<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
October 31, 1997 0-22906
- --------------------------------- -----------------------
For the Quarter Ended Commission File Number
ABC Rail Products Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3498749
- --------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Michigan Avenue, Chicago, IL 60604-2402
--------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (312) 322-0360
-----------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 28, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 8,976,304 Shares
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7 - 10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 14
Part II Other Information
Item 2 Changes in Securities 15
Item 6 Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of October 31, 1997 and July 31, 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
October 31, July 31,
ASSETS 1997 1997
- ------ ----------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowances of $1,219 and $1,006, respectively $ 45,454 $ 38,208
Inventories (Note 3) 43,310 46,580
Prepaid expenses and other current assets 3,007 1,964
Prepaid income taxes 713 963
-------- --------
Total current assets 92,484 87,715
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,927 1,927
Buildings and improvements 12,491 12,491
Machinery and equipment 85,448 84,653
Construction in progress 44,603 36,421
-------- --------
Less - Accumulated depreciation 144,469 135,492
(39,703) (37,480)
-------- --------
Net property, plant and equipment 104,766 98,012
-------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
15,400 14,684
-------- --------
OTHER ASSETS - net 29,884 30,196
-------- --------
Total assets $242,534 $230,607
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 5,087 $ 2,991
Current maturities of long-term debt 2,405 3,987
Accounts payable 26,340 26,617
Accrued liabilities 13,396 11,273
-------- --------
Total current liabilities 47,228 44,868
-------- --------
LONG-TERM DEBT, less current maturities
104,041 95,011
-------- --------
DEFERRED INCOME TAXES
5,931 5,881
-------- --------
OTHER LONG-TERM LIABILITIES
4,133 4,351
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized;
8,954,082 shares issued and outstanding as of October 31, 1997
and July 31, 1997 90 90
Additional paid-in capital 67,362 67,362
Retained earnings 13,749 13,044
-------- --------
Total stockholders' equity 81,201 80,496
-------- --------
Total liabilities and stockholders' equity $242,534 $230,607
======== ========
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended October 31, 1997 and 1996
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31
------------------------------
1997 1996
------- -------
<S> <C> <C>
NET SALES $67,885 $55,911
COST OF SALES 61,093 50,538
------- -------
Gross profit 6,792 5,373
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,622 3,242
------- -------
Operating income 3,170 2,131
EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES 401 7
INTEREST EXPENSE 2,185 1,275
AMORTIZATION OF DEFERRED FINANCING COSTS 129 53
------- -------
Income before income taxes 1,257 810
PROVISION FOR INCOME TAXES 552 331
------- -------
Net income $ 705 $ 479
======= =======
NET INCOME PER COMMON SHARE $ 0.08 $ 0.06
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,220 8,297
======= =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
4
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended October 31, 1997 and 1996
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
------ ---------- --------
<S> <C> <C> <C>
BALANCE, July 31, 1996 $83 $55,251 $ 9,062
Net income - - 479
Exercised stock options 1 1,259 -
Income tax benefit from exercised stock options - 355 -
--- ------- -------
BALANCE, October 31, 1996 $84 $56,865 $ 9,541
=== ======= =======
BALANCE, July 31, 1997 $90 $67,362 $13,044
Net income - - 705
--- ------- -------
BALANCE, October 31, 1997
$90 $67,362 $13,749
=== ======= =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended October 31, 1997 and 1996
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 31
-------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 705 $ 479
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income of unconsolidated joint ventures (401) (7)
Depreciation and amortization 3,277 2,725
Deferred income taxes 300 150
Changes in certain assets and liabilities:
Accounts receivable - net (7,246) 57
Inventories 3,270 (1,503)
Prepaid expenses and other current assets (1,043) (996)
Other assets - net (642) (717)
Accounts payable and accrued liabilities 1,858 (23)
Other long-term liabilities (218) (1)
------- -------
Total adjustments (845) (315)
------- -------
Net cash provided by (used in) operating activities (140) 164
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,083) (6,123)
Investment in joint ventures (321) (2,271)
------- -------
Net cash used in investing activities (9,404) (8,394)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts 2,096 936
Activity under the Credit Agreement:
Net activity under revolving line of credit 10,041 4,494
Repayment of acquisition facility - (1,465)
Draw on acquisition facility - 1,750
Issuance of other long-term debt - 1,878
Repayment of other long-term debt (2,593) (573)
Payment of deferred financing costs - (50)
Exercised stock options - 1,260
------- -------
Net cash provided by financing activities 9,544 8,230
------- -------
Net change in cash - -
CASH, beginning of period - -
------- -------
CASH, end of period $ - $ -
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,698 $ 1,232
Cash paid for income taxes 39 84
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
6
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
ABC Rail Products Corporation (the "Company") is a leader in the
engineering, manufacturing and marketing of replacement products and
original equipment for the freight railroad and rail transit industries.
The Company's products include specialty trackwork, such as rail crossings
and switches; mechanical products, such as rail car, locomotive and idler
wheels, mounted wheel sets and metal brake shoes; classification yard
products and automation systems; and railway signal systems installation
and maintenance services.
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the results of
operations and financial condition of the Company for and as of the interim
dates. Results for the interim period are not necessarily indicative of
results for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1997
Annual Report to Stockholders.
2. Business Combinations
Effective December 17, 1996, the Company acquired American Systems
Technologies, Inc. ("AST") of Verona, Wisconsin for common stock. AST
provides railway signal system installation and maintenance to the short
line, regional, commuter and transit railroads. As part of the purchase
agreement, the prior owners will be issued additional shares of common
stock if certain earnings goals are met over the next three years. For the
three months ended October 31, 1997, the issuance of such contingent
shares, based on AST's current level of earnings, has been assumed in the
earnings per share computations.
This acquisition was accounted for under the purchase method of accounting.
Accordingly, certain recorded assets and liabilities of AST were revalued
to estimated fair market values as of the acquisition date. Management has
used its best judgment and available information in estimating the fair
market value of those assets and liabilities. Any changes to these
estimates are not expected to be material. The operating results of AST
are included in the consolidated statement of operations from the date of
acquisition.
7
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for substantially all inventories.
Inventory costs include material, labor and manufacturing overhead.
Supplies and spare parts primarily consist of manufacturing supplies and
equipment replacement parts.
Inventories at October 31, 1997, and July 31, 1997, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1997 1997
----------- --------
<S> <C> <C>
Raw materials $23,629 $27,734
Work in process 9,096 8,575
Finished goods 6,246 5,983
Supplies and spare parts 4,339 4,288
------- -------
$43,310 $46,580
======= =======
</TABLE>
4. Debt
On November 15, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for the issuance of up to $100 million
of Subordinated Debt Securities and/or shares of its Common Stock. On
February 1, 1997, the Company completed an offering (the "Offering") of $50
million of 9-1/8% Senior Subordinated Notes (the "Notes"). The Company used
the $47.9 million of net proceeds of the Offering to repay certain
outstanding indebtedness under its primary and other credit facilities. A
$0.3 million extraordinary after-tax loss was recognized in the third
quarter of fiscal year 1997 upon the early retirement of this indebtedness.
Financing costs of $2.2 million were deferred in connection with the
issuance of the Notes. The Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
senior indebtedness of the Company and other liabilities of the Company's
subsidiaries. The Notes will mature in 2004, unless repurchased earlier at
the option of the Company after January 15, 1999 at 102% of face value
prior to January 14, 2000, or at 100% face value thereafter. The Notes are
subject to mandatory repurchase or redemption prior to maturity upon a
Change of Control (as defined). The Indenture under which the Notes were
issued subjects the Company to various financial covenants which, among
other things, require the Company to maintain (all as defined) (i) a
minimum Consolidated Net Worth, (ii) a minimum Operating Coverage Ratio and
(iii) a maximum Funded Debt to Consolidated Capitalization Ratio and limits
the Company's ability to (i) incur additional indebtedness, (ii) complete
certain mergers, consolidations and sales of assets, and (iii) pay
dividends or other distributions. The Company was in compliance with all of
its covenants under this obligation as of October 31, 1997.
8
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Prior to the Offering, the Company's primary credit facilities included a
five year credit agreement (the "Credit Agreement") and two term loans. The
Credit Agreement included a $15.0 million non-amortizing term loan, a $50.0
million (as amended) revolving credit line and a $17.8 million (as amended)
acquisition facility.
Simultaneous with the consummation of the Offering, the Company amended and
restated the Credit Agreement. Under the amended Credit Agreement (i) the
non-amortizing term loan and the acquisition facility that existed under
the Credit Agreement were paid in full and canceled, (ii) the revolving
credit line that existed under the Credit Agreement was increased to $90
million and (iii) the terms of certain financial covenants were modified.
The modified financial covenants under the amended Credit Agreement are
similar to those under the Notes Indenture. The Company was in compliance
with the new debt covenants as of October 31, 1997, except for the
limitation on Capital Expenditures, for which a waiver was obtained.
Interest on all amounts borrowed under the amended Credit Agreement is
payable at the option of the Company at either the base rate (as defined)
plus 0.5%, or LIBOR (as defined) plus 2.0% and is payable monthly while the
base rate is in effect or every one to six months while the LIBOR rate is
in effect. As of October 31, 1997, the weighted average interest rate of
outstanding borrowings under the Credit Agreement was 8.2%. The Company has
pledged as collateral under the Credit Agreement substantially all of its
property, plant and equipment, eligible accounts receivable and
inventories, intellectual property and capital stock of its subsidiaries.
As of October 31, 1997, availability under the amended Credit Agreement was
$15.3 million.
The Company entered into a seven-year term loan agreement on July 20, 1995,
to finance up to $12.5 million of capital expenditures for the rail mill
center located in Chicago Heights, Illinois. Through October 31, 1997,
$10.8 million had been drawn under this term loan. The term loan is secured
by the related fixed assets, bears weighted average interest at 7.4% as of
October 31, 1997 and contains financial covenants which require the Company
to maintain minimum levels of net worth and a minimum fixed charge coverage
ratio. A second, similar term loan was repaid in full with a portion of the
proceeds from the Offering. Except for the interest coverage ratio, the
Company was in compliance with all of its covenants under the term loan as
of October 31, 1997. A waiver was obtained from the lender for the non-
compliance on the interest coverage ratio.
9
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Commitments and Contingencies
In connection with its formation and the purchase of certain assets and
liabilities from the Railroad Products Group of Abex Corporation ("Abex")
in 1987, the Company obtained a comprehensive environmental indemnity from
Abex. The indemnity covers environmental conditions, whether or not then
known, in existence at the time of purchase, without dollar or time limit.
In October, 1994, the Company filed suit against Abex which asserts that
Abex is required to indemnify the Company for the reduction in value of one
of the sold properties (a Pennsylvania manufacturing facility formerly
owned by the Company) caused by the environmental contamination at that
site.
The Company is also a party to various other legal proceedings arising in
the ordinary course of business, none of which is expected to have a
material adverse effect on the Company's business, financial condition or
results of operations.
6. China Joint Venture
In May 1996, the Company entered into a joint venture agreement with
China's Ministry of Railroads to establish the Datong ABC Castings Company
Ltd. The joint venture will manufacture wheels in China primarily for the
rapidly growing Chinese railway markets. The Company's contribution of its
40% share in the joint venture will consist of technical know-how,
expertise and cash. The Company's cash infusion of $9.2 million has been
contributed to the joint venture and additional amounts have been deferred
in organizing the venture. The cash funding is being used to construct a
manufacturing facility which is expected to be operational by mid 1998.
7. Subsequent Events
Shortly after the end of the first quarter of fiscal 1998, the Company
acquired United Railway Signal Group, Inc. ("URSG") headquartered in
Jacksonville, Florida for a combination of cash and the Company's common
stock totaling $1.4 million. URSG provides independent signal engineering
services to the railroad industry. As part of the purchase agreement, the
prior owners will be issued additional shares of common stock if certain
earnings goals are met over the next three years. This acquisition will be
accounted for under the purchase method of accounting.
10
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the interim periods included in the accompanying unaudited
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended October 31, 1997 Compared to Three Months Ended October 31,
1996
Net Sales. Net sales increased 21.4% to $67.9 million from $55.9 million. The
increase in sales is due primarily to a general increase in sales in the Track
Products Division ($8.6 million). Approximately one-half of the Track Product
Division increase is related to the additional sales associated with the
December 1996 acquisition of AST.
Gross Profit and Cost of Sales. Gross profit increased 26.4% to $6.8 million
from $5.4 million. The $1.4 million increase was primarily due to the sales
changes discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million. The small increase in expenses
between quarters reflects additional expense in the customer support area (field
sales and customer service) to meet the expanding needs of our customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Operating Income. Operating income increased 48.3% to $3.2 million from $2.1
million. The increase resulted largely from the 26.4% ($1.4 million) increase in
gross profit, offset by the increase in selling, general and administrative
expenses ($0.4 million). In addition to these factors, the Company's sales and
profits are typically lower during the first half of the Company's fiscal year
than during the second half of the fiscal year. See "Seasonality."
Other. Equity earnings from unconsolidated joint ventures were $0.4 million
during the current quarter primarily due to the Anchor Brake Shoe joint venture
established on July 31, 1995. Prior quarter's equity earnings were not
significant. Interest expense increased 71.4%, or $0.9 million, due primarily to
an overall higher level of outstanding debt to support acquisitions, capital
projects and expanding operations, along with the marginally higher interest
rate on the new Senior Subordinated Notes.
11
<PAGE>
SEASONALITY
- -----------
The peak season for installation of specialty trackwork extends from March
through October, when weather conditions are generally favorable for
installation and, as a result, net sales of specialty trackwork have
historically been more concentrated in the period from January through June, a
period roughly corresponding to the second half of the Company's fiscal year. In
addition, a number of the Company's facilities close for regularly scheduled
maintenance in the late summer and late December, which tends to reduce
operating results during the first half of the Company's fiscal year. Transit
industry practice with respect to specialty trackwork generally involves the
periodic shipment of large quantities, which may be unevenly distributed
throughout the year. The Company does not expect any significant departure from
the historical demand patterns during the present fiscal year ending July 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Cash generated from operations, structured borrowings and equity offerings have
been the major sources of funds for working capital, capital expenditures and
acquisitions. For the three months ended October 31, 1997 and 1996, net cash
provided by (used in) operating activities totaled $(0.1) million and $0.2
million, respectively. The decrease in operating cash flow is due primarily to a
net increase in working capital items, partially offset by increased recorded
earnings.
Capital expenditures during the first quarter of fiscal 1998 and 1997 were $9.1
million and $6.1 million, respectively.
In May 1996, the Company entered into a joint venture agreement with China's
Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The
joint venture will manufacture wheels in China primarily for the rapidly growing
Chinese railway markets. The Company's contribution of its 40% share in the
joint venture will consist of technical know-how, expertise and cash. The
Company's total cash infusion of $9.2 million has already been contributed to
the joint venture. The cash funding is being used to construct a manufacturing
facility which is expected to be operational by mid 1998.
Shortly after the end of the first quarter of fiscal 1998, the Company acquired
United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville,
Florida for a combination of cash and the Company's common stock totaling $1.4
million. URSG provides independent signal engineering services to the railroad
industry. As part of the purchase agreement, the prior owners will be issued
additional shares of common stock if certain earnings goals are met over the
next three years. This acquisition will be accounted for under the purchase
method of accounting.
For the three months ended October 31, 1997 and 1996, net cash provided by
financing activities totaled $9.5 million and $8.2 million, respectively. The
increase in financing cash flows is due primarily to the net borrowings under
the Credit Agreement to support the reduced cash from operating activities and
the increased use of cash for investing activities.
12
<PAGE>
On November 15, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for the issuance of up to $100 million of
Subordinated Debt Securities and/or shares of its Common Stock. On February 1,
1997, the Company completed an offering (the "Offering") of $50 million of
9-1/8% Senior Subordinated Notes (the "Notes"). The Company used the $47.9
million of net proceeds of the Offering to repay certain outstanding
indebtedness under its primary and other credit facilities. A $0.3 million
extraordinary after-tax loss was recognized in the third quarter of fiscal year
1997 upon the early retirement of this indebtedness. Financing costs of $2.2
million were deferred in connection with the issuance of the Notes. The Notes
are general unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior indebtedness of the Company and
other liabilities of the Company's subsidiaries. The Notes will mature in 2004,
unless repurchased earlier at the option of the Company after January 15, 1999
at 102% of face value prior to January 14, 2000, or at 100% face value
thereafter. The Notes are subject to mandatory repurchase or redemption prior to
maturity upon a Change of Control (as defined). The Indenture under which the
Notes were issued subjects the Company to various financial covenants which,
among other things, require the Company to maintain (all as defined) (i) a
minimum Consolidated Net Worth, (ii) a minimum Operating Coverage Ratio and
(iii) a maximum Funded Debt to Consolidated Capitalization Ratio and limits the
Company's ability to (i) incur additional indebtedness, (ii) complete certain
mergers, consolidations and sales of assets, and (iii) pay dividends or other
distributions. The Company was in compliance with all of its covenants under
this obligation as of October 31, 1997.
Prior to the Offering, the Company's primary credit facilities included a five-
year credit agreement (the "Credit Agreement") and two term loans. The Credit
Agreement included a $15.0 million non-amortizing term loan, a $50.0 million (as
amended) revolving credit line and a $17.8 million (as amended) acquisition
facility.
Simultaneous with the consummation of the Offering, the Company amended and
restated the Credit Agreement. Under the amended Credit Agreement (i) the non-
amortizing term loan and the acquisition facility that existed under the Credit
Agreement were paid in full and canceled, (ii) the revolving credit line that
existed under the Credit Agreement was increased to $90 million and (iii) the
terms of certain financial covenants were modified.
The modified financial covenants under the amended Credit Agreement are similar
to those under the Notes Indenture. The Company was in compliance with the new
debt covenants as of October 31, 1997, except for the limitation on Capital
Expenditures for which a waiver was obtained.
Interest on all amounts borrowed under the Credit Agreement is payable at the
option of the Company at either the base rate (as defined) plus 0.5%, or LIBOR
(as defined) plus 2.0% and is payable monthly while the base rate is in effect
or every one to six months while the LIBOR rate is in effect. As of October 31,
1997, the weighted average interest rate of outstanding borrowings under the
Credit Agreement was 8.2%. The Company has pledged as collateral under the
Credit Agreement substantially all of its property, plant and equipment,
eligible accounts receivable and inventories, intellectual property and capital
stock of its subsidiaries. As of October 31, 1997, availability under the
amended Credit Agreement was $15.3 million.
13
<PAGE>
The Company entered into a seven-year term loan agreement on July 20, 1995, to
finance up to $12.5 million of capital expenditures for the rail mill center
located in Chicago Heights, Illinois. Through October 31, 1997, $10.8 million
had been drawn under this term loan. The term loan is secured by the related
fixed assets, bears weighted average interest at 7.4% as of October 31, 1997 and
contains financial covenants which require the Company to maintain minimum
levels of net worth and a minimum fixed charge coverage ratio. A second, similar
term loan was repaid in full with a portion of the proceeds from the Offering.
Except for the interest coverage ratio, the Company was in compliance with all
of its covenants under the term loan as of October 31, 1997. A waiver was
obtained from the lender for the non-compliance on the interest coverage ratio.
REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------
The foregoing contains forward-looking statements that are based on current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from current expectations due to a number of
factors, including general economic conditions; competitive factors and pricing
pressures; shifts in market demand; the performance and needs of industries
served by the Company's businesses; actual future costs of operating expenses
such as rail and scrap steel, self-insurance claims and employee wages and
benefits; actual costs of continuing investments in technology; the availability
of capital to finance possible acquisitions and to refinance debt; the ability
of management to implement the Company's strategy of acquisitions, rebuilding
and process improvements; and the risks described from time to time in the
Company's SEC reports.
14
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 2 - Changes in Securities
Shortly after the end of the first quarter of fiscal 1998, the
Company issued 22,222 shares of common stock to the prior owners of
United Railway Signal Group, Inc. ("URSG") as part of the
consideration paid for the Company's acquisition of URSG. In
addition, pursuant to the purchase agreement, the Company agreed to
issue additional shares of common stock to the prior owners of URSG
if certain earnings goals are met over the next three years. The
Company relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, for such issuances.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Restated Certificate of Incorporation of the Company
(1)
3.2 Bylaws of the Company (2)
10.1 Amendment No. 2 dated as of October 31, 1997 to the
Second Amended and Restated Loan and Security
Agreement, dated as of January 3, 1997 among the
Company, ABC Deco Inc. and American Systems
Technologies, Inc., as borrowers, the financial
institutions named therein, as lenders, and American
National Bank and Trust Company of Chicago, as agent,
as amended by Amendment No. 1 thereto dated as of
August 8, 1997.
27.1 Financial Data Schedule.
(1) Incorporated by reference to the same numbered exhibit
filed with the Registrant's Registration Statement on Form
S-1 originally filed with the Securities and Exchange
Commission on April 13, 1994 (SEC File No. 33-77652).
(2) Incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1994 (SEC File No. 0-22906).
(B) Reports on Form 8-K
None
15
<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.
ABC RAIL PRODUCTS CORPORATION
/s/ D. Chisholm MacDonald
-----------------------------------
D. Chisholm MacDonald
Executive Vice President --
Administration and Business Development
and Chief Financial Officer
(Duly authorized Officer and Principal
Financial and Accounting Officer)
Date: December 10, 1997
-------------------------
16
<PAGE>
Exhibit 10.1
------------
AMENDMENT NO. 2 AND WAIVER AGREEMENT
------------------------------------
THIS AMENDMENT NO. 2 AND WAIVER AGREEMENT (this "Agreement") is
entered into as of October 31, 1997 by and among ABC Rail Products Corporation
("Rail"), ABC Deco Inc. ("Deco"), American System Technologies, Inc. ("AST;"
AST, Rail and Deco being the "Borrowers"), the financial institutions named on
the signature pages hereto (collectively, the "Lenders") and American National
Bank and Trust Company of Chicago, as agent for the Lenders (the "Agent").
RECITALS
--------
WHEREAS, the Borrowers, the Lenders and the Agent have entered into
that certain Second Amended and Restated Loan and Security Agreement dated as of
January 31, 1997 (as heretofore amended, supplemented or otherwise modified, the
"Loan Agreement");
WHEREAS, the Borrowers desire that Rail acquire United Railway Signal
Group, Inc., a Florida corporation ("United");
WHEREAS, Rail proposes that the acquisition (the "Acquisition") of
United be accomplished by merging United with and into ABC Rail Acquisition II
Corporation, a Delaware corporation wholly owned by Rail ("Acquisition II
Corporation") and that immediately after giving effect thereto Acquisition II
Corporation will change its name to "United Railway Signal Group, Inc.;"
WHEREAS, Rail further proposes that the Acquisition be consummated
pursuant to (1) that certain Plan of Merger dated October 31, 1997 between
Acquisition II Corporation and United (the "Merger Agreement") in the form
attached as Exhibit A to the Supplemental Agreement referred to below, and (2)
that certain Supplemental Agreement dated as of October 31, 1997 among Rail and
the shareholders of United (the "Supplemental Agreement") substantially (in
every material respect) in the form attached hereto as Exhibit A (the Merger
Agreement and Supplemental Agreement being, collectively, referred to as the
"Acquisition Agreement");
WHEREAS, United has liabilities under certain bank loan facilities in
an aggregate amount not in excess of $235,000 (the "United Bank Debt");
WHEREAS, in order to consummate the Acquisition, the Borrowers have
requested that the Agent and the Lenders amend and/or waive certain provisions
of the Loan Agreement as provided herein; and
WHEREAS, the Agent and the Lenders are willing to enter into this
Agreement, but only on the terms and subject to the conditions set forth below;
<PAGE>
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Definitions. Terms defined in the Loan Agreement which are used
herein shall have the same meaning as are set forth in the Loan Agreement for
such terms unless otherwise defined herein.
2. Amendments. Subject to Section 5 below:
(a) Subsection 1.1 is hereby amended by adding thereto the
following (in appropriate alphabetical order):
"Acquisition II" shall mean ABC Rail Acquisition II Corporation,
a Delaware corporation.
"Old United" shall mean United Railway Signal Group, Inc., a
Florida corporation.
"United Merger" shall mean that certain Plan of Merger dated
October 31, 1997 between Acquisition II and Old United.
"United Supplemental Agreement" shall mean that certain
Supplemental Agreement dated as of October 31, 1997 among Rail and the
shareholders of Old United.
(b) Subsection 3.13 is hereby amended by adding after the last
sentence thereof the following: "No Borrower or Subsidiary of a Borrower
shall hold or possess any raw materials, work-in-process or other inventory
owned by a Person other than such Borrower or such Subsidiary as the case
may be ("Third Party Goods"), whether on consignment or otherwise, unless
(i) the Agent has received prior written notice thereof and such further
information relating thereto as it may reasonably request, (ii) all Third
Party Goods are at all times segregated from such Borrower's or such
Subsidiary's (as the case may be) other property, clearly marked as
consigned goods or otherwise non-owned property and maintained in manner so
as to be readily identifiable, (iii) all Third Party Goods are excluded
from Eligible Inventory and separately reported as such in the Monthly
Reports and Collateral Reports of each Borrower (as applicable) and (iv)
the value (determined at the lesser of cost, determined in a first-in,
first-out basis, or market) of all Third Party Goods for all Borrowers and
their Subsidiaries does not exceed $5,000,000 at any one time."
(c) Subsection 8.2 is hereby amended by adding after the last
word of clause (iv) thereof the following: "and indebtedness owed by
Acquisition II to Rail permitted under Subsection 8.4(x)."
-2-
<PAGE>
(d) Subsection 8.4 is hereby amended by adding after the last
word of clause (x) thereof the following:
"; and an intercompany loan by Rail to its wholly owned
subsidiary, Acquisition II, in an amount up to $2,050,000
for the purpose of (1) funding the $1,000,000 cash
consideration to be paid pursuant to the United Merger, (2)
funding the $550,000 consideration to be paid in connection
with certain employment and non-compete agreements pursuant
to the United Supplemental Agreement and (3) funding up to
$500,000 from time to time of working capital of Acquisition
II, provided that such intercompany loan is evidenced by a
promissory note duly pledged to Agent to secure payment and
performance of Rail's Liabilities"
(e) Schedules 6.1, 6.12 and 8.5 to the Loan Agreement are hereby
amended and restated in the form of Schedules 6.1, 6.12 and 8.5 hereto.
3. Waivers. Subject to Section 5 below, the Agent and the Lenders
hereby waive:
(a) the terms of Subsection 8.3 of the Loan Agreement insofar as
such terms would be breached by consummation of the Acquisition; provided
that the Acquisition is consummated in accordance with the terms of the
Acquisition Agreement.
(b) the terms of Subsection 8.1 and Subsection 8.2 of the Loan
Agreement insofar as such terms would be breached by the existence of the
United Bank Debt, provided that immediately after consummating the
Acquisition, the United Bank Debt is paid in full and any and all Liens
securing the United Bank Debt are unconditionally and completely released;
and
(c) the terms of Subsection 8.4 of the Loan Agreement insofar as
the terms thereof were breached by the investment by Rail of not more than
$1,000 in Acquisition II Corporation in order to capitalize and create
Acquisition II Corporation, provided that Acquisition II Corporation prior
to the merger with United shall have no assets or liabilities of any kind
and shall have conducted no business or operations of any kind.
4. Acknowledgment. Subject to Section 5 below, the Agent, the
Lenders and the Borrowers acknowledge that immediately after giving effect to
the Acquisition in accordance with the terms hereof, United shall constitute a
Subsidiary of the Borrower and not an Excluded Subsidiary.
-3-
<PAGE>
5. Conditions of Effectiveness. Sections 2, 3 and 4 of this
Agreement shall become effective as of the date hereof on the date (the
"Effective Date") that the Agent has received all of the following documents,
each such document to be in form and substance satisfactory to the Agent:
(a) eight (8) copies of this Agreement duly executed by each of
the parties hereto;
(b) eight (8) copies of a Guaranty and Security Agreement duly
executed by United substantially in the form of Exhibit B attached hereto;
(c) UCC Financing Statements duly executed by Acquisition II (in
the name of "ABC Rail Acquisition II Corporation" and "United Railway
Signal Group, Inc.") substantially as required by the Agent;
(d) eight (8) copies of a Pledge Amendment duly executed by the
Borrower substantially in the form of Exhibit C attached hereto;
(e) evidence, satisfactory to the Agent, that the United Bank
Debt has been paid in full and that any and all Liens securing such
indebtedness have been released;
(f) the originally executed intercompany note described in
Section 2(d) above together with an assignment thereof executed by Rail;
(g) eight (8) copies of a Secretary's Certificate duly executed
by the corporate secretary of United as to its charter, by-laws, board
resolutions and incumbency of relevant officers; and
(h) such other documents, certificates, amendments, agreements,
opinions, endorsements to title insurance policies and other items as the
Agent may reasonably request in connection with this Agreement.
6. Representations, Warranties and Agreements of the Borrowers.
(a) Each Borrower represents and warrants that this Agreement and
the Loan Agreement as amended hereby, constitute legal, valid and binding
obligations of such Borrower and are enforceable against such Borrower in
accordance with their terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally or by general equitable
principles.
(b) Each Borrower hereby reaffirms all covenants, representations
and warranties made in the Loan Agreement as amended hereby and after
giving effect hereto.
-4-
<PAGE>
Each Borrower hereby agrees that all covenants, representations and
warranties made in the Loan Agreement and all other Financing Agreements
shall be deemed to have been remade as of the date hereof and (if
different) the Effective Date.
(c) Each Borrower represents and warrants that as of the date
hereof, and (if different) as of the Effective Date, there exists no
Default or Event of Default after giving effect to this Agreement and
consummation of the transactions contemplated thereby.
(d) Promptly after the Effective Date, the Borrowers will cause
to be delivered to the Agent: (i) a copy of the executed and final
Acquisition Agreement together with a copy of executed and final material
agreements and other documents relating thereto, certified as true and
complete by an appropriate officer; and (ii) a stock certificate evidencing
the shares described in the Pledge Amendment referred to in Section 5(d)
above, together with a stock power duly executed by Rail in blank with
respect to such pledged stock certificate.
7. Reference to the Effect on the Loan Agreement.
(a) On and after the Effective Date, (i) each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import shall mean and be a reference to the Loan Agreement as
amended hereby, and (ii) each reference to the Loan Agreement in all other
Financing Agreements shall mean and be a reference to the Loan Agreement,
as amended hereby.
(b) Except as specifically amended above, the Loan Agreement, and
all other Financing Agreements and other documents, instruments and
agreements executed and/or delivered in connection therewith, shall remain
in full force and effect, and are hereby ratified and confirmed.
(c) Except as expressly set forth herein, the execution, delivery
and effectiveness of this Agreement shall not operate as a waiver of any
right, power or remedy of the Agent or the Lenders, nor constitute a waiver
of, or consent to and departure from, any provision of the Loan Agreement,
any other Financing Agreement, or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
8. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws (without giving effect to conflicts of law
principles) of the State of Illinois.
9. Headings. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
-5-
<PAGE>
10. Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery by any party of an executed counterpart hereof by telecopy
of similar facsimile transmission shall constitute valid and effective delivery
hereof by such party.
-6-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
ABC RAIL PRODUCTS CORPORATION
By:_________________________________
Title:______________________________
ABC DECO INC.
By:_________________________________
Title:______________________________
AMERICAN SYSTEMS TECHNOLOGIES, INC.
By:_________________________________
Title:______________________________
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, individually and as
Agent
By:_________________________________
Title:______________________________
-7-
<PAGE>
BTM CAPITAL CORPORATION
By:_________________________________
Title:______________________________
LASALLE NATIONAL BANK
By:_________________________________
Title:______________________________
NATIONS BANK OF TEXAS, N.A.
By:_________________________________
Title:______________________________
MELLON BANK, N.A.
By:_________________________________
Title:______________________________
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 45,454<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 43,310
<CURRENT-ASSETS> 92,484
<PP&E> 144,469
<DEPRECIATION> 39,703
<TOTAL-ASSETS> 242,534
<CURRENT-LIABILITIES> 47,228
<BONDS> 104,041
0
0
<COMMON> 90
<OTHER-SE> 81,201
<TOTAL-LIABILITY-AND-EQUITY> 242,534
<SALES> 67,885
<TOTAL-REVENUES> 67,885
<CGS> 61,093
<TOTAL-COSTS> 61,093
<OTHER-EXPENSES> 3,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,314
<INCOME-PRETAX> 1,257
<INCOME-TAX> 552
<INCOME-CONTINUING> 705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 705
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1> Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
