<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
January 31, 1998 0-22906
- -------------------------- ----------------------
For the Quarter Ended Commission File Number
ABC Rail Products Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3498749
- --------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Michigan Avenue, Chicago, IL 60604-2402
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (312) 322-0360
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 6, 1998
- ---------------------------- -------------------------------
Common Stock, $.01 par value 8,976,304 Shares
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
Page
-------
<S> <C> <C>
Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7 - 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 13
Part II Other Information
Item 2 Changes in Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 14 - 15
</TABLE>
2
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 31, 1998 and July 31, 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
January 31, July 31,
ASSETS 1998 1997
- ------ ----------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowances of $1,361 and $1,006, respectively $ 48,980 $ 38,208
Inventories (Note 3) 48,278 46,580
Prepaid expenses and other current assets 3,689 1,964
Prepaid income taxes 1,012 963
----------- --------
Total current assets 101,959 87,715
----------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,927 1,927
Buildings and improvements 12,525 12,491
Machinery and equipment 86,538 84,653
Construction in progress 59,769 36,421
----------- --------
160,759 135,492
Less - Accumulated depreciation (41,842) (37,480)
----------- --------
Net property, plant and equipment 118,917 98,012
----------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 15,544 14,684
----------- --------
OTHER ASSETS - net 33,684 30,196
----------- --------
Total assets $ 270,104 $230,607
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 6,485 $ 2,991
Current maturities of long-term debt 2,996 3,987
Accounts payable 30,835 26,617
Accrued liabilities 16,144 11,273
----------- --------
Total current liabilities 56,460 44,868
----------- --------
LONG-TERM DEBT, less current maturities (Note 4) 122,008 95,011
----------- --------
DEFERRED INCOME TAXES 5,931 5,881
----------- --------
OTHER LONG-TERM LIABILITIES 4,066 4,351
----------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
8,976,304 shares and 8,954,082 shares issued and outstanding
as of January 31, 1998 and July 31, 1997, respectively 90 90
Additional paid-in capital 67,798 67,362
Retained earnings 13,751 13,044
----------- --------
Total stockholders' equity 81,639 80,496
----------- --------
Total liabilities and stockholders' equity $ 270,104 $230,607
=========== ========
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $70,370 $55,710 $138,255 $111,621
COST OF SALES 62,351 47,102 123,444 97,640
-------- ------- -------- --------
Gross profit 8,019 8,608 14,811 13,981
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,054 2,752 7,676 5,994
-------- ------- -------- --------
Operating income 3,965 5,856 7,135 7,987
EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES 268 45 669 52
INTEREST EXPENSE 2,100 1,423 4,285 2,698
AMORTIZATION OF DEFERRED FINANCING COSTS 144 59 273 112
-------- ------- -------- --------
Income before income taxes and cumulative effect of accounting
change 1,989 4,419 3,246 5,229
PROVISION FOR INCOME TAXES 876 1,811 1,428 2,142
-------- ------- -------- --------
Income before cumulative effect of accounting change 1,113 2,608 1,818 3,087
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 6) (1,111) -- (1,111) --
-------- ------- -------- --------
Net income $ 2 $ 2,608 $ 707 $ 3,087
======== ======= ======== ========
EARNINGS PER SHARE DATA (Note 5):
Basic:
Income before cumulative effect of accounting
change $ 0.12 $ 0.30 $ 0.20 $ 0.36
Cumulative effect of accounting change (0.12) -- (0.12) --
-------- ------- -------- --------
Net income -- $ 0.30 $ 0.08 $ 0.36
======== ======= ======== ========
Weighted average common shares outstanding 8,970 8,668 8,963 8,498
======== ======= ======== ========
Diluted:
Income before cumulative effect of accounting
change $ 0.12 $ 0.30 $ 0.20 $ 0.36
Cumulative effect of accounting change (0.12) -- (0.12)
-------- ------- -------- --------
Net income $ -- $ 0.30 $ 0.08 $ 0.36
======== ======= ======== ========
Weighted average common and equivalent shares outstanding 9,291 8,792 9,259 8,605
======== ======= ======== ========
The accompanying notes to unaudited consolidated financial statements are an integral part of these financial statements.
</TABLE>
4
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
-------- ---------- --------
<S> <C> <C> <C>
BALANCE, July 31, 1996 $ 83 $55,251 $ 9,062
Net income - - 3,087
Exercised stock options 1 1,484 -
Income tax benefit from exercised stock options - 417 -
Shares issued in business acquisition 6 10,220 -
-------- ------- -------
BALANCE, January 31, 1997 $ 90 $67,372 $12,149
======== ======= =======
BALANCE, July 31, 1997 $ 90 $67,362 $13,044
Net income - - 707
Shares issued in business acquisition - 436 -
-------- ------- -------
BALANCE, January 31, 1998 $ 90 $67,798 $13,751
======== ======= =======
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements.
5
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Six Months Ended January 31, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2 $ 2,608 $ 707 $ 3,087
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change (Note 6) 1,111 - 1,111 -
Equity income of unconsolidated joint ventures (268) (45) (669) (52)
Depreciation and amortization 3,372 3,680 6,649 6,405
Deferred income taxes 31 156 331 306
Changes in certain assets and liabilities, net of effect of acquired businesses:
Accounts receivable - net (2,938) 2,200 (10,184) 2,257
Inventories (4,849) (7,853) (1,579) (9,356)
Prepaid expenses and other current assets (666) (509) (1,709) (1,505)
Other assets - net (3,017) (476) (3,659) (1,193)
Accounts payable and accrued liabilities 7,088 7,350 8,946 7,327
Other long-term liabilities (67) 2 (285) 1
------- ------- ------- -------
Total adjustments ( 203) 4,505 (1,048) 4,190
------- ------- ------- -------
Net cash provided by (used in) operating activities (201) 7,113 (341) 7,277
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,276) (6,857) (26,359) (12,980)
Business acquisitions, less cash acquired (1,039) (2) (1,039) (2)
Investment in joint ventures (20) (650) (341) (2,921)
------- ------- ------- -------
Net cash used in investing activities (18,335) (7,509) (27,739) (15,903)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts 1,398 (2,597) 3,494 (1,661)
Activity under the Credit Agreement:
Net activity under revolving line of credit (7,905) 4,922 2,136 9,416
Repayment of acquisition facility - (1,563) - (3,028)
Draw on acquisition facility - - - 1,750
Issuance of Senior Subordinated Notes 25,000 - 25,000 -
Issuance of other long-term debt 1,516 - 1,516 1,878
Repayment of other long-term debt (285) (570) (2,878) (1,143)
Payment of deferred financing costs (1,188) (21) (1,188) (71)
Exercised stock options - 225 - 1,485
------- ------- ------- -------
Net cash provided by financing activities 18,536 396 28,080 8,626
------- ------- ------- -------
Net change in cash - - - -
CASH, beginning of period - - - -
------- ------- ------- -------
CASH, end of period $ - $ - $ - $ -
------- ------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,713 $ 1,394 $ 4,411 $ 2,626
Cash paid for income taxes, net 719 592 758 676
NON-CASH TRANSACTIONS:
Business acquisitions
Common stock issued $ 436 $10,226 $ 436 $10,226
Cash paid 1,078 2 1,078 2
------- ------- ------- -------
Total consideration 1,514 10,228 1,514 10,228
Assets acquired 2,298 17,209 2,298 17,209
------- ------- ------- -------
Liabilities assumed $ 784 $ 6,981 $ 784 $ 6,981
======= ======= ======= =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
6
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
ABC Rail Products Corporation (the "Company") is a leader in the
engineering, manufacturing and marketing of replacement products and
original equipment for the freight railroad and rail transit industries.
The Company's products include specialty trackwork, such as rail crossings
and switches; mechanical products, such as rail car, locomotive and idler
wheels, mounted wheel sets and metal brake shoes; classification yard
products and automation systems; and railway signal systems installation,
engineering and maintenance services.
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the results of
operations and financial condition of the Company for and as of the interim
dates. Results for the interim period are not necessarily indicative of
results for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company believes
that the disclosures contained herein are adequate to make the information
presented not misleading. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1997 Annual Report to
Stockholders and the Company's amended 1997 Form 10-K/A.
2. Business Combinations
Effective December 17, 1996, the Company acquired American Systems
Technologies, Inc. ("AST") of Verona, Wisconsin for common stock valued at
$10.2 million. AST provides railway signal system installation and
maintenance to the short line, regional, commuter and transit railroads. As
part of the purchase agreement, the prior owners will be issued additional
shares of common stock if certain earnings goals are met over the
succeeding three years.
Shortly after the beginning of the second quarter of fiscal 1998, the
Company acquired United Railway Signal Group, Inc. ("URSG") headquartered
in Jacksonville, Florida for a combination of cash and the Company's common
stock totaling $1.5 million. URSG provides independent signal engineering
services to the railroad industry. As part of the purchase agreement, the
prior owners will be issued additional shares of common stock if certain
earnings goals are met over the next three years.
These acquisitions were accounted for under the purchase method of
accounting. Accordingly, certain recorded assets and liabilities of these
companies were revalued to estimated fair values as of the acquisition
date. Management has used its best judgment and available information in
estimating the fair market value of those assets and
7
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
liabilities. Any changes to these estimates are not expected to be
material. The operating results of these companies are included in the
consolidated statement of operations from the date of acquisition.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for substantially all inventories.
Inventory costs include material, labor and manufacturing overhead.
Supplies and spare parts primarily consist of manufacturing supplies and
equipment replacement parts.
Inventories at January 31, 1998, and July 31, 1997, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Raw materials $26,264 $27,734
Work in process 10,023 8,575
Finished goods 7,529 5,983
Supplies and spare parts 4,462 4,288
---------- ----------
$48,278 $46,580
========== ==========
</TABLE>
4. Debt
On December 23, 1997, the Company (under the Registration Statement filed
with the SEC on November 15, 1996) completed an offering of $25.0 million,
8 3/4% Senior Subordinated Notes, Series B (the "Notes - Series B"). The
Company used the $24.1 million of net proceeds of this offering to repay
indebtedness under its primary credit facility. The Notes - Series B are
general unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior indebtedness of the Company
and other liabilities of the Company subsidiaries. Financing costs of $1.2
million were deferred in connection with the issuance of the Notes - Series
B. The Company was in compliance with all of its covenants under both its
Subordinated Note obligations as of January 31, 1998.
The Company was in compliance with the debt covenants under its Credit
Agreement as of January 31, 1998, except for the limitation on capital
expenditures, the interest coverage ratio and limitations on intercompany
loans for which waivers were obtained. As of January 31, 1998, availability
under the Credit Agreement was $25.1 million.
The Company entered into a seven-year term loan agreement on July 20, 1995,
to finance up to $12.5 million of capital expenditures for the rail mill
center located in Chicago Heights, Illinois. In December, 1997, the Company
drew an additional $1.5 million under the term loan. Through January 31,
1998, $12.3 million had been drawn under this term loan. Except for the
interest coverage ratio, the Company was in compliance with all of its
covenants under the term loan as of January 31, 1998. A waiver was obtained
from the lender for the non-compliance on the interest coverage ratio.
8
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Earnings Per Share
SFAS No. 128, "Earnings Per Share" was issued in February 1997 and adopted
by the Company in the second quarter of fiscal 1998. This new pronouncement
established revised reporting standards for earnings per share and has been
retroactively applied to all periods presented herein. Previously reported
earnings per share for each such period were not materially different than
currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been
reported under the prior standard. Diluted earnings per share for the
Company includes the impact of the assumed exercise of dilutive stock
options as well as the assumed issuance of up to 180,000 shares related to
the earn-out for AST. The assumed issuance of contingent shares (along with
the assumed earnings level) related to the earn-out for USRG would be
antidilutive to diluted earnings per share.
6. Accounting Change
On November 20, 1997, the FASB Emerging Issues Task Force reached a
consensus that all companies must write-off previously capitalized business
process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior
fiscal years. In accordance with this consensus, the Company recorded a
non-cash, after-tax charge of $1.1 million to reflect the cumulative effect
of this accounting change.
9
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the interim periods included in the accompanying unaudited
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended January 31, 1998 Compared to Three Months Ended January 31,
1997
Net Sales. Net sales increased 26.3% to $70.4 million from $55.7 million. The
increase in sales is due primarily to a general increase in sales in the Wheel
Services Division ($7.1 million) and the additional sales associated with the
December 1996 acquisition of American Systems Technologies, Inc.
Gross Profit and Cost of Sales. Gross profit decreased from 15.5% of revenue in
1997 to 11.4% of revenue in 1998. The decrease in the gross profit is primarily
due to production inefficiencies at the Calera, Alabama wheel plant while it
works on implementing process improvements in the wheel foundry and the
machining operations. Calera production is expected to increase throughout the
second half of fiscal 1998 as these improvements are implemented in stages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million. The increase in expenses between
periods reflects additional expense in the customer support area (field sales
and customer service) to meet the expanding needs of our customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Other. Equity earnings from unconsolidated joint ventures increased to $0.3
million from $0.1 million primarily due to the Anchor Brake Shoe joint venture
established on July 31, 1995. Interest expense increased 47.6%, or $0.7 million,
due primarily to an overall higher level of outstanding debt to support
acquisitions, capital projects and expanding operations, along with the
marginally higher interest rate on the new Senior Subordinated Notes.
Accounting Change. On November 20, 1997, the FASB Emerging Issues Task Force
reached a consensus that all companies must write-off previously capitalized
business process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior fiscal
years. In accordance with this consensus, the Company recorded a non-cash,
after-tax charge of $1.1 million to reflect the cumulative effect of this
accounting change.
Earnings Per Share. SFAS No. 128, "Earnings Per Share" was issued in February
1997 and adopted by the Company in the second quarter of fiscal 1998. This new
pronouncement established revised reporting standards for earnings per share and
has been retroactively applied to all periods presented herein. Previously
reported earnings per share for each such period were not materially different
than currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been reported
under the prior standard. Diluted earnings per share for the Company includes
the impact of the assumed exercise of dilutive stock options as well as the
assumed issuance of up to 180,000 shares related to the earn-out for AST. The
assumed issuance of contingent shares (along with the assumed earnings level)
related to the earn-out for USRG would be antidilutive to diluted earnings per
share.
10
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended January 31, 1998 Compared to Six Months Ended January 31, 1997
Net Sales. Net sales increased 23.9% to $138.3 million from $111.6 million. The
increase in sales is due primarily to a general increase in sales in the Wheel
Services Division ($5.8 million), and the additional sales associated with the
December 1996 acquisition of American Systems Technologies, Inc.
Gross Profit and Cost of Sales. Gross profit decreased from 12.5% of revenue in
1997 to 10.7% of revenue in 1998 due to the production inefficiencies at the
Calera wheel manufacturing plant discussed in the quarter to quarter analysis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million. The increase in expenses between
periods reflects additional expense in the customer support area (field sales
and customer service) to meet the expanding needs of our customers and the
additional effort required to support the Company's new information systems
(SAP's R/3 enterprise-wide software).
Other. Equity earnings from unconsolidated joint ventures increased to $0.7
million from $0.1 million primarily due to the Anchor Brake Shoe joint venture
established on July 31, 1995. Interest expense increased 58.8%, or $1.6 million,
due primarily to an overall higher level of outstanding debt to support
acquisitions, capital projects and expanding operations, along with the
marginally higher interest rate on the new Senior Subordinated Notes.
Accounting Change. On November 20, 1997, the FASB Emerging Issues Task Force
reached a consensus that all companies must write-off previously capitalized
business process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process re-engineering costs in prior fiscal
years. In accordance with this consensus, the Company recorded a non-cash,
after-tax charge of $1.1 million to reflect the cumulative effect of this
accounting change.
Earnings Per Share. SFAS No. 128, "Earnings Per Share" was issued in February
1997 and adopted by the Company in the second quarter of fiscal 1998. This new
pronouncement established revised reporting standards for earnings per share and
has been retroactively applied to all periods presented herein. Previously
reported earnings per share for each such period were not materially different
than currently reported diluted earnings per share. Additionally, application of
the new standard for fiscal 1998 periods did not materially impact the
calculation of diluted earnings per share versus what would have been reported
under the prior standard. Diluted earnings per share for the Company includes
the impact of the assumed exercise of dilutive stock options as well as the
assumed issuance of up to 180,000 shares related to the earn-out for AST. The
assumed issuance of contingent shares (along with the assumed earnings level)
related to the earn-out for USRG would be antidilutive to diluted earnings per
share.
11
<PAGE>
SEASONALITY
- -----------
The peak season for installation of specialty trackwork extends from March
through October, when weather conditions are generally favorable for
installation and, as a result, net sales of specialty trackwork have
historically been more concentrated in the period from January through June, a
period roughly corresponding to the second half of the Company's fiscal year. In
addition, a number of the Company's facilities close for regularly scheduled
maintenance in the late summer and late December, which tends to reduce
operating results during the first half of the Company's fiscal year. Transit
industry practice with respect to specialty trackwork generally involves the
periodic shipment of large quantities, which may be unevenly distributed
throughout the year. The Company does not expect any significant departure from
the historical demand patterns during the present fiscal year ending July 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Cash generated from operations, structured borrowings and debt and equity
offerings have been the major sources of funds for working capital, capital
expenditures and acquisitions. For the six months ended January 31, 1998 and
1997, net cash provided by (used in) operating activities totaled $(0.3) million
and $7.3 million, respectively. The decrease in operating cash flow is due
primarily to a net increase in working capital, along with reduced net earnings.
Capital expenditures during the first six months of fiscal 1998 and 1997 were
$26.4 million and $13.0 million, respectively. The increase in spending between
periods is due principally to improvements at the Calera, Alabama wheel plant
and construction of the Rail Mill in Chicago Heights, Illinois.
In May 1996, the Company entered into a joint venture agreement with China's
Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The
joint venture will manufacture wheels in China primarily for the Chinese railway
markets. The Company's contribution of its 40% share in the joint venture will
consist of technical know-how, expertise and cash. The Company has invested
$9.2 million of cash in the joint venture through January 31, 1998. The cash
funding is being used to construct a manufacturing facility which is expected to
be operational by mid 1998.
At the beginning of the second quarter of fiscal 1998, the Company acquired
United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville,
Florida for a combination of cash and the Company's common stock totaling $1.5
million. URSG provides independent signal engineering services to the railroad
industry. As part of the purchase agreement, the prior owners will be issued
additional shares of common stock if certain earnings goals are met over the
next three years. This acquisition was accounted for under the purchase method
of accounting.
In January, 1998, the Company purchased the exclusive rights to patents for the
manufacture and sale of heat-treated and head-hardened rail in the Americas. An
initial down payment of $0.5 million has been made on equipment for processing
the rail. Total expenditures over the next year for patent rights and production
equipment are expected to be $10 - $12 million and are expected to be financed
through the Company's Credit Agreement.
For the six months ended January 31, 1998 and 1997, net cash provided by
financing activities totaled $28.1 million and $8.6 million, respectively. The
increase in financing cash flows is due primarily to the issuance of an
additional $25.0 million of Senior Subordinated debt.
On December 23, 1997, the Company (under the Registration Statement filed with
the SEC on November 15, 1996) completed an offering of $25 million 8 3/4% Senior
Subordinated Notes, Series B (the "Notes - Series B"). The Company used the
$24.1 million of net proceeds of this Offering to repay indebtedness under its
primary credit facility. The Notes - Series B are
12
<PAGE>
general unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company and other
liabilities of the Company subsidiaries. The Notes - Series B rank pari passu
with the 9 1/8% Notes. Financing costs of $1.2 million were deferred in
connection with the issuance of the Notes - Series B. The Notes - Series B will
mature in 2000, unless repurchased earlier at the option of the Company on or
after December 31, 1999 at 102% of face value prior to December 30, 2000 or at
100% of face value thereafter. The Notes - Series B are subject to mandatory
repurchase or redemption prior to maturity upon a change of control (as defined
in the Indenture). The Indenture under which the Notes - Series B were issued
subjects the Company to various financial covenants which are substantially
similar to the covenants relating to the 9 1/8% Notes. The Company was in
compliance with all of its covenants under its Subordinated Note obligations as
of January 31, 1998.
The Company was in compliance with the debt covenants under its Credit Agreement
as of January 31, 1998, except for the limitation on capital expenditures, the
interest coverage ratio and limitations on intercompany loans for which waivers
were obtained. As of January 31, 1998, availability under the Credit Agreement
was $25.1 million.
The Company entered into a seven-year term loan agreement on July 20, 1995, to
finance up to $12.5 million of capital expenditures for the rail mill center
located in Chicago Heights, Illinois. In December, 1997, the Company drew an
additional $1.5 million under the term loan. Through January 31, 1998, $12.3
million had been drawn under this term loan. Except for the interest coverage
ratio, the Company was in compliance with all of its covenants under the term
loan as of January 31, 1998. A waiver was obtained from the lender for the non-
compliance on the interest coverage ratio.
The Company started to address the "Y2K" or Year 2000 problem, caused by
obsolete computer programs which cannot recognize dates beyond 1999, over
two years ago. As part of that analysis, it was determined, based on recognized
industry standards, that the Company would have to incur a minimum of $2.0
million to upgrade its existing legacy systems to solve the "Y2K" problem. Based
on that analysis, the Company elected to install new software (SAP's R/3
enterprise software) which is expected to not only solve the "Y2K" computer
problem but to also fully support the Company's overall strategic growth plans.
The estimated completion date for the basic SAP R/3 software programs continues
to be the Spring of 1999. At the present time, management is unable to estimate
the potential impact on the Company of the possible failure of its customers and
suppliers to become Year 2000 compliant. If the Company's major customers and
suppliers are not and do not become Year 2000 compliant on a timely basis, the
Company's results of operations could be adversely affected.
REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------
The foregoing contains forward-looking statements that are based on current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from current expectations due to a number of
factors, including general economic conditions; competitive factors and pricing
pressures; shifts in market demand; the performance and needs of industries
served by the Company's businesses; actual future costs of operating expenses
such as rail and scrap steel, self-insurance claims and employee wages and
benefits; actual costs of continuing investments in technology; the availability
of capital to finance possible acquisitions and to refinance debt; the ability
of management to implement the Company's strategy of acquisitions, rebuilding
and process improvements; "Y2K" issues and the risks described from time to time
in the Company's SEC reports.
13
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 2 - Changes in Securities
Shortly after the beginning of the second quarter, the Company
issued 22,222 shares of common stock to the prior owners of
United Railway Signal Group, Inc. ("URSG") as part of the
consideration paid for the Company's acquisition of URSG. In
addition, pursuant to the purchase agreement, the Company agreed
to issue additional shares of common stock to the prior owners of
URSG if certain earnings goals are met over the next three years.
The Company relied upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, for such issuances.
Item 4 - Submission of Matters to a Vote of Security Holders
On November 21, 1997 the annual stockholders' meeting was held. The
following individuals were elected directors at the meeting:
<TABLE>
<CAPTION>
Director Votes For Withheld
-------- --------- --------
<S> <C> <C>
Donald W. Grinter 7,811,612 3,050
Norman M. Doerr 7,812,012 2,650
Jean-Pierre M. Ergas 7,665,512 149,150
Donald R. Gant 7,811,712 2,950
Clarence E. Johnson 7,812,012 2,650
James E. Martin 7,812,012 2,650
George W. Peck IV 7,811,212 3,450
</TABLE>
In addition, one other matter was submitted for shareholder approval at the
meeting which was the ratification of the appointment of Arthur Andersen LLP for
the fiscal year ended July 31, 1998. The votes cast for, votes cast against and
abstentions were as follows:
<TABLE>
<CAPTION>
In Favor Against Abstain
-------- ------- -------
<S> <C> <C>
7,689,315 122,947 2,400
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (2)
10.1 Amendment No. 3 dated as of December 8, 1997 to the Second
Amended and Restated Loan and Security Agreement, dated as
of January 3, 1997 among the Company, ABC Deco Inc. and
American Systems Technologies, Inc., as borrowers, the
financial institutions named therein, as lenders, and
American National Bank and Trust Company of Chicago, as
agent, as amended by Amendment No. 1 thereto dated as of
August 8, 1997 and Amendment No. 2 thereto dated as of
October 31, 1997.
27.1 Financial Data Schedule.
14
<PAGE>
(1) Incorporated by reference to the same numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 originally
filed with the Securities and Exchange Commission on April 13,
1994 (SEC File No. 33-77652).
(2) Incorporated by reference to the same numbered exhibit filed with
the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1994 (SEC File No. 0-22906).
(B) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABC RAIL PRODUCTS CORPORATION
/s/ Robert W. Willmschen, Jr.
-----------------------------
Robert W. Willmschen, Jr.
Executive Vice President
and Chief Financial Officer
(Duly authorized Officer)
/s/ J.P. Singsank
-----------------------------
J. P. Singsank
Corporate Controller and
Assistant Secretary
(Chief Accounting Officer)
Date: February 20, 1998
-----------------
16
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 3 AND CONSENT AGREEMENT
--------------------------------------
THIS AMENDMENT NO. 3 AND CONSENT AGREEMENT (the "Agreement") is
entered into as of December 8, 1997 by and among ABC Rail Products Corporation
("Rail"), ABC Deco Inc. ("Deco"), and American Systems Technologies, Inc.("AST";
Rail, Deco and AST being, collectively, the "Borrowers"), the financial
institutions named on the signature page hereto (the "Lenders") and American
National Bank and Trust Company of Chicago, as agent for the Lenders (the
"Agent").
RECITALS:
--------
A. The Agent, the Lenders and the Borrowers have entered into a Second
Amended and Restated Loan and Security Agreement dated as of January 31, 1997
(as heretofore amended, supplemented or otherwise modified, the "Loan
Agreement").
B. The Borrowers have requested that the Agent and the Lenders agree to
amend the Loan Agreement pursuant to the terms and subject to the conditions
hereof.
In consideration of the premises set forth above, the terms and
conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Definitions. Terms defined in the Loan Agreement which are used
herein shall have the same meanings as are set forth in the Loan Agreement for
such terms unless otherwise defined herein.
2. Amendment and Consent. Subject to the complete satisfaction of
all of the conditions set forth in Section 3 below: (a) the Required Lenders
hereby consent, pursuant to the provisions of Subsection 8.17 of the Loan
Agreement, to an amendment of the Subordinated Debt Documents in the form of
Exhibit A attached hereto; and (b) Subsection 8.13(B) of the Loan Agreement is
hereby amended by deleting the reference therein to "$61,530,000" and inserting
in lieu thereof the following: "$63,166,000."
3. Conditions. The terms of Section 2(a) and 2(b) above shall become
effective only when each of the following conditions have been completely, and
substantially concurrently, satisfied as determined by the Agent (the date of
such satisfaction being hereinafter referred to as the "Effective Date"):
(a) Documents. The Agent shall have received each of the
following agreements, instruments and other documents, in each case in form
and substance acceptable to the Agent:
<PAGE>
(i) eight (8) copies of this Agreement duly executed and
delivered by each of the Borrowers and the Required Lenders; and
(ii) such other documents, certificates, agreements,
opinions and items as the Agent may request in connection herewith.
(b) Representations and Warranties; No Default. As of the
Effective Date, the representations and warranties contained herein and in
the Loan Agreement shall be true and complete, and no Default or Event of
Default shall exist.
4. Representations, Warranties and Agreements of the Borrowers.
(a) Each of the Borrowers represents and warrants that: (1) the
execution and delivery by such Borrower of this Agreement and the
agreements and instruments contemplated hereby and the performance of each
Borrower's obligations hereunder and thereunder: (i) are within the
corporate powers of each Borrower; (ii) are duly authorized by the Board of
Directors of each Borrower, and, if necessary, the stockholders of each
Borrower; (iii) are not in contravention of the terms of the Charter or By-
Laws of any Borrower, or of any contract, instrument, indenture or other
agreement or undertaking to which any Borrower is a party or by which any
Borrower or any of its property is bound or any judgment, decree or order
applicable to any Borrower; (iv) do not require any governmental consent,
registration or approval or any filing with or notice to any governmental
entity or agency; (v) do not contravene any governmental restriction
binding upon any Borrower; and (vi) will not result in the imposition of
any lien, charge, security interest or encumbrance upon any property of any
Borrower under any indenture, mortgage, deed of trust, loan or credit
agreement or other agreement or instrument to which any Borrower is a party
or by which it or any of its property may be bound or affected; (2) this
Agreement has been duly executed and delivered by each Borrower and
constitutes the legal, valid and binding obligation of each Borrower,
enforceable against each Borrower in accordance with its terms, except as
limited by applicable bankruptcy, reorganization, insolvency or similar
laws affecting the enforcement of creditors' rights generally and except as
limited by general principles of equity; (3) the Loan Agreement, after
giving effect hereto, constitutes the legal, valid and binding obligation
of the Borrowers enforceable against the Borrowers in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally or by general equitable principles; and (4) as
of the date hereof, and as of the Effective Date, there exists no Default
or Event of Default.
(b) Each of the Borrowers hereby reaffirms all covenants,
representations and warranties made in the Loan Agreement and all other
Financing Agreements. Each of the Borrowers hereby agrees that all
covenants, representations and warranties made in the Loan Agreement and
all other Financing Agreements shall be deemed to have been remade as of
the date hereof and the Effective Date.
<PAGE>
5. Reference to the Effect on the Loan Agreement.
(a) On and after the Effective Date, (i) each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import shall mean and be a reference to the Loan Agreement as
amended hereby, and (ii) each reference to the Loan Agreement in all other
Financing Agreements shall mean and be a reference to the Loan Agreement,
as amended hereby.
(b) The Loan Agreement, and all other documents, instruments and
agreements executed and/or delivered in connection therewith, shall remain
in full force and effect, and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Agreement
shall not operate as a waiver of any right, power or remedy of the Agent or
the Lenders, nor constitute a waiver of, or consent to any departure from,
any provision of the Loan Agreement, or any other documents, instruments
and agreements executed and/or delivered in connection therewith.
6. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws (as opposed to conflicts of law provisions)
of the State of Illinois.
7. Headings. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
8. Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery by any party of telecopied copies of executed counterparts
hereof shall constitute execution and delivery hereof by such party.
9. Termination. This Agreement shall cease to be of any effect if
the Effective Date has not occurred on or before December 31, 1997.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
ABC RAIL PRODUCTS CORPORATION
By: /s/ D. Chisholm MacDonald
----------------------------------------
Title: Executive Vice President --
----------------------------------------
Administration and Business Development
----------------------------------------
ABC DECO INC.
By: /s/ D. Chisholm MacDonald
----------------------------------------
Title:
----------------------------------------
AMERICAN SYSTEMS TECHNOLOGIES, INC.
By: /s/ D. Chisholm MacDonald
----------------------------------------
Title:
----------------------------------------
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, individually and as
Agent
By: /s/ Dennis E. Harrison
----------------------------------------
Title: Senior Vice President
----------------------------------------
BTM CAPITAL CORPORATION
By: /s/ James E. Torkelson
----------------------------------------
Title: V.P.--Region Manager
----------------------------------------
<PAGE>
LASALLE NATIONAL BANK
By: /s/ Terri Maurer
----------------------------------------
Title: Vice President
----------------------------------------
NATIONS BANK OF TEXAS, N.A.
By: /s/ James Berkemeier
----------------------------------------
Title: Vice President
----------------------------------------
MELLON BANK, N.A.
By: /s/ Jeffrey G. Saperstein
----------------------------------------
Title: Assistant Vice President
----------------------------------------
<PAGE>
EXHIBIT A
---------
See Attached
<PAGE>
JDRP Draft of December 8, 1997
------------------------------
ABC RAIL PRODUCTS CORPORATION
the Company
AND
FIRST TRUST NATIONAL ASSOCIATION
the Trustee
____
SECOND SUPPLEMENTAL INDENTURE
Dated as of December 1, 1997
Supplementing that certain
Indenture
Dated as of January 15, 1997
as heretofore supplemented and amended
through and including the First Supplemental
Indenture dated January 15, 1997
<PAGE>
SECOND SUPPLEMENTAL INDENTURE
This SECOND SUPPLEMENTAL INDENTURE dated as of December 1, 1997 (this
"Amendment") is made and entered into by and between ABC RAIL PRODUCTS
CORPORATION, a Delaware corporation (the "Company"), and FIRST TRUST NATIONAL
ASSOCIATION, Chicago, Illinois, a national banking association, as trustee (the
"Trustee") under the Indenture dated as of January 15, 1997 (as heretofore
supplemented and amended through and including the First Supplemental Indenture
dated January 15, 1997, the "Indenture"), between the Company and the Trustee.
Except as otherwise provided herein, capitalized terms used but not defined
herein shall have the meanings assigned to such terms in the Indenture.
RECITALS
WHEREAS, pursuant to Sections 301 and 303 of the Indenture, the Company has
heretofore executed the Officer's Certificate dated as of January 28, 1997 (the
"Officer's Certificate") establishing the provisions of a series of Securities
under the Indenture entitled "9 1/8% Senior Subordinated Notes Due 2004";
WHEREAS, it is currently necessary for the Company to restate its fiscal
year 1996 consolidated financial statements;
WHEREAS, pursuant to Section 901(2) of the Indenture, without the consent
of any Holders, the Company, when authorized by or pursuant to a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental to the Indenture, in form satisfactory to the Trustee and the
Company, to, among other things, add to the covenants of the Company for the
benefit of the Holders of all or any series of Securities;
WHEREAS, the Company and the Trustee desire to add to a covenant of the
Company contained in the Officer's Certificate;
WHEREAS, this Amendment has been authorized by a Board Resolution;
WHEREAS, the amendments to the Officer's Certificate that are contemplated
by this Amendment are not otherwise prohibited by Section 902 of the Indenture;
NOW, THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
<PAGE>
ARTICLE I AMENDMENTS
---------------------
Section 1.1 Definitions. Capitalized terms used in this Article I shall
have the meanings assigned such terms in the Officer's Certificate.
Section 1.2 Consolidated Net Worth. Subparagraph (b) of Paragraph 10 of
the Officer's Certificate is hereby amended to read as follows:
"The Company will maintain Consolidated Net Worth at the end of each
of its fiscal quarters at an amount not less than the sum of (i) $56.6
million, plus (ii) 35% of Consolidated Net Income for each of its
fiscal quarters occurring after October 31, 1996 plus (iii) 85% of the
amount of the net proceeds from the sale of any of the Company's or
its Subsidiaries' capital stock, options or warrants computed on a
cumulative basis;"
ARTICLE II MISCELLANEOUS
-------------------------
Section 2.1 Severability. If any provision of this Amendment is held to
be in conflict with any applicable statute or rule of law, or is otherwise held
to be unenforceable for any reason whatsoever, such circumstances shall not have
the effect of rendering the provision in question inoperative or unenforceable
in any other part or circumstance, or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable to any extent
whatsoever.
The invalidity of any one or more phrases, sentences, clauses or Sections
of this Amendment shall not affect the remaining portions of this Amendment, or
any part hereof.
Section 2.2 Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Illinois.
Section 2.3 Execution in Counterparts. This Amendment may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
[the remainder of this page is intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto had caused this Amendment to be
executed and attested in their names by their respective duly authorized
officers, all as of the day and year first above written.
ABC RAIL PRODUCTS CORPORATION
By:________________________________
Title:_____________________________
(SEAL)
Attest:
__________________________
Title:____________________
FIRST TRUST NATIONAL ASSOCIATION, as
Trustee
By:_________________________________
Title:______________________________
(SEAL)
- ------
Attest:
__________________________
Title:____________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE PERIOD ENDED JANUARY 31, 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> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 48,980<F1>
<ALLOWANCES> 0
<INVENTORY> 48,278
<CURRENT-ASSETS> 101,959
<PP&E> 160,759
<DEPRECIATION> 41,842
<TOTAL-ASSETS> 270,104
<CURRENT-LIABILITIES> 56,460
<BONDS> 122,008
0
0
<COMMON> 90
<OTHER-SE> 81,549
<TOTAL-LIABILITY-AND-EQUITY> 270,104
<SALES> 138,255
<TOTAL-REVENUES> 138,255
<CGS> 123,444
<TOTAL-COSTS> 123,444
<OTHER-EXPENSES> 7,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,558
<INCOME-PRETAX> 3,246
<INCOME-TAX> 1,428
<INCOME-CONTINUING> 1,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,111)
<NET-INCOME> 707
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<FN>
<F1> Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
