<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1998
REGISTRATION NO. 333-65517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ABC RAIL PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3462,2743 36-3498749
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
J.P. SINGSANK CORPORATE CONTROLLER AND
ASSISTANT SECRETARY ABC RAIL PRODUCTS
CORPORATION 200 SOUTH MICHIGAN AVENUE
ABC RAIL PRODUCTS CORPORATION 200 SUITE 1300 CHICAGO, ILLINOIS 60604
SOUTH MICHIGAN AVENUE SUITE 1300 (312) 322-0360
CHICAGO, ILLINOIS 60604 (312) 322-0360 (NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
(ADDRESS, INCLUDING ZIP CODE, AND INCLUDING AREA CODE, OF AGENT FOR
TELEPHONE NUMBER, SERVICE)
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
---------------
COPIES TO:
JONES, DAY, REAVIS & NACO, INC. SCHIFF HARDIN & WAITE
POGUE 2001 BUTTERFIELD ROAD 6600 SEARS TOWER
77 WEST WACKER SUITE 502 CHICAGO, ILLINOIS
CHICAGO, ILLINOIS DOWNERS GROVE, ILLINOIS 60515 60606
60601-1692 (630) 852-1300 (312) 258-5606
(312) 782-3939 ATTN: JOSEPH A. SEHER, ATTN: ROBERT J.
ATTN: GARY T. CHAIRMAN OF THE BOARD AND CHIEF REGAN, ESQ.
JOHNSON, ESQ. EXECUTIVE OFFICER
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
effective time of the merger (the "Merger") of a subsidiary of ABC Rail
Products Corporation and NACO, Inc., as described in the Amended and Restated
Agreement and Plan of Merger, dated December 10, 1998, (the "Merger Agreement")
attached as Exhibit A to the Proxy Statement/Prospectus forming a part of this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ABC RAIL PRODUCTS CORPORATION
200 SOUTH MICHIGAN AVENUE
SUITE 1300
CHICAGO, ILLINOIS 60604
Dear ABC Stockholder:
You are cordially invited to attend a special meeting of stockholders of ABC
Rail Products Corporation which will be held at x:00 a.m., local time, on
Thursday, January 28, 1999, at , Chicago, Illinois.
At this important special meeting, we will be taking action necessary to
approve a merger transaction. Your company has entered into an Agreement and
Plan of Merger dated as of September 17, 1998, as amended and restated on
December 10, 1998, that provides for a merger between ABC and NACO, Inc. NACO
will become a wholly-owned subsidiary of ABC. We will change our name to ABC-
NACO Inc. NACO is a supplier of freight car suspension systems and other
railroad products as well as steel castings used in flow control products.
We believe this merger of equals will create one of the largest suppliers of
technologically advanced products for the railroad industry. The agreement
couples two complementary companies that are well-positioned in their
respective segments of the rail supply industry.
Under the terms of the merger agreement, you will continue to hold your ABC
shares and NACO stockholders will receive 8.7 newly-issued shares of ABC common
stock for each share of NACO they hold. After the merger, the former NACO
stockholders will hold approximately 50 percent of the combined company.
At the special meeting, we will seek your approval of the issuance of 9,381,880
shares of common stock in the merger. We will also seek your approval to amend
your company's charter to provide for a classified board of directors. In
addition we will ask for your vote to approve the change in your company's name
to ABC-NACO Inc. and to approve the postponement or adjournment of the special
meeting if proposed by your board of directors. The attached Proxy
Statement/Prospectus provides you with information regarding all these
proposals.
Your board of directors has unanimously approved the merger agreement and
determined that the transactions contemplated by it are fair to and in the best
interests of ABC and the ABC stockholders. Your board of directors unanimously
recommends that stockholders of ABC vote FOR the issuance of shares in the
merger, FOR the charter amendment creating a classified board, FOR the change
in the name of the company and FOR the adjournment proposal.
YOUR APPROVAL OF THE ISSUANCE OF THE SHARES OF ABC COMMON STOCK AND THE
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION ARE CONDITIONS TO THE MERGER. WE
CANNOT COMPLETE THE MERGER UNLESS EACH OF THE SHARE ISSUANCE, THE AMENDMENT TO
ESTABLISH A CLASSIFIED BOARD AND THE AMENDMENT TO CHANGE THE NAME OF THE
COMPANY IS APPROVED BY ABC'S STOCKHOLDERS.
Your vote is important no matter how many shares you hold. Even if you plan to
attend the meeting, I urge you to mark, sign and date the enclosed proxy and
return it promptly in the enclosed postage paid envelope. The giving of a proxy
will not prevent you from voting in person at the meeting. If you have any
questions prior to the special meeting or need further assistance please call
our proxy solicitor, Corporate Investor Communications, Inc., at 1-888-296-
3301.
Thank you and I look forward to seeing you at the meeting.
Sincerely,
Donald W. Grinter
Chairman and Chief Executive Officer
<PAGE>
ABC RAIL PRODUCTS CORPORATION
200 SOUTH MICHIGAN AVENUE
SUITE 1300
CHICAGO, ILLINOIS 60604
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 28, 1999
----------------
To the Stockholders of ABC Rail Products Corporation:
Notice Is Hereby Given that a special meeting of stockholders of ABC Rail
Products Corporation, a Delaware corporation ("ABC"), will be held at
Chicago, Illinois on January 28, 1999, at [TIME], local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the issuance of shares
(the "Share Issuance") of common stock, par value $0.01 per share, together
with the associated stock purchase rights, of ABC (the "ABC common stock")
pursuant to the Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"), dated as of December 10, 1998, among ABC, NACO, Inc.
("NACO") and ABCR Acquisition Sub, Inc. The Merger Agreement provides for
the merger of ABCR Acquisition Sub, Inc. with and into NACO (the "Merger").
The Share Issuance, the Merger and the Merger Agreement are more fully
described in the accompanying Proxy Statement/Prospectus, and a copy of the
Merger Agreement is attached as Exhibit A to the Prospectus/Proxy
Statement.
2. To consider and vote upon a proposal to amend ABC's certificate of
incorporation to provide for a classified board of directors as provided in
the Merger Agreement (the "Classified Board Amendment").
3. To consider and vote upon a proposal to amend ABC's certificate of
incorporation to change the name of the corporation to "ABC-NACO Inc." as
provided in the Merger Agreement (the "Corporate Name Amendment").
4. To consider and vote upon a proposal to postpone or adjourn the special
meeting, if proposed by the ABC board of directors (the "Adjournment
Proposal").
5. To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
The close of business on December 21, 1998 has been fixed as the record date
for determination of the stockholders entitled to notice of, and to vote at,
the special meeting and any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF ABC UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF THE SHARE ISSUANCE, THE CLASSIFIED BOARD AMENDMENT, THE CORPORATE
NAME AMENDMENT AND THE ADJOURNMENT PROPOSAL.
APPROVAL OF THE SHARE ISSUANCE, THE CLASSIFIED BOARD AMENDMENT AND THE
CORPORATE NAME AMENDMENT ARE EACH A CONDITION TO COMPLETION OF THE MERGER. WE
CANNOT COMPLETE THE MERGER UNLESS EACH OF THESE MATTERS IS APPROVED BY
STOCKHOLDERS. WE WILL NOT ADOPT THE AMENDMENTS TO THE CERTIFICATE OF
INCORPORATION IF THE ISSUANCE OF SHARES IN THE MERGER IS NOT APPROVED BY ABC
STOCKHOLDERS.
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy card and return it promptly in the enclosed,
postage-paid envelope so that your vote can be recorded. If you are
<PAGE>
attending the special meeting and desire to do so, you may revoke your proxy
card and vote in person, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
By order of the board of directors,
J.P. Singsank
Corporate Controller and Assistant
Secretary
Dated: , 1998
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY CARD IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL
PROPOSALS. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY HAS BEEN
VOTED AT THE SPECIAL MEETING.
2
<PAGE>
This document is a proxy statement describing matters to be voted on by ABC
stockholders at the special meeting. This document is also a prospectus
regarding the shares of ABC common stock to be issued in connection with the
merger. This document is dated , 1998 and is first being mailed to ABC
stockholders on or about , 1998. This document is also being mailed to NACO
stockholders on or about that date.
This document incorporates important business and financial information about
ABC that is not included in or delivered with this document. You may obtain
this information without charge upon written or oral request from ABC at the
following address:
ABC Rail Products Corporation
200 South Michigan Avenue
Suite 1300
Chicago, Illinois 60604
(312) 322-0360
Attention: J.P. Singsank
Corporate Controller and Assistant Secretary
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY TO RECEIVE THEM
BEFORE THE MEETING. IF YOU REQUEST ANY INCORPORATED DOCUMENTS, ABC WILL MAIL
THEM TO YOU BY FIRST-CLASS MAIL, OR OTHER EQUALLY PROMPT MEANS, WITHIN ONE
BUSINESS DAY OF RECEIPT OF YOUR REQUEST.
- --------------------------------------------------------------------------------
ABC RAIL PRODUCTS CORPORATION
PROXY STATEMENT/PROSPECTUS
RELATING TO
MERGER WITH NACO, INC.
- --------------------------------------------------------------------------------
WE ARE PROPOSING A MERGER WITH NACO, INC. WE ARE ASKING OUR STOCKHOLDERS TO
APPROVE THE ISSUANCE OF 9,381,880 SHARES OF OUR COMMON STOCK. THE COMMON STOCK
WILL BE ISSUED TO THE CURRENT COMMON STOCKHOLDERS OF NACO, INC. AND NACO, INC.
WILL BECOME A SUBSIDIARY OF ABC. AFTER THE MERGER, THE COMPANY WILL BE RENAMED
ABC-NACO INC.
WE WILL HOLD A SPECIAL MEETING OF ABC STOCKHOLDERS ON JANUARY 28, 1999 TO
CONSIDER MATTERS NECESSARY TO COMPLETE THE MERGER.
See "Risk Factors and Other Considerations" beginning on page 13 for certain
matters you should consider.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THE MERGER DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS
OR THE ABC COMMON STOCK TO BE ISSUED IN THE MERGER, AND THEY HAVE NOT
DETERMINED WHETHER THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THE
FAIRNESS OR MERITS OF THE MERGER. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ABC common stock is traded on the Nasdaq Stock Market's National Market System
under the symbol "ABCR."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
SUMMARY OF PROXY STATEMENT/PROSPECTUS..................................... 4
The Companies........................................................... 4
ABC Rail Products Corporation......................................... 4
NACO, Inc............................................................. 4
The Combined Company.................................................. 4
The Special Meeting..................................................... 5
Recommendation of the Board of Directors................................ 5
Required Vote........................................................... 5
No Appraisal Rights..................................................... 5
Material Federal Income Tax Consequences................................ 6
Market Prices for ABC Common Stock...................................... 6
Summary Unaudited Pro Forma Combined Financial Data..................... 7
Comparative Per Share Data.............................................. 9
Security Ownership of Management and Principal Stockholders............. 10
Interests of Certain Persons in the Merger.............................. 10
Opinion of ABC Financial Adviser........................................ 11
Opinion of NACO Financial Adviser....................................... 11
Conditions to the Merger................................................ 11
Termination of the Merger Agreement..................................... 12
Termination Fees........................................................ 12
Amendment or Waiver..................................................... 12
No Solicitation......................................................... 12
Forward-looking Statements.............................................. 13
RISK FACTORS AND OTHER CONSIDERATIONS..................................... 14
Risks Related to the Merger............................................. 14
Uncertainties in Integrating the Businesses and Achieving Benefits of
Merger............................................................... 14
Need to Refinance Indebtedness to Complete Merger..................... 14
High Leverage......................................................... 15
Other Considerations Related to the Merger.............................. 15
Changes in Voting Interest............................................ 15
Effect of ABC Stock Price Fluctuations................................ 15
Risks Related to Our Business and Operations as ABC-NACO................ 16
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................ 19
THE ABC SPECIAL MEETING, VOTING AND PROXIES............................... 20
Purpose; Time and Place................................................. 20
Record Date; Voting Rights.............................................. 21
Quorum.................................................................. 21
Required Vote........................................................... 21
Proxies................................................................. 22
Cost of Solicitation.................................................... 22
Adjournment............................................................. 22
NACO Stockholders....................................................... 22
THE MERGER................................................................ 22
General................................................................. 22
Background of the Merger................................................ 23
Recommendation of the ABC Board and Reasons for the Merger.............. 26
Recommendation of the NACO Board and Reasons for the Merger............. 28
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Benefits of the Merger.................................................. 30
Opinion of Financial Adviser to ABC..................................... 30
Opinion of Financial Adviser to NACO.................................... 34
Merger Consideration; Exchange Ratio.................................... 39
Effective Time of the Merger............................................ 40
Conversion of Shares; Procedures for Exchange of Certificates........... 40
Management and Operations After the Merger.............................. 40
Interests of Certain Persons in the Merger.............................. 41
Resale of ABC Common Stock.............................................. 42
Accounting Treatment.................................................... 42
Nasdaq Listing.......................................................... 42
ABC Rights Agreement.................................................... 42
Material Federal Income Tax Consequences................................ 43
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 45
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Balance Sheet as of
October 31, 1998....................................................... 46
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Statement of
Operations For The 3 Months Ended October 31, 1998..................... 47
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Statement of
Operations For The 3 Months Ended October 31, 1997..................... 48
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Statement of
Operations For The Year Ended July 31, 1998............................ 49
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Statement of
Operations For The Year Ended July 31, 1997............................ 49
ABC-NACO INC. Unaudited Pro Forma Combined Condensed Statement of
Operations For The Year Ended July 31, 1996............................ 49
Notes to Unaudited Pro Forma Combined Condensed Financial Information... 52
NACO SELECTED HISTORICAL FINANCIAL DATA................................... 54
NACO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 57
BUSINESS OF NACO.......................................................... 70
ABC SELECTED HISTORICAL FINANCIAL DATA.................................... 90
ABC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 92
BUSINESS OF ABC........................................................... 98
DESCRIPTION OF ABC CAPITAL STOCK.......................................... 105
COMPARATIVE RIGHTS OF ABC STOCKHOLDERS AND NACO STOCKHOLDERS.............. 109
THE MERGER AGREEMENT...................................................... 113
The Merger.............................................................. 113
Effective Time.......................................................... 113
Conversion of Shares; Exchange of Stock Certificates; No Fractional
Shares................................................................. 113
Representations and Warranties.......................................... 114
Certain Covenants....................................................... 115
Termination............................................................. 118
Termination Fees........................................................ 119
Expenses................................................................ 120
Amendment, Extension and Waiver......................................... 120
AMENDMENTS TO ABC CERTIFICATE OF INCORPORATION............................ 120
Classified Board........................................................ 120
Change of Corporate Name................................................ 123
ADJOURNMENT PROPOSAL...................................................... 124
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STOCK OWNERSHIP............................................................ 125
EXPERTS.................................................................... 127
LEGAL MATTERS.............................................................. 127
STOCKHOLDER PROPOSALS...................................................... 128
WHERE YOU CAN FIND MORE INFORMATION........................................ 128
NACO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-1
EXHIBIT A MERGER AGREEMENT................................................. A-1
EXHIBIT B OPINION OF SALOMON SMITH BARNEY INC.............................. B-1
EXHIBIT C OPINION OF ROBERT W. BAIRD & CO. INCORPORATED.................... C-1
EXHIBIT D FORM OF AMENDMENTS TO ABC CERTIFICATE OF INCORPORATION........... D-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
ABC and NACO believe that combining the companies will create one of the
largest suppliers of technologically advanced products and services for the
railroad industry. The merger will couple two complementary companies that are
well-positioned in their respective segments of the rail supply industry.
Q. HOW WILL THE MERGER WORK?
NACO will merge with a subsidiary of ABC and thus become a subsidiary of ABC.
As part of the merger, ABC will change its name to ABC-NACO Inc. The terms of
the merger are set out in the merger agreement that has been signed by ABC and
NACO.
Q. HOW ARE ABC STOCKHOLDERS TREATED IN THE MERGER?
You will not have to exchange your shares. The number of shares you hold in
ABC-NACO will not change.
Q. HOW ARE NACO STOCKHOLDERS TREATED IN THE MERGER?
Each outstanding share of NACO common stock will be exchanged for 8.7 shares of
ABC common stock. This number is referred to as the exchange ratio. NACO
stockholders will receive cash for fractional shares.
Q. HOW MANY SHARES OF COMMON STOCK WILL ABC ISSUE?
ABC will issue 9,381,880 shares of its common stock in the merger. At December
21, 1998, NACO had 1,078,377 outstanding shares of common stock. At that date,
ABC had 8,976,304 outstanding shares of common stock.
Q. WHAT ARE SOME OF THE BENEFITS OF THE MERGER?
We currently expect to achieve about $20 million to $25 million in annual
benefits or synergies (on a pre-tax basis) as a result of the merger. We cannot
be sure that we will be able to achieve these estimated improvements and
savings. Details on the benefits of the merger, including the expenses and
capital expenditures necessary to achieve these benefits, are included later in
this document.
Q. DO THE NACO STOCKHOLDERS HAVE TO APPROVE THE MERGER?
Yes. NACO will also hold a stockholders' meeting to approve the merger.
Q. WHAT DO I DO IF I AM AN ABC STOCKHOLDER?
ABC stockholders should mail in your signed proxy card in the return envelope
as soon as possible so that your shares can be voted at the January 28, 1999
special meeting.
Q. WHAT DO I DO IF I AM A NACO STOCKHOLDER?
NACO stockholders will receive this document as a prospectus of ABC for the ABC
common stock to be issued in the merger. This document is accompanied by
information sent directly from NACO regarding the NACO special meeting. The
NACO special meeting will be held on the same day as the ABC special meeting.
Q. IF MY ABC SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
Your broker will vote your shares only if you provide instructions on how to
vote. You should contact your broker and ask what directions your broker will
need from you. Your broker will not be able to vote your shares without
instructions from you.
1
<PAGE>
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You can change your vote at any time before your proxy is voted at the
special shareholder meeting. You can do this in one of three ways. First, you
can send a written notice stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card. Third, you can attend the
meeting and vote in person. Your attendance alone will not, however, revoke
your proxy. If you have instructed a broker to vote your shares, you must
follow directions received from your broker to change those instructions.
Q. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
The exchange of shares of NACO common stock for shares of ABC common stock in
the merger will be tax-free to NACO stockholders for federal income tax
purposes. Holders of NACO common stock will pay taxes on any cash received for
fractional shares. The merger will not be taxable to current holders of ABC
common stock or to ABC.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
We expect the merger to be completed promptly following the ABC and NACO
special meetings.
Q. WHEN WILL ABC HOLD ITS NEXT ANNUAL MEETING OF STOCKHOLDERS?
ABC postponed the regular annual meeting of stockholders that would have been
held in November 1998. You will receive a notice regarding the date of the
meeting and any matters to be voted upon prior to the next annual meeting.
Q. WHERE CAN I GET ADDITIONAL INFORMATION?
If you are an ABC stockholder you should contact:
ABC Rail Products Corporation
200 South Michigan Avenue
Suite 1300
Chicago, Illinois 60604
Attention: J.P. Singsank, Corporate Controller and Assistant Secretary
(312) 322-0360
If you are a NACO stockholder you should contact:
NACO, Inc.
100 West Monroe Street
Suite 1010
Chicago, Illinois 60603
Attention: John M. Lison, Executive Vice President, Corporate Development
and Secretary
(312) 606-2000
2
<PAGE>
SUMMARY OF PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents
referred to in "Where You Can Find More Information" (page 126). The merger
agreement is attached as Exhibit A to this document. We encourage you to read
the merger agreement. It is the legal document that governs the merger. The
page references below will direct you to further information in this document
regarding the topic covered under that caption.
THE COMPANIES
ABC Rail Products Corporation (Page 89)
ABC is a leader in the engineering, manufacturing and marketing of replacement
products and original equipment for the North American freight railroad and
rail transit industries. The company's products include specialty trackwork,
such as rail crossings and switches; mechanical products, such as railcar,
locomotive and idler wheels, mounted wheel sets and metal brake shoes;
classification yard products and automation systems; and railroad signal and
communications systems, engineering, installation and maintenance services. In
its fiscal year ended July 31, 1998, ABC's mechanical products accounted for
48% of total sales, trackwork products accounted for 44% and signal and
communication systems accounted for 8%.
ABC's principal offices are at 200 South Michigan Avenue, Suite 1300, Chicago,
Illinois 60604 and its telephone number is (312) 322-0360.
NACO, Inc. (Page 53)
NACO is a leader in the design, manufacture and supply of highly engineered
cast steel and related products for the railroad and flow control markets. NACO
designs, manufactures and supplies a broad line of technologically advanced
products. NACO's proprietary products include high performance freight car
trucks, freight car trucks employing Barber (R) suspension systems, a wide
variety of freight car and locomotive couplers and related products. NACO also
produces locomotive truck frames and other locomotive castings to customer
specifications and provides fully assembled locomotive trucks on a just-in-time
basis. NACO's flow products group produces high integrity steel alloy valve
bodies and related components for manufacturers of industrial flow control
systems. Customers who produce flow control equipment for the natural gas, pulp
and paper, oil, chemical, waste control and water treatment industries use
NACO's flow products. In its fiscal year ended on March 29, 1998, sales of
NACO's rail products accounted for 77 percent of NACO's total sales, while
sales of flow control products accounted for 23 percent of NACO's total sales.
NACO is a privately held company.
NACO's principal offices are at 2001 Butterfield Road, Suite 502, Downers
Grove, Illinois 60515 and its telephone number is (630) 852-1300.
The Combined Company
The combined company's customers will include all of the Class I railroads and
major owners, builders and lessors of freight cars and locomotives in North
America. Major customers also will include regional and short-line railroads,
rail transit systems and manufacturers of industrial flow control systems.
ABC's largest customers are Burlington Northern Santa Fe Corporation and Union
Pacific Corporation. NACO's largest customers are TTX Company, General Electric
Transportation Systems, a unit of the General Electric Company and Thrall Car
Manufacturing Co.
3
<PAGE>
THE SPECIAL MEETING (PAGE 19)
The ABC special meeting is scheduled to be held at : .m., local time, on
Thursday, January 28, 1999, at the , Chicago, Illinois and at any
adjournment or postponement thereof. The record date for the determination of
holders of ABC common stock entitled to notice of and to vote at the special
meeting is December 21, 1998. On the record date, shares of ABC common
stock were outstanding and entitled to vote.
At the special meeting, ABC stockholders will be asked to approve the following
matters in connection with the merger:
-- the issuance of shares of ABC common stock to the NACO stockholders
-- the amendment to the ABC certificate of incorporation to establish a
classified board of directors
-- the amendment to the ABC certificate of incorporation to change the name
of the company to ABC-NACO Inc.
-- any adjournment or postponement of the meeting proposed by the board of
directors.
RECOMMENDATION OF THE BOARD OF DIRECTORS (PAGE 25, 27)
THE ABC BOARD OF DIRECTORS, BY A UNANIMOUS VOTE, HAS APPROVED AND ADOPTED THE
MERGER AGREEMENT, THE ISSUANCE OF THE ABC SHARES IN THE MERGER AND THE
AMENDMENTS TO THE ABC CERTIFICATE OF INCORPORATION. THE ABC BOARD OF DIRECTORS
RECOMMENDS THAT ABC'S STOCKHOLDERS VOTE (1) FOR APPROVAL OF THE ISSUANCE OF
SHARES, AND (2) FOR APPROVAL OF THE TWO AMENDMENTS TO THE CERTIFICATE OF
INCORPORATION. WE CANNOT COMPLETE THE MERGER UNLESS ALL THESE MATTERS ARE
APPROVED BY THE ABC STOCKHOLDERS. LIKEWISE, WE WILL NOT ADOPT THE AMENDMENTS TO
THE CERTIFICATE OF INCORPORATION IF THE ISSUANCE OF SHARES IN THE MERGER IS NOT
APPROVED BY ABC STOCKHOLDERS.
The NACO board of directors also has unanimously approved the merger.
REQUIRED VOTE (PAGE 20)
The issuance of ABC shares to holders of NACO shares in the merger requires the
affirmative vote of a majority of the votes cast on the proposal. Each of the
amendments to the certificate of incorporation requires the affirmative vote of
a majority of the total outstanding ABC shares. Approval of any other matter at
the meeting requires the affirmative vote of a majority of the ABC shares
present or represented by proxy and entitled to vote at the special meeting.
Each ABC stockholder is entitled to one vote per share on each matter. Broker
non-votes and abstentions will not count as votes "cast" for the proposal to
approve the issuance of shares by ABC and therefore will not have the effect of
a no vote on that proposal. Broker non-votes and abstentions will have the
effect of a no vote on the proposals to amend the certificate of incorporation
of ABC and the proposal to approve any adjournment of the special meeting
proposed by the board of directors of ABC.
Adoption of the merger agreement by the NACO stockholders requires the
affirmative vote of a majority of the outstanding NACO shares. Mr. Joseph A.
Seher, Chairman of the Board and Chief Executive Officer of NACO, beneficially
owns, directly or indirectly, 569,179 shares of NACO common stock, constituting
approximately 56% of the outstanding NACO Common stock. As part of the
transaction, Mr. Seher has agreed to vote all of such shares in favor of
adoption of the merger agreement.
NO APPRAISAL RIGHTS
Neither NACO stockholders nor ABC stockholders are entitled to dissenters'
appraisal rights in connection with the merger. ABC stockholders are not
entitled to dissenters' appraisal rights in connection with the issuance of
stock or amendments to the ABC certificate of incorporation.
4
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 42)
The merger is structured so that none of ABC, ABC's merger subsidiary, NACO or
the ABC common stockholders or NACO common stockholders will recognize any gain
or loss for federal income tax purposes in connection with the merger (except
for taxes payable because of cash received instead of fractional ABC shares by
NACO stockholders). The merger is conditioned on receipt of legal opinions
regarding these federal income tax consequences.
As of the date of this document, ABC and NACO have received opinions from their
counsel that the merger is tax free. It is a condition to the completion of the
merger that these opinions be confirmed. We will not waive this condition
unless stockholder approval of the transaction is resolicited.
TAX MATTERS CAN BE COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN TAX
ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
MARKET PRICES FOR ABC COMMON STOCK
ABC's common stock is traded on the Nasdaq Stock Market's National Market
System under the symbol "ABCR". The following table sets forth, for the periods
indicated, the high and low sales prices of the ABC common stock as reported on
Nasdaq. ABC did not pay any dividends during its fiscal years ending July 31,
1997 or 1998.
<TABLE>
<CAPTION>
ABC RAIL PRODUCTS
-------------------
HIGH LOW
------- -------
<S> <C> <C> <C>
ABC 1997 FISCAL YEAR
First Quarter...................................... $22.125 $14.750
Second Quarter..................................... 21.625 14.500
Third Quarter...................................... 22.250 13.750
Fourth Quarter..................................... 19.625 15.250
ABC 1998 FISCAL YEAR
First Quarter...................................... 20.875 16.500
Second Quarter..................................... 21.750 17.000
Third Quarter...................................... 19.875 17.125
Fourth Quarter..................................... 19.250 14.250
ABC 1999 FISCAL YEAR
First Quarter...................................... 17.500 8.000
Second Quarter (through , 1998).................
</TABLE>
On September 16, 1998, the last full trading day prior to the public
announcement of the execution of the original merger agreement, the closing
price of one share of ABC common stock as reported on the Nasdaq National
Market System was $13.25. On December 9, 1998, the last full trading day prior
to announcement of the execution of the amended merger agreement, the closing
price of one share of ABC common stock as reported on the Nasdaq National
Market System was $13.375.
On , 1998, the most recent practicable date prior to the printing of this
Proxy Statement/Prospectus for which sales price information was obtainable,
the last sale price of one share of ABC common stock as reported on the Nasdaq
National Market System was $ .
Because the market price of the ABC common stock is subject to fluctuation, the
market value of the ABC common stock that NACO stockholders will receive in the
merger may increase or decrease prior to the merger. Stockholders are urged to
obtain a current market quotation for the ABC common stock.
5
<PAGE>
NACO is privately-held and there is, therefore, no established public trading
market for the NACO common stock. For information regarding the NACO common
stock, see "Comparative Per Share Data" and "NACO Selected Historical Financial
Data."
On September 15, 1998, there were approximately 63 holders of record of ABC
common stock.
ABC-NACO's dividend policy following the merger will be determined by the ABC-
NACO board of directors from time to time based upon the results of operations
and financial condition of ABC-NACO, the terms of debt instruments and such
other factors as the ABC-NACO board considers relevant. Financial covenants and
other restrictions contained in the credit facilities and other agreements
relating to ABC-NACO's indebtedness may require it to meet certain financial
tests and may restrict its ability to pay dividends.
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (PAGE 43)
The following table sets forth certain summary unaudited pro forma combined
condensed financial data giving effect to the merger using the pooling-of-
interests method of accounting. For a complete description of these pro forma
data, see "Unaudited Pro Forma Combined Condensed Financial Information"
included elsewhere herein.
ABC's fiscal year ends on July 31. NACO's fiscal year ends on the Sunday
closest to March 31. We expect that ABC's fiscal year-end will be adopted by
the combined entity as the annual financial reporting period. For purposes of
the pro forma data included in this Proxy Statement/Prospectus, the year-ends
of the two companies have not been conformed, as permitted under Regulation S-X
promulgated by the Securities and Exchange Commission ("SEC"). For purposes of
presenting these pro forma data, the financial position of NACO as of October
25, 1998, June 28, 1998, March 30, 1997 and March 31, 1996 and the results of
NACO's operations for the three months ended October 25, 1998 and September 28,
1997 and the twelve months ended June 28, 1998, March 30, 1997 and March 31,
1996, are combined with ABC's financial position as of October 31, 1998, July
31, 1998, 1997 and 1996 and the results of ABC's operations for the three
months ended October 31, 1998 and 1997 and the twelve months ended July 31,
1998, 1997 and 1996, respectively. Accordingly, revenues of $26.5 million and
net loss of $0.1 million, and revenues of $70.3 million and net income of $0.9
million representing NACO's results of operations for July 1998 and the period
March 31, 1997 to June 29, 1997, respectively, are excluded from the Statement
of Operations Data.
The unaudited pro forma data reflect the application of the pooling-of-
interests method of accounting for the merger. Under this method of accounting,
the recorded assets, liabilities, income and expenses of ABC and NACO are
combined and recorded at their historical cost amounts, except as noted below.
As permitted in a pooling-of-interests business combination, the unaudited pro
forma data reflect certain adjustments to conform the accounting policies of
both companies, as described in Note 2 to the Unaudited Pro Forma Combined
Condensed Financial Information. These adjustments retroactively conform, for
all periods presented, the accounting policies of both companies, consistent
with the intent to present both companies as though they always had been
combined.
ABC-NACO expects to record material pre-tax special charges which could
aggregate from $15 million to $20 million ($11 million to $14 million after-
tax) following consummation of the merger to cover the direct costs of the
merger, the cost of integrating certain aspects of the businesses of ABC and
NACO, the cost of asset rationalizations and employee terminations to eliminate
duplicate functions and excess capacity, and debt refinancing costs. These
special charges were not included in the unaudited pro forma data. Management
estimates that incremental capital expenditures of approximately $9 million
over a period of eighteen months following consummation of the merger will also
be necessary to implement the actions necessary to achieve the synergy benefits
described herein.
6
<PAGE>
The unaudited pro forma data also do not reflect synergistic savings that
management believes may be realized following the merger. The ABC and NACO
management teams have preliminarily estimated annual pre-tax synergy
improvements of between $20 million and $25 million following completion of the
merger. Management estimates that $2.5 million to $2.75 million of these
synergies can be achieved in fiscal 1999; $18 million to $22 million can be
achieved in fiscal 2000; and the entire $20 million to $25 million annually
thereafter. Management expects the transaction to be accretive to earnings per
share during fiscal 1999 before special charges and before estimated synergies
benefits. For example, if the transaction had occurred on August 1, 1998, the
pro forma effect on ABC's diluted earnings per share for the quarter ended
October 31, 1998 is accretive by $0.13 per share.
The unaudited pro forma data should be read in conjunction with, and are
qualified in their entirety by, the "Unaudited Pro Forma Combined Condensed
Financial Information" included elsewhere herein, and the separate historical
consolidated financial statements and notes thereto of ABC and NACO. The
financial statements of ABC are incorporated by reference into this Proxy
Statement/Prospectus; the financial statements of NACO appear elsewhere herein.
The Unaudited Pro Forma Combined Condensed Financial Information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred had the merger
been completed at the dates indicated, nor is it indicative of future operating
results or financial position of the combined companies.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE THREE MONTHS ENDED
YEAR ENDED JULY 31, OCTOBER 31,
---------------------------- --------------------
1998 1997 1996 1998 1997
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $634,921 $535,718 $519,209 $ 169,434 $ 138,256
Cost of sales............. 541,096 465,777 448,469 143,157 119,366
-------- -------- -------- --------- ---------
Gross profit............ 93,825 69,941 70,740 26,277 18,890
Selling, general and ad-
ministrative expenses.... 57,824 49,629 42,869 16,354 12,847
Other operating expenses.. -- (1,430) 5,955 -- --
-------- -------- -------- --------- ---------
Operating income........ 36,001 21,742 21,916 9,923 6,043
Other non-operating in-
come..................... (1,616) (1,041) (2,333) (175) (401)
Interest expense.......... 13,862 12,620 9,526 3,742 3,707
-------- -------- -------- --------- ---------
Income before income
taxes, cumulative
effect of accounting
change and
extraordinary item..... 23,755 10,163 14,723 6,365 2,737
Provision for income tax-
es....................... 9,601 3,914 5,539 2,616 1,384
-------- -------- -------- --------- ---------
Income before cumulative
effect of accounting
change and
extraordinary item..... $ 14,154 $ 6,249 $ 9,184 $ 3,740 $ 1,353
======== ======== ======== ========= =========
Income before cumulative
effect of accounting
change and extraordinary
item per share:
Basic................... $ 0.79 $ 0.36 $ 0.54 $ 0.21 $ 0.08
Diluted................. $ 0.77 $ 0.34 $ 0.52 $ 0.20 $ 0.07
Weighted average shares
outstanding:
Basic................... 17,850 17,593 16,983 17,883 17,826
Diluted................. 18,474 18,145 17,613 18,519 18,417
BALANCE SHEET DATA:
Total assets.............. $425,297 $340,142 $262,568 $ 456,681 $355,621
Total debt (including cash
overdrafts).............. 208,131 156,927 105,550 224,394 167,045
Stockholders' equity...... 92,446 78,363 59,486 94,223 80,626
</TABLE>
7
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth selected comparative per share data for ABC and
NACO on an historical and unaudited pro forma combined and pro forma combined
equivalent basis giving effect to the merger using the pooling-of-interests
method of accounting. The information is derived from the historical financial
statements of ABC and NACO and the Unaudited Pro Forma Combined Condensed
Financial Information, all of which are incorporated by reference or included
elsewhere in this document. This information should be read in conjunction with
such historical and pro forma financial statements and the related notes. See
"Where You Can Find More Information," "NACO Consolidated Financial Statements"
and "Unaudited Pro Forma Combined Condensed Financial Information". The pro
forma combined per share data are intended for informational purposes and do
not purport to represent what the combined company's results of operations
would have been had the merger, in fact, occurred at an earlier date, or
project the results for any future date or period. Upon consummation of the
merger, the actual financial position and results of operations of the combined
company will differ, perhaps significantly, from the pro forma per share data
reflected below due to a variety of factors, some of which may not be under the
control of the combined company.
<TABLE>
<CAPTION>
NACO
HISTORICAL PRO FORMA
-------------- PRO FORMA COMBINED
ABC(1) NACO(2) COMBINED(3) EQUIVALENT(4)
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE AND EXTRAORDINARY
ITEM PER SHARE:
BASIC:
Fiscal year 1998.................. $0.82 $5.41 $0.79 $6.87
Fiscal year 1997.................. 0.41 2.47 0.36 3.13
Fiscal year 1996.................. 1.05 0.59 0.54 4.70
Quarter ended October 31, 1998.... 0.07 3.02 0.21 1.83
Quarter ended October 31, 1997.... 0.08 0.61 0.08 0.70
DILUTED:
Fiscal year 1998.................. 0.81 5.13 0.77 6.70
Fiscal year 1997.................. 0.41 2.34 0.34 2.96
Fiscal year 1996.................. 1.03 0.56 0.52 4.52
Quarter ended October 31, 1998.... 0.07 2.87 0.20 1.74
Quarter ended October 31, 1997.... 0.08 0.58 0.07 0.61
BOOK VALUE PER COMMON SHARE (5):
As of October 31, 1998 9.60 9.72 5.27 45.85
</TABLE>
- --------
(1) The ABC earnings per share data are for its historical fiscal years ended
July 31 and fiscal quarters ended October 31. The ABC book value per share
is as of October 31, 1998.
(2) The NACO earnings per share data are for its historical fiscal years ended
on the last Sunday in March, its fiscal quarter ended September 28, 1997
and the three months ended October 25, 1998. The NACO book value per share
is as of October 25, 1998.
(3) The pro forma combined per share information was computed with total pro
forma shares of the combined company at an exchange ratio of 8.7.
Additionally, as more fully described under "Unaudited Pro Forma Combined
Condensed Financial Information," the periods and dates combined to arrive
at these pro forma per share data were not conformed, as permitted under
the SEC regulations.
(4) The NACO pro forma combined equivalent per share information represents the
pro forma combined per share information multiplied by the exchange ratio
of 8.7.
(5) Book value per common share is calculated as stockholders' equity divided
by common shares outstanding.
8
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS (Page 123)
At September 1, 1998, the officers and directors of ABC beneficially owned
approximately 10% of the issued and outstanding shares of ABC common stock. At
September 1, 1998, the officers and directors of NACO beneficially owned
approximately 81% of the issued and outstanding shares of NACO common stock.
After the merger, the executive officers and directors of the combined company,
as a group, will own approximately 45% of the issued and outstanding shares of
the combined company taking into account the exchange ratio of 8.7 shares of
ABC common stock for each share of NACO common stock.
Holdings of executive officers, directors and major stockholders of ABC and
NACO are described under "Stock Ownership."
INTERESTS OF CERTAIN PERSONS IN THE MERGER (Page 40)
Officer and Director Positions
The merger agreement provides that the ABC-NACO board of directors will have
eight members, including Mr. Donald W. Grinter, Chairman and Chief Executive
Officer of ABC and Mr. Joseph A. Seher, Chairman and Chief Executive Officer of
NACO. In addition, ABC has designated Mr. Jean-Pierre M. Ergas, Mr. James E.
Martin and Mr. George W. Peck IV, current directors of ABC, to serve as
directors after the merger. NACO has designated Mr. Richard A. Drexler, Mr.
Daniel W. Duval and Mr. Willard H. Thompson, current directors of NACO, to
serve after the merger.
Mr. Grinter will serve as Chairman of the Board of ABC-NACO and Mr. Seher will
act as Chief Executive Officer. Mr. Vaughn W. Makary, NACO's President and
Chief Operating Officer, will serve as President and Chief Operating Officer.
Other officers will include John M. Lison, NACO's Executive Vice President of
Corporate Development and Secretary, who will serve as Executive Vice
President--Treasury, Corporate Development and Secretary; John W. Waite, NACO's
Executive Vice President and Chief Administrative Officer, who will serve as
Executive Vice President and Chief Administrative Officer; James P. Singsank,
ABC's Corporate Controller and Assistant Secretary, who will serve as ABC-
NACO's Vice President--Finance and Chief Accounting Officer; Brian L.
Greenburg, NACO's Vice President and Corporate Controller, who will serve as
Vice President--Corporate Controller; Joseph A. Parsons, ABC's Vice President--
Human Resources, who will serve as Vice President--Human Resources; and Vincent
V. Rea, ABC's Corporate Treasurer, who will serve as Corporate Treasurer.
Mr. Wayne R. Rockenbach, NACO's Chief Financial Officer, has notified NACO that
he will be terminating his employment with NACO upon completion of the merger.
As a result of a change-in-control agreement between Mr. Rockenbach and NACO,
and the "change-in-control" as defined in the agreement caused by the merger,
Mr. Rockenbach will be entitled to an estimated $892,000 of severance benefits
upon his termination. ABC-NACO will be obligated to pay this amount after the
merger.
Classified Board
ABC stockholders are being asked to approve an amendment to the ABC certificate
of incorporation to create a classified board to become effective at the same
time as the merger. This means that the ABC-NACO board will be divided into
three groups or classes. The directors in Class I will have a term which will
expire at the first annual meeting of stockholders following the merger, those
in Class II will have a term which will expire at the second annual meeting
following the merger and those in Class III will have a term expiring at the
third annual meeting following the merger. After the board is classified, each
future election of directors will be for a three year term. At the time of the
merger, the board of ABC-NACO will set the size of the board at eight
9
<PAGE>
members and the non-continuing ABC directors will resign. The ABC-NACO board
will then fill the vacancies with the four persons designated by NACO to be
directors.
Indemnification
In the merger agreement, ABC agrees that each officer and director of NACO and
its subsidiaries before the merger will continue after the merger to have all
indemnification rights and limitations on liability that were in place before
the merger with respect to claims related to their service as officers and
directors prior to the completion of the merger.
Voting Agreement
Joseph A. Seher, Chairman of the Board and Chief Executive Officer of NACO,
beneficially owns, directly or indirectly, 569,179 shares of NACO common stock
constituting approximately 56% of the outstanding NACO common stock. As part of
the transaction, Mr. Seher has agreed to vote such shares in favor of adoption
of the merger agreement.
Registration Rights Agreement
ABC will enter into a registration rights agreement with each of NACO's
affiliates. The form of the registration rights agreement is attached as
Exhibit H to the merger agreement which is attached as Exhibit A to this Proxy
Statement/Prospectus. The registration rights agreement provides the NACO
affiliates with the ability to have the shares of ABC common stock they receive
in the merger to be registered for resale. It is a condition to NACO's
obligation to consummate the merger that ABC execute the registration rights
agreement.
OPINION OF ABC FINANCIAL ADVISER (Page 29)
In deciding to approve the merger, one of the factors that ABC's board of
directors considered was the opinion of its financial adviser, Salomon Smith
Barney Inc., that, as of September 17, 1998 and based upon and subject to the
considerations set forth in such opinion, the exchange ratio (based on the
formula set out in the original merger agreement) was fair, from a financial
point of view, to the holders of ABC common stock. ABC urges its stockholders
to read carefully the entire Salomon Smith Barney opinion attached as Exhibit B
to this document.
OPINION OF NACO FINANCIAL ADVISER (Page 33)
In deciding to approve the merger, one of the factors that NACO's board of
directors considered was the opinion of its financial adviser, Robert W. Baird
& Co. Incorporated, that, as of September 17, 1998 and based upon and subject
to the considerations set forth in such opinion, the exchange ratio (based on
the formula set out in the original merger agreement) was fair, from a
financial point of view, to the holders of NACO common stock. NACO stockholders
should read carefully the entire Robert W. Baird & Co. Incorporated opinion
attached as Exhibit C to this document.
CONDITIONS TO THE MERGER (Page 116)
ABC and NACO will not complete the merger unless a number of conditions are
satisfied or, if permitted, waived by them. These include:
1. NACO stockholders must adopt and approve the merger agreement and the
merger;
2. ABC stockholders must approve the issuance of ABC shares to the NACO
stockholders and the amendments to the ABC certificate of incorporation;
10
<PAGE>
3. We must receive all required governmental and regulatory approvals and
any waiting periods required by law must have passed;
4. There must be no law, regulation or order making the merger illegal or
prohibiting the merger;
5. We must receive legal opinions confirming the tax-free nature of the
merger;
6. We must receive a letter from ABC's independent public accountants
stating that it is appropriate to account for the merger as a "pooling-
of-interests"; and
7. The Nasdaq must approve the shares of ABC common stock issuable in the
merger for listing on the Nasdaq Stock Market's National Market System.
TERMINATION OF THE MERGER AGREEMENT (Page 117)
ABC and NACO mutually can agree to terminate the merger agreement at any time
without completing the merger. In addition, either company can terminate the
merger agreement if:
1. The merger is not completed before February 28, 1999;
2. A governmental authority prohibits the merger;
3. NACO stockholders do not adopt and approve the merger agreement and the
merger;
4. ABC stockholders do not approve the issuance of ABC shares to the NACO
stockholders and the amendments to the ABC certificate of incorporation;
5. The other party materially breaches or fails to comply with (and fails
to cure such breach or failure within the requisite time period) any of
its representations, warranties, covenants or agreements set forth in
the merger agreement; or
6. Under certain circumstances, if the board of directors of a party
withdraws or modifies its recommendation to its stockholders in
accordance with the merger agreement or accepts a bona fide superior
acquisition proposal from a third party.
TERMINATION FEES (Page 118)
The merger agreement requires ABC or NACO to pay the other party a $5,000,000
termination fee and reimburse the other party $2,000,000 for expenses if the
merger agreement is terminated upon the occurrence of certain of the events
described above under the caption "--Termination of the Merger Agreement."
AMENDMENT OR WAIVER (Page 119)
The merger agreement may be amended by ABC or NACO at any time before or after
the approval by the stockholders. After such stockholder approval no amendment
may be made which by law would require stockholder approval unless such
stockholder approval is obtained.
At any time before the merger is completed, ABC or NACO may waive any time
limit, any inaccurate representation or any other requirement of the merger
agreement. No waiver can be made which by law would require stockholder
approval unless such stockholder approval is obtained.
NO SOLICITATION (Page 114)
ABC and NACO have each agreed, subject to certain limited exceptions, not to
initiate or engage in any discussions or negotiations with another party
regarding a business combination with such other party while the merger is
pending.
11
<PAGE>
FORWARD-LOOKING STATEMENTS (Page 18)
This document contains forward-looking statements that are subject to certain
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of ABC, NACO and
the combined company as well as statements preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends," or similar
expressions. You should understand that certain important factors, in addition
to those discussed elsewhere in this document and in the documents that are
incorporated herein by reference, could affect the future results of the
combined companies and could cause those results to differ materially from
those expressed in our forward-looking statements.
12
<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
You should consider carefully all of the information contained in this
document, including the following factors which relate to the merger and to our
combined business as ABC-NACO:
RISKS RELATED TO THE MERGER
Uncertainties in Integrating the Businesses and Achieving Benefits of Merger
ABC and NACO have entered into the merger agreement with the expectation that
the merger will result in certain benefits. These benefits include, among
others, cost savings, operating efficiencies, revenue enhancements and other
synergies expected to be about $20 million to $25 million annually following
the merger. See "The Merger--Recommendation of the ABC Board and Reasons for
the Merger" and "--Recommendation of the NACO Board and Reasons for the
Merger." Achieving the benefits of the merger will depend in part upon the
integration of our businesses in an efficient manner, and there can be no
assurance that this will occur.
In arriving at the estimated synergies, management of ABC and NACO have
estimated that $13 million to $16 million in annual benefits can be obtained by
applying NACO's manufacturing technology and know-how to the combined company's
foundry operations, thus reducing the number of wheels that must be scrapped.
Also, increasing production at ABC's Calera plant by manufacturing only high-
volume wheels at that plant and shifting production of low volume products to
other plants more suited to such volumes should contribute to these benefits.
We also estimate that $4 million to $5 million in annual benefits can be
obtained by improvements to other manufacturing operations by applying NACO's
technology to other ABC plants and alternative production sourcing within the
combined company. Finally, we expect that the remaining amount of estimated
annual benefits can be obtained through enhanced revenues and combining general
and administrative functions and eliminating duplication. Enhanced revenues are
expected to be achieved through the introduction of the sale of a greater
number of products within the combined company's wheel assembly and
distribution facilities as well as through expanding such facilities. If we are
not able to achieve all the anticipated improvements, the benefits of the
merger may be less than currently estimated.
The integration of ABC's and NACO's businesses will require substantial
attention from management. Diversion of management attention from and any
difficulties encountered in the transition and integration process could have a
material adverse effect on the revenues, levels of expenses and operating
results of the combined company. There can be no assurance that we will realize
any of the anticipated benefits of the merger. For a discussion of other
factors and assumptions related to the synergy estimates, see "The Merger--
Recommendation of the ABC Board and Reasons for the Merger," "--Recommendation
of the NACO Board and Reasons for the Merger," and "--Benefits of the Merger."
We estimate that the direct costs of the merger will be from $15 million to $20
million ($11 million to $14 million after-tax). These costs are not included in
the unaudited pro forma data. We also estimate that we will have to make
incremental capital expenditures of approximately $9 million during the
eighteen months following the merger to achieve the expected synergy benefits
referred to above. Our costs could be higher than anticipated and we may need
additional capital expenditures to achieve the synergy benefits.
13
<PAGE>
High Leverage
Following the merger and the expected refinancings described above, ABC-NACO
will be a highly leveraged company. On a pro forma basis, after giving effect
to the merger, total indebtedness of ABC-NACO as of October 31, 1998 would have
been $224.4 million (exclusive of the effect of any prepayment premiums, costs
of refinancing or costs of the merger). After the merger, total capitalization
of ABC-NACO will be about 70.4% debt and 29.6% equity. Management has plans to
reduce indebtedness, but we cannot be certain we will be successful in reducing
the highly leveraged condition of the combined ABC-NACO.
OTHER CONSIDERATIONS RELATED TO THE MERGER
Changes in Voting Interest
The merger agreement provides for the current stockholders of NACO to receive
ABC common stock in the merger which will result in such NACO stockholders
owning approximately 50% on a fully diluted basis of the voting power of ABC-
NACO after the merger (including shares that may be issued upon exercise of
options, warrants and other rights). This issuance will constitute substantial
dilution of the voting interest in ABC of the current ABC stockholders.
Following the merger, Mr. Seher will beneficially own, directly or indirectly,
approximately 26% of the voting power of ABC-NACO on a fully diluted basis. The
existing directors and officers of NACO (including Mr. Seher) currently hold
about 81% of the NACO common stock and after the merger will hold about 40% of
ABC-NACO common stock.
Effect of ABC Stock Price Fluctuations
The price of the ABC common stock may vary significantly from the price as of
the date of execution of the merger agreement, the date of this document or the
date of the special stockholder meeting. These variances may be due to changes
in the businesses, operations, results and prospects of ABC or NACO, market
assessments of the likelihood that the merger will be consummated and the
timing thereof, general market and economic conditions, and other factors. For
example, between September 17, 1997 and September 17, 1998, the closing sales
price of the ABC common stock has ranged from a high of $21.75 to a low of
$10.00 and between September 17, 1998 and December 9, 1998 from a high of
$17.25 to a low of $12.375. In addition, the stock market generally has
experienced significant price and volume fluctuations. Market fluctuations
could have a material adverse effect on the market or liquidity of the ABC
common stock. Lower stock prices for the ABC common stock will not result in
any adjustment to the exchange ratio of 8.7 shares of ABC stock for each share
of NACO stock. Consequently, the total value of the ABC stock to be received by
NACO stockholders may be more or less than the value based on the market price
of the ABC stock when the merger agreement was signed or when the special
meetings of stockholders take place. The historical market prices of ABC common
stock are included under "Market Prices for ABC Common Stock."
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RISKS RELATED TO OUR BUSINESS AND OPERATIONS AS ABC-NACO
Loss of Business From Major Customers
The railroad supply market has a highly concentrated customer base. ABC's
largest customers are Burlington Northern Santa Fe Corporation and Union
Pacific Corporation, which each accounted for approximately 18% of ABC's net
sales for fiscal 1998. No other customer accounted for more than 10% of ABC's
fiscal 1998 net sales. ABC's five largest customers accounted for approximately
54% of its net sales during fiscal 1998. A significant decrease in business
from any of these customers, or the loss of any major customer, could have a
material adverse effect on us. For the quarter ended October 31, 1998, track
orders from two of our major Class I Railroad customers were down significantly
from the first quarter last year.
NACO focuses its sales and marketing efforts on customers that are leaders in
the railroad and flow control industries. As a result, a relatively small
number of customers are responsible for a significant portion of net sales in
any given year. NACO's ten largest customers accounted for approximately 70%,
68% and 65% of NACO's net sales in fiscal 1997, 1996 and 1995, respectively.
NACO's three largest customers are TTX Company, GE Transportation and Thrall
Car Manufacturing Co. In fiscal 1997, 1996 and 1995, TTX Company accounted for
approximately 17%, 11% and 11%, respectively, of NACO's net sales; GE
Transportation accounted for approximately 16%, 13% and 18%, respectively, of
NACO's net sales; and Thrall Car Manufacturing Co. accounted for approximately
11%, 14% and 8%, respectively, of NACO's net sales. The loss of, or a
significant decrease in, business from any of these three customers or from
other substantial customers could have a material adverse effect on our
business or results of operations.
The flow control industry is currently experiencing significant consolidation.
In fiscal 1997, four of NACO's ten largest customers (measured by net sales)
were in the flow control industry. Due to consolidation in the flow control
industry, we will be competing for orders from a smaller number of larger flow
control customers. The loss of business from any of our substantial flow
control customers could have a material adverse effect on our business or
results of operations.
Possible Lack of Production Capability
If we are unable to complete planned conversion and expansion of manufacturing
facilities on time or as planned, we may not be able to manufacture certain of
our railroad products for our customers on a timely basis which may adversely
impact our relationships with such customers. Major capital expenditures to
improve manufacturing capability by ABC in the last two fiscal years include a
major upgrade of machining operations at the Calera, Alabama wheel plant, which
is operational, and a new rail mill in Chicago Heights. NACO's principal
railroad products manufacturing facilities in the United States, Canada and
Mexico currently are operating at full capacity. NACO is nearing completion of
the conversion and expansion of one of the plants at its Sahagun, Mexico
facility, which is scheduled to be fully operational by the end of calendar
1998. We expect the completed plant to increase the production capacity of
certain of our railroad products.
Impact on Financial Results of Foreign Currency Fluctuations
In addition to manufacturing products in the United States, we manufacture
products in Canada, Mexico and Scotland. As a result, a significant portion of
our costs and expenses are incurred in currencies other than U.S. dollars.
Currently, the value of the U.S. dollar in comparison to local currencies in
Mexico and Canada is very favorable. However, adverse fluctuations in the value
of the U.S. dollar in comparison to local currencies in the countries in which
we operate may have a negative impact on our financial results in the future.
Possible Inability to Satisfy Regulatory Requirements
The Association of American Railroads promulgates a wide variety of rules and
regulations governing safety, including, among other things, the design,
performance and manufacture of equipment used on freight cars in interchange
service throughout the North American railroad system. Existing products have
undergone and new products are required to undergo extensive and rigorous
Association of American Railroads testing and
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approval processes. Similarly, the casting facilities of railroad products
manufacturers are required to be certified and to undergo periodic inspections
in order to continue to produce Association of American Railroads certified
products. If we fail to maintain the Association of American Railroads
certifications of our railroad products facilities in North America or obtain
Association of American Railroads certifications of new facilities or railroad
products, our business or results of operations could be materially adversely
affected.
Countries outside of North America also have regulatory authorities that
regulate railroad safety, freight car design, and the design, performance and
manufacture of component parts for railcars used on their railroad systems. In
addition, certain European countries have created an entity known as the Union
Internationale des Chemins de Fer, whose function is to promulgate regulations
for safety matters, including the design and manufacture of freight car
equipment which is used in interchange service on European railroad systems. If
we fail to obtain and maintain certifications of our product offerings within
the various countries in which we market outside of North America or as
required by the Union Internationale des Chemins de Fer, our ability to market
and sell railroad products in those countries could be materially adversely
affected.
Year 2000 Compliance; Replacement of Computer Systems
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000.
ABC and NACO both have projects underway to address Year 2000 problems. We are
implementing changes in information systems technology that will enable our
systems to process transactions in the Year 2000. This entails the replacement
of substantially all of our existing financial and operating information
systems with fully-compliant new systems. In addition, we are currently
reviewing other systems to ensure that they are Year 2000 compliant. We are
also reviewing the possible effects that might arise from the interaction of
our computer systems with those of our suppliers and customers should their
computer systems not be Year 2000 compliant.
We cannot be sure that we will be able to address the Year 2000 issues for all
of our software and applications in a timely manner or that we will not
encounter unexpected difficulties or significant additional expenses relating
to adequately addressing the Year 2000 issue. If we or our major customers or
suppliers fail to address adequately the Year 2000 issues, or we fail to
successfully integrate or convert our computer systems generally, our business
or results of operations could be materially adversely affected.
Possible Work Stoppages or Labor Unrest
Labor unions represent approximately 68% of ABC's employees and 83% of NACO's
employees. We believe that our labor relations are satisfactory. NACO resolved
a six-day work stoppage in May 1998 at its Hamilton, Ontario facility (the
second in the last three years) and a four-day work stoppage in June 1998 at
its Sahagun, Mexico facility. However, we cannot be certain that work stoppages
will not occur in the future or that we will reach new agreements upon
expiration of our union contracts. If we suffer work stoppages or fail to reach
new agreements with our unions, our business or results of operations could be
materially adversely affected.
Possible Fluctuating Operating Results
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 to June, a
period roughly corresponding to the second half of ABC's fiscal year. In
addition, a number of ABC's facilities close for regularly scheduled
maintenance in late summer and late December, which tends to reduce operating
results during the first half of our fiscal year. Consequently, the majority of
ABC's net sales of specialty trackwork have historically occurred in
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the second half of its fiscal year. In addition, transit industry practice with
respect to specialty trackwork generally involves the periodic shipment of
large quantities, which may be unevenly distributed throughout the year. For
fiscal 1998, sales of specialty trackwork products accounted for approximately
44% of ABC's net sales.
Demand for railroad products generally fluctuates in response to overall
economic conditions, changes in freight traffic and other factors. In economic
downturns, railroads and other customers may defer certain expenditures.
Reductions in freight traffic may reduce demand for our replacement products by
reducing wear. Railroads, particularly Class I railroads, can experience
operational problems as a result of heavier traffic demands, which have an
unpredictable impact on railroad expenditures for new and replacement products,
including those we sell.
The flow control industry also fluctuates particularly in response to economic
conditions and changes in oil prices. Our flow control business or results of
operations could be materially adversely affected during economic downturns or
periods of depressed oil prices.
NACO has experienced, and may in the future experience, fluctuations in
quarterly results of operations. A number of NACO's facilities, as well as
those of certain of its customers, close for regularly scheduled maintenance in
the summer, and NACO and certain of its customers also close for extended
holiday periods in December. As a result, NACO's operating results for its
second and third fiscal quarters tend to be lower than other quarters.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Proxy Statement/Prospectus constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements relate to
anticipated financial performance, management's plans and objectives for future
operations, business prospects, outcome of regulatory proceedings, market
conditions and other matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements in certain
circumstances. The following discussion is intended to identify the forward-
looking statements and certain factors that could cause future outcomes to
differ materially from those set forth in the forward-looking statements.
Forward-looking statements include the information concerning possible or
assumed future results of operations of ABC-NACO, as the combined company, and
other future events set forth under "Questions and Answers About the Merger,"
"Risk Factors and Other Considerations--Risks Related to the Merger--
Uncertainties in Integrating the Business and Achieving Benefits of the
Merger," "--Refinancing of Indebtedness," "Risk Factors--Risks Relating to Our
Business and Operations as ABC-NACO," "The Merger--Recommendations of the ABC
Board and Reasons for the Merger," "--Recommendations of the NACO Board and
Reasons for the Merger," "--Benefits of the Merger," "--Opinion of Financial
Adviser to ABC," "--Opinion of Financial Adviser to NACO," "--Management and
Operations After the Merger," "Unaudited Pro Forma Combined Condensed Financial
Information," and other statements in this Proxy Statement/Prospectus
identified by words such as "anticipate," "estimate," "expect," "intend,"
"believe," and "objective," and include, in particular, the statements as to:
(i) the ability of the combined company to compete more effectively in
its markets;
(ii) the anticipated levels and sources of synergies and cost savings
resulting from the Merger and estimated timing of achieving such synergies
and cost savings;
(iii) the anticipated manner in which identified cost savings and
synergies will be achieved;
(iv) the estimated amount by which the merger is expected to be accretive
to earnings beginning in fiscal year 1999;
(v) the estimated amount of costs and incremental capital expenditures
necessary to achieve the synergy benefits;
(vi) the ability of the combined company to reduce indebtedness or its
highly leveraged condition;
(vii) the ability of the combined entity to further diversify through
acquisitions or development of new business and the marketing and delivery
of new products and services;
(viii) the ability to attract and retain qualified employees and the
anticipated benefits to employees;
(ix) the ability of ABC and NACO to obtain all required consents and
approvals necessary to consummate the Merger;
(x) the beliefs of the ABC board and the basis for those beliefs set
forth under "The Merger--Recommendation of the ABC Board and Reasons for
the Merger;"
(xi) the beliefs of the NACO board and the basis for those beliefs set
forth under "The Merger--Recommendation of the NACO Board and Reasons for
the Merger;"
(xii) the estimates, projections and forecasts analyzed by ABC's
financial adviser in connection with its opinion as set forth under "The
Merger--Opinion of Financial Adviser to ABC;" and
(xiii) the estimates, projections and forecasts analyzed by NACO's
financial adviser in connection with its opinion as set forth under "The
Merger--Opinion of Financial Adviser to NACO."
Readers are cautioned not to place undue reliance on such forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
combined company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may affect ABC-NACO's
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operations, markets, products, services and prices. In addition to any
assumptions and other factors referred to specifically in connection with such
forward-looking statements, factors that could cause ABC-NACO's actual results
to differ materially from those contemplated in any forward-looking statement
include, among others, the following:
(i) general economic and business conditions;
(ii) industry capacity;
(iii) changes in technology;
(iv) changes in political, social and economic conditions;
(v) regulatory matters;
(vi) challenges associated with the integration of the operations of ABC
and NACO;
(vii) regulatory delays or conditions imposed by regulatory bodies in
approving the Merger;
(viii) adverse regulatory treatment;
(ix) the ability of ABC and NACO to implement and realize anticipated
synergies and cost savings from the Merger;
(x) the actual costs required to effect the Merger and to realize synergies
and cost savings;
(xi) the loss of any significant customers;
(xii) changes in business strategy or development plans;
(xiii) actual future costs of operating expenses such as rail and scrap
steel, self-insurance claims and employee wages and benefits;
(xiv) actual costs of continuing investments in technology;
(xv) the availability of capital to finance possible acquisitions and to
refinance debt;
(xvi) the ability of management to implement the strategy of acquisitions
and process improvements;
(xvii) changes in the capital markets affecting the ability to finance
capital requirements; and
(xviii) the other factors listed in the ABC Form 10-K or in other reports
previously or hereafter filed by ABC with the SEC, which are incorporated
by reference herein.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized, as well as other factors, may also cause actual
results to differ materially from those projected. Neither ABC nor NACO assumes
any obligation to update such forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
THE ABC SPECIAL MEETING, VOTING AND PROXIES
This document is being furnished to ABC's common stockholders in connection
with the solicitation of proxies by the ABC board of directors from the ABC
stockholders for use at the ABC special meeting. This document is also being
provided to the holders of NACO common stock as a prospectus in connection with
the offer by ABC to such NACO stockholders of the ABC common stock to be issued
in the merger.
PURPOSE; TIME AND PLACE
The ABC special meeting is scheduled to be held on January 28, 1999, at :
.m., local time, at Chicago, Illinois and at any adjournment or
postponement thereof. The purpose of the special meeting is to approve the
following matters in connection with the merger:
-- the issuance of shares of ABC common stock to the NACO stockholders
-- the amendment to the ABC certificate of incorporation to establish a
classified board of directors
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-- the amendment to the ABC certificate of incorporation to change the name
of the company to ABC-NACO Inc.
-- any adjournment or postponement of the meeting proposed by the board of
directors.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
DETERMINED THAT THE TRANSACTIONS CONTEMPLATED BY IT ARE FAIR TO AND IN THE BEST
INTERESTS OF ABC AND THE ABC STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS OF ABC VOTE FOR THE ISSUANCE OF SHARES IN THE
MERGER, FOR THE CHARTER AMENDMENT ESTABLISHING A CLASSIFIED BOARD, FOR THE
CHANGE IN THE NAME OF THE CORPORATION AND FOR THE ADJOURNMENT PROPOSAL.
CERTAIN MEMBERS OF THE ABC BOARD OF DIRECTORS AND CERTAIN MEMBERS OF THE NACO
BOARD OF DIRECTORS WILL BECOME DIRECTORS AND/OR EMPLOYEES OF ABC-NACO FOLLOWING
CONSUMMATION OF THE MERGER. THEREFORE, SUCH DIRECTORS AND OFFICERS HAVE THESE
AND OTHER INTERESTS IN THE MERGER AGREEMENT THAT ARE IN ADDITION TO THE
INTERESTS OF STOCKHOLDERS OF ABC OR NACO GENERALLY AND THAT COULD POTENTIALLY
REPRESENT CONFLICTS OF INTEREST. THE BOARD OF DIRECTORS OF ABC AND THE BOARD OF
DIRECTORS OF NACO WERE AWARE OF THESE INTERESTS AND CONSIDERED THEM, AMONG
OTHER MATTERS, IN APPROVING THE MERGER AGREEMENT. SEE "THE MERGER--INTERESTS OF
CERTAIN PERSONS IN THE MERGER."
RECORD DATE; VOTING RIGHTS
Holders of record of shares of ABC common stock at the close of business on
December 21, 1998, the record date, will be entitled to notice of and to vote
at the special meeting. As of the record date, [ ] shares of ABC common stock
were issued and outstanding and entitled to vote. Each outstanding share of ABC
common stock is entitled to one vote upon each matter presented at the special
meeting.
QUORUM
The holders of a majority of the shares of ABC common stock issued and
outstanding must be present in person or represented by proxy at the ABC
special meeting for a quorum to be present. Abstentions and broker non-votes
(i.e., proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owners or other persons entitled to
vote shares as to a matter with respect to which brokers or nominees do not
have discretionary power to vote) will be considered present for the purpose of
establishing a quorum.
REQUIRED VOTE
The issuance of the ABC common stock to holders of NACO common stock in the
merger (the "Share Issuance") requires the affirmative vote of a majority of
the votes cast on the proposal. The amendment to the ABC certificate of
incorporation to establish a classified board of directors (the "Classified
Board Amendment") and the amendment to the ABC certificate of incorporation to
change the name of the company to "ABC-NACO Inc." (the "Corporate Name
Amendment") each requires the affirmative vote of a majority of the total
outstanding shares of ABC common stock. Approval of any other matter at the
meeting requires the affirmative vote of a majority of the ABC shares present
or represented by proxy at the special meeting. Each ABC stockholder is
entitled to one vote per share on each matter.
Broker non-votes and abstentions will not count as votes "cast" for the Share
Issuance and therefore will not have the effect of a no vote on that proposal.
Broker non-votes and abstentions will have the effect of a no vote on the
Classified Board Amendment, the Corporate Name Amendment and the Adjournment
Proposal.
The directors and executive officers of ABC, together with their affiliates as
a group, own beneficially approximately 10% of the issued and outstanding
shares of ABC common stock. Except for those persons
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identified under "Stock Ownership--ABC Stock Ownership", no person holds of
record or, to the knowledge of ABC management, owns beneficially more than 5%
of the outstanding ABC common stock.
PROXIES
Holders of ABC common stock may vote either in person or by properly executed
proxy. By completing and returning the form of proxy, you authorize the persons
named therein to vote all your ABC shares on your behalf. All completed
returned will be voted in accordance with the instructions indicated on such
proxies. If no instructions are given, properly executed proxies will be voted
FOR approval of the Share Issuance and FOR approval of the Classified Board
Amendment and the Corporate Name Amendment and FOR any proposal to postpone or
adjourn the special meeting. In addition, the persons designated in such
proxies will have discretion to vote on any matter incident to the conduct of
the ABC special meeting.
You may revoke a previously granted proxy at any time before it is voted by
filing with the Secretary of ABC a revoking instruction or another duly
executed and subsequently dated proxy or by attending the meeting and voting in
person. Attendance at the special meeting will not, in itself, constitute
revocation of a previously granted proxy.
Proxies and ballots will be received and tabulated by American Stock Transfer
and Trust Company, ABC's transfer agent.
PLEASE DO NOT SEND ANY SHARE CERTIFICATE WITH YOUR PROXY CARDS.
COST OF SOLICITATION
ABC will bear the cost of the solicitation of proxies for the ABC special
meeting, except that ABC and NACO will share equally expenses incurred in
connection with printing and filing this document. Proxies may be solicited by
certain officers and employees of ABC or its subsidiaries by mail, by
telephone, personally or by other communications, without compensation apart
from their normal salaries. ABC has retained Corporate Investor Communications,
Inc. to assist in the solicitation of proxies from ABC stockholders, including
brokers' accounts, at a fee for such services of $7,500 and reasonable out-of-
pocket expenses.
ADJOURNMENT
The ABC special meeting may be adjourned to another date and/or place for any
proper purpose (including, without limitation, for the purpose of soliciting
additional proxies). We are asking for your vote to approve such an adjournment
(the "Adjournment Proposal") if proposed by the ABC board of directors.
NACO STOCKHOLDERS
NACO stockholders will receive additional information directly from NACO
regarding the time and place of the NACO meeting and how to vote at the NACO
meeting.
THE MERGER
GENERAL
The Agreement and Plan of Merger dated as of September 17, 1998, as amended and
restated on December 10, 1998 (the "Merger Agreement"), by and among NACO, ABC
and ABCR Acquisition Sub, Inc. (the "Merger Subsidiary"), is the legal document
that governs the merger transaction described herein. The Merger Agreement
provides for the merger of Merger Subsidiary with and into NACO, as a result of
which NACO will become a wholly owned subsidiary of ABC (the "Merger"). ABC
will be renamed "ABC-NACO Inc." ("ABC-NACO"). As a result of the Merger, the
former stockholders of NACO will own approximately 50 percent of the
outstanding voting shares of ABC-NACO on a fully diluted basis. We expect to
complete the Merger promptly following the special meetings of ABC and NACO.
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The Merger Agreement is summarized under the heading "The Merger Agreement."
The full text of the Merger Agreement is set out in Exhibit A to this document.
You should read the summary and Exhibit A in their entirety.
BACKGROUND OF THE MERGER
Since the early 1990's, the management of ABC periodically has analyzed various
potential strategic options that might be available to ABC, including possible
business combinations with other rail products and services companies. It long
has been the view of management that the railroad products industry is
undergoing consolidation. In addition, ABC management has noted the trend
toward the outsourcing of more and more functions by railroads and has believed
that rail suppliers delivering an integrated package of complementary products
would be favored by customers over suppliers of component parts. ABC's
manufactured products include, among others, railcar wheels, and mounted wheel
sets, which are components of a railcar undercarriage. ABC management believes
that if a single company could build a complete undercarriage (as is planned
for ABC-NACO after the merger), that company would be able to design, engineer
and sell an integrated system so as to achieve the highest performance level
and increase the attractiveness of its proprietary product offerings to
customers.
The management of NACO also periodically has analyzed various strategic
options, including possible business combinations with other rail products and
services companies, and, alternatively, an initial public offering of its
common stock. Affiliation with a public rail products and services company, or
being a public company in its own right, management believed, could maximize
shareholder value and provide NACO with a platform for future growth. In
addition, NACO management also has seen trends towards consolidation and
outsourcing in the rail products and services industry. For NACO, whose
manufactured products include, among others, freight car trucks and freight car
couplers and related products, delivering a complete undercarriage also would
be an important step in meeting customer needs and becoming a premier supplier
of technologically advanced products and services for the railroad industry.
Due to the nature of their respective businesses, ABC and NACO provide
complementary products and services for many of the same customers. As a
result, ABC and NACO were familiar with each other's business and operations.
From time to time, they have bid and were awarded contracts from European
railroads for delivery of complete railcar undercarriages.
ABC and NACO have held discussions with each other and with other rail products
and services companies regarding possible strategic alliances and business
combinations. During the summer of 1997, Donald W. Grinter, Chairman and Chief
Executive Officer of ABC, and Joseph A. Seher, Chairman and Chief Executive
Officer of NACO, with the assistance of various company representatives and
financial advisers, discussed the possibility of a combination transaction. In
connection with those discussions, ABC and NACO entered into an agreement dated
June 5, 1997 regarding the confidentiality of any evaluation material reviewed.
Although confidential evaluation material was exchanged, the parties only had
preliminary discussions and were unable to reach agreement as to an exchange
ratio or any other terms. In these talks, ABC indicated it required a
transaction resulting in ABC stockholders retaining about 60% to 70% of the
resulting company. This level was unacceptable to NACO. The exploratory
discussions with NACO were terminated and the possibility of a business
combination between ABC and NACO was dismissed by both parties on or about
September 19, 1997 at a meeting between Messrs. Grinter and Seher, following
which both parties requested a return of the evaluation materials they had
provided.
Following September 19, 1997, ABC continued to receive exploratory calls from
various other companies regarding their possible interest in exploring a
strategic transaction, but management did not view any of these contacts as
meriting serious consideration. No proposal was presented to the ABC board.
Working with its financial adviser, NACO determined to prepare for the
registration of its common stock with the SEC in an initial public offering.
NACO prepared a draft registration statement during the spring and summer of
1998, but did not file it with the SEC.
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Messrs. Grinter and Seher met on March 17, May 19, and June 17, 1998, at which
times the possibility of a transaction between ABC and NACO was again
discussed. On July 10, 1998, Messrs. Grinter and Seher met again to discuss the
possibility of a transaction between ABC and NACO. This meeting also included
Robert W. Willmschen, Jr., ABC's Executive Vice President and Chief Financial
Officer and Wayne R. Rockenbach, NACO's Senior Vice President and Chief
Financial Officer. On July 22 and 23, Messrs. Grinter and Willmschen
accompanied Mr. Seher and Vaughn W. Makary, NACO's President and Chief
Operating Officer, on a visit to the Sahagun, Mexican operations of NACO.
On July 28, 1998, Messrs. Grinter and Willmschen met with representatives of
Robert W. Baird & Co. Incorporated ("Baird"), NACO's financial adviser, to
discuss the possibility of a strategic transaction between ABC and NACO. The
next day, Mr. Grinter, accompanied by three other members of ABC's board of
directors, Norman Doerr, James E. Martin and George W. Peck IV, visited the
NACO Technologies facility at Lombard, Illinois. They were given a tour of that
site led by Mr. Seher. ABC's board of directors met at its regularly-scheduled
meeting beginning on July 30 and discussed the possibility of a transaction
between ABC and NACO. Mr. Grinter and other ABC officers continued to explore
the possibility of a strategic combination. NACO's board of directors also held
a regular meeting on July 30 at which it reviewed the status of discussions
with ABC. Following these meetings, in telephone calls between Messrs. Grinter
and Seher, a strategic merger of equals emerged as the framework for analyzing
the terms of a possible transaction.
Management of ABC and NACO believed that, notwithstanding their inability to
reach agreement as to the terms of a business combination in 1997 and the
termination of their discussions at that time, changed circumstances presented
an opportunity to reach an agreement between the parties. The changed
circumstances included recent results of operations of both companies, market
conditions and reevaluation of the possible synergies and cost savings that
could be produced by a merger.
On August 6, ABC and NACO entered into a Mutual Exclusivity Agreement pursuant
to which each company agreed not to solicit, initiate or encourage the
submission of any proposal or offer from any person relating to the acquisition
of any of their respective capital stock or other voting securities or any
substantial portion of their respective assets (exclusive of the filing by NACO
of a preliminary prospectus with the SEC, so long as there was no public
distribution thereof) or to participate in any discussions or negotiations
regarding, furnishing any information with respect to, assisting or
participating in, or facilitating any effort by any person to do the foregoing.
The original term of this Mutual Exclusivity Agreement was until September 11,
1998.
On August 11, 1998, a meeting was held in Chicago at the offices of Baird. In
attendance were representatives from NACO, ABC, their respective counsel and
Baird. Legal and accounting due diligence began shortly thereafter. ABC
retained Salomon Smith Barney Inc. ("Salomon") to serve as its financial
adviser on August 13. The first draft of a Merger Agreement was circulated to
the working group on August 17 by Schiff Hardin & Waite, counsel for NACO. The
draft proposed a strategic merger of equals between ABC and NACO. On August 19,
a working group meeting was held at the office of Salomon in Chicago to discuss
various transactional issues. In attendance were representatives of ABC, NACO,
as well as their counsel and financial advisers. On August 21, management due
diligence presentations were given by ABC and NACO at the office of Salomon in
Chicago. In attendance were representatives of ABC and NACO, as well as their
counsel and financial advisers.
ABC's board of directors met in a special meeting on August 31 and reviewed the
status of discussions between representatives of ABC and NACO. The ABC board of
directors considered presentations by its legal counsel, Jones, Day, Reavis &
Pogue, and Salomon. Following that meeting, ABC's officers continued to explore
the possibility of a strategic combination. Messrs. Grinter and Seher agreed
orally to extend the term of the Confidentiality Agreement until September 11,
1998.
NACO's board of directors met on September 3, with its legal counsel, Schiff
Hardin & Waite, and its financial adviser, Baird, to discuss the status of the
merger discussions with ABC. ABC's board of directors met at a special meeting
on September 9 and reviewed the status of discussions between representatives
of ABC and
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NACO. Mr. Seher, as well as Messrs. Makary and Rockenbach, attended that
meeting. Following that meeting, ABC's and NACO's officers and representatives
continued to explore the possibility of a strategic combination. Work on a
possible transaction continued with a meeting at the office of Salomon on
September 13 at which counsel and financial advisers to ABC and NACO resolved
certain open items regarding the proposed Merger Agreement and related issues.
On September 14, Messrs. Grinter and Seher orally agreed to extend the Mutual
Exclusivity Agreement until September 21, 1998.
On the morning of September 17, 1998, counsel and the financial advisers held a
teleconference and resolved remaining issues, subject to board review and
approval. Later on September 17, 1998, NACO's board of directors met at a
special meeting and approved the proposed transaction following presentations
by Baird and Schiff Hardin & Waite. Baird discussed its written opinion that,
as of such date and subject to the assumptions and limitations set forth
therein, the exchange ratio (as set forth in the original merger agreement
dated as of September 17, 1998 (the "original merger agreement") was fair, from
a financial point of view, to the holders of NACO common stock. Schiff Hardin &
Waite reviewed the terms of the original merger agreement and the legal
standards applicable to the NACO board's consideration of the proposed "merger
of equals" transaction. ABC's board of directors met at a special meeting on
September 17 and approved the transaction following presentations by Salomon
and Jones, Day, Reavis & Pogue. Salomon discussed its written opinion that, as
of such date and subject to the assumptions and limitations set forth therein,
the exchange ratio (as set forth in the original merger agreement) was fair,
from a financial point of view, to the holders of ABC common stock. Jones, Day,
Reavis & Pogue reviewed the terms of the original merger agreement and the
legal standards applicable to the ABC board's consideration of the proposed
"merger of equals" transaction. Officers of ABC and of NACO executed the
original merger agreement later that evening and the two companies issued a
joint press release announcing the transaction.
Following public announcement of the merger, the parties began to prepare the
proxy statement/prospectus for filing with the SEC and started the work to
obtain necessary regulatory approvals and to negotiate a new credit facility
for the combined company. The parties also began discussions concerning how to
integrate the operations of the two companies. After discussions concerning
these matters, management of ABC and NACO agreed to make certain modifications
to the original merger agreement.
The original merger agreement called for the exchange ratio to be set by a
formula. The formula was designed to ensure that the ABC stockholders and the
NACO stockholders would each have an approximate 50% ownership interest of the
combined company taking into account shares that could be issued upon the
exercise of options, warrants or other arrangements for both companies.
Further, the number of options on ABC common stock used to calculate the
exchange ratio was to be determined by a formula based on an average of recent
trading prices for ABC. Finally, the original agreement provided that either
party could terminate the agreement if the average price of the ABC common
stock over a specified 60 day period prior to the merger was below $13 per
share. The Merger Agreement, as approved on December 10, 1998, eliminates the
formula for determining the exchange ratio, fixes the exchange ratio at 8.7 and
eliminates the provision for the parties to terminate the Merger Agreement if
the ABC stock price were to decline below $13 per share.
The board of directors of ABC and the board of directors of NACO each believe
that these changes to the original merger agreement are in the best interest of
their respective stockholders. Accelerating the date for fixing the exchange
ratio rather than relying on a complex formula and eliminating the ability of
either party to terminate the merger in the event the ABC stock price falls
below an average of $13 per share adds certainty to the transaction. As a
result of these changes, stockholders can be assured that the merger will occur
at a specified exchange ratio and that the merger will not be jeopardized by
changes to the ABC stock price.
The Merger Agreement, including the changes referred to above, was considered
by the ABC board on December 2, 1998 and approved by the board of directors of
ABC on December 10, 1998. The Merger Agreement, including those changes, was
also approved by the board of directors of NACO on December 10, 1998.
The board of directors of ABC and the board of directors of NACO each
determined that the Merger Agreement, including the changes referred to above,
was in the best interests of their respective stockholders.
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Neither board believed that it was necessary to ask its financial adviser to
update its opinion as a result of those changes or any other developments, and
neither financial adviser has updated its opinion. On December 10, 1998, the
officers of ABC and of NACO executed the Merger Agreement and the two companies
issued a joint press release announcing the changes to the transaction.
RECOMMENDATION OF THE ABC BOARD AND REASONS FOR THE MERGER
THE ABC BOARD BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTEREST OF,
ABC AND THE ABC STOCKHOLDERS. ACCORDINGLY, THE ABC BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE ABC
STOCKHOLDERS VOTE FOR THE SHARE ISSUANCE, THE CLASSIFIED BOARD AMENDMENT AND
THE CORPORATE NAME AMENDMENT, ALL OF WHICH ARE NECESSARY TO COMPLETE THE
MERGER.
The ABC board believes that the consummation of the Merger presents a unique
opportunity to create a premier supplier of technologically advanced products
and services for the railroad industry.
In reaching its decision to approve the original merger agreement, the ABC
board consulted with ABC management, as well as with its financial and legal
advisers, and considered a variety of factors, including the following:
(i) The ABC board's familiarity with and review of ABC's business,
operations, financial condition, earnings and prospects.
(ii) The anticipated effectiveness of the Merger in implementing and
accelerating ABC's strategy to be a broader based supplier of products to
the rail industry and the benefits associated with NACO's strong position
as the leading designer and producer of high performance freight car
suspension systems ("trucks") and as the leading supplier of other types of
freight car trucks, locomotive truck frames, freight car couplers and other
products, the depth of NACO's management team and the quality of its
operations.
(iii) The business, operations, financial condition, earnings and prospects
of each of ABC and NACO. In making its determination, the ABC board took
into account the results of ABC's due diligence review of NACO's business.
(iv) The scale, scope and strength of the operations of the combined
company, in that the combined company would be North America's number one
manufacturer of specialty trackwork; the number one supplier of high-
performance freight car trucks; the number two producer of railcar wheels
and distributor of mounted wheel sets; the number one or number two
supplier of all other types of freight car trucks, freight car couplers and
related products as well as locomotive truck frames; a rapidly growing
supplier of railroad signal system services; and a leading producer of high
integrity steel castings used in flow products.
(v) The competitive advantage that the combined company would have through
the combination of NACO's technological strengths as a designer and
producer of freight car trucks with ABC's strengths as a producer of
freight car wheels and assembler of wheel sets, thus permitting the
combined company to design, engineer and sell railcar suspension systems,
complete with wheels, which can achieve the highest performance level.
(vi) The further competitive advantage that the combined company would have
as a result of incorporating NACO's considerable process technology and
know-how in the production of steel castings by the combined company for
high quality, low cost, railcar wheels as well as to achieve a leadership
position in trackwork castings.
(vii) The additional competitive advantage that the combined company would
have as a result of introducing the sale and distribution of various
freight car and locomotive repair parts produced by NACO into ABC's
existing geographically dispersed wheel assembly facilities, and expanding
the location of wheel assembly facilities, particularly in Mexico.
(viii) The anticipated financial impact of the proposed transaction on the
combined company's future financial performance.
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(ix) The expectation that the Merger would result in synergies for the
combined company's operations, including significant operating advantages
relative to competitors and to ABC on a stand-alone basis, as well as the
possibility of enhancing revenues through substantial cross-selling
opportunities. The ABC board noted that, although no assurances could be
given that any particular level of synergies will be achieved, the
managements of ABC and NACO had identified potential pre-tax synergies in
the form of operating improvements, cost savings and enhanced annual
revenues of approximately $20 million to $25 million annually following
consummation of the Merger. The board noted that management estimated that
$2.5 million to $2.75 million of these synergies can be achieved in fiscal
1999; $18 million to $22 million can be achieved in fiscal 2000; and the
entire $20 million to $25 million annually thereafter. The combined
company's ability to achieve such results depends on various factors, a
number of which will be beyond its control, including the regulatory
environment, economic conditions, unanticipated changes in business
conditions and inflation. There can, therefore, be no assurance in this
regard. See "Cautionary Statement Concerning Forward-Looking Statements."
(x) The expenses and capital expenditures necessary to achieve these
benefits. See "--Benefits of the Merger" and "--Management and Operations
After the Merger." The board considered the estimated level of costs ($15
million to $20 million or $11 million to $14 million after-tax) and
additional capital expenditures ($9 million) necessary to achieve the
benefits to be acceptable given the anticipated benefits.
(xi) The structure of the Merger and the terms of the Merger Agreement,
which were reciprocal in nature, and that the Merger is intended to qualify
as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and for "pooling of interests" accounting
treatment.
(xii) The proposed arrangements with members of management of ABC and NACO,
including that Mr. Grinter would serve as Chairman of the board of the
combined company after the Merger, Mr. Seher would serve as Chief Executive
Officer of the combined company after the Merger, Mr. Makary would serve as
President and Chief Operating Officer of the combined company after the
Merger, and that Messrs. Grinter and Seher, along with three non-management
members of each of ABC's and NACO's current boards of directors would be
members of the eight person board of directors of the combined company
following the Merger. See "--Management and Operations after the Merger."
(xiii) The opinion of Salomon that, as of September 17, 1998, the exchange
ratio (as set forth in the original merger agreement) was fair, from a
financial point of view, to the holders of ABC common stock. See "--Opinion
of Financial Adviser to ABC."
(xiv) The belief of ABC's senior management and the ABC board that ABC and
NACO share the same values and commitments and that their managements
possess complementary skills and expertise.
In addition to the factors described above, the board of directors of ABC also
considered the following negative factors relating to the Merger:
(i) The likelihood that NACO's sales to the new railcar build market will
be more cyclical than those of ABC and be more adversely affected by any
future recession.
(ii) The risks associated with NACO's manufacturing operations in Mexico.
In reaching its decision to approve the Merger Agreement, including the changes
referred to above, the ABC board consulted with ABC management, as well as with
its financial and legal advisers, and considered a variety of factors,
including the following:
(i) The desire to simplify the agreement by accelerating the fixing of the
exchange ratio on December 10, 1998 rather than waiting until the
completion of the merger to set the exchange ratio.
(ii) The fact that a simpler agreement would be easier for stockholders to
understand.
(iii) The fact that an exchange ratio of 8.7 shares of ABC stock for each
share of NACO stock had been used in negotiations, was approximately the
number assumed by ABC's financial adviser when it made its calculations and
was approximately the number that would have been derived under the
original formula if calculated on December 10, 1998.
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(iv) The fact that elimination of the exchange ratio formula and fixing the
exchange ratio at 8.7 shares of ABC common stock for each share of NACO
common stock would not significantly change the resulting ownership of the
ABC stockholders and NACO stockholders of the combined company and that ABC
stockholders and NACO stockholders would each still have about 50% of the
resulting shares.
(v) The fact that eliminating the ability of either party to terminate the
agreement if the average ABC stock price fell below $13 per share would add
certainty to the transaction and that ABC stockholders would be able to
realize the advantages of the merger even if the ABC stock price were to
decline.
The foregoing discussion of the information and factors considered by the ABC
board is not intended to be exhaustive but includes all material factors
considered by the ABC board. In reaching its determination to approve and
recommend that Merger, the ABC board did not assign any relative or specific
weights to the foregoing factors, and individual directors may have given
differing weights to different factors. The ABC board is unanimous in its
recommendation that ABC stockholders vote for the Share Issuance, the
Classified Board Amendment and the Corporate Name Amendment, all of which are
necessary to complete the Merger.
RECOMMENDATION OF THE NACO BOARD AND REASONS FOR THE MERGER
THE NACO BOARD BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, NACO AND THE NACO STOCKHOLDERS. ACCORDINGLY, THE NACO BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT NACO STOCKHOLDERS
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, AS AMENDED AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
The NACO board believes that the consummation of the Merger presents a unique
opportunity to create a premier supplier of technologically advanced products
and services for the railroad industry.
In reaching its decision to approve the original merger agreement, the NACO
board consulted with NACO management, as well as with its financial and legal
advisers, and considered a variety of factors, including the following:
(i) The NACO board's familiarity with and review of NACO's business,
operations, financial condition, earnings and prospects.
(ii) The anticipated effectiveness of the Merger in implementing and
accelerating NACO's strategy to be a broader based supplier of products to
the rail industry and the benefits associated with ABC's strong position as
North America's leading producer of specialty trackwork; as the second
leading producer of railcar wheels and distributor of mounted wheel sets
and a rapidly growing supplier of railroad signal system services, the
depth of ABC's management team and the quality of its operations.
(iii) The business, operations, financial condition, earnings and prospects
of each of ABC and NACO. In making its determination, the NACO board took
into account the results of NACO's due diligence review of ABC's business.
(iv) The competitive advantage that the combined company would have through
the combination of NACO's technological strengths as a designer and
producer of freight car trucks with ABC's strengths as a producer of
freight car wheels and assembler of wheel sets, thus permitting the
combined company to design, engineer and sell railcar suspension systems,
complete with wheels, which can achieve the highest performance level.
(v) The further competitive advantage that the combined company would have
as a result of incorporating NACO's considerable process technology and
know-how in the production of steel castings by the combined company for
high quality, low cost, railcar wheels as well as to achieve a leadership
position in trackwork castings.
(vi) The additional competitive advantage that the combined company would
have as a result of introducing the sale and distribution of various
freight car and locomotive repair parts produced by NACO
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into ABC's existing geographically dispersed wheel assembly facilities, and
expanding the location of wheel assembly facilities, particularly in
Mexico.
(vii) The fact that NACO stockholders will receive registered shares of ABC
common stock in the Merger and that, as a result, NACO stockholders will
have the ability, consistent with legal and other restrictions, to publicly
sell their interests in the combined company after consummation of the
Merger.
(viii) The anticipated financial impact of the proposed transaction on the
combined company's future financial performance.
(ix) The expectation that the Merger would result in synergies for the
combined company's operations, including significant operating advantages
relative to competitors and to NACO on a stand-alone basis, as well as the
possibility of enhancing revenues through substantial cross-selling
opportunities. The NACO board noted that, although no assurances could be
given that any particular level of synergies will be achieved, the
managements of ABC and NACO had identified potential pre-tax synergies in
the form of operating improvements, cost savings and enhanced annual
revenues of approximately $20 million to $25 million annually following
consummation of the Merger. The board noted that management estimated that
$2.5 million to $2.75 million of these synergies can be achieved in fiscal
1999; $18 million to $22 million can be achieved in fiscal 2000; and the
entire $20 million to $25 million annually thereafter. The combined
company's ability to achieve such results depends on various factors, a
number of which will be beyond its control, including the regulatory
environment, economic conditions, unanticipated changes in business
conditions and inflation. There can, therefore, be no assurance in this
regard. See "Cautionary Statement Concerning Forward-Looking Statements."
(x) The board also considered the expenses and capital expenditures
necessary to achieve these benefits. See "--Benefits of the Merger" and "--
Management and Operations After the Merger." The board considered the
estimated level of costs ($15 million to $20 million or $11 million to $14
million after-tax) and anticipated additional capital expenditures ($9
million) necessary to achieve the benefits to be acceptable given the
anticipated benefits.
(xi) The structure of the Merger and the terms of the Merger Agreement,
which were reciprocal in nature, and that the Merger is intended to qualify
as a reorganization under Section 368(a) of the Code, and for "pooling of
interests" accounting treatment.
(xii) The proposed arrangements with members of management of ABC and NACO,
including that Mr. Grinter would serve as Chairman of the board of the
combined company after the Merger, Mr. Seher would serve as Chief Executive
Officer of the combined company after the Merger, Mr. Makary would serve as
President and Chief Operating Officer of the combined company after the
Merger, and that Messrs. Grinter and Seher, along with three non-management
members of ABC's and NACO's current boards of directors would be members of
the board of directors of the combined company following the Merger. See
"--Management and Operations after the Merger."
(xiii) The opinion of Baird that, as of September 17, 1998, the exchange
ratio (based on the formula set forth in the original merger agreement) was
fair, from a financial point of view, to NACO's stockholders. See "--
Opinion of Financial Adviser to NACO."
(xiv) The belief of NACO's senior management and the NACO board that ABC
and NACO share the same values and commitments and that their managements
possess complementary skills and expertise.
In addition to the factors described above, the board of directors of NACO also
considered the following negative factors relating to the Merger:
(i) ABC's relatively low gross margins in light of its high levels of
capital spending over the last three years.
(ii) ABC's high bank indebtedness used to finance capital spending which
has yet to produce significant operating earnings improvement.
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In reaching its decision to approve the Merger Agreement, including the changes
referred to above, the NACO board consulted with NACO management, as well as
with its financial and legal advisers, and considered a variety of factors,
including the following:
(i) The desire to simplify the agreement by accelerating the fixing of the
exchange ratio on December 10, 1998 rather than waiting until the
completion of the merger to set the exchange ratio.
(ii) The fact that a simpler agreement would be easier for stockholders to
understand.
(iii) The fact that an exchange ratio of 8.7 shares of ABC stock for each
share of NACO stock had been used in negotiations, was approximately the
number assumed by NACO's financial adviser when it made its calculations
and was approximately the number that would have been derived under the
original formula if calculated on December 10, 1998.
(iv) The fact that elimination of the exchange ratio formula and fixing the
exchange ratio at 8.7 shares of ABC common stock for each share of NACO
common stock would not significantly change the resulting ownership of the
ABC stockholders and NACO stockholders of the combined company and that the
ABC stockholders and NACO stockholders would each still have about 50% of
the resulting shares.
(v) The fact that eliminating the ability of either party to terminate the
agreement if the average ABC stock price fell below $13 per share would add
certainty to the transaction and that NACO stockholders would be able to
realize the advantages of the merger even if the ABC stock price were to
decline.
The foregoing discussion of the information and factors considered by the NACO
board is not intended to be exhaustive but includes all material factors
considered by the NACO board. In reaching its determination to approve and
recommend that Merger, the NACO board did not assign any relative or specific
weights to the foregoing factors, and individual directors may have given
differing weights to different factors. The NACO board is unanimous in its
recommendation that NACO stockholders vote for approval and adoption of the
Merger Agreement.
BENEFITS OF THE MERGER
While there can be no assurances as to the achievement of the combined
company's business and financial goals, ABC and NACO currently expect to
achieve about $20 million to $25 million in annual pre-tax synergies as a
result of the Merger. Management estimates that $2.5 million to $2.75 million
of these synergies can be achieved during fiscal 1999, $18 million to $22
million in fiscal year 2000 and the entire $20 million to $25 million annually
thereafter. In arriving at the estimated synergies, management of ABC and NACO
have estimated that $13 million to $16 million in annual benefits can be
obtained by applying NACO's manufacturing technology and know-how to the
combined company's foundry operations, thus reducing the number of wheels that
must be scrapped. Also, increasing production at ABC's Calera plant by
manufacturing only high-volume wheels at that plant and shifting production of
low volume products to other plants more suited to such volumes should
contribute to these benefits. We also estimate that $4 million to $5 million in
annual benefits can be obtained by improvements to other manufacturing
operations by applying NACO's technology to other ABC plants and alternative
production sourcing within the combined company. Finally, we expect that the
remaining amount of estimated annual benefits can be obtained through enhanced
revenues and combining general and administrative functions and eliminating
duplication. Enhanced revenues are expected to be achieved through the
introduction of the sale of a greater number of products within the combined
company's wheel assembly and distribution facilities as well as through
expanding such facilities. If we are not able to achieve all the anticipated
improvements, the benefits of the merger may be less than currently estimated.
OPINION OF FINANCIAL ADVISER TO ABC
Salomon has delivered a written opinion to the ABC board that, as of September
17, 1998, the exchange ratio (determined as provided in the original merger
agreement) is fair, from a financial point of view, to ABC's stockholders. No
limitations were imposed by the ABC board upon Salomon with respect to the
investigations made or procedures followed by Salomon in rendering the opinion.
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The full text of the opinion of Salomon, which sets forth the assumptions made,
matters considered and limits on the review undertaken by Salomon, is attached
as Exhibit B to this Joint Proxy Statement/Prospectus and incorporated by
reference herein. ABC stockholders are urged to read this opinion in its
entirety.
Salomon's opinion is directed only to the fairness, from a financial point of
view, to ABC stockholders of the exchange ratio and does not address ABC's
underlying business decisions to effect the Merger. Salomon's opinion was
delivered pursuant to its engagement by the ABC board and is directed solely to
the ABC board for its benefit and use in considering the Merger. Salomon's
opinion was not rendered with a view toward serving as or constituting a
recommendation to any ABC stockholder as to how such stockholder should vote
with respect to the Merger.
In conducting its analysis and arriving at its opinion, Salomon reviewed and
analyzed, among other things, (a) the Agreement and Plan of Merger by and among
ABC and NACO; (b) certain publicly available information concerning ABC,
including the Annual Report on Form 10-K of ABC for the fiscal year ended July
31, 1997; (c) certain financial information concerning the business,
operations, assets and prospects of ABC, including financial forecasts and
projections, furnished to Salomon by the senior management of ABC for purposes
of Salomon's analysis; (d) certain publicly available information concerning
the trading of, and the trading market for, the ABC common stock; (e) certain
internally prepared documents relating to NACO which Salomon discussed with
NACO management; (f) certain publicly available information concerning NACO;
(g) certain financial information concerning the business, operations, assets
and prospects of NACO, including financial forecasts and projections, furnished
to Salomon by the senior management of NACO for purposes of Salomon's analysis;
(h) certain analyses and estimates prepared by senior management of ABC and
NACO concerning ABC and NACO as combined entities; (i) certain publicly
available information with respect to certain of such other companies'
securities; and (j) certain publicly available information concerning the
nature and terms of certain other transactions that Salomon considered relevant
to its inquiry. To the extent Salomon reviewed financial forecasts and
projections for specific periods, Salomon did not consider such information to
be material to its opinion as to the exchange ratio to be offered to holders of
ABC common stock. Salomon also participated in meetings with certain officers
and representatives of ABC and NACO, and their respective counsel, to discuss
the foregoing, including, in particular, certain cost savings and operating
synergies, including potential consolidation of corporate staff and operating
facilities and more efficient utilization of operating assets, intended to be
derived from the Merger. See "--Recommendation of the ABC Board and Reasons for
the Merger." Salomon also took into account its assessment of general economic,
market and financial conditions, as well as its experience in connection with
similar transactions and securities valuation generally.
In its review and analysis and in arriving at its opinion, Salomon assumed and
relied upon the accuracy and completeness of all the financial and other
information provided by or on behalf of ABC or NACO or publicly available and
it did not assume any responsibility for independent verification of any such
information or any independent evaluation or appraisal of the assets and
liabilities of ABC or NACO. With respect to forecasts and projections, as well
as estimates and analyses with respect to cost savings and operating synergies
intended to be derived from the Merger, Salomon assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of ABC and NACO. Salomon expressed
no view as to such forecasts, projections, estimates and analyses, or the
assumptions on which they are based. Salomon also assumed, with ABC's consent,
that the Merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Code and on the advice of ABC accountants that the Merger
will be recorded as a pooling-of-interests transaction under generally accepted
accounting principles ("GAAP"). Salomon did not assume any responsibility for
making, or obtain, any independent evaluations or appraisals of the properties
or facilities of ABC or NACO. Salomon's engagement in connection with the
Merger did not include the solicitation of, and it did not solicit, prospective
acquirors of all or a part of ABC. Salomon participated in negotiations and
reviewed the terms of the Merger. Salomon's opinion is based upon conditions
(including market prices for ABC common stock) as it existed and could be
evaluated by Salomon as of the
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respective dates of Salomon's opinion and does not represent an opinion as to
the price at which shares of ABC common stock will trade if and when issued
pursuant to the Merger.
In arriving at its opinion, Salomon performed a variety of financial and
comparative analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Salomon did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significant and relevance of each analysis and
factor. Accordingly, Salomon believes that its analyses must be considered as a
whole and that considering any portion of such analysis and of the factors
considered therein, without considering all analyses and factors, could create
a misleading or incomplete view of the process underlying its opinion.
The following is a summary of analyses performed by Salomon in connection with
its opinion.
Stock Trading History. Salomon reviewed the performance of the market price
and trading volume of the ABC common stock for the period beginning at
September 15, 1997 and ended at September 14, 1998. From this review, Salomon
observed that ABC had lost nearly half its value after reaching its 52 week
high in December 1997, during a period when ABC achieved analysts' estimates
for earnings per share ("EPS") during the year. In addition, Salomon analyzed
ABC's relative stock price performance for the same period as compared to an
index of ABC's comparable companies and the S&P Composite Index. From this
review, Salomon concluded that, relative to the two indices, ABC's stock price
had witnessed a steady decline during the prior six months. Furthermore,
Salomon reviewed ABC's 60-day moving trading average. From this review, Salomon
concluded that the 60-day moving trading average of ABC's stock price per share
had not reached the $13.00 per share level during the previous twelve months,
the price of ABC's stock at which ABC or NACO can terminate the Merger
Agreement.
Contribution Analysis. Salomon reviewed the relative contribution of each of
ABC and NACO to the combined company with respect to revenues, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), earnings before
interest and taxes ("EBIT"), net income, total assets, total debt and total
equity for ABC's unaudited fiscal year ended July31, 1998 and NACO's latest
twelve months ended June 30, 1998. In addition, as part of the contribution
analysis, Salomon reviewed credit ratios, including total debt to EBITDA and
total debt to book capitalization. Salomon calculated the relative contribution
of each of ABC and NACO to the pro forma combined company, prior to merger cost
savings and restructuring charges. The analysis indicated ABC would have
contributed 50.1% to total revenues for the combined company, 52.0% to total
EBITDA of the combined company, 49.5% to total EBIT of the combined company,
52.7% to total net income of the combined company, 69.4% to total assets of the
combined company, 72.5% to total debt of the combined company, and 92.4% to
total stockholders' equity of the combined company. Salomon compared the
relative contribution of ABC to the pro forma combined company to the pro forma
ownership of ABC stockholders of 50.0% on a fully diluted basis and concluded
that such comparison supported its opinion as to the fairness of the exchange
ratio from a financial point of view to holders of ABC common stock.
Comparable Company Analysis. In the context of a transaction such as the
Merger where an exchange ratio is based upon the recent and long-term
respective market valuations of the companies involved, among other factors, a
comparable company analysis is often used to confirm the consistency of market
valuation of the companies involved, as compared to each other and to other
companies deemed to be relevant. Salomon reviewed and compared the financial,
operating and market performance for ABC and the financial and operating
performance of NACO to the following group of publicly-traded companies: The
Greenbrier Companies, Harmon Industries, Inc., Johnstown America Industries,
Inc., L.B. Foster Company, MotivePower Industries, Inc., Trinity Industries,
Inc., Varlen Corporation, and Westinghouse Air Brake Company (the "Comparable
Group"). Salomon selected the Comparable Group of companies on the basis of
various factors, the most important of which was each company's concentration
in the rail supply products business. Salomon examined certain publicly
available or estimated financial and market data for each member of the
Comparable
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Group, including: the ratios of firm value (defined as equity market value
adjusted by adding long-term debt and subtracting cash, marketable securities
and estimated cash proceeds from the exercise of certain stock options) to the
latest twelve months ("LTM") revenues, LTM EBITDA and LTM EBIT; and the ratios
of price per share to First Call earnings estimates for 1998 and 1999. The
analysis indicated that the median multiples of LTM revenues, LTM EBITDA, LTM
EBIT, 1998 First Call earnings estimates and 1999 First Call earnings estimates
were 0.7x, 5.5x, 7.7x, 16.3x and 11.0x respectively. As a multiple of LTM
revenues, LTM EBITDA and LTM EBIT, ABC traded at 0.8x, 7.9x and 13.4x,
respectively. As a multiple of actual 1998 earnings and 1999 First Call
earnings estimates, ABC traded at 16.3x and 11.0x, respectively.
For valuation purposes, Salomon calculated a range based on the Comparable
Group's multiples highlighted above which Salomon judged to be appropriate.
Salomon applied the multiple range to each of ABC's and NACO's LTM financial
information as provided by the respective management teams. Assuming net debt
of $146.0 million for ABC and $55.3 million for NACO, Salomon arrived at an
implied equity value range of $115 million to $145 million for ABC and an
implied equity value range of $150 million to $180 million for NACO.
Selected Precedent Transactions. In the context of a transaction such as the
Merger where an exchange ratio is based upon the recent and long-term
respective market valuations of the companies involved, among other factors, a
comparable acquisition analysis is often used to confirm market valuations of
the companies involved, as compared to acquisitions deemed to be relevant.
Salmon selected nine comparable acquisitions which occurred between May 1994
and November 1997 ("Acquisition Comparables") on the basis of various factors,
the most important of which was each acquisition occurred in the rail supply
products business. The Acquisition Comparables included the following
transactions (acquiror/target): Rail Acquisitions Corp./Portec Inc.-Railway
Products; Finmeccanica S.p.A./Union Switch & Signal; Westinghouse Air Brake
Company/Vapor Corporation; Varlen Corporation/Brenco; Trinity Industries,
Inc./Transcisco Industries, Inc.; Trinity plc/MI Douglas & Schopf Maschinenbau;
ABC Rail Products Corp./GE Railcar Wheel & Parts Services Corp.-Wheel Mounting
Business; Harmon Industries/Servo Corporation of America-Transportation
Division; and Dimelng, Scbreiber & Park/VMV Enterprise Inc. Salomon examined
certain publicly available financial data for each member of the Acquisition
Comparables, including: the ratios of adjusted purchase price as a multiple of
revenues, EBITDA and EBIT. The analysis indicated that the median multiples of
revenues, EBITDA, and EBIT were 0.9x, 8.1x and 8.1x, respectively.
For valuation purposes, Salomon calculated a range based on the Acquisition
Comparables' multiples highlighted above which Salomon judged to be
appropriate. Salomon applied the multiple range to each of ABC's and NACO's LTM
financial information as provided by the respective management teams. Assuming
net debt of $146.0 million for ABC and $55.3 million for NACO, Salomon arrived
at an implied equity value range of $125 million to $155 million for ABC and an
implied equity value range of $160 million to $190 million for NACO.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Salomon
estimated the present value of the future cash flows that each ABC and NACO
could produce under various assumptions in accordance with five-year financial
forecasts, formulated by the managements of ABC and NACO and thereafter
compiled by Salomon, and certain variants thereof. Salomon calculated the
estimated present value of the future cash flows of ABC as the sum of (i) the
aggregate discounted value (using various discount rates from 9.0% to 11.0%) of
the five year unlevered free cash flow of ABC plus (ii) the discounted value
(using various discount rates from 9.0% to 11.0%) of the final year's projected
EBITDA multiplied by numbers representing various terminal or exit multiples
(ranging from 5.0x to 7.0x). Salomon calculated the estimated present value of
the future cash flows of NACO as the sum of (i) the aggregate discounted value
(using various discount rates from 12.0% to 14.0%) of the five year unlevered
free cash flow of NACO plus (ii) the discounted value (using various discount
rates from 12.0% to 14.0%) of the final year's projected EBITDA multiplied by
numbers representing various terminal or exit multiples (ranging from 5.0 x to
7.0x). This analysis produced a range of equity values for each of ABC and
NACO.
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For valuation purposes, Salomon calculated a range of implied equity values
based on ABC's and NACO's unlevered free cash flow which were derived from the
companies' financial forecasts, the various discount rates highlighted above
and the various terminal or exit multiples highlighted above. Assuming net debt
of $146.0 million for ABC and $55.3 million for NACO, Salomon arrived at an
implied equity value range of $220 million to $260 million for ABC and an
implied equity value range of $290 million to $340 million for NACO.
Discounted Cash Flow Analysis (Sensitivity). Salomon performed the same
analysis described in the "Discounted Cash Flow Analysis" section with the
exception of modifications to both ABC's and NACO's five-year forecasts. In
both analyses revenues, gross margins and EBIT margins were modified making the
five-year forecast more conservative, while in the NACO analysis the discount
rate was reduced by 200 basis points to a range of 10% to 12%.
For valuation purposes, Salomon calculated a range of implied equity values
based on ABC's and NACO's unlevered free cash flow which were derived from the
companies' financial forecasts, the various discount rates highlighted above
and the various terminal or exit multiples highlighted above. Assuming net debt
of $146.0 million for ABC and $55.3 million for NACO, Salomon arrived at an
implied equity value range of $130 million to $170 million for ABC and an
implied equity value range of $180 million to $210 million for NACO.
Salomon is an internationally recognized investment banking firm and regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions and for other purposes. The ABC board selected Salomon
as its financial adviser on the basis of Salomon's international reputation,
its experience in transactions similar to the Merger and its familiarity with
ABC and its business. In the course of its business, Salomon may trade the
securities of ABC for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to the terms of an engagement letter dated August 13, 1998, ABC has
agreed to pay Salomon $750,000 following the execution of a definitive
agreement and an additional fee equal to a designated percentage of the
aggregate consideration, less any amount previously paid. Based on a closing
stock price on September18, 1998 of $15.563 per share, Salomon's additional fee
would have been approximately $1.9 million. In addition, ABC has agreed to pay
Salomon's reasonable expenses or, if the Merger is not consummated, an equal
amount to the reasonable expenses of Salomon in connection with the Merger or
the termination thereof. No additional fees will be paid to Salomon for its
opinion. Whether or not the Merger is consummated, ABC has also agreed to
indemnify Salomon, and certain related persons, against certain liabilities
relating to or arising out of its engagement, including certain liabilities
under federal securities laws.
As noted under the caption "Recommendation of the ABC Board and Reasons for the
Merger," the fairness opinion of Salomon was only one of many factors
considered by the ABC board in determining to approve the Merger.
OPINION OF FINANCIAL ADVISER TO NACO
NACO retained Baird to act as its financial adviser in connection with the
Merger. As part of such services, NACO requested that Baird render its opinion
as to the fairness, from a financial point of view, of the exchange ratio
(based on the formula set forth in the original merger agreement, the "exchange
ratio"), to the holders of NACO common stock. On September 17, 1998, Baird
rendered its opinion to NACO's board of directors to the effect that, as of
such date, the exchange ratio was fair, from a financial point of view, to the
holders of NACO common stock. The Merger Agreement does not contemplate the
delivery of an updated opinion, nor has NACO's board of directors requested
that Baird update its opinion to take into account developments subsequent to
September 17, 1998. Therefore, Baird will not update its opinion prior to the
closing of the Merger and expresses no view as to the impact of developments
subsequent to September 17, 1998 on its opinion.
THE FULL TEXT OF BAIRD'S OPINION, DATED SEPTEMBER 17, 1998, WHICH SETS FORTH
THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED
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AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS
OPINION, IS ATTACHED AS EXHIBIT C TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE ORIGINAL EXCHANGE RATIO TO THE
HOLDERS OF NACO COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
NACO STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE
MERGER AGREEMENT. THE SUMMARY OF BAIRD'S OPINION SET FORTH BELOW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED AS
EXHIBIT C. NACO STOCKHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY. BAIRD WILL NOT UPDATE ITS OPINION PRIOR TO THE CLOSING OF THE MERGER.
In conducting its investigation and analysis and in arriving at its opinion,
Baird reviewed such information and took into account such financial and
economic factors as it deemed relevant under the circumstances. In that
connection, Baird, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of NACO and ABC furnished to Baird for purposes of
its analysis, as well as publicly available information of ABC including, but
not limited to, ABC's recent filings with the SEC and equity analyst research
reports prepared by various investment banking firms, including Baird; (ii)
reviewed the draft Merger Agreement in the form presented to NACO's board of
directors; (iii) compared the historical market prices and trading activity of
ABC common stock with those of certain other publicly traded companies Baird
deemed relevant; (iv) compared the financial position and operating results of
NACO and ABC with those of certain publicly traded companies Baird deemed
relevant; (v) compared the proposed financial terms of the Merger with the
financial terms of certain other business combinations Baird deemed relevant;
and (vi) reviewed the potential pro forma financial effects of the Merger on
NACO and ABC based on, among other things, certain estimates of cost savings,
synergies and other projected combined benefits expected to result from the
Merger (the "Estimated Merger Benefits"), jointly prepared and provided to
Baird by the senior managements of NACO and ABC. Baird held discussions with
certain members of NACO's and ABC's senior management concerning NACO's and
ABC's historical and current financial condition and operating results, as well
as the future prospects of NACO and ABC, respectively, and those of ABC-NACO,
including the strategic rationale for the Merger. Baird also considered such
other information, financial studies, analyses and investigations and
financial, economic and market criteria which Baird deemed relevant for the
preparation of its opinion. NACO and ABC determined the exchange ratio in arms-
length negotiations. NACO did not place any limitation upon Baird with respect
to the procedures followed or factors considered by Baird in rendering its
opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to Baird by or on behalf of NACO and ABC, and has not
assumed any responsibility to verify any such information independently. Baird
assumed, with NACO's consent, that: (i) the Merger will be accounted for as a
pooling-of-interests under generally accepted accounting principles; (ii) the
Merger will qualify as a tax-free reorganization under the provisions of
Section 368(a) of the Code; (iii) all material assets and liabilities
(contingent or otherwise, known or unknown) of NACO and ABC are as set forth in
the consolidated financial statements of NACO and ABC, respectively; (iv) the
Merger will be consummated in accordance with the terms of the Merger
Agreement, without any amendment thereto and without waiver by NACO or ABC of
any of the conditions to their respective obligations thereunder; and (v) in
the course of obtaining the necessary regulatory and other consents or
approvals for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications to existing agreements, will be
imposed that will have a material adverse effect on the contemplated benefits
of the Merger. Baird also assumed that the financial forecasts, including the
Estimated Merger Benefits, examined by it were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
NACO's senior management as to the future performance of NACO, ABC's senior
management as to the future performance of ABC and by both senior managements
as to the future performance of ABC-NACO. In conducting its review, Baird did
not undertake nor obtain an independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of NACO or ABC nor did it make
a physical inspection of the properties or facilities of NACO or
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ABC. Baird's opinion necessarily was based upon economic, monetary and market
conditions as they existed and could be evaluated on the date of its opinion,
and did not predict or take into account any changes which may occur, or
information which may become available, after the date of such opinion.
Furthermore, Baird expressed no opinion as to the price or range of prices at
which ABC common stock or the common stock of ABC-NACO will trade at any time.
In rendering it opinion, Baird noted that the Merger Agreement and the other
documents relating to the Merger include, among other things, certain
provisions which Baird understands are designed to create a balance of control
of ABC-NACO after the Merger. Baird also noted that, as a result of the
exchange ratio, the stockholders of NACO and ABC will have essentially equal
ownership interests in ABC-NACO immediately following the Merger. Accordingly,
the exchange ratio does not reflect a change of control premium to the
stockholders of either NACO or ABC, and in rendering its opinion Baird analyzed
the Merger as a strategic business combination not involving a sale of control
of either NACO or ABC.
The following is a summary of the material financial analyses performed by
Baird in connection with rendering its opinion.
Historical Stock Price Performance. As part of its analysis, Baird reviewed the
recent stock price performance of ABC common stock and compared the stock price
performance of ABC common stock with the following seven publicly traded rail
supply companies: Atchison Casting Corporation; The Greenbrier Companies, Inc.;
Harmon Industries, Inc.; MotivePower Industries, Inc.; Trinity Industries,
Inc.; Varlen Corporation and Westinghouse Air Brake Company (the "Selected
Comparable Public Companies").
Selected Public Company Operating Performance Analysis. For purposes of its
analysis, Baird reviewed certain publicly available financial information as of
the most recently reported period for the Selected Comparable Public Companies
including, but not limited to, recent filings with the SEC and news releases.
Baird compared the financial position and operating results of NACO and ABC to
the Selected Comparable Public Companies with respect to the following: (i)
latest available twelve months ("LTM") net sales, which ranged from $264.2
million to $2.6 billion (excluding NACO and ABC); (ii) LTM gross margins, which
ranged from 14.8% to 32.3% with a median of 23.9% (excluding NACO and ABC);
(iii) LTM income from operations before depreciation and amortization
("EBITDA") margins, which ranged from 9.9% to 19.5% with a median of 13.3%
(excluding NACO and ABC); (iv) LTM income from operations ("EBIT") margins,
which ranged from 6.9% to 15.4% with a median of 10.4% (excluding NACO and
ABC), and (v) LTM net income margins, which ranged from 3.1% to 7.5% with a
median of 6.0% (excluding NACO and ABC). Additionally, Baird compared the 5-
year projected EPS growth (as provided by First Call consensus estimates) for
ABC to the Selected Comparable Public Companies, which ranged from 11.0% to
15.0% with a median of 14.0% (excluding ABC).
Analysis of NACO Valuation Multiples. Baird calculated the "Implied Total
Equity Value" and "Implied Enterprise Value" of NACO to be $119.3 million and
$175.1 million, respectively. The Implied Total Equity Value of NACO was
obtained by multiplying the last reported sale price on the Nasdaq National
Market of ABC common stock of $12.75 per share on September 11, 1998 by the
"Adjusted NACO Shares Outstanding", defined as the product of an assumed
exchange ratio of 8.680x and the total number of outstanding shares of NACO
common stock as of the date of the original merger agreement, including shares
issuable upon exercise of a warrant. The last reported sale price on the Nasdaq
National Market of ABC common stock of $12.75 per share on September 11, 1998
was used by Baird as a basis for the Average ABC Trading Price (as defined in
the original merger agreement) in the calculation of the assumed exchange
ratio. The Implied Enterprise Value was obtained by adding NACO's total debt
outstanding (as of June 30, 1998 as provided to Baird by NACO senior
management) to the Implied Total Equity Value. In performing its analysis,
Baird used, among other items, operating statistics for NACO's twelve months
ended June 30, 1998 ("NACO's LTM"), as provided by NACO management. NACO's
actual fiscal year-end is the Sunday which falls closest to March 31; however,
NACO's financial statements were adjusted by NACO senior management to a June
30 year-end for comparison purposes to ABC's July 31 year-end. Therefore, for
the purpose of Baird's analyses, the term "fiscal," when used in reference to
the operating results of NACO, refers to a year-end of June 30.
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Baird calculated multiples of the Implied Total Equity Value to NACO's LTM net
income and its estimated net income for fiscal 1999 (based on NACO senior
management's estimates) and multiples of NACO's Implied Enterprise Value to
NACO's LTM net sales, LTM EBITDA and LTM EBIT. The calculations resulted in
multiples of the Implied Total Equity Value to net income ("P/E Ratios") of
18.0x based on NACO's LTM net income and 7.3x based on its net income for
fiscal 1999. The ratio of Implied Enterprise Value to NACO's LTM net sales, LTM
EBITDA and LTM EBIT yielded multiples of 0.6x, 6.0x and 9.3x, respectively.
Analysis of ABC Valuation Multiples. In order to assess the relative public
market valuation of ABC common stock to be issued in exchange for NACO common
stock, Baird reviewed various ABC valuation multiples. Baird calculated the
"Implied Total Equity Value" and "Implied Enterprise Value" of ABC to be $119.3
million and $271.7 million, respectively. The Implied Total Equity Value of ABC
was obtained by multiplying the last reported sale price on the Nasdaq National
Market of ABC common stock of $12.75 per share on September 11, 1998 by the
Fully Diluted ABC Shares (as defined in the original merger agreement), which
includes the total number of shares of ABC common stock outstanding, fully
diluted options and shares issuable pursuant to certain earn-out agreements.
The last reported sale price on the Nasdaq National Market of ABC common stock
of $12.75 per share on September 11, 1998 was used as a basis for the Average
ABC Trading Price in the calculation of the Fully Diluted ABC Shares. The
Implied Enterprise Value was obtained by adding ABC's total debt outstanding
(based on audited financial statements as of July 31, 1998 as provided by ABC
senior management) to the Implied Total Equity Value. In performing its
analysis, Baird used, among other items, operating statistics for ABC's twelve
months ended July 31, 1998 ("ABC's LTM"). The term "fiscal," when used in
reference to the operating results of ABC, ABC-NACO, or the Selected Comparable
Public Companies, refers to a year-end of July 31. Baird calculated multiples
of the Implied Total Equity Value to ABC's LTM net income and its estimated net
income for fiscal 1999 (based on ABC management's estimates) and multiples of
ABC's Implied Enterprise Value to ABC's LTM net sales, LTM EBITDA and LTM EBIT.
The calculations resulted in multiples of the Implied Total Equity Value to net
income of 16.1x based on ABC's LTM net income and 10.2x based on estimated net
income for fiscal 1999. The ratio of Implied Enterprise Value to ABC's LTM net
sales, LTM EBITDA and LTM EBIT yielded multiples of 0.9x, 8.2x and 13.4x,
respectively. For purposes of calculating ABC's EBITDA and EBIT, Baird included
in such calculation the Equity Income (Loss) of Unconsolidated Joint Ventures.
Analysis of Selected Publicly Traded NACO Comparable Companies. Baird reviewed
certain publicly available financial information as of the most recently
reported period and stock market information, as of September 11, 1998, for the
Selected Comparable Public Companies. For each comparable company, Baird
calculated (based on the latest publicly available information) (i) the Implied
Total Equity Value which was obtained by multiplying each respective company's
last reported sale price per share on September 11, 1998 by its total number of
outstanding shares of common stock, including shares issuable upon exercise of
stock options and warrants, less net proceeds from the exercise of such stock
options and warrants, and (ii) the Implied Enterprise Value, which was obtained
by adding the company's outstanding total debt and subtracting the company's
cash and cash equivalents. Baird then calculated multiples, for each comparable
company, of Implied Enterprise Value to LTM net sales, LTM EBITDA and LTM EBIT.
Baird next compared those multiples to the relevant NACO multiples. An analysis
of the multiples of Implied Enterprise Value to LTM net sales, LTM EBITDA and
LTM EBIT yielded 0.6x, 6.0x and 9.3x, respectively, for NACO compared to
medians of 0.8x, 5.3x and 7.1x, respectively, for the Selected Comparable
Public Companies. For NACO and each comparable company, Baird also calculated
P/E Ratios based on (i) Adjusted NACO Shares Outstanding and an assumed Average
ABC Trading Price of $12.75 per share for NACO and (ii) the closing stock
prices as of September 11, 1998 for the Selected Comparable Public Companies
and (iii) net income statistics for the LTM and estimated fiscal 1999 periods.
An analysis of the P/E Ratios based on NACO's LTM net income and estimated net
income for fiscal 1999 yielded multiples of 18.0x and 7.3x, respectively,
compared to LTM and estimated fiscal 1999 median multiples of 11.5x and 9.6x,
respectively, for the Selected Comparable Public Companies. Baird observed that
the NACO multiples were generally within the range of the Selected Comparable
Public Companies' multiples, which supported its opinion as to the fairness of
the original exchange ratio from a financial point of view to the holders of
NACO common stock.
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Analysis of Selected Publicly Traded ABC Comparable Companies. In order to
assess the relative public market valuation of ABC common stock to be issued in
exchange for NACO common stock, Baird reviewed certain publicly available
financial information as of the most recently reported period and stock market
information as of September 11, 1998, for the Selected Comparable Public
Companies. For each comparable company, Baird then compared multiples of
Implied Enterprise Value to LTM net sales, LTM EBITDA and LTM EBIT to the
relevant ABC multiples. An analysis of the multiples of Implied Enterprise
Value to LTM net sales, LTM EBITDA and LTM EBIT yielded 0.9x, 8.2x and 13.4x,
respectively, for ABC compared to median multiples of 0.8x, 5.3x and 7.1x,
respectively, for the Selected Comparable Public Companies. For ABC and each
comparable company, Baird also calculated P/E Ratios based on the closing stock
prices as of September 11, 1998, and net income statistics for the LTM and
estimated fiscal 1999 periods. An analysis of the P/E Ratios based on ABC's LTM
net income and estimated net income for fiscal 1999 yielded multiples of 16.1x
and 10.2x, respectively, compared to LTM and estimated fiscal 1999 median
multiples of 11.5x and 9.6x, respectively, for the Selected Comparable Public
Companies. Baird observed that the ABC multiples were generally within the
range of the Selected Comparable Public Companies' multiples, which supported
its opinion as to the fairness of the exchange ratio from a financial point of
view to the holders of NACO common stock.
NACO Discounted Cash Flow Analysis. Baird performed a discounted cash flow
analysis of NACO, on a stand-alone basis, using NACO senior management's
projections for fiscal 1999 through fiscal 2003 without taking into account the
Estimated Merger Benefits. In such analysis, Baird applied terminal value
multiples of 7.0x to 9.0x to EBIT in fiscal 2003 and used discount rates of
13.0% to 15.0%. Such analysis produced Implied Total Equity Value per share for
NACO ranging from $27.73 to $38.12 per share, based on Adjusted NACO Shares
Outstanding, which reflects an assumed exchange ratio of 8.680x.
ABC Discounted Cash Flow Analysis. In order to assess the relative public
market valuation of ABC common stock to be issued in exchange for NACO common
stock, Baird performed a discounted cash flow analysis of ABC, on a stand-alone
basis, using ABC senior management's projections for fiscal 1999 through fiscal
2003 without taking into account the Estimated Merger Benefits. In such
analysis, Baird applied terminal value multiples of 7.0x to 9.0x to EBIT in
fiscal 2003 and used discount rates of 8.5% to 10.5%. Such analysis produced
Implied Total Equity Value per share for ABC ranging from $19.77 to $31.05 per
share, based on Fully Diluted ABC Shares.
Contribution Analysis. Baird analyzed NACO's and ABC's relative contribution
to ABC-NACO with respect to certain measurements, including net sales, gross
profit, EBITDA, EBIT and net income. As a result of the Merger, NACO's
stockholders will own approximately 50.0% of the outstanding common stock of
ABC- NACO assuming an exchange ratio of 8.680x. This compares to NACO's
contribution, based on pro forma fiscal 1997 and fiscal 1998 operating results
(after giving effect to the Merger and excluding the Estimated Merger Benefits)
for ABC-NACO, of approximately 49.9% to 51.7% of net sales, 56.8% to 57.1% of
gross profit, 41.0% to 46.7% of EBITDA, 40.2% to 48.4% of EBIT and 35.5% to
47.3% of net income. Baird observed that such comparisons supported its opinion
as to the fairness of the exchange ratio from a financial point of view to the
holders of NACO common stock.
Pro Forma Merger Analysis. In order to assess the financial impact of the
Merger, Baird prepared pro forma merger analyses. In conducting its analyses,
Baird relied upon certain assumptions described above and projected earnings
estimates for NACO (prepared by NACO senior management) and ABC (prepared by
ABC management). Baird compared the earnings per share of the common stock of
NACO (based on Adjusted NACO Shares Outstanding) and ABC common stock, each on
a stand-alone basis, to the earnings per share of the common stock of ABC-NACO
on a pro forma basis. This analysis (assuming no transaction-related expenses
or Estimated Merger Benefits) indicated that the proposed transaction would be
accretive to NACO's stockholders and dilutive to ABC's stockholders on an
earnings per share basis in fiscal 1998 by approximately 4.9% and (8.2%),
respectively, and dilutive to NACO's stockholders and accretive to ABC's
stockholders on an earnings per share basis in fiscal 1999 by approximately
(12.1%) and 21.9%, respectively. Additionally,
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including a range of pre-tax cost savings of between $22.0 million and $29.0
million based on the full-year pro forma Estimated Merger Benefits, this
analysis indicated that the proposed transaction would be accretive to NACO's
and ABC's stockholders in both fiscal 1998 and 1999. The estimated fiscal 1998
accretion to NACO's stockholders and ABC's stockholders ranges from
approximately 104% to 135% and 78% to 106%,
respectively. The estimated fiscal 1999 accretion to NACO's stockholders and
ABC's stockholders ranges from approximately 27% to 39% and 76% to 93%,
respectively.The results of the pro forma merger analysis are not necessarily
indicative of future operating results or financial position.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird. The preparation of a fairness opinion is a complex
process and is not susceptible to partial analyses or summary description.
Baird believes that its analyses must be considered as a whole, and that
selecting portions of such analyses without considering all analyses and
factors would create an incomplete view of the processes underlying its
opinion. Baird did not attempt to assign specific weights to particular
analyses. Additionally, no company used in the above analyses is directly
comparable to NACO or ABC. Any estimates contained in Baird's analyses are not
necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. Estimates of values of companies do
not purport to be appraisals or necessarily to reflect the prices at which
companies may actually be sold. Because such estimates are inherently subject
to uncertainty, Baird does not assume responsibility for their accuracy.
Baird, as part of its investment banking business, is engaged in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. NACO retained Baird because of its experience and
expertise in the valuation of businesses and their securities in connection
with mergers and acquisitions. In the ordinary course of business, Baird may
from time to time trade the securities of ABC for its own account and for
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Compensation. Pursuant to an engagement letter dated May 22, 1997, as amended
and supplemented, between NACO and Baird, NACO agreed to pay Baird, on the
closing of the transaction, a transaction fee equal to a specified percentage
of the total consideration paid. Based on a closing stock price of $15.563 per
share as of September 18, 1998, Baird will be paid a transaction fee equal to
approximately $1.9 million, of which $50,000 has been paid as a retainer.
Additionally, NACO has agreed to pay Baird a fee of $150,000 for delivering its
fairness opinion on September 17, 1998. NACO has also agreed to reimburse Baird
for certain of its reasonable out-of-pocket expenses and to indemnify Baird,
its affiliates and their respective directors, officers, employees and agents
and controlling persons against certain liabilities relating to or arising out
of its engagement, including liabilities under the federal securities laws.
In the past, Baird has provided investment banking services to NACO, including
acting as financial adviser to NACO since May 1997 in evaluating its strategic
and financial alternatives. Except for the fees disclosed in the preceding
paragraph, Baird has not received any compensation for services provided to
NACO. Baird also previously provided investment banking services to ABC from
time to time, having acted as managing underwriter in the public offering of
shares of ABC common stock in 1994 and of certain debt securities of ABC in
1997. In addition, Baird previously acted as financial adviser to ABC in 1995
and 1996 in connection with certain acquisitions and joint venture
arrangements. Baird received customary compensation for the above-mentioned
services, including an aggregate of approximately $1.7 million for services
rendered during the past two years in connection with Baird having acted as
managing underwriter of certain debt securities of ABC. Baird is a subsidiary
of The Northwestern Mutual Life Insurance Company which currently holds NACO's
$15.0 million principal amount senior subordinated note. In connection with the
issuance of this note, NACO issued a related warrant that entitled Northwestern
Mutual to purchase 54,271 shares of NACO common stock for a purchase price of
$0.01 per share. In December 1998, the warrant was exercised and the NACO
shares were issued.
38
<PAGE>
MERGER CONSIDERATION; EXCHANGE RATIO
At the Effective Time, each outstanding share of NACO common stock and all
rights in respect thereof will cease to exist and be converted into the right
to receive (in addition to cash in lieu of fractional shares) 8.7 shares of ABC
common stock (the "Exchange Ratio").
In addition, each warrant, option and other right granted by NACO to purchase
shares of NACO common stock will be converted into a warrant, option or other
right, as the case may be, to purchase shares of ABC common stock in such an
amount and at such an exercise price as provided in the Merger Agreement and
otherwise having the same terms and conditions as are in effect immediately
prior to the Effective Time. The number of shares of ABC common stock issuable
on exercise of such a converted warrant, option or other right shall be based
on the Exchange Ratio and the price to be paid by the holder on such exercise
shall be the original exercise price divided by the Exchange Ratio.
EFFECTIVE TIME OF THE MERGER
The Merger will be effective at the time a Certificate of Merger is duly filed
with the Secretary of State of Delaware or such later date or time as is set
forth in the Certificate of Merger (the "Effective Time"). The Effective Time
will occur as soon as possible after all conditions to the Merger are
satisfied.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Under the Merger Agreement, ABC will enter into an agreement with American
Stock Transfer and Trust Co. (or another bank or trust company selected by ABC
and satisfactory to NACO, the "Exchange Agent") to effect the exchange of NACO
common stock for ABC common stock. ABC will deposit with the Exchange Agent
certificates representing the ABC common stock for conversion to NACO common
stock in accordance with the Merger Agreement. Holders of NACO shares of common
stock must surrender their certificates representing their NACO common stock to
the Exchange Agent and will be entitled to receive in exchange therefore a
certificate or certificates representing the number of full shares of ABC
common stock into which the NACO shares so surrendered have been converted in
accordance with the Merger Agreement, together with cash in lieu of any
fractional shares. The shares of ABC common stock issued on such conversion
will be considered issued as of the Effective Time. Until the NACO shares are
surrendered and exchanged, each outstanding NACO certificate will represent the
appropriate number of shares of ABC common stock. No dividend or other
distribution, if any, payable to holders of ABC common stock of record at any
time after the Effective Time will be paid to the holders of such unsurrendered
NACO certificates until such certificates are surrendered for exchange. No
interest will be paid on any dividend or other distribution paid on such later
surrendered NACO shares. Neither ABC, NACO nor the Exchange Agent will be
responsible for any unclaimed dividend or distribution that has been paid over
to any public official under any applicable abandoned property, escheat or
similar law.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
In the Merger Agreement, ABC agrees to reduce the members of its board of
directors from seven members to four members, including Mr. Grinter and three
currently serving non-management members of the board and to cause four persons
mutually agreed upon with NACO to be appointed as additional directors of ABC
at the Effective Time. At the Effective Time, the ABC-NACO board of directors
will consist of eight members. See "--Interests of Certain Persons in the
Merger."
In addition, the Merger Agreement provides that, after consummation of the
Merger, the members of the combined company's board of directors serve for
staggered terms and will be classified into three classes of three-year terms.
Initially, an equal number of directors from ABC and NACO will be appointed to
each class of the board of the combined company. The amendment to the ABC
certificate of incorporation to provide for a classified board must be approved
by ABC stockholders in order to implement these requirements of the Merger
Agreement.
39
<PAGE>
ABC-NACO expects to record material pre-tax special charges which could
aggregate at from $15 million to $20 million ($11 million to $14 million after-
tax) following consummation of the Merger to cover the direct costs of the
Merger, the cost of integrating certain aspects of the businesses of ABC and
NACO, the cost of asset rationalizations and employee terminations to eliminate
duplicate functions and excess capacity and debt refinancing costs. Such costs
are expected to be incurred within eighteen months after the Merger and
substantially all of such costs are expected to require the outlay of cash.
These special charges were not included in the unaudited pro forma data.
Management estimates that incremental capital expenditures of approximately $9
million over a period of eighteen months following consummation of the Merger
will also be necessary to implement the actions necessary to achieve the
synergy benefits described herein.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In the Merger Agreement, NACO and ABC have agreed that the ABC-NACO board at
the Effective Time will include four directors designated by ABC and four
directors designated by NACO, including Mr. Grinter and Mr. Seher. ABC
designated Messrs. Ergas, Martin, and Peck. NACO has designated Messrs.
Drexler, Duval and Thompson. Under the classified board proposal described
under "Amendments to ABC Certificate of Incorporation--Classified Board,"
Messrs. Martin and Thompson will serve in Class I, Messrs. Drexler and Peck
will serve in Class II and Messrs. Duval, Ergas, Grinter and Seher will serve
in Class III. In addition, ABC has agreed that each officer and director of
NACO or any of its subsidiaries before the Merger will continue after the
Merger to have all indemnification rights and limitations on liability that
were in place before the Merger with respect to claims related to their service
as officers and directors prior to the completion of the merger.
Effective at the completion of the Merger, ABC will be bound by and become a
party to presently existing change-in-control agreements between NACO and
Messrs. Seher, Makary, Waite and Rockenbach (the "Executives"). Pursuant to
such change-in-control agreements, if NACO (and after the Merger, ABC-NACO)
terminates an Executive other than for cause (as defined in the agreement),
NACO (and after the Merger, ABC-NACO) will be obligated (i) to pay the
Executive as severance an amount equal to two times such Executive's base
salary plus such Executive's pro rata bonus for the year in which he is
terminated, in addition to certain miscellaneous expenses and (ii) to continue
such Executive's medical benefits and insurance coverage for a period of time
specified in the agreement. If an Executive is terminated by NACO (and after
the Merger, ABC-NACO) other than for cause or the Executive terminates his
employment with NACO for good reason (as defined in the agreement) within three
years of a change of control (as defined in the agreement), the Executive will
be entitled to all of the foregoing payments and benefits plus the larger of
(i) two times the average bonus paid to the Executive during the two fiscal
years prior to his termination and (ii) two times the bonus the Executive
otherwise would have earned in the year in which he was terminated. See
"Business of NACO--Severance and Change in Control Agreements."
ABC also will enter into a registration rights agreement (the "Registration
Rights Agreement") with the following NACO stockholders, each of whom is an
executive officer and/or director of NACO: Joseph A. Seher; Vaughn W. Makary;
Wayne R. Rockenbach; John W. Waite; John M. Lison; Stephen W. Becker; John M.
Giba; Brian L. Greenburg; Michael B. Heisler; Jack R. Long; Wilbur G. Streams;
Richard A. Drexler; Daniel W. Duval; and Willard H. Thompson (collectively, the
"Holders"). The form of Registration Rights Agreement is attached as Exhibit H
to the Merger Agreement included in Exhibit A to this Proxy
Statement/Prospectus. It is a condition to NACO's obligation to consummate the
Merger that ABC execute the Registration Rights Agreement. Under the
Registration Rights Agreement, commencing 180 days after the Effective Time,
Holders holding at least two percent (2%) of the then outstanding shares of ABC
common stock may demand that ABC file a registration statement under the
Securities Act for a public offering of the shares of ABC common stock covered
by the Registration Rights Agreement (the "Registrable Securities"), provided
that such demand registration relates to at least 360,000 Registrable
Securities. In addition, the Holders are entitled to piggyback registration
rights under circumstances where ABC proposes to register shares of its common
stock in a public offering. The Holders are limited to two demand registrations
and one piggy-back registration, subject to certain exceptions. The
Registration Rights Agreement terminates on its
40
<PAGE>
sixth anniversary, subject to earlier termination for any Holder eligible to
sell Registrable Securities in accordance with Rule 145(d)(2) or (3) under the
Securities Act.
Mr. Wayne R. Rockenbach, NACO's Chief Financial Officer, has notified NACO that
he will be terminating his employment with NACO for good reason upon completion
of the merger. The merger will be a "change-in-control" as defined in Mr.
Rockenbach's change-in-control agreement. Mr. Rockenbach will be entitled to an
estimated $892,000 of severance benefits upon his termination. ABC-NACO will be
obligated to pay this amount after the merger.
The ABC board of directors and the NACO board of directors were each aware of
all of the interests described above and considered them, among other matters,
in approving the Merger Agreement and the transactions contemplated thereby and
in recommending that the stockholders of their respective companies vote for
the matters to be considered by them as described in this document.
RESALE OF ABC COMMON STOCK
All ABC common stock received by NACO stockholders in the Merger will be freely
transferable except that ABC common stock received by persons who are deemed to
be "affiliates" (as such term is used in Rules 144 and 145 under the Securities
Act or for purposes of qualifying for "pooling-of-interests" accounting
treatment) of NACO prior to the Merger or affiliates of ABC after the Merger
may be resold by them only in transactions permitted by the resale provisions
of Rule 145 promulgated under the Securities Act (or Rule 144 in case of such
persons who become affiliates of ABC) or as otherwise permitted under the
Securities Act. In addition affiliates of NACO will have certain restrictions
concerning sales or reduction of risk regarding ABC common stock for the 30 day
period prior to the Merger and until ABC publicly releases earnings covering a
period of at least 30 days of post-Merger operations. Persons who may be deemed
to be affiliates of ABC or NACO generally include individuals or entities that
control, are controlled by, or are under common control with, such party and
may include certain officers and directors of such party as well as principal
stockholders of such party. The Merger Agreement requires each party to use its
reasonable best efforts to cause each person who may be deemed to be an
affiliate to deliver to the other party on or prior to the Effective Time a
written agreement to the effect that, in the case of any NACO affiliate, such
person will not offer or sell or otherwise dispose of any of the ABC common
stock issued to such person pursuant to the Merger except pursuant to an
effective registration statement or in compliance with Rule 145 or an exemption
from registration under the Securities Act and, in the case of any NACO
affiliate or ABC affiliate, such person will not offer or sell or otherwise
dispose of any ABC common stock in a way that would adversely affect the
qualification of the Merger for "pooling of interests" accounting treatment.
ACCOUNTING TREATMENT
For financial accounting purposes, we expect the Merger to be accounted for
under the "pooling-of-interests" method of accounting (as defined by Accounting
Principle Board Opinion #16, "Business Combinations"). It is a condition to the
closing of the Merger that ABC's independent public accountant issues a letter
to the effect that it is appropriate to account for the Merger as a pooling-of-
interests.
NASDAQ LISTING
We expect to list for trading on the Nasdaq National Market System the
additional shares of ABC common stock to be issued in connection with the
merger. It is a condition to the closing of the Merger that such shares be
accepted for listing upon issuance.
ABC RIGHTS AGREEMENT
In September 1995, ABC adopted a Rights Agreement (as amended, the "Rights
Agreement"). Under the Rights Agreement, ABC has issued one preferred share
purchase right (a "Right") for each outstanding share
41
<PAGE>
of ABC common stock. The Rights are currently represented by the certificates
for ABC common stock and do not trade separately from the ABC common stock.
If the Rights were to become exercisable, each Right would entitle the holder
to buy one one-hundredth of a share of ABC preferred stock at price of $150.00
per share, subject to adjustment. The Rights will be exercisable only if a
person or group acquires 15% of the outstanding ABC common stock (such person
or group, an "Acquiring Person") or announces a tender or exchange offer
following which it would hold 15% of the outstanding ABC common stock. If a
person or group becomes an Acquiring Person, each holder of a Right (other than
the rights owned by such person or group, which would be void), would receive,
upon exercise, shares of ABC common stock with a market value of two times the
exercise price of a Right. If, following the time that any person or group
becomes an Acquiring Person, ABC were acquired in a merger or other business
combination, each Right would be exercisable for shares of ABC common stock or
that number of the acquiring company's shares of common stock in each case
having a market value of two times the exercise price of the Rights.
In connection with the negotiation of the Merger Agreement, ABC and NACO agreed
that the ABC board of directors would adopt an amendment to the Rights
Agreement (the "Amendment") immediately prior to the execution of the Merger
Agreement to provide that, notwithstanding anything to the contrary in the
Rights Agreement, the Merger Agreement and the transactions contemplated
thereby will not have any effect under the Rights Agreement. In addition, the
Amendment provides that any person that beneficially owns 15% or more of the
outstanding ABC common stock at the Effective Time will not be deemed to be an
Acquiring Person unless that person acquires (or becomes affiliated or
associated with another person that beneficially owns) additional shares of ABC
common stock representing 1% or more of the then-outstanding ABC common stock.
Further, the Amendment also provides that any redemption of the Rights or any
supplement, modification, amendment or waiver of any provision of the Rights
Agreement by ABC would not be effective unless it is approved by not less than
80% of the members of the ABC Board of Directors then in office. The ABC Board
of Directors adopted the Amendment on September 17, 1998.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion is a summary description of the material federal
income tax consequences of the Merger. The discussion is based upon the
provisions of the Internal Revenue Code, applicable Treasury Regulations
promulgated thereunder, judicial decisions and administrative rulings and
practices, all as in effect on the date of this Proxy Statement/Prospectus, and
does not address any state, local or foreign income or other tax consequences
of the Merger.
The consummation of the Merger is conditioned, among other things, upon the
receipt by ABC of an opinion from Jones, Day, Reavis & Pogue, counsel for ABC,
and the receipt by NACO of an opinion from Schiff, Hardin & Waite, counsel for
NACO, in each case confirming that the Merger will be treated for federal
income tax purposes as a tax-free reorganization under Section 368(a) of the
Code. Such opinions will be based upon certain customary representations that
are expected to be made at the Effective Time by executives of ABC and NACO,
and will be subject to certain assumptions and limitations set forth therein. A
ruling will not be sought from the IRS regarding the Merger. The opinions of
counsel referred to above will not be binding on the IRS, and the IRS may
disagree with the conclusions expressed in such opinions.
Treatment of ABC and Its Stockholders, Merger Subsidiary and NACO
In the opinion of Jones, Day, Reavis & Pogue, the existing stockholders of ABC
will not recognize any gain or loss as a result of the Merger. In addition,
ABC, ABC Acquisition Sub, Inc. and NACO, each of which a party to the
reorganization within the meaning of Section 368(b) of the Code, will also not
recognize any gain or loss as a result of the Merger.
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<PAGE>
Treatment of Holders of NACO Common Stock
The following discussion is not a complete description of all of the federal
income tax consequences of the Merger to holders of NACO common stock, and, in
particular, does not address all aspects of federal income taxation that may be
relevant to a particular holder of NACO common stock in light of such holder's
personal investment or tax circumstances, or to a holder of NACO common stock
that is subject to special treatment under the federal income tax laws
(including life insurance companies, foreign persons, tax-exempt entities,
financial institutions, broker-dealers, or holders who acquired NACO common
stock pursuant to the exercise of employee stock options or otherwise as
compensation). The discussion also assumes that the NACO common stock will be
held as capital assets by the holders thereof at the Effective Time of the
Merger.
EACH HOLDER OF NACO COMMON STOCK IS ADVISED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
In the opinion of Schiff, Hardin & Waite, a holder of NACO common stock who
exchanges such stock solely for ABC common stock will not recognize any gain or
loss. However, to the extent that a holder of NACO common stock receives cash
in lieu of a fractional share, such cash payment will be treated under Section
302 of the Internal Revenue Code as a redemption of the fractional share and
such redemption will be treated as a distribution in full payment in exchange
for such holder's fractional share. A holder who receives cash in lieu of a
fractional share will recognize gain or loss in an amount equal to the
difference between the cash received and the holder's adjusted basis of such
fractional share. Any gain or loss recognized by a holder will, under most
circumstances, be treated as capital gain. The aggregate adjusted basis of ABC
common stock received in the exchange will generally equal such holder's
aggregate adjusted basis in the NACO common stock surrendered. The holding
period for shares of ABC common stock received in exchange for shares of NACO
common stock pursuant to the Merger will include the holding period of the
shares of NACO common stock surrendered, provided such surrendered shares were
held as capital assets by the holders at the Effective Time of the Merger.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as of
October 31, 1998 combines the historical balance sheets of ABC and NACO as if
the Merger had been effective on October 31, 1998, after giving effect to
certain pro forma adjustments described in the accompanying notes.
The following Unaudited Pro Forma Combined Condensed Statements of Operations
are presented as if the Merger had been effective August 1, 1995 after giving
effect to certain pro forma adjustments described in the accompanying notes.
ABC's fiscal year ends on July 31; NACO's fiscal year ends on the Sunday
closest to March 31. We expect that ABC's fiscal year-end will be adopted by
the combined company as the annual financial reporting period. For purposes of
the pro forma data included in this Proxy Statement/Prospectus, the year-ends
of the two companies have not been conformed, as permitted under Regulation S-X
promulgated by the SEC. For purposes of presenting such pro forma data, the
financial position of NACO as of October 25, 1998, June 28, 1998, March 30,
1997 and March 31, 1996 and the results of NACO's operations for the three
months ended October 25, 1998 and September 28, 1997 and the twelve months
ended June 28, 1998, March 30, 1997 and March 31, 1996 are combined with ABC's
financial position as of October 31, 1998, July 31, 1998, 1997 and 1996 and the
results of ABC's operations for the three months ended October 31, 1998 and
1997 and the twelve months ended July 31, 1998, 1997 and 1996, respectively.
Accordingly, revenues of $26.5 million and net loss of $0.1 million, and
revenues of $70.3 million and net income of $0.9 million representing NACO's
results of operations for July 1998 and the period March 31, 1997 to June 29,
1997, respectively, are excluded from the Unaudited Pro Forma Combined
Condensed Statements of Operations.
The Unaudited Pro Forma Combined Condensed Financial Information and notes
thereto reflect the application of the pooling-of-interests method of
accounting for the Merger. Under this method of accounting, the recorded
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<PAGE>
assets, liabilities, income and expenses of ABC and NACO are combined and
recorded at their historical cost amounts, except as noted below.
As permitted in a pooling-of-interests business combination, the Unaudited Pro
Forma Combined Financial Information reflects certain adjustments to conform
the accounting policies of both companies, as described in Note 2 to the
Unaudited Pro Forma Combined Condensed Financial Information. These adjustments
retroactively conform, for all periods presented, the accounting policies of
both companies, consistent with the intent to present both companies as though
they had always been combined.
ABC-NACO expects to record material pre-tax special charges which could
aggregate from $15 million to $20 million ($11 million to $14 million after-
tax) following consummation of the Merger to cover the direct costs of the
Merger, the cost of integrating certain aspects of the businesses of ABC and
NACO, the cost of asset rationalizations and employee terminations to eliminate
duplicate functions and excess capacity, and debt refinancing costs. These
special charges were not included in the Unaudited Pro Forma Combined Condensed
Statements of Operations or Balance Sheet. Management estimates that
incremental capital expenditures of approximately $9 million over a period of
18 months following consummation of the Merger will also be necessary to
implement the actions necessary to achieve the synergy benefits described
herein.
The Unaudited Pro Forma Combined Condensed Financial Information also does not
reflect synergistic savings that management believes may be realized following
the Merger. The ABC and NACO management teams have preliminarily estimated
annual pre-tax synergy improvements of between $20 million and $25 million
following completion of the merger. Management estimates that $2.5 million to
$2.75 million of these synergies can be achieved in fiscal 1999; $18 million to
$22 million can be achieved in fiscal 2000; and the entire $20 million to $25
million annually thereafter. Management expects the transaction to be accretive
to earnings per share during fiscal 1999 before special charges and before
estimated synergies benefits. For example, if the transaction had occurred on
August 1, 1998, the pro forma effect on ABC's diluted earnings per share for
the quarter ended October 31, 1998 is accretive by $0.13 per share.
The Unaudited Pro Forma Combined Condensed Financial Information should be read
in conjunction with, and are qualified in their entirety by, the separate
historical consolidated financial statements and notes thereto of ABC and NACO.
The financial statements of ABC are incorporated by reference into this Proxy
Statement/Prospectus; the financial statements of NACO appear elsewhere herein.
The Unaudited Pro Forma Combined Condensed Financial Information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred had the Merger
been consummated at the dates indicated, nor is it indicative of future
operating results or financial position of the merged companies.
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<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and marketable securities.... $ -- $ 487 $ -- $ 487
Account receivable, net........... 56,185 42,523 -- 98,708
Inventories, net.................. 59,450 23,719 -- 83,169
Other current assets.............. 6,213 5,411 -- 11,624
-------- -------- ------- --------
Total current assets............ 121,848 72,140 -- 193,988
Property, plant and equipment,
net.............................. 146,047 66,017 -- 212,064
Investment in unconsolidated joint
ventures......................... 14,731 -- -- 14,731
Other non-current assets.......... 35,210 688 -- 35,898
-------- -------- ------- --------
Total assets.................... $317,836 $138,845 $ -- $456,681
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Cash overdrafts................... $ 5,145 $ 2,309 $ -- $ 7,454
Accounts payable.................. 34,621 40,914 -- 75,535
Accrued liabilities............... 14,733 16,341 -- 31,074
Current maturities of long-term
debt............................. 2,985 8,299 -- 11,284
-------- -------- ------- --------
Total current liabilities....... 57,484 67,863 -- 125,347
Long-term debt, less current
maturities....................... 161,251 44,405 -- 205,656
Other noncurrent liabilities...... 12,893 16,627 1,935 (c) 31,455
Common stock...................... 90 6 -- 96
Paid-in capital................... 67,798 271 -- 68,069
Retained earnings................. 18,320 10,315 (1,935)(c) 26,700
Cumulative translation
adjustment....................... -- (642) -- (642)
-------- -------- ------- --------
Total stockholders' equity...... 86,208 9,950 (1,935) 94,223
-------- -------- ------- --------
Total liabilities and
stockholders' equity........... $317,836 $138,845 $ -- $456,681
======== ======== ======= ========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this balance sheet.
45
<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales......................... $77,514 $92,371 $ (451)(b) $169,434
Cost of sales..................... 69,566 76,262 (2,671)(a,c) 143,157
------- ------- ------- --------
Gross profit.................... 7,948 16,109 2,220 26,277
Selling, general and
administrative expenses.......... 4,648 9,085 2,621 (a) 16,354
------- ------- ------- --------
Operating income................ 3,300 7,024 (401) 9,923
Equity income of unconsolidated
joint ventures................... (175) -- -- (175)
Interest expense.................. 2,414 1,328 -- 3,742
Other non-operating expense....... -- 451 (451)(b) --
------- ------- ------- --------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item.. 1,061 5,245 50 6,356
Provision for income taxes........ 446 2,150 20 (d) 2,616
------- ------- ------- --------
Income before cumulative effect
of accounting change and
extraordinary item............. $ 615 $ 3,095 $ 30 $ 3,740
======= ======= ======= ========
Income before cumulative effect of
accounting change and
extraordinary item per share:
Basic........................... $ 0.07 $ 0.21
Diluted......................... $ 0.07 $ 0.20
Weighted average shares
outstanding:
Basic........................... 8,976 17,883
Diluted......................... 9,140 18,519
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this financial statement.
46
<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales......................... $67,885 $70,727 $ (356)(b) $138,256
Cost of sales..................... 61,093 60,901 (2,628)(a,c) 119,366
------- ------- ------- --------
Gross profit.................... 6,792 9,826 2,272 18,890
Selling, general and
administrative expenses.......... 3,622 6,647 2,578 (a) 12,847
------- ------- ------- --------
Operating income................ 3,170 3,179 (306) 6,043
Equity income of unconsolidated
joint ventures................... (401) -- -- (401)
Interest expense.................. 2,314 1,393 -- 3,707
Other non-operating expense....... -- 356 (356)(b) --
------- ------- ------- --------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item.... 1,257 1,430 50 2,737
Provision for income taxes........ 552 812 20 (d) 1,384
------- ------- ------- --------
Income before cumulative effect of
accounting change and
extraordinary item............... $ 705 $ 618 $ 30 $ 1,353
======= ======= ======= ========
Income before cumulative effect of
accounting change and
extraordinary item per share:
Basic........................... $ 0.08 $ 0.08
Diluted......................... $ 0.08 $ 0.07
Weighted average shares
outstanding:
Basic........................... 8,954 17,826
Diluted......................... 9,073 18,417
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this financial statement.
47
<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales....................... $319,038 $317,613 $(1,730)(b) $634,921
Cost of sales................... 281,707 268,495 (9,106)(a,c) 541,096
-------- -------- ------- --------
Gross profit.................. 37,331 49,118 7,376 93,825
Selling, general and
administrative expenses........ 18,741 30,190 8,893 (a) 57,824
-------- -------- ------- --------
Operating income.............. 18,590 18,928 (1,517) 36,001
Equity income of unconsolidated
joint ventures................. (1,616) -- -- (1,616)
Interest expense................ 8,124 5,738 -- 13,862
Other non-operating expense..... -- 1,730 (1,730)(b) --
-------- -------- ------- --------
Income before income taxes,
cumulative effect of
accounting change and
extraordinary item........... 12,082 11,460 213 23,755
Provision for income taxes...... 4,690 4,826 85 (d) 9,601
-------- -------- ------- --------
Income before cumulative
effect of accounting change
and extraordinary item....... $ 7,392 $ 6,634 $ 128 $ 14,154
======== ======== ======= ========
Income before cumulative effect
of accounting change and
extraordinary item per share:
Basic......................... $ 0.82 $ 0.79
Diluted....................... $ 0.81 $ 0.77
Weighted average shares
outstanding:
Basic......................... 8,969 17,850
Diluted....................... 9,121 18,474
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this financial statement.
48
<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales...................... $259,190 $277,726 $(1,198)(b) $535,718
Cost of sales.................. 232,069 241,786 (8,078)(a,c) 465,777
-------- -------- ------- --------
Gross profit................. 27,121 35,940 6,880 69,941
Selling, general and
administrative expenses....... 14,232 27,532 7,865 (a) 49,629
Wilsons asset liquidation
gain.......................... -- (1,430) -- (1,430)
-------- -------- ------- --------
Operating income............. 12,889 9,838 (985) 21,742
Equity income of unconsolidated
joint ventures................ (1,041) -- -- (1,041)
Interest expense............... 7,378 5,242 -- 12,620
Other non-operating expense.... -- 1,198 (1,198)(b) --
-------- -------- ------- --------
Income before income taxes,
cumulative effect of
accounting change and
extraordinary item.......... 6,552 3,398 213 10,163
Provision for income taxes..... 2,951 878 85 (d) 3,914
-------- -------- ------- --------
Income before cumulative
effect of accounting change
and extraordinary item...... $ 3,601 $ 2,520 $ 128 $ 6,249
======== ======== ======= ========
Income before cumulative effect
of accounting change and
extraordinary item per share:
Basic........................ $ 0.41 $ 0.36
Diluted...................... $ 0.41 $ 0.34
Weighted average shares
outstanding:
Basic........................ 8,709 17,593
Diluted...................... 8,789 18,145
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this financial statement.
49
<PAGE>
ABC-NACO INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS PRO FORMA
ABC NACO (SEE NOTE 2) COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales....................... $240,664 $279,758 $(1,213)(b) $519,209
Cost of sales................... 209,290 245,600 (6,421)(a,c) 448,469
-------- -------- ------- --------
Gross profit.................. 31,374 34,158 5,208 70,740
Selling, general and
administrative expenses........ 12,290 24,375 6,204 (a) 42,869
Wilsons asset impairment
charge......................... -- 2,800 -- 2,800
Special charge.................. 3,155 -- -- 3,155
-------- -------- ------- --------
Operating income.............. 15,929 6,983 (996) 21,916
Settlement of litigation........ (2,800) -- -- (2,800)
Equity loss of unconsolidated
joint ventures................. 144 -- -- 144
Interest expense................ 5,411 4,115 -- 9,526
Other non-operating expense..... -- 1,536 (1,213)(b) 323
-------- -------- ------- --------
Income before income taxes,
cumulative effect of
accounting change and
extraordinary item........... 13,174 1,332 217 14,723
Provision for income taxes...... 4,726 726 87 (d) 5,539
-------- -------- ------- --------
Income before cumulative
effect of accounting change
and extraordinary item....... $ 8,448 $ 606 $ 130 $ 9,184
======== ======== ======= ========
Income before cumulative effect
of accounting change and
extraordinary item per share:
Basic......................... $ 1.05 $ 0.54
Diluted....................... $ 1.03 $ 0.52
Weighted average shares
outstanding:
Basic......................... 8,062 16,983
Diluted....................... 8,220 17,613
</TABLE>
The accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information are an integral part of this financial statement.
50
<PAGE>
ABC-NACO INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
NOTE 1--BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Condensed Financial Information assumes the
issuance of shares of ABC common stock and common stock equivalents in exchange
for all outstanding shares of NACO common stock and common stock equivalents at
an exchange ratio of 8.7. Such financial information also assumes that the
Merger will be accounted for using the pooling-of-interests method of
accounting pursuant to Opinion No. 16 of the Accounting Principles Board. The
pooling-of-interests method of accounting assumes that the combining companies
have been merged from their inception, and the historical financial statements
for periods prior to consummation of the Merger are restated as though the
companies had been combined from their inception.
Pursuant to the rules and regulations of the SEC, the Unaudited Pro Forma
Combined Condensed Statements of Operations exclude the results of operations
associated with extraordinary items and cumulative effects of accounting
changes. The Unaudited Pro Forma Combined Condensed Financial Information do
not give effect to any cost savings which may result from the integration of
ABC's and NACO's operations, nor do they include the special charges directly
related to the Merger, which will be incurred to complete the Merger and to
achieve such savings.
The following Unaudited Pro Forma Combined Condensed Statements of Operations
are presented as if the Merger had been effective August 1, 1995. ABC's fiscal
year ends on July 31; NACO's fiscal year ends on the Sunday closest to March
31. ABC's fiscal year-end will be adopted by the combined entity as the annual
financial reporting period. For purposes of the pro forma data included in this
Proxy Statement/Prospectus, the year-ends of the two companies have not been
conformed, as permitted under Regulation S-X promulgated by the SEC. For
purposes of presenting such pro forma data, the financial position of NACO as
of October 25, 1998, June 28, 1998, March 30, 1997 and March 31, 1996 and the
results of NACO's operations for the three months ended October 25, 1998 and
September 28, 1997 and the twelve months ended June 28, 1998, March 30, 1997
and March 31, 1996 are combined with ABC's financial position as of October 31,
1998, July 31, 1998, 1997 and 1996 and the results of ABC's operations for the
three months ended October 31, 1998 and 1997 and the twelve months ended July
31, 1998, 1997 and 1996, respectively. Accordingly, revenues of $26.5 million
and net loss of $0.1 million, and revenues of $70.3 million and net income of
$0.9 million representing NACO's results of operations for July 1998 and the
period March 31, 1997 to June 29, 1997, respectively, are excluded from the
Unaudited Pro Forma Combined Condensed Statements of Operations.
NOTE 2--ADJUSTMENTS TO CONFORM ACCOUNTING POLICIES
As permitted in a pooling-of-interests business combination, the Unaudited Pro
Forma Combined Condensed Financial Information reflects certain adjustments to
conform the accounting policies of both companies. The pro forma adjustments
are as follows:
(a) ABC and NACO had classified certain types of plant and administrative costs
differently in their respective classified statements of operations. Such
expenses primarily related to plant-level salaried employee bonuses,
accounting salaries and related costs, and information system costs. All
such expenses which were classified in the historical financial statements
as a component of cost of sales have been reclassified as selling, general
and administrative expenses in order to conform the presentation of such
expenses.
(b) ABC and NACO had classified cash discounts taken by customers differently
in their respective classified statements of operations. Such discounts
which were classified in the NACO historical financial statements as a
component of other non-operating expense were reclassified as a reduction
of net sales in order to conform the presentation of such discounts.
(c) Conformity in the method of original adoption of Statement of Financial
Accounting Standards No. 106--"Employers Accounting for Postretirement
Benefits Other Than Pensions." ABC chose to recognize the
51
<PAGE>
ABC-NACO INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION--(CONTINUED)
1993 transition obligation ratably over a 20-year period. NACO chose the
option of immediate recognition. ABC-NACO will follow the immediate
recognition method.
(d) Estimated provision for income taxes related to pro forma adjustments
described at (c) above are based on an assumed combined federal and state
income tax rate of approximately 40%.
As a result, these adjustments retroactively conform, for all periods
presented, the accounting policies of both companies, consistent with the
intent to present both entities as though they had always been combined.
NOTE 3--MERGER-RELATED CHARGES AND POTENTIAL SAVINGS
ABC-NACO expects to record material pre-tax special charges which could
aggregate from $15 million to $20 million ($11 million to $14 million after-
tax) following consummation of the Merger to cover the direct costs of the
Merger, the cost of integrating certain aspects of the businesses of ABC and
NACO, the cost of asset rationalizations and employee terminations to eliminate
duplicate functions and excess capacity and debt refinancing costs. Such costs
are expected to be incurred within eighteen months after the Merger and
substantially all such costs are expected to require the outlay of cash. These
special charges were not included in the Unaudited Pro Forma Combined Condensed
Statements of Operations or Balance Sheet. Management estimates that
incremental capital expenditures of approximately $9 million over a period of
eighteen months following consummation of the Merger will be necessary to
implement the actions necessary to achieve the synergy benefits described
above. See "The Merger--Benefits of the Merger" and "--Management and
Operations After the Merger."
While there can be no assurance as to the achievement of the combined company's
business and financial goals, ABC and NACO currently expect to achieve about
$20 million to $25 million in annual pre-tax synergies as a result of the
Merger. Management estimates that $2.5 million to $2.75 million of these
synergies can be achieved during fiscal 1999, $18 million to $22 million in
fiscal year 2000 and the entire $20 million to $25 million annually thereafter.
In arriving at the estimated synergies, management of ABC and NACO have
estimated that $13 million to $16 million in annual benefits can be obtained by
applying NACO's manufacturing technology and know-how to the combined company's
foundry operations, thus reducing the number of wheels that must be scrapped.
Also, increasing production at ABC's Calera plant by manufacturing only high-
volume wheels at that plant and shifting production of low volume products to
other plants more suited to such volumes should contribute to these benefits.
Management also estimates that $4 million to $5 million in annual benefits can
be obtained by improvements to other manufacturing operations by applying
NACO's technology to other ABC plants and alternative production sourcing
within the combined company. Finally, management expects that the remaining
amount of estimated annual benefits can be obtained through enhanced revenues
and combining general and administrative functions and eliminating duplication.
Enhanced revenues are expected to be achieved through the introduction of the
sale of a greater number of products within the combined company's wheel
assembly and distribution facilities as well as through expanding such
facilities.
NOTE 4--NET PER SHARE DATA
The pro forma combined per share data has been computed based on the combined
historical income from continuing operations as adjusted for retroactive
changes in certain accounting methods of both companies in order to achieve
conformity. The weighted average number of shares outstanding for the periods
presented was calculated to give effect to shares assumed to be issued under
the terms of the Merger Agreement, as if the
52
<PAGE>
Merger and stock issuance had occurred at the beginning of the periods
presented. For purposes of this calculation, ABC's weighted average common and
equivalent shares outstanding were increased by NACO's weighted average common
and equivalent shares outstanding (as adjusted by multiplying by the exchange
ratio of 8.7) for each period presented.
NACO SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial data of NACO as of and for
the periods indicated. The selected historical financial data of NACO as of
March 29, 1998 and March 30, 1997 and for each of the three years in the period
ended March 29, 1998, have been derived from the audited financial statements
of NACO included in this Proxy Statement/Prospectus. The selected historical
financial data of NACO as of March 31, 1996, April 2, 1995 and April 3, 1994
and for each of the two years in the period ended April 2, 1995 are derived
from the audited financial statements of NACO not included herein. The selected
historical financial data of NACO as of September 27, 1998 and September 28,
1997 and for each of the six month periods then ended are derived from the
unaudited financial statements of NACO included in this Proxy
Statement/Prospectus and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of NACO for
such interim periods. The NACO results for the six months ended September 27,
1998 are not necessarily indicative of the NACO results to be expected for the
full fiscal year. The information set forth below should be read in conjunction
with the NACO financial statements and the related notes thereto included under
"NACO Consolidated Financial Statements" herein and the information set forth
in "NACO Management's Discussion and Analysis of Financial Condition and
Results of Operations," included herein.
53
<PAGE>
NACO, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------------- ---------------------------
MARCH 29, MARCH 30, MARCH 31, APRIL 2, APRIL 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996 1995 1994(1) 1998(2) 1997
--------- --------- --------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $303,258 $277,726 $279,758 $230,484 $145,823 $174,838 $141,052
Cost of sales........... 256,866 241,786 245,600 201,695 130,375 147,070 120,566
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 46,392 35,940 34,158 28,789 15,448 27,768 20,486
Selling, general and
administrative
expenses............... 29,065 27,532 24,375 16,751 11,840 16,437 13,484
Wilsons asset impairment
charge and liquidation
(gain)(3).............. -- (1,430) 2,800 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income from
operations............ 17,327 9,838 6,983 12,038 3,608 11,331 7,002
Other expense, net...... (1,717) (1,198) (1,536) (1,046) (643) (1,010) (806)
Interest expense........ (5,676) (5,242) (4,115) (1,962) (1,116) (2,769) (2,792)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and cumulative
effect of accounting
change................ 9,934 3,398 1,332 9,030 1,849 7,552 3,404
Provision (benefit) for
income taxes(4)........ 4,418 878 726 (1,865) -- 3,033 1,854
-------- -------- -------- -------- -------- -------- --------
Income before
cumulative effect of
accounting change..... 5,516 2,520 606 10,895 1,849 4,519 1,550
Cumulative effect of
accounting change(5)... -- -- -- -- (6,089) -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 5,516 $ 2,520 $ 606 $ 10,895 $ (4,240) $ 4,519 $ 1,550
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Basic:
Income before
cumulative effect of
accounting change..... $ 5.41 $ 2.47 $ 0.59 $ 10.60 $ 1.99 $ 4.42 $ 1.52
Net income (loss)...... $ 5.41 $ 2.47 $ 0.59 $ 10.60 $ (4.55) $ 4.42 $ 1.52
Weighted average common
shares outstanding
(000's)............... 1,020 1,021 1,025 1,028 931 1,023 1,019
Diluted:
Income before
cumulative effect of
accounting change..... $ 5.13 $ 2.34 $ 0.56 $ 10.60 $ 1.99 $ 4.19 $ 1.44
Net income (loss)...... $ 5.13 $ 2.34 $ 0.56 $ 10.60 $ (4.55) $ 4.19 $ 1.44
Weighted average common
shares outstanding
including assumed
exercise of warrant
(000's)............... 1,075 1,075 1,080 1,028 931 1,077 1,074
OPERATING DATA:
Backlog(6).............. $ 98,060 $ 55,915 $ 67,209 $117,433 $ 49,021 $ 97,825 $ 59,656
Depreciation and
amortization........... 10,031 8,373 5,425 3,042 1,740 4,898 4,539
Capital
expenditures(7)........ 15,895 11,307 16,619 10,193 8,798 11,110 4,579
BALANCE SHEET DATA:
Total assets............ $121,370 $109,535 $ 93,542 $ 71,713 $ 50,407 $135,441 $113,087
Total debt (including
cash overdrafts)....... 53,797 54,938 45,258 21,082 20,577 57,217 55,512
Stockholders' equity
(deficit).............. 5,370 (37) (2,323) (4,364) (15,525) 9,543 1,471
</TABLE>
- --------
(1) Results of operations for fiscal 1993 were adversely affected by a flood
which damaged one facility and a fire at another facility.
(2) Results of operations for the six months ended September 27, 1998 were
adversely affected by a six-day work stoppage at one facility (Hamilton)
and a four-day work stoppage at another facility (Sahagun). Management has
estimated that these work stoppages adversely affected sales by
approximately $2.2 million and income from operations by approximately $0.9
million during this period.
(3) NACO recorded a $2.8 million write-down in fiscal 1995 and a liquidation
gain of $1.4 million in fiscal 1996 in connection with certain actions
taken with respect to its Wilsons facility. See "NACO
54
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations," included herein.
(4) Income taxes were not recorded in fiscal 1993 because any taxable income
was offset by previously reserved net operating loss carryforwards.
(5) NACO adopted the provisions of Statement of Accounting Standards No. 106,
Employer's Accounting for Postretirement Benefits Other Than Pensions,
effective March 29, 1993. NACO elected to recognize immediately the
cumulative effect of this accounting change, which caused NACO to record an
after-tax charge of $6.1 million.
(6) The Company's backlog is based upon actual customer purchase orders that
the Company believes are firm and does not include purchase orders
anticipated, but not yet placed, in connection with ongoing customer
retrofit or production programs.
(7) Excludes expenditures for business acquisitions.
55
<PAGE>
NACO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of NACO's consolidated financial
condition and consolidated results of operation should be read in conjunction
with "NACO Selected Historical Financial Data" and NACO's Consolidated
Financial Statements and Notes thereto appearing under "NACO Consolidated
Financial Statements." This discussion contains certain forward-looking
statements which involve risks and uncertainties. NACO's actual results could
differ materially from the results expressed in, or implied by, such
statements. See "Cautionary Statement Concerning Forward-Looking Statements."
INTRODUCTION
NACO is the parent company of National Castings, Inc. ("NCI"), which was formed
in 1985 to acquire a substantial portion of the assets of the steel casting
operations of Midland-Ross Corporation's National Castings Division. NACO
subsequently purchased the Keokuk, Iowa facility (the "Keokuk Facility") in
1987; the Hamilton, Ontario, Canada facility (the "Hamilton Facility") in 1993;
the Leven, Fife, Scotland facility (the "Levin Facility") in 1994; Wilsons
Foundry and Engineering Company Limited (the "Wilsons Facility") in Bishop
Auckland, England in 1994 (which ceased operations and was liquidated in 1996);
the Richmond, Texas facility (the "Richmond Facility") in 1996; and the
Sahagun, Hidalgo, Mexico facility (the "Sahagun Facility") in 1996.
NACO reports its operations in three segments: (i) Rail Products Group; (ii)
Flow Products Group; and (iii) Other, which includes the current operations of
the Leven Facility and the discontinued operations of the Wilsons Facility. In
order to maximize production capacity to satisfy changes in demand for flow
control products and railroad products, NACO has historically manufactured and
included certain flow control products in its Rail Products Group and certain
railroad products in its Flow Products Group. The following table summarizes
net sales for NACO's operating segments and net sales by product group within
these operating segments, as well as its intercompany sales, for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
MARCH 29, 1998 MARCH 30, 1997 MARCH 31, 1996
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Rail Products:
Rail....................... $213,074 70.3% $190,031 68.4% $197,233 70.5%
Flow....................... 626 0.2 -- -- -- --
-------- ----- -------- ----- -------- -----
Total...................... 213,700 70.5 190,031 68.4 197,233 70.5
Flow Products:
Rail....................... 18,288 6.0 19,793 7.1 29,701 10.6
Flow....................... 64,242 21.2 54,205 19.5 36,156 12.9
-------- ----- -------- ----- -------- -----
Total...................... 82,530 27.2 73,998 26.6 65,857 23.5
Other:
Rail....................... 2,753 0.9 1,333 0.5 3,759 1.3
Flow....................... 6,389 2.1 12,633 4.5 14,113 5.1
-------- ----- -------- ----- -------- -----
Total...................... 9,142 3.0 13,966 5.0 17,872 6.4
Intercompany................. (2,114) (0.7) (269) -- (1,204) (0.4)
-------- ----- -------- ----- -------- -----
Total net sales.............. $303,258 100.0% $277,726 100.0% $279,758 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ---------------------------------
SEPT. 27, SEPT. 28,
1998 1997 SEPT. 27, 1998 SEPT. 28, 1997
-------------- -------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rail Products Group:
Rail.................. $67,831 75.2 % $49,315 69.7 % $130,852 74.8 % $ 96,065 68.1 %
Flow.................. 633 0.7 -- 0.0 827 0.5 -- 0.0
------- ----- ------- ----- -------- ----- -------- -----
Total................. 68,464 75.9 49,315 69.7 131,679 75.3 96,065 68.1
Flow Products Group:
Rail.................. 4,344 4.8 3,981 5.6 7,630 4.4 9,744 6.9
Flow.................. 15,351 17.0 15,602 22.1 31,137 17.8 31,630 22.4
------- ----- ------- ----- -------- ----- -------- -----
Total................. 19,695 21.8 19,583 27.7 38,767 22.2 41,374 29.3
Other:
Rail.................. 930 1.0 494 0.7 1,880 1.1 784 0.5
Flow.................. 1,938 2.2 1,544 2.2 4,176 2.4 3,040 2.2
------- ----- ------- ----- -------- ----- -------- -----
Total................. 2,868 3.2 2,038 2.9 6,056 3.5 3,824 2.7
Intercompany............ (869) (0.9) (209) (0.3) (1,664) (1.0) (211) (0.1)
------- ----- ------- ----- -------- ----- -------- -----
Total net sales......... $90,158 100.0 % $70,727 100.0 % $174,838 100.0 % $141,052 100.0 %
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
NACO's fiscal year ends on the Sunday closest to March 31. Fiscal 1997 ended on
March 29, 1998; fiscal 1996 ended on March 30, 1997; fiscal 1995 ended on March
31, 1996.
NACO's improved net sales over the last several years are attributable
primarily to an increased demand for cast steel products in the railroad supply
and flow control supply markets. In particular, NACO has benefitted from
increased demand for its proprietary products, expanded its manufacturing
capabilities, and, as a result of strategic acquisitions, increased
manufacturing capacity. NACO also has benefitted from improved economic
conditions, industry trends and the specific factors described herein.
NACO's Rail Products Group has capitalized on its design and development of
proprietary product designs and its improvement in its engineering and
manufacturing capabilities to increase sales of freight car trucks.
Approximately 70% of the Rail Products Group's sales of freight car products in
both fiscal 1997 and the six months ended September 27, 1998 were sales of
freight car trucks using its high performance Swing Motion(TM) suspension
system and trucks using the Barber(R) suspension system. NACO sells its freight
car products to the new equipment market and the repair, replacement and
retrofit market. During the past three fiscal years, approximately 40% of the
freight car products sold by NACO were for repair, replacement or retrofit
programs for the existing North American freight car fleet. NACO's success in
selling its proprietary products for major retrofit programs is attributable to
customer demand for products that provide improved ride quality and lower
overall life cycle costs.
The Rail Products Group also sells railroad products which are produced in
accordance with customer-owned designs and specifications, including locomotive
truck frames and other cast steel products used on locomotives as well as
assembly services for certain types of locomotive trucks. Substantially all of
NACO's locomotive sales are for the construction of new locomotives in North
America. The significant increases in NACO's sales to the locomotive market
over the past three fiscal years are attributable to an increase in demand for
larger and more technologically advanced locomotives produced by NACO's
customers.
The Flow Products Group engineers and manufactures steel and high alloy valve
housings and related castings for manufacturers of industrial flow control
systems. While NACO sells valve housings and related castings primarily to
manufacturers of flow control systems, it believes a significant portion of the
products it sells are used to repair, replace or upgrade existing flow control
systems. The major factors contributing to the increase in the sales of the
Flow Products Group over the last three fiscal years are (i) NACO's acquisition
of the
57
<PAGE>
Richmond Facility from Cooper Cameron Corp. at the end of fiscal 1995, (ii)
NACO's entering into a supply agreement with Cooper Cameron Corp. at the end of
fiscal 1995 and (iii) NACO's increasing penetration in the flow control supply
market. The Flow Products Group's results historically have included certain
railroad castings, which accounted for approximately 22%, 27%, 45% and 20% of
net sales of the Flow Products Group in fiscal 1997, 1996 and 1995 and the six
months ended September 27, 1998, respectively. In order to maximize production
capacity to increase sales to its flow control customers, NACO initiated a
program in late fiscal 1996 to relocate the production of certain locomotive
products from the Keokuk Facility to the Sahagun Facility and the Hamilton
Facility. While this program is expected to be completed in fiscal 1998, NACO
expects to continue to manufacture locomotive products at the Keokuk Facility
as and when the need requires. NACO also includes in its Flow Products Group
the sales of products for military replacement, large on- and off-highway
vehicles, pumps and similar heavy capital goods not used in the flow control
industry which in total accounted for approximately 6%, 8%, 8% and 7% of
reported sales of the Flow Products Group in fiscal 1997, 1996 and 1995 and the
six months ended September 27, 1998, respectively.
NACO has taken several steps to augment its manufacturing capacity and
capabilities in response to increased demand for its products. In March 1996,
NACO significantly expanded the capacity and capabilities of its Flow Products
Group with the acquisition of the Richmond Facility, including its inventories,
machinery and equipment. In July 1996, NACO acquired the Sahagun Facility in a
court-approved public bidding process arising out of a bankruptcy, and is
currently in the process of converting and expanding a portion of the Sahagun
Facility into a state-of-the-art railroad products casting facility. In
addition, NACO has three supply arrangements in place with casting facilities
in three countries designed to provide NACO with additional manufacturing
capacity and flexibility. The majority of the products NACO purchases through
its supply arrangements are finished products manufactured in accordance with
NACO's specifications and, with the exception of any final inspection, are
delivered directly to customers. NACO's sales of products purchased from supply
arrangements accounted for 4.7%, 5.0%, 5.1% and 4.7% of consolidated net sales
in fiscal 1997, 1996 and 1995 and the six months ended September 27, 1998,
respectively.
The comparability of operating results for the last three fiscal years is
affected by several events related to the cessation of operations in fiscal
1996 of the Wilsons Facility. NACO acquired the facility in February 1994 and
recorded an asset impairment charge of $2.8 million in fiscal 1995 reflecting
the write-down of certain assets at the Wilsons Facility. Following continued
operating losses, NACO entered into a Company Voluntary Arrangement ("CVA") in
May 1996 under United Kingdom insolvency laws. During fiscal 1996, operating
losses of the Wilsons Facility exceeded the maximum cumulative losses allowed
by the CVA. NACO declined to provide further funding which led the CVA
supervisor to declare a failure of the CVA and to appoint receivers in
September 1996. The receivers liquidated the assets of the Wilsons Facility
with the proceeds applied to liquidation costs and claims of creditors,
exclusive of intercompany indebtedness. At liquidation, the liabilities of the
Wilsons Facility exceeded its written down asset values carried in NACO's
consolidated financial statements, which resulted in a liquidation gain for
NACO in fiscal 1996 of $1.4 million. See Note 13 of the Notes to the
Consolidated Financial Statements of NACO Inc.
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NACO RESULTS OF OPERATIONS
The following table sets forth results of operations data in dollar amounts and
as a percentage of NACO's net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
MARCH 29, 1998 MARCH 30, 1997 MARCH 31, 1996
--------------- --------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Sales.................. $303,258 100.0 $277,726 100.0 $279,758 100.0
Cost of Sales.............. 256,866 84.7 241,786 87.1 245,600 87.8
-------- ----- -------- ----- -------- -----
Gross Profit............. 46,392 15.3 35,940 12.9 34,158 12.2
Selling, General and
Administrative Expenses... 29,065 9.6 27,532 9.9 24,375 8.7
Wilsons Asset Impairment
Charge and Liquidation
(Gain).................... -- -- (1,430) (0.5) 2,800 1.0
-------- ----- -------- ----- -------- -----
Income from Operations... 17,327 5.7 9,838 3.5 6,983 2.5
Other Expense, net......... (1,717) (0.5) (1,198) (0.4) (1,536) (0.5)
Interest Expense........... (5,676) (1.9) (5,242) (1.9) (4,115) (1.5)
-------- ----- -------- ----- -------- -----
Income before Income
Taxes................... 9,934 3.3 3,398 1.2 1,332 0.5
Provision for Income
Taxes..................... (4,418) (1.5) (878) (0.3) (726) (0.3)
-------- ----- -------- ----- -------- -----
Net Income................. $ 5,516 1.8 $ 2,520 0.9 $ 606 0.2
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ --------------------------------
SEPT. 27, SEPT. 28,
1998 1997 SEPT. 27, 1998 SEPT. 28, 1997
-------------- -------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- -------- ----- -------- -----
(UNAUDITED) (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............... $90,158 100.0% $70,727 100.0% $174,838 100.0% $141,052 100.0%
Cost of sales........... 75,776 84.0 60,901 86.1 147,070 84.1 120,566 85.5
------- ----- ------- ----- -------- ----- -------- -----
Gross Profit.......... 14,382 16.0 9,826 13.9 27,768 15.9 20,486 14.5
Selling, General and
Administrative
Expenses............... 8,475 9.4 6,647 9.4 16,437 9.4 13,484 9.5
------- ----- ------- ----- -------- ----- -------- -----
Income from
Operations........... 5,907 6.6 3,179 4.5 11,331 6.5 7,002 5.0
Other Expense, net...... (547) (0.6) (356) (0.5) (1,010) (0.6) (806) (0.6)
Interest Expense........ (1,308) (1.5) (1,393) (2.0) (2,769) (1.6) (2,792) (2.0)
------- ----- ------- ----- -------- ----- -------- -----
Income before Income
Taxes................ 4,052 4.5 1,430 2.0 7,552 4.3 3,404 2.4
Provision for Income
Taxes.................. (1,583) (1.8) (812) (1.1) (3,033) (1.7) (1,854) (1.3)
------- ----- ------- ----- -------- ----- -------- -----
Net Income.............. $ 2,469 2.7% $ 618 0.9% $ 4,519 2.6% $ 1,550 1.1%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
NACO THREE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 28, 1997
Net Sales
Net sales increased by $19.4 million, or 27.5%, from $70.7 million in the three
months ended September 28, 1997 to $90.2 million in the three months ended
September 27, 1998. Sales for the Rail Products Group increased by $19.1
million, or 38.8%, from $49.3 million in the three months ended September 28,
1997 to $68.5 million in the three months ended September 27, 1998. The
principal reasons for this increase were an increase in sales of both Swing
Motion and Barber suspension freight car trucks which increased by 49.2% and an
increase in sales of locomotive frames, assemblies and other castings which
increased by 23.4%. Sales in the Flow Products Group were substantially the
same in both quarters at $19.6 million in the three months ended
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<PAGE>
September 28, 1997 and $19.7 million in the three months ended September 27,
1998 with only minor changes in the product mix between rail and valve housing
castings. The Company continues to experience a softening in demand in the flow
products market as a number of the major customers are being affected by, among
other things, the lower prices of oil and lower product demands in Asia and
other international markets. Sales of the Other Segment, which in both three
month periods included only the operations of the Leven Facility, were higher
in the three months ended September 27, 1998 than the prior year's period by
$0.8 million, or 40.7%.
Gross Profit
Gross profit increased 46.4% from $9.8 million, or 13.9% of net sales, in the
three months ended September 28, 1997 to $14.4 million, or 16.0% of net sales,
in the three months ended September 27, 1998. Gross profit of the Rail Products
Group increased by $4.8 million due to the higher sales in the current year's
period, better absorption of fixed costs at the higher revenues and more
favorable product mix. Gross profit of the Flow Products Group decreased by
$0.5 million due primarily to product mix at the foundries. Gross profit of the
Other Segment increased by $0.3 million due to higher sales and the favorable
impact on absorption of fixed costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.8 million, or
27.5%, from $6.6 million, or 9.4% of net sales, in the three months ended
September 28, 1997 to $8.5 million, or 9.4% of net sales, in the three months
ended September 27, 1998. The increase in these expenses in the three months
ended September 27, 1998 from the prior year's period was primarily
attributable to (i) higher compensation and fringe benefits of $1.1 million,
(ii) higher customer related costs for advertising and warranty of $0.2 million
and (iii) higher travel and related costs of $0.2 million.
Income from Operations
Income from operations increased 85.8% from $3.2 million, or 4.5% of net sales,
in the three months ended September 28, 1997 to $5.9 million, or 6.6% of net
sales, in the three months ended September 27, 1998. The increase in operating
income was due to an improvement in both the Rail Products Group and the
Glencast operation which reported income from operations improvements of $4.1
million and $0.5 million, respectively. The income from operations of the Flow
Products Group was lower by $0.5 million and the Corporate Office expenses were
higher by $1.2 million which resulted primarily from higher provisions under
the management bonus program.
Other Expense, net
Other expense, net, was $0.5 million in the three months ended September 27,
1998 which is higher than the prior year's period by $0.2 million. In both
periods, this expense represented the cash discounts offered to customers for
accelerated payments of their account balances.
Interest Expense
Interest expense decreased by $0.1 million from $1.4 million in the three
months ended September 28, 1997 to $1.3 million in the three months ended
September 27, 1998.
Income Taxes
The provision for income taxes increased $0.8 million from $0.8 million in the
three months ended September 28, 1997 to $1.6 million in the three months ended
September 27, 1998 due largely to higher income levels. The effective income
tax rate decreased from 56.8% in the three months ended September 28, 1997 to
39.1% in the three months ended September 27, 1998 which was due in part to
lower losses at the Glencast operation for which the Company has not recorded
any tax benefits.
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<PAGE>
NACO SIX MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER
28, 1997
Net Sales
Net sales increased by $33.8 million, or 24.0%, from $141.1 million in the six
months ended September 28, 1997 to $174.8 million in the six months ended
September 27, 1998. Sales for the Rail Products Group increased by $35.6
million, or 37.1%, from $96.1 million in the six months ended September 28,
1997 to $131.7 million in the six months ended September 27, 1998. The
principal reasons for this increase were an increase in sales of both Swing
Motion and Barber suspension freight car trucks which increased by 41.2% and an
increase in sales of locomotive frames, assemblies and other castings which
increased by 43.2%. Sales in the Rail Products Group in the six months ended
September 27, 1998 were adversely impacted by six-day and four-day work
stoppages during labor negotiation at the Hamilton Facility and the Sahagun
Facility, respectively. Management estimates that sales were adversely affected
by approximately $2.2 million during the work stoppages. Sales in the Flow
Products Group decreased by $2.6 million, or 6.3%, from $41.4 million in the
six months ended September 28 1997 to $38.8 million in the six months ended
September 27, 1998. The decrease occurred during the first quarter and was due
primarily to lower sales of locomotive castings due to the transfer of some of
these products to the Rail Products Group foundries. Sales of valve housings
and related castings were slightly lower during the current year's six month
period. However, the Company continues to experience a softening in demand in
the flow products market as a number of the major customers are being affected
by, among other things, the lower prices of oil and lower product demands in
Asia and other international markets. Sales of the Other Segment, which in both
six month periods included only the operations of the Leven Facility, were
higher in the six months ended September 27, 1998 than the prior year's period
by $2.2 million, or 58.4%.
Gross Profit
Gross profit increased 35.5% from $20.5 million, or 14.5% of net sales, in the
six months ended September 28, 1997 to $27.8 million, or 15.9% of net sales, in
the six months ended September 27, 1998. Gross profit of the Rail Products
Group increased by $6.9 million due to the higher sales in the current year's
period, better absorption of fixed costs at the higher revenues and more
favorable product mix. Gross profit of the Flow Products Group decreased by
$0.6 million due primarily to product mix at the foundries and lower sales.
Gross profit of the Other Segment increased by $1.0 million due to higher sales
and the favorable impact on absorption of fixed costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.0 million, or
21.9%, from $13.5 million, or 9.6% of net sales, in the six months ended
September 28, 1997 to $16.4 million, or 9.4% of net sales, in the six months
ended September 27, 1998. The increase in these expenses in the six months
ended September 27, 1998 from the prior year's period was primarily
attributable to (i) higher compensation and fringe benefits of $1.6 million,
(ii) higher customer related costs for advertising and warranty of $0.3 million
and (iii) higher travel and related costs of $0.3 million.
Income from Operations
Income from operations increased 61.8% from $7.0 million, or 5.0% of net sales,
in the six months ended September 28, 1997 to $11.3 million, or 6.5% of net
sales, in the six months ended September 27, 1998. The increase in operating
income was due to an improvement in both the Rail Products Group and the
Glencast operation which reported income from operations improvements of $5.5
million and $1.1 million, respectively. The income from operations of the Flow
Products Group was lower by $0.6 million and the Corporate Office expenses were
higher by $1.5 million which resulted primarily from higher provisions under
the management bonus program. Management estimates that the work stoppages that
occurred at the Hamilton Facility and the Sahagun Facility during the first
quarter of the six month period ended September 27, 1998 adversely affected
61
<PAGE>
operating income by approximately $0.9 during this six month period, due
primarily to the lost gross profit on the shipments that were not made during
this period as a result of the work stoppages.
Other Expense, Net
Other expense, net, was $1.0 million in the six months ended September 27, 1998
which is higher than the prior year's period by $0.2 million. In both periods,
this expense represented the cash discounts offered to customers for
accelerated payments of their account balances.
Interest Expense
Interest expense was $2.8 million in both six month periods.
Income Taxes
The provision for income taxes increased $1.2 million from $1.9 million in the
six months ended September 28, 1997 to $3.0 million in the six months ended
September 27, 1998 due largely to higher income levels. The effective income
tax rate decreased from 54.5% in the six months ended September 28, 1997 to
40.2% in the six months ended September 27, 1998 which was due in part to lower
losses at the Glencast operation for which the Company has not recorded any tax
benefits.
NACO FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Net sales increased by $25.5 million, or 9.2%, from $277.8 million in fiscal
1996 to $303.3 million in fiscal 1997. The overall increase in net sales was
attributable to increased net sales in each of NACO's two principal products
groups: the Rail Products Group and the Flow Products Group. In the Rail
Products Group, net sales increased $23.7 million, or 12.5% from $190.0 million
in fiscal 1996 to $213.7 million in fiscal 1997. The principal reasons for this
increase were (i) an increase of $19.8 million, or 83.5%, in locomotive casting
and assembly sales attributable to the transfer of the manufacture and sale of
certain locomotive products to the Rail Products Group from the Flow Products
Group and a higher volume of frame and assembly sales, and (ii) an increase in
freight car products sales of $3.9 million, or 2.3%, primarily attributable to
higher sales of freight car trucks. While sales of Swing Motion(TM) trucks
increased substantially, sales of other freight car trucks were significantly
lower due primarily to a slowdown in orders from Canadian customers. In the
Flow Products Group, net sales increased $8.5 million, or 11.5%, from $74.0
million in fiscal 1996 to $82.5 million in fiscal 1997. This increase was
primarily the result of higher sales of valve housings and related castings of
$10.6 million, and was partially offset by lower sales of locomotive castings
of $1.5 million as the production of certain castings was relocated to the Rail
Products Group. Sales of the Other segment, which consisted of the combined
operations of the Wilsons Facility and the Leven Facility, decreased by $4.8
million due to the cessation of operations at the Wilsons Facility in September
1996 and lower sales by the Leven Facility. Sales at the Leven Facility in
fiscal 1997 were impacted by the continued slowdown in orders which resulted
from the unfavorable effect of changes in the British Pound Sterling relative
to other European currencies.
Gross Profit
Gross profit increased 29.1% from $35.9 million, or 12.9% of net sales, in
fiscal 1996 to $46.4 million, or 15.3% of net sales, in fiscal 1997. Gross
profit of the Rail Products Group increased by $9.7 million in fiscal 1997 due
to higher sales of freight car trucks, particularly Swing Motion trucks,
combined with improved operating efficiencies at the Cicero Facility and
increased sales of trucks using Barber(R) suspensions made by the Sahagun
Facility. Gross profit of the Flow Products Group increased by $1.6 million due
primarily to higher sales and improved mix of products at the Keokuk Facility.
The gross profit from the Other segment decreased by $0.7 million due to lower
sales and less absorption of fixed costs at the Leven Facility. In
62
<PAGE>
addition, gross profit benefitted in fiscal 1997 by $1.1 million ($0.3 million
accrued during fiscal 1996) as a result of eliminating a volume discount
arrangement with a customer in return for a future pricing agreement on a
product. The future pricing of the product, which will remain unchanged through
calendar 2000, is approximately 0.3% lower than the average net price for
fiscal 1997 prior to the change.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.5 million, or
5.6%, from $27.5 million, or 9.9% of net sales, in fiscal 1996 to $29.1
million, or 9.6% of net sales, in fiscal 1997. The increase in these expenses
from fiscal 1996 to fiscal 1997 was primarily due to (i) higher compensation
and fringe benefits of $1.7 million, (ii) higher depreciation related to the
development of Company-wide information systems of $0.4 million and (iii)
higher provisions for warranty expense of $0.4 million. The increase was
partially offset by (i) the effect of a severance provision of $0.7 million
recorded in fiscal 1996 without a comparable charge in fiscal 1997 and (ii)
lower licensing fee expenses due to a decrease in sales of freight car trucks
using Barber(R) suspensions made by the Hamilton Facility.
Income from Operations
Income from operations increased 76.1% from $9.8 million, or 3.5% of sales, in
fiscal 1996 to $17.3 million, or 5.7% of sales, in fiscal 1997. This increase
was due primarily to the Rail Products Group whose income from operations
increased by $9.4 million. Income from operations also benefited from the
elimination of a volume discount arrangement with a customer as described
above. In addition, NACO recorded a liquidation gain in fiscal 1996 from the
closure of the Wilsons Facility of $1.4 million, which was partially offset by
a loss of $1.2 million from the Wilsons Facility in the first half of fiscal
1996. Income from operations, excluding the operating results and liquidation
gain attributable to the Wilsons Facility, increased from $9.6 million in
fiscal 1996 to $17.3 million in fiscal 1997.
Other Expense, net
Other expense, net, increased by $0.5 million from $1.2 million in fiscal 1996
to $1.7 million in fiscal 1997. In both fiscal years, the other expense
represents cash discounts offered to customers for accelerated payments of
their account balances. The other expense increase in fiscal 1997 was due
primarily to higher sales and an increase in cash discounts related to the
increase in accelerated payments by customers.
Interest Expense
Interest expense increased $0.4 million from $5.2 million in fiscal 1996 to
$5.7 million in fiscal 1997. This increase was due to higher borrowing levels
and an increase in the weighted average interest rate from 9.4% in fiscal 1996
to 9.9% in fiscal 1997.
Income Taxes
The provision for income taxes increased $3.5 million from $0.9 million in
fiscal 1996 to $4.4 million in fiscal 1997 due largely to higher income levels.
The effective rate for fiscal 1997 was 44.5% which was higher than the U.S.
statutory rate primarily as a result of changes in the valuation allowances
related to foreign net operating loss carryforwards.
NACO FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales
Net sales decreased by $2.0 million, or 0.7%, from $279.8 million in fiscal
1995 to $277.8 million in fiscal 1996. Sales in the Rail Products Group
decreased by $7.2 million, or 3.7%, from $197.2 million in fiscal 1995 to
$190.0 million in fiscal 1996. The major factors affecting this decrease were
(i) a reduction in freight car
63
<PAGE>
product sales by $2.3 million, primarily the result of a slow-down in Canadian
customers' orders, and (ii) a decrease in locomotive product sales of $4.9
million, primarily the result of lower deliveries of truck frames. Sales in the
Flow Products Group increased by $8.1 million, or 12.4%, from $65.9 million in
fiscal 1995 to $74.0 million in fiscal 1996. The major factors contributing to
this increase were higher valve housing and related casting sales of $17.3
million, due to the inclusion of a full year of sales from the recently
acquired Richmond Facility and market expansion benefitting the Keokuk
Facility. The increased valve castings sales were offset by a $9.9 million
decrease in locomotive castings included in the Flow Products Group as
discussed above. The decrease in locomotive sales included in the Flow Products
Group's results was largely due to fewer locomotives being built and a higher
proportion of DC locomotives built on which NACO supplies fewer cast parts than
on the AC locomotives. Sales of the Other segment, which consisted of the
combined operations of the Wilsons Facility and the Leven Facility, decreased
$3.9 million from $17.9 million in fiscal 1995 to $14.0 million in fiscal 1996.
Sales of the Leven Facility increased by $3.2 million from fiscal 1995 to
fiscal 1996, and were offset by a decrease of $7.1 million at the Wilsons
Facility, which ceased operations in September1996.
Gross Profit
Gross profit increased from $34.2 million, or 12.2% of net sales, in fiscal
1995 to $35.9 million, or 12.9% of net sales, in fiscal 1996. Gross profit of
the Rail Products Group decreased by $0.2 million in fiscal 1996 due largely to
reduced margins on lower sales at the Hamilton Facility, which were offset in
part by improved results on higher volumes at the Cicero Facility and the
Sahagun Facility. Gross profit of the Flow Products Group decreased by $1.0
million in fiscal 1996 from the prior fiscal year due to changes in the product
mix at the Keokuk Facility and the loss of a supply source based in India. The
gross profit of the Other segment improved by $3.0 million going from a
negative gross profit of $2.0 million in fiscal 1995 to a positive gross profit
of $1.0 million in fiscal 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.2 million, or
13.0%, from $24.4 million, or 8.7% of net sales, in fiscal 1995 to $27.5
million, or 9.9% of net sales, in fiscal 1996. The increase in these expenses
from fiscal 1995 to fiscal 1996 was primarily due to (i) increased expenses in
fiscal 1996 of $2.6 million due to the addition of new business units added in
the latter part of fiscal 1995 ($1.7 million by NACO Technologies; $0.5 million
by the Richmond Facility; and $0.4 million by the Sahagun Facility), (ii) an
increase in fiscal 1996 of $1.0 million in depreciation related to a new
computer system, (iii) an increase in fiscal 1996 of $0.4 million in travel and
related expenses and (iv) an increase in severance expenses of $0.7 million in
fiscal 1996. These expenses were offset by a reduction in costs at the Wilsons
Facility in fiscal 1996 of $2.3 million due to the cessation of its operations
in September 1996.
Income from Operations
Income from operations increased 40.9% from $7.0 million, or 2.5% of net sales,
in fiscal 1995 to $9.8 million, or 3.5% of net sales, in fiscal 1996. In fiscal
1995, NACO recorded an asset impairment charge of $2.8 million reflecting a
write-down of certain assets at the Wilsons Facility. In fiscal 1996, the
liquidation of the Wilsons Facility resulted in a $1.4 million liquidation gain
for NACO, representing the excess of the liabilities of the Wilsons Facility
over its asset values. Income from operations, excluding the operating results
and liquidation gain related to the Wilsons Facility, would have been $9.6
million in fiscal 1996 compared to $15.3 million in fiscal 1995, or a decrease
of $5.7 million.
Other Expense, net
Other expense, net, decreased approximately $0.3 million from $1.5 million in
fiscal 1995 to $1.2 million in fiscal 1996 primarily as a result of fiscal 1995
including expenses of $0.3 million related to a canceled initial
64
<PAGE>
public offering of NACO's stock. The balance of the other expenses for fiscal
1995 and fiscal 1996 represents cash discounts offered to selected customers
for early payment of receivables.
Interest Expense
Interest expense increased by $1.1 million from $4.1 million in fiscal 1995 to
$5.2 million in fiscal 1996. This increase was due to an increase in the
average outstanding borrowings from $34.7 million in fiscal 1995 to $50.7
million in fiscal 1996, although the overall weighted average interest rate
decreased from 10.3% in fiscal 1995 to 9.4% in fiscal 1996.
Income Taxes
The provisions for income taxes increased by $0.2 million from $0.7 million in
fiscal 1995 to $0.9 million in fiscal 1996 due to higher pre-tax income in
fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
NACO has experienced, and may in the future experience, fluctuations in
quarterly results of operations. A number of NACO's facilities, as well as
those of certain of its customers, close for regularly scheduled maintenance in
the summer, and NACO and certain of its customers also close for extended
holiday periods in December. As a result, NACO's operating results for the
second and third fiscal quarters tend to be lower than other quarters.
LIQUIDITY AND CAPITAL RESOURCES
NACO's principal sources of liquidity and capital resources are net cash
provided by operations and borrowings under a Revolving Credit Agreement. For
fiscal 1995, net cash used in operating activities was $7.1 million, as
compared to net cash provided by operating activities of $11.7 million and
$17.1 million in fiscal 1996 and 1997, respectively. The increase in net cash
flow over such periods was attributable primarily to higher net income and
lower increases in net working capital. For the six months ended September 27,
1998 and September 28, 1997, net cash provided by operating activities was $7.9
million and $3.9 million, respectively.
Historically, net cash provided by operating activities and borrowings under
the Revolving Credit Agreement have been used to fund increases in working
capital, as necessary, and capital expenditures. In addition, NACO historically
has offered selected customers cash discounts for early payment of their
accounts receivable balances as a means to better utilize availability under
its Revolving Credit Agreement. In fiscal 1995, cash was used to fund an
increase in net working capital (net working capital--defined as total current
assets less total current liabilities--excluding cash, cash overdrafts, current
maturities of long-term debt and net working capital of business acquisitions
at the date of purchase) of $17.3 million and cash was generated from a
reduction in net working capital of $1.4 million in fiscal 1996 and $0.6
million in fiscal 1997. The net working capital increase for the six months
ended September 27, 1998 was $2.3 million. The changes in net working capital
in these periods related primarily to increases in accounts receivable and
inventories, which were offset by increases in accounts payable and other
liabilities. NACO expects that its investment in accounts receivable will
increase in the future as it eliminates its practice of offering cash discounts
to customers for earlier than normal payment. NACO has a short production cycle
for the majority of its products and inventories have increased at rates
substantially lower than the rate at which sales have increased.
NACO had positive working capital (defined as total current assets less total
current liabilities) of $9.9 million at the end of fiscal 1996, $5.4 million at
the end of fiscal 1997, and $6.6 million at the end of the six months ended
September 27, 1998.
NACO has made approximately $63 million of capital expenditures (excluding
expenditures for business acquisitions) over the last five fiscal years, for an
average of approximately $12.5 million per year or 5.0% of
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net sales. Capital expenditures, excluding expenditures for business
acquisitions, were $16.6 million in fiscal 1995 (5.9% of net sales), $11.3
million in fiscal 1996 (4.1% of net sales), $15.9 million in fiscal 1997 (5.2%
of net sales) and $4.6 million and $11.1 million in the respective six-month
periods ended September 28, 1997 and September 27, 1998 (3.2% and 6.4% of net
sales, respectively). Capital expenditures for fiscal 1995 were made to expand
production capabilities and install a client server computer system throughout
NACO's locations. Capital expenditures in fiscal 1996 and fiscal 1997 and the
six months ended September 27, 1998 were largely for projects designed to
expand the capacity of and to improve the efficiency of NACO's production
facilities. NACO anticipates capital expenditures in the remaining six months
of fiscal 1998 to be between approximately $10 million and $12 million. A
substantial portion of these anticipated expenditures will be used to increase
manufacturing capacities and capabilities, to increase production throughput
and to improve operating efficiencies.
NACO has had in place since November 1993 a Revolving Credit Agreement with The
CIT Group/Credit Finance, Inc. It currently provides for maximum potential
borrowings of up to $35.0 million and permits limited advances from NACO's U.S.
operating subsidiary borrowers to its non-U.S. operating subsidiaries.
Borrowings under the Revolving Credit Agreement are based upon eligible
receivables and inventories, as defined, and are secured by substantially all
of NACO's assets in the United States. The Revolving Credit Agreement also
provides for a term loan of $9.8 million, repayable in equal monthly
installments, with a final payment of $3.9 million due at the termination date
of the Revolving Credit Agreement on November 30, 2000. Borrowings bear
interest at the prime rate plus 0.75%, except for approximately $1.0 million of
the term loan, which bears interest at the prime rate plus 1.75%. The Revolving
Credit Agreement contains a number of restrictive covenants, including
restrictions on dividends, common stock repurchases and mergers and
acquisitions, all as defined. As of September 27, 1998, borrowings outstanding
under the revolving credit portion of the Revolving Credit Agreement were $21.5
million, and NACO had additional unused availability under the Revolving Credit
Agreement, based upon eligible receivables and inventories, of $5.5 million.
See "--Risk Factors and Other Considerations" regarding refinancing of
indebtedness expected to occur in connection with the merger.
In March 1995, NACO entered into a Note Agreement with The Northwestern Mutual
Life Insurance Company, providing for the issuance of a $15.0 million Senior
Subordinated Note with a detachable Warrant. The Warrant entitles Northwestern
to purchase 54,271 shares of the common stock at a nominal price of $0.01 per
share, subject to certain adjustments. The $216,000 fair value of the Warrant
as agreed to between the parties was deducted from the face value of the Senior
Subordinated Note and added to additional paid-in-capital. The Senior
Subordinated Note bears interest at 11.75%, payable semiannually, and requires
principal payments of $5.0 million in each of 2003, 2004 and 2005. The Note
Agreement contains a number of restrictive covenants, including financial
covenant tests on fixed charge coverage, tangible net worth maintenance and
leverage, as well as restrictions on the payment of dividends and the
incurrence of additional indebtedness or liens, all as defined. As of September
27, 1998 and for the four fiscal quarters then ended, the actual fixed charge
coverage ratio was 2.57 compared to a required ratio of not less than 1.40; the
tangible net worth maintenance amount was $9.9 million compared to a required
minimum of $5.1 million; and the actual leverage ratio was 0.40 compared to a
maximum ratio of 0.55. The Note Agreement requires that NACO offer to prepay
the entire principal amount outstanding should there occur a change in
ownership or change in management, all as defined, at a price of 100.0% of the
principal amount then outstanding plus a pre-payment penalty based upon a
formula set forth in the Note Agreement. Consummation of the Merger will
constitute a change in control under the Note Agreement. See "Risk Factors and
Other Considerations" regarding refinancing of indebtedness expected to occur
in connection with the merger. The proceeds of the Senior Subordinated Note
were used to reduce the amount outstanding under NACO's Revolving Credit
Agreement, to retire a revolver and term debt facility used by the Hamilton
Facility, and to prepay certain minor indebtedness agreements, with the balance
invested in short-term U.S. government instruments.
In April 1995, NACO entered into a Supply Agreement and the related Customer
Loan Agreement with Canadian Pacific Limited, a railroad products customer of
NACO ("Canadian Pacific"). Under the terms of these agreements, Canadian
Pacific agreed to purchase substantially all of its requirements for freight
car trucks
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from NACO through December 31, 1998, at fixed pricing which became adjustable
beginning in 1996 for changes based on a producer price index and in 1997 for
changes in scrap metal prices. In return for NACO's agreement to supply
Canadian Pacific's requirements, Canadian Pacific loaned $6.3 million ($9.0
million Canadian dollars) to NACO pursuant to the Customer Loan Agreement. The
loan bears interest, payable quarterly, at the prime rate of the Bank of
Montreal plus 2.0%, and is secured by substantially all of the property,
plant, and other fixed assets at the Hamilton Facility. Principal on the loan
is repaid monthly by NACO based upon the amount of Canadian Pacific's
purchases of products, with a maximum repayment in any year of $2.8 million
($4.0 million Canadian dollars). As of September 27, 1998, borrowings
outstanding were $3.2 million ($4.9 million Canadian dollars) which were due
December 31, 1998. In December 1998, the agreement was amended to extend the
due date to December 31, 2000. The proceeds of the Customer Loan Agreement
were used to retire certain trade obligations and to increase production
capacity at the Hamilton Facility, with the balance invested in short-term
bank instruments.
In connection with the acquisition of certain assets of the Richmond Facility
and the acquisition of the Sahagun Facility in 1996, NACO issued acquisition
notes of $3.0 million and $5.0 million, respectively, payable to the sellers
of the facilities. The Richmond acquisition note is unsecured but guaranteed
by NACO and bears interest, payable quarterly, at 8.0% per annum, with monthly
principal payments, beginning October 1996 based upon the amount of purchases
of products by the seller. The balance of the loan, if any, is required to be
repaid on December 31, 1999. The Sahagun acquisition note is guaranteed by
NACO and NCI, is secured by a mortgage on the land and buildings acquired and
requires 48 monthly payments of $128,880 of principal and interest. The
interest rate on the loan is 10.0% per annum.
As of September 27, 1998, NACO's outstanding debt was approximately $29.5
million under the Revolving Credit Agreement, $14.9 million under the Senior
Subordinated Note and $10.1 million under various other debt agreements.
YEAR 2000 COMPLIANCE
The Year 2000 problem refers to computer applications using only the last two
digits to refer to a year rather than all four digits. As a result, these
applications could fail or create erroneous results if they recognize "00" as
the year 1900 rather than the Year 2000.
NACO has initiated several projects that include, but are not limited to,
information and communication systems; manufacturing and office equipment;
business customers and vendors. A summary of these projects is as follows:
Information Systems
During 1997, NACO initiated an extensive search for an integrated
manufacturing and financial software package primarily to have the necessary
tools to streamline, standardize and simplify the business processes at all of
its facilities. At completion of this project, the information systems will
also be Year 2000 compliant. This project includes the migration from system
34's, VAX and PC DOS systems located at various locations to two HP servers
utilizing ROI's fully integrated Manage 2000 application software.
Implementation of the new Manage 2000 system was started in April 1998 and is
scheduled for completion in June 1999 and will include NACO's seven
manufacturing locations, the technology center and the corporate office. The
cost of this project yet to be incurred, which includes software, limited
additional hardware and external and direct internal costs of implementation,
is estimated to be $4 million, most of which will be capitalized as incurred.
Communication Systems
Closely related to the above project are NACO's internal and external
communication systems. This project includes the replacement and/or upgrades
of personal computers (PC's), standardizing and upgrading all PC software
(Windows NT Network, Windows 95/98, Office 97 including Microsoft Exchange,
Excel, and Word), Auto CAD and PRO Engineering, and installation of Frame
Relay T1 communication lines to connect local and wide area networks. The
installation of the infrastructure at NACO's nine locations is expected to be
completed
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by March 1999. In addition, an assessment of all manufacturing equipment and
their related applications, security and fire control systems, safety
equipment, utility and telephone systems and office equipment is expected to be
completed by March 1999.
Third Parties
Year 2000 compliance letters have been sent to NACO's major third parties
(customers, vendors, service providers, etc.) to ensure that all significant
future business associates are addressing and preparing for the Year 2000. NACO
continues to work with all significant third parties and has initiated a
tracking system to monitor responses and resolve issues as they arise.
Year 2000 Risks
Potential risks to NACO in relation to the completion of Year 2000 compliance
projects are:
-- Failure to complete on a timely basis the installation of the integrated
financial/manufacturing system
-- Failure to complete on a timely basis the necessary replacements and/or
upgrades to the internal and external communication systems
-- Failure to identify and replace all Year 2000 non-compliant
manufacturing equipment, utility and/or office equipment
-- Failure of major third parties to identify and implement Year 2000
compliance plans required and/or NACO's failure to timely recognize their
non compliance
Contingency Plans
Contingency plans, if necessary, are expected to be completed by March 1999 to
address the risks discussed above.
No assurance can be given, however, that NACO will be able to address the Year
2000 issues for all of its software and applications in a timely manner or that
it will not encounter unexpected difficulties or significant expenses relating
to adequately addressing the Year 2000 issue. If NACO or its major customers,
suppliers or other third parties with whom NACO does business fail to address
adequately the Year 2000 issues, or NACO fails to successfully integrate or
converts its computer systems generally, NACO's business or results of
operations could be materially adversely affected.
FOREIGN EXCHANGE
NACO's U.S. exports are generally invoiced in U.S. dollars. A significant
portion of the sales of NACO's foreign subsidiaries for fiscal 1997 and
anticipated for fiscal 1998 are invoiced to customers in the United States in
U.S. dollars, whereas the costs and expenses incurred in connection with these
sales are incurred in local currencies. NACO has not entered into foreign
exchange hedges for these transactions.
EFFECTS OF INFLATION
General price inflation has not had a material impact on NACO's results of
operations. When possible, NACO follows the general industry practice of
passing on to the customer the changes in the cost of the scrap metal purchased
by NACO.
INCOME TAXES
NACO uses an asset and liability approach for financial accounting and
reporting for income taxes. If it is more likely than not that some portion of
a deferred asset will not be realized, a valuation allowance is recognized.
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The valuation allowances are reviewed periodically to determine whether
circumstances have changed to indicate that a change in a valuation allowance
is appropriate. NACO reviews a number of factors in its periodic reviews of the
valuation allowances such as future estimated operating earnings, tax laws,
regulations and interpretations, and timing of the turnaround of book versus
tax timing differences. As of March 29, 1998, NACO had net operating losses in
the United States of $3.9 million and $7.9 million in its foreign subsidiaries.
NACO's tax returns in the United States have not been examined by the revenue
authorities and its net operating loss could be subject to substantial
limitations, including disallowance in total. Due to the uncertainty as to the
ultimate realization of its net operating loss carryforwards, NACO has
determined it appropriate to record federal income tax provisions at the full
federal income tax rate and to establish valuation allowances for the net
operating loss carryforwards in the United Kingdom and Mexico.
RECENT ACCOUNTING PRONOUNCEMENTS
In fiscal 1997, NACO adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, SFAS No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, and SFAS No. 132, Employers' Disclosures
About Pension and Other Retirement Benefits, with no material effect on NACO's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No.133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. NACO is required to adopt SFAS No.133
beginning in the fiscal year ending April 2, 2000. While NACO has not yet
quantified the impact of adopting SFAS No.133 on its financial statements, NACO
does not believe it will have a material effect on its results of operations or
financial condition.
BUSINESS OF NACO
GENERAL
NACO designs, manufactures and supplies highly engineered cast steel and
related products for the railroad supply and flow control supply markets.
NACO's business is organized into three operating segments--"Rail Products
Group," "Flow Products Group" and "Other"--which focus on the sale of railroad
products and flow control products. A brief description of each operating
segment is presented below. See note 12 of the Notes of Consolidated Financial
Statements of NACO.
Rail Products Group
NACO designs, manufactures and supplies a broad line of technologically
advanced products for the railroad industry. NACO's proprietary products
include (i) high performance freight car trucks, including a line of trucks
employing NACO's Swing Motion suspension system, the Unitruck II(R) and the
Axle Motion II(TM) truck and (ii) freight car couplers and related products,
including NACO's High Endurance(TM) rotary coupler and its High Endurance(TM)
Reduced Slack Coupler. In particular, demand for the Swing Motion(TM) line has
continued to grow and now includes such varied applications as the Class I
railroad Autotrack fleet, RoadRailer(R) trailers, coal freight cars and high-
speed freight cars attached to North American passenger railcars (i.e.,
Amtrak). In addition to NACO's proprietary products, NACO is also a major
manufacturer of, and has made technological advancements to, freight car trucks
that employ the traditional Barber(R) suspension system, and NACO produces a
wide variety of couplers and other freight car products. NACO also manufactures
railroad products that are produced in accordance with customer-owned designs
and specifications, including locomotive truck frames and a variety of other
locomotive casting products, and NACO provides fully assembled locomotive
trucks on a just-in-time basis. NACO believes, based upon industry information
and information obtained from
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its customers, that it is the leading manufacturer of high performance freight
car trucks with an approximately 80% share of the North American market, and
that it is the number one or two supplier of all other types of freight car
trucks, freight car couplers and related products and locomotive truck frames
in North America. NACO's Rail Products Group supplies both the new equipment
market and the repair, replacement and retrofit market. All of NACO's railroad
products meet or exceed applicable standards and specifications established by
the AAR.
Flow Products Group
NACO engineers, manufactures and supplies steel and high alloy valve housings
and related castings for manufacturers of industrial flow control systems for
use in the natural gas, pulp and paper, oil, chemical, waste control and water
treatment, and other manufacturing process industries. These products are
manufactured in accordance with customer designs and specifications relating to
cast integrity, external environment and internal fluid pressure tolerances.
NACO believes that its Flow Products Group has a favorable competitive position
as a result of its ability to offer its customers one of the widest ranges of
steel and high alloy flow control castings and its ability to offer low cost
castings through its network of casting facilities and supply arrangements.
Other
The "Other" operating segment consists of NACO's current operations at the
Leven Facility and its former operations at the Wilsons Facility. The principal
purpose of NACO's 1994 acquisition of the Leven Facility was to acquire its
rights to and to continue the development of the Replicast(R) ceramic shell
casting process. See "--Manufacturing." In addition, the Leven Facility was,
along with the Wilsons Facility, a part of NACO's strategy to expand the
operations of both its Flow Products Group and its Rail Products Group within
Europe. The Leven Facility increased sales of its commercial castings within
the United Kingdom during the last three years and currently produces the
RoadRailer(R) product which is shipped to the United States and sold by NACO to
its Rail Products Group customers. The Wilsons Facility, however, which was
acquired to gain entrance to the European flow control markets, was liquidated
in 1996 after it continued to incur operating losses following a financial
restructuring.
In 1997, NACO relocated its European railroad products engineering group to the
Leven Facility and, along with NACO's European sales and marketing personnel,
the Leven Facility has served as a base for NACO's continuing efforts to
develop markets for its products in Europe. NACO has recently made the decision
to organize its efforts within Europe into a separate operating group and,
while efforts to implement that decision are proceeding, the centralization has
not yet been finalized. When completed, the European group will focus on
adapting, marketing and manufacturing NACO's proprietary railroad products
within Europe.
MARKET OVERVIEW AND INDUSTRY DEMAND--NACO
Railroad Freight Car Market
Historically, the railroad supply market has been characterized by fluctuations
in demand principally in response to economic conditions. According to the AAR,
freight car deliveries in the 1960s and 1970s averaged more than 62,000 units
per year and only fell below 40,000 units in two years during that period. The
market experienced an unusually severe decline in production of new freight
cars and locomotives in the early 1980s due to a combination of factors.
Spurred largely by federal tax incentives for capital goods which helped to
create attractive freight car hire rates and other perceived benefits of
freight car ownership, record numbers of freight cars were purchased in the
late 1970s. Production of freight cars peaked at approximately 96,000 units in
1979. The elimination of those tax incentives, combined with increasing
competition for freight traffic from the trucking industry, resulted in a
substantial overcapacity of freight cars in the railroad industry by the early
1980s. After deregulation of the railroad industry in 1980, railroads
consolidated their route systems and downsized their equipment base in an
effort to reduce operating costs and improve their competitive position
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relative to trucking companies. As a result, production of freight cars
declined to a record low of approximately 5,900 units in 1983 and deliveries
averaged only 20,500 units per year from 1984 through 1992.
By the early 1990's, the overcapacity of freight cars in the railroad industry
had been greatly eliminated, and production of freight cars began to grow again
as railroads continued their efforts to increase efficiency and reduce costs.
According to industry sources, production of new freight cars has increased
significantly over the last five years, and average deliveries increased to
approximatley 51,530 units per year from 1993 through 1997. This growth
resulted in part from an economic recovery in the railroad industry,
demonstrated by a 49% increase in revenue ton miles hauled by Class I railroads
in North America from 919 billion in 1980 to 1,373 billion in 1997. Other key
factors contributing to such growth include advances in freight car technology,
the significant growth of intermodal transportation as an alternative to other
forms of long-haul freight transportation (which has resulted in the
technological obsolescence of certain types of freight cars presently in
service), upgrades to existing freight cars and increased replacement of the
aging freight car fleets. NACO expects these trends to cause retirements from
the freight car fleets, resulting in greater demand for new equipment, as well
as opportunities to provide replacement products to railroads and other owners
and users of freight cars.
Flow Control Supply Market
The flow control supply market is fragmented among hundreds of different
suppliers which manufacture valve castings and fittings consisting of various
metals, including iron, steel, brass, bronze and nickel-base and high alloys.
NACO focuses on the manufacture of steel and high alloy castings and does not
compete in other segments of the flow control supply market. Since 1987,
shipments of steel and high alloy flow control castings have grown as a result
of rising industrial production and increased demand from companies in certain
industries, such as the oil and gas industry, which require the distinctive
characteristics of steel and high alloy castings necessary for compliance with
safety and pollution control standards.
NACO BUSINESS STRATEGY
NACO's principal goal has been to achieve continuing sales and earnings growth
by capitalizing on and further developing the competitive advantages of both
its Rail Products Group and its Flow Products Group. The key elements of NACO's
strategy for achieving this goal have been to:
(1) Build Upon Its Commitment to Technology Leadership through NACO
Technologies
NACO believes its commitment to technology differentiates it from its
competitors. NACO historically has made substantial investments in attracting,
training and retaining highly skilled technical employees and developing highly
engineered products, including its proprietary line of high performance freight
car trucks which were first introduced in large-scale commercial applications
in the early 1990's. In October 1995, NACO formed NACO Technologies, a stand-
alone research, development and product testing facility in Lombard, Illinois,
as the focus of its ongoing technology efforts. Today, NACO Technologies
employs 50 people, including 35 design and engineering professionals who employ
state-of-the-art computer-based design and engineering systems and three-
dimensional software modeling to identify, test and develop new and enhanced
products for NACO's target markets, to improve NACO's existing products, and to
enhance NACO's manufacturing processes. NACO believes its commitment to
technology has enabled it to become a principal supplier to customers that are
the leaders in the railroad supply and flow control industries.
(2) Enhance Existing and Develop New High Performance Proprietary Products
NACO's focus in the Rail Products Group has been and will remain on the
development, manufacture and sale, both domestically and internationally, of
its wide range of proprietary freight car truck and coupler products.
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NACO's proprietary products are designed to provide customers with superior
performance and lower overall life-cycle costs. For example, NACO believes that
the advantages offered by its portfolio of high performance freight car
trucks--ride quality, fuel savings, reduced maintenance costs and longer
service life--will enable it to maintain and strengthen its competitive
position in that market. NACO's Advanced Vehicle Dynamics(TM) design technology
has contributed to NACO's leading North American market position in high
performance freight car trucks. NACO also has incorporated proprietary patented
features into its manufacture of freight car trucks employing the Barber(R)
suspension system and coupler products employing traditional AAR designs.
(3) Implement Innovative Manufacturing Process Improvements, such as Advanced
Precision Technology(TM), Replicast(R) Technology and Six Sigma
NACO has improved and intends to continue to improve its manufacturing
processes through technological innovation. Its Advanced Precision
Technology(TM) enables NACO to design and produce castings with a much greater
degree of dimensional accuracy compared with traditional manufacturing
processes. Advanced Precision Technology(TM) permits NACO to produce precisely
dimensioned and lighter weight castings which have the same or improved
strength and durability as castings produced with traditional technologies.
NACO has implemented a "Six Sigma" initiative which employs statistical
measurement techniques in all phases of NACO's design, engineering, customer
service and manufacturing processes. NACO's Six Sigma initiative analyzes and
statistically measures both the output and the cost of the various processes
and procedures employed by NACO in its day-to-day operations. This initiative
will permit NACO to optimize the efficiency and minimize the cost of each
component part of its operations. NACO also has focused on the development of
Replicast(R) ceramic shell casting technology as a potentially superior
alternative to sand casting, with potential applications across NACO's line of
railroad and flow control products. NACO recently launched a commercial
production line employing the Replicast(R) ceramic shell technology to produce
traditional AAR coupler products after extensive testing and refinement at NACO
Technologies and its Leven casting facility. NACO believes that its
Replicast(R) technology will enable it to increase its manufacturing capacity
and produce higher quality products at lower prices and with reduced turnaround
times.
(4) Focus on Customer Relationships with Industry Leaders
NACO continually strives to be a primary supplier of products it manufactures
to customers that are leaders in the railroad and flow control industries,
principally by capitalizing on the performance and cost features of its
products and services. In its Flow Products Group, NACO emphasizes its
"partnership" role in providing a broad range of high integrity steel castings
for all aspects of the customer's operations. As a "partner," NACO works
directly with the customer to design the steel casting, build the tooling
needed to manufacture the casting, test a sample casting to ensure that it
meets the customer's specifications, and manufacture or procure the casting for
delivery to the customer as needed to meet the customer's production schedule.
NACO believes its partnering approach will yield further benefits for its Flow
Products Group as valve and pump manufacturers continue to consolidate and
reduce the number of their outside suppliers.
(5) Capitalize on Low-Cost and Versatile Manufacturing Capabilities,
particularly through the Expansion of the Sahagun Facility
NACO has made approximately $63 million of capital investments (excluding
business acquisitions) in its manufacturing facilities and NACO Technologies
during the last five fiscal years, for an average of approximately $12.5
million per year or 5.0% of net sales. These expenditures have been made
principally for product and process improvements designed to maximize the
ability of NACO's geographically diverse manufacturing facilities to produce
the highest volume of "value added" products at the lowest possible cost. NACO
is in the process of greatly expanding its Sahagun Facility to: (i) permit the
full range of its railroad product offerings (excluding locomotive frames) to
be produced at that facility; (ii) accommodate increased production of railroad
products as well as certain flow control products; and (iii) relocate certain
locomotive production to its Sahagun Facility from its Keokuk Facility in order
to produce such products using lower cost methods and to increase capacity to
produce higher margin products at its Keokuk Facility. NACO believes that
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it has the flexibility to shift the manufacture of its railroad products among
its facilities in response to customer demand, cost and other relevant factors.
(6) Pursue International Growth Opportunities, especially in the Americas and
Europe
NACO believes that the expansion of railroad and locomotive suppliers into
international markets, primarily Mexico, South America and Europe, may provide
significant sales growth opportunities for NACO. NACO is the only producer of
freight car trucks and couplers in both Canada and Mexico. In addition, NACO is
well-positioned to benefit from new and increased business in Europe as a
result of its market development efforts within European markets, its presence
in Scotland and its supply relationships in Portugal and the Czech Republic.
PRODUCTS
NACO's products can be classified into two major product groups:
Rail Products Group
NACO's Rail Products Group designs, manufactures and supplies products for the
railroad industry, including (i) products employing NACO's proprietary designs,
(ii) products which employ designs based upon AAR standards and traditional
technology, such as the Barber(R) suspension system, and (iii) products
employing customer designs. The products produced by the Rail Products Group
primarily relate to freight car trucks, locomotive truck frames and freight car
and locomotive couplers and related products. A freight car truck, which
consists of two side frames and a bolster, is the undercarriage of the freight
car and contains the suspension system for the freight car. Each freight car
typically consists of two freight car trucks. The trucks hold the axles and
wheels in place and support the weight of the freight car. A locomotive truck
frame is the undercarriage of the locomotive. Each locomotive has two truck
frames which surround the wheels, axles and brakes and support the weight of
the locomotive. Couplers are used to connect freight cars with other freight
cars and locomotives.
Proprietary Design Products
NACO develops, engineers and is the sole owner of the design and tooling of its
proprietary railroad products. NACO's most successful proprietary railroad
products are its Swing Motion(TM) line of trucks. Swing Motion(TM) is a
technologically advanced, high-speed truck suspension system which produces a
more stable ride by reducing lateral movement. Through NACO Technologies, NACO
has been able to design and successfully test freight car trucks employing the
Swing Motion(TM) suspension system for 47 different car configurations. Such
testing and development has reduced service and cost problems and produced such
benefits as fuel savings, reduced wheel and track wear, reduced maintenance
costs, longer service life, and reduced downtime and out-of-service costs. As a
result, freight car trucks using the Swing Motion(TM) suspension system
regularly exceed not only AAR safety standards, but industry high performance
ride quality standards as well. Demand for the Swing Motion(TM) line has
continued to grow and now includes such varied applications as the Class I
railroad Autotrack fleet, RoadRailer(R) trailers, coal freight cars and high-
speed freight cars attached to North American passenger railcars (i.e.,
Amtrak).
NACO entered into an agreement in 1997 with the European unit of one of its
largest United States railroad products customers to modify, test and jointly
seek regulatory approval for and market freight car trucks employing NACO's
Swing Motion(TM) suspension system in the United Kingdom. Engineering of such
freight car trucks has been completed and the first of such freight car trucks
employing Swing Motion(TM) has recently been approved for use on United Kingdom
railroads. NACO has also recently begun supplying freight car trucks employing
its proprietary Axle Motion II(R) primary suspension system to a large state
owned railroad in Scandinavia and has submitted a freight car truck employing
its UniTruck II(R) technology for UIC approval for the sale of freight car
trucks employing that technology within Europe. In addition, NACO has recently
entered
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into an agreement with ZDB, a.s., of Bohurnin, Czech Republic to jointly
develop cast versions of the UIC "Y" series of freight car trucks, the design
most commonly used in European freight car trucks, although such trucks are
typically fabricated rather than cast.
NACO manufactures several proprietary designs of couplers and related products,
including the High Endurance(R) Rotary Coupler. Rotary couplers are used on
coal cars and permit coal to be unloaded by rotating the car without detaching
it from the train as had been necessary prior to NACO's development of the
rotary coupler. NACO believes that, in North America, it is the leading
manufacturer of rotary couplers. NACO's proprietary design of an articulated
connector, which connects intermodal freight cars, offers the advantages of
reduced slack, easier assembly and disassembly and binding-free performance. In
addition to its proprietary designs of couplers and related products for
freight cars, NACO manufactures several proprietary designs of couplers used
exclusively on locomotives. NACO's proprietary locomotive coupler designs
consist of several varieties of "E" and "F" locomotive couplers of the type
used on substantially all of the locomotives in North America. NACO
manufactures all of the cast steel products which comprise a coupler, including
knuckles and yokes.
NACO also manufactures its own proprietary designs of trucks, couplers and
related products for use in underground mines and steel mills. These products
are functionally the same as the trucks, couplers and related products which
NACO manufactures for the railroad industry, but they are designed to be used
on the captive railroad systems in mines, mills and other non-interchange
railroad systems.
Traditional and AAR-Standard Design Products
NACO is a leading manufacturer of freight car trucks employing the Barber(R)
suspension system and has produced numerous versions of freight car trucks
using the Barber(R) suspension system under license from Standard Car Truck
Company ("Standard"), which does not itself manufacture trucks. Trucks
employing the Barber(R) suspension system are the most common type of freight
car truck and are used on the majority of the freight cars in North America.
NACO is one of only three manufacturers licensed by Standard to manufacture and
sell trucks employing the Barber(R) suspension system in the United States.
NACO's license for United States sales is non-exclusive, and co-terminus with
the life of the United States patents. NACO is the only manufacturer licensed
to manufacture and sell such trucks in Canada and Mexico. NACO's license for
Canadian sales is non-exclusive and may be terminated by either party on six
month's written notice. The license for Mexican sales is non-exclusive and does
not contain expiration or termination rights. NACO owns the proprietary designs
and the tooling for the trucks it manufactures which are based on the type of
freight car, the weight and other features of the freight car, the intended use
of the freight car by the customer and other needs of the customer.
NACO also manufactures certain other freight car products that are widely used
in the railroad industry. NACO is one of only four manufacturers of traditional
AAR design couplers, which employ cross-licensed technology owned by NACO and
three of its competitors. NACO believes it is one of the largest manufacturers
of AAR standard "E" and "F" freight car couplers of the type used on
substantially all of the freight cars in North America. NACO also manufactures
a line of related freight car products, including articulated connectors, draft
gear housings, centerplates and draft sills.
The merger will not have any effect on NACO's rights under the licence
agreements with Standard and the cross-license arrangements regarding the AAR
design couplers referred to above and will not give rise to any party's ability
to terminate those agreements.
In addition to manufacturing new and replacement products for the railroad
industry, NACO also offers remanufacturing services through its castings
reclamation division ("CRI"). CRI remanufactures freight car couplers, yokes,
draft gears and other components and allows NACO to offer its customers high
quality components at a significant savings as compared to new components. CRI
purchases used railroad components
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from owners and users of freight cars, refurbishes and rebuilds the components,
and sells the refurbished components to customers from whom they were purchased
or to other customers in the market for refurbished railroad components. Unit
exchange programs are also offered to minimize customer downtime. CRI has the
capability to weld, grind, gauge and heat components as required, and it sorts,
grades and reconditions components to gauge tolerances in accordance with AAR
specifications. Components which cannot be reclaimed are used by NACO as scrap.
Customer Designed Products
NACO is also a large manufacturer of railroad products which are produced in
accordance with customer-owned designs and specifications. NACO's engineers
have incorporated the customer's designs into NACO's manufacturing process to
produce a unique product. NACO's principal work in the area of customer-
designed products involves locomotive truck frames. Locomotive truck frames,
which are large, complex steel castings weighing approximately 12,000 pounds,
are among the most difficult castings to produce. NACO is one of only two
manufacturers in North America currently equipped to manufacture locomotive
frame castings. NACO has worked with one of its customers to develop, and NACO
now manufactures, several varieties of 3-axle, bolsterless locomotive truck
frames. NACO also custom-engineers and manufactures a variety of other
locomotive casting products which attach to the truck frame and channel power
from the motors to the wheels, including motor shell ends, axle tubes, traction
pins, center pin blocks and axle caps.
Flow Products Group
NACO's Flow Products Group engineers, manufactures and supplies steel and high
alloy valve housings and related castings for manufacturers of industrial flow
control systems for use in the natural gas, pulp and paper, oil, chemical,
waste control and water treatment, and other manufacturing process industries.
Because of the corrosive nature of the materials transported through flow
control systems in these industries, flow control system manufacturers
generally utilize steel and high alloy castings of the type manufactured by
NACO rather than castings made of other metals. The valve housings and related
castings produced by NACO generally range in size from 25 pounds to
approximately 25,000 pounds and form the outer shell of the valves used in flow
control systems manufactured by NACO's customers.
Typically, NACO manufactures these products in accordance with the tolerances
and specifications required by its customers. Flow control customers generally
provide NACO with casting designs and specifications of the external
environmental and internal fluid pressure tolerances required of the castings,
and NACO works with its customers to engineer and manufacture products that
meet these criteria. NACO currently maintains a large inventory of customer-
owned casting patterns as part of its effort to become the primary steel and
steel alloy castings supplier for customers of its Flow Products Group.
NACO's customers incorporate its valve housings and other valve castings into
the flow control systems they produce. While NACO sells valve housings and
related castings primarily to manufacturers of flow control systems, a
significant portion of NACO's valve housings and related castings are used to
repair, replace or upgrade existing flow control systems.
In addition to the flow control products which NACO engineers and manufactures,
NACO supplies its customers with flow control products which NACO purchases
from manufacturers with which it has supply arrangements. NACO purchases these
products to enable it to offer a complete range of cast steel products to its
flow control customers.
NACO also manufactures and sells a variety of other cast steel and related
products to manufacturers of military replacement products, large on-and off-
highway vehicles, pumps and similar heavy capital goods. These other types of
cast steel and related products are not used in the flow control industry, but
are included in NACO's Flow Products Group and accounted for approximately 6.2%
and 7.0% of the Flow Product Group's sales in this category in fiscal 1997 and
the six months ended September 27, 1998, respectively.
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NACO TECHNOLOGIES
NACO formally established NACO Technologies in October 1995 to focus on and
expand the scope of its technology initiatives in the areas of product
development and design and manufacturing process improvement. In fiscal 1997,
1996 and 1995 and the six months ended September 27, 1998, NACO spent
approximately $3.7 million, $3.5 million, $1.8 million and $2.0 million,
respectively, on NACO Technologies' projects and initiatives (exclusive of
capital expenditures associated with property, plant and equipment
investments).
NACO's principal purpose in establishing NACO Technologies as the focus of its
ongoing technology efforts was to promote: (i) the development and sale of high
value-added products, (ii) the ability to assist customers in the initial
design of components in order to optimize manufacturing efficiency while also
striving to reduce the weight and cost of the product, (iii) the implementation
of NACO's "best practices" program, which involves documenting and
standardizing the "best practices" employed by each of NACO's facilities with
respect to particular operating systems or problems and communicating and
employing the practices in all of NACO's facilities and (iv) cycle-time
reduction by utilizing computer models to reduce design and implementation
error which is normally accomplished through "trial and error" on the
manufacturing floor.
NACO Technologies employs approximately 50 persons, including 35 engineers,
many of whom work directly with customers and end users to develop specialized
castings to meet their needs. NACO's engineers devote significant resources in
an attempt to identify, develop and test new and enhanced products for NACO's
target markets in advance of customer needs or requests. NACO Technologies has
worked extensively with the Leven Facility on the further development,
refinement and commercialization of the Replicast(R) ceramic shell technology.
NACO believes that ceramic shell casting is the most advanced molding process
currently available, and that it reduces or eliminates a significant amount of
the machining required of castings produced by other methods. The Replicast(R)
ceramic shell technology process is a licensed technology which historically
has not been commercially applied to large scale, mass-produced castings. As a
result of NACO's significant research and expenditures in developing and
enhancing the ceramic shell process, NACO believes that it can now apply
Replicast(R) ceramic shell technology in a cost-effective manner to large
scale, high volume railroad and flow control castings.
NACO Technologies uses a total system approach to railroad design called
Advanced Vehicle Dynamics(R) which enables NACO's engineers to design
specialized systems that meet the individual needs of different car types and
different operating environments. The Advanced Vehicle Dynamics(R) design
system contributes to (i) lower component weight, which allows for the
transport of more cargo and reduces fuel consumption, thereby contributing to
lower operating costs, (ii) longer maintenance cycles, which results in lower
overall life cycle costs, and (iii) improved safety by reducing slack and
providing slackless connections between cars and components, which enhances the
performance and operation of high-speed trains.
Advanced Precision Technology(TM) ("APT") is NACO's effort to integrate product
design and process engineering to optimize product manufacturability.
Specifically, the purpose of APT is to improve casting solidification and
improve yield, improve product accuracy and precision and optimize product
weight. Through these improvements, APT provides reduced cost, enhanced
performance and improved wear characteristics for optimum product design.
APT is applicable to all of NACO's casting processes, including the traditional
green sand, air-set and Replicast(R) ceramic shell processes. APT uses 3-D
solid modeling software as the basis for designing each product, enabling
NACO's engineers to analyze function, fit for use, structural integrity,
solidification and yield. Once the design is optimized, all tooling is
developed directly from the model and is CNC machined, and the tooling and
products' dimensional accuracy are verified by coordinate measuring machine
inspection. This approach increases accuracy and precision and enables precise
repeatable castings. Additionally, new core technology is employed to reduce
misalignment between cores and reduce shifts between the cores and the mold.
The total number of cores used is reduced, saving labor and reducing cost.
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In 1996, NACO began to implement its Six Sigma initiative to reduce costs
through quality improvement. Six Sigma is a methodology that uses advanced
statistical techniques to increase the capabilities and accuracy of processes.
Six Sigma measures a process on the basis of relevant design, engineering and
other criteria, with improvements implemented based on the results of this
analysis. Pursuant to Six Sigma, a process is first measured based on frequency
of defects (a defect is anything that results in customer dissatisfaction) to
provide a starting point to indicate how well the process is currently
performing. If unacceptable levels of defects are found, Six Sigma statistical
techniques are employed by NACO process improvement engineers to conduct
studies and to establish corrective programs to improve the process, resulting
in less variation and fewer defects. A process under Six Sigma is designed to
reduce variations to approximately 3 defects per million parts.
NACO's Six Sigma program involves the participation of employees across NACO.
The Six Sigma program is primarily implemented and monitored by NACO's process
improvement engineers, each of whom has extensive training in the Six Sigma
process. These engineers are supported by NACO Technologies' Process Group and
a governing committee, which includes certain executive officers.
The majority of NACO Technologies' personnel and operations are located at
NACO's 30,000 square foot Lombard facility. However, NACO Technologies also
operates out of NACO's Hamilton Facility and Leven Facility. The equipment at
certain of these facilities is designed to, among other things, simulate field
conditions for freight car systems as well as to accelerate testing to measure
component life. This enables NACO to reduce the amount of time required to
design new casting products by reducing the need to place a number of prototype
castings in service and monitor their performance and wear characteristics over
time.
MANUFACTURING
NACO has assembled a network of casting facilities that enables it to
manufacture a wide range of cast steel products at multiple facilities. NACO
currently operates four facilities in the United States and one each in Canada,
Mexico and Scotland. NACO seeks to maximize its operating efficiency by
shifting the manufacture of cast steel products among its facilities in
response to customer lead times, cost structure and other relevant factors.
NACO is currently in the process of converting one of the plants at its Sahagun
Facility into a state-of-the-art railroad products casting facility that will
operate in conjunction with NACO's existing railroad products castings facility
at the Sahagun Facility. The new plant at the Sahagun Facility is expected to
be fully operational by the end of 1998 and should enable NACO to optimize its
production of railroad products among four North American facilities to
minimize overall costs and maximize delivery capability and efficiency. NACO
has derived and expects to continue to derive significant competitive
advantages at its Sahagun Facility as a result of its ability to supply lower-
cost products with quicker delivery times to, among others, manufacturers of
freight cars who have commenced or are planning to commence operations in
Mexico.
Casting is one of three methods, along with forging and fabrication, which
shape metal into desired forms. Castings are made by pouring liquid metal into
a mold and allowing the metal to cool until it solidifies. 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. 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.
NACO is presently implementing a number of innovative strategic casting
initiatives to be used in conjunction with NACO's traditional casting methods
which will enable NACO to increase its manufacturing capacity and produce
higher quality products at lower costs and with reduced turnaround times.
Historically, NACO has
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primarily used the green sand casting method, but it also uses air-set casting
and ceramic shell casting in the manufacture of its products. A summary
description of each of these casting methods is set forth below.
Green Sand Castings
NACO primarily uses a "green sand" process at the Cicero Facility, the Melrose
Park Facility, the Hamilton Facility and the Sahagun Facility to produce the
sand molds into which steel is poured to make steel castings. The green sand
process, which involves mechanically bonding sand to form molds, is the lowest
cost molding process used by NACO and is used principally to produce railroad
products castings.
Air-set Castings
NACO's Keokuk Facility, Richmond Facility and Leven Facility primarily use an
air-set process, a molding process in which the sand is chemically-bonded to
produce sand molds. NACO also has a small air-set production line at its
Sahagun Facility. Air-set technology produces castings with greater dimensional
accuracy and a smoother surface than does the green sand molding process. Air-
set technology is used primarily to produce valve housings and related
castings. Through the air-set process, NACO has the ability to produce large
quantities of hundreds of different types of castings. In addition, the
metallurgical laboratory at the Keokuk Facility currently is capable of
formulating over 100 different types of steel for production use. NACO believes
that the quality and process control procedures it has developed at the Keokuk
Facility and the Richmond Facility produce castings with fewer internal defects
and greater soundness reliability, making them among the most technically
advanced air-set casting facilities in the steel casting industry.
Ceramic Shell Casting
The Replicast(R) ceramic shell process involves the manufacture and use of a
lightweight, high density polystyrene replica of a cast steel component. The
replicas are given a ceramic coating prior to high temperature firing (during
which the polystyrene replica is vaporized). The steel is then poured into the
ceramic shell, which produces castings that weigh significantly less than those
produced by other casting methods and which require minimal machining and
finishing which otherwise would add significantly to the final product's total
cost. The primary benefits of ceramic shell casting, as compared to traditional
casting techniques, include excellent surface finish, consistent repeatability,
a high degree of dimensional accuracy and reduced post-production machining.
As a result of NACO's developments in ceramic casting technology, its Leven
facility is now able to produce ceramic shell castings from 25 to 550 pounds on
over 50 different specifications, including carbon, low alloy and stainless
steels, and has become the sole source supplier for ceramic shell manufactured
couplers used on Wabash National's RoadRailer(R) trailer. In June 1998, NACO
successfully completed the first phase of its ceramic shell production lines at
the Cicero Facility. NACO has begun initial product production using the
Replicast(R) ceramic shell technology and is planning to use the ceramic shell
casting process in its production of various railroad and flow products now
produced by other casting methods at its other facilities.
SUPPLY ARRANGEMENTS
NACO has historically entered into a number of supply or product sourcing
arrangements with non-U.S. casting facilities which enable NACO to satisfy
demand for its products and thereby increase its market share, balance the
production of its owned casting facilities and gain economic advantages by
shifting production to lower cost, longer lead-time casting facilities. The
majority of the products purchased by NACO through its supply arrangements are
completed products.
NACO currently has supply arrangements with three casting facilities located in
San Juan del Rio, Mexico; Famoes, Portugal; and Bohurnin, Czech Republic, which
provide it with additional manufacturing capacity without significant upfront
capital expenditures or ongoing investment by NACO. NACO uses these supply
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arrangements principally to supplement the manufacturing capacity of its seven
casting facilities. The supply arrangements also provide NACO with an
opportunity to assess whether a casting facility should be considered for
possible acquisition by NACO. Through the relationship created by the supply
arrangement, NACO gains first-hand experience in all aspects of a casting
facility's operations and is therefore able to make an informed judgment about
the potential benefits of an acquisition. One example of this approach is
NACO's experience at the Sahagun Facility which, prior to its purchase by NACO
in 1996, had supplied products to NACO under a supply arrangement.
SALES AND MARKETING
NACO pursues an integrated sales and marketing approach that includes senior
management, engineering and technical professionals, and sales representatives,
all of whom work together to develop relationships with customers at all levels
of their organizations to identify and respond to customer needs. NACO employs
a team of sales representatives to market NACO's products to existing and
potential customers. NACO designates one sales representative to be the account
manager for each customer and gives the representative primary responsibility
for servicing the customer's needs. Each account manager involves the
appropriate senior management and engineering and technical professionals to
assist in marketing NACO's products, services and capabilities to the customer.
In addition to marketing products directly to its customers, NACO targets
selected end users, such as railroads and utilities, and other owners of
freight cars and locomotives, to encourage them to specify NACO's products in
their orders. NACO also works with end users and owners of freight cars and
locomotives to develop products that are customized to their needs.
NACO's engineering and technical professionals are actively involved in
marketing and customer service, often meeting and working with customers to
improve existing products and develop new casting products and applications.
NACO 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.
NACO's marketing efforts often go beyond arrangements for specific product
purchases. As part of its efforts to develop customer relationships, NACO works
with many of its customers on a long-term basis to design and manufacture new
products which are customized to their needs. NACO believes that these
relationships provide its customers with a stable source of supply, improved
product quality and design, and superior customer service.
NACO CUSTOMERS
Customers of NACO's Rail Products Group include all of the Class I railroads
and major owners, builders and lessors of freight cars and locomotives in North
America. Customers of NACO's Flow Products Group include manufacturers of
industrial flow control systems that are used in the natural gas, pulp and
paper, oil, chemical, waste control and water treatment industries. In fiscal
1997, 1996 and 1995, sales to NACO's ten largest customers accounted for 70%,
68% and 65%, respectively, of NACO's net sales. NACO's three largest customers
are TTX Company, GE Transportation and Thrall Car Manufacturing Co., which
accounted for approximately 17%, 16% and 11%, respectively, of NACO's net sales
in fiscal 1997. No other customer accounted for more than 10% of NACO's net
sales in fiscal 1997.
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The following table sets forth in alphabetical order NACO's ten largest
customers in fiscal 1997, the principal line of business in which each such
customer operates and the principal products supplied to each such customer by
NACO:
<TABLE>
<CAPTION>
CUSTOMER BUSINESS PRINCIPAL PRODUCTS
-------- -------- ------------------
<S> <C> <C>
Cooper Cameron Corp. Flow control systems manufacturer Valve housings and related castings
Dresser Industries, Inc. Flow control systems manufacturer Valve housings and related castings
Fisher Controls Flow control systems manufacturer Valve housings and related castings
International, Inc.
GE Transportation Locomotive builder Locomotive truck frames and other
locomotive castings
Greenbrier Companies, Inc. Freight car builder Freight car trucks and couplers
Thrall Car Manufacturing Co. Freight car builder Freight car trucks and couplers
Trinity Industries, Inc. Freight car builder Freight car trucks and couplers
TTX Company Freight car owner/lessor Freight car trucks, articulated
connectors and couplers
Tyco International, Ltd. Flow control systems manufacturer Valve housings and related castings
Union Pacific Corp. Class I railroad Freight car trucks and couplers
</TABLE>
BACKLOG
At September 27, 1998, NACO had approximately $97.8 million of backlog,
compared to backlog of approximately $98.1 million at March 29, 1998, $55.9
million at March 30, 1997 and $67.2 million at March 31, 1996. NACO's backlog
is based upon actual customer purchase orders that NACO believes are firm and
does not include purchase orders anticipated, but not yet placed, by customers.
The backlog at any particular time is affected by a number of factors relating
to, among other things, NACO's production schedule and the time at which
customers generate purchase orders. Given the nature of NACO's relationships
with its customers, NACO may, in some cases, begin working on customer orders
in advance of the time when formal purchase orders are issued and shortly
before the products are shipped. A comparison of backlog from period to period
is not necessarily meaningful and the level of backlog at any particular time
is not necessarily indicative of the future sales levels or the future
operating performance of NACO. Certain customer purchase orders are subject to
cancellation by the customer upon prior notice to NACO, although NACO
historically has not experienced cancellation of any significant portion of
customer orders. NACO believes that substantially all of the orders currently
in its backlog will be filled within one year.
COMPETITION
NACO operates in highly competitive markets and faces significant competition
from a limited number of established companies in the United States. NACO has
historically experienced limited foreign competition in its product markets,
but expects to face increased competition from foreign suppliers of railroad
and flow control products as it expands the production and sale of such
products into other countries. Although no single company competes with NACO
across all of its product lines, some of NACO's competitors are larger and have
greater financial resources than NACO. Competition in NACO's markets is based
upon product design and performance, price, quality, and customer service and
support.
In the railroad supply market, NACO's primary competitors in the manufacture of
freight car cast steel products are American Steel Foundries (a division of
Amsted Industries Incorporated), Buckeye Steel
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Castings Co. (a subsidiary of Worthington Industries, Inc.), and McConway &
Torley Corp. (a subsidiary of Ellicott Machine Corp., Int'l.). NACO has been
subject to limited foreign competition in the manufacture of freight car
castings for the North American market due to the importance of AAR
certification. NACO's primary competitor in the manufacture of locomotive truck
frames is Atchison Casting Corp. In the manufacture of other locomotive
castings, NACO has several competitors including Atchison Casting Corp., Racine
Steel Castings and several smaller foundries.
The flow control supply market is fragmented, and NACO competes with numerous
other companies that manufacture the type of steel and high alloy valve
housings and related products that NACO produces. NACO's largest competitors in
this market are TIC United Corp., Pacific Steel Casting Co., Quality Electric
Steel Castings, Inc. and Citation Corp.
INTELLECTUAL PROPERTY
NACO relies on a combination of trademark, trade secret and other intellectual
property law, confidentiality and nondisclosure agreements and other protective
measures to establish and protect its proprietary rights in its intellectual
property. However, there can be no assurance that such efforts will be
successful, or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
NACO's proprietary information. NACO currently holds 25 U.S. patents and has
applications pending for an additional five U.S. patents. NACO also holds 15
foreign patents. NACO uses a cost-benefit analysis to determine whether the
value of patent protection justifies the expense of seeking the protection.
NACO believes its intellectual property is a valuable asset of its business and
will protect its intellectual property by legal action in appropriate
situations.
RAW MATERIALS
The primary raw materials used by NACO to manufacture its steel casting
products are scrap steel and alloys such as chromium and manganese, electrical
power, natural gas and sand. NACO purchases most of its raw materials in bulk
from a small number of suppliers. Certain raw materials which are expensive to
transport, such as scrap steel, are purchased by NACO from sources which are
located close to the casting facilities where the materials are used.
The scrap steel market historically has been a relatively stable market, with
ample supply and fairly consistent prices. Although the price of scrap steel
has fluctuated significantly in recent years, NACO generally has been able to
recover cost increases from its customers through a scrap price surcharge which
is calculated on a formula basis and is standard industry practice. NACO does
not anticipate any difficulty in obtaining sufficient scrap steel and alloys
for its manufacturing operations.
NACO has experienced occasional difficulties with respect to its supply of
electrical power and natural gas. NACO has interruptible power service
contracts with its electrical power suppliers, and electrical service at
several of its casting facilities is interrupted from time to time, which
results in temporary cutbacks in operations at the affected facilities.
NACO EMPLOYEES
As of September 27, 1998, NACO has approximately 4,600 employees, approximately
83% of whom are covered by collective bargaining agreements. The United
Steelworkers of America and the United Auto Workers represent a majority of
NACO's hourly employees. NACO has three-year collective bargaining agreements
at its four largest manufacturing facilities in the United States: the Cicero
Facility, the Keokuk Facility, the Melrose Park Facility and the Richmond
Facility, which expire in April 2000, May 1999, December 1999 and March 1999,
respectively. In May 1998, NACO signed a three-year collective bargaining
agreement at the Hamilton Facility. Employees at NACO's Leven Facility are
covered by three-year collective bargaining agreements with five different
labor unions which expire in September 2001. In June 1998, NACO
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signed a two-year collective bargaining agreement at its Sahagun Facility.
Other collective bargaining arrangements include CRI and the Pattern Makers
Union (at the Cicero Facility) which expire in February 2001 and August 1998,
respectively. Since its formation, NACO has had a four-day work stoppage at its
Sahagun Facility in June 1998, a six-day and a five-day work stoppage at its
Hamilton Facility in 1998 and 1995, respectively, and a one-week work stoppage
at its Cicero Facility in 1988. Management believes that its current labor
relations are satisfactory.
NACO FACILITIES
NACO maintains its headquarters in Downers Grove, Illinois and conducts its
production operations at six Company-owned casting facilities and two leased
facilities. Substantially all of NACO's owned casting facilities and tangible
fixed assets are pledged as security under certain financing agreements of
NACO. NACO believes that its facilities are in good condition, and upon
completion of the Sahagun Facility, will be suitable for its needs.
NACO's principal facilities are summarized below:
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
NAME LOCATION SQUARE FEET LEASED PRINCIPAL USE
---- -------- ------------ ------ -------------
<S> <C> <C> <C> <C>
Rail Products Group
Cicero Facility Cicero, Illinois, USA 700,000 Owned Freight car castings
Hamilton Facility Hamilton, Ontario, Canada 425,000 Owned Freight car and locomotive
castings
Melrose Park Facility Melrose Park, Illinois, USA 240,000 Owned Freight car and locomotive
castings
Sahagun Facility Sahagun, Hidalgo, Mexico 794,500 Owned Freight car and locomotive
castings
Flow Products Group
Keokuk Facility Keokuk, Iowa, USA 122,000 Owned Valve housings and related
castings
Keokuk Facility Keokuk, Iowa, USA 30,000 Leased Finishing plant
Keokuk Facility Keokuk, Iowa, USA 54,000 Leased Pattern storage facility
Keokuk Facility Keokuk, Iowa, USA 15,000 Owned General offices
Richmond Facility Richmond, Texas, USA 249,000 Leased Valve housings and related
castings
Other
NACO Technologies Lombard, Illinois, USA 30,000 Leased Research & Development/Product
Engineering
Leven Facility Leven, Fife, Scotland 213,000 Owned Commercial castings
NACO Corporate Downers Grove, Illinois, USA 12,500 Leased Corporate headquarters
</TABLE>
REGULATION OF NACO
Industry Standards
The AAR promulgates a wide variety of rules and regulations governing safety,
including, among other things, the design, performance and manufacture of
equipment used on freight cars in interchange service throughout the North
American railroad system. Among other things, the AAR's interchange rules
define all significant physical and dimensional elements of interchange service
freight cars and their key components, including trucks and couplers. The AAR
also certifies railcar builders and component manufacturers that provide
equipment for use in interchange service. The AAR specifications are complex
and NACO believes that considerable proprietary expertise and information are
required to manufacture these products economically. AAR rules require regular
quality reviews of facilities used to manufacture freight cars and freight car
components. The effect of these regulations is that each manufacturer of
railroad products, including NACO, must maintain its certification with the AAR
as a freight car component manufacturer, and freight car products sold by such
manufacturer must meet AAR standards and be manufactured in an AAR-certified
casting facility.
Countries outside of North America also have regulatory authorities that
regulate railroad safety, freight car design, and the design, performance and
manufacture of component parts for freight cars used on their railroad systems.
In addition, certain European countries have created the UIC, whose function is
to promulgate regulations for safety matters, including the design and
manufacture of freight car equipment used in
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interchange service on European railroad systems. NACO must obtain and maintain
certifications of its product offerings within the various countries in which
it markets and sells its products outside of North America.
Environmental Matters
NACO is subject to federal, state and local environmental laws and regulations
concerning, among other matters, air emissions, waste water discharge, solid
and hazardous waste disposal and employee health and safety. NACO maintains an
active program of environmental compliance, which is supervised by NACO's
environmental compliance officer, and believes that its current operations are
in material compliance with all applicable federal, state and local
environmental laws and regulations. NACO plans to upgrade the air quality of
its U.S. casting facilities over the next several years in accordance with the
anticipated future requirements of the federal Clean Air Act. Environmental
legislation, regulations and policies have changed rapidly in recent years, and
NACO may be subject to increasingly stringent environmental standards in the
future.
NACO LEGAL PROCEEDINGS
NACO is a party to several legal actions arising in the ordinary course of
business. In management's opinion, the outcome of these items will not
materially affect NACO's business, financial condition or results or
operations.
DIRECTORS AND EXECUTIVE OFFICERS OF NACO
The following table sets forth certain information regarding NACO's directors
and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joseph A. Seher...... 54 Chairman of the Board and Chief Executive Officer
Vaughn W. Makary..... 49 President, Chief Operating Officer and Director
Senior Vice President, Chief Financial Officer and
Wayne R. Rockenbach.. 55 Director
Executive Vice President, Chief Administrative
John W. Waite........ 55 Officer and Director
Executive Vice President--Corporate Development,
John M. Lison........ 54 Secretary and Director
Stephen W. Becker.... 43 Executive Vice President--NACO Technologies
John M. Giba......... 55 Executive Vice President--Rail Products Group
Brian L. Greenburg... 39 Vice President and Corporate Controller
President--Locomotive, Flow and Specialty Products
Michael B. Heisler... 47 Group
Jack R. Long......... 59 Senior Vice President--International
Wilbur G. Streams.... 53 Vice President--Merger Integration
Richard A. Drexler... 51 Director
Daniel W. Duval...... 62 Director
Willard H. Thompson.. 70 Director
</TABLE>
Joseph A. Seher. Mr. Seher has served as Chairman of the Board and Chief
Executive Officer of NACO since its formation in 1987. From 1985 to 1987, Mr.
Seher was Chairman of the Board and Chief Executive Officer of NCI. From 1981
to 1985, Mr. Seher was Executive Director of Corporate Development for Atcor,
Inc., a manufacturer and distributor of electrical, mechanical, fire protection
and consumer products. Mr. Seher also has served as a management consultant
with A.T. Kearney & Co. and an instructor at The Harvard Business School.
Vaughn W. Makary. Mr. Makary has served as President and Chief Operating
Officer of NACO since 1988 and as a director of NACO since 1993. From 1987 to
1988, Mr. Makary was Executive Vice President of NACO. From 1985 to 1987, he
was Executive Vice President of NCI. Prior thereto, Mr. Makary held a number of
executive positions with the National Castings Division of Midland-Ross
Corporation.
Wayne R. Rockenbach. Mr. Rockenbach has served as Senior Vice President and
Chief Financial Officer of NACO since 1989 and as a director of NACO since
1990. Prior to joining NACO, Mr. Rockenbach held senior
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financial positions with AM International, Inc., a worldwide supplier to the
graphics industry, from 1981 to 1988. Prior thereto, Mr. Rockenbach held senior
auditing positions with Kraft, Inc., Borden, Inc. and Arthur Andersen & Co.
John W. Waite. Mr. Waite has served as Executive Vice President and Chief
Administrative Officer of NACO since June 1997 and as a director of NACO since
October 1993. From 1989 through June 1997, Mr. Waite was Executive Vice
President of NACO. From 1987 to 1988, Mr. Waite was NACO's Senior Vice
President--Finance of NCI. From 1985 to 1987, he was Vice President--Finance of
NCI. Prior thereto, Mr. Waite held a number of executive positions with the
National Castings Division of Midland-Ross Corporation.
John M. Lison. Mr. Lison has served as Executive Vice President, Corporate
Development since October 1, 1998 and as Secretary and a director of NACO since
NACO's formation in 1987. Mr. Lison has been the managing partner in the law
firm of Lison & Griffin, P.C. since its inception in 1986, and is a member of
the board of directors for several private companies. From 1980 to 1986, Mr.
Lison was Vice President, General Counsel and Secretary of Atcor, Inc. From
1975 to 1980, he was Vice President and Secretary of Heizer Corporation, a
venture capital firm.
Stephen W. Becker. Mr. Becker has served as Executive Vice President--NACO
Technologies since 1995. Mr. Becker was Vice President and General Manager of
NCI from 1993 to 1995 and Vice President--Corporate Development of NACO from
1992 to 1993. From 1991 to 1992, Mr. Becker was Vice President and General
Manager of the Unitcast Division of William Cook North America, Inc. From 1989
to 1991, Mr. Becker was a Vice President and the General Manager of the Toledo
Division of NCI. From 1986 to 1989, Mr. Becker was Director of Engineering of
NCI. Prior thereto, Mr. Becker held a number of executive positions with NCI
and the National Castings Division of Midland-Ross Corporation.
John M. Giba. Mr. Giba has served as Executive Vice President--Rail Products
Group since October 1996. He was Vice President and General Manager of NCI from
March 1995 through 1996. Mr. Giba was Vice President--Corporate Development of
NACO from July 1994 to February 1995 and Vice President--Sales and Marketing of
NCI from 1989 to January 1994. From 1987 to 1989, Mr. Giba was General Manager
of NACO's Mine and Mill Division. From 1985 to 1987, he was General Manager of
the Mine and Mill Division of NCI. Prior thereto, Mr. Giba held a number of
positions with the National Castings Division of Midland-Ross Corporation.
Brian L. Greenburg. Mr. Greenburg has served as Vice President and Corporate
Controller of NACO since April 1998. From July 1997 to April 1998, Mr.
Greenburg served as Vice President and Controller--Flow Products Group. From
January 1996 to June 1997, Mr. Greenburg served as Vice President of Finance
and Chief Financial Officer of Milwaukee Valve Co. Inc. From 1992 to 1995, Mr.
Greenburg served, on behalf of NACO, as the Controller of Acerlan S.A. de C.V.
Mr. Greenburg was a NACO employee during the time he worked at Acerlan, a
foundry operation located in San Juan del Rio, Mexico, pursuant to a management
agreement between Acerlan's unrelated parent corporation and NACO. Under that
management agreement, NACO managed the foundry operations, including finances,
and Acerlan sold castings, primarily for flow control products, to NACO for
resale by NACO's Flow Products Group. Mr. Greenburg also served as the Manager
of Planning and Analysis for NACO from 1989 to 1991, as the Plant Controller
for the Cicero Facility from 1987 to 1988, and as the General Accounting
Manager of NCI from 1985 to 1987.
Michael B. Heisler. Mr. Heisler has served as President--Locomotive, Flow and
Specialty Products Group since December 1998. He was Executive Vice President
from June 1997 to December 1998 to focus on Naco's European Operations. Mr.
Heisler was Executive Vice President--Locomotive and Valve Operations from 1995
to 1997, Executive Vice President and General Manager of the Keokuk Facility
from 1987 to 1994 and Vice President--Corporate Development of NACO from 1986
to 1987. Prior to joining NACO, Mr. Heisler held a number of executive
management positions at various steel foundry companies.
Jack R. Long. Mr. Long has served as Senior Vice President--International of
NACO since 1994. From 1987 to 1994, Mr. Long was Vice President--International
of NACO. From 1985 to 1987, Mr. Long was Vice
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President--International of NCI. Prior thereto, Mr. Long held a number of
executive positions in engineering and sales with the National Castings
Division of Midland-Ross Corporation.
Wilbur G. Streams. Mr. Streams has served as Vice President--Merger Integration
since December 1998. He was Executive Vice President--Flow Products Group from
September 1997 to December 1998. Mr. Streams was Vice President--Facilities and
Environment and Vice President--Corporate Development of NACO from 1995 to
September 1997, Vice President--Engineering of NCI from 1991 to 1995, and
General Manager of Castings Reclamations Inc. from 1988 to 1991. Prior thereto,
Mr. Streams held a number of positions with NCI and the National Castings
Division of Midland-Ross Corporation.
Richard A. Drexler. Mr. Drexler has served as a director of NACO since 1995 and
is currently the Chairman of NACO's Audit and Finance Committee. Since 1993,
Mr. Drexler has served as Chairman, Chief Executive Officer and President of
Allied Products Corporation, which manufactures equipment for agricultural and
related uses and also manufactures mechanical and hydraulic presses.
Daniel W. Duval. Mr. Duval has been a director of NACO since 1995 and is
currently Chairman of NACO's Compensation Committee. Mr. Duval has served as
President and Chief Executive Officer of Robbins & Myers, Inc., a manufacturer
of fluid management equipment for process industries, since 1986. Prior to such
time, Mr. Duval was President and Chief Operating Officer of Midland-Ross
Corporation.
Willard H. Thompson. Mr. Thompson has served as a director of NACO since 1988.
Mr. Thompson has been an owner and senior transport consultant of Transport
Specialty Group of California, Inc., a transportation consulting company, since
1988 and also served as a railroad transport/intermodal specialist for the
World Bank.
NACO BOARD COMMITTEES
Audit and Finance Committee. The NACO board of directors has established an
Audit and Finance Committee to make recommendations concerning the engagement
of independent public accountants, review with the independent public
accountants the scope and results of the audit engagement, approve professional
services provided by the independent public accountants, review the
independence of the independent public accountants, consider the range of audit
and non-audit fees and review the adequacy of NACO's internal accounting
controls. The Audit and Finance Committee consists of Messrs. Drexler
(Chairman) and Duval.
Compensation Committee. The NACO board of directors has established a
Compensation Committee to establish NACO's general compensation and benefit
policies, make recommendations to the NACO board of directors concerning
salaries and incentive compensation for NACO's officers and employees and
administer the Stock Plan. The Compensation Committee consists of Messrs. Duval
(Chairman), Drexler and Thompson.
COMPENSATION OF DIRECTORS
Directors who are also executive officers of NACO receive no additional
compensation for service as directors. Messrs. Drexler, Duval and Thompson,
NACO's non-employee directors, receive an annual fee of $25,000, $25,000 and
$22,000 respectively, and each receive a meeting fee of $1,000 for each meeting
attended and an annual fee of $4,000 to serve as Chairman of a committee of the
NACO board of directors. The non-employee directors are also reimbursed for
expenses related to attending meetings.
NACO has a consulting arrangement with Mr. Thompson which provides that NACO
will pay Mr. Thompson $3,000 per month plus reasonable out-of-pocket expenses
incurred on NACO's behalf. This arrangement is subject to renewal each year by
both Mr. Thompson and NACO. Mr. Thompson received a consulting fee of $36,000
in fiscal 1997.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following summary compensation table specifies
the compensation for services in all capacities to NACO for NACO's Chief
Executive Officer and the four other most highly compensated executive officers
(the "Named Executive Officers") for fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
SALARY BONUS COMPENSATION(1)
($) ($) ($)
------- ------- ---------------
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION FOR FISCAL 1997
- --------------------------- -------------------------------
<S> <C> <C> <C>
Joseph A. Seher
(Chairman of the Board and Chief Executive
Officer)...................................... 403,392 262,215 21,141
Vaughn W. Makary
(President and Chief Operating Officer)....... 305,016 161,658 16,362
Wayne R. Rockenbach
(Senior Vice President and Chief Financial
Officer)...................................... 247,584 128,748 29,705
John W. Waite
(Executive Vice President and Chief
Administrative Officer)....................... 221,544 115,212 18,599
Michael B. Heisler
(President--Locomotive, Flow and Specialty
Products Group)............................... 213,150 75,810 10,864
</TABLE>
- --------
(1) Includes NACO's matching contributions to NACO's 401(k) Plan for the
benefit of the Named Executive Officers in the following amounts: $8,569
for Mr. Seher; $11,028 for Mr. Makary; $9,595 for Mr. Rockenbach; $8,549
for Mr. Waite; and $8,165 for Mr. Heisler. Also includes premiums paid on
life insurance policies on the life of each Named Executive Officer in the
following amounts: $12,572 for Mr. Seher; $5,334 for Mr. Makary; $20,110
for Mr. Rockenbach; $10,050 for Mr. Waite; and $2,699 for Mr. Heisler. The
beneficiaries under each life insurance policy have been designated by the
respective Named Executive Officer.
NACO STOCK PLAN
NACO adopted the 1997 NACO Omnibus Stock Plan (the "NACO Stock Plan") in
October 1997. 57,127 shares of NACO common stock were reserved for issuance
under the NACO Stock Plan, of which 49,377 shares are available for issuance.
NACO has issued only restricted shares of NACO common stock, and has not
granted any options, under the NACO Stock Plan. The NACO Stock Plan permits the
grant of (i) incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended, (ii) nonstatutory stock options, (iii) restricted shares
of NACO common stock and (iv) stock appreciation rights. The NACO Stock Plan is
administered by the Compensation Committee of the NACO board of directors,
which determines the key employees to whom awards are granted, the terms and
conditions of such awards and the type of awards to be granted.
Under the NACO Stock Plan, the exercise price of ISOs must be not less than
100% of the fair market value of NACO common stock on the date of grant, except
that, in the case of any ISOs granted to an employee who owns more than 10% of
the combined voting power of all classes of NACO's capital stock (a "Ten
Percent Employee"), the option price must be 110% of such fair market value.
The exercise price of non-qualified stock options is determined by the NACO
board of directors at the time of grant. No ISOs may be exercised after the
expiration of ten years from the date of grant (five years in the case of an
ISO granted to a Ten Percent Employee). Otherwise, stock options may be
exercised at such times, in such amounts and subject to such restrictions as
are determined in its discretion by the Compensation Committee.
SEVERANCE AND CHANGE IN CONTROL AGREEMENTS
NACO has severance and change in control agreements with the following
Executives: Joseph A. Seher, Vaughn A. Makary, John W. Waite and Wayne R.
Rockenbach. The agreements provide, among other things,
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that if the Company terminates an Executive's employment other than for cause
(as defined in the agreement), NACO will be obligated to pay such Executive the
following amounts as severance: (i) two times the Executive's base salary as of
the termination date; (ii) the Executive's pro rata bonus for the year in which
he is terminated; and (iii) certain car allowances and outplacement service
fees. In addition, NACO shall continue the Executive's medical benefits and
insurance coverage until the earlier of (i) two years from the date of
termination and (ii) the time, if applicable, at which the Executive receives
similar benefits from a new employer. If an Executive is terminated by NACO
other than for cause or the Executive terminates his employment with NACO for
good reason (as defined in the agreement) within three years of a change in
control (as defined in the agreement), the Executive will be entitled to all of
the foregoing severance payments and benefits plus the larger of (i) two times
the average bonus paid to the Executive during the two fiscal years prior to
his termination and (ii) two times the bonus the Executive otherwise would have
earned based on the Executive's current salary multiplied by the targeted bonus
percentage for the Executive set forth in NACO's Incentive Compensation Plan
for the year in which he was terminated. If severance payments to an Executive
would result in the imposition of an excise tax on such payments, NACO will
also reimburse the Executive for such excise tax plus the income and excise
taxes thereon.
NACO has a similar severance and change in control agreement with Michael B.
Heisler, except that, pursuant to such agreement, (i) Mr. Heisler is entitled
to severance for one year's base salary instead of the two years to which the
Executives are entitled and (ii) Mr. Heisler is prohibited from competing with
NACO for the longer of (A) one year from the date of his termination and (B)
the period during which he is entitled to severance payments and benefits.
INCENTIVE COMPENSATION PLAN
NACO's Incentive Compensation Plan is designed to reward key management
personnel, including NACO's executive officers, with a specified bonus if NACO
or the division in which such personnel are employed achieves certain results
in operating income and return on managed assets. Each eligible employee's
target bonus is based on a percentage of such employee's salary. The eligible
employee will be entitled to receive up to 60% of his or her target bonus based
on the level of operating income of NACO or the division in which the employee
works, and up to the remaining 40% of his or her target bonus based on the
return on the managed assets of NACO or the division in which the employee
works. The Chief Executive Officer may also increase a bonus payout to reward
good management skills.
STOCK PURCHASE AGREEMENTS
NACO has Stock Purchase Agreements (the "Stock Agreements") with certain of its
employees, including each of its Named Executive Officers, pursuant to which
NACO sold to such employees an aggregate of 411,797 shares of NACO common stock
at prices determined by NACO, and each of the employees agreed to sell such
shares of NACO common stock back to NACO upon the occurrence of certain events
and subject to the terms of the Stock Agreements. The shares of NACO common
stock sold to the employees vest with respect to each employee at a rate of 20%
per year for each year that the employee is continuously employed with NACO
following the date of his or her Stock Agreement. If the employee ceases for
any reason to be employed by NACO or wishes to sell, transfer or otherwise
dispose of the shares of NACO common stock owned by him or her that are subject
to the Stock Agreement, NACO has a right of first refusal to purchase such
shares of NACO common stock. Pursuant to the Stock Agreements, NACO is entitled
to purchase any unvested shares of NACO common stock at the price at which such
shares were originally sold to the employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are and, during fiscal 1997, were,
Richard Drexler, Daniel Duval and Willard Thompson. See "--NACO Board of
Directors and Committees" above.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John M. Lison, formerly the managing partner of the law firm of Lison &
Griffin, P.C., counsel to NACO, served as Executive Vice President--Corporate
Development since October 1, 1998 and as Secretary, and a director of NACO
since its formation in 1987. In fiscal 1997, NACO paid Lison & Griffin, P.C.
$640,975 in legal fees for services performed in connection with general legal
matters during fiscal 1997.
See "The Merger--Opinion of Financial Advisor to NACO--Compensation" for
information concerning the exercise of a warrant to purchase NACO common stock
held by Northwestern Mutual Life Insurance Company, an affiliate of Baird, the
financial adviser to NACO.
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ABC SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial data of ABC as of and for the
periods indicated. The selected historical financial data of ABC as of July 31,
1998, 1997, 1996, 1995 and 1994 and for each of the five years in the period
ended July 31, 1998, have been derived from the audited financial statements of
ABC, some of which are incorporated by reference in this document. The selected
historical financial data of ABC as of October 31, 1998 and 1997 and for each
of the three month periods then ended are derived from the unaudited financial
statements of ABC, some of which are incorporated by reference in this document
and in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of ABC for such interim periods.
The ABC results for the three months ended October 31, 1998 are not necessarily
indicative of the ABC results to be expected for the full fiscal year. The
information set forth below should be read in conjunction with the ABC
financial statements and related notes thereto included in ABC's Annual Report
on Form 10-K for the year ended July 31, 1998 incorporated by reference herein,
and the information set forth in "ABC Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
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ABC RAIL PRODUCTS CORPORATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED JULY 31, OCTOBER 31
------------------------------------------------ --------------------
1998 1997 1996 1995(6) 1994(7) 1998 1997
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $319,038 $259,190 $240,664 $243,229 $187,176 $ 77,514 $ 67,885
Cost of sales........... 281,707 232,069 209,290 207,645 160,615 69,566 61,093
-------- -------- -------- -------- -------- --------- ---------
Gross profit........... 37,331 27,121 31,374 35,584 26,561 7,948 6,792
Selling, general and
administrative
expenses............... 18,741 14,232 12,290 13,011 11,579 4,648 3,622
Special charge(1)....... -- -- 3,155 -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Operating income....... 18,590 12,889 15,929 22,573 14,982 3,300 3,170
Settlement of
litigation(2).......... -- -- (2,800) -- -- -- --
Equity (income) loss of
unconsolidated joint
ventures............... (1,616) (1,041) 144 (393) (31) (175) (401)
Interest expense........ 7,505 7,016 5,239 3,387 3,147 2,241 2,185
Amortization of deferred
financing costs........ 619 362 172 275 380 173 129
-------- -------- -------- -------- -------- --------- ---------
Income before income
taxes, cumulative
effect of accounting
changes and
extraordinary items... 12,082 6,552 13,174 19,304 11,486 1,061 1,257
Provision for income
taxes.................. 4,690 2,951 4,726 7,619 4,599 446 552
-------- -------- -------- -------- -------- --------- ---------
Income before
cumulative effect of
accounting changes and
extraordinary items... 7,392 3,601 8,448 11,685 6,887 615 705
Cumulative effect of
accounting changes(3).. (1,111) -- -- (1,214) -- (1,620) --
Extraordinary items(4).. -- (310) -- (814) (1,690) -- --
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)...... $ 6,281 $ 3,291 $ 8,448 $ 9,657 $ 5,197 $ (1,005) $ 705
======== ======== ======== ======== ======== ========= =========
PER SHARE DATA:
Basic:
Income before
cumulative effect of
accounting changes and
extraordinary items... $ 0.82 $ 0.41 $ 1.05 $ 1.52 $ 1.08 $ 0.07 $ 0.08
Net income (loss)...... $ 0.70 $ 0.38 $ 1.05 $ 1.26 $ 0.82 $ (0.11) $ 0.08
Weighted average common
shares outstanding
(000's)............... 8,969 8,709 8,062 7,694 6,358 8,976 8,954
Diluted:
Income before
cumulative effect of
accounting changes and
extraordinary items... $ 0.81 $ 0.41 $ 1.03 $ 1.48 $ 1.06 $ 0.07 $ 0.08
Net income (loss)...... $ 0.69 $ 0.37 $ 1.03 $ 1.22 $ 0.80 $ (0.11) $ 0.08
Weighted average common
and equivalent shares
outstanding (000's)... 9,121 8,789 8,220 7,890 6,473 9,140 9,073
OPERATING DATA:
Backlog(5).............. $ 52,038 $ 57,332 $ 33,041 $ 45,429 $ 74,747 $ 44,040 $ 50,129
Depreciation and
amortization........... 12,449 12,412 11,022 7,909 5,703 4,772 3,277
Capital expenditures.... 51,110 34,607 13,943 25,497 11,331 12,400 9,083
BALANCE SHEET DATA:
Total assets............ $295,341 $230,607 $169,026 $157,264 $ 95,774 $ 317,836 $ 242,534
Total debt (including
cash overdrafts)....... 152,345 101,989 60,292 63,544 28,455 169,381 111,533
Stockholders' equity.... 87,213 80,496 64,396 50,454 34,918 86,208 81,201
</TABLE>
- --------
(1) Represents non-recurring charges primarily for the closure of a
manufacturing facility and the cost of certain reengineering efforts.
(2) Represents proceeds from the settlement of a lawsuit.
(3) Represents the after-tax cumulative effect of accounting changes whereby:
in fiscal 1995, ABC adopted new provisions for accounting for certain
postemployment benefits which were previously accounted for on a cash
basis; in fiscal 1998, ABC expensed previously capitalized business process
reengineering costs; and, in fiscal 1999, ABC expensed previously
capitalized start-up costs.
(4) Represents the after-tax effect of extraordinary non-cash charges in
connection with the write-off of unamortized deferred financing costs
related to the early extinguishment of debt in connection with (i) the
refinancing and the initial public offering described in note 7 below in
fiscal 1994 and (ii) the refinancing of certain indebtedness in fiscal 1995
and fiscal 1997.
(5) Includes only firm orders, as of the end of the fiscal period, for which
customers have issued releases for production and delivery and excludes the
non-current portion of any long-term supply arrangement.
(6) In May 1995, ABC acquired a wheel mounting business for approximately $26.1
million.
(7) In September 1993, ABC refinanced a significant portion of its outstanding
debt and redeemed all outstanding shares of its preferred stock at a
discount. In December 1993, ABC used net proceeds of $35.1 million from its
initial public offering to retire a substantial portion of the debt issued
in the September 1993 refinancing.
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ABC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of ABC's consolidated financial condition
and consolidated results of operation should be read in conjunction with "ABC
Selected Historical Financial Data" and ABC's Consolidated Financial Statements
and Notes thereto included in its Annual Report on Form 10-K for the year ended
July 31, 1998, incorporated by reference in this document. This discussion
contains certain forward-looking statements which involve risks and
uncertainties. ABC's actual results could differ materially from the results
expressed in, or implied by, such statements. See "Cautionary Statement
Concerning Forward-Looking Statements."
RESULTS OF OPERATIONS--THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE
MONTHS ENDED OCTOBER 31, 1997
Net Sales
Net sales increased 14.2% to $77.5 million from $67.9 million. The increase in
sales is due primarily to an increase in sales in the Wheel Manufacturing and
Wheel Services Division ($10.1 million), with production up substantially over
last year at the wheel manufacturing facility. Offsetting this increase was a
$3.7 million reduction in sales within the Track Products Division. Track
orders from two of our major Class I Railroad customers were down significantly
from the first quarter last year. The decline in orders from one of these major
customers is due to an across-the-board reduction in orders for capital goods
by that customer that may also impact future periods.
Gross Profit and Cost of Sales
Gross profit increased from 10.0% of revenue in 1997 to 10.3% of revenue in
1998. The increase in the gross profit is primarily the result of improved
operating results in the Wheel Division, partially offset by the reduction in
the Track Products Division as a result of the lower sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.0 million. The
increase in expenses between periods reflects additional expense required to
support ABC's new information systems (SAP's R/3 enterprise-wide software) and
other general increases.
Accounting Change
In April 1998, Statement of Position No. 98-5 was issued which requires that
companies write-off previously capitalized start-up costs and expense future
start-up costs as incurred. ABC had capitalized certain start-up costs in prior
periods. Effective August 1, 1998, ABC elected early adoption of this standard
and wrote-off $2.6 million ($1.6 million after-tax) of previously capitalized
start-up costs.
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RESULTS OF OPERATIONS--FISCAL YEARS ENDED JULY 31, 1998, 1997 AND 1996
Overview
ABC reported net income of $6.3 million or $0.69 per share on a diluted basis
for the year ended July 31, 1998 as compared to net income of $3.3 million or
$0.37 per share in 1997 and net income of $8.4 million or $1.03 per share in
1996. Operating results for the year ended July 31, 1998 include a non-cash,
after-tax charge of $1.1 million for the cumulative effect of a change in
accounting for previously capitalized process reengineering costs. Operating
results for the year ended July 31, 1997 also include an extraordinary charge
of $0.3 million for the early retirement of debt.
The diluted earnings per share effect of the accounting change and
extraordinary item on ABC's net income was to decrease diluted earnings per
share by $0.12 from $0.81 to $0.69 in 1998, and to decrease diluted earnings
per share by $0.04 in 1997 from $0.41 to $0.37.
Net Sales
Fiscal 1998 net sales increased $59.8 million (23.1%) following a fiscal 1997
sales increase over fiscal 1996 of $18.5 million (7.7%). Sales of railcar
wheels and wheel services increased $29.0 million in fiscal 1998, primarily
resulting from an increased level of activity to support customers that build
new railcars and increased production from ABC's Calera, Alabama, railcar wheel
manufacturing plant. Net sales of ABC's Track Products Division increased $15.0
million in fiscal 1998. Net sales of the Systems Division increased $15.8
million in fiscal 1998. The Systems Division was formed with the acquisition of
American Systems Technologies, Inc. in December 1996.
The fiscal 1997 sales increase was primarily in the Track Products Division
($16.0 million); and was predominately related to additional sales ($12.4
million) associated with the May 1996 acquisition of DeCo Industries Inc. and
Deco Automation and the December 1996 acquisition of American Systems
Technologies. Sales of specialty trackwork products in fiscal 1997 were
marginally above the prior year's sales. The specialty trackwork product sales
in fiscal 1997 were adversely affected by the merger-induced slowdown of
trackwork order releases from the Western Class I railroads. Sales at ABC's
Calera wheel manufacturing plant were flat between fiscal 1997 and 1996.
Offsetting the recovery from the mid-fiscal 1996 fire at the Calera plant was
an overall lower-than-normal level of capacity during 1997 due to disruptions
caused by the implementation of process improvements at the facility.
Gross Profit and Cost of Sales
Gross profit increased from 10.5% of net sales in fiscal 1997 to 11.7% of net
sales in 1998. Gross profit declined from 13.0% of net sales in fiscal 1996 to
10.5% of net sales in 1997. The improvement in the gross profit margin in 1998
is primarily due to improved sales volumes in all major divisions and improved
production at the Calera, Alabama, wheel plant. The decrease in the gross
profit margin from 1996 to 1997 was primarily due to the impact of disruptions
to production caused by the implementation of major improvements to
manufacturing operations, primarily at the Calera, Alabama, wheel plant.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.5 million from fiscal
1997 to fiscal 1998. The increase in expenses reflects additional expense in
the customer support area (field sales and customer service)
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to meet the expanding needs of customers, the additional effort required to
support ABC's new information systems (SAP's R/3 Enterprise-wide software) and
the increased level of incentive compensation payments for fiscal 1998.
Selling, general and administrative expenses increased $1.9 million from fiscal
1996 to fiscal 1997. The increase in 1997 was primarily in the customer support
area for the reasons noted above.
Other
During fiscal 1996, ABC recorded a special pre-tax charge of $3.2 million. The
charge covered plant closure costs related to the joint venture with Anchor
Brake Shoe Company, business process reengineering costs and additional taxes
on products sold into Mexico. See Note 12 of the Notes to Consolidated
Financial Statements for additional information.
Interest expense, net of amounts capitalized on ABC's major construction
projects, increased 7.0%, or $0.5 million, due primarily to overall higher
level of outstanding debt, along with marginally higher interest rates.
Interest expense increased $1.8 million (33.9%) in 1997 over 1996 due primarily
to an overall higher level of outstanding debt and higher average interest
rates.
Accounting Change
On November 20, 1997, the FASB's Emerging Issues Task Force reached a consensus
that companies must write-off previously capitalized business process
reengineering costs and expense future costs as incurred. ABC had capitalized
certain process reengineering costs in prior fiscal years. In accordance with
this consensus, in fiscal 1998, ABC recorded a non-cash, after-tax charge of
$1.1 million to reflect the cumulative effect of this accounting change.
Extraordinary Item
The extraordinary non-cash, after-tax charge of $0.3 million in fiscal 1997
represents the write-off of unamortized deferred financing costs related to
previous indebtedness which was retired with proceeds from the issuance of the
senior subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and debt have been the major sources of funds
for working capital, capital expenditures and acquisitions. ABC has
significantly increased the level of its capital expenditures in the last two
fiscal years. Capital expenditures totaled $51.1 million, $34.6 million, and
$13.9 million in fiscal years 1998, 1997 and 1996, respectively, and $12.4
million and $9.1 million for the three months ended October 31, 1998 and 1997,
respectively. Major capital expenditures in the more recent periods include a
new rail milling facility in Chicago Heights, Illinois and a major upgrade of
the machining operations at the Calera, Alabama, wheel plant. During this time
period, ABC also invested capital on new computer equipment, enterprise-wide
software, and software installation which will substantially enhance ABC's
management information systems. The rail mill began commercial production in
the second quarter of fiscal year 1999. The improved Calera facility was
operational by June 1998. Most of the basic modules of the SAP's R/3
enterprise-wide software system are operational.
In fiscal year 1997, ABC also invested approximately $10 million in a joint
venture with China's Ministry of Railroads to build a railcar wheel
manufacturing plant in China. This joint venture began operations at the end of
fiscal year 1998.
In January 1998, ABC purchased certain patents for the manufacture and sale of
heat-treated and heat-hardened rail in the U.S. and Canada. ABC is in the
process of setting up a facility for the production of this product. ABC's
investment for the patent rights and the production equipment will approximate
$21 million. The plant is anticipated to begin production in early fiscal 2000.
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Cash generated from operating activities was $1.3 million, $3.7 million and
$21.8 million in fiscal 1998, 1997 and 1996, respectively. Cash used in
operating activities was $4.5 million and $0.1 million for the three months
ended October 31, 1998 and 1997, respectively. The decrease in operating cash
flow between quarters is due primarily to a net increase in working capital.
ABC has elected to build some inventory in the Track Products Division in
anticipation of additional orders after the start of the calendar year. The
slight decline in cash generated by operating activities in 1998 was due to
increased net earnings, offset by an increase in working capital requirements
due to the increased level of business activity. The decrease in fiscal 1997
was due primarily to a decrease in earnings and the use of cash to support
increased working capital requirements.
ABC expects capital expenditures to be in the range of $25 million to $35
million in fiscal year 1999. ABC has unused lines of credit totaling
approximately $13.2 million as of October 31, 1998. ABC believes that its cash
generated from operations for fiscal year 1999 and its lines of credit will be
sufficient to fund the cash needs for working capital and capital expenditures.
Cash flows from financing activities during fiscal 1998 and the first quarter
of fiscal 1999 reflect net borrowings under ABC's revolving line of credit and
the issuance of $25.0 million of 8 3/4% Senior Subordinated Notes, Series B.
During fiscal 1997, ABC's Credit Agreement was amended and restated in
conjunction with the issuance of $50 million of 9 1/8% Senior Subordinated
Notes. Under the amended Credit Agreement, certain loans and acquisitions
facilities were paid in full, the revolving credit line was increased to $90
million and terms of certain financial covenants were modified.
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 ABC's fiscal year. In
addition, a number of ABC'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 ABC's fiscal year. Transit industry
practice with respect to specialty track work generally involves the periodic
shipment of large quantities, which may be unevenly distributed throughout the
year. ABC did not experience any significant departure from the historical
demand patterns during fiscal 1998.
YEAR 2000 ISSUES
The year 2000 ("Y2K") problem refers to computer applications using only the
last two digits to refer to a year rather than all four digits. As a result,
these applications could fail or create erroneous results if they recognize
"00" as the year 1900 rather than the year 2000.
In addressing the Y2K issues, ABC has taken initiatives in three general areas:
information technology ("IT") and communication systems; non-IT systems and
related third party issues. The following is a summary of these programs.
IT and Communication Systems
Since late 1995, ABC, in support of its long-range strategic plans, has
significantly upgraded and continues to upgrade its information technology and
communication systems. This upgrade includes: enterprise-wide application
systems (SAP's R/3 system), migration from midsize computers to client/server
based systems, upgraded personal computers "PC's," upgraded PC software
(standardized on Windows NT, Windows 9X, Microsoft Exchange, Microsoft Office
Suite and Back Office applications software), "SDRC Ideas 3D CAD and Auto CAD",
local area networks (LAN's), wide area networks (WAN's), and network
integration of advanced fax, printer, and advanced copier systems. A by-product
of these endeavors is that a large portion of
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ABC's IT and non-voice communication systems, and many of its voice
communication systems are now Y2K compliant.
ABC's exceptions to Y2K compliance are: five of ABC's nineteen plants are not
yet converted to SAP's R/3 system; one HP3000 mid-size computer running Y2K
non-compliant software is not yet removed from operation; shop labor collection
and PC support applications at certain plants are not yet Y2K compliant;
certain Auto CAD sites are not yet Y2K compliant; EDI systems are not fully
compliant; certain PC's require BIOS and/or operating system and application
system upgrades; certain network hardware, mainly routers, require replacement;
up to half of the phone systems (PBX's) at ABC's plants need to be upgraded or
replaced based on an assessment of 40% of the PBX systems to-date; and other
intelligent office equipment in a stand alone mode such as fax machines,
copiers, printers, etc. may not be Y2K non-compliant. These issues are
anticipated to be remediated by the middle of calendar year 1999.
Non-IT Systems
Internal non-IT systems comprised mainly of building air management systems,
elevator systems, security and fire control systems, safety systems, equipment
and machinery operating and control systems, compressed air, electrical and
natural gas systems, and equipment such as lift trucks, mobile cranes, etc.,
are being assessed by third party consultants specializing in Y2K compliance
and remediation planning. This assessment will be completed by December 31,
1998. Based on the experience at 9 out of 14 plants already surveyed showing
that about 11% of devices must be replaced, the availability of needed devices
and the minimal time required to replace the devices, ABC expects the
remediation to be completed by June 1999.
Third Parties
ABC has third party relationships with approximately 25 large railroad and
railcar customers, raw materials suppliers and suppliers of financial and
outsourced investor and employee information and management services. Most of
these third parties are publicly traded corporations subject to disclosure
requirements. ABC is presently engaged in ongoing discussions and evaluations
of these third parties' Y2K readiness; while simultaneously advising them of
ABC's readiness. ABC intends to begin monitoring Y2K disclosures in SEC filings
of these third parties commencing with the current quarter filings.
Major customers referred to above report having had Y2K compliance programs
running for at least one to two years and indicate that their systems that
interact with ABC are or will be compliant for Y2K. Based on discussions with
these customers, assessment of the customers capability, and long time customer
operating practices, ABC believes that these key customers will be Y2K
compliant in all material matters affecting ABC. ABC will continue to monitor
its customers' Y2K compliance.
ABC is also in ongoing discussion with key suppliers of outsourced services
including, but not limited to, stock transfer, debt servicing, payroll, banking
collection and disbursements, and benefit programs. At this time, ABC has
concluded that all material suppliers of these services are or will be Y2K
compliant by the end of calendar 1998. ABC will continue to monitor their Y2K
compliance.
With the exception of rail products purchased from the large aforementioned
suppliers, other raw materials--mainly railroad ties, miscellaneous steel plate
and bar, fasteners, scrap steel and foundry supplies--are purchased from
numerous small suppliers who ABC believes are able to manually execute their
business and are readily replaceable. ABC has concluded there is no material
risk of being unable to procure these needed raw materials.
The specific Y2K IT and communication system remediation tasks previously
outlined are being accomplished by in-house IS and user personnel whose costs
are recorded as normal operating expense.
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The IT System software upgrades are being executed under ongoing maintenance
and support agreements with software vendors, and the BIOS upgrades to certain
hardware are being executed under similar arrangements with hardware vendors.
The replacement cost of non-remediable PC's will not be material. Network
hardware component replacement costs, along with copiers and fax machine
replacement costs, will also not be material. ABC is not yet in a position to
estimate the cost of Non-IT system and third party compliance issues, but has
no reason to believe, based upon its evaluations done to date, that such costs,
in the aggregate, would be material.
Y2K Risks
The principal risks to ABC relating to the completion of its compliance
conversion efforts related to its IT and communications systems are:
. Inability to recruit and/or retain key staff.
. Failure to complete SAP's R/3 system installation in the five remaining
plants.
. Failure to replace non-compliant EDI systems.
. Failure to replace non-compliant labor data collection systems.
ABC believes that adequate replacements for non-compliant network components,
PC's, copiers, fax machines and PBX's are commercially available at reasonable
prices and in good supply. ABC believes that adequate time and resources are
available to remediate these areas as needed.
ABC is attempting to quantify the principle IT and communication systems risks
at this time. Areas that could be affected include, but are not limited to, the
ability to: obtain and process orders and/or retain certain material customers
if EDI is not remediated; operate plants not having Y2K functional IT
production systems; develop adequate product costs in the event of labor data
collection system failures; and maintain and operate ABC's IT and communication
systems lacking adequate staff resources.
The principal risks to ABC relating to non-IT systems are failures in control
systems for significant machines and equipment or facility systems. These risks
are presently under assessment and are expected to be completed by December 31,
1998. Until this assessment is completed, ABC has no basis to form an estimate
of remediation problems, costs or difficulties, and cannot estimate the
potential costs of such issues at this time.
The principal risks to ABC in its relationship with third parties are:
. Failure of third party systems used to conduct such third parties
business including customers, rail suppliers and suppliers of financial
and outsourced investor and employee information and management
services.
. Failure to implement compliant EDI systems with key customers.
Based on Y2K compliance work done to-date, ABC believes its key customers are
currently Y2K compliant or will be Y2K compliant in all material respects and
that service suppliers will be Y2K compliant or can be replaced within an
acceptable time frame. ABC has or will obtain compliance certification from
suppliers of key services as soon as such certifications are available. Other
than rail supplied by key customers, ABC currently believes that other raw
materials do not pose a significant risk.
Contingency Plans
ABC intends to deal with contingency planning during the latter part of its
second fiscal quarter of fiscal 1999, after the results of the assessment and
remediation in progress have been ascertained.
ABC's description of its Y2K compliance issue is based upon information
obtained by ABC through evaluations of ABC's IT communication systems and
customer and supplier Y2K compliance. No assurance can be given that ABC will
be able to address the Y2K issues for all of its software and applications in a
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timely manner or that it will not encounter unexpected difficulties or
significant expenses relating to adequately addressing the Y2K issue. If ABC or
the major customers or suppliers with whom ABC does business fail to address
adequately the Y2K issues, or ABC fails to successfully integrate or convert
its computer systems generally, ABC's business or results of operations could
be materially adversely affected.
REGARDING "FORWARD-LOOKING" STATEMENTS
The foregoing outlook contains forward-looking statements that are based on
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from current expectations due to a
number of factors, including general economic conditions; competitive factors
and pricing pressures; shifts in market demand; the performance and needs of
industries served by ABC'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 ABC's strategy of acquisitions,
rebuilding and process improvements; and the risks described from time to time
in ABC's SEC reports.
BUSINESS OF ABC
GENERAL
ABC is a leader in the engineering, manufacturing and marketing of replacement
products and original equipment for the North American freight railroad and
rail transit industries. ABC's products include specialty trackwork, such as
rail crossings and switches; mechanical products, such as railcar, locomotive
and idler wheels, mounted wheel sets and metal brake shoes; classification yard
products and automation systems; and railroad signal systems installation and
maintenance services. ABC operates in the composite brake shoe market through a
joint venture.
On September 17, 1998, ABC announced the signing of a definitive merger of
equals agreement with NACO to create one of the largest suppliers of
technologically advanced products for the railroad industry. NACO is the
leading North American supplier of high performance freight car suspension
systems, a leading supplier of other types of freight car trucks, locomotive
truck frames, freight car couplers and related products, as well as high
integrity steel castings used in flow control products.
ABC's business began in 1902 as the American Brake Shoe and Foundry Company. In
1987, ABC was formed by management as a Delaware corporation to acquire
substantially all of the assets and certain related liabilities of the Railroad
Products Group of Abex Corporation ("Abex"), which was then a subsidiary of IC
Industries, now Whitman Corporation. In August 1989, then current management
effected a leveraged recapitalization of ABC pursuant to which dividends and
special payments of approximately $20 million were paid to its stockholders. In
1991, an affiliate of Kohlberg & Co. ("Kohlberg") acquired control of ABC
through the purchase of certain stockholder interests and newly-issued common
stock of ABC. In 1995, Kohlberg sold its entire interest in the common stock of
ABC.
Leading Freight Railroad Market Share. ABC has a substantial share of all of
the specialty trackwork and mechanical products markets it serves. Based upon
industry information and information gathered from its customers, ABC believes
that it has an approximately 50% share of the North American freight specialty
trackwork market, more than twice that of its next largest competitor, and is
the second largest producer of domestic wheels for freight railcars.
Integrated Manufacturing and Engineering Capability. ABC is the only vertically
integrated specialty trackwork manufacturer in North America. It designs,
engineers and manufactures in-house a full line of specialty trackwork
products, including rail transit specialty trackwork based on technology
provided through
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ABC's relationship with Cogifer S.A. ("Cogifer"). See "Cogifer Relationship"
for additional information on Cogifer. ABC maintains six specialty trackwork
manufacturing facilities located in various U.S. geographical areas. Certain
specialty trackwork components that are subject to the most concentrated
pressure must be made of special manganese steel alloys, which harden under the
repeated pressure of passing wheels. ABC is the only U.S. specialty trackwork
manufacturer that operates its own manganese steel foundry for the manufacture
of these key specialty trackwork components. This foundry enables ABC to
maintain strict quality control at all stages of the production process. In
addition, ABC is the only North American specialty trackwork manufacturer with
the in-house ability to design and craft the wooden patterns used to produce
its specialty trackwork component castings. This capability, together with more
than 80 years of specialty trackwork designs contained in ABC's extensive
computer-aided design system, gives ABC a competitive advantage in responding
to freight railroads' needs for customized products manufactured to rigorous
standards. This capability also allows ABC to adapt to European technologies
for high-speed and light rail applications, derived through its relationship
with Cogifer, to serve the needs of rail transit customers. ABC also designs,
engineers and manufactures in-house its entire line of wheels and metal brake
shoes and, reworks and distributes new and used freight car wheel sets.
Capital Investment. Over the last four fiscal years, ABC implemented a number
of special capital expenditure programs. These expenditures are expected to
improve quality and increase capacity in ABC's specialty trackwork operations,
reduce costs and improve efficiencies in its wheel operations and update ABC's
information technology and communications hardware and software. The capital
expenditure programs consists of: new machining facilities at ABC's Calera,
Alabama wheel plant to reduce costs and improve efficiencies in the production
of railroad and idler wheels; new process equipment for ABC's specialty
trackwork facilities to decrease scrap rates and rework costs and ensure
superior product quality; a new manufacturing facility in Chicago Heights,
Illinois, which houses new state-of-the-art rail milling equipment that will
support ABC's specialty trackwork initiatives; and implementation of SAP's R/3
enterprise-wide software system. These capital expenditures were all
substantially completed by early fiscal 1999 and were financed primarily out of
free cash flow and borrowings.
Expanding Rail Transit Market Presence. ABC is also a supplier of specialty
trackwork to North American rail transit systems, which generally conform to
freight railroad standards. Historically, however, sales of specialty trackwork
to the rail transit industry have accounted for only a small portion of ABC's
specialty trackwork sales. ABC has recognized a rising demand for rail transit
specialty trackwork and has responded by forming a dedicated rail transit
marketing group and aggressively pursuing rail transit projects throughout
North America. Increasingly, North American transit system authorities are
evaluating or employing European-style high-speed and light rail technology,
particularly with respect to proposed new systems. ABC has access to much of
this technology through its relationship with Cogifer, which ABC believes
enhances its ability to compete in the rail transit market.
Strategic Joint Ventures, Alliances and Acquisitions. ABC continually explores
opportunities to enhance its technology base and marketing and distribution
capabilities. In addition, ABC seeks acquisitions of complementary product
lines, particularly those that offer potential manufacturing or marketing
synergies. Since fiscal 1995, ABC has acquired six businesses and entered into
three ventures which resulted in ABC having initial or expanded operations in
the mounted wheel set, retarders, classification yard products and automation
systems, composite brake shoe, railroad signal and communication systems,
engineering and maintenance services businesses and a presence in Mexico and
China. Since ABC is a manufacturer of both specialty trackwork and mechanical
products and provides signaling and communication services, it has greater
access to railroads' engineering and purchasing departments than companies that
offer only a single product line. ABC therefore is positioned to effectively
market additional products if it were to acquire or develop new product lines.
Because the railroad supply industry is highly fragmented, with many private
companies manufacturing only single product lines and railroads exiting the
component manufacturing business, ABC believes that a variety of acquisition
opportunities exist.
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PRODUCTS AND SERVICES
Specialty Trackwork. ABC manufactures specialty trackwork to customer
specifications, generally for replacement of existing track, in the case of
freight railroads, or for replacement and new construction of rail transit
systems. ABC's products include track switches or turnouts, which divert a
train from one track to another; crossings, which allow one set of railroad
tracks to cross through another; switch throws, which set a track switch in
order to divert a train from one track to another; and other trackwork products
including guard rails and rail lubricators. ABC also manufactures cast
manganese steel trackwork components which are sold as part of a track switch
assembly or as replacement parts. Typically, track switches serve to divert
trains between two tracks, but ABC also designs and manufactures more
complicated track switches serving three, four or even more route diversions to
meet switching requirements in areas of high density traffic, such as urban
freight yards, passenger terminals and high traffic industrial and port areas.
In addition, ABC designs, manufactures and installs classification yard
products and automation systems. For fiscal 1998, 1997 and 1996, sales of
specialty trackwork products accounted for approximately 44%, 49% and 49%,
respectively, of ABC's net sales.
Signal Systems. ABC designs, assembles, installs and maintains railroad signal
systems. ABC entered this business in December 1996, through an acquisition.
For fiscal 1998 and 1997, sales of signal systems and related services
accounted for 8% and 3%, respectively, of ABC's net sales.
Railcar, Locomotive and Idler Wheels and Wheel Sets. ABC manufactures 28, 33,
36 and 38-inch diameter wheels for freight railcars and 40-inch diameter wheels
for diesel locomotives. These wheels are made of cast steel. Within a
particular size classification, variations exist in flange width and bore size.
The railroad industry generally considers wheels as "stock" items for their
common sizes and variations. In addition to producing railroad wheels, ABC has
been the sole-source manufacturer of cast idler wheels for Caterpillar Inc.'s
high-drive tracked equipment since 1988. Idler wheels are secondary wheels, not
connected to the equipment's power train, which guide the treads on such
tracked construction equipment as bulldozers and backhoes. In May 1995, ABC
commenced its wheel mounting and assembly operations as a result of its
acquisition of General Electric Railcar Wheel and Parts Service Corporation's
wheel mounting business ("the Wheel Mounting Acquisition"). The wheel mounting
operation, which is primarily a reconditioning service business,
remanufactures, reworks and distributes new and used freight car wheel sets.
Freight car wheel sets consist of the wheel, axle and bearing units that are
mounted to freight cars. ABC's reconditioning services include inspection and
analysis of existing wheel sets to determine necessary replacement parts,
remachining of axle units, replacement and/or remachining of wheels, and
replacement and/or reinstallation of bearings. ABC also supplies new wheel sets
using new and/or remachined parts of components. For fiscal 1998, 1997 and
1996, sales of railcar, locomotive and idler wheels and wheel sets accounted
for approximately 44%, 43% and 46%, respectively, of ABC's net sales.
Composition and Metal Brake Shoes. Composition and metal brake shoes bear
directly on the railroad wheel and exert friction to generate braking power.
Worn brake shoes are replaced during routine maintenance or at inspection sites
located at various areas along the railroad. Composition brake shoes are made
from fibers, elastomers and various resins and provide a higher level of
friction for use with modern, low-pressure braking systems; metal brake shoes
are made from cast iron. Composition and metal brake shoes are not
interchangeable. For certain applications, the composition shoe is superior for
braking and reducing heat buildup. Pursuant to American Association of
Railroads ("AAR") regulations, all new railcars and locomotives that will
operate across different railroads must have composition brake shoe systems by
January 1, 1999. Older railcars and locomotives with higher pressure braking
systems require metal brake shoes. Metal brake shoes also are preferable to
composition brake shoes in winter weather because they provide more effective
braking in ice and snow. Although the demand for metal brake shoes is expected
to decline over time as older railcars are phased out of railroads' fleets and
the new AAR regulations take effect, they will continue to be in demand on
certain trains that do not operate in interchange. For fiscal 1998, 1997 and
1996, sales of metal brake shoes accounted for approximately 4%, 5% and 5% of
ABC's net sales, respectively. Effective July 31,
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1995, ABC contributed its composition brake shoe operation into the joint
venture between ABC and Anchor Brake Shoe Company.
INDUSTRY STANDARDS
Specialty trackwork products must conform to American Railway Engineering
Association ("AREA") specifications in order to be used in the North American
freight railroad system. The specifications are complex and their application
on different railroads is further specified by each railroad's maintenance-of-
way engineering practices. Given these specifications, ABC believes
considerable proprietary expertise and information are required to manufacture
these products economically.
The AAR interchange rules govern all matters related to railcars which operate
among different railroads (i.e., interchange). Among other things, the
interchange rules define all significant physical and dimensional elements of
interchange service railcars and their key components, including wheels and
brake shoes. The rules also require regular quality reviews and certification
of facilities used to manufacture railcars and key railcar components.
The interchange and related rules also specify financial matters related to
interchange operations, including brake shoe replacement pricing. As
locomotives and railcars move across different railroads, brake shoes (rapid
wear components) often need to be replaced. Under the interchange rules, the
railroad moving the railcar at the time must replace the worn brake shoe and
the amount that can be charged to the owner of the railcar is fixed. Therefore,
the replacing railroad will use the least expensive replacement brake shoe
available that complies with the interchange rules, which tends to limit
increases in composition brake shoe prices.
COGIFER RELATIONSHIP
North American specialty trackwork producers historically have concentrated on
the requirements of freight customers and have tended to meet rail transit
system customer needs with adaptations of freight specialty trackwork
technology. Transit customers are increasingly evaluating and employing
products specifically designed to provide smooth, quiet service on high-speed
and light rail systems.
Recognizing the importance of the growing demand for European-style high-speed
and light rail technology, in February 1992, ABC formed a long-term
relationship with Cogifer. Cogifer is the leading supplier of European-style
high-speed and light rail specialty trackwork to the world market, including
specialty trackwork for the high speed TGV (Train a Grande Vitesse) trains in
France and other parts of Europe.
ABC Rail-Cogifer Technologies is a 50-50 joint venture partnership of ABC and
Cogifer. The partnership's purpose is to market, design, engineer and supply
European-style high-speed and light rail technology to the North American
market. The marketing activities of ABC and the partnership are coordinated by
ABC. Production is subcontracted to the most suitable joint venture partner.
The technology exchange agreement provides ABC access to Cogifer's design
concepts, expertise and information which can be applied by ABC to the
potentially large intercity "Amtrak-type" rail passenger market, the small but
developing market for high-speed freight railroad switches, and the North
American manufacturing of certain elements of European-style high-speed and
light rail specialty trackwork. Cogifer has similar access to ABC's technology
for use outside North America and other defined markets.
SALES AND MARKETING
ABC sells directly to the majority of its customers through its own sales
force, which is organized into groups that focus on specialty trackwork
products, which includes yard retarders and automation systems, railroad signal
systems installation and maintenance or railcar wheels and wheel sets. ABC's
specialty trackwork sales force covers the U.S. and Canada on a regional basis.
ABC supplements its specialty trackwork sales efforts
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with the technical support of its engineering staff, which advises on product
design and cost estimation. ABC's mechanical products sales force covers the
U.S., Canada and Mexico. Certain members of ABC's senior management also
actively participate in marketing efforts. ABC believes that these senior
executives have developed close relationships with the purchasing managers and
senior management of many of ABC's principal customers. ABC and Cogifer
maintain a separate marketing staff which targets sales to rail transit systems
in North America. ABC markets through sales representatives to its smaller
customers, such as short lines, industrial and mining market segments.
ABC also markets its products internationally both directly and through sales
agents. A number of other countries have extensive freight railroad systems
patterned on AAR and AREA standards. Consequently, ABC's products are either
already suited, or are readily adaptable, to the needs of customers in these
markets. International sales, represented less than 8% of ABC's net sales
during fiscal 1998.
CUSTOMERS
ABC's principal specialty trackwork and yard retarder and automation system
customers are the North American Class I railroads, although ABC also sells
these products to a number of regional and short-line railroads as well as rail
transit systems. ABC's wheel and wheel mounting customers include the Class I
railroads, regional and short-line railroads, railcar and locomotive
manufacturers and railroad service companies. ABC's metal brake shoe customers
include railroads, rail transit systems and manufacturers of railcar and
locomotive braking systems. ABC's two largest customers are Burlington Northern
Santa Fe ("Burlington Northern") and Union Pacific Corporation, which each
accounted for approximately 18% of ABC's net sales for fiscal 1998. No other
customer accounted for more than 10% of fiscal 1998 net sales. ABC has multi-
year agreements with Burlington Northern and Union Pacific Corporation for the
supply of specialty trackwork products through December, 1998 and September,
1999, respectively. ABC's five largest customers accounted for approximately
54% of ABC's net sales during fiscal 1998.
MANUFACTURING
In the manufacture of specialty trackwork, rail and various other steel
products purchased from outside suppliers are fabricated and bolted or welded
to cast manganese steel components in accordance with precise design standards.
Primary finished products are complete or component parts of switches and
crossings. These products are fabricated and packaged at the plant, then
shipped by rail or truck to the job site where the end user or contractor
assembles and installs them in the right-of-way. Increasingly, ABC assembles
switches and crossings at its plants and ships them in "panelized" form to the
job site where they are installed, thereby saving the track owners the labor
cost of assembling the product on site. Manufacturing operations at the
specialty trackwork plants include casting manganese steel, forging, shearing,
sawing, drilling, bending, machining and assembly. Certain cast manganese
components are subjected to an explosion hardening process which increases
their useful life.
In the manufacture of classification yard products, rail and other steel
products purchased from outside suppliers are also bolted and welded in
accordance with design standards. The products are assembled at the plant and
then shipped by truck to the job site for installation.
The cast steel wheel manufacturing process consists of the following steps.
Various grades of steel scrap are melted in electric furnaces and mixed with
certain alloys. Several chemical analyses are performed on each heat to insure
compliance with AAR specifications before the furnace is tapped. The metal is
poured into a graphite mold that has been machined for a specific wheel design.
The metal solidifies in the mold for a period of time depending on the wheel
size and weight. The wheel is then removed from the mold and placed in a
controlled cooling chamber. In accordance with AAR specifications, the wheel
surfaces are cleaned, heat treated, quenched and tempered. In the last steps of
the process, the wheel's critical surfaces are machined and inspected using
non-destructive ultrasonic and radiographic techniques as well as standard
gauging methods.
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The metal brake shoe manufacturing process consists primarily of melting cast
scrap with various alloys. The molten metal is poured into green sand molds
containing steel backs and reinforced with expanded wire bundles to prevent
premature cracking in service. The product solidifies in the mold and the rough
casting is cleaned and inspected to ensure dimensional and metallurgical
requirements are satisfied.
COMPETITION
ABC is the largest manufacturer of specialty trackwork in North America,
serving all of the Class I railroads and a number of regional and short-line
railroads. In specialty trackwork, ABC competes with a number of North American
manufacturers, including Cleveland Track, Voest-Alpine Nortrak Inc., an
affiliate of Voest-Alpine Eisenbahn Systeme AG and Progress Rail, a subsidiary
of Florida Progress Corp. Most of these companies' manufacturing facilities are
located in the eastern U.S. which gives them a slight competitive shipping
advantage in the eastern U.S. markets over ABC's Chicago Heights facility,
which serves customers in the eastern U.S. In ABC's opinion, the locations of
its specialty trackwork manufacturing facilities in Superior, Wisconsin;
Newton, Kansas; Cincinnati, Ohio and Pueblo, Colorado provide it with a
competitive advantage with respect to railroads operating in the western U.S.
and Canada.
ABC is the second largest U.S. manufacturer of freight railcar and locomotive
wheels. In the market for freight railcar and locomotive cast wheels, ABC's
primary competitor is Griffin Wheel Company, a subsidiary of AMSTED Industries,
Inc. ABC also competes with Standard Steel, a division of Freedom Forge
Corporation, which manufactures forged wheels. ABC, along with Progress Rail,
are the largest independent freight car wheel mounting operations in North
America. The majority of such wheel mounting operations are currently performed
in-house by Class I railroads. The remaining independent wheel mounting market
is highly fragmented. ABC is the only U.S. manufacturer of metal brake shoes.
ABC is a leading supplier of railroad classification yard retarder control and
automation systems. In this market, ABC's primary competitors are Union Switch
& Signal and General Railway Signal. In the signal systems market, ABC's
primary competitors are MEC Rail, a division of Mass Electric Construction
Company, Harmon Industries, Inc. and Safetron Systems Corporation.
The principal competitive factors in the specialty trackwork market are product
quality, on-time delivery, price and technical service and support. The
principal competitive factors in the mechanical products market are price and
product availability. The principal competitive factors in the wheel mounting
service market are product quality and availability. The principal competitive
factors in the signal systems market are price and design and installation and
maintenance expertise. The limited number of railroad customers, their efforts
to reduce costs, and excess industry capacity in certain of ABC's product lines
historically have limited ABC's ability to increase prices. ABC believes it is
well-positioned to compete in all of its served markets, due to its leading
market share, engineering capability, broad manufacturing base and long-
standing customer relationships. Historically, ABC has experienced limited
foreign competition due to the specialized nature of many of its products, the
importance of AAR product approvals and AREA specifications and the cost of
shipping. However, there can be no assurance that foreign competition will not
increase in the future.
ORDER BACKLOG
Specialty trackwork deliveries generally require lead-times of one to three
months. Most specialty trackwork installations occur in the period from March
through October. Consequently, deliveries are somewhat seasonal, with order
backlog increasing in the spring and decreasing in the late summer. For
discussion of quarterly results of operations, see "ABC Management's Discussion
and Analysis of Financial Condition and Results of Operations." Order backlog
for wheels and brake shoes is less meaningful because these products have short
production lead-times. All order backlog figures include only firm orders for
which customers have issued releases for production and delivery and exclude
the non-current portion of any long-term supply arrangements. ABC's backlog was
$52.0 million and $57.3 million as of July 31, 1998 and 1997, respectively and
$44.0 million and $50.1 million as of October 31, 1998 and 1997, respectively.
ABC expects to fill the majority of its order backlog as of October 31, 1998
during the fiscal year 1999.
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INTELLECTUAL PROPERTY
ABC holds 24 U.S. trademarks and 32 foreign trademarks. ABC actively protects
trademarks which it believes have significant goodwill value. ABC currently
holds 36 U.S. patents and 61 foreign patents and has applications pending for
12 U.S. patents and 34 foreign patents. ABC applies for patent protection when
it believes the expense of doing so is justified. ABC also relies on trade
secrets and know-how in the production of its specialty trackwork and
mechanical products. ABC does not believe that its intellectual property rights
are critical to its success.
RAW MATERIAL SUPPLIERS
The principal raw materials for specialty trackwork are railroad rail and
manganese. ABC purchases rail from various rail manufacturers. In certain
instances, ABC purchases rail directly from its railroad customers for whom
specialty trackwork is being built, capitalizing on their purchasing economies.
The primary raw material for railcar and locomotive wheels is steel scrap, a
commodity material which is readily available from a number of suppliers. The
primary raw material for metal brake shoes is iron scrap, a commodity material,
which is readily available from a number of suppliers.
There are at least two suppliers for each raw material and component ABC
purchases. ABC currently purchases actively from a broad range of suppliers. No
supplier accounted for more than 10% of ABC's purchases in fiscal 1998.
EMPLOYEES
As of July 31, 1998, ABC had nearly 1,800 employees, approximately 68% of whom
are represented by unions. The principal union representing hourly employees is
the United Steelworkers of America. In fiscal 1998, ABC negotiated five-year
agreements with represented employees at its Newton, Kansas, Superior,
Wisconsin and Duluth, Minnesota track assembly plants due to the expiration of
related collective bargaining agreements, as well as an initial 2 1/3 year
contract for its signal installation and maintenance employees. These
negotiations affected approximately 17% of ABC's hourly employees. In 1998, ABC
negotiated a new five-year collective bargaining agreement at its Pueblo,
Colorado facility; negotiated a new three-year collective bargaining agreement
at its Anderson, Indiana facility; and has scheduled labor negotiations for its
Chicago Heights, Illinois track products plant, its Baltimore, Maryland
brakeshoe plant and its Calera, Alabama wheel foundry. These fiscal 1999
negotiations affect approximately 49% of ABC's employees. ABC believes that its
labor relations are good.
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DESCRIPTION OF ABC CAPITAL STOCK
GENERAL
The total amount of the authorized capital stock of ABC is 25,000,000 shares of
common stock, par value $0.01, and 1,000,000 shares of preferred stock, par
value $1.00 (the "Preferred Stock"), none of which are outstanding. No series
of Preferred Stock has been designated other than 100,000 shares of Series A
Junior Participating Preferred Stock (the "Series A Preferred Stock"). The
following description is a summary of the material provisions of ABC's capital
stock and is qualified in its entirety by reference to the provisions of ABC's
restated certificate of incorporation, its bylaws and the Rights Agreement,
dated as of September 29, 1995, as amended through September 18, 1998 (the
"Rights Agreement") between ABC and LaSalle National Trust, N.A., as Rights
Agent, copies of which have been filed as exhibits to the Registration
Statement of which the Proxy Statement/Prospectus forms a part.
COMMON STOCK, RIGHTS AND SERIES A PREFERRED STOCK
Common Stock
As of September 15, 1998, there were 8,976,304 shares of common stock
outstanding held by 63 holders of record (including brokerage firms and other
nominees). The issued and outstanding shares of common stock are validly
issued, fully paid and nonassessable. The holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the board of directors of ABC may
from time to time determine, subject to any prior rights of the holders of any
preferred stock that may be outstanding. Upon liquidation, dissolution or
winding up of ABC, the holders of common stock are entitled to receive pro rata
the assets of ABC that are legally available for distribution, after payment of
all debts and other liabilities and subject to the prior rights of any holders
of preferred stock then outstanding. Each outstanding share of common stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
is no cumulative voting.
Rights and Series A Preferred Stock
Under the Rights Agreement, each outstanding share of common stock is
accompanied by one preferred share purchase right (each, a "Right"). Except as
described below, each Right entitles the registered holder to purchase from ABC
one one-hundredth of a share of Series A Preferred Stock at a purchase price of
$150 per one one-hundredth share (the "Purchase Price"), subject to adjustment.
The description and terms of the Rights are set forth in the Rights Agreement.
Notwithstanding anything to the contrary set forth below, the Rights Agreement,
as amended, provides that the Rights Agreement will not be affected as a result
of the Merger Agreement and the transactions contemplated thereby. In addition,
any person who would otherwise be an Acquiring Person (as defined below) as of
the Effective Time of the Merger will not be deemed to be an Acquiring Person
unless that person acquires (or becomes associated with another owner of ) ABC
common stock representing at least 1% of the then-outstanding ABC common stock.
From the Record Date (as such term is defined in the Rights Agreement), the
Rights attach implicitly to all common stock certificates outstanding. No
separate Right certificates have been distributed. Until the earlier of (i) 10
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
common stock (the "Shares Acquisition Date") or (ii) 15 business days (or such
later date as may be determined by action of the board of directors prior to
the time that any person becomes an Acquiring Person) following the
commencement of (or a public announcement of an intention to make) a tender or
exchange offer if, upon consummation thereof, such person or group would be the
beneficial owner of 15% or more of such outstanding shares of common stock (the
earlier of such dates being called the "Distribution Date"), the Rights will be
evidenced by the common stock certificates, together with a copy of
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the Summary of Stockholder Right Plan that is attached as Exhibit C to the
Rights Agreement (the "Summary of Stockholder Rights Plan") and not by separate
certificates.
The Rights Agreement also provides that, until the Distribution Date, the
Rights will be transferred with and only with the common stock. Until the
Distribution Date (or earlier redemption, expiration or termination of the
Rights), the transfer of any certificates for common stock, with or without a
copy of the Summary of Stockholder Rights Plan, will also constitute the
transfer of the Rights associated with the common stock represented by such
certificates. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the common stock as of the close of business on the
Distribution Date and, thereafter, such separate Right Certificates alone will
evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire at
the earliest of (i) September 29, 2005 (the "Final Expiration Date"), (ii) the
redemption of the Rights by ABC as described below and (iii) the exchange of
all Rights for common stock as described below.
In the event that any person (other than ABC, its subsidiaries or any person
receiving newly-issued shares of common stock directly from ABC) becomes the
beneficial owner of 15% or more of the then outstanding shares of common stock,
each holder of a Right will thereafter have the right to receive, upon exercise
at the then current exercise price of the Right, common stock (or, in certain
circumstances, cash, property or other securities of ABC) having a value equal
to two times the exercise price of the Right. The Rights Agreement contains an
exemption for any issuance of common stock by ABC directly to any person (for
example, in a private placement or an acquisition by ABC in which common stock
is used as consideration), even if that person would become the beneficial
owner of 15% or more of the common stock, provided that such person does not
acquire any additional shares of common stock.
In the event that, at any time following the Shares Acquisition Date, ABC is
acquired in a merger or other business combination transaction or 50% or more
of ABC's assets or earning power are sold, proper provision will be made so
that each holder of a Right will thereafter have the right to receive, upon
exercise at the then current exercise price of the Right, common stock of the
acquiring or surviving company having a value equal to two times the exercise
price of the Right.
Notwithstanding the foregoing, following the occurrence of any of the events
set forth in the preceding two paragraphs (the "Triggering Events"), any Rights
that are, or (under certain circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person will immediately become null
and void.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights,
are subject to adjustment from time to time to prevent dilution, among other
circumstances, in the event of a stock dividend on, or a subdivision, split,
combination, consolidation or reclassification of, the Series A Preferred Stock
or the common stock, or a reverse split of the outstanding shares of the Series
A Preferred Stock or the common stock.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
common stock and prior to the acquisition by such person or group of 50% or
more of the outstanding common stock, the board of directors may exchange the
Rights (other than Rights owned by such person or group. which will have become
void), in whole or in part, at an exchange ratio of one share of common stock
per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in the
Purchase Price. ABC will not be required to issue fractional shares of Series A
Preferred Stock or common stock (other than fractions in multiples of one one-
hundredths of a share of Series A Preferred Stock) and, in lieu thereof, an
adjustment in cash may be made based on the market price of the Series A
Preferred Stock or common stock on the last trading date prior to the date of
exercise.
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At any time after the date of the Rights Agreement until the time that a person
becomes an Acquiring Person, the board of directors may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price"),
which may (at the option of ABC) be paid in cash, shares of common stock or
other consideration deemed appropriate by the board of directors. Upon the
effectiveness of any action of the board of directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of ABC, including, without limitation, the right to vote or to
receive dividends.
The board of directors of ABC is generally responsible for administering,
interpreting and making all decisions and taking all actions with respect to
the Rights Agreement, including, without limitation, the decision to redeem or
exchange the Rights or to amend the Rights Agreement (each of the foregoing
being hereinafter referred to as an "Action"). Notwithstanding the foregoing,
in the event the board of directors is required or permitted to take any Action
with respect to the Rights Agreement and (i) such Action occurs on or after the
date of a change (resulting from a proxy or consent solicitation) in the board
of directors as composed at the commencement of such solicitation and (ii) a
person who was a participant in the solicitation has stated that such person
(or any of its affiliates or associates) has taken, intends to take or may
consider taking, or if the majority of the Continuing Directors (as hereinafter
defined) has determined in good faith that such person (or any of its
affiliates or associates) has taken, intends to take or is likely to take, any
action that would result in such person becoming an Acquiring Person or which
would cause the occurrence of a Triggering Event, then, such Action shall not
be effective for purposes of the Rights Agreement unless (i) at the time of
such Action there are at least three Continuing Directors and such Action is
approved by a majority of the Continuing Directors then holding office.
"Continuing Directors" is defined as those directors who are either presently
in office or have been approved or nominated by Continuing Directors, and who
are neither Acquiring Persons nor affiliates or associates of Acquiring
Persons.
The provisions of the Rights Agreement may be amended by ABC, except that (i)
the redemption of the Rights or any supplement, modification, amendment or
waiver of any provision of he Rights Agreement by ABC will not be effective
unless approved by not less than 80% of the directors then in office and (ii)
any amendment adopted after the time that a person becomes an Acquiring Person
may not adversely affect the interests of holders of Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire ABC without
conditioning the offer on the Rights being redeemed or a substantial number of
Rights being acquired, and under certain circumstances the Rights beneficially
owned by such a person or group will become void. The Rights should not
interfere with any merger or other business combination approved by the board
of directors because, if the Rights would become exercisable as a result of
such merger or business combination, the board of directors may, at its option,
at any time prior to the time that any Person becomes an Acquiring Person,
redeem all (but not less than all) of the then outstanding Rights at the
Redemption Price.
PREFERRED STOCK
The board of directors is authorized to issue preferred stock in series and to
fix the designations, powers, preferences, rights, qualifications, limitations,
or restrictions of any such series including without limitation, the rate and
nature of dividends, the price and terms and conditions on which shares may be
redeemed, the amount payable in the event of voluntary or involuntary
liquidation, the terms and conditions for conversion or exchange into any other
class or series of stock, voting rights, preemptive rights and other terms. To
date, the board of directors has so fixed only the Series A Preferred Stock.
Although no preferred stock is currently outstanding, because the board of
directors has the power to establish the preferences and rights of the shares
of any additional series of Preferred Stock, it may afford holders of any such
Preferred Stock preferences, powers
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and rights (including voting rights), senior to the rights of holders of common
stock, which could adversely affect the holders of common stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under ABC's certificate of incorporation, as of September 15, 1998, there are
approximately 16,023,696 shares of common stock and 1,000,000 shares of
preferred stock available for future issuance without stockholder approval. ABC
will issue approximately 9.4 million shares in the merger, leaving about 6.6
million shares available for future issuance. These additional shares may be
utilized for a variety of corporate purposes including future public offerings
to raise additional capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved common stock and
preferred stock may be to enable the board of directors to issue shares to
persons friendly to current management that could render more difficult or
discourage an attempt to obtain control of ABC by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of ABC's
management. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of ABC.
The board of directors is authorized without any future action by the
stockholders to determine the rights, preferences, privileges and restrictions
of the unissued preferred stock. The purpose of authorizing the board of
directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The board of
directors may issue preferred stock with voting and conversion rights that
could adversely affect the voting power of the holders of common stock, and
that could, among other things, have the effect of delaying, deferring or
preventing a change in control of ABC.
CERTAIN CHARTER AND BYLAW PROVISIONS
ABC's restated certificate of incorporation contains a provision that limits
the liability of ABC's directors for monetary damages for breach of fiduciary
duty as a director or officer to the full extent permitted by the General
Corporation Law of the State of Delaware. Such limitation does not, however,
affect the liability of a director (i) for any breach of the director's duty of
loyalty to ABC or its stockholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases or (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision is to eliminate the
rights of ABC and its stockholders (through stockholders' derivative suits on
behalf of ABC) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of ABC or any stockholder to seek non-monetary relief such as an
injunction in the event of a breach of a director's duty of care.
Section 203 of the General Corporation Law of the State of Delaware (the
"Delaware Business Combination Act") generally imposes a three-year moratorium
on business combinations between a Delaware corporation and an "interested
stockholder" (in general, a stockholder owning 15% or more of a corporation's
outstanding voting stock) or an affiliate or associate thereof unless (i) prior
to an interested stockholder becoming such, the board of directors of the
corporation approved either the business combination or the transaction
resulting in an interested stockholder becoming such; (ii) upon consummation of
the transaction resulting in an interested stockholder becoming such, the
interested stockholder owns at least 85% of the voting stock outstanding at the
time the transaction commenced (excluding, from the calculation of outstanding
shares, shares beneficially owned by directors who are also officers and
certain employee stock plans); or (iii) on or after an interested stockholder
becomes such, the business combination is approved by (a) the board of
directors and (b) holders of at least 66 2/3% of the outstanding shares (other
than those shares beneficially owned by the interested stockholder) at a
meeting of stockholders.
The Delaware Business Combination Act applies to certain public companies
incorporated in the State of Delaware unless the corporation expressly elects
not to be governed by such legislation and sets forth such
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election in (i) the corporation's original certificate of incorporation; (ii)
an amendment to the corporation's bylaws as adopted by the corporation's board
of directors within 90 days of the effective date of such legislation; or (iii)
an amendment to the corporation's certificate of incorporation or bylaws as
approved by (in addition to any other vote required by law) a majority of the
shares entitled to vote (however, such amendment would not be effective until
12 months after the date of its adoption and would not apply to any business
combination between the corporation and any person who became an interested
stockholder on or prior to such adoption of such amendment). ABC has not made
such an election and is therefore subject to the Delaware Business Combination
Act.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the ABC common stock is American Stock
Transfer & Trust Company.
COMPARATIVE RIGHTS OF ABC STOCKHOLDERS AND NACO STOCKHOLDERS
NACO is a Delaware corporation, with a large stockholder that exercises control
of the corporation and approximately 61 other stockholders of record, none of
whom own more than 6% of NACO's common stock. Such persons' rights as
stockholders have been governed by the NACO certificate of incorporation (the
"NACO Charter") and the NACO By-laws. Following the Merger, the NACO
stockholders will hold shares in ABC, a Delaware corporation and a public
company, and their rights will be governed by Delaware law, the ABC certificate
of incorporation, as amended, (the "ABC Charter"), the ABC By-laws and the
Rights Agreement. Accordingly, the material difference between the present
rights of NACO stockholders and their rights as holders of ABC securities is
that following the Merger they will be stockholders in a public company
governed by the ABC Charter and ABC By-laws as well as the Rights Agreement,
rather than the NACO Charter and the NACO By-laws.
The other material differences between the rights of NACO stockholders and ABC
stockholders are set forth below. This summary is not intended to be relied
upon as an exhaustive list or detailed description of the provisions discussed
and is qualified in its entirety by the ABC Charter and the ABC By-laws and the
Rights Agreement and by the NACO Charter and the NACO By-laws, to which ABC and
NACO stockholders are referred.
AUTHORIZED SHARES OF CAPITAL STOCK
NACO
The NACO Charter authorizes the issuance of up to 2,000,000 shares of capital
stock, of which 1,600,000 shares are $0.01 par value common stock, and 400,000
shares are $0.01 par value Class A common stock. Shares of Class A common stock
may not be issued if the total number of shares of Class A common stock
outstanding after such issuance would cause the number of outstanding shares of
Class A common stock to exceed 25% of the then outstanding shares of common
stock, exclusive of shares held in NACO's treasury.
The NACO Charter provides the Class A common stock with exchange rights. Each
record holder of NACO Class A common stock is entitled to exchange any or all
of the shares of Class A common stock held by such holder for the number of
shares of common stock set forth in the NACO Charter (1) if NACO's Board, by a
majority vote of the directors then in office, declares a conversion, (2)
automatically in the event of a sale, transfer, assignment, liquidation or
other disposition (whether by merger, consolidation, sale of assets or stock,
liquidation, dissolution or otherwise) by NACO of the business of any
subsidiary to which a series of Class A common stock relates substantially as
an entirety to a person, entity or group of which NACO is not a majority owner,
or (3) upon the liquidation, dissolution or winding up of NACO.
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ABC
The ABC Charter authorizes the issuance of 25,000,000 shares of $0.01 par value
common stock and 1,000,000 shares of $1.00 par value preferred stock. As of the
date of this Proxy Statement/Prospectus, 8,976,304 shares of ABC common stock
are issued and outstanding, and no shares of preferred stock are issued and
outstanding. The shares of ABC preferred stock may be issued from time to time
by the ABC Board of Directors in one or more series, and the variations,
relative rights and preferences as between different series of each class may
be fixed and determined by resolution of the ABC Board of Directors with
respect to number of shares constituting the series, voting rights, redemption
rights, the rate of dividend, liquidation payments, conversion rights,
subscription rights and sinking fund provisions. During the time that any
series of ABC preferred stock is outstanding, no dividends may be declared or
paid by the ABC Board of Directors on the shares of ABC common stock, unless
dividends on all outstanding shares of ABC preferred stock for the current and
all past dividend periods have been declared and paid or provision made for the
payment thereof.
VOTING RIGHTS
NACO
Holders of common stock and Class A common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders. The holders of common stock and Class A common stock vote
together as a single class on all matters provided that (1) the holders of the
common stock voting separately as a class shall be entitled to approve, by the
vote of a majority of shares of common stock then outstanding, any amendment,
alteration or repeal of any of the provisions of the NACO Charter which
adversely affects the rights, powers or privileges of the Class A common stock;
(2) the holders of the Class A common stock voting separately as a class shall
be entitled to approve, by the vote of a majority of shares of Class A common
stock then outstanding, any amendment, alteration or repeal of any of the
provisions of the NACO Charter which adversely affects the rights, powers or
privileges of the Class A common stock; and (3) any increase in the number of
authorized shares of Class A common stock shall be subject to approval by both
(A) the holders of a majority of the shares of common stock and Class A common
stock then outstanding, voting together as a single class based upon their
respective voting rights, and (B) the holders of a majority of the shares of
Class A common stock then outstanding, voting separately as a class. Neither
the NACO Charter nor By-laws provide for cumulative voting for the election of
directors.
ABC
Subject to the voting rights of holders of any then outstanding ABC preferred
stock, each ABC common share is entitled to one vote on each matter submitted
to a vote of the stockholders of ABC. Shares of ABC common stock are not
entitled to any cumulative voting rights.
SPECIAL MEETINGS OF STOCKHOLDERS
NACO
The NACO By-laws provide that special meetings may be called by the President,
and shall be called by the President or Secretary (i) at the request in writing
of a majority of the NACO Board of Directors, or (ii) at the written request of
the holders of a majority of the outstanding shares of NACO entitled to vote at
the meeting.
ABC
The ABC By-laws provide that special meetings of stockholders may be called by
the Board of Directors or by the President, and shall be called by the
President or Secretary at the written request of the holders of a majority of
the outstanding shares of ABC entitled to vote at the meeting.
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STOCKHOLDER ACTION WITHOUT A MEETING
NACO
The NACO By-laws provide that any action required or permitted to be taken at
any annual or special meeting of stockholders, may be taken without a meeting,
provided that a written consent is signed by the holders of outstanding stock
representing the minimum number of votes that would be necessary to take such
action at a meeting.
ABC
The ABC Charter and By-Laws have no provisions covering stockholder action by
written consent. Under the DGCL any action that could be taken at a
stockholders meeting may be taken by written consent if consents representing
the required vote of stockholders are obtained.
BOARD OF DIRECTORS; REMOVAL; VACANCIES
NACO
The NACO By-laws provide that the NACO Board shall consist of not more than 12
nor less than 3 directors. There are currently eight directors serving on the
NACO Board. Any director or the entire Board of Directors may be removed, with
or without cause, by the holders of a majority of shares entitled to vote at an
election of directors. Vacancies and newly created directorships may be filled
by the affirmative vote of a majority of the directors then in office (even
though less than a quorum). Each director so chosen shall hold office until the
next annual election and until his or her successor is duly elected and shall
qualify, unless sooner displaced. The NACO Charter and By-laws do not provide
for a classified board of directors.
ABC
The ABC By-laws provide that the ABC Board shall consist of one or more
members, and the number shall be fixed by resolution of the Board, and in the
absence of a resolution shall be nine. There are currently 7 directors serving
on the ABC Board. No later than the Effective Time of the Merger, the ABC By-
laws will be amended to set the number of directors to eight members. See "The
Merger--Management and Operations After the Merger." Vacancies and newly
created directorships may be filled by the affirmative vote of a majority of
the directors then in office (even though less than a quorum). Each director so
chosen shall hold office until the next annual election and until their
successors are duly elected and shall qualify, unless sooner displaced. Any
director or the entire Board of Directors may be removed, with or without
cause, by the holders of a majority of shares entitled to vote at an election
of directors.
Upon adoption of the Classified Board Amendment, the ABC Charter will provide
that the ABC-NACO Board will be divided into three classes and each class will
serve staggered three year terms. At each annual meeting of stockholders, one
class of directors will be elected for a three-year term. Upon the adoption of
the classified board, any director or the entire Board of Directors may be
removed only for cause.
STOCKHOLDER RIGHTS PLAN
NACO does not have a stockholder's rights plan. ABC is party to the Rights
Agreement. See "Description of ABC Capital Stock."
OTHER PROVISIONS
Other significant provisions of the ABC Charter and Bylaws and NACO Charter and
Bylaws and related matters are substantially similar and are briefly described
below.
Redemption and Repurchase of Capital Stock. Under the DGCL, subject to certain
limitations, a corporation's stock may be made subject to redemption by the
corporation at its option, at the option of the holders of such
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stock or upon the happening of a specified event. The DGCL also provides that a
corporation may repurchase its own shares with certain exceptions. As
previously described, the ABC Charter provides the ABC Board of Directors with
the power to fix redemption and repurchase rights, preferences and limitations
of ABC preferred stock.
Liquidation Rights. NACO stockholder's rights upon the liquidation or
dissolution of NACO are substantially the same as those of ABC stockholders
upon the liquidation or dissolution of ABC.
Supermajority Voting Requirements; Business Combinations. The DGCL generally
requires the affirmative vote of the holders of a majority of the outstanding
stock of a corporation entitled to vote on the matter to approve a merger,
consolidation or dissolution of the corporation or a disposition of all or
substantially all of the corporation's assets. Neither NACO's or ABC's Charter
or Bylaws have supermajority voting requirements for business combinations or
other matters.
Preemptive Rights. Neither NACO's nor ABC's Charter or Bylaws provide for
preemptive rights for stockholders.
Appraisal Rights. The DGCL provides for appraisal rights only in the case of
certain mergers or consolidations and not (unless the certificate of
incorporation of a corporation so provides) in the case of other mergers, a
sale or transfer of all or substantially all of its assets or an amendment to
its certificate of incorporation. In addition, the DGCL does not provide
appraisal rights in connection with a merger or consolidation (unless the
certificate of incorporation of a corporation so provides) to the holders of
shares of a constituent corporation listed on a national securities exchange
(or designated as a national market system security by the National Association
of Securities Dealers, Inc.) or held of record by more than 2,000 stockholders,
unless the applicable agreement of merger or consolidation requires the holders
of such shares to receive, in exchange for such shares, any property other than
shares of stock of the resulting or surviving corporation, shares of stock of
any other corporation listed on a national securities exchange (or designated
as described above) or held of record by more than 2,000 holders, cash in lieu
of fractional shares or any combination of the foregoing.
The NACO Charter does not specifically provide for appraisal rights other than
those rights designated by the DGCL. Because the ABC common stock to be
received by NACO stockholders in the merger is listed on the Nasdaq National
Market System, NACO stockholders will not have appraisal rights.
The ABC Charter does not specifically provide for appraisal rights. The DGCL
denies ABC stockholders appraisal rights in connection with the Merger and any
of the transactions contemplated thereby.
Stockholder Proposal Procedures. None of the DGCL, the NACO Charter and By-laws
and the ABC Charter and By-laws limit the ability of NACO and ABC stockholders,
respectively, to bring any business (other than nominations for the election of
directors) before a meeting of stockholders.
Indemnification. The NACO By-laws provide for indemnification by NACO of
officers, directors, employees and agents, to the fullest extent permitted by
the DGCL. The ABC Charter also provides for indemnification by ABC of officers,
directors, employees and agents, to the fullest extent permitted by the DGCL.
Limitation of Personal Liability of Directors. The ABC Charter provides that no
director of ABC shall be personally liable to ABC or ABC stockholders for or
with respect to any acts or omissions in the performance of his or her duties
as a director of ABC to the extent permitted by the DGCL. The NACO Charter has
a similar provision limiting the personal liability of its directors.
Amendment of Charter Documents. Both, the NACO Charter and the ABC Charter may
be amended pursuant to the DGCL by a majority vote of the total number of
shares outstanding and entitled to vote thereon. If any such amendment would
adversely affect the rights of any holders of shares of a class or series of
stock, the
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vote of the holders of a majority of all outstanding shares of the class or
series, voting as a class, is also necessary to authorize such amendment.
Amendment of By-Laws. Both the NACO Charter and ABC Charter provide that the
stockholders or the Board of Directors may adopt, alter, amend or repeal the
respective By-laws.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement. A
copy of the Merger Agreement is attached as Exhibit A to this Proxy
Statement/Prospectus and is incorporated herein by reference. All capitalized
terms not defined herein shall have the meaning assigned to them in the Merger
Agreement. The following summary does not purport to be complete and is subject
to the more complete information set forth in the Merger Agreement. All
stockholders of NACO and ABC are encouraged to read the Merger Agreement
carefully and in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the satisfaction or waiver of
the terms and conditions contained therein, Merger Sub will be merged with and
into NACO. Following the Merger, NACO will continue as the surviving
corporation and as a wholly-owned subsidiary of ABC.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective upon the
filing of a Certificate of Merger with the Secretary of State of the State of
Delaware or at such time thereafter as is set forth in the Certificate of
Merger.
CONVERSION OF SHARES; EXCHANGE OF STOCK CERTIFICATES; NO FRACTIONAL SHARES
At the Effective Time, each share of NACO common stock issued and outstanding
immediately prior to the Effective Time will, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive 8.7 shares of ABC common stock (the "Exchange Ratio"). If
between the date of the Merger Agreement and the Effective Time the outstanding
shares of ABC common stock are changed into a different number of shares or a
different class by reason of any dividend, stock split, recapitalization, or
similar event, the Exchange Ratio will be appropriately adjusted. At the
Effective Time, each outstanding share of common stock of Merger Subsidiary
will be converted into one share of common stock of the Surviving Corporation,
and each share of NACO common stock held in the treasury of NACO or held by any
NACO Subsidiary, ABC, Merger Subsidiary or any other ABC subsidiary will be
canceled and retired and no payment will be made with respect thereto.
No fractional shares of ABC common stock will be issued in connection with the
Merger to the holders of NACO common stock. Instead, each holder of NACO common
stock otherwise entitled to receive a fractional share of ABC common stock,
upon surrender of stock certificates evidencing shares of NACO common stock,
will be entitled to receive an amount of cash (without interest) determined by
multiplying (i) the Weighted Average ABC Trading Price by (ii) the fractional
share interest to which such holder would otherwise be entitled.
At or prior to the Effective Time, ABC will make available to American Stock
Transfer & Trust Company, as Exchange Agent, for the benefit of the holders of
shares of NACO common stock: (i) stock certificates representing the number of
shares of ABC common stock issuable pursuant to the Merger Agreement in
exchange for the outstanding shares of NACO's common stock and (ii) cash to be
paid in lieu of fractional shares of ABC common stock. As soon as reasonably
practicable after the Effective Time, the Exchange Agent will mail to each
holder of record of a stock certificate which immediately prior to the
Effective Time
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represented outstanding shares of NACO common stock whose shares were converted
into the right to receive shares of ABC common stock a letter of transmittal
and instructions for use in effecting the surrender of the stock certificates
in exchange for stock certificates representing shares of ABC common stock.
Upon surrender of a stock certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder of such
stock certificate will be entitled to receive in exchange therefor a stock
certificate representing that number of whole shares of ABC common stock and,
if applicable, a check representing the cash consideration to which such holder
is entitled pursuant to the Merger Agreement on account of a fractional share
of ABC common stock. The stock certificate so surrendered will be canceled.
Until surrendered, each stock certificate which immediately prior to the
Effective Time represented shares of NACO common stock will be deemed after the
Effective Time to evidence only the right to receive upon such surrender a
stock certificate representing the number of whole shares of ABC common stock
and cash in lieu of any fractional shares which the holder of such certificate
is entitled to receive in the Merger.
The holder of any unexchanged stock certificate will not be entitled to receive
any dividends or other distributions payable by ABC nor will any cash payment
in lieu of fractional shares be paid until the stock certificate has been
exchanged. Subject to the effect of applicable laws, following surrender of any
such stock certificate there will be paid to such holder, without interest, (i)
promptly after the time of such surrender, the amount of any cash payable in
lieu of fractional shares of ABC common stock to which such holder is entitled
and the amount of dividends or other distributions with a record date after the
Effective Time paid with respect to such whole shares of ABC common stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole shares of ABC common stock.
All shares of ABC common stock issued upon the surrender for exchange of stock
certificates formerly representing shares of NACO common stock (together with
any cash paid in lieu of fractional shares) will be deemed to have been issued
in full satisfaction of all rights pertaining to such shares of NACO common
stock.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of NACO,
ABC and Merger Sub. These include representations and warranties by NACO and
ABC as to their respective organization and qualification under applicable law;
corporate power to conduct business; requisite authority and approvals with
respect to the transactions contemplated by the Merger Agreement;
capitalization; noncontravention of, and compliance with, applicable legal and
contractual requirements; reports filed by ABC with the Commission; financial
statements; absence of certain changes or liabilities; litigation; tax matters;
real property; intellectual property; material contracts; employee benefit and
labor matters; environmental matters; stockholder votes in connection with
approving the transactions contemplated by the Merger Agreement; the
inapplicability of ABC's stockholder rights plan to the Merger; "pooling-of-
interest" accounting matters; and the receipt of fairness opinions of financial
advisers. The representations and warranties will terminate at the Effective
Time or upon termination of the Merger Agreement.
Some of the representations and warranties are qualified by reference to
"Material Adverse Effect." Under the Merger Agreement, the term "Material
Adverse Effect" is defined to mean a material adverse effect on (i) the
condition (financial or otherwise), business, assets, liabilities, properties
or results of operations of NACO and its subsidiaries taken as a whole, or ABC
and its subsidiaries taken as a whole, as the case may be, or (ii) on the
ability of NACO or ABC, as the case may be, to perform any material obligations
under the Merger Agreement, but in all cases excluding the impact of actions or
omissions of a party taken with the prior consent of the other party in
contemplation of the transactions contemplated by the Merger Agreement or
changes in generally accepted accounting principles ("GAAP").
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CERTAIN COVENANTS
Conduct of Business Pending the Merger
Each of NACO and ABC has agreed that, until the Effective Time or earlier
termination of the Merger Agreement, it and its Subsidiaries will and, in the
case of ABC, ABC will use its reasonable efforts to cause its Affiliated
Entities to, conduct its businesses in the ordinary course and use its
reasonable best efforts to preserve intact its business organizations and
relationships with third parties and keep available the services of its present
officers and employees.
The Merger Agreement provides that NACO and its subsidiaries and ABC and its
subsidiaries will not, and ABC will use its reasonable efforts to not permit
its Affiliated Entities to, take any action outside the parameters specified in
the Merger Agreement, such as, among other things and with certain exceptions,
amending its organizational documents; issuing, selling or encumbering shares
of its capital stock or options to acquire any shares of such capital stock;
selling, leasing or encumbering property or assets (except in the ordinary
course of business); declaring or paying dividends or recapitalizing or
redeeming capital stock; making material acquisitions or entering into or
consummating business combinations; altering its corporate structure; incurring
indebtedness or material liabilities (except in the ordinary course of
business); granting severance or termination pay to, or entering into
employment or deferred compensation agreements with, or increasing (except for
normal increases in the ordinary course of business consistent with past
practice) the compensation or benefits payable to, directors, officers or
employees; or disposing of any rights in any NACO's or ABC's material
intellectual property.
The Merger Agreement also provides that the parties will develop prior to the
Effective Time a joint operating plan, a joint capital expenditure budget and a
joint financing plan under the chairmanship of Mr. Vaughn W. Makary, the
President and Chief Operating Officer of NACO in an effort to achieve the
synergies from the Merger as soon as possible after the Effective Time.
Special Meetings of Stockholders
Each of NACO and ABC has agreed to take all action necessary to hold a special
meeting of its stockholders promptly following the effectiveness of the
Registration Statement for the purpose of considering and taking action upon
the Merger Agreement and the Merger, with NACO stockholders to consider and
vote upon the adoption of the Merger Agreement and ABC stockholders to consider
and vote upon the Share Issuance, the Classified Board Amendment and the
Corporate Name Amendment. Each of NACO and ABC also has agreed that its board
of directors will recommend to its stockholders that they adopt and approve the
Merger Agreement, the Merger and the other transactions contemplated by the
Merger Agreement.
No Solicitation
Each of NACO and ABC has agreed that neither it nor any of its Subsidiaries
will, and that it will use its reasonable best efforts to ensure the officers,
directors, advisors, representatives and other agents of it and its
Subsidiaries will not, directly or indirectly:
. solicit, initiate or encourage the submission of any Acquisition Proposal
(as defined below), or
. engage in discussions or negotiations with, or disclose any non-public
information relating to it or its Subsidiaries or afford access to its or
its Subsidiaries' properties, books or records, to any person that has
made, or has indicated an interest in making an Acquisition Proposal;
provided, however, that either party may furnish non-public information,
participate in negotiations or enter into agreements regarding an
Acquisition Proposal if (but only if):
--its board of directors determines in good faith, after receipt of
such Acquisition Proposal and after consultation with outside counsel
and an independent financial adviser that it is necessary to do so in
order to comply with its fiduciary duties to stockholders under
applicable law; and
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--it receives an executed confidentiality agreement from the person or
entity making the Acquisition Proposal.
Each of NACO and ABC must promptly advise the other party of the receipt by it
of any Acquisition Proposal, or any request to discuss a transaction which is
reasonably likely to lead to an Acquisition Proposal, the material terms and
conditions of such Acquisition Proposal or request, the identity of the person
or entity making any such Acquisition Proposal or request, and any material
modifications to any of the foregoing. An "Acquisition Proposal" means any
offer or proposal for, or public announcement of an intention (whether or not
conditional) to propose, a merger, consolidation, recapitalization, liquidation
or other business combination involving NACO or any of its Subsidiaries, or ABC
or any of its Subsidiaries, as the case may be, or the acquisition or purchase
of 15% or more of any class of equity securities of NACO or any of its
Subsidiaries or ABC or any of its Subsidiaries, as the case may be, or any
tender offer (including self-tenders) or exchange offer that if consummated
would result in any person beneficially owning 15% or more of any class of
equity securities of NACO or any of its Subsidiaries or ABC or any of its
Subsidiaries, as the case may be, or a substantial portion of the assets of,
NACO or any of its Subsidiaries or ABC or any of its Subsidiaries, as the case
may be. An Acquisition Proposal with respect to NACO or any of its Subsidiaries
is referred to as a "NACO Acquisition Proposal," and an Acquisition Proposal
with respect to ABC or any of its Subsidiaries is referred to as an "ABC
Acquisition Proposal."
Additional Agreements
Pursuant to the Merger Agreement, NACO and ABC have agreed, among other things,
that:
. they will give each other reasonable access to their respective books and
records, furnish such financial and operating data and other information
as reasonably requested, and instruct their key management employees,
counsel and financial advisers to cooperate in their respective
investigations;
. they will prepare and ABC will file and use its reasonable best efforts
to have declared effective the Registration Statement and will take any
action required under applicable state securities or "blue sky" laws in
connection with the issuance of ABC common stock issuable in the Merger;
. ABC will file with Nasdaq a listing application covering the shares of
ABC common stock issuable in the Merger and will use its reasonable best
efforts to obtain, prior to the Effective Time, approval for the listing
of such shares on the Nasdaq National Market System;
. NACO will use its reasonable best efforts to obtain from its affiliates
an agreement not to, among other things, transfer shares of ABC common
stock issued to such person in the Merger except pursuant to an effective
registration statement or in compliance with Rule 145 or an exemption
from the registration requirements under the Securities Act, and ABC and
NACO will each use its reasonable best efforts to cause its affiliates to
agree not to sell shares of ABC common stock for a certain period before
and after the Effective Time so as to not adversely affect the
qualification of the Merger as a pooling of interests for financial
accounting purposes;
. they will pay their own expenses incurred in connection with the Merger
and the transactions contemplated thereby, except as provided in the
Merger Agreement;
. they will take any actions necessary to cause the Merger to qualify as a
reorganization under Section 368(a) of the Code;
. they will not take any action that would cause a pooling of interests
accounting treatment not to be obtained; and
. all rights to indemnification and all limitations on liability existing
in favor of each person who at or prior to the Effective Time was an
officer or director of NACO or any of its Subsidiaries as in effect as of
the date of the Merger Agreement will survive the Merger and continue in
full force and effect.
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CONDITIONS TO THE MERGER
Conditions to Each Party's Obligation to Effect the Merger
The respective obligations of NACO and ABC to effect the Merger are subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(i) the approval by the NACO stockholders of the Merger Agreement and the
Merger, and by the ABC stockholders of the Share Issuance, the Classified
Board Amendment and the Corporate Name Amendment;
(ii) no temporary restraining order, preliminary or permanent injunction
or other order, judgment, decree, statute, law, ordinance, rule or
regulation by any Governmental Authority being in effect and preventing the
consummation of the Merger or being reasonably likely to have a Material
Averse Effect on ABC or NACO;
(iii) the waiting period (and any extension thereof) applicable to the
Merger under the Hart-Scott-Rodino Act having expired or been terminated;
(iv) NACO and ABC obtaining all consents, approvals and actions of, and
making all filings with and notices to, any Governmental Authority or third
party required to consummate the Merger and the other transactions
contemplated by the Merger Agreement;
(v) the Registration Statement of which this Proxy Statement/Prospectus
forms a part having become effective, and no stop order suspending such
effectiveness being issued and remaining in effect; and
(vi) the shares of ABC common stock issuable in connection with the
Merger having been approved for listing on the Nasdaq National Market
System.
In addition, each of ABC's and NACO's obligation to effect the Merger is
subject to the satisfaction or waiver of the following additional conditions:
(i) the representations and warranties of the other party to the Merger
Agreement contained in the Merger Agreement being true and correct on the
date of the Merger Agreement and (except to the extent specifically given
as of an earlier date) at and as of the Closing Date;
(ii) the other party to the Merger Agreement having performed in all
material respects all obligations required to be performed by it under the
Merger Agreement on or before the Closing Date;
(iii) ABC and NACO having received from their legal counsel, Jones, Day,
Reavis & Pogue and Schiff Hardin & Waite, respectively, opinions covering
certain corporate matters and opinions stating that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Code and that ABC and NACO will each be a party to such reorganization
within the meaning of Section 368(b) of the Code (see "The Merger--Material
Federal Income Tax Consequences");
(vi) ABC having entered into a registration rights agreement with certain
NACO executive officers substantially in the form of an exhibit to the
Merger Agreement;
(vii) ABC having entered into agreements with certain NACO executive
officers making ABC a party to existing change-of-control agreements
between each such person and NACO; and
(viii) ABC having received an unqualified opinion from Arthur Andersen
LLP, its independent public accountants, with respect to the consolidated
financial statements of ABC included in ABC's Annual Report on Form 10-K
for the fiscal year ended July 31, 1998.
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TERMINATION
The Merger Agreement may be terminated at any time before the Effective Time:
(i) by the mutual written consent of NACO and ABC;
(ii) by either NACO or ABC if:
(a) the Merger is not consummated on or before February 28, 1999;
(b) any statute, rule, regulation or executive order is in effect
prohibiting the consummation of the Merger, or any order, decree,
ruling or injunction is entered permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or
injunction is final and nonappealable and the party seeking to
terminate the Merger Agreement on this ground shall have used its
reasonable best efforts to remove such order, decree, ruling or
injunction;
(c) the other party breaches or fails to perform in any material
respect any of its representations, warranties or obligations under the
Merger Agreement, and such breach or failure to perform is not cured
within thirty (30) days after written notice;
(d) the approval of the stockholders of NACO or the stockholders of ABC
contemplated by the Merger Agreement has not been obtained at duly held
meetings of stockholders;
(e) the board of directors of NACO determines that a bona fide NACO
Acquisition Proposal made by a third party on terms that a majority of
the members of the board of directors of NACO determines in good faith
(based on the advice of an independent financial adviser) is more
favorable to NACO and to its stockholders than the transactions
contemplated by the Merger Agreement (such a NACO Acquisition Proposal
is referred to as a "NACO Superior Proposal"), except that NACO may not
terminate the Merger Agreement on this ground unless and until (i)
three Business Days have elapsed following delivery to ABC of a written
notice of such determination by the board of directors of NACO and
during such three Business Day period NACO (A) promptly informs ABC of
the terms and conditions of the NACO Acquisition Proposal and the
identity of the person making the NACO Acquisition Proposal and (B)
otherwise cooperates with ABC with respect thereto (subject to the
condition that the board of directors of NACO shall not be required to
take any action that it believes, after consultation with outside legal
counsel, would violate its obligations to NACO or NACO's stockholders
under applicable law) with the intent of enabling ABC to engage in good
faith negotiations so that the transactions contemplated by the Merger
Agreement may be effected, (ii) at the end of such three Business Day
period the board of directors of NACO continues reasonably to believe
that the NACO Acquisition Proposal constitutes a NACO Superior
Proposal, (iii) simultaneously with such termination NACO enters into a
definitive acquisition, merger or similar agreement to effect the NACO
Superior Proposal and (iv) NACO pays to ABC the termination fee and
expenses described below under "--Termination Fees" and "--Expenses";
or
(f) the board of directors of ABC determines that a bona fide ABC
Acquisition Proposal made by a third party on terms that a majority of
the members of the board of directors of ABC determines in good faith
(based on the advice of an independent financial adviser) is more
favorable to ABC and to its stockholders than the transactions
contemplated by the Merger Agreement (such an ABC Acquisition Proposal
is referred to as an "ABC Superior Proposal"), except that ABC may not
terminate the Merger Agreement on this ground unless and until (i)
three Business Days have elapsed following delivery to NACO of a
written notice of such determination by the board of directors of ABC
and during such three Business Day period ABC (A) promptly informs NACO
of the terms and conditions of the ABC Acquisition Proposal and the
identity of the person making the ABC Acquisition Proposal and (B)
otherwise cooperates with NACO with respect thereto (subject to the
condition that the board of directors of ABC shall not be required to
take any action that it believes, after consultation with outside legal
counsel, would violate its obligations to ABC or ABC's stockholders
under applicable law) with the intent of enabling NACO to engage in
good faith
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negotiations so that the transactions contemplated by the Merger
Agreement may be effected, (ii) at the end of such three Business Day
period the board of directors of ABC continues reasonably to believe
that the ABC Acquisition Proposal constitutes an ABC Superior Proposal,
(iii) simultaneously with such termination ABC enters into a definitive
acquisition, merger or similar agreement to effect the ABC Superior
Proposal and (iv) ABC pays to NACO the termination fees and expenses
described below under "--Termination Fees" and "--Expenses".
(iii) by ABC, if:
(a) the board of directors of NACO shall have (i) withdrawn or modified
in a manner adverse to ABC its approval or recommendation of the Merger
Agreement and the transactions contemplated thereby or (ii) approved or
recommended, or proposed publicly to approve or recommend, any NACO
Acquisition Proposal; or
(b) a tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of NACO is commenced prior to the Effective
Time, and the board of directors of NACO fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders
(including such a failure by taking no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders)
within the time period specified by Rule 14e-2 under the 1934 Act.
(iv) by NACO, if:
(a) the board of directors of ABC shall have (i) withdrawn or modified
in a manner adverse to NACO its approval or recommendation of the
Merger Agreement and the transactions contemplated thereby or (ii)
approved or recommended, or proposed publicly to approve or recommend,
any ABC Acquisition Proposal; or
(b) a tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of ABC is commenced prior to the Effective
Time, and the board of directors of ABC fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders
(including such a failure by taking no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders)
within the time period specified by Rule 14e-2 under the 1934 Act.
TERMINATION FEES
NACO and ABC agree that NACO will pay to ABC a fee of $5,000,000 (the
"Termination Fee") in cash and will reimburse ABC for all fees, costs and
expenses incurred by ABC in connection with the Merger Agreement and the
transactions contemplated thereby (including but not limited to fees and
expenses of investment bankers, accountants and attorneys) in the amount of
$2,000,000 (the "Covered Expenses") under the following circumstances:
(i) NACO or ABC terminates the Merger Agreement because the NACO board of
directors determines that a NACO Acquisition Proposal constitutes a NACO
Superior Proposal;
(ii) ABC terminates the Merger Agreement because the NACO board of
directors (a) withdraws or modifies in a manner adverse to ABC its approval
or recommendation of the Merger Agreement and the transactions contemplated
thereby or (b) approves or recommends, or proposes publicly to approve or
recommend a NACO Acquisition Proposal;
(iii) ABC terminates the Merger Agreement because the NACO board of
directors fails to recommend against acceptance of a tender offer or
exchange offer for 20% or more of the outstanding shares of capital stock
of NACO within the time period specified by Rule 14e-2 under the 1934 Act;
or
(iv) NACO terminates the Merger Agreement because the Merger has not been
consummated by February 28, 1999 or NACO or ABC terminates the Merger
Agreement because the NACO stockholders failed to adopt and approve the
Merger Agreement and the transactions contemplated thereby and, in each
case, concurrently with or within twelve months after such termination a
NACO Acquisition Proposal (other than an initial public offering of NACO
common stock) is consummated.
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NACO and ABC agree that ABC will pay to NACO the Termination Fee and reimburse
NACO for its Covered Expenses under the following circumstances:
(i) ABC or NACO terminates the Merger Agreement because the ABC board
determines that an ABC Acquisition Proposal constitutes an ABC Superior
Proposal;
(ii) NACO terminates the Merger Agreement because the ABC board of
directors (a) withdraws or modifies in a manner adverse to NACO its
approval or recommendation of the Merger Agreement and the transactions
contemplated thereby or (b) approves or recommends, or proposes publicly to
approve or recommend, an ABC Acquisition Proposal;
(iii) NACO terminates the Merger Agreement because the ABC board of
directors fails to recommend against acceptance of a tender offer or
exchange offer for 20% or more of the outstanding shares of capital stock
of ABC within the time period specified by Rule 14e-2 under the 1934 Act;
or
(iv) ABC terminates the Merger Agreement because the Merger has not been
consummated by February 28, 1999 or ABC or NACO terminates the Merger
Agreement because the ABC stockholders failed to approve the Share
Issuance, the Classified Board Amendment and the Corporate Name Amendment
and, in each case, concurrently with or within twelve months after such
termination an ABC Acquisition Proposal is consummated.
If the Merger Agreement is terminated by NACO or ABC because the other party's
stockholders failed to approve the Merger Agreement (and no NACO Acquisition
Proposal or ABC Acquisition Proposal, as the case may be, is consummated within
twelve months of such termination), then such other party will reimburse NACO
or ABC, as the case may be, for its Covered Expenses.
EXPENSES
NACO and ABC will each pay its own costs and expenses in connection with the
Merger Agreement and the transactions contemplated thereby, except as described
above under "--Termination Fees" and for (i) expenses incurred in connection
with the printing of this Proxy Statement/Prospectus and the Registration
Statement, and (ii) the filing fees required in connection with the filing of
the Registration Statement and the premerger notification under the Hart-Scott
Rodino Act, which will be shared equally by NACO and ABC.
AMENDMENT, EXTENSION AND WAIVER
The Merger Agreement may be amended by written agreement at any time before the
Effective Time, provided that after stockholder approval of the Merger has been
obtained, no amendment may be made which, by law, would require further
approval by such stockholders without the further approval of such
stockholders.
At any time before the Effective Time, either NACO or ABC may (i) extend the
time for the performance of any of the obligations or other acts of the other
party, (ii) waive any inaccuracies in the representations and warranties
contained in the Merger Agreement or in any document delivered pursuant thereto
or (iii) waive compliance with any of the agreements or conditions contained in
the Merger Agreement, except the requirement that an amendment to the Merger
Agreement be in writing. Any agreement on the part of either NACO or ABC to any
such extension or waiver shall be valid against such party only if set forth in
a written instrument signed by such party.
AMENDMENTS TO ABC CERTIFICATE OF INCORPORATION
CLASSIFIED BOARD
The ABC board of directors has approved a resolution amending the certificate
of incorporation to provide for a classified board of directors (the
"Classified Board"). At the special meeting, stockholders will consider and
vote on this proposed amendment. The text of the proposed amendment is attached
to this document as
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Exhibit D. The statements made in this document with respect to this amendment
to the certificate of incorporation should be read in conjunction with and are
qualified in their entirety by reference to Exhibit D.
This amendment may have the effect of making it more difficult for stockholders
to remove the existing management of ABC; and therefore, the amendment may
discourage potentially unfriendly bids for ABC's stock. See "Possible Anti-
takeover Effects of Classified Board."
Description of Classified Board Amendment
The ABC certificate of incorporation would be amended to provide for a
classified board of directors. The amendment would operate to divide the board
of directors into three separate classes of directors, to serve a three year
term and until their successors are duly elected and qualified with each class
being elected at different annual stockholder meetings. Following the
effectiveness of the amendment, the directors selected by the board for Class I
(Messrs. Martin and Thompson) will have a term which will expire at the first
annual meeting of stockholders following the merger, those in Class II (Messrs.
Drexler and Peck) will have a term which will expire at the second annual
meeting following the merger and those in Class III (Messrs. Duval, Ergas,
Grinter and Seher) will have a term expiring at the third annual meeting
following the merger. After the board is classified, each future election of
directors will be for a three year term. At the time of the merger, the board
of ABC-NACO will set the size of the board at eight members and the non-
continuing ABC directors will resign. The board will then fill the vacancies
with the persons designated by NACO to be directors and establish the classes.
The proposed amendment would replace the prior system of electing all of the
directors annually for one year terms.
If the number of directors constituting the board of directors is increased or
decreased, the resulting number of directors will be apportioned among the
three classes as determined by the board except that the term of any incumbent
director may not be shortened. Under the DGCL, if a board is classified by
action of the stockholders, unless the certificate of incorporation specifies
otherwise, members of the board of directors may be removed by the stockholders
before the expiration of their respective terms only for cause. Accordingly, in
the event that ABC stockholders approve this proposal, none of the directors
elected to the Classified Board may be removed without cause prior to the
expiration of their respective terms.
Reasons for Classified Board Amendment
Since directors will be serving for longer terms which expire at different
times and directors may only be removed for cause by a supermajority vote of
stockholders, the board of directors believes that a Classified Board will
promote continuity of management; and thereby, enhance the ability of ABC to
carry out long-range plans and goals for its benefit and the benefit of its
stockholders. Although ABC has not experienced difficulties in the past in
maintaining continuity of the board and management, the board of directors
believes that a Classified Board will assist ABC in maintaining this continuity
of management into the future. Additionally, a classified board has certain
anti-takeover effects that the board believes will deter unsolicited takeover
attempts and protect the value of each stockholder's investment in ABC. See
"Possible Anti-takeover Effects of the Classified Board Amendment."
A Classified Board would also extend the time it would take for a majority
stockholder to obtain control of ABC's board of directors; and thereby, limit
abusive takeover tactics. Assuming each class of directors is equal in size, a
majority stockholder could not obtain control of the board of directors until
the second annual stockholders' meeting after it acquired a majority of the
voting stock. During this time, the board of directors would have a better
opportunity to defend ABC against abusive takeover tactics and to negotiate
with any majority stockholder to obtain more favorable price and terms in any
merger or tender offer.
Possible Anti-takeover Effects of the Classified Board Amendment
The board of directors believes that adoption of the classified board amendment
may have anti-takeover effects as described below. Also described below are the
general anti-takeover provisions of the DGCL.
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Anti-takeover Provisions of The DGCL
As set forth above, the DGCL prohibits stockholders from removing members of a
classified board without cause before the expiration of their respective terms
unless the certificate specifies otherwise. The DGCL contains a number of other
provisions which are designed to strengthen the position of incumbent
management in connection with a takeover attempt. For example, Delaware law
provides that a company has the general power, exercisable by its board of
directors, to accept, reject, respond to or take no action in respect of an
actual or proposed acquisition, divestiture, tender offer, takeover or other
fundamental change. The case law of Delaware has developed special standards
for deciding whether to uphold or advocate the actions of incumbent management
in the context of takeover proposals.
ABC is also subject to Section 203 of the DGCL, which provides that a person
who acquires fifteen percent (15%) or more of the outstanding voting stock of a
Delaware corporation becomes an "interested stockholder." Section 203 prohibits
a corporation from engaging in mergers or certain other "business combinations"
with an interested stockholder for a period of three (3) years, unless (i)
prior to the date the stockholder becomes an interested stockholder, the board
of directors approves either the business combination or the transaction which
results in the stockholder becoming an interested stockholder, or (ii) the
interested stockholder is able to acquire ownership of at least eighty-five
percent (85%) of the outstanding voting stock of the corporation (excluding
shares owned by directors of the corporation who are also officers and shares
owned by certain employee stock plans) in the same transaction by which the
stockholder became an interested stockholder, or (iii) the interested
stockholder obtains control of the board of directors, which then approves a
business combination which is authorized by a vote of the holders of two-thirds
of the outstanding voting stock not held by the interested stockholder.
The definition of interested stockholder does not include persons whose
ownership of voting stock exceeds the fifteen percent (15%) threshold as a
result of action taken by the corporation unless that person thereafter
acquires additional stock.
A "business combination" is defined broadly in the DGCL to include any merger
or consolidation with the interested stockholder, any merger or consolidation
caused by the interested stockholder in which the surviving corporation will
not be subject to Delaware law, or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition to the interested stockholder of any assets of
the corporation having a market value equal to or greater than ten percent
(10%) of the aggregate market value of the assets of the corporation. "Business
combination" is also defined to include transfers of stock of the corporation
or a subsidiary to the interested stockholder (except for transfers in
conversion, exchange or pro rata distribution which do not increase the
interested stockholder's proportionate ownership of a class or series), or any
receipt by the interested stockholder (except proportionately as a stockholder)
of any loans, advances, guaranties, pledges or financial benefits.
Possible Consequences of the Anti-takeover Effects of the Classified Board
Amendment
The board of directors believes that adoption of the Classified Board, to the
extent that it deters unsolicited takeover attempts, will promote conditions of
stability in the business, management and control of ABC, discourage in advance
certain takeover offers or other attempts to accumulate ABC's stock and
encourage anyone contemplating such actions to negotiate with ABC and will
assist ABC in defending against any such action if the board of directors does
not believe it to be in the best interests of ABC and all of its stockholders.
Although the board of directors is not aware of any overt threat of such a
takeover attempt at this time, the board of directors believes that creation of
a classified board is in the best interest of ABC.
A takeover offer often places the target corporation in the position of making
a forced sale. Hostile acquirers sometimes make takeover offers when the market
price of a potential target's stock may be temporarily depressed. The board of
directors believes that the consideration offered in such a situation, even
though it may be in excess of the then market price, may be less than the
consideration which could be obtained in a freely negotiated transaction. In a
freely negotiated transaction, the board of directors would have the
opportunity to
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seek a suitable partner at a time of its choosing and to negotiate the most
favorable price terms which reflect not only the current, but also the future
value of ABC. The board of directors may also believe that the takeover offer
is not in the best interests of ABC and its stockholders for additional
reasons, such as those exhibited in the large number of business failures which
result from overleveraged transactions. In the context of an unsolicited offer,
the board may not have adequate time to consider fully the takeover offer and
to determine what actions are in the best interests of ABC and its stockholders
despite the provisions of applicable federal law regarding the minimum duration
of certain takeover offers. Adoption of a classified board attempts to
ameliorate the problems inherent in these situations.
Takeover offers or other non-market acquisitions of stock are usually made at
prices above the prevailing market price of the corporation's stock and often
have a corresponding effect on such market price. Accumulation of stock through
market purchases, whether or not for the purpose of acquiring control, may also
support the price of a corporation's stock at levels higher than otherwise
would be the case. Adoption of a classified board may discourage such takeover
offers and purchases, even if holders of a majority of ABC's shares desire to
sell such shares.
Adoption of a classified board may also make it more difficult to accomplish a
transaction requiring stockholder approval or to displace management quickly,
even if a majority of the stockholders of ABC desire to do so. Under certain
circumstances, a classified board may permit management of ABC to perpetuate
itself in control of ABC. In addition, a classified board could encourage a
potential purchaser of ABC to negotiate with the board of directors and offer
terms acceptable to it. Such terms might include continuation of the existing
management of ABC or a commitment by the purchaser to provide benefits (such as
employment contracts) not available to stockholders generally.
Vote Required for Approval of Classified Board Amendment
The affirmative vote of at least the majority of the outstanding shares of ABC
common stock is required in order to approve the amendment to the ABC
certificate of incorporation to establish a classified board. An abstention or
failure to vote on this proposal is not an affirmative vote and, therefore,
will have the same effect as a negative vote on this proposal. If approved, the
amendment to the certificate of incorporation will become effective upon the
filing of a Certificate of Amendment with the Secretary of State of Delaware.
We expect the amendment will become effective at the same time as the merger.
The amendment will not become effective if the Merger is not approved and
consummated.
Directors Recommend a Vote For the Classified Board Amendment
THE ABC BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE AMENDMENT TO
THE CERTIFICATE OF INCORPORATION TO CREATE A CLASSIFIED BOARD. WE CANNOT
COMPLETE THE MERGER UNLESS THE AMENDMENT TO CREATE A CLASSIFIED BOARD IS
APPROVED.
CHANGE OF CORPORATE NAME
The ABC board of directors has approved a resolution amending the certificate
of incorporation to provide that the name of the corporation be changed to
"ABC-NACO Inc." The ABC board believes that changing the corporation's name is
appropriate in light of the Merger and will better reflect the company's
business and origins. Including both company's historic names in the new
company name will help maintain a consistent profile with our customers.
The affirmative vote of at least the majority of the outstanding shares of ABC
common stock is required in order to approve the amendment to the ABC
certificate of incorporation to change the name of the corporation. An
abstention or failure to vote on this proposal is not an affirmative vote and,
therefore, will have the same effect as a negative vote on this proposal. We
expect the amendment to change the corporate name will become effective at the
same time as the Merger. The amendment to change the corporate name will not
become effective if the Merger is not approved and consummated.
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THE ABC BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE AMENDMENT TO
THE CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE CORPORATION TO ABC-
NACO INC. WE CANNOT COMPLETE THE MERGER UNLESS THE AMENDMENT TO CHANGE THE NAME
OF THE CORPORATION IS APPROVED.
ADJOURNMENT PROPOSAL
The ABC board of directors may determine that it will recommend that the ABC
special meeting scheduled for January 28, 1999 be postponed or adjourned. One
reason for such action would be to allow additional time for management to
solicit proxies in support of the proposal to issue shares of ABC common stock
in the Merger, to approve the Classified Board Amendment or to approve the
Corporate Name Amendment. Approval of such a matter by stockholders would
require the affirmative vote of a majority of the shares represented at the
meeting in person or by proxy. An abstention or failure to vote on this
proposal will have the effect of a negative vote on this proposal.
THE ABC BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE PROPOSAL TO
POSTPONE OR ADJOURN THE SPECIAL MEETING AT THE DIRECTION OF THE BOARD OF
DIRECTORS.
STOCK OWNERSHIP
ABC STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the ABC common stock as of September 1, 1998 of (a) persons owning
of record or known to ABC to be the beneficial owner of more than five percent
of its outstanding common stock, (b) each director, (c) each of its executive
officers and (d) all current directors and executive officers of ABC as a
group. All information with respect to beneficial ownership has been furnished
by the respective director, executive officer or stockholder, as the case may
be, or has been derived from documents filed by such stockholder with the SEC.
To the knowledge of ABC, each of such stockholders has sole voting and
investment power over the shares indicated unless otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES PERCENT
---- --------- -------
<S> <C> <C>
ICM Asset Management, Inc............................ 1,084,850(1) 12.1%
David L. Babson & Co., Inc........................... 962,800(2) 10.7%
State of Wisconsin Investment Board.................. 885,000(3) 9.9
Investment Advisors, Inc............................. 800,500(4) 8.9
Wellington Management Company, LLP................... 712,000(5) 7.9
LGT Asset Management, Inc............................ 454,950(6) 5.1
Janus Capital Corporation/Thomas H. Bailey/Janus
Venture Fund........................................ 450,000(7) 5.0
Donald W. Grinter.................................... 320,617(8) 3.6
Norman M. Doerr...................................... 18,107(9) *
Jean-Pierre M. Ergas................................. 20,000(10) *
Donald R. Gant....................................... 27,000(11) *
Clarence E. Johnson.................................. 30,000(12) *
James E. Martin...................................... 23,000(13) *
George W. Peck IV.................................... 19,000(14) *
David G. Kleeschulte................................. 69,918(15) *
D. Chisholm MacDonald................................ 120,000(16) 1.3
Rick M. Turner....................................... 14,000(17) *
Robert W. Willmschen, Jr............................. 35,000(18) *
Steven Yoder......................................... 214,971(19) 2.4
All current directors and executive officers as a
group............................................... 911,613(20) 10.2%
</TABLE>
- --------
*Less than 1.0%
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(1) According to its most recently filed Schedule 13G, ICM Asset Management,
Inc. ("ICM") exercises sole voting power over 718,650 shares and sole
dispositive power over 1,084,850 shares. ICM is an Investment Advisor
registered under section 203 of the Investment Advisors Act of 1940. ICM's
address is 601 W. Main Avenue, Suite 600, Spokane Washington, 99201.
(2) According to its most recently filed Schedule 13G, David L. Babson and
Company Incorporated ("DLB") has sole voting power over 960,300 shares,
shared voting power over 2,500 shares and sole dispositive power over
962,800 shares. DLB states in its Schedule 13G that it is an investment
advisor, which may be deemed to beneficially own 962,800 shares of common
stock of ABC which are owned by numerous investment counseling clients.
DLB's address is One Memorial Drive, Cambridge, Massachusetts, 02142-1300.
(3) According to the most recently filed Schedule 13G/A of this entity, it is
a government agency which manages public pension funds subject to
provisions comparable to the Employee Retirement Income Security Act of
1974 ("ERISA") and has sole voting and dispositive power over all 885,800
shares. Its address is P.O. Box 7842, Madison, Wisconsin 53707.
(4) According to its most recently filed Schedule 13G, Investment Advisors,
Inc. ("Investment Advisors") exercises sole voting power and dispositive
power over 603,500 shares and shared voting and dispositive power over
197,000 shares. The shares are held by various custodian banks for various
clients of Investment Advisors. Investment Advisors' address is 3700 First
Bank Place, Box 357, Minneapolis, MN, 55440.
(5) According to its most recently filed Schedule 13G, Wellington Management
Company, LLP ("Wellington") exercises shared voting power over 392,000
shares and shared dispositive power over 712,000 shares. Wellington is an
Investment Advisor registered under section 203 of the Investment Advisors
Act of 1940 and a Parent Holding Company under the Exchange Act.
Wellington states in its Schedule 13G that it is an investment advisor,
which may be deemed to beneficially own 712,000 shares of common stock of
ABC, which are held of record by Wellington clients. The shares noted
above were acquired by Wellington Trust Company, NA, 75 State Street,
Boston, Massachusetts, 02109, a wholly owned subsidiary of Wellington and
a bank as defined under the Exchange Act. Wellington's address is 75 State
Street, Boston, Massachusetts, 02109.
(6) According to its most recently filed Schedule 13G, LGT Asset Management,
Inc.'s address is 50 California, 27th Fl., San Francisco, California
94111.
(7) According to the most recently filed joint Schedule 13G of these entities
and Mr.Bailey, these entities and Mr. Bailey share voting and dispositive
power over all shares. Janus Capital Corporation ("Janus Capital") is the
beneficial owner of these shares through its role as investment adviser or
sub-adviser which furnishes investment advice to several investment
companies registered under Section 8 of the Investment Company Act and
individual and institutional clients (the "Managed Portfolios") which hold
these shares. Thomas H. Bailey is a 12.2% owner and the President and
Chairman of the Board of Janus Capital. Janus Venture Fund is one of the
Managed Portfolios to which Janus Capital provides investment advice, and
the interest of Janus Venture Fund amounts to all shares. The address for
these entities and Mr.Bailey is 100 Fillmore Street, Suite 300, Denver,
Colorado 80206-4923.
(8) Includes 92,000 shares subject to outstanding options which are
exercisable as of or within 60 days of September 1, 1998.
(9) Includes 5,000 shares subject to outstanding options which are exercisable
as of or within 60 days of September 1, 1998.
(10) Includes 15,000 shares subject to outstanding options which are
exercisable as of or within 60 days of September 1, 1998.
(11) Includes 20,000 shares subject to outstanding options which are
exercisable as of or within 60 days of September 1,998.
(12) Includes 20,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
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(13) Includes 15,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998. Also includes
3,000 shares held in an irrevocable trust created for the benefit of Mr.
Martin's grandchildren, with respect to which Mr. Martin's shares
dispositive power with the trustee, who is his daughter.
(14) Includes 15,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
(15) Includes 45,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
(16) Includes 60,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
(17) Includes 14,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
(18) Includes 30,000 shares subject to outstanding stock options which are
exercisable as of or within 60 days of September 1, 1998.
(19) In connection with ABC's acquisition of American Systems Technologies,
Inc. ("AST") in December of 1996, Steven M. Yoder, former President of AST
and an executive officer of ABC, pursuant to the Supplemental Agreement by
and among ABC and certain shareholders of AST, agreed to vote for the
election of the slate of nominees to the Board of Directors of ABC
presented by the Board of Directors of ABC and on all other matters to be
voted upon by the stockholders, in accordance with the recommendation of
the Board of Directors of ABC. Mr. Yoder beneficially owns 214,971 shares,
or approximately 2.4%, of the outstanding Common Stock of ABC as of
September 1, 1998.
(20) Includes 331,000 shares subject to outstanding options which are held by
current directors and executive officers and are exercisable as of or
within 60 days of September 1, 1998.
NACO STOCK OWNERSHIP
The following table sets forth certain information concerning the beneficial
ownership of NACO common stock as of September 1, 1998 held by (a) persons
owning of record or known to NACO to be the beneficial owner of more than five
percent of its outstanding common stock, (b) each director, (c) each of its
executive officers and (d) all current directors and executive officers of NACO
as a group. Except as otherwise indicated, all persons listed below have sole
voting and investment power with respect to their shares of NACO common stock.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT
--------------------------- ------- -------
<S> <C> <C>
Joseph A. Seher........................................ 569,179(2) 55.6
Vaughn W. Makary....................................... 56,740 5.5
John W. Waite.......................................... 49,755 4.9
Wayne R. Rockenbach.................................... 48,170 4.7
John M. Lison.......................................... 41,599(3) 4.1
Willard H. Thompson.................................... 9,660 *
Richard A. Drexler..................................... 2,000 *
Daniel W. Duval........................................ 2,000 *
All Directors and executive officers as a group (14
persons).............................................. 828,361 80.9%
======= ====
</TABLE>
- --------
* Less than 1.0%.
(1) Unless otherwise specified, the address of each of the persons listed in
the table is 2001 Butterfield Road, Suite 502, Downers Grove, Illinois
60515.
(2) Includes 280,000 shares held in two separate trusts established by Mr.Seher
for the benefit of his daughters.
(3) Mr. Lison holds a warrant to purchase 15,000 shares currently held by
Mr.Seher and also reported in Mr. Seher's beneficial ownership total.
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EXPERTS
The audited consolidated financial statements as of July 31, 1998 and 1997, and
for each of the three years in the period ended July 31, 1998, incorporated in
this Proxy Statement/Prospectus by reference from ABC's Annual Report on Form
10-K for the fiscal year ended July 31, 1998 have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report,
which is also incorporated herein by reference, and have been so incorporated
in reliance upon the authority of said firm as experts in accounting and
auditing. Reference is made to said report, which calls attention to a change
in accounting principle with respect to business process reengineering costs.
The audited consolidated financial statements as of March 29, 1998 and March
30, 1997, and for each of the three years in the period ended March 29, 1998 of
NACO included in this Proxy Statement/Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report,
which is also included herein, and have been so included in reliance upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Jones, Day, Reavis & Pogue will pass upon the legality of the shares of ABC
common stock to be issued in connection with the Merger.
STOCKHOLDER PROPOSALS
ABC has elected to postpone its regular annual meeting of stockholders until
after the special meeting. Under rules of the SEC, we must include certain
proposals, if any, received from our stockholders in our proxy materials for
the annual meeting of stockholders. These stockholder proposals must be
received by us before a deadline specified in the SEC rules or we may omit the
proposal. Normally, the deadline would be 120 days before the date of mailing
of the proxy materials for the prior year's meeting. Because we will be
changing the date of the next annual meeting from its usual time, any proposal
must be received by us a reasonable amount of time prior to mailing the proxy
materials for that annual meeting. We will make a public announcement of the
date of the next annual meeting in advance and will indicate a date by which
stockholder proposals must be received. This public announcement will be in one
of our Form 10-Q's filed with the SEC or by some other public means.
WHERE YOU CAN FIND MORE INFORMATION
ABC files file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information that the companies file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. ABC's public filings are also available to the public from commercial
document retrieval services and at the Internet web site maintained by the SEC
at "http://www.sec.gov." Reports, proxy statements and other information
concerning ABC also may be inspected at the offices of The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
NACO is a private company and is not required to file public reports with the
SEC or any other agency.
ABC has filed the Registration Statement to register with the SEC the ABC
common stock to be issued to NACO stockholders in the Merger. This Proxy
Statement/Prospectus is a part of the Registration Statement and constitutes a
prospectus of ABC, as well as a proxy statement of ABC for the ABC special
meeting. As a private company, NACO is not subject to the SEC's proxy rules.
This document is being distributed to NACO
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stockholders in connection with the special meeting of stockholders at which
approval of the Merger Agreement will be considered.
As allowed by SEC rules, this Proxy Statement/Prospectus does not contain all
the information that shareholders can find in the Registration Statement or the
exhibits to the Registration Statement.
The SEC allows ABC to "incorporate by reference" information into this Proxy
Statement/Prospectus, which means that ABC can disclose important information
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement/Prospectus, except for any information superseded by information
contained directly in the Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that ABC has previously filed with the SEC. These documents contain important
information about ABC and its financial condition.
<TABLE>
<CAPTION>
PERIOD
ABC SEC FILINGS (FILE NO. 0-22906): ------
<S> <C>
Annual Report on Form 10-K and Form 10-
K/A....................................... Year ended July 31, 1998
Quarterly Report on Form 10-Q.............. Quarter ended October 31, 1998
Form 8-K................................... Dated September 18, 1998
</TABLE>
ABC hereby incorporates by reference additional documents that ABC may file
with the SEC between the date of this Proxy Statement/Prospectus and the dates
of the special meeting. These include periodic reports, such as Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as well as proxy statements. A description of our capital stock is included
under "Description of ABC Capital Stock."
ABC has supplied all information contained or incorporated by reference in this
Proxy Statement/Prospectus relating to ABC or ABC Acquisition or Sub, and NACO
has supplied all such information relating to NACO.
If you are a ABC stockholder, you may have received some of the documents
incorporated by reference. You may also obtain any of such documents from ABC
or the SEC or the Internet web site described above. Documents incorporated by
reference are available from ABC without charge, excluding all exhibits, unless
specifically incorporated by reference as an exhibit in this Proxy
Statement/Prospectus. Stockholders may obtain documents incorporated by
reference in this Proxy Statement/Prospectus by requesting them in writing or
by telephone from ABC at the following address:
ABC Rail Products Corporation
200 South Michigan Avenue
Suite 1300
Chicago, Illinois 60604
(312) 322-0360
Attention: J.P. Singsank
Corporate Controller and Assistant Secretary
If you would like to request documents, please do so by to receive them
before the meetings. If you request any incorporated documents, ABC will mail
them to you by first-class mail, or other equally prompt means, within one
business day of receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE YOUR SHARES AT THE SPECIAL MEETING.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED , 1998. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THE PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF ABC SHARES IN THE
MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
127
<PAGE>
INDEX TO NACO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of March 29, 1998 and March 30, 1997...... F-3
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended March 29, 1998, March 30, 1997 and March 31, 1996........... F-4
Consolidated Statements of Cash Flows for the Years Ended March 29, 1998,
March 30, 1997 and March 31, 1996....................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended March
29, 1998, March 30, 1997 and March 31, 1996............................. F-6
Notes to Consolidated Financial Statements............................... F-7
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 27, 1998 (unaudited) and
March 29, 1998.......................................................... F-26
Consolidated Statements of Operations and Comprehensive Income for the
Three Months and Six Months Ended September 27, 1998 and September 28,
1997 (unaudited)........................................................ F-27
Consolidated Statements of Cash Flows for the Three Months and Six Months
Ended September 27, 1998 and September 28, 1997 (unaudited)............. F-28
Consolidated Statements of Stockholders' Equity for the Three Months and
Six Months Ended September 27, 1998 and September 28, 1997 (unaudited).. F-29
Notes to Consolidated Financial Statements (unaudited)................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
NACO, Inc.:
We have audited the accompanying consolidated balance sheets of NACO, Inc. (a
Delaware corporation) and Subsidiaries (the "Company") as of March 29, 1998,
and March 30, 1997, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended March 29, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NACO, Inc. and
Subsidiaries as of March 29, 1998, and March 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
March 29, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
May 1, 1998 (except with
respect to the matter
discussed in Note 15, as to
which the date is September
17, 1998).
F-2
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 262 $ 350
Trade accounts receivable, less allowances (Note 1)...... 37,415 30,107
Other receivables........................................ 1,635 1,410
Inventories, net (Note 3)................................ 18,066 20,260
Prepaid expenses and other current assets................ 3,132 2,207
Deferred income tax asset (Note 11)...................... 1,331 1,814
-------- --------
Total current assets................................... 61,841 56,148
-------- --------
Property, Plant and Equipment, net (Note 3)................ 58,637 52,359
-------- --------
Other Assets, net (Note 3)................................. 892 1,028
-------- --------
Total assets........................................... $121,370 $109,535
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash overdrafts.......................................... $ -- $ 1,049
Accounts payable......................................... 30,455 26,757
Current maturities of long-term debt (Note 4)............ 9,723 4,823
Accrued liabilities (Note 3)............................. 16,239 13,575
-------- --------
Total current liabilities.............................. 56,417 46,204
-------- --------
Long-term Debt, net of current maturities (Note 4)......... 44,074 49,066
-------- --------
Accrued Postretirement Benefits (Note 10).................. 7,768 7,490
-------- --------
Other Liabilities.......................................... 4,813 5,755
-------- --------
Deferred Income Taxes (Note 11)............................ 2,928 1,057
-------- --------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Common stock, $.01 par value, 2,000,000 shares
authorized, 1,021,356 and 1,021,238 shares outstanding
as of March 29, 1998, and March 30, 1997, respectively
(Note 7)................................................ 6 6
Additional paid-in capital............................... 251 233
Retained earnings (deficit).............................. 5,275 (241)
Cumulative translation adjustment........................ (162) (35)
-------- --------
Total stockholders' equity............................. 5,370 (37)
-------- --------
Total liabilities and stockholders' equity............. $121,370 $109,535
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
F-3
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------
MARCH 29, MARCH 30, MARCH 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Sales..................................... $303,258 $277,726 $279,758
Cost of Sales................................. 256,866 241,786 245,600
-------- -------- --------
Gross profit.............................. 46,392 35,940 34,158
Selling, General and Administrative Expenses.. 29,065 27,532 24,375
Wilsons Asset Impairment Charge and
Liquidation (Gain) (Note 13)................. -- (1,430) 2,800
-------- -------- --------
Income from operations.................... 17,327 9,838 6,983
Other Expense, net (Note 9)................... (1,717) (1,198) (1,536)
Interest Expense.............................. (5,676) (5,242) (4,115)
Income before income taxes................ 9,934 3,398 1,332
Provision for Income Taxes (Note 11).......... (4,418) (878) (726)
-------- -------- --------
Net income................................ 5,516 2,520 606
Other Comprehensive Income, net of tax:
Foreign currency translation adjustment..... (127) (246) 248
Minimum pension liability adjustment........ -- -- 1,182
-------- -------- --------
Other comprehensive income................. (127) (246) 1,430
-------- -------- --------
Comprehensive income...................... $ 5,389 $ 2,274 $ 2,036
======== ======== ========
Basic Earnings Per Share (Note 1):
Net income.................................. $ 5.41 $ 2.47 $ 0.59
======== ======== ========
Diluted Earnings Per Share (Note 1):
Net income.................................. $ 5.13 $ 2.34 $ 0.56
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------
MARCH 29, MARCH 30, MARCH 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income..................................... $ 5,516 $ 2,520 $ 606
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 10,031 8,373 5,425
Wilsons asset impairment charge and
liquidation (gain).......................... -- (1,430) 2,800
Deferred income taxes........................ 2,354 898 440
Changes in certain assets and liabilities,
net of effects from acquisitions--
Trade and other receivables................ (7,533) 3,032 (8,531)
Inventories................................ 2,194 (2,725) (2,136)
Prepaid expenses and other current assets.. (925) 899 (1,230)
Other assets............................... (277) (217) 337
Accounts payable........................... 3,698 941 (1,518)
Accrued liabilities........................ 2,664 507 (2,672)
Other liabilities.......................... (664) (1,088) (588)
-------- -------- --------
Total adjustments.......................... 11,542 9,190 (7,673)
-------- -------- --------
Net cash provided by (used in) operating
activities.............................. 17,058 11,710 (7,067)
-------- -------- --------
Cash Flows from Investing Activities:
Acquisition of business........................ -- (5,272) --
Capital expenditures........................... (15,895) (11,307) (16,619)
-------- -------- --------
Net cash used in investing activities.... (15,895) (16,579) (16,619)
-------- -------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) under U.S. revolving
credit line................................... (3,030) 3,723 17,965
Issuance of long-term debt..................... -- -- 6,574
Net borrowings (payments) under other
indebtedness.................................. 2,938 1,800 (2,558)
Change in cash overdrafts...................... (1,049) (274) (805)
Payment of deferred financing costs............ (128) (220) --
Proceeds from sale of common stock............. 18 12 5
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. (1,251) 5,041 21,181
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. (88) 172 (2,505)
Cash and cash equivalents, beginning of year..... 350 178 2,683
-------- -------- --------
Cash and cash equivalents, end of year........... $ 262 $ 350 $ 178
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM
RETAINED PENSION CUMULATIVE
COMMON ADDITIONAL EARNINGS LIABILITY TRANSLATION
TOTAL STOCK PAID-IN CAPITAL (DEFICIT) ADJUSTMENT ADJUSTMENT
------- ------ --------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 2, 1995.. $(4,364) $ 6 $216 $(3,367) $(1,182) $ (37)
Comprehensive income.. 2,036 -- -- 606 1,182 248
Issuance of common
stock................ 5 -- 5 -- -- --
------- ---- ---- ------- ------- -----
Balance, March 31,
1996................... (2,323) 6 221 (2,761) -- 211
Comprehensive income.. 2,274 -- -- 2,520 -- (246)
Issuance of common
stock................ 12 -- 12 -- -- --
------- ---- ---- ------- ------- -----
Balance, March 30,
1997................... (37) 6 233 (241) -- (35)
Comprehensive income.. 5,389 -- -- 5,516 -- (127)
Issuance of common
stock................ 18 -- 18 -- -- --
------- ---- ---- ------- ------- -----
Balance, March 29,
1998................... $ 5,370 $ 6 $251 $ 5,275 $ -- $(162)
======= ==== ==== ======= ======= =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
NACO, Inc., together with its consolidated subsidiaries (the "Company"),
designs, manufactures and supplies highly engineered cast steel and related
products principally for the railroad supply and flow control supply markets.
The Company specializes in proprietary, custom-engineered and industry standard
cast steel products for use in the manufacture, repair and retrofit of freight
cars, locomotives and valve systems. The Company's casting facilities are
located at Cicero, Illinois (the "Cicero Facility"), Melrose Park, Illinois
(the "Melrose Park Facility"), Keokuk, Iowa (the "Keokuk Facility"), Hamilton,
Ontario, Canada (the "Hamilton Facility"), Richmond, Texas (the "Richmond
Facility"), Sahagun, Hidalgo, Mexico (the "Sahagun Facility") and Leven, Fife,
Scotland (the "Leven Facility"). The Company closed its operation at Wilsons
Foundry and Engineering Company Limited in Bishop Auckland, England (the
"Wilsons Facility") in September 1996 (Note 13).
Fiscal Year
The Company's fiscal year ends on the Sunday closest to March 31. Fiscal 1997
ended on March 29, 1998; fiscal 1996 ended on March 30, 1997; and fiscal 1995
ended on March 31, 1996. Each fiscal year comprised 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
Actual results could differ from those estimates. The most significant
estimates with regard to these financial statements are related to commitments
and contingencies (Note 6) and income taxes (Note 11).
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method. Inventory costs include materials, labor and
manufacturing overhead. Purchased parts inventories primarily represent items
sold as replacement parts or are components of the final assembled products
sold by the Company.
Deferred Financing Costs
Costs incurred in securing and issuing long-term debt are amortized over the
life of the related debt.
Property, Plant and Equipment and Depreciation
Property, plant and equipment purchased in connection with business
acquisitions have been valued at fair market value at the time of the
acquisition, less, if any, the allocable share of the bargain purchase element
inherent in the acquisitions. Property and equipment additions subsequent to
the acquisitions are stated at cost. Expenditures for maintenance and repairs
are charged to expense when incurred, while expenditures for major
F-7
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
renovations and betterments that extend the useful life of an asset are
capitalized. Cost includes interest associated with significant capital
projects. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts. The Company
periodically reviews the carrying value of its property, plant and equipment to
determine whether there are indications of an impairment that would require an
adjustment to the carrying values.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives used for recognizing
depreciation expense for financial reporting purposes generally are as follows:
<TABLE>
<S> <C>
Buildings and improvements...................................... 7-20 years
Machinery and equipment......................................... 3-12 years
Computer hardware and software.................................. 3 years
Patterns, tools, gauges and dies................................ 3-5 years
</TABLE>
Depreciation expense was $9,617,000, $8,007,000 and $5,117,000 for fiscal 1997,
1996 and 1995, respectively.
Foreign Currency Translation
Where the local currency is the functional currency, translation adjustments
are recorded as a separate component of Stockholders' Equity. All transaction
gains and losses and any translation adjustments where the U.S. dollar is the
functional currency are recorded in income.
Revenue Recognition
Revenue is generally recognized at the time the goods are shipped to the
customer. When customers, under the terms of specific orders, request that the
Company manufacture and invoice goods prior to shipment to the customers, the
Company recognizes revenue based on the actual completion of the manufacturing
process. These limited occurrences generally arise as a result of the
customer's manufacturing delays, scheduling or capacity constraints or lack of
storage space and, in each instance, the customer accepts title to the goods at
the date of the Company's corresponding invoice. In each case of "bill and
hold" sales, NACO ensures that the transaction complies with the seven
conditions and the six considerations contained in AAER No. 108 of the
Securities Exchange Commission. Reserves for estimated sales returns and
allowances are recorded as a reduction of revenues in the period the related
revenues are recognized. An analysis of the Company's allowance for
uncollectible accounts for fiscal 1997, 1996, and 1995 is shown below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Balance, beginning of year.......................... $ 781 $1,109 $ 622
Provisions charged to expense....................... 185 319 647
Accounts written off, net of recoveries............. (286) (647) (160)
----- ------ ------
Balance, end of year................................ $ 680 $ 781 $1,109
===== ====== ======
</TABLE>
F-8
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" in fiscal 1997. The following table
reconciles the numerator and denominator used in the calculation of basic and
diluted earnings per share for fiscal 1997, 1996 and 1995 (dollar amounts in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Income (Numerator).................... $ 5,516 $ 2,520 $ 606
========== ========== ==========
Shares (Denominator):
Basic--
Weighted average common shares
outstanding.......................... 1,020,410 1,021,113 1,025,378
========== ========== ==========
Diluted--
Weighted average common shares
outstanding.......................... 1,020,410 1,021,113 1,025,378
Effect of exercise of warrant......... 54,271 54,271 54,271
---------- ---------- ----------
Total............................... 1,074,681 1,075,384 1,079,649
========== ========== ==========
Earnings per Share--
Basic................................... $ 5.41 $ 2.47 $ 0.59
========== ========== ==========
Diluted................................. $ 5.13 $ 2.34 $ 0.56
========== ========== ==========
</TABLE>
Research and Development Expenses
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Expenditures for fiscal 1997,
1996 and 1995 are immaterial.
Cash Overdrafts
Cash overdrafts represent the aggregate amount of checks which have been issued
and have not yet cleared the zero-balance disbursement accounts, net of any
cash in specific depository accounts which will be automatically drawn against
as such checks clear the disbursement accounts. If funds are not available in
the depository accounts, the deficiency will be funded by the Company's
revolving credit agreement.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts and other receivables, accounts payable
and accrued liabilities approximated fair value because of the short maturity
of these items.
New Accounting Pronouncements
The Company adopted during fiscal 1997 the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share", and SFAS No. 130,
"Reporting Comprehensive Income", SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information", and SFAS No. 132, "Employers'
Disclosures About Pension and Other Postretirement Benefits".
F-9
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
The acquisition of the Richmond Facility in March 1996 included working
capital, consisting primarily of inventories, and production machinery and
equipment. The purchase price for the assets acquired of $3.0 million was
financed by a seller's note. The purchase price was allocated first to the
working capital items with the balance of $2.5 million allocated to property,
plant and equipment. The seller's net book value of the fixed assets as carried
in its accounting records was approximately $3.3 million. The bargain purchase
amount of $0.8 million has been deducted from the seller's carrying value of
the fixed assets.
In July 1996, the Company purchased certain land, buildings, machinery and
equipment at the Sahagun Facility from the trustee in bankruptcy of five
related companies (the "Trustee"), all of which had previously been owned by
the Mexican government. The Company had a long standing agreement with one of
the bankrupt companies to purchase at fixed prices certain railroad products it
produced. That agreement terminated upon the filing of the bankruptcy but, with
Court approval, the Company entered into a new short term agreement with the
Trustee to continue purchasing such products during the time the Trustee was
attempting to sell the assets. After a public bidding process and Court
approval, the Company acquired substantially all of the fixed assets of the
bankrupt companies located within the industrial complex at the Sahagun
Facility. At the time of the acquisition, only the steel foundry portion of the
complex was operating but the acquisition also included an iron foundry, a
machine shop, a specialty steel producing and fabricating facility, a farm
implement and tractor assembly plant as well as a pattern shop, offices and a
variety of other buildings. The purchase price was paid through a combination
of cash, notes (which were guaranteed by the Company), and the assumption of
specific liabilities to both the union workers of the bankrupt companies and
certain of the salaried employees, many of whom, but not all, were then hired
by the Company. The specific liabilities which were assumed arose under the
labor agreements and the Mexican federal labor laws which were in effect at the
acquisition date. Such liabilities were for the payments required to be made
upon the termination of employment of those individuals who the Company hired
as well as for certain other specific labor related payments. Apart from these
liabilities, no other liabilities were assumed and the Company was indemnified
by the Trustee from any other liabilities. Subsequent to the acquisition and in
the normal course of its business, the Company also purchased certain items of
inventory, tooling and other miscellaneous items which were not included in the
original public bid documents. The purchase price, including the specific
liabilities assumed, for the assets acquired has been allocated to those assets
based upon their fair market value at the acquisition date. During fiscal 1997,
the purchase price allocation was finalized and $775,000 was added to property,
plant and equipment.
The effect of the above acquisitions, which were accounted for under the
purchase method of accounting, was not significant to the Company's
consolidated results of operations in the year of acquisition. The operating
results of these businesses have been included in the accompanying consolidated
results of operations from the acquisition dates. The Company did not record
any goodwill related to these acquisitions. (See Note 5).
F-10
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet accounts as of March 29, 1998, and
March 30, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
Inventories
Raw materials...................................... $ 2,204 $ 3,105
Purchased parts.................................... 2,920 3,183
Work in process.................................... 7,904 5,694
Finished goods..................................... 5,038 8,278
-------- --------
Total inventories, net........................... $ 18,066 $ 20,260
======== ========
Property, plant and equipment
Land............................................... $ 2,538 $ 2,468
Buildings and improvements......................... 8,474 7,979
Machinery and equipment............................ 75,755 61,483
Patterns, tools, gauges and dies................... 7,026 5,968
-------- --------
Total............................................ 93,793 77,898
Less accumulated depreciation...................... (35,156) (25,539)
-------- --------
Property, plant and equipment, net............... $ 58,637 $ 52,359
======== ========
Other assets
Deferred financing costs........................... $ 1,752 $ 1,474
Acquisition related costs.......................... 394 394
-------- --------
Total............................................ 2,146 1,868
Less accumulated amortization...................... (1,254) (840)
-------- --------
Other assets, net................................ $ 892 $ 1,028
======== ========
Accrued liabilities
Compensation and related items..................... $ 9,470 $ 7,247
Taxes, other than payroll items.................... 2,327 964
Other.............................................. 4,442 5,364
-------- --------
Total accrued liabilities........................ $ 16,239 $ 13,575
======== ========
</TABLE>
F-11
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DEBT
Debt outstanding as of March 29, 1998, and March 30, 1997, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
United States
Revolving credit................................... $18,658 $21,688
Bank term loan..................................... 8,474 4,276
Keokuk bank term loan.............................. 333 378
11.75% Senior Subordinated Note with a common stock
purchase warrant.................................. 14,848 14,827
State of Iowa term loan............................ 300 350
Acquisition note--Richmond facility................ 1,375 2,603
Unsecured notes.................................... 161 115
------- -------
Total United States.............................. 44,149 44,237
------- -------
Canada
Customer note...................................... 3,689 4,049
------- -------
Mexico
Acquisition note................................... 3,279 4,406
------- -------
United Kingdom
Overdraft facilities and other..................... 2,680 1,197
------- -------
Total debt....................................... 53,797 53,889
Less current maturities............................ (9,723) (4,823)
------- -------
Total long-term debt............................. $44,074 $49,066
======= =======
</TABLE>
Revolving Credit and Bank Term Loan
The Company's revolving credit agreement covers its United States operating
subsidiaries and provides for maximum potential borrowings to $35.0 million
which includes a term loan of $8.5 million with the balance of the borrowings
based upon eligible receivables and inventories. The agreement terminates on
November 30, 2000. Borrowings under the agreement are secured by substantially
all of the Company's United States assets. Borrowings bear interest at the
prime rate plus 0.75%, except for $1.1 million of the term loan which bears
interest at the prime rate plus 1.75%. The agreement requires the Company to
pay interest on borrowings of at least $2.5 million, based on a monthly
average, and to pay a commitment fee of 0.25% per annum on the unused portion
of the credit. The agreement contains a number of covenants including, among
others, restrictions on dividends, common stock repurchases and mergers and
acquisitions, all as defined. The term loan outstanding at March 29, 1998, of
$8.5 million is repayable monthly with the balance of $3.9 million due on
November 30, 2000. As of March 29, 1998, borrowings outstanding under the
revolving credit portion of the agreement were $18.7 million and the Company
had unused availability under the agreement of $7.6 million.
11.75% Senior Subordinated Note with a Common Stock Purchase Warrant
In March 1995, the Company issued a $15.0 million senior subordinated note
together with a common stock purchase warrant to a major insurance company. The
warrant agreement allows the insurance company to purchase 54,271 common shares
of the Company's common stock at a price of $0.01 per share, subject to
F-12
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
certain adjustments. The fair value of the warrant agreed to between the
Company and the insurance company was $216,000 which amount has been deducted
from the face value of the note and added to additional paid-in capital. The
note bears interest at 11.75%, payable semi-annually, and requires principal
payments of $5.0 million in 2003, 2004 and 2005. The agreement, as amended,
contains a number of restrictive covenants including, among others, financial
covenant tests on fixed charge coverage, net worth maintenance and leverage, as
well as restrictions on the payment of dividends and the incurrence of
additional indebtedness or liens, all as defined. As of March 29, 1998, and for
the year then ended, the actual fixed charge coverage ratio was 2.11 compared
to a required ratio of not less than 1.40; the tangible net worth maintenance
test required a minimum of $1.7 million, which was met; and the actual leverage
ratio was 0.45 compared to a maximum ratio of 0.55, all as defined in the
agreement.
Other Debt
The Keokuk bank term loan, which originated in December 1993 for $500,000,
bears interest at 1% over the bank's base rate, adjusted annually, and requires
120 monthly payments of principal and interest. The loan is secured by the real
estate and machinery and equipment at the Keokuk Facility's main foundry
location.
The State of Iowa term loan from the Iowa Department of Economic Development
originated in October 1993 for $500,000. The loan is unsecured, non-interest
bearing and requires ten annual payments of $50,000 which commenced in November
1994.
The acquisition note arose in connection with the purchase of the assets of the
Richmond Facility. The note is unsecured, bears interest at 8% per annum,
payable quarterly, and is guaranteed by the Company. Principal payments are
made monthly, commencing in October 1996, and are based upon the amount of
products purchased by the seller of the Richmond Facility assets. The balance
of the loan, if any, is required to be repaid on December 31, 1999.
In April 1995, the Company entered into an exclusive supply agreement and a
related loan agreement with Canadian Pacific Limited, a railroad products
customer of the Company ("Canadian Pacific"). Under the terms of these
agreements, Canadian Pacific agreed to purchase substantially all of its
requirements for freight car trucks from the Company through December 31, 1998,
at fixed pricing which can be adjusted starting in 1996 for changes based on a
producer price index and in 1997 for changes in scrap metal prices. In return
for the Company's agreement to supply Canadian Pacific's requirements, Canadian
Pacific loaned $6.3 million to the Company. The loan bears interest, payable
quarterly, at the prime rate of the Bank of Montreal plus 2%, and is secured by
substantially all of the Company's Canadian property, plant and other fixed
assets. The Company repays the principal on the loan monthly based upon the
amount of Canadian Pacific's purchases of products, with a maximum repayment in
any year of $2.8 million. The balance of the loan, if any, is required to be
repaid on December 31, 1998.
The acquisition note in Mexico arose in connection with the July 1996
acquisition of the Sahagun Facility. The note is payable to the seller of the
assets. The loan is secured by a mortgage on the land and buildings acquired
and requires forty-eight monthly payments of principal and interest of
$128,880. The interest rate on the loan is 10.0%. The loan is guaranteed by the
Company.
The United Kingdom borrowings consist of an overdraft facility of $1,750,000,
which is payable upon demand, and a term loan of $930,000 that is payable
monthly to fiscal 2003. The borrowings bear interest at the bank's base rate
plus 3.0% on the overdraft facility and 2.5% on the term loan, are secured by
all assets of the Leven Facility and are guaranteed by the Company.
F-13
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of Debt as of March 29, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR--
-------------
<S> <C>
1998............................................................... $ 9,723
1999............................................................... 3,677
2000............................................................... 24,728
2001............................................................... 267
2002............................................................... 316
Thereafter......................................................... 15,086
-------
$53,797
=======
</TABLE>
The weighted average interest rates on the debt were 9.9% and 9.4% as of March
29, 1998 and March 30, 1997, respectively.
The Company believes, based upon current terms, that the carrying value of all
long-term debt as of March 29, 1998, approximates fair value.
5. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of annual supplemental cash flow information for fiscal 1997, 1996
and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Interest paid in cash............................ $5,582 $ 5,226 $ 3,128
====== ======= =======
Income taxes paid in cash........................ $ 746 $ 155 $ 359
====== ======= =======
Acquisitions of businesses (see Note 2)
Working capital................................ $ -- $ 584 $ 494
Property, plant and equipment and acquisition
related costs................................. 775 14,993 2,506
Long-term employee liabilities assumed......... (775) (5,295) --
Acquisition debt............................... -- (5,010) (3,000)
------ ------- -------
Net cash used................................ $ -- $ 5,272 $ --
====== ======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to several legal actions arising in the ordinary course
of business. In management's opinion, the outcome of these items will not
materially affect the Company's business, financial condition or results of
operations. The Company's operations are subject to a variety of federal, state
and local environmental laws and regulations. Management believes that its
current operations are in material compliance with all applicable environmental
laws and regulations.
F-14
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMON STOCK
As of March 29, 1998, the Company has 2,000,000 authorized shares of common
stock of $.01 par value. The following table summarizes the common share
transactions:
<TABLE>
<S> <C>
Outstanding as of April 2, 1995................................. 1,031,142
Issued........................................................ 3,750
Canceled...................................................... (16,154)
---------
Outstanding as of March 31, 1996................................ 1,018,738
Issued........................................................ 4,000
Canceled...................................................... (1,500)
---------
Outstanding as of March 30, 1997................................ 1,021,238
Issued........................................................ 5,000
Canceled...................................................... (4,882)
---------
Outstanding as of March 29, 1998................................ 1,021,356
=========
</TABLE>
There are certain restrictions on the common stock (other than the 612,309
shares issued to the Company's founders) issued to all current stockholders
including an obligation to offer them to the Company or its designee prior to
any sale.
In October 1997, the Company adopted the 1997 Omnibus Stock Plan under which
57,127 shares of Common Stock were reserved for issuance. This Plan permits the
grant of (i) incentive stock options, (ii) nonstatutory stock options, (iii)
restricted shares and (iv) stock appreciation rights. As of March 29, 1998,
52,127 shares of Common Stock were available for future issuance under the
Stock Plan to key employees of the Company.
8. LEASE AGREEMENTS
The Company occupies various manufacturing, warehouse and office facilities and
uses certain equipment under operating lease arrangements. Rental expense
charged to operations for fiscal 1997, 1996 and 1995 was $3,044,000, $2,931,000
and $2,450,000, respectively. Future minimum rental payments under operating
leases that have initial or remaining terms in excess of one year are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR--
-------------
<S> <C>
1998................................................................ $1,843
1999................................................................ 1,751
2000................................................................ 883
2001................................................................ 312
2002................................................................ 261
------
$5,050
======
</TABLE>
F-15
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. OTHER EXPENSE, NET
Other income (expense) items in the results of operations for the fiscal years
1997, 1996 and 1995 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash discounts for early customer payments...... $(1,717) $(1,198) $(1,213)
Costs related to postponed initial public
offering of Company common stock............... -- -- (323)
------- ------- -------
Total......................................... $(1,717) $(1,198) $(1,536)
======= ======= =======
</TABLE>
10. PENSIONS AND OTHER POSTRETIREMENT PLANS
United States Plans
Net periodic pension cost for fiscal 1997, 1996 and 1995 under the United
States defined benefit pension plans covering substantially all hourly
employees at the Cicero Facility, the Melrose Park Facility and the Keokuk
Facility included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost on benefits earned during the period....... $ 546 $ 511 $ 431
Interest cost on projected benefit obligation........... 787 795 730
Expected return on plan assets.......................... (868) (805) (715)
Amortization of prior service costs..................... 25 21 13
Recognized net actuarial loss........................... 8 54 42
----- ----- -----
Net periodic pension cost............................. $ 498 $ 576 $ 501
===== ===== =====
</TABLE>
The Company maintains benefit plans which provide certain of the unionized
employees of the Cicero Facility and the Melrose Park Facility, as well as
their dependents and beneficiaries, with postretirement medical and life
insurance benefits. The participants eligible to receive postretirement medical
benefits are restricted to those employees actually retired or employed as of
June 1991 for one plant and January 1992 for another plant, and participants
must meet certain age and/or years of service requirements. The Company
provides certain of the unionized employees of the Keokuk Facility and the
Richmond Facility with life insurance only. The Company's postretirement plans
are not funded. Net periodic postretirement benefit expense for fiscal 1997,
1996 and 1995 includes the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost on benefits earned during the period........... $140 $127 $132
Interest cost on accumulated postretirement benefit
obligation and amortization of gains....................... 310 230 418
---- ---- ----
Total postretirement benefit expense...................... $450 $357 $550
==== ==== ====
</TABLE>
F-16
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the reconciliation of the changes in benefit
obligation and the changes in the plan assets for the fiscal years ended March
29, 1998 and March 30, 1997, (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------- -------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Changes in benefit
obligation--
Benefit obligation at
beginning of year....... $10,561 $ 9,741 $ 5,359 $ 6,361
Service cost............. 428 393 140 126
Interest cost............ 787 795 411 386
Amendments............... 49 161 37 42
Actuarial (gain) loss.... 849 126 608 (1,293)
Benefits paid............ (676) (655) (263) (263)
------- ------- ----------- -----------
Benefit obligation at
end of year........... 11,998 10,561 6,292 5,359
------- ------- ----------- -----------
Change in plan assets--
Fair value of plan assets
at beginning of year.... 11,710 10,665 -- --
Actual return on plan
assets.................. 4,228 1,691 -- --
Employer contribution.... 127 127 -- --
Benefits paid............ (795) (773) -- --
------- ------- ----------- -----------
Fair value of plan
assets at end of
year.................. 15,270 11,710 -- --
------- ------- ----------- -----------
Funded status............ 3,272 1,149 (6,292) (5,359)
Unrecognized net
actuarial (gain)........ (3,111) (601) (1,543) (2,169)
Unrecognized transition
obligation.............. 33 41 -- --
Unrecognized prior
service cost............ 335 311 67 38
------- ------- ----------- -----------
Prepaid (accrued)
benefit cost.......... $ 529 $ 900 $ (7,768) $ (7,490)
======= ======= =========== ===========
</TABLE>
Key assumptions used in the calculations above for fiscal 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
1997 1996 1997 1996
----- ----- ------- -------
<S> <C> <C> <C> <C>
Discount rate................................... 7.00% 7.75% 7.00% 7.75%
Expected long-term rate of return on assets..... 9.00% 9.00% -- --
</TABLE>
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligations for pre-age 65 participants is 8.00% in
fiscal 1997 declining to an ultimate rate of 5.50% in fiscal 2004 and for post-
age 65 participants is 7.00% in fiscal 1997 declining to an ultimate rate of
5.50% in fiscal 2004. A one-percentage point change in the assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE POINT
-------------------
INCREASE (DECREASE)
-------- ----------
<S> <C> <C>
Effects on total service
and interest cost
components............. 13.7% (12.7)%
Effect on postretirement
benefit obligation..... 12.4% (11.2)%
</TABLE>
In addition, the Company maintains a defined contribution plan for United
States salaried employees not represented by labor unions. This plan provides
for Company contributions of not less than 100% of each employee's
contributions commencing April 1, 1997 and 50% prior thereto, subject to
certain limitations. The Company's contributions were $546,000 in fiscal 1997,
$213,000 in fiscal 1996, and $203,000 in fiscal 1995.
F-17
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Retirement Plans
As set forth in Note 2 above, the Company assumed specific liabilities to make
termination payments to union workers and salaried employees at the Sahagun
Facility. The Company has chosen to account for these liabilities as if they
constituted a non-contributory, unfunded, defined benefit pension plan. The
following table summarizes the pension plan expense for fiscal 1997, and for
the eight months from date of acquisition to March 30, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service cost on benefits earned during the period.............. $196 $139
Interest cost on projected benefit obligation.................. 246 353
Other.......................................................... (91) 16
---- ----
Net periodic pension cost.................................... $351 $508
==== ====
</TABLE>
The following table sets forth the reconciliation of the changes in benefit
obligation for the eight month period ended March 30, 1997, and the fiscal year
ended March 29, 1998 (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
Changes in benefit obligation--
Benefit obligation at beginning of period........... $ 3,653 $ 5,295
Service cost........................................ 196 139
Interest cost....................................... 246 369
Actuarial (gain) loss............................... 1,142 --
Benefits paid....................................... (810) (2,222)
------- -------
Benefit obligation at end of year................... 4,427 3,581
------- -------
Unrecognized net actuarial loss..................... 1,233 270
------- -------
Prepaid (accrued) benefit cost...................... $(3,194) $(3,311)
======= =======
Key assumptions which vary over time
Discount rate....................................... 6.50% 7.00%
Expected return on plan assets...................... N/A N/A
Average rate of increase in compensation levels..... 3.5% 3%-8%
</TABLE>
The Company maintains defined contribution plans for substantially all
employees at the Hamilton Facility and the Leven Facility. The Company's
contributions to these plans, which vary by company and employee group, were
$309,000, $343,000 and $264,000 in fiscal 1997, 1996 and 1995, respectively.
Consolidated
The total consolidated retirement pension plan expense for fiscal 1997, 1996
and 1995 was $1,758,000, $1,740,000 and $1,087,000, respectively. The Company
has no plans to terminate any of its retirement plans.
11. INCOME TAXES
The Company uses an asset and liability approach for financial accounting and
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred asset will not be realized, a valuation allowance is
recognized.
F-18
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pretax income (loss) for fiscal 1997, 1996 and 1995 was taxed under the
following jurisdictions (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
United States..................................... $11,849 $1,874 $ 8,728
Foreign........................................... (1,915) 1,524 (7,396)
------- ------ -------
Total........................................... $ 9,934 $3,398 $ 1,332
======= ====== =======
</TABLE>
The income tax (provision) benefit for fiscal 1997, 1996 and 1995 was as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current
United States................................ $(2,057) $ (100) $ (6)
State and local.............................. -- -- --
Foreign...................................... (6) 250 (254)
------- ------- -------
Total current.............................. (2,063) 150 (260)
------- ------- -------
Deferred
United States................................ (7,355) (1,755) (21)
State and local.............................. (650) (251) (3)
Foreign...................................... 976 (4,103) 2,711
------- ------- -------
Total deferred............................. (7,029) (6,109) 2,687
------- ------- -------
Change in valuation allowance.................. 4,674 5,081 (3,153)
------- ------- -------
Total provision............................ $(4,418) $ (878) $ (726)
======= ======= =======
</TABLE>
A reconciliation between the Company's effective income tax rate and the U.S.
federal income tax statutory rate for fiscal 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ------
<S> <C> <C> <C>
U.S. federal statutory rate......................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit................. 6.5 3.0 0.7
Change in valuation allowance related to items other
than net operating losses.......................... 6.7 4.3 236.7
Tax benefit for write-off of intercompany
receivable......................................... 0.0 0.0 (255.3)
Differences in foreign rates........................ (1.0) (0.2) 23.4
Permanent differences............................... 2.1 (13.0) 9.1
Other............................................... (3.8) (2.3) 5.9
---- ----- ------
Effective income tax rate......................... 44.5% 25.8% 54.5%
==== ===== ======
</TABLE>
F-19
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and (liabilities) are comprised of the following as of
March 29, 1998, and March 30, 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
Deferred current tax assets, net
Accrued liabilities and reserves.................... $ 1,975 $ 1,814
Inventories......................................... (644) --
------- -------
Total deferred tax assets......................... 1,331 1,814
------- -------
Deferred long-term tax liabilities, net
Deferred tax provision.............................. (9,796) (4,481)
Deferred insurance proceeds......................... (135) (360)
Accrued postretirement benefits..................... 3,098 2,931
Accrued liabilities and reserves.................... 27 538
Depreciation and amortization....................... (1,942) (1,960)
Tax benefit of U.S. operating loss and credits...... 4,027 7,271
Tax benefit of foreign operating losses............. 2,976 860
Less valuation allowance............................ (1,183) (5,856)
------- -------
Total deferred tax liabilities.................... (2,928) (1,057)
------- -------
Total deferred tax asset (liability), net......... $(1,597) $ 757
======= =======
</TABLE>
The Company recorded a valuation allowance due to uncertainty as to the
ultimate realizability of the deferred tax assets. In fiscal 1995, the Company
increased the valuation allowance by $3,153,000 to reflect a net increase in
foreign tax assets of the Hamilton Facility, the Leven Facility and the Wilsons
Facility. In fiscal 1996, the Company decreased the valuation allowance by
$5,081,000 to account for the utilization of deferred tax assets and the write-
off of tax assets related to the Wilsons Facility. In fiscal 1997, the Company
decreased the valuation allowance by $4,673,000 to account for the utilization
of deferred tax assets. The Company continues to maintain a valuation allowance
of $1,183,000 to reflect the uncertainty of realization of foreign tax assets
at the Leven Facility and the Sahagun Facility.
As of March 29, 1998, the Company has a United States net operating loss
carryforward of approximately $3,911,000, which expires in 2009 to 2011 and
$2,510,000 of AMT credits which may be carried forward indefinitely. Due to the
uncertainty as to the ultimate realization of its United States net operating
loss carryforward, the Company has recorded federal income tax provisions at
the full federal income tax rate until the uncertainty with respect to the
United States net operating loss carryforward has been resolved. In addition,
the Company has net operating loss carryforwards of $1,779,000 related to the
Hamilton Facility that expire in the fiscal year 2005, $3,941,000 related to
the Leven Facility and the Wilsons Facility which may be carried forward
indefinitely and $2,188,000 related to its Sahagun Facility that will expire in
fiscal 2006.
Internal Revenue Code Section 382 provides for a limitation on the utilization
of net operating loss and credit carryforwards in the case of a more than 50%
stock ownership change. Under Section 382, net operating loss and credit
carryforwards generated prior to the change date are subject to an annual
limitation based on the value of the corporation immediately before the change
multiplied by the long-term tax-exempt rate. Future ownership changes could
have an impact on the timing or ultimate utilization of the United States net
operating loss carryforwards and credits.
F-20
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. OPERATING SEGMENTS, CUSTOMER CONCENTRATIONS AND LABOR
The Company designs, manufactures and supplies highly engineered cast steel and
related products principally for the railroad supply and flow control supply
markets. The Company specializes in proprietary, custom-engineered and industry
standard cast steel products for use in the manufacture, repair and retrofit of
freight cars, locomotives and valve systems. The Company has three reportable
segments: Rail Products Group; Flow Products Group; and Other. The Rail
Products Group designs, manufactures and supplies a broad line of proprietary,
industry standard and custom engineered products for the railroad market,
including industry standard and high performance freight car trucks, locomotive
trucks and related products and freight car and locomotive couplers and
coupling systems. The Rail Products Group's customers include, among others,
all of the Class I railroads and major owners and builders of freight cars and
locomotives in North America. The largest portion of the Flow Products Group
designs, manufactures and supplies steel and high alloy valve housings and
related castings for manufacturers of industrial flow control systems for use
in natural gas, pulp and paper, oil, chemical, waste control and water
treatment, and other manufacturing process industries. In addition to valve
housings and related castings, the Flow Control Group also manufactures
products for the general commercial industry, military replacement parts and
various rail castings. The Other segment represents the combined operations of
the Leven Facility and the Wilsons Facility which are both located in the
United Kingdom, use similar manufacturing processes and serve similar markets.
As discussed in Note 13, operations at the Wilsons Facility ceased in September
1996 and from that date forward the Other segment includes only the operations
of the Leven Facility.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operating income or loss before interest and income taxes, and also on
operating cash flow defined as operating income or loss plus depreciation and
amortization.
The Company accumulates its expenses for the Corporate Headquarters and NACO
Technologies which, in part, provide services to each of the operating
segments. However, these costs are not allocated to the units for management
review of the segment's operating performance.
Intersegment sales and transfers, which are not material, are accounted for on
a cost plus stipulated markup which the Company believes approximates arm's
length prices.
The Company's reportable segments are its strategic business units that
generally serve separate markets. They are managed separately because each
business requires different technology, servicing and marketing strategies. The
Rail Products Group consists of the Cicero Facility, the Melrose Park Facility,
the Hamilton Facility and the Sahagun Facility, which generally utilize the
green sand process to produce castings. The Flow Products Group consists of the
Keokuk Facility and the Richmond Facility, which generally utilize the airset
casting process, and the product sourcing and distribution operation.
F-21
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial data by operating segment together with the items necessary to
reconcile these amounts to the consolidated financial statements are shown
below for fiscal 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
OPERATING SEGMENTS
--------------------------
RAIL FLOW TOTAL CORPORATE
PRODUCTS PRODUCTS OPERATING & NACO INTERSEGMENT
GROUP GROUP OTHER(A) SEGMENTS TECHNOLOGY ELIMS. CONSOLIDATED
-------- -------- -------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1997
Sales by Product
Line--
Rail................ $213,074 $18,288 $ 2,753 $234,115 $ -- $(1,488) $232,627
Flow................ 626 64,242 6,389 71,257 -- (626) 70,631
-------- ------- ------- -------- -------- ------- --------
Total sales....... 213,700 82,530 9,142 305,372 -- (2,114) 303,258
======== ======= ======= ======== ======== ======= ========
Operating income...... 28,055 4,316 (1,350) 31,021 (13,694) -- 17,327
Total assets.......... 83,367 25,157 6,477 115,001 6,821 (452) 121,370
Depreciation and
amortization......... 5,618 1,493 407 7,518 2,513 -- 10,031
Capital expenditures.. 13,554 1,203 501 15,258 637 -- 15,895
Fiscal 1996
Sales by Product
Line--
Rail................ $190,031 $19,793 $ 1,333 $211,157 $ -- $ (33) $211,124
Flow................ -- 54,205 12,633 66,838 -- (236) 66,602
-------- ------- ------- -------- -------- ------- --------
Total sales....... 190,031 73,998 13,966 277,995 -- (269) 277,726
======== ======= ======= ======== ======== ======= ========
Operating income...... 18,615 3,538 808 22,961 (13,123) -- 9,838
Total assets.......... 68,602 25,423 6,049 100,074 9,597 (136) 109,535
Depreciation and
amortization......... 4,479 1,349 387 6,215 2,158 -- 8,373
Capital expenditures.. 6,939 1,707 394 9,040 2,267 -- 11,307
Fiscal 1995
Sales by Product
Line--
Rail................ $197,233 $29,701 $ 3,759 $230,693 $ -- $ (436) $230,257
Flow................ -- 36,156 14,113 50,269 -- (768) 49,501
-------- ------- ------- -------- -------- ------- --------
Total sales....... 197,233 65,857 17,872 280,962 -- (1,204) 279,758
======== ======= ======= ======== ======== ======= ========
Operating income...... 19,891 5,477 (8,950) 16,418 (9,435) -- 6,983
Total assets.......... 52,881 21,760 9,424 84,065 9,613 (136) 93,542
Depreciation and
amortization......... 2,962 924 359 4,245 1,180 -- 5,425
Capital expenditures.. 7,031 1,410 3,985 12,426 4,193 -- 16,619
</TABLE>
- --------
(a) The Other operating segment includes the operations at the Leven Facility
and the Wilsons Facility. Operating income for fiscal 1996 includes a gain
on liquidation of $1.4 million and fiscal 1995 includes an asset impairment
charge of $2.8 million related to the Wilsons Facility. (See Note 13)
F-22
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial data by geographic area are shown below (sales are attributed to
countries based on location of the customer) for fiscal 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
UNITED
FISCAL YEAR UNITED STATES CANADA MEXICO KINGDOM OTHER TOTAL
----------- ------------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... 1997 $260,902 $31,162 $ 1,152 $ 7,224 $2,818 $303,258
1996 217,742 42,596 2 13,751 3,635 277,726
1995 188,244 71,528 589 15,149 4,248 279,758
Long-Lived Assets....... 1997 $ 26,647 $ 9,981 $20,545 $ 2,356 $ -- $ 59,529
1996 28,206 9,259 13,660 2,262 -- 53,387
1995 26,217 6,927 -- 2,883 -- 36,027
</TABLE>
The Company's customers are not concentrated in any specific geographic region
but are concentrated in the railroad transportation and flow control
industries. A significant portion of the Company's sales are to large North
American railroads, freight car and locomotive manufacturers and manufacturers
of flow control systems. The Company has not experienced any significant bad
debt losses since its inception. The Company performs continuing credit
evaluations of its customers' financial condition. In fiscal 1997, 1996 and
1995, sales to the Company's ten largest customers accounted for 70%, 68% and
65%, respectively, of consolidated sales. Although the top ten customers may
change from year to year, they include customers from each of the Company's
served markets. One customer accounted for 17%, 11% and 11% of consolidated
sales in fiscal 1997, 1996 and 1995, respectively. Another customer accounted
for 16% of consolidated sales in fiscal 1997, 13% in fiscal 1996 and 18% in
fiscal 1995. A third customer accounted for 11% of consolidated sales in fiscal
1997 and 14% in fiscal 1996. Sales for the first and third customers above are
included in the Rail Products Group. Sales for the second customer above are
included in both the Rail Products and the Flow Products Groups. A significant
decrease in business from these customers could have an adverse effect on the
Company. The Company believes that the relationships with these customers have
been stable.
Approximately 83% of the Company's employees are covered by collective
bargaining agreements. Each plant is represented by separate unions or union
locals with contracts that expire at various times with four contracts expiring
in fiscal 1998. Of such four contracts, the Company renegotiated the labor
contracts covering employees at the Hamilton Facility and the Sahagun Facility
and experienced an approximate one-week work stoppage at each facility. The
other two labor contracts, covering the Richmond Facility and the Leven
Facility, will expire in fiscal 1998 and, in total, represent about 7% of the
total number of Company employees. While management believes that its labor
relations are satisfactory, there can be no assurance that labor contracts
which come up for renewal will be renewed or the terms under which such
renewals may occur. Failure to renew significant contracts can lead to work
stoppages that could have a material adverse effect on the Company's business
and results of operations.
13. WILSONS FACILITY--OPERATIONS AND RESTRUCTURING
The Company purchased the Wilsons Facility in February 1994. Significant losses
were incurred at the Wilsons Facility since its acquisition. The Company
implemented during fiscal 1995 and 1996 a number of programs designed to
curtail further losses and reduce the cash requirements to operate the
business. In addition, the Company filed a petition for administration under
the United Kingdom insolvency laws in March 1996, which filing was withdrawn
upon the approval by the creditors of the Wilsons Facility of a Company
Voluntary Arrangement ("CVA") in May 1996. Under the CVA, the Wilsons Facility
continued to operate its business and agreed to make payments to creditors for
liabilities, excluding intercompany indebtedness, existing as of the date of
the CVA.
F-23
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There was inherent risk to the success of the operations of the Wilsons
Facility after its restructuring as increases in the volume of business of the
Wilsons Facility with its customers and its internal cash flow generation were
required because the Company made the decision to limit additional intercompany
funding to the Wilsons Facility with the commencement of the CVA. The history
of losses of the Wilsons Facility and the inherent risk in the Company's plan
for the future operations of the Wilsons Facility required a review for
impairment of the long-lived assets associated with this business unit under
the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. The carrying value of long-lived assets related to the Wilsons
Facility was $3.5 million as of March 31, 1996. The present value of estimated
future cash flows was used to approximate the fair value of the long-lived
assets on a going concern basis. This analysis resulted in a $2.8 million write
down to the carrying value of the long-lived assets of the Wilsons Facility as
of March 31, 1996.
During fiscal 1996, the Wilsons Facility continued to incur operating losses
and exceeded the maximum cumulative losses allowed by the CVA. The Company
declined to provide further funding. Accordingly, the CVA supervisor declared
failure of the CVA and appointed receivers who ceased operations of the Wilsons
Facility in September 1996. The receivers liquidated the assets of the Wilsons
Facility and used the proceeds to pay the liquidation costs of the Wilsons
Facility and to distribute to its creditors, exclusive of the Company. At the
time the Wilsons Facility ceased operations and was liquidated, its liabilities
exceeded its written down asset values carried in the Company's consolidated
financial statements, which resulted in a liquidation gain for the Company in
fiscal 1996 of $1.4 million.
Summarized below are the operating results for the Wilsons Facility for the
first five months of fiscal 1996 and fiscal 1995, which are included in the
Company's consolidated operating results (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Sales................................................... $ 2,517 $ 9,605
Cost of sales........................................... 3,209 12,354
------- -------
Gross profit (loss)................................... (692) (2,749)
Selling, general and administrative expenses............ 491 2,766
Asset impairment charge and liquidation (gain).......... (1,430) 2,800
------- -------
Income (loss) from operations......................... $ 247 $(8,315)
======= =======
</TABLE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
fiscal 1997 and 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year 1997(a)
Net sales............................... $70,325 $70,727 $77,528 $84,678
Gross profit............................ 10,660 9,826 11,227 14,679
Income from operations.................. 3,823 3,179 3,397 6,928
Income before income taxes.............. 1,974 1,430 1,442 5,088
Net income.............................. 932 618 766 3,200
Earnings per share:
Basic................................. 0.91 0.61 0.75 3.14
Diluted............................... 0.87 0.58 0.71 2.98
</TABLE>
F-24
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year 1996(b)
Net sales............................... $70,282 $69,860 $68,777 $68,807
Gross profit............................ 10,488 8,580 8,877 7,995
Income from operations.................. 4,291 3,003 2,055 489
Income before income taxes.............. 2,692 1,292 423 (1,009)
Net income.............................. 1,467 1,633 562 (1,142)
Earnings per share:
Basic................................. 1.43 1.60 0.55 (1.12)
Diluted............................... 1.36 1.52 0.52 (1.12)
</TABLE>
- --------
(a) In February 1998, the Company renegotiated an existing volume discount
agreement with a customer that eliminated any volume discount accrued for
the customer in return for future pricing agreements on a certain product.
Accordingly, the volume discount accrued previously ($0.3 million in the
fourth quarter of fiscal 1996, $0.3 million in the first quarter of fiscal
1997, $0.2 million in the second quarter of fiscal 1997, and $0.3 million
in the third quarter of fiscal 1997) totaling $1.1 million was reversed
increasing operating income (increased net income by $0.7 million). The
future pricing of the product, which will remain unchanged through calendar
2000, is approximately 0.3% lower than the average net price for fiscal
1997 prior to the change.
(b) The quarters in fiscal 1996 were impacted by the operating losses of the
Wilsons Facility which were partially offset by the liquidation gain
resulting from its closure. The net effect of its operating losses and
liquidation gain included in consolidated operating income was a loss of
$0.6 million in the first quarter, a gain of $0.7 million in the second
quarter, no effect on the third quarter, and a gain of $0.1 million in the
fourth quarter.
15. SUBSEQUENT EVENT
On September 17, 1998, the Company announced the signing of a definitive merger
of equals agreement with ABC Rail Products Corporation ("ABC"). ABC is a
manufacturer of specialty trackwork, producer of railcar wheels and distributor
of mounted wheel sets, and a supplier of railway signal system services. ABC's
net sales and net income for the year ended July 31, 1998 were $319,038 and
$6,281, respectively.
The definitive agreement provides that the Company will be merged with a merger
subsidiary of ABC and that the combined parent will be named ABC-NACO Inc. The
Company's stockholders will receive newly issued ABC shares representing
approximately a 50% interest in the combined company. This stock for stock
transaction is expected to be tax-free and accounted for as a pooling-of-
interests. The board of directors and executive management of the combined
company will consist of various directors and managers from both companies.
Consummation of this transaction is subject to customary conditions, including
regulatory approvals and approval of the merger by stockholders of each
company. This transaction is anticipated to close in late 1998. As a result of
the merger, certain of the Company's debt facilities with change of control
provisions will be required to be amended or paid. The Company and ABC have
commenced negotiations to amend or replace the current bank and other debt
facilities.
F-25
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 27, MARCH 29,
1998 1998
------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 456 $ 262
Trade accounts receivable, less allowances........... 39,421 37,415
Other receivables.................................... 1,881 1,635
Inventories, net (Note 2)............................ 22,361 18,066
Prepaid expenses and other current assets............ 4,235 3,132
Deferred income tax asset............................ 1,331 1,331
-------- --------
Total current assets............................... 69,685 61,841
-------- --------
Property, Plant and Equipment, net..................... 65,039 58,637
-------- --------
Other Assets, net...................................... 717 892
-------- --------
Total assets....................................... $135,441 $121,370
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash overdrafts...................................... $ 2,702 $ --
Accounts payable..................................... 35,895 30,455
Current maturities of long-term debt (Note 3)........ 8,372 9,723
Accrued liabilities.................................. 16,140 16,239
-------- --------
Total current liabilities.......................... 63,109 56,417
-------- --------
Long-term Debt, net of current maturities (Note 3)..... 46,143 44,074
-------- --------
Accrued Postretirement Benefits........................ 7,997 7,768
-------- --------
Other Liabilities...................................... 4,508 4,813
-------- --------
Deferred Income Taxes.................................. 4,141 2,928
-------- --------
Commitments and Contingencies (Note 4).................
Stockholders' Equity:
Common stock, $.01 par value, 2,000,000 shares
authorized, 1,024,106 and 1,021,356 shares
outstanding as of September 27, 1998 and March 29,
1998, respectively (Note 6)......................... 6 6
Additional paid-in capital........................... 271 251
Retained earnings.................................... 9,794 5,275
Cumulative translation adjustment.................... (528) (162)
-------- --------
Total stockholders' equity......................... 9,543 5,370
-------- --------
Total liabilities and stockholders' equity......... $135,441 $121,370
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
F-26
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales............................ $90,158 $70,727 $174,838 $141,052
Cost of Sales........................ 75,776 60,901 147,070 120,566
------- ------- -------- --------
Gross profit..................... 14,382 9,826 27,768 20,486
Selling, General and Administrative
Expenses............................ 8,475 6,647 16,437 13,484
------- ------- -------- --------
Income from operations........... 5,907 3,179 11,331 7,002
Other Expense, net................... (547) (356) (1,010) (806)
Interest Expense..................... (1,308) (1,393) (2,769) (2,792)
------- ------- -------- --------
Income before income taxes....... 4,052 1,430 7,552 3,404
Provision for Income Taxes........... (1,583) (812) (3,033) (1,854)
------- ------- -------- --------
Net income....................... 2,469 618 4,519 1,550
Other Comprehensive Income, net of
tax:
Foreign currency translation
adjustment........................ (130) 15 (366) (40)
------- ------- -------- --------
Comprehensive income............. $ 2,339 $ 633 $ 4,153 $ 1,510
======= ======= ======== ========
Basic Earnings Per Share (Note 1):
Net income....................... $ 2.41 $ 0.61 $ 4.42 $ 1.52
======= ======= ======== ========
Diluted Earnings Per Share (Note 1):
Net income....................... $ 2.29 $ 0.58 $ 4.19 $ 1.44
======= ======= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-27
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income......................... $ 2,469 $ 618 $ 4,519 $ 1,550
------- ------- -------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 2,517 2,257 4,898 4,539
Deferred income taxes.............. 1,041 804 1,213 1,523
Changes in certain assets and
liabilities--
Trade and other receivables........ (758) (3,976) (2,252) (2,891)
Inventories........................ 187 (737) (4,295) 45
Prepaid expenses and other current
assets............................ (1,480) (318) (1,103) (733)
Other assets....................... (130) 15 (381) (40)
Accounts payable................... 377 2,774 5,440 1,257
Accrued liabilities................ 266 (1,445) (99) (2,027)
Other liabilities.................. 25 403 (76) 717
------- ------- -------- -------
Total adjustments................ 2,045 (223) 3,345 2,390
------- ------- -------- -------
Net cash provided by operating
activities...................... 4,514 395 7,864 3,940
------- ------- -------- -------
Cash Flows from Investing Activities:
Capital expenditures............... (5,768) (1,885) (11,110) (4,579)
------- ------- -------- -------
Net cash used in investing
activities...................... (5,768) (1,885) (11,110) (4,579)
------- ------- -------- -------
Cash Flows from Financing Activities:
Net borrowings (payments) under
U.S. revolving credit line........ (296) 2,303 2,844 93
Net (payments) under other
indebtedness...................... (715) (684) (2,126) (1,113)
Change in cash overdrafts.......... 2,442 (70) 2,702 1,594
Proceeds, net, from sale
(repurchase) of common stock...... 6 -- 20 (2)
------- ------- -------- -------
Net cash provided by financing
activities...................... 1,437 1,549 3,440 572
------- ------- -------- -------
Net increase (decrease) in cash.. 183 59 194 (67)
Cash, beginning of period............ 273 224 262 350
------- ------- -------- -------
Cash, end of period.................. $ 456 $ 283 $ 456 $ 283
======= ======= ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-28
<PAGE>
NACO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED CUMULATIVE
COMMON ADDITIONAL EARNINGS TRANSLATION
TOTAL STOCK PAID-IN CAPITAL (DEFICIT) ADJUSTMENT
------ ------ --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, March 30, 1997... $ (37) $ 6 $233 $ (241) $ (35)
Comprehensive income.... 1,510 -- -- 1,550 (40)
Issuance of common
stock.................. (2) -- (2) -- --
------ ---- ---- ------ -----
Balance, September 28,
1997..................... $1,471 $ 6 $231 $1,309 $ (75)
====== ==== ==== ====== =====
Balance, March 29, 1998... $5,370 $ 6 $251 $5,275 $(162)
Comprehensive income.... 4,153 -- -- 4,519 (366)
Repurchase of common
stock.................. 20 -- 20 -- --
------ ---- ---- ------ -----
Balance, September 27,
1998..................... $9,543 $ 6 $271 $9,794 $(528)
====== ==== ==== ====== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-29
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include, in the
opinion of the management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations and
financial condition of the Company for and as of the interim dates, and the net
income and the cash flows for three months and six months ended September 28,
1997, and September 27, 1998. Results for the interim periods are not
necessarily indicative of the results for the entire fiscal 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 not misleading. These
unaudited consolidated financial statements should be read in conjunction with
the latest audited consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
Business
NACO, Inc., together with its consolidated subsidiaries (the "Company"),
designs, manufactures and supplies highly engineered cast steel and related
products principally for the railroad supply and flow control supply markets.
The Company specializes in proprietary, custom-engineered and industry standard
cast steel products for use in the manufacture, repair and retrofit of freight
cars, locomotives and valve systems.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
Actual results could differ from those estimates. The most significant
estimates with regard to these financial statements are related to commitments
and contingencies (Note 4) and income taxes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
F-30
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Earnings per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" in fiscal 1997. The following table
reconciles the numerator and denominator used in the calculation of basic and
diluted earnings per share (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income (Numerator)......... $ 2,469 $ 618 $ 4,519 $ 1,550
========== ========== ========== ==========
Shares (Denominator):
Basic--
Weighted average common
shares outstanding........ 1,023,606 1,018,023 1,023,106 1,019,464
Diluted--
Weighted average common
shares outstanding........ 1,023,606 1,018,023 1,023,106 1,019,464
Effect of exercise of
warrant................... 54,271 54,271 54,271 54,271
---------- ---------- ---------- ----------
Total.................... 1,077,877 1,072,294 1,077,377 1,073,735
========== ========== ========== ==========
Earnings per Share--
Basic........................ $ 2.41 $ 0.61 $ 4.42 $ 1.52
========== ========== ========== ==========
Diluted...................... $ 2.29 $ 0.58 $ 4.19 $ 1.44
========== ========== ========== ==========
</TABLE>
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined under
the first-in, first-out method. Inventory costs include materials, labor and
manufacturing overhead. The components of inventory at September 27, 1998, and
March 29, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
SEPT.
27, MARCH 29,
1998 1998
------- ---------
<S> <C> <C>
Inventories
Raw materials......................................... $ 1,912 $ 2,204
Purchased parts....................................... 3,819 2,920
Work in process....................................... 9,636 7,904
Finished goods........................................ 6,994 5,038
------- -------
Total inventories, net.............................. $22,361 $18,066
======= =======
</TABLE>
F-31
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. DEBT
Debt outstanding as of September 27, 1998, and March 29, 1998, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPT.
27, MARCH 29,
1998 1998
------- ---------
<S> <C> <C>
United States
Revolving credit.................................... $21,502 $18,658
Bank term loan...................................... 8,003 8,474
Keokuk bank term loan............................... 311 333
11.75% Senior Subordinated Note with a common stock
purchase warrant................................... 14,859 14,848
State of Iowa term loan............................. 300 300
Acquisition note--Richmond Foundry.................. 698 1,375
Unsecured notes..................................... 689 161
------- -------
Total United States............................... 46,362 44,149
------- -------
Canada
Customer note....................................... 3,241 3,689
------- -------
Mexico
Acquisition note.................................... 2,668 3,279
------- -------
United Kingdom
Overdraft facilities and other...................... 2,244 2,680
------- -------
Total debt........................................ 54,515 53,797
Less current maturities............................. (8,372) (9,723)
------- -------
Total long-term debt.............................. $46,143 $44,074
======= =======
</TABLE>
Revolving Credit and Bank Term Loan
The Company's revolving credit agreement covers its United States operating
subsidiaries and provides for maximum potential borrowings to $35.0 million
which includes a term loan of $8.0 million with the balance of the borrowings
based upon eligible receivables and inventories. The agreement terminates in
November, 2000. Borrowings under the agreement are secured by substantially all
of the Company's United States assets. Borrowings bear interest at the prime
rate plus 0.75%, except for $1.0 million of the term loan which bears interest
at the prime rate plus 1.75%. The agreement contains a number of covenants
including, among others, restrictions on dividends, common stock repurchases
and mergers and acquisitions, all as defined. As of September 27, 1998,
borrowings outstanding under the revolving credit portion of the agreement were
$21.5 million and the Company had unused availability under the agreement of
$5.5 million.
11.75% Senior Subordinated Note with a Common Stock Purchase Warrant
In March, 1995, the Company issued a $15.0 million senior subordinated note
together with a common stock purchase warrant to a major insurance company. The
warrant agreement allows the insurance company to purchase 54,271 common shares
of the Company's common stock at a price of $0.01 per share, subject to certain
adjustments. The note bears interest at 11.75%, payable semi-annually, and
requires principal payments of $5.0 million in 2003, 2004 and 2005. The
agreement, as amended, contains a number of restrictive covenants including,
among others, financial covenant tests on fixed charge coverage, net worth
maintenance and leverage, as well as restrictions on the payment of dividends
and the incurrence of additional indebtedness
F-32
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
or liens, all as defined. As of September 27, 1998, and for the four fiscal
quarters then ended, the actual fixed charge coverage ratio was 2.57 compared
to a required ratio of not less than 1.40; the tangible net worth maintenance
test required a minimum of $5.1 million, which was met; and the actual leverage
ratio was .40 compared to a maximum ratio of .55, all as defined in the
agreement.
4. COMMITMENTS AND CONTINGENCIES
The Company is a party to several legal actions arising in the ordinary course
of business. In management's opinion, the outcome of these items will not
materially affect the Company's business, financial condition or results of
operations. The Company's operations are subject to a variety of federal, state
and local environmental laws and regulations. Management believes that its
current operations are in material compliance with all applicable environmental
laws and regulations.
5. OPERATING SEGMENTS, CUSTOMER CONCENTRATIONS AND LABOR
The Company designs, manufactures and supplies highly engineered cast steel and
related products principally for the railroad supply and flow control supply
markets. The Company specializes in proprietary, custom-engineered and industry
standard cast steel products for use in the manufacture and retrofit of freight
cars, locomotives and valve systems. The Company has three reportable segments
Rail Products Group; Flow Products Group; and Other, which in both three month
periods represents the Leven, Scotland operations.
The Company accumulates its expenses for the Corporate Headquarters and NACO
Technologies which, in part, provide services to each of the operating
segments. However, these costs are not allocated to the units for management
review of the segments operating performance.
Intersegment sales and transfers, which are not material, are accounted for on
a cost plus stipulated markup which the Company believes approximates arm's
length prices.
F-33
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Financial data by operating segment together with the items necessary to
reconcile these amounts to the consolidated financial statements are shown
below:
<TABLE>
<CAPTION>
OPERATING SEGMENTS
-------------------------
RAIL FLOW TOTAL CORPORATE
PRODUCTS PRODUCTS OPERATING & NACO INTERSEGMENT
GROUP GROUP OTHER SEGMENTS TECHNOLOGY ELIMS. CONSOLIDATED
-------- -------- ------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended
September 27, 1998
Sales by Product
Line--
Rail................ $ 67,831 $ 4,344 $ 930 $ 73,105 $ -- $ (236) $ 72,869
Flow................ 633 15,351 1,938 17,922 -- (633) 17,289
-------- ------- ------- -------- ------- ------- --------
Total sales....... 68,464 19,695 2,868 91,027 -- (869) 90,158
======== ======= ======= ======== ======= ======= ========
Operating income...... 9,914 82 (23) 9,973 (4,066) -- 5,907
Total assets.......... 95,407 25,025 7,293 127,725 8,005 (289) 135,441
Three months ended
September 28, 1997
Sales by Product
Line--
Rail................ $ 49,315 $ 3,981 $ 494 $ 53,790 $ -- $ (209) $ 53,581
Flow................ -- 15,602 1,544 17,146 -- -- 17,146
-------- ------- ------- -------- ------- ------- --------
Total sales....... 49,315 19,583 2,038 70,936 -- (209) 70,727
======== ======= ======= ======== ======= ======= ========
Operating income...... 5,864 541 (479) 5,926 (2,747) -- 3,179
Total assets.......... 73,749 25,558 5,322 104,629 8,599 (141) 113,087
Six months ended
September 27, 1998
Sales by Product
Line--
Rail................ $130,852 $ 7,630 $ 1,880 $140,362 $ -- $ (837) $139,525
Flow................ 827 31,137 4,176 36,140 -- (827) 35,313
-------- ------- ------- -------- ------- ------- --------
Total sales....... 131,679 38,767 6,056 176,502 -- (1,664) 174,838
======== ======= ======= ======== ======= ======= ========
Operating income...... 17,917 1,129 85 19,131 (7,800) -- 11,331
Total assets.......... 95,407 25,025 7,293 127,725 8,005 (289) 135,441
Six months ended
September 28, 1997
Sales by Product
Line--
Rail................ $ 96,065 $ 9,744 $ 784 $106,593 $ -- $ (209) $106,384
Flow................ -- 31,630 3,040 34,670 -- (2) 34,668
-------- ------- ------- -------- ------- ------- --------
Total sales....... 96,065 41,374 3,824 141,263 -- (211) 141,052
======== ======= ======= ======== ======= ======= ========
Operating income...... 12,402 1,728 (1,034) 13,096 (6,094) -- 7,002
Total assets.......... 73,749 25,558 5,322 104,629 8,599 (141) 113,087
</TABLE>
The Company's customers are not concentrated in any specific geographic region
but are concentrated in the railroad transportation and flow control
industries. A significant portion of the Company's sales are to large North
American railroads, freight car and locomotive manufacturers and manufacturers
of flow control systems. The Company has not experienced any significant bad
debt losses since its inception. The Company performs continuing credit
evaluations of its customers' financial condition. Over the past several years,
sales to the
F-34
<PAGE>
NACO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Company's ten largest customers has accounted for approximately 70% of
consolidated sales. Three customers in the most recent fiscal year ended March
29, 1998, accounted for 17%, 16% and 11% of consolidated sales. A significant
decrease in business from these customers could have an adverse effect on the
Company. The Company believes that the relationships with these customers have
been stable.
Approximately 83% of the Company's employees are covered by collective
bargaining agreements. Each plant is represented by separate unions or union
locals with contracts that expire at various times with four contracts expiring
in fiscal 1998. Of such four contracts, the Company renegotiated the labor
contracts covering employees at its facilities in Leven, Scotland, Hamilton,
Canada and Sahagun, Mexico and experienced an approximate one-week work
stoppage at the latter two facilities. The labor contracts covering its
Richmond, Texas facility is the only other labor contract that will expire in
fiscal 1998 and represents about 2% of the total number of Company employees.
While management believes that its labor relations are satisfactory, there can
be no assurance that labor contracts which come up for renewal will be renewed
or the terms under which such renewals may occur. Failure to renew significant
contracts can lead to work stoppages that could have a material adverse effect
on the Company's business and results of operations.
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NACO, INC.,
ABC RAIL PRODUCTS CORPORATION
AND
ABCR ACQUISITION SUB, INC.
DATED AS OF DECEMBER 10, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
THE MERGER AND THE CLOSING.............................................. 1
SECTION 1.1--The Merger................................................. 1
SECTION 1.2--Effective Time............................................. 1
SECTION 1.3--Effect of the Merger....................................... 2
SECTION 1.4--Subsequent Actions......................................... 2
SECTION 1.5--Certificate of Incorporation; By-Laws; Directors, Officers
and Committees......................................................... 2
SECTION 1.6--The Closing................................................ 3
ARTICLE II
EFFECT ON STOCK OF THE SURVIVING CORPORATION AND THE MERGED
CORPORATION............................................................ 3
SECTION 2.1--Conversion of Securities................................... 3
SECTION 2.2--Conversion of Shares....................................... 3
SECTION 2.3--Cancellation of Treasury Shares............................ 3
SECTION 2.4--Conversion of Common Stock of Merger Subsidiary into Common
Stock of the Surviving Corporation..................................... 4
SECTION 2.5--Exchange of Shares Other Than Treasury Shares.............. 4
SECTION 2.6--Transfer Books............................................. 4
SECTION 2.7--No Fractional Share Certificates........................... 5
SECTION 2.8--Rights to Purchase NACO Common Stock....................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NACO.................................. 6
SECTION 3.1--Organization, Qualification, and Corporate Power........... 6
SECTION 3.2--Authorization of Transaction; Required Filings and
Consents............................................................... 6
SECTION 3.3--Capitalization; Subsidiaries............................... 6
SECTION 3.4--Noncontravention........................................... 7
SECTION 3.5--Brokers' Fees.............................................. 7
SECTION 3.6--Registration Statement..................................... 8
SECTION 3.7--Financial Statements....................................... 8
SECTION 3.8--Absence of Undisclosed Liabilities......................... 8
SECTION 3.9--Events Subsequent to Fiscal Year End....................... 8
SECTION 3.10--Legal Compliance.......................................... 8
SECTION 3.11--Tax Matters............................................... 8
SECTION 3.12--Real Property............................................. 9
SECTION 3.13--Intellectual Property..................................... 9
SECTION 3.14--Contracts and Commitments................................. 9
SECTION 3.15--Litigation................................................ 10
SECTION 3.16--Employee Benefits......................................... 10
SECTION 3.17--Environmental Matters..................................... 12
SECTION 3.18--Labor Matters............................................. 12
SECTION 3.19--Certain Business Relationships............................ 13
SECTION 3.20--Approval Required......................................... 13
SECTION 3.21--No Negotiations........................................... 13
SECTION 3.22--Accounting Matters........................................ 13
SECTION 3.23--Opinion of Financial Advisor.............................. 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ABC AND MERGER SUBSIDIARY............. 13
SECTION 4.1--Organization, Qualification, and Corporate Power........... 14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 4.2--Authorization of Transaction; Required Filings and
Consents............................................................... 14
SECTION 4.3--Capitalization; Subsidiaries; Affiliated Entities.......... 14
SECTION 4.4--Noncontravention........................................... 15
SECTION 4.5--Brokers' Fees.............................................. 16
SECTION 4.6--SEC Documents.............................................. 16
SECTION 4.7--Financial Statements....................................... 16
SECTION 4.8--Absence of Undisclosed Liabilities......................... 17
SECTION 4.9--Events Subsequent to Fiscal Year End....................... 17
SECTION 4.10--Legal Compliance.......................................... 17
SECTION 4.11--Tax Matters............................................... 17
SECTION 4.12--Real Property............................................. 18
SECTION 4.13--Intellectual Property..................................... 18
SECTION 4.14--Contracts and Commitments................................. 18
SECTION 4.15--Litigation................................................ 19
SECTION 4.16--Employee Benefits......................................... 19
SECTION 4.17--Environmental Matters..................................... 21
SECTION 4.18--Labor Matters............................................. 21
SECTION 4.19--Certain Business Relationships............................ 22
SECTION 4.20--Approval Required......................................... 22
SECTION 4.21--No Negotiations........................................... 22
SECTION 4.22--Tax Treatment............................................. 22
SECTION 4.23--Merger Subsidiary......................................... 22
SECTION 4.24--The Rights Agreement...................................... 22
SECTION 4.25--Accounting Matters........................................ 23
SECTION 4.26--Opinion of Financial Advisor.............................. 23
SECTION 4.27--Affiliated Entities....................................... 23
ARTICLE V
COVENANTS AND AGREEMENTS................................................ 23
SECTION 5.1--Conduct of NACO and ABC.................................... 23
SECTION 5.2--Stockholders' Meetings; Proxy Material..................... 25
SECTION 5.3--Registration Statement; Joint Proxy Statement; Other
Actions................................................................ 25
SECTION 5.4--No Solicitation............................................ 26
SECTION 5.5--Takeover Statute........................................... 28
SECTION 5.6--Tax Treatment.............................................. 28
SECTION 5.7--Conveyance Taxes........................................... 28
SECTION 5.8--Access to Information; Confidentiality Agreement........... 28
SECTION 5.9--Affiliate Agreements....................................... 28
SECTION 5.10--Obligations of Merger Subsidiary.......................... 29
SECTION 5.11--Director and Officer Liability............................ 29
SECTION 5.12--Notices and Consents...................................... 29
SECTION 5.13--Notice; Supplements to Disclosure Schedule................ 29
SECTION 5.14--Tax Certificates.......................................... 30
SECTION 5.15--Pooling of Interests...................................... 30
SECTION 5.16--Further Assurances........................................ 30
SECTION 5.17--Transition Planning....................................... 30
ARTICLE VI
CONDITIONS TO THE MERGER................................................ 30
SECTION 6.1--Conditions to Obligations of Each Party to Effect the
Merger................................................................. 30
SECTION 6.2 -- Additional Conditions to Obligations of NACO............. 31
SECTION 6.3 -- Additional Conditions to Obligations of ABC.............. 32
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VII
TERMINATION, AMENDMENT
AND WAIVER............. 32
SECTION 7.1--
Termination............ 32
SECTION 7.2--Effect of
Termination............ 34
SECTION 7.3--Amendment.. 35
SECTION 7.4--Waiver..... 35
ARTICLE VIII
GENERAL PROVISIONS...... 35
SECTION 8.1--Non-
Survival of
Representations,
Warranties and
Agreements............. 35
SECTION 8.2--Notices.... 36
SECTION 8.3--Expenses... 36
SECTION 8.4--Certain
Definitions............ 36
SECTION 8.5--Headings... 38
SECTION 8.6--
Severability........... 38
SECTION 8.7--Entire
Agreement; No Third-
Party Beneficiaries.... 38
SECTION 8.8--
Assignment............. 38
SECTION 8.9--Governing
Law.................... 39
SECTION 8.10--Consent to
Jurisdiction........... 39
SECTION 8.11--Costs of
Enforcement............ 39
SECTION 8.12--
Publicity.............. 39
SECTION 8.13--
Incorporation of
Exhibits and Disclosure
Schedule............... 39
SECTION 8.14--
Counterparts........... 39
</TABLE>
iii
<PAGE>
DISCLOSURE SCHEDULE
<TABLE>
<CAPTION>
SECTION DESCRIPTION
------- -----------
<C> <S>
1.5(c) Officers and Directors of Surviving Corporation
1.5(d) Officers of ABC
3.3(b) NACO Securities
3.3(c)(i) NACO Subsidiaries
3.3(c)(i)(i) Liens on NACO Securities
3.4 NACO Noncontravention
3.5 NACO Brokers' Fees
3.6 NACO Draft Registration Statement
3.8 NACO Undisclosed Liabilities
3.12 NACO Real Property
3.13(a) NACO Intellectual Property
3.14(a) NACO Contracts
3.14(b) Exceptions to NACO Contracts
3.16(a) NACO Employee Benefit Plans
3.16(d) NACO Contributions to Multi-Employer Plans
3.16(f) NACO Retiree Medical/Life Insurance Benefits
3.17 NACO Environmental Matters
3.18 NACO Labor Matters
4.3(b) ABC Securities
4.3(c) ABC Affiliated Entities
4.4 ABC Noncontravention
4.5 ABC Brokers' Fees
4.8 ABC Undisclosed Liabilities
4.9 ABC Events Subsequent to Fiscal Year End
4.11 ABC Taxes
4.12 ABC Real Property
4.13(a) ABC Intellectual Property
4.13(c) ABC Intellectual Property to Affiliated Entities
4.14(a) ABC Contracts
4.14(b) Exceptions to ABC Contracts
4.16(a) ABC Employee Benefit Plans
4.16(c) ABC Non-Multi-Employer Plans
4.16(d) ABC Contributions to Multi-Employer Plans
4.16(f) ABC Retiree Medical/Life Insurance Benefits
4.17 ABC Environmental Matters
4.18 ABC Labor Matters
4.27(a) ABC Affiliated Entities
5.1(g) Conduct of NACO and ABC
6.2(d) ABC Required Consents
6.2(h) Parties to Change-of-Control Agreements
6.3(d) NACO Required Consents
8.3(i) ABC Estimated Transaction Expenses
8.3(ii) NACO Estimated Transaction Expenses
8.4(h)(i) ABC Knowledge Officers
8.4(h)(ii) NACO Knowledge Officers
</TABLE>
iv
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
A Voting Agreement
Form of Restated Certificate of Incorporation of the Surviving
B Corporation
C Form of Amended and Restated By-laws of the Surviving Corporation
D Form of NACO Affiliate's Agreement
E Form of ABC Affiliate's Agreement
F Form of ABC Tax Certificate
G Form of NACO Tax Certificate
H Form of Registration Rights Agreement
I Form of Opinion of Counsel to ABC
J Form of Opinion of Counsel to NACO
</TABLE>
v
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINITION PAGE
- ---------- ----
<S> <C>
ABC........................................................................ 1
ABC Acquisition Proposal................................................... 38
ABC Balance Sheet.......................................................... 53
ABC Common Stock........................................................... 4
ABC Contract............................................................... 26
ABC Employee Benefit Plans................................................. 26
ABC Financial Statements................................................... 22
ABC Intellectual Property.................................................. 24
ABC Preferred Stock........................................................ 20
ABC SEC Documents.......................................................... 22
ABC Special Meeting........................................................ 34
ABC Stock Options.......................................................... 20
ABC Superior Proposal...................................................... 46
Affiliated Entity.......................................................... 50
Agreement.................................................................. 1
APB 16..................................................................... 18
Applicable Law............................................................. 10
Business Day............................................................... 51
Certificate of Merger...................................................... 2
Cleanup.................................................................... 51
Closing.................................................................... 4
Closing Date............................................................... 4
Code....................................................................... 1
Confidentiality Agreement.................................................. 39
Control Group.............................................................. 51
Delaware Law............................................................... 2
Disclosure Schedule........................................................ 8
Draft Registration Statement............................................... 11
Effective Time............................................................. 2
Environmental Claim........................................................ 51
Environmental Laws......................................................... 51
ERISA...................................................................... 14
Exchange Act............................................................... 20
Exchange Agent............................................................. 5
Exchange Fund.............................................................. 5
Exchange Ratio............................................................. 4
GAAP....................................................................... 1
Governmental Authority..................................................... 9
Governmental Licenses...................................................... 8
Hart-Scott-Rodino Act...................................................... 9
Hazardous Materials........................................................ 51
IRS........................................................................ 12
Joint Proxy Statement...................................................... 34
Knowledge.................................................................. 51
Liens...................................................................... 10
Material Adverse Effect.................................................... 52
Merged Corporation......................................................... 2
Merger..................................................................... 1
Merger Subsidiary.......................................................... 1
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
DEFINITION PAGE
- ---------- ----
<S> <C>
Multi-Employer Plan........................................................ 14
NACO....................................................................... 1
NACO Acquisition Proposal.................................................. 37
NACO Balance Sheet......................................................... 52
NACO Common Stock.......................................................... 4
NACO Contract.............................................................. 14
NACO Employee Benefit Plans................................................ 14
NACO Financial Statements.................................................. 11
NACO Intellectual Property................................................. 12
NACO Rights................................................................ 7
NACO Shares................................................................ 5
NACO Special Meeting....................................................... 34
NACO Superior Proposal..................................................... 46
Nasdaq NMS................................................................. 7
Parties.................................................................... 2
Party...................................................................... 2
Permits.................................................................... 12
Permitted Liens............................................................ 52
Person..................................................................... 52
Pre-Surrender Dividends.................................................... 6
Registration Statement..................................................... 20
Release.................................................................... 52
Representatives............................................................ 38
Restraints................................................................. 42
Rights Agreement........................................................... 19
SEC........................................................................ 11
SEC Regulations............................................................ 20
Securities Act............................................................. 9
September Agreement........................................................ 1
Special Meetings........................................................... 34
Subsidiary................................................................. 52
Surviving Corporation...................................................... 2
Surviving Corporation Common Stock......................................... 5
Tax........................................................................ 52
Tax Return................................................................. 53
Taxes...................................................................... 52
Termination Date........................................................... 45
Voting Agreement........................................................... 1
</TABLE>
vii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of December 10,
1998, (this "Agreement"), by and among NACO, Inc., a Delaware corporation
("NACO"), ABC Rail Products Corporation, a Delaware corporation ("ABC"), and
ABCR Acquisition Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of ABC ("Merger Subsidiary").
W I T N E S S E T H
WHEREAS, the Boards of Directors of NACO, ABC and Merger Subsidiary have each
determined that it is in the best interests of their respective stockholders
for NACO and ABC to enter into a business combination in a "merger of equals"
under which Merger Subsidiary will, upon the terms and subject to the
conditions set forth herein, merge with and into NACO (the "Merger") so that
NACO will become a wholly owned subsidiary of ABC;
WHEREAS, the Boards of Directors of NACO, ABC and Merger Subsidiary (and ABC
as the sole stockholder of Merger Subsidiary) have each determined that the
Merger and the other transactions contemplated hereby are consistent with, and
in furtherance of, their respective business strategies and goals and have each
approved the Merger upon the terms and subject to the conditions set forth
herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall constitute a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for financial accounting purposes, it is intended that the Merger
shall be accounted for as a "pooling of interests" under United States
generally accepted accounting principles ("GAAP");
WHEREAS, as an inducement to ABC to enter into this Agreement, Joseph A.
Seher, the Chairman, Chief Executive Officer and majority stockholder of NACO,
and ABC have entered into a Voting Agreement as set forth in Exhibit A hereto
(the "Voting Agreement") pursuant to which Mr. Seher has agreed to vote his
shares of NACO Common Stock in favor of the Merger and the transactions
contemplated by this Agreement;
WHEREAS, NACO, ABC and Merger Subsidiary entered into an Agreement and Plan
of Merger dated as of September 17, 1998 (the "September Agreement"), and now
desire to amend and restate the September Agreement in its entirety as of the
date hereof;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER AND THE CLOSING
SECTION 1.1--The Merger. At the Effective Time and subject to and upon the
terms and conditions of this Agreement and the Delaware General Corporation Law
("Delaware Law"), Merger Subsidiary shall be merged with and into NACO, the
separate corporate existence of Merger Subsidiary shall cease, and NACO shall
continue as the surviving corporation which shall be a wholly owned subsidiary
of ABC. NACO as the surviving corporation after the Merger is herein sometimes
referred to as the "Surviving Corporation" and Merger Subsidiary as the non-
surviving corporation after the Merger is herein sometimes referred to as the
"Merged Corporation." NACO, ABC and Merger Subsidiary are herein referred to
collectively as the "Parties" and each individually as a "Party."
SECTION 1.2--Effective Time. As promptly as practicable on the Closing Date,
the Parties shall cause the Merger to be consummated by filing a Certificate of
Merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware with respect to the Merger, in such form as required by, and
executed in accordance with, the relevant provisions of Delaware Law. The
Merger shall become effective at such time as the Certificate of Merger is duly
filed with the Secretary of State of Delaware, or at such later date or time as
may be set forth in the Certificate of Merger (such time as the Merger becomes
effective being hereinafter referred to as the "Effective Time").
A-1
<PAGE>
SECTION 1.3--Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
NACO and Merger Subsidiary shall continue with, or vest in, as the case may be,
NACO as the Surviving Corporation, and all debts, liabilities and duties of
NACO and Merger Subsidiary shall continue to be, or become, as the case may be,
the debts, liabilities and duties of NACO as the Surviving Corporation. At the
Effective Time, the Surviving Corporation shall be a direct wholly owned
subsidiary of ABC.
SECTION 1.4--Subsequent Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise in
the Surviving Corporation its right, title or interest in, to or under any of
the rights, properties, privileges, franchises or assets of either of its
constituent corporations acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or otherwise to
carry out this Agreement, the officers and directors of the Surviving
Corporation shall be directed and authorized to execute and deliver, in the
name and on behalf of either of such constituent corporations, all such deeds,
bills of sale, assignments and assurances and to take and do, in the name and
on behalf of each of such corporations or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties, privileges,
franchises or assets in the Surviving Corporation or otherwise to carry out
this Agreement.
SECTION 1.5--Certificate of Incorporation; By-Laws; Directors, Officers and
Committees. Unless otherwise agreed by NACO and ABC before the Effective Time,
at the Effective Time:
(a) The restated certificate of incorporation of NACO, as in effect
immediately prior to the Effective Time, shall be amended at and as of the
Effective Time as set forth in Exhibit B hereto and, as so amended, such
restated certificate of incorporation shall be the restated certificate of
incorporation of the Surviving Corporation until thereafter amended as
provided by law and such certificate of incorporation;
(b) The amended and restated by-laws of NACO, as in effect immediately
prior to the Effective Time, shall be amended at and as of the Effective
Time as set forth in Exhibit C hereto and, as so amended, such amended and
restated by-laws shall be the amended and restated by-laws of the Surviving
Corporation until thereafter amended as provided by law and by the restated
certificate of incorporation and the amended and restated by-laws of the
Surviving Corporation;
(c) The members of the Board of Directors and the officers of the
Surviving Corporation at the Effective Time shall be as designated in
Section 1.5(c) of the Disclosure Schedule and shall serve in such
capacities for the applicable period specified in accordance with the by-
laws of the Surviving Corporation. If any director designated in accordance
with Section 1.5(c) of the Disclosure Schedule shall be unable to serve as
a director at the Effective Time, or if any officer designated in
accordance with Section 1.5(c) of the Disclosure Schedule ceases to be a
full-time employee of either NACO or ABC before the Effective Time, the
Parties will agree upon another person to serve in such person's stead; and
(d) The members of the Board of Directors (including the classes into
which such members shall be classified) and the members of the committees
of the Board of Directors (including the chairmen thereof) at the Effective
Time shall be mutually agreed upon by NACO and ABC, provided that the Board
of Directors of ABC shall consist of eight (8) persons: Joseph A. Seher and
Donald W. Grinter, three persons to be named by Joseph A. Seher and the
Board of Directors of NACO, and three persons to be named by Donald W.
Grinter and the Board of Directors of ABC. All directors designated herein
shall serve in such capacities for the applicable period specified in
accordance with the restated certificate of incorporation (as to be amended
to provide for the classified Board of Directors) and by-laws of ABC. If
any director designated herein shall be unable to serve as a director
(including as a member or chairman of any committee) at the Effective Time,
the Party which designated such individual shall designate another
individual to serve in such individual's place. The officers of ABC at the
Effective Time shall be as
A-2
<PAGE>
designated in Section 1.5(d) of the Disclosure Schedule and shall serve in
such capacities for the applicable period specified in accordance with the
by-laws of ABC. If any officer designated in accordance with Section 1.5(d)
of the Disclosure Schedule ceases to be a full-time employee of either NACO
or ABC before the Effective Time, the Parties will agree upon another
person to serve in such person's stead.
(e) The restated certificate of incorporation of ABC shall be amended at
and as of the Effective Time to provide for (i) a change in the name of ABC
to "ABC-NACO Inc." and (ii) a classified Board of Directors as contemplated
by Section 1.5(d).
SECTION 1.6--The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at 10:00 a.m. on a date (the
"Closing Date") and at a place to be specified by the parties, which shall be
(i) no later than the second Business Day following the satisfaction or waiver
of all conditions to the obligations of the Parties to consummate the
transactions set forth in Article VI hereof (other than conditions with respect
to actions the respective Parties will take at the Closing itself), or (ii) at
such other time and place and on such other date as NACO and ABC shall agree.
ARTICLE II
EFFECT ON STOCK OF THE SURVIVING
CORPORATION AND THE MERGED CORPORATION
SECTION 2.1--Conversion of Securities. The manner and basis of converting the
shares of common stock of the Surviving Corporation and of the Merged
Corporation at the Effective Time, by virtue of the Merger and without any
action on the part of any of the Parties or the holder of any of such
securities, shall be as hereinafter set forth in this Article II.
SECTION 2.2--Conversion of Shares.
(a) Each share of common stock, par value $.01 per share, of NACO (the "NACO
Common Stock") outstanding immediately prior to the Effective Time, and all
rights in respect thereof shall, at the Effective Time and without any action
on the part of any holder thereof, forthwith cease to exist and be converted
into the right to receive 8.7 (the "Exchange Ratio") fully paid and
nonassessable shares of common stock, par value $0.01 per share, of ABC (the
"ABC Common Stock"), provided that fractional shares shall be entitled to
receive cash in lieu of fractional shares pursuant to Section 2.7.
(b) The Exchange Ratio shall be appropriately adjusted to eliminate the
impact of any dividend (whether in cash, securities or other property, but
excluding any regular, quarterly cash dividend of ABC), stock split,
reclassification, recapitalization, reverse split, or similar event, announced
or occurring, with respect to ABC Common Stock and with a record date after
execution of this Agreement and before the Effective Time.
(c) As of the Effective Time, all shares of NACO Common Stock outstanding
immediately prior to the Effective Time (excluding those shares to be cancelled
in accordance with Section 2.3, the "NACO Shares") shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any NACO Shares shall
cease to have any rights with respect thereto, except the right to receive the
certificates representing shares of ABC Common Stock into which such NACO
Shares have been converted and any cash in lieu of fractional shares of ABC
Common Stock to be issued or paid in consideration therefor upon surrender of
such certificate in accordance with Section 2.5, without interest, subject to
the limitations set forth in Sections 2.3 and 2.7 hereof.
SECTION 2.3--Cancellation of Treasury Shares. At the Effective Time, each
share of NACO Common Stock held in the treasury of NACO or by any of NACO's
Subsidiaries, and each share of NACO Common Stock that is owned by ABC, Merger
Subsidiary or any other Subsidiary of ABC, immediately prior to the Effective
Time shall be canceled and retired and no shares of stock or other securities
of ABC or the Surviving Corporation shall be issuable, and no payment or other
consideration shall be made, with respect thereto.
A-3
<PAGE>
SECTION 2.4--Conversion of Common Stock of Merger Subsidiary into Common
Stock of the Surviving Corporation. At the Effective Time, the shares of common
stock, par value $0.01 per share, of Merger Subsidiary issued and outstanding
immediately prior to the Effective Time, and all rights in respect thereof,
shall, without any action on the part of ABC, forthwith cease to exist and be
converted into an aggregate of 1,000 validly issued, fully paid and
nonassessable shares of common stock of the Surviving Corporation, par value
$0.01 per share (the "Surviving Corporation Common Stock"). Immediately after
the Effective Time and upon surrender by ABC of the certificate representing
the shares of the common stock of Merger Subsidiary, the Surviving Corporation
shall deliver to ABC an appropriate certificate or certificates representing
the shares of Surviving Corporation Common Stock created by conversion of the
common stock of Merger Subsidiary owned by ABC.
SECTION 2.5--Exchange of Shares Other Than Treasury Shares. Subject to the
terms and conditions hereof, at or prior to the Effective Time, ABC shall enter
into an agreement with American Stock Transfer and Trust Co. or such other bank
or trust company as may be designated by ABC and as shall be reasonably
satisfactory to NACO (the "Exchange Agent") to effect the exchange of NACO
Shares for ABC Common Stock in accordance with the provisions of this Article
II. At or prior to the Effective Time, ABC shall deposit, or cause to be
deposited, with the Exchange Agent for the benefit of the holders of NACO
Shares certificates representing ABC Common Stock for conversion of NACO Shares
in accordance with the provisions of Section 2.2 hereof (such certificates,
together with any dividends or distributions with respect thereto and any cash
payable in lieu of any fractional shares of ABC Common Stock being herein
referred to as the "Exchange Fund"). Commencing immediately after the Effective
Time and until the appointment of the Exchange Agent shall be terminated, each
holder of a certificate or certificates theretofore representing NACO Shares
may surrender the same to the Exchange Agent, and, after the appointment of the
Exchange Agent shall be terminated, any such holder may surrender any such
certificate to ABC. Such holder shall be entitled upon such surrender to
receive in exchange therefor a certificate or certificates representing the
number of full shares of ABC Common Stock into which NACO Shares theretofore
represented by the certificate or certificates so surrendered shall have been
converted in accordance with the provisions of Section 2.2 hereof, together
with a cash payment in lieu of fractional shares, if any, in accordance with
Section 2.7 hereof, and all such shares of ABC Common Stock shall be deemed to
have been issued at the Effective Time. Until so surrendered and exchanged,
each outstanding certificate which, prior to the Effective Time, represented
issued and outstanding NACO Shares shall be deemed for all corporate purposes
of ABC, other than the payment of dividends and other distributions, if any, to
evidence ownership of the number of full shares of ABC Common Stock into which
NACO Shares theretofore represented thereby shall have been converted at the
Effective Time. Unless and until any such certificate theretofore representing
NACO Shares is so surrendered, no dividend or other distribution, if any,
payable to the holders of record of ABC Common Stock as of any date subsequent
to the Effective Time shall be paid to the holder of such certificate in
respect thereof. Except as otherwise provided in Section 2.6 hereof, upon the
surrender of any such certificate theretofore representing NACO Shares,
however, the record holder of the certificate or certificates representing
shares of ABC Common Stock issued in exchange therefor shall receive from the
Exchange Agent or from ABC, as the case may be, payment of the amount of
dividends and other distributions, if any, which as of any date subsequent to
the Effective Time and until such surrender shall have become payable with
respect to such number of shares of ABC Common Stock ("Pre-Surrender
Dividends"). No interest shall be payable with respect to the payment of Pre-
Surrender Dividends upon the surrender of certificates theretofore representing
NACO Shares. After the appointment of the Exchange Agent shall have been
terminated, any holders of certificates representing NACO Shares which have not
received payment of Pre-Surrender Dividends shall look only to ABC for payment
thereof. Notwithstanding the foregoing provisions of this Section 2.5, neither
the Exchange Agent nor any Party shall be liable to a holder of NACO Shares for
any ABC Common Stock, any dividends or distributions thereon or any cash
payment for fractional shares as contemplated by Section 2.7 hereof, delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
SECTION 2.6--Transfer Books. The stock transfer books of NACO shall be closed
at the Effective Time and no transfer of any NACO Shares will thereafter be
recorded on any of such stock transfer books. In the
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event of a transfer of ownership of NACO Shares that is not registered in the
stock transfer records of NACO at the Effective Time, a certificate or
certificates representing the number of full shares of ABC Common Stock into
which such NACO Shares shall have been converted shall be issued to the
transferee together with a cash payment in lieu of fractional shares, if any,
in accordance with Section 2.7 hereof, and a cash payment in the amount of Pre-
Surrender Dividends, if any, in accordance with Section 2.5 hereof, if the
certificate or certificates representing such NACO Shares is or are surrendered
as provided in Section 2.5 hereof, accompanied by all documents required to
evidence and effect such transfer and by evidence of payment of any applicable
stock transfer tax.
SECTION 2.7--No Fractional Share Certificates. (a) No scrip or fractional
share certificate for ABC Common Stock will be issued upon the surrender for
exchange of certificates evidencing NACO Shares, and an outstanding fractional
share interest will not entitle the owner thereof to vote, to receive dividends
or to any rights of a stockholder of ABC or of the Surviving Corporation with
respect to such fractional share interest.
(b) As promptly as practicable following the Effective Time, ABC shall
deliver to the Exchange Agent for deposit in the Exchange Fund an amount
sufficient for the Exchange Agent to pay each holder of NACO Common Stock an
amount in cash equal to the product obtained by multiplying the fractional
share interest to which such holder would otherwise be entitled (after taking
into account all NACO Shares held of record at the Effective Time by such
holder) by the average of the per share closing sale prices of ABC Common Stock
on the Nasdaq Stock Market National Market System ("Nasdaq NMS"), as reported
in The Wall Street Journal, for the five trading days immediately preceding the
date of the Effective Time.
(c) As soon as practicable after the determination of the amount of cash, if
any, to be paid to holders of NACO Shares with respect to any fractional share
interests, the Exchange Agent shall make available such amounts, net of any
required withholding, to such holders of NACO Shares, subject to and in
accordance with the terms of Section 2.5 hereof.
(d) Any portion of the Exchange Fund which remains undistributed for six
months after the Effective Time shall be delivered to ABC, upon demand, and any
holders of NACO Shares who have not theretofore complied with the provisions of
this Article II shall thereafter look only to ABC for satisfaction of their
claims for ABC Common Stock, any cash in lieu of fractional shares of ABC
Common Stock and any Pre-Surrender Dividends, in each case, without any
interest thereon.
(e) The Exchange Agent shall invest all cash included in the Exchange Fund,
as directed by ABC. Any interest and other income resulting from such
investments shall be paid to ABC.
SECTION 2.8--Rights to Purchase NACO Common Stock. At the Effective Time,
each warrant, option and other right granted by NACO to purchase shares of NACO
Common Stock ("NACO Rights") which is outstanding and unexercised immediately
prior to the Effective Time shall be converted into a warrant, option or other
right, as the case may be, to purchase shares of ABC Common Stock in such
amount and at such exercise price as provided below and otherwise having the
same terms and conditions as are in effect immediately prior to the Effective
Time (except to the extent that such terms, conditions and restrictions are
altered in accordance with their terms as a result of the transactions
contemplated hereby):
(a) the number of shares of ABC Common Stock to be subject to the
converted warrant, option or right, as the case may be, shall be equal to
the product of (i) the number of shares of NACO Common Stock subject to the
original NACO Right and (ii) the Exchange Ratio;
(b) the exercise price per share of ABC Common Stock under the converted
warrant, option or right, as the case may be, shall be equal to (i) the
exercise price per share of NACO Common Stock under the original NACO Right
divided by (ii) the Exchange Ratio; provided, however, that in no event
shall the exercise price per share of ABC Common Stock be less than par
value per share of ABC Common Stock; and
(c) upon each exercise of NACO Rights by a holder thereof, the aggregate
number of shares of ABC Common Stock deliverable upon such exercise shall
be rounded down, if necessary, to the nearest whole share and the aggregate
exercise price shall be rounded up, if necessary, to the nearest cent.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NACO
NACO represents and warrants to ABC that the statements contained in this
Article III are correct and complete as of the date of this Agreement and will
be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Article III), except as set forth in specifically referenced
sections of the disclosure schedule attached hereto (the "Disclosure
Schedule").
SECTION 3.1--Organization, Qualification, and Corporate Power. Each of NACO
and its Subsidiaries is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation. Each of
NACO and its Subsidiaries is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the lack of such qualification would not have a Material
Adverse Effect. Each of NACO and its Subsidiaries has all corporate power and
all governmental licenses, authorizations, consents and approvals
(collectively, "Governmental Licenses") required to carry on the business in
which it is engaged, except for failures to have any such Governmental License
which would not, individually or in the aggregate, have a Material Adverse
Effect. NACO has heretofore delivered to ABC complete and correct copies of the
certificate of incorporation and the by-laws of NACO and each of its
Subsidiaries as currently in effect.
SECTION 3.2--Authorization of Transaction; Required Filings and Consents.
NACO has full power and authority (including full corporate power and
authority) to enter into, execute and deliver this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the performance of NACO's
obligations hereunder have been duly and validly authorized by the Board of
Directors of NACO and, except for the approval and adoption of this Agreement
by NACO's stockholders, no other corporate proceedings on the part of NACO are
necessary to authorize the execution, delivery and performance of this
Agreement and to consummate the transactions contemplated hereby. The Board of
Directors of NACO has determined that the transactions contemplated by this
Agreement are in the best interest of NACO and its stockholders and to
recommend to such stockholders that they approve and adopt this Agreement and
the transactions contemplated hereby. Subject to the approval and adoption of
this Agreement by NACO's stockholders, this Agreement has been duly executed
and delivered by NACO and constitutes, assuming due authorization, execution
and delivery of this Agreement by ABC and Merger Subsidiary, the valid and
binding obligation of NACO, enforceable against NACO in accordance with its
terms. NACO does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any Federal, state, local or
foreign government, court of competent jurisdiction, administrative agency,
commission or other governmental authority or instrumentality (each, a
"Governmental Authority") in connection with the execution and delivery of this
Agreement in order for the Parties to consummate the transactions contemplated
by this Agreement, except for (a) the filing of the Certificate of Merger with
the Delaware Secretary of State and appropriate documents with the relevant
authorities of the other states in which NACO is qualified to do business; (b)
the filing of a pre-merger notification and report form by NACO under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Hart-Scott-
Rodino Act"); (c) compliance with any applicable requirements of state blue sky
or takeover laws; and (d) such other notices, filings, authorizations, consents
or approvals (i) the failure of which to be given, made or obtained
individually or in the aggregate would not reasonably be expected to have a
Material Adverse Effect or (ii) that become applicable as a result of the
business or activities in which ABC or any of its Subsidiaries or Affiliated
Entities is or proposes to be engaged or any acts or omissions by, or facts
pertaining to, ABC.
SECTION 3.3--Capitalization; Subsidiaries.
(a) The authorized capital stock of NACO consists of 2,000,000 shares of NACO
Common Stock, of which 400,000 shares have been designated as Class A Common
Stock. As of September 15, 1998, 1,024,106
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shares of NACO Common Stock were outstanding, 1,035 shares of NACO Common Stock
were held in NACO's treasury and no shares of NACO's Class A Common Stock were
issued or outstanding or held in NACO's treasury. All of the issued and
outstanding shares of NACO Common Stock have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof arising from NACO. All
prior sales of NACO's securities have been made in compliance with or under an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws, and no
shareholders of NACO have any rescission rights with respect to any NACO Common
Stock or other NACO securities.
(b) An aggregate of 49,377 shares of NACO Common Stock are reserved and
authorized for issuance pursuant to NACO's Omnibus Stock Option Plan. Except as
set forth in Section 3.3(b) of the Disclosure Schedule, NACO does not have and
is not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character to or by which NACO is a party or is
bound which, directly or indirectly, obligate NACO to issue, deliver, sell,
redeem, repurchase or otherwise acquire any shares of NACO Common Stock or any
other equity security of NACO or any securities representing the right to
purchase or otherwise receive any shares of NACO Common Stock or any other
equity security of NACO.
(c) Section 3.3(c)(i) of the Disclosure Schedule sets forth a true and
correct list of all of NACO's Subsidiaries. NACO owns, directly or indirectly,
all of the outstanding capital stock of each of its Subsidiaries. Each share of
each Subsidiary owned directly or indirectly by NACO is duly authorized and
validly issued and is fully paid, nonassessable and free of preemptive rights,
and, except as set forth in Section 3.3(c)(ii) of the Disclosure Schedule, each
share is free and clear of all mortgages, liens, security interests, charges,
easements, leases, subleases, covenants, rights of way, options, claims,
restrictions or encumbrances of any kind (collectively "Liens"), and all rights
of first refusal and limitations on NACO's voting rights. None of NACO's
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
sale or issuance by such Subsidiary or by NACO or any other Subsidiary of NACO,
of any shares of capital stock or any other equity security of such Subsidiary
or any securities representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security of such Subsidiary.
SECTION 3.4--Noncontravention. Neither the execution and delivery of this
Agreement by NACO, nor the performance by NACO of its obligations hereunder,
will, assuming the receipt of the consents listed in Section 6.3(d) of the
Disclosure Schedule, (a) conflict with or result in a breach of any provision
of the certificate of incorporation, by-laws or equivalent organizational
instrument of NACO or any of its Subsidiaries, (b) violate any Applicable Law,
injunction, judgment, order, decree, ruling, charge, or other restriction of
any Governmental Authority applicable to NACO or any of its Subsidiaries or by
which NACO or any of its Subsidiaries is bound or to which any of their assets
is subject or (c) except as set forth in Section 3.4 of the Disclosure
Schedule, conflict with, result in a violation or breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, indenture, lease, Governmental License, instrument, or other
arrangement to which NACO or any of its Subsidiaries is a party or by which
NACO or any of its Subsidiaries is bound or to which any of their assets is
subject (or result in the imposition of any Lien upon any of their assets),
except, with respect to clauses (b) and (c) above, where the violation,
conflict, breach, default, acceleration, termination, modification,
cancellation, failure to give notice, or Lien would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. As used
herein, the term "Applicable Law" means any statute, law (including common
law), ordinance, rule or regulation applicable to the Person referenced.
SECTION 3.5--Brokers' Fees. Except as set forth in Section 3.5 of the
Disclosure Schedule, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
NACO or any of its Subsidiaries that would be entitled to any fee or commission
from NACO or any of its Subsidiaries, the Surviving Corporation, ABC or any of
ABC's Affiliates, in connection with, or as a result of the consummation of,
the transactions contemplated by this Agreement.
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SECTION 3.6--Registration Statement. As of the date hereof, neither NACO nor
any of its Subsidiaries is required to file any reports, proxy statement,
forms, registration statements or other documents with the Securities and
Exchange Commission (the "SEC"). Except as set forth in Section 3.6 of the
Disclosure Schedule, the draft Registration Statement on Form S-1 dated August
6, 1998 (the "Draft Registration Statement") previously furnished to ABC, as of
its date, (a) complied in all material respects with the requirements of the
Securities Act and applicable SEC Regulations and (b) contained no untrue
statement of a material fact nor omitted to state a material fact required to
be stated therein or necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
SECTION 3.7--Financial Statements. The audited consolidated balance sheets,
statements of operations and comprehensive income, statements of stockholders'
equity and statements of cash flows of NACO and its consolidated Subsidiaries
as of and for each of the fiscal years ended March 31, 1996, March 30, 1997 and
March 29, 1998, and the unaudited consolidated balance sheets, statements of
operations and comprehensive income and statements of cash flows of NACO and
its consolidated Subsidiaries as of and for the three month period ended June
28, 1998 (collectively, the "NACO Financial Statements") (including, in each
case, any notes and schedules thereto), a true and correct copy of which has
previously been furnished to ABC, (a) have been prepared in accordance with
GAAP consistently applied during the periods involved (except as may be
indicated in the related notes and schedules thereto) and (b) fairly present in
all material respects the consolidated financial condition of NACO and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of the unaudited NACO Financial Statements, to normal year-end adjustments
which are not expected to be, individually or in the aggregate, material in
amount).
SECTION 3.8--Absence of Undisclosed Liabilities. Except as set forth in
Section 3.8 of the Disclosure Schedule and except for liabilities and
obligations incurred in the ordinary course of business since the date of NACO
Balance Sheet, neither NACO nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a consolidated balance sheet of NACO and
its consolidated Subsidiaries or in the notes thereto except for those that
would not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
SECTION 3.9--Events Subsequent to Fiscal Year End. Since the date of NACO
Balance Sheet, NACO and its Subsidiaries have conducted their businesses in the
ordinary course of business, and neither NACO nor any of its Subsidiaries has
experienced any change in its financial condition, business, assets, properties
or prospects which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect. Since the date of
NACO Balance Sheet, neither NACO nor any of its Subsidiaries has taken any of
the actions or permitted to occur any of the events specified in Section 5.1(a)
through (o).
SECTION 3.10--Legal Compliance. NACO and its Subsidiaries are in compliance
with all Applicable Laws, ordinances, judgments, decrees, rules and regulations
of any Governmental Authority applicable to their business and operations,
except for such violations, if any, which, individually or in the aggregate,
has not had or could not reasonably be expected to have, a Material Adverse
Effect. All governmental approvals, permits and Governmental Licenses
(collectively, "Permits") required to conduct the business of NACO and its
Subsidiaries have been obtained, are in full force and effect and are being
complied with, except for failures to obtain such Permits, to have such Permits
in full force and effect or to be in compliance with such Permits, if any,
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
SECTION 3.11--Tax Matters.
(a) Complete and correct copies of all material Tax Returns and all
amendments or modifications thereto filed or caused to be filed by NACO and its
Subsidiaries for the last five full fiscal years have been delivered to ABC.
Each such Tax Return reflects accurately all liability for Taxes of NACO and
its Subsidiaries for the periods covered thereby and is complete and correct in
all material respects. Except for Taxes the non-filing or
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non-payment of which would not have a Material Adverse Effect, NACO and its
Subsidiaries have filed all material Tax Returns for Taxes required to be filed
and have paid all Taxes due with respect to such Tax Returns.
(b) NACO has established adequate reserves on the Financial Statements for
payment for Taxes by NACO and its Subsidiaries relating to periods (or portions
thereof) for which a Tax Return was required to be filed, for Taxes that are
not then due or payable and have or will establish adequate reserves for Taxes
relating to subsequent periods through the Closing.
(c) Neither NACO nor any of its Subsidiaries is currently under examination
by the Internal Revenue Service (the "IRS") or any other Governmental Authority
with respect to Taxes; and neither NACO nor any of its Subsidiaries has been
contacted by or is currently corresponding with any state or local government
with respect to the requirement to file Tax Returns and/or pay any Taxes. No
waivers of statute of limitations have been given to or requested by any
Governmental Authority.
SECTION 3.12--Real Property. Section 3.12 of the Disclosure Schedule sets
forth (a) a correct and complete list of all leases of real property to which
NACO or any of its Subsidiaries is a party as lessee as of the date hereof
involving an annual lease payment of more than $100,000, including an
identification of the parties, the property, the term of the lease and the rent
or lease payments thereunder, and (b) a correct and complete list of all real
property owned by NACO and its Subsidiaries as of the date hereof, including an
identification of the property, the record owner and the principal structures
thereon.
SECTION 3.13--Intellectual Property.
(a) Section 3.13(a) of the Disclosure Schedule sets forth a correct and
complete list (the "NACO Intellectual Property") of (i) all letters patent and
patent applications, and (ii) all registered and other material utility models,
utility model applications, trade names, brand names, trademarks, service
marks, trademark and service mark registrations and applications, copyright
registrations and applications; with respect to both clauses (i) and (ii), both
domestic and foreign, presently owned, possessed, used or held by NACO and its
Subsidiaries. Section 3.13(a) of the Disclosure Schedule also identifies each
license, agreement, or other permission which NACO or its Subsidiaries has
granted to or received from any third party with respect to any NACO
Intellectual Property.
(b) NACO and its Subsidiaries own or have a binding, enforceable right to use
NACO Intellectual Property, are the owner of record of any application,
registration or grant for each item of NACO Intellectual Property, and have
properly executed and recorded all documents necessary to perfect their title
to such NACO Intellectual Property. Neither the conduct of NACO's or any of its
Subsidiaries' business nor any of the products sold or services provided by
NACO or its Subsidiaries in connection therewith (except for such infringements
or violation of rights which, in the aggregate, would not be reasonably
expected to have a Material Adverse Effect) infringes upon or is inconsistent
with the intellectual property rights of any other Person. To the Knowledge of
NACO, neither the conduct of any other Person's business, nor the nature of any
of the products it sells or services it provides, infringes upon or is
inconsistent with any NACO Intellectual Property. Neither NACO nor any of its
Subsidiaries has any liability for, or has given any indemnification for,
patent, trademark or copyright infringement with respect to any products
manufactured, used, distributed or sold by NACO or its Subsidiaries. NACO and
its Subsidiaries have filed all documents and paid all taxes, fees, and other
financial obligations required to maintain in force and effect all NACO
Intellectual Property until Closing.
SECTION 3.14--Contracts and Commitments.
(a) Except as set forth in Section 3.14(a) of the Disclosure Schedule,
neither NACO nor any of its Subsidiaries is a party to or is bound by any
contract, arrangement, commitment or understanding (whether written or oral)
(i) with respect to the employment of any director, officer, employee or
consultant which,
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solely in the case of employees or consultants, provide for payments in excess
of $125,000 per annum or cannot be terminated upon 30 days' or less notice
without penalty or premium, (ii) which, upon consummation of the transactions
contemplated by this Agreement will (either alone or upon the occurrence of any
additional acts or events) result in any payment (including, without
limitation, severance payments, golden parachute payments, change in control
payments, unemployment compensation payments or otherwise) becoming due from
ABC, NACO, the Surviving Corporation or any of their respective Subsidiaries to
any director, officer or employee (current, former or retired) thereof, (iii)
which is a material contract (as defined in Item 601(b)(10) of Regulation S-K
of the SEC) to be performed after the date of this Agreement, (iv) which is a
contract or agreement not otherwise described by clause (iii) hereof involving
the payment of more than $125,000 per annum, (v) which materially restricts the
conduct of any line of business by NACO or any of its Subsidiaries or (vi)
under which any of the benefits will be increased, or the vesting of the
benefits will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by this
Agreement. Each contract, arrangement, commitment or understanding of the type
described in this Section 3.14(a), whether or not set forth in Section 3.14(a)
of the Disclosure Schedule, is referred to herein as a "NACO Contract." NACO
has previously delivered to ABC true and correct copies of each NACO Contract.
(b) Except as set forth in Section 3.14(b) of the Disclosure Schedule, (i)
each NACO Contract is valid and binding and in full force and effect, (ii) NACO
and each of its Subsidiaries have performed all obligations required to be
performed by it to date under each NACO Contract, except where such
noncompliance, individually or in the aggregate, has not had and would not
reasonably be expected to have a Material Adverse Effect, (iii) no event or
condition exists which constitutes or, after notice or lapse of time or both,
would constitute, a material default on the part of NACO or any of its
Subsidiaries under any such NACO Contract, except where such default,
individually or in the aggregate, has not had and would not reasonably be
expected to have a Material Adverse Effect and (iv) no other party to such NACO
Contract is, to the Knowledge of NACO, in default in any respect thereunder,
except where such default, individually or in the aggregate, has not had and
would not reasonably be expected to have a Material Adverse Effect.
SECTION 3.15--Litigation. Neither NACO nor any of its Subsidiaries or any of
their respective directors, officers, agents or employees (in their respective
capacities as such) (a) is subject to any outstanding injunction, judgment,
order, decree, ruling, or charge or (b) is a party to, or to the Knowledge of
NACO, threatened to be made a party to, any action, suit, proceeding, hearing,
or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction,
except where the injunction, judgment, order, decree, ruling, charge, action,
suit, proceeding, hearing, or investigation could not, either individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 3.16--Employee Benefits.
(a) Section 3.16(a) of the Disclosure Schedule contains a complete list of
each employee benefit plan or arrangement sponsored, maintained or contributed
to by NACO or any other member of a Control Group of NACO for the benefit of
any current or former employee, officer or director, or their dependents or
beneficiaries, or providing benefits to such persons in respect of services
provided to any such entity, including, but not limited to, employee benefit
plans subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), deferred compensation plans, bonus plans, stock option
plans, employment agreements, change in control agreements, hospitalization,
disability and other insurance plans, severance or termination pay plans and
policies ("NACO Employee Benefit Plans") (true and accurate copies of which,
together with, where applicable, the most recent annual reports on Form 5500,
summary plan descriptions with respect thereto and actuarial or valuation
reports, were furnished to ABC).
(b) With respect to each NACO Employee Benefit Plan which is not a multi-
employer plan described in Section 3(37)) of ERISA ("Multi-Employer Plan"): (i)
each has been operated and administered in all material respects in compliance
with its terms and with all applicable laws, including, but not limited to,
ERISA and the Code; (ii) no actions, suits, claims or disputes are pending or,
to the Knowledge of NACO, threatened or
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anticipated (other than routine claims for benefits); (iii) no audits,
inquiries, reviews, proceedings, claims, or demands are pending with any
Governmental Authority; (iv) to the Knowledge of NACO, there are no facts which
exist which could give rise to any material liability to NACO or any of its
Subsidiaries in the event of any such investigation, claim, action, suit,
audit, review, or other proceeding (other than for routine claims for benefits,
funding obligations in the ordinary course and liability due to the Pension
Benefit Guaranty Corporation for premiums in the ordinary course); (v) all
reports, returns, and similar documents required to be filed with any
Governmental Authority or distributed to any plan participant have been duly or
timely filed or distributed; and (vi) no non-exempt "prohibited transaction"
has occurred within the meaning of the applicable provisions of ERISA or the
Code.
(c) With respect to each NACO Employee Benefit Plan which is not a Multi-
Employer Plan: (i) the IRS has issued a favorable determination letter, true
and correct copies of which have been furnished to ABC with respect to each
such plan intended to qualify under Code Section 401(a), that such plans are
qualified and exempt from federal income taxes; (ii) no reportable event
(within the meaning of Section 4043 of ERISA) has occurred with respect to any
such plan subject to Title IV of ERISA, other than one for which the 30-day
notice requirement has been waived; (iii) the greatest of the projected benefit
obligations or the accumulated benefit obligations (under Financial Accounting
Standard 87) and the current liability within the meaning of Section 412(l)(7)
of the Code with respect to any such plan subject to Title IV of ERISA (as of
most recent actuarial valuation for such plan), did not exceed the then current
fair market value of the assets of such plan (determined using the actuarial
assumptions used for the most recent actuarial valuation for such plan); (iv)
all contributions or other payments to, and payments from and with respect to,
such plans, including to any Governmental Authority, which may have been
required to be made in accordance with such plans and ERISA or the Code or
other Applicable Law have been timely made; (v) all such contributions or other
payments to the plans, and all payments under the plans (except those to be
made from a trust qualified under Section 401(a) or exempt from tax by reason
of Section 501(c)(9) of the Code) and all payments with respect to the plans
(including, without limitation, to the Pension Benefit Guaranty Corporation or
any Governmental Authority and insurance premiums) for any period ending before
the Closing Date that are not yet, but will be, required to be made are
properly accrued and reflected on the NACO Balance Sheet.
(d) Except as set forth in Section 3.16(d) of the Disclosure Schedule,
neither NACO nor any other member of a Control Group of NACO contributes to, or
within the past ten years has contributed to, a Multi-Employer Plan. To the
extent that either NACO or any other member of a Control Group of NACO has so
contributed to any such plan, (i) all contributions required to be made to such
Multi-Employer Plans by NACO and such Control Group members have been timely
made, (ii) neither NACO nor any other member of a Control Group of NACO has
incurred any material liability (including secondary liability) to any Multi-
Employer Plan which has not been satisfied as a result of a complete or partial
withdrawal from such Multi-Employer Plan under (S) 4201 of ERISA or as a result
of a sale of assets described in (S) 4204 of ERISA, and (iii) neither NACO or
any member of a Control Group of NACO has been notified that any Multi-Employer
Plan is in reorganization or insolvent under and within the meaning of (S) 4241
or (S) 4245 of ERISA or is at risk of entering reorganization or becoming
insolvent, or that any Multi-Employer Plan intends to terminate or has been
terminated under (S) 4041A of ERISA.
(e) Except as set forth in Section 3.14(a) of the Disclosure Schedule,
neither the consummation or announcement of or other action relating to the
transactions contemplated by this Agreement will entitle any director, officer,
employee (current, former or retired) or consultant of NACO or its Subsidiaries
or any trustee under any "rabbi trust" or similar arrangement to any payment,
and, will not accelerate the time of payment or vesting, or increase the amount
of compensation, due to any such person, whether or not some other subsequent
action or event would be required to cause such payment, acceleration, vesting
or increase to be triggered.
(f) Except as set forth in Section 3.16(f) of the Disclosure Schedule, none
of the NACO Employee Benefit Plans promises or provides retiree medical or life
insurance benefits to any person, except as otherwise required by Applicable
Law.
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SECTION 3.17--Environmental Matters. Except as set forth in Section 3.17 of
the Disclosure Schedule:
(a) NACO and its Subsidiaries are in compliance with all applicable
Environmental Laws, except where failures to be in compliance would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Prior to the date of this Agreement, neither NACO nor any of
its Subsidiaries has received any unresolved written communication, whether
from a Governmental Authority, citizens' group, employee or otherwise,
alleging: (i) that NACO or any of its Subsidiaries is not in compliance with
applicable Environmental Laws; (ii) that NACO or any of its Subsidiaries is
potentially liable under applicable Environmental Laws; or (iii) requesting
information, investigation or Cleanup of any site or property under the
Comprehensive Environmental Response, Compensation and Liability Act or the
Clean Water Act or comparable state laws, except with respect to any of the
foregoing which would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect;
(b) there is no Environmental Claim pending or threatened in writing against
NACO or any of its Subsidiaries or against any Person whose liability for any
Environmental Claim NACO or any of its Subsidiaries has or may have retained or
assumed either contractually or by operation of law that would, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect;
(c) there are no present or past actions, activities, circumstances,
conditions, events or incidents including, without limitation, the Release or
presence of any Hazardous Material from or at any real property owned, operated
or leased by NACO or any of its Subsidiaries, that could form the basis of any
Environmental Claim against NACO or any of its Subsidiaries or, to the
Knowledge of NACO, against any Person whose liability for any Environmental
Claim NACO or any of its Subsidiaries has or may have retained or assumed
either contractually or by operation of law that would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect;
(d) NACO and each of its Subsidiaries possess or have timely applied for all
governmental authorizations and Permits required for the conduct of the
business of NACO and its Subsidiaries under applicable Environmental Laws,
except where the failure to have such authorization or Permits would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect;
(e) there are no underground storage tanks (as defined in the federal
Resource Conservation and Recovery Act and applicable state laws) located on
any real property owned, operated or leased by NACO or any of its Subsidiaries;
(f) neither NACO nor any of its Subsidiaries has arranged for the disposal of
any Hazardous Materials at any site which is the subject of federal, state or
local enforcement actions, or other government or private investigations both
relating to Cleanup actions that have not been resolved and that would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect; and
(g) NACO has disclosed to ABC all material facts that NACO reasonably
believes are necessary for an evaluation of environmental, health or safety
matters affecting the future earnings, costs and expenses of NACO or its
Subsidiaries or affiliates including, without limitation, potential costs
associated with any material Environmental Claim and the cost of any material
pollution control equipment that is reasonably likely to be required in the
next five years.
SECTION 3.18--Labor Matters. Section 3.18 of the Disclosure Schedule lists
all labor and collective bargaining agreements to which NACO or any of its
Subsidiaries is a party or by which any of them are bound. During the last
three years, except as set forth in Section 3.18 of the Disclosure Schedule, no
unfair labor practice charges or complaints have been filed (or have been
pending) with the National Labor Relations Board against NACO or any of its
Subsidiaries in connection with the conduct of NACO or any of its Subsidiaries
or any of their respective assets or businesses and, except as set forth in
Section 3.18 of the Disclosure Schedule,
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there has been no union organizational activity in the three years prior to the
date hereof. Except as set forth in Section 3.18 of the Disclosure Schedule,
neither NACO nor any Subsidiary has (a) any Knowledge of any event or
circumstance which is reasonably likely to give rise to the filing of any
unfair labor practice charge or complaint; or (b) received any notice or
communication reflecting an intention or a threat to file any such charges or
complaint or a petition for certification of a collective bargaining
representative in connection with the conduct of the businesses of NACO or any
of its Subsidiaries. NACO and each of its Subsidiaries has complied in all
material respects with all Applicable Laws relating to the employment of labor,
including those related to wages, hours, collective bargaining, the withholding
and payment of Taxes and contributions, safety and civil rights in connection
with the conduct of the business of NACO and each of its Subsidiaries. Except
as set forth on Section 3.18 of the Disclosure Schedule, there are no material
controversies pending or, to the Knowledge of NACO, threatened between NACO or
any of its Subsidiaries and any of their employees, and there have been no work
stoppages or other such controversies during the last three years in connection
with the conduct of the businesses of NACO or any of its Subsidiaries.
SECTION 3.19--Certain Business Relationships. Except as disclosed in the
Draft Registration Statement, none of the respective officers, directors or
employees of NACO or any of its Subsidiaries or any of such persons' Affiliates
(a) has been involved in any business arrangement or relationship with NACO or
any of its Subsidiaries within the past 12 months or (b) owns any asset,
tangible or intangible, which is used in the business of NACO or any of its
Subsidiaries which in either circumstance, would be required to be disclosed
pursuant to Item 404 of Regulation S-K.
SECTION 3.20--Approval Required. The affirmative vote of the holders of a
majority of the outstanding shares of NACO Common Stock is the only vote of the
holders of any class or series of NACO's capital stock necessary or required
under this Agreement or under Applicable Law to approve the Merger, this
Agreement and the transactions contemplated hereby.
SECTION 3.21--No Negotiations. Neither NACO nor any of its Subsidiaries is
currently engaged in negotiations or discussions with any Person regarding any
potential Acquisition Proposal.
SECTION 3.22--Accounting Matters. NACO has received an opinion from Arthur
Andersen LLP, its independent public accountants, that NACO qualifies as an
entity that may be a party to a business combination for which the "pooling of
interests" method of accounting under Opinion No. 16 of the Accounting
Principles Board ("APB 16") and applicable SEC Regulations would be available,
and a signed copy of such opinion has been delivered to ABC. Neither NACO nor
any of its Subsidiaries has taken or agreed to take any action that would
prevent the Merger from qualifying as a "pooling of interests" under APB 16 and
applicable SEC Regulations.
SECTION 3.23--Opinion of Financial Advisor. NACO has received the written
opinion of Robert W. Baird & Co. Incorporated, dated the date of the approval
of the September Agreement by NACO's Board of Directors, to the effect that, as
of such date, the Exchange Ratio is fair from a financial point of view to the
holders of shares of NACO Common Stock. A signed copy of such opinion has been
delivered to ABC.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ABC
AND MERGER SUBSIDIARY
ABC and Merger Subsidiary represent and warrant to NACO that the statements
contained in this Article IV are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article IV), except as set forth in the specifically
referenced sections of the Disclosure Schedule.
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SECTION 4.1--Organization, Qualification, and Corporate Power. Each of ABC
and its Subsidiaries and Affiliated Entities is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of
its incorporation. Each of ABC and its Subsidiaries and Affiliated Entities is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where the lack
of such qualification would not have a Material Adverse Effect. Each of ABC and
its Subsidiaries and Affiliated Entities has all Governmental Licenses required
to carry on the business in which it is engaged, except for failures to have
any such Governmental License which would not, individually or in the
aggregate, have a Material Adverse Effect. ABC has heretofore delivered to NACO
complete and correct copies of the certificate of incorporation and the by-laws
of ABC and each of its Subsidiaries as currently in effect.
SECTION 4.2--Authorization of Transaction; Required Filings and Consents. ABC
and Merger Subsidiary each has full power and authority (including full
corporate power and authority) to enter into, execute and deliver this
Agreement and to perform their respective obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the performance of ABC's and Merger Subsidiary's respective
obligations hereunder have been duly and validly authorized by the Board of
Directors of ABC and Merger Subsidiary, respectively, and by ABC as the sole
stockholder of Merger Subsidiary, and, except for the approval and adoption of
this Agreement and the transactions contemplated thereby, including the
amendments to the restated certificate of incorporation of ABC, by ABC's
stockholders, no other corporate proceedings on the part of ABC or Merger
Subsidiary are necessary to authorize the execution, delivery and performance
of this Agreement and to consummate the transactions contemplated hereby. The
Board of Directors of ABC has taken or will take all necessary and appropriate
action so that the Rights Agreement, dated as of September 29, 1995, between
ABC and LaSalle National Trust N.A., as amended (the "Rights Agreement"), and
Section 203 of the Delaware Law, will be inapplicable to this Agreement and the
transactions contemplated hereby. The Board of Directors of ABC has determined
that the transactions contemplated by this Agreement are in the best interest
of ABC and its stockholders and to recommend to such stockholders that they
approve and adopt this Agreement and the transactions contemplated hereby.
Subject to the approval and adoption of this Agreement by ABC's stockholders,
this Agreement has been duly executed and delivered by ABC and Merger
Subsidiary and constitutes, assuming due authorization, execution and delivery
of this Agreement by NACO, the valid and binding obligation of ABC and Merger
Subsidiary, enforceable against ABC and Merger Subsidiary in accordance with
its terms. Neither ABC nor Merger Subsidiary need give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any
Governmental Authority in connection with the execution and delivery of this
Agreement in order for the Parties to consummate the transactions contemplated
by this Agreement, except for (a) the filing of the Certificate of Merger with
the Delaware Secretary of State; (b) the filing of a pre-merger notification
and report form by ABC under the Hart-Scott-Rodino Act; (c) the filing with the
SEC of a registration statement on Form S-4 or any other form for which ABC
then qualifies and which counsel for ABC shall deem appropriate for the
registration and issuance of ABC Common Stock to be issued in the Merger (the
"Registration Statement"); (d) compliance with any applicable requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
General Rules and Regulations promulgated under the Securities Act and the
Exchange Act (the "SEC Regulations"); (e) such filings with and approvals of
Nasdaq to permit the shares of ABC Common Stock to be issued in the Merger to
be listed on the Nasdaq NMS; (f) compliance with any applicable requirements of
state blue sky or takeover laws; (g) such other notices, filings,
authorizations, consents or approvals (i) the failure of which to be given,
made or obtained individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect or (ii) that become applicable as a
result of the business or activities in which NACO or any of its respective
Affiliates is or proposes to be engaged or any acts or omissions by, or facts
pertaining to, NACO.
SECTION 4.3--Capitalization; Subsidiaries; Affiliated Entities.
(a) The authorized capital stock of ABC consists of 25,000,000 shares of ABC
Common Stock and 1,000,000 shares of preferred stock, par value $1.00 per share
(the "ABC Preferred Stock"), of which 100,000
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shares have been designated as Series A Junior Participating. As of September
15, 1998, 8,976,304 shares of ABC Common Stock were outstanding, no shares of
ABC Common stock were held in ABC's treasury and no shares of ABC Preferred
Stock were issued or outstanding or held in ABC's treasury. All of the issued
and outstanding shares of ABC Common Stock have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof arising from ABC.
All prior sales of ABC's securities have been made in compliance with or under
an exemption from the registration requirements of the Securities Act and
applicable state securities laws, and no shareholders of ABC have any
rescission rights with respect to any ABC Common Stock or other ABC securities.
(b) An aggregate of 847,250 shares of ABC Common Stock are reserved and
authorized for issuance pursuant to ABC's stock option plans, of which options
("ABC Stock Options") to purchase a total of 709,000 shares of ABC Common Stock
were outstanding as of September 15, 1998. Since September 1, 1998, ABC has not
granted any ABC Stock Options. The names of the optionees holding ABC Stock
Options, the date of grant of each ABC Stock Option outstanding as of September
15, 1998, the number of shares of ABC Common Stock subject to each such ABC
Stock Option, the expiration date of each such ABC Stock Option, and the price
at which each such ABC Stock Option may be exercised are set forth in Section
4.3(b) of the Disclosure Schedule. Except as set forth on Schedule 4.3(b) of
the Disclosure Schedule, no vesting restrictions of any ABC Stock Options will,
as a consequence of the Merger, lapse so as to accelerate the vesting of any
such ABC Stock Options. Except for ABC Stock Options and rights to acquire
shares of ABC's Series A Junior Participating Preferred Stock pursuant to the
Rights Agreement, ABC does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character to or by which ABC is a party or is bound which, directly or
indirectly, obligate ABC to issue, deliver, sell, redeem, repurchase or
otherwise acquire any shares of ABC Common Stock or ABC Preferred Stock or any
other equity security of ABC or any securities representing the right to
purchase or otherwise receive any shares of ABC Common Stock or any other
equity security of ABC. Except as set forth in Schedule 4.3(b) of the
Disclosure Schedule, all existing option agreements subject to ABC stock option
plans are in form and substance substantially the same as the form of option
agreement filed as Exhibit 10.14 to ABC's Annual Report on Form 10-K for the
year ended July 31, 1997, and each conforms to the expressly enumerated
provisions of the ABC stock option plan under which each was issued, including,
without limitation, as to exercise and vesting.
(c) Section 4.3(c) of the Disclosure Schedule sets forth the name,
jurisdiction of incorporation or organization, and capitalization of each of
ABC's Subsidiaries and Affiliated Entities. ABC owns, directly or indirectly,
all of the outstanding capital stock of its Subsidiaries. Except as set forth
on Section 4.3(c) of the Disclosure Schedule, each share of each Subsidiary and
Affiliated Entity owned directly or indirectly by ABC is duly authorized and
validly issued and is fully paid, nonassessable and free of preemptive rights
and is free and clear of all Liens, rights of first refusal and limitations on
ABC's voting rights. Except as set forth on Section 4.3(c) of the Disclosure
Schedule, none of ABC's Subsidiaries or Affiliated Entities has or is bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the sale or issuance by such Subsidiary
or Affiliated Entity, or by ABC or any other Subsidiary of ABC, of any shares
of capital stock or any other equity security of such Subsidiary or Affiliated
Entity or any securities representing the right to purchase or otherwise
receive any shares of capital stock or any other equity security of such
Subsidiary or Affiliated Entity.
SECTION 4.4--Noncontravention. Neither the execution and delivery of this
Agreement by ABC and Merger Subsidiary, nor the performance by ABC and Merger
Subsidiary of their respective obligations hereunder, will, assuming the
receipt of the consents listed in Section 6.2(d) of the Disclosure Schedule,
(a) conflict with or result in a breach of any provision of the certificate of
incorporation, by-laws or equivalent organizational instrument of ABC or any of
its Subsidiaries or Affiliated Entities, (b) violate any Applicable Law,
injunction, judgment, order, decree, ruling, charge, or other restriction of
any Governmental Authority applicable to ABC or any of its Subsidiaries or
Affiliated Entities or by which ABC or any of its Subsidiaries
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or Affiliated Entities is bound or to which any of their assets is subject or
(c) except as set forth on Section 4.4 of the Disclosure Schedule conflict
with, result in a violation or breach of, constitute a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, indenture, lease,
Governmental License, instrument, or other arrangement to which ABC or any of
its Subsidiaries or Affiliated Entities is a party or by which ABC or any of
its Subsidiaries or Affiliated Entities is bound or to which any of their
assets is subject (or result in the imposition of any Lien upon any of their
assets), except, with respect to clauses (b) and (c) above, where the
violation, conflict, breach, default, acceleration, termination, modification,
cancellation, failure to give notice, or Lien would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 4.5--Brokers' Fees. Except as set forth in Section 4.5 of the
Disclosure Schedule, there is no investment banker, broker, finder or other
intermediary which has been retained by, or is authorized to act on behalf of,
ABC or any of its Subsidiaries or, to ABC's Knowledge, its Affiliated Entities,
that would be entitled to any fee or commission from ABC or any of its
Subsidiaries or Affiliated Entities, the Surviving Corporation, NACO or any of
NACO's Affiliates, in connection with, or as a result of the consummation of,
the transactions contemplated by this Agreement.
SECTION 4.6--SEC Documents. ABC has timely filed all required reports, proxy
statements, forms, registration statements and other documents with the SEC
since July 31, 1995 (the "ABC SEC Documents"). As of their respective dates,
and giving effect to any amendments thereto filed prior to the date of this
Agreement, (a) the ABC SEC Documents complied or, in the case of any reports,
proxy statements, registration statements, forms or other documents filed by
ABC with the SEC after the date of this Agreement, will comply, in all material
respects with the requirements of the Securities Act or the Exchange Act, as
the case may be, and the applicable SEC Regulations and (b) none of the ABC SEC
Documents contained or, in the case of any reports, proxy statements,
registration statements, forms or other documents filed by ABC with the SEC
after the date of this Agreement, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, no representation is made by ABC with respect to statements made
therein based on information supplied by NACO in writing for inclusion or
incorporation by reference therein or with respect to omitted information
regarding NACO so required to be included therein. None of ABC's Subsidiaries
or Affiliated Entities is required to file any reports, proxy statements,
forms, registration statements or other documents with the SEC.
SECTION 4.7--Financial Statements.
(a) The audited consolidated balance sheets, statements of income, statements
of stockholders' equity and statements of cash flows of ABC and its
consolidated Subsidiaries as of and for each of the fiscal years ended July 31,
1995, 1996 and 1997, and the unaudited condensed consolidated balance sheets,
statements of income and statements of cash flows of ABC and its consolidated
Subsidiaries as of and for each of the three month periods in the Quarterly
Reports on Form 10-Q since July 31, 1997 (collectively, the "ABC Financial
Statements") (including, in each case, any notes and schedules thereto), (a)
comply as to form in all material respects with applicable accounting
requirements and SEC Regulations, (b) have been prepared in accordance with
GAAP consistently applied during the periods involved (except as may be
indicated in the related notes and schedules thereto) and (c) fairly present in
all material respects the consolidated financial condition of ABC and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of the unaudited ABC Financial Statements for periods beginning after July
31, 1997, to normal year-end adjustments which are not expected to be,
individually or in the aggregate, material in amount).
(b) ABC has provided to NACO complete and correct copies of all financial
statements of each of ABC's Affiliated Entities as of and for each most recent
fiscal year.
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SECTION 4.8--Absence of Undisclosed Liabilities
(a) Except as set forth in the ABC SEC Documents filed prior to the date
hereof, and except for liabilities and obligations incurred in the ordinary
course of business since the date of the most recent consolidated balance sheet
included in the ABC SEC Documents, neither ABC nor any of its Subsidiaries has
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by GAAP to be set forth on a consolidated
balance sheet of ABC and its consolidated Subsidiaries or in the notes thereto
except for those that would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(b) Except for liabilities and obligations incurred in the ordinary course of
business since the date of the most recent balance sheet included in the
financial statements of any of ABC's Affiliated Entities, none of such
Affiliated Entities, to ABC's Knowledge, has any liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) required to be
included by applicable accounting requirements except for those that would not,
in the aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 4.9--Events Subsequent to Fiscal Year End. Except as disclosed in the
ABC SEC Documents filed prior to the date hereof, since the date of the ABC
Balance Sheet, ABC and its Subsidiaries and, to ABC's Knowledge, its Affiliated
Entities have conducted their businesses in the ordinary course of business,
and neither ABC nor any of its Subsidiaries or, to ABC's Knowledge, any of its
Affiliated Entities has experienced any change in its financial condition,
business, assets, properties or prospects, which, individually or in the
aggregate, has had, or could reasonably be expected to have, a Material Adverse
Effect. Except as set forth in Section 4.9 of the Disclosure Schedule, since
the date of the ABC Balance Sheet neither ABC nor any of its Subsidiaries or,
to ABC's Knowledge, any of its Affiliated Entities has taken any of the actions
or permitted to occur any of the events specified in Section 5.1(a) through
(o).
SECTION 4.10--Legal Compliance. ABC and its Subsidiaries and, to ABC's
Knowledge, its Affiliated Entities are in compliance with all Applicable Laws,
ordinances, judgments, decrees, rules and regulations of any Governmental
Authority applicable to their business and operations, except for such
violations, if any, which, individually or in the aggregate, has not had or
could not reasonably be expected to have, a Material Adverse Effect. All
Permits required to conduct the business of ABC and its Subsidiaries and, to
ABC's Knowledge, its Affiliated Entities have been obtained, are in full force
and effect and are being complied with, except for failures to obtain such
Permits, to have such Permits in full force and effect or to be in compliance
with such Permits, if any, which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
SECTION 4.11--Tax Matters.
(a) Complete and correct copies of all material Tax Returns and all
amendments or modifications thereto filed or caused to be filed by ABC and its
Subsidiaries and, to ABC's Knowledge, its Affiliated Entities, for the last
five full fiscal years have been delivered to NACO. Each such Tax Return
reflects accurately all liability for Taxes of ABC and its Subsidiaries and, to
ABC's Knowledge, its Affiliated Entities, for the periods covered thereby and
is complete and correct in all material respects. Except for Taxes the non-
filing or non-payment of which would not have a Material Adverse Effect, ABC
and its Subsidiaries and, to ABC's Knowledge, its Affiliated Entities, have
filed all material Tax Returns for Taxes required to be filed and have paid all
Taxes due with respect to such Tax Returns.
(b) ABC has established adequate reserves on the Financial Statements for
payment for Taxes by ABC and its Subsidiaries and, to ABC's Knowledge, its
Affiliated Entities, relating to periods (or portions thereof) for which a Tax
Return was required to be filed, for Taxes that are not then due or payable and
have or will establish adequate reserves for Taxes relating to subsequent
periods through the Closing.
(c) Except as set forth in Section 4.11 of the Disclosure Schedule, neither
ABC nor any of its Subsidiaries, or to ABC's Knowledge, any of its Affiliated
Entities is currently under examination by the IRS or any other Governmental
Authority with respect to Taxes; and neither ABC nor any of its Subsidiaries,
or to ABC's
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knowledge, any of its Affiliated Entities has been contacted by or is currently
corresponding with any state or local government with respect to the
requirement to file Tax Returns and/or pay any Taxes. No waivers of statute of
limitations have been given to or requested by any Governmental Authority.
SECTION 4.12--Real Property. Section 4.12 of the Disclosure Schedule sets
forth (a) a correct and complete list of all leases of real property to which
ABC or any of its Subsidiaries or Affiliated Entities is a party as lessee as
of the date hereof involving an annual lease payment of more than $100,000,
including an identification of the parties, the property, the term of the lease
and the rent or lease payments thereunder, and (b) a correct and complete list
of all real property owned by ABC or any of its Subsidiaries or Affiliated
Entities as of the date hereof, including an identification of the property,
the record owner and the principal structures thereon.
SECTION 4.13--Intellectual Property.
(a) Section 4.13(a) of the Disclosure Schedule sets forth a correct and
complete list (the "ABC Intellectual Property") of (i) all letters patent and
patent applications, and (ii) all registered and other material utility models,
utility model applications, trade names, brand names, trademarks, service
marks, trademark and service mark registrations and applications, copyright
registrations and applications; with respect to both clauses (i) and (ii), both
domestic and foreign, presently owned, possessed, used or held by ABC and its
Subsidiaries. Section 4.13(a) of the Disclosure Schedule also identifies each
license, agreement, or other permission which ABC or its Subsidiaries has
granted to or received from any third party with respect to any ABC
Intellectual Property.
(b) ABC and its Subsidiaries own or have a binding, enforceable right to use
the ABC Intellectual Property, are the owner of record of any application,
registration or grant for each item of ABC Intellectual Property, and have
properly executed and recorded all documents necessary to perfect their title
to such ABC Intellectual Property. Neither the conduct of ABC's or any of its
Subsidiaries' business nor any of the products sold or services provided by ABC
or its Subsidiaries in connection therewith (except for such infringements or
violation of rights which, in the aggregate, would not be reasonably expected
to have a Material Adverse Effect) infringes upon or is inconsistent with the
intellectual property rights of any other Person. To the Knowledge of ABC,
neither the conduct of any other Person's business, nor the nature of any of
the products it sells or services it provides, infringes upon or is
inconsistent with any ABC Intellectual Property. Neither ABC nor any of its
Subsidiaries has any liability for, or has given any indemnification for,
patent, trademark or copyright infringement with respect to any products
manufactured, used, distributed or sold by ABC or its Subsidiaries. ABC and its
Subsidiaries have filed all documents and paid all taxes, fees, and other
financial obligations required to maintain in force and effect all ABC
Intellectual Property until Closing.
(c) Section 4.13(c) of the Disclosure Schedule sets forth a correct and
complete list of all ABC Intellectual Property with respect to which ABC has
granted any rights to any of its Affiliated Entities, specifying (i) the nature
of the ABC Intellectual Property, (ii) the Affiliated Entity to whom ABC has
granted such rights and (iii) the location of such ABC Intellectual Property.
SECTION 4.14--Contracts and Commitments.
(a) Except as set forth in Section 4.14(a) of the Disclosure Schedule, in the
exhibit index to ABC's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997 or in the exhibit index of any Quarterly Report on Form 10-Q or
Current Report on Form 8-K filed with the SEC since July 31, 1997, neither ABC
nor any of its Subsidiaries or, to ABC's knowledge, any of its Affiliated
Entities is a party to or is bound by any contract, arrangement, commitment or
understanding (whether written or oral) (i) with respect to the employment of
any director, officer, employee or consultant which, solely in the case of
employees or consultants, provide for payments in excess of $125,000 per annum
or cannot be terminated upon 30 days' or less notice without penalty or
premium, (ii) which, upon consummation of the transactions contemplated by this
Agreement will (either alone or upon the occurrence of any additional acts or
events) result in any payment (including, without limitation, severance
payments, golden parachute payments, change in control payments, unemployment
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compensation payments or otherwise) becoming due from ABC or any of its
Affiliated Entities, NACO, the Surviving Corporation, or any of their
respective Subsidiaries, to any director, officer or employee (current, former
or retired) thereof, (iii) which is a material contract (as defined in Item
601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this
Agreement, (iv) which is a contract or agreement not otherwise described by
clause (iii) hereof involving the payment of more than $125,000 per annum, (v)
which materially restricts the conduct of any line of business by ABC or any of
its Subsidiaries or, to ABC's Knowledge, any of its Affiliated Entities or,
(vi) under which any of the benefits will be increased, or the vesting of the
benefits will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by this
Agreement. Each contract, arrangement, commitment or understanding of the type
described in this Section 4.14(a), whether or not set forth in Section 4.14(a)
of the Disclosure Schedule or in the exhibit index to ABC's Form 10-K for the
fiscal year ended July 31, 1997, is referred to herein as an "ABC Contract."
ABC has previously delivered to NACO true and correct copies of each ABC
Contract.
(b) Except as set forth in Section 4.14(b) of the Disclosure Schedule, (i)
each ABC Contract is valid and binding and in full force and effect, (ii) ABC
and each of its Subsidiaries and Affiliated Entities have performed all
obligations required to be performed by it to date under each ABC Contract,
except where such noncompliance, individually or in the aggregate, has not had
and would not reasonably be expected to have a Material Adverse Effect, (iii)
no event or condition exists which constitutes or, after notice or lapse of
time or both, would constitute, a material default on the part of ABC or any of
its Subsidiaries or, to ABC's Knowledge, any of its Affiliated Entities under
any such ABC Contract, except where such default, individually or in the
aggregate, has not had and would not reasonably be expected to have a Material
Adverse Effect and (iv) no other party to such ABC Contract is, to the
Knowledge of ABC, in default in any respect thereunder, except where such
default, individually or in the aggregate, has not had and would not reasonably
be expected to have a Material Adverse Effect.
SECTION 4.15--Litigation. Except as set forth in the ABC SEC Documents,
neither ABC nor any of its Subsidiaries or, to ABC's Knowledge, any of its
Affiliated Entities, or any of their respective directors, officers, agents or
employees (in their respective capacities as such) (a) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (b) is a
party to, or to the Knowledge of ABC, threatened to be made a party to, any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction, except where the injunction, judgment, order, decree,
ruling, charge, action, suit, proceeding, hearing, or investigation could not,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
SECTION 4.16--Employee Benefits.
(a) Section 4.16(a) of the Disclosure Schedule contains a complete list of
each employee benefit plan or arrangement sponsored, maintained or contributed
to by ABC or any other member of a Control Group of ABC for the benefit of any
current or former employee, officer or director, or their dependents or
beneficiaries, or providing benefits to such persons in respect of services
provided to any such entity, including, but not limited to, employee benefit
plans subject to the ERISA, deferred compensation plans, bonus plans, stock
option plans, employment agreements, change in control agreements,
hospitalization, disability and other insurance plans, severance or termination
pay plans and policies ("ABC Employee Benefit Plans") (true and accurate copies
of which, together with, where applicable, the most recent annual reports on
Form 5500, summary plan descriptions with respect thereto and actuarial or
valuation reports, were furnished to NACO).
(b) With respect to each ABC Employee Benefit Plan which is not a Multi-
Employer Plan: (i) each has been operated and administered in all material
respects in compliance with its terms and with all applicable laws, including,
but not limited to, ERISA and the Code; (ii) no actions, suits, claims or
disputes are pending or, to the Knowledge of ABC, threatened or anticipated
(other than routine claims for benefits); (iii) no audits, inquiries, reviews,
proceedings, claims, or demands are pending with any Governmental Authority;
(iv) to the
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Knowledge of ABC there are no facts which exist which could give rise to any
material liability to ABC or any of its Subsidiaries in the event of any such
investigation, claim, action, suit, audit, review, or other proceeding (other
than for routine claims for benefits, funding obligations in the ordinary
course and liability due to the Pension Benefit Guaranty Corporation for
premiums in the ordinary course); (v) all reports, returns, and similar
documents required to be filed with any Governmental Authority or distributed
to any plan participant have been duly or timely filed or distributed; and (vi)
no non-exempt "prohibited transaction" has occurred within the meaning of the
applicable provisions of ERISA or the Code.
(c) Except as set forth in Section 4.16(c) of the Disclosure Schedule, with
respect to each ABC Employee Benefit Plan which is not a Multi-Employer Plan:
(i) the IRS has issued a favorable determination letter, true and correct
copies of which have been furnished to NACO with respect to each such plan
intended to qualify under Code Section 401(a), that such plans are qualified
and exempt from federal income taxes; (ii) no reportable event (within the
meaning of Section 4043 of ERISA) has occurred with respect to any such plan
subject to Title IV of ERISA, other than one for which the 30-day notice
requirement has been waived; (iii) the greatest of the projected benefit
obligations or the accumulated benefit obligations (under Financial Accounting
Standard 87) and the current liability within the meaning of Section 412(l)(7)
of the Code with respect to any such plan subject to Title IV of ERISA (as of
the most recent actuarial valuation for such plan) did not exceed the then
current fair market value of the assets of such plan (determined using the
actuarial assumptions used for the most recent actuarial valuation for such
plan); (iv) all contributions or other payments to, and payments from and with
respect to, such plans, including to any Governmental Authority, which may have
been required to be made in accordance with such plans and ERISA or the Code or
other Applicable Law, have been timely made; (v) all such contributions or
other payments to the plans, and all payments under the plans (except those to
be made from a trust qualified under Section 401(a) or exempt from tax by
reason of Section 501(c)(9) of the Code) and all payments with respect to the
plans (including, without limitation, to the Pension Benefit Guaranty
Corporation or any Governmental Authority and insurance premiums) for any
period ending before the Closing Date that are not yet, but will be, required
to be made are properly accrued and reflected on the ABC Balance Sheet.
(d) Except as set forth in Section 4.16(d) of the Disclosure Schedule,
neither ABC nor any other member of a Control Group of ABC contributes to, or
within the past ten years has contributed to, a Multi-Employer Plan. To the
extent that either ABC or any other member of a Control Group of ABC has so
contributed to any such plan, (i) all contributions required to be made to such
Multi-Employer Plans by ABC and such Control Group members have been timely
made, (ii) neither ABC nor any other member of a Control Group of ABC has
incurred any material liability (including secondary liability) to any Multi-
Employer Plan which has not been satisfied as a result of a complete or partial
withdrawal from such Multi-Employer Plan under (S) 4201 of ERISA or as a result
of a sale of assets described in (S) 4204 of ERISA, and (iii) neither ABC or
any member of a Control Group of ABC has been notified that any Multi-Employer
Plan is in reorganization or insolvent under and within the meaning of (S) 4241
or (S) 4245 of ERISA or is at risk of entering reorganization or becoming
insolvent, or that any Multi-Employer Plan intends to terminate or has been
terminated under (S) 4041A of ERISA.
(e) Except as set forth in Section 4.14(a) of the Disclosure Schedule,
neither the consummation or announcement of or other action relating to the
transactions contemplated by this Agreement will entitle any director, officer,
employee (current, former or retired) or consultant of ABC or its Subsidiaries
or any trustee under any "rabbi trust" or similar arrangement to any payment,
and, will not accelerate the time of payment or vesting, or increase the amount
of compensation, due to any such person, whether or not some other subsequent
action or event would be required to cause such payment, acceleration, vesting
or increase to be triggered.
(f) Except as set forth in Section 4.14(f) of the Disclosure Schedule, none
of the ABC Employee Benefit Plans promises or provides retiree medical or life
insurance benefits to any person, except as otherwise required by Applicable
Law.
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SECTION 4.17--Environmental Matters. Except as set forth in Section 4.17 of
the Disclosure Schedule:
(a) ABC and its Subsidiaries and Affiliated Entities are in compliance with
all applicable Environmental Laws, except where failures to be in compliance
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect. Prior to the date of this Agreement, neither ABC nor
any of its Subsidiaries or Affiliated Entities, has received any unresolved
written communication, whether from a Governmental Authority, citizens' group,
employee or otherwise, alleging: (i) that ABC or any of its Subsidiaries or
Affiliated Entities is not in compliance with applicable Environmental Laws;
(ii) that ABC or any of its Subsidiaries or Affiliated Entities is potentially
liable under applicable Environmental Laws; or (iii) requesting information,
investigation or Cleanup of any site or property under the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Water Act or
comparable state laws, except with respect to any of the foregoing which would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect;
(b) there is no Environmental Claim pending or threatened in writing against
ABC or any of its Subsidiaries or Affiliated Entities or against any Person
whose liability for any Environmental Claim ABC or any of its Subsidiaries or
Affiliated Entities has or may have retained or assumed either contractually or
by operation of law that would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect;
(c) there are no present or past actions, activities, circumstances,
conditions, events or incidents including, without limitation, the Release or
presence of any Hazardous Material from or at any real property owned, operated
or leased by ABC or any of its Subsidiaries or, to ABC's Knowledge, any of its
Affiliated Entities that could form the basis of any Environmental Claim
against ABC or any of its Subsidiaries or, to ABC's Knowledge, against any of
its Affiliated Entities or any Person whose liability for any Environmental
Claim ABC or any of its Subsidiaries or Affiliated Entities has or may have
retained or assumed either contractually or by operation of law that would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect;
(d) ABC and its Subsidiaries and, to ABC's Knowledge, its Affiliated
Entities, possess or have timely applied for all governmental authorizations
and Permits required for the conduct of the business of ABC and its
Subsidiaries and Affiliated Entities under applicable Environmental Laws,
except where the failure to have such authorizations or Permits would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect;
(e) there are no underground storage tanks (as defined in the federal
Resource Conservation and Recovery Act and applicable state laws) located on
any real property owned, operated or leased by ABC or any of its Subsidiaries
or, to ABC's Knowledge, any of its Affiliated Entities;
(f) neither ABC nor any of its Subsidiaries or, to ABC's Knowledge, its
Affiliated Entities has arranged for the disposal of any Hazardous Materials at
any site which is the subject of federal, state or local enforcement actions,
or other government or private investigations both relating to Cleanup actions
that have not been resolved and that would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect; and
(g) ABC has disclosed to NACO all material facts that NACO reasonably
believes are necessary for an evaluation of environmental, health or safety
matters affecting the future earnings, costs and expenses of ABC or its
Subsidiaries or, to ABC's Knowledge, its Affiliated Entities including, without
limitation, potential costs associated with any material Environmental Claim
and the cost of any material pollution control equipment that is reasonably
likely to be required in the next five years.
SECTION 4.18--Labor Matters. Section 4.18 of the Disclosure Schedule lists
all labor and collective bargaining agreements to which ABC or any of its
Subsidiaries or, to ABC's Knowledge, any of its Affiliated
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Entities is a party or by which any of them are bound. During the last three
years, except as set forth in Section 4.18 of the Disclosure Schedule, no
unfair labor practice charges or complaints have been filed (or have been
pending) with the National Labor Relations Board against ABC or any of its
Subsidiaries or, to ABC's Knowledge, any of its Affiliated Entities in
connection with the conduct of ABC or any of its Subsidiaries or Affiliated
Entities or any of their respective assets or businesses and, except as set
forth in Section 4.18 of the Disclosure Schedule, there has been no union
organizational activity in the three years prior to the date hereof. Except as
set forth in Section 4.18 of the Disclosure Schedule, neither ABC nor any
Subsidiary or, to ABC's Knowledge, any Affiliated Entity has (a) any Knowledge
of any event or circumstance which is reasonably likely to give rise to the
filing of any unfair labor practice charge or complaint; or (b) received any
notice or communication reflecting an intention or a threat to file any such
charges or complaint or a petition for certification of a collective bargaining
representative in connection with the conduct of the businesses of ABC or any
of its Subsidiaries or, to ABC's Knowledge, any of its Affiliated Entities. ABC
and each of its Subsidiaries and, to ABC's Knowledge, each of its Affiliated
Entities has complied in all material respects with all Applicable Laws
relating to the employment of labor, including those related to wages, hours,
collective bargaining, the withholding and payment of Taxes and contributions,
safety and civil rights in connection with the conduct of the business of ABC
and each of its Subsidiaries and Affiliated Entities. Except as set forth in
Section 4.18 of the Disclosure Schedule, there are no material controversies
pending or, to ABC's Knowledge, threatened between ABC or any of its
Subsidiaries or Affiliated Entities and any of their employees, and there have
been no work stoppages or other such controversies during the last three years
in connection with the conduct of the businesses of ABC or any of its
Subsidiaries or, to ABC's Knowledge, any of its Affiliated Entities.
SECTION 4.19--Certain Business Relationships. None of the respective
officers, directors or employees of ABC or any of its Subsidiaries or, to ABC's
Knowledge, any of its Affiliated Entities, (a) has been involved in any
business arrangement or relationship with ABC or any of its Subsidiaries or, to
ABC's Knowledge, any of its Affiliated Entities within the past 12 months or
(b) owns any asset, tangible or intangible, which is used in the business of
ABC or any of its Subsidiaries or, to ABC's Knowledge, any of its Affiliated
Entities, which, in either circumstance, would be required to be disclosed
pursuant to Item 404 of Regulation S-K.
SECTION 4.20--Approval Required. The issuance of the ABC Common Stock in the
Merger requires the affirmative vote of the holders of a majority of the shares
of ABC Common Stock present or represented by proxy, and each of the amendments
to the restated certificate of incorporation of ABC requires the affirmative
vote of the holders of a majority of the outstanding shares of ABC Common
Stock. These are the only votes of the holders of any class or series of ABC's
capital stock necessary or required under this Agreement or under Applicable
Law to approve the Merger, this Agreement and the transactions contemplated
hereby.
SECTION 4.21--No Negotiations. Neither ABC nor any of its Subsidiaries or, to
ABC's Knowledge, any of its Affiliated Entities, is currently engaged in
negotiations or discussions with any Person regarding any potential Acquisition
Proposal.
SECTION 4.22--Tax Treatment. Neither ABC nor any of its Subsidiaries or, to
ABC's Knowledge, any of its Affiliated Entities, nor any of their affiliates,
has taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying as
a reorganization under the provision of Section 368(a) of the Code.
SECTION 4.23--Merger Subsidiary. Merger Subsidiary has not conducted any
business and does not have any liabilities other than those hereunder nor does
it have any operating assets except as contemplated hereby.
SECTION 4.24--The Rights Agreement. The Board of Directors of ABC has adopted
a resolution (a true and correct copy of which has been furnished to NACO)
authorizing the Rights Agreement to be duly amended to provide that the rights
provided thereunder will be inapplicable to this Agreement, the consummation of
the Merger and the other transactions contemplated by this Agreement. Any such
amendment to the Rights Agreement shall be reasonably satisfactory in form and
substance to NACO.
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SECTION 4.25--Accounting Matters. ABC has received an opinion from Arthur
Andersen LLP, its independent public accountants, that ABC qualifies as an
entity that may be a party to a business combination for which the "pooling of
interests" method of accounting under ABP 16 and applicable SEC Regulations
would be available, and a signed copy of such opinion has been delivered to
NACO. Neither ABC nor any of its Subsidiaries or, to ABC's Knowledge, any of
its Affiliated Entities, has taken or agreed to take any action that would
prevent the Merger from qualifying as a "pooling of interests" under APB 16 and
applicable SEC Regulations.
SECTION 4.26--Opinion of Financial Advisor. ABC has received the written
opinion of Salomon Smith Barney Inc., dated the date of the approval of the
September Agreement by ABC's Board of Directors, to the effect that, as of such
date, the Exchange Ratio is fair from a financial point of view to the holders
of shares of ABC Common Stock. A signed copy of such opinion has been delivered
to NACO.
SECTION 4.27--Affiliated Entities. Except as set forth in Section 4.27 of the
Disclosure Schedule:
(a) Neither of ABC nor any of its Subsidiaries or Affiliated Entities is
required to, or is a party to any agreement pursuant to which ABC or any of
its Subsidiaries or Affiliated Entities could be required to, make any
capital contribution, capital call or other similar payment or investment
in or with respect to any Affiliated Entity.
(b) ABC has terminated, without penalty or premium, the Commercial
Representation Agreement entered into in February 1992 between ABC and
Cogifer Industries, and neither ABC nor any of its Subsidiaries or
Affiliated Entities has any liability or continuing obligation under such
agreement.
(c) The Joint Venture Agreement, dated March 14, 1997, between ABC and
Damy Cambios de Via, S.A. de C.V. has been amended to, among other things,
exclude from the terms of such agreement and from ABC's "Product Line" (as
such term is defined in such agreement) (i) all present and future services
and products offered or manufactured by or through NACO, the Surviving
Corporation or any of its Subsidiaries, (ii) ABC's wheel mounting services
and (iii) all wheels manufactured or sold by or through ABC or any of its
Subsidiaries, or the Surviving Corporation.
ARTICLE V
COVENANTS AND AGREEMENTS
SECTION 5.1--Conduct of NACO and ABC. From the date hereof until the
Effective Time, NACO and ABC and their respective Subsidiaries shall, and ABC
shall use its reasonable efforts to cause its Affiliated Entities to, conduct
their businesses in the ordinary course and to use their reasonable best
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
employees. Without limiting the generality of the foregoing, other than as
specifically contemplated by this Agreement or with the written consent of ABC,
in the case of NACO, or NACO, in the case of ABC (which consent shall not be
unreasonably withheld or delayed), from the date hereof until the Effective
Time, neither NACO nor ABC shall (and neither shall permit any of its
respective Subsidiaries to, and ABC shall use its reasonable efforts to not
permit its Affiliated Entities to):
(a) declare, set aside or pay any dividend or other distribution with
respect to any shares of capital stock (other than dividends and
distributions by a direct or indirect wholly owned Subsidiary of NACO or
ABC to its parent) or repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other equity securities of, or other
ownership interests in, NACO or any of its Subsidiaries, or ABC or any of
its Subsidiaries or Affiliated Entities, as the case may be, except in
connection with (i) the issuance of shares of ABC Common Stock upon the
exercise of ABC Stock Options outstanding as of September 15, 1998 or (ii)
the repurchase of shares of NACO Common Stock pursuant to stock repurchase
agreements entered into with NACO prior to September 15, 1998;
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(b) issue, deliver, pledge or sell shares of capital stock or any
securities convertible into or exchangeable or exercisable for, or any
rights, warrants or options to acquire, any such shares, except for (i) the
issuance of ABC Common Stock upon the exercise of ABC Stock Options
outstanding as of September 15, 1998 or (ii) the issuance of NACO Common
Stock upon the exercise of NACO Rights outstanding as of September 15,
1998;
(c) amend any material term of any outstanding security issued by NACO or
ABC or any of their Subsidiaries or by any of ABC's Affiliated Entities or,
solely with respect to ABC, take any action that would cause the ABC Common
Stock not to remain publicly traded and listed on the Nasdaq NMS;
(d) except in the ordinary course of business, (i) incur any indebtedness
for borrowed money, (ii) issue any debt securities, or (iii) assume,
guarantee, endorse or otherwise as an accommodation become responsible for
the obligations of any Person other than NACO or any of its Subsidiaries or
ABC or any of its Subsidiaries;
(e) create or assume any Lien on any of its assets, other than Permitted
Liens or Liens which, in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect;
(f) change any method of accounting or accounting practice, except for
any such change required by reason of a change in GAAP;
(g) except as set forth in Section 5.1(g) of the Disclosure Schedule, and
with respect to clause (iv) below except as may be required to facilitate
or obtain a determination letter from the IRS that a plan is "qualified"
within the meaning of Code Section 401(a), (i) grant any severance or
termination pay to any directors, officers or employees (current, former or
retired), (ii) enter into any employment, deferred compensation or other
similar agreement (or any amendment to any such existing agreement) with
any directors or executive officers or employees, (iii) increase the
benefits payable under any existing severance or termination pay policies
or employment agreements or (iv) increase the compensation, bonus or other
benefits payable to any directors, officers or employees other than normal
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense;
(h) consummate (or enter into any agreement or agreement in principle
with respect to or take any steps to facilitate) any merger, business
combination, sale of stock or sale of material assets or any acquisition of
stock or assets or operations of another entity, or, other than in
accordance with past practice, write off as uncollectible any notes or
accounts receivable or write down the value of any inventory;
(i) dispose of or permit to lapse any rights in any NACO Intellectual
Property or ABC Intellectual Property or disclose to any Person not an
employee or otherwise dispose of any trade secret, process or know-how not
heretofore a matter of public knowledge, except pursuant to judicial order
or process;
(j) amend the certificate of incorporation or by-laws or comparable
organizational documents of NACO or any of its Subsidiaries or ABC or any
of its Subsidiaries or Affiliated Entities;
(k) alter (through merger, liquidation, reorganization, restructuring or
any other fashion) the corporate structure or ownership of NACO or any of
its Subsidiaries or ABC or any of its Subsidiaries or Affiliated Entities,
except for the issuance or repurchase of capital stock pursuant to Section
5.1(a) or (b);
(l) make any material tax election or settle or compromise any material
federal, state, local or foreign Tax liability;
(m) sell, lease, license, close or otherwise dispose of any assets of
NACO or any of its Subsidiaries or ABC or any of its Subsidiaries or
Affiliated Entities, except in the ordinary course of business;
(n) incur any material obligation or liability, including without
limitation any liability for non-performance or termination of any contract
or agreement, except liabilities or obligations incurred in the ordinary
course of business; or
(o) authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by this Agreement.
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SECTION 5.2--Stockholders' Meetings; Proxy Material.
(a) NACO and ABC will (i) as promptly as practicable following the date of
this Agreement, prepare letters to stockholders, notices of meetings, a joint
proxy statement and forms of proxies to be distributed to stockholders in
connection with the Merger (such materials are collectively referred to herein
as the "Joint Proxy Statement"), and mail the Joint Proxy Statement to their
respective stockholders as promptly as practicable after the Registration
Statement is declared effective under the Securities Act, (ii) use their
reasonable best efforts to obtain the necessary approvals by their respective
stockholders of this Agreement and the transactions contemplated hereby and
(iii) otherwise comply in all material respects with all legal requirements
applicable to the NACO Special Meeting and the ABC Special Meeting,
respectively.
(b) NACO shall, in accordance with Applicable Law and NACO's restated
certificate of incorporation and amended and restated by-laws, duly call, give
notice of, convene and hold a special meeting of its stockholders (the "NACO
Special Meeting") as promptly as practicable after the Registration Statement
is declared effective under the Securities Act for the purpose of considering
and taking action upon this Agreement and the Merger. The Board of Directors of
NACO shall recommend approval and adoption by NACO's stockholders of this
Agreement, the Merger and the other transactions contemplated hereby. Without
limiting the generality of the foregoing but subject to its rights to terminate
this Agreement pursuant to Section 7.1 hereof, NACO agrees that its obligations
pursuant to the first sentence of this Section 5.2(b) shall not be affected by
the commencement, public proposal, public disclosure or communication to NACO
of any NACO Acquisition Proposal.
(c) ABC shall, in accordance with Applicable Law and ABC's restated
certificate of incorporation and by-laws, duly call, give notice of, convene
and hold a special meeting of its stockholders (the "ABC Special Meeting," and
together with the NACO Special Meeting, the "Special Meetings") as promptly as
practicable after the Registration Statement has been declared effective under
the Securities Act for the purpose of considering and taking action upon this
Agreement and the Merger. The Board of Directors of ABC shall recommend
approval and adoption by ABC's stockholders of this Agreement, the Merger and
the other transactions contemplated hereby. Without limiting the generality of
the foregoing but subject to its rights to terminate this Agreement pursuant to
Section 7.1 hereof, ABC agrees that its obligations pursuant to the first
sentence of this Section 5.2(c) shall not be affected by the commencement,
public proposal, public disclosure or communication to ABC of any ABC
Acquisition Proposal.
(d) NACO and ABC shall use their reasonable best efforts to hold the Special
Meetings on the same date.
SECTION 5.3--Registration Statement; Joint Proxy Statement; Other Actions.
(a) ABC Common Stock to be issued in the Merger shall be registered with the
SEC under the Securities Act on the Registration Statement. As promptly as
practicable after the date of this Agreement, ABC shall prepare, with the
assistance of NACO, as appropriate (including, but not limited to, preparation
by NACO and its counsel of applicable disclosure in the Joint Proxy Statement
and the Registration Statement relating to tax consequences of the Merger on
holders of NACO Shares and submission of any required tax opinions), and file
with the SEC the Registration Statement, together with the Joint Proxy
Statement to be included therein and any other documents required by the
Securities Act or the Exchange Act in connection with the Merger. Each of ABC
and NACO shall use its reasonable best efforts to respond promptly to any
comments of the SEC and to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing. ABC
shall also take any action required to be taken under any applicable state
securities or "blue sky" laws in connection with the issuance of the ABC Common
Stock in connection with the Merger. NACO shall promptly furnish to ABC all
information concerning NACO and NACO's stockholders as may be reasonably
required in connection with any action contemplated by this Section 5.3. ABC
shall notify NACO promptly of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff for amendments or supplements
to the Registration Statement and the Joint Proxy Statement or for additional
information and will supply NACO with copies of all correspondence with the SEC
or its staff with respect to
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the Registration Statement and the Joint Proxy Statement. Whenever any event
occurs which should be set forth in an amendment or supplement to the
Registration Statement or the Joint Proxy Statement, ABC or NACO, as the case
may be, shall promptly inform the other of such occurrence and cooperate in
filing with the SEC or its staff, and/or mailing to stockholders of NACO and
ABC, such amendment or supplement.
(b) NACO covenants that none of the information supplied in writing by NACO
for inclusion or incorporation by reference in the Registration Statement will,
at the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Registration Statement,
together with the Joint Proxy Statement included therein, will comply in all
material respects with the provisions of the Securities Act and the Exchange
Act, as the case may be, and the rules and regulations thereunder, except that
no representation is made by NACO with respect to statements made therein based
on information supplied by ABC in writing for inclusion or incorporation by
reference therein or with respect to omitted information regarding ABC so
required to be included therein.
(c) ABC covenants that none of the information supplied in writing by ABC for
inclusion or incorporation by reference in the Registration Statement will, at
the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading. ABC covenants that the Registration
Statement and the Joint Proxy Statement will comply in all material respects
with the provisions of the Securities Act and the Exchange Act, as the case may
be, and the rules and regulations thereunder, except that no representation is
made by ABC with respect to statements made therein based on information
supplied by NACO in writing for inclusion or incorporation by reference therein
or with respect to omitted information regarding NACO so required to be
included therein.
(d) ABC shall promptly prepare following the date of this Agreement and file
with Nasdaq a listing application covering the shares of ABC Common Stock
issuable in the Merger and shall use its reasonable best efforts to obtain,
prior to the Effective Time, approval for the listing on the Nasdaq NMS of such
shares of ABC Common Stock.
(e) As promptly as practicable after the date of this Agreement, each of NACO
and ABC shall use its respective best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, and to assist and cooperate with
the other party in doing, all things necessary, proper or advisable to
consummate and make effective the Merger and to identify and address issues
(including but not limited to issues arising in connection with change in
control covenants under existing financing agreements ) relating to the
operation of the respective companies following the Merger.
SECTION 5.4--No Solicitation.
(a) From the date hereof until the termination of this Agreement, NACO and
its Subsidiaries shall not (whether directly or indirectly through advisors,
agents or other intermediaries), and NACO shall use its reasonable best efforts
to ensure that the respective officers, directors, advisors, representatives or
other agents of NACO and its Subsidiaries will not, directly or indirectly, (i)
solicit, initiate or encourage any NACO Acquisition Proposal or (ii) engage in
discussions or negotiations with, or disclose any non-public information
relating to NACO or any of its Subsidiaries or afford access to the properties,
books or records of NACO or any of its Subsidiaries to, any Person that has
made, or has indicated its interest in making, a NACO Acquisition Proposal;
provided, however, that if there has been no breach of the foregoing provisions
of this Section 5.4(a) and if NACO's Board of Directors determines in good
faith, after it has received a NACO Acquisition Proposal and after consultation
with outside counsel and an independent financial advisor, that it is necessary
to do so in order to comply with its fiduciary duties under Applicable Law,
NACO may furnish
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information with respect to NACO and its Subsidiaries and participate in
negotiations and enter into agreements regarding such NACO Acquisition
Proposal; provided, however, that NACO's Board of Directors shall not take any
of the foregoing action until after notice to ABC with respect to such action
and unless, prior to furnishing information to, or entering into negotiations
with, such Person, NACO shall have received a confidentiality agreement in
customary form from such Person and thereafter shall promptly advise ABC orally
and in writing of the receipt by it (or by any of the other entities or persons
referred to above) after the date hereof of any NACO Acquisition Proposal, or
any request to discuss a transaction which is reasonably likely to lead to a
NACO Acquisition Proposal, the material terms and condition of such NACO
Acquisition Proposal or request, the identity of the person or entity making
such NACO Acquisition Proposal or request, and any material modifications to
any of the foregoing. For purposes of this Agreement, "NACO Acquisition
Proposal" means any offer or proposal for, or public announcement of an
intention (whether or not conditional) to propose, a merger, consolidation,
recapitalization, liquidation or other business combination involving NACO or
any of its Subsidiaries or the acquisition or purchase of 15% or more of any
class of equity securities of NACO or any of its Subsidiaries, or any tender
offer (including self-tenders) or exchange offer that if consummated would
result in any Person beneficially owning 15% or more of any class of equity
securities of NACO or any of its Subsidiaries, or a substantial portion of the
assets of, NACO or any of its Subsidiaries, other than the transactions
contemplated by this Agreement. Nothing contained in this Section 5.4(a) shall
prohibit NACO or NACO's Board of Directors from taking and disclosing to NACO's
stockholders a position with respect to a tender or exchange offer by a third
party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act
or from making any disclosure required by Applicable Law.
(b) From the date hereof until the termination of this Agreement, ABC and its
Subsidiaries shall not (whether directly or indirectly through advisors, agents
or other intermediaries), and ABC shall use its reasonable best efforts to
ensure that the respective officers, directors, advisors, representatives or
other agents of ABC and its Subsidiaries will not, directly or indirectly, (i)
solicit, initiate or encourage any ABC Acquisition Proposal or (ii) engage in
discussions or negotiations with, or disclose any non-public information
relating to ABC or any of its Subsidiaries or afford access to the properties,
books or records of ABC or any of its Subsidiaries to, any Person that has
made, or has indicated its interest in making, an ABC Acquisition Proposal;
provided, however, that if there has been no breach of the foregoing provisions
of this Section 5.4(b) and if ABC's Board of Directors determines in good
faith, after it has received an ABC Acquisition Proposal and after consultation
with outside counsel and an independent financial advisor, that it is necessary
to do so in order to comply with its fiduciary duties under Applicable Law, ABC
may furnish information with respect to ABC and its Subsidiaries and
participate in negotiations and enter into agreements regarding such ABC
Acquisition Proposal; provided, however, that ABC's Board of Directors shall
not take any of the foregoing action until after notice to NACO with respect to
such action and unless, prior to furnishing information to, or entering into
negotiations with, such Person, ABC shall have received a confidentiality
agreement in customary form from such Person and thereafter shall promptly
advise NACO orally and in writing of the receipt by it (or by any of the other
entities or persons referred to above) after the date hereof of any ABC
Acquisition Proposal, or any request to discuss a transaction which is
reasonably likely to lead to an ABC Acquisition Proposal, the material terms
and conditions of such ABC Acquisition Proposal or request, the identity of the
person or entity making such ABC Acquisition Proposal or request, and any
material modifications to any of the foregoing. For purposes of this Agreement,
"ABC Acquisition Proposal" means any offer or proposal for, or public
announcement of an intention (whether or not conditional) to propose, a merger,
consolidation, recapitalization, liquidation or other business combination
involving ABC or any of its Subsidiaries or the acquisition or purchase of 15%
or more of any class of equity securities of ABC or any of its Subsidiaries, or
any tender offer (including self-tenders) or exchange offer that if consummated
would result in any Person beneficially owning 15% or more of any class of
equity securities of ABC or any of its Subsidiaries, or a substantial portion
of the assets of, ABC or any of its Subsidiaries, other than the transactions
contemplated by this Agreement. Furthermore, nothing contained in this Section
5.4(b) shall prohibit ABC or ABC's Board of Directors from taking and
disclosing to ABC's stockholders a position with respect to a tender or
exchange offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or from making any disclosure required by
Applicable Law.
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SECTION 5.5--Takeover Statute. If any "fair price," "moratorium," "control
share acquisition" or other form of antitakeover statute or regulation,
including, without limitation, the provisions of Section 203 of the Delaware
Law, shall become applicable to the transactions contemplated hereby, NACO, ABC
and each of their Board of Directors shall grant such approvals and take such
actions as are necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.
SECTION 5.6--Tax Treatment. ABC and NACO shall take all actions necessary to
cause the Merger to qualify as a reorganization under the provisions of Section
368(a) of the Code, and neither ABC nor NACO will take any action inconsistent
therewith.
SECTION 5.7--Conveyance Taxes. ABC and NACO shall cooperate in the
preparation, execution and filing of all Tax Returns, questionnaires,
applications, or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp Taxes, any
transfer, recording, registration and other fees, and any similar Taxes that
become payable in connection with the transactions contemplated hereunder that
are required or permitted to be filed on or before the Effective Time.
SECTION 5.8--Access to Information; Confidentiality Agreement.
(a) Upon reasonable advance notice, between the date hereof and the Effective
Time, ABC and NACO shall (i) give to one another and to one another's counsel,
financial advisors, auditors and other authorized representatives
(collectively, "Representatives") reasonable access during normal business
hours to its and its Subsidiaries books and records, (ii) furnish to one
another and to one another's Representatives such financial and operating data
and other information as such Persons may reasonably request and (iii) instruct
their respective key management employees, counsel and financial advisors to
cooperate with one another in their respective investigations of the business
of NACO and ABC; provided that all requests for information or to interview
ABC's or NACO's key management employees should be directed to and coordinated
with the chief legal officer of ABC and the chief legal officer of NACO,
respectively, or such person or persons as each such officer shall designate;
and provided further that any information and documents received by NACO, ABC
and their respective Representatives (whether furnished before or after the
date of this Agreement) shall be held in strict confidence in accordance with
the Confidentiality Agreement in effect as of the date hereof between ABC and
NACO (the "Confidentiality Agreement"), which shall remain in full force and
effect pursuant to the terms thereof, notwithstanding the execution and
delivery of this Agreement, the termination hereof or the Closing.
Notwithstanding anything to the contrary in this Agreement, neither NACO nor
ABC shall be required to disclose any information to the other or the other's
Representatives if doing so would violate any agreement, law, rule or
regulation to which NACO or ABC or any of their respective Subsidiaries is a
party or is subject.
(b) NACO and ABC hereby agree that the Confidentiality Agreement and the
Mutual Exclusivity Agreement dated August 6, 1998 between ABC and NACO are each
hereby amended to provide that any provision therein which in any manner would
be inconsistent with this Agreement or the transactions contemplated hereby
shall terminate as of the date hereof; provided, however, that such provisions
of the Confidentiality Agreement and such Mutual Exclusivity Agreement will be
reinstated in the event that this Agreement is terminated.
SECTION 5.9--Affiliate Agreements.
(a) As soon as practicable after the date hereof, NACO shall deliver to ABC a
letter identifying all Persons who are reasonably expected to be, at the time
of the NACO Special Meeting, "affiliates" of NACO, as such term is used in Rule
145 under the Securities Act or for purposes of qualifying the Merger as a
"pooling of interests" for accounting purposes in accordance with APB 16 and
applicable SEC Regulations. NACO shall use its reasonable best efforts to cause
each such Person to deliver to NACO and to ABC on or prior to the date of the
mailing of the Joint Proxy Statement a written agreement substantially in the
form attached as Exhibit D hereto.
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(b) As soon as practicable after the date hereof, ABC shall deliver to NACO a
letter identifying all Persons who are reasonably expected to be, at the time
of the ABC Special Meeting, "affiliates" of ABC, as such term is used in Rule
145 under the Securities Act or for purposes of qualifying the Merger as a
"pooling of interests" for accounting purposes in accordance with APB 16 and
applicable SEC Regulations. ABC shall use its reasonable best efforts to cause
each such Person to deliver to ABC and to NACO on or prior to the date of the
mailing of the Joint Proxy Statement a written agreement substantially in the
form attached as Exhibit E hereto.
SECTION 5.10--Obligations of Merger Subsidiary. Merger Subsidiary will, and
ABC will take all action necessary to cause Merger Subsidiary to, perform its
obligations under this Agreement and to consummate the Merger on the terms and
subject to the conditions set forth in this Agreement.
SECTION 5.11--Director and Officer Liability. All rights to indemnification
and all limitations on liability existing in favor of each person who at or
prior to the Effective Time was an officer or director of NACO or any of its
Subsidiaries, as provided in the applicable certificate of incorporation and
by-laws of NACO and its Subsidiaries, or in an agreement between any of such
persons and NACO or any of its Subsidiaries as in effect as of the date hereof,
shall survive the Merger and continue in full force and effect.
SECTION 5.12--Notices and Consents. NACO and ABC shall cooperate with one
another (a) in determining whether any action by or in respect of, or filing
with, any Governmental Authority is required, or any actions, consents,
approvals or waivers are required to be obtained from parties to any material
contracts in connection with the consummation of the transactions contemplated
by this Agreement and (b) in seeking any such actions, consents, approvals or
waivers or making any such filings, furnishing information required in
connection therewith and seeking timely to obtain any such actions, consents,
approvals or waivers. Without limiting the generality of the foregoing, each of
ABC and NACO will file any notification and report forms and related materials
that it may be required to file with the Federal Trade Commission and the
Antitrust Division of the United States Department of Justice under the Hart-
Scott-Rodino Act within ten days of the date of this Agreement, will use its
reasonable best efforts to obtain termination of the applicable waiting period,
and will make any further filings pursuant thereto that may be necessary,
proper, or advisable in connection therewith.
SECTION 5.13--Notice; Supplements to Disclosure Schedule.
(a) NACO will promptly give notice to ABC of, upon receipt of notice or
Knowledge of, any fact or the occurrence of any event or the failure of any
event to occur which would or could reasonably be expected to make any
representation or warranty by NACO contained herein untrue or result in the
failure to satisfy any of the conditions specified in Section 6.1 or 6.3
hereof, and NACO will keep ABC informed on a regular basis as to the status of
such events. From time to time prior to the Effective Time, NACO will promptly
supplement or amend the Disclosure Schedule with respect to any matter
hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth in the Disclosure Schedule.
However, no such supplement or amendment of the Disclosure Schedule shall be
deemed to cure any breach of any representation, warranty or agreement made in
this Agreement unless ABC specifically agrees thereto in writing.
(b) ABC will promptly give notice to NACO of, upon receipt of notice or
Knowledge of, any fact or the occurrence of any event or the failure of any
event to occur which would or could reasonably be expected to make any
representation or warranty by ABC contained herein untrue or result in the
failure to satisfy any of the conditions specified in Section 6.1 or 6.2
hereof, and ABC will keep NACO informed on a regular basis as to the status of
such events. From time to time prior to the Effective Time, ABC will promptly
supplement or amend the Disclosure Schedule with respect to any matter
hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth in the Disclosure Schedule.
However, no such supplement or amendment of the Disclosure Schedule shall be
deemed to cure any breach of any representation, warranty or agreement made in
this Agreement unless NACO specifically agrees thereto in writing.
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SECTION 5.14--Tax Certificates. ABC and NACO shall cause certificates
containing the representations substantially in the form of Exhibit F and
Exhibit G hereto, respectively, to be executed by an executive officer of ABC
and NACO, respectively, and to be delivered to Schiff Hardin & Waite, counsel
to NACO, and to Jones, Day, Reavis & Pogue, counsel to ABC, on the date
immediately prior to the mailing of the Joint Proxy Statement and on the
Closing Date, in each case dated as of such respective dates.
SECTION 5.15--Pooling of Interests. Each of NACO and ABC shall use reasonable
best efforts to cause the transactions contemplated by this Agreement,
including the Merger, to be accounted for as a "pooling of interests" under APB
16 and applicable SEC Regulations, and such accounting treatment to be accepted
by ABC's independent public accountants, and by the SEC, and each of NACO and
ABC agrees that it shall take no action that would cause such accounting
treatment not to be obtained. NACO and ABC shall have each received a letter
from the independent public accountants for ABC, dated as of the Closing Date
and addressed to both NACO and ABC, stating that the Merger will qualify as a
"pooling of interests" transaction under APB 16 and applicable SEC Regulations.
SECTION 5.16--Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of NACO and Merger Subsidiary,
any deeds, bills of sale, assignments or assurances and to take and do, in the
name and on behalf of NACO and Merger Subsidiary, any other actions to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of NACO acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger.
SECTION 5.17--Transition Planning. During the period between the date of this
Agreement and the Effective Time, the parties shall work closely together to
achieve the synergies from the Merger as soon as possible. Such plans will
include a joint operating plan, a joint capital expenditure budget, and a joint
financing plan, including presentations to proposed capital sources. The
development and implementation of such plans shall be chaired by Vaughn W.
Makary, or such other appropriate persons who will be ABC-NACO officers, and
shall include representatives of both ABC and NACO. Subject to their separate
fiduciary responsibilities, the parties will commence implementation of such
joint plans prior to the Effective Time.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1--Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each Party to effect the Merger shall be subject
to the following conditions:
(a) Stockholder Approval. The Merger and this Agreement shall have been
approved and adopted by the requisite vote of the stockholders of ABC in
accordance with Delaware Law and the rules of Nasdaq and by the requisite
vote of the stockholders of NACO in accordance with Delaware Law;
(b) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order, judgment, decree,
statute, law, ordinance, rule or regulation, entered, enacted, promulgated,
enforced or issued by any Governmental Authority of competent jurisdiction
or other legal restraint or prohibition (collectively, "Restraints") shall
be in effect (i) preventing the consummation of the Merger, or (ii) which
otherwise is reasonably likely to have a Material Adverse Effect on ABC or
NACO, as applicable; provided, however, that each of the Parties shall have
used its reasonable best efforts to prevent the entry of any such
Restraints and to appeal as promptly as possible any such Restraints that
may be entered;
(c) Hart-Scott-Rodino Act. The waiting period (including any extension
thereof) applicable to the consummation of the Merger under the Hart-Scott-
Rodino Act shall have expired or been terminated;
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(d) Governmental and Regulatory Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental Authority required
of NACO, ABC or any of their Subsidiaries to consummate the Merger and the
other transactions contemplated hereby shall have been obtained (other than
the filing of the Certificate of Merger provided for under Section 1.3),
all in form and substance reasonably satisfactory to ABC and NACO;
(e) Registration Statement Effective. The Registration Statement shall
have become effective, no stop order suspending the effectiveness of the
Registration Statement shall then be in effect, and no proceedings for that
purpose shall then be threatened by the SEC or shall have been initiated by
the SEC and not concluded or withdrawn;
(f) Blue Sky. Any state securities or blue sky permits or approvals
required to carry out the transactions contemplated hereby shall have been
received;
(g) Stock Exchange Listing. The shares of ABC Common Stock into which
NACO Shares will be converted pursuant to Article II hereof shall have been
duly approved for listing on the Nasdaq NMS; and
(h) FIRPTA. NACO and ABC shall have each received from the other an
affidavit meeting the requirements of Section 1445(b)(3) of the Code and
the Treasury Regulations promulgated thereunder.
SECTION 6.2--Additional Conditions to Obligations of NACO. The obligations of
NACO to effect the Merger are also subject to the fulfillment of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
ABC and Merger Subsidiary contained in this Agreement shall be true and
correct in all respects when made and at and as of the Closing Date, as if
made at and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such date), except where the failure of
such representations and warranties to be so true and correct (without
giving effect to any limitation as to "materiality" or "Material Adverse
Effect" set forth therein) does not have, and is not likely to have,
individually or in the aggregate, a Material Adverse Effect on ABC;
(b) Agreements, Conditions and Covenants. ABC and Merger Subsidiary shall
have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or
complied with by them on or before the Closing Date;
(c) Certificates. NACO shall have received a certificate of an executive
officer of ABC to the effect set forth in paragraphs (a) and (b) above; and
(d) Required Consents. ABC shall have obtained, and provided copies to
NACO of, all of the consents, waivers and approvals required by Section
6.2(d) of the Disclosure Schedule, unless the failure to obtain such
consent, waiver or approval is not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect.
(e) Tax Opinions. NACO shall have received from Schiff Hardin & Waite,
counsel to NACO, on a date immediately prior to the mailing of the Joint
Proxy Statement and on the Closing Date, opinions, in each case dated as of
such respective dates and stating that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code and that ABC, Merger Subsidiary and NACO will
each be a party to that reorganization within the meaning of Section 368(b)
of the Code and that no gain or loss will be recognized by the stockholders
of NACO upon their exchange of NACO Common Stock for ABC Common Stock under
Section 354 of the Code (except to the extent such a stockholder receives
cash in lieu of fractional shares and to the extent of a payment of
transfer taxes made on behalf of such stockholder, if any). In rendering
such opinions, counsel for NACO shall be entitled to rely upon
representations of officers of ABC and NACO substantially in the form of
Exhibits F and G hereto;
(f) Registration Rights Agreement. ABC shall have entered into a
registration rights agreement, in substantially the form attached as
Exhibit H hereto, with the persons identified in said form of registration
rights agreement;
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(g) Opinion of Counsel to ABC and Merger Sub. NACO shall have received
the legal opinion of Jones, Day, Reavis & Pogue dated the Closing Date,
covering the items specified in Exhibit I hereto;
(h) Change-of-Control Agreements. ABC shall have entered into an
agreement with each of the persons listed on Section 6.2(h) of the
Disclosure Schedule reasonably satisfactory to NACO pursuant to which ABC
will be bound by and made a party to the change-of-control agreements
between NACO and each of the persons listed on Section 6.2(h) of the
Disclosure Schedule; and
(i) Unqualified Audit Opinion. ABC shall have received an unqualified
opinion from Arthur Andersen LLP, its independent public accountants, with
respect to the consolidated financial statements of ABC included in ABC's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
SECTION 6.3--Additional Conditions to Obligations of ABC. The obligations of
ABC to effect the Merger are also subject to the fulfillment of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
NACO contained in this Agreement shall be true and correct in all respects
when made and at and as of the Closing Date, as if made at and as of such
time (except to the extent expressly made as of an earlier date, in which
case as of such date), except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality" or "Material Adverse Effect" set forth
therein) does not have, and is not likely to have, individually or in the
aggregate, a Material Adverse Effect on NACO;
(b) Agreements, Conditions and Covenants. NACO shall have performed or
complied in all material respects with all agreements, conditions and
covenants required by this Agreement to be performed or complied with by it
on or before the Closing Date;
(c) Certificates. ABC shall have received a certificate of an executive
officer of NACO to the effect set forth in paragraphs (a) and (b) above;
(d) Required Consents. NACO shall have obtained, and provided copies to
ABC of, all of the consents, waivers and approvals required by Section
6.3(d) of the Disclosure Schedule, unless the failure to obtain such
consent, waiver or approval is not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect.
(e) Tax Opinions. ABC shall have received from Jones, Day, Reavis &
Pogue, counsel to ABC, on a date immediately prior to the mailing of the
Joint Proxy Statement and on the Closing Date, opinions, in each case dated
as of such respective dates and stating that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, and that NACO, Merger Sub and ABC will each be
a party to that reorganization. In rendering such opinions, counsel for ABC
shall be entitled to rely upon representations of officers of ABC and NACO
substantially in the form of Exhibits F and G hereto; and
(f) Opinion of Counsel to NACO. ABC shall have received the opinion of
counsel to NACO dated as of the Closing Date, covering the items specified
in Exhibit J hereto.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1--Termination. This Agreement may be terminated at any time before
the Effective Time, in each case as authorized by the respective Board of
Directors of NACO or ABC:
(a) by mutual written consent of each of NACO and ABC;
(b) by either NACO or ABC if the Merger shall not have been consummated
on or before February 28, 1999 (the "Termination Date"); provided, however,
that the right to terminate this Agreement under
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this Section 7.1(b) shall not be available to any Party whose failure to
fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before the
Termination Date;
(c) by either NACO or ABC if (i) a statute, rule, regulation or executive
order shall have been enacted, entered or promulgated prohibiting the
consummation of the Merger substantially on the terms contemplated hereby
or (ii) an order, decree, ruling or injunction shall have been entered
permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger substantially on the terms contemplated hereby
and such order, decree, ruling or injunction shall have become final and
non-appealable and the party seeking to terminate this Agreement pursuant
to this clause 7.1(c)(ii) shall have used its reasonable best efforts to
remove such order, decree, ruling or injunction;
(d) by either NACO or ABC if (i) the other shall have breached, or failed
to comply with, in any material respect any of its obligations under this
Agreement or any representation or warranty made by such other Party shall
have been incorrect in any material respect when made or shall have since
ceased to be true and correct in any material respect, and (ii) such
breach, failure or misrepresentation is not cured within 30 days after
notice thereof and (iii) such breach, failure or misrepresentation would
cause the condition set forth in Sections 6.2(a) and 6.2(b) or Sections
6.3(a) or 6.3(b), as the case may be, not to be satisfied;
(e) by either NACO or ABC if the approval of the stockholders of NACO
contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at a duly held meeting of
stockholders or of any adjournment thereof;
(f) by either NACO or ABC if the approval of the stockholders of ABC
contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at a duly held meeting of
stockholders or of any adjournment thereof;
(g) by either NACO or ABC if the Board of Directors of NACO determines
that a bona fide NACO Acquisition Proposal made by a third party on terms
that a majority of the members of the Board of Directors of NACO determines
in good faith (based on the advice of an independent financial advisor) is
more favorable to NACO and to its stockholders than the transactions
contemplated hereby (such a NACO Acquisition Proposal is referred to herein
as a "NACO Superior Proposal"), except that NACO may not terminate this
Agreement pursuant to this clause 7.1(g) unless and until (i) three
Business Days have elapsed following delivery to ABC of a written notice of
such determination by the Board of Directors of NACO and during such three
Business Day period NACO (A) promptly informs ABC of the terms and
conditions of the NACO Acquisition Proposal and the identity of the Person
making the NACO Acquisition Proposal and (B) otherwise cooperates with ABC
with respect thereto (subject, in the case of this clause (B), to the
condition that the Board of Directors of NACO shall not be required to take
any action that it believes, after consultation with outside legal counsel,
would violate its obligations to NACO or NACO's stockholders under
Applicable Law) with the intent of enabling ABC to engage in good faith
negotiations so that the transactions contemplated hereby may be effected,
(ii) at the end of such three Business Day period the Board of Directors of
NACO continues reasonably to believe that the NACO Acquisition Proposal
constitutes a NACO Superior Proposal, (iii) simultaneously with such
termination NACO enters into a definitive acquisition, merger or similar
agreement to effect the NACO Superior Proposal and (iv) NACO pays to ABC
the amount specified and within the time period specified in Section
7.2(b);
(h) by either ABC or NACO if the Board of Directors of ABC determines
that a bona fide ABC Acquisition Proposal made by a third party on terms
that a majority of the members of the Board of Directors of ABC determines
in good faith (based on the advice of an independent financial advisor) is
more favorable to ABC and to its stockholders than the transactions
contemplated hereby (such an ABC Acquisition Proposal is referred to herein
as an "ABC Superior Proposal"), except that ABC may not terminate this
Agreement pursuant to this clause 7.1(h) unless and until (i) three
Business Days have elapsed following delivery to NACO of a written notice
of such determination by the Board of Directors of ABC and during such
three Business Day period ABC (A) promptly informs NACO of the terms and
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conditions of the ABC Acquisition Proposal and the identity of the Person
making the ABC Acquisition Proposal and (B) otherwise cooperates with NACO
with respect thereto (subject, in the case of this clause (B), to the
condition that the Board of Directors of ABC shall not be required to take
any action that it believes, after consultation with outside legal counsel,
would violate its obligations to ABC or ABC's stockholders under Applicable
Law) with the intent of enabling NACO to engage in good faith negotiations
so that the transactions contemplated hereby may be effected, (ii) at the
end of such three Business Day period the Board of Directors of ABC
continues reasonably to believe that the ABC Acquisition Proposal
constitutes an ABC Superior Proposal, (iii) simultaneously with such
termination ABC enters into a definitive acquisition, merger or similar
agreement to effect the ABC Superior Proposal and (iv) ABC pays to NACO the
amount specified and within the time period specified in Section 7.2(c);
(i) by ABC if the Board of Directors of NACO shall have (i) withdrawn or
modified in a manner adverse to ABC its approval or recommendation of this
Agreement and the transactions contemplated hereby or (ii) approved or
recommended, or proposed publicly to approve or recommend, any NACO
Acquisition Proposal;
(j) by NACO if the Board of Directors of ABC shall have (i) withdrawn or
modified in a manner adverse to NACO its approval or recommendation of this
Agreement and the transactions contemplated hereby or (ii) approved or
recommended, or proposed publicly to approve or recommend, any ABC
Acquisition Proposal;
(k) by ABC if a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of NACO is commenced prior to the
Effective Time, and the Board of Directors of NACO fails to recommend
against acceptance of such tender offer or exchange offer by its
stockholders (including such a failure by taking no position with respect
to the acceptance of such tender offer or exchange offer by its
stockholders) within the time period specified by Rule 14e-2; OR
(l) by NACO if a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of ABC is commenced prior to the
Effective Time, and the Board of Directors of ABC fails to recommend
against acceptance of such tender offer or exchange offer by its
stockholders (including such a failure by taking no position with respect
to the acceptance of such tender offer or exchange offer by its
stockholders) within the time period specified by Rule 14e-2.
SECTION 7.2--Effect of Termination. (a) In the event of termination of this
Agreement as provided in Section 7.1 hereof, and subject to the provisions of
Section 8.1 hereof, this Agreement shall forthwith become void and there shall
be no liability on the part of any of the Parties, except (i) as set forth in
this Section 7.2 and in Section 8.3 hereof; and (ii) nothing herein shall
relieve any Party from liability for any wilful breach hereof.
(b) Notwithstanding any provision in this Agreement to the contrary, if (i)
this Agreement is terminated by NACO or ABC pursuant to Section 7.1(g), (ii)
this Agreement is terminated by ABC pursuant to Section 7.1(i) or 7.1(k), or
(iii) (A) this Agreement is terminated by NACO pursuant to Section 7.1(b) or by
ABC or NACO pursuant to Section 7.1(e) and (B) concurrently with or within
twelve months after such termination a NACO Acquisition Proposal other than an
initial public offering of NACO Common Stock shall have been consummated, then,
in any case, NACO shall: (x) pay to ABC a fee of $5,000,000 in cash as
liquidated damages and not as a penalty, such payment to be made simultaneously
with such termination in the case of a termination by NACO pursuant to Section
7.1(g) and promptly, but in no event later than the second Business Day
following a termination by ABC pursuant to Section 7.1(g), 7.1(i) or 7.1(k)
and, in the case of clause (iii) of this Section 7.2(b), upon the consummation
of such NACO Acquisition Proposal; and (y) reimburse ABC for all fees, costs
and expenses incurred by ABC in connection with this Agreement and the
transactions contemplated hereby, including but not limited to fees and
expenses of investment bankers, accountants and attorneys, in the amount of
$2,000,000 (collectively, the "ABC Covered Expenses") (less the amount, if any,
of ABC Covered Expenses paid under Section 7.2(d)), such reimbursement to be
paid in cash no later than the second Business Day following ABC's delivery to
NACO of a written notice setting forth the amount to be reimbursed to ABC.
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(c) Notwithstanding any provision in this Agreement to the contrary, if (i)
this Agreement is terminated by ABC or NACO pursuant to Section 7.1(h), (ii)
this Agreement is terminated by NACO pursuant to Section 7.1(j) or 7.1(l), or
(iii) (A) this Agreement is terminated by ABC pursuant to Section 7.1(b) or by
NACO or ABC pursuant to Section 7.1(f) and (B) concurrently with or within
twelve months after such termination an ABC Acquisition Proposal shall have
been consummated, then, in any case, ABC shall: (x) pay to NACO a fee of
$5,000,000 in cash as liquidated damages and not as a penalty, such payment to
be made simultaneously with such termination in the case of a termination by
ABC pursuant to Section 7.1(h) and promptly, but in no event later than the
second Business Day following a termination by NACO pursuant to Section 7.1(h),
7.1(j) or 7.1(l) and, in the case of clause (iii) of this Section 7.2(c), upon
the consummation of such ABC Acquisition Proposal; and (y) reimburse NACO for
all fees, costs and expenses incurred by NACO in connection with this Agreement
and the transactions contemplated hereby, including but not limited to fees and
expenses of investment bankers, accountants and attorneys, in the amount of
$2,000,000 (collectively, the "NACO Covered Expenses") (less the amount, if
any, of NACO Covered Expenses paid under Section 7.2(e)), such reimbursement to
be paid in cash no later than the second Business Day following NACO's delivery
to ABC of a written notice setting forth the amount to be reimbursed to NACO.
(d) If this Agreement is terminated by NACO or ABC pursuant to Section
7.1(e), then NACO shall, without prejudice and in addition to any other rights
of ABC against NACO, reimburse ABC for ABC Covered Expenses. Payment for such
reimbursement shall be made to ABC in cash no later than the second Business
Day following ABC's delivery to NACO of a written notice setting forth the
amount to be reimbursed to ABC.
(e) If this Agreement is terminated by ABC or NACO pursuant to Section
7.1(f), then ABC shall, without prejudice and in addition to any other rights
of NACO against ABC, reimburse NACO for all NACO Covered Expenses. Payment for
such reimbursement shall be made to NACO in cash no later than the second
Business Day following NACO's delivery to ABC of a written notice setting forth
the amount to be reimbursed to NACO.
SECTION 7.3--Amendment. This Agreement may be amended by the Parties pursuant
to an instrument in writing adopted by action taken by each of NACO and ABC at
any time before the Effective Time; provided, however, that, after approval of
the Merger Agreement by the stockholders of NACO and ABC, no amendment may be
made which by law would require further approval by such stockholders without
the further approval of such stockholders. This Agreement may not be amended
except by an instrument in writing signed by the Parties.
SECTION 7.4--Waiver. At any time before the Effective Time, a Party may (a)
extend the time for the performance of any of the obligations or other acts of
the other Parties, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(c) subject to the proviso of Section 7.3, waive compliance by the other
Parties with any of the agreements or conditions contained herein. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only as against such Party and only if set forth in an instrument in writing
signed by such Party.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1--Non-Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time, except that the agreements set forth in Article I and
Sections 2.4, 2.5, 2.6, 2.7, 2.8 and 5.11 hereof shall survive the Effective
Time indefinitely. The representations, warranties and agreements in this
agreement shall terminate upon the termination of this Agreement pursuant to
Section 7.1 hereof, except that the agreements set forth in Sections 5.3(b) and
(c), 7.2, 8.3, 8.9, 8.10, 8.11 and 8.12 hereof shall survive termination
indefinitely. Nothing contained herein shall limit any covenant or agreement of
the Parties which by its terms contemplates performance after the Effective
Time.
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SECTION 8.2--Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date of receipt and shall be delivered personally or mailed
by registered or certified mail (postage prepaid, return receipt requested),
sent by overnight courier or sent by telecopy, to the Parties at the following
addresses or telecopy numbers (or at such other address or telecopy number for
a Party as shall be specified by like notice):
(a) if to NACO:
Joseph A. Seher
Chairman and Chief Executive Officer
2001 Butterfield Road
Downers Grove, Illinois 60515
Telecopy No.: (630) 852-2144
with a copy to:
Schiff Hardin & Waite
6600 Sears Tower
Chicago, Illinois 60606
Attention: Robert J. Regan, Esq.
Telecopy No.: (312) 258-5600
(b) if to ABC or Merger Subsidiary:
Donald W. Grinter
Chairman and Chief Executive Officer
200 South Michigan Avenue
Chicago, Illinois 60604
Telecopy No.: (312) 322-0360
with a copy to:
Jones, Day, Reavis & Pogue
77 West Wacker Drive
Suite 3500
Chicago, Illinois 60601
Attention: Douglas H. Walter, Esq.
Telecopy No.: (312) 782-8585
SECTION 8.3--Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such costs and
expenses, except that those expenses incurred in connection with the printing
of the Joint Proxy Statement and the Registration Statement, as well as the
filing fees related thereto and any filing fee required in connection with the
filing of premerger notifications under the Hart-Scott-Rodino Act, shall be
shared equally by NACO and ABC. Section 8.3(i) of the Disclosure Schedule sets
forth an itemized statement of the fees and expenses that ABC reasonably and in
good faith estimates that it will incur in connection with this Agreement and
the Merger. Section 8.3(ii) of the Disclosure Schedule sets forth an itemized
statement of the fees and expenses that NACO reasonably and in good faith
estimates that it will incur in connection with this Agreement and the Merger.
SECTION 8.4--Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Affiliated Entity" means each Person (other than any Subsidiary of
ABC) in which ABC has an equity interest in excess of 25%.
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(b) "Business Day" means any day other than a Saturday, a Sunday or a day
on which commercial banks located in the State of Illinois are authorized
or required by law or other governmental action to be closed.
(c) "Cleanup" means all actions required by applicable Environmental Laws
to (i) cleanup, remove, treat, manage or remediate Hazardous Materials in
the indoor or outdoor environment; (ii) prevent the Release of Hazardous
Materials so that they do not migrate, endanger or threaten to endanger
public health or welfare or the indoor or outdoor environment; (iii)
perform pre-remedial studies and investigations and post-remedial
monitoring and care; or (iv) respond to any government requests for
information or documents in any way relating to cleanup, removal, treatment
or remediation or potential cleanup, removal, treatment or remediation of
Hazardous Materials in the indoor or outdoor environment.
(d) "Control Group" means a controlled group of corporations of which ABC
or NACO, as the case may be, is a member within the meaning of Code
(S)414(b), any group of corporations or entities under common control with
ABC or NACO, as the case may be, within the meaning of Code (S)414(c) or
any affiliated service group of which ABC or NACO, as the case may be, is a
member within the meaning of Code (S)414(m).
(e) "Environmental Claim" means any judicial or administrative claim,
action, cause of action, investigation or written notice by any Person
alleging potential liability or responsibility (including, without
limitation, potential liability for investigatory costs, Cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, fines or penalties) arising out of, based on or
resulting from (i) the presence or Release of any Hazardous Materials at
any location, whether or not owned or operated by NACO or any of its
Subsidiaries or ABC or any of its Subsidiaries or Affiliated Entities, as
the case may be, or (ii) circumstances forming the basis of any violation
of any Environmental Law.
(f) "Environmental Laws" means all federal, state, local and foreign laws
and regulations relating to pollution or protection of the environment,
including, without limitation, laws relating to Releases or threatened
Releases of Hazardous Materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
(g) "Hazardous Materials" means all substances defined as Hazardous
Substances, Toxic Substances, Hazardous Waste, Pollutants or Contaminants,
or regulated as such under, any Environmental Law, including all matters
affecting air, ground, ground water, surface water and/or environmental
quality or safety, including, without limitation, petroleum, petroleum-
derived products, underground storage tanks, polychlorinated biphenyls and
asbestos.
(h) "Knowledge" means, with respect to ABC, the knowledge ABC's executive
officers listed in Section 8.4(h)(i) of the Disclosure Schedule, and with
respect to NACO, the knowledge of NACO's executive officers listed in
Section 8.4(h)(ii) of the Disclosure Schedule, in each case, after
reasonable inquiry.
(i) "NACO Balance Sheet" means the audited consolidated balance sheets of
NACO and its consolidated Subsidiaries for the fiscal year ended March 29,
1998.
(j) "Material Adverse Effect" means a material adverse effect (i) on the
condition (financial or otherwise), business, assets, liabilities,
properties or results of operations of NACO and its Subsidiaries taken as a
whole, or ABC and its Subsidiaries taken as a whole, as the case may be, or
(ii) on the ability of NACO, or ABC, as the case may be, to perform any
material obligations hereunder or under the transactions contemplated
hereby; provided, however, that Material Adverse Effect shall not be deemed
to include the impact of (A) actions or omissions of NACO or ABC taken with
the prior written consent of NACO or ABC, as applicable, in contemplation
of the transactions contemplated hereby or (B) changes in GAAP.
(k) "Permitted Liens" means Liens (a) for any current Taxes or
assessments (including but not limited to assessments for maintenance and
repair) not yet delinquent, (b) reflected on the NACO Balance Sheet or the
ABC Balance Sheet, (c) which do not materially detract from the value, or
interfere with the
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present use of, such assets or (d) created by statute of carriers,
warehousemen, mechanics, laborers and materialmen incurred in the ordinary
course of business for sums not yet due.
(l) "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
(m) "Release" means any release, spill, emission, discharge, leaking,
pumping, injection, deposit, disposal, dispersal, leaching or migration
into the environment (including, without limitation, ambient air, surface
water, groundwater and surface or subsurface strata) or into or out of any
vessel (including the abatement or discarding of barrels or other
containers containing Hazardous Materials), including the movement of
Hazardous Materials through, on or in the air, soil, surface water or
ground water.
(n) "Subsidiary" means any Person with respect to which NACO or ABC, as
the case may be, directly or indirectly owns a majority of the common stock
or has the power to vote or direct the voting of sufficient securities to
elect a majority of the directors or others performing similar functions
with respect to such Person.
(o) "Tax" or "Taxes" means all taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income,
alternative or add-on minimum, environmental, gross receipts, sales, use,
goods and services, ad valorem, transfer, capital stock, franchise,
profits, license, withholding, payroll, single business, employment,
excise, severance, stamp, occupation, property, unemployment or other
taxes, customs, duties, fees, assessments or charges of any kind
whatsoever, and any installments with respect thereto, together with any
interest, penalties, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign) upon NACO or any of its
Subsidiaries, or ABC or any of its Subsidiaries, as the case may be.
(p) "Tax Return" means any reports, return, statement or other written
information required to be supplied to a taxing authority in connection
with Taxes.
(q) "ABC Balance Sheet" means the audited consolidated balance sheet of
ABC and its consolidated Subsidiaries for the fiscal year ended July 31,
1997.
SECTION 8.5--Headings. The headings contained in this Agreement (including in
the Table of Contents, the Index of Exhibits and the Index of Disclosure
Schedules) and the defined terms contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
SECTION 8.6--Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the maximum extent possible.
SECTION 8.7--Entire Agreement; No Third-Party Beneficiaries. This Agreement,
the Confidentiality Agreement, the Disclosure Schedule and any documents
delivered by the Parties in connection herewith constitute the entire agreement
and, except as expressly set forth herein and therein, supersede any and all
other prior agreements and undertakings, both written and oral, among the
Parties, or any of them, with respect to the subject matter hereof and, except
for the provisions of Article II and Section 5.12, are not intended to confer
upon any Person other than NACO, ABC, and Merger Subsidiary and, after the
Effective Time, their respective stockholders and the Surviving Corporation,
any rights or remedies hereunder.
SECTION 8.8--Assignment. This Agreement shall not be assigned by operation of
law or otherwise.
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SECTION 8.9--Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed entirely within that State, without
regard to the conflicts of laws provisions thereof.
SECTION 8.10--Consent to Jurisdiction. Each of the Parties hereto (a)
consents to submit itself to the personal jurisdiction of any Federal court
located in the State of Delaware or any Delaware state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court,
and (c) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than
a Federal court sitting in the State of Delaware or a Delaware state court.
Notwithstanding the foregoing, such consent to jurisdiction is solely for the
purpose referred to in this Section 8.10 and shall not be deemed to be a
general submission other than for such purpose.
SECTION 8.11--Costs of Enforcement. Except as otherwise set forth herein, the
prevailing Party in any proceeding brought to enforce any provision of the
Agreement shall be entitled to recover the reasonable fees and costs of its
counsel, plus all other costs of such proceeding.
SECTION 8.12--Publicity. NACO and ABC will consult with and provide each
other the opportunity to review and comment upon any press release or other
public statement or comment prior to the issuance of such press release or
other public statement or comment relating to this Agreement or the
transactions contemplated herein and shall not issue any such press release or
other public statement or comment prior to such consultation except as may be
required by law or by obligations pursuant to any listing agreement with any
national securities exchange.
SECTION 8.13--Incorporation of Exhibits and Disclosure Schedule. The Exhibits
and the Disclosure Schedule identified in this Agreement are incorporated by
reference and made a part hereof.
SECTION 8.14--Counterparts. This Agreement may be executed in one or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as
of the date first written above by their respective officers thereunto duly
authorized.
NACO, Inc.
/s/ Joseph A. Seher
By: _________________________________
Name: Joseph A. Seher
Title: Chairman and Chief
Executive Officer
ABC Rail Products Corporation
/s/ Donald W. Grinter
By: _________________________________
Name: Donald W. Grinter
Title: Chairman and Chief
Executive Officer
ABCR Acquisition Sub, Inc.
/s/ Donald W. Grinter
By: _________________________________
Name: Donald W. Grinter
Title: President
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EXHIBIT B
OPINION OF SALOMON SMITH BARNEY INC.
September 17, 1998
Board of Directors
ABC Rail Products Corporation
200 South Michigan Avenue
Chicago, IL 60604
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock of ABC Rail Products Corporation (the
"Company" or "ABC Rail") of the exchange ratio under the Agreement and Plan of
Merger by and among NACO, Inc. ("NACO"), ABCR Acquisition Sub Inc. ("Merger
Sub") and the Company, dated as of September 17, 1998 (the "Merger Agreement").
We understand that, in the Merger, Merger Sub will be merged with NACO, the
separate corporate existence of Merger Sub shall cease, and NACO shall continue
as the surviving corporation which shall be a wholly owned subsidiary of the
Company. We further understand that, upon effectiveness of the Merger, each
issued and outstanding share of common stock, par value $0.01 per share, of
NACO (the "NACO Common Stock"), will be converted into approximately 8.7 fully
paid and non-assessable shares as determined in accordance with terms in the
Merger Agreement (the "Exchange Ratio") of Common Stock, par value $0.01 per
share, of ABC Rail (the "ABC Rail Common Stock").
In connection with rendering our opinion, we have reviewed: (i) a draft of the
Merger Agreement; (ii) certain publicly available business and financial
information relating to the Company, which was discussed with us by management
of the Company; (iii) certain internally prepared documents relating to NACO
which we discussed with NACO; (iv) information relating to certain strategic
implications and operational benefits anticipated to result from the Merger,
which we discussed with the Company and NACO; (v) certain publicly available
and other information concerning the trading of, and the trading market for,
the publicly traded securities of the Company; (vi) certain publicly available
information with respect to other companies that we believe to be comparable in
certain respects to the Company and NACO; and (vii) certain publicly available
information with respect to other merger and acquisition transactions that we
believe to be comparable in certain respects to the Merger. In addition to the
foregoing, we have conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate to arrive at our opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all information provided to or reviewed by us or publicly
available, and we have not assumed any responsibility for any independent
verification of any of such information. With respect to financial forecasts,
and other information and data provided to or reviewed by, and relied upon by,
us, we have been advised by the managements of the Company and NACO that such
forecasts and other information were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the Company and NACO as
to the expected future financial performance of the Company and NACO and the
strategic implications and operational benefits anticipated from the Merger. We
express no opinion with respect to such forecasts or the assumptions on which
they were based. We further relied on the assurances of managements of the
Company and NACO that they were unaware of any facts that would make the
forecasts or information and data provided to us incomplete or misleading. We
have not made or been provided with any independent evaluations or appraisals
of any of the Company's or NACO's assets, properties, liabilities or
securities. We have been advised by you that the Merger Agreement, in the form
executed by the parties, will not vary from the draft that we reviewed in any
way that is material to this opinion. We have assumed that the Merger will be
accounted for as a pooling-of-interests in accordance with generally accepted
accounting principles ("GAAP"), and that the Merger qualifies for such
<PAGE>
accounting treatment under GAAP. We have also assumed that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and none of the Company, NACO,
Merger Sub or holders of ABC Rail Common Stock will recognize gain or loss for
U.S. federal or state income tax purposes as a result of the Merger.
As you are aware, Salomon Smith Barney Inc. ("Salomon Smith Barney") is acting
as financial advisor to the Company in connection with the Merger for which we
will receive certain fees, including with regard to the rendering of this
opinion, a significant portion of which fees is contingent upon the
consummation of the Merger. In the ordinary course of our securities business
we and our affiliates may hold or actively trade the debt and equity securities
of the Company for our own account and for the account of our customers and,
accordingly, we may at any time hold a long or short position in such
securities. In addition, we and our affiliates (including Travelers Group Inc.
and its affiliates) may maintain other business and financial relationships
with the Company and NACO.
Our engagement in connection with the Merger did not include the solicitation
of, and we have not solicited, prospective acquirors of all or part of the
Company. Our opinion, as expressed below, relates to the relative values of the
Company and NACO and does not imply any conclusion as to what the value of the
merged company's common stock actually will be when issued pursuant to the
Merger or the price at which such stock will trade following the consummation
of the Merger. Our opinion necessarily is based upon conditions and
circumstances as they exist and can be evaluated as of the date hereof and does
not address the underlying business decision of the Company to enter into the
Merger Agreement. Specifically, we have not been asked to, nor do we, express
an opinion as to the relative merits of the Merger as compared to any
alternative business strategies that might exist for the Company or the effect
of any other transaction in which the Company might engage.
This opinion is for the benefit and use by members of the Board of Directors of
the Company in connection with their evaluation of the Merger and does not
constitute a recommendation to any holder of shares of ABC Rail Common Stock as
to how such stockholder should vote with respect to the Merger. This opinion
may not be published or otherwise used by the Company without our prior written
consent, other than as provided for in the engagement agreement, dated August
13, 1998, between the Company and Salomon Smith Barney.
Based upon, and subject to, the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of ABC Rail Common Stock.
Very truly yours,
Salomon Smith Barney Inc.
<PAGE>
EXHIBIT C
OPINION OF ROBERT W. BAIRD & CO. INCORPORATED
September 17, 1998
PERSONAL & CONFIDENTIAL
Board of Directors
NACO, Inc.
2001 Butterfield Road
Suite 502
Downers Grove, IL 60515
Gentlemen:
NACO, Inc. (the "Company") proposes to enter into a merger of equals
transaction by means of an Agreement and Plan of Merger (the "Agreement") with
ABC Rail Products Corporation ("ABC") and ABCR Acquisition, Inc., a wholly
owned subsidiary of ABC ("Merger Sub"). Pursuant to the Agreement, at the
Effective Time (as defined in the Agreement), Merger Sub will be merged with
and into the Company (the "Merger") and each outstanding share of common stock,
par value $.01 per share of the Company ("Company Common Stock") (other than
shares held by the Company, ABC or any of their respective subsidiaries) will
be converted solely into the right to receive the number of shares of common
stock, par value $0.01 per share of ABC ("ABC Common Stock") equal to the
Exchange Ratio (as hereinafter defined).
The Exchange Ratio means that number of shares of ABC Common Stock (rounded up
to the nearest one thousandth) equal to the number of Fully Diluted ABC Shares
(as defined in the Agreement) divided by the number of Fully Diluted NACO
Shares (as defined in the Agreement). Based on the Exchange Ratio, current
holders of Company Common Stock and current holders of ABC Common Stock each
would own approximately 50% of the outstanding shares of ABC Common Stock on a
fully diluted basis immediately following consummation of the Merger (assuming
for analytical purposes that proceeds from the hypothetical exercise of stock
options are used to repurchase shares of ABC Common Stock).
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Company Common Stock of the Exchange Ratio.
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment banking
business, is engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In
that connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company furnished to us for purposes of our
analysis; (ii) reviewed certain internal information, primarily financial in
nature, including projections, concerning the business and operations of ABC
furnished to us for purposes of our analysis, as well as publicly available
information including but not limited to ABC's recent filings with the
Securities and Exchange Commission and equity analyst research reports prepared
by various investment banking firms including Baird; (iii) reviewed the draft
Agreement in the form presented to the Company's Board of Directors; (iv)
compared the historical market prices and trading activity of ABC Common Stock
with those of certain other publicly traded companies we deemed relevant; (v)
compared the financial position and operating results of the Company and ABC
with those of other publicly traded companies we deemed relevant;
<PAGE>
(vi) compared the proposed financial terms of the Merger with the financial
terms of certain other business combinations we deemed relevant; and (vii)
reviewed the potential pro forma financial effects of the Merger on the Company
and ABC based on, among other things, certain estimates of cost savings,
synergies and other projected combined benefits expected to result from the
Merger, jointly prepared and provided to us by the senior managements of the
Company and ABC. We have held discussions with certain members of the Company's
and ABC's senior management concerning the Company's and ABC's respective
historical and current financial condition and operating results, as well as
the future prospects of the Company and ABC, respectively. We have also
considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria which we deemed
relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to us by or
on behalf of the Company and ABC, or publicly available, and have not assumed
any responsibility to verify any such information independently. We have also
assumed, with your consent, that (i) the Merger will be accounted for as a
pooling of interests under generally accepted accounting principles; (ii) the
Merger will qualify as a tax-free reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as amended; (iii) all
material assets and liabilities (contingent or otherwise, known or unknown) of
the Company and ABC are as set forth in the consolidated financial statements
of the Company and ABC, respectively; (iv) the Merger will be consummated in
accordance with the terms of the Agreement, without any amendment thereto and
without waiver by the Company or ABC of any of the conditions to their
respective obligations thereunder; and (v) in the course of obtaining the
necessary regulatory and other consents or approvals for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications to existing agreements, will be imposed that will have a material
adverse effect on the contemplated benefits of the Merger. We have assumed that
the financial forecasts examined by us were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the Company's senior management as to future performance of the Company, and
ABC's senior management as to future performance of ABC. In conducting our
review, we have not undertaken nor obtained an independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of the
Company or ABC nor have we made a physical inspection of the properties or
facilities of the Company or ABC. Our opinion necessarily is based upon
economic, monetary and market conditions as they exist and can be evaluated on
the date hereof, and does not predict or take into account any changes which
may occur, or information which may become available, after the date hereof.
We note that the Agreement and the other documents relating to the Merger
include, among other things, certain provisions which we understand are
designed to create a balance of control of ABC after the Merger. Further, as
noted above, as a result of the Exchange Ratio, the stockholders of the Company
and ABC will have essentially equal ownership interests in ABC immediately
following the Merger. Accordingly, the Exchange Ratio does not reflect a change
of control premium to the stockholders of either the Company or ABC, and in
rendering our opinion we have analyzed the Merger as a strategic business
combination not involving a sale of control of the Company.
Our opinion has been prepared solely for the information of the Company's Board
of Directors, and shall not be used for any other purpose or disclosed to any
other party without the prior written consent of Baird; provided, however, that
this letter may be reproduced in full in the Proxy Statement to be provided to
the Company's stockholders in connection with the Merger. This opinion does not
address the relative merits of the Merger and any other potential transactions
or business strategies considered by the Company's Board of Directors, and does
not constitute a recommendation to any stockholder of the Company as to how any
such stockholder should vote with respect to the Merger. In addition, we are
not expressing any opinion as to the price or range of prices at which ABC
Common Stock will trade at any time. Baird has acted as financial advisor to
the Company in connection with the Merger and will receive a fee for our
services, part of which is payable upon the preparation and delivery of this
fairness opinion and part of which is contingent upon consummation of the
Merger. In the past, we have provided investment banking services to the
Company,
<PAGE>
including acting as financial advisor to the Company in evaluating its
strategic and financial alternatives. We also have previously provided
investment banking services to ABC from time to time, having acted as managing
underwriter in the public offering of shares of ABC Common Stock and of certain
debt securities of ABC. In addition, we previously acted as financial advisor
to ABC in connection with certain acquisitions. Baird received customary
compensation for the above-mentioned services. Baird is a subsidiary of The
Northwestern Mutual Life Insurance Company which currently holds the Company's
$15.0 million principal amount Senior Subordinated Note and a related Warrant
that entitles it to purchase 54,271 shares of Company Common Stock for a
purchase price of $0.01 per share. In the Merger, this Warrant will be
converted into the right to purchase a number of shares of ABC Common Stock
equal to the product of 54,271 and the Exchange Ratio.
In the ordinary course of our business, we may from time to time trade the
securities of ABC for our own account or accounts of our customers and,
accordingly, may at any time hold long or short positions in such securities.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of Company Common Stock.
Sincerely yours,
Robert W. Baird & Co. Incorporated
<PAGE>
EXHIBIT D
FORM OF AMENDMENTS TO
ABC CERTIFICATE OF INCORPORATION
The undersigned, desiring to amend the Restated Certificate of Incorporation of
ABC Rail Products Corporation, a Delaware corporation ("ABC"), pursuant to
Section 242 of the Delaware General Corporation Law, Does Hereby Certify:
First: The Board of Directors of ABC, by unanimous approval at a meeting of the
directors, evidenced by board resolutions and approval of the requisite
vote of each class of stockholders, has duly adopted the following
resolutions proposing and declaring necessary, advisable and appropriate
the following amendments to the Restated Certificate of Incorporation of
ABC:
Resolved: that the Board has determined that it is in the best interests
of the Corporation's stockholders to increase the number of
Directors from seven to eight members;
Further
Resolved: that the Board has determined that it is in the best interests
of the Corporation's stockholders to initially classify the
members of the Board into two classes each of two Directors, the
term of office of such classes expiring at the annual election of
directors of the Corporation in 1999 and 2000, respectively, and
one class of four Directors, the term of office in such class
expiring at the annual election of directors of the Corporation
in 2001;
Further
Resolved: that Article First of the Restated Certificate of Incorporation
of ABC, as amended to date, be restated in its entirety to read:
"The name of the Corporation is ABC-NACO Inc."
Further
Resolved: that an Article Eleventh be added to the Restated Certificate
of Incorporation of ABC, as amended to date, in its entirety to
read:
Eleventh: (a) The number of directors comprising the Board shall
not exceed eight (8) members and number of directors in each
class of directors shall be fixed from time to time by or in the
manner provided in the Corporation's By-Laws.
(b) The Board shall be divided into three classes of directors
with the term of office of directors in the first class (Class
I) to expire at the annual election of directors of the
Corporation in 1999, the term of office of directors of the
second class (Class II) to expire at the annual election of
directors of the Corporation in 2000, and the term of office of
the directors of the third class (Class III) to expire at the
annual election of directors of the Corporation in 2001. The
initial directors shall be as follows: the initial directors of
Class I shall be James E. Martin and William H. Thompson; the
initial directors of Class II shall be Richard A. Drexler and
George W. Peck IV; the initial directors of Class III shall be
Daniel W. Duval, Jean-Pierre M. Ergas, Donald W. Grinter and
Joseph A. Seher. Each of the initial directors shall hold office
until his or her respective successor is elected and qualified,
except as required by law. At each annual election of directors
of the Corporation, directors chosen to succeed those whose
terms then expire shall be elected for a term of office expiring
at the third succeeding annual election of directors of the
Corporation occurring after their election. At each annual
election of the directors of the Corporation, the successors to
the class of directors whose term expires at that meeting will
be elected by plurality vote of all votes cast at such election.
Election of directors of the Corporation must be by written
ballot.
(c) Notwithstanding anything contained in this Restated
Certificate of Incorporation, as amended, to the contrary, the
affirmative vote of the holders of at least 66 2/3 of the voting
power of the outstanding stock of the Corporation entitled to
vote in the election of the
<PAGE>
directors of the Board, voting together as a single class, is
required to amend or repeal, or adopt any provision inconsistent
with, this Article Eleventh. The amendment or repeal of, or the
adoption of any provision inconsistent with, this Article
Eleventh must be by written ballot.
Second: That the aforesaid amendments have been duly adopted in accordance with
Section 242 of the Delaware General Corporation Law.
Third: That the aforesaid amendments shall become effective contemporaneously
with the effective date of the merger between ABCR Acquisition Sub, Inc.
and NACO, Inc. pursuant to the Amended and Restated Agreement and Plan
of Merger by and among ABC, NACO, Inc. and ABCR Acquisition Sub, Inc.,
dated December 10, 1998.
In Witness Whereof, ABC has caused this Certificate of Amendment to be signed
by its Chief Executive Officer, as of this day of , 199 .
ABC Rail Products Corporation
By: ____________________________
CHIEF EXECUTIVE OFFICER
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ABC is incorporated under the laws of the State of Delaware. Section 145 of the
General Corporation Law of the State of Delaware ("Section 145") provides that
a Delaware corporation may indemnify any persons who are, or are threatened to
be made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer, director, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. A Delaware corporation may indemnify
any persons who were or are parties, or are threatened to be made a party, to
any threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests except that no indemnification
is permitted without judicial approval if the officer or director is adjudged
to be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above or in
defense of any claim, issue or matter therein, the corporation must indemnify
him against the expenses that such officer or director has actually and
reasonably incurred in connection therewith.
ABC's restated certificate of incorporation provides that each person who is or
was or had agreed to become a director or officer of ABC, or each such person
who is or was serving or who had agreed to serve at the request of the Board of
Directors or an officer of ABC as an employee or agent of ABC or as a director,
officer, employee or agent of another corporation, general or limited
partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators or estate of such person), shall be indemnified by
ABC to the full extent permitted by the General Corporation Law of the State of
Delaware or any other applicable laws as presently or hereafter in effect.
Without limiting the generality or the effect of the foregoing, ABC may enter
into one or more agreements with any person that provide for indemnification
greater or different than that provided in the restated certificate of
incorporation.
ABC's restated certificate of incorporation also provides that to the full
extent permitted by the General Corporation law of the State of Delaware or any
other applicable laws presently or hereafter in effect, no director of ABC
shall be personally liable to ABC or its stockholders for or with respect to
any acts or omissions in the performance of his or her duties as a director of
ABC.
ABC's bylaws provide that each person who is or was or had agreed to become a
director or officer of ABC, or each such person who is or was serving or who
had agreed to serve at the request of the Board of Directors or an officer of
ABC as an employee or agent of ABC or as a director, officer, employee or agent
of another corporation, general or limited partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
such person), shall be indemnified by ABC to the full extent permitted by the
General Corporation law of the State of Delaware or any other applicable laws
as presently or hereafter in effect. Without limiting the generality or the
effect of the foregoing, ABC may enter into one or more agreements with any
person that provide for indemnification greater or different than that provides
in the bylaws.
ABC has in effect insurance policies in the amount of $10.0 million covering
all of ABC's directors and officers.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) The following exhibits, as required by Item 601 of Regulation S-K, are
filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger by and among ABC,
ABCR Acquisition Sub, Inc. and NACO, Inc., dated as of December 10,
1998 (included as Exhibit A to Proxy Statement/Prospectus filed as
part of this registration statement)
3.1 Restated Certificate of Incorporation of the Company (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).
3.2 Bylaws of the Company (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).
3.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company (Incorporated by
reference to Exhibit 3.1 filed with the Registrant's Quarterly Report
on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-
22906).
3.4 Certificate of Correction of Certificate of Designation of the Company
(Incorporated by reference to Exhibit 3.2 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1996)
(SEC File No. 0-22906).
3.5 Form of Certificate of Amendment to Restated Certificate of
Incorporation (included as Exhibit D to Proxy Statement/Prospectus)
4.1 Form of certificate representing shares of Common Stock of the Company
(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 October 12, 1993) (SEC File
No. 33-70242).
4.2 Rights Agreement, dated as of September 29, 1995 between the Company
and LaSalle National Trust, N.A., as Rights Agent (the "Rights
Agreement"), which includes the Form of Certificate of Designation,
Preferences and Rights, the form of Rights Certificate and the Summary
of Stockholder Rights Plan (Incorporated by reference to the same
numbered exhibit filed with the Registrant's Current Report on Form 8-
K dated October 2, 1995) (SEC File No. 0-22906).
4.3 Amendment No. 1 to the Rights Agreement Dated November 15, 1996
(Incorporated by reference to Exhibit 4.1 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1996)
(SEC File No. 0-22906).
4.4 Amendment No. 2 to the Rights Agreement Dated September 17, 1998
(Incorporated by reference to Exhibit 4.1 filed with the Registrant's
Form 8-A/A on September 24, 1998) (SEC File No. 0-22906)
4.5 Indenture dated January 15, 1997, from ABC to First Trust of Illinois,
National Association, as Trustee (incorporated by reference to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on November 15, 1996) (SEC File No.
333-16241)
4.6 First Supplemental Indenture to the Indenture dated January 15, 1997,
from ABC to First Trust of Illinois, National Association, as Trustee
(incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on January 17,
1997) (SEC File No. 0-22906)
4.7 Second Supplemental Indenture to the Indenture dated January 15, 1997,
from ABC to First Trust of Illinois, National Association, as Trustee
(incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on December 22,
1997) (SEC File No. 0-22906)
5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of the
shares of ABC common stock to be issued pursuant to this Registration
Statement. (to be filed by amendment)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
8.1 Opinion of Jones, Day, Reavis & Pogue regarding federal income tax
consequences (to be filed by amendment)
8.2 Opinion of Schiff Hardin & Waite regarding federal income tax
consequences (to be filed by amendment)
10.1 Registration Rights Agreement, dated as of August 28, 1991, among the
Company, KARC and the Management Investors named therein (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 October 12, 1993) (SEC File No.
33-70242).
10.2 Second Amended and Restated Loan and Security Agreement (the "Security
Agreement"), dated as of January 31, 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, and Amendment
No. 1 thereto dated as of August 8, 1997 ("Amendment 1"), Amendment
No. 2 thereto dated as of October 31, 1997 ("Amendment 2") Amendment
No. 3 thereto dated as of December 8, 1997 ("Amendment 3"), Amendment
No. 4 thereto dated December 22, 1997 ("Amendment 4") and Amendment
No. 5 thereto dated April 24, 1998 ("Amendment 5") (Security Agreement
and Amendment 1 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, 1997 (SEC File No. 0-22906); Amendment 2
incorporated by reference to Exhibit 10.1 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31 , 1997
(SEC File No. 0-22906); Amendment 3 incorporated by reference to
Exhibit 10.1 filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1998 (SEC File No. 0-22906);
Amendment 4 incorporated by reference to Exhibit 10.1 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
30, 1998 (SEC File No. 0-22906); and Amendment 5 incorporated by
reference to Exhibit 10.3 filed with the Registrant's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998 (SEC File No. 0-
22906).
10.3 Stock Option Plan dated July 1, 1993 (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 October 12, 1993) (SEC File No. 33-70242).
10.4 Lease, entered into March 10, 1993, between the Company and Milton M.
Siegel Company (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
October 12, 1993) (SEC File No. 33-70242).
10.5 ABC Rail Corporation Master Savings Trust (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 October 12, 1993) (SEC File No. 33-70242).
10.6 ABC Rail Corporation Savings and Investment Plan, as amended and
restated effective as of May 1, 1988 (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 October 12, 1993) (SEC File No. 33-70242).
10.7 Partnership Agreement, dated as of February 1, 1992, by and between
ABC Rail French Holdings, Inc. and Cogifer Americas, Inc.
(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 October 12, 1993) (SEC File
No. 33-70242).
10.8 Commercial Representation Agreement, dated February 21, 1992, between
the Company and Cogifer Industries of Croissy-sur-Sein, France and
certain of its affiliates (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 October 12, 1993) (SEC File No. 33-70242).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.9 Agreement, dated February 21, 1992, by and between the Company and
Cogifer Industries (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
October 12, 1993) (SEC File No. 33-70242).
10.10 Lease, dated March 1, 1994, by and between the City of Newton, Kansas
and the Company (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).
10.11 1994 Director Stock Option Plan (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).
10.12 Amendment No. 1 to 1994 Director Stock Option Plan (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, 1996)
(SEC File No. 0-22906).
10.13 Form of option agreement evidencing options granted to Donald W.
Grinter (72,000 shares), D. Chisholm MacDonald (40,000 shares), David
G. Kleeschulte (40,000 shares) and Eugene Ziemba (60,000 shares)
pursuant to the Stock Option Plan listed as Exhibit 10.3 above
(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).
10.14 Asset Purchase Agreement dated April 3, 1995, between the Company and
General Electric Railcar Wheel and Parts Service Corporation
(Incorporated by reference to the same numbered exhibit filed with the
Registrant's Current Report on Form 8-K dated May 15, 1995) (SEC File
No. 0-22906).
10.15 1994 Stock Option Plan (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).
10.16 Agreement and General Release dated as of October 2, 1996 between Ben
R. Yorks and the Company (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, 1996) (SEC File No. 0-22906).
21.1 Subsidiaries of the Company (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).
23.1 Consent of Independent Public Accountants of ABC
23.2 Consent of Independent Public Accountants of NACO
23.3 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1 and 8.1)
23.4 Consent of Schiff Hardin & Waite (included in Exhibit 8.2)
23.5 Consent of Salomon Smith Barney Inc. to the inclusion of their opinion
as Exhibit B to the Proxy Statement/Prospectus included herein
(previously filed)
23.6 Consent of Robert W. Baird & Co. Incorporated to the inclusion of
their opinion as Exhibit C to the Proxy Statement/Prospectus included
herein (previously filed)
24.1 Powers of Attorney (previously filed)
27.1 NACO Financial Data Schedule (filed herewith)
99.1 Consent of Joseph A. Seher to be named a director of ABC (previously
filed)
99.2 Consent of Richard A. Drexler to be named a director of ABC
(previously filed)
99.3 Consent of Daniel W. Duval to be named a director of ABC (previously
filed)
99.4 Consent of Willard H. Thompson to be named a director of ABC
(previously filed)
99.5 Form of proxy to be used at the ABC stockholders meeting (to be filed
by amendment)
</TABLE>
II-4
<PAGE>
(b) Financial Statement Schedules:
All schedules are omitted since the required information is not present in
amounts sufficient to require submission of schedules of because the
information required is included in the consolidated financial statements and
notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by section10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement.
(b) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(d) That, for purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) That, prior to any public reoffering of the securities registered hereunder
through use of a prospectus that is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such offering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(f) That every prospectus (i) that is filed pursuant to paragraph (e)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
(g) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statements through the date of responding to the request.
(h) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(i) To supply by a means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO,
STATE OF ILLINOIS, ON DECEMBER 15, 1998.
ABC Rail Products Corporation
/s/ Donald W. Grinter
By: _________________________________
DONALD W. GRINTER
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON DECEMBER 15, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Donald W. Grinter Chairman and Chief ,
______________________________________ Executive Officer of ABC
DONALD W. GRINTER Rail Products Corporation
and Director
/s/ J.P. Singsank Corporate Controller and
______________________________________ Assistant Secretary
J.P. SINGSANK (principal accounting
officer
& principal financial
officer)
* Director ,
______________________________________
NORMAN M. DOERR
* Director ,
______________________________________
JEAN-PIERRE M. ERGAS
* Director ,
______________________________________
DONALD R. GANT
* Director ,
______________________________________
JAMES E. MARTIN
* Director ,
______________________________________
GEORGE W. PECK, IV
</TABLE>
- --------
* The undersigned by signing his name hereunto has hereby signed this
registration statement or amendment thereto on behalf of the above-named
officers and directors, on December 15, 1998, pursuant to a power of attorney
executed on behalf of each such director and officer and filed with the
Securities and Exchange Commission.
/s/ Donald W. Grinter
By: _________________________________
DONALD W. GRINTER
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT LOCATION IN
NO. DESCRIPTION DOCUMENT
------- ----------- -----------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Merger by Incorporated by
and among ABC, ABCR Acquisition Sub, Inc. and NACO, reference
Inc dated as of December 10, 1998 (included as
Exhibit A to Proxy Statement/Prospectus)
3.1 Restated Certificate of Incorporation of the Company Incorporated by
(Incorporated by reference to the same numbered reference
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).
3.2 Bylaws of the Company (Incorporated by reference to Incorporated by
the same numbered exhibit filed with the reference
Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994) (SEC File No. 0-
22906).
3.3 Certificate of Designation, Preferences and Rights Incorporated by
of Series A Junior Participating Preferred Stock of reference
the Company (Incorporated by reference to Exhibit
3.1 filed with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1996)
(SEC File No. 0-22906).
3.4 Certificate of Correction of Certificate of Incorporated by
Designation of the Company (Incorporated by reference
reference to Exhibit 3.2 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
October 31, 1996) (SEC File No. 0-22906).
3.5 Form of Certificate of Amendment to Restated
Certificate of Incorporation (included as Exhibit D
to Proxy Statement/Prospectus)
4.1 Form of certificate representing shares of Common Incorporated by
Stock of the Company (Incorporated by reference to reference
the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1
originally filed with the Securities and Exchange
Commission on October 12, 1993) (SEC File No. 33-
70242).
4.2 Rights Agreement, dated as of September 29, 1995 Incorporated by
between the Company and LaSalle National Trust, reference
N.A., as Rights Agent (the "Rights Agreement"),
which includes the Form of Certificate of
Designation, Preferences and Rights, the form of
Rights Certificate and the Summary of Stockholder
Rights Plan (Incorporated by reference to the same
numbered exhibit filed with the Registrant's Current
Report on Form 8-K dated October 2, 1995) (SEC File
No. 0-22906).
4.3 Amendment No. 1 to the Rights Agreement Dated Incorporated by
November 15, 1996 (Incorporated by reference to reference
Exhibit 4.1 filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended October
31, 1996) (SEC File No. 0-22906).
4.4 Amendment No. 2 to the Rights Agreement Dated Incorporated by
September 17, 1998 (Incorporated by reference to reference
Exhibit 4.1 filed with the Registrant's Form 8-A/A
on September 24, 1998) (SEC File No. 0-22906)
4.5 Indenture dated January 15, 1997, from ABC to First Incorporated by
Trust of Illinois, National Association, as Trustee reference
(incorporated by reference to the Registrant's
Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on November 15,
1996) (SEC File No. 333-16241)
4.6 First Supplemental Indenture to the Indenture dated Incorporated by
January 15, 1997, from ABC to First Trust of reference
Illinois, National Association, as Trustee
(incorporated by reference to the Registrant's
Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 17, 1997) (SEC
File No. 0-22906)
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LOCATION IN
NO. DESCRIPTION DOCUMENT
------- ----------- -----------
<C> <S> <C>
4.7 Second Supplemental Indenture to the Indenture Incorporated by
dated January 15, 1997, from ABC to First Trust of reference
Illinois, National Association, as Trustee
(incorporated by reference to the Registrant's
Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 22,
1997) (SEC File No. 0-22906).
5.1 Opinion of Jones, Day, Reavis & Pogue regarding the To be filed by
legality of the shares of ABC common stock to be amendment
issued pursuant to this Registration Statement (to
be filed by amendment).
8.1 Opinion of Jones, Day, Reavis & Pogue regarding To be filed by
federal income tax consequences (to be filed by amendment
amendment).
8.2 Opinion of Schiff Hardin & Waite regarding federal To be filed by
income tax consequences (to be filed by amendment). amendment
10.1 Registration Rights Agreement, dated as of August Incorporated by
28, 1991, among the Company, KARC and the reference
Management Investors named therein (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 October 12, 1993) (SEC File No. 33-
70242).
10.2 Second Amended and Restated Loan and Security Incorporated by
Agreement (the "Security Agreement"), dated as of reference
January 31, 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, and Amendment
No. 1 thereto dated as of August 8, 1997
("Amendment 1"), Amendment No. 2 thereto dated as
of October 31, 1997 ("Amendment 2") Amendment No. 3
thereto dated as of December 8, 1997 ("Amendment
3"), Amendment No. 4 thereto dated December 22,
1997 ("Amendment 4") and Amendment No. 5 thereto
dated April 24, 1998 ("Amendment 5") (Security
Agreement and Amendment 1 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, 1997 (SEC File No. 0-
22906); Amendment 2 incorporated by reference to
Exhibit 10.1 filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended October
31, 1997 (SEC File No. 0-22906); Amendment 3
incorporated by reference to Exhibit 10.1 filed
with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1998 (SEC File
No. 0-22906); Amendment 4 incorporated by reference
to Exhibit 10.1 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
April 30, 1998 (SEC File No. 0-22906); and
Amendment 5 incorporated by reference to Exhibit
10.3 filed with the Registrant's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998
(SEC File No. 0-22906).
10.3 Stock Option Plan dated July 1, 1993 (Incorporated Incorporated by
by reference to the same numbered exhibit filed reference
with the Registrant's Registration Statement on
Form S-1 originally filed with the Securities and
Exchange Commission on October 12, 1993) (SEC File
No. 33-70242).
10.4 Lease, entered into March 10, 1993, between the Incorporated by
Company and Milton M.Siegel Company (Incorporated reference
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 October 12, 1993) (SEC File
No. 33-70242).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LOCATION IN
NO. DESCRIPTION DOCUMENT
------- ----------- -----------
<C> <S> <C>
10.5 ABC Rail Corporation Master Savings Trust Incorporated by
(Incorporated by reference to the same numbered reference
exhibit filed with the Registrant's Registration
Statement on Form S-1 originally filed with the
Securities and Exchange Commission on October 12,
1993) (SEC File No. 33-70242).
10.6 ABC Rail Corporation Savings and Investment Plan, as Incorporated by
amended and restated effective as of May 1, 1988 reference
(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 October 12,
1993) (SEC File No. 33-70242).
10.7 Partnership Agreement, dated as of February 1, 1992, Incorporated by
by and between ABC Rail French Holdings, Inc. and reference
Cogifer Americas, Inc. (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 October 12, 1993) (SEC File No. 33-
70242).
10.8 Commercial Representation Agreement, dated February Incorporated by
21, 1992, between the Company and Cogifer Industries reference
of Croissy-sur-Sein, France and certain of its
affiliates (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
October 12, 1993) (SEC File No. 33-70242).
10.9 Agreement, dated February 21, 1992, by and between Incorporated by
the Company and Cogifer Industries (Incorporated by reference
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 October 12, 1993) (SEC File No. 33-
70242).
10.10 Lease, dated March 1, 1994, by and between the City Incorporated by
of Newton, Kansas and the Company (Incorporated by reference
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).
10.11 1994 Director Stock Option Plan (Incorporated by Incorporated by
reference to the same numbered exhibit filed with reference
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994) (SEC File No. 0-
22906).
10.12 Amendment No. 1 to 1994 Director Stock Option Plan Incorporated by
(Incorporated by reference to the same numbered reference
exhibit filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1996)
(SEC File No. 0-22906).
10.13 Form of option agreement evidencing options granted Incorporated by
to Donald W. Grinter (72,000 shares), D. Chisholm reference
MacDonald (40,000 shares), David G. Kleeschulte
(40,000 shares) and Eugene Ziemba (60,000 shares)
pursuant to the Stock Option Plan listed as Exhibit
10.3 above (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).
10.14 Asset Purchase Agreement dated April 3, 1995, Incorporated by
between the Company and General Electric Railcar reference
Wheel and Parts Service Corporation (Incorporated by
reference to the same numbered exhibit filed with
the Registrant's Current Report on Form 8-K dated
May 15, 1995) (SEC File No. 0-22906).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LOCATION IN
NO. DESCRIPTION DOCUMENT
------- ----------- -----------
<C> <S> <C>
10.15 1994 Stock Option Plan (Incorporated by reference Incorporated by
to the same numbered exhibit filed with the reference
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).
10.16 Agreement and General Release dated as of October Incorporated by
2, 1996 between Ben R, Yorks and the Company reference
(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,
1996) (SEC File No. 0-22906).
21.1 Subsidiaries of the Company (Incorporated by Incorporated by
reference to the same numbered exhibit filed with reference
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).
23.1 Consent of Independent Public Accountants of ABC. Filed herewith
23.2 Consent of Independent Public Accountants of NACO. Filed herewith
23.3 Consent of Jones, Day, Reavis & Pogue (included in To be filed by
Exhibit 5.1 and 8.1). amendment
23.4 Consent of Schiff Hardin & Waite (included in To be filed by
Exhibit 8.2). amendment
23.5 Consent of Salomon Smith Barney Inc. to the Previously filed
inclusion of their opinion as Exhibit B to the
Proxy Statement/Prospectus included herein.
23.6 Consent of Robert W. Baird & Co. Incorporated to Previously filed
the inclusion of their opinion as Exhibit C to the
Proxy Statement/Prospectus included herein.
24.1 Powers of Attorney. Previously filed
27.1 NACO Financial Data Schedule. Filed herewith
99.1 Consent of Joseph A. Seher to be named a director Previously filed
of ABC.
99.2 Consent of Richard A. Drexler to be named a Previously filed
director of ABC.
99.3 Consent of Daniel W. Duval to be named a director Previously filed
of ABC.
99.4 Consent of Willard H. Thompson to be named a Previously filed
director of ABC.
99.5 Form of proxy to be used at the ABC stockholders To be filed by
meeting. amendment
</TABLE>
4
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated September 17, 1998, included in ABC Rail Products Corporation's
Annual Report on Form 10-K for the year ended July 31, 1998, and to all
references to our firm included in or made part of this Registration Statement
on Form S-4.
Arthur Andersen LLP
Chicago, Illinois
December 14, 1998
<PAGE>
EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 1, 1998 (except with respect to the matter discussed in Note
15, as to which the date is September 17, 1998) for NACO, Inc. and Subsidiaries
and to all references to our firm included in or made part of this Registration
Statement on Form S-4.
Arthur Andersen LLP
Chicago, Illinois
December 14, 1998
<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 SIX MONTHS ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> SEP-27-1998
<CASH> 456
<SECURITIES> 0
<RECEIVABLES> 39,421<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 22,361
<CURRENT-ASSETS> 69,685
<PP&E> 65,039<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 135,441
<CURRENT-LIABILITIES> 63,109
<BONDS> 54,515
0
0
<COMMON> 6
<OTHER-SE> 9,537
<TOTAL-LIABILITY-AND-EQUITY> 135,441
<SALES> 174,838
<TOTAL-REVENUES> 174,838
<CGS> 147,070
<TOTAL-COSTS> 147,070
<OTHER-EXPENSES> 1,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,769
<INCOME-PRETAX> 7,552
<INCOME-TAX> 3,033
<INCOME-CONTINUING> 4,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,519
<EPS-PRIMARY> 4.42
<EPS-DILUTED> 4.19
<FN>
<F1>Notes and accounts receivable-trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
<F2>Property, plant, and equipment are reported net of allowances for doubtful
accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
