<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
AND 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 of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 South Fourth Street, Atchison, Kansas 66002
- -------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 367-2121
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
----------------------------
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 from the past 90 days. Yes X . No .
--- ---
There were 7,618,959 shares of common stock, $.01 par value per share,
outstanding on February 5, 1999
<PAGE>
PART I
ITEM 1. Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ---------
(Unaudited)
ASSETS
---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,364 $ 9,336
Customer accounts receivable, net of allowance for 88,072 88,469
doubtful accounts of $421 and $508, respectively
Inventories 66,220 62,146
Deferred income taxes 2,817 3,186
Other current assets 9,573 9,615
-------- --------
Total current assets 168,046 172,752
PROPERTY, PLANT AND EQUIPMENT, Net 150,969 137,290
INTANGIBLE ASSETS, Net 33,167 25,424
DEFERRED FINANCING COSTS, Net 648 746
OTHER ASSETS 10,362 9,927
-------- --------
TOTAL $363,192 $346,139
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 35,543 $ 37,259
Accrued expenses 46,617 52,690
Current maturities of long-term obligations 8,889 6,021
--------- ---------
Total current liabilities 91,049 95,970
LONG-TERM OBLIGATIONS 108,805 87,272
DEFERRED INCOME TAXES 13,939 12,608
OTHER LONG-TERM OBLIGATIONS 4,539 3,670
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS 217 349
OVER COST, Net
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 7,919 7,596
MINORITY INTEREST IN SUBSIDIARIES 4,229 3,060
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 82 82
authorized shares; 8,241,661 and 8,226,570
shares issued, respectively
Class A common stock (non-voting), $.01 par value, -- --
700,000 authorized shares; no shares issued and
outstanding
Additional paid-in capital 81,086 80,957
Retained earnings 58,250 55,205
Accumulated foreign currency translation adjustment (1,023) (630)
--------- ---------
138,395 135,614
Less shares held in treasury:
Common stock, 606,602 and 36,002 shares, respectively, at cost (5,900) --
--------- ---------
Total stockholders' equity 132,495 135,614
--------- ---------
TOTAL $ 363,192 $ 346,139
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 122,955 $ 84,435 $ 239,531 $ 153,231
COST OF GOODS SOLD 104,208 71,772 206,863 131,356
---------- ---------- ---------- ----------
GROSS PROFIT 18,747 12,663 32,668 21,875
OPERATING EXPENSES:
Selling, general and administrative 11,625 7,256 22,588 12,605
Amortization of intangibles 312 231 569 406
---------- ---------- ---------- ----------
Total operating expenses 11,937 7,487 23,157 13,011
---------- ---------- ---------- ----------
OPERATING INCOME 6,810 5,176 9,511 8,864
INTEREST EXPENSE 2,150 823 4,122 1,285
MINORITY INTEREST IN NET INCOME 59 116 51 179
OF SUBSIDIARIES
---------- ---------- ---------- ----------
INCOME BEFORE TAXES 4,601 4,237 5,338 7,400
INCOME TAXES 1,893 1,847 2,293 3,185
---------- ---------- ---------- ----------
NET INCOME $ 2,708 $ 2,390 $ 3,045 $ 4,215
========== ========== ========== ==========
NET INCOME PER COMMON AND
EQUIVALENT SHARE:
BASIC $ 0.35 $ 0.29 $ 0.38 $ 0.52
========== ========== ========== ==========
DILUTED $ 0.35 $ 0.29 $ 0.38 $ 0.51
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT
SHARES OUTSTANDING:
BASIC 7,771,336 8,161,661 7,955,241 8,154,812
========== ========== ========== ==========
DILUTED 7,771,336 8,220,053 7,955,241 8,215,597
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- ------- ------- --------
<S> <C> <C> <C> <C>
NET INCOME $ 2,708 $ 2,390 $ 3,045 $ 4,215
OTHER COMPREHENSIVE INCOME,
BEFORE TAX:
Foreign currency translation adjustments (33) (244) (33) (239)
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME,
BEFORE TAX $ 2,675 $ 2,146 $ 3,012 $ 3,976
INCOME TAX EXPENSE (BENEFIT)
RELATED TO ITEMS OF OTHER
COMPREHENSIVE INCOME (13) (105) (13) (103)
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME,
NET OF TAX $ 2,688 $ 2,251 $ 3,025 $ 4,079
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,045 $ 4,215
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 6,845 5,839
Minority interest in net income of subsidiaries 47 184
(Gain) Loss on disposal of capital assets (71) 13
Deferred income taxes 289 713
Changes in assets and liabilities (exclusive of
effects of acquired companies):
Receivables 3,003 3,834
Inventories (2,717) (2,903)
Other current assets (332) (315)
Accounts payable (4,033) (1,945)
Accrued expenses (7,238) (5,974)
Post retirement obligation other
than pension 323 323
Other 302 100
-------- --------
Cash provided by (used in) operating activities (537) 4,084
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,372) (8,229)
Payment for purchase of net assets of subsidiaries,
net of cash acquired (13,133) (26,725)
Proceeds from sale of capital assets 1,003 781
Payment for investments in unconsolidated subsidiaries (150) --
Advances under subordinated note receivable -- (1,484)
-------- --------
Cash used in investing activities (25,652) (35,657)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 129 397
Payment for repurchase of common stock (5,900) --
Payment for purchase of stock in subsidiaries (393) (11)
Payments on long-term obligations (2,999) (140)
Net borrowings under revolving loan note 27,400 15,487
-------- --------
Cash provided by financing activities 18,237 15,733
-------- --------
EFFECT OF EXCHANGE RATE ON CASH (20) 3
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ($ 7,972) ($15,837)
CASH AND CASH EQUIVALENTS, Beginning of period 9,336 19,819
-------- --------
CASH AND CASH EQUIVALENTS, End of period $ 1,364 $ 3,982
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company for
the year ended June 30, 1998, as included in the Company's 1998 Annual
Report to Stockholders.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. Results of operations for
interim periods are not necessarily indicative of results to be expected
for a full year.
On July 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "REPORTING COMPREHENSIVE INCOME". In accordance with
this statement the Company has presented a separate consolidated statement
of comprehensive income for the three-month and six-month periods ended
December 31, 1998, and has presented the three-month and six-month periods
ended December 31, 1997 for comparative purposes.
Certain December 31, 1997 amounts have been reclassified to conform with
December 31, 1998 classifications.
2. Inventories
<TABLE>
<CAPTION>
As of
-------------------------
December 31, June 30,
1998 1998
---- ----
(Thousands)
<S> <C> <C>
Raw materials $11,171 $11,152
Work-in-process 41,309 37,939
Finished goods 7,859 7,385
Deferred supplies 5,881 5,670
======= =======
$66,220 $62,146
======= =======
</TABLE>
<PAGE>
3. Income Taxes
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Current:
Domestic $1,245 $ 2,004
Foreign 759 468
------ -------
$2,004 $ 2,472
Deferred:
Domestic $ 94 $ 713
Foreign 195 ---
------ -------
$ 289 $ 713
------ -------
Total $2,293 $ 3,185
====== =======
</TABLE>
4. Acquisitions
Effective September 1, 1998, the Company purchased 90% of the outstanding
capital stock of London Precision Machine and Tool Ltd. ("London
Precision") for U.S. $13.8 million in cash. London Precision, located in
London, Ontario, Canada, is an industrial machine shop which serves the
locomotive, mining and construction, pulp and paper markets, among others.
The Company financed this transaction with funds available under its
revolving credit facility. In connection with the acquisition of London
Precision, the Company recorded approximately $8.4 million of goodwill,
which is being amortized over 25 years. The transaction has been treated as
a purchase for financial reporting purposes. The results of operations of
London Precision have been included in the Company's statement of
operations from the date of acquisition.
5. Additional Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
------ -------
<S> <C> <C>
Cash paid during the period for:
Interest $4,163 $1,335
====== ======
Income Taxes $4,227 $4,024
====== ======
Supplemental schedule of noncash investing
and financing activities:
Unexpended bond funds $0 ($487)
====== =======
</TABLE>
<PAGE>
6. Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE." This
Statement established new standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly held common stock
or potential common stock. The Statement requires dual presentation of
basic and diluted EPS on the face of the income statement for entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
The Company adopted SFAS No. 128 effective for the quarter ended
December 31, 1997. Following is a reconciliation of basic and diluted EPS
for the three-month and six-month periods ended December 31, 1998 and 1997,
respectively.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended December 31, 1998
- --------------------------------------------
Weighted
Net Average Earnings
Income Shares Per Share
---------- --------- ----------
Basic EPS
Income available to
common stockholders $2,708,000 7,771,336 $ 0.35
Effect of Dilutive Securities
Options --
---------- --------- ----------
Diluted EPS $2,708,000 7,771,336 $ 0.35
========== ========= ==========
For the three months ended December 31, 1997
- --------------------------------------------
Weighted
Net Average Earnings
Income Shares Per Share
---------- --------- ----------
Basic EPS
Income available to
common stockholders $2,390,000 8,161,661 $ 0.29
Effect of Dilutive Securities
Options 58,392
---------- --------- ----------
Diluted EPS $2,390,000 8,220,053 $ 0.29
========== ========= ==========
For the six months ended December 31, 1998
- ------------------------------------------
Weighted
Net Average Earnings
Income Shares Per Share
---------- --------- ----------
Basic EPS
Income available to
common stockholders $3,045,000 7,955,241 $ 0.38
Effect of Dilutive Securities
Options --
---------- --------- ----------
Diluted EPS $3,045,000 7,955,241 $ 0.38
========== ========= ==========
For the six months ended December 31, 1997
- ------------------------------------------
Weighted
Net Average Earnings
Income Shares Per Share
---------- --------- ----------
Basic EPS
Income available to
common stockholders $4,215,000 8,154,812 $ 0.52
Effect of Dilutive Securities
Options 60,785 (0.01)
---------- --------- ----------
Diluted EPS $4,215,000 8,215,597 $ 0.51
========== ========= ==========
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Net sales for the second quarter of fiscal 1999 were $123.0 million,
representing an increase of $38.6 million, or 45.6%, over net sales of $84.4
million in the second quarter of fiscal 1998. The operations acquired by the
Company since October 6, 1997 generated net sales of $12.5 million and $56.3
million in the second quarter of fiscal 1998 and fiscal 1999, respectively, as
follows:
<TABLE>
<CAPTION>
FY98 2nd Qtr FY99 2nd Qtr
Operation Date Acquired Net Sales Net Sales
--------- ------------- ------------ ------------
<S> <C> <C> <C>
Inverness Castings Group, Inc. 10 / 06 / 97 $12.5 million $12.1 million
Sheffield Forgemasters Group Limited 04 / 06 / 98 -- 35.5 million
Claremont Foundry, Inc. 05 / 01 / 98 -- 2.0 million
London Precision Machine & Tool Ltd. 09 / 01 / 98 -- 6.7 million
</TABLE>
Excluding net sales generated by the operations acquired since October 6, 1997,
net sales for the second quarter of fiscal 1999 were $66.7 million, representing
a decrease of $5.2 million, or 7.2%, from net sales of $71.9 million in the
second quarter of fiscal 1998. This 7.2% decrease in net sales was due primarily
to decreases in net sales to the mining, power generation, agricultural and
petrochemical markets, partially offset by an increase in net sales to the rail
market.
Net sales for the first six months of fiscal 1999 were $239.5 million,
representing an increase of $86.3 million, or 56.3%, over net sales of $153.2
million in the first six months of fiscal 1998. The operations acquired by the
Company since October 6, 1997 generated net sales of $12.5 million and $106.9
million in the first six months of fiscal 1998 and fiscal 1999, respectively, as
follows:
<TABLE>
<CAPTION>
FY98 2nd Qtr FY99 2nd Qtr
Operation Date Acquired Net Sales Net Sales
--------- ------------- ------------ ------------
<S> <C> <C> <C>
Inverness Castings Group, Inc. 10 / 06 / 97 $12.5 million $23.5 million
Sheffield Forgemasters Group Limited 04 / 06 / 98 -- 70.8 million
Claremont Foundry, Inc. 05 / 01 / 98 -- 3.6 million
London Precision Machine & Tool Ltd. 09 / 01 / 98 -- 9.0 million
</TABLE>
Excluding net sales generated by the operations acquired since October 6, 1997,
net sales for the first six months of fiscal 1999 were $132.6 million,
representing a decrease of $8.1 million, or 5.8%, over net sales of $140.7
million in the first six months of fiscal 1998. This 5.8% decrease in net sales
was due primarily to decreases in net sales to the mining, power generation,
agricultural and petrochemical markets, partially offset by an increase in net
sales to the rail market.
<PAGE>
Gross profit for the second quarter of fiscal 1999 increased by $6.0 million, or
48.0%, to $18.7 million, or 15.2% of net sales, compared to $12.7 million, or
15.0% of net sales, for the second quarter of fiscal 1998. Gross profit for the
first six months of fiscal 1999 increased by $10.8 million, or 49.3 %, to $32.7
million, or 13.6% of net sales, compared to $21.9 million, or 14.3% of net
sales, for the first six months of fiscal 1998. The increase in gross profit for
both periods was primarily due to increased sales volume levels resulting from
the acquisitions of Sheffield Forgemasters Group Limited ("Sheffield") and
London Precision Machine and Tool Ltd. ("London Precision"). The contribution
from London Precision and improved results at the Company's Amite facility due
to increased sales volume levels, improved productivity and reduced employee
turnover and training positively impacted gross profit as a percentage of net
sales in both periods. Offsetting these factors were: (i) decreased absorption
of overhead resulting from lower net sales to the offshore oil and gas, mining,
power generation, petrochemical and agricultural markets, (ii) continued
productivity and scrap problems at Inverness Castings Group, Inc. ("Inverness"),
(iii) increased warranty costs at Canada Alloy Castings, Ltd. and (iv) increased
training costs, higher employee turnover and increased overtime due to the
generally tight labor markets. In addition, gross profit as a percentage of net
sales for the first six months was impacted by (i) reduced productivity and
excessive overtime due to power curtailments under the Company's interruptible
electricity contracts resulting from the extreme heat during the first quarter
and (ii) higher plant maintenance shutdown costs at Atchison/St. Joe and
Prospect Foundry, Inc. ("Prospect").
Selling, general and administrative expense ("SG&A") for the second quarter of
fiscal 1999 was $11.6 million, or 9.5% of net sales, compared to $7.3 million,
or 8.6% of net sales, in the second quarter of fiscal 1998. For the first six
months of fiscal 1999, SG&A was $22.6 million, or 9.4% of net sales, compared to
$12.6 million, or 8.2% of net sales, for the first six months of fiscal 1998.
The increase in SG&A was primarily attributable to expenses associated with the
operations acquired by the Company in fiscal 1998 and fiscal 1999. The increase
in SG&A as a percentage of net sales for both periods was primarily due to
higher average SG&A as a percentage of net sales at Sheffield.
Amortization of certain intangibles for the second quarter of fiscal 1999 was
$312,000 or 0.3% of net sales, as compared to $231,000 or 0.3% of net sales, in
the second quarter of fiscal 1998. Amortization of certain intangibles for the
first six months of fiscal 1999 was $569,000 or 0.2% of net sales, as compared
to $406,000, or 0.3% of net sales, for the first six months of fiscal 1998. The
intangible assets consist of goodwill recorded in connection with certain of the
Company's acquisitions. In connection with the acquisition of London Precision,
the Company recorded approximately $8.4 million of goodwill, which is being
amortized over 25 years. 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 Foundries, Ltd.
Interest expense for the second quarter of fiscal 1999 increased to $2.2 million
or 1.7% of net sales, from $823,000, or 1.0% of net sales, in the second quarter
of fiscal 1998. For the first six months of fiscal 1999, interest expense
increased to $4.1 million, or 1.7% of net sales, from $1.3 million, or 0.8% of
net sales, in the first six months of fiscal 1998. The increase in interest
<PAGE>
expense reflects an increase in the average amount of outstanding indebtedness
primarily incurred to finance the Company's acquisitions.
Income tax expense for the second quarter of fiscal 1999 reflected the combined
federal, state and provincial statutory rate of approximately 41.0%. Income tax
expense for the first six months of fiscal 1999 reflected the combined federal,
state and provincial statutory rate of approximately 43.0%. Income tax expense
for the second quarter and first six months of fiscal 1998 reflected the
combined federal, state and provincial statutory rate of approximately 43.0%.
The Company's combined effective tax rate reflects the different federal, state
and provincial statutory rates of the various jurisdictions in which the Company
operates, and the proportion of taxable income earned in each of those tax
jurisdictions.
As a result of the foregoing, net income for the second quarter of fiscal 1999
was $2.7 million, compared to net income of $2.4 million for the second quarter
of fiscal 1998. Net income for the first six months of fiscal 1999 was $3.0
million, compared to net income of $4.2 million for the first six months of
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operating activities for the first six months of fiscal 1999 was
$537,000, compared to cash provided by operating activities of $4.1 million for
the first six months of fiscal 1998. This change was primarily attributable to
increased working capital requirements primarily relating to accounts payable
and accrued expenses balances.
Working capital was $77.0 million at December 31, 1998, as compared to $76.8
million at June 30, 1998. The increase primarily resulted from decreased
accounts payable and accrued expenses balances and net additional working
capital of $849,000 associated with the acquisition of London Precision, offset
by a $2.9 million increase in the current maturities of the Company's existing
outstanding indebtedness.
During the first six months of fiscal 1999, the Company made capital
expenditures of $13.4 million, as compared to $8.2 million for the first six
months of fiscal 1998. Included in the first six months of fiscal 1999 were
capital expenditures of $1.9 million on upgrading the 1,500 ton forging press to
2,500 tons at Sheffield. Included in the first six months of fiscal 1998 were
capital expenditures of $1.4 million on a new sand reclamation system at the
Atchison/St. Joe Division and $1.3 million on a new mold line at Prospect. The
balance of capital expenditures in both periods was used for routine projects at
each of the Company's facilities.
On August 12, 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to 1.2 million common shares of its
then outstanding 8.2 million common shares. The stock repurchases may be made
from time to time at prevailing prices in the open market or in privately
negotiated transactions, depending on market conditions, the price of Company's
common stock and other factors. The Company will make such stock repurchases
using internally generated funds and borrowings under its credit facility. The
Company's Note Purchase Agreement currently allows repurchases of up to nearly
$6.2 million of Company
<PAGE>
common stock. Any share repurchases will be added to the Company's treasury
shares and will be available for reissuance in connection with the Company's
acquisitions, employee benefit plans or for other corporate purposes. Through
December 31, 1998, the Company had repurchased 570,600 shares at a cost of
$5.9 million.
On October 7, 1998, the Company and its bank entered into the First Amendment to
the Amended and Restated Credit Agreement ("the Credit Agreement"). The Credit
Agreement consists of a $40 million term loan and a $70 million revolving credit
facility. This amendment permits the Company to repurchase up to $24 million of
its common stock, subject to a limitation of $10 million in any fiscal year
unless certain financial ratios are met, and provides for an option to increase
the revolving portion of the credit facility to $100 million if the Company
issues senior subordinated notes. Proceeds from the issuance of any senior
subordinated notes must be used to permanently pre-pay the $40 million term loan
portion of the credit facility. Loans under the credit facility may be used for
general corporate purposes, acquisitions and approved investments.
On October 12, 1998, the insurance company holding the Company's unsecured
senior notes granted a limited waiver increasing the permitted repurchases of
the Company's common stock from $3.2 million to $6.2 million.
Total indebtedness of the Company at December 31, 1998 was $117.7 million, as
compared to $93.3 million at June 30, 1998. This increase of $24.4 million
primarily reflects indebtedness incurred of $13.8 million to finance the
acquisition of London Precision and $5.9 million to repurchase 570,600 shares of
the Company's common stock. At December 31, 1998, $7.2 million was available for
borrowing under the Company's revolving credit facility.
Effective September 1, 1998, the Company purchased 90% of the outstanding
capital stock of London Precision for U.S. $13.8 million cash. London Precision,
located in London, Ontario, Canada, is an industrial machine shop which serves
the locomotive, mining and construction, pulp and paper markets, among others.
The Company financed this transaction with funds available under its revolving
credit facility.
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, working capital requirements and repurchases of the
Company's common stock for the next two years. However, the level of capital
expenditure and working capital 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.
YEAR 2000 COMPUTER ISSUES
The Company has conducted a comprehensive review of its hardware and software
systems to identify those systems that could be affected by the "Year 2000"
issue and has developed an implementation plan to resolve the identified issues.
The Company believes that, with replacement or modification of its existing
computer systems, updates by vendors and conversion to new software, the Year
2000 issue will not pose significant operational problems for the
<PAGE>
Company's computer systems. The Company expects to complete implementation of
computer systems that are Year 2000 compliant in fiscal 1999, although
testing may continue in the first two quarters of fiscal 2000. Based on its
review of non-information technology systems to date, the Company does not
anticipate the need to develop an extensive contingency plan for such systems
or to incur material costs in that regard.
The Company relies on a number of customers and suppliers, including banks,
telecommunication providers, utilities, and other providers of goods and
services. The inability of these third parties to conduct their business for a
significant period of time due to the Year 2000 issue could have a material
adverse impact on the Company's operations. The Company is currently assessing
the Year 2000 compliance of its significant customers and suppliers. To date,
the Company has been advised by two thirds of its significant customers that
they expect to be Year 2000 compliant by the end of calendar 1999. There can be
no assurance that the systems of other companies that interact with the Company
will be sufficiently Year 2000 compliant. The Company's reliance on single
source suppliers, however, is minimal, and the Company seeks to limit sole
source supply relationships. The Company, however, has entered into national
service agreements for the supply of certain raw materials and freight service
from single sources. If the Company does not identify or fix all Year 2000
problems in critical operations, or if a major supplier or customer is unable to
supply raw materials or receive the Company's product, the Company's results of
operations or financial condition could be materially impacted.
Year 2000 project expenditures to date total $770,000. The Company expects to
incur an additional $1.3 million of costs. The Company presently anticipates
that it will complete its Year 2000 assessment and remediation by June 30, 1999.
However, there can be no assurance that the Company will be successful in
implementing its Year 2000 implementation plan according to the anticipated
schedule due to the potential lack of availability of trained personnel and
their ability to identify relevant computer codes, among other uncertainties.
The Company does not anticipate the need for an extensive contingency plan for
problems arising with its customers and suppliers. Should problems arise,
appropriate resources will be utilized to address problems.
FORWARD-LOOKING STATEMENTS
The sections entitled "Liquidity and Capital Resources" and "Year 2000 Computer
Issues" contain forward-looking statements that involve a number of risks and
uncertainties. Forward-looking statements such as "expects," "intends,"
contemplating" and statements pertaining to the adequacy of funding for capital
expenditure and working capital requirements for the next two years are not
historical in nature. Among the factors that could cause actual results to
differ materially from such forward-looking statements include: the size and
timing of future acquisitions, business conditions and the state of the general
economy, particularly the capital goods industry, the strength of the U.S.
dollar and British pound, interest rates, the availability of labor, the
competitive environment in the casting industry and changes in laws and
regulations that govern the Company's business, particularly environmental
regulations.
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in Item
7A of the Company's Form 10-K for the fiscal year ended June 30, 1998. There has
been no material change to that information required to be disclosed in this
Form 10-Q filing.
<PAGE>
PART II
ITEM 1 - Legal Proceedings
NOT APPLICABLE
ITEM 2 - Changes in Securities and Use of Proceeds
Unregistered Securities Transactions
In lieu of cash compensation for services rendered in their capacity
as Directors of the Company, Mr. David Belluck, Mr. Ray Witt, Mr. John
Whitney and Mr. Stuart Uram were each provided at their election
1,240, 620, 1,240 and 620 shares, respectively, of common stock on
December 7, 1998, with a then-current market value of $9.69 per share.
Such transactions were exempt from registration under the Securities
Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the
Act.
ITEM 3 - Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on November 20, 1998.
Stockholders owning 7,823,578 shares voted in favor of David L.
Belluck as a Class II director. There were 125,281 shares withheld.
Stockholders owning 7,823,644 shares voted in favor of John O. Whitney
as a Class II director. There were 125,215 shares withheld.
Accordingly, Mr. Belluck and Mr. Whitney were elected as Class II
directors for a term of three years. Previously elected and continuing
to serve their terms are Hugh H. Aiken, Ray H. Witt and Stuart Z.
Uram.
ITEM 5 - Other Information
NOT APPLICABLE
ITEM 6 - Exhibits and Reports of Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter ended December 31, 1998.
<PAGE>
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atchison Casting Corporation
(Registrant)
DATE: February 5, 1999 /s/ HUGH H. AIKEN
--------------------------------------------
Hugh H. Aiken, Chairman of the
Board, President and Chief
Executive Officer
DATE: February 5, 1999 /s/ KEVIN T. MCDERMED
--------------------------------------------
Kevin T. McDermed, Vice President, Chief
Financial Officer, Treasurer and Secretary
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