurring sale in the first
quarter of fiscal 1995 to Indian Railways of $746,000, which sale had a much
higher gross profit as a percentage of net sales than the Company's average.
SG&A for fiscal 1996 was $15.5 million, or 8.4% of net sales, compared to
$13.1 million, or 9.2% of net sales, in fiscal 1995. The increase in SG&A was
primarily attributable to expense associated with the operations acquired by
the Company in fiscal 1995 and fiscal 1996. The decrease in SG&A as a
percentage of net sales was primarily attributable to decreased expenditures
for outside professional services.
Amortization of certain intangibles for fiscal 1996 was $1.5 million, or
0.8% of net sales, compared to $1.4 million, or 1.0% of net sales, in fiscal
1995. The intangible assets consisted of the capitalized value of a
non-compete agreement with Rockwell International and goodwill recorded in
connection with the acquisitions of Prospect Foundry, Kramer, Empire and G&C.
Partially offsetting the expense relating to the amortization of these assets
is the amortization of the excess of acquired net assets over cost (negative
goodwill) recorded by the Company in connection with the acquisition of
Canadian Steel.
On April 11, 1996, the Company and its insurance carrier reached final
settlement of the Company's claim filed as a result of the July 1993 Missouri
River flood. Other income for fiscal 1996 was $27.0 million ($16.2 million,
net of related income tax expense of $10.8 million), consisting primarily of
insurance payments for business interruption and property damage. Other
income for fiscal 1995 was $6.4 million ($3.9 million, net of related income
tax expense of $2.5 million), consisting primarily of insurance payments for
business interruption damage.
Interest expense for fiscal 1996 increased to $2.8 million, or 1.5% of net
sales, from $2.3 million, or 1.6% of net sales, in fiscal 1995. The increase
in interest expense is the result of an increase in the average amount of
indebtedness outstanding as a result of the Company's acquisitions.
Income tax expense for fiscal 1996 and fiscal 1995 reflected the combined
federal and state statutory rate of approximately 40% and 39%, respectively.
As a result of the foregoing factors, net income increased by $11.8
million, from net income of $9.5 million in fiscal 1995 to net income of
$21.3 million in fiscal 1996. Excluding other income, net income decreased
from $5.6 million in fiscal 1995 to $5.1 million in fiscal 1996.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed operations with internally generated
funds, proceeds from the sale of senior notes and available borrowings under
its bank credit facilities. Cash provided by operating activities for fiscal
1997 was $22.3 million, a decrease of $14.3 million from fiscal 1996. This
decrease was primarily attributable to the inclusion, in fiscal 1996, of
income from insurance payments relating to the Company's flood insurance
claim of $27.3 million ($16.3 million, net of related income tax expense of
$11.0 million).
Working capital was $57.2 million at June 30, 1997, as compared to $36.4
million at June 30, 1996. The increase primarily resulted from net additional
working capital of $11.2 million associated with the Company's acquisitions
and increased cash balances resulting from the net proceeds of the Company's
public offering of Common Stock remaining after paying all of the Company's
then-outstanding borrowings under its revolving credit facility.
During fiscal 1997, the Company made capital expenditures of $13.9 million,
as compared to $12.7 million in fiscal 1996. Included in fiscal 1997 were
capital expenditures of $2.1 million at G&C, primarily relating to the
conversion from cupola to electric melting. The balance of capital
expenditures was used for routine projects at each of the Company's
facilities, primarily related to productivity enhancing equipment, such as
new mold lines, CNC pattern-cutting machines, machine tools, sand reclamation
systems and computer hardware and software modeling systems. In fiscal 1996,
the Company made capital expenditures for routine projects at each of the
Company's facilities. The Company expects to make approximately $16 million
of capital expenditures during fiscal 1998, including a new mold line at
Prospect, the completion of a new sand reclamation system at the Atchison/St.
Joe Division and routine projects at each of the Company's facilities.
The Company's revolving credit facility provides for unsecured loans of up
to $60 million and matures on July 29, 2000. Loans under this revolving
credit facility will bear interest at fluctuating rates of either: (i) the
bank's corporate base rate or (ii) LIBOR plus 1.50% subject, in the case of
the LIBOR rate option, to a reduction of up to 0.50% (50 basis points) if
certain financial ratios are met. At June 30, 1997, $50.6 million was
available for borrowing under this facility. Loans under this revolving
credit facility may be used for general corporate purposes, acquisitions and
approved investments. The revolving credit facility provides that the Company
may not make acquisitions of foundries or related businesses without the
prior written consent of the banks holding two-thirds of the loan commitments
unless either (i) after giving effect to the acquisition, the Company's ratio
of consolidated total debt to total capitalization does not exceed 40% or
(ii) once the 40% threshold has been met in that fiscal year, the total
aggregate principal amount expended for all acquisitions thereafter in that
fiscal year does not exceed 25% of stockholders' equity as of the end of the
preceding fiscal year plus 25% of net proceeds received from the issuance of
additional equity during that fiscal year.
To reduce the Company's outstanding bank indebtedness previously incurred
for acquisitions and to fund future acquisitions, the Company completed a
public offering of 4,370,000 shares of its Common Stock in May 1997,
including 2,599,024 shares sold by the Company and 1,770,976 shares sold by a
selling stockholder. The net proceeds of the shares sold by the Company were
approximately $37.9 million.
The Company believes that its operating cash flow and amounts available for
borrowing under its revolving credit facility will be adequate to fund its
capital expenditure and working capital requirements for the next two years.
However, the level of capital expenditure and working capital
29
<PAGE>
requirements may be greater than currently anticipated as a result of the
size and timing of future acquisitions, or as a result of unforeseen
expenditures relating to compliance with environmental laws. Acquisitions
have been financed primarily with borrowings under the Company's revolving
credit facility. During fiscal 1997, the Company purchased LA Die Casting,
Canada Alloy, Pennsylvania Steel and Jahn Foundry for $8.8 million, $4.4
million, $8.2 million and $6.2 million, respectively, in each case with funds
available under the Company's revolving credit facility. On July 1, 1997, the
Company purchased the Beloit Castings Division ("BCD") from Beloit
Corporation for $7.2 million in cash, subject to adjustment. BCD now
operates under the name PrimeCast, as a subsidiary of the Company. This
acquisition was financed with available cash balances.
Statements above in the subsection entitled "General" and this subsection
of this Annual Report on Form 10-K such as "expects" and statements regarding
quarterly fluctuations, statements regarding the adequacy of funding for
capital expenditure and working capital requirements for the next two years
and similar expressions that are not historical are forward-looking
statements that involve risks and uncertainties. Such statements include the
Company's expectation as to future performance. Among the factors that could
cause actual results to differ materially from such forward-looking
statements are the following: business conditions and the state of the
general economy, particularly the capital goods industry, the strength of the
dollar, the fluctuation of interest rates, the competitive environment in the
castings industry and changes in laws and regulations that govern the
Company's business, particularly environmental regulations.
INFLATION
Management believes that the Company's operations have not been materially
adversely affected by inflation or changing prices.
30
<PAGE>
SUPPLEMENTAL QUARTERLY INFORMATION
The Company's business is characterized by large unit and dollar volume
customer orders. As a result, the Company has experienced and may continue to
experience fluctuations in its net sales and net income from quarter to
quarter. Generally, the first fiscal quarter is seasonally weaker than the
other quarters as a result of plant shutdowns for maintenance at most of the
Company's foundries as well as at many customers' plants. In addition, the
Company's operating results may be adversely affected in fiscal quarters
immediately following the consummation of an acquisition while the operations
of the acquired business are integrated into the operations of the Company.
The following table presents selected unaudited supplemental quarterly
results for fiscal 1996 and fiscal 1997.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
QUARTERS ENDED QUARTERS ENDED
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE
(unaudited) (unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales........ $36,987 $40,683 $52,330 $55,081 $48,998 $61,622 $66,313 $68,836
Gross Profit..... 5,755 4,846 7,852 10,016 6,641 10,111 11,976 13,655
Other Income(1)... 9,768 513 1 16,675 -- -- -- --
Operating Income..... 11,811 1,264 3,618 21,766 2,238 4,963 5,794 7,197
Net Income........... $ 6,845 $ 332 $ 1,463 $12,686 $ 941 $ 2,371 $2,862 $3,554
======= ====== ======= ======= ======= ======= ====== ======
Net Income Per Share..... $ 1.24 $ 0.06 $ 0.27 $ 2.29 $ 0.17 $ 0.43 $0.51 $ 0.54
======= ====== ======= ======= ======= ======= ====== ======
Net Income Per
Share Excluding
Other Income(1)......... $ 0.15 $ 0.00 $ 0.27 $ 0.50 $ 0.17 $ 0.43 $0.51 $ 0.54
======= ====== ======= ======= ======= ======= ====== ======
_______
</TABLE>
(1) Other Income consists primarily of gains recorded by the Company from
settlement of the business interruption and casualty and property
damage resulting from the July 1993 Missouri River flood. The
Company's fiscal 1996 quarters ended September, December, March and June
include gains from these recoveries of $9.9, $0.7, $0.0 and $16.7 million,
respectively.
NEW ACCOUNTING STANDARDS
For a discussion of new accounting standards, see Note 1 of the
Company's Notes to Consolidated Financial Statements.
31
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this
Item, beginning on page F-1 of this Report. No financial statement schedules
are required to be filed under Regulation S-X.
Selected quarterly financial data required under this item is included in
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Registrant's Proxy Statement for the
1997 Annual Meeting of Stockholders, dated September 26, 1997, to be filed
pursuant to Regulation 14A. The required information as to executive
officers is set forth in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders, dated September 26, 1997, to be filed pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders, dated September 26, 1997, to be filed pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders, dated September 26, 1997, to be filed pursuant to Regulation
14A.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Page
Number
(a) Documents list
(1) The following financial statements are included in Part II
Item 8:
Report of Independent Accountants F-2
Consolidated Balance Sheets at
June 30, 1996 and 1997 F-3
Consolidated Statements of Income for the Years F-5
Ended June 30, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity F-6
For the Years Ended June 30, 1995, 1996 and 1997
Consolidated Statements of Cash Flows For the Years F-7
Ended June 30, 1995, 1996 and 1997
Notes to Consolidated Financial Statements F-8
(2) No Financial Statement Schedules are required to be filed.
(3) List of Exhibits:
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.
(c) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section to this report.
(d) FINANCIAL STATEMENTS SCHEDULES
The consolidated financial statement schedules required by this Item
are listed under Item 14(a)(2).
34
<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.
ATCHISON CASTING CORPORATION
(Registrant)
By: /s/ Hugh H. Aiken
---------------------
Hugh H. Aiken
Principal Executive Officer
Dated: September 4, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dated indicated:
Signature Title Date
/s/ Hugh H. Aiken Chairman of the Board, September 4, 1997
Hugh H. Aiken President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Stuart Z. Uram Director September 4, 1997
Stuart Z. Uram
/s/ David L. Belluck Director September 4, 1997
David L. Belluck
Ray H. Witt Director
/s/ John O. Whitney Director September 4, 1997
John O. Whitney
/s/ Kevin T. McDermed Vice President, Chief September 4, 1997
Kevin T. McDermed Financial Officer, Treasurer
and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
<PAGE>
ATCHISON CASTING
CORPORATION AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
AND FOR THE YEARS ENDED JUNE 30, 1995,
1996 AND 1997, AND INDEPENDENT AUDITORS' REPORT
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets - June 30, 1996 and 1997 F-3
Consolidated Statements of Income - Years Ended June 30, 1995, 1996
and 1997 F-5
Consolidated Statements of Stockholders' Equity - Years Ended
June 30, 1995, 1996 and 1997 F-6
Consolidated Statements of Cash Flows - Years Ended June 30, 1995,
1996 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Atchison Casting Corporation
Atchison, Kansas
We have audited the accompanying consolidated balance sheets of Atchison
Casting Corporation and subsidiaries (the "Company") as of June 30, 1996 and
1997 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Kansas City, Missouri
August 14, 1997
F-2
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS 1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ 7,731 $ 19,819
Customer accounts receivable, net of allowance for
doubtful accounts of $295 and $381 at
June 30, 1996 and 1997 32,224 40,310
Inventories 24,357 30,867
Deferred income taxes 1,985 1,501
Other current assets 1,968 2,336
------- --------
Total current assets 68,265 94,833
PROPERTY, PLANT AND EQUIPMENT, Net 72,160 93,116
INTANGIBLE ASSETS, Net 18,441 21,866
DEFERRED CHARGES, Net 440 525
OTHER ASSETS 2,878 3,068
---------- ----------
TOTAL $ 162,184 $ 213,408
========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
CURRENT LIABILITIES:
Accounts payable $ 8,483 $ 11,530
Accrued expenses 22,583 25,145
Current maturities of long-term obligations 780 927
------- ---------
Total current liabilities 31,846 37,602
LONG-TERM OBLIGATIONS 34,655 27,758
DEFERRED INCOME TAXES 12,686 16,349
OTHER LONG-TERM OBLIGATIONS 1,207 1,243
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS OVER
COST, Net 922 633
POSTRETIREMENT OBLIGATION OTHER
THAN PENSION 5,414 5,844
MINORITY INTEREST IN SUBSIDIARIES 800 1,248
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 authorized
shares; no shares issued and outstanding
Common stock, $.01 par value, 19,300,000 authorized
shares; 5,528,912 and 8,146,715 shares issued
and outstanding in 1996 and 1997, respectively 56 81
Class A common stock (non-voting), $.01 par
value, 700,000 authorized shares; no shares
issued and outstanding
Additional paid-in capital 42,159 80,342
Retained earnings 32,712 42,440
Minimum pension liability adjustment (293)
Accumulated foreign currency translation adjustment 20 (132)
Common stock held in treasury, 36,002
shares in 1996 and 1997, at cost ------- --------
Total stockholders' equity 74,654 122,731
---------- ----------
TOTAL $ 162,184 $ 213,408
========== ==========
See notes to consolidated financial statements.
F-4
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
NET SALES $ 141,579 $ 185,081 $ 245,769
COST OF GOODS SOLD 115,458 156,612 203,386
--------- --------- ---------
GROSS PROFIT 26,121 28,469 42,383
OPERATING EXPENSES:
Selling, general and administrative 13,058 15,459 21,559
Amortization of intangibles 1,392 1,508 632
Other income (6,370) (26,957)
--------- --------- ---------
Total operating expenses 8,080 (9,990) 22,191
--------- --------- ---------
OPERATING INCOME 18,041 38,459 20,192
INTEREST EXPENSE 2,326 2,845 3,227
MINORITY INTEREST IN NET INCOME OF
SUBSIDIARIES 280 225 270
--------- --------- ---------
INCOME BEFORE INCOME TAXES 15,435 35,389 16,695
INCOME TAXES 5,971 14,063 6,967
--------- --------- ---------
NET INCOME $ 9,464 $ 21,326 $ 9,728
========= ========= ========
NET INCOME PER COMMON AND
EQUIVALENT SHARES $ 1.73 $ 3.87 $ 1.67
========= ========= ========
WEIGHTED AVERAGE NUMBER OF COMMON
AND EQUIVALENT SHARES OUTSTANDING 5,477,881 5,516,597 5,830,695
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MINIMUM FOREIGN
ADDITIONAL PENSION CURRENCY
COMMON PAID-IN RETAINED LIABILITY TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 $ 55 $ 41,019 $ 1,922 $ (313) $ 42,683
Issuance of 11,754 shares 154 154
Issuance of 26,895 shares for
purchase of subsidiary 450 450
Conversion of 19,629 shares of
Class A common stock to common stock
Minimum pension liability adjustment,
net of income tax benefit of $38 (62) (62)
Purchase of 30,823 nonvested shares
under Stock Restriction Agreement
Foreign currency translation adjustment
of investment in subsidiary $ 9 9
Net income 9,464 9,464
--------- ------------- ------------- ----------- ----------------- ----------
Balance, June 30, 1995 55 41,623 11,386 (375) 9 52,698
Issuance of 34,333 shares 1 402 403
Exercise of stock options (10,000 shares) 134 134
Minimum pension liability adjustment,
net of income tax expense of $59 82 82
Purchase of 5,179 nonvested shares
under Stock Restriction Agreement
Foreign currency translation adjustment
of investment in subsidiary 11 11
Net income 21,326 21,326
--------- ------------- ------------- ----------- ----------------- ----------
Balance June 30, 1996 56 42,159 32,712 (293) 20 74,654
Issuance of 2,610,203 shares 25 38,080 38,105
Exercise of stock options (7,600 shares) 103 103
Foreign currency translation
adjustment of investment in subsidiary (152) (152)
Minimum pension liability adjustment,
net of income tax expense of $187 293 293
Net income 9,728 9,728
--------- ------------- ------------- ----------- ----------------- ----------
Balance June 30, 1997 $ 81 $ 80,342 $ 42,440 $ $ (132) $ 122,731
--------- ------------- ------------- ----------- ----------------- ----------
--------- ------------- ------------- ----------- ----------------- ----------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 9,464 $ 21,326 $ 9,728
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 6,067 7,411 8,667
Minority interest in net income of subsidiaries 280 225 270
(Gain) loss on disposal of capital assets (50) 8 54
Accretion of long-term obligation discount 160 161
Deferred income taxes 1,551 7,918 1,816
Changes in assets and liabilities:
Receivables 2,350 (8,286) (349)
Insurance receivable (6,137) 6,137
Inventories (7,168) 1,614 1,231
Other current assets (177) (715) 205
Accounts payable 1,697 (1,480) 190
Accrued expenses 7,344 2,073 23
Postretirement obligation other than pension 162 209 430
Other 31 9 36
------- --------- --------
Cash provided by operating activities 15,574 36,610 22,301
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,837) (12,740) (13,852)
Proceeds from sale of capital assets 57 8 38
Payment for purchase of net assets of subsidiaries, (13,327) (13,251) (27,698)
net of cash acquired
Assets held for resale (1,566) (274) 840
Advances under subordinated note receivable (800)
Payment for investments in unconsolidated subsidiaries (330) (330)
------- --------- --------
Cash used in investing activities (27,673) (26,587) (41,802)
------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 154 537 38,208
Proceeds from sale of minority interest in subsidiaries 84 63 178
Proceeds from issuance of long-term obligations 33,231 5,309 1,293
Payments on long-term obligations (21,026) (2,646) (1,343)
Capitalized financing costs paid (221) (283) (214)
Net repayments under revolving loan note (6,031) (6,521)
------- --------- --------
Cash provided by (used in) financing activities 12,222 (3,051) 31,601
------- --------- --------
EFFECT OF EXCHANGE RATE ON CASH (2) (12)
NET INCREASE IN CASH AND CASH
EQUIVALENTS 121 6,972 12,088
CASH AND CASH EQUIVALENTS, Beginning of period 638 759 7,731
------- --------- --------
CASH AND CASH EQUIVALENTS, End of period $ 759 $ 7,731 $ 19,819
------- --------- --------
------- --------- --------
See notes to consolidated financial statements
</TABLE>
F-7
<PAGE>
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Atchison Casting Corporation and subsidiaries ("ACC"
or the "Company") was organized in 1991 for the purpose of becoming a broad
based foundry company producing iron, steel and non-ferrous castings ranging
from one pound to 120,000 pounds. A majority of the Company's sales are to
U.S. customers, however, the Company also has sales to Canadian and other
foreign customers.
PERVASIVENESS 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.
BASIS OF PRESENTATION - The consolidated financial statements present the
financial position of the Company ("ACC") and its subsidiaries, Amite
Foundry and Machine, Inc. ("AFM"), Prospect Foundry, Inc. ("Prospect
Foundry"), Quaker Alloy, Inc. ("Quaker"), Canadian Steel Foundries, Ltd.
("Canadian Steel"), Kramer International, Inc. ("Kramer"), Empire Steel
Castings, Inc. ("Empire"), La Grange Foundry Inc. ("La Grange Foundry"), The
G&C Foundry Company ("G&C"), Los Angeles Die Casting Inc. ("LA Die
Casting"), Canada Alloy Castings, Ltd. ("Canada Alloy"), Pennsylvania Steel
Foundry & Machine Company ("Pennsylvania Steel") and Jahn Foundry Corp.
("Jahn Foundry"). AFM, Kramer, Empire, La Grange Foundry, Canada Alloy,
Pennsylvania Steel and Jahn Foundry are wholly owned subsidiaries. The
Company owns 90.9%, 95.7%, 90.2%, 92.0% and 90.7% of the outstanding capital
stock of Prospect Foundry, Quaker, Canadian Steel, G&C and LA Die Casting,
respectively. All significant intercompany accounts and balances have been
eliminated.
STATEMENT OF CASH FLOWS - For purposes of cash flow reporting, cash and cash
equivalents include cash on hand, amounts due from banks and temporary
investments with original maturities of 90 days or less at the date of
purchase.
REVENUE RECOGNITION - Sales and related cost of sales are recognized upon
shipment of products. Sales and related cost of sales under long-term
contracts to commercial customers are recognized as units are delivered.
RECEIVABLES - Approximately 28%, 21% and 17% of the Company's business in
1995, 1996 and 1997, respectively, was with two major customers in the
locomotive and general industrial markets. As of June 30, 1996 and 1997, 19%
and 15%, respectively, of accounts receivable were with these two major
customers. The Company generally does not require collateral or other
security on accounts receivable. Credit risk is controlled through credit
approvals, limits and monitoring procedures.
F-8
<PAGE>
INVENTORY - Approximately 26% of the Company's inventory is valued at the
lower of cost, determined on the last-in, first-out ("LIFO") method, or
market. The remaining inventory is valued at the lower of cost, determined
on the first-in, first-out ("FIFO") method, or market.
PROPERTY, PLANT AND EQUIPMENT - Major renewals and betterments are
capitalized while replacements, maintenance and repairs which do not improve
or extend the life of the respective assets are charged to expense as
incurred. Upon sale or retirement of assets, the cost and related
accumulated depreciation applicable to such assets are removed from the
accounts and any resulting gain or loss is reflected in operations.
Property, plant and equipment is carried at cost less accumulated
depreciation. Plant and equipment is depreciated over the estimated useful
lives of the assets using the straight-line method.
INTANGIBLE ASSETS - Intangible assets acquired are being amortized over
their estimated lives using the straight-line method. The Company
periodically reviews the continuing value of intangibles to determine if
there has been an impairment. The basis of this valuation includes the
continuing profitability of the acquired operations, their expected future
undiscounted cash flows, the maintenance of a significant customer base and
similar factors.
ACCRUED INSURANCE EXPENSE - Costs estimated to be incurred in the future for
employee medical benefits and casualty insurance programs resulting from
claims which have occurred are accrued currently.
In order to support claims for workers' compensation benefits, at June 30,
1997 the Company has letters of credit aggregating $3,495 and a certificate
of deposit of $200.
INCOME TAXES - Deferred income taxes are provided on temporary differences
between the financial statements and tax basis of the Company's assets and
liabilities in accordance with the liability method.
EARNINGS PER SHARE - Earnings per common share are based upon the weighted
average number of common and common equivalent shares outstanding.
STOCK PLANS - The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, in October 1995. SFAS No. 123 allows companies to
continue under the approach set forth in Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt provisions of SFAS No. 123 based on the estimated fair
value of employee stock options. Companies electing to retain the approach
under APB No. 25 are required to disclose pro forma net income and net
income per share in the notes to the financial statements, as if they had
adopted the fair value accounting method under SFAS No. 123. The Company has
elected to retain its current accounting approach under APB No. 25.
NEW ACCOUNTING STANDARDS - In February 1997, the FASB issued SFAS No. 128,
EARNINGS PER SHARE (SFAS No. 128), effective for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic earnings
per share and diluted earnings per share on the face of the income
statement, and a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation in the
F-9
<PAGE>
notes to the financial statements. The Company will adopt SFAS No. 128
effective for the year ended June 30, 1998.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Management has not completed their evaluation of the impact of
SFAS No. 131 on the financial statements footnote disclosure.
2. ACQUISITIONS
On December 14, 1995, the Company purchased certain assets of the La Grange,
Missouri foundry operations of Gardner Denver Machinery, Incorporated for
$5,187 in cash and $103 of related expenses. La Grange Foundry produces gray
and ductile iron castings for the industrial compressor and pump markets,
among others. The Company financed this transaction with funds available
under its revolving credit facility.
On March 11, 1996, the Company purchased all of the outstanding capital
stock of G&C for $9,620 in cash, the assumption of $2,000 of change of
control benefits, the assumption of $524 of outstanding indebtedness and
$119 of related expenses. ACC subsequently issued 8% of the acquired G&C
stock to G&C management. The difference between the fair market value of the
minority interest, as estimated by the Company's management, and the
consideration paid by G&C management, was not material. G&C, located in
Sandusky, Ohio, is a foundry that produces gray and ductile iron castings,
principally used in hydraulic applications. The Company financed this
transaction with funds available under its revolving credit facility.
On October 1, 1996, the Company purchased all of the outstanding capital
stock of LA Die Casting, a California corporation, for $8,753 in cash and
$221 of related expenses. ACC subsequently issued 9.3% of the acquired LA
Die Casting stock to LA Die Casting management. The difference between the
fair market value of the minority interest, as estimated by the Company's
management, and the consideration paid by LA Die Casting management, was not
material. LA Die Casting, located in Los Angeles, California, produces
precision aluminum and zinc die castings for the computer, communications
and recreation industries. The Company financed this transaction with funds
available under its revolving credit facility.
On October 26, 1996, the Company purchased all of the outstanding capital
stock of Canada Alloy for $4,421(U.S.) in cash and $36 of related expenses.
Canada Alloy, located in Kitchener, Ontario, produces stainless, carbon and
alloy steel castings for a variety of markets, including power generation
equipment, pulp and paper machinery, pumps and valves. The Company financed
this transaction with funds available under its revolving credit facility.
On October 31, 1996, the Company purchased all of the outstanding capital
stock of Pennsylvania Steel, a Pennsylvania corporation, for $8,170 in cash
and $24 of related expenses. Pennsylvania Steel, located in Hamburg,
Pennsylvania, produces carbon and stainless steel castings for the power
generation, valve, pump and other industrial equipment markets. The Company
financed this transaction with funds available under its revolving credit
facility.
F-10
<PAGE>
On February 14, 1997, the Company purchased all of the outstanding capital
stock of Jahn Foundry, a Massachusetts corporation, for $5,900 in cash and
$315 of related expenses. Jahn Foundry, located in Springfield,
Massachusetts, produces gray iron castings for the automotive, air
conditioning and agricultural markets. The Company financed this transaction
with funds available under its revolving credit facility.
The acquisitions have been accounted for by the purchase method of
accounting, and accordingly, the purchase price including the related
acquisition expenses has been allocated to the assets acquired based on the
estimated fair values at the date of the acquisitions. For the G&C and LA
Die Casting acquisitions, the excess of purchase price over estimated fair
values of the net assets acquired has been included in "Intangible Assets,
net" on the Consolidated Balance Sheets. For the La Grange Foundry, Canada
Alloy, Pennsylvania Steel and Jahn Foundry acquisitions, the fair value of
the net assets acquired exceeded the purchase price. Accordingly, the excess
fair value was subtracted from identifiable long-term assets ratably based
on their relative fair values as a percentage of total long-term assets.
The estimated fair values of assets and liabilities acquired in the 1995,
1996 and 1997 acquisitions, are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash $ 49 $ 1,778 $ 142
Customer accounts receivable 6,421 1,791 7,835
Inventories 5,699 2,557 7,799
Property, plant and equipment 2,623 7,825 15,872
Intangible assets, primarily goodwill 6,444 4,779 4,336
Other assets 338 206 737
Accounts payable and accrued expenses (6,543) (1,529) (5,535)
Deferred income taxes 389 247 (2,141)
Other long-term obligations (1,594) (101) (705)
Long-term obligations (2,524) (500)
---------- ----------- ----------
13,826 15,029 27,840
Stock issued (450)
Cash acquired (49) (1,778) (142)
---------- ---------- ----------
Cash used in acquisitions $ 13,327 $ 13,251 $ 27,698
========== ========== ==========
</TABLE>
The operating results of these acquisitions are included in ACC's
Consolidated Statements of Income from the dates of acquisition. The
following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions occurred at July 1, 1995, after giving
effect to certain adjustments, including amortization of goodwill, interest
expense on the acquisition debt and related income tax effects. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions
been made as of that date or of results which may occur in the future.
F-11
<PAGE>
1996 1997
(UNAUDITED)
Net sales $ 254,399 $ 267,006
Net income 21,342 10,152
Net income per common and equivalent shares 3.87 1.74
3. INVENTORIES
1996 1997
Raw materials $ 3,589 $ 5,186
Work-in-process 16,677 17,540
Finished goods 1,455 3,967
Deferred supplies 2,636 4,174
---------- ----------
$ 24,357 $ 30,867
========= ==========
Inventories as of June 30, 1996 and 1997 would have been higher by $642 and
$326, respectively, had the Company used the first-in, first-out method of
valuing those inventories valued using the last-in, first-out method.
4. PROPERTY, PLANT AND EQUIPMENT
LIVES
(IN YEARS) 1996 1997
Land $ 1,822 $ 3,584
Improvements to land 12-15 2,109 2,695
Buildings and improvements 35 14,088 22,553
Machinery and equipment 5-14 59,541 75,341
Automobiles and trucks 3 428 1,261
Office furniture, fixtures and equipment 5-10 1,798 3,141
Tooling and patterns 1.5-6 3,186 3,579
-------- --------
82,972 112,154
Less accumulated depreciation 17,179 24,994
-------- -------
65,793 87,160
Construction in progress 5,169 5,437
Unexpended bond funds 1,198 519
--------- ---------
$ 72,160 $ 93,116
========= =========
Depreciation expense was $4,304, $5,745 and $7,903 for the years ended
June 30, 1995, 1996 and 1997, respectively.
F-12
<PAGE>
5. INTANGIBLE ASSETS
LIVES
(IN YEARS) 1996 1997
Goodwill 25 $ 19,578 $ 23,914
Less accumulated amortization 1,137 2,048
--------- ---------
$ 18,441 $ 21,866
========= =========
Amortization expense was $1,790, $1,744 and $911 for the years ended
June 30, 1995, 1996 and 1997, respectively.
6. DEFERRED CHARGES
LIVES
(IN YEARS) 1996 1997
Capitalized financing costs 3 to 10 $ 572 $ 786
Less accumulated amortization 132 261
------ ------
$ 440 $ 525
====== ======
Amortization of such costs was $139, $158 and $129 for the years ended
June 30, 1995, 1996 and 1997, respectively, of which $46, $69 and $129,
respectively, is included in interest expense.
On March 8, 1996, the Company and Harris Trust and Savings Bank ("Harris")
entered into the First Amendment to the Credit Agreement (the "Credit
Agreement") dated July 24, 1994 providing for an increase in unsecured loans
from $20,000 to $40,000 and an increase in permitted subsidiary indebtedness
from $2,500 to $5,500. In connection with this amendment, $150 of financing
costs were capitalized and are being amortized over the remaining two and
one-half year term of the Credit Agreement.
On May 1, 1996, the Company's La Grange Foundry subsidiary entered into a
Loan Agreement with the Missouri Development Finance Board (the "Board"),
providing for a loan of $5,100 to La Grange using the proceeds of the
Board's Industrial Development Revenue Bonds, Series 1996 (La Grange Foundry
Inc. Project). The Loan Agreement terminates on November 1, 2011. In
connection with this loan agreement, $133 of financing costs were
capitalized and are being amortized over ten years.
On May 12, 1997, the Company and Harris entered into the First Amendment to
the Credit Agreement dated May 24, 1996 providing for an increase in
unsecured loans from $40 million to $60 million and an extension of the
maturity date to July 29, 2000. In connection with this amendment, $214 of
financing costs were capitalized and are being amortized over three years.
F-13
<PAGE>
7. ACCRUED EXPENSES
1996 1997
Payroll, vacation and other compensation $ 5,560 $ 6,425
Accrued pension liability 2,131 1,822
Advances from customers 1,194 913
Reserve for flood repairs 6,946 6,773
Reserve for workers' compensation and employee
health care 3,128 3,884
Income taxes payable 535 1,442
Taxes other than income 385 584
Interest payable 800 740
Other 1,904 2,562
-------- --------
$ 22,583 $ 25,145
======== ========
8. LONG-TERM OBLIGATIONS
On July 29, 1994, the Company issued to an insurance company $20 million
aggregate principal amount of unsecured, senior notes. The notes have an
average maturity of seven years and bear interest at a fixed rate of 8.44%
per year.
Concurrently, with the sale of the senior notes, the Company entered into a
credit agreement with Harris providing for unsecured loans of up to $20
million in a three year revolving credit facility. Loans under the revolving
credit facility will bear interest at fluctuating rates of either (i) the
bank's corporate base rate or (ii) LIBOR plus 1.75% subject, in the case of
the LIBOR rate option, to reduction of up to 0.50% (50 basis points) if
certain financial ratios are met. Loans under this revolving credit facility
may be used for general corporate purposes and approved investments.
On March 8, 1996, the Company and Harris entered into the First Amendment to
the Credit Agreement providing for an increase in unsecured loans from $20
million to $40 million and an increase in permitted subsidiary indebtedness
from $2,500 to $5,500.
On May 1, 1996, the Company's La Grange Foundry subsidiary entered into a
Loan Agreement with the Board, providing for a loan of $5,100 to La Grange
Foundry using the proceeds of the Board's Industrial Development Revenue
Bonds, Series 1996 (La Grange Foundry Inc. Project). Loans under the Loan
Agreement will bear interest at rates that fluctuate weekly based upon the
then-prevailing market rates for such securities. Loans under this Loan
Agreement were used to finance the costs of acquiring, and will be used to
finance the costs of reconstructing, improving and equipping certain
additions and improvements to the Company's La Grange Foundry manufacturing
facilities. The Loan Agreement terminates on November 1, 2011.
On May 24, 1996, the Company entered into a new credit agreement with Harris
providing for unsecured loans of up to $40 million in a revolving credit
facility terminating on July 29, 1998. Loans under this revolving credit
facility will bear interest at fluctuating rates of either (i) the bank's
corporate base rate or (ii) LIBOR plus 1.50% subject, in the case of the
LIBOR rate option, to a reduction of up to 0.50% (50 basis points) if
certain financial ratios are met. Loans under this revolving credit facility
may be used for general corporate purposes, acquisitions and approved
investments.
F-14
<PAGE>
On May 12, 1997, the Company and Harris entered into the First Amendment to
the Credit Agreement providing for an increase in unsecured loans from $40
million to $60 million and an extension of the maturity date to July 29,
2000. At June 30, 1997, $50.6 million was available for borrowing under this
facility after consideration of letters of credit of $9.4 million. Amounts
are outstanding as follows as of June 30:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Unsecured, senior notes with an insurance company,
maturing on July 30, 2004 and bearing interest at a
fixed rate of 8.44% per year $ 20,000 $ 20,000
Unsecured, revolving credit facility with Harris,
maturing on July 29, 2000, bearing interest at 8.25% (Prime) 7,200
Term loan between G&C and the Ohio Department of
Development, secured by certain assets of G&C,
maturing on June 1, 1999, bearing interest at 5.0% 95 64
Term loan between G&C and OES Capital,
Incorporated (assignee of loan agreement with Ohio
Air Quality Development Authority), secured by
certain assets of G&C, maturing on December 31,
2006, bearing interest at 6.5% 1,707 2,854
Change of Control Benefits to be paid by G&C
pursuant to certain Employment Agreements and
a Change of Control Agreement, maturing on
June 11, 1998, non interest bearing 1,333 667
Term loan between La Grange Foundry and the Missouri
Development Finance Board, secured by a letter
of credit, maturing on November 1, 2011 bearing
interest at 3.69% and 4.38%, respectively 5,100 5,100
----------- ----------
35,435 28,685
Less current maturities 780 927
----------- ----------
Total long-term obligations $ 34,655 $ 27,758
=========== ==========
</TABLE>
The credit agreement with Harris and a note purchase agreement with an
insurance company limit the Company's ability to pay dividends in any fiscal
year to an amount not more than 25% of net earnings in the preceding fiscal
year.
The amounts of long-term obligations outstanding as of June 30, 1997 mature
as follows:
1998 $ 927
1999 3,136
2000 3,119
2001 3,136
2002 3,155
Thereafter 15,212
--------
$28,685
=========
F-15
<PAGE>
The amounts of interest expense for the years ended June 30, 1995, 1996 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Senior notes with an insurance company $ 1,544 $ 1,688 $ 1,688
Credit facility with Harris 576 902 1,236
Subordinated promissory note payable to Rockwell 160 161
Amortization of deferred charges 46 69 129
Other 25 174
-------- -------- --------
$ 2,326 $ 2,845 $ 3,227
======== ======== ========
</TABLE>
9. INCOME TAXES
Income taxes for the years ended June 30, 1995, 1996 and 1997 are comprised
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current expense/(benefit):
Federal $ 3,169 $ 4,972 $ 3,601
State and local 943 1,376 867
Foreign 308 (203) 683
-------- -------- --------
4,420 6,145 5,151
Deferred expense 1,551 7,918 1,816
-------- -------- --------
$ 5,971 $ 14,063 $ 6,967
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Items giving rise to the provision for deferred
income taxes:
Postretirement benefits $ (187) $ (145) $ (167)
Accrued liabilities (56) 160 350
Net operating loss carryforwards 577 (190)
Pension costs (20) 16 (53)
Alternative minimum tax credit carryforward 1,264 724
Flood wall capitalization 36
Deferred gain on flood proceeds 5,898 560
Depreciation and amortization 753 1,003 978
Inventory (231) 56 406
Minimum pension liability 33 (70)
Valuation allowance 190
All other (582) 240 (258)
-------- -------- --------
$ 1,551 $ 7,918 $ 1,816
======== ======== =========
</TABLE>
F-16
<PAGE>
Following is a reconciliation between the total income taxes and the amount
computed by multiplying income before income taxes by the statutory federal
income tax rate:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Computed expected
federal income tax
expense $ 5,248 34.0 $ 12,465 35.0 $ 5,938 35.0
State income taxes,
net of federal benefit 624 4.1 1,498 4.2 717 4.2
Permanent differences 182 1.1 337 0.9 310 1.8
Other (83) (0.5) (237) (0.6) 2
-------- ---- ---------- --------- -------- ------
$ 5,971 38.7 $ 14,063 39.5 $ 6,967 41.0
======== ==== ========= ========= ======== ======
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. Deferred income taxes
as of June 30, 1996 and 1997 are comprised of the following:
1996 1997
Deferred tax assets:
Postretirement benefits $ 1,988 $ 2,155
Accrued liabilities 1,900 1,539
Net operating loss carryforwards 472
Pension costs 882 964
Valuation allowance (472)
Flood wall capitalization 429 429
Other 520 22
----------- -----------
5,719 5,109
Deferred tax liabilities:
Depreciation and amortization 9,108 11,416
Deferred gain on flood proceeds 6,257 6,811
Inventory 808 1,585
Minimum pension liability 240
Capital start-up costs 66 41
Discounted note 39 24
Other 81 80
----------- -----------
16,599 19,957
----------- -----------
(10,880) (14,848)
Allocation to minimum pension liability adjustment 179
----------- -----------
Total $ (10,701) $ (14,848)
========== ===========
F-17
<PAGE>
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. As of June 30,
1996, no allowance has been recorded. As of June 30, 1997, an allowance of
$472 has been recorded.
United States income taxes have not been provided on $1,620 and $357 of
cumulative undistributed earnings of Canadian Steel and Canada Alloy,
respectively, because of the Company's intentions to reinvest these
earnings. It is not practical to determine the unrecognized deferred tax
liability that would be payable upon remittance of assets that represent
those earnings. Such taxes, if ultimately paid, may be recoverable as
foreign tax credits in the United States.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
CASH, CUSTOMER ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE - The carrying
amounts of these items are a reasonable estimate of their fair value.
LONG-TERM OBLIGATIONS AND CURRENT MATURITIES OF LONG-TERM OBLIGATIONS -
Based on the borrowing rates currently available to the Company for loans
with similar terms and maturities, the fair value approximates carrying
value.
11.STOCKHOLDERS' EQUITY
In connection with the acquisition of the steel castings business from
Rockwell on June 14, 1991, the Company issued common stock or conveyed
purchase rights for common stock to certain employees in accordance with
various stock restriction agreements representing 476,173 shares. All such
shares became fully vested as of June 30, 1996.
F-18
<PAGE>
The Atchison Casting 1993 Incentive Stock Plan (the "Incentive Plan") was
adopted by the Board of Directors on August 10, 1993 and approved by the
Company's stockholders on September 27, 1993. The Incentive Plan allows the
Company to grant stock options to employees to purchase up to 300,000 shares
of common stock at prices that are not less than the fair market value at
the date of grant. The options become exercisable with respect to one-third
of the shares subject to the options each year from the date of grant and
remain exercisable for a term of not more than 10 years after the date of
grant. The Incentive Plan provides that no options may be granted more than
10 years after the date of approval by the stockholders. The changes in
outstanding options were as follows:
SHARES PRICE RANGE
UNDER OPTION PER SHARE
Balance, June 30, 1994 145,300 $ 13.375
Issued 31,000 14.500-14.75
Surrendered (5,900) 13.375
-------
Balance, June 30, 1995 170,400 13.375-14.75
Issued 45,800 14.125
Surrendered (4,000) 13.375
-------
Balance, June 30, 1996 212,200 13.375-14.75
Issued 33,533 15.75-19.125
Exercised (7,600) 13.375-14.50
Surrendered (8,134) 13.375-14.50
-------
Balance, June 30, 1997 229,999 13.375-19.125
=======
Exercisable
June 30, 1997 157,466 $12.875-14.75
=======
At June 30, 1997, options to purchase 62,401 shares were authorized but not
granted.
The 1993 Atchison Casting Corporation Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors on August 10, 1993
and approved by the Company's stockholders on September 27, 1993. An
aggregate of 400,000 shares of common stock were initially made available
for purchase by employees upon the exercise of options under the Purchase
Plan. On the first day of every option period (option periods are three-
month periods beginning on January 1, April 1, July 1 or October 1 and
ending on the next March 31, June 30, September 30 or December 31,
respectively), each eligible employee is granted a nontransferable option to
purchase common stock from the Company on the last day of the option period.
As of the last day of an option period, employee contributions (authorized
payroll deductions) during such option period will be used to purchase full
and partial shares of common stock. The price for stock purchased under each
option is 90% of the stock's fair market value on the first day or the last
day of the option period, whichever is lower. During the years ended June
30, 1995, 1996 and 1997, 11,754, 34,333 and 11,179 common shares,
respectively, were purchased by employees under the Purchase Plan. At June
30, 1997, 338,866 shares remained available for grant.
F-19
<PAGE>
On November 18, 1994, the Company's stockholders approved the Atchison
Casting Non-Employee Director Option Plan (the "Director Option Plan"). The
Director Option Plan provides that each non-employee director of the Company
who served in such capacity on April 15, 1994 and each non-employee director
upon election or appointment to the Board of Directors thereafter shall
automatically be granted an option to purchase 10,000 shares of the
Company's common stock. No person shall be granted more than one such option
pursuant to the Director Option Plan. An aggregate of 100,000 shares were
reserved for purchase under the plan. The price for stock purchased under
the plan is the fair market value at the date of grant. The changes in
outstanding options were as follows:
SHARES PRICE
UNDER OPTION PER SHARE
Balance, June 30, 1995 50,000 13.375
Exercised (10,000) 13.375
-------
Balance, June 30, 1996 40,000 13.375
=======
Balance, June 30, 1997 40,000 13.375
=======
Because the options granted on April 15, 1994, were subject to approval by
the stockholders, they are reflected as 1995 grants. At June 30, 1997,
options to purchase 50,000 shares were authorized but not granted.
The Company applies APB No. 25 in accounting for its stock option plans,
under which no compensation cost has been recognized for stock option
awards. Had compensation cost for the stock option plans been determined in
accordance with the fair value accounting method prescribed under SFAS No.
123, the Company's net earnings per share on a pro forma basis would have
been as follows:
1996 1997
Net income:
As reported $ 21,326 $ 9,728
Pro forma 21,129 9,353
Net income per share:
As reported 3.87 1.67
Pro forma 3.83 1.61
The SFAS No. 123 fair value method of accounting is not required to be
applied to options granted prior to July 1, 1995, therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years. Compensation cost for 1997 includes options granted during a two-year
period.
For the purpose of computing the pro forma effects of stock option grants
under the fair value accounting method, the fair value of each stock option
grant was estimated on the date of the grant using the Black-Scholes option
pricing model. The weighted-average fair value of stock options granted
during 1997 was $7.95. The following weighted average assumptions were used
for grants during the period:
F-20
<PAGE>
Risk-free interest rate 6.5%
Expected life 10 years
Expected volatility 15%
Dividend yield -
12.PENSION PLANS
The Company sponsors separate defined benefit pension plans for certain of
its salaried and hourly employees. Employees are eligible to participate on
the date of employment with vesting after five years of service. Benefits
for hourly employees are determined based on years of credited service
multiplied by a benefit formula or unit. Benefits for salaried employees are
determined based on credited service and employee earnings.
Pension expense for the defined benefit plans is presented below.
1995 1996 1997
Service costs $ 594 $ 717 $ 929
Interest costs 1,579 1,961 2,389
Actual return on net assets (1,267) (4,302) (3,308)
Net deferral items 20 2,559 810
------ ------ -------
$ 926 $ 935 $ 820
====== ====== =======
F-21
<PAGE>
The pension plans' assets (primarily U. S. Government securities, common
stock and corporate bonds) are deposited with a bank. A comparison of
projected benefit obligation and plan assets at fair value as of June 30,
1996 and 1997 is presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------------------ ---------------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ (8,653) $ (15,102) $ (27,221) $ (5,295)
=========== =========== ========== =========
Accumulated benefit
obligation $ (9,371) $ (15,564) $ (28,120) $ (5,509)
=========== =========== ========== =========
Projected benefit obligation $ (13,520) $ (15,564) $ (32,131) $ (5,509)
Plan assets at fair value 10,829 14,506 31,579 4,782
--------- ---------- ---------- ---------
Projected benefit obligation
in excess of plan assets (2,691) (1,058) (552) (727)
Unrecognized prior
service costs 129 189 118 79
Unrecognized net obligation (384) 417 (3)
Unrecognized net (gain)/loss 2,272 (44) (277) (152)
Additional liability (732) (42)
--------- ---------- ---------- ---------
Accrued pension liability $ (674) $ (1,228) $ (714) $ (842)
=========== =========== ========== =========
The actuarial valuation was
prepared assuming:
Discount rate 7.25 % 7.75 %
Expected long-term rate of
return on plan assets 9.00 % 9.00 %
Salary increases per year 5.00 % 5.00 %
</TABLE>
In accordance with SFAS No. 87, the Company has recorded an additional
minimum pension liability for underfunded plans of $732 and $42 at June 30,
1996 and 1997, respectively, representing the excess of unfunded accumulated
benefit obligations over previously recorded pension cost liabilities. A
corresponding amount is recognized as an intangible asset except to the
extent that these additional liabilities exceed related unrecognized prior
service cost and net transition obligation, in which case the increase in
liabilities is charged directly to stockholders' equity. For 1996 and 1997,
$82 and $293 of the excess minimum pension liability, respectively, resulted
in a credit to equity, net of income taxes of $59 and $187, respectively.
In addition, the Company sponsors a defined contribution 401(k) benefit plan
covering certain of its salaried employees who have attained age 21 and have
completed one year of service. The Company matches 75% of employee
contributions up to 8% of an employee's salary. Employees vest in the
Company matching contributions after five years. The cost of the Company's
contribution was $330, $429 and $452 for the years ended June 30, 1995, 1996
and 1997, respectively.
F-22
<PAGE>
The Company's subsidiaries, Prospect Foundry, LA Die Casting and Jahn
Foundry contributed $206, $189, and $274 for the fiscal years ended June 30,
1995, 1996 and 1997, respectively, to multiemployer pension plans for
employees covered by a collective bargaining agreement. These plans are not
administered by the Company and contributions are determined in accordance
with provisions of negotiated labor contracts. Information with respect to
the Company's proportionate share of the excess of the actuarially computed
value of vested benefits over the total of the pension plan's net assets is
not available from the plan's administrators. The Multiemployer Pension Plan
Amendments Act of 1980 (the "Act") significantly increased the pension
responsibilities of participating employers. Under the provisions of the
Act, if the plans terminate or the Company withdraws, the Company may be
subject to a substantial "withdrawal liability." As of the date of the most
current unaudited information submitted by the plan's administrators
(December 31, 1996), no withdrawal liabilities exist.
The Company also has various other profit sharing plans. Costs of such plans
charged against earnings were $403, $878 and $553 for the years ended
June 30, 1995, 1996 and 1997, respectively.
13.POSTRETIREMENT OBLIGATION OTHER THAN PENSION
The Company provides certain health care and life insurance benefits to
certain of its retired employees. SFAS No. 106, EMPLOYER'S ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, requires the Company to accrue
the estimated cost of retiree benefit payments during the years the employee
provides services. The accumulated postretirement benefit obligation and the
accrued postretirement benefit cost as of June 30, 1996 and 1997 is as
follows:
1996 1997
Accumulated postretirement benefit obligation:
Retirees $ 874 $ 1,231
Fully eligible active plan participants 864 742
Other active plan participants 4,069 4,428
------ --------
5,807 6,401
Plan assets at fair value
------ --------
Accumulated postretirement benefit obligation
in excess of plan assets 5,807 6,401
Unrecognized net loss (1,503) (1,535)
Unrecognized prior service cost 1,110 978
------ --------
Accrued postretirement benefit cost $ 5,414 $ 5,844
------ --------
------ --------
F-23
<PAGE>
Net postretirement benefit cost for the years ended June 30, 1995, 1996 and
1997 consisted of the following components:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 180 $ 223 $ 289
Interest cost on accumulated postretirement
benefit obligation 281 328 429
Amortization of prior service cost (132) (132) (69)
Amortization of loss 7
------ ------ -------
$ 329 $ 426 $ 649
====== ====== =======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for pre-age 65 benefits as of June 30,
1997 was 9.1% decreasing each successive year until it reaches 6.0% in 2017,
after which it remains constant. The assumed rate used for post-age 65
benefits was 8.6% decreasing each successive year until it reaches 6.0% in
2022. A one-percentage-point increase in the assumed health care cost trend
rate for each year would increase the accumulated postretirement benefit
obligation as of June 30, 1997 by approximately $963 (15.0%) and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for the year then ended by approximately $119
(16.6%). The assumed discount rate used in determining the accumulated
postretirement obligation as of June 30, 1997 was 7.75%, and the assumed
discount rate in determining the service cost and interest cost for the year
ended June 30, 1997 was 7.5%.
14.OPERATING LEASES
The Company leases certain buildings, equipment, automobiles and trucks, all
accounted for as operating leases, on an as needed basis to fulfill general
purposes. Total rental expense was $957, $544 and $657 for the years ended
June 30, 1995, 1996 and 1997, respectively. Long-term, noncancellable
operating leases having an initial or remaining term in excess of one year
require minimum rental payments as follows:
1998 $ 443
1999 114
2000 48
2001 12
2002
F-24
<PAGE>
15.MAJOR CUSTOMERS
The Company's operations are conducted within one business segment and
revenues attributable to foreign customers are not material. Net sales to
and customer accounts receivable from major customers are as follows:
<TABLE>
<CAPTION>
AMOUNT OF NET SALES
--------------------------------------
1995 1996 1997
----------- --------- -----------
<S> <C> <C> <C>
Customer A $ 18,611 $ 24,822 $ 30,232
Customer B 20,606 13,396 12,165
----------- --------- -----------
$ 39,217 $ 38,218 $ 42,397
----------- --------- -----------
----------- --------- -----------
</TABLE>
CUSTOMER
ACCOUNTS
RECEIVABLE
--------------------
1996 1997
--------- ---------
Customer A $ 3,765 $ 4,966
Customer B 2,481 823
--------- ---------
$ 6,246 $ 5,789
--------- ---------
--------- ---------
16.ADDITIONAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,611 $ 2,728 $ 3,346
Income taxes 5,224 6,883 4,269
Supplemental schedule of noncash investing and financing
activities:
Minimum pension liability adjustment, net of income
tax benefit (expense) of $38, ($59) and ($187),
respectively, recorded to stockholders' equity 62 (82) (293)
Recording of other asset related to pension liability (15) (24) (209)
Recording of additional pension liability (85) 175 689
Unexpended bond funds 1,198 (679)
Issuance of common stock in purchase of subsidiary 450
</TABLE>
17.OTHER INCOME
Other income in fiscal 1996 includes $11,087 of payments received by the
Company from its insurance carrier in final settlement of the business
interruption portion of the Company's insurance claim. Other income also
includes $16,231 of payments received in the fourth quarter from the
Company's insurance carrier in final settlement of the casualty and property
damage portion of the Company's insurance claim. The Company's claim was a
result of the July 1993 Missouri River flood. As of June 30, 1996 and 1997,
the Company has recorded $6,946 and $6,773, respectively, in reserves
against future repair expenses which have been classified as accrued
expenses.
F-25
<PAGE>
Other income in fiscal 1995 includes $6,639 in partial payments by the
Company's insurance carrier against the business interruption portion of the
Company's insurance claim, which was filed as a result of the July 1993
Missouri River flood.
18.SUBSEQUENT EVENTS
On July 1, 1997, ACC purchased the Beloit Castings Division ("BCD") from
Beloit Corporation for $7.2 million in cash, subject to adjustment. BCD now
operates under the name PrimeCast, Inc. ("PrimeCast"), as a subsidiary of
ACC. PrimeCast is a group of four foundries in Beloit, WI and South Beloit
IL, including two iron foundries, a steel foundry and a non-ferrous foundry,
that produce castings for the paper-machinery, pump, valve, mining and
construction markets.
******
F-26
<PAGE>
EXHIBIT INDEX
Exhibit
2.1 Stock Purchase Agreement dated as of February 28, 1996 by and among
the stockholders of G&C, the Stockholders' Representative and the
Company (incorporated by reference to Exhibit 2 of the Company's
Current Report on Form 8-K dated March 25, 1996)
3.1 Articles of Incorporation of Atchison Casting Corporation, A Kansas
corporation (incorporated by reference to Exhibit 4.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994)
3.2 By-Laws of Atchison Casting Corporation, a Kansas corporation
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994)
4.0 Long-term debt instruments of the Company in amounts not exceeding
10% of the total assets of the Company and its subsidiaries on a
consolidated basis will be furnished to the Commission upon request
4.1(a)Credit Agreement dated as of May 24, 1996 by and among the Company,
the banks party thereto and Harris Trust and Savings Bank, as Agent
(incorporated by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996)
4.1(b)First Amendment dated as of May 12, 1997 to Credit Agreement dated as
of May 24, 1996 by and among the Company, the banks party thereto and
Harris Trust and Savings Bank, as Agent (incorporated by reference to
Exhibit 4.4(b) of Amendment No. 2 to Form S-2 Registration Statement
No. 333-25157 filed May 19,1997)
4.2(a)Note Purchase Agreement dated as of July 29, 1994 between the Company
and Teachers Insurance and Annuity Association of America pursuant to
which the Company's 8.44% Senior Notes due 2004 were issued
(incorporated by reference to Exhibit 4.3 of the Company's Annual
Report on Form 10-K for the year ended June 30, 1994)
4.2(b)First Amendment dated as of March 8, 1996 to the Note Purchase
Agreement dated July 29, 1994, between the Company and Teachers
Insurance and Annuity Association of America (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form 8-K
dated March 25, 1996)
4.2(c)Second Amendment dated as of May 24, 1996 to the Note Purchase
Agreement dated July 29, 1994, between the Company and Teachers
Insurance and Annuity Association of America (incorporated by
reference to Exhibit 4.2(c) of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996)
<PAGE>
EXHIBIT INDEX
Exhibit
4.3 Specimen stock certificate (incorporated by reference to Exhibit 4.3
of Amendment No. 2 to Form S-2 Registration Statement No. 333-25157
filed May 19, 1997)
10.1(a)Employment Agreement between the Company and Hugh H. Aiken dated as
of June 14, 1991 (incorporated by reference to Exhibit 10.1 of
Form S-1 Registration Statement No. 33-67774 filed August 23, 1993)
10.1(b)Amendment No. 1 dated as of September 27, 1993 to Employment
Agreement between the Company and Hugh H. Aiken (incorporated by
reference to Exhibit 10.1(b) of Amendment No. 1 to Form S-1
Registration Statement No. 33-67774 filed September 27, 1993)
10.2 Atchison Casting 1993 Incentive Stock Plan (incorporated by reference
to Exhibit 10.7 of Form S-1 Registration Statement No. 33-67774 filed
August 23, 1993)
10.3 Confidentiality and Noncompetition Agreements by and among the
Company and executive officers of the Company (incorporated by
reference to Exhibit 10.8 of Form S-1 Registration Statement No. 33-
67774 filed August 23, 1993)
10.4 Atchison Casting Non-Employee Director Option Plan (incorporated by
reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K
for the year ended June 30, 1994)
10.5 Letter Agreement dated January 3, 1995 between James Stott and the
Company (incorporated by reference to Exhibit 10.1 of the Company's
quarterly Report on Form 10-Q for the quarter ended December 31,
1994)
10.6 Stock Option Agreement dated February 1, 1995 by and between Edward
J. Crowley, Rhoda, Stoudt & Bradley Law Offices and the Company
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994)
10.7 Employment Agreement dated February 1, 1995 by and between Edward J.
Crowley, Empire Steel Castings, Inc. and the Company (incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994)
10.8 Employment Incentive Stock Agreement dated as of April 1, 1994 by and
between Prospect Foundry, Inc., Atchison Casting Corporation and
Richard J. Sitarz (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
<PAGE>
EXHIBIT INDEX
Exhibit
10.9 Plan for conversion of subsidiary stock to Atchison Casting
Corporation stock(incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
10.10 Purchase and Sale Agreement dated as of December 30, 1996 by and
among Kramer, James Stott and David Jungen (incorporated by reference
to Exhibit 10 of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996)
10.11 Intermediary Fee Agreement between Riverside Partners, Inc. and the
Company dated February 17, 1997 (incorporated by reference to Exhibit
10.16 of Form S-2 Registration Statement No. 333-25157 filed May 19,
1997)
10.12 Employment Agreement dated as of February 23, 1996 by and between G&C
and Charles T. Carroll (incorporated by reference to Exhibit 10.17 of
Amendment No. 2 to Form S-2 Registration Statement No. 333-25157
filed May 19, 1997)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
SUBSIDIARY STATE OF INCORPORATION
---------- ----------------------
Amite Foundry and Machine, Inc.
Louisiana
Prospect Foundry, Inc.
Minnesota
Quaker Alloy, Inc.
Pennsylvania
Canadian Steel Foundries Ltd.
Canada
Kramer International, Inc.
Wisconsin
Empire Steel Castings, Inc.
Pennsylvania
La Grange Foundry Inc.
Missouri
The G&C Foundry Company
Ohio
Los Angeles Die Casting Inc.
California
Canada Alloy Castings, Ltd.
Canada
Pennsylvania Steel Foundry &
Machine Company
Pennsylvania
Jahn Foundry Corp. Massachusetts
PrimeCast, Inc. Wisconsin
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Numbers 33-74602, 33-81908 and 33-91566 of Atchison Casting Corporaton on
Form S-8 of our report dated August 14, 1997, appearing in this Annual
Report on Form 10-K of Atchison Casting Corporation for the year ended
June 30, 1997
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Kansas City, Missouri
September 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 19819
<SECURITIES> 0
<RECEIVABLES> 40310
<ALLOWANCES> 381
<INVENTORY> 30867
<CURRENT-ASSETS> 94833
<PP&E> 118110
<DEPRECIATION> 24994
<TOTAL-ASSETS> 213408
<CURRENT-LIABILITIES> 37602
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 122650
<TOTAL-LIABILITY-AND-EQUITY> 213408
<SALES> 245769
<TOTAL-REVENUES> 245769
<CGS> 203386
<TOTAL-COSTS> 22191
<OTHER-EXPENSES> 270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3227
<INCOME-PRETAX> 16695
<INCOME-TAX> 6967
<INCOME-CONTINUING> 9728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9728
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
