-----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, Wmp/79N55it8sMy3bt11NZuK8wC2QiCdHhtY9FKsvnoP7uzDQrmyZYtLvtK6oSy5 kFpicM2etESw93TSELrihQ== 0000950131-97-007210.txt : 19971211 0000950131-97-007210.hdr.sgml : 19971211 ACCESSION NUMBER: 0000950131-97-007210 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971210 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABC RAIL PRODUCTS CORP CENTRAL INDEX KEY: 0000913364 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 363499749 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22906 FILM NUMBER: 97735840 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: STE 1300 CITY: CHICAGO STATE: IL ZIP: 60604-2402 BUSINESS PHONE: 3123220360 MAIL ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: 200 S MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60604 10-Q 1 FORM 10-Q DATED 10/31/1997 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 October 31, 1997 0-22906 - --------------------------------- ----------------------- For the Quarter Ended Commission File Number ABC Rail Products Corporation (Exact name of registrant as specified in its charter) Delaware 36-3498749 - --------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 South Michigan Avenue, Chicago, IL 60604-2402 -------------------------------------------------- (Address of principal executive offices) Registrant's telephone number (312) 322-0360 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------------ ------------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 28, 1997 - ---------------------------- -------------------------------- Common Stock, $.01 par value 8,976,304 Shares ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES INDEX
Page ---- Part I Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Unaudited Consolidated Financial Statements 7 - 10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 14 Part II Other Information Item 2 Changes in Securities 15 Item 6 Exhibits and Reports on Form 8-K 15
2 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of October 31, 1997 and July 31, 1997 (In thousands, except share and per share data)
October 31, July 31, ASSETS 1997 1997 - ------ ----------- -------- (unaudited) CURRENT ASSETS: Accounts receivable, less allowances of $1,219 and $1,006, respectively $ 45,454 $ 38,208 Inventories (Note 3) 43,310 46,580 Prepaid expenses and other current assets 3,007 1,964 Prepaid income taxes 713 963 -------- -------- Total current assets 92,484 87,715 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 1,927 1,927 Buildings and improvements 12,491 12,491 Machinery and equipment 85,448 84,653 Construction in progress 44,603 36,421 -------- -------- Less - Accumulated depreciation 144,469 135,492 (39,703) (37,480) -------- -------- Net property, plant and equipment 104,766 98,012 -------- -------- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 15,400 14,684 -------- -------- OTHER ASSETS - net 29,884 30,196 -------- -------- Total assets $242,534 $230,607 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Cash overdrafts $ 5,087 $ 2,991 Current maturities of long-term debt 2,405 3,987 Accounts payable 26,340 26,617 Accrued liabilities 13,396 11,273 -------- -------- Total current liabilities 47,228 44,868 -------- -------- LONG-TERM DEBT, less current maturities 104,041 95,011 -------- -------- DEFERRED INCOME TAXES 5,931 5,881 -------- -------- OTHER LONG-TERM LIABILITIES 4,133 4,351 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 25,000,000 shares authorized; 8,954,082 shares issued and outstanding as of October 31, 1997 and July 31, 1997 90 90 Additional paid-in capital 67,362 67,362 Retained earnings 13,749 13,044 -------- -------- Total stockholders' equity 81,201 80,496 -------- -------- Total liabilities and stockholders' equity $242,534 $230,607 ======== ========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated balance sheets. 3 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended October 31, 1997 and 1996 (Unaudited) (In thousands, except per share data)
Three Months Ended October 31 ------------------------------ 1997 1996 ------- ------- NET SALES $67,885 $55,911 COST OF SALES 61,093 50,538 ------- ------- Gross profit 6,792 5,373 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,622 3,242 ------- ------- Operating income 3,170 2,131 EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES 401 7 INTEREST EXPENSE 2,185 1,275 AMORTIZATION OF DEFERRED FINANCING COSTS 129 53 ------- ------- Income before income taxes 1,257 810 PROVISION FOR INCOME TAXES 552 331 ------- ------- Net income $ 705 $ 479 ======= ======= NET INCOME PER COMMON SHARE $ 0.08 $ 0.06 ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,220 8,297 ======= =======
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 4 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Months Ended October 31, 1997 and 1996 (Unaudited) (In thousands)
Additional Common Paid-in Retained Stock Capital Earnings ------ ---------- -------- BALANCE, July 31, 1996 $83 $55,251 $ 9,062 Net income - - 479 Exercised stock options 1 1,259 - Income tax benefit from exercised stock options - 355 - --- ------- ------- BALANCE, October 31, 1996 $84 $56,865 $ 9,541 === ======= ======= BALANCE, July 31, 1997 $90 $67,362 $13,044 Net income - - 705 --- ------- ------- BALANCE, October 31, 1997 $90 $67,362 $13,749 === ======= =======
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 5 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended October 31, 1997 and 1996 (Unaudited) (In thousands)
Three Months Ended October 31 ------------------- 1997 1996 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 705 $ 479 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity income of unconsolidated joint ventures (401) (7) Depreciation and amortization 3,277 2,725 Deferred income taxes 300 150 Changes in certain assets and liabilities: Accounts receivable - net (7,246) 57 Inventories 3,270 (1,503) Prepaid expenses and other current assets (1,043) (996) Other assets - net (642) (717) Accounts payable and accrued liabilities 1,858 (23) Other long-term liabilities (218) (1) ------- ------- Total adjustments (845) (315) ------- ------- Net cash provided by (used in) operating activities (140) 164 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,083) (6,123) Investment in joint ventures (321) (2,271) ------- ------- Net cash used in investing activities (9,404) (8,394) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in cash overdrafts 2,096 936 Activity under the Credit Agreement: Net activity under revolving line of credit 10,041 4,494 Repayment of acquisition facility - (1,465) Draw on acquisition facility - 1,750 Issuance of other long-term debt - 1,878 Repayment of other long-term debt (2,593) (573) Payment of deferred financing costs - (50) Exercised stock options - 1,260 ------- ------- Net cash provided by financing activities 9,544 8,230 ------- ------- Net change in cash - - CASH, beginning of period - - ------- ------- CASH, end of period $ - $ - ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1,698 $ 1,232 Cash paid for income taxes 39 84
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 6 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation ABC Rail Products Corporation (the "Company") is a leader in the engineering, manufacturing and marketing of replacement products and original equipment for the freight railroad and rail transit industries. The Company's products include specialty trackwork, such as rail crossings and switches; mechanical products, such as rail car, locomotive and idler wheels, mounted wheel sets and metal brake shoes; classification yard products and automation systems; and railway signal systems installation and maintenance services. The accompanying unaudited consolidated financial statements include, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the results of operations and financial condition of the Company for and as of the interim dates. Results for the interim period are not necessarily indicative of results for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1997 Annual Report to Stockholders. 2. Business Combinations Effective December 17, 1996, the Company acquired American Systems Technologies, Inc. ("AST") of Verona, Wisconsin for common stock. AST provides railway signal system installation and maintenance to the short line, regional, commuter and transit railroads. As part of the purchase agreement, the prior owners will be issued additional shares of common stock if certain earnings goals are met over the next three years. For the three months ended October 31, 1997, the issuance of such contingent shares, based on AST's current level of earnings, has been assumed in the earnings per share computations. This acquisition was accounted for under the purchase method of accounting. Accordingly, certain recorded assets and liabilities of AST were revalued to estimated fair market values as of the acquisition date. Management has used its best judgment and available information in estimating the fair market value of those assets and liabilities. Any changes to these estimates are not expected to be material. The operating results of AST are included in the consolidated statement of operations from the date of acquisition. 7 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for substantially all inventories. Inventory costs include material, labor and manufacturing overhead. Supplies and spare parts primarily consist of manufacturing supplies and equipment replacement parts. Inventories at October 31, 1997, and July 31, 1997, consisted of the following (in thousands):
October 31, July 31, 1997 1997 ----------- -------- Raw materials $23,629 $27,734 Work in process 9,096 8,575 Finished goods 6,246 5,983 Supplies and spare parts 4,339 4,288 ------- ------- $43,310 $46,580 ======= =======
4. Debt On November 15, 1996, the Company filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to $100 million of Subordinated Debt Securities and/or shares of its Common Stock. On February 1, 1997, the Company completed an offering (the "Offering") of $50 million of 9-1/8% Senior Subordinated Notes (the "Notes"). The Company used the $47.9 million of net proceeds of the Offering to repay certain outstanding indebtedness under its primary and other credit facilities. A $0.3 million extraordinary after-tax loss was recognized in the third quarter of fiscal year 1997 upon the early retirement of this indebtedness. Financing costs of $2.2 million were deferred in connection with the issuance of the Notes. The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company and other liabilities of the Company's subsidiaries. The Notes will mature in 2004, unless repurchased earlier at the option of the Company after January 15, 1999 at 102% of face value prior to January 14, 2000, or at 100% face value thereafter. The Notes are subject to mandatory repurchase or redemption prior to maturity upon a Change of Control (as defined). The Indenture under which the Notes were issued subjects the Company to various financial covenants which, among other things, require the Company to maintain (all as defined) (i) a minimum Consolidated Net Worth, (ii) a minimum Operating Coverage Ratio and (iii) a maximum Funded Debt to Consolidated Capitalization Ratio and limits the Company's ability to (i) incur additional indebtedness, (ii) complete certain mergers, consolidations and sales of assets, and (iii) pay dividends or other distributions. The Company was in compliance with all of its covenants under this obligation as of October 31, 1997. 8 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Prior to the Offering, the Company's primary credit facilities included a five year credit agreement (the "Credit Agreement") and two term loans. The Credit Agreement included a $15.0 million non-amortizing term loan, a $50.0 million (as amended) revolving credit line and a $17.8 million (as amended) acquisition facility. Simultaneous with the consummation of the Offering, the Company amended and restated the Credit Agreement. Under the amended Credit Agreement (i) the non-amortizing term loan and the acquisition facility that existed under the Credit Agreement were paid in full and canceled, (ii) the revolving credit line that existed under the Credit Agreement was increased to $90 million and (iii) the terms of certain financial covenants were modified. The modified financial covenants under the amended Credit Agreement are similar to those under the Notes Indenture. The Company was in compliance with the new debt covenants as of October 31, 1997, except for the limitation on Capital Expenditures, for which a waiver was obtained. Interest on all amounts borrowed under the amended Credit Agreement is payable at the option of the Company at either the base rate (as defined) plus 0.5%, or LIBOR (as defined) plus 2.0% and is payable monthly while the base rate is in effect or every one to six months while the LIBOR rate is in effect. As of October 31, 1997, the weighted average interest rate of outstanding borrowings under the Credit Agreement was 8.2%. The Company has pledged as collateral under the Credit Agreement substantially all of its property, plant and equipment, eligible accounts receivable and inventories, intellectual property and capital stock of its subsidiaries. As of October 31, 1997, availability under the amended Credit Agreement was $15.3 million. The Company entered into a seven-year term loan agreement on July 20, 1995, to finance up to $12.5 million of capital expenditures for the rail mill center located in Chicago Heights, Illinois. Through October 31, 1997, $10.8 million had been drawn under this term loan. The term loan is secured by the related fixed assets, bears weighted average interest at 7.4% as of October 31, 1997 and contains financial covenants which require the Company to maintain minimum levels of net worth and a minimum fixed charge coverage ratio. A second, similar term loan was repaid in full with a portion of the proceeds from the Offering. Except for the interest coverage ratio, the Company was in compliance with all of its covenants under the term loan as of October 31, 1997. A waiver was obtained from the lender for the non- compliance on the interest coverage ratio. 9 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Commitments and Contingencies In connection with its formation and the purchase of certain assets and liabilities from the Railroad Products Group of Abex Corporation ("Abex") in 1987, the Company obtained a comprehensive environmental indemnity from Abex. The indemnity covers environmental conditions, whether or not then known, in existence at the time of purchase, without dollar or time limit. In October, 1994, the Company filed suit against Abex which asserts that Abex is required to indemnify the Company for the reduction in value of one of the sold properties (a Pennsylvania manufacturing facility formerly owned by the Company) caused by the environmental contamination at that site. The Company is also a party to various other legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's business, financial condition or results of operations. 6. China Joint Venture In May 1996, the Company entered into a joint venture agreement with China's Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The joint venture will manufacture wheels in China primarily for the rapidly growing Chinese railway markets. The Company's contribution of its 40% share in the joint venture will consist of technical know-how, expertise and cash. The Company's cash infusion of $9.2 million has been contributed to the joint venture and additional amounts have been deferred in organizing the venture. The cash funding is being used to construct a manufacturing facility which is expected to be operational by mid 1998. 7. Subsequent Events Shortly after the end of the first quarter of fiscal 1998, the Company acquired United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville, Florida for a combination of cash and the Company's common stock totaling $1.4 million. URSG provides independent signal engineering services to the railroad industry. As part of the purchase agreement, the prior owners will be issued additional shares of common stock if certain earnings goals are met over the next three years. This acquisition will be accounted for under the purchase method of accounting. 10 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the interim periods included in the accompanying unaudited Consolidated Financial Statements. RESULTS OF OPERATIONS - --------------------- Three Months Ended October 31, 1997 Compared to Three Months Ended October 31, 1996 Net Sales. Net sales increased 21.4% to $67.9 million from $55.9 million. The increase in sales is due primarily to a general increase in sales in the Track Products Division ($8.6 million). Approximately one-half of the Track Product Division increase is related to the additional sales associated with the December 1996 acquisition of AST. Gross Profit and Cost of Sales. Gross profit increased 26.4% to $6.8 million from $5.4 million. The $1.4 million increase was primarily due to the sales changes discussed above. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.4 million. The small increase in expenses between quarters reflects additional expense in the customer support area (field sales and customer service) to meet the expanding needs of our customers and the additional effort required to support the Company's new information systems (SAP's R/3 enterprise-wide software). Operating Income. Operating income increased 48.3% to $3.2 million from $2.1 million. The increase resulted largely from the 26.4% ($1.4 million) increase in gross profit, offset by the increase in selling, general and administrative expenses ($0.4 million). In addition to these factors, the Company's sales and profits are typically lower during the first half of the Company's fiscal year than during the second half of the fiscal year. See "Seasonality." Other. Equity earnings from unconsolidated joint ventures were $0.4 million during the current quarter primarily due to the Anchor Brake Shoe joint venture established on July 31, 1995. Prior quarter's equity earnings were not significant. Interest expense increased 71.4%, or $0.9 million, due primarily to an overall higher level of outstanding debt to support acquisitions, capital projects and expanding operations, along with the marginally higher interest rate on the new Senior Subordinated Notes. 11 SEASONALITY - ----------- The peak season for installation of specialty trackwork extends from March through October, when weather conditions are generally favorable for installation and, as a result, net sales of specialty trackwork have historically been more concentrated in the period from January through June, a period roughly corresponding to the second half of the Company's fiscal year. In addition, a number of the Company's facilities close for regularly scheduled maintenance in the late summer and late December, which tends to reduce operating results during the first half of the Company's fiscal year. Transit industry practice with respect to specialty trackwork generally involves the periodic shipment of large quantities, which may be unevenly distributed throughout the year. The Company does not expect any significant departure from the historical demand patterns during the present fiscal year ending July 31, 1998. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------- Cash generated from operations, structured borrowings and equity offerings have been the major sources of funds for working capital, capital expenditures and acquisitions. For the three months ended October 31, 1997 and 1996, net cash provided by (used in) operating activities totaled $(0.1) million and $0.2 million, respectively. The decrease in operating cash flow is due primarily to a net increase in working capital items, partially offset by increased recorded earnings. Capital expenditures during the first quarter of fiscal 1998 and 1997 were $9.1 million and $6.1 million, respectively. In May 1996, the Company entered into a joint venture agreement with China's Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The joint venture will manufacture wheels in China primarily for the rapidly growing Chinese railway markets. The Company's contribution of its 40% share in the joint venture will consist of technical know-how, expertise and cash. The Company's total cash infusion of $9.2 million has already been contributed to the joint venture. The cash funding is being used to construct a manufacturing facility which is expected to be operational by mid 1998. Shortly after the end of the first quarter of fiscal 1998, the Company acquired United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville, Florida for a combination of cash and the Company's common stock totaling $1.4 million. URSG provides independent signal engineering services to the railroad industry. As part of the purchase agreement, the prior owners will be issued additional shares of common stock if certain earnings goals are met over the next three years. This acquisition will be accounted for under the purchase method of accounting. For the three months ended October 31, 1997 and 1996, net cash provided by financing activities totaled $9.5 million and $8.2 million, respectively. The increase in financing cash flows is due primarily to the net borrowings under the Credit Agreement to support the reduced cash from operating activities and the increased use of cash for investing activities. 12 On November 15, 1996, the Company filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to $100 million of Subordinated Debt Securities and/or shares of its Common Stock. On February 1, 1997, the Company completed an offering (the "Offering") of $50 million of 9-1/8% Senior Subordinated Notes (the "Notes"). The Company used the $47.9 million of net proceeds of the Offering to repay certain outstanding indebtedness under its primary and other credit facilities. A $0.3 million extraordinary after-tax loss was recognized in the third quarter of fiscal year 1997 upon the early retirement of this indebtedness. Financing costs of $2.2 million were deferred in connection with the issuance of the Notes. The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company and other liabilities of the Company's subsidiaries. The Notes will mature in 2004, unless repurchased earlier at the option of the Company after January 15, 1999 at 102% of face value prior to January 14, 2000, or at 100% face value thereafter. The Notes are subject to mandatory repurchase or redemption prior to maturity upon a Change of Control (as defined). The Indenture under which the Notes were issued subjects the Company to various financial covenants which, among other things, require the Company to maintain (all as defined) (i) a minimum Consolidated Net Worth, (ii) a minimum Operating Coverage Ratio and (iii) a maximum Funded Debt to Consolidated Capitalization Ratio and limits the Company's ability to (i) incur additional indebtedness, (ii) complete certain mergers, consolidations and sales of assets, and (iii) pay dividends or other distributions. The Company was in compliance with all of its covenants under this obligation as of October 31, 1997. Prior to the Offering, the Company's primary credit facilities included a five- year credit agreement (the "Credit Agreement") and two term loans. The Credit Agreement included a $15.0 million non-amortizing term loan, a $50.0 million (as amended) revolving credit line and a $17.8 million (as amended) acquisition facility. Simultaneous with the consummation of the Offering, the Company amended and restated the Credit Agreement. Under the amended Credit Agreement (i) the non- amortizing term loan and the acquisition facility that existed under the Credit Agreement were paid in full and canceled, (ii) the revolving credit line that existed under the Credit Agreement was increased to $90 million and (iii) the terms of certain financial covenants were modified. The modified financial covenants under the amended Credit Agreement are similar to those under the Notes Indenture. The Company was in compliance with the new debt covenants as of October 31, 1997, except for the limitation on Capital Expenditures for which a waiver was obtained. Interest on all amounts borrowed under the Credit Agreement is payable at the option of the Company at either the base rate (as defined) plus 0.5%, or LIBOR (as defined) plus 2.0% and is payable monthly while the base rate is in effect or every one to six months while the LIBOR rate is in effect. As of October 31, 1997, the weighted average interest rate of outstanding borrowings under the Credit Agreement was 8.2%. The Company has pledged as collateral under the Credit Agreement substantially all of its property, plant and equipment, eligible accounts receivable and inventories, intellectual property and capital stock of its subsidiaries. As of October 31, 1997, availability under the amended Credit Agreement was $15.3 million. 13 The Company entered into a seven-year term loan agreement on July 20, 1995, to finance up to $12.5 million of capital expenditures for the rail mill center located in Chicago Heights, Illinois. Through October 31, 1997, $10.8 million had been drawn under this term loan. The term loan is secured by the related fixed assets, bears weighted average interest at 7.4% as of October 31, 1997 and contains financial covenants which require the Company to maintain minimum levels of net worth and a minimum fixed charge coverage ratio. A second, similar term loan was repaid in full with a portion of the proceeds from the Offering. Except for the interest coverage ratio, the Company was in compliance with all of its covenants under the term loan as of October 31, 1997. A waiver was obtained from the lender for the non-compliance on the interest coverage ratio. REGARDING FORWARD-LOOKING STATEMENTS - ------------------------------------ The foregoing contains forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from current expectations due to a number of factors, including general economic conditions; competitive factors and pricing pressures; shifts in market demand; the performance and needs of industries served by the Company's businesses; actual future costs of operating expenses such as rail and scrap steel, self-insurance claims and employee wages and benefits; actual costs of continuing investments in technology; the availability of capital to finance possible acquisitions and to refinance debt; the ability of management to implement the Company's strategy of acquisitions, rebuilding and process improvements; and the risks described from time to time in the Company's SEC reports. 14 Part II OTHER INFORMATION - -------------------------------------------------------------------------------- Item 2 - Changes in Securities Shortly after the end of the first quarter of fiscal 1998, the Company issued 22,222 shares of common stock to the prior owners of United Railway Signal Group, Inc. ("URSG") as part of the consideration paid for the Company's acquisition of URSG. In addition, pursuant to the purchase agreement, the Company agreed to issue additional shares of common stock to the prior owners of URSG if certain earnings goals are met over the next three years. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, for such issuances. Item 6 - Exhibits and Reports on Form 8-K (A) Exhibits 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company (2) 10.1 Amendment No. 2 dated as of October 31, 1997 to the Second Amended and Restated Loan and Security Agreement, dated as of January 3, 1997 among the Company, ABC Deco Inc. and American Systems Technologies, Inc., as borrowers, the financial institutions named therein, as lenders, and American National Bank and Trust Company of Chicago, as agent, as amended by Amendment No. 1 thereto dated as of August 8, 1997. 27.1 Financial Data Schedule. (1) Incorporated by reference to the same numbered exhibit filed with the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on April 13, 1994 (SEC File No. 33-77652). (2) Incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1994 (SEC File No. 0-22906). (B) Reports on Form 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABC RAIL PRODUCTS CORPORATION /s/ D. Chisholm MacDonald ----------------------------------- D. Chisholm MacDonald Executive Vice President -- Administration and Business Development and Chief Financial Officer (Duly authorized Officer and Principal Financial and Accounting Officer) Date: December 10, 1997 ------------------------- 16 EX-10.1 2 AMENDMENT #2 TO LOAN AND SECURITY AGREEMENT Exhibit 10.1 ------------ AMENDMENT NO. 2 AND WAIVER AGREEMENT ------------------------------------ THIS AMENDMENT NO. 2 AND WAIVER AGREEMENT (this "Agreement") is entered into as of October 31, 1997 by and among ABC Rail Products Corporation ("Rail"), ABC Deco Inc. ("Deco"), American System Technologies, Inc. ("AST;" AST, Rail and Deco being the "Borrowers"), the financial institutions named on the signature pages hereto (collectively, the "Lenders") and American National Bank and Trust Company of Chicago, as agent for the Lenders (the "Agent"). RECITALS -------- WHEREAS, the Borrowers, the Lenders and the Agent have entered into that certain Second Amended and Restated Loan and Security Agreement dated as of January 31, 1997 (as heretofore amended, supplemented or otherwise modified, the "Loan Agreement"); WHEREAS, the Borrowers desire that Rail acquire United Railway Signal Group, Inc., a Florida corporation ("United"); WHEREAS, Rail proposes that the acquisition (the "Acquisition") of United be accomplished by merging United with and into ABC Rail Acquisition II Corporation, a Delaware corporation wholly owned by Rail ("Acquisition II Corporation") and that immediately after giving effect thereto Acquisition II Corporation will change its name to "United Railway Signal Group, Inc.;" WHEREAS, Rail further proposes that the Acquisition be consummated pursuant to (1) that certain Plan of Merger dated October 31, 1997 between Acquisition II Corporation and United (the "Merger Agreement") in the form attached as Exhibit A to the Supplemental Agreement referred to below, and (2) that certain Supplemental Agreement dated as of October 31, 1997 among Rail and the shareholders of United (the "Supplemental Agreement") substantially (in every material respect) in the form attached hereto as Exhibit A (the Merger Agreement and Supplemental Agreement being, collectively, referred to as the "Acquisition Agreement"); WHEREAS, United has liabilities under certain bank loan facilities in an aggregate amount not in excess of $235,000 (the "United Bank Debt"); WHEREAS, in order to consummate the Acquisition, the Borrowers have requested that the Agent and the Lenders amend and/or waive certain provisions of the Loan Agreement as provided herein; and WHEREAS, the Agent and the Lenders are willing to enter into this Agreement, but only on the terms and subject to the conditions set forth below; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Terms defined in the Loan Agreement which are used herein shall have the same meaning as are set forth in the Loan Agreement for such terms unless otherwise defined herein. 2. Amendments. Subject to Section 5 below: (a) Subsection 1.1 is hereby amended by adding thereto the following (in appropriate alphabetical order): "Acquisition II" shall mean ABC Rail Acquisition II Corporation, a Delaware corporation. "Old United" shall mean United Railway Signal Group, Inc., a Florida corporation. "United Merger" shall mean that certain Plan of Merger dated October 31, 1997 between Acquisition II and Old United. "United Supplemental Agreement" shall mean that certain Supplemental Agreement dated as of October 31, 1997 among Rail and the shareholders of Old United. (b) Subsection 3.13 is hereby amended by adding after the last sentence thereof the following: "No Borrower or Subsidiary of a Borrower shall hold or possess any raw materials, work-in-process or other inventory owned by a Person other than such Borrower or such Subsidiary as the case may be ("Third Party Goods"), whether on consignment or otherwise, unless (i) the Agent has received prior written notice thereof and such further information relating thereto as it may reasonably request, (ii) all Third Party Goods are at all times segregated from such Borrower's or such Subsidiary's (as the case may be) other property, clearly marked as consigned goods or otherwise non-owned property and maintained in manner so as to be readily identifiable, (iii) all Third Party Goods are excluded from Eligible Inventory and separately reported as such in the Monthly Reports and Collateral Reports of each Borrower (as applicable) and (iv) the value (determined at the lesser of cost, determined in a first-in, first-out basis, or market) of all Third Party Goods for all Borrowers and their Subsidiaries does not exceed $5,000,000 at any one time." (c) Subsection 8.2 is hereby amended by adding after the last word of clause (iv) thereof the following: "and indebtedness owed by Acquisition II to Rail permitted under Subsection 8.4(x)." -2- (d) Subsection 8.4 is hereby amended by adding after the last word of clause (x) thereof the following: "; and an intercompany loan by Rail to its wholly owned subsidiary, Acquisition II, in an amount up to $2,050,000 for the purpose of (1) funding the $1,000,000 cash consideration to be paid pursuant to the United Merger, (2) funding the $550,000 consideration to be paid in connection with certain employment and non-compete agreements pursuant to the United Supplemental Agreement and (3) funding up to $500,000 from time to time of working capital of Acquisition II, provided that such intercompany loan is evidenced by a promissory note duly pledged to Agent to secure payment and performance of Rail's Liabilities" (e) Schedules 6.1, 6.12 and 8.5 to the Loan Agreement are hereby amended and restated in the form of Schedules 6.1, 6.12 and 8.5 hereto. 3. Waivers. Subject to Section 5 below, the Agent and the Lenders hereby waive: (a) the terms of Subsection 8.3 of the Loan Agreement insofar as such terms would be breached by consummation of the Acquisition; provided that the Acquisition is consummated in accordance with the terms of the Acquisition Agreement. (b) the terms of Subsection 8.1 and Subsection 8.2 of the Loan Agreement insofar as such terms would be breached by the existence of the United Bank Debt, provided that immediately after consummating the Acquisition, the United Bank Debt is paid in full and any and all Liens securing the United Bank Debt are unconditionally and completely released; and (c) the terms of Subsection 8.4 of the Loan Agreement insofar as the terms thereof were breached by the investment by Rail of not more than $1,000 in Acquisition II Corporation in order to capitalize and create Acquisition II Corporation, provided that Acquisition II Corporation prior to the merger with United shall have no assets or liabilities of any kind and shall have conducted no business or operations of any kind. 4. Acknowledgment. Subject to Section 5 below, the Agent, the Lenders and the Borrowers acknowledge that immediately after giving effect to the Acquisition in accordance with the terms hereof, United shall constitute a Subsidiary of the Borrower and not an Excluded Subsidiary. -3- 5. Conditions of Effectiveness. Sections 2, 3 and 4 of this Agreement shall become effective as of the date hereof on the date (the "Effective Date") that the Agent has received all of the following documents, each such document to be in form and substance satisfactory to the Agent: (a) eight (8) copies of this Agreement duly executed by each of the parties hereto; (b) eight (8) copies of a Guaranty and Security Agreement duly executed by United substantially in the form of Exhibit B attached hereto; (c) UCC Financing Statements duly executed by Acquisition II (in the name of "ABC Rail Acquisition II Corporation" and "United Railway Signal Group, Inc.") substantially as required by the Agent; (d) eight (8) copies of a Pledge Amendment duly executed by the Borrower substantially in the form of Exhibit C attached hereto; (e) evidence, satisfactory to the Agent, that the United Bank Debt has been paid in full and that any and all Liens securing such indebtedness have been released; (f) the originally executed intercompany note described in Section 2(d) above together with an assignment thereof executed by Rail; (g) eight (8) copies of a Secretary's Certificate duly executed by the corporate secretary of United as to its charter, by-laws, board resolutions and incumbency of relevant officers; and (h) such other documents, certificates, amendments, agreements, opinions, endorsements to title insurance policies and other items as the Agent may reasonably request in connection with this Agreement. 6. Representations, Warranties and Agreements of the Borrowers. (a) Each Borrower represents and warrants that this Agreement and the Loan Agreement as amended hereby, constitute legal, valid and binding obligations of such Borrower and are enforceable against such Borrower in accordance with their terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally or by general equitable principles. (b) Each Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement as amended hereby and after giving effect hereto. -4- Each Borrower hereby agrees that all covenants, representations and warranties made in the Loan Agreement and all other Financing Agreements shall be deemed to have been remade as of the date hereof and (if different) the Effective Date. (c) Each Borrower represents and warrants that as of the date hereof, and (if different) as of the Effective Date, there exists no Default or Event of Default after giving effect to this Agreement and consummation of the transactions contemplated thereby. (d) Promptly after the Effective Date, the Borrowers will cause to be delivered to the Agent: (i) a copy of the executed and final Acquisition Agreement together with a copy of executed and final material agreements and other documents relating thereto, certified as true and complete by an appropriate officer; and (ii) a stock certificate evidencing the shares described in the Pledge Amendment referred to in Section 5(d) above, together with a stock power duly executed by Rail in blank with respect to such pledged stock certificate. 7. Reference to the Effect on the Loan Agreement. (a) On and after the Effective Date, (i) each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import shall mean and be a reference to the Loan Agreement as amended hereby, and (ii) each reference to the Loan Agreement in all other Financing Agreements shall mean and be a reference to the Loan Agreement, as amended hereby. (b) Except as specifically amended above, the Loan Agreement, and all other Financing Agreements and other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Agent or the Lenders, nor constitute a waiver of, or consent to and departure from, any provision of the Loan Agreement, any other Financing Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (without giving effect to conflicts of law principles) of the State of Illinois. 9. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. -5- 10. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery by any party of an executed counterpart hereof by telecopy of similar facsimile transmission shall constitute valid and effective delivery hereof by such party. -6- IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. ABC RAIL PRODUCTS CORPORATION By:_________________________________ Title:______________________________ ABC DECO INC. By:_________________________________ Title:______________________________ AMERICAN SYSTEMS TECHNOLOGIES, INC. By:_________________________________ Title:______________________________ AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, individually and as Agent By:_________________________________ Title:______________________________ -7- BTM CAPITAL CORPORATION By:_________________________________ Title:______________________________ LASALLE NATIONAL BANK By:_________________________________ Title:______________________________ NATIONS BANK OF TEXAS, N.A. By:_________________________________ Title:______________________________ MELLON BANK, N.A. By:_________________________________ Title:______________________________ -8- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUL-31-1998 AUG-01-1997 OCT-31-1997 0 0 45,454 0 43,310 92,484 144,469 39,703 242,534 47,228 104,041 0 0 90 81,201 242,534 67,885 67,885 61,093 61,093 3,221 0 2,314 1,257 552 705 0 0 0 705 0.08 0.08 Notes and accounts receivable - trade are reported net of allowances for doubtful accounts in the Consolidated Balance Sheets.
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