SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1999
Commission file number 0-22906
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ABC-NACO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3498749
(State or other jurisdiction (I.R.S.Employer
of incorporation) Identification Number)
2001 BUTTERFIELD ROAD
SUITE 502
DOWNERS GROVE, ILLINOIS 60515
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 852-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's common stock, $.01 par
value, held by non-affiliates of the registrant as of February 15, 2000 was
$122,745,103.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of February 15, 2000 was 19,061,132.
Portions of the following document are incorporated by reference: 1999
Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on
April 20, 2000--Part III.
<PAGE>
PART I
ITEM 1-BUSINESS
GENERAL
ABC-NACO Inc. (''the Company'') is one of the world's leading suppliers of
technologically advanced products and services to the freight railroad and flow
control industries through its three business segments: Rail Products, Rail
Services and Systems, and Flow and Specialty Products. With four technology
centers around the world supporting its three business segments, the Company
holds pre-eminent market positions in the design, engineering, and manufacture
of high performance freight railcar, locomotive and passenger rail suspension
and coupler systems, wheels and mounted wheel sets, and specialty track
products. The Company also supplies freight, railroad and transit signaling
systems and services, as well as highly engineered valve bodies and components
for industrial flow control systems worldwide.
On February 19, 1999, ABC Rail Products Corporation (''ABC'') consummated a
merger (''the Merger'') with NACO, Inc. (''NACO''), a privately held Delaware
corporation that designed, manufactured and supplied cast steel products for the
railroad supply and flow control supply markets. The newly merged Company
("ABC-NACO") is now positioned to meet the growing needs of the freight rail
industry for suppliers that can support their expanding business requirements.
On September 23, 1999, the Company's Board of Directors adopted a
resolution to change the Company's fiscal year-end to December 31. The Company
had previously been operating on a fiscal year beginning August 1 and ending
July 31. The primary reason for the change was to align the Company's fiscal
year-end with the calendar-year reporting used by its major customers. This
Form 10-K transition report covers the five-month Transition Period, August 1,
1999, through December 31, 1999 (the "Transition Period").
MARKET OVERVIEW AND INDUSTRY DEMAND
The recent Merger created a powerful railway supply company that is
positioned to respond to the favorable market trends for this industry sector.
For the first time in history, one company can design, produce and assemble the
major under carriage components (commonly referred to as a ''truck'' or
''bogie'') for freight car systems and the specialty trackwork they run on.
Since it is the truck that controls the ride characteristics of the rail car,
the ability to study the interaction of the truck components and the track on
which it runs is critical to the design and manufacture of proprietary products
that improve ride handling characteristics. The benefits to railroads, railcar
owners and shippers are: lower wheel wear, faster train speeds, larger hauling
capacity, reduced fuel consumption, less track wear, improved life cycle cost,
and reduced cargo damage. Using these proprietary design and build concepts, the
Company has the ability to deliver truck-specific applications for different
customer needs and performance situations.
The new Company's capabilities directly support the growing trends
exhibited by the Class I railroads in the United States. As a result of their
recent mergers, they want to reduce their invested capital. This initiative is
leading to a decrease in direct ownership of railcars by the railroads. The new
railcar owners (utility companies, non-railroad lessors and customers of the
railroads) are very interested in the net cost of ownership associated with a
railcar. As a result, the Company is able to demonstrate to this new breed of
car owner that its products will reduce their maintenance cost and allow for
larger loads, thereby decreasing their effective freight cost and minimizing the
in-transit damage to their product. As a result, customers specify the Company's
products on new car builds or as retrofits to existing railcars. The Class I
railroads are also seeking rail supply consolidators that offer sub-assemblies
and complete product packages and related services. This initiative is driving
the developing trend by the Class I railroads to identify outside service
providers for their non-haul activities such as wheel mounting, track panelizing
and signal and communication design, installation and maintenance. This trend is
evidenced by the Company's recent long-term contract with Union Pacific Railroad
Company (''UP'') to perform, in conjunction with Gunderson Rail Services, all of
the freight car wheel mounting and repair and wheel maintenance services for
UP's entire North American rail system.
Industrywide freight car builds are forecasted to remain strong. While the
current build levels are projected to be off the peak levels of the past couple
of years, the estimate of 50,000-60,000 cars per year for the next two to three
years still represents a strong level of new car build activity. More of these
cars will be built outside the United States where the Company has major
manufacturing facilities. In 1999, approximately 28% of new cars were built in
Mexico and Canada. It is estimated that in 2000 about 49% of the railcars will
be built in Mexico and Canada. The Company is the only American Association of
Railroads (''AAR'') approved manufacturer with facilities in all NAFTA
countries. That certification provides the Company maximum flexibility to
produce its products in its most cost effective facilities.
Railroad revenue ton miles (a measure of volume and level of hauling
activity on the railroads) continue to increase year over year. This rather
inelastic level of activity is a prime driver of approximately 50% of the
Company's revenue that is generated by replacement business.
Another emerging trend is the move by the European freight railroads to
heavier axle loading, thereby increasing hauling capacity leading to a
corresponding decrease in freight hauling expense. The Company has been
positioning itself in Europe for a number of years through its European
manufacturing facilities, local sales force and region-specific product testing.
BUSINESS STRATEGY
The Company's principal goal has been to achieve continuing sales and
earnings growth by capitalizing on and further developing the competitive
advantages within its Business Segments-Rail Products, Rail Services and
Systems, and Flow and Specialty Products. The key elements of the Company's
strategy for achieving this goal have been to:
(1) Build Upon Its Commitment to Technology Leadership through ABC-NACO
Technologies
The Company believes its commitment to technology differentiates it from
its competitors. In recent years, the Company 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, the Company formed
NACO Technologies (now ABC-NACO Technologies), a stand-alone research,
development and product testing facility in Lombard, Illinois, as the focus of
its ongoing technology efforts. Today, ABC-NACO Technologies employs 39 people,
including 30 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 the
Company's target markets, to improve the Company's existing products, and to
enhance the Company's manufacturing processes. The Company believes its
commitment to technology has enabled it to become a principal supplier to
customers for its products and services.
(2) Enhance Existing and Develop New High Performance Proprietary Products
The Company's focus in its Business Segments has been and will remain on
the development, manufacture and sale, both domestically and internationally, of
its wide range of proprietary products. The Company's proprietary products are
designed to provide customers with superior performance and lower overall
life-cycle costs. For example, the Company believes that the advantages offered
by its portfolio of high performance freight car truck ride quality, fuel
savings, reduced maintenance costs and longer service life will enable it to
maintain and strengthen its competitive position in that market. The Company's
Advanced Vehicle DynamicsTM design technology has contributed to the Company's
leading North American market position in high performance freight car trucks.
The Company also has incorporated proprietary patented features into the
manufacturing of freight car truck suspension systems and proprietary coupler
products employing traditional AAR designs. The Company is expanding this design
technology to the development of higher performance freight car wheels and other
specialty track products.
(3) Continue to Implement Innovative Manufacturing Process Improvements, such
as Advanced Precision TechnologyTM, Replicast Technology, Six
Sigma and ISO 9000
The Company has improved and intends to continue to improve its
manufacturing processes through technological innovation. Its Advanced Precision
TechnologyTM enables the Company to design and produce castings with a much
greater degree of dimensional accuracy compared with traditional manufacturing
processes. Advanced Precision TechnologyTM permits the Company to produce
precisely dimensioned and lighter weight castings which have the same or
improved strength and durability as castings produced with traditional
technologies. The Company has implemented a ''Six Sigma'' initiative which
employs statistical measurement techniques in all phases of the Company's
design, engineering, customer service and manufacturing processes. The Company's
Six Sigma initiative analyzes and statistically measures both the output and the
cost of the various processes and procedures employed by the Company in its
day-to-day operations. This initiative will permit the Company to optimize the
efficiency and minimize the cost of each component part of its operations. The
Company also has focused on the development of Replicast ceramic shell casting
technology as a potentially superior alternative to sand casting, with potential
applications across the Company's Business Segments. ABC-NACO recently launched
a commercial production line employing the Replicast ceramic shell technology
to produce traditional AAR coupler products after extensive testing and
refinement at ABC-NACO Technologies and its Leven casting facility. The Company
believes that its Replicast technology will enable it to increase its
manufacturing capacity and produce higher quality products at lower prices and
with reduced turnaround times. To further support its work-flow processes, the
Company has achieved ISO 9001 and 9002 certification at 22 of its facilities.
This certification further strengthens the Company's commitment to the quality
of its processes.
(4) Focus on Customer Relationships with Industry Leaders
The Company 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 and Specialty Products segment, the
Company 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'', the Company 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 meet the customer's production schedule.
The Company believes its partnering approach will yield further benefits as its
customers continue to consolidate and outsource non-core business activities 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
The Company has made approximately $187.7 million of capital investments
(excluding business acquisitions) in its manufacturing facilities and ABC-NACO
Technologies during the Transition Period and for the last three fiscal years
ended July 31, 1999. These expenditures have been made principally for product
and process improvements designed to maximize the ability of the Company's
geographically diverse manufacturing facilities to produce the highest volume of
''value added'' products at the lowest possible cost. The Company recently
completed the expansion of its Sahagun, Mexico, facility to permit the full
range of railroad products offered (excluding locomotive frames) to be produced
at that facility; accommodate increased production of railroad products as well
as certain flow control products; and relocate certain locomotive production to
its Sahagun facility from its Keokuk facility in order to produce these products
using lower cost methods and to increase capacity available to produce higher
margin products at its Keokuk facility. The Company believes that it has the
flexibility to shift the manufacturing of its railroad products among its
facilities in response to customer demand and cost. The Company's manufacturing
operations in Canada, Mexico and the United States gives it the flexibility to
shift production to the most cost effective facility; while at the same time
allowing it to take advantage of the growing trend of building new railcars in
Mexico and Canada.
(6) Pursue International Growth Opportunities, especially in the Americas and
Europe
The Company 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 the Company. The
Company is the only producer of freight car trucks and couplers in both Canada
and Mexico. In addition, the Company 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 in Portugal and its
supply relationship in the Czech Republic.
(7) Strategic Alliances and Acquisitions
The Company continually explores opportunities to enhance its technology
base and its marketing and distribution capabilities. In addition, the Company
seeks acquisitions of complementary product lines, particularly those that offer
potential manufacturing or marketing synergies. Since fiscal 1995, the Company
has acquired seven businesses and entered into three ventures which resulted in
the Company having initial or expanded operations in the mounted wheel set,
retarders, classification yard products and automation systems, composite brake
shoes, railroad signal and communication systems, engineering and maintenance
services businesses and a presence in Mexico and China. Since the Company is a
manufacturer and provider of complimentary rail-related products and services,
it has greater access to railroads' engineering and purchasing departments than
companies that offer only a single product line. The Company, 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, the Company believes
that a variety of acquisition opportunities exist, allowing it to bundle more
and more related product sales to its customers.
BUSINESS SEGMENTS
The Company conducts its operations through its three business segments
which consist of: Rail Products, Rail Services and Systems, and Flow and
Specialty Products. The Company realigned its segments during the Transition
Period to better reflect the organizational and marketing changes that were
enacted within the Company. The Company's trackwork product line which
previously had been reported as part of the Rail Products segment is now
included as part of the Rail Services and Systems segment. The Company now
markets its services for signaling and trackwork products to the railroads
through one organization headed by one division president. In addition, the
Company for strategic reasons, placed its metal brake shoe foundry into the Flow
and Specialty Products segment. The current and historical segment financial
information has been restated to reflect these changes.
Rail Products. In its Rail Products segment, the Company designs, produces
and assembles the major undercarriage components for freight car systems. The
segment designs, manufactures and supplies products that 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 part of 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.
The segment 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 and are used in North America and International service.
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.
The segment also manufactures various other freight car products that are
widely used in the railroad industry. The group is one of only four
manufacturers of traditional AAR design couplers (couplers are used to connect
freight cars with other freight cars and locomotives), which employ
cross-licensed technology owned by the Company and three of its competitors. The
Company 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. The Company also manufactures a line of related
freight car products, including articulated connectors, draft gear housings,
centerplates and draft sills.
For the Transition Period and fiscal 1999, 1998, and 1997, Rail Products
segment sales accounted for approximately 56%, 55%, 46% and 48%, respectively,
of the Company's sales before intercompany eliminations and other.
Rail Services and Systems. This segment includes the wheel mounting
operation, which is primarily a reconditioning service business that
re-manufactures, 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. The Company's reconditioning services include
inspection and analysis of existing wheel sets to determine necessary
replacements parts, re-machining of axle units, replacement and/or re-machining
of wheels, and replacement and/or reinstallation of bearings. The Company also
supplies new wheel sets.
The segment 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. The Company's
products include track switches and turnouts that divert a train from one track
to another; crossings that allow one set of railroad tracks to cross through
another; switches that set a track switch in order to divert a train from one
track to another; and other trackwork products including guard rails and
retarders. Track switches typically serve to divert trains between two tracks.
The Company also designs and manufactures more complicated track switches
serving three or more route diversions needed to meet switching requirements in
areas of high density traffic, such as urban freight yards, passenger terminals
and high traffic industrial and port areas.
The segment also designs, assembles, installs and maintains railroad and
transit signal systems.
For the Transition Period and fiscal 1999, 1998, and 1997, Rail Services
and Systems segment sales accounted for approximately 33%, 35%, 40% and 36%,
respectively, of the Company's sales before intercompany eliminations and other.
Flow and Specialty Products. Flow and Specialty Products 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 the Company rather than castings made of other metals.
The valve housings and related castings produced by the Company generally range
in size from 25 pounds to approximately 2,500 pounds and form the outer shell of
the valves used in flow control systems manufactured by the Company's customers.
The Company also manufactures cast Manganese steel trackwork components which
are sold as part of a track assembly or as replacement parts. In addition, the
group produces idler wheels and metal brake shoes. Idlers are secondary wheels
that guide the treads on such tracked construction equipment as bulldozers and
backhoes.
For the Transition Period and fiscal 1999, 1998, and 1997, Flow and
Specialty Products segment sales accounted for approximately 11%, 10%, 14% and
16%, respectively, of the Company's sales before intercompany eliminations and
other.
REGULATION
The AAR promulgates a wide variety of rules and regulations governing,
among other things, safety and the design, performance and manufacture of
equipment used on freight cars in interchange service throughout the North
American railroad system. The AAR's interchange rules define all significant
physical and dimensional elements of interchange service freight cars and their
key components, including trucks, couplers and wheels. The AAR also certifies
railcar builders and component manufacturers that provide equipment for use in
interchange service. The AAR specifications are complex and the Company believes
that considerable proprietary expertise and information is 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 the Company, must maintain its certification with
the AAR as a freight car component manufacturer, and freight car products sold
by that manufacturer must meet AAR standards and be manufactured in an
AAR-certified facility.
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, the Company believes
considerable proprietary expertise and information are required to manufacture
these products economically.
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 Union International des
Chemins de Fer (''UIC''), whose function is to promulgate regulations for safety
matters, including the design and manufacture of freight car equipment used in
interchange service on European railroad systems. The Company 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.
SALES AND MARKETING
The Company pursues an integrated sales and marketing approach that
includes senior management, engineering and technical professionals, and sales
representatives, all of whom work together to identify and respond to customer
needs by developing relationships with customers at all levels. The Company
employs a team of sales persons to market the Company's products to existing and
potential customers. The Company 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 the Company's products, services and capabilities to the
customer. In addition to marketing products directly to its customers, the
Company targets selected end users, such as railroads, leasing companies, and
utilities, and other owners of freight cars and locomotives to encourage them to
specify the Company's products in their orders. The Company also works with end
users and owners of freight cars and locomotives to develop products that are
customized to their needs.
The Company'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 products and applications. The Company
believes the high level of technical assistance in product development, design,
manufacturing and testing that it provides to its customers gives it an
advantage over its competition.
The Company's marketing efforts often go beyond arrangements for specific
product purchases. As part of its efforts to develop customer relationships, the
Company works with many of its customers on a long-term basis to design and
manufacture new products which are customized to their needs. The Company
believes that these relationships provide its customers with a stable source of
supply, improved product quality and design, and superior customer service.
CUSTOMERS
Customers of the Company's Rail Products segment include all of the North
American Class I railroads and major owners, builders and lessors of freight
cars and locomotives in North America, regional and short-line railroads, as
well as rail transit systems and European railroads. Customers for the Rail
Services and Systems segment include the North American Class I railroads,
regional and short-line railroads, railcar and locomotive manufacturers, and
railroad service companies. Customers of the Company's Flow and Specialty
Products segment 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 the Transition Period, sales to the Company's
five largest customers accounted for 43% of the Company's net sales. The
Company's largest customers are TrailerTrain (TTX) and Union Pacific Railroad
Company which accounted for approximately 11% and 10%, respectively, of the
Company's net sales in the Transition Period. No other customer accounted for
more than 10% of the Company's net sales in the Transition Period.
MANUFACTURING
The principal manufacturing activities within Rail Products include the
manufacture of cast steel wheels and a wide range of cast steel products. 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 techniques as well as standard gauging methods.
Railroad cast steel products are produced in 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.
The Company is presently implementing a number of innovative strategic
casting initiatives to be used in conjunction with the Company's traditional
casting methods which will enable the Company to increase its manufacturing
capacity and produce higher quality products at lower costs and with reduced
turnaround times. Historically, the Company has 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. Certain of the Company's railroad products casting
facilities primarily use a ''green sand'' process 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 the Company and is used principally to produce railroad products
castings.
Ceramic Shell Casting. The Replicast 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 requires
minimal machining and finishing, which would otherwise 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, and a high degree of dimensional accuracy and reduced
post-production machining.
As a result of the Company's developments in ceramic casting technology,
its Leven, Scotland, 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 the Wabash National's RoadRailer trailer.
In June, 1998, the Company successfully completed the first phase of its ceramic
shell production lines at the Cicero, Illinois, facility. The Company is now
using the Replicast ceramic shell technology and is contemplating using the
ceramic shell casting process in its production of various railroad and flow
products now produced by other casting methods at its other facilities.
Air-set Castings. The Flow and Specialty Products segment primarily uses an
air-set process. In this molding process, the sand is chemically-bonded to
produce sand molds. Air-set technology produces castings with greater
dimensional accuracy and a smoother surface than does the green sand molding
process. Through the air-set process, the Company 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. The Company
believes that the quality and process control procedures it has developed at the
Keokuk 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.
The principal manufacturing activity with Rail Services and Systems is the
manufacture of specialty trackwork. In the manufacture of specialty trackwork,
rail and various other steel products are purchased from outside suppliers and
machined, 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, the Company 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
forging, shearing, sawing, drilling, bending, machining and assembly. Certain
cast Manganese components are subjected to an explosion hardening process which
increases their useful life.
SUPPLY ARRANGEMENTS
The Company has historically entered into a number of supply or product
sourcing arrangements with non-U.S. casting facilities which enable the Company
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 the Company through its
supply arrangements are completed products.
The Company currently has supply arrangements with two casting facilities
located in San Juan del Rio, Mexico; and Bohurmin, Czech Republic, which provide
it with additional manufacturing capacity without significant up front capital
expenditures or ongoing investment by the Company. The Company uses these supply
arrangements principally to supplement the manufacturing capacity of its casting
facilities. The supply arrangements also provide the Company with an opportunity
to better assess whether a casting facility should be considered for possible
acquisition by the Company. Through the relationship created by the supply
arrangement, the Company 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. Two examples of this approach are the
Company's experiences at the Sahagun, Mexico facility which, prior to its
purchase by the Company in 1996, had supplied products to the Company under a
supply arrangement and the Cometna facility in Lisbon, Portugal which, prior to
its purchase by the Company in 1999, had supplied products to the Company under
a supply agreement.
COMPETITION
The Company operates in highly competitive markets and faces significant
competition from a limited number of established companies in the United States.
The Company has historically experienced limited foreign competition in its
product markets, but expects to face increased competition from foreign
suppliers of railroad products as it expands the production and sale of its
products into other countries. Historically, the Company has experienced limited
foreign competition in North America due to the specialized nature of many of
its products, the importance of AAR product approvals, AREA specifications and
the cost of shipping. Although no single company competes with the Company
across all of its product lines, some of the Company's competitors are larger
and have greater financial resources than the Company. Competition in the
Company's markets is based upon product design and performance, price, quality,
on-time delivery, product availability, installation expertise, and customer
service and support. The Company believes it is well positioned to compete in
all of its served markets, due to its leading market share, technical
capability, broad manufacturing base and long-standing customer relationships.
In the Rail Products segment, the Company is the second largest U.S.
manufacturer of freight railcar and locomotive wheels. In the market for freight
railcar and locomotive cast wheels, the Company's primary competitor is Griffin
Wheel Company, a subsidiary of Amsted Industries, Inc. The Company also competes
with Standard Steel, a division of Freedom Forge Corporation, which manufactures
forged wheels. Primary competitors in the manufacture of freight car cast steel
products are American Steel Foundries (a division of Amsted Industries
Incorporated), Buckeye Steel Castings Co. (a subsidiary of Buckeye Holdings,
Inc.) and McConway & Torley Corp. (a subsidiary of Trinity Industries Inc.). The
Company's primary competitor in the manufacture of locomotive truck frames is
Atchison Casting Corp. In the manufacture of other locomotive castings, the
Company has several competitors including Atchison Casting Corp., Racine Steel
Castings and several smaller foundries.
In the Rail Services and Systems segment, the Company, along with Progress
Rail, operate the two 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, except for Union Pacific, which
outsources to the Company. The remaining independent wheel mounting market is
highly fragmented. In the served market for signal and communication services,
the Company's primary competitors are Union Switch, MEC Rail (a division of Mass
Electric Construction Company), Harmon Industries, Inc. and Safetron Systems
Corporation. The Company is the largest manufacturer of specialty trackwork
products in North America, serving all of the Class I railroads and a number of
regional and short-line railroads. In specialty trackwork, ABC-NACO competes
with a number of North American manufacturers, including Cleveland Track,
Voest-Alpine Nortrak Inc., an affiliate of Voest-Alpine Eisenbahn Systemme AG
and Progress Rail, a subsidiary of Florida Progress Corporation. 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
the Company's Chicago Heights, Illinois, facility, which serves customers in the
eastern U.S. In the Company's opinion, the locations of its specialty trackwork
manufacturing facilities in Pueblo, Colorado and Superior, Wisconsin provide it
with a competitive advantage with respect to railroads operating in the western
U.S. and Canada.
In the Flow and Specialty Products segment, the market is fragmented, and
the Company competes with numerous other companies that manufacture the type of
steel and high alloy valve housings and related products that the Company
produces. The Company's largest competitors in this market are TIC United Corp.,
Pacific Steel Casting Co., Quality Electric Steel Castings, Inc. and Citation
Corp. The Company is the only U.S. manufacturer of metal brake shoes.
ORDER BACKLOG
The Company's backlog at any particular time is affected by a number of
factors relating to, among other things, the Company's production schedule and
the time at which customers generate purchase orders. 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 ''Management's Discussion and Analysis of Financial
Condition and Results of Operations.'' Order backlog for wheels 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. The Company's backlog was $85.1 million and
$125.3 million as of December 31, 1999 and July 31, 1999, respectively. The
Company expects to fill the majority of its order backlog as of December 31,
1999 during the calendar year 2000.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, 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 these efforts
will be successful, or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's proprietary information. The Company currently holds 35 U.S.
trademarks and 33 foreign trademarks. The Company holds 58 U.S. patents and 43
foreign patents and has applications pending for 10 U.S. patents, 41 foreign
patents, and 4 foreign trademarks. The Company uses a cost-benefit analysis to
determine whether the value of patent protection justifies the expense of
seeking the protection. The Company 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 the Company to manufacture its various
steel casting products are scrap steel and alloys such as Chromium and
Manganese, electrical power, natural gas and sand. The Company 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 the Company 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 can fluctuate, the Company 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. The Company does not
anticipate any difficulty in obtaining sufficient scrap steel and alloys for its
manufacturing operations.
The Company has experienced occasional difficulties with respect to its
supply of electrical power and natural gas. The Company has interruptible power
service contracts with its electrical power suppliers, and electrical service at
some of its casting facilities is interrupted from time to time, which results
in temporary cutbacks in operations at the affected facilities.
The principal raw materials for specialty trackwork products are railroad
rail and Manganese. The Company purchases rail from various rail manufacturers.
In certain instances, the Company purchases rail directly from its railroad
customers for whom specialty trackwork is being built, capitalizing on their
purchasing economies.
EMPLOYEES
As of December 31, 1999, the Company had 5,946 employees, approximately
78% of who are represented by labor unions. The Company believes that its labor
relations are satisfactory.
The Company recently entered into five-year labor agreements with Rail
Services and Systems employees in Pueblo, Colorado, and Chicago Heights,
Illinois; a four-year agreement with Flow and Specialty Products foundry
employees in Richmond, Texas; three-year agreements with Rail Products employees
in Melrose Park, Illinois, Calera, Alabama and Crown Point, Indiana, Flow and
Specialty Products employees in Keokuk, Iowa and Baltimore, Maryland and Rail
Services and Systems employees in Verona, Wisconsin; and a one-year agreement
with Rail Product employees in Sahagun, Mexico.
The Company anticipates that it will negotiate agreements in the Year 2000
with Rail Services and Systems employees in Mexico City and agreements will be
negotiated with Rail Products employees in Melrose Park and Cicero, Illinois and
Sahagun, Mexico. These negotiations affect approximately 31% of the Company's
employees.
ENVIRONMENTAL MATTERS
For a description of compliance with environmental matters and of
litigation related thereto, see ''Part I, Item 3-Legal Proceedings'' herein.
SEGMENT REPORTING
Refer to the Company's financial statements as of December 31, 1999, July
31, 1999 and 1998, and for the Transition Period and the three years ended July
31, 1999, 1998, and 1997 included herein, for the required segment and
geographical disclosures.
<PAGE>
ITEM 2-PROPERTIES
The Company maintains its headquarters in Downers Grove, Illinois and
conducts its operations in 24 principal manufacturing plants. The Company
believes its property and equipment is in good condition and suitable for its
needs. The Company's principal operating facilities are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
-----------
SQUARE
-----------
LOCATION(1) FOOTAGE OWNED/LEASED DESCRIPTION OF USE
- --------------------------- ----------- ------------- ------------------------------------------
<S> <C> <C> <C>
Chicago Heights, Illinois 182,000 Owned Specialty trackwork rail manufacturing
Chicago Heights, Illinois 244,000 Owned Specialty trackwork manufacturing
Cincinnati, Ohio 135,000 Owned (2) Specialty trackwork manufacturing
Pueblo, Colorado 111,000 Owned Specialty trackwork manufacturing
Superior, Wisconsin 94,000 Owned Specialty trackwork manufacturing
Newton, Kansas 58,000 Leased (3) Specialty trackwork manufacturing
Ashland, Wisconsin 57,000 Owned (3) Specialty trackwork panelizing
Anderson, Indiana 155,000 Owned (2) Manganese steel trackwork castings
Crown Point, Indiana 20,000 Leased Manganese steel trackwork casting patterns
Calera, Alabama 259,000 Owned Cast railroad wheels
Calera, Alabama 19,000 Owned Cast railroad wheels
Baltimore, Maryland 61,000 Owned Metal brake shoes
Kansas City, Kansas 36,000 Leased Railroad wheel assembly
Lewistown, Pennsylvania 29,000 Owned Railroad wheel assembly
Chicago Heights, Illinois 21,000 Owned Railroad wheel assembly
Mexico City, Mexico 24,000 Leased Railroad wheel assembly
Corsicana, Texas 18,000 Owned Railroad wheel assembly
San Bernardino, California 65,000 Leased Railroad wheel assembly
Verona, Wisconsin 13,000 Leased Railway signal system assembly
Jacksonville, Florida 13,000 Leased Railway signal system assembly
Cicero, Illinois 700,000 Owned Freight car castings
Hamilton, Ontario, Canada 425,000 Owned Freight car and locomotive castings
Melrose Park, Illinois 240,000 Owned Freight car and locomotive castings
Sahagun, Hidalgo, Mexico 794,500 Owned Freight car and locomotive castings
Lisbon, Portugal 520,000 Owned Freight car and locomotive castings
Keokuk, Iowa 122,000 Owned Valve housings and related castings
Keokuk, Iowa 30,000 Leased Finishing plant
Keokuk, Iowa 54,000 Leased Pattern storage facility
Keokuk, Iowa 15,000 Owned General offices
Richmond, Texas 249,000 Leased Specialty castings and idler wheels
Lombard, Illinois 30,000 Leased Research & development/product engineering
Leven, Fife, Scotland 213,000 Owned Railway and industrial castings
</TABLE>
(1) All locations are in the USA unless otherwise indicated.
(2) Facility has been closed and is being marketed for sale.
(3) Facility is leased by the Company in connection with an industrial
revenue bond arrangement and pursuant to a lease which grants the Company an
option to purchase the facility for a nominal amount.
All of the non-real estate assets located at the Company's owned
manufacturing and assembly facilities within the U.S., other than Newton, Kansas
and Ashland, Wisconsin, are pledged as security under the Company's senior
credit facility. Real estate assets at the Company's Ashland, Wisconsin, and
Superior, Wisconsin, facilities have been pledged to a third party bank as
letter of credit provider supporting an Industrial Revenue Bond offering.
The Company has also pledged its real estate assets at its Hamilton, Ontario
facility to a key customer under a ''payment-in-kind'' credit agreement along
with a first priority security interest in the facility's equipment and related
motor vehicles. A second priority security interest in this facility's equipment
and furniture assets was provided to the Company's senior credit facility
lenders.
ITEM 3-LEGAL PROCEEDINGS
The Company is subject to a variety of environmental laws and regulations
governing discharges to air and water, the handling, storage and disposal of
hazardous or solid waste materials and the remediation of contamination
associated with releases of hazardous substances. Although the Company believes
it is in material compliance with all of the various regulations applicable to
its business, there can be no assurance that requirements will not change in the
future or that the Company will not incur significant cost to comply with such
requirements. The Company employs responsible personnel at each facility, along
with various environmental engineering consultants from time to time to assist
with ongoing management of environmental, health and safety requirements.
The Company is also a party to various other legal proceedings arising in
the ordinary course of business, none of which is expected in management's
opinion, after consultation with legal counsel, to have a material adverse
effect, either individually or in the aggregate, on the Company's consolidated,
financial position or results of operations.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On November 19, 1999, the Company held the 1999 Annual Meeting of
Shareholders. The following matters were approved by shareholders:
1.) Election to the Board of Directors for a three-year term one class of
directors, consisting of James E. Martin and Willard H. Thompson. The vote
totals were as follows:
For Withheld Abstain
---- -------- -------
16,493,519 0 470,958
2.) Approval and adoption of the Company's 1999 Omnibus Stock Plan. The
votes cast for, votes cast against and abstentions were as follows:
For Against Abstain
--- ------- -------
13,032,332 1,975,193 380,833
3.) Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants. The votes cast for, votes cast against and
abstentions were as follows:
For Against Abstain
--- ------- -------
16,950,017 4,910 9,550
ITEM 4A-EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ---------------------------------------------------------
<S> <C> <C>
Joseph A. Seher . . 55 Chief Executive Officer and Director
Vaughn W. Makary. . 50 President and Chief Operating Officer
John W. Waite . . . 56 Executive Vice President and Chief Administrative Officer
J. P. Singsank. . . 53 Senior Vice President and Chief Financial Officer
Brian L. Greenburg. 40 Vice President and Corporate Controller
Vincent V. Rea. . . 37 Vice President and Corporate Treasurer
Mark F. Baggio. . . 39 Vice President, General Counsel and Secretary
</TABLE>
JOSEPH A. SEHER. Mr. Seher has served as Chief Executive Officer of the Company
since February, 1999. Prior to the Merger, Mr. Seher 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
National Castings, Inc. (''NCI''), a subsidiary of NACO. 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 the Company since February, 1999. Mr. Makary served as President and
Chief Operating Officer of NACO from 1988 to February, 1999, and as a director
of NACO from 1993 to February, 1999.
JOHN W. WAITE. Mr. Waite has served as Executive Vice President and Chief
Administrative Officer of the Company since February, 1999. Mr. Waite served as
Executive Vice President and Chief Administrative Officer of NACO from June,
1997 to February, 1999 and as a director of NACO from October, 1993, to
February, 1999. From 1989 through June 1997, Mr. Waite was Executive Vice
President of NACO.
J. P. SINGSANK. Mr. Singsank has served as Senior Vice President and Chief
Financial Officer of the Company since July, 1999. Mr. Singsank served as Vice
President of Finance and Chief Accounting Officer for the Company from February,
1999 to July, 1999 and as Corporate Controller for ABC from 1993 to February,
1999.
BRIAN L. GREENBURG. Mr. Greenburg has served as Vice President and Corporate
Controller of the Company since February, 1999. Mr. Greenburg served as Vice
President and Corporate Controller of NACO from April, 1998 to February, 1999.
From July 1997 to April 1998, Mr. Greenburg served as Vice President and
Controller- Flow Products Group of NACO. From January 1996 to June 1997, Mr.
Greenburg served as Vice President of Finance and Chief Financial Officer of
Milwaukee Valve Co., Inc. From 1985 to April, 1995, Mr. Greenburg held other
various financial positions with NACO.
VINCENT V. REA. Mr. Rea has served as Vice President and Corporate Treasurer of
ABC-NACO Inc. since July, 1999. From May, 1998, through February, 1999, Mr. Rea
was Corporate Treasurer of ABC and subsequently held the same position with the
merged ABC-NACO Inc. From 1986 through April, 1998, Mr. Rea held a number of
financial management and treasury positions with both Safety-Kleen Corp. and
Motorola, Inc.
MARK F. BAGGIO. Mr. Baggio has served as Vice President, General Counsel and
Secretary of the Company since July, 1999. From February, 1999, to July, 1999,
Mr. Baggio served as the Company's Senior Corporate Counsel. Prior to the
Merger, Mr. Baggio was a principal in the law firm of Lison & Griffin P.C. where
he worked from 1987 to 1998. Mr. Baggio also served as an auditor with the U.S.
General Accounting Office.
<PAGE>
ITEM 5-MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on The Nasdaq Stock Market's
National Market System under the symbol ''ABCR.'' Set forth below are the high
and low closing bid prices for the Company's common stock during the periods
indicated, as reported by the National Market System.
<TABLE>
<CAPTION>
QUARTERS ENDED TWO MONTHS ENDED
------------------------------------
OCT. 31 JAN. 31 APRIL 30 JULY 31 DEC. 31, 1999
-------- -------- -------- -------- ----------------
Transition Period Ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
High . . . . . . . . . . . . . . . . . . . $ 20.125 N/A N/A N/A $ 11.437
Low. . . . . . . . . . . . . . . . . . . . $ 8.750 N/A N/A N/A $ 8.000
Fiscal Year Ended July 31, 1999:
High . . . . . . . . . . . . . . . . . . . $ 17.750 $ 15.750 $ 15.500 $21.000 N/A
Low. . . . . . . . . . . . . . . . . . . . $ 8.000 $ 10.000 $ 12.000 $12.750 N/A
Fiscal Year Ended July 31, 1998:
High . . . . . . . . . . . . . . . . . . . $ 20.875 $ 21.750 $ 19.875 $19.250 N/A
Low. . . . . . . . . . . . . . . . . . . . $ 16.500 $ 17.000 $ 17.125 $14.250 N/A
</TABLE>
ITEM 6-SELECTED FINANCIAL DATA
On February 19, 1999, the Company consummated a merger (the ''Merger'') between
a wholly owned subsidiary of ABC Rail Products Corporation (''ABC'') and NACO,
Inc. (''NACO''). As a result of the Merger, each outstanding share of NACO
common stock was converted into 8.7 shares of ABC common stock, resulting in the
issuance of approximately 9.4 million shares. The Merger was treated as a
tax-free reorganization for federal income tax purposes and is accounted for as
a pooling-of-interests transaction. The accompanying selected financial data
reflect the combined results of ABC and NACO as if the Merger occurred on the
first day of the earliest period presented and is based on the fiscal periods
described below.
Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal
year-end was the Sunday closest to March 31. ABC's fiscal year was adopted by
the Company as the annual financial reporting period. As permitted under
Regulation S-X promulgated by the Securities and Exchange Commission, the
year-ends of the two companies have not been conformed for periods prior to
fiscal 1999. The financial position of NACO as of June 28, 1998, March 30, 1997,
March 31, 1996, and April 2, 1995 and the results of NACO's operations for the
twelve months ended June 28, 1998, March 30, 1997, March 31, 1996 and April 2,
1995 are combined with ABC's financial position as of July 31, 1998, 1997, 1996
and 1995 and the results of ABC's operations for the twelve months ended July
31, 1998, 1997, 1996 and 1995, respectively. Accordingly, revenues of $26.5
million and a 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 Company's Consolidated Statements of Operations. As permitted in a
pooling-of-interests business combination, the ABC-NACO financial statements
reflect certain adjustments to conform the accounting policies of both
companies.
On September 23, 1999, the Company's Board of Directors adopted a
resolution to change the Company's fiscal year-end to December 31 from July 31.
The principal reason for the change was to align the Company's fiscal year-end
with the fiscal year-end of its major customers. The Company filed a Form 10-Q
quarterly report for the quarter ending October 31, 1999 and this Form 10-K
transition report covers the five-month Transition Period from August 1, 1999 to
December 31, 1999. Comparable, unaudited results for the five months ended
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net sales . . . . . . . . . . . . . . . . . $276,366
Gross profit. . . . . . . . . . . . . . . . 39,246
SG&A. . . . . . . . . . . . . . . . . . . . 25,601
Operating income. . . . . . . . . . . . . . 13,645
Income before income taxes and cumulative
effect of accounting change . . . . . 7,094
Provision for income taxes. . . . . . . . . 790
Income before cumulative effect of
accounting change . . . . . . . . . . . 6,304
Cumulative effect of accounting change,
net of income taxes of $1,014 . . . . . 1,620
Net income. . . . . . . . . . . . . . . . . $ 4,684
========
Earnings per share, after cumulative effect
of accounting change:
Basic . . . . . . . . . . . . . . . . . $ 0.26
Diluted . . . . . . . . . . . . . . . . $ 0.25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE YEAR ENDED JULY 31,
------------------------------------------------
DEC. 31,1999 1999 1998 1997 1996 1995
- --------------------------------------------------------- --------- --------- --------- --------- --------- -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $239,861 $665,497 $634,921 $535,718 $519,209 $472,426
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 214,833 570,523 543,310 466,757 449,918 405,557
--------- --------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 25,028 94,974 91,611 68,961 69,291 66,869
Selling, general and administrative expenses. . . . . . . 24,962 60,225 56,282 48,649 41,743 33,087
Wilsons asset impairment charge and liquidation (gain)(1) - - - (1,430) 2,800 -
Merger and other restructuring charges(2) . . . . . . . . 1,201 21,925 - - 3,155 -
--------- --------- --------- --------- --------- ---------
Operating income (loss). . . . . . . . . . . . . . . . (1,135) 12,824 35,329 21,742 21,593 33,782
Settlement of litigation(3) . . . . . . . . . . . . . . . - - - - (2,800) -
Equity (income) loss of unconsolidated joint ventures . . (29) 66 (1,616) (1,041) 144 (393)
Interest expense. . . . . . . . . . . . . . . . . . . . . 9,398 17,782 13,862 12,620 9,526 5,624
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative
effect of accounting changes and
extraordinary items. . . . . . . . . . . . . . . . . (10,504) (5,024) 23,083 10,163 14,723 28,551
Provision (benefit) for income taxes. . . . . . . . . . . (4,979) 923 9,305 3,914 5,572 5,874
--------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting changes and extraordinary items . . . . . (5,525) (5,947) 13,778 6,249 9,151 22,677
Cumulative effect of accounting changes(4). . . . . . . . - (1,620) (1,111) - - (3,241)
Extraordinary items(5). . . . . . . . . . . . . . . . . . - (3,158) - (310) - (814)
--------- --------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . . . . . $ (5,525) $(10,725) $ 12,667 $ 5,939 $ 9,151 $ 18,622
========= ========= ========= ========= ========= =========
PER SHARE DATA:
Basic:
Income (loss) before cumulative effect of
accounting changes and extraordinary items . . . . . $ (0.30) $ (0.33) $ 0.77 $ 0.36 $ 0.54 $ 1.36
Net income (loss). . . . . . . . . . . . . . . . . . . $ (0.30) $ (0.59) $ 0.71 $ 0.34 $ 0.54 $ 1.12
Weighted average common shares outstanding . . . . . . 18,623 18,142 17,850 17,587 16,946 16,615
Diluted:
Income (loss) before cumulative effect of
accounting changes and extraordinary items . . . . . $ (0.30) $ (0.33) $ 0.75 $ 0.35 $ 0.52 $ 1.31
Net income (loss). . . . . . . . . . . . . . . . . . . $ (0.30) $ (0.59) $ 0.69 $ 0.33 $ 0.52 $ 1.08
Weighted average common and equivalent
shares outstanding . . . . . . . . . . . . . . . . . 18,623 18,142 18,474 18,139 17,576 17,283
OPERATING DATA:
Backlog(6). . . . . . . . . . . . . . . . . . . . . . . . $ 85,114 $125,287 $155,804 $113,247 $100,250 $162,862
Depreciation and amortization . . . . . . . . . . . . . . 13,373 30,126 22,476 20,785 16,447 10,951
Capital expenditures(7) . . . . . . . . . . . . . . . . . 17,659 54,640 68,915 46,528 30,562 35,690
BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . . . . . . . . . . $492,471 $453,821 $423,896 $340,142 $262,568 $228,977
Total debt (including cash overdrafts). . . . . . . . . . 252,454 229,619 208,131 156,927 105,550 84,626
Stockholders' equity. . . . . . . . . . . . . . . . . . . 86,679 81,557 92,070 78,366 59,852 43,741
_
</TABLE>
(1) The Company recorded a $2.8 million write-down in fiscal 1996 and a
liquidation gain of $1.4 million in fiscal 1997 in connection with certain
actions taken with respect to its Wilsons facility.
(2) The charge in fiscal 1996 represents non-recurring charges primarily for
the closure of a manufacturing facility and the cost of certain reengineering
efforts. The charges in fiscal 1999 and the five months ended December 31, 1999
relate to costs and restructuring actions associated with the Merger, as well as
costs associated with the restructuring of certain operations within the Rail
Systems and Services segment.
(3) Represents proceeds from the settlement of a lawsuit against ABEX.
(4) Represents the after-tax cumulative effect of accounting changes
whereby, in fiscal 1995, the Company adopted new provisions for accounting for
certain postemployment and postretirement benefits which were previously
accounted for on a cash basis; in fiscal 1998, the Company expensed previously
capitalized business process reengineering costs; and in fiscal 1999, the
Company expensed previously capitalized start-up costs.
(5) Represents the after-tax effect of extraordinary charges recognized in
connection with the write-off of unamortized deferred financing costs, make
whole payments and termination fees related to the early extinguishment of debt
in connection with the refinancing of certain indebtedness in fiscal 1995,
fiscal 1997 and fiscal 1999.
(6) 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 arrangements.
(7) Excludes expenditures for business acquisitions.
<PAGE>
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operation should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere herein. This discussion contains certain
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from the results expressed in, or implied
by, such statements. See ''Regarding Forward-Looking Statements.''
BASIS OF PRESENTATION
On February 19, 1999, the Company consummated a merger (the ''Merger'')
between a wholly owned subsidiary of ABC Rail Products Corporation (''ABC'') and
NACO, Inc. (''NACO''). As a result of the Merger, each outstanding share of NACO
common stock was converted into 8.7 shares of ABC common stock, resulting in the
issuance of approximately 9.4 million shares. The Merger was treated as a
tax-free reorganization for federal income tax purposes and is accounted for as
a pooling-of-interests transaction. The following discussions reflect the
combined results of ABC and NACO as if the Merger occurred on the first day of
the earliest period described and is based on the fiscal periods described
below.
Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal
year-end was the Sunday closest to March 31. ABC's fiscal year was adopted by
the Company as the annual financial reporting period. As permitted under
Regulation S-X promulgated by the Securities and Exchange Commission, the
year-ends of the two companies have not been conformed for periods prior to
fiscal 1999. The financial position of NACO as of June 28, 1998 and the results
of NACO's operations for the twelve months ended June 28, 1998 and March 30,
1997 are combined with ABC's financial position as of July 31, 1998 and the
results of ABC's operations for the twelve months ended July 31, 1998 and 1997,
respectively. Accordingly, revenues of $26.5 million and a 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 Company's
Consolidated Statements of Operations. As permitted in a pooling-of-interests
business combination, the ABC-NACO financial statements reflect certain
adjustments to conform the accounting policies of both companies.
On September 23, 1999, the Company's Board of Directors adopted a
resolution to change the fiscal year-end to December 31 from July 31. The
principal reason for the change was to align the Company's year-end with the
fiscal year-end of its major customers. The Company filed a Form 10-Q quarterly
report for the fiscal quarter ending October 31, 1999 and this Form 10-K
transition report covers the five-month Transition Period ("Transition Period")
from August 1, 1999 to December 31, 1999.
The Company realigned its segments during the Transition Period to better
reflect the organizational and marketing changes that were enacted within the
Company. The Company's trackwork product line which previously had been
reported as part of the Rail Products segment is now included as part of the
Rail Services and Systems segment. The Company now markets its services for
signaling and trackwork products to the railroads through one organization
headed by one division president. In addition, the Company for strategic
reasons, placed its metal brake shoe foundry into the Flow and Specialty
Products segment. The current and historical segment financial information have
been restated to reflect these changes.
RESULTS OF OPERATIONS
Consolidated Sales and Gross Profits
The following table sets forth consolidated net sales and gross profit data
for the periods indicated:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
-----------------------------
DECEMBER 31,1999 1999 1998 1997
- --------------------- ------------------- ---------------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Sales . . . . . $ 239.9 $665.5 $634.9 $535.7
Gross Profit. . . . $ 25.0 $ 95.0 $ 91.6 $ 69.0
% of Sales. . . . . 10.4% 14.3% 14.4% 12.9%
</TABLE>
Net sales decreased 13.2% to $239.9 million in the Transition Period from
$276.4 million in the comparable period in 1998. Sales within the Rail Systems
and Systems segment decreased 17.2% from $103.9 million in 1999 to $86.0
million. This decrease was driven primarily by the weak demand for the group's
specialty trackwork products. Sales within the Rail Products segment decreased
6.5% from $155.7 million in the five months ended December 31, 1998 to $145.5
million in the Transition Period. The revenue drop within this segment was
primarily attributable to reduced demand from major rail car builders as these
customers stopped replenishing inventories of freight rail car components in
anticipation of the rail industry's outlook for the coming year.
In fiscal 1999, annual net sales increased 5% to $665.5 million from $634.9
million in fiscal 1998. Fiscal 1998 net sales increased 19% from $535.7 million
in fiscal 1997. In fiscal 1999, the increase was due in part to the ongoing ramp
up of the Sahagun, Mexico, facility as well as continued strong market
conditions within the Rail Products segment. These conditions were a direct
result of a strong domestic economy that increased demand for freight car
components and locomotive truck assemblies. The increase from 1997 to 1998 was
driven primarily within the Rail Products and Rail Services and Systems
segments, once again, as a result of the strong overall economy.
Gross profit decreased to $25.0 million or 10.4% of sales in the Transition
Period from $39.2 million or 14.2% of sales in the comparable period in 1998.
Gross profit within the Rail Products segment decreased by $8.6 million from
$24.5 million or 15.7% of sales in the five months ended December 31, 1998 to
$15.9 million or 10.9% of sales in the Transition Period. The margin within
this segment was impacted by operating variances within the Company's Sahagun,
Mexico operation as it continued to ramp up its production during the year, as
well as the demand issues described above related to the company's freight rail
car components. Gross profit within the Rail Services and Systems segment
decreased by $3.7 million from $11.0 million or 10.6% of sales in the comparable
period in 1998 to $7.3 million or 8.5% of sales in the Transition Period. The
margin decrease within this segment was attributable to weak demand for the
group's specialty trackwork products. Gross profit within the Flow and
Specialty Products decreased by $1.9 million from $4.0 million or 11.9% of sales
in the five months ended December 31, 1998 to $2.1 million or 7.1% of sales in
the Transition Period. The margin drop within this group was related to start
up costs incurred at the unit's Richmond, Texas facility, as well as reduced
demand for the company's specialty rail car brakeshoes.
Gross profit as a percentage of net sales decreased slightly in fiscal 1999
to 14.3% from 14.4% in fiscal 1998. However, these numbers were both
improvements upon fiscal 1997's percentage of 12.9%. The overall improvement in
margin from 1997, when compared to the years 1998 and 1999, was driven entirely
within the Rail Products segment for the reasons described above.
Consolidated SG&A and Operating Income
A summary of Selling, General and Administrative ("SG&A") expenses and
Operating Income with respective percentages of sales, for the periods
indicated, follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
--------------------
DECEMBER 31, 1999 1999 1998 1997
- ------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
SG&A $25.0 $60.2 $56.3 $48.6
% of Sales 10.4% 9.0% 8.9% 9.1%
Operating Income\(Loss)* $(1.1) $12.8 $35.3 $21.7
% of Sales 0.5% 1.9% 5.6% 4.1%
</TABLE>
*Includes $1.2 million of Merger and other restructuring charges for the five
months ended December 31, 1999; $21.9 million of Merger and other
restructuring charges in fiscal 1999 described below; and a $1.4 million Wilsons
Liquidation gain in fiscal 1997.
Selling, general and administrative expenses decreased by $0.6 million
during the Transition Period from the comparable period in 1998 as a result
of merger synergies. Prior to the synergies, SG&A was flat as a percentage of
sales in fiscal 1999, 1998 and 1997.
Operating income decreased to $12.8 million during fiscal 1999 from $35.3
million in fiscal 1998. In fiscal 1999, operating income was impacted by a
one-time Merger and other restructuring charges of $21.9 million. Fiscal 1998
operating income increased 62% from $21.7 million in fiscal 1997.
During the third and fourth quarters of the fiscal year ended July 31,
1999, the Company recorded $16.1 million and $5.8 million, respectively, of
Merger and other restructuring charges. During the Transition Period, the
Company recorded additional charges of $1.2 million, including adjustments of
previously-recorded charges based on actual expenses incurred on the related
initiatives. The primary components of the aggregate $23.1 million of calendar
1999 charges include: (a) $9.5 million of costs incurred as a direct result of
the Merger for advisory and other professional fees, (b) the consolidation of
the corporate activities of the merged companies into one facility, and (c) the
consolidation of several manufacturing and assembly operations into fewer
facilities to eliminate duplicative functions and to improve operating
efficiencies. The charges were computed based on actual cash payouts,
management's estimate of realizable value of the affected tangible and
intangible assets and estimated exit costs including severance and other
employee benefits based on existing severance policies. The Company expects
that these restructuring efforts will result in reduced operating costs,
including lower salary and hourly payroll costs and depreciation/amortization.
Employee severance costs included in the aggregate charge, totaling $7.9
million, were for 33 corporate employees, 109 salaried plant employees and 581
hourly plant employees. As of December 31, 1999, all of these employees had
been terminated.
Certain of the restructuring initiatives within the Rail Services and
Systems segment were prompted by the excess capacity resulting from the
operation of the Company's new state-of-the-art rail mill facility in Chicago
Heights, Illinois. With this new capacity on line, the Company closed its
Cincinnati, Ohio facility and discontinued manufacturing at its Newton, Kansas
facility (which also has a distribution operation) by July 31, 1999. The
Company also closed its foundry operation in Anderson, Indiana by October 31,
1999. The Manganese castings used in specialty track products that were
produced at Andersen are now produced at the Company's manufacturing facility in
Richmond, Texas. The duplicative leased corporate facility and another
administrative facility were closed in September 1999. In addition to these
closures, the Company has decided to close an assembly facility in Verona,
Wisconsin. This Rail Services and Systems facility is expected to be closed by
the end of 2000 with all operations being transferred to another Company
location.
Costs associated with these facility closures, excluding severance, are
$2.2 million of non-cash provisions for the write down of obsolete assets and
leasehold improvements and $1.4 million in cash provisions for idle facility and
property disposal costs. In addition to these costs, the Company incurred $2.1
million of cash costs related to the transfer of Manganese castings and other
operations into the Richmond facility and the relocation of previous Richmond
operations into another Company facility. These costs primarily represent the
relocation of equipment and employees and the installation of the new operations
at Richmond.
The following table is a summary roll forward of the Merger and other
restructuring reserves through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Aggregate Balance
Charge Deductions 12/31/99
---------- ---------- ---------
<S> <C> <C> <C>
Cash provisions:
Merger advisory and other fees. . . . . . $ 9.5 $ (9.5) $ -
Employee severance. . . . . . . . . . . . 7.9 (4.5) 3.4
Idle facility and property disposal costs 1.4 (0.6) 0.8
Relocation of operations. . . . . . . . . 2.1 (2.1) -
------- -------- ----
Total cash costs . . . . . . . . . . . 20.9 $(16.7) $4.2
======= ====
Non-cash asset writedowns. . . . . . . . . . 2.2
-------
Total. . . . . . . . . . . . . . . . . $23.1
=======
</TABLE>
The remaining cash costs are expected to be expended during the next twelve to
fifteen months.
Other
The Company's equity income from its investments in joint ventures
decreased from $0.4 million in the five months ended December 31, 1998 to
break-even during the Transition Period. Equity income (loss) from
unconsolidated joint ventures decreased to a $(0.1) million loss in fiscal 1999
from $1.6 million of income in fiscal 1998. These decreases were primarily
attributable to start up costs and initial operating losses generated from the
Company's joint venture located in China that began producing railcar wheels in
November 1998. Fiscal 1998 equity income from unconsolidated joint ventures
increased 55% from $1.0 million in fiscal 1997 due principally to improve
operating results from the Company's brakeshoe joint venture.
A summary of total interest cost, for the periods indicated, follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
---------------------
DECEMBER 31, 1999 1999 1998 1997
------------------- ---- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest Expense $ 9.4 $17.8 $13.9 $12.6
===== ====== ===== =====
</TABLE>
Interest expense, net of capitalized interest, increased to $9.4 million
during the Transition Period from $7.0 million in the comparable period of 1998.
This increase resulted from higher borrowing levels required to support the
Company's increase in working capital and capital spending programs. Interest
expense, net of capitalized interest, increased to $17.8 million during fiscal
1999 from $13.9 million in fiscal 1998 and $12.6 million in fiscal 1997.
Capitalized interest associated with the financing of new capital projects
totaled $0.3 in the Transition Period, $2.4 million in fiscal 1999, $3.9 million
in fiscal 1998 and $0.2 million in fiscal 1997. The interest cost increase in
fiscal 1999 was primarily attributable to the financing of the Company's
Sahagun, Mexico, capacity expansion project as well as the construction of the
Rail Mill in Chicago Heights, Illinois. At December 31, 1999, approximately 31%
of the Company's $252.5 million of debt was at a fixed rate of interest.
The Company's effective tax rates for the Transition Period, fiscal 1999,
1998, and 1997 were 47.4%, 18.4%, 40.3% and 38.5%, respectively. The lower
effective tax rate during fiscal 1999 primarily reflects reductions in tax
reserves due to the ultimate realization of certain net operating losses.
The non-cash effect of an accounting change of $2.6 million ($1.6 million
after-tax) in fiscal 1999 represents the write-off, in accordance with Statement
of Position 98-5, of previously capitalized start-up costs. In addition, 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 reengineering costs in prior fiscal years. In
accordance with this consensus, the Company recorded a non-cash charge of $1.8
million ($1.1 million after-tax) in fiscal 1998 to reflect the cumulative effect
of this accounting change.
On February 19, 1999, the Company, in conjunction with the Merger, entered
into a new credit facility with a syndicate of financial institutions. This
financing triggered the write-off of unamortized deferred financing costs, make
whole payments and early termination fees that resulted from the extinguishment
of certain pre-Merger debt. The after-tax charge recorded to account for these
items was $3.2 million. The Company also recorded in fiscal 1997 a non-cash,
after-tax charge of $0.3 million which 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.
RAIL PRODUCTS SEGMENT
The following table sets forth, for the periods indicated, Rail Products
segment sales before intercompany eliminations and other, gross profit, SG&A and
operating income data:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
---------------------------
DECEMBER 31, 1999 1999 1998 1997
- --------------------- ------------------- ---------------------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales $145.5 $ 388.3 $309.8 $281.9
Gross Profit $ 15.9 $ 59.0 $ 39.0 $ 26.8
% of Net Sales 10.9% 15.2% 12.6% 9.5%
SG&A $ 7.5 $ 15.7 $ 12.9 $ 11.8
% of Net Sales 5.1% 4.0% 4.2% 4.2%
Operating Income $ 8.4 $ 43.3 $ 26.0 $ 15.0
% of Net Sales 5.8% 11.2% 8.4% 5.3%
</TABLE>
Rail Products net sales decreased 7% to $145.5 million in the Transition
Period from $155.7 million in the comparable period of 1998. Rail Products net
sales increased 25% from $309.8 million in fiscal 1998 to $388.3 million in
fiscal 1999. Fiscal 1998 sales increased 10% from $281.9 in 1997. In fiscal
1999 and 1998, continued strong demand generated from new railcar and locomotive
car builds in addition to the continued ramp up and higher operating
efficiencies at the Company's Sahagun, Mexico, facility contributed to the
strong year to year sales gains. The revenue drop in the Transition Period was
primarily attributable to reduced demand from major rail car builders as these
customers stopped replenishing inventories of freight rail car components in
anticipation of the rail industry's outlook for the coming year.
Gross profit in the Transition Period decreased 35% from $24.5 million in
the five months ended December 31, 1998 to $15.9 in the Transition Period. Rail
Products gross profit increased 51% to $59.0 million during fiscal 1999 from
$39.0 million in fiscal 1998. Fiscal 1998 gross profit increased 46% from $26.8
million in fiscal 1997. The Transition Period decline was impacted by the
reduced demand from rail car builders that is described above as well as
operating variances within its Sahagun, Mexico operation as it continued to ramp
its production during the Transition Period. The overall reasons for the
improvement and changes in gross profit from fiscal 1997 to fiscal 1999 are as
described in the sales summary. SG&A as a percentage of sales held relatively
firm during the fiscal years 1999, 1998 and 1997 at 4.0%, 4.2% and 4.2%
respectively. During the Transition Period, SG&A as a percentage of sales
climbed to 5.2% which corresponded with the segment's revenue decline during the
period.
RAIL SERVICES AND SYSTEMS SEGMENT
The following table sets forth, for the periods indicated, Rail Services
and Systems segment sales before intercompany eliminations and other, gross
profit, SG&A and operating income data:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
----------------------
DECEMBER 31, 1999 1999 1998 1997
- ---------------------- ------------------- ---------------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Sales $86.0 $247.5 $269.7 $207.9
Gross Profit $ 7.3 $ 26.0 $ 39.8 $ 31.2
% of Net Sales 8.5% 10.5% 14.8% 15.0%
SG&A $ 3.4 $ 13.2 $ 12.0 $ 10.9
% of Net Sales 4.0% 5.3% 4.5% 5.2%
Operating Income $ 3.9 $ 12.8 $ 27.7 $ 20.3
% of Net Sales 4.5% 5.2% 10.3% 9.8%
</TABLE>
Rail Services and Systems net sales decreased by 17% to $86.0 million in
the Transition Period from $103.9 million in the comparable period of 1998.
Sales decreased by 8% from $269.7 million in fiscal 1998 to $247.5 million in
fiscal 1999. Fiscal 1998 sales increased 30% from $207.9 million in 1997. The
sales decreases in the Transition Period and fiscal year 1999 were attributable
to a downturn in demand for the group's specialty trackwork products from its
peak year in fiscal 1998. The increase in fiscal 1998 sales from fiscal 1997
was driven by increased demand for the Company's wheel mounting services.
Rail Services and Systems gross profit decreased by 34% to $7.3 million in
the Transition Period from $11.0 million in the comparable period of 1998
Gross profit decreased 35% from $39.8 million in fiscal 1998 to $26.0 million in
fiscal 1999. The gross profit decreases in these years were driven by the
downturn in demand for the group's trackwork products. Fiscal 1998 margin
increased 28% from $31.2 million in fiscal 1997. The gross profit increase in
fiscal 1998 was a direct result of the peak year performance for trackwork
products. SG&A as a percentage of sales dropped to 4.0% during the Transition
Period as a result of calendar 1999 restructuring efforts within the group.
FLOW AND SPECIALTY PRODUCTS SEGMENT
The following table sets forth, for the periods indicated, Flow and
Specialty Products segment sales before intercompany eliminations and other,
gross profit, SG&A and operating income data:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEARS ENDED JULY 31,
---------------------
DECEMBER 31, 1999 1999 1998 1997
------------------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales $29.6 $74.1 $93.6 $94.2
Gross Profit $ 2.1 $10.5 $14.7 $11.2
% of Net Sales 7.1% 14.2% 15.7% 11.9%
SG&A 1.7 $ 4.3 $ 4.6 $ 4.3
% of Net Sales 5.7% 5.8% 4.9% 4.6%
Operating Income $ 0.4 $ 6.2 $10.1 $ 6.9
% of Net Sales 1.4% 8.4% 10.8% 7.3%
</TABLE>
Flow and Specialty Products net sales decreased by 12% to $29.6 million in
the Transition Period from $33.7 million in the comparable period of 1998.
Sales decreased by 21% from $93.6 million in fiscal 1998 to $74.1 million in
fiscal 1999. Fiscal 1997 sales of $94.2 million were 1% higher than fiscal
1998. Transition Period sales were lower due to reduced demand for the group's
specialty freight car brake shoes. During fiscal 1999, the revenue drop within
this segment was largely related to the depressed oil prices within the
petroleum industry that severely depressed demand for valves and the
corresponding valve bodies produced within the segment.
Flow and Specialty Products gross profit of $2.1 million during the
Transition Period decreased by 48% when compared to gross profit of $4.0 million
for the five months ended December 31, 1998. This decrease was once again
directly related to the reduced demand for the group's specialty freight car
break shoes. Gross profit decreased 29% from $14.7 million in fiscal 1998 to
$10.5 million in fiscal 1999. The overall reasons for the deterioration in
gross profit during this period are as described above. Fiscal 1998 gross
profit was 31% higher than fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $0.3 million at December 31,
1999, compared to $3.2 million at July 31, 1999. In the Transition Period, the
Company utilized $11.3 million from operating activities, primarily due to lower
earnings (after adjustments for non-cash items), increased inventory levels and
a $5.3 million payment made in conjunction with the long-term service contract
signed with the Union Pacific Railroad Company. Fiscal 1999 operating
activities generated $37.7 million of cash.
The Company increased its borrowings during the Transition Period by $29.4
million on its revolving lines of credit primarily to fund the $17.7 million of
capital expenditures, $9.4 million of repayments on term loans and the $11.3
million of cash utilized in operating activities. During fiscal 1999, the $37.7
million of net cash generated from operating activities as well as the
additional $19.8 net cash provided by the Company's financing activities were
utilized to fund the $54.6 million of capital expenditures. The most
significant capital expenditure during fiscal 1999 was the completion of the
expansion project in Sahagun, Mexico.
Consolidated net working capital decreased $8.7 million to $56.3 million at
December 31, 1999 from $65.0 million at July 31, 1999. Consolidated current
assets increased $15.0 million to $195.2 million at December 31, 1999 from
$180.2 million at July 31, 1999. Consolidated current liabilities increased
$23.7 million to $138.9 million at December 31, 1999 from $115.2 million at July
31, 1999.
On October 29, 1999, the Company acquired all outstanding common stock of
COMETNA-Companhia Metalurgical Nacional, S.A. ("Cometna") located in Lisbon,
Portugal for $8.3 million of the Company's common stock. Cometna manufactures
and machines products for the freight and passenger rail industries in Europe
and is part of the Company's Rail Products segment. The acquisition was
accounted for under the purchase method of accounting.
Immediately after the consummation of the Merger, the Company entered into
a new revolving credit facility (the "Credit Facility") with a syndicate of
financial institutions, in which Bank of America National Trust & Savings
Association acted as the Agent and Letter of Credit Issuing Lender and Bank of
America Canada acted as the Canadian Revolving Lender. The Credit Facility
provides the Company with a revolving line of credit of up to $200.0 million.
The Credit Facility's covenants include ratio restrictions on total leverage,
senior leverage, interest coverage, minimum net worth restriction and
restrictions on capital expenditures.
The initial net proceeds of the Credit Facility were used to (i) refinance
existing bank debt and certain other indebtedness of the Company, (ii) refinance
substantially all of NACO's outstanding debt, (iii) provide initial financing
for the Company's on-going working capital needs, and (iv) pay fees and expenses
relating to the Merger and the Credit Facility. The early retirement of the
refinanced debt resulted in a $5.2 million extraordinary charge ($3.2 million
after-tax) representing the non-cash write-off of related unamortized deferred
financing costs and prepayment penalties of $4.5 million. The Credit Facility
employs an IBOR-based variable interest rate index and assesses a spread over
the IBOR base which is determined by a Consolidated Leverage pricing grid. The
weighted average interest rate at December 31, 1999 was 8.6%. Availability at
December 31, 1999 was $27.5 million.
On March 8, 2000, the Company entered into a Second Amendment and
Restatement of the Credit Agreement that was effective as of December 30, 1999
to modify certain of the financial covenants in the Credit Agreement, which the
Company otherwise would have not been in compliance with as of December 31,
1999. The amended covenants included the Maximum Consolidated Leverage Ratio,
Maximum Senior Leverage Ratio and the Minimum Interest Coverage Ratio. In
addition, a minimum pro-forma EDITDA covenant was added to the Credit Agreement.
The Company and its Lenders also modified other terms and conditions within the
Credit Agreement including the pricing grid, which is based upon the Company's
Consolidated Leverage Ratio. The currently applied margin of 300 basis points
over IBOR is the maximum IBOR margin provided for by the Amendment. The
revolving line of credit now has scheduled commitment reductions as follows:
January 1, 2001-$10 million, June 30, 2001-$5.0 million, January 1, 2002-$10.0
million, June 30, 2002-$5.0 million and January 1, 2003-$15.0 million. The
total commitment reductions aggregate to $45.0 million and will reduce the
revolving credit commitment to a total of $155.0 million as of January 1, 2003.
With the Amendment, the Company was in compliance with the Credit Agreement as
of December 31, 1999. Based upon management's forecasts for calendar year
2000, the Company anticipates being in compliance with its Credit Agreement
covenants at each quarterly measurement point during the upcoming year. The
Company anticipates being able to operate within the reduced Credit Agreement
commitment levels through use of its free cash flow generated from operations,
realignment of the Company's capitalization components through a new universal
shelf registration, the potential disposal of certain non-core operating assets
and the March 8, 2000 convertible preferred stock investment by private equity
funds managed by ING Furman Selz investments.
On October 12, 1999, the Company entered into an Amendment, Waiver and
Release Agreement to the Credit Agreement to release certain collateral related
to its Mexican subsidiary and to reflect the change in the Company's fiscal year
and reporting periods for covenant measurement purposes. The Company then
entered into two subsequent modifications to the Credit Agreement that were
effective as of October 29, 1999 to modify certain of the financial leverage
covenants in the Credit Agreement which the Company otherwise would not have
been in compliance with as of October 31, 1999.
On February 1, 1997, the Company completed an offering (the ''Offering'')
of $50 million of 9 1/8% Senior Subordinated Notes (the ''9 1/8% Notes''). The
Company used the $47.9 million of net proceeds of the Offering to repay certain
outstanding indebtedness under its primary and other credit facilities. The 9
1/8% Notes are general unsecured obligations of the Company and are subordinated
in right of payment to all existing and future senior indebtedness of the
Company and other liabilities of the Company's subsidiaries. The 9 1/8% Notes
will mature in 2004, unless repurchased earlier at the option of the Company at
100% of face value. The 9 1/8% Notes are subject to mandatory repurchase or
redemption prior to maturity upon a Change of Control (as defined). The
indenture under which the 9 1/8% Notes were issued limits the Company's ability
to (i) incur additional indebtedness, (ii) complete certain mergers,
consolidations and sales of assets, and (iii) pay dividends or other
distributions. On December 23, 1997, the Company completed a second offering of
$25.0 million of 8 3/4% Senior Subordinated Notes, Series B (the ''8 3/4%
Notes'') due in 2004 with similar provisions as the 9 1/8% Notes.
The Company is also required to meet a number of financial covenants on its
9 1/8% Notes and 8 3/4% Notes including minimum interest coverage,
minimum consolidated net worth and maximum funded debt to capitalization. The
interest coverage ratio at December 31, 1999 was 2.44 with the minimum
requirement being 2.40. The funded debt to capitalization ratio at December 31,
1999 was 74.96% with the maximum allowable being 75.0%. These same leverage
covenants need to be met at each quarter-end through the maturity dates for
these notes. Failure to meet these covenant tests would give the noteholders
the unilateral right to accelerate the maturity of the related debt after a
requisite cure period. In addition, cross-default provisions do exist to the
Credit Agreement. If the Company does not have adequate cash or is unable
to remain compliant with such financial covenants, it may be required to further
refinance its exising indebtedness, seek additional financing, or issue common
stock or other securities to raise cash to assist in financing its operations.
The Company has no current commitments or arrangements for such financing
alternatives, and there can be no assurances that such financing
alternatives will be available on acceptable terms, or at all. The Company's
inability to make any payments when due or to satisfy its financial covenants
under its existing borrowing facilities could have a material adverse effect on
the Company.
A new universal shelf registration was declared effective on October 29,
1999, for issuances up to $300 million of debt or equity securities, and the
unused portion of the previous universal shelf registration was de-registered.
As of December 31, 1999, no securities were issued under the new universal shelf
registration.
On December 23, 1997, the Company completed an offering of $25 million 8
3/4% Senior Subordinated Notes, Series B (the ''8 3/4% Notes''). The Company
used the $24.1 million of net proceeds of this offering to repay indebtedness
under its primary credit facility. The 8 3/4% Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future senior indebtedness of the Company and other liabilities of
the Company subsidiaries. The 8 3/4% Notes rank with the 9 1/8% Notes. Financing
costs of $1.2 million were deferred in connection with the issuance of the 8
3/4% Notes. The 8 3/4% Notes will mature in 2004, 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 8 3/4% Notes
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 8
3/4% Notes were issued subjects the Company to various financial covenants which
are substantially similar to the covenants relating to the 9 1/8% Notes.
In December, 1998, a $3.0 million Industrial Revenue Bonds (IRB) was issued
on behalf of the Company for the new paneling facility in Ashland, Wisconsin.
The IRB's bear an adjustable rate of interest as determined by the Public Bond
Market Association. As of December 31, 1999, the adjustable interest rate on the
bonds was set at 5.67%. The bonds mature in December 2018.
Debt was 74% of total capitalization as of December 31, 1999, 74% of total
capitalization at July 31, 1999, and 69% of total capitalization at July 31,
1998. The Company's objective is to reduce its total debt as a percent of total
capitalization over time.
On March 8, 2000, the Company issued 300,000 shares of Series B cumulative
convertible preferred stock ($1 par value) to private equity funds managed by
ING Furman Selz Investments for $30 million. The preferred stock will pay
dividends at the rate of 8% per annum accrued semi-annually and paid in the form
of common stock or cash, at the discretion of the Company. The preferred stock
is convertible into common stock at the average closing price of the Company's
common stock for the thirty trading days ending February 17, 2000, which was
$9.00 per share. The preferred stock can be converted into common shares at the
Company's option under certain conditions at any time three years after
issuance. The net proceeds received from the sale of preferred stock were
applied to reduce the outstanding indebtedness under the Company's Revolving
Credit Facility.
During the quarter ending January 31, 1999, the Company suspended its
previous plan to construct a plant in central Illinois to process used rail into
reusable heat-treated and head-hardened rail. The project is being re-evaluated
in conjunction with the Merger. The machinery and equipment which has been
built is being stored pending completion of a revised business plan. The total
investment to date for this project is $11.6 million.
Capital expenditures from current operations are projected to be $25
million during the upcoming calendar year. The Company believes that its cash
generated from operations for calendar year 2000 will be sufficient to fund the
cash needs for working capital and capital expenditures.
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.
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, except where noted, does not expect any
significant departure from the historical demand patterns during the present
calendar year ending December 31, 2000.
YEAR 2000 ISSUES
In addressing the Year 2000 ("Y2K") issues, the Company has undertaken
numerous initiatives during the past few years as described in Item 7 of the
Company's Form 10-K for the fiscal year ended July 31, 1999. With a few minor
exceptions, the Company was Y2K compliant as of December 31, 1999. The
following is a synopsis of the results of specific areas that were being
addressed as Y2K potential problem areas:
1. All enterprise systems have continued to operate fully since
December 31, 1999, including the February leap year situation.
2. All machinery and equipment were checked and, where appropriate,
made compliant. The Company has not had any issues since
the year-end changeover.
3. All vendors and suppliers have continued to provide support
according to plan.
4. All PC's and network equipment, where appropriate, have been made
compliant. The Company did not report any problems since the
change.
5. All changes made prior to December 31, 1999, were completed
according to plan and within budget except for one minor time
and attendance system. In this case, a workaround for the system
was put in place before year-end. The workaround does not
pose any significant business concern or cost to the Company
6. No other business process problems related to the Y2K have been
reported .
The Company does not foresee any future concerns related to the Y2K which
could have a material, adverse effect on the Company. The Company's total cost
incurred related to Y2K compliance efforts was immaterial.
In June 1998, the FASB issued SFAS No. 133, ''Accounting for Derivative
Instruments and for Hedging Activities.'' This new pronouncement requires that
certain derivative instruments be recognized in balance sheets at fair value and
for changes in fair value to be recognized in operations. Additional guidance is
also provided to determine when hedge accounting treatment is appropriate
whereby hedging gains and losses are offset by losses and gains related directly
to the hedged item. While the standard, as amended, must be adopted in the
fiscal year beginning after June 15, 2000, its impact on the Company's
consolidated financial statements is not expected to be material as the Company
has not historically used derivative and hedge instruments.
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 long-term business strategy of
acquisitions; ''Y2K'' issues and the risks described from time to time in the
Company's SEC reports.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk sensitive instruments do not subject the Company
to material market risk exposures, except as such risks relate to interest rate
fluctuations. As of December 31, 1999, the Company has long-term debt
outstanding with a carrying value of $252.5 million. The estimated fair value of
this debt is $237.0 million. The Company historically has not entered into
interest rate protection agreements. Fixed interest rate debt outstanding as of
December 31, 1999 represents 31% of total debt, carries an average interest of
8.8% and matures as follows: $1.1 million in fiscal 2000, $0.8 million in fiscal
2001, $0.7 million in fiscal 2002, $0.7 million in fiscal 2003, $75.8 million in
fiscal 2004 and $0.1 million thereafter. Variable interest rate debt outstanding
as of December 31, 1999 had an average interest rate at that date of 8.6% and
matures as follows: $5.1 million in fiscal 2000, $3.2 million in fiscal 2001, $0
million in fiscal 2002, $162.0 million in fiscal 2003, zero in fiscal 2004 and
$3.0 million thereafter.
<PAGE>
ITEM 8-FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ABC-NACO Inc.:
We have audited the accompanying consolidated balance sheets of ABC-NACO
Inc. (a Delaware corporation) AND SUBSIDIARIES (''the Company'') as of December
31, 1999, July 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the five months ended
December 31, 1999 and for each of the three years in the period ended July 31,
1999. 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 financial statements referred to above, present fairly, in
all material respects, the financial position of ABC-NACO Inc. and Subsidiaries
as of December 31, 1999, July 31, 1999 and 1998, and the results of their
operations and their cash flows for the five months ended December 31, 1999 and
for each of the three years in the period ended July 31, 1999 in conformity
with generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for business process reengineering costs
effective August 1, 1997, and its method of accounting for start-up costs
effective August 1, 1998.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 8, 2000
<PAGE>
<TABLE>
<CAPTION>
ABC-NACO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Five
Months Ended
Dec. 31, For the Year Ended July 31,
------------ ------------------------------
1999 1999 1998 1997
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $239,861 $665,497 $634,921 $535,718
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . 214,833 570,523 543,310 466,757
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 25,028 94,974 91,611 68,961
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . 24,962 60,225 56,282 48,649
WILSONS ASSET LIQUIDATION GAIN . . . . . . . . . . . . . . . . . . - - - (1,430)
MERGER AND OTHER RESTRUCTURING CHARGES . . . . . . . . . . . . . . 1,201 21,925 - -
--------- --------- --------- ---------
Operating income (loss). . . . . . . . . . . . . . . . . . . (1,135) 12,824 35,329 21,742
EQUITY (INCOME) LOSS FROM UNCONSOLIDATED JOINT
VENTURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) 66 (1,616) (1,041)
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . 9,398 17,782 13,862 12,620
--------- --------- --------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary item. . . . . . . . . (10,504) (5,024) 23,083 10,163
PROVISION/(CREDIT) FOR INCOME TAXES. . . . . . . . . . . . . . . . (4,979) 923 9,305 3,914
--------- --------- --------- ---------
Income (loss) before cumulative effect of accounting change
and extraordinary item. . . . . . . . . . . . . . . . . . (5,525) (5,947) 13,778 6,249
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income taxes of $1,014 and $695, respectively . . . . . . - (1,620) (1,111) -
EXTRAORDINARY ITEM, net of income taxes of $2,062
and $215, respectively. . . . . . . . . . . . . . . . . . . . . - (3,158) - (310)
--------- --------- --------- ---------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . $ (5,525) $(10,725) $ 12,667 $ 5,939
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Basic:
Income (loss) before cumulative effect of accounting change
and extraordinary item . . . . . . . . . . . . . . . . . $ (0.30) $ (0.33) $ 0.77 $ 0.36
Cumulative effect of accounting change . . . . . . . . . . . - (0.09) (0.06) -
Extraordinary item. . . . . . . . . . . . . . . . . . . . . - (0.17) - (0.02)
-------- -------- -------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (0.30) $ (0.59) $ 0.71 $ 0.34
========= ========= ========= =========
Diluted:
Income (loss) before cumulative effect of accounting change
and extraordinary item . . . . . . . . . . . . . . . . . $ (0.30) $ (0.33) $ 0.75 $ 0.35
Cumulative effect of accounting change . . . . . . . . . . . - (0.09) (0.06) -
Extraordinary item. . . . . . . . . . . . . . . . . . . . . - (0.17) - (0.02)
-------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (0.30) $ (0.59) $ 0.69 $ 0.33
========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABC-NACO INC.
CONSOLIDATED BALANCE SHEETS
As of
Dec. 31, As of July 31,
--------------------
ASSETS 1999 1999 1998
--------- --------- ---------
(In thousands, except share data)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351 $ 3,159 $ 273
Account receivable, less allowance of $1,804, $1,705 and $2,113, respectively. . . 79,617 82,995 90,252
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,132 73,633 74,521
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . 12,401 11,189 4,680
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,680 9,226 3,435
--------- --------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,181 180,202 173,161
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT-net . . . . . . . . . . . . . . . . . . . . . . . . . 245,010 228,093 202,891
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES. . . . . . . . . . . . . . . . . . . . . 13,886 14,490 15,586
OTHER NONCURRENT ASSETS-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,394 31,036 32,258
--------- --------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $492,471 $453,821 $423,896
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Cash overdrafts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 6,560
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 6,207 4,588 11,704
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,678 73,456 59,694
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,983 37,129 34,359
--------- --------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,868 115,173 112,317
--------- --------- ---------
LONG-TERM DEBT, less current maturities . . . . . . . . . . . . . . . . . . . . . . 246,247 225,031 189,867
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,699 14,194 10,702
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,978 17,866 18,940
COMMITMENTS AND CONTINGENCIES
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; 19,372,242 shares,
18,386,336 shares and 17,872,976 shares issued and outstanding, respectively. 194 184 179
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,240 68,383 67,980
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,954 13,479 24,309
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . (709) (489) (398)
--------- --------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,679 81,557 92,070
--------- --------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . $492,471 $453,821 $423,896
========= ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABC-NACO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL MINIMUM CUMULATIVE
COMMON PAID-IN RETAINED PENSION TRANSLATION
STOCK CAPITAL EARNINGS LIABILITY ADJUSTMENT TOTAL
--------------- -------- ---------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1996 . . . . . . . . . . . $ 172 $ 55,389 $ 4,771 $ (691) $ 211 $ 59,852
Comprehensive income . . . . . . . . . . - - 5,939 691 (246) 6,384
Shares issued in business acquisition. . 6 10,220 - - - 10,226
Common stock issued. . . . . . . . . . . 1 1,496 - - - 1,497
Income tax benefit from exercised stock
options. . . . . . . . . . . . . . . . - 407 - - - 407
--------------- -------- ---------- ----------- ------------ ---------
BALANCE, July 31, 1997 . . . . . . . . . . . 179 67,512 10,710 - (35) 78,366
Comprehensive income . . . . . . . . . . - - 12,667 - (308) 12,359
Shares issued in business acquisition. . - 436 - - - 436
Common stock issued. . . . . . . . . . . - 32 - - - 32
NACO comprehensive income (3/31/97-
6/27/97) (Note 1). . . . . . . . . . . - - 932 - (55) 877
--------------- -------- ---------- ----------- ------------ ---------
BALANCE, July 31, 1998 . . . . . . . . . . . 179 67,980 24,309 - (398) 92,070
Comprehensive loss . . . . . . . . . . . - - (10,725) - 8 (10,717)
Common stock issued. . . . . . . . . . . 5 300 - - - 305
Income tax benefit from exercised stock
options. . . . . . . . . . . . . . . . - 103 - - - 103
NACO comprehensive loss (6/29/98-
7/31/98) (Note 1). . . . . . . . . . . - - (105) - (99) (204)
--------------- -------- ---------- ----------- ------------ ---------
BALANCE, July 31, 1999 . . . . . . . . . . . 184 68,383 13,479 - (489) 81,557
Comprehensive loss . . . . . . . . . . . - - (5,525) - (220) (5,745)
Common stock issued. . . . . . . . . . . 4 2,563 - - - 2,567
Shares issued in business acquisition. 6 8,294 - - - 8,300
--------------- -------- ---------- ----------- ------------ ---------
BALANCE, December 31, 1999 . . . . . . . . . $ 194 $ 79,240 $ 7,954 $ - $ (709) $ 86,679
=============== ======== ========== =========== ============ =========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABC-NACO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The
Five
Months
Ended
Dec. 31, For the Year Ended July 31,
--------- -------------------------------
1999 1999 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,525) $(10,725) $ 12,667 $ 5,939
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
Extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,158 - 310
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . - 1,620 1,111 -
Merger and other restructuring charges. . . . . . . . . . . . . . . . . . . 1,201 21,925 - -
Wilsons asset liquidation gain. . . . . . . . . . . . . . . . . . . . . . . - - - (1,430)
Equity (income) loss of unconsolidated joint ventures . . . . . . . . . . . (29) 66 (1,616) (1,041)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 13,373 30,126 22,476 20,785
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,949) 1,289 4,972 1,574
NACO net cash flows--3/31/97 to 6/27/97 (Note 1). . . . . . . . . . . . . . - - (125) -
NACO net cash flows--6/28/98 to 7/31/98 (Note 1). . . . . . . . . . . . . . - (6) - -
Changes in certain assets and liabilities, net of effect of business
combinations
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,478 5,577 (21,024) 2,581
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,558) 1,278 (8,344) (9,796)
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . (1,193) (7,468) (790) 845
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . (5,599) (3,966) (7,719) (2,812)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 12,537 (4,140) 17,898 306
Other noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . . (6,057) (1,038) (2,221) (1,215)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities. . . . . . . . . (11,321) 37,696 17,285 16,046
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,659) (54,640) (68,915) (46,528)
Proceeds from sale assets . . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,550 1,272
Business acquisitions, less cash acquired . . . . . . . . . . . . . . . . . . 59 - (1,376) (5,344)
Investments in unconsolidated joint ventures. . . . . . . . . . . . . . . . . - - (190) (8,064)
Dividends from unconsolidated joint ventures. . . . . . . . . . . . . . . . . 633 - 904 -
--------- --------- --------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (16,967) (54,640) (68,027) (58,664)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving lines of credit. . . . . . . . . . . . . . . . 29,377 57,395 25,606 11,935
Proceeds from sale leaseback. . . . . . . . . . . . . . . . . . . . . . . . . 5,984
Change in cash overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . - (10,036) 855 (1,338)
Issuance of senior subordinated notes . . . . . . . . . . . . . . . . . . . . - - 25,000 50,000
Borrowings of term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,576 3,473 11,678
Payment of term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,423) (31,150) (2,987) (28,057)
Payment of financing costs. . . . . . . . . . . . . . . . . . . . . . . . . . (458) (1,363) (1,282) (2,925)
Exercised stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . - 408 - 1,497
--------- --------- --------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . 25,480 19,830 50,665 42,790
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . (2,808) 2,886 (77) 172
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . . . . . . . 3,159 273 350 178
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . . . . . . . $ 351 $ 3,159 $ 273 $ 350
========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
ABC-NACO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JULY 31, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND OPERATIONS
ABC-NACO Inc. (''the Company'') is a supplier of technologically advanced
products and services to the freight railroad and flow control industries
through its three business segments: Rail Products, Rail Services and Systems,
and Flow and Specialty Products. With four technology centers around the world
supporting its three business segments, the Company holds market positions in
the design, engineering, and manufacture of high performance freight railcar,
locomotive and passenger rail suspension and coupler systems, wheels and mounted
wheel sets, and specialty track products. The Company also supplies freight,
railroad and transit signaling systems and services, as well as highly
engineered valve bodies and components for industrial flow control systems
worldwide.
In the aggregate, the Company operates 19 U.S manufacturing plants in 12
states; plants in Sahagun, Mexico, Lisbon, Portugal, Leven, Scotland and
Dominion, Canada; has unconsolidated joint ventures with plants in Illinois,
China and Mexico; and has other facilities (administrative, engineering, etc.)
in 4 states. Approximately 78% of the Company's employees are covered by
collective bargaining agreements. During the next year, two of these bargaining
agreements will expire. 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.
The current composition of the Company was achieved by the consummation of
a merger (the ''Merger'') on February 19, 1999, between a wholly owned
subsidiary of the Company (formerly ABC Rail Products Corporation (''ABC'')) and
NACO, Inc. (''NACO''). As a result of the Merger, each outstanding share of NACO
common stock was converted into 8.7 shares of ABC common stock, resulting in the
issuance of approximately 9.4 million shares. The Merger was treated as a
tax-free reorganization for federal income tax purposes and is accounted for as
a pooling-of-interests transaction. The accompanying consolidated financial
statements reflect the combined results of ABC and NACO as if the Merger
occurred on the first day of the earliest period presented and is based on the
fiscal periods described below.
Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal
year-end was the Sunday closest to March 31. ABC's fiscal year-end was adopted
by the Company as the annual financial reporting period. As permitted under
Regulation S-X promulgated by the Securities and Exchange Commission, the
year-ends of the two companies have not been conformed for periods prior to
fiscal 1999. The financial position of NACO as of June 28, 1998 and the results
of NACO's operations for the twelve months ended June 28, 1998, and March 30,
1997, are combined with ABC's financial position as of July 31, 1998, and the
results of ABC's operations for the twelve months ended July 31, 1998, and 1997,
respectively. Accordingly, revenues of $26.5 million and a 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 Company's
Consolidated Statements of Operations. Comprehensive income (loss) for these two
NACO periods is reflected in the Company's Consolidated Statements of
Stockholders' Equity.
The following table reconciles previously reported operating results of ABC
to the corresponding amounts reflected in the accompanying Statements of
Operations and include various adjustments to conform the accounting policies of
the two companies (in thousands):
<PAGE>
<TABLE>
<CAPTION>
PREVIOUSLY COMBINED
REPORTED CONFORMING (CURRENTLY
BY ABC NACO ADJUSTMENTS REPORTED)
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
1998
Net sales. . . . $ 319,038 $ 317,613 $ (1,730) $ 634,921
Operating income 18,590 18,256 (1,517) 35,329
Net income . . . 6,281 6,258 128 12,667
1997
Net sales. . . . $ 259,190 $ 277,726 $ (1,198) $ 535,718
Operating income 12,889 9,838 (985) 21,742
Net income . . . 3,291 2,520 128 5,939
</TABLE>
The conforming adjustments included the following:
(a) ABC and NACO had classified cash discounts taken by customers
differently in their respective classified statements of operations. These
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 discounts.
(b) Regarding the method of original adoption of Statement of Financial
Accounting Standards No. 106-''Employers' Accounting for Postretirement Benefit
Obligations Other Than Pensions'', NACO chose the option of immediate
recognition of the transition obligation while ABC chose the amortization
option. ABC-NACO will follow the immediate recognition method which had an
impact of increasing operating income by $213,000 each year ($128,000
after-tax).
On September 23, 1999, the Company's Board of Directors adopted a
resolution to change the Company's year-end to December 31 from July 31. The
principal reason for the change was to align the Company's fiscal year-end with
the fiscal year-end of its major customers. This Form 10-K transition report
covers the five-month Transition Period from August 1, 1999 to December 31, 1999
("Transition Period"). Comparable, unaudited results of operations for the
Company for the five months ended December 31, 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $276,366
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . 39,246
SG&A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,601
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . 13,645
Income before income taxes and cumulative
effect of accounting change . . . . . . . . . . . . . . . . 7,094
Provision for income taxes. . . . . . . . . . . . . . . . . . . . 790
Income before cumulative effect of
accounting change . . . . . . . . . . . . . . . . . . . . . . 6,304
Cumulative effect of accounting change,
net of income taxes of $1,014 . . . . . . . . . . . . . . . . 1,620
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,684
========
Earnings per share, after cumulative effect of accounting change:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.25
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial information reflects 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.
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. Investments in unconsolidated 50% or
less owned joint ventures are accounted for under the equity method.
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 7) and income taxes (Note 12).
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts for the Transition Period and the years
ended July 31, 1999, 1998 and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------
1999 1999 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of year . . . . . . $1,705 $2,113 $1,987 $1,974
Provision charged to income. . . . . 260 206 815 421
Accounts written off . . . . . . . . (161) (857) (561) (659)
Allowance from business acquisition. - - - 251
NACO net change (3/31/97-6/27/97). . - - (128) -
NACO net change (6/29/98-7/31/98). . - 243 - -
------- ------- ------- -------
Balance at end of year . . . . . . . . . $1,804 $1,705 $2,113 $1,987
======= ======= ======= =======
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method for substantially all inventories. Inventory
costs include materials, labor and manufacturing overhead. Inventories at
December 31, 1999, July 31, 1999 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------
1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
Raw materials. . . . . . . . . . . $44,148 $31,964 $40,765
Supplies and spare parts . . . . . 5,258 5,206 4,361
Work in process and finished goods 44,726 36,463 29,395
------- ------- -------
Total inventories. . . . . . . $94,132 $73,633 $74,521
======= ======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, which for
self-constructed assets includes interest and internal labor and overhead costs
directly related to constructing the asset. 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. The Company also
capitalizes direct costs incurred in developing or obtaining computer software
for internal use once the Company determines that the new software will be
completed and will fulfill its intended use. Costs incurred prior to such
determination are expensed as incurred. Such capitalized costs include direct
payroll and related costs for personnel that worked directly on the project to
develop or obtain the computer software, external costs that were attributable
to the software development and interest. The software costs capitalized through
December 31, 1999 primarily relate to the development of enterprise-wide
computer software systems, which will be amortized over estimated useful lives
of five to ten years.
Major renewals and betterments, which extend the useful life of an asset,
are capitalized. Routine maintenance and repairs are expensed as incurred.
Significant maintenance and repairs expected to be incurred during scheduled
shutdowns of the Company's foundry operations are accrued during the periods
that the foundry is operational. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any related gain or loss is reflected in operations. 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 or useful lives.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Depreciation expense charged to operations was $12.1
million for the Transition Period and $27.5 million, $20.1 million and $18.5
million for the years ended July 31, 1999, 1998 and 1997, respectively. The
estimated useful lives used for recognizing depreciation expense for financial
reporting purposes generally are as follows:
<TABLE>
<CAPTION>
<S> <C>
ASSET DESCRIPTION LIFE
- ---------------------------------- ----------
Buildings and improvements . . . 7-30 years
Machinery and equipment. . . . . 3-12 years
Computer hardware and software . 3-10 years
Patterns, tools, gauges and dies 3-5 years
</TABLE>
Property, plant and equipment at December 31, 1999, July 31,
1999 and 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------
1999 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Land. . . . . . . . . . . . . . . . . $ 7,644 $ 5,232 $ 4,423
Buildings and improvements. . . . . . 42,268 33,403 24,950
Machinery and equipment . . . . . . . 267,189 248,040 165,586
Construction in progress. . . . . . . 28,302 29,583 80,058
Patterns, tools, gauges and dies. . . 14,610 19,650 10,497
---------- ---------- ---------
360,013 335,908 285,514
Less-Accumulated depreciation . . . . (115,003) (107,815) (82,623)
---------- ---------- ---------
Property, plant and equipment-net $ 245,010 $ 228,093 $202,891
========== ========== =========
</TABLE>
The Company capitalized $0.3 million, $2.4 million, $3.9 million and $0.2
million in interest during the Transition Period and for the years ended July
31, 1999, 1998 and 1997, respectively.
The most significant component of construction in progress as of July 31,
1998 was a rail milling facility in Illinois which went on-line in fiscal 1999.
As of December 31, 1999, and July 31, 1999, the most significant component of
construction in progress was the Company's investment in a rail hardening
process. The rail hardening project is being re-evaluated in conjunction with
the Merger. The machinery and equipment which has been built is being stored
pending completion of a revised business plan. The total investment to date for
this project is $11.6 million.
During the Transition Period, the Company sold certain productive assets
for $5.9 million and leased the assets back under an operating lease. The
resulting gain of $0.4 million was deferred and will be recognized ratably over
the six year life of the related lease.
OTHER NONCURRENT ASSETS
Other noncurrent assets at December 31, 1999, July 31, 1999 and 1998
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
---------------
1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
Deferred financing costs-net. . . . . . . $ 3,713 $ 3,850 $ 3,977
Patents . . . . . . . . . . . . . . . . . 2,011 2,011 2,007
Excess costs over net assets acquired-net 20,621 18,544 20,082
Union Pacific contract costs-net . . . . 5,159 - -
Prepaid pension costs and other-net . . . 6,890 6,631 6,192
------- ------- -------
Other noncurrent assets-net . . . . . $38,394 $31,036 $32,258
======= ======= =======
</TABLE>
Deferred financing costs, net of accumulated amortization of $1.6 million,
$1.4 million and $2.2 million as of December 31, 1999, July 31, 1999 and 1998,
respectively, represent legal costs and other associated costs related to the
Company's issuance of debt. Deferred financing costs are amortized over the term
of the related debt. Pursuant to the early retirement of certain indebtedness,
the related after-tax costs of $3.2 million and $0.3 million were written-off
during the years ended July 31, 1999 and 1997, respectively.
The excess cost over net assets of acquired businesses is being amortized
on the straight-line basis over 15 to 25 years. Related amortization expense for
the Transition Period was $0.4 million and for the years ended July 31, 1999,
1998 and 1997 was $1.0 million, $0.9 million, and $0.8 million, respectively.
Accumulated amortization as of December 31, 1999, July 31, 1999 and 1998 was
$3.6 million, $3.2 million and $2.2 million, respectively. Should events or
circumstances occur subsequent to the acquisition of a business which bring into
question the realizable value or impairment of the related goodwill, the Company
will evaluate the remaining useful life and balance of goodwill and make
adjustments, if required. The Company's principal consideration in determining
impairment include the strategic benefit to the Company of the particular
business as measured by undiscounted current and expected future operating
income levels of that particular business and expected undiscounted future cash
flows. Should an impairment be identified, a loss would be reported to the
extent that the carrying value of the related goodwill exceeds the fair value of
that goodwill as determined by valuation techniques available in the
circumstances.
In November, 1999, the Company entered into a long-term supply agreement
with the Union Pacific Railroad ("UP") to supply and service wheelsets for its
North American operations. A condition of the agreement required the Company to
make a $5.25 million up-front payment to the UP. This $5.25 million payment was
deferred by the Company and is being amortized over the 10-year agreement term.
ACCRUED EXPENSES
Accrued expenses at December 31, 1999, July 31, 1999 and 1998 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
---------------
1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
Compensation including related benefits and taxes . . . . . $11,433 $12,542 $15,232
Merger and other restructuring accrual. . . . . . . . . . . 4,196 8,424 -
Taxes, other than compensation taxes. . . . . . . . . . . . 8,236 4,272 5,353
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 6,355 2,629 3,386
Billings in excess of contract costs and estimated earnings 45 145 1,092
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,718 9,117 9,296
------- ------- -------
Total accrued expenses. . . . . . . . . . . . . . . . . $42,983 $37,129 $34,359
======= ======= =======
</TABLE>
INCOME TAXES
Deferred income tax assets and liabilities are recorded for all temporary
differences between financial and tax reporting and are the result of
differences in the timing of recognition of certain income and expense items for
financial and tax reporting. The Company does not provide for U. S. income taxes
which would be payable if undistributed earnings of its foreign subsidiaries
were remitted to the U.S. because the Company either considers such earnings to
be invested for an indefinite period or anticipates that if such earnings were
distributed, the U.S. income taxes payable would be substantially offset by
foreign tax credits.
WORKERS' COMPENSATION INSURANCE
The Company is self-insured for a portion of its workers' compensation
claims. The Company provides for workers' compensation insurance each period
based on its estimate of the total ultimate payout for all claims and related
fees.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivables, accounts payable, cash
overdrafts and accrued expenses approximate their respective fair values due to
their short maturities. Refer to Note 5 for disclosure regarding the fair value
of the Company's long-term debt.
FOREIGN CURRENCY TRANSLATION
Where the local currency of the Company's foreign subsidiaries 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 as a component of selling, general and administrative
expenses. These gains (losses) were not material for the Transition Period or
for the years ended July 31, 1999, 1998 and 1997, respectively.
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,
the Company ensures that the transaction complies with the seven conditions and
the six considerations contained in AAER No. 108 of the Securities and Exchange
Commission. Reserves for estimated sales returns and allowances are recorded as
a reduction of revenues in the period the related revenues are recognized.
Certain revenue from the Company's railway signal and communication
engineering, construction and maintenance contracts is recognized on the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Costs include materials, direct and allowable labor and
overhead. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability may result in revisions to costs and
income, the effects of which are recognized in the period in which the revisions
are determined.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Expenditures for the
Transition Period and for the years ended July 31, 1999, 1998 and 1997 were
immaterial.
EARNINGS PER SHARE
The following table reconciles the denominator used in the calculation of
basic and diluted earnings per share for the Transition Period and for the years
ending July 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------
1999 1999 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic-
Weighted average common shares outstanding . . . . . 18,623 18,142 17,850 17,587
====== ====== ====== ======
Diluted-
Weighted average common shares outstanding . . . . . 18,623 18,142 17,850 17,587
Effect of assumed exercise of warrant. . . . . . . . - - 472 472
Effect of assumed exercise of stock options. . . . . - - 77 75
Effect of assumed shares issued pursuant to business
acquisition earn-out agreements . . . . . . . . . . - - 75 5
------ ------ ------ ------
Total diluted. . . . . . . . . . . . . . . . . . 18,623 18,142 18,474 18,139
====== ====== ====== ======
</TABLE>
Other common stock equivalents which would have increased diluted shares
(in thousands) by 984, 470, 350 and 291 shares for the periods ended December
31, 1999, July 31, 1999, 1998 and 1997, respectively, were not included in the
computation of diluted earnings per share because the assumed exercise of such
equivalents would have been antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In November 1997, the FASB's Emerging Issues Task Force reached a consensus
that requires companies to write-off previously capitalized business process
reengeering costs and expense future costs as incurred. The Company had
capitalized certain process reengineering costs in prior years. In accordance
with this consensus, effective August 1, 1997, the Company recorded a non-cash
charge of $1.8 million ($1.1 million after tax) to reflect the cumulative effect
of this accounting change.
In April 1998, Statement of Position No. 98-5 was issued which requires
that companies write-off defined previously capitalized start-up costs and
expense future start-up costs as incurred. The Company had capitalized certain
start-up costs in prior periods, including $1.5 million during fiscal 1998.
Effective August 1, 1998, the Company recorded a non-cash charge of $2.6 million
($1.6 million after-tax) to reflect the cumulative effect of this accounting
change.
In June 1998, the FASB issued SFAS No. 133, ''Accounting for Derivative
Instruments and for Hedging Activities.'' This new pronouncement requires that
certain derivative instruments be recognized in balance sheets at fair value and
for changes in fair value to be recognized in operations. Additional guidance is
also provided to determine when hedge accounting treatment is appropriate
whereby hedging gains and losses are offset by losses and gains related directly
to the hedged item. While the standard, as amended, must be adopted in the
fiscal year beginning after June 15, 2000, its impact on the Company's
consolidated financial statements is not expected to be material as the Company
has not historically used derivative and hedge instruments.
RECLASSIFICATIONS
As permitted under the pooling-of-interests method of accounting, the
Company's consolidated financial information reflects certain adjustments to
conform the accounting policies of both companies. 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.
3. BUSINESS ACQUISITIONS
During the Transition Period, the Company acquired all outstanding common
stock of COMENTA--Companhia Metalurgica Nacional, S.A. ("Cometna") located in
Lisbon, Portugal for $8.3 million of the Company's common stock. Cometna
manufactures and machines products for the freight and passenger rail industries
in Europe and is part of the Company's Rail Products segment. The acquisition
was accounted for under the purchase method of accounting and no goodwill was
recorded with respect to the transaction.
The aggregate purchase price paid for fiscal 1998 business acquisitions was
$1.9 million, including 22,222 shares of the Company's common stock valued at
$0.4 million. Other than as described below, the aggregate purchase price for
fiscal 1997 business acquisitions was $20.6 million, including 555,556 shares of
the Company's common stock valued at $10.2 million. Goodwill recorded from the
fiscal 1998 and 1997 acquisitions was $1.6 million and $9.3 million,
respectively. An additional 333,333 shares of the Company's stock were
contingently issuable over the three years following the respective acquisition
dates pursuant to certain acquisition agreements. As of December 31, 1999, the
end of the contingency period, 311,110 shares were deemed issued pursuant to
these contingencies. The individual and aggregate effect of these acquisitions
was not significant to the Company's operations.
These acquisitions were accounted for under the purchase method of
accounting. Accordingly, certain recorded assets and liabilities of the acquired
businesses were revalued to estimated fair values as of the acquisition dates.
Management used its best judgment and available information in estimating the
fair value of those assets and liabilities. Any changes to those estimates are
not expected to be material. The operating results of the acquired businesses
are included in the consolidated statements of operations from their date of
acquisition.
4. CONTRACT RECEIVABLES AND STATUS
Contract receivables included in accounts receivable as of December 31,
1999 and July 31, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------
1999 1999 1998
------- ------- ------
<S> <C> <C> <C>
Billed . . . . . . . . . . . . . . . . . . . . . . $ 4,525 $ 4,392 $5,572
Retainage. . . . . . . . . . . . . . . . . . . . . 1,122 751 1,180
Costs and estimated earnings in excess of billings 10,395 10,190 2,680
------- ------- ------
$16,042 $15,333 $9,432
======= ======= ======
</TABLE>
A substantial portion of the December 31, 1999 retainage receivable is expected
to be collected by December 2000.
Information with respect to contracts in progress as of December 31, 1999, July
31, 1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-----------------
1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts $24,843 $20,284 $16,275
Estimated earnings . . . . . . . . . . . 5,232 4,793 8,087
------- ------- -------
30,075 25,077 24,362
Less-Billings to date. . . . . . . . . . 19,725 15,032 22,774
------- ------- -------
$10,350 $10,045 $ 1,588
======= ======= =======
</TABLE>
Such amounts are classified in the accompanying balance sheet as of December 31,
1999, and July 31, 1999 and 1998 as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-----------------
1999 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable $10,395 $10,190 $ 2,680
Accrued expenses. . (45) (145) (1,092)
-------- -------- --------
$10,350 $10,045 $ 1,588
======== ======== ========
</TABLE>
5. DEBT
Debt outstanding as of December 31, 1999, July 31, 1999 and 1998 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
------------------
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Revolving Credit Facility. . . . . . $165,471 $134,300 $ -
Previous Revolving Credit Facilities - - 79,497
9 1/8% Senior Subordinated notes . . 50,000 50,000 50,000
8 3/4% Senior Subordinated notes . . 25,000 25,000 25,000
11 3/4%, Senior Subordinated note. . - - 14,854
Term loans . . . . . . . . . . . . . 250 8,522 21,968
Industrial revenue bonds . . . . . . 5,805 6,285 3,354
Other. . . . . . . . . . . . . . . . 5,928 5,512 6,898
--------- --------- ---------
Total debt . . . . . . . . . . . 252,454 229,619 201,571
Less-Current maturities. . . . . . . (6,207) (4,588) (11,704)
--------- --------- ---------
Total long-term debt . . . . . . $246,247 $225,031 $189,867
========= ========= =========
</TABLE>
Immediately after the consummation of the Merger, the Company entered into
a new revolving credit facility (the "Credit Facility") with a syndicate of
financial institutions, in which Bank of America National Trust & Savings
Association acted as the Agent and Letter of Credit Issuing Lender and Bank of
America Canada acted as the Canadian Revolving Lender. The Credit Facility
provides the Company with a revolving line of credit of up to $200.0 million.
The Credit Facility's covenants include ratio restrictions on total leverage,
senior leverage, interest coverage, minimum net worth restriction and
restrictions on capital expenditures.
The initial net proceeds of the Credit Facility were used to (i) refinance
existing bank debt and certain other indebtedness of the Company, (ii) refinance
substantially all of NACO's outstanding debt, (iii) provide initial financing
for the Company's on-going working capital needs, and (iv) pay fees and expenses
relating to the Merger and the Credit Facility. The early retirement of the
refinanced debt resulted in a $5.2 million extraordinary charge ($3.2 million
after-tax) representing the non-cash write-off of related unamortized deferred
financing costs and prepayment penalties of $4.5 million. The Credit Facility
employs an IBOR-based variable interest rate index and assesses a spread over
the IBOR base which is determined by a Consolidated Leverage pricing grid. The
weighted average interest rate at December 31, 1999 was 8.6%. Availability at
December 31, 1999 was $27.5 million.
On March 8, 2000, the Company entered into a Second Amendment and
Restatement of the Credit Agreement that was effective as of December 30, 1999
to modify certain of the financial covenants in the Credit Agreement, which the
Company otherwise would have not been in compliance with as of December 31,
1999. The amended covenants included the Maximum Consolidated Leverage Ratio,
Maximum Senior Leverage Ratio and the Minimum Interest Coverage Ratio. In
addition, a minimum pro-forma EDITDA covenant was added to the Credit Agreement.
The Company and its Lenders also modified other terms and conditions within the
Credit Agreement including the pricing grid, which is based upon the Company's
Consolidated Leverage Ratio. The currently applied margin of 300 basis points
over IBOR is the maximum IBOR margin provided for by the Amendment. The
revolving line of credit now has scheduled commitment reductions as follows:
January 1, 2001-$10 million, June 30, 2001-$5.0 million, January 1, 2002-$10.0
million, June 30, 2002-$5.0 million and January 1, 2003-$15.0 million. The
total commitment reductions aggregate to $45.0 million and will reduce the
revolving credit commitment to a total of $155.0 million as of January 1, 2003.
With the Amendment, the Company was in compliance with the Credit Agreement as
of December 31, 1999. Based upon management's forecasts for calendar year
2000, the Company anticipates being in compliance with its Credit Agreement
covenants at each quarterly measurement point during the upcoming year. The
Company anticipates being able to operate within the reduced Credit Agreement
commitment levels through use of its free cash flow generated from operations,
realignment of the Company's capitalization components through a new universal
shelf registration, the potential disposal of certain non-core operating assets
and the March 8, 2000 convertible preferred stock investment by private equity
funds managed by ING Furman Selz investments.
On October 12, 1999, the Company entered into an Amendment, Waiver and
Release Agreement to the Credit Agreement to release certain collateral related
to its Mexican subsidiary and to reflect the change in the Company's fiscal year
and reporting periods for covenant measurement purposes. The Company then
entered into two subsequent modifications to the Credit Agreement that were
effective as of October 29, 1999 to modify certain of the financial leverage
covenants in the Credit Agreement which the Company otherwise would not have
been in compliance with as of October 31, 1999.
On February 1, 1997, the Company completed an offering (the ''Offering'')
of $50 million of 9 1/8% Senior Subordinated Notes (the ''9 1/8% Notes''). The
Company used the $47.9 million of net proceeds of the Offering to repay certain
outstanding indebtedness under its primary and other credit facilities. The 9
1/8% Notes are general unsecured obligations of the Company and are subordinated
in right of payment to all existing and future senior indebtedness of the
Company and other liabilities of the Company's subsidiaries. The 9 1/8% Notes
will mature in 2004, unless repurchased earlier at the option of the Company at
100% of face value. The 9 1/8% Notes are subject to mandatory repurchase or
redemption prior to maturity upon a Change of Control (as defined). The
indenture under which the 9 1/8% Notes were issued limits the Company's
ability to (i) incur additional indebtedness, (ii) complete certain mergers,
consolidations and sales of assets, and (iii) pay dividends or other
distributions. On December 23, 1997, the Company completed a second offering of
$25.0 million of 8 3/4% Senior Subordinated Notes, Series B (the ''8 3/4%
Notes'') due in 2004 with similar provisions as the 9 1/8% Notes.
The Company is also required to meet a number of financial covenants on its
9 1/8% Notes and 8 3/4% Notes including minimum interest coverage,
minimum consolidated net worth and maximum funded debt to capitalization. The
interest coverage ratio at December 31, 1999 was 2.44 with the minimum
requirement being 2.40. The funded debt to capitalization ratio at December 31,
1999 was 74.96% with the maximum allowable being 75.0%. These same leverage
covenants need to be met at each quarter-end through the maturity dates for
these notes. Failure to meet these covenant tests would give the noteholders
the unilateral right to accelerate the maturity of the related debt after a
requisite cure period. In addition, cross-default provisions do exist to the
credit Agreement. If the Company does not have adequate cash or is unable to
remain compliant with such financial covenants, it may be required to further
refinance its existing indebtedness, seek additional financing, or issue common
stock or other securities to raise cash to assist in financing its operation
The Company has no current commitments or arrangements for such financing
alternatives, and there can be no assurances that such financing
alternatives will be available on acceptable terms, or at all. The Company's
inability to make any payments when due or to satisfy its financial covenants
under its existing borrowing facilities could have a material adverse effect on
the Company.
A new universal shelf registration was declared effective on October 29,
1999, for issuances up to $300 million of debt or equity securities, and the
unused portion of the previous universal shelf registration was de-registered.
As of December 31, 1999, no securities were issued under the new universal shelf
registration.
Prior to the Merger, ABC and NACO had their own primary bank credit
facilities which allowed for aggregate borrowings and outstanding letters of
credit, as amended, of up to $125 million, including a term loan portion of $8.5
million. Revolving credit was limited by eligible accounts receivables and
inventories. Borrowings were secured by substantially all U.S. assets and bore
interest based on either prime or LIBOR rates plus applicable margins. These
previous primary bank credit facilities were terminated upon the refinancing
under the Credit Facility. The weighted average interest rate on borrowings
under these credit facilities as of July 31, 1998 was 8.4%.
In December, 1998, a $3.0 million Industrial Revenue Bonds (IRB) was issued
on behalf of the Company for the new paneling facility in Ashland, Wisconsin.
The IRB's bear an adjustable rate of interest as determined by the Public Bond
Market Association. As of December 31, 1999, the adjustable interest rate on the
bonds was set at 5.67%. The bonds mature in December 2018.
In March 1995, NACO issued a $15.0 million 11.75% senior subordinated note
together with a common stock purchase warrant to a major insurance company. The
warrant agreement allowed the insurance company to purchase 54,271 common shares
of NACO's common stock at a price of $0.01 per share, subject to certain
adjustments. During fiscal 1999, the insurance company exercised its warrant for
54,271 NACO shares (representing 472,158 shares of the Company based on the
Merger exchange ratio). The fair value of the warrant agreed to between the
Company and the insurance company was $0.2 million, which amount has been
deducted from the face value of the note and added to additional paid-in
capital. The fair value of the warrant was determined by averaging the net
present value of the note and the value of the NACO's equity using a multiple of
its earnings before interest, income taxes and depreciation, both of which
calculations used independent third party comparables as benchmarks.
Other indebtedness represents notes due to sellers of the Company's
business acquisitions, a note due to a customer in exchange for entering into a
supply agreement with that customer and other indebtedness. The other
indebtedness bears interest as of December 31, 1999 at rates from 4.0% to 11.5%
and mature from 2000 to 2005.
The Company was in compliance with all of its covenants, as amended, under
its debt obligations as of December 31, 1999. The weighted average interest
rates on all debt as of December 31, 1999, July 31, 1999 and 1998 were 8.7%,
7.6% and 8.8%, respectively.
Maturities of debt as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Twelve months ending December 31:
<S> <C>
2000 . . . . . . . . . . . . . . $ 6,207
2001 . . . . . . . . . . . . . . 4,010
2002 . . . . . . . . . . . . . . 684
2003 . . . . . . . . . . . . . . 162,722
2004 . . . . . . . . . . . . . . 75,765
Thereafter . . . . . . . . . . . 3,066
--------
$252,454
=========
</TABLE>
The Company's carrying amount of debt, excluding the 9 1/8% Notes and the
8 3/4% Notes, approximates the market value of such debt because the interest
rates on such debt are variable and are set periodically based on the
current rates during the year. The December 31, 1999 quoted market price of
the 9 1/8% Notes and 8 3/4% Notes was $40.0 million and $19.5 million,
respectively, while the aggregate carrying value as of such date was
$75.0 million. The July 31, 1999 quoted market price of the 9 1/8% Notes
and 8 3/4% Notes was $45.7 million and $22.3 million, respectively, and their
aggregate carrying value on such date was $75.0 million. The July 31, 1998
quoted market price of the 9 1/8% Notes and the 8 3/4% Notes aggregated to
$74.6 million, while their aggregate carrying value as of such date was
$75.0 million.
6. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of supplemental cash flow information for the Transition Period
and for the years ended July 31, 1999, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-----------------------------
1999 1999 1998 1997
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Interest paid in cash . . . . . . . . . . . . . . . $ 8,529 $20,569 $17,460 $ 11,526
Income taxes paid in cash . . . . . . . . . . . . . 89 3,306 3,021 1,855
Acquisitions of businesses (Note 3):
Working capital, except cash. . . . . . . . . . (5,928) - (226) (967)
Property, plant and equipment and acquisition-
related costs. . . . . . . . . . . . . . . . . 18,999 - 467 15,564
Goodwill. . . . . . . . . . . . . . . . . . . . - - 1,571 12,174
Long-term liabilities assumed . . . . . . . . . (1,949) - - (6,191)
Acquisition debt. . . . . . . . . . . . . . . . (2,881) - - (5,010)
Stock issued. . . . . . . . . . . . . . . . . . (8,300) - (436) (10,226)
-------- ------- -------- ---------
Net cash used (received). . . . . . . . . . $ (59) $ - $ 1,376 $ 5,344
======== ======= ======== =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to a variety of environmental laws and regulations
governing discharges to air and water, the handling, storage and disposal of
hazardous or solid waste materials and the remediation of contamination
associated with releases of hazardous substances. Although the Company believes
it is in material compliance with all of the various regulations applicable to
its business, there can be no assurance that requirements will not change in the
future or that the Company will not incur significant cost to comply with such
requirements. The Company employs responsible personnel at each facility, along
with various environmental engineering consultants from time to time to assist
with ongoing management of environmental, health and safety requirements.
The Company obtains performance bonds, sometimes on behalf of its
unconsolidated joint ventures, and is party to certain other guarantees. Such
bonds and guarantees aggregated to $11.6 million as of December 31, 1999;
however, the Company does not expect that any claims will be made against these
financial instruments. Accordingly, the estimated market value of such
instruments is not material.
The Company is also a party to various other legal proceedings arising in
the ordinary course of business, none of which is expected in management's
opinion, after consultation with legal counsel, to have a material adverse
effect, either individually or in the aggregate on the Company's consolidated,
financial position or results of operations.
The Company occupies various manufacturing, warehouse and office facilities
and uses certain equipment under operating lease arrangements. Rental expense
charged to operations for the Transition Period and the fiscal years ended July
31, 1999, 1998 and 1997 was $3.9 million, $8.3 million, $6.8 million and $5.4
million, respectively. At December 31, 1999, 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>
<S> <C>
Twelve months ending December 31:
2000. . . . . . . . . . . . . $6,265
2001. . . . . . . . . . . . . 4,223
2002. . . . . . . . . . . . . 3,369
2003. . . . . . . . . . . . . 2,878
2004. . . . . . . . . . . . . 2,720
Thereafter. . . . . . . . . . 2,626
------
$22,081
=======
</TABLE>
8. RETIREMENT PENSION PLANS
UNITED STATES PLANS
The Company maintains defined benefit pension plans covering certain hourly
employees in the United States. The plans provide benefits for certain employees
that are based on the employees' years of service and also provides benefits for
other employees that are based on the employees' years of service and
compensation upon their retirement from the Company. The plans invest primarily
in investment grade corporate bonds, government bonds, corporate stocks and
cash. Net periodic pension cost for the Transition Period and the fiscal years
ended July 31, 1999, 1998 and 1997 under the United States defined benefit
pension plans covering certain hourly employees included the following
components (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
---------------------------
1999 1999 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service cost. . . . . . . . . . . . . . . . . $ 568 $ 1,517 $ 1,243 $ 1,215
Interest cost on projected benefit obligation 1,060 1,929 1,774 1,640
Expected return on plan assets. . . . . . . . (1,559) (2,845) (2,184) (2,646)
Amortization of prior service costs . . . . . 157 251 154 1,376
Recognized net actuarial (gain) loss. . . . . (104) (97) (36) 54
Amortization of net transition liability. . . 25 55 56 -
Recognized for curtailment. . . . . . . . . . 331 - - -
-------- -------- -------- --------
Net periodic pension cost . . . . . . . . $ 478 $ 810 $ 1,007 $ 1,639
======== ======== ======== ========
</TABLE>
The Company maintains benefit plans which provide certain of its unionized
employees, their dependents and beneficiaries with postretirement medical and/or
life insurance benefits. Some of the Company's postretirement plans are not
funded. The Company has established a Voluntary Employee Benefit Association
trust to fund a portion of this obligation. Contributions of $0.2 million, $1.0
million, $0.9 million and $1.4 million were made to the trust during the
Transition Period and in the fiscal years ended July 31, 1999, 1998, and 1997,
respectively. Net periodic postretirement benefit expense for the Transition
Period and the fiscal years ended July 31, 1999, 1998 and 1997 includes the
following components (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-----------------------
1999 1999 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 153 $ 339 $ 213 $ 307
Interest cost on accumulated postretirement benefit obligation 440 868 544 661
Expected return on plan assets . . . . . . . . . . . . . . . . (162) (332) (246) (242)
Amortization of prior service costs. . . . . . . . . . . . . . 5 11 2 -
Recognized net actuarial (gain) loss . . . . . . . . . . . . . (47) (120) 77 143
------ ------ ------ ------
Total postretirement benefit expense $ 389 $ 766 $ 590 $869
===== ====== ====== =====
</TABLE>
The following table sets forth the reconciliation of the changes in benefit
obligations and the changes in the value of plan assets for the Transition
Period, and the fiscal years ended July 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- -------------------------
12/31/99 7/31/99 7/31/98 12/31/99 7/31/99 7/31/98
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Changes in benefit obligation-
Benefit obligation at beginning of period. . . . $ 30,450 $ 25,190 $ 22,042 $ 12,327 $ 12,556 $ 12,083
Service cost . . . . . . . . . . . . . . . . . . 568 1,517 1,243 153 339 213
Interest cost. . . . . . . . . . . . . . . . . . 1,060 1,929 1,774 440 868 544
Amendments . . . . . . . . . . . . . . . . . . . 846 2,361 151 - 31 -
Actuarial (gain) loss. . . . . . . . . . . . . . (2,205) 696 1,384 973 (898) 130
Increase due to curtailment. . . . . . . . . . . 175 - - - - -
Benefits paid. . . . . . . . . . . . . . . . . . (744) (1,243) (1,404) (171) (569) (414)
---------- --------- --------- ---------- --------- ---------
Benefit obligation at end of period. . . . . . . 30,150 30,450 25,190 13,722 12,327 12,556
Changes in value of plan assets-
Fair value of plan assets at beginning of period 36,735 30,500 23,616 4,197 3,327 2,465
Actual return on plan assets . . . . . . . . . . 962 5,079 5,279 202 470 335
Employer contributions . . . . . . . . . . . . . 510 2,399 3,009 171 969 941
Benefits paid. . . . . . . . . . . . . . . . . . (744) (1,243) (1,404) (171) (569) (414)
---------- --------- --------- ---------- --------- ---------
Fair value of plan assets at end of period . . . 37,463 36,735 30,500 4,399 4,197 3,327
Funded status-
Funded status. . . . . . . . . . . . . . . . . . 7,314 6,285 5,310 (9,322) (8,130) (9,229)
Unrecognized prior service cost. . . . . . . . . 3,839 3,757 1,647 81 85 65
Unrecognized net actuarial gain. . . . . . . . . (5,996) (4,952) (3,367) (1,690) (2,669) (1,648)
Unrecognized transition obligation . . . . . . . 144 179 234 - - -
---------- --------- --------- ---------- --------- ---------
Prepaid (accrued) benefit cost . . . . . . . . . $ 5,301 $ 5,269 $ 3,824 $ (10,931) $(10,714) $(10,812)
========== ========= ========= ========== ========= =========
</TABLE>
Key assumptions used in the calculations above were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- ----------------------
12/31/99 7/31/99 7/31/98 12/31/99 7/31/99 7/31/98
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . 7.750% 7.125% 7.125% 7.750% 7.125% 7.125%
Expected long-term rate of return on assets 9.250% 9.125% 9.000% 9.250% 9.250% 9.000%
</TABLE>
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligations for participants is 6.5% in the Transition
Period declining to an ultimate rate of 5.0% in year 2003. A one percentage
point change in the assumed health care cost trend rates would have the
following effects for the Transition Period and as of December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
ONE PERCENTAGE POINT
INCREASE DECREASE
--------- ----------
<S> <C> <C>
Effects on total service and interest cost components $ 26 $ (23)
Effect on postretirement benefit obligation . . . . . $ 433 $ (392)
</TABLE>
In addition, the Company maintains defined contribution plans for United
States salaried employees and for certain hourly employees. These plans provide
for Company contributions of not less than 100% of each employee's contributions
commencing July 1, 1999 for certain former ABC employees, and April 1, 1997 for
certain former NACO employees; and 50% prior thereto, subject to certain
limitations. The Company's contributions were $0.4 million, $1.3 million, $1.2
million and $0.7 million in the Transition Period and in the years ended July
31, 1999, 1998 and 1997, respectively. In addition, the former ABC plan makes
contributions to the plan equal to 1% of salaried and certain hourly employees
compensation. These additional contributions were $0.1 million for the
Transition Period and $0.2 million for each of the years ended July 31, 1999,
1998, and 1997, respectively.
FOREIGN RETIREMENT PLANS
The Company assumed specific liabilities to make termination payments to
union workers and salaried employees at the Sahagun, Mexico facility in July
1996. The Company has chosen to account for these liabilities as if they
constituted a noncontributory, unfunded, defined benefit pension plan. The
following table summarizes the pension plan expense for the Transition Period
and fiscal years ended July 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
---------------------
1999 1999 1998 1997
----- ----- ------ -----
<S> <C> <C> <C> <C>
Service cost. . . . . . . . . . . . . . . . . $ 119 $ 246 $ 246 $ 139
Interest cost on projected benefit obligation 113 256 196 353
Amortization of unrecognized (gain) loss. . . 41 47 (91) 16
----- ----- ------ -----
Net periodic pension cost . . . . . . . . $ 273 $ 549 $ 351 $ 508
===== ===== ====== =====
</TABLE>
The following table sets forth the reconciliation of the changes in benefit
obligation for the Transition Period and the fiscal years ended July 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
------------------
1999 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Changes in benefit obligation-
Benefit obligation at beginning of period $ 4,356 $ 4,197 $ 4,792
Service cost . . . . . . . . . . . . . . 119 246 246
Interest cost. . . . . . . . . . . . . . 113 256 196
Actuarial loss (gain). . . . . . . . . . 1,604 47 (91)
Benefits paid. . . . . . . . . . . . . . (776) (390) (946)
-------- -------- --------
Benefit obligation at end of period. . . 5,416 4,356 4,197
Unrecognized net actuarial loss. . . . . 3,449 1,696 1,210
-------- -------- --------
Prepaid (accrued) benefit cost . . . . . $(1,967) $(2,660) $(2,987)
======== ======== ========
</TABLE>
The acturial loss in the Transition Period is primarily the result of higher
than expected wages and benefits from the assumptions used in the prior year's
computation.
Key assumptions used in the calculations above were as follows:
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-------------
1999 1999 1998
----- ----- -----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . 5.5% 6.5% 6.5%
Average rate of increase in compensation levels 1.5% 1.5% 3.5%
</TABLE>
The Company's Canadian and Scottish subsidiaries maintain defined
contribution plans for substantially all employees. The Company's contributions
to these plans, which vary by company and employee group, was $0.1 million for
the Transition Period and $0.3 million for each of the years ended July 31,
1999, 1998 and 1997, respectively.
POSTEMPLOYMENT PLANS
The Company provides selected former hourly and salaried disabled employees
continued medical benefits until age 65 or recovered from disability and certain
other limited benefits for other selected former employees.
Net periodic postemployment costs for the Transition Period and the years
ended July 31, 1999, 1998 and 1997, included the following components (in
thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
--------------------
1999 1999 1998 1997
------ ----- ----- -----
<S> <C> <C> <C> <C>
Estimated costs for newly disabled employees . $ 33 $ 80 $ 80 $ 80
Interest cost on projected benefit obligation. 17 107 124 170
Net amortization and deferral. . . . . . . . . (590) 327 324 287
------ ----- ----- -----
Net periodic postemployment cost (benefit) $(540) $ 514 $ 528 $ 537
====== ===== ===== =====
</TABLE>
The net benefit in the Transition Period is due to the retiree medical benefits
that are no longer included as part of postemployment plans. These are now
classified as part of postretirement plans.
The following table sets forth the funded status of the plan at December
31, 1999, July 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------
1999 1999 1998
------ ------- -------
<S> <C> <C> <C>
Accumulated benefit obligation. . . . . . . . . . . . . $ 387 $1,516 $1,516
Plan assets at fair value . . . . . . . . . . . . . . . - - -
------ ------- -------
Accumulated benefit obligation in excess of plan assets $ 387 1,516 1,516
Net unrecognized loss . . . . . . . . . . . . . . . . . (11) (563) (259)
------ ------- -------
Accrued postemployment liabilities. . . . . . . . . $ 376 $ 953 $1,257
====== ======= =======
</TABLE>
The discount rate used in the calculations summarized above was 7.75% for
the Transition Period, 6.75% in fiscal 1999 and 7.25% in fiscal 1998.
9. STOCK OPTION PLANS
The Company has various stock option plans which provide for the granting
of incentive or nonqualified options to certain directors, officers and
employees to purchase shares of its common stock within prescribed periods, up
to 10 years, at prices equal to the fair market value on the date of grant. Such
options vest over periods up to four years. During fiscal 1999, the Company
adopted the 1999 Omnibus Stock Plan for which 1,500,000 shares are reserved for
issuance. This plan was approved at the Annual Shareholders Meeting, November
19, 1999. Upon the Merger, NACO's stock option plan was terminated. No options
were outstanding under that plan on the Merger date.
Activity during the Transition Period and the years ended July 31, 1999,
1998 and 1997 under the Company's stock option plans and with respect to certain
options is summarized below (in thousands, except prices and years):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------- ------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- ------ ------
<S> <C> <C> <C> <C>
July 31, 1996. . . 721 $ 15.42 310 $13.05
Issued . . . . 165 17.66
Exercised. . . (128) 11.65
Canceled . . . (126) 19.04 _____ _____
------------ ------------
July 31, 1997. . . 632 16.04 387 13.98
Issued . . . . 85 18.94
Canceled . . . (26) 21.01 _____ _____
------------ ------------
July 31, 1998. . . 691 16.21 514 15.30
Issued(a). . . 525 13.32
Exercised. . . (30) 10.00
Canceled . . . (151) 18.83 _____ _____
------------ ------------
July 31, 1999. . . 1,035 $ 14.54 444 $15.38
Issued . . . . 19 10.95
Canceled . . . (70) 16.90 _____ _____
------ --------
December 31, 1999. 984 $ 14.30 438 $15.36
======= ======== ====== ======
</TABLE>
(a) Includes 507,000 options granted at $13.39 per share under the 1999
Omnibus Stock Plan.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------
OUTSTANDING EXERCISABLE
--------------------------------- ------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES YEARS PRICE SHARES PRICE
- ------------------------- --------- -------- --------- ------- ------
<S> <C> <C> <C> <C>
10.00-$12.00 233. 4.1 $ 10.12 208 $10.01
12.01-$16.00 542 8.8 $ 13.60 32 $15.68
16.01 -$21.62 209 4.5 $ 20.79 198 $20.94
</TABLE>
As allowed under SFAS No. 123, the Company continues to account for its
stock-based compensation plans in accordance with the prior accounting standard,
Accounting Principles Board Opinion No. 25, under which it recognized no
compensation expense in the Transition Period and the years ended July 31, 1999,
1998 or 1997. The following table reflects certain pro forma earnings
information as if compensation cost had been determined on the fair valued-based
accounting method for options granted in the Transition Period and the years
ended July 31, 1999, 1998 and 1997, and certain information regarding options
granted in such years and assumptions used in determining the fair value of such
options, using the Black-Scholes options pricing model (dollars in thousands,
except per share).
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------------------
1999 1999 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Pro forma income (loss) . . . . . . . . . . . . $ (5,550) $ (12,016) $ 12,277 $ 5,666
Pro forma diluted income (loss) per share . . . $ (0.30) $ (0.66) $ 0.66 $ 0.31
Weighted average fair value of granted options. $ 6.66 $ 8.28 $ 10.02 $ 8.51
Assumptions-
Weighted average risk-free interest rate. . 6.3% 5.8% 5.8% 6.3%
Volatility. . . . . . . . . . . . . . . . . 45.9% 39.8% 32.8% 30.4%
Expected lives. . . . . . . . . . . . . . . 8.1 years 8.1 years 6.1 years 7.2 years
Dividend yield. . . . . . . . . . . . . . . 0.0% 0.0% 0.0% 0.0%
</TABLE>
10. UNCONSOLIDATED JOINT VENTURES
The Company owns 50% of Anchor Brake Shoe, L.L.C. (''Anchor''). Anchor
designs, manufactures, markets and sells railcar composite brake shoes. The
Company's investment in Anchor was $7.0 million as of December 31, 1999. Each
partner's share of the joint venture can be purchased by the other partner, at
market value, if the other partner is involved in a future change in control
situation. Additionally, the other partner has an option which it can exercise
as of April 1, 2001, to purchase the Company's interest in Anchor.
Summarized financial information for Anchor for the Transition Period and
for the years ended July 31, 1999, 1998 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-----------------------
1999 1999 1998 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
Current assets . . . . $7,674 $ 7,267 $ 4,644 $ 5,968
Noncurrent assets. . . 7,724 9,442 9,450 7,850
Current liabilities. . 1,491 2,013 2,766 1,776
Noncurrent liabilities - - - 1,983
Net sales. . . . . . . 7,194 18,781 17,917 15,329
Gross profit . . . . . 2,052 5,910 5,643 4,411
Net income . . . . . . 975 2,847 3,138 2,854
</TABLE>
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
(''Datong''). The joint venture manufactures wheels in China primarily for the
Chinese railway markets. The Company's contribution of its 40% share in the
joint venture ABC-NACO Inc. consists of technical know-how, expertise and cash.
The cash funding was used to construct a manufacturing facility, which was
operational in late calendar 1998. The intangible component of the Company's
contribution was valued at $1.8 million and such amount is ratably being
recognized as additional equity earnings. The Company will earn royalties on
certain sales from this venture. The Company's investment in Datong was $7.3
million as of December 31, 1999.
In addition to these, the Company has other joint venture arrangements
which are not significant to the Company's results of operations. The Company
occasionally pays certain items on behalf of the joint ventures and is
subsequently reimbursed for such payments. Also, some of the ventures purchase
materials from the Company for use in production or for direct resale. Trade
accounts receivable from these affiliates as of December 31, 1999, July 31, 1999
and 1998, were $1.1 million, $1.6 million and $2.3 million, respectively, and
are included in accounts receivable in the accompanying consolidated balance
sheets. Other amounts owed to or from these affiliates at these dates were not
material.
11. MERGER AND OTHER SPECIAL CHARGES
During the third and fourth quarters of the fiscal year ended July 31,
1999, the Company recorded $16.1 million and $5.8 million, respectively, of
Merger and other restructuring charges. During the Transition Period, the
Company recorded additional charges of $1.2 million, including adjustments of
previously-recorded charges based on actual expenses incurred on the related
initiatives. The primary components of the aggregate $23.1 million of calendar
1999 charges include: (a) $9.5 million of costs incurred as a direct result of
the Merger for advisory and other professional fees, (b) the consolidation of
the corporate activities of the merged companies into one facility, and (c) the
consolidation of several manufacturing and assembly operations into fewer
facilities to eliminate duplicative functions and to improve operating
efficiencies. The charges were computed based on actual cash payouts,
management's estimate of realizable value of the affected tangible and
intangible assets and estimated exit costs including severance and other
employee benefits based on existing severance policies. The Company expects
that these restructuring efforts will result in reduced operating costs,
including lower salary and hourly payroll costs and depreciation/amortization.
Employee severance costs included in the aggregate charge, totaling $7.9
million, were for 33 corporate employees, 109 salaried plant employees and 581
hourly plant employees. As of December 31, 1999, all of these employees had
been terminated.
Certain of the restructuring initiatives within the Rail Services and
Systems segment were prompted by the excess capacity resulting from the
operation of the Company's new state-of-the-art rail mill facility in Chicago
Heights, Illinois. With this new capacity on line, the Company closed its
Cincinnati, Ohio facility and discontinued manufacturing at its Newton, Kansas
facility (which also has a distribution operation) by July 31, 1999. The
Company also closed its foundry operation in Anderson, Indiana by October 31,
1999. The Manganese castings used in specialty track products that were
produced at Andersen are now produced at the Company's manufacturing facility in
Richmond, Texas. The duplicative leased corporate facility and another
administrative facility were closed in September 1999. In addition to these
closures, the Company has decided to close an assembly facility in Verona,
Wisconsin. This Rail Services and Systems facility is expected to be closed by
the end of 2000 with all operations being transferred to another Company
location.
Costs associated with these facility closures, excluding severance, are
$2.2 million of non-cash provisions for the write down of obsolete assets and
leasehold improvements and $1.4 million in cash provisions for idle facility and
property disposal costs. In addition to these costs, the Company incurred $2.1
million of cash costs related to the transfer of Manganese castings and other
operations into the Richmond facility and the relocation of previous Richmond
operations into another Company facility. These costs primarily represent the
relocation of equipment and employees and the installation of the new operations
at Richmond.
The following table is a summary roll forward of the Merger and
other restructuring reserves through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Aggregate Charge Deductions Balance 12/31/99
----------------- ------------ -----------------
<S> <C> <C> <C>
Cash provisions:
Merger advisory and other fees. . . . . . $ 9.5 $ (9.5) $ -
Employee severance. . . . . . . . . . . . 7.9 (4.5) 3.4
Idle facility and property disposal costs 1.4 (0.6) 0.8
Relocation of operations. . . . . . . . . 2.1 (2.1) -
----------------- ------------ -----------------
Total cash costs . . . . . . . . . . . 20.9 $ (16.7) $ 4.2
============ =================
Non-cash asset writedowns. . . . . . . . . . 2.2
-----------------
Total. . . . . . . . . . . . . . . . . $ 23.1
=================
</TABLE>
The remaining cash costs are expected to be expended during the next twelve to
fifteen months.
WILSONS LIQUIDATION GAIN
During fiscal 1997, due to continued operating losses, the Company declined
to provide further funding for a foundry facility it had in England
(''Wilsons''). Pursuant to an earlier agreement with its creditors, receivers
were appointed who ceased the foundry's operations in September 1996. The
receivers liquidated the foundry's assets using the proceeds to pay Wilsons'
liquidation costs with the remainder being distributed to its creditors,
exclusive of the Company. At the time the foundry 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 1997 of $1.4 million. Prior to its liquidation,
fiscal 1997 operating results of the foundry were not material.
12. INCOME TAXES
Income (loss) before income taxes, cumulative effect of accounting change
and extraordinary item consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------------
1999 1999 1998 1997
--------- --------- -------- -------
<S> <C> <C> <C> <C>
United States $ (8,144) $(12,554) $26,827 $ 8,639
Foreign . . . (2,360) 7,530 (3,744) 1,524
--------- --------- -------- -------
Total . . $(10,504) $ (5,024) $23,083 $10,163
========= ========= ======== =======
</TABLE>
The provision (benefit) for income taxes for the Transition Period and for years
ended July 31, 1999, 1998 and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-------------------------
1999 1999 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal. . . . . . $(2,064) $ 3,262 $4,283 $2,130
State. . . . . . . (291) 491 680 330
Foreign. . . . . . 1,251 1,568 63 (250)
-------- -------- ------- -------
Total current. (1,104) 5,321 5,026 2,210
-------- -------- ------- -------
Deferred:
United States. . . (3,177) (5,222) 4,901 1,343
Foreign. . . . . . (698) 824 (622) 361
-------- -------- ------- -------
Total deferred (3,875) (4,398) 4,279 1,704
-------- -------- ------- -------
Total. . . . . $(4,979) $ 923 $9,305 $3,914
======== ======== ======= =======
</TABLE>
A reconciliation between the U. S. federal statutory rate and the Company's
effective income tax rate on income before income taxes, cumulative effect of
accounting change and extraordinary item is as follows:
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
---------------------
1999 1999 1998 1997
------- ------- ----- -----
<S> <C> <C> <C> <C>
U. S. federal statutory rate . . . . . (34.0)% (34.0)% 34.0% 34.0%
State taxes, net of federal benefit. . (4.0) 5.9 5.1 4.0
Difference due to foreign subsidiaries (10.7) 49.4 (0.6) -
Nondeductible goodwill amortization. . 1.0 7.9 1.0 1.7
Nondeductible Merger costs . . . . . . - 36.2 - -
Change in tax reserves . . . . . . . . 5.5 (49.7) 3.3 1.4
Other. . . . . . . . . . . . . . . . . (5.2) 2.7 (2.5) (2.6)
------- ------- ----- -----
Effective income tax rate. . . . . (47.4)% 18.4% 40.3% 38.5%
======= ======= ===== =====
</TABLE>
Deferred tax assets and liabilities are recorded for all temporary
differences between financial and tax reporting and are the result of
differences in the timing of recognition of certain income and expense items for
financial and tax reporting. The major temporary differences that give rise to
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JULY 31, 1999 JULY 31, 1998
--------------------- ------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Property basis differences . . . . . . . . $ - $ (14,685) $ - $ (13,334) $ - $ (11,014)
Insurance reserves . . . . . . . . . . . . 2,248 - 2,791 - 2,597 -
Inventory basis differences. . . . . . . . 1,682 (1,461) 974 (1,501) 394 (1,147)
Allowance for doubtful accounts. . . . . . 770 - 607 - 683 -
Postretirement and postemployment reserves 4,322 (2,030) 4,047 (1,968) 3,981 (1,553)
Other employee benefit reserves. . . . . . 790 - 510 - 666 -
Other, net . . . . . . . . . . . . . . . . - (678) 3,823 - 3,512 -
------- ------------- ------- ------------- ------- -------------
Total. . . . . . . . . . . . . . . . $ 9,812 $ (18,854) $12,752 $ (16,803) $11,833 $ (13,714)
======= ============= ======= ============= ======= =============
</TABLE>
In addition to the above deferred income taxes, the Company, as of December
31, 1999, had various income tax carryforwards including: U.S. net operating
losses of $31.3 million which expire in 2008 to 2019, $9.4 million in Portugal
which expire in 2000 to 2005, $6.0 million in Scotland which can be carried
forward indefinitely and $0.5 million in Sweden which can also be carried
forward indefinitely. The Company also has U.S. alternative minimum tax credits
of $5.5 million, which do not expire. Similarly, the Company, as of July 31,
1999, had various income tax carryforwards including: U.S. foreign tax credits
of $1.8 million; U.S. alternative minimum tax credits of $4.5 million, which do
not expire; and net operating losses in Scotland of $5.3 million, which do not
expire. Similarly, the Company, as of July 31, 1998 had various income tax
carryforwards including: U.S. net operating losses of $1.3 million; U.S.
alternative minimum tax credits of $3.0 million; and net operating losses in
Scotland, Mexico and Canada of $3.9 million, $2.3 million and $2.2 million,
respectively. Due to the uncertainty as to the ultimate realization of certain
credit carryforwards, the Company has recorded tax reserves of $11.7 million,
$9.4 million, and $11.9 million as of December 31, 1999, July 31, 1999 and
1998, respectively. Changes in the reserves are primarily due to additional net
operating losses in foreign jurisdictions, changes in the other deferred tax
assets of foreign subsidiaries and ultimate realization of U.S. and foreign net
operating losses to offset taxable income.
13. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS
The Company manages its operations through three reporting segments: Rail
Products, Rail Services and Systems, and Flow and Specialty Products. These
distinct business units generally serve separate markets. They are managed
separately since each business requires different technology, servicing and
marketing strategies. The following describes the types of products and services
from which each segment derives its revenues:
<TABLE>
<CAPTION>
<S> <C>
Rail Products . . . . . . Freight car and locomotive castings
Rail Services and Systems . Wheel assembly, signal systems, and specialty trackwork
Flow and Specialty Products Valve housing and related castings
</TABLE>
The Company realigned its segments during the Transition Period to better
reflect the organizational and marketing changes that were enacted within the
Company. The Company's trackwork product line which previously had been
reported as part of the Rail Products segment is now included as part of the
Rail Services and Systems segment. The Company now markets its services for
signaling and trackwork products to the railroads through one organization
headed by one division president. In addition, the Company for strategic
reasons, placed its metal brake shoe foundry into the Flow and Specialty
Products segment. The current and historical segment financial information have
been restated to reflect these changes.
To evaluate the performance of these segments, the Chief Executive Officer
examines operating income or loss before interest and income taxes, as well as
operating cash flow. Operating cash flow is defined as operating income or loss
plus depreciation and amortization. The accounting policies for the operating
segments are the same as those described in the summary of the significant
accounting policies. Intersegment sales and transfers are accounted for on a
cost plus stipulated mark-up which the Company believes approximates arm's
length prices.
Corporate headquarters and ABC-NACO Technologies primarily provide support
services to the operating segments. The costs associated with these services
include interest expense, income tax expense (benefit), Merger and restructuring
charges, research and development expense, and goodwill amortization, among
other costs. These costs are not allocated to the segments and are included
within ''other'' below.
The following tables present a summary of operating results and assets by
segment and a reconciliation to the Company's consolidated totals (in
thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
-------------------------------
REVENUES 1999 1999 1998 1997
- ------------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Rail Products . . . . . . . . $ 145,457 $388,257 $309,765 $281,944
Rail Services and Systems . . 86,045 247,451 269,691 207,881
Flow and Specialty Products . 29,584 74,101 93,620 94,235
---------- --------- --------- ---------
Total Reportable Segments 261,086 709,809 673,076 584,060
Elimination and Other . . . . (21,225) (44,312) (38,155) (48,342)
---------- --------- --------- ---------
Total . . . . . . . . $ 239,861 $665,497 $634,921 $535,718
========== ========= ========= =========
DEC. 31, JULY 31,
-------------------------------
OPERATING INCOME (LOSS) 1999 1999 1998 1997
- ------------------------------- ---------- --------- --------- ---------
Rail Products . . . . . . . . $ 8,439 $ 43,287 $ 26,040 $ 15,008
Rail Services and Systems . . 3,917 12,820 27,712 20,348
Flow and Specialty Products . 355 6,234 10,090 6,908
---------- --------- --------- ---------
Total Reportable Segments 12,711 62,341 63,842 42,264
Elimination and Other . . . . (13,846) (49,517) (28,513) (20,522)
---------- --------- --------- ---------
Total . . . . . . . . $ (1,135) $ 12,824 $ 35,329 $ 21,742
========== ========= ========= =========
DEC. 31, JULY 31,
------------------------------
ASSETS 1999 1999 1998 1997
- ------------------------------- ---------- --------- --------- ---------
Rail Products . . . . . . . . $ 178,355 $174,372 $151,329 $112,896
Rail Services and Systems . . 191,126 172,783 174,996 137,926
Flow and Specialty Products . 31,471 25,944 27,572 29,240
---------- --------- --------- ---------
Total Reportable Segments 400,952 373,099 353,897 280,062
Other . . . . . . . . . . . . 91,519 80,722 69,999 60,080
---------- --------- --------- ---------
Total . . . . . . . . $ 492,471 $453,821 $423,896 $340,142
========== ========= ========= =========
DEC. 31, JULY 31,
-------------------------------
DEPRECIATION AND AMORTIZATION 1999 1999 1998 1997
- ------------------------------- ---------- --------- --------- ---------
Rail Products . . . . . . . . $ 6,199 $ 13,821 $ 10,465 $ 8,870
Rail Services and Systems . . 3,995 9,613 6,002 6,507
Flow and Specialty Products . 1,182 1,906 1,782 1,599
---------- --------- --------- ---------
Total Reportable Segments 11,376 25,340 18,249 16,976
Other. . . . . . . . . . . . 1,997 4,786 4,227 3,809
---------- --------- --------- ---------
Total . . . . . . . $ 13,373 $ 30,126 $ 22,476 $ 20,785
========== ========= ========= =========
DEC. 31, JULY 31,
-------------------------------
CAPITAL EXPENDITURES 1999 1999 1998 1997
- ------------------------------- ---------- --------- --------- ---------
Rail Products . . . . . . . . $ 8,115 $ 26,063 $ 31,484 $ 11,512
Rail Services and Systems . . 1,870 17,377 25,320 24,313
Flow and Specialty Products . 4,278 4,031 1,179 1,838
---------- --------- --------- ---------
Total Reportable Segments 14,263 47,471 57,983 37,663
Other . . . . . . . . . . . . 3,396 7,169 10,932 8,865
---------- --------- --------- ---------
Total . . . . . . . $ 17,659 $ 54,640 $ 68,915 $ 46,528
========== ========= ========= =========
</TABLE>
The following table reflects revenues and long-lived assets by country.
Revenues were attributed to countries based on the location of the
customer (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JULY 31,
----------------------------
REVENUES 1999 1999 1998 1997
- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
United States . $ 202,037 $567,956 $567,673 $466,314
Mexico. . . . . 5,306 14,374 8,467 2,828
Canada. . . . . 21,346 65,742 48,738 49,078
England . . . . 2,993 12,811 7,224 13,751
Turkey. . . . . 6,612 - - -
Other . . . . . 1,567 4,614 2,819 3,747
--------- -------- -------- --------
Total . . $ 239,861 $665,497 $634,921 $535,718
========= ======== ======== ========
DEC. 31, JULY 31,
----------------------------
LONG-LIVED ASSETS 1999 1999 1998 1997
- ----------------- --------- -------- -------- --------
United States . $ 230,814 $228,500 $216,213 $171,098
Mexico. . . . . 36,773 33,665 22,787 13,660
Canada. . . . . 9,867 9,518 9,547 9,259
Portugal. . . . 17,986 - - -
England . . . . 1,850 1,936 2,188 2,262
--------- -------- -------- --------
Total . . $ 297,290 $273,619 $250,735 $196,279
========= ======== ======== ========
</TABLE>
The Company's significant customers are Class I railroads and suppliers of
new freight cars. One customer accounted for 11.3%, 15.7%, 13.3% and 9.0% of
consolidated net sales for the Transition Period and the years ended July 31,
1999, 1998 and 1997, respectively. Another customer accounted for 10.0%, 7.0%,
10.3% and 11.5% of consolidated net sales for the Transition Period and for the
years ended July 31, 1999, 1998 and 1997, respectively. Both customers are
served by the Rail Products and Rail Services and Systems segments.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Interim data for the Transition Period includes net sales, gross profits
and net loss of $144.2 million, $15.9 million and $1.9 million, respectively,
for the three months ended October 31, 1999, and $95.7 million, $9.1 million
and $3.6 million, respectively, for the two months ended December 31, 1999.
Related loss per share was $0.10 and $0.19 for the three and two month
periods, respectively. The two month period includes pre-tax restructuring
charges of $1.2 million.
<PAGE>
Quarterly financial data for the years ended July 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999-
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,447 $163,383 $173,625 $159,042
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 25,571 18,311 24,553 26,539
Income (loss) before accounting change and extraordinary
item(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,740 932 (9,421) (1,198)
Net income (loss)(b). . . . . . . . . . . . . . . . . . . . . . 2,230 932 (12,579) (1,308)
Income (loss) before accounting change and extraordinary item
per share-
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.05 $ (0.51) $ (0.07)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.05 $ (0.51) $ (0.07)
Net income (loss) per share-
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.13 $ 0.05 $ (0.69) $ (0.07)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.12 $ 0.05 $ (0.69) $ (0.07)
FISCAL YEAR 1998-
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $138,256 $147,406 $173,919 $175,340
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 18,224 19,598 26,698 27,091
Income before accounting change(c). . . . . . . . . . . . . . . 1,230 1,786 5,584 5,178
Net income(d) . . . . . . . . . . . . . . . . . . . . . . . . . 1,230 675 5,584 5,178
Income before accounting change per share-
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.10 $ 0.31 $ 0.29
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.10 $ 0.30 $ 0.28
Net income per share-
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.04 $ 0.31 $ 0.29
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.04 $ 0.30 $ 0.28
</TABLE>
(a) Includes pre-tax Merger and other restructuring charges of $16.1 million
and $5.8 million in the third and fourth quarters, respectively.
(b) Includes an after-tax cumulative effect of an accounting change for
startup costs of $1.6 million in the first quarter and an
after-tax extraordinary charge of $3.2 million related to the early
retirement of certain debt in the third quarter.
(c) Includes $0.7 million of net income from the reversal of previously
accrued volume discounts pursuant to the third quarter renegotiations
of an existing agreement with a certain customer.
(d) Includes an after-tax cumulative effect of an accounting change for
business process reengineering costs of $1.1 million in the second
quarter.
15. SUBSEQUENT EVENTS
On March 8, 2000, the Company issued 300,000 shares of Series B cumulative
convertible preferred stock ($1 par value) to private equity funds managed by
ING Furman Selz Investments for $30 million. The preferred stock has certain
voting rights and will pay dividends at the rate of 8% per annum accrued
semi-annually and paid in the form of common stock or cash, at the discretion of
the Company. The preferred stock is convertible into common stock at the
average closing price of the Company's common stock for the thirty trading days
ending February 17, 2000, which was $9.00 per share. The preferred stock can be
converted into common shares at the Company's option under certain conditions at
any time three years after issuance. The net proceeds received from the sale of
preferred stock were applied to reduce the outstanding indebtedness under the
Company's Revolving Credit Facility.
While the conversion price may change under specific conditions, the $9.00
per share price on the date that the Company and the preferred stock holders
were committed to completing the transaction represented a discount from the
market value of the underlying common stock on that date by an aggregate of
$11.9 million. This discount represents the value of the beneficial conversion
feature of the preferred stock. Accordingly, the Company initially recorded the
value of the preferred stock as $18.1 million with the $11.9 million credited to
Additional paid-in capital, offset by $1.6 million in fees paid to ING Furman
Selz Investments. Since the preferred stock is convertible at any time at the
holders' option, this discount also represents an immediate deemed dividend to
those holders at the date of issuance. Accordingly, upon issuance, the Company
also recorded a $11.9 million dividend to these holders.
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth under the
caption ''Election of Directors'' in the Company's proxy statement related to
the Transition Period annual meeting of stockholders to be held on April 20,
2000 (the ''Proxy Statement'') and is incorporated herein by reference.
Information regarding executive officers of the Company is included as Item 4A
of Part I hereof as permitted by the Instructions to 401(b) of Regulation S-K.
Information required by Item 405 of Regulation S-K is set forth under the
caption ''Section 16(a) Beneficial Ownership Reporting Compliance'' in the Proxy
Statement and is incorporated by reference herein.
ITEM 11-EXECUTIVE COMPENSATION
Information required by this item is set forth under the caption
''Executive Compensation'' in the Proxy Statement and, except for information
under the captions ''Executive Compensation-Report of Executive Compensation''
and ''Executive Compensation-Performance Graph,'' is incorporated by reference
herein.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption ''Stock
Ownership of Certain Beneficial Owners and Management'' in the Proxy Statement
and is incorporated by reference herein.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1.
The following financial statements and the report thereon of Arthur
Andersen LLP are included in item 8 of this report:
Report of Independent Public Accountants
Consolidated Statements of Operations for the Five Months Ended
December 31, 1999 and for Years Ended July 31, 1999, 1998
and 1997
Consolidated Balance Sheets as of December 31, 1999, July 31,
1999 and 1998
Consolidated Statements of Stockholders' Equity for the Five
Months Ended December 31, 1999 and for Years Ended July 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Five Months Ended
December 31, 1999 and for Years Ended July 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All schedules are omitted since the required information is not present
in amounts sufficient to require submission of the schedules or
because the information required is included in the consolidated
financial statements and notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
Amended and Restated Agreement and Plan of Merger (the ''Merger Agreement'') by and among
ABC, ABCR Acquisition Sub, Inc. and NACO, Inc. dated as of December 10, 1998
(Incorporated by reference to Exhibit 2.1 to ABC's Registration Statement on Form S-4 (No.
2.1 333-65517), as filed with the Securities and Exchange Commission on January 21, 1999.
Amendment to the Merger Agreement, dated as of February 16, 1999 by and among ABC,
ABCR Acquisition Sub, Inc. and NACO, Inc. (Incorporated by reference to Exhibit 2.2 to the
2.2 Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906).
Restated Certificate of Incorporation, as amended (Incorporated by reference to the same
numbered exhibit to the Registrant's Current Report on Form 8-K dated February 19, 1999)
3.1 (SEC File No. 0-22906).
Restated Bylaws (Incorporated by reference to the same numbered exhibit to the Registrant's
3.2 Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906).
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-
3.3 22906).
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
3.4 ended October 31, 1996) (SEC File No. 0-22906).
Certificate of Designation, Preferences and Rights of Series B Cumulative Convertible Preferred
3.5 Stock of the Company, dated March 8, 2000.
Specimen Common Stock Certificate (Incorporated by reference to the Registrant's Exhibit 4.2
filed with the Quarterly Report on Form 10-Q for the quarter ended January 31, 1999) (SEC File
4.1 No. 33-70242).
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
4.2 Registrant's Current Report on Form 8-K dated October 2, 1995) (SEC File No. 0-22906).
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
4.3 quarter ended October 31, 1996) (SEC File No. 0-22906).
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
4.4 No. 0-22906).
4.5 Amendment No. 3 to the Rights Agreement Dated March 8, 2000.
Indenture, dated January 15, 1997, from ABC to First Trust of Illinois, National Association, as
Trustee (Incorporated by reference to Exhibit 4.5 in the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on November 15, 1996) (SEC File
4.6 No. 333-16241).
First Supplemental Indenture to the Indenture dated January 15, 1997 between ABC and First
Trust National Association, as Trustee (Incorporated by reference to Exhibit 4.1 in the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on
4.7 January 17, 1997) (SEC File No. 0-22906).
Second Supplemental Indenture to the Indenture dated as of January 15, 1997 between ABC and
First Trust 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
4.8 22, 1997) (SEC File No. 0-22906).
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------------------------- -----------
4.9 New Credit Agreement, dated February 19, 1999 between the Company and a syndicate of
financial institutions (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K dated February 19, 1999) (SEC File No. 0-22906).
Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Credit
Agreement, dated as of February 19, 1999, by and among the Company and certain of its
affiliates, and Bank of America National Association, individually and as agent for the benefit of
the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.1 filed with the
4.10 Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.)
Amended and Restated Credit Agreement, entered into as of October 29, 1999, between the
Company and certain of its affiliates and Bank of America National Association, individually
and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by
reference to Exhibit 4.2 filed with the Registrant's Quarterly Report on Form 10-Q for the
4.11 quarter ended October 31, 1999.)
Amendment to Amended and Restated Credit Agreement, entered into as of October 29, 1999,
by and among the Company and certain of its affiliates, and Bank of America National
Association, individually and as agent for the benefit of the lenders under the Credit Agreement.
(Incorporated by reference to Exhibit 4.3 filed with the Registrant's Quarterly Report on Form
4.12 10-Q for the quarter ended October 31, 1999.)
Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Credit
Agreement, dated as of February 19, 1999, by and among the Company and certain of its
affiliates, and Bank of America national Association, individually and as agent for the benefit of
the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 10.2 filed with
4.13 the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.)
4.14 Amended and Restated Credit Agreement, entered into as of October 29, 1999, between the
Company and certain of its affiliates and Bank of America National Association, individually
and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by
reference to Exhibit 10.3 filed with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1999.)
Amendment to Amended and Restated Credit Agreement, entered into as of October 29, 1999,
by and among the Company and certain of its affiliates, and Bank of America National
Association, individually and as agent for the benefit of the lenders under the Credit Agreement.
Incorporated by reference to Exhibit 10.4 filed with the Registrant's Quarterly Report on Form
4.15 10-Q for the quarter ended October 31, 1999.)
Second Amended and Restated Credit Agreement, entered into as of March 8, 2000, by and
among the Company and certain of its affiliates, and Bank of America National Association,
individually and as agent for the benefit of the lenders under the Credit Agreement. (Filed
4.16 herewith as Exhibit 4.16.)
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
10.1 Securities and Exchange Commission on October 12, 1993) (SEC File No. 33-70242).
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
10.2 Securities and Exchange Commission on October 12, 1993) (SEC File No.33-70242).
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
10.3 Exchange Commission on October 12, 1993) (SEC File No. 33-70242).
1994 Director Stock Option Plan (Incorporated by reference to the same numbered Exhibit
10.11 filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31,
10.4 1994) (SEC File No. 0-22906).
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
10.5 ended July 31, 1996) (SEC File No. 0-22906).
Form of option agreement evidencing options granted pursuant to the Stock Option Plan listed
as Exhibit 10.1 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
10.6 No. 0-22906).
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
10.7 Exchange Commission on April 13, 1994) (SEC File No. 33-77652).
Registration Rights Agreement, dated as of February 19, 1999, by and among the Company and
certain affiliates of NACO listed as parties thereto (Incorporated by reference to Exhibit 10.1
filed with the Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC
10.8 File No. 0-22906).
Form of Amended and Restated Severance Agreement, dated as of February 19, 1999, entered
into between the Company and each of Joseph A. Seher, Vaughn W. Makary, Wayne R.
Rockenbach and John W. Waite (Incorporated by reference to Exhibit 10.2 filed with the
Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-
10.9 22906).
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------------------------- -----------
Form of Stock Purchase Agreement entered into between NACO and certain of its employees
(Incorporated by reference to Exhibit 10.3 filed with the Quarterly Report of Form 10-Q for the
10.10 quarter ended January 31, 1999) (SEC File No. 0-22906).
Wheelset Supply and Services Agreement, dated as of November 9, 1999, between the
Company and Union Pacific Railroad Company (incorporated by reference to Exhibit 10.1 to
10.11 the Company's current report on Form 8-K filed with the SEC on November 18, 1999).
10.12 ABC-NACO Inc. 1999 Omnibus Stock Plan.
10.13 Investors' Rights Agreement
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants of Registrant.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated March 14, 2000 ABC-NACO Inc.
(Registrant)
/s/ Joseph A. Seher
-----------------------
Joseph A. Seher
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 14, 2000:
/s/ J. P. Singsank /s/ Brian L. Greenburg
- ---------------------- -------------------------
J. P. Singsank Brian L. Greenburg
Senior Vice President and Vice President and
Chief Financial Officer Corporate Controller
(Duly authorized Officer) (Chief Accounting Officer)
* *
- ------------------------------- -----------------------------
Donald W. Grinter Daniel W. Duval
Chairman of the Board and Director Director
/s/ Joseph A. Seher *
- ----------------------- ------------------------------
Joseph A. Seher James E. Martin
Chief Executive Officer and Director Director
(Principal Executive Officer)
* *
- -------------------------------- ----------------------------
George W. Peck IV Jean-Pierre M. Ergas
Director Director
* *
- ------------------------------- -----------------------------
Richard A. Drexler Willard H. Thompson
Director Director
By: /s/ J.P. Singsank
---------------------
J.P. Singsank
Attorney-in-Fact for the designated
officers and directors pursuant to powers
of attorney filed as exhibits herewith
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT LOCATION IN
NUMBER.. DOCUMENT DESCRIPTION DOCUMENT
- -------- ------------------------------------------------------------------------------------ -------------
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of merger (the "merger. Incorporated
Agreement") by and among ABC, ABCR Acquisition Sub, Inc. and NACO, Inc. by reference
dated as of December 10, 1998 (Incorporated by reference to Exhibit 2.1 to
ABC's Registration Statement on Form S-4 (No. 333-65517), as filed with the
Securities and Exchange Commission on January 21, 1999.
2.2 Amendment to the Merger Agreement, dated as of February 16, 1999 by and Incorporated
among ABC, ABCR Acquisition Sub, Inc. and NACO, Inc. (Incorporated by by reference
reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
February 19, 1999) (SEC File No. 0-22906)
3.1 Restated Certificate of Incorporation, as amended (Incorporated by reference to Incorporated
the same numbered exhibit to the Registrant's Current Report on Form 8-K dated by reference
February 19, 1999) (SEC File No. 0-22906)
3.2 Restated Bylaws (Incorporated by reference to the same numbered exhibit to Incorporated
the Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File by reference
No.0-22906)
3.3 Certificate of Designation, Preferences and Rights of Series A Junior Incorporated
Participating Preferred Stock of the Company (Incorporated by reference to by reference
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
(Incorporated by reference to Exhibit 3.2 filed with the Registrant's Quarterly by reference
Report on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-
22906).
3.5 Certificate of Designation, Preferences and Rights of Series B Cumulative Filed
Convertible Preferred Stock of the Company, dated March 8, 2000 herewith
4.1 Specimen Common Stock Certificate (Incorporated by reference to the Incorporated
Registrant's Exhibit 4.2 filed with the Quarterly Report on Form 10-Q for the by reference
quarter ended January 31, 1999) (SEC File No. 33-70242)
4.2 Rights Agreement, dated as of September 29, 1995 between the Company and Incorporated
LaSalle National Trust, N.A., as Rights Agent (the ''Rights Agreement''), which by reference
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
(Incorporated by reference to Exhibit 4.1 filed with the Registrant's Quarterly by reference
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
Incorporated by reference to Exhibit 4.1 filed with the Registrant's Form 8-A/A by reference
on September 24,1998 (SEC File No. 0-22906).
4.5 Amendment No. 3 to the Rights Agreement Dated March 8, 2000. Filed
herewith
4.6 Indenture, dated January 15, 1997, from ABC to First Trust of Illinois, National Incorporated
Association, as Trustee (Incorporated by reference to Exhibit 4.5 in the by reference
Registrant's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on November 15, 1996) (SEC File No. 333-16241)
4.7 First Supplemental Indenture to the Indenture dated January 15, 1997 between Incorporated
ABC and First Trust National Association, as Trustee (Incorporated by reference to by reference
Exhibit 4.1 in 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).
4.8 Second Supplemental Indenture to the Indenture dated as of January 15, 1997 Incorporated
between ABC and First Trust National Association, as Trustee (Incorporated by by reference
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).
4.9 New Credit Agreement, dated February 19, 1999 between the Company and a Incorporated
syndicate of financial institutions (Incorporated by reference to Exhibit 4.1 to the by reference
Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File 4.9
No.0-22906)
EXHIBIT LOCATION IN
NUMBER.. DOCUMENT DESCRIPTION DOCUMENT
- -------- ------------------------------------------------------------------------------------ -------------
4.10 Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Incorporated
Credit Agreement, dated as of February 19, 1999, by and among the Company by reference
and certain of its affiliates, and Bank of America National Association,
individually and as agent for the benefit of the lenders under the Credit
Agreement. (Incorporated by reference to Exhibit 4.1 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.)
4.11 Amended and Restated Credit Agreement, entered into as of October 29, 1999, Incorporated
between the Company and certain of its affiliates and Bank of America National by reference
Association, individually and as agent for the benefit of the lenders under the
Credit Agreement. (Incorporated by reference to Exhibit 4.2 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31,
1999.)
4.12 Amendment to Amended and Restated Credit Agreement, entered into as of Incorporated
October 29, 1999, by and among the Company and certain of its affiliates, and by reference
Bank of America National Association, individually and as agent for the benefit of
the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.3
filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999.)
4.13 Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Incorporated
Credit Agreement, dated as of February 19, 1999, by and among the Company by reference
and certain of its affiliates, and Bank of America national Association,
individually and as agent for the benefit of the lenders under the Credit
Agreement. ( Incorporated by reference to Exhibit 10.2 filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.)
4.14 Amended and Restated Credit Agreement, entered into as of October 29, 1999, Incorporated
between the Company and certain of its affiliates and Bank of America National by reference
Association, individually and as agent for the benefit of the lenders under the
Credit Agreement. (Incorporated by reference to Exhibit 10.3 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31,
1999.)
4.15 Amendment to Amended and Restated Credit Agreement, entered into as of. Incorporated
October 29, 1999, by and among the Company and certain of its affiliates, and by reference
Bank of America National Association, individually and as agent for the benefit
of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit
10.4 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1999.)
4.16 Second Amended and Restated Credit Agreement, entered into as of March 8, Filed
2000, by and among the Company and certain of its affiliates, and Bank of herewith
America National Association, individually and as agent for the benefit of the
lenders under the Credit Agreement.
10.1 Stock Option Plan dated July 1, 1993 (Incorporated by reference to the Incorporated
same numbered exhibit filed with the Registrant's Registration Statement on by reference
Form 1993) (SEC File No. 33-70242
10.2 ABC Rail Corporation Master Savings Trust (Incorporated by reference to the Incorporated
same numbered exhibit filed with the Registrant's Registration Statement on by reference
Form S-1 originally filed with the Securities and Exchange Commission on
October 12, 1993)(SEC File No. 33-70242)
10.3 ABC Rail Corporation Savings and Investment Plan, as amended and restated Incorporated
effective as of May 1, 1988 (Incorporated by reference to the same numbered by 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)
10.4 1994 Director Stock Option Plan (Incorporated by reference to the same Incorporated
numbered Exhibit 10.11 filed with the Registrant's Annual Report on Form 10-K by reference
for the fiscal year ended July 31, 1994) (SEC File No. 0-22906)
10.5 Amendment No. 1 to 1994 Director Stock Option Plan (Incorporated by Incorporated
reference to the same numbered exhibit filed with the Registrant's Annual Report by reference
on Form 10-K for the fiscal year ended July 3
10.6 Form of option agreement evidencing options granted pursuant to the Stock Incorporated
Option Plan listed as Exhibit 10.1 above (Incorporated by reference to the same by reference
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).
10.7 1994 Stock Option Plan (Incorporated by reference to the same numbered exhibit Incorporated
filed with the Registrant's Registration Statement on Form S-1 originally filed by reference
with the Securities and Exchange Commission on April 13, 1994) (SEC File No.
33- 77652).
10.8 Registration Rights Agreement, dated as of February 19, 1999, by and among the Incorporated
Company and certain affiliates of NACO listed as parties thereto (Incorporated by reference
by reference to Exhibit 10.1 filed with the Quarterly Report of Form 10-Q for the
quarter ended January 31, 1999) (SEC File No. 0-22906)
EXHIBIT LOCATION IN
NUMBER.. DOCUMENT DESCRIPTION DOCUMENT
- -------- ------------------------------------------------------------------------------------ -------------
10.9 Form of Amended and Restated Severance Agreement, dated as of February 19, Incorporated
1999, entered into between the Company and each of Joseph A. Seher, Vaughn by reference
W. Makary, Wayne R. Rockenbach and John W. Waite (Incorporated by
reference to Exhibit 10.2 filed with the Quarterly Report of Form 10-Q for the
quarter ended January 31, 1999) (SEC File No. 0-22906).
10.10 Form of Stock Purchase Agreement entered into between NACO and certain of Incorporated
its employees (Incorporated by reference to Exhibit 10.3 filed with the Quarterly by reference
Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-
22906).
10.11 Wheelset Supply and Services Agreement, dated as of November 9, 1999,. Incorporated
between the Company and Union Pacific Railroad Company. (Incorporated by by reference
reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with
the SEC on November 18, 1999.)
10.12 ABC-NACO Inc. 1999 Omnibus Stock Plan. Filed
herewith
10.13 Investors Rights Agreement by and among ABC-NACO Inc., Furman Selz.. Filed
Investors II L.P., FS Employee Investors LLC, and FS Parallel Fund L.P., Dated herewith
as of March 8, 2000.
21.1 Subsidiaries of the Registrant. Filed
herewith
23.1 Consent of Independent Public Accountants of Registrant. Filed
. herewith
24.1 Powers of Attorney Filed
herewith
27.1 Financial Data Schedule. Filed
herewith
</TABLE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
ABC-NACO INC.
ABC-NACO Inc., a Delaware corporation (the "Corporation"), pursuant to the
-----------
provisions of Section 151 of the General Corporation Law of the State of
Delaware (the "DGCL"), does hereby make this Certificate of Designation under
----
the corporate seal of the Corporation and does hereby state and certify that
pursuant to the authority vested in the Board of Directors of the Corporation by
the Certificate of Incorporation, the Board of Directors has duly adopted the
following resolutions:
RESOLVED, that pursuant to Article Fourth of the Certificate of
Incorporation, as amended (which authorizes one million (1,000,000) shares of
preferred stock, par value $1.00 per share ("Preferred Stock"), none of which is
---------------
presently issued and outstanding), the Board of Directors hereby fixes the
designations and preferences and relative participating, optional and other
special rights and qualifications, limitations and restrictions of a new series
of Preferred Stock consisting of shares to be designated as Series B Cumulative
Convertible Preferred Stock.
Series B Cumulative Convertible Preferred Stock
- ----------------------------------------------------
RESOLVED, that the holders of Series B Cumulative Convertible Preferred
Stock, except as otherwise provided by law, shall have and possess the following
rights and preferences.
A. Series B Cumulative Convertible Preferred Stock.
----------------------------------------------------
1. Designation, Number of Shares. This series of preferred stock
---------------------------------
shall be designated as Series B Cumulative Convertible Preferred Stock ("Series
------
B Preferred Stock"), and the number of shares that shall constitute such series
- ------------------
shall be Three Hundred Thousand (300,000). The par value of Series B Preferred
Stock shall be $1.00 per share.
2. Rank. With respect to dividend rights and rights on
----
liquidation, winding up and dissolution of the Corporation, Series B Preferred
Stock shall rank senior to:
(i) the Common Stock, par value $0.01 per share ("Common
------
Stock"), of the Corporation; and
(ii) the Series A and each other class of capital stock or
class or series of Preferred Stock issued by the Corporation after the date
hereof (in accordance with Paragraph A.7.(a)(ii) hereof), the terms of which,
other than the Series A, shall specifically provide that such class or series
shall rank junior to Series B Preferred Stock as to dividend rights or rights on
liquidation, winding up and dissolution of the Corporation (each of the
securities in clauses (i) and (ii) above collectively referred to as "Junior
------
Securities").
- ----------
2. Dividend Provisions.
--------------------
(a) Each holder of Series B Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends on each share of Series B Preferred Stock
after the date of the original issuance of the Series B Preferred Stock at a
rate equal to eight percent (8.0%) per share per annum on One Hundred Dollars
($100) per share in cash, or at the Corporation's election, in fully paid,
non-restricted, fully tradable, non-assessable shares of Common Stock, which
shares of such Common Stock shall be valued at one hundred percent (100%) of the
average closing price on the NASDAQ National Market ("NASDAQ") for the sixty
------
(60) consecutive trading days immediately prior to the Dividend Declaration Date
(as defined in Paragraph B. hereof). With respect to any dividend on the Series
B Preferred Stock paid by the Corporation in shares of Common Stock, such shares
of Common Stock when issued shall be (i) registered for sale by the holder of
the Series B Preferred Stock under the Securities Act of 1933, as amended (and
applicable state securities laws), and (ii) listed on NASDAQ or the NYSE.
(b) All dividends, whether payable in cash or in shares of
Common Stock, shall be cumulative, whether or not earned or declared, and shall
accrue on a semi-annual basis beginning on the date of the original issuance of
Series B Preferred Stock (whether or not funds are legally available for the
declaration and/or payment of such dividends), and shall be payable
semi-annually in arrears on each Dividend Payment Date (as defined in Paragraph
B. hereof), commencing on the first Dividend Payment Date after the date of the
original issuance of such Series B Preferred Stock. Each dividend on Series B
Preferred Stock shall be payable to the holders of record of Series B Preferred
Stock as they appear on the stock register of the Corporation on such record
date as may be fixed by the Board of Directors, which record date shall not be
less than ten (10) nor more than sixty (60) calendar days prior to the
applicable Dividend Payment Date. Notwithstanding the foregoing, during the
first two (2) years after the date of original issuance of the Series B
Preferred Stock, the Corporation shall be entitled to defer payment of dividends
on shares of Series B Preferred Stock; provided, that during such two-year
--------
period, dividends on shares of Series B Preferred Stock shall cumulate and
compound and any so deferred dividends shall be payable in full upon the second
anniversary of the date of original issuance of the Series B Preferred Stock.
(c) Dividends shall cease to accrue in respect of any shares
of Series B Preferred Stock on the date such shares are converted into shares of
Common Stock in accordance with Paragraph A.5. hereof.
(d) Accrued dividends on the Series B Preferred Stock, if not
paid on the first or any subsequent Dividend Payment Date following accrual,
shall thereafter accrue additional dividends ("Additional Dividends") in respect
--------------------
thereof, compounded semi-annually, at the rate specified hereinabove in
Paragraph A.3.(a) hereof or as specified hereinbelow in Paragraph A.3.(g)
hereof.
(e) All dividends paid with respect to shares of Series B
Preferred Stock pursuant to Paragraph A.3.(a) shall be paid pro rata to the
holders of Series B Preferred Stock of record entitled thereto.
(f) Dividends on account of arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the holders of Preferred Stock of record on any date
as may be fixed by the Board of Directors, which date is not more than thirty
(30) calendar days prior to the payment of such dividends.
(g) The dividend payable to holders of Series B Preferred
Stock as set forth above in Paragraph A.3.(a) shall be increased to a rate of
twelve percent (12%) per share per annum on the Series B Liquidation Preference
(the "Default Dividends"), which Default Dividends shall be payable in either
------------------
cash, unless prohibited by the Credit Agreement dated as of February 19, 1999
among the Company, ABC-NACO de MEXICO, S.A. de C.V., Dominion Castings Limited,
Bank of America Canada, Bank of America National Trust and Savings Association
and the other financial institutions party thereto, as amended and restated, or
Common Stock at the choosing of each holder of Series B Preferred Stock, upon
the occurrence and during the continuance of any of the following events (each
an "Event of Default" and collectively the "Events of Default"), upon the giving
---------------- -----------------
of written notice thereof to the Corporation by the holders of a majority of the
shares of Series B Preferred Stock then outstanding:
(i) in the event that the Corporation does not (A)
declare the dividend payable on the shares of Series B Preferred Stock within
(30) calendar days of the Dividend Declaration Date, (B) fulfill its dividend
payment obligation in full for the Series B Preferred Stock, as set forth
herein, within thirty (30) calendar days after said dividend payment is due and
payable, or (C) fulfill its dividend payment obligation in the form of either
cash or stock as required herein; or
(ii) in the event that the Corporation shall have
materially breached any of the representations and warranties contained in any
of the Stock Purchase Agreement or the Investors Rights Agreement; or
(iii) in the event that the Corporation shall have
materially breached any of the covenants or agreements contained in any of the
Stock Purchase Agreement or the Investors Rights Agreement and such breach shall
not have been cured to the satisfaction of the holders of record of a majority
of the shares of Series B Preferred Stock then outstanding within forty-five
(45) calendar days after the date of giving of notice of such breach to the
Corporation; or
(iv) in the event that the Corporation shall (A) apply
for or consent to the appointment of a receiver, trustee or liquidator for the
Corporation or any of its property; (B) admit in writing its inability to pay
debts as they mature; (C) make a general assignment for the benefit of
creditors; (D) be adjudicated bankrupt or insolvent; (E) file a voluntary
petition in bankruptcy, a petition or answer seeking reorganization or an
arrangement with creditors to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against it in
any proceeding under any such law; or (F) have failed to have an involuntary
petition in bankruptcy filed against it dismissed and discharged within sixty
(60) calendar days after the date of such filing; corporate actions shall be
taken for the purpose of effecting any of the foregoing; or an order, judgment
or decree shall be entered without the application, approval or consent of the
Corporation, by any court of competent jurisdiction, approving a petition
seeking reorganization of the Corporation or of all or a substantial part of its
assets, and such order, judgment or decree shall continue unstayed and in effect
for sixty (60) calendar days (a "Bankruptcy"); or
----------
(v) if at any time after the date of original issuance
of the first share of Series B Preferred Stock, shares of Common Stock are not
publicly traded on NASDAQ or NYSE, or fail to satisfy the then current
requirements for listing on such market or exchange.
Notwithstanding the foregoing, in the event that the Corporation is
unable to meet its obligation to pay cash dividends in the form of cash because
of (a) a deficiency in the cash position of the Corporation such that the
payment of such dividends in cash would have a Material Adverse Effect on the
Corporation, or (b) a prohibition by the DGCL, then the Corporation shall be
permitted to pay Default Dividends in shares of Common Stock during such time
the condition described in this paragraph continues; provided, however, that the
-------- -------
Corporation shall not be entitled to satisfy its dividend payment obligations by
paying dividends in shares of Common Stock upon the occurrence or during the
continuance of an Event of Default set forth in Paragraph A.3.(g)(iv) hereof.
(h) The holders of Series B Preferred Stock shall be entitled
to receive the dividends provided for in Paragraphs A.3.(a) and (g) hereof in
preference to and in priority over any dividends upon any of the Junior
Securities. Such dividends on the Series B Preferred Stock shall be cumulative,
whether or not earned or declared, so that if at any time full Accumulated
Dividends (as defined in Paragraph B. below) on all shares of Preferred Stock
then outstanding have not been paid for all Dividend Periods then elapsed and a
prorated dividend on the Series B Preferred Stock at the rate aforesaid from the
Dividend Payment Date immediately preceding the Junior Payment Date (as defined
below) to the Junior Payment Date have not been paid or set aside for payment,
the amount of such unpaid dividends shall be paid before any sum shall be set
aside for or applied by the Corporation to the purchase, redemption or other
acquisition for value of any shares of Junior Securities (either pursuant to any
applicable sinking fund requirement or otherwise) or any dividend or other
distribution shall be paid or declared and set apart for payment on any Junior
Securities (the date of any such actions to be referred to as the "Junior
------
Payment Date"). In the event that the Corporation shall pay or declare any
-------
dividend, or make any distribution, on account of any Junior Securities
(including Common Stock), the holders of Series B Preferred Stock shall
participate with the holders of Common Stock or other Junior Securities on a pro
rata basis, based upon the number of shares of Common Stock or other Junior
Securities held by each such holder (assuming conversion of all such shares of
Series B Preferred Stock into Common Stock on the terms set forth herein), in
receipt of such dividends when, as and if declared by the Board of Directors
(other than a dividend payable in shares of Common Stock or other securities or
rights convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock), which dividends shall be in
addition to and not in lieu of the dividends on shares of Series B Preferred
Stock set forth in Paragraphs A.3.(a) or A.3.(g) hereof .
(i) Dividends payable on Series B Preferred Stock for any
period less than one (1) year shall be computed on the basis of a 360-day year
consisting of twelve 30-day months plus the actual number of calendar days
elapsed in the month for which such dividends are payable.
3. Liquidation Preference.
-----------------------
(a) Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of all shares of
Series B Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to One Hundred Dollars ($100.00) in cash per share, plus an
amount equal to full cumulative dividends (whether or not earned or declared)
accrued and unpaid thereon, including Default Dividends and Additional Dividends
(such amount, as so determined, is referred to herein as the "Series B
--------
Liquidation Preference"), to the date of final distribution and no more, before
--------------
any payment or distribution is made on account of any Junior Securities. After
payment in full pursuant to this Paragraph A.4., the holders of Series B
Preferred Stock shall not be entitled to any further participation in any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Corporation.
(b) Certain Transactions Treated as Liquidation. For
-----------------------------------------------
purposes of this Paragraph A.4., at the election of the holders of record of a
majority of the then outstanding shares of Series B Preferred Stock, (A) any
acquisition of the Corporation by means of merger or other form of corporate
reorganization with or into another corporation in which outstanding shares of
the Corporation are exchanged for securities or other consideration issued, or
caused to be issued, by the other corporation or its subsidiary, in which
transaction this Corporation is not the surviving entity, and, as a result of
which transaction, the stockholders of the Corporation own fifty percent (50%)
or less of the voting power of the surviving entity, (B) any acquisition in a
transaction or series of transactions by a person or group (as defined below) of
persons the result of which is that such person or group of persons owns
beneficially fifty percent (50%) or more of the voting securities then
outstanding of the Corporation, or (C) a sale, transfer or lease (other than a
pledge or grant of a security interest to a bona fide lender) of all or
substantially all of the assets of the Corporation and its Subsidiaries on a
consolidated basis (other than to a wholly-owned subsidiary of the Corporation),
shall be treated as a liquidation, dissolution or winding up of the Corporation
and shall entitle the holders of Series B Preferred Stock to receive at the
closing of any such transactions the amount that would be received in a
liquidation, dissolution or winding up pursuant to Paragraph A.4.(a). hereof.
For purposes hereof, the term "group" means two or more persons who act as a
partnership, syndicate, or pursuant to any other arrangement or understanding,
for the purpose of acquiring, holding, or disposing of securities of the Company
including without limitation pursuant to Rule 13d-5 promulgated under the
Exchange Act .
4. Conversion.
----------
(a) Right of Conversion. Each share of Series B Preferred
---------------------
Stock shall be convertible, at the option of the holder thereof, at any time,
and from time to time, after the date of issuance of such share, at the office
of the Corporation or any transfer agent for the Series B Preferred Stock, into
such number of fully paid, registered, non-assessable shares of Common Stock as
is determined by dividing (i) One Hundred Dollars ($100.00) plus an amount equal
to full cumulative dividends (whether or not earned or declared) accrued and
unpaid thereon, including Default Dividends and Additional Dividends by (ii) the
Conversion Price. The "Conversion Price" for the Series B Preferred Stock shall
----------------
be the average closing price of the Company's Common Stock for the thirty
trading days ending February 17, 2000 as reported by Bloomberg rounded up to the
nearest dollar. The Conversion Price for the Series B Preferred Stock shall be
subject to adjustment as set forth in Paragraph A.5.(c) hereof.
(b) Procedures for Voluntary Conversion. Before any holder
-------------------------------------
of shares of Series B Preferred Stock shall be entitled to convert any of such
shares into shares of Common Stock, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Series B Preferred Stock, and shall give written
notice by mail, postage prepaid, or hand delivery, to the Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued, and in the case of a partial conversion of the
Series B Preferred Stock, the certificate or certificates for shares of the
Series B Preferred Stock not converted. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holders of
shares of Series B Preferred Stock, or to the nominee or nominees of such
holders, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series B Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act, the conversion may, at the option of any holder tendering
the Series B Preferred Stock for conversion, be conditioned upon the
effectiveness of such offering, in which event the person(s) entitled to receive
Common Stock issuable upon such conversion of the Series B Preferred Stock shall
not be deemed to have converted such Series B Preferred Stock until immediately
prior to the effectiveness of such offering and the Corporation shall deliver to
such holders tendering Series B Preferred Stock for conversion written notice of
the anticipated date of such effectiveness no less than ten (10) calendar days
prior thereto.
(c) Adjustments of Conversion Price. So long as any shares
---------------------------------
of Series B Preferred Stock are outstanding, the Conversion Price of the Series
B Preferred Stock shall be subject to adjustment from time to time as follows:
(i) (A) Upon issuance (or deemed issuance pursuant
to the provisions hereof) by the Corporation of any Additional Stock (as defined
below) after the date of issuance of Series B Preferred Stock, without
consideration or for an Effective Price per share, or, in the case of
Convertible Securities, a conversion price per share, less than the Conversion
Price for the Series B Preferred Stock in effect immediately prior to the
issuance (or deemed issuance) of such Additional Stock, then the Conversion
Price for the Series B Preferred Stock in effect immediately prior to each (such
issuance or deemed issuance) shall be adjusted to a price determined by the
following formula: (A + B) (C + D), where "A" equals the number of shares of
Common Stock outstanding immediately prior to such issuance or sale multiplied
by the then applicable Conversion Price, where "B" equals the consideration, if
any, received by the Corporation upon such issuance or sale, where "C" equals
the total number of shares of Common Stock outstanding prior to issuance of the
additional shares and where "D" equals any Additional Stock or any conversion
shares, or any other shares reserved for issuance which are associated with such
financing, immediately after such issuance or sale. See Annex A hereto for an
-------
example of the formula set forth herein.
(B) No adjustment of the Conversion Price for
Series B Preferred Stock shall be made in an amount less than one-half of One
Cent ($0.005) per share, provided that any adjustments which are not required to
be made by reason of this sentence shall be carried forward and shall be taken
into account in any subsequent adjustment to the Conversion Price. No
adjustment of the Conversion Price for the Series B Preferred Stock pursuant to
this Paragraph A.5.(c)(i) shall have the effect of increasing such Conversion
Price for the Series B Preferred Stock above the Conversion Price in effect
immediately prior to such adjustment.
(C) In the case of the issuance of securities of
the Corporation for cash, the amount of consideration received by the
Corporation for such securities shall be deemed to be the amount of cash paid
therefor before deducting any discounts, commissions or other expenses allowed,
paid or incurred by the Corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.
(D) In the case of the issuance of securities of
the Corporation for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to have a dollar value equal to
the fair market value as determined by the Board of Directors in accordance with
generally accepted accounting principles of such non-cash consideration,
irrespective of any accounting treatment thereof.
(E) In the case of the issuance (whether before, on
or after the date of issuance of Series B Preferred Stock) of Options or
Convertible Securities, the following provisions shall apply for all purposes of
this Paragraph A.5.(c)(i) and Paragraph A.5.(c)(ii) hereof:
(1) With respect to Options to purchase Common Stock, the
aggregate maximum number of shares of Common Stock deliverable upon exercise of
such Options shall be deemed to have been issued at the time such Options were
issued and for a consideration equal to the consideration (determined in the
manner provided in Subparagraph A.5.(c)(i)(C) and Subparagraph A.5.(c)(i)(D)
hereof), if any, received by the Corporation for such Options plus the minimum
exercise price provided in such Options for Common Stock issuable thereunder.
(2) With respect to Convertible Securities and Options to purchase
Convertible Securities, the aggregate maximum number of shares of Common Stock
deliverable upon the conversion or exchange of any such Convertible Securities
and the aggregate maximum number of shares of Common Stock issuable upon the
exercise of such Options to purchase Convertible Securities and the subsequent
conversion or exchange of such Convertible Securities shall be deemed to have
been issued at the time such Convertible Securities or such Options were issued
and for a consideration equal to the consideration, if any, received by the
Corporation for any such Convertible Securities and Options, plus the minimum
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such Convertible Securities or the exercise of such
Options and the conversion or exchange of the Convertible Securities issuable
upon exercise of such Options (the consideration in each case to be determined
in the manner provided in Subparagraphs A.5.(c)(i)(C) and A.5.(c)(i)(D) hereof).
(3) In the event of any change in the number of shares of Common
Stock deliverable, or in the consideration payable to the Corporation, upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price of the Series B Preferred
Stock, to the extent in any way affected by or computed using such Options or
Convertible Securities, shall be recomputed to reflect such change, but no
further adjustment shall be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such Options or the
conversion or exchange of such Convertible Securities.
(4) Upon the expiration or termination of any such Options or any
such rights to convert or exchange Convertible Securities, the Conversion Price
of the Series B Preferred Stock, to the extent in any way affected by or
computed using such Options or Convertible Securities, shall be recomputed to
reflect the issuance of only the number of shares of Common Stock (and Options
and Convertible Securities which remain in effect) that were actually issued
upon the exercise of such Options or upon the conversion or exchange of such
Convertible Securities.
(5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Subparagraphs A.5.(c)(i)(E)(1)
and (2) hereof shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Subparagraph
A.5.(c)(i)(E)(3) or (4) hereof.
(ii) "Additional Stock" shall mean any shares of Common
-----------------
Stock or shares of Common Stock issuable pursuant to Convertible Securities
issued or Options (or deemed to have been issued pursuant to Paragraph
A.5.(c)(i)(E) hereof) by the Corporation after the date of issuance of Series B
Preferred Stock, except:
(A) Common Stock issued pursuant to a transaction
described in Paragraph A.5.(c)(iii) hereof;
(B) Common Stock or options to purchase such Common
Stock issued to officers, employees or directors of, or consultants to, the
Corporation, pursuant to any agreement, plan or arrangement approved by the
Board of Directors of the Corporation (the "Permitted Options"); and
------------------
(C) Common Stock issued or issuable upon conversion
of shares of Series B Preferred Stock.
(iii) In the event the Corporation at any time or from
time to time after the date of issuance of Series B Preferred Stock fixes a
record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of shares of Common Stock
entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
------------------------
without payment of any consideration by such holder for the additional shares of
Common Stock or Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend, distribution, split or subdivision if
no record date is fixed), the Conversion Price of the Series B Preferred Stock
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series B Preferred Stock shall be
increased in proportion to such increase in the aggregate number of shares
issuable with respect to Common Stock Equivalents, with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Subparagraph A.5.(c)(i)(E)
hereof.
(iv) If the number of shares of Common Stock outstanding
at any time after the date of issuance of Series B Preferred Stock is decreased
by a combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for the Series B Preferred
Stock shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of Series B Preferred Stock shall be
decreased in proportion to such decrease in the outstanding shares of Common
Stock.
(d) Other Distributions. In the event the Corporation shall
--------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Paragraph A.5.(c)(iii)
hereof, then, in each such case for the purpose of this Paragraph A.5.(d), the
holders of shares of Series B Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were holders of the
number of shares of Common Stock into which their shares of Series B Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of shares of Common Stock entitled to receive such distribution.
(e) Recapitalization. If at any time or from time to time
----------------
there shall be a recapitalization or reclassification of Common Stock (other
than a subdivision, combination or consolidation, merger or sale of assets or
stock transaction provided for in Paragraph A.4.(b) hereof), provision shall be
made so that each holder of shares of Series B Preferred Stock shall thereafter
be entitled to receive, upon conversion of the Series B Preferred Stock, the
number of shares of stock or other securities or property of the Corporation or
otherwise, receivable upon such recapitalization or reclassification by a holder
of the number of shares of Common Stock into which such shares of Series B
Preferred Stock could have been converted immediately prior to such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Paragraph A.5. with respect to the rights
of the holders of shares of Series B Preferred Stock after the recapitalization
or reclassification to the end that the provisions of this Paragraph A.5.
(including adjustments of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series B Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(f) No Impairment. The Corporation will not, by amendment of
-------------
this Certificate of Incorporation or through any reorganization,
recapitalization or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Paragraph A.5. and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of shares of Series B Preferred Stock against
impairment.
(g) No Fractional Shares. No fractional shares shall be
----------------------
issued upon conversion of the Series B Preferred Stock, and the number of shares
of Common Stock to be issued shall be rounded upward to the nearest whole share,
and there shall be no payment to a holder of shares of Series B Preferred Stock
for any such rounded fractional share. Whether or not fractional shares result
from such conversion shall be determined on the basis of the total number of
shares of Series B Preferred Stock the holder is at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(h) Certificate as to Adjustments. Upon the occurrence of
--------------------------------
each adjustment or readjustment of the Conversion Price of the Series B
Preferred Stock pursuant to this Paragraph A.5., the Corporation, at its
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of shares of Series
B Preferred Stock a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based, certified by the Corporation's Chief Executive Officer or Chief Financial
Officer. The Corporation shall, upon the written request at any time of any
holder of shares of Series B Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustment and
readjustment, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of Series B
Preferred Stock.
(i) Notices of Record Date. In the event of any taking by
-------------------------
the Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series B Preferred Stock, at least twenty
(20) calendar days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) Reservation of Stock Issuable Upon Conversion, Dividends.
--------------------------------------------------------
The Corporation shall at all times take appropriate steps to reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of (i) effecting the conversion of the shares of Series B Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series B
Preferred Stock, and (ii) the payment of dividends as contemplated in Paragraphs
A.3.(a) and (g). If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of Series B Preferred Stock or the payment of dividends, then
in addition to such other remedies as shall be available to the holder of such
shares of Series B Preferred Stock, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes.
(k) Notices. Any notice required by the provisions of this
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Paragraph A.5. to be given to the holders of shares of Series B Preferred Stock
shall be deemed given when received if delivered via courier or sent by
facsimile, or by United States mail, postage prepaid, and addressed to each
holder of record at its address appearing on the books of the Corporation.
(l) Mandatory Conversion.
---------------------
(i) At any time after the third (3rd) anniversary of the
date of the original issuance of the Series B Preferred Stock, all or a portion
of the shares of Series B Preferred Stock shall, at the option of the
Corporation (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of Common Stock
in accordance with Paragraph A.5.(a) above, if the following three conditions
are met:
(A) the Closing Common Stock Market Price (as
defined in Paragraph B.(d) hereof) for sixty (60) consecutive trading days
ending no more than fifteen (15) trading days prior to such mandatory
conversion, shall be the greater of (1) $18.00 or (2) not less than two hundred
percent (200%) of the Conversion Price then in effect;
(B) the average trading volume during such sixty
(60) trading day period shall be at least 45,000 shares per trading day; and
(C) an effective shelf registration (in accordance
with Section 4(b) of the Investors Rights Agreement) is then in effect for the
shares of Common Stock to be issued upon conversion of the shares of Series B
Preferred Stock .
(ii) If the Corporation has elected to convert Series B
Preferred Stock into Common Stock pursuant to Paragraph A.5.(l)(i) above, the
Corporation will provide written notice of mandatory conversion of shares of
Series B Preferred Stock to each holder of record of Series B Preferred Stock no
less than ten (10) nor more than twenty (20) calendar days prior to the date
fixed for conversion by prepaid overnight delivery service, to each holder at
such holder's address as it appears on the stock register of the Corporation.
The Corporation's obligation to deliver shares of Common Stock shall be deemed
fulfilled if, on the mandatory conversion date, the Corporation shall deposit
with a bank or trust company in New York, New York having capital of at least
One Hundred Million Dollars ($100,000,000), such number of shares of Common
Stock as are required to be delivered by the Corporation upon the conversion of
the shares of Series B Preferred Stock so called for conversion. Provided the
Corporation has fulfilled its obligation to deposit shares as provided in the
foregoing sentence, effective on the mandatory conversion date fixed by the
Corporation and notified to the holders of Series B Preferred Stock, each
outstanding share of Series B Preferred Stock plus an amount equal to full
cumulative dividends (whether or not earned or declared) accrued and unpaid
thereon, including Default Dividends and Accumulated Dividends, shall be
converted into a fully paid, registered, and non-assessable share of Common
Stock at the Conversion Price then in effect, automatically and without any
action on the part of any holder of shares of Series B Preferred Stock, and each
such share of Common Stock shall be deemed outstanding from and after the
mandatory conversion date.
5. Status of Converted Stock. In the event any shares of Series B
-------------------------
Preferred Stock are converted to Common Stock pursuant to Paragraph A.5. hereof,
the shares so converted or so redeemed shall be canceled, retired and eliminated
and shall not be reissued by the Corporation.
6. Voting Rights.
--------------
(a) Class Voting Rights.
---------------------
(i) Except as otherwise provided below, a vote of at
least a majority of the shares of the Series B Preferred Stock then outstanding
shall be sufficient to take any action requiring the vote of the Series B
Preferred Stock as a separate class. At any meeting where the Series B
Preferred Stock shall have the right to vote as a separate class, the presence,
in person or by proxy, of a majority of the then outstanding shares of Series B
Preferred Stock shall constitute a quorum of such class.
(ii) So long as any Series B Preferred Stock is
outstanding, the Corporation shall not, without the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of all
outstanding shares of Series B Preferred Stock voting separately as a class,
given in person or by proxy, either in writing or by resolution adopted at an
annual or special meeting called for this purpose (A) amend, alter or repeal any
provision of the Certificate of Incorporation or By-laws of the Corporation,
each as amended, so as to affect, in any manner adverse to the holders of Series
B Preferred Stock, the relative rights, preferences, qualifications, limitations
or restrictions of the Series B Preferred Stock; or (B) increase the authorized
number of shares of Series B Preferred Stock or create, authorize, designate or
reclassify any authorized stock of the Corporation into, or increase the
authorized amount of, or issue any capital stock or any securities convertible
into or exchangeable or exercisable for any securities of the Corporation,
ranking, either as to payment of dividends, distributions of assets upon
liquidation or otherwise or redemption, prior or senior to or pari passu with
the Series B Preferred Stock, or (C) create, authorize or issue any Junior
Securities, which are required to be redeemed by the Corporation at any time
that any shares of Series B Preferred Stock are outstanding.
(b) Board of Directors. Until the occurrence of an Event of
-------------------
Default, the holders of shares of Series B Preferred Stock shall not be entitled
to elect any director to the Corporation's Board of Directors. Upon the
occurrence of an Event of Default and the expiration of any cure period
specified in Paragraph A.3(g), the holders of record of shares of Series B
Preferred Stock shall be entitled to elect, voting separately as a class one (1)
director to the Corporation's Board of Directors (the "Series B Director") and
-----------------
the Corporation shall immediately upon such occurrence and the expiration of any
such cure period, and in no event later than two (2) business days thereafter
arrange for the election of the Series B Director whether by special meeting or
otherwise. At any such meeting called for the purpose of electing the Series B
Director, the presence in person or by proxy of the holders of record of a
majority of the shares of Series B Preferred Stock then outstanding, shall
constitute a quorum for the election of the Series B Director to be elected by
such holders. A vacancy in any directorship entitled to be elected by the
holders of record of shares of Series B Preferred Stock (including without
limitation, a vacancy resulting from the decision during an earlier election by
the holders of the Series B Preferred Stock not to fill the directorship to be
held by the Series B Director) shall be filled only by vote or written consent
of the holders of record of shares of Series B Preferred Stock, in the manner
set forth herein. Each Series B Director who shall have been elected as
provided in this Paragraph A.7.(b) may be removed during his or her term of
office, whether with or without cause, by the holders of record of a majority of
the shares of Series B Preferred Stock then outstanding. The Series B Director
shall be entitled to one (1) vote on all matters which directors are entitled to
vote on. The holders of record of a majority of the shares of Series B
Preferred Stock then outstanding shall have the right to call meetings of the
Board of Directors and management of the Corporation, upon no less than ten (10)
calendar days' prior written notice; provided, that such meetings are called no
--------
more frequently than once per fiscal quarter.
B. Definitions. As used herein, the following terms shall have the
-----------
following definitions:
(a) "Accumulated Dividends" means with respect to any share
----------------------
of Series B Preferred Stock, the dividends that have accrued on such shares as
of such specific date for Dividend Periods ending on or prior to such date and
that have not previously been paid in cash, including Additional Dividends and
Default Dividends.
(b) "Additional Dividends" has the meaning given to such term
--------------------
in Paragraph A.3.(d).
(c) "Additional Stock" has the meaning set forth in Paragraph
----------------
A.5.(c)(ii).
(d) "Closing Common Stock Market Price" for any day means the
---------------------------------
last sale price regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices regular way, in either case as
reported NASDAQ, NYSE or any other national securities market.
(e) "Common Stock Equivalents" has the meaning set forth in
--------------------------
Paragraph A.5.(c)(iii) hereof.
(f) "Conversion Price" has the meaning set forth in Paragraph
----------------
A.5.(a) hereof.
(g) "Convertible Securities" means any indebtedness or shares
----------------------
of stock convertible into or exchangeable for Common Stock.
(h) "Dividend Declaration Date" means the last trading day on
-------------------------
NASDAQ immediately prior to June 30 and December 31 of each year in which any
shares of the Series B Preferred Stock are outstanding.
(i) "Dividend Payment Dates" means July 31 and January 31 of
-----------------------
each year (or, if such day is not a business day, the next succeeding day that
is a business day);
(j) "Dividend Period" means the Initial Dividend Period and,
----------------
thereafter, each Semi-Annual Dividend Period.
(k) "Effective Price" of shares of Additional Stock means the
---------------
quotient determined by dividing (i) the total number of such shares of
Additional Stock issued or sold, or deemed to have been issued or sold, by the
Corporation under Paragraph A.5.(c) hereof, into (ii) the consideration received
by the Corporation under Paragraph A.5.(c) hereof for the issuance of such
shares of Additional Stock.
(l) "Initial Dividend Period" means the dividend period
-------------------------
commencing on the date of issuance of the Series B Preferred Stock and ending on
the first Dividend Payment Date to occur thereafter.
(m) "Investors" shall have the meaning set forth in the Stock
---------
Purchase Agreement.
(n) "Investors Rights Agreement" means the Investors Rights
----------------------------
Agreement dated as of March 8, 2000, by and among the Corporation and the
Investors named therein, the Schedules and Exhibits thereto, and any certificate
or other document required thereby, as the same may be amended from time to
time.
(o) "Junior Payment Date" has the meaning set forth in
---------------------
Paragraph A.3.(h) hereof.
(p) "Junior Securities" has the meaning set forth in
------------------
Paragraph A.2. hereof.
(q) "Material Adverse Effect" shall mean (i) any adverse
-------------------------
change in the condition (financial or otherwise), assets (including without
limitation tangible and intangible assets), liabilities, business, or results of
operations or prospects of the Company or any of its Subsidiaries, which change,
individually or in the aggregate, is material to the Company and its
Subsidiaries taken as a whole, or (ii) any event, matter, condition or effect
which materially adversely impairs the ability of the Company to perform on a
timely basis its obligations under this Agreement or the Company to consummate
the transactions contemplated by this Agreement.
(r) "NASDAQ" shall have the meaning set forth in Paragraph
------
A.3.(a) hereof.
(s) "NYSE" shall mean the New York Stock Exchange.
----
(t) "Option" means rights, options or warrants to subscribe
------
for, purchase or otherwise acquire Common Stock or Convertible Securities.
(u) "Permitted Options" has the meaning set forth in
------------------
Paragraph A.5.(c)(ii)(B) hereof.
(v) "person" shall mean and include an individual, a
------
corporation, a partnership, a trust, an unincorporated organization and a
government or any department, agency or political subdivision thereof.
(w) "Semi-Annual Dividend Periods" means the semi-annual
------------------------------
periods (1) commencing on each January 1 and ending on each June 30 and (2)
commencing on July 1 and ending on each December 31.
(x) "Stock Purchase Agreement" means the Preferred Stock
--------------------------
Purchase Agreement dated as of February 18, 2000, by and among the Corporation
and the Investors named therein, the Schedules and Exhibits thereto, and any
certificate or other document required thereby, as the same may be amended from
time to time.
(y) "Subsidiaries" means when used with reference to a
------------
person, a corporation or limited liability company, the majority of the
outstanding voting securities or membership interests of which are owned
directly or indirectly by such person.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
signed on the _____ day of March, 2000.
ABC-NACO INC.
By: _________________________
Name: J.P. Singsank
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
ANNEX A
Example of Application of Formula for Adjustment of Conversion Price.
If, twelve (12) months after the original issuance of the Series B Preferred
Stock, 9,000,000 shares of Common Stock were then outstanding and the
Corporation was to issue 100,000 shares of Common Stock (the Additional Stock)
for $8.00 per share (and thus, less than the $9 Conversion Price for Series B
Preferred Stock then in effect), the Conversion Price would be adjusted as
follows:
<TABLE>
<CAPTION>
<S> <C>
[(C +D)]
[(9,000,000 x $9) + (100,000 x $8)]/[(9,000,000) +(100,000)]
[(81,000,000)+($800,000 )]. . . . ./[(9,100,000)]
[(81,800,000)]. . . . . . . . . . ./[(9,100,000)]
= $8.989
</TABLE>
AMENDMENT NO. 3 TO THE RIGHTS AGREEMENT
---------------------------------------
This Amendment No. 3, dated as of March 8, 2000 (this "Amendment No. 3"),
is to the Rights Agreement, dated as of September 29, 1995, between ABC-NACO
Inc., a Delaware corporation (the "Company"), and LaSalle National Trust, N.A.,
a national banking association (the "Rights Agent").
WITNESSETH:
WHEREAS, the Company and the Rights Agent are parties to that certain
Rights Agreement dated as of September 29, 1995, and amended on November 18,
1996 and September 18, 1998 (as so amended, the "Rights Agreement"); and
WHEREAS, the Company intends to issue and sell a series of its Preferred
Stock to certain investors affiliated with Furman Selz (the "Investors")
pursuant that certain Preferred Stock Purchase Agreement dated as of February
18, 2000 by and among the Company and the Investors; and
WHEREAS, the Rights Agreement is inapplicable to the issuance and sale of
the Preferred Stock to the Investors, insofar as the definition of "Acquiring
Person" specifically excludes the acquisition of "newly-issued Common Shares
directly from the Company;" and
WHEREAS, the Company and the Investors desire that the Rights Agreement be
inapplicable to certain future acquisitions of shares of the Company's Common
Stock by affiliates of the Investors solely in their capacity as a market-maker
in the Company's securities in accordance with the rules of the National
Association of Securities Dealers, Inc.; and
WHEREAS, pursuant to and in compliance with the provisions of Section 27 of
the Rights Agreement, the Company and the Rights Agent desire to amend the
Rights Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained, the Company and the Rights Agent agree as follows:
SECTION I. Defined Terms. Capitalized terms used but not defined herein
shall have the meanings given to such terms in the Rights Agreement.
SECTION II. Amendment to the Rights Agreement.
2.01. The definition of "Acquiring Person" in Section I of the Rights
Agreement is amended by adding the following language at the end of the first
proviso of the second sentence of the definition of "Acquiring Person:"
<PAGE>
2
", except that if such Person becomes the Beneficial Owner of any additional
Common Shares solely as a result of its market-making activities in the
Company's securities undertaken solely in its capacity as a market-maker in
accordance with the rules of the National Association of Securities Dealers,
Inc., then such Person shall not be deemed to be an Acquiring Person until it
becomes the Beneficial Owner of 25% or more of the Common Shares of the Company
(and thereafter remains a Beneficial Owner of 25% or more of the Common Shares
of the Company);"
SECTION III. Miscellaneous.
3.01 Governing Law. This Amendment No. 3 shall be deemed to be made
--------------
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of the State of Delaware applicable
to contracts to be made and performed entirely within the State of Delaware.
3.02 Counterparts. This Amendment No. 3 may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
3.03 Descriptive Headings. Descriptive headings of several Sections of
--------------------
this Amendment No. 3 have been inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
3.04 Ratification. This Amendment No. 3 is limited as specified and
------------
shall not constitute a modification, acceptance, consent or waiver of any other
provision of the Rights Agreement. The Rights Agreement, including the Exhibits
thereto, as hereby amended, is in all respects ratified and confirmed, and all
rights and powers created thereby or thereunder shall be and remain in full
force and effect. From and after the date hereof, all references in the Rights
Agreement, the Exhibits thereto and all other documents related to the Rights
Agreement shall be deemed to be references to the Rights Agreement after giving
effect to this Amendment No. 3.
3.05 Effectiveness. This Amendment No. 3 shall be effective as of the
-------------
day and year first above written.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 to be duly
executed and attested as of the day and year first above written.
ABC-NACO INC.
By:
Name:
Title:
ATTEST:
By:
Name:
Title:
LASALLE BANK NATIONAL ASSOCIATION
By:
Name:
Title:
ATTEST:
By:
Name:
Title:
SECOND AMENDED AND RESTATED
---------------------------
CREDIT AGREEMENT
----------------
This Second Amended and Restated Credit Agreement (this "Agreement")
---------
is entered into as of March __, 2000, by and among ABC-NACO Inc., a Delaware
corporation (the "Company"), ABC-NACO de Mexico, S.A. de C.V., a Mexican
-------
corporation (the "Mexican Borrower"), Dominion Castings Limited, an Ontario
-----------------
corporation (the "Canadian Borrower" and, together with the Company and the
------------------
Mexican Borrower, the "Borrowers"), each of the several financial institutions
---------
signatory hereto (collectively, the "Majority Lenders") and Bank of America,
----------------
N.A. (f/k/a Bank of America National Trust and Savings Association) individually
and as agent (the "Agent") for the benefit of the Lenders under the Credit
-----
Agreement hereinafter referred to.
RECITALS
--------
A. The Borrowers, Bank of America Canada, as Canadian Revolving
Lender, the financial institutions from time to time party thereto and the Agent
and Letter of Credit Issuing Lender are parties to that certain credit agreement
dated as of February 19, 1999, as amended by that certain Amendment, Waiver and
Release Agreement dated as of October 12, 1999, as further amended by that
certain Amended and Restated Credit Agreement dated as of October 29, 1999 and
as further amended by that certain Amendment to Amended and Restated Credit
Agreement dated as of October 29, 1999 (the "Credit Agreement"). Unless
----------------
otherwise specified herein, capitalized terms used in this Agreement shall have
the meanings ascribed to them by the Credit Agreement, as amended hereby.
B. The Borrowers, the Agent and the Majority Lenders have agreed
to further amend the Credit Agreement on terms and conditions herein set forth,
subject to the terms and conditions hereof.
NOW, THEREFORE, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
1. Amendments to Credit Agreement. Effective as of the Effective Date
-------------------------------
(defined below), the Credit Agreement is hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is amended by deleting
-------------
the table in the definition of "Applicable Margin" in its entirety and
------------------
substituting in lieu thereof the following:
<TABLE>
<CAPTION>
"Loans
-----
<S> <C> <C> <C>
Offshore Base Commitment
Level Rate Rate Fee
- ----- --------- ----- -----------
I . . 1.50% 0.50% 0.40%
II. . 1.75% 0.75% 0.45%
III . 2.00% 1.00% 0.50%
IV. . 2.25% 1.25% 0.50%
V . . 2.50% 1.50% 0.50%
VI. . 2.75% 1.75% 0.55%
VII . 3.00% 2.00% 0.60%"
</TABLE>
(b) Section 1.01 of the Credit Agreement is further amended by
-------------
deleting the phrase "combined Commitments" located in the proviso of definition
of "L/C Commitment" and substituting in lieu thereof the phrase "Available
---------------
Commitment".
-
(c) Section 1.01 of the Credit Agreement is further amended by
-------------
deleting the proviso in the definition of "Interest Coverage Ratio" in its
entirety and substituting in lieu thereof the following:
"provided, that, with respect to periods ending prior to December 31,
--------- ----
2000, Consolidated Interest Expense and EBITDA shall be calculated for the
immediately preceding twelve months."
(d) Section 1.01 of the Credit Agreement is further amended by
-------------
deleting the proviso in the definition of "Leverage Ratio" in its entirety and
--------------
substituting in lieu thereof the following:
"provided, that, with respect to periods ending prior to December 31,
--------- ----
2000, EBITDA shall be calculated for the immediately preceding twelve months."
(e) Section 1.01 of the Credit Agreement is further amended by
-------------
deleting the proviso in the definition of "Senior Leverage Ratio" in its
----------------------
entirety and substituting in lieu thereof the following:
"provided, that, with respect to periods ending prior to December 31,
--------- ----
2000, EBITDA shall be calculated for the immediately preceding twelve months."
(f) Section 1.01 of the Credit Agreement is further amended by
-------------
deleting the following existing definitions therein in their entirety and
substituting in lieu thereof the following:
""EBITDA" means, for any period, the Company's and its Subsidiaries'
------
Net Income on a consolidated basis, determined in accordance with GAAP; plus, to
----
the extent deducted in the computation of Net Income for such period, (a)
Consolidated Interest Expense, (b) income or franchise taxes paid or accrued and
(c) amortization and depreciation expense; provided, however, that Net Income
-------- -------
shall be computed for these purposes without giving effect to (a) non-cash,
non-recurring extraordinary losses or special charges and (b) extraordinary or
special gains; and provided, further, that for periods ending on or prior to
--- -------- -------
July 31, 1999, all extraordinary losses reported in fiscal year 1998 and up to
$15,000,000 of additional cash extraordinary items and special charges related
to the Merger may be excluded from such computation; and provided, further, that
--- -------- -------
"EBITDA" shall be calculated after giving effect on the Pro Forma Basis to any
Acquisition or disposition of the Designated Non-Core Assets as if such
Acquisition or disposition occurred on the first day of the applicable period.
EBITDA for the Fiscal Quarters ended July 31, 1998, October 31, 1998 and January
31, 1999 shall be deemed to be that set forth on Schedule 1.1 hereto.
"Level" means, and includes, Level I, Level II, Level III, Level IV,
-----
Level V, Level VI or Level VII whichever is in effect at the relevant time.
"Level I" shall exist at any time the Leverage Ratio is less than
--------
2.5:1.0.
"Level II" shall exist at any time the Leverage Ratio is less than
---------
3.0:1.0 but equal to or greater than 2.5:1.0.
"Level III" shall exist at any time the Leverage Ratio is less than
----------
3.5:1.0 but equal to or greater than 3.0:1.0.
"Level IV" shall exist at any time the Leverage Ratio is less than
---------
4.0:1.0 but greater than or equal to 3.5.0:1.0.
"Level V" shall exist at any time the Leverage Ratio is less than
--------
4.5:1.0 but greater than or equal to 4.0:1.0.
"Level VI" shall exist at any time the Leverage Ratio is less than
---------
5.0:1.0 but greater than or equal to 4.5:1.0.
"Level VII" shall exist at any time the Leverage Ratio is greater than
---------
or equal to 5.0:1.0."
(g) Section 1.01 of the Credit Agreement is further amended by
-------------
inserting the following new definitions in their appropriate alphabetical:
""Available Commitment" as to any Lender, means such Lender's Commitment
---------------------
reduced by its Pro Rata Share of the Permitted Acquisition Reserve and as to all
Lenders, means the aggregate of such Lender's Commitment reduced by the
Permitted Acquisition Reserve.
Foundry Acquisition" means the acquisition of a North American foundry by
-------------------
the Company as determined by the Agent and the Majority Lenders.
"Net Proceeds" means (a) the sum of cash or readily marketable cash
-------------
equivalents received (including by way of a cash generating sale or discounting
-
of a note or receivable, but excluding any other consideration received in the
form of assumption by the acquiring Person of debt or other obligations relating
to the properties or assets so disposed of or received in any other non-cash
form) therefrom, whether at the time of such disposition or subsequent thereto,
or (b) with respect to any sale or issuance of equity or debt securities of the
Company or any Subsidiary, cash or readily marketable cash equivalents received
(but excluding any other non-cash form) therefrom, whether at the time of such
disposition, sale or issuance or subsequent thereto, net, in either case, of all
legal, title and recording tax expenses, commissions and other fees and all
costs and expenses incurred and all federal, state, local and other taxes
required to be accrued as a liability as a consequence of such transactions.
"Permitted Acquisition Reserve" means, at any date, an amount equal to 50%
------------------------------
of the aggregate Net Proceeds realized upon the sale or disposition of all or
any part of the Designed Non-Core Assets made by the Company or any of its
Subsidiaries less any amount utilized pursuant to the following sentence and
----
less any reductions required by the last sentence of this definition.
-
The Permitted Acquisition Reserve may be utilized (and shall be deemed to
be reduced immediately prior to such utilization) by the Company for the cash
portion of the purchase price paid in connection with an Acquisition permitted
by Section 8.04 hereof as long as (a) use of the Permitted Acquisition Reserve
-------------
for such Acquisition is approved by the Majority Lenders or (b) all of the
following conditions are satisfied:
(i) the Acquisition is consummated and such consideration is
paid on or before the 18th month anniversary of the date of receipt of Net
Proceeds which established such portion of the Permitted Acquisition Reserve to
be utilized (determined on a first-in, first-out basis) and
(ii) after giving affect of such Acquisition, the Company's
pro-forma Senior Leverage Ratio shall be no greater than the ratio required by
Section 8.14 at the time of consummation of such Acquisition less 0.25 and the
------------ ----
Agent shall have received a certificate from a Responsible Officer certifying to
the foregoing and attaching a calculation satisfactory to the Agent
demonstrating the same. The Permitted Acquisition Reserve shall be reduced to
the extent utilized as permitted by the preceding sentence. The Permitted
Acquisition Reserve shall also be reduced on the 18th month anniversary of the
date of receipt of Net Proceeds which establish any portion of the Permitted
Acquisition Reserve to the extent such amount has not been utilized (determined
on a first-in, first out basis) pursuant to the second sentence of this
definition and the amount of such deduction shall be applied as a permanent
reduction of the Commitments pursuant to Section 2.10(c) hereof.
----------------
"Pro Forma Basis" means, with respect to the preparation of pro forma
----------------
financial statements for purposes of the tests set forth in the permitted
adjustment to EBITDA, a pro forma on the basis that (A) any Indebtedness
incurred or assumed in connection with such Acquisition, or reduced or
eliminated in connection with such sale or disposition, was incurred, assumed,
reduced or eliminated on the first day of the applicable period, (B) if such
Indebtedness bears a floating interest rate, such interest shall be paid over
the pro forma period at the rate in effect on the date of such Acquisition or
sale or disposition, as the case may be (C) all income and expense associated
with the assets or entity acquired in connection with such Acquisition, or sold
or disposed of in connection with such disposition, for the most recently ended
four fiscal quarter period for which such income and expense amounts are
available shall be treated as being earned or incurred by the Company over the
applicable period on a pro forma basis and (D) without giving effect to any cost
savings.
"Scheduled Commitment Reduction" has the meaning specified in Section
-------------------------------- -------
2.10(b)."
--
(h) Section 2.01 of the Credit Agreement is amended by (A) adding
-------------
the following phrase after the term "Commitment" appearing in the second
parenthetical of the first sentence therein "as may be reduced pursuant to the
terms hereof" and (B) (i) deleting the phrase "combined Commitments" appearing
in the first proviso to the first sentence therein, (ii) deleting the term
"Commitment" appearing in the first proviso to the first sentence therein and
(iii) deleting the term "Commitment" appearing in the last sentence thereof, and
substituting in each place in lieu thereof, the phrase "combined Available
Commitments or Available Commitment, respectively".
(i) Sections 2.05, 2.06, 2.08, 2.09 and 3.01 of the Credit
----------------------------------------------
Agreement are amended by deleting term "Commitment" wherever such term appears
in such Sections and substituting in lieu thereof the phrase "Available
Commitment"; provided, however, that wheresoever such term shall appear in such
-------- -------
Sections as "Swing Line Commitment" or "L/C Commitment" no such substitution
therefor shall be made.
(j) Section 2.09 of the Credit Agreement is amended by inserting
-------------
after clause (d) thereof the following new clause (e):
"(e) On the Business Day of receipt of the proceeds from the sale or
disposition of any Designated Non-Core Assets, the Company shall prepay the
Revolving Loans in an amount equal to 35% of the Net Proceeds realized upon such
sale or disposition made by the Company or any of its Subsidiaries in any fiscal
year and such amount prepaid shall permanently reduce the Commitments of the
Revolving Lenders. Any reduction of the Commitments shall be applied to each
Revolving Lender according to its Pro Rata Share; provided, however, that
-------- -------
amounts prepaid pursuant to this Section 2.09(e) prior to January 1, 2001 shall
---------------
be applied first to reduce the January 1, 2001 Scheduled Commitment Reduction
and second to reduce the June 30, 2001 Scheduled Commitment Reduction. Once
reduced in accordance with this Section the Commitments may not be increased.
The Company shall use its best efforts to notify the Agent and each Revolving
Lender of the amount of any required prepayment as soon as practicable and in no
event later than ten (10) Business Days before it is made."
(k) Section 2.10 of the Credit Agreement is amended by deleting
-------------
the heading "Repayment" and inserting in lieu thereof the following "Repayment
--------- ---------
and Commitment Reductions" and is further amended by inserting an "(a)" before
--------------------------
the word "the" appearing at the beginning of the first sentence thereof and
inserting after clause (a) thereof the following new clauses (b), (c) and (d):
"(b) Notwithstanding anything to the contrary herein and independent of
any other obligation to make any reduction of the Commitments, the aggregate
Commitments shall be permanently reduced on the following dates by the amounts
set forth opposite such date, as such amounts may be reduced pursuant to Section
-------
2.09(e) (each, a "Scheduled Commitment Reduction").
- ------- --------------------------------
<TABLE>
<CAPTION>
<S> <C>
Aggregate Scheduled
Date. . Commitment Reduction
- ------- ---------------------
1/1/01. $ 10,000,000
6/30/01 $ 5,000,000
1/1/02. $ 10,000,000
6/30/02 $ 5,000,000
1/1/03. $ 15,000,000
</TABLE>
(c) The aggregate Commitments shall be permanently reduced by any
decrease in the Permitted Acquisition Reserve required by the last sentence of
the definition of Permitted Acquisition Reserve.
(d) Each reduction of the Commitments pursuant to clauses (b) and (c)
above shall be applied to each Lender in accordance with its Pro Rata Share and
the Commitments once reduced may not be increased."
(l) Section 8.02 of the Credit Agreement is amended by (i)
-------------
deleting the word "and" appearing at the end of clause (b) thereof, (ii)
deleting the period appearing at the end of clause (c) thereof and inserting ";
and" in place thereof and (iii) inserting after clause (c) thereof the following
new clause (d):
"(d) dispositions of equipment, inventory, assets and property by the
Company or any of its Subsidiaries constituting all or any part of the
Designated Non-Core Assets; provided, that, the Company shall comply with the
-------- ----
provision of Section 2.09(e) in connection with such sale or disposition."
----------------
(m) Section 8.04 of the Credit Agreement is amended by inserting
-------------
the following after the word "exceeds" in clause (ii) of paragraph (f) therein:
"(x) if the Company's Senior Leverage Ratio as of the preceding fiscal
quarter is greater than or equal to 2.75:1.0, $5,000,000 for any single
Acquisition or, as long as the aggregate consideration for such Acquisitions
during the Term of this Agreement, after giving effect to the proposed
Acquisition, would not exceed $20,000,000 (other than consideration of the
Foundry Acquisition) or (y) if the Company's Senior Leverage Ratio as of the
preceding fiscal quarter is less than 2.75:1.0,"
(n) Section 8.04 of the Credit Agreement is further amended by (i)
------------
deleting the word "and" appearing at the end of clause (f) thereof, (ii)
deleting the period appearing at the end of clause (g) thereof and inserting ";
and" in place thereof and (iii) inserting after clause (g) thereof the following
new clause (h):
"(h) the Foundry Acquisition; provided, that, the aggregate purchase
-------- ----
price therefor shall not exceed $13,000,000 and provided, further, that the cash
-------- -------
consideration, together with the assumption of debt, portion of such aggregate
purchase price shall not exceed $3,000,000."
(o) Effective as of December 30, 1999, Section 8.14 of the Credit
------------
Agreement is amended by deleting the table therein in its entirety and
substituting in lieu thereof the following:
<TABLE>
<CAPTION>
<S> <C>
"Period. Ratio
- ---------------------------------------- ---------
From and including the last day of the
fiscal quarter ended in December, 1999
to but excluding the last day of the
fiscal quarter ended in March, 2000 5.50:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
March, 2000 to but excluding the last
day of the fiscal quarter ended in June,
2000 6.00:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in June,
2000 to but excluding the last day of
the fiscal quarter ended in September,
2000 5.80:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
September, 2000 to but excluding the
last day of the fiscal quarter ended in
December, 2000 5.50:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
December, 2000 to but excluding the
last day of the fiscal quarter ended in
March, 2001. 5.00:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
March, 2001 to but excluding the last
day of the fiscal quarter ended in June,
2001 4.75:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in June
2001 to but excluding the last day of
the fiscal quarter ended in September,
2001 4.50:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
September, 2001 to but excluding the
last day of the fiscal quarter ended in
December, 2001 . . . . . . . . . . . . . 4.25:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
December, 2001 to but excluding the
last day of the fiscal quarter ended in
March 2002 4.00:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in
March, 2002 to but excluding the last
day of the fiscal quarter ended in June,
2002 3.75:1.0
Thereafter, from and including the last
day of the fiscal quarter ended in June,
2002 to but excluding the last day of
the fiscal quarter ended in September,
2002 3.50:1.0
Thereafter 3.25:1.0"
</TABLE>
(p) Effective as of December 30, 1999, Section 8.15 of the Credit
------------
Agreement is amended by deleting the table therein in its entirety and
substituting in lieu thereof the following:
<TABLE>
<CAPTION>
<S> <C>
Period . . . . . . . . . . . . . . . . . . . Ratio
---------
From and including the last day of the
fiscal quarter ended in December, 1999 to
but excluding the last day of the fiscal
quarter ended in March, 2000 . . . . . . . . 4.00:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in March, 2000
to but excluding the last day of the fiscal
quarter ended in June, 2000. . . . . . . . . 4.50:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in June, 2000 to
but excluding the last day of the fiscal
quarter ended in September, 2000 . . . . . . 4.30:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in September,
2000 to but excluding the last day of the
fiscal quarter ended in December, 2000 . . . 4.00:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in December,
2000 to but excluding the last day of the
fiscal quarter ended in March, 2001. . . . . 3.50:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in March, 2001
to but excluding the last day of the fiscal
quarter ended in June, 2001. . . . . . . . . 3.25:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in June 2001 to
but excluding the last day of the fiscal
quarter ended in September, 2001 . . . . . . 3.00:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in September,
2001 to but excluding the last day of the
fiscal quarter ended in December, 2001 . . . 2.75:1.0
Thereafter . . . . . . . . . . . . . . . . . 2.50:1.0"
</TABLE>
(q) Effective as of December 30, 1999, Section 8.16 of the Credit
------------
Agreement is amended by deleting the table therein in its entirety and
substituting in lieu thereof the following:
<TABLE>
<CAPTION>
<S> <C>
"Period . . . . . . . . . . . . . . . . . . . Ratio
- --------------------------------------------- -------
From and including the last day of the
fiscal quarter ended in December, 1999 to
but excluding the last day of the fiscal
quarter ended in March, 2000. . . . . . . . . 2.25:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in March, 2000
to but excluding the last day of the fiscal
quarter ended in June, 2000 . . . . . . . . . 2.00:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in June, 2000 to
but excluding the last day of the fiscal
quarter ended in September, 2000. . . . . . . 1.95:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in September,
2000 to but excluding the last day of the
fiscal quarter ended in December, 2000. . . . 2.20:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in December,
2000 to but excluding the last day of the
fiscal quarter ended in March, 2001 . . . . . 2.50:1.0
Thereafter, from and including the last day
of the fiscal quarter ended in March, 2001
to but excluding the last day of the fiscal
quarter ended in June, 2001 . . . . . . . . . 2.75:1.0
Thereafter. . . . . . . . . . . . . . . . . . 3.00:1.0"
</TABLE>
(r) The Credit Agreement is amended by inserting the following new
Section8.19:
- -----------
" 8.19 EBITDA. As of the end of any fiscal quarter, the Company shall
------
not permit its EBITDA for the immediately preceding twelve month period to be
less than $44,000,000; plus or minus, as the case may be, any adjustment to
EBITDA pursuant to the last proviso of the definition of EBITDA for such
period."
2. Other Agreements.
-----------------
(a) Field Audit. In accordance with Section 7.10 of the Credit
------------ ------------
Agreement, within 30 days after the date hereof, the Company, at its expense,
shall cooperate with the Agent and its representatives to complete a field audit
of the Company and its Subsidiaries and the results of the field audit shall be
shared with each of the Lenders.
(b) Assignment of Operating Accounts. Within 30 days after the
-----------------------------------
date hereof, the Company shall have assigned to the Collateral Agent, on behalf
of the Lenders, any and all balances, credits, deposits (general or special,
time or demand, provisional or final), accounts, including without limitation,
all operating accounts, or monies of or in the name of the Company and the
Collateral Agent shall have received acknowledgements of its perfected interest
therein from all such account holders as it deems necessary.
3. Representations and Warranties of the Borrowers. The Borrowers
----------------------------------------------------
represent and warrant that:
(a) The execution, delivery and performance by each of the
Borrowers of this Agreement have been duly authorized by all necessary corporate
action and that this Agreement is a legal, valid and binding obligation of such
Borrower enforceable against such Borrower in accordance with its terms, except
as the enforcement thereof may be subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally;
(b) Each of the representations and warranties contained in the
Credit Agreement is true and correct in all material respects on and as of the
date hereof as if made on the date hereof, except to the extent that any such
representation or warranty relates to an earlier date, in which case such
representation or warranty shall be true and correct in all material respects as
of such earlier date; and
(c) After giving effect to this Agreement, no Default or Event of
Default has occurred and is continuing.
4. Conditions to Effectiveness of Agreement. This Agreement shall
--------------------------------------------
become effective on the date (the "Effective Date") each of the following
---------------
conditions precedent is satisfied:
(a) Execution and Delivery. The Borrowers, the Agent and the
------------------------
Majority Lenders shall have executed and delivered this Agreement.
(b) No Defaults. After giving effect to this Agreement, no
------------
Default or Event of Default under the Credit Agreement shall have occurred and
be continuing.
(c) Representations and Warranties. After giving effect to the
--------------------------------
amendments contemplated by this Agreement, the representations and warranties of
the Borrowers contained in this Agreement, the Credit Agreement and the other
Loan Documents shall be true and correct in all respects as of the Effective
Date, with the same effect as though made on such date, except to the extent
that any such representation or warranty relates to an earlier date, in which
case such representation or warranty shall be true and correct in all material
respects as of such earlier date.
(d) Reaffirmation of Guaranty. The Agent shall have received a
---------------------------
Reaffirmation of Guaranty dated as of the Effective Date in the form of Exhibit
-------
A-1 and Exhibit A-2 attached hereto duly executed by each Guarantor.
- --- ------------
(e) Equity Investment. Prior to or concurrently with the
------------------
execution of this Agreement, the Company shall have received not less than
$15,000,000 in Net Proceeds (as defined in the Credit Agreement, as amended
hereby) from the issuance of the Company's capital stock on terms and conditions
satisfactory to the Agent and the Majority Lenders.
(f) Legal Opinion. The Company shall agree to deliver an opinion
--------------
addressed to the Agent, the Collateral Agent and the Lenders of Mark F. Baggio,
in form and substance satisfactory to the Agent.
(g) Payment of Expenses and Fees. The Company shall have paid all
----------------------------
of the fees and expenses of (i) Winston & Strawn, counsel to the Agent and (ii)
the Company shall have paid in full to the Agent for ratable distribution to
each Lender an amount equal to 0.1875% of the Commitment of such Lender.
5. Reference to and Effect Upon the Credit Agreement.
--------------------------------------------------------
(a) Upon the Effective Date, each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like
import and each reference to the Credit Agreement in each Loan Document shall
mean and be a reference to the Credit Agreement as amended and restated hereby
and the Credit Agreement is amended as set forth herein and is hereby restated
in its entirety to read as set forth in the Credit Agreement with the amendments
specified herein.
(b) Except as specifically amended above, all of the terms,
conditions and covenants of the Credit Agreement and the other Loan Documents
shall remain unaltered and in full force and effect and are hereby ratified and
confirmed in all respects.
(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 any
Lender under the Credit Agreement or any other Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein.
6. Costs and Expenses. The Company hereby affirms its obligation under
-------------------
Section 11.04 of the Credit Agreement to reimburse the Agent for all reasonable
- --------------
costs, internal charges and out-of-pocket expenses paid or incurred by the Agent
in connection with the preparation, negotiation, execution and delivery of this
Agreement, including but not limited to the attorneys' fees and time charges of
attorneys for the Agent with respect thereto. Furthermore, the Company hereby
affirms its obligation under Section 7.10 of the Credit Agreement to pay the
------------
expenses incurred in connection with the inspection of its property and books
and records under Section 2(a) of this Agreement.
------
7. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original but all
such counterparts shall constitute one and the same instrument.
(signature pages follow)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the date above first written.
ABC-NACO INC.
By:
Name:
Title:
ABC-NACO de MEXICO S.A. de C.V.
By:
Name:
Title:
DOMINION CASTINGS LIMITED
By:
Name:
Title:
<PAGE>
BANK OF AMERICA, NATIONAL ASSOCIATION, as Agent
By:
Name:
Title:
BANK OF AMERICA, NATIONAL ASSOCIATION,
Individually as a Lender and as the Issuing Lender
By:
Name:
Title:
<PAGE>
ABN AMRO BANK N.V., as a Lender
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
BANKBOSTON, N.A., as a Lender
By:
Name:
Title:
<PAGE>
BANK ONE, NA (Main Office Chicago), as a Lender
By:
Name:
Title:
<PAGE>
FIRSTAR BANK MILWAUKEE, N.A., as a Lender
By:
Name:
Title:
<PAGE>
HARRIS TRUST AND SAVINGS BANK, as a Lender
By:
Name:
Title:
<PAGE>
LASALLE BANK NATIONAL ASSOCIATION, as a Lender
By:
Name:
Title:
<PAGE>
THE NORTHERN TRUST COMPANY, as a Lender
By:
Name:
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION, as a Lender
By:
Name:
Title:
<PAGE>
U.S. BANK NATIONAL ASSOCIATION, as a Lender
By:
Name:
Title:
<PAGE>
BANK OF AMERICA CANADA, as Canadian Revolving Lender
By:
Name:
Title:
<PAGE>
------
EXHIBIT A-1
REAFFIRMATION OF GUARANTY
-------------------------
Each of the undersigned acknowledges receipt of a copy of the Second
Amended and Restated Credit Agreement (the "Amendment") dated March __, 2000,
---------
consents to such Amendment and hereby reaffirms its obligations under that
certain Subsidiary Guaranty dated February 19, 1999 by the direct and indirect
subsidiaries of ABC-NACO Inc.
Dated as of March __, 2000.
NACO, INC.
By:
Name:
Title:
ABC RAIL BRAKESHOE HOLDINGS, INC.
By:
Name:
Title:
ABC RAIL FRENCH HOLDINGS, INC.
By:
Name:
Title:
<PAGE>
ABC RAIL PRODUCTS CHINA INVESTMENT CORPORATION
By:
Name:
Title:
ABC RAIL SYSTEMS, INC.
By:
Name:
Title:
ABC RAIL (VIRGIN ISLANDS) CORPORATION
By:
Name:
Title:
TRANSIT & RAIL SYSTEMS, INC.
By:
Name:
Title:
NATIONAL CASTINGS, INC.
By:
Name:
Title:
NACO FLOW PRODUCTS, INC.
By:
Name:
Title:
NATIONAL ENGINEERED PRODUCTS COMPANY, INC.
By:
Name:
Title:
<PAGE>
- ------
EXHIBIT A-2
REAFFIRMATION OF GUARANTY
-------------------------
Each of the undersigned acknowledges receipt of a copy of the Second
Amended and Restated Credit Agreement (the "Amendment") dated March __, 2000,
---------
consents to such Amendment and hereby reaffirms its obligations under that
certain Mexican Subsidiary Guaranty dated February 19, 1999, as amended by that
certain Amendment of Mexican Subsidiary Guaranty dated as of October 12, 1999.
Dated as of March __, 2000.
ABC-NACO DE MEXICO, S.A. DE C.V.
By:
Name:
Title:
ABC-NACO SERVICIOS FERROVIARIOS, S.A. DE C.V.
By:
Name:
Title:
COMMERCIALIZADORA NATIONAL CASTINGS, S.A. DE C.V.
By:
Name:
Title:
<PAGE>
1
ABC-NACO INC.
1999 OMNIBUS STOCK PLAN
1. General. This Omnibus Stock Plan (the "Plan") provides eligible
-------
employees ("Key Employees") of ABC-NACO Inc. (the "Company"), and members of its
-
Board of Directors (the "Board") who are not employed by the Company or any
Subsidiary Corporation ("Non-Employee Director") with the opportunity to acquire
or expand their equity interest in the Company by making available for award or
purchase shares of $0.01 par value common stock of the Company ("Common
Shares"), through the granting of options to purchase Common Shares ("Stock
Options"), the granting of Common Shares subject to temporal restrictions on
transfer and substantial risks of forfeiture ("Restricted Stock"), and the
granting of options to receive payments based on the appreciation of Common
Shares ("SARs"). Stock Options, Restricted Stock and SARs shall be collectively
referred to herein as "Grants"; an individual grant of Stock Options, Restricted
Stock or SARs shall be individually referred to herein as a "Grant". It is
intended that Key Employees may be granted, simultaneously or from time to time,
Stock Options that qualify as incentive stock options ("Incentive Stock
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") or Stock Options that do not so qualify. No provision of the Plan
is intended or shall be construed to grant Key Employees alternative rights in
any Incentive Stock Option granted under the Plan so as to prevent such Stock
Option from qualifying under Section 422 of the Code.
2. Purpose of the Plan. The purpose of the Plan is to provide continuing
----------------------
incentives to Key Employees of the Company and of any Subsidiary Corporation of
the Company and to Non-Employee Directors, by encouraging such Key Employees and
Non-Employee Directors to acquire new or additional share ownership in the
Company, thereby increasing their proprietary interest in the Company's business
and enhancing their personal interest in the Company's success.
For purposes of the Plan, a "Subsidiary Corporation" means any corporation
fifty percent (50%) of the stock of which is directly or indirectly owned or
controlled by the Company.
3. Effective Date of the Plan. The Plan, as amended and restated herein,
-----------------------------
shall become effective upon its adoption by the Board of Directors and its
subsequent approval by holders of a majority of the outstanding shares of voting
capital stock of the Company. If the Plan, as amended and restated herein, is
not so approved within twelve (12) months after the date the Plan is adopted by
the Board, it shall continue in force and effect as constituted prior to this
amendment and restatement. However, if the Plan, as amended and restated
herein, is so approved, no further shareholder approval shall be required with
respect to the making of Grants pursuant to the Plan, except as provided in
Section 13 hereof.
4. Administration of the Plan. The Plan shall be administered by the
-----------------------------
Compensation Committee (the "Committee") of the Board.
A majority of the Committee shall constitute a quorum. The Committee shall
be composed of not fewer than two Non-Employee Directors, all of whom are
"outside directors" for purposes of Section 162(m) of the Code and regulations
issued thereunder. The acts of a majority of the members present at any meeting
at which a quorum is present (or acts unanimously approved in writing by the
members of the Committee) shall constitute binding acts of the Committee.
Subject to the terms and conditions of the Plan, the Committee shall be
authorized and empowered:
(1) To select the Key Employees and Non-Employee Directors to whom
Grants may be made;
(2) To determine the number of Common Shares to be covered by any
Grant;
(3) To prescribe the terms and conditions of any Grants made under
the Plan, and the form(s) and agreement(s) used in
connection with such Grants, which shall include agreements
governing the granting of Restricted Stock, Stock Options
and/or SARs;
(4) To determine the time or times when Stock Options and/or SARs
will be granted and when they will terminate in whole
or in part;
(5) To determine the time or times when Stock Options and SARs
that are granted may be exercised;
(6) To determine, at the time a Stock Option is granted under the
Plan, whether such Option is an Incentive Stock Option
entitled to the benefits of Section 422 of the Code;
(7) To interpret the Plan and from time to time adopt any rules
and regulations for carrying out the Plan that it may
deem advisable;
(8) To establish any other Stock Option agreement provisions not
inconsistent with the terms and conditions of the Plan or,
where the Stock Option is an Incentive Stock Option, with
the terms and conditions of Section 422 of the Code; and
(9) To determine whether SARs will be made part of any Grants
consisting of Stock Options, and to approve any SARs
made part of any such Grants pursuant to Section 9 hereof.
<PAGE>
5. Key Employees and Non-Employee Directors Eligible for Grants. Grants may
------------------------------------------------------------
be made from time to time to those Key Employees of the Company or a Subsidiary
Corporation, and to those Non-Employee Directors, who are designated by the
Committee in its sole and exclusive discretion. Key Employees may include, but
shall not necessarily be limited to, members of the Board and officers of the
Company and any Subsidiary Corporation along with any other party whose
relationship with the Company is such that the Committee shall deem such person
a Key Employee; however, Stock Options intended to qualify as Incentive Stock
Options shall only be granted to Key Employees while actually employed by the
Company or a Subsidiary Corporation. The Board may grant more than one Stock
Option, with or without SARs, to the same Key Employee or Non-Employee Director.
No Stock Option shall be granted to any Key Employee or Non-Employee Director
during any period of time when such Key Employee or Non-Employee Director is on
a leave of absence.
6. Shares Subject to the Plan. The shares to be issued pursuant to any
------------------------------
Grant made under the Plan shall be Common Shares. Either Common Shares held as
treasury stock, or authorized and unissued Common Shares, or both, may be so
issued, in such amount or amounts within the maximum limits of the Plan as the
Committee shall from time to time determine. In the event an SAR is granted in
tandem with a Stock Option pursuant to Section 9 and such SAR is thereafter
exercised in whole or in part, such Stock Option or the portion thereof to which
the duly exercised SAR relates shall be deemed to have been exercised for
purposes of such Stock Option, but may be made available for reoffering under
the Plan to any eligible employee.
The total number of Common Shares that may be subject to Grants (excluding
Incentive Stock Options) shall be the aggregate of (A) ______ percent (__%) of
the number of issued and outstanding Common Shares as of __________, 1999, plus
(B) _________ percent (__%) of any increase (other than any increase due to an
adjustment under the next following paragraph) in the number of issued and
outstanding Common Shares in excess of the number of issued and outstanding
Common Shares as of ____________, 1999. Notwithstanding the foregoing, the
total of Common Shares that may subject to Incentive Stock Options under the
Plan shall be ______________ (_____) Common Shares. Such total number of Common
Shares shall be adjusted in accordance with the provisions of the next following
paragraph and a Common Share subject to a Stock Option and a related SAR shall
only be counted once. In the event that (a) any Stock Option granted under the
Plan expires unexercised or is terminated, surrendered or canceled (other than
in connection with the exercise of a related SAR) without being exercised in
whole in part for any reason, (b) any SAR not granted in connection with a Stock
Option expires unexercised or is terminated, surrendered or canceled without
being exercised in whole or in part for any reason or (c) any Restricted Stock
granted under the Plan is forfeited to the Company in connection with the
violation of any restrictions imposed upon such Restricted Stock pursuant to the
Plan, then the number of Common Shares therefore subject to such Stock Option or
SAR, or constituting such Restricted Stock, or the unexercised, terminated,
surrendered, forfeited, canceled or reacquired portion thereof, shall be added
to the remaining number of Common Shares that may be subject to Grants under the
Plan. Such Grants may include Grants to former holders of such Stock Options,
SARs or Restricted Stock and, subject to the terms of the Plan may be upon such
terms and conditions as the Committee shall determine, which terms may be more
or less favorable than those applicable to such former holders of Stock Options,
SARs or Restricted Stock. The total number of Common Shares with respect to
which Stock Options or SARs, or any combination thereof, may be granted under
the Plan to any Key Employee or Non-Employee Director during any twelve (12)
month period shall not exceed _____________ (____) Common Shares.
<PAGE>
If, at any time subsequent to the date of adoption of the Plan by the
Board, the number of Common Shares are increased or decreased, or changed into
or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation (whether as a result of a
stock split, stock dividend, combination or exchange of shares, exchange for
other securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization or otherwise): (i) there shall automatically be
substituted for each Common Share subject to an unexercised Stock Option or SAR
(in whole or in part) granted under the Plan, the number and kind of shares of
stock or other securities into which each outstanding Common Share shall be
changed or for which each such Common Share shall be exchanged; (ii) the option
price per Common Share or unit of securities shall be increased or decreased
proportionately so that the aggregate purchase price for the securities subject
to a Stock Option or SAR shall remain the same as immediately prior to such
event; and (iii) any outstanding Restricted Stock that is converted, exchanged
or otherwise changed into a different number or kind of stock or security, shall
continue to be subject to any and all terms, conditions and restrictions
originally applicable to such Restricted Stock. In addition to the foregoing,
the Board shall be entitled in the event of any such increase, decrease or
exchange of Common Shares to make other adjustments to the securities subject to
a Stock Option or SAR, to the provisions of the Plan, and to any related Stock
Option or SAR agreements (including adjustments which may provide for the
elimination of fractional shares), where necessary to preserve the terms and
conditions of any Grants hereunder.
7. Stock Option Provisions.
-------------------------
(1) General. The Board may grant to Key Employees Stock Options that
-------
either qualify as Incentive Stock Options under Section 422 of the Code or do
not so qualify, and may grant to Non-Employee Directors only Stock Options that
do not qualify as Incentive Stock Options. However, any Stock Option which is
an Incentive Stock Option shall only be granted within 10 years from the earlier
of (i) the date the Plan is adopted by the Board, or (ii) the date the Plan is
approved by the shareholders of the Company.
<PAGE>
(2) Stock Option Price. The option price per Common Share which may be
------------------
purchased under a Stock Option granted under the Plan shall be determined by the
Board at the time of Grant, but shall not be less than one hundred percent
(100%) of the Fair Market Value of a Common Share, determined as of the date
such Stock Option is granted; however, if a Key Employee to whom an Incentive
Stock Option is granted is, at the time of the grant of such Incentive Stock
Option, an "owner," as defined in Section 422(b)(6) of the Code (modified as
provided in Section 424(d) of the Code) of more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
Subsidiary Corporation (a "Substantial Shareholder"), the option price per
Common Share of such Incentive Stock Option, as determined by the Board, shall
not be less than one hundred ten percent (110%) of the Fair Market Value of a
Common Share on the date such Incentive Stock Option is granted. The Fair
Market value of a Common Share shall be the average of the closing price for
Common Shares as reported on the NASDAQ Stock Market for the twenty (20)
business days ending on the third (3) business day preceding the date with
respect to which such Common Shares are being valued, for which trades on Common
Shares were reported on the NASDAQ Stock Market. If no trades occur on a
certain day, the closing price for the last preceding day on which trading
occurred will be used as closing price for that day. If Common Shares are not
readily tradable on an established securities market, the Fair Market Value of
Common Shares shall be determined in accordance with procedures to be
established by the Board. The day on which the Committee approves the granting
of a Stock Option shall be considered the date on which such Stock Option is
granted.
(3) Period of Stock Option. The Committee shall determine when each
-------------------------
Stock Option is to expire. However, no Stock Option shall be exercisable for a
period of more than ten (10) years from the date upon which such Stock Option is
granted. Further, no Incentive Stock Option granted to a Key Employee who is a
Substantial Shareholder at the time of the grant of such Incentive Stock Option
shall be exercisable after the expiration of (5) years from the date of grant of
such Incentive Stock Option.
(4) Limitation of Exercise and Transfer of Stock Options. Only the Key
----------------------------------------------------
Employee or Non-Employee Director to whom a Stock Option is granted may exercise
such Stock Option, except where a guardian or other legal representative has
been duly appointed for such person, except as otherwise provided in the case of
such person's death. No Stock Option granted hereunder shall be transferable by
a Key Employee or Non-Employee Director other than by will or the laws of
descent and distribution. No Stock Option granted hereunder may be pledged or
hypothecated, nor shall any such Stock Option be subject to execution,
attachment or similar process. Notwithstanding the preceding provisions of this
paragraph, a Key Employee or Non-Employee Director at any time prior to his
death may assign all or any portion of a Stock Option (other than an Incentive
Stock Option) to (i) his spouse or lineal descendants, (ii) the trustee of a
trust for the primary benefit of his spouse or lineal descendants, (iii) a
partnership of which his spouse and lineal descendants are the only partners, or
(iv) a tax-exempt organization as described in Section 501(c)(3) of the Code.
In such event the spouse, lineal descendants, trustee, partnership or tax-exempt
organization will be entitled to all of the rights of the Key Employee or
Non-Employee Director with respect to the assigned portion of such Stock Option
and such portion of the Stock Option will continue to be subject to all of the
terms, conditions and restrictions applicable to the Stock Option as set forth
herein and in any related Stock Option agreement immediately prior to the
effective date of the assignment. Any such assignment will be permitted only if
(i) the Key Employee or Non-Employee Director does not receive any consideration
therefore, and (ii) the assignment is expressly approved by the Committee. Any
such assignment shall be evidenced by an appropriate written document executed
by the Key Employee or Non-Employee Director, and a copy thereof shall be
delivered to the Committee on or prior to the effective date of the assignment.
This paragraph shall apply to all Stock Options granted under the Plan at any
time (other than Incentive Stock Options).
<PAGE>
(5) Employment, Holding Period Requirements For Certain Options. The
-------------------------------------------------------------
Committee may condition any Stock Option granted hereunder upon the continued
employment of the Key Employee by the Company or by a Subsidiary Corporation, or
upon the continued service of a Non-Employee Director as a member of the Board,
and may make any such Stock Option immediately exercisable. However, the
Committee will require that, from and after the date of grant of any Incentive
Stock Option to a Key Employee hereunder until the day three (3) months prior to
the date such Incentive Stock Option is exercised, such Key Employee must be an
employee of the Company or of a Subsidiary Corporation, but always subject to
the right of the Company or any such Subsidiary Corporation to terminate such
Key Employee's employment during such period. Each Stock Option shall be subject
to such additional restrictions as to the time and method of exercise as shall
be prescribed by the Committee. Upon completion of such requirements, if any, a
Stock Option or the appropriate portion thereof may be exercised in whole or in
part from time to time during the option period, however, such exercise right(s)
shall be limited to whole shares.
(6) Payment of Stock Option Price. A Stock Option shall be exercised
-------------------------------
by a Key Employee or Non-Employee Director giving written notice to the Company
of his intention to exercise the same, accompanied by full payment of the option
price. Such option price shall be paid (i) with cash or check, (ii) with a
surrender of Common Shares having a Fair Market Value on the date of exercise
equal to the option price, (iii) with cash received from a broker-dealer to whom
the Key Employee or Non-Employee Director has submitted an exercise notice
consisting of a fully-endorsed Stock Option (however, in the case of a Key
Employee or Non-Employee Director subject to Section 16 of the Securities
Exchange Act of 1934, this payment option shall only be available to the extent
such payment procedures comply with Regulation T issued by the Federal Reserve
Bank), (iv) by directing the Company to withhold such number of Common Shares
otherwise issuable upon exercise of such Stock Option having an aggregate Fair
Market Value on the date of exercise equal to the option price, (v) by such
other medium of payment as the Committee, in its discretion, shall authorize at
the time of Grant, or (vi) by any combination of the foregoing methods of
payment. In lieu of a separate election governing each exercise of a Stock
Option, a Key Employee or a Non-Employee Director may file a blanket election
with the Committee which shall govern all future exercises of Stock Options
until revoked by the Key Employee or Non-Employee Director. The Company shall
issue, in the name of the Key Employee or Non-Employee Director, stock
certificates representing the total number of Common Shares issuable pursuant to
the exercise of any Stock Option as soon as reasonably practicable after such
exercise, provided that any Common Shares purchased through a broker-dealer
pursuant to Clause (iii) above shall be delivered to such broker-dealer in
accordance with 12 C.F.R. 220.3(e)(4) or other applicable provision of law. No
method shall cause any Stock Option granted under the Plan as an Incentive Stock
Option to not qualify under Section 422 of the Code, or cause any Common Share
issued in connection with the exercise of a Stock Option not to be a fully paid
and non-assessable Common Share.
<PAGE>
(7) Cancellation and Replacement of Stock Options and Related Rights.
------------------------------------------------------------------
The Committee may at any time or from time to time permit the voluntary
surrender by a Key Employee or Non-Employee Director who is the holder of any
outstanding Stock Options under the Plan, where such surrender is conditioned
upon the granting to such Key Employee or Non-Employee Director of new Stock
Options for such number of Common Shares as the Board shall determine, or may
require such a voluntary surrender as a condition precedent to the grant of new
Stock Options. The Board shall determine the terms and conditions of new Stock
Options, including the prices at and periods during which they may be exercised,
in accordance with the provisions of the Plan, all or any of which may differ
from the terms and conditions of the Stock Options surrendered. Any such new
Stock Options shall be subject to all the relevant provisions of the Plan. The
granting of new Stock Options in connection with the surrender of outstanding
Stock Options under the Plan shall be considered for the purposes of the Plan as
the granting of new Stock Options and not an alteration, amendment or
modification of the Plan or of the Stock Options being surrendered.
(8) Limitation on Exercisable Incentive Stock Options. The
------------------------------------------------------
aggregate Fair Market Value of the Common Shares first becoming subject to
exercise as Incentive Stock Options by a Key Employee during any given calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). Such
aggregate Fair Market Value shall be determined as of the date such Stock Option
is granted, taking into account, in the order in which granted, any other
incentive stock options granted by the Company, or by a parent or subsidiary
thereof.
8. Restricted Stock.
-----------------
(1) Grant. The Committee shall determine the Key Employees and
-----
Non-Employee Directors to whom, and the time or times at which, Grants of
Restricted Stock will be made, the number of shares of Restricted Stock to be
granted, the price (if any) to be paid by such Key Employees or Non-Employee
Directors (subject to Section 8(b)), the time or times within which such
Restricted Stock Grants may be subject to forfeiture, and the other terms and
conditions of the Grants in addition to those set forth in Section 8(b). The
Committee may condition the Grant of Restricted Stock upon the attainment of
specified performance goals or such other factors as the Board may determine in
its sole discretion.
(2) Terms and Conditions. Restricted Stock granted under the Plan
----------------------
shall contain any terms and conditions, not inconsistent with the provisions of
the Plan, imposed by the Committee or the Board. A Key Employee or Non-Employee
Director who receives a Grant of Restricted Stock shall not have any rights with
respect to such Grant, unless and until such Key Employee or Non-Employee
Director has executed an agreement evidencing such Grant in the form approved
from time to time by the Board, has delivered a fully executed copy thereof to
the Company, and has otherwise compiled with the applicable terms and conditions
of such Grant. In addition, Restricted Stock granted under the Plan shall be
subject to the following terms and conditions:
(1) The purchase price for Common Shares consisting of Restricted
Stock, if any, will be equal to their Fair Market Value taking into account
all the circumstances of such Grant including the restrictions contained
in the Agreement.
(2) Grants of Restricted Stock shall only be pursuant to a written
agreement and paying whatever price (if any) is required under Section
8(b)(i).
<PAGE>
(3) Each Key Employee or Non-Employee Director granted Restricted
Stock shall be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the name of such
Key Employee or Non-Employee Director, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to
such Grant.
(4) Any stock certificates evidencing Common Shares consisting of
Restricted Stock shall either (A) be held in custody by the Company until
the employment, service and other restrictions thereon shall all have lapsed;
or (B) be affixed with a legend, identifying such Shares as Restricted
Stock and expressly prohibiting the sale, transfer, tender, pledge,
assignment or encumbrance of such Shares, as the Board shall
determine. With respect to any Restricted Stock held in custody by the
Company, the Key Employee or Non-Employee Director granted such Restricted
Stock shall deliver to the Company a stock power, endorsed in blank, relating
to the Common Shares represented by such Stock. With respect to any Restricted
Stock held by a Key Employee or Non-Employee Director under legend, the Key
Employee or Non-Employee Director granted such Restricted Stock shall deliver
to the Company an acknowledgment that such Stock remains subject to a
substantial risk of forfeiture in the event of termination of employment or
service on the Board under certain circumstances.
(5) Subject to the provisions of the Plan and the Restricted Stock
agreement, during a temporal period set by the Board and commencing with the
date of such Grant (the "Restriction Period"), a Key Employee or Non-Employee
Director shall not be permitted to sell, transfer, tender, pledge,
assign or otherwise encumber any Restricted Stock granted under the Plan.
However, the Board, in its sole discretion, may provide for the lapse of
such transfer or other restrictions in installments, or accelerate or
waive such restrictions in whole or in part, based on service,
performance or other factors and criteria selected by the Board.
(6) Except as provided in this Section 8(b)(vi) and Section
8(b)(v), a Key Employee or Non-Employee Director shall have, with respect to
shares of Restricted Stock granted to him, all of the rights of a
shareholder of the Company, including the right to vote such Stock and the
right to receive any dividends thereon. The Board, in its sole discretion and
as determined at the time of a Grant of Restricted Stock, may permit or require
cash dividends otherwise due and payable to be deferred and, if the Board so
determines, reinvested either in additional Restricted Stock (to the extent
Common Shares are available), or otherwise. Stock dividends issued with
respect to Restricted Stock shall be treated as additional shares of
Restricted Stock. As Restricted Stock, such additional Common Shares will be
subject to the same restrictions and conditions applicable to the
Restricted Stock with respect to which such additional Common Shares were
issued.
<PAGE>
(7) No Restricted Stock shall be transferable by a Key Employee or
Non- Employee Director other than by will or as provided in the Stock Purchase
Agreement.
(3) Minimum Value Provisions. To ensure that Grants of Restricted
--------------------------
Stock reflect the performance of the Company and service of the Key Employee or
Non-Employee Director, the Committee may provide, in its sole discretion, for a
tandem performance-based award, or other Grant, designed to guarantee a minimum
value, payable in cash or Common Shares, to the recipient of a Restricted Stock
Grant, subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Board.
9. Stock Appreciation Rights. A Key Employee or Non-Employee Director may
---------------------------
be granted the right to receive a payment based on the increase in the value of
Common Shares occurring after the date of such Grant; such rights shall be known
as Stock Appreciation Rights ("SARs"). SARs may (but need not) be granted to a
Key Employee or Non-Employee Director in tandem with, and exercisable in lieu of
exercising, a Grant of Stock Options. SARs will be granted upon terms and
conditions specified by the Committee. No Key Employee or Non-Employee Director
shall be entitled to SAR rights solely as a result of the Grant of a Stock
Option to him. Any such rights, if granted, may only be exercised by the holder
thereof, either with respect to all, or a portion, of the Stock Option to which
it applies. When granted in tandem with a Stock Option, an SAR shall provide
that the holder of a Stock Option shall have the right to receive an amount
equal to one hundred percent (100%) of the excess, if any, of the Fair Market
Value of the Common Shares covered by such Option, determined as of the date of
exercise of such SAR (in the same manner as such value is determined for
purposes of the granting of Stock Options), over the price to be paid for such
Common Shares under such Option. Such amount shall be payable by the Company in
one or more of the following manners, as determined by the Committee:
(1) cash (or check);
2) fully paid Common Shares having a Fair Market Value equal to
such amount; or
(3) a combination of cash (or check) and Common Shares.
<PAGE>
In no event may any person exercise any SARs granted hereunder unless (i)
such person is then permitted to exercise the Stock Option or the portion
thereof with respect to which such SARs relate, and (ii) the Fair Market Value
of the Common Shares covered by the Stock Option, determined as provided above,
exceeds the option price of such Common Shares. Upon the exercise of any SARs,
the Stock Option, or that portion thereof to which such SARs relate, shall be
canceled and automatically extinguished. A SAR granted in tandem with a Stock
Option hereunder shall be made a part of the Stock Option agreement to which
such SAR relates, in a form approved by the Board and not inconsistent with the
Plan. The granting of a Stock Option or SARs shall impose no obligation upon
the optionee to exercise such Stock Option or SAR. The Company's obligation to
satisfy SARs shall not be funded or secured in any manner. Except as provided
in Section 7(d), no SAR granted hereunder shall be transferable by the Key
Employee or Non-Employee Director granted such SAR, other than by will or the
laws of descent and distribution.
10. If a Key Employee ceases to be an employee of the Company and every
Subsidiary Corporation, or a Non-Employee Director ceases to a member of the
Board, for a reason other than death, retirement, or Permanent and Total
Disability, his Grants shall, unless extended by the Board on or before his date
of termination of employment or service, terminate on the effective date of such
termination of employment or service. Neither the Key Employee or Non-Employee
Director nor any other person shall have any right after such date to exercise
all or any part of his Stock Options or SARs, and all Restricted Stock which is
not vested or otherwise subject to restriction shall thereupon be forfeited,
and/or declared void and without value.
If termination of employment or service is due to death or Permanent and
Total Disability, then outstanding Stock Options and SARs may be exercised
within the one (1) year period ending on the anniversary of such death or
Permanent and Total Disability. In the case of death, such outstanding Stock
Options and SARs shall be exercised by such Key Employee's or Non-Employee
Director's estate, or the person designated by such Key Employee or Non-Employee
Director by will, or as otherwise designated by the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Stock Option
or SAR be exercisable after the expiration of the option period, and in the case
of exercises made after a Key Employee's or Non-Employee Director's death, not
to any greater extent than the Key Employee or Non-Employee Director would have
been entitled to exercise such Option or SAR at the time of his death.
Restricted Stock held by a Key Employee or Non-Employee Director whose
employment by the Company or any Subsidiary Corporation or service on the Board
terminates by reason of death or Permanent and Total Disability shall thereupon
vest and all restrictions and risks of forfeiture thereon shall thereupon lapse.
Subject to the discretion of the Board and consistent with the provision of
any applicable agreement, in the event a Key Employee terminates employment with
the Company and all Subsidiary Corporations because of normal retirement under
any pension plan, or if a Non-Employee Director's service on the Board
terminates due to retirement on or after attaining age 65, (a) any then
outstanding Stock Options and/or SARs held by such Key Employee or Non-Employee
Director shall lapse at the earlier of the end of the term of such Stock Option
or SAR, or three (3) months after such retirement or Permanent and Total
Disability; and (b) any Restricted Stock held by such Key Employee or
Non-Employee Director shall thereafter vest and any applicable restrictions
shall lapse, to the extent such Restricted Stock would have become vested or no
longer subject to restriction within one year front the time of termination had
the Key Employee or Non-Employee Director continued to fulfill all of the
conditions of the Restricted Stock during such period (or on such accelerated
basis as the Board may determine at or after date of Grant).
<PAGE>
In the event a Key Employee of the Company or one of its Subsidiary
Corporations or a Non-Employee Director is granted a leave of absence by the
Company or such Subsidiary Corporation or by the Board, to enter military
service or because of sickness, his employment with the Company or such
Subsidiary Corporation or service on the Board shall not be considered
terminated, and he shall be deemed an employee of the Company or such Subsidiary
Corporation or a Non-Employee Director during such leave of absence or any
extension thereof granted by the Company or such Subsidiary Corporation or the
Board.
For purposes of this section "Permanent and Total Disability" means a
physical or mental condition which is expected to render an individual
permanently unable to perform his usual duties or any comparable duties for the
Company or any Subsidiary Corporation or as a member of the Board. The
determination of the existence of such condition shall be made by the Committee
and shall be final and binding upon the individual and all other parties. The
Committee may require the submission of such medical evidence as it may deem
necessary in order to arrive at its determination.
11. Change of Control. Upon the occurrence of a Change of Control (as
-------------------
defined below), notwithstanding any other provisions hereof or of any agreement
to the contrary, all Stock Options and SARs granted under (the Plan shall become
immediately exercisable in full and all Restricted Stock Grants shall become
immediately vested and any applicable restrictions shall lapse.
For the purposes of the Plan a Change in Control means the earliest of:
(1) any person (as such term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended ("Exchange Act")), has acquired (other
than directly from the Company) beneficial ownership (as that term is
defined in Rule 13d-3 under the Exchange Act), of more than twenty-five
percent (25%) of the outstanding capital stock of the Company entitled to
vote for the election of directors;
(2) the commencement by an entity, person, or group (other than the
Company or a Subsidiary Corporation of the Company) of a tender offer
or an exchange offer for more than twenty-five percent (25%) of the
outstanding voting stock of the Company.
(3) the effective time of (i) a merger or consolidation or other
business combination of the Company with one or more other corporation as a
result of which the holders of the outstanding voting stock of the Company
immediately prior to such business combination hold less than seventy-five
percent (75%) of the voting stock of the surviving or resulting corporation,
(ii) a transfer of substantially all of the assets of the Company other than
to an entity of which the Company owns at least seventy-five percent (75%)
of the voting stock;
(4) the election, over any period of time, to the Board of the Company
without the recommendation or approval of the incumbent Board, of the lesser
of (i) three (3) directors, or (ii) directors constituting a majority of the
number of directors of the Company then in office; or
(5) the occurrence of any arrangement or understanding relating to the
Company which would give rise to a filing requirement with the Securities and
Exchange Commission pursuant to Rule 14F-1 of the Exchange Act Rules under the
Securities Exchange Act of 1934.
12. Withholding Taxes. Whenever the Company proposes or is required to
------------------
issue or transfer Common Shares to a recipient under the Plan, the Company
shall have the right to require the recipient to remit to the Company an amount
sufficient to satisfy all federal, state and local withholding tax requirements
prior to the delivery of any such Common Shares. If such Common Shares have
been delivered prior to the time a withholding obligation arises, the Company
shall have the right to require the recipient to remit to the Company an amount
sufficient to satisfy all federal, state or local withholding tax requirements
at the time such obligation arises and to withhold from other amounts payable to
the recipient, as compensation or otherwise, as necessary. Whenever payments
under the Plan are to be made to an individual in cash, such payments shall be
net of any amounts sufficient to satisfy all federal, state or local withholding
tax requirements. In connection with a Grant in the form of Common Shares, a
recipient may elect to satisfy his tax withholding obligations incurred with
respect to the Taxable Date of the Grant by (a) directing the Company to
withhold a portion of the Common Shares otherwise distributable to the recipient
or his assignee pursuant to the exercise of a Stock Option or (b) by
transferring to the Company a certain number of Common Shares (either subject to
a Restricted Stock agreement or previously owned), such Common Shares being
valued at the Fair Market Value thereof on the Taxable Date. Notwithstanding any
provision of the Plan to the contrary a recipient's election pursuant to the
preceding sentence (a) must be made on or prior to the Taxable Date with respect
to such Grant and (b) must be irrevocable. In lieu of a separate election on
each Taxable Date of a Grant, a recipient may make a blanket election with the
Committee that shall govern all future Taxable Dates until revoked by the
recipient. If the holder of Common Shares purchased in connection with the
exercise of an Incentive Stock Option disposes of such Common Shares within two
years of the date such Incentive Stock Option was granted or within one year of
such exercise, he shall notify the Committee of such disposition and the
recipient shall remit an amount necessary to satisfy applicable withholding
requirements, including those arising under federal income tax laws. If the
recipient does not remit such amount, the Company may withhold all or a portion
of any compensation or other amounts then or in the future owed to the recipient
as necessary to satisfy such requirements. Taxable Date means the date a
recipient recognizes income with respect to a Grant under the Code or any
applicable state income tax law.
13. Amendment or Termination. The Board or the Committee may at any time
--------------------------
amend, terminate, suspend or modify the Plan without the authorization of the
shareholders of the Company to the extent allowed by law, including without
limitation any rules issued by the Securities and Exchange Commission under
Section 16 of the Securities Exchange Act of 1934, insofar as shareholder
approval thereof is required in order for the Plan to continue to satisfy the
requirements of Rule 16b-3 under the Act. No amendment, termination, suspension
or modification of the Plan shall adversely affect any right acquired by any
recipient under a Grant awarded before the date of such termination, suspension
or modification, unless such recipient shall consent; but it shall be
conclusively presumed than any adjustment for changes in capitalization as
provided for herein does not adversely affect any such right.
14. Investment Representation, Approvals and Listings. The Committee may,
---------------------------------------------------
if it deems appropriate, condition its grant of any Stock Option hereunder upon
receipt of a representation from the Key Employee or Non-Employee Director which
is substantially as follows (and subject to modification from to time in the
discretion of the Board):
I agree that any Common Shares of ABC-NACO Inc. which I may acquire pursuant to
this Stock Option shall be acquired for investment purposes only and not with a
view to distribution or resale, and may not be transferred, sold, assigned,
pledged, hypothecated or otherwise disposed of by me unless (i) a registration
statement or post-effective amendment to a registration statement under the
Securities Act of 1933, as amended, with respect to said Common Shares has
become effective so as to permit the sale or other disposition of said shares by
me; or (ii) there is presented to ABC-NACO Inc. an opinion of counsel
satisfactory to ABC-NACO Inc. to the effect that the sale or other proposed
disposition of said Common Shares by me may lawfully be made otherwise than
pursuant to an effective registration statement or post-effective amendment to a
registration statement relating to the said shares under the Securities Act of
1933, as amended.
The Company shall not be required to issue any certificate or certificates
for Common Shares upon the exercise of any Stock Option or a SAR granted under
the Plan prior to (i) the obtaining of any approval from any governmental agency
which the Company shall, in its sole discretion, determine to be necessary or
advisable; (ii) the admission of such Common Shares to listing on any national
securities exchange on which the Common Shares may be listed; (iii) the
completion of any registration or other qualifications of the Common Shares
under any state or federal law or ruling or regulations of any governmental body
which the Company shall, in its sole discretion, determine to be necessary or
advisable or the determination by the Company, in its sole discretion, that any
registration or other qualification of the Common Shares is not necessary or
advisable; and (iv) the obtaining of ail investment representation from the Key
Employee or Non-Employee Director in the form stated above or in such other form
as the Company, its sole discretion, shall determine to be adequate.
15. General Provisions. The form and substance of Stock Option agreements,
------------------
Restricted Stock agreements, and SAR agreements made hereunder, whether granted
at the same or different times, need not be identical. Nothing in the Plan or
in any agreement shall confer upon any Key Employee or Non-Employee Director any
right to continue in the employ of the Company or any of its Subsidiary
Corporations, or to continue to serve on the Board to be entitled to any
remuneration or benefits not set forth in the Plan or such Grant, or to
interfere with or limit the right of the Company or any Subsidiary Corporation
or the Board to terminate his employment or service at any time, with or without
cause. Nothing contained in the Plan or in any Stock Option agreement or SAR
shall be construed as entitling any Key Employee or Non-Employee Director to any
rights of a shareholder as a result of the Grant of a Stock Option or an SAR,
until such time as Common Shares are actually issued to him pursuant to the
exercise of such Option or SAR. The Plan may be assumed by the successors and
assigns of the Company. The liability of the Company under the Plan and any
sale made hereunder is limited to the obligations set forth herein with respect
to such sale and no term or provision of the Plan shall be construed to impose
any liability on the Company in favor of any Key Employee or Non-Employee
Director with respect to any loss, cost or expense which he may incur in
connection with or arising out of any transaction in connection with the Plan.
The cash proceeds received by the Company from the issuance of Common Shares
pursuant to the Plan will be used for general corporate purposes. The expense
of administering the Plan shall be borne by the Company. The captions and
section numbers appearing in the Plan are inserted only as a matter of
convenience. They do not define, limit, construe or describe the scope or
intent of the provisions of the Plan.
16. Termination of the Plan. The Plan shall terminate on , 2009,
-------------------------
and thereafter no Stock Options or Restricted Stock or SARs shall be granted
hereunder. All Stock Options and SARs outstanding at the time of termination of
the Plan shall continue in full force and effect according to their terms and
the terms and conditions of the Plan.
IN WITNESS WHEREOF, the Company, by order of its Board of Directors, has
caused the undersigned, duly authorized officer to execute the Plan as of this
day of, 1999.
ABC-NACO Inc.
By Order of the Board of Directors
INVESTORS RIGHTS AGREEMENT
THIS IS AN INVESTORS RIGHTS AGREEMENT (this "Agreement"),dated as of this
March 8, 2000, by and among ABC-NACO INC., a Delaware corporation (the "Corpora-
tion"), having its principal office at 2001 Butterfield Road, Suite 502, Downers
Grove, Illinois 60515, FURMAN SELZ INVESTORS II L.P., a Delaware limited partner
ship, having its principal office at 55 East 52 Street, New York, New York 10055
("FSI-II"), FS EMPLOYEE INVESTORS LLC, a Delaware limited liability company,
having its principal office at 55 East 52 Street, New York, New York 10055
("FSE"), and FS PARALLEL FUND L.P., a Delaware limited partnership, having its
principal office at 55 East 52 Street, New York, New York 10055-0002 ("FSP"),
and together with FSI-II and FSE, individually referred to as an "Investor"
and collectively as the "Investors").
BACKGROUND
----------
A. The Corporation is a corporation duly organized and existing under the
laws of the State of Delaware with an authorized capitalization of 26,000,000
shares of which (a) 1,000,000 shares are authorized as Preferred Stock (as
defined below), of which 300,000 shares have been designated Series B Preferred
Stock (as defined below) and are issued and outstanding as of this date; and (b)
25,000,000 shares are authorized as Common Stock (as defined below).
B. The Corporation and the Investors have entered into the Stock Purchase
Agreement (as defined below).
C. The Investors own in connection with the Closing of the Stock Purchase
Agreement that number of shares of the Corporation's Series B Preferred Stock
(including any shares hereafter acquired by the Investors, and their successors
or assigns from any person by any means, including without limitation, any
acquisition by gift, purchase, dividend, conversion, stock split, recapi-
lization or otherwise, collectively, the "Shares") set forth opposite the name
of each Investor on Schedule I attached hereto. It is deemed to be in the best
interest of the Corporation that provision be made for the continuity and
stability of the business and policies of the Corporation and, to that end, the
Corporation and each of the Investors hereby set forth their agreement with
respect to the Shares.
NOW, THEREFORE, in consideration of the premises and of the mutual consents and
obligations hereinafter set forth, the parties hereto hereby further agree as
follows:
SECTION 1. DEFINITIONS. All capitalized terms used in this Agreement shall
have the meaning assigned to them elsewhere in this Agreement or as specified
below:
"Affiliate" of a person means (i) a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by or is under
common control with, the first mentioned person, and (ii) "associate", as the
term is defined in Rule 12b-2 promulgated under the Exchange Act as in effect as
of the date of this Agreement.
"Certificate Of Designation" shall have the meaning set forth in the Stock
Purchase Agreement. A copy of the Certificate of Designation is attached hereto
as Exhibit B.
"Certificate Of Incorporation" means the Corporation's Amended and Restated
Certificate of Incorporation, filed in the Office of the Secretary of State of
the State of Delaware as amended to date, a copy of which is attached hereto as
Exhibit A.
"Closing" means the closing of the transactions contemplated under the
Stock Purchase Agreement.
"Closing Date" means the date on which the Closing under the Stock Purchase
Agreement occurs.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means (a) the Corporation's Common Stock, par value $.0l per
share, as authorized on the date of this Agreement, (b) any other capital stock
of any class or classes (however designated) of the Corporation, authorized on
or after the date hereof, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating distributions after the payment of dividends and
distributions on any shares entitled to preference under the Certificate of
Incorporation (as the same may be amended from time to time after the Closing),
and (c) any other securities into which or for which any of the securities
described in clause (a) or (b) of this definition may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of assets
or otherwise.
"Conversion Price" means, with respect to the conversion of the Series B
Preferred Stock to Common Stock, the average closing price of the Company's
Common Stock for the thirty trading days ending February 17, 2000 as reported by
Bloomberg rounded up to the nearest dollar, as of the date of execution of this
Agreement, subject to adjustment as provided in the Certificate of Designation.
"Default Dividends" shall have the meaning set forth in the Certificate of
Designation.
"Documents" means this Agreement, the Stock Purchase Agreement and the
Certificate of Designation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder, all as the
same shall be in effect at the time.
"Exchange Act Registration Statement" means a registration statement filed
pursuant to the Exchange Act, relating to any class of equity securities of the
Corporation.
"Excluded Form" means a registration statement filed pursuant to the
Securities Act on Form S-8, S-4 or any similar or successor forms.
"Form S-3" shall mean the form under the Securities Act as is in effect on
the date hereof or any successor registration forms under the Securities Act
subsequently adopted by the Commission which permit inclusion or incorporation
of substantial information by reference to other documents filed by the
Corporation with the Commission.
"Holder" shall mean any holder of Series B Preferred Stock owning of record
Registrable Securities that have not been sold to the public and, for purposes
of this Agreement, a record holder of the Series B Preferred Stock convertible
into such Registrable Securities shall be deemed to be the Holder of such
Registrable Securities; provided, however, that the Corporation shall in no
event be obligated to register the Series B Preferred Stock, and that Holders of
Registrable Securities shall not be required to convert their shares of Series B
Preferred Stock into Common Stock in order to exercise the registration rights
granted under Section 4 hereof, until immediately before the effectiveness of
the offering to which the registration relates.
"Initiating Holders" shall have the meaning set forth in Section 4(d)(ii)
hereof.
"Material Adverse Effect" shall mean (i) any adverse change in the
condition (financial or otherwise), assets (including without limitation
tangible and intangible assets), liabilities, business, or results of operations
or prospects of the Company or any of its Subsidiaries, which change,
individually or in the aggregate, is material to the Company and its
Subsidiaries taken as a whole, or (ii) any event, matter, condition or effect
which materially adversely impairs the ability of the Company to perform on a
timely basis its obligations under this Agreement or the Company to consummate
the transactions contemplated by this Agreement.
"NASD" shall have the meaning set forth in Section 4(c)(xiv) hereof.
"NASDAQ" means the NASDAQ National Market.
"NYSE" means the New York Stock Exchange.
"Person" means and includes an individual, a corporation, a partnership, a
trust, an unincorporated organization and a government or any department, agency
or political subdivision thereof.
"Register," "registered" and "registration" shall refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement.
"Registrable Securities" means: (a) all the shares of Common Stock of the
Corporation issued or issuable upon the conversion of the shares of Series B
Preferred Stock that are now owned or may hereafter be acquired by any Holder or
its permitted successors and assigns; and (b) any shares of Common Stock of the
Corporation issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of all such
shares of Common Stock described in clause (a) of this definition; excluding in
all cases, however, (i) any Registrable Securities sold pursuant to registration
under the Securities Act or (ii) any Registrable Securities publicly sold,
subsequent to the Corporation's initial public offering of securities registered
under the Securities Act, pursuant to Rule 144 (or similar or successor rule)
promulgated under the Securities Act.
"Registrable Securities then outstanding" means the number of shares of
Registrable Securities that are then issued and outstanding or are then issuable
pursuant to the exercise or conversion of then outstanding and then exercisable
options, warrants or convertible securities.
"Registration Expenses" shall have the meaning set forth in Section 4(d)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder, all as the same
shall be in effect at the time.
"Series B Preferred Stock" shall mean the Corporation's authorized 300,000
shares of Series B Cumulative Convertible Preferred Stock, par value $ 1.00 per
share, having the designations, rights, preferences and privileges and
qualifications, limitations and restrictions of preferred stock set forth in the
Certificate of Designation.
"Subsidiaries" shall mean, when used with reference to a person, means a
corporation or limited liability company, the majority of the outstanding voting
securities or membership interests of which are owned directly or indirectly by
such person.
"Stock Purchase Agreement" shall mean the Preferred Stock Purchase
Agreement dated as of February 18, 2000, by and among the Corporation and the
Investors, as the same may be amended from time to time.
"Violation" shall have the meaning set forth in Section 4(i)(i) hereof.
SECTION 2. Covenants of the Corporation Not Surviving Conversion. So long as
any shares of the Series B Preferred Stock are outstanding, the Corporation
hereby covenants and agrees as follows:
(a) Reserve for Reserved Shares. The Corporation currently has reserved
an aggregate of Four Million (4,000,000) shares of its authorized but unissued
Common Stock for purposes of effecting the conversion of the shares of Series B
Preferred Stock and paying the Investors dividends in Common Stock. The
Corporation shall at all times take appropriate steps to reserve and keep
available out of its authorized but unissued shares of Common Stock, for the
purpose of effecting the conversion of the shares of Series B Preferred Stock,
paying the Investors dividends in Common Stock and paying Default Dividends in
respect to the Series B Preferred Stock in accordance with the Certificate of
Designation, and otherwise complying with the terms of this Agreement, such
additional number of its duly authorized but unissued shares of Common Stock as
shall be sufficient to effect the conversion of the shares of Series B Preferred
Stock from time to time outstanding, or otherwise to comply with the terms of
this Agreement. If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the shares of
Series B Preferred Stock, or otherwise to comply with the terms of this
Agreement or the Certificate of Designation, the Corporation shall forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes. The Corporation shall obtain any authorization, consent,
approval or other action by or make any filing with any court or administrative
body that may be required under applicable state securities laws in connection
with the issuance of shares of Common Stock upon conversion of the shares of
Series B Preferred Stock.
(b) Strategic Plan. In the event that the Corporation has not
delivered a copy of the Corporation's strategic plan (the "Strategic Plan") to
the Investors prior to the Closing of the Stock Purchase Agreement, the
Corporation promptly will deliver such plan to the Investors as soon as
available.
(c) Rule 144. As set forth in Section 4(k) hereto, the Corporation
shall take all necessary action to comply with the requirements of Rule 144
under the Securities Act.
SECTION 3. Covenants of the Corporation Surviving Conversion. At all times
from the date of this Agreement the Corporation hereby agrees to the following
covenants:
(a) NASDAQ Listing. The Corporation shall take all actions necessary or
appropriate to ensure that the shares of stock issuable upon conversion of the
Series B Preferred Stock are listed or authorized to be quoted on the NASDAQ or
listed on any national securities exchange on which shares of Common Stock are
then listed. The Corporation will take all actions necessary or appropriate to
ensure that it maintains a public market for its Common Stock on NASDAQ or the
NYSE.
(b) Meetings with Management. The Corporation shall arrange for and
make available members of its executive management to meet with the Investors
and their representatives, at such times as the Investors shall reasonably
request, but no less frequently than on a quarterly basis (if so requested), to
discuss with the Investors and their representatives the Corporation's business,
results of operations, financial statements, prospects and any other topics or
issues that the Investors may reasonably request to be reviewed and discussed at
such meetings.
(c) Registration Rights. The Corporation shall take all necessary
action to give effect to the registration rights set forth in Section 4 hereto.
(d) Securities Filings. The Corporation shall take all necessary or
appropriate actions requested by the Investors to assist the Investors in
complying with the Investors' obligations to make any and all securities filings
under the Exchange Act, the Securities Act or the applicable state securities
laws of any state required in connection with the transactions contemplated
herein.
SECTION 4. Registration Rights.
(a) Restrictive Legend. Each certificate for the Series B Preferred
Stock and each certificate for any such securities issued to subsequent
transferees of any such certificate shall be stamped or otherwise imprinted with
the following legend and shall not be transferable except in compliance with or
a valid exception from the Securities Act and applicable state "blue sky" laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW."
(b) Shelf Registration.
(i) Except as contemplated in Section 4(d) hereof, at the request and
direction of the Holders of at least thirty-three percent (33%) of the
Registrable Securities then outstanding (the "Holders' Shelf Request"), the
Corporation shall, at its sole cost and expense, file with the Commission and
thereafter shall use its best efforts to cause to be declared effective, not
later than ninety (90) calendar days after the date of the Holders' Shelf
Request, a registration statement (the "Shelf Registration Statement"), on a
Form S-3 or any successor form thereto, if the Company is then eligible,
relating to the offer and sale of the shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock and Common Stock issuable
in respect of any dividends described in the Certificate of Designation on the
shares of Series B Preferred Stock (the "Securities") by the Holders thereof,
from time to time, in accordance with the methods of distribution set forth in
the Shelf Registration Statement and Rule 415 under the Securities Act
(hereinafter, the "Shelf Registration"); provided, however, that no Holder of
Securities (other than the Investors) shall be entitled to have the Securities
covered by such Shelf Registration Statement unless such Holder of Securities
agrees in writing to be bound by all the provisions of this Agreement applicable
to such Holder of Securities.
(ii) The Corporation shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the prospectus
included therein to be lawfully delivered by the Holders of Securities until all
the shares of Securities covered by the Shelf Registration Statement have been
sold pursuant thereto. The Corporation shall be deemed not to have used its best
efforts to keep the Shelf Registration Statement effective during the requisite
period if it voluntarily takes any action that would result in Holders of the
Securities covered thereby not being able to offer and sell such Securities
during that period, unless such action is required by applicable law.
(iii) Notwithstanding any other provisions of this Agreement to the
contrary, the Corporation shall cause the Shelf Registration Statement and the
related prospectus and any amendment or supplement thereto, as of the effective
date of the Shelf Registration Statement, amendment or supplement, (i) to comply
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations of the Commission and (ii) not to contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(c) Shelf Registration Procedures. In connection with any Shelf
Registration contemplated by Section 4(b) hereof, the following provisions shall
apply:
(i) The Corporation shall (A) furnish to the Investors and each Holder
of Securities, if applicable, prior to the filing thereof with the Commission, a
copy of the Shelf Registration Statement and each amendment thereof and each
supplement, if any, to the prospectus included therein and, in the event that
the Investors or any Holder of Securities, if applicable, is participating in
the Shelf Registration Statement, shall use its best efforts to reflect in each
such document, when so filed with the Commission, such comments as such
Investors or any Holder of Securities, if applicable, reasonably may propose;
and (B) include the names of the Holders of Securities who propose to sell
Securities pursuant to the Shelf Registration Statement as selling security
holders.
(ii) he Corporation shall advise (and confirm such advice in writing
if requested by the recipient of the advice) the Investors and the Holders of
Securities, if applicable:
(A) when the Shelf Registration Statement or any amendment thereto has
been filed with the Commission and when the Shelf Registration Statement or any
post-effective amendment thereto has become effective;
(B) of any request by the Commission for amendments or supplements to
the Shelf Registration Statement or the prospectus included therein or for
additional information;
(C) of the issuance by the Commission of any stop order suspending the
effectiveness of the Shelf Registration Statement or the initiation of any
proceedings for that purpose;
(D) of the receipt of the Corporation or its legal counsel of any
notification with respect to the suspension of the qualification of the
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and
(E) of the happening of any event that requires the Corporation to make
changes in the Shelf Registration Statement or the prospectus in order that the
Shelf Registration Statement or the prospectus does not contain an untrue
statement of a material fact nor omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
(iii) The Corporation shall use its best efforts to obtain the
withdrawal at the earliest possible time of any order suspending the
effectiveness of the Shelf Registration Statement.
(iv) The Corporation shall furnish to each Holder of Securities
included within the coverage of the Shelf Registration, without charge, at least
one copy of the Shelf Registration Statement and any post-effective amendment
thereto, including financial statements and schedules, and, if the Holder of
Securities so requests in writing, all exhibits thereto (including those, if
any, incorporated by reference).
(v) The Corporation shall deliver to each Holder of Securities included
within the coverage of the Shelf Registration, without charge, as many copies of
the prospectus (including each preliminary prospectus) included in the Shelf
Registration Statement and any amendment or supplement thereto as such person
may reasonably request. The Corporation consents, subject to the provisions of
this Agreement, to the use of the prospectus or any amendment or supplement
thereto included in the Shelf Registration Statement by each of the selling
Holders of the Securities in connection with the offering and sale of the
Securities covered by such prospectus or any such amendment or supplement.
(vi) Prior to any public offering of the shares of Securities, pursuant
to any Shelf Registration Statement, the Corporation shall register or qualify
or cooperate with the Holders of Securities included therein and their
respective counsel in connection with the registration or qualification of the
Securities for offer and sale under the securities or "blue sky" laws of such
states of the United States as any Holder of Securities covered by such Shelf
Registration Statement; provided, however, that the Corporation shall not be
required to (A) qualify generally to do business in any jurisdiction where it is
not then so qualified or (B) take any action which would subject it to general
service of process or to taxation in any jurisdiction where it is not then so
subject.
(vii) The Corporation shall cooperate with the Holders of Securities to
facilitate the timely preparation and delivery of certificates representing the
Securities to be sold pursuant to any Shelf Registration Statement free of any
restrictive legends and in such denominations and registered in such names as
the Holders of Securities may request a reasonable period of time prior to sales
of the Securities pursuant to such Shelf Registration Statement.
(viii) Upon the occurrence of any event contemplated by paragraphs (B)
through (E) of Section 4(c)(ii) above during the period for which the
Corporation is required to maintain an effective Shelf Registration Statement,
the Corporation shall promptly prepare and file a post-effective amendment to
the Shelf Registration Statement or a supplement to the related prospectus and
any other required document so that, as thereafter delivered to Holders of
Securities, the prospectus will not contain an 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. If the Corporation notifies the Investors
and the Holders of Securities then Investors, and the Holders of Securities
shall suspend use of such prospectus, and the period of effectiveness of the
Shelf Registration Statement provided for in Section 4(b) above shall be
extended by the number of days from and including the date of the giving of such
notice to and including the date when the Investors and the Holders of
Securities shall have received such amended or supplemented prospectus pursuant
to this Section 4(c)(viii),
(ix) The Corporation will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the Shelf
Registration and will make generally available to its security holders (or
otherwise provide in accordance with Section 11(a) of the Securities Act) an
earnings statement (which need not be audited) satisfying the provisions of
Section 11(a) of the Securities Act, no later than forty-five (45) calendar days
after the end of a 12-month period (or ninety (90) calendar days, if such period
is a fiscal year) beginning with the first month of the Corporation's first
fiscal quarter commencing after the effective date of the Registration
Statement, which statement shall cover such 12-month period.
(x) Each Holder of Securities to be sold pursuant to the Shelf
Registration Statement shall furnish to the Corporation such information
regarding the Holder and the distribution of the Securities as the Corporation
may from time to time reasonably require and request for inclusion in the Shelf
Registration Statement (and shall promptly correct any information previously
furnished if the inclusion of such information in such Shelf Registration
Statement would be materially misleading), and the Securities of any Holder that
unreasonably fails to furnish such information that unreasonably fails to
furnish such information within a reasonable time after receiving such request.
(xi) The Corporation shall enter into such customary agreements
(including if requested an underwriting agreement in customary form) and take
all such other action, if any, as any Holder of Securities shall reasonably
request in order to facilitate the disposition of the Securities pursuant to any
Shelf Registration. If an underwriting agreement is entered into pursuant to
this paragraph, the Corporation shall cause any such agreement to contain
indemnification provisions and procedures substantially similar to those set
forth in Section 4(i) hereof (or such other procedures acceptable to the Holders
of a majority of the aggregate principal amount of the Securities registered
under the applicable Shelf Registration Statement and the managing underwriters,
if any) with respect to all parties to be indemnified pursuant to Section 4(i)
hereof.
(xii) In the case of any Shelf Registration, the Corporation shall (A)
make reasonably available for inspection by the Holders of Securities, any
underwriter participating in any disposition pursuant to the Shelf Registration
Statement and any attorney, accountant or other agent retained by the Holders of
Securities or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Corporation and (B) cause
the Corporation's officers, directors, employees, accountants and auditors to
supply all relevant information reasonably requested by the Holders of
Securities or any such underwriter, attorney, accountant or agent in connection
with the Shelf Registration Statement, in each case as shall be reasonably
necessary, in the judgment of the Holder or any such underwriter, attorney,
accountant or agent referred to in this paragraph, to conduct a reasonable
investigation within the meaning of Section 11 of the Securities Act; provided,
however, that the foregoing inspection and information gathering shall be
coordinated on behalf of the Investors and Holders of Securities by one counsel
designated by and on behalf of such other parties; and provided, further, that
as to any information that is designated in writing by the Corporation, in good
faith, as confidential at the time of delivery, such information shall be kept
confidential by the Holders of Securities or by any such underwriter, attorney,
accountant or other agent.
(xiii) In the case of any Shelf Registration, (A) the Corporation, if
reasonably requested by Holders of a majority of the Securities covered by such
Shelf Registration, which request shall not be more frequent than once per
fiscal quarter, shall cause its counsel to deliver an opinion and updates
thereof relating to the Securities in customary form addressed to such Holders
of Securities and dated, in the case of the initial opinion, the effective date
of such Shelf Registration Statement, provided such opinion is requested prior
to the effective date (it being agreed that the matters to be covered by such
opinion shall include such matters as are customarily included in opinions
requested in underwritten offerings); and (B) the Corporation, if requested by
any majority of Holders of Securities covered by such Shelf Registration, shall
cause its officers to execute and deliver all customary documents and
certificates and updates thereof reasonably requested.
(xiv) In the event that any broker-dealer registered under the Exchange
Act shall underwrite any Securities or participate as a member of an
underwriting syndicate or selling group or "assist in the distribution" (within
the meaning of the Rules of Fair Practice and the By-Laws of the National
Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder
of such Securities or as an underwriter, a placement or sales agent or a broker
or dealer in respect thereof, or otherwise, the Corporation shall use its best
efforts to assist such broker-dealer in complying with the requirements of such
Rules and By-Laws, including, without limitation, by (A) if such Rules or
By-Laws shall so require, engaging a "qualified independent underwriter" (as
defined in Section 2720 thereof) to participate in the preparation of the
Registration Statement relating to such Securities, to exercise usual standards
of due diligence in respect thereto and, if any portion of the offering
contemplated by such Shelf Registration Statement is an underwritten offering or
is made through a placement or sales agent, to recommend the yield of such
Securities, (B) indemnifying any such qualified independent underwriter to the
extent of the indemnification of underwriters provided in Section 4(i) hereof,
and (C) providing such information to such broker-dealer as may be required in
order for such broker-dealer to comply with the requirements of the Rules of
Fair Practice of the NASD.
(xv) The Corporation shall use its best efforts to take all other steps
necessary to effect the registration of the Securities covered by a Shelf
Registration Statement contemplated hereby.
(d) Demand Registration. In lieu of the Shelf Registration referred to
in Section 4(b) hereof, the Holders of at least thirty-three (33%) of the
Registrable then outstanding Securities may elect to require the Corporation to
effect, at the Corporation's sole cost and expense, a registration of
Registrable Securities under this Section 4(d) that the Holders of (the
"Holders' Demand Request"):
(i) If the Corporation receives the Holders' Demand Request that the
Corporation file a registration statement on Form S-1 or S-3 (or similar
successor forms) under the Securities Act covering the registration of the
Registrable Securities, then the Corporation shall, within ten (10) business
days after the receipt thereof, give written notice of such request to all
Holders, and effect, as soon as practicable, the registration under the
Securities Act of all Registrable Securities which the Holders request to be
registered and included in such registration, subject only to the limitations of
this Section 4(d).
(ii) If the Holders initiating the registration request under this
Section 4(d) ("Initiating Holders") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Corporation as a part of their request made pursuant to this Section
4(d) and the Corporation shall include such information in the written notice
referred to in Section 4(d)(i) hereof. In such event, the right of any Holder
to include such Holder's Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting.
(iii) The Corporation is obligated to effect only one (1) such
registration pursuant to this Section 4(d) set forth above.
(iv) All expenses incurred in connection with the demand registration
effected pursuant to this Section 4(d), including without limitation all federal
and "blue sky" registration and qualification fees, printers' and accounting
fees, fees and disbursements of counsel for the Corporation, and of one counsel
for the participating Holders together (the "Registration Expenses") shall be
borne by the Corporation.
(e) Piggyback Registrations.
(i) The Corporation shall notify all Holders of Registrable Securities
in writing at least forty-five (45) calendar days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Corporation (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Corporation, but excluding registration statements on an Excluded Form or
relating to any employee benefit plan or a corporate reorganization) and shall
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20)
calendar days after receipt of the above-described notice from the Corporation,
so notify the Corporation in writing, and in such notice shall inform the
Corporation of the number of Registrable Securities such Holder wishes to
include in such registration statement. If a Holder decides not to include all
of its Registrable Securities in any registration statement thereafter filed by
the Corporation, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Corporation with respect to
offerings of its securities, all upon the terms and conditions set forth herein.
(ii) If the registration statement under which the Corporation gives
notice under this Section 4(e) (the "Piggyback Registration") is for an
underwritten offering, the Corporation shall so advise the Holders of
Registrable Securities. In such event, the right of any such Holder's
Registrable Securities to be included in a registration pursuant to this Section
4(e) shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting to
the extent provided herein. All Holders proposing to distribute their
Registrable Securities through such underwriting shall enter into an
underwriting agreement in such customary form with the managing underwriter or
underwriters selected for such underwriting. If any Holder disapproves of the
terms of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Corporation and the underwriter, delivered at least five
(5) business days prior to the effective date of the registration statement. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
excluded and withdrawn from the registration.
(iii) If any of the Registrable Securities registered pursuant to any
Piggyback Registration are to be sold in one or more firm commitment
underwritten offerings, and the managing underwriters advise in writing the
Corporation and the holders of such Registrable Securities that in its or their
opinion or, in the case of a Piggyback Registration not being underwritten, the
Corporation shall reasonably determine (and notify the holders of Registrable
Securities of such determination), after consultation with an investment banker
of nationally recognized standing, that the number of shares of Common Stock
(including Registrable Securities) proposed to be sold in such offering exceeds
the maximum number of shares of Common Stock that can be sold in such offering,
the Corporation shall include in such registration only such maximum number of
shares of Common Stock (including Registrable Securities) which, in the opinion
of such underwriter or underwriters, or the Corporation, as the case may be,
selected in the following order of priority: (i) first, all of the shares of
Common Stock that the Corporation proposes to sell for its own account, if any,
and (ii) second, the securities requested to be included therein, and which the
managing underwriters shall in their reasonable discretion deem advisable,
allocated pro rata, based upon the number of shares of Common Stock that each
such person shall have requested to be included therein.
(iv) All Registration Expenses incurred in connection with a
registration pursuant to this Section 4(e) shall be borne by the Corporation.
(f) Additional Registration Rights. If the Corporation grants
registration rights to holders of any security of the Corporation which are more
favorable to such holders than the registration rights granted hereunder, then
such more favorable registration rights shall also be deemed to be granted to
the Holders of the Registrable Securities hereunder, and the Corporation
covenants and agrees to take any and all steps necessary to modify the terms of
this Agreement to so provide.
(g) Obligations of the Corporation. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Corporation
shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become and remain effective within one hundred fifty
(150) calendar days of notice from the Holders of the Registrable Securities;
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used into comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement and to keep such registration
statement effective, in the case of a firm commitment underwriting, until each
underwriter has completed the distribution of all securities purchased by it
and, in the case of any other offering, until the earlier of the sale of all
Registrable Securities covered thereby or one hundred eighty (180) calendar days
after the effective date thereof; provided, however, that such 180-day period
shall be extended for a period of time equal to the period the Holder refrains
from selling any Registrable Securities included in such registration at the
request of an underwriter of the Common Stock or if the Corporation has provided
the notice described in subparagraph (vii) below;
(iii) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with her documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration;
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided, that the Corporation shall not be required in connection therewith or
as a condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(v) Use its best efforts to list the securities covered by such
registration statement with any securities exchange, if any, on which the Common
Stock of the Corporation is then listed;
(vi) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement;
(vii) Notify each Holder of Registrable Securities and each underwriter
under such registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, and promptly thereafter, prepare and furnish to all Holders a
reasonable number of copies of an amended to or supplemental prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue statement of
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing;
(viii) Furnish, at the request of any Holder requesting registration of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (A) an opinion, dated as of such date, of the
counsel representing such the Corporation for the purposes of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities, and (B) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Corporation, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of the Registrable Securities; and
(ix) Make available for inspection by each seller of Registrable
Securities, any underwriter participating in any registration statement, and any
attorney, accountant by such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Corporation, and
cause the Corporation's officers, directors and employees to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement.
(h) Furnish Information. It shall be a condition precedent to the
obligations of the Corporation to take any action pursuant to Sections 4(b),
4(d) and 4(e) that the selling Holders shall furnish to the Corporation such
information regarding themselves, the Registrable Securities held by them, and
the intended method of disposition of such securities as shall be required to
effect the registration of their Registrable Securities.
(i) Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 4(b), 4(d) or 4(e):
(i) To the extent permitted by law, the Corporation shall indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation")):
(A) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements thereto,
(B) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or
(C) any violation or alleged violation by the Corporation of the
Securities Act, the Exchange Act, any federal or state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
federal or state securities law in connection with the offering covered by such
registration statement, and the Corporation shall reimburse each such Holder, or
a partner, officer or director, underwriter or controlling person of such Holder
for any legal or other expenses reasonably incurred by them, as incurred, in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 4(i) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Corporation (which consent shall not be unreasonably withheld
or delayed), nor shall the Corporation be liable in any case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by such Holder, or a partner, officer, director, underwriter or
controlling person of such Holder.
(ii) to the extent permitted by law, each selling Holder shall
indemnify and hold harmless the Corporation, each of its directors and officers
who have signed the registration statement, each person, if any, who controls
the Corporation within the meaning of the Securities Act, any underwriter and
any other Holder selling securities under such registration statement or any of
such other Holder's partners, directors or officers or any person who controls
such Holder within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
the Corporation or any such director, officer, controlling person, underwriter
or other such Holder, or a partner, director, officer or controlling person of
such other Holder may become subject under the Securities Act, the Exchange Act
or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder shall reimburse any legal or other expenses reasonably
incurred by the Corporation or any such director, officer, controlling person,
underwriter or other Holder, partner, officer, director or controlling person of
such other Holder in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 5(j) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; and provided, further, that the total amounts
payable in indemnity by a Holder under this Section 4(i)(ii) in respect of any
Violation shall not exceed the net proceeds received by such Holder in the
registered offering out of which such Violation arises.
(iii) Promptly after receipt by an indemnified party under this Section
4(i) of notice of the commencement of any action (including any governmental
action), such indemnified party shall, if a claim in respect thereof is to be
made against any indemnifying party under this Section 4(i), deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 4(i), but the omission so to deliver
written notice to the indemnifying party shall not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
4(i).
(iv) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (A) any Holder
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this Section 4(i) but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 4(i) provides for indem-
nification in such case, or (B) contribution under the Securities Act may be
required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
4(i), then, and in each such case, the Corporation or such Holder shall
contribute to the aggregate losses, claims, damages or liabilities as is
appropriate to reflect not only the relative benefits received by the
indemnified party and the indemnifying party, but also the relative fault of the
indemnified party and the indemnifying party, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action; provided,
however, that, in any such case, (1) no such Holder shall be required to
contribute any amount in excess of the public offering price of all such
Registrable Securities offered and sold by such Holder pursuant to such
registration statement; and (2) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(v) The obligations of the Corporation and Holders under this Section
4(i) shall survive the completion of any offering of Registrable Securities in a
registration statement, and the termination of this Agreement.
(j) "Market Stand-Off' Agreement. Each Holder hereby agrees that it
shall not, to the extent requested by the Corporation and an underwriter of
Common Stock of the Corporation, sell or otherwise transfer or dispose of any
Registrable Securities (other than Registrable Securities being registered in
such offering) for up to that period of time following the effective date of a
registration statement of the Corporation filed under the Securities Act as is
requested by the managing underwriter(s) of such offering, not to exceed one
hundred twenty (120) calendar days; provided, however, that:
(i) such agreement shall be applicable only to the first such
registration statement of the Corporation which covers securities to be sold on
its behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(ii) all officers, directors and ten percent (10%) or greater
stockholders of the Corporation, provided such stockholders have acquired such
securities directly from the Corporation, then holding Common Stock of the
Corporation, shall enter into similar agreements.
In order to enforce the foregoing covenant, the Corporation may impose stop
transfer instructions with respect to the then-remaining Registrable Securities
of each Holder (and the shares or securities of every other person subject to
the foregoing restriction) until the end of such period.
(k) Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, the
Corporation agrees to:
(i) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(ii) File with the Commission in a timely manner all reports and other
documents required of the Corporation under the Securities Act and the Exchange
Act; and
(iii) So long as a Holder owns any Registrable Securities, furnish to
the Holder forthwith upon request a written statement by the Corporation as to
its compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Corporation, and such other reports and documents of the
Corporation as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
(l) Removal of Legends, Etc. Notwithstanding the foregoing provisions
of this Section 4, the restrictions imposed by this Section 4 upon the
transferability of any Registrable Securities shall cease and terminate when any
such Registrable Securities are sold or otherwise disposed of in accordance with
the intended method of disposition by the seller or sellers thereof set forth in
the registration statement which does not require that the securities
transferred bear the legend set forth in Section 4(a). Whenever the restrictions
imposed by this Section 4 shall terminate as herein provided, the Holder of any
Registrable Securities as to which such restrictions have terminated shall be
entitled to receive from the Corporation, without expense, one or more new
certificates not bearing the restrictive legend set forth in Section 4(a) and
not containing any other reference to the restrictions imposed by this Section
4.
(m) Filing of Reports Under the Exchange Act. The Corporation shall
give prompt notice to the Investor of:
(i) the filing of an Exchange Act Registration Statement; and
(ii) the effectiveness of such Exchange Act Registration Statement and
the number of shares of such class of equity securities outstanding as reported
in such Exchange Act Registration Statement, in order to enable the parties to
this Agreement to comply with any reporting requirements under the Exchange Act
or the Securities Act. The Corporation shall, at any time after the Corporation
shall register any shares of Common Stock under the Securities Act and upon the
written request of any Investor, file an Exchange Act Registration Statement
relating to any class of Equity Securities of the Corporation then held by the
Investors, whether or not the class of equity securities with respect to which
such request is made shall be held by at least the number of persons which would
require the filing of a registration statement under Section 12(g)(1) of the
Exchange Act. The Corporation shall comply with all the reporting requirements
of the Exchange Act, and shall comply with all other public information
reporting requirements of the Commission as a condition to the availability of
an exemption from the Securities Act (under Rule 144 thereof, as amended from
time to time, or successor rule thereto or otherwise) for the sale of Common
Stock by the Investors. The Corporation shall cooperate with Investor in
supplying such information as may be necessary for the Investors to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act (under Rule 144 thereof or otherwise) for the sale of Common
Stock by any Investor.
(n) Underwritten Registration. Except in the case of an offering under
a registration under Section 4(d), if any of the Registrable Securities are to
be sold in an underwritten offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by
the Corporation and, in the case of a registration effected under Sections 4(b)
or 4(e), approved in writing by the Holders of at least thirty-three (33%)
percent of the Registrable Securities requesting inclusion of their Registrable
Securities in such registration statement. In the event of underwritten
offering of Registrable Securities in connection with a Holders' Demand Request,
the investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of at least thirty-three
(33%) percent of the Registrable Securities requesting inclusion of their
Registrable Securities in such registration statement under Section 4(d).
SECTION 5. Observer Rights. The Company shall give to each Investor notice of
each meeting of the Board of Directors of the Company at the same time and in
the same manner as notice is given to the directors of the Company. One (1)
designee of the Investors shall be entitled to attend in person, as an
observer, all meetings held in person and to listen to telephone meetings of
the Board of Directors of the Company solely for the purpose of allowing the
Investors to have current information with respect to the affairs of the Company
. The Company shall provide to such parties in connection with each meeting
their respective observer designee is entitled to attend, whether or not present
at such meeting, copies of all notices, minutes, consents, and all other
materials or information that it provides to the directors of the Company with
respect to such meeting, at the same time such materials and information are
given to the directors of the Company (except that materials and information
provided to directors of the Company at meetings at which a designee of such
parties is not present shall be provided to such parties promptly after the
meeting). The observer rights afforded by this Section 5 shall not apply (i) if
the Investors and their affiliates do not own shares of Series B Preferred Stock
having an aggregate liquidation preference of ten million dollars or more, or
(ii) when the holders of shares of Series B Preferred Stock have elected a
director as a result of an Event of Default as defined in the Certificate of
Designation.
SECTION 6. Severability; Governing Law. If any provisions of this Agreement
is determined to be illegal and unenforceable by any court of law, the remaining
provisions shall be severable and enforceable in accordance with their terms.
The parties hereto agree that Investor would suffer irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached by
the Corporation. It is accordingly agreed that Investor shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any state court located in the
State of New York, or the United States District Court for the Southern District
of New York or any federal court in the State of New York (as to which the
Corporation agrees to submit to jurisdiction for the purposes of such or any
other action), this being in addition to any other remedy to which Investor is
entitled at law or in equity, and, if an Investor is successful on the merits in
any such action, that the costs and expenses (including reasonable attorneys'
fees) incurred by Investor in seeking enforcement of this Agreement or the
Certificate of Designation shall be the sole and exclusive responsibility of the
Corporation. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York as to matters within the scope thereof,
and as to all other matters shall be governed by and construed in accordance
with the internal law of the State of Delaware.
SECTION 7. Benefits of Agreement . This Agreement shall be binding upon and
inure benefit of the parties and their respective successors and assigns, legal
representatives and heirs. Subject to the terms of this Agreement,
including the five percent (5%) limitation set forth below, the Investor may
transfer any or all of its rights hereunder to any purchaser or transferee of
all or a portion of the currently outstanding shares of Series B Preferred
Stock, including any right or interest therein, without the prior written
consent of the Corporation or any stockholder of the Corporation. In the event
that a transfer involves at least five percent (5%) of the currently outstanding
shares of Series B Preferred Stock, including any right or interest therein,
such transferee shall be deemed to be "Investor," and a "Holder", as
appropriate, for purposes of this Agreement, and may again transfer such rights
in accordance with, and subject to, the terms of this Agreement.
SECTION 8. Notices. All notices, requests, claims, demands and other
communication hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by cable, telegram, facsimile transmission
with confirmation of receipt, or telex, or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties as
follows:
if to Investors:
Furman Selz Investors II L.P.
FS Employee Investors LLC
FS Parallel Fund, L.P.
c/o FS Private Investments LLC, Manager
c/o ING Furman Selz Investments
55 East 52nd Street, 37th Floor
New York, New York 10055-0002
Attention: James L. Luikart
Phone: (212) 409-5600
Fax: (212)409-5874
with a required copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attention: Carmen J. Romano, Esq.
Phone: (215) 994-4000
Fax: (215) 994-2222
if to the Company:
ABC-NACO INC.
2001 Butterfield Road
Suite 502
Downers Grove, Illinois 60515
Attention: Vincent V. Rea,
Vice President and Corporate Treasurer
Phone (630) 852-1300
Fax: (630) 737-0162
with required copies to:
ABC-NACO Inc.
2001 Butterfield Road
Suite 502
Downers Grove, IL 60515
Attention: Mark F. Baggio, Esq.
Vice President, General Counsel
and Secretary
Phone: (630) 852-1300
Fax: (630) 737-0167
Schiff Hardin & Waite
6600 Sears Tower
Chicago, Illinois 60606
Attention: Robert J. Regan, Esq.
Phone: (312) 258-5606
Fax: (312) 258-5700
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 9. Changes. The terms and provisions of this Agreement may not
be modified, amended, or any of the provisions hereof waived, temporarily or
permanently, except pursuant to the written consent of the parties hereto;
except that any rights applicable to Investor may be waived by Investor without
the consent of the Corporation, or the other stockholders of the Corporation.
SECTION 10. Captions. The captions herein are inserted for convenience
only and s define, limit, extend or describe the scope of this Agreement or
affect the construction hereof
SECTION 11. Nouns and Pronouns. Whenever the context may require, any
pronoun herein shall include the corresponding masculine, feminine or neuter
forms and the singular form of names and pronouns shall include the plural and
vice-versa..
SECTION 12. Merger Provision. This Agreement (as the same may be amended
from time), and the Stock Purchase Agreement, constitute the entire agreement
and understanding among the parties pertaining to the subject matter hereof
and supersede all prior and contemporaneous agreements therewith.
SECTION 13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed on their behalf
ABC-NACO INC.
By:_________________________________
Name: J.P. Singsank
Title: Senior Vice President and Chief Financial Officer
INVESTORS:
FURMAN SELZ INVESTORS II L.P.
FS EMPLOYEE INVESTORS LLC
FS PARALLEL FUND L.P.
By: FS PRIVATE INVESTMENTS LLC, Manager
By:_________________________________
Name: James L. Luikart
Title: Managing Member
<TABLE>
<CAPTION>
SCHEDULE I
<S> <C>
Series B
Investors . . . . . . . . . . Preferred Stock
- ----------------------------- ---------------
FURMAN SELZ INVESTORS II L.P.
FS EMPLOYEE INVESTORS LLC . . 264,466.6666
FS PARALLEL FUND L.P. . . . . 22,666.6666
12,866.6666
</TABLE>
Page 2 Document2
<TABLE>
<CAPTION>
SUBSIDIARIES OF ABC-NACO INC.
Exhibit 21.1
JURISDICTION OF PERCENTAGE
NAME U.S. FEIN INCORPORATION OF OWNERSHIP OWNER
- ------ ---------------- --------------- ------------- --------
<S> <C> <C> <C> <C>
NACO, Inc.. . . . . . . . . . . . . . . 36-3525574 Delaware, U.S. 100% ABC-NACO Inc.
2001 Butterfield Road
Downers Grove, IL 60515
National Castings Inc.. . . . . . . . . 36-3366864 Delaware, U.S. 100% NACO Inc.
110 N. 25th Avenue
Melrose Park, Il 60160
NACO Flow Products, Inc.. . . . . . . . 42-1302332 Delaware, U.S. 100% National Castings Inc.
f/k/a Keokuk Steel
Castings Co., Inc.
600 Morgan Street
Keokuk, IA 52632
National Engineered . . . . . . . . . . 42-1375026 Iowa, U.S. 100% National Castings Inc.
Products Company, Inc.
A/k/a. NEPCO
128 Collins Road
Richmond, TX 77469
ABC-NACO Europe Ltd.. . . . . . . . . . N/A Scotland, UK 100% National Castings Inc.
f/k/a Glencast Limited
Kirkland Works
Leven, Fife KY8 2LE
Scotland
Dominion Castings Limited . . . . . . . N/A Ontario, Canada 100% National Castings Inc.
100 Depew Street
Hamilton, Ontario L8L 8G1
Canada
National Castings de Mexico . . . . . . N/A United Mexican States 1% National Castings Inc.
S.A. de C.V.. . . . . . . . . . . . . . 99% ABC-NACO de Mexico
Corredor Industrial S/N . . . . . . . . S.A. de C.V.
Cd. Sahagun, Hidalgo
43990 Mexico
NACO Europe AB. . . . . . . . . . . . . N/A Sweden 100% NACO, Inc.
Box 1343
Herserudsvagen 18
S-181 25 Lidingo
Sweden
ABC-NACO de Mexico, . . . . . . . . . . N/A United Mexican States 99% NACO, Inc.
S.A. de C.V.. . . . . . . . . . . . . . 1% National Castings Inc.
Corredor Industrial S/N
Cd. Sahagun, Hidalgo
43990 Mexico
Servicios National Castings,. . . . . . N/A United Mexican States 99% ABC-NACO, S.A. de C.V.
Corredor Industrial S/N . . . . . . . . 1% National Castings Inc.
Cd. Sahagun, Hidalgo
43990 Mexico
<PAGE>
JURISDICTION OF PERCENTAGE
NAME. . . . . . . . . . . . . . . . . . U.S. FEIN INCORPORATION OF OWNERSHIP OWNER
- ---- --------- --------------- ------------ ------
Comercializadora National . . . . . . . N/A United Mexican States 99% ABC-NACO, S.A. de C.V.
Castings, S.A. de C.V.. . . . . . . . . 1% National Castings Inc.
Corredor Industrial S/N
Cd. Sahagun, Hidalgo
43990 Mexico
ABC-NACO Servicios. . . . . . . . . . . N/A United Mexican States 99% ABC-NACO, S.A. de C.V.
Ferroviares, S.A. de C.V. . . . . . . . 1% National Castings Inc.
Ave. Mario Colin S/N Esquina Miraflores
Valle de Ceylan
Tlalnepantla, Estado de Mexico, 54150
ABC Rail Brakeshoe Holdings Inc.. . . . 36-4121590 Delaware, U.S. 100% ABC-NACO Inc.
2001 Butterfield Road
Suite 502
Downers Grove, IL 60515
ABC Rail French Holdings, Inc.. . . . . 36-4019618 Delaware, U.S. 100% ABC-NACO Inc.
2001 Butterfield Road
Suite 502
Downers Grove, IL 60515
ABC Rail Products . . . . . . . . . . . 36-4096911 Delaware, U.S. 100% ABC-NACO Inc.
China Investment Corporation
2001 Butterfield Road
Suite 502
Downers Grove, IL 60515
ABC Rail Systems, Inc.. . . . . . . . . 36-1611003 Wisconsin, U.S. 100% ABC-NACO Inc.
f/k/a American Systems
Technologies, Inc.
421 S. Nine Mound Road
Verona, WI 53593
ABC Rail (Virgin Islands) Corporation . 66-0477167 U.S. Virgin Islands 100% ABC-NACO Inc.
The Guardian Building
Havensight
St. Thomas, VI 63033
Transit & Rail Systems. . . . . . . . . 04-3333618 Massachusetts, U.S. 100% ABC-NACO Inc.
Engineering, Inc.
268 Summer Street
Boston, MA 02210
Cometna Companhia Metalurgica N/A Portugal 100% ABC-NACO Europe Ltd
Nacional, S.A.
1675-901 Famoes
Portugal
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 8, 2000, included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-90086, 33-90090 and
33-90092 on Form S-8 and Nos. 333-16241, 333-89601 and 333-90441 on Form
S-3.
Chicago, Illinois
March 13, 2000
Page 7 10K POWER OF ATTORNEY.doc
10K POWER OF ATTORNEY.doc
03/13/00
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ Daniel W. Duval
- ----------------------
Daniel W. Duval
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ Richard A. Drexler
- -------------------------
Richard A. Drexler
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ Jean-Pierre Ergas
- -----------------------
Jean-Pierre Ergas
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ Donald W. Grinter
- ------------------------
Donald W. Grinter
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ James E. Martin
- ----------------------
James E. Martin
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ George W. Peck IV
- -------------------------
George W. Peck IV
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, as a director and/or an officer of ABC-NACO Inc. (the
"Company"), does hereby constitute and appoint Joseph A. Seher and J. P.
Singsank, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Company's Annual Report
on Form 10-K for the Fiscal 1999 Stub Year ended December 31, 1999 and any and
all amendments thereto, and to file the same, with exhibits and schedules
thereto, and other documents therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact, or his substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23 day of February, 2000.
/s/ Willard H. Thompson
- --------------------------
Willard H. Thompson
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
ABC-NACO Inc.
Financial Data Schedule
For Period Ended December 31, 1999
(Dollars in Thousands)
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
Five Months Ended
and as of
December 31, 1999
---------------------
Fiscal year-end December 31, 1999
Period start August 1, 1999
Period end December 31, 1999
Cash and cash items 351
Marketable securities -
Notes and accounts receivable - trade 79,617*
Allowances for doubtful accounts -
Inventory 94,132
Total current assets 195,181
Property, plant, and equipment 360,013
Accumulated depreciation 115,003
Total assets 492,471
Total current liabilities 138,868
Bonds, mortgages, and similar debt 246,247
Preferred stock - mandatory redemption -
Preferred stock - no mandatory redemption -
Common stock 194
Other stockholders' equity 86,485
Total liabilities and stockholders' equity 492,471
Net sales 239,861
Total revenues 239.861
Cost of tangible products 214,833
Total costs and expenses applicable to sales and revenues 214,833
Other costs and expenses 26,134
Provision for doubtful accounts and notes -
Interest and amortization of debt discount 9,398
Income before taxes and other items (10,504)
Income tax expense (4,979)
Income/loss from continuing operations (5,525)
Discontinued operations -
Extraordinary items -
Cumulative effect - changes in accounting principles -
Net income or loss (5,525)
Earnings per share - basic (0.30)
Earnings per share - diluted (0.30)
* Notes and accounts receivable - trade are reported net of allowances for
- --------------------------------------------------------------------------------
doubtful accounts in the Consolidated Balance Sheets.
- -----------------------------------------------------------
</TABLE>
