-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G7JqS+Eo6WEyd4YyXUfoLVFSl1kP8Kc8wCjx4n4h3UN82qsyy4mgNUO6WLAihdZG pLcDeqgThX2CGRo/jCmzIg== /in/edgar/work/0000913364-00-000029/0000913364-00-000029.txt : 20001115 0000913364-00-000029.hdr.sgml : 20001115 ACCESSION NUMBER: 0000913364-00-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABC NACO INC CENTRAL INDEX KEY: 0000913364 STANDARD INDUSTRIAL CLASSIFICATION: [3460 ] IRS NUMBER: 363498749 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22906 FILM NUMBER: 764395 BUSINESS ADDRESS: STREET 1: 2001 BUTTERFIELD ROAD STREET 2: SUITE 502 CITY: DOWNES GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 3123224614 MAIL ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: SUITE 1300 CITY: CHICAGO STATE: IL ZIP: 60604 FORMER COMPANY: FORMER CONFORMED NAME: ABC RAIL PRODUCTS CORP DATE OF NAME CHANGE: 19931014 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 September 30, 2000 0-22906 - --------------------------- ------------------------ For the Quarterly Period Ended Commission File Number ABC-NACO INC. (Exact name of registrant as specified in its charter) Delaware 36-3498749 - ---------------------------.............................----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2001 Butterfield Road, Suite 502, Downers Grove, IL 60515 ---------------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code (630) 852-1300 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 7, 2000 - ----------------------------- ----------------------------- COMMON STOCK, $.01 PAR VALUE 19,872,242 SHARES ABC-NACO INC. INDEX Page ---- Part I Financial Statements Item 1 Unaudited Consolidated Financial Statements Unaudited Consolidated Balance Sheets 3 Unaudited Consolidated Statements of Operations 4 Unaudited Consolidated Statements of Stockholders' Equity 5 Unaudited Consolidated Statements of Cash Flows 6 Notes to Unaudited Consolidated Financial Statements 7 - 18 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 - 29 Item 3 Quantitative and Qualitative Disclosures About Market Risk 29 Part II Other Information Item 6 Exhibits and Reports on Form 8-K 30
ABC-NACO INC. CONSOLIDATED BALANCE SHEETS As of September 30, 2000 and December 31, 1999 (UNAUDITED) (In thousands, except share data) Sept. 30, December 31, 2000 1999 ---- ---- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $443 $351 Accounts receivable, less allowances of $1,724 and $1,804, respectively . . 95,450 79,617 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,517 94,132 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 10,996 12,401 Prepaid income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,253 8,680 ---------- ---------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,659 195,181 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,557 7,644 Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . 47,022 42,268 Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 284,028 267,189 Patterns, tools, gauges and dies. . . . . . . . . . . . . . . . . . . . . . 14,864 14,610 Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . 23,063 28,302 ---------- ---------- 376,534 360,013 Less - Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (135,972) (115,003) ---------- ---------- Net property, plant and equipment . . . . . . . . . . . . . . . . . . . 240,562 245,010 ---------- ---------- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES. . . . . . . . . . . . . . . . . . 15,036 13,886 ---------- ---------- OTHER NON_CURRENT ASSETS - net. . . . . . . . . . . . . . . . . . . . . . . . . 43,462 38,394 ---------- ---------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527,719 $ 492,471 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- CURRENT LIABILITIES: Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . $ 7,732 $ 6,207 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,661 89,678 Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,392 42,983 ---------- ---------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 131,785 138,868 ---------- ---------- LONG-TERM DEBT, less current maturities . . . . . . . . . . . . . . . . . . . . 272,765 246,247 ---------- ---------- DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,646 6,699 ---------- ---------- OTHER NON_CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 13,582 13,978 ---------- ---------- COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . - - STOCKHOLDERS' EQUITY: Convertible Preferred stock, $1.00 par value; 1,000,000 shares authorized; 300,000 shares issued and outstanding at September 30, 2000 . . . . . . 28,425 - Common stock, $.01 par value; 25,000,000 shares authorized; 19,872,242 and 19,372,242 shares issued and outstanding, respectively. 199 194 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 95,565 79,240 Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . (18,748) 7,954 Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . (2,500) (709) ---------- ---------- Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 102,941 86,679 ---------- ---------- Total liabilities and stockholders' equity. . . . . . . . . . . . . . . $ 527,719 $ 492,471 ========== ==========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated balance sheets.
ABC-NACO INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 --------- --------- --------- --------- NET SALES $131,043 $145,072 $443,075 $475,016 COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . 122,306 121,196 393,045 409,835 --------- --------- --------- --------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . 8,737 23,876 50,030 65,181 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . 14,645 13,055 42,992 43,959 MERGER AND OTHER RESTRUCTURING CHARGES . . . . . . . . . . . . . . 9,838 - 11,427 21,925 --------- --------- --------- --------- Operating income (loss). . . . . . . . . . . . . . . . . . (15,746) 10,821 (4,389) (703) EQUITY INCOME (LOSS) FROM UNCONSOLIDATED JOINT VENTURES. . . . . . 950 (411) 2,257 (324) INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . 6,655 4,543 18,883 13,113 AMORTIZATION OF DEFERRED FINANCING COSTS . . . . . . . . . . . . . 464 306 1,008 742 --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item. (21,915) 5,561 (22,023) (14,882) PROVISION (BENEFIT) FOR INCOME TAXES . . . . . . . . . . . . . . . (8,793) 1,691 (8,551) (712) --------- --------- --------- --------- Income (loss) before extraordinary item . . . . . . . . . (13,122) 3,870 (13,472) (14,170) EXTRAORDINARY ITEM, net of income tax of $2,062. . . . . . . . . . - - - (3,158) --------- --------- --------- --------- Net income (loss). . . . . . . . . . . . . . . . . . . . . $(13,122) $ 3,870 $(13,472) $(17,328) ========= ========= ========= ========= EARNINGS PER SHARE DATA: Income (loss) before extraordinary item . . . . . . . . . . $(13,122) $ 3,870 $(13,472) $(14,170) Adjustment related to preferred stock . . . . . . . . . . . - - (11,877) - Preferred stock dividends . . . . . . . . . . . . . . . . . (600) - (1,353) - --------- --------- --------- --------- Adjusted income (loss) before extraordinary item. . . . . . (13,722) 3,870 (26,702) (14,170) Extraordinary item. . . . . . . . . . . . . . . . . . . . . - - - (3,158) --------- --------- --------- --------- Net income (loss) available to common stockholders. . . $(13,722) $ 3,870 $(26,702) $(17,328) ========= ========= ========= ========= BASIC EARNINGS PER SHARE: Adjusted income (loss) before extraordinary item . . . . . $ (0.69) $ 0.21 $ (1.36) $ (0.78) Extraordinary item . . . . . . . . . . . . . . . . . . . . - - - (0.17) --------- --------- --------- --------- Net income (loss) available to common stockholders. . $ (0.69) $ 0.21 $ (1.36) $ (0.95) ========= ========= ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . . 19,872 18,379 19,572 18,318 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: Adjusted income (loss) before extraordinary item . . . . . $ (0.69) $ 0.21 $ (1.36) $ (0.78) Extraordinary item . . . . . . . . . . . . . . . . . . . . - - - (0.17) --------- --------- --------- --------- Net income (loss) available to common stockholders. . $ (0.69) $ 0.21 $ (1.36) $ (0.95) ========= ========= ========= ========= WEIGHTED AVERAGE SHARES AND STOCK EQUIVALENTS. . . . . . . . . . . 19,872 18,607 19,572 18,318 ========= ========= ========= =========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements.
ABC-NACO INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2000 and 1999 (unaudited) (In thousands) Additional Retained Cumulative Preferred Common Paid-in Earnings Translation Stock Stock Capital (Deficit) Adjustment Total ------- ------ -------- ---------- ------------ --------- BALANCE, December 31, 1998 . . . . . . . . . . . . $ - $ 184 $ 67,981 $ 28,888 $ (676) $ 96,377 Comprehensive income (loss). . . . . . . . . . . - - - (17,328) 255 (17,073) Income tax benefit from exercised stock options. - - 300 - - 300 Common stock issued. . . . . . . . . . . . . . . - - 102 - - 102 ------- ------ -------- ---------- ------------ --------- BALANCE, September 30, 1999. . . . . . . . . . . . $ - $ 184 $ 68,383 $ 11,560 $ (421) $ 79,706 ======= ====== ======== ========== ============ ========= BALANCE, December 31, 1999 . . . . . . . . . . . . $ - $ 194 $ 79,240 $ 7,954 $ (709) $ 86,679 Comprehensive loss . . . . . . . . . . . . . . . - - - (13,472) (1,791) (15,263) Preferred stock issued . . . . . . . . . . . . . 28,425 - 11,877 (11,877) - 28,425 Preferred stock dividends earned . . . . . . . . - - 1,353 (1,353) - - Shares issued in business acquisition. . . . . . - 5 3,095 - - 3,100 ------- ------ -------- ---------- ------------ --------- BALANCE, September 30, 2000. . . . . . . . . . . . $28,425 $ 199 $ 95,565 $ (18,748) $ (2,500) $102,941 ======= ====== ======== ========== ============ =========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements.
ABC-NACO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three and Nine Months Ended September 30, 2000 and 1999 (UNAUDITED) (In thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 --------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(13,122) $3,870 $(13,472) $(17,328) Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary item . . . . . . . . . . . . . . . . . . . . . - - - 3,158 Merger and other restructuring charges . . . . . . . . . . . 9,838 - 11,427 21,925 Equity (income) loss from unconsolidated joint ventures. . . (950) 411 (2,257) 324 Depreciation and amortization . . . . . . . . . . . . . . . 8,200 8,179 25,257 23,524 Deferred income taxes. . . . . . . . . . . . . . . . . . . . (8,617) 60 (8,626) 1,108 Changes in certain assets and liabilities, net of effect of business combinations Accounts receivable . . . . . . . . . . . . . . . . . 4,405 (5,006) (15,533) (15,800) Inventories . . . . . . . . . . . . . . . . . . . . . 6,634 (4,896) (10,385) 5,253 Prepaid expenses and other current assets . . . . . . 2,712 6,109 1,405 (12,401) Other noncurrent assets . . . . . . . . . . . . . . . (346) (2,108) (1,666) (2,217) Accounts payable and accrued expenses . . . . . . . . (10,388) (11,116) (19,884) (11,540) Other noncurrent liabilities. . . . . . . . . . . . . (2,027) (1,422) (2,187) 1,883 --------- --------- --------- --------- Net cash used in operating activities. . . . . . . (3,661) (5,919) (35,921) (2,111) --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures. . . . . . . . . . . . . . . . . . . . . (4,928) (11,467) (15,688) (32,635) Dividends from unconsolidated joint ventures. . . . . . . . . 449 - 1,107 - Business acquisition . . . . . . . . . . . . . . . . . . . . - - (2,000) - --------- --------- --------- --------- Net cash used in investing activities. . . . . . . (4,479) (11,467) (16,581) (32,635) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving lines of credit. . . . . . . . 9,875 16,147 27,149 62,074 Change in cash overdrafts . . . . . . . . . . . . . . . . . . - 2,766 - (1,523) Payment of term debt. . . . . . . . . . . . . . . . . . . . . (647) (3,449) (1,606) (28,696) Borrowings of term debt . . . . . . . . . . . . . . . . . . . - - - 3,507 Payment of deferred financing costs . . . . . . . . . . . . . (680) - (1,374) (1,182) Exercised stock options . . . . . . . . . . . . . . . . . . . - 402 - 402 Issuance of convertible preferred stock . . . . . . . . . . . - - 28,425 - --------- --------- --------- --------- Net cash provided by financing activities . . . . 8,548 15,866 52,594 34,582 --------- --------- --------- --------- Net change in cash. . . . . . . . . . . . . . . . 408 (1,520) 92 (164) CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . . . 35 1,520 351 164 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . . . $ 443 $ - $ 443 $ - ========= ========= ========= =========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. ABC-NACO INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION ABC-NACO Inc. (the "Company") is a supplier of technologically advanced products and services to the freight railroad and flow control industries. The Company operates in three business segments: Rail Products, Rail Services and Systems, and Flow and Specialty Products, and has 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. The accompanying unaudited consolidated financial statements include, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results of operations and financial condition of the Company for and as of the interim dates. Results for the interim period are not necessarily indicative of results for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the information and the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999 and the Company's Transition Report on Form 10-K for the five months ended December 31, 1999. The Company is a result of a merger (the "Merger") on February 19, 1999, between 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 the Company's 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 has been 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. Unaudited results of operations for ABC and NACO prior to the Merger from January 1, 1999, to February 19, 1999 were (in thousands):
ABC NACO -------- -------- Revenue. $52,659 $60,552 Net loss (669) (51)
On September 23, 1999, the Company's Board of Directors adopted a resolution changing 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-K transition report for the five-month transition period from August 1, 1999 to December 31, 1999 (the "Transition Period"). 2. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for substantially all inventories. Inventory costs include material, labor and manufacturing overhead. Inventories at September 30, 2000, and December 31, 1999, consisted of the following (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Raw materials. . . . . . . . . . . $ 45,050 $44,148 Supplies and spare parts . . . . . 8,830 5,258 Work in process and finished goods 50,637 44,726 ------------- ------- $ 104,517 $94,132 =========== =======
3. DEBT Senior Credit Facility - ---------------------- 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 and interest coverage, a 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 September 30, 2000 was 9.74%. Availability at September 30, 2000 was $6.0 million. On October 12, 1999, the Company entered into an Amendment, Waiver and Release Agreement to the Credit Facility 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 Facility that were effective as of October 29, 1999 to modify certain of the financial leverage covenants in the Credit Facility which the Company otherwise would not have been in compliance with as of October 31, 1999. On March 8, 2000, the Company entered into a Second Amendment and Restatement of the Credit Facility that was effective as of December 30, 1999 to modify certain of the financial covenants in the Credit Facility, 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 Facility. The Company and its Lenders also modified other terms and conditions within the Credit Facility including the pricing grid, which is based upon the Company's Consolidated Leverage Ratio. With the Second Amendment and Restatement of the Credit Facility, the Company was in compliance with all covenants under the Credit Facility as of December 31, 1999. On October 30, 2000, the Company entered into a Third Amended and Restated Credit Facility that was effective as of September 30, 2000 to modify certain of the financial covenants in the Credit Facility, which the Company otherwise would not have been in compliance with as of September 30, 2000. The amended covenants included the Maximum Consolidated Leverage Ratio, Maximum Senior Leverage Ratio, Minimum Interest Coverage Ratio and Minimum EBITDA requirement. The amended covenant requirements as of, and for the twelve months ended September 30, 2000, and the actual results, in brackets, were as follows (all as defined): Maximum Consolidated Leverage Ratio - 7.50 (7.35), Maximum Senior Leverage Ratio -5.50 (5.39), Minimum Interest Coverage Ratio - 1.40 (1.53) and Minimum EBITDA - $38.0 million ($38.1 million). The corresponding requirements as of and for the twelve months ending December 31, 2000 are 7.55, 5.55, 1.30 and $38.0 million, respectively. The amendment modified the covenants through March 31, 2001, at which time the covenants will revert back to the covenants in place pursuant to the March 8, 2000 amendment. The lenders will consider further amendments to the covenants, if necessary, at that time, based on the progress made through that date on the Company's planned non-core asset disposition program. The Company and its lenders also modified other terms and conditions within the Credit Facility including the pricing grid, which continues to be based upon the Company's Consolidated Leverage Ratio. The newly applied margin of 400 basis points over IBOR is the maximum IBOR margin provided for by the Amendment. As a result of the Third Amended and Restated Credit Agreement, the revolving line of credit now has scheduled commitment reductions as follows: January 1, 2001 - $10.0 million, April 1, 2001 - $35.0 million, April 15, 2001 - $15.0 million. These commitment reductions, which will ultimately reduce the revolving Credit Facility commitments to $140.0 million by April 15, 2001, are not expected to materially impair the Company's liquidity or capital resources position, as proceeds realized from the planned disposition of non-core assets (up to 85% of which are required to be used to pay down bank debt) are expected to offset the commitment reductions. The Company will also be assessed a significant cash penalty if outstanding borrowings are not reduced to $175 million by January 31, 2001. Senior Subordinated Notes - ------------------------- 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 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 required to meet a number of financial covenants on its 9 1/8% Notes and 8 3/4% Notes (together the "Notes") including minimum Operating Coverage Ratio, Minimum Consolidated Net Worth and Maximum Funded Debt to Capitalization. On August 3, 2000, the Company commenced a consent solicitation of its Note holders to approve amendments to certain provisions governing the Notes. Those amendments included a revision of the Operating Coverage Ratio requirement to 1.8:1.0 from 2.4:1.0 (including for the twelve month period ended September 30, 2000) and an increase in the interest coupon rate for all Notes to 10 1/2% effective October 1, 2000. The consent solicitation was successfully completed in late September 2000 and resulted in a $0.7 million payment to the Note holders in the form of a consent fee. The fee will be amortized as additional interest expense over the remaining life of the Notes. Other than the annual interest rate, none of the maturity dates, payment provisions, redemption provisions or other similar terms of the Notes were changed. The actual Operating Coverage Ratio at September 30, 2000 was 1.81 versus the amended minimum requirement of 1.80. The funded Debt to Capitalization ratio at September 30, 2000 was 73.7% with the maximum allowable under the Note indenture being 75.0%. These same covenant tests are to be met at the end of each quarter through the maturity dates for these Notes. The Company has experienced continuing softness in the demand for loose wheels and lower than normal sales activity with select other core products due to reduced new freight car production and the railroads' ongoing cut-back of spending on discretionary maintenance and repair items. In addition, the Company recorded a third quarter pre-tax special charge of $9.8 million and anticipates a fourth quarter pre-tax charge of approximately $2.0 million, for permanent facility and operational consolidations associated with improved manufacturing process and other changes. While management's forecasts for the next four quarters reflect continued compliance with all of the amended covenants, the earnings impact of the factors described above and the timing and impact of key dispositions of non-core operating assets cannot be easily measured. Accordingly, compliance with these covenants over the ensuing quarters may depend upon further amendments. Failure to meet the Credit Facility's or the Notes' covenant tests would give the respective creditors the unilateral right to accelerate the maturity of the related debt after a requisite cure period. In addition, cross-default provisions under the Credit Facility would be triggered upon a default under the Notes. 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 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. A universal shelf registration was declared effective by the Securities and Exchange Commission on October 29, 1999, for issuance up to $300 million of debt or equity securities. As of September 30, 2000, no securities were issued under the new universal shelf registration. 4. CONVERTIBLE PREFERRED STOCK 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 $30.0 million. The preferred stock has voting rights under certain circumstances 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 after March 2003. The net proceeds received from the sale of preferred stock ($28.4 million after offering costs) were applied to reduce the outstanding indebtedness under the Company's 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 offset by $1.6 million of transaction costs, with the $11.9 million credited to additional paid-in capital. 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. Additionally, the preferred stock earned actual dividends of $1.4 million during the nine months ended September 30, 2000. Both the actual and deemed dividends are deducted from the net loss for the three and nine months ended September 30, 2000 to arrive at loss available to common stockholders in the earnings per share calculations for those periods. In such calculations, other common stock equivalents, which would have increased diluted shares by 3,333,000 for the three months and nine months ended September 30, 2000, were not included in the computation of diluted earnings per share because the assumed exercise of such equivalents would be antidilutive. 5. MERGER AND OTHER RESTRUCTURING COSTS All of the Merger and other restructuring charges recorded by the Company since the Merger 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. The Company recorded a restructuring charge of $9.3 million in the quarter ended September 30, 2000 for costs associated with the planned closing of its Melrose Park, Illinois plant ($3.1 million), a reduction of multiple leased facilities in its Keokuk, Iowa operations ($0.6 million), additional costs associated with prior restructuring initiatives, and severance and related benefit costs for permanent salaried and hourly workforce reductions throughout the organization ($5.6 million). Due largely to the implementation of Advanced Precision Casting processes in some of its other manufacturing facilities, the Company announced the closure of its Melrose Park, Illinois Rail Products facility, and recorded a $3.1 million restructuring charge for related closure costs. Total cash costs associated with the Melrose Park closure include $0.7 million of severance and related benefit costs for approximately 242 hourly and 42 salaried employees (substantially all of whom are expected to be terminated during the fourth quarter of 2000) and $1.1 million of idle facility and property disposal costs expected to be incurred from the time of vacancy through the estimated sale date of the property. An additional $1.3 million of non-cash costs were recorded for the expected write-off of equipment to be scrapped or sold. The Company expects to cease production at this facility by year-end 2000, with the building sale to be completed within one year of its vacancy. The Company recorded a $0.6 million charge for costs associated with a movement of its Keokuk, Iowa Flow and Specialty Products production, storage facilities and offices from multiple buildings into a new leased facility. Estimated cash costs of $0.5 million include duplicate lease and building security and utility costs for the vacated properties. Non-cash costs of $0.1 million are related to the write-off of leasehold improvements that cannot be transferred from the vacated facilities. An additional $0.5 million provision was recorded in the third quarter related to prior restructuring initiatives, primarily related to the Company's idled facilities in Anderson, Indiana and Cincinnati, Ohio which have not been sold as quickly as initially expected. Planned permanent reductions in employment levels resulted in a charge of $5.6 million, representing cash severance and related benefit costs for approximately 67 salaried employees throughout the Company, including its closed Verona, Wisconsin offices, and required cash severance payments made to production employees at the Company's Sahagun, Mexico facility. The majority of the related payments will occur in the fourth quarter of 2000 and first quarter of 2001, with some payments continuing through 2004 for certain severed employees. For the three months period ended September 30, 2000, $0.8 million of costs have been paid. The following table is a summary roll forward of the restructuring reserves recorded in the third quarter ended September 30, 2000 (in thousands):
Aggregate Charge Deductions Balance ----------------- ------------ -------- Cash provisions: Employee severance & benefits . . . . . . $ 6.3 $ (0.8) $ 5.5 Idle facility and property disposal costs 2.1 - 2.1 ----------------- -------- Total cash costs . . . . . . . . . . . 8.4 $ (0.8) $ 7.6 ============ ======== Non-cash asset write-downs . . . . . . . . . 1.4 ----------------- Total. . . . . . . . . . . . . . . . . $ 9.8 =================
During the three months ended March 31, 2000, the Company recorded $1.6 million of Merger and other restructuring charges for cash severance costs for 35 salaried employees and 30 hourly plant employees effected by the Company's year-long effort to eliminate duplicate functions and to improve operating efficiencies as a result of the Merger. As of September 30, 2000, all of these employees have been terminated and substantially all of related costs were paid. 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 and through month ending September 30, 2000, the Company recorded additional charges of $1.2 million and $0.2 million respectively, 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. 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 September 30, 2000, all of these employees had been terminated and all but $0.1 million of the severance has been paid 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 was 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, all of which has been spent as of September 30, 2000. In addition to these costs, the Company incurred and expended $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. 6. BUSINESS SEGMENT INFORMATION 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: Rail Products Freight car and locomotive castings Rail Services and Systems Specialty trackwork, wheel assembly & signal systems Flow and Specialty Products Valve housing and related castings 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. 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. Management continually evaluates its internal structure and aligns its reporting structure to maximize its operating results. Changes to segment reporting are made to reflect the way management evaluates its businesses. 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 for the consolidated company. 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 other 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 by segment and a reconciliation to the Company's consolidated totals (in thousands):
Three months ended Nine months ended Sept. 30, Sept. 30, - -------------------------------------------- REVENUES 2000 1999 2000 1999 - -------------------------------------------- --------- --------- --------- --------- Rail Products . . . . . . . . . . . . . . . $ 54,900 $ 90,928 $205,367 $288,291 Rail Services and Systems . . . . . . . . . 64,081 48,004 203,350 170,304 Flow and Specialty Products . . . . . . . . 19,807 18,156 63,696 52,056 --------- --------- --------- --------- Total Reportable Segments . . . . . . . 138,788 157,088 472,413 510,651 Elimination and Other . . . . . . . . . . . (7,745) (12,016) (29,338) (35,635) --------- --------- --------- --------- Total . . . . . . . . . . . . . . . $131,043 $145,072 $443,075 $475,016 ========= ========= ========= ========= OPERATING INCOME (LOSS) - -------------------------------------------- Rail Products . . . . . . . . . . . . . . . $ (3,448) $ 10,806 $ 7,293 $ 30,076 Rail Services and Systems . . . . . . . . . 2,092 2,566 12,134 7,050 Flow and Specialty Products . . . . . . . . 966 2,731 6,819 4,980 --------- --------- --------- --------- Total Reportable Segments . . . . . . . (390) 16,103 26,246 42,106 Elimination and Other . . . . . . . . . . . (15,356) (5,282) (30,635) (42,809) --------- --------- --------- --------- Total . . . . . . . . . . . . . . . $(15,746) $ 10,821 $ (4,389) $ (703) ========= ========= ========= =========
7. BUSINESS ACQUISITIONS On October 29, 1999, the Company acquired all outstanding common stock of COMETNA - Companhia Metalurgica Nacional, S.A. (Cometna) located in Lisbon, Portugal for $8.3 million, or 674,796 shares, 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. On June 23, 2000, the Company acquired certain assets of Donovan Demolition, Inc. ("Donovan") located in Danvers, Illinois. In addition, the Company acquired a patent from a shareholder of Donovan. The total purchase price of $7.6 million for these assets included $2.0 million in cash, a $2.5 million note and 500,000 shares of the Company's common stock valued at $3.1 million. The Donovan bargain purchase amount of $2.6 million has been deducted from the appraised value of property, plant and equipment. 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 judgement 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 Company's consolidated statements of operations from their acquisition dates. 8. 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 $6.9 million as of September 30, 2000. 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 three and nine months ended September 30, 2000, and 1999 is as follows (in thousands):
Three Months Nine Months Ended Ended Sept. 30, Sept. 30, ------------- ------------ 2000 1999 2000 1999 ------- ------------ ------- ------- Net sales. . $ 4,166 $ 4,187 $13,905 $14,183 Gross profit 935 1,397 3,744 4,521 Net income . 376 683 1,885 2,461
In May 1996, the Company entered into a joint venture 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 railways markets. The Company's contribution of its 40% share in Datong consists of technical know-how, expertise and cash. The cash funding was used to construct a manufacturing facility, which was operational in early 1999. 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 earns royalties on certain sales from this venture. The Company's investment in Datong was $8.4 million as of September 30, 2000. Summarized financial information for Datong for the three and nine months ended September 30, 2000, and 1999 is as follows (in thousands):
Three Months Nine Months Ended Ended Sept. 30, Sept. 30, ------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net sales. . $ 8,884 $ 3,548 $20,397 $ 7,337 Gross profit 2,497 571 20 (142) Net income . 1,717 (281) 2,594 (2,221)
In addition, the Company has other joint venture arrangements which are not significant to the Company's results of operations. 9. SUPPLEMENTAL CASH FLOW A summary of supplemental cash flow information follows (in thousands):
Three months ended Nine months ended Sept. 30, Sept. 30, -------------------- ------------------ 2000 1999 2000 1999 ------- ------ ------ ----- Interest paid in cash. . . . . . . . $ 6,460 $ 4,738 $18,040 $12,485 Income taxes paid (received) in cash (18) 54 (1,427) 679 Acquisition of businesses (Note 7): Working capital, except cash . . . - - 300 - Property, plant and equipment and acquisition- related costs . . . . - - 2,800 - Other non-current assets . . . . . - - 4,500 - Acquisition debt . . . . . . . . . - - (2,500) - Stock issuance . . . . . . . . . . - - (3,100) - ---------- -------- ---------- ------- Net cash used . . . . . . . . . $ 0 $ 0 $ 2,000 $ 0 ========= ======== ======= =======
ITEM 2 ABC-NACO INC. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the interim periods included in the accompanying unaudited Consolidated Financial Statements. 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 or groups: 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 20 U.S manufacturing plants in 12 states; plants in Sahagun, Mexico, Mexico City, 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 U.S. states. 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. The Company manages its operations through three reporting segments or groups: 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: Rail Products Freight car and locomotive castings Rail Services and Systems Specialty trackwork, wheel assembly & signal systems Flow and Specialty Products Valve housing and related castings RESULTS OF OPERATIONS - ----------------------- Three Months Ended September 30, 2000 Compared To Three Months September 30, 1999 Net Sales. Consolidated net sales decreased $14.0 million or 10.0% to $131.0 million in the third quarter of 2000. The decline was largely the result of lower demand from car builders and continued reduced spending on maintenance items such as loose wheels by the railroads. The Rail Products Segment was most impacted by these market conditions, as sales in that segment of $54.9 million were $36.0 million or 39.6% lower than the comparable quarter in 1999. Sales within the Rail Services and Systems Segment increased 33.5% to $64.1 million in 2000 from $48.0 million in 1999. The increase versus the same quarter of 1999 is primarily due to the Company's long-term supply agreement with the Union Pacific Railroad to supply and service wheel sets for its North American operations. This agreement took effect in November 1999. Sales within the Flow and Specialty Products Segment increased 9.1% from $18.2 million in 1999 to $19.8 million in 2000. Continued high oil prices has generated additional demand for exploration, which in turn has increased demand for valve bodies sold by this segment. Gross Profit. Consolidated gross profit decreased 63.4% to $8.7 million in 2000 from $23.9 million in 1999. Gross profit reflects continued softness in the Company's core business and one-time period costs associated with the start-up production phase of its Advanced Precision Technology manufacturing process in its Rail Products Segment. Gross profit within the Rail Products Segment decreased $13.1 million to $1.6 million in 2000. Within the Rail Services and Systems Segment, gross profit of $5.0 million was 8.1% lower than 1999. Production inefficiencies in the Track Products portion of this segment impacted overall margins versus 1999. Gross profit within the Flow and Specialty Products Segment declined $1.6 million or 41.9% versus 1999, due largely to reduced needs for higher margin manganese castings that service the Track business, significantly impacting results for one manufacturing facility within the Flow segment. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.6 million or 12.2% versus 1999, due to increased selling efforts in European markets, building the necessary relationships for future sales growth, partially offset by savings from the Company's salaried workforce reduction programs. Merger and Other Restructuring Costs. The Company recorded a restructuring charge of $9.3 million in the quarter ended September 30, 2000 for costs associated with the planned closing of its Melrose Park, Illinois plant ($3.1 million), a reduction of multiple leased facilities in its Keokuk, Iowa operations ($0.6 million) and severance and related benefit costs for permanent salaried and hourly workforce reductions throughout the organization ($5.6 million). An additional $0.5 million provision was recorded in the third quarter related to prior restructuring initiatives, primarily related to the Company's idled facilities in Anderson, Indiana and Cincinnati, Ohio which have not been sold as quickly as initially expected. Refer to Footnote (5) for a more detailed description of these costs. Equity Income of Unconsolidated Joint Ventures. The Company's income from its equity investments in joint ventures improved to $1.0 million in 2000 versus a loss of $0.4 million in 1999. Improving volumes and related earnings in the China wheel business contributed to this gain. Interest Expense. Interest expense, including the effect of capitalizing $0.1 million of interest in 1999, increased $2.1 million to $6.7 million in 2000. This increase was attributable to higher borrowing levels due to slower market conditions and increased borrowing rates. Net Income (Loss). The net loss of $13.1 million including the $6.0 million after-tax restructuring charges for the current period, or $0.69 loss per share (including the effect of preferred stock dividends in 2000), compares to 1999 net income of $3.9 million or $0.21 earnings per share. The preferred stock was issued in March 2000. Nine Months Ended September 30, 2000 Compared To Nine Months September 30, 1999 Net Sales. Year-to-date consolidated net sales of $443.1 million in 2000 is 6.7% lower than 1999 net sales of $475.0 million for the corresponding nine-month period. Significant market softness in the Rail Products Segment was only partially offset by good sales growth, year-to-year, in the Company's other two primary segments. Sales within the Rail Products Segment through nine months decreased 28.8% or $82.9 million to $205.4 million in 2000. The impact of high fuel prices, resulting in reduced spending on maintenance items such as loose wheels by the railroads, have negatively impacted sales within this segment year-to-date. Sales of $203.4 million within the Rail Services and Systems Segment in 2000 were 19.4% higher than 1999 sales of $170.3 million, in part due to the Company's November, 1999, long-term supply agreement with the Union Pacific Railroad to supply and service wheel sets for its North American operations. Increased demand for valve bodies due to additional demand for fuel exploration has resulted in a 22.3% sales increase within the Flow and Specialty Products Segment year-to-year. Sales increased in this segment from $52.1 million in 1999 to $63.7 million in 2000. Gross Profit. Nine-month consolidated gross profit of $50.0 million in 2000 was $15.1 million or 23.2% less than 1999 gross profit due largely to lower sales activity in the Company's core business and costs incurred in the implementation of the Advanced Precision Technology program. Gross profit for the nine-months ended September 30, 2000 included $1.7 million for vendor rebates, compared to none recorded in the comparable period of 1999. Rail Products' gross profit declined $21.1 million or 51.2% to $20.1 million in 2000 from $41.2 million in 1999. Profit shortfalls in this segment reflected low sales volume due to rail supply industry market conditions previously described. Within the Rail Services and Systems segment, gross profit increased 22.2% or $3.6 million to $19.6 million in 2000 versus $16.1 million in 1999. Increased sales contributed to improved margins. Gross profit within the Flow and Specialty Products Segment, also benefiting from increased sales activity, increased to $10.3 million in 2000 versus $7.9 million in 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses are down $1.0 million, or 2.2% year-to-year, reflecting expected operating efficiencies stemming from the Merger, partially offset by planned increased selling effort in Europe. Merger and Other Restructuring Costs. During the nine months ended September 30, 2000, the Company recorded $11.4 million of restructuring charges. In the first quarter of 2000, a charge of $1.6 million was recorded which included cash employee severance costs for 35 salaried employees and 30 hourly plant employees and was part of the Company's long-term effort to eliminate duplicate functions and improve operating efficiencies as a result of the Merger. As of September 30, 2000, all of these employees have been terminated and $1.5 million of related costs were paid. The Company recorded a restructuring charge of $9.3 million in the quarter ended September 30, 2000 for costs associated with the planned closing of its Melrose Park, Illinois plant ($3.1 million), a reduction of multiple leased facilities in its Keokuk, Iowa operations ($0.6 million), additional costs associated with prior restructuring initiatives, and severance and related benefit costs for permanent salaried and hourly workforce reductions throughout the organization ($5.6 million). An additional $0.5 million provision was recorded in the third quarter related to prior restructuring initiatives, primarily related to the Company's idled facilities in Anderson, Indiana and Cincinnati, Ohio which have not been sold as quickly as initially expected. Refer to Footnote (5) for a more detailed description of these costs. The Company incurred a pre-tax charge of $21.9 million in the six months ended June 30, 1999 relative to the direct costs associated with the February 19, 1999 Merger between ABC Rail Products and NACO as well as costs associated with the restructuring of the Track Products Group. The Merger related charge totaled $18.4 million on a pre-tax basis and included advisory fees, employee severance obligations and other general expenses. The Track Products Group's restructuring charge totaled $3.5 million on a pre-tax basis and included costs for shutting down facilities, employee severance obligations and other general expenses. Refer to Footnote (5) for a more detailed description of these costs. Equity Income of Unconsolidated Joint Ventures. The Company's income from its equity investments in joint ventures improved to $2.3 million in 2000 versus a loss of $0.3 million in 1999. Improving volumes in the China wheel business, along with continued earnings from the brake shoe joint venture contributed to this gain, which was mostly realized in the second and third quarter of 2000. Interest Expense. Interest expense, including the effect of capitalizing $0.1 million of interest in 2000 and $0.8 million in 1999, increased $5.8 million to $18.9 million in 2000. This increase was attributable to higher borrowing levels and increased borrowing rates. Extraordinary Item. On February 19, 1999, the Company, in conjunction with the Merger, entered into a new credit facility with a syndicate of financial institutions. This triggered the write-off of unamortized deferred financing balances, make whole payments and early termination fees that resulted form the extinguishment of the old debt. The after-tax charge recorded to account for these items was $3.2 million. Net Loss. Net loss of $13.5 million for the current nine-month period compares favorably to a prior year loss of $17.3 million. The 1999 nine-month results were impacted by a pre-tax charge of $21.9 million for Merger and other restructuring costs and an after-tax extraordinary loss of $3.2 million described above. The 2000 results include a pre-tax charge of $11.4 million of Restructuring Charges. Including the effect of preferred stock dividends in 2000, and Merger related charges and extraordinary losses in 1999 and in 2000, earnings per share in the current nine-month period was a loss of $1.36 versus a loss of $0.95 in the corresponding nine-months of 1999. LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------- For the nine months ended September 30, 2000, net cash used in operating activities totaled $35.9 million compared to net cash used in operating activities of $2.1 million in 1999. The decrease in operating cash flow is due primarily to lower cash earnings and increased working capital levels. The increase in inventory relates to the initial stock levels required in implementing the service agreement with Union Pacific Railroad Company. The Company is starting to see inventory levels decline in the third quarter as it moves beyond the initial implementation stage of the service agreement with Union Pacific Railroad. On October 29, 1999, the Company acquired all outstanding common stock of COMETNA - Companhia Metalurgica Nacional, S.A. (Cometna) located in Lisbon, Portugal for $8.3 million or 674,796 shares 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. On June 23, 2000, the Company acquired certain assets of Donovan Demolition, Inc. ("Donovan") located in Danvers, Illinois. In addition, the Company acquired a patent from a shareholder of Donovan. The total purchase price of $7.6 million for these assets included $2.0 million in cash, a $2.5 million note and 500,000 shares of the Company's common stock valued at $3.1 million. The Donovan bargain purchase amount of $2.6 million has been deducted from the appraised value of property, plant and equipment. Capital expenditures during the nine months ended September 30, 2000 and 1999 were $15.7 million and $32.6 million, respectively. Capital spending for the balance of 2000 will remain at reduced levels versus last year as most of the major initiatives started in 1999 to improve operating processes are completed. In total, capital spending will be approximately $4.0 million less than the Company's full-year original projection of $25.0 million. For nine months ended September 30, 2000 and 1999, net cash provided by financing activities totaled $52.6 million and $34.6 million, respectively. The net increase in 2000 resulted from the Company's issuance of its Series B cumulative convertible preferred stock along in March 2000. Senior Credit Facility - ---------------------- 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 and interest coverage, a 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 September 30, 2000 was 9.74%. Availability at September 30, 2000 was $6.0 million. On October 12, 1999, the Company entered into an Amendment, Waiver and Release Agreement to the Credit Facility 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 Facility that were effective as of October 29, 1999 to modify certain of the financial leverage covenants in the Credit Facility which the Company otherwise would not have been in compliance with as of October 31, 1999. On March 8, 2000, the Company entered into a Second Amendment and Restatement of the Credit Facility that was effective as of December 30, 1999 to modify certain of the financial covenants in the Credit Facility, 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 Facility. The Company and its Lenders also modified other terms and conditions within the Credit Facility including the pricing grid, which is based upon the Company's Consolidated Leverage Ratio. With the Second Amendment and Restatement of the Credit Facility, the Company was in compliance with all covenants under the Credit Facility as of December 31, 1999. On October 30, 2000, the Company entered into a Third Amended and Restated Credit Facility that was effective as of September 30, 2000 to modify certain of the financial covenants in the Credit Facility, which the Company otherwise would not have been in compliance with as of September 30, 2000. The amended covenants included the Maximum Consolidated Leverage Ratio, Maximum Senior Leverage Ratio, Minimum Interest Coverage Ratio and Minimum EBITDA requirement. The amended covenant requirements as of, and for the twelve months ended September 30, 2000, and the actual results, in brackets, were as follows (all as defined): Maximum Consolidated Leverage Ratio - 7.50 (7.35), Maximum Senior Leverage Ratio -5.50 (5.39), Minimum Interest Coverage Ratio - 1.40 (1.53) and Minimum EBITDA - $38.0 million ($38.1 million). The corresponding requirements as of, and for the twelve months ending December 31, 2000 are 7.55, 5.55, 1.30 and $38.0 million, respectively. The amendment modified the covenants through March 31, 2001, at which time the covenants will revert back to the covenants in place pursuant to the March 8, 2000 amendment. The lenders will consider further amendments to the covenants, if necessary, at that time, based on the progress made through that date on the Company's planned non-core asset disposition program. The Company and its lenders also modified other terms and conditions within the Credit Facility including the pricing grid, which continues to be based upon the Company's Consolidated Leverage Ratio. The newly applied margin of 400 basis points over IBOR is the maximum IBOR margin provided for by the Amendment. As a result of the Third Amended and Restated Credit Agreement, the revolving line of credit now has scheduled commitment reductions as follows: January 1, 2001 - $10.0 million, April 1, 2001 - $35.0 million, April 15, 2001 - $15.0 million. These commitment reductions, which will ultimately reduce the revolving Credit Facility commitments to $140.0 million by April 15, 2001, are not expected to materially impair the Company's liquidity or capital resources position, as proceeds realized from the planned disposition of non-core assets (up to 85% of which are required to be used to pay down bank debt) are expected to offset the commitment reductions. The Company will also be assessed a significant cash penalty if outstanding borrowings are not reduced to $175 million by January 31, 2001. Senior Subordinated Notes - ------------------------- 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 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 required to meet a number of financial covenants on its 9 1/8% Notes and 8 3/4% Notes (together the "Notes") including minimum Operating Coverage Ratio, Minimum Consolidated Net Worth and Maximum Funded Debt to Capitalization. On August 3, 2000, the Company commenced a consent solicitation of its Note holders to approve amendments to certain provisions governing the Notes. Those amendments included a revision of the Operating Coverage Ratio requirement to 1.8:1.0 from 2.4:1.0 (including for the twelve month period ended September 30, 2000) and an increase in the interest coupon rate for all Notes to 10 1/2% effective October 1, 2000. The consent solicitation was successfully completed in late September 2000 and resulted in a $0.7 million payment to the Note holders in the form of a consent fee. The fee will be amortized as additional interest expense over the remaining life of the Notes. Other than the annual interest rate, none of the maturity dates, payment provisions, redemption provisions or other similar terms of the Notes were changed. The actual Operating Coverage Ratio at September 30, 2000 was 1.81 versus the amended minimum requirement of 1.80. The funded Debt to Capitalization ratio at September 30, 2000 was 73.7% with the maximum allowable under the Note indenture being 75.0%. These same covenant tests are to be met at the end of each quarter through the maturity dates for these Notes. The Company has experienced continuing softness in the demand for loose wheels and lower than normal sales activity with select other core products due to reduced new freight car production and the railroads' ongoing cut-back of spending on discretionary maintenance and repair items. In addition, the Company recorded a third quarter pre-tax special charge of $9.8 million and anticipates a fourth quarter pre-tax charge of approximately $2.0 million for permanent facility and operational consolidations associated with improved manufacturing process and other changes. While management's forecasts for the next four quarters reflect continued compliance with all of the amended covenants, the earnings impact of the factors described above and the timing and impact of key dispositions of non-core operating assets cannot be easily measured. Accordingly, compliance with these covenants over the ensuing quarters may depend upon further amendments. Failure to meet the Credit Facility's or the Notes' covenant tests would give the respective creditors the unilateral right to accelerate the maturity of the related debt after a requisite cure period. In addition, cross-default provisions under the Credit Facility would be triggered upon a default under the Notes. 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 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. A universal shelf registration was declared effective by the Securities and Exchange Commission on October 29, 1999, for issuances up to $300 million of debt or equity securities. As of September 30, 2000, no securities were issued under the new universal shelf registration. 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 $30.0 million. The preferred stock has voting rights under certain circumstances 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 after March 2003. The net proceeds received from the sale of preferred stock ($28.4 million after offering costs) were applied to reduce the outstanding indebtedness under the Company's 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 offset by $1.6 million of transaction costs, with the $11.9 million credited to additional paid-in capital. 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. Additionally, the preferred stock earned actual dividends of $1.4 million during the nine months ended September 30, 2000. Both the actual and deemed dividends are deducted from the net loss for the three and nine months ended September 30, 2000 to arrive at loss available to common stockholders in the earnings per share calculations for those periods. 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 by the Company. The machinery and equipment built is being stored pending completion of a revised business plan. The total investment to date for this project is $11.6 million. Under its non-core asset disposition program, the Company is in various stages of due diligence discussions with a number of parties. If all the assets under discussion were sold, the Company would experience a significant reduction in its current level of annual revenue. Up to 85% of the net proceeds from these dispositions will be used to redeem outstanding indebtedness. RISK MANAGEMENT - ---------------- Foreign Currency - ----------------- As a Company with multi-national operations, many of the Company's transactions are denominated in foreign currencies. The Company uses financial instruments to mitigate its overall exposure to the effects of currency fluctuations on its cash flows. The Company's policy is not to speculate in such financial instruments for profit or gain. Instruments used as hedges must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the hedging contract. Currently, the Company hedges forecasted transactions relating to its manufacturing operations for its ABC-NACO de Mexico subsidiary located in Sahagun, Mexico and its Cometna subsidiary located in Lisbon, Portugal. At September 30, 2000, the Company had approximately $25.1 million notional value of foreign currency option collar contracts outstanding with expiration dates through March, 2001, hedging manufacturing cost exposures within its ABC-NACO de Mexico subsidiary. The fair market value of these contracts from the Company's perspective was $0.4 million at September 30, 2000. Also at September 30, 2000, the Company had $4.0 million notional value of foreign currency forward contracts outstanding relating to forecasted U.S. dollar transactions within its Cometna, Portugal subsidiary with expiration dates through March, 2001. Interest Rate - -------------- From time to time, the Company enters into various interest rate hedging transactions for purposes of managing exposures to fluctuations in interest rates. Currently, the Company hedges a portion of its exposure to fluctuations in LIBOR interest rates through the use of an interest rate reversion swap. This swap effectively converts a portion of the Company's outstanding credit facility borrowings from a floating LIBOR rate to a fixed rate of interest, up to a maximum trigger point, at which time these borrowings revert back to the floating LIBOR rate of interest. At September 30, 2000, the Company had $25.0 million notional value interest rate reversion swap contracts outstanding. The fair market value of these contracts from the Company's perspective at September 30, 2000 was ($0.3) million. REGARDING FORWARD-LOOKING STATEMENTS - -------------------------------------- This report 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; and the risks described from time to time in the Company's SEC reports. Some of the uncertainties that may affect future results are discussed in more detail in the Company's Annual Report on Form 10-K for the Transition Period ending December 31, 1999. All forward-looking statements included in this document are based upon information presently available, and the Company assumes no obligation to update any forward looking statements. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company has experienced no material changes in its market risk exposure since the filing of its Form 10-K report for the Transition Period ended December 31, 1999. For a further description regarding foreign currency and interest rate hedging risks, refer to the Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operation. Part II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Third Amendment and Restated Credit Facility dated as of October 30, 2000. 27.1 Financial Data Schedule for period ended September 30, 2000. (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABC-NACO Inc. (Registrant) By: J. P. Singsank Senior Vice President and Chief Financial Officer By: Larry A. Boik Vice President and Corporate Controller (Chief Accounting Officer) Date: November 13, 2000 ------------------------- EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ------------------------- 4.1 Third Amendment and Restated Credit Facility dated as of October 30, 2000. 27.1 Financial Data Schedule for quarter ended September 30, 2000. EX-4.1 2 0002.txt THIRD AMENDMENT AND RESTATED CREDIT $200,000,000 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of October 30, 2000 among ABC-NACO INC., ABC-NACO de MEXICO, S.A. de C.V., DOMINION CASTINGS LIMITED, BANK OF AMERICA CANADA, as Canadian Revolving Lender, BANK OF AMERICA NATIONAL ASSOCIATION, as Agent and Letter of Credit Issuing Lender and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO Arranged By BANC OF AMERICA SECURITIES LLC THIRD AMENDED AND RESTATED -------------------------- CREDIT AGREEMENT ---------------- This Third Amended and Restated Credit Agreement (this "Agreement") is entered into as of October 30, 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, as further amended by that certain Amendment to Amended and Restated Credit Agreement dated as of October 29, 1999 and as further amended by that certain Second Amended and Restated Credit Agreement dated as of March 9, 2000 (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 definition of "Permitted Acquisition Reserve" therein in its entirety. (b) 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: ""Available Commitment" as to any Lender, means such Lender's Commitment and as to all Lenders, means the aggregate of such Lenders' Commitment. "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; 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; provided, further, that for periods ending on or prior to December 29, 2000, up to $12,000,000 of additional cash extraordinary items and special charges relating to restructuring changes 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. "Interest Coverage Ratio" means, at any date, the ratio determined by dividing (a) EBITDA by (b) Adjusted Consolidated Interest Expense for the immediately preceding four consecutive fiscal quarters for which the Agent has received financial statements in compliance with Section 7.01; provided, that, with respect to periods ending prior to December 31, 2000, Adjusted Consolidated Interest Expense and EBITDA shall be calculated for the immediately preceding twelve months. "Level" means, and includes, Level I, Level II, Level III, Level IV, Level V, Level VI, Level VII, Level VIII or Level IX whichever is in effect at the relevant time. "Level VII" shall exist at any time the Leverage Ratio is less than 5.5:1.0 but greater than or equal to 5.0:1.0." (c) 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: Level Offshore Rate Base Rate Commitment Fee I 2.00% 1.00% 0.40% II 2.25% 1.25% 0.45% III 2.50% 1.50% 0.50% IV 2.75% 1.75% 0.50% V 3.00% 2.00% 0.50% VI 3.25% 2.25% 0.55% VII 3.50% 2.50% 0.60% VIII 3.75% 2.75% 0.65% IX 4.00% 3.00% 0.70%" (d) Section 1.01 of the Credit Agreement is further amended by inserting the following new definitions in their appropriate alphabetical order: ""Adjusted Consolidated Interest Expense" means, for any period, gross consolidated interest expense for the period (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) for the Company and its Subsidiaries, plus the portion of the up-front costs and expenses for Swap Contracts (to the extent not included in gross interest expense) fairly allocated to such Swap Contracts as expenses for such period, as determined in accordance with GAAP and after giving effect to any Swap Contract then in effect; provided, however, that "Consolidated Interest Expense" shall be calculated after giving effect on a Pro Forma Basis to any reduction to the Commitments arising from the application of proceeds from any disposition of the Designated Non-Core Assets as if such disposition and reduction had occurred on the first day of the applicable period. "Metal Brake Shoe Business" means all the assets and business, including without limitation all equipment, machinery, inventory and fixtures, used or involved in the engineering and manufacturing of metal brake shoes located at the Company's Baltimore, Maryland facility. "Level VIII" shall exist at any time the Leverage Ratio is less than 6.0:1.0 but greater than or equal to 5.5:1.0. "Level IX" shall exist at any time the Leverage Ratio is greater than or equal to 6.0:1.0. "Operating Coverage Ratio" shall have the meaning given such term in that certain Indenture dated as of January 15,1997 between the Company (formerly ABC Rail Products Corporation) and U.S. Bank National Association (successor Trustee to First Trust National Association), as supplemented prior to the date Hereof but without giving effect to any subsequent amendment, waiver or Modification thereof." (e) Section 2.09 of the Credit Agreement is amended by deleting the existing clause (e) therein in its entirety and substituting in lieu thereof the following: "(e) On the Business Day of receipt of the proceeds from the sale or disposition of any Designated Non-Core Assets (other than the Metal Brake Shoe Business), the Company shall prepay the Revolving Loans in an amount equal to 85% of the Net Proceeds realized upon such sale or disposition made by the Company or any of its Subsidiaries in any fiscal year. With respect to the sale or disposition of the Metal Brake Shoe Business or any disposition of property by the Company or any Subsidiary made in reliance on Section 8.02(c), the Company shall prepay the Revolving Loans in an amount equal to 35% of the Net Proceeds realized upon such sale or disposition. Amounts prepaid pursuant to this Section 2.09(e) 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, 2002 shall be applied first to the extent the following dates have not passed to reduce the January 1, 2001 Scheduled Commitment Reduction, second to reduce the April 1, 2001 Scheduled Commitment Reduction, third to reduce the April 15, 2001 Scheduled Commitment Reduction, fourth to reduce the June 30, 2001 Scheduled Commitment Reduction and fifth to reduce the January 1, 2002 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." (f) Section 2.10 of the Credit Agreement is amended by inserting the following in appropriate chronological order in the table appearing in clause (b) thereof: "4/1/01 $35,000,000 4/15/01 $15,000,000" (g) Section 2.10 of the Credit Agreement is further amended by deleting the existing clauses (c) and (d) therein in their entirety and substituting in lieu thereof the following: ""(c) Notwithstanding anything to the contrary herein, the Majority Lenders may waive, postpone or delay the Scheduled Commitment Reduction scheduled for 4/1/01 and 4/15/01. (d) Each reduction of the Commitments pursuant to clause (b) above shall be applied to each Lender in accordance with its Pro Rata Share and the Commitments once reduced may not be increased." (h) Section 8.02 of the Credit Agreement is amended by deleting the "; and" appearing at the end of paragraph (c) therein and inserting in lieu thereof the following: "provided, further, 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 accordance with Section 2.09(e); and" (i) Section 8.04 of the Credit Agreement is amended by deleting clause (ii) of paragraph (f) therein in its entirety and substituting in lieu thereof the following: "(ii) the consideration for any such Acquisition shall not consist of cash or cash equivalents," (j) Effective as of September 30, 2000, Section 8.14 of the Credit Agreement is amended by deleting the table therein in its entirety and substituting in lieu thereof the following: "Period Ratio From and including the last day of the fiscal 7.50:1.0 quarter ended in September, 2000 to but excluding the last day of the fiscal quarter ended in December, 2000 Thereafter, from and including the last day of the 7.55:1.0 fiscal quarter ended in December, 2000 to but excluding the last day of the fiscal quarter ended in March, 2001 Thereafter, from and including the last day of the 7.00:1.0 fiscal quarter ended in March, 2001 to but excluding the last day of the fiscal quarter ended in June, 2001 Thereafter, from and including the last day of the 4.00:1.0 fiscal quarter ended in June 2001 to but excluding the last day of the fiscal quarter ended in March, 2002 Thereafter, from and including the last day of the 3.75:1.0 fiscal quarter ended in March, 2002 to but excluding the last day of the fiscal quarter ended in June, 2002 Thereafter, from and including the last day of the 3.50:1.0 fiscal quarter ended in June, 2002 to but excluding the last day of the fiscal quarter ended in September, 2002 Thereafter 3.25:1.0" (k) Effective as of September 30, 2000, Section 8.15 of the Credit Agreement is amended by deleting the table therein in its entirety and substituting in lieu thereof the following: "Period Ratio From and including the last day of the 5.50:1.0 fiscal quarter ended in September, 2000 to but excluding the last day of the fiscal quarter ended in December, 2000 Thereafter, from and including the last day of the 5.55:1.0 fiscal quarter ended in December, 2000 to but excluding the last day of the fiscal quarter ended in March, 2001 Thereafter, from and including the last day of the 4.50:1.0 fiscal quarter ended in March, 2001 to but excluding the last day of the fiscal quarter ended in June, 2001 Thereafter, from and including the last day of the 3.00:1.0 fiscal quarter ended in June 2001 to but excluding the last day of the fiscal quarter ended in September, 2001 Thereafter, from and including the last day of the 2.75:1.0 fiscal quarter ended in September, 2001 to but excluding the last day of the fiscal quarter ended in December, 2001 Thereafter 2.50:1.0" (l) Effective as of September 30, 2000, Section 8.16 of the Credit Agreement is amended by deleting the table therein in its entirety and substituting in lieu thereof the following: "Period Ratio From and including the last day of the 1.40:1.0 fiscal quarter ended in September, 2000 to but excluding the last day of the fiscal quarter ended in December, 2000 Thereafter, from and including the last day of the 1.30:1.0 fiscal quarter ended in December, 2000 to but excluding the last day of the fiscal quarter ended in March, 2001 Thereafter, from and including the last day of the 1.00:1.0 fiscal quarter ended in March, 2001 to but excluding the last day of the fiscal quarter ended in June, 2001 Thereafter, from and including the last day of the 1.20:1.0 fiscal quarter ended in June 2001 to but excluding the last day of the fiscal quarter ended in September, 2001 Thereafter, from and including the last day of the 2.25:1.0 fiscal quarter ended in September, 2001 to but excluding the last day of the fiscal quarter ended in December, 2001 Thereafter 3.00:1.0" (m) Section 8.19 of the Credit Agreement is amended by deleting the existing provision in its entirety and substituting in lieu thereof the following: "(a) As of the end of any fiscal quarter ended in September, 2000 and December, 2000, the Company shall not permit its EBITDA for the immediately preceding twelve month period to be less than $38,000,000; 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. (b) As of the end of any fiscal quarter ended in March, 2001, the Company shall not permit its EBITDA for the immediately preceding twelve month period to be less than $40,000,000; 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. (c) As of the end of any fiscal quarter ended in June 2001 and thereafter, 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." (n) The Credit Agreement is amended by inserting the following new Section 8.20: "8.20 Operating Coverage Ratio. Effective as of November 30, 2000 and thereafter, the Company will maintain, at the end of each of its fiscal month, an Operating Coverage Ratio with respect to the trailing twelve month period then ended taken as a whole of at least 1.8:1.0." (o) The Credit Agreement is amended by inserting the following new Section 8.21: "8.21 Subordinated Debt. The Company will not modify, supplement or amend any note, debenture, agreement, indenture or any other instrument entered into or issued in respect of the Subordinated Debt without the prior written consent of the Majority Lenders." 2. Covenants. (a) Mortgages. The Company hereby agrees, as soon as possible, but not later than 60 days after the Effective Date, unless otherwise reasonably extended by the Agent, to deliver to the Agent for the benefit of the Lenders: (i) fully executed deeds of trust, mortgages or similar documents (the "Mortgages") in each case in form and substance satisfactory to the Agent, which shall cover the parcels of real property owned by the Borrower identified on Schedule A hereto (the "Mortgaged Property"); (ii) an ATLA Form B (or other form acceptable to the Agent) mortgagee policy of title insurance or a binder issued by a title insurance company satisfactory to the Agent insuring (or undertaking to insure, in the case of a binder) that the Mortgages create and constitute a valid first Lien against the Mortgaged Property in favor of the Agent, with such endorsements and affirmative insurance as the Agent may request; (iii) current ATLA surveys and surveyor's certification as to all Mortgaged Property to the extent reasonably requested by the Agent, each in form and substance satisfactory to the Agent; and (iv) such other documents, instruments and agreements (including Phase I environmental site assessments, if any, and opinions of counsel) relating to the Mortgaged Property as the Agent in its reasonable discretion may request. (b) Field Audit. In accordance with Section 7.10 of the Credit Agreement, the Company, at its own expense, shall cooperate with the Agent and its representatives to complete a field audit of the Company and its Subsidiaries and share the results of the field audit with each of the Lenders. (c) Appraisals. The Company, at its expense, hereby agrees, as soon as possible, but not later than 60 days after the Effective Date, unless otherwise extended by the Agent, to perform or cause to be performed an appraisal on a representative cross-section of machinery, equipment, inventory and real property owned by the Company or its Subsidiaries as shall be determined by the Agent and deliver copies of all such appraisals to the Collateral Agent. (d) Monthly Asset Disposition Report. As soon as available, but not later than 10 days after then end of each fiscal month, the Company shall cause its agent, Robert W. Baird, to deliver to the Agent a report updating the progress and status of any sale or disposition of any Designated Non-Core Asset and covering any other matters relating thereto as requested by the Agent." 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 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) Officer's Certificate. The Agent shall have received a certificate signed by a Responsible Officer of the Company, dated as of the Effective Date, certifying that as of September 30, 2000 the Company was in compliance with the covenants and provisions contained in all notes, debentures, agreements and other instruments entered into or issued in respect of the Subordinated Debt. (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) 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: 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: ABN AMRO BANK N.V., as a Lender By: Name: Title: By: Name: Title: FLEET NATIONAL BANK, as a Lender By: Name: Title: BANK ONE, NA (Main Office Chicago), as a Lender By: Name: Title: FIRSTAR BANK, N.A., as a Lender By: Name: Title: HARRIS TRUST AND SAVINGS BANK, as a Lender By: Name: Title: LASALLE BANK NATIONAL ASSOCIATION, as a Lender By: Name: Title: THE NORTHERN TRUST COMPANY, as a Lender By: Name: Title: PNC BANK, NATIONAL ASSOCIATION, as a Lender By: Name: Title: U.S. BANK NATIONAL ASSOCIATION, as a Lender By: Name: Title: BANK OF AMERICA CANADA, as Canadian Revolving Lender By: Name: Title: Exhibit A-1 REAFFIRMATION OF GUARANTY ------------------------- Each of the undersigned acknowledges receipt of a copy of the Third Amended and Restated Credit Agreement (the "Amendment") dated October __, 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 October __, 2000. NACO, INC. By: Name: Title: ABC RAIL BRAKESHOE HOLDINGS, INC. By: Name: Title: ABC RAIL FRENCH HOLDINGS, INC. By: Name: Title: 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: - ------ Exhibit A-2 REAFFIRMATION OF GUARANTY ------------------------- Each of the undersigned acknowledges receipt of a copy of the Third Amended and Restated Credit Agreement (the "Amendment") dated October __, 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 October __, 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: NATIONAL CASTINGS DE MEXICO, S.A. DE C.V. By: Name: Title: SERVICIOS NATIONAL CASTINGS, S.A. DE C.V. By: Name: Title: EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. This schedule contains summary financial information extracted from the unaudited Consolidated Balance sheets and Consolidated Statements of Operations for the period ended September 30, 2000 and is qualified in its entirety by reference to such financial statements. 1 3-MOS DEC-31-1999 JUL-01-2000 SEP-30-2000 443 0 95,450 0 104,517 228,659 376,534 135,972 527,719 131,785 272,765 0 28,425 199 74,317 527,719 131,043 131,043 122,306 122,306 23,533 0 7,119 (21,915) (8,793) (13,122) 0 0 0 (13,122) (.69) (.69) *Notes and accounts receivable-trade are reported net of allowances for doubtful accounts in the Consolidated Balance Sheets.
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