-----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, IXdXtXQrFbt4hyDh3+7Z7qVStVNTWRX5DH6S104en9nkbSxgg59UHnRk91UHxAcw L8Jw7Mtkuh6ZhnrB0tZpZw== 0000950131-01-500981.txt : 20010501 0000950131-01-500981.hdr.sgml : 20010501 ACCESSION NUMBER: 0000950131-01-500981 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABC NACO INC CENTRAL INDEX KEY: 0000913364 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 363498749 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-22906 FILM NUMBER: 1615708 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-K/A 1 d10ka.txt FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No 1 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the year ended December 31, 2000 Commission file number 0-22906 ------------- ABC-NACO INC. (Exact name of registrant as specified in its charter) Delaware 36-3498749 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 335 Eisenhower Lane South Lombard, Illinois 60148 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (630) 792-2010 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock, $.01 par value, held by non-affiliates of the registrant as of April 9, 2001 was $43,666.990. The number of shares of the registrant's common stock, $.01 par value, outstanding as of April 17, 2001 was 19,872,242. PART I This Form 10-K/A (Amendment No. 1) is being filed to amend the annual report on Form 10-K for the fiscal year ended December 31, 2000 (the "Original Form 10-K") which was filed on April 17, 2001. All capitalized terms used in this Form 10-K/A and not defined herein are used herein as defined in the Original Form 10-K. ITEM 1--BUSINESS General ABC-NACO Inc. ("the Company") is a supplier of technologically advanced products and services to the freight railroad industry through its two core business segments: Rail Products and Rail Services and Systems. With four technology centers around the world supporting its 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. Until the sale of the Signal Group within the Rail Services and Systems segment in February 2001, the Company also supplied freight, railroad and transit signaling systems and services. In late 2000, the Company decided to discontinue the operations of its Flow and Specialty Products segment. This segment primarily supplies steel and high alloy valve and related castings for industrial flow control systems. The operating results of this segment have been reflected as discontinued operations in the accompanying statements of operations. On February 19, 1999, ABC Rail Products Corporation ("ABC") consummated a merger ("the Merger") with NACO, Inc. ("NACO"), a privately held Delaware corporation that designed, manufactured and supplied cast steel products for the railroad supply and flow control supply markets. On September 23, 1999, the Company's Board of Directors adopted a resolution to change the Company's fiscal year-end to December 31. The Company had previously been operating on a fiscal year beginning August 1 and ending July 31. The primary reason for the change was to align the Company's fiscal year-end with the calendar-year reporting used by its major customers. This Form 10-K refers to the five-month period, August 1, 1999, through December 31, 1999 as the "Transition Period." The year ended December 31, 2000 is referred to as "2000" and the years ended July 31, 1999 and 1998 are referred to as "fiscal 1999" and "fiscal 1998" respectively. Market Overview and Industry Demand The Merger created a railway supply company positioned to respond to the favorable market trends for this industry sector. For the first time in history, one company could design, produce and assemble the major under carriage components (commonly referred to as a "truck" or "bogie") for freight car systems and the specialty trackwork they run on. Since it is the truck that controls the ride characteristics of the rail car, the ability to study the interaction of the truck components and the track on which it runs is critical to the design and manufacture of proprietary products that improve ride handling characteristics. The benefits to railroads, railcar owners and shippers are: lower wheel wear, faster train speeds, larger hauling capacity, reduced fuel consumption, less track wear, improved life cycle cost, and reduced cargo damage. Using these proprietary design and build concepts, the Company has the ability to deliver truck-specific applications for different customer needs and performance situations. The Company's capabilities directly support the growing trends exhibited by the Class I railroads in the United States. As a result of their recent mergers, they want to reduce their invested capital. This initiative is leading to a decrease in direct ownership of railcars by the railroads. The new railcar owners (utility companies, non-railroad lessors and customers of the railroads) are very interested in the net cost of ownership associated with a railcar. As a result, the Company is able to demonstrate to this new group of car owners that its products will reduce their maintenance cost and allow for heavier loads, thereby decreasing their effective freight cost and minimizing the in-transit damage to their product. As a result, customers specify the Company's products on new car builds or as retrofits to existing railcars. The Class I railroads are also seeking rail supply consolidators that offer sub-assemblies and complete product packages and related services. This initiative is driving the developing trend by the Class I railroads to identify outside service providers for their non-haul activities such as wheel mounting, track panelizing and signal and communication design, installation and maintenance. This trend is evidenced by the Company's late 1999 long-term contract with Union Pacific Railroad Company ("UP") to perform, in conjunction with Gunderson Rail Services, all of the freight car wheel mounting and repair and wheel maintenance services for UP's entire North 2 American rail system. Additionally, the Company entered into a similar long-term service agreement to provide new and reconditioned wheel sets to Kansas City Southern Railway's entire railcar maintenance system on March 6, 2001. Industrywide freight car builds are forecasted to remain steady. While the current build levels are projected to be off the peak levels of the past couple of years, the estimate of 35,000-55,000 cars per year for the next two to three years still represents a reasonable level of new car build activity. More of these cars will be built outside the United States where the Company has major manufacturing facilities. In 2000, approximately 31% of new cars were built in Mexico and Canada. It is estimated that in 2001 about 33% of the railcars will be built in Mexico and Canada. The Company is the only American Association of Railroads ("AAR") approved manufacturer with facilities in all NAFTA countries. That certification provides the Company maximum flexibility to produce its products in its most cost effective facilities. Railroad revenue ton miles (a measure of volume and level of hauling activity on the railroads) continue to increase year over year. This rather inelastic level of activity is a prime driver of approximately 60% of the Company's revenue that is generated by replacement business. Another emerging trend is the move by the European freight railroads to heavier axle loadings, thereby increasing hauling capacity leading to a corresponding decrease in freight hauling expense. The Company has been positioning itself in Europe for a number of years through its European manufacturing facilities, local sales force and region-specific product testing. The February 2001 announcement of an order from Railtrack PLC of freight wagons using the Company's proprietary Axle Motion II suspension system is evidence of this trend. Business Strategy The Company's principal goal has been to achieve continuing sales and earnings growth by capitalizing on and further developing the competitive advantages within its core Business Segments--Rail Products and Rail Services and Systems. The key elements of the Company's strategy for achieving this goal have been to: (1) Build Upon Its Commitment to Technology Leadership through ABC-NACO Technologies The Company believes its commitment to technology differentiates it from its competitors. In recent years, the Company has made substantial investments in attracting, training and retaining highly skilled, technical employees and developing highly engineered products, including its proprietary line of high performance freight car trucks which were first introduced in large-scale commercial applications in the early 1990's. In October 1995, the Company formed NACO Technologies (now ABC-NACO Technologies), a stand-alone research, development and product testing facility in Lombard, Illinois, as the focus of its ongoing technology efforts. Today, ABC-NACO Technologies employs 31 people, including 23 design and engineering professionals who employ state-of-the-art computer-based design and engineering systems and three-dimensional software modeling to identify, test and develop new and enhanced products for the Company's target markets, to improve the Company's existing products, and to enhance the Company's manufacturing processes. The Company believes its commitment to technology has enabled it to become a principal supplier to customers for its products and services. (2) Enhance Existing and Develop New High Performance Proprietary Products The Company's focus in its Business Segments has been and will remain on the development, manufacture and sale, both domestically and internationally, of its wide range of proprietary products. The Company's proprietary products are designed to provide customers with superior performance and lower overall life- cycle costs. For example, the Company believes that the advantages offered by its portfolio of high performance freight car truck ride quality, fuel savings, reduced maintenance costs and longer service life will enable it to maintain and strengthen its competitive position in that market. The Company's Advanced Vehicle Dynamics(TM) design technology has contributed to the Company's leading North American market position in high performance freight car trucks. The Company also has incorporated proprietary patented features into the manufacturing of freight car truck suspension systems and proprietary coupler products employing traditional AAR designs. The Company is expanding this design technology to the development of higher performance freight car wheels and other specialty track products. 3 (3) Continue to Implement Innovative Manufacturing Process Improvements, such as Replicast(R) Technology, Six Sigma and ISO 9000 The Company has improved and intends to continue to improve its manufacturing processes through technological innovation. Its latest improvements enable the Company to design and produce castings with a much greater degree of dimensional accuracy compared with traditional manufacturing processes. Improved proceeses permit the Company to produce precisely dimensioned and lighter weight castings which have the same or improved strength and durability as castings produced with traditional technologies. The Company has implemented a "Six Sigma" initiative which employs statistical measurement techniques in all phases of the Company's design, engineering, customer service and manufacturing processes. The Company's Six Sigma initiative analyzes and statistically measures both the output and the cost of the various processes and procedures employed by the Company in its day-to-day operations. This initiative will permit the Company to optimize the efficiency and minimize the cost of each component part of its operations. The Company also has focused on the development of Replicast(R) ceramic shell casting technology as a potentially superior alternative to sand casting, with potential applications across the Company's Business Segments. ABC-NACO recently launched a commercial production line employing the Replicast(R) ceramic shell technology to produce traditional AAR coupler products after extensive testing and refinement at ABC-NACO Technologies and its Leven casting facility. The Company believes that its Replicast(R) technology will enable it to increase its manufacturing capacity and produce higher quality products at lower prices and with reduced turnaround times. To further support its work-flow processes, the Company has achieved ISO 9001 and 9002 certification at 27 of its facilities. This certification further strengthens the Company's commitment to the quality of its processes. Improvements in its manufacturing processes has allowed the Company more flexibility across facilities. As a result, the Company elected to close its Melrose Park, Illinois operation in 2000 and continues to evaluate production capacity in its remaining facilities to achieve optimal efficiencies and results. (4) Focus on Customer Relationships with Industry Leaders The Company continually strives to be a primary supplier of products it manufactures to customers that are leaders in the railroad industry, principally by capitalizing on the performance and cost features of its products and services. The Company emphasizes its "partnership" role in providing a broad range of high integrity steel castings for all aspects of the customer's operations. As a "partner," the Company works directly with the customer to design the steel casting, build the tooling needed to manufacture the casting, test a sample casting to ensure that it meets the customer's specifications, and manufacture or procure the casting for delivery to meet the customer's production schedule. The Company believes its partnering approach will yield further benefits as its customers continue to consolidate and outsource non-core business activities and reduce the number of their outside suppliers. (5) Capitalize on Low-Cost and Versatile Manufacturing Capabilities, particularly through the Expansion of the Sahagun Facility The Company has made approximately $193.8 million of capital investments (excluding business acquisitions) in its manufacturing facilities and ABC-NACO Technologies during 2000, the Transition Period and for the last three fiscal years ended July 31, 1999. These expenditures have been made principally for product and process improvements designed to maximize the ability of the Company's geographically diverse manufacturing facilities to produce the highest volume of "value-added" products at the lowest possible cost. The Company completed the expansion of its Sahagun, Mexico, facility in 1999 to permit the full range of railroad products offered (excluding locomotive frames) to be produced at that facility; accommodate increased production of railroad products and relocate certain locomotive production to its Sahagun facility from its Keokuk facility in order to produce these products using lower cost methods and to increase capacity available to produce higher margin products at its Keokuk facility. The Company believes that it has the flexibility to shift the manufacturing of its railroad products among its facilities in response to customer demand and cost. The Company's manufacturing operations in Canada, Mexico and the United States give it the flexibility to shift production to the most cost effective facility while, at the same time, allowing it to take advantage of the growing trend of building new railcars in Mexico and Canada. 4 (6) Pursue International Growth Opportunities, especially in the Americas and Europe The Company believes that the expansion of railroad and locomotive suppliers into international markets, primarily Mexico, South America and Europe, may provide significant sales growth opportunities for the Company. The Company is the only producer of freight car trucks and couplers in both Canada and Mexico. In addition, the Company is well-positioned to benefit from new and increased business in Europe as a result of its market development efforts within European markets, its presence in Scotland and in Portugal and its supply relationship in the Czech Republic. In addition, the Company's successful wheel manufacturing venture in China is serving as a platform for other opportunities to support the fast growing needs of the Chinese rail industry. (7) Strategic Alliances, Acquisitions and Selective Disposition of Non-Core Assets The Company continually explores opportunities to enhance its technology base and its marketing and distribution capabilities. In addition, the Company seeks acquisitions of complementary product lines, particularly those that offer potential manufacturing or marketing synergies. Since fiscal 1996, the Company has acquired seven businesses and entered into three ventures which resulted in the Company having initial or expanded operations in the mounted wheel set, retarders, classification yard products and automation systems, engineering and maintenance services businesses and a presence in Mexico and China. Since the Company is a manufacturer and provider of complementary rail-related products and services, it has greater access to railroads' engineering and purchasing departments than companies that offer only a single product line. The Company, therefore, is positioned to effectively market additional products if it were to acquire or develop new product lines. Because the railroad supply industry is highly fragmented, with many private companies manufacturing only single product lines and railroads exiting the component manufacturing business, the Company believes that a variety of acquisition opportunities exist, allowing it to bundle more and more related product sales to its customers. In 2000, the Company initiated a plan to dispose of select non-core assets in order to reduce debt and focus on the strengths within its base businesses. As part of this plan, the Company sold its 50% interest in Anchor Brake Shoe L.L.C. on December 28, 2000. On February 23, 2001 the Company sold its Rail Systems Division, which was part of its Rail Systems and Services segment. The Rail Systems Division provided freight and transit railroads with engineering, design and construction services for signal, communications and train control projects. The majority of the proceeds from the sale of these operations were used to reduce debt. The Company hass also agreed to sell its Flow and Specialty Products business in 2001. The Company continues to evaluate its remaining operations in accordance with this strategic initiative. Recent Developments Current Business Situation The Company has incurred large operating losses since the Merger and has experienced increasing cash flow constraints since the second half of 2000. Some of the Company's businesses have been adversely impacted by several industry issues, including, among other things, a decline in the new railcar building industry, higher fuel costs and general decline in the overall United States economy. Due to these conditions, the Company's financial strength has deteriorated causing negative reactions from vendors and lenders that tend to reduce the Company's operating flexibility. The Company responded to these conditions during 2000 and early 2001 by initiating or completing several restructuring plans, selling non-core business operations and assets and amending various terms under its primary lending agreements. However, the especially difficult operating environment during the fourth quarter of 2000 and the resulting pressure on the Company's financial covenants has resulted in the Company's taking of additional actions in order to improve its long-term viability as a business concern. Some of those actions included: . The Company accepted the resignation of its Chairman and Chief Executive Officer on April 3, 2001. A non-executive director has assumed the responsibility of Chairman and Vaughn W. Makary the Chief Operating Officer and President has been appointed as the new Chief Executive Officer. The Board of Directors, which approved the management change, has charged the new CEO with a mission to quickly implement additional changes within the organization that will return the Company to profitability. In addition, various members of the Board of Directors have been and will continue to provide special consulting services to the Company. . As further described in Note 5, the Company sold its freight, railcar and transit signaling systems and services business for approximately $21.1 million. On April 17, 2001, the Company agreed to sell its Flow and Specialty Products business segment for approximately $24.0 million. A significant portion of the proceeds from these sales were and will be used to permanently reduce outstanding borrowing commitments under the primary bank credit facility (the "Credit Facility"). The buyer of the Flow and Specialty Products businesses is a new company formed by the management of the businesses and investment funds managed by ING Furman Selz Investments ("ING"), preferred stockholders of the Company. . The Company received a commitment from ING and expects approval from the senior lenders for ING to provide the Company with $15 million of secured short-term loans due in January 2002 (the "ING Bridge Notes"). The ING Bridge Notes will rank pari passu with borrowings under the Credit Facility. There will be no requirements to use any portion of the expected net $13.0 million of proceeds from this borrowing to further reduce outstanding borrowings under the Credit Facility. As such, the Company will retain these funds for general corporate purposes, primarily to fund its current working capital needs. The ING Bridge Notes will be repaid with proceeds from the issuance of a new series of redeemable, convertible preferred stock to be purchased by funds managed by ING subject to the completion of a) stockholder approval of such issuance, including the approval to authorize sufficient new common shares to accommodate this transaction and b) the successful amendment of various provisions and covenants under the Notes Indenture. Preferred stock (a) will pay dividends at a rate of 10% per annum payable semi-annually in cash except that the first two year's of dividends shall be paid in April 2003, b) will be convertible at a price equal to $2.50 per share of the Company's common stock, c) will be callable at the Company's option upon certain events and d) will be redeemable at the holder's option at $200 per share plus any accumulated dividends if any in the event of a change in control as defined. Also upon issuance of the preferred stock, ING will receive warrants to purchase 6.0 million shares of the Company's common stock at a price of $0.01 per share. Additional warrants to purchase 750,000 shares of common stock at a price of $0.01 per share will be exercisable for every quarter beginning July 1, 2002 if earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, for the preceding twelve month period is less than $70.0 million and no sale of the company has occurred by the end of such quarters. In any event the holders of additional warrants will not receive more than 6.0 million shares. Effective with the issuance of the ING Bridge Notes, the Series B preferred stock will be exchanged for a new series of preferred stock with a dividend rate of 10%. 40% of previously deferred cash dividends of the Series B will become immediately payable (approximately $1.0 million as of April 2001) and the new preferred stock will become redeemable at the holder's option at $200 per share plus accumulated dividends if any and will be convertible into shares of common stock upon certain change of control situations at a premium conversion rate. Beginning with the issuance of the ING Bridge note, the holders of the new preferred stock will be entitled to nominate three persons to the company's board of directors. . The Company received a commitment from the senior lenders under the Credit Facility to amend that facility. The primary terms of the amendment will include a) a waiver from the senior lenders under the Credit Facility for all financial covenant and other provision violations as of December 31, 2000 and through April 17, 2001, b) shortening the final maturity date of the facility from July 31, 2003 to January 5, 2003, c) allow the ING Bridge Notes, d) maximum aggregate commitments and outstanding borrowings will be permanently reduced to $150 million by April 2002, e) mandatory prepayments and further permanent reductions of maximum commitments are required upon qualifying asset sales, tax refunds, receivables collections, equity and debt issuances (excluding ING series C preferred stock and Bridge Notes) and upon incurrence of Excess Cash Flows, as defined, f) interest rates will be increased, for all borrowings, to prime plus 2.75%, g) certain additional collateral will be required, h) cross default provisions will be modified, including additional provisions regarding the ING Bridge Notes, and i) existing covenants will be replaced by a rolling, quarterly minimum EBITDA covenant, a maximum capital expenditure covenant, and a loan to value covenant, all as defined . An amendment fee of $1.5 million will be due half on the date of the amendment and half at maturity of the amended facility. The senior lenders will also receive warrants to purchase up to two percent, on a fully diluted basis, of the Company's common stock at a deminimis price. The warrants and resulting common shares will be able to be put to the Company at any time at a per share price equal to the greater of a pre-determined fixed price or the market value per share of the Company's common stock. . While the ING Bridge Notes and the Credit Facility amendment are expected to close on May 2, 2001, and all of its future restructuring plans have not been finalized, management has developed preliminary plans to significantly reduce the Company's operating costs. Such plans include, among other things: The sale or extended mothballing of its wheel making facility. A sale, upon terms currently contemplated by the Company, along with a related long-term supply arrangement, would allow the Company access to loose wheels for its wheel shop business at prices lower than its current cost of production at this facility. The additional consolidation of production plants and/or particular product lines to take advantage of utilizing available capacity in certain plants with lower labor and other production costs. Idled plants or manufacturing lines will be sold or held for future use. A significant reduction in selling, general and administrative costs through headcount reductions, in certain cases as a result of the plant consolidations and sales, strict control over variable administrative costs, including certain incentive compensation, and simplification of production processes. In addition, the Company has relocated its corporate headquarters into an existing administration building. A significant reduction in capital spending. Capital spending over the recent years was increased over normal levels for a variety of reasons, most substantially due to the Company investing in new technologies to improve its manufacturing processes and products. As many of those capital programs are now complete, including the new rail milling facility in Illinois and the technology driven process changes at several North American plants, capital spending will decrease to significantly lower levels in 2001 and beyond. With the closing of the agreements and commitments agreed to as of April 17, 2001 and the actions planned for the remainder of the year, management and the Board of Directors of the Company believe that the Company can continue as a business concern and that it will continue to have available financing in place as the Company attempts to return to profitability. Certain economic and other future conditions are not in the Company's control; and, as such, no assurances can be given that the Company will be successful in its efforts to return to profitability. Business Segments The Company conducts its operations through its two core business segments which consist of: Rail Products and Rail Services and Systems. In late 2000, the Company decided to discontinue the operations of its Flow and Specialty Products segment. The Company realigned its segments during the Transition Period to better reflect the organizational and marketing changes that were enacted within the Company. The Company's trackwork product line which previously had been reported as part of the Rail Products segment is now included as part of the Rail Services and Systems segment. The current and historical segment financial information have been restated to reflect these changes. Rail Products. In its Rail Products segment, the Company designs, produces and assembles the major undercarriage components for freight car systems. The segment designs, manufactures and supplies products that primarily relate to freight car trucks, locomotive truck frames and freight car and locomotive couplers and related products. A freight car truck, which consists of two side frames and a bolster, is part of the undercarriage of the freight car and contains the suspension system for the freight car. Each freight car typically consists of two freight car trucks. The trucks hold the axles and wheels in place and support the weight of the freight car. A locomotive truck frame is the undercarriage of the locomotive. Each locomotive has two truck frames which surround the wheels, axles and brakes and support the weight of the locomotive. 5 The segment's wheel making facility manufactures 28, 33, 36 and 38-inch diameter wheels for freight railcars and 40-inch diameter wheels for diesel locomotives. These wheels are made of cast steel and are used in North America and International service. Within a particular size classification, variations exist in flange width and bore size. The railroad industry generally considers wheels as "stock" items for their common sizes and variations. The current uncertainty in interest rate levels, coupled with the recent increase in fuel costs, has resulted in a reduction in new car build activity and cutback in discretionary maintenance and repair spending by the Company's railroad customers. As a result of these events, the Company's loose wheel making facility has significantly reduced productions since late 2000 and has not produced new wheels since mid-February 2001. The Company is currently exploring options for the facility ranging from an extended mothballing of the operation to a potential sale of the plant. The Company's current negotiations to sell the facility, includes a long-term supply agreement with the buyer. The value expected to be received upon such a transaction is dependent on further negotiations and resolution of many factors; however, management expects the value to be received would be in excess of the facility's carrying value. Absent a successful sale of this facility, ultimate realization of the related $35.7 million of net assets (as of March 31, 2001) is dependant upon (among other things) return to more historically normal order levels. However, there can be no assurances that such transactions or conditions will occur or that they will allow for full realization of the assets at this facility. The segment also manufactures various other freight car products that are widely used in the railroad industry. The group is one of only four manufacturers of traditional AAR design couplers (couplers are used to connect freight cars with other freight cars and locomotives), which employ cross- licensed technology owned by the Company and three of its competitors. The Company believes it is one of the largest manufacturers of AAR standard "E" and "F" freight car couplers of the type used on substantially all of the freight cars in North America. The Company also manufactures a line of related freight car products, including articulated connectors, draft gear housings, centerplates and draft sills. For 2000, the Transition Period and fiscal 1999 and 1998, Rail Products segment sales accounted for approximately 52%, 69%, 66% and 57%, respectively, of the Company's sales before inter-company eliminations. Rail Services and Systems. This segment includes the wheel mounting operation, which is primarily a reconditioning service business that re-manufactures, reworks and distributes new and used freight car wheel sets. Freight car wheel sets consist of the wheel, axle and bearing units that are mounted to freight cars. The Company's reconditioning services include inspection and analysis of existing wheel sets to determine necessary replacement parts, re-machining of axle units, replacement and/or re-machining of wheels, and replacement and/or reinstallation of bearings. The Company also supplies new wheel sets. The segment manufactures specialty trackwork to customer specifications, generally for replacement of existing track, in the case of freight railroads, or for replacement and new construction of rail transit systems. The Company's products include track switches and turnouts that divert a train from one track to another; crossings that allow one set of railroad tracks to cross through another; switches that set a track switch in order to divert a train from one track to another; and other trackwork products including guard rails and retarders. Track switches typically serve to divert trains between two tracks. The Company also designs and manufactures more complicated track switches serving three or more route diversions needed to meet switching requirements in areas of high density traffic, such as urban freight yards, passenger terminals and high traffic industrial and port areas. The segment had also designed, assembled, installed and maintained railroad and transit signal systems until the Company sold this business in February 2001. For 2000, the Transition Period and fiscal 1999 and 1998, Rail Services and Systems segment sales accounted for approximately 55%, 41%, 42% and 50%, respectively, of the Company's sales before inter-company eliminations. Of the 2000 sales in this segment, 11% or $29.9 million were from the signaling system business. Flow and Specialty Products (Discontinued Operations). The Flow and Specialty Products group engineers, manufactures and supplies steel and high alloy valve housings and related castings for manufacturers of industrial flow control systems for use in the natural gas, pulp and paper, oil, chemical, waste control and water treatment, and other manufacturing process industries. Because of the corrosive nature of the materials transported through flow control systems in these industries, flow control system manufacturers generally utilize steel and high alloy castings of the type manufactured by the group rather than castings made of other metals. The valve housings and related castings produced by the group generally range in size from 25 pounds to approximately 2,500 pounds and form the outer shell of the valves used in flow control systems manufactured by the group's customers. The group also manufactures cast Manganese steel trackwork components which are sold as part of a track assembly or as replacement parts. In addition, the group produces idler wheels and metal brake shoes. Idlers are secondary wheels that guide the treads on such tracked construction equipment as bulldozers and backhoes. As part of its non-core asset disposition strategy, the Company has agreed to sell its Flow and Specialty Products businesses in 2001. 6 Regulation The AAR promulgates a wide variety of rules and regulations governing, among other things, safety and the design, performance and manufacture of equipment used on freight cars in interchange service throughout the North American railroad system. The AAR's interchange rules define all significant physical and dimensional elements of interchange service freight cars and their key components, including trucks, couplers and wheels. The AAR also certifies railcar builders and component manufacturers that provide equipment for use in interchange service. The AAR specifications are complex and the Company believes that considerable proprietary expertise and information is required to manufacture these products economically. AAR rules require regular quality reviews of facilities used to manufacture freight cars and freight car components. The effect of these regulations is that each manufacturer of railroad products, including the Company, must maintain its certification with the AAR as a freight car component manufacturer, and freight car products sold by that manufacturer must meet AAR standards and be manufactured in an AAR- certified facility. Specialty trackwork products must conform to American Railway Engineering Association ("AREA") specifications in order to be used in the North American freight railroad system. The specifications are complex and their application on different railroads is further specified by each railroad's maintenance-of-way engineering practices. Given these specifications, the Company believes considerable proprietary expertise and information are required to manufacture these products economically. Countries outside of North America also have regulatory authorities that regulate railroad safety, freight car design, and the design, performance and manufacture of component parts for freight cars used on their railroad systems. In addition, certain European countries have created the Union International des Chemins de Fer ("UIC"), whose function is to promulgate regulations for safety matters, including the design and manufacture of freight car equipment used in interchange service on European railroad systems. The Company must obtain and maintain certifications of its product offerings within the various countries in which it markets and sells its products outside of North America. Sales and Marketing The Company pursues an integrated sales and marketing approach that includes senior management, engineering and technical professionals, and sales representatives, all of whom work together to identify and respond to customer needs by developing relationships with customers at all levels. The Company employs a team of sales persons to market the Company's products to existing and potential customers. The Company designates one sales representative to be the account manager for each customer and gives the representative primary responsibility for servicing the customer's needs. Each account manager involves the appropriate senior management and engineering and technical professionals to assist in marketing the Company's products, services and capabilities to the customer. In addition to marketing products directly to its customers, the Company targets selected end users, such as railroads, leasing companies, and utilities, and other owners of freight cars and locomotives to encourage them to specify the Company's products in their orders. The Company also works with end users and owners of freight cars and locomotives to develop products that are customized to their needs. The Company's engineering and technical professionals are actively involved in marketing and customer service, often meeting and working with customers to improve existing products and develop new products and applications. The Company believes the high level of technical assistance in product development, design, manufacturing and testing that it provides to its customers gives it an advantage over its competition. The Company's marketing efforts often go beyond arrangements for specific product purchases. As part of its efforts to develop customer relationships, the Company works with many of its customers on a long-term basis to design and manufacture new products which are customized to their needs. The Company believes that these relationships provide its customers with a stable source of supply, improved product quality and design, and superior customer service. 7 Customers Customers of the Company's Rail Products segment include all of the North American Class I railroads and major owners, builders and lessors of freight cars and locomotives in North America, regional and short-line railroads, as well as rail transit systems and European railroads. Customers for the Rail Services and Systems segment include the North American Class I railroads, regional and short-line railroads, railcar and locomotive manufacturers, and railroad service companies. Customers of the Company's discontinued Flow and Specialty Products segment include manufacturers of industrial flow control systems that are used in the natural gas, pulp and paper, oil, chemical, waste control and water treatment industries. In 2000, sales to the Company's five largest customers accounted for 55.4% of the Company's net sales. The Company's largest customer is Union Pacific Railroad Company which accounted for approximately 26.7% of the Company's continuing net sales in 2000. No other customer accounted for more than 10% of the Company's continuing net sales in 2000. Manufacturing The principal manufacturing activities within Rail Products include the manufacture of cast steel wheels and a wide range of cast steel products. The cast steel wheel manufacturing process consists of the following steps. Various grades of steel scrap are melted in electric furnaces and mixed with certain alloys. Several chemical analyses are performed on each heat to ensure compliance with AAR specifications before the furnace is tapped. The metal is poured into a graphite mold that has been machined for a specific wheel design. The metal solidifies in the mold for a period of time depending on the wheel size and weight. The wheel is then removed from the mold and placed in a controlled cooling chamber. In accordance with AAR specifications, the wheel surfaces are cleaned, heat treated, quenched and tempered. In the last steps of the process, the wheel's critical surfaces are machined and inspected using non- destructive ultrasonic techniques as well as standard gauging methods. Railroad cast steel products are produced in one of three methods, along with forging and fabrication, which shape metal into desired forms. Castings are made by pouring liquid metal into a mold and allowing the metal to cool until it solidifies. Castings can offer significant advantages over forgings and fabrications. A well-designed casting can be lighter, stronger and more stress and corrosion resistant than a fabricated part. Although castings and forgings are similar in several respects, castings are generally less expensive than forgings. Steel is more difficult to cast than iron, copper or aluminum because it melts at higher temperatures, undergoes greater shrinkage as it solidifies, causing the casting to crack or tear if the mold is not properly designed, and is highly reactive with oxygen, causing chemical impurities to form as it is poured through air into the mold. The Company has recently implemented a number of innovative strategic casting initiatives to be used in conjunction with the Company's traditional casting methods which will enable the Company to increase its manufacturing capacity and produce higher quality products at lower costs and with reduced turnaround times. Historically, the Company has primarily used the green sand casting method, but it also uses air-set casting and ceramic shell casting in the manufacture of its products. A summary description of each of these casting methods is set forth below. Green Sand Castings. Certain of the Company's railroad products casting facilities primarily use a "green sand" process to produce the sand molds into which steel is poured to make steel castings. The green sand process, which involves mechanically bonding sand to form molds, is the lowest cost molding process used by the Company and is used principally to produce railroad products castings. Ceramic Shell Casting. The Replicast(R) ceramic shell process involves the manufacture and use of a lightweight, high density polystyrene replica of a cast steel component. The replicas are given a ceramic coating prior to high temperature firing (during which the polystyrene replica is vaporized). The steel is then poured into the ceramic shell, which produces castings that weigh significantly less than those produced by other casting methods and require minimal machining and finishing, which would otherwise add significantly to the final product's total cost. The primary benefits of ceramic shell casting, as compared to traditional casting techniques, include excellent surface finish, consistent repeatability, and a high degree of dimensional accuracy and reduced post-production machining. As a result of the Company's developments in ceramic casting technology, its Leven, Scotland, facility is now able to produce ceramic shell castings from 25 to 550 pounds on over 50 different specifications, including carbon, 8 low alloy and stainless steels, and has become the sole source supplier for ceramic shell manufactured couplers used on the Wabash National's RoadRailer(R) trailer. In June, 1998, the Company successfully completed the first phase of its ceramic shell production lines at the Cicero, Illinois, facility. Air-set Castings. The discontinued Flow and Specialty Products segment primarily uses an air-set process. In this molding process, the sand is chemically-bonded to produce sand molds. Air-set technology produces castings with greater dimensional accuracy and a smoother surface than does the green sand molding process. Through the air-set process, the Company has the ability to produce large quantities of hundreds of different types of castings. In addition, the metallurgical laboratory at the Keokuk facility currently is capable of formulating over 100 different types of steel for production use. The Company believes that the quality and process control procedures it has developed at the Keokuk facility produce castings with fewer internal defects and greater soundness reliability, making them among the most technically advanced air-set casting facilities in the steel casting industry. The principal manufacturing activity with Rail Services and Systems is the manufacture of specialty trackwork. In the manufacture of specialty trackwork, rail and various other steel products are purchased from outside suppliers and machined, fabricated and bolted or welded to cast manganese steel components in accordance with precise design standards. Primary finished products are complete or component parts of switches and crossings. These products are fabricated and packaged at the plant, then shipped by rail or truck to the job site where the end user or contractor assembles and installs them in the right-of-way. Increasingly, the Company assembles switches and crossings at its plants and ships them in "panelized" form to the job site where they are installed, thereby saving the track owners the labor cost of assembling the product on site. Manufacturing operations at the specialty trackwork plants include forging, shearing, sawing, drilling, bending, machining and assembly. Certain cast Manganese components are subjected to an explosion hardening process which increases their useful life. Supply Arrangements The Company has historically entered into a number of supply or product sourcing arrangements with non-U.S. casting facilities which enable the Company to satisfy demand for its products and thereby increase its market share, balance the production of its owned casting facilities and gain economic advantages by shifting production to lower cost, longer lead-time casting facilities. The majority of the products purchased by the Company through its supply arrangements are completed products. The Company currently has supply arrangements with two casting facilities located in San Juan del Rio, Mexico; and Bohurmin, Czech Republic, which provide it with additional manufacturing capacity without significant up-front capital expenditures or ongoing investment by the Company. The Company uses these supply arrangements principally to supplement the manufacturing capacity of its casting facilities. The supply arrangements also provide the Company with an opportunity to better assess whether a casting facility should be considered for possible acquisition by the Company. Through the relationship created by the supply arrangement, the Company gains first-hand experience in all aspects of a casting facility's operations and is, therefore, able to make an informed judgment about the potential benefits of an acquisition. Two examples of this approach are the Company's experiences at the Sahagun, Mexico, facility which, prior to its purchase by the Company in 1996, had supplied products to the Company under a supply arrangement and the Cometna facility in Lisbon, Portugal, which, prior to its purchase by the Company in 1999, had supplied products to the Company under a supply agreement. Competition The Company operates in highly competitive markets and faces significant competition from a limited number of established companies in the United States. The Company has historically experienced limited foreign competition in its product markets, but expects to face increased competition from foreign suppliers of railroad products as it expands the production and sale of its products into other countries. Historically, the Company has experienced limited foreign competition in North America due to the specialized nature of many of its products, the importance of AAR product approvals, AREA specifications and the cost of shipping. Although no single company competes with the Company across all of its product lines, some of the Company's competitors are larger and have greater financial resources than the Company. Competition in the Company's markets is based upon product design and performance, 9 price, quality, on-time delivery, product availability, installation expertise, and customer service and support. The Company believes it is well positioned to compete in all of its served markets, due to its leading market share, technical capability, broad manufacturing base and long-standing customer relationships. In the Rail Products segment, the Company is the second largest U.S. manufacturer of freight railcar and locomotive wheels. In the market for freight railcar and locomotive cast wheels, the Company's primary competitor is Griffin Wheel Company, a subsidiary of Amsted Industries, Inc. The Company also competes with Standard Steel, a division of Freedom Forge Corporation, which manufactures forged wheels. Primary competitors in the manufacture of freight car cast steel products are American Steel Foundries (a division of Amsted Industries Incorporated), Buckeye Steel Castings Co. (a subsidiary of Buckeye Holdings, Inc.) and McConway & Torley Corp. (a subsidiary of Trinity Industries Inc.). The Company's primary competitor in the manufacture of locomotive truck frames is Atchison Casting Corp. In the manufacture of other locomotive castings, the Company has several competitors including Atchison Casting Corp., Racine Steel Castings and several smaller foundries. In the Rail Services and Systems segment, the Company, along with Progress Rail, operate the two largest independent freight car wheel mounting operations in North America. The majority of such wheel mounting operations are currently performed in-house by Class I railroads, except for Union Pacific and Kansas City Southern Railway, which outsource to the Company. The remaining independent wheel mounting market is highly fragmented. The Company is the largest manufacturer of specialty trackwork products in North America, serving all of the Class I railroads and a number of regional and short-line railroads. In specialty trackwork, ABC-NACO competes with a number of North American manufacturers, including Cleveland Track, Voest-Alpine Nortrak Inc., an affiliate of Voest-Alpine Eisenbahn Systemme AG and Progress Rail, a subsidiary of Florida Progress Corporation. Most of these companies' manufacturing facilities are located in the eastern U.S. which gives them a slight competitive shipping advantage in the eastern U.S. markets over the Company's Chicago Heights, Illinois, facility, which serves customers in the eastern U.S. In the Company's opinion, the locations of its specialty trackwork manufacturing facilities in Pueblo, Colorado and Superior, Wisconsin provide it with a competitive advantage with respect to railroads operating in the western U.S. and Canada. In the discontinued Flow and Specialty Products segment, the market is fragmented, and the segment competes with numerous other companies that manufacture the type of steel and high alloy valve housings and related products that the segment produces. The segment's largest competitors in this market are TIC United Corp., Pacific Steel Casting Co., Quality Electric Steel Castings, Inc. and Citation Corp. The segment is the only U.S. manufacturer of metal brake shoes. The Company has agreed to sell this segment in 2001. Order Backlog The Company's backlog at any particular time is affected by a number of factors relating to, among other things, the Company's production schedule and the time at which customers generate purchase orders. Specialty trackwork deliveries generally require lead-times of one to three months. Most specialty trackwork installations occur in the period from March through October. Consequently, deliveries are somewhat seasonal, with order backlog increasing in the spring and decreasing in the late summer. For discussion of quarterly results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Order backlog for wheels is less meaningful because these products have short production lead-times. All order backlog figures include only firm orders for which customers have issued releases for production and delivery and exclude the non-current portion of any long-term supply arrangements. The Company's backlog was $64.6 million and $64.7 million as of December 31, 2000 and December 31, 1999, respectively. The Company expects to fill the majority of its order backlog as of December 31, 2000 during 2001. Intellectual Property The Company relies on a combination of patents, trademark, trade secret and other intellectual property law, confidentiality and nondisclosure agreements and other protective measures to establish and protect its proprietary rights in its intellectual property. However, there can be no assurance that these efforts will be successful, or that 10 others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's proprietary information. The Company currently holds 30 U.S. trademarks and 33 foreign trademarks. The Company holds 64 U.S. patents and 57 foreign patents and has applications pending for 12 U.S. patents, 44 foreign patents, and 6 foreign trademarks. The Company uses a cost-benefit analysis to determine whether the value of patent protection justifies the expense of seeking the protection. The Company believes its intellectual property is a valuable asset of its business and will protect its intellectual property by legal action in appropriate situations. Raw Materials The primary raw materials used by the Company to manufacture its various steel casting products are scrap steel and elements such as Chromium and Manganese, electrical power, natural gas and sand. The Company purchases most of its raw materials in bulk from a small number of suppliers. Certain raw materials which are expensive to transport, such as scrap steel, are purchased by the Company from sources which are located close to the casting facilities where the materials are used. The scrap steel market historically has been a relatively stable market, with ample supply and fairly consistent prices. Although the price of scrap steel can fluctuate, the Company generally has been able to recover cost increases from its customers through a scrap price surcharge which is calculated on a formula basis and is standard industry practice. The Company does not anticipate any difficulty in obtaining sufficient scrap steel and alloys for its manufacturing operations. The Company has experienced occasional difficulties with respect to its supply of electrical power and natural gas. The Company has interruptible power service contracts with its electrical power suppliers, and electrical service at some of its casting facilities is interrupted from time to time, which results in temporary cutbacks in operations at the affected facilities. The principal raw materials for specialty trackwork products are railroad rail and Manganese. The Company purchases rail from various rail manufacturers. In certain instances, the Company purchases rail directly from its railroad customers for whom specialty trackwork is being built, capitalizing on their purchasing economies. Employees As of December 31, 2000, the Company had 4,418 employees approximately 77% of whom are represented by Labor Unions and 13% are in the discontinued Flow and Specialty business. The Company believes that its labor relations are satisfactory. The Company has three-year agreements with its Rail Products employees located in Cicero, Illinois and Calera, Alabama. These agreements expire in 2001 and 2002. A one-year agreement is in place with the Rail Products employees located in Sahagun, Mexico, expiring May 30, 2001. The Company has started negotiations with the employees in Sahagun, Mexico and anticipates entering into a new agreement in the next few weeks. The Company anticipates it will negotiate agreements in 2001 with Rail Products employees in Hamilton, Ontario, Cicero, Illinois (Pattern Shop), and with employees in Glencast, Scotland and Cometna, Portugal. The company has five-year labor agreements in place with its Track Products employees located in Pueblo, Colorado; Superior, Wisconsin and Chicago Heights, Illinois. These agreements expire at varying times in 2003 and 2004. The Company also has a three-year agreement with its Track Products employees located in Crown Point, Indiana that expires in 2002. Three-year agreements are in place with the Flow and Specialty Products employees in Richmond, Texas; Keokuk, Iowa and Baltimore, Maryland. These agreements expire during 2002 and 2003. 11 These 2001 negotiations affect approximately 48% of the Company's employees. Environmental Matters For a description of compliance with environmental matters and of litigation related thereto, see "Part I, Item 3--Legal Proceedings" herein. Segment Reporting Refer to the Company's financial statements included herein, for the required segment and geographical disclosures. 12 ITEM 2--PROPERTIES The Company is in the process of moving its headquarters from Downers Grove, Illinois, to Lombard, Illinois. The Company conducts its operations in 23 principal manufacturing plants. The Company believes its property and equipment is in good condition and suitable for its needs. The Company's principal operating facilities are as follows:
Approximate square Location(1) footage Owned/Leased Description of use - ------------------------------------------------------------------------------------------------------------------ Anderson, Indiana............. 155,000 Owned (2) Manganese steel trackwork castings Ashland, Wisconsin............ 57,000 Owned (3) Specialty trackwork panelizing Baltimore, Maryland........... 61,000 Owned Metal brake shoes Danvers, Illinois............. 10,600 Owned (8) Explosion hardening trackwork manufacturing Danvers, Illinois............. 17,600 Owned (8) Explosion hardening trackwork manufacturing Danvers, Illinois............. 30,000 Owned (8) Explosion hardening trackwork manufacturing Danvers, Illinois............. 12,000 Owned (8) Explosion hardening trackwork manufacturing Danvers, Illinois............. 1,000 Owned (8) Storage Facility Calera, Alabama............... 259,000 Owned Cast railroad wheels Calera, Alabama............... 19,000 Owned Cast railroad wheels Chicago Heights, Illinois..... 182,000 Owned Specialty trackwork rail manufacturing Chicago Heights, Illinois..... 244,000 Owned Specialty trackwork manufacturing Chicago Heights, Illinois..... 21,000 Owned Railroad wheel assembly Cicero, Illinois.............. 700,000 Owned Freight car castings Cincinnati, Ohio.............. 135,000 Owned (4) Specialty trackwork manufacturing Corsicana, Texas.............. 18,000 Owned Railroad wheel assembly Crown Point, Indiana 20,000 Leased Patterns and Specialty Trackwork Hamilton, Ontario, Canada..... 425,000 Owned Freight car and locomotive castings Jacksonville, Florida......... 13,000 Leased (5) Railway signal system assembly Kansas City, Kansas........... 36,000 Leased Railroad wheel assembly Keokuk, Iowa.................. 122,000 Owned (7) Valve housings and related castings Keokuk, Iowa.................. 30,000 Leased (6) Finishing plant Keokuk, Iowa.................. 54,000 Leased (6) Pattern storage facility Keokuk, Iowa.................. 15,000 Owned (2) General offices Keokuk, Iowa.................. 180,170 Leased (7) Flow & Specialty castings Leven, Fife, Scotland......... 213,000 Owned Railway and industrial castings Lewistown, Pennsylvania....... 29,000 Owned Railroad wheel assembly Lisbon, Portugal.............. 520,000 Owned Freight car and locomotive castings Lombard, Illinois............. 30,000 Leased Research & development/product engineering Melrose Park, Illinois........ 240,000 Owned (2) Freight car and locomotive castings Mexico City, Mexico........... 24,000 Leased Railroad wheel assembly Newton, Kansas................ 58,000 Leased (3) Specialty trackwork manufacturing Pueblo, Colorado.............. 111,000 Owned Specialty trackwork manufacturing Richmond, Texas............... 249,000 Leased (7) Manganese steel trackwork casting and idler wheels Sahagun, Hidalgo, Mexico...... 794,500 Owned Freight car and locomotive castings San Bernardino, California.... 65,000 Leased Railroad wheel assembly Superior, Wisconsin........... 94,000 Owned Specialty trackwork manufacturing Verona, Wisconsin............. 13,000 Leased (2) Railway signal system assembly
(1) All locations are in the USA unless otherwise indicated. (2) Facility has been closed and is being marketed for sale or sublease. (3) Facility is leased by the Company in connection with an industrial revenue bond arrangement and pursuant to a lease which grants the Company an option to purchase the facility for a nominal amount. (4) Facility has been closed and was sold in February, 2001. (5) Business sold in February 2001. Lease assumed by buyer. (6) Facility lease expires in 2001. Operations have been consolidated into remaining Iowa properties. (7) Business agreed to be sold in 2001. Buyer will assume leases. (8) Said improvements rest on 5.74 acres of real estate pursuant to a Ground Lease dated June 23, 2000. 13 All of the non-real estate assets located at the Company's owned manufacturing and assembly facilities within the U.S., other than Newton, Kansas, and Ashland, Wisconsin, are pledged as security under the Company's senior credit facility. Real estate assets at the Company's Ashland, Wisconsin, and Superior, Wisconsin, facilities have been pledged to a third party bank as letter of credit provider supporting an outstanding Industrial Revenue Bond. The Company has also pledged its real estate assets at its Hamilton, Ontario facility to a key customer under a "payment-in-kind" credit agreement along with a first priority security interest in the facility's equipment and related motor vehicles. A second priority security interest in this facility's equipment and furniture assets was provided to the Company's senior credit facility lenders. ITEM 3--LEGAL PROCEEDINGS The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur significant cost to comply with such requirements. The Company employs responsible personnel at each facility, along with various environmental engineering consultants from time to time to assist with ongoing management of environmental, health and safety requirements. The Company is also a party to various other legal proceedings arising in the ordinary course of business, none of which is expected in management's opinion, after consultation with legal counsel, to have a material adverse effect, either individually or in the aggregate, on the Company's consolidated, financial position or results of operations. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. 14 ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position - ------------------------------------------------------------------------------------------ Vaughn W. Makary 51 Chief Executive Officer and President John W. Waite 58 Executive Vice President and Chief Administrative Officer J. P. Singsank 54 Senior Vice President and Chief Financial Officer Larry A. Boik 41 Vice President and Corporate Controller Brian L. Greenburg 42 Vice President and Corporate Treasurer Mark F. Baggio 40 Vice President, General Counsel and Secretary
Vaughn W. Makary. Mr. Makary was elected Chief Executive Officer, President and a Director of the Company in April, 2001. Mr. Makary served as President and Chief Operating Officer of the Company from February, 1999 to April, 2001. Mr. Makary served as President and Chief Operating Officer of NACO from 1988 to February, 1999, and as a director of NACO from 1993 to February, 1999. John W. Waite. Mr. Waite has served as Executive Vice President and Chief Administrative Officer of the Company since February, 1999. Mr. Waite served as Executive Vice President and Chief Administrative Officer of NACO from June, 1997 to February, 1999 and as a director of NACO from October, 1993, to February, 1999. From 1989 through June 1997, Mr. Waite was Executive Vice President of NACO. J. P. Singsank. Mr. Singsank has served as Senior Vice President and Chief Financial Officer of the Company since July, 1999. Mr. Singsank served as Vice President of Finance and Chief Accounting Officer for the Company from February, 1999 to July, 1999 and as Corporate Controller for ABC from 1993 to February, 1999. Larry A. Boik. Mr. Boik has served as Vice President and Corporate Controller of the Company since July, 2000. Prior to joining the Company, Mr. Boik held a variety of financial leadership positions within U.S. Can Corporation, a leading international metal and plastic manufacturer of consumer and industrial use containers, dating back to May, 1989. Mr. Boik served as U.S. Can Corporation's Assistant Corporate Controller since October 1997. Mr. Boik also served as Division Controller for FoxMeyer Drug and held an assortment of financial positions with Continental Can dating back to September 1983. Brian L. Greenburg. Mr. Greenburg has served as Vice President and Treasurer of the Company since January 2001. From July 2000 to December 2000, Mr. Greenburg served as Vice President of Finance and Chief Financial Officer for the Company's BuyMetalCastings.com unit. Mr. Greenburg has served as Vice President and Corporate Controller of the Company from February, 1999 to July, 2000. Mr. Greenburg served as Vice President and Corporate Controller of NACO from April, 1998 to February, 1999. From July 1997 to April 1998, Mr. Greenburg served as Vice President and Controller-- Flow Products Group of NACO. From January 1996 to June 1997, Mr. Greenburg served as Vice President of Finance and Chief Financial Officer of Milwaukee Valve Co., Inc. From 1985 to April, 1995, Mr. Greenburg held other various financial positions with NACO. Mark F. Baggio. Mr. Baggio has served as Vice President, General Counsel and Secretary of the Company since July, 1999. From February, 1999, to July, 1999, Mr. Baggio served as the Company's Senior Corporate Counsel. Prior to the Merger, Mr. Baggio was a principal in the law firm of Lison & Griffin P.C. where he worked from 1987 to 1998. Mr. Baggio also served as an auditor with the U.S. General Accounting Office. PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company is traded on The Nasdaq Stock Market's National Market System under the symbol "ABCR." Set forth below are the high and low closing bid prices for the Company's common stock during the periods indicated, as reported by the National Market System. 15
Quarters --------------------------------------------------- First Second Third Fourth ----------- ----------- ---------- ----------- Calendar year Ended December 31, 2000: High............................................ $14.250 $11.625 $ 8.250 $ 7.875 Low............................................. $ 7.313 $ 5.156 $ 4.750 $ 4.625 Transition Period Ended December 31, 1999 (a): High............................................ $20.125 $11.437 N/A N/A Low............................................. $ 8.750 $ 8.000 N/A N/A Fiscal Year Ended July 31, 1999: High............................................ $17.750 $15.750 $15.500 $21.000 Low............................................. $ 8.000 $10.000 $12.000 $12.750
(a) First quarter is the three months ended October 30, 1999 and second quarter represents two months ended December 31, 1999. ITEM 6--SELECTED FINANCIAL DATA On February 19, 1999, the Company consummated a merger (the "Merger") between a wholly owned subsidiary of ABC Rail Products Corporation ("ABC") and NACO, Inc. ("NACO"). As a result of the Merger, each outstanding share of NACO common stock was converted into 8.7 shares of ABC common stock, resulting in the issuance of approximately 9.4 million shares. The Merger was treated as a tax- free reorganization for federal income tax purposes and is accounted for as a pooling-of-interests transaction. The accompanying selected financial data reflect the combined results of ABC and NACO as if the Merger occurred on the first day of the earliest period presented and is based on the fiscal periods described below. Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal year-end was the Sunday closest to March 31. ABC's fiscal year was adopted by the Company as the annual financial reporting period. As permitted under Regulation S-X promulgated by the Securities and Exchange Commission, the year- ends of the two companies have not been conformed for periods prior to fiscal 1999. The financial position of NACO as of June 28, 1998, March 30, 1997, March 31, 1996, and April 2, 1995 and the results of NACO's operations for the twelve months ended June 28, 1998, March 30, 1997, March 31, 1996 and April 2, 1995 are combined with ABC's financial position as of July 31, 1998, 1997, 1996 and 1995 and the results of ABC's operations for the twelve months ended July 31, 1998, 1997, 1996 and 1995, respectively. Accordingly, revenues of $26.5 million and a net loss of $0.1 million, and revenues of $70.3 million and net income of $0.9 million representing NACO's results of operations for July 1998 and the period March 31, 1997 to June 27, 1997, respectively, are excluded from the Company's Consolidated Statements of Operations. As permitted in a pooling-of-interests business combination, the ABC-NACO financial statements reflect certain adjustments to conform the accounting policies of both companies. On September 23, 1999, the Company's Board of Directors adopted a resolution to change the fiscal year-end to December 31 from July 31. The principal reason for the change was to align the Company's year-end with the fiscal year-end of its major customers. Comparable, unaudited results for the twelve months ended December 31, 1999 and the five months ended December 31, 1998 are as follows (in thousands):
Twelve Months Five Months Ended Ended Dec. 31, 1999 Dec. 31, 1998 ----------------- --------------- Net sales $559,046 $242,627 Gross profit 72,186 35,268 Selling, general and administrative expense 55,595 23,764 Operating income (loss) (4,124) 11,504 Income from continuing operations before cumulative effect of accounting change and extraordinary item (19,102) 4,994 Net income (loss) $(20,933) $ 4,684 Earnings per share, after cumulative effect of accounting change, discontinued operations and extraordinary item Basic ($1.14) $ 0.26 Diluted ($1.14) $ 0.25
16
For the For the Year Five Months Ended Ended Dec. 31, 2000 Dec. 31, 1999 ------------------------------ (in thousands, except per share data) Statement of Operations Data: Net sales............................................................ $482,230 $210,277 Cost of sales........................................................ 445,309 187,343 -------- -------- Gross profit....................................................... 36,921 22,934 Selling, general and administrative expenses......................... 61,702 23,223 Nonrecurring losses (gains) (1)...................................... 9,002 (915) -------- -------- Operating income (loss)............................................ (33,783) 626 Settlement of litigation(2).......................................... -- -- Equity (income) loss of unconsolidated joint ventures................ (2,557) (29) Interest expense..................................................... 28,328 9,398 -------- -------- Income (loss) from continuing operations before income taxes, cumulative effect of accounting changes and extraordinary items...... (59,554) (8,743) Provision (benefit) for income taxes................................. 480 (4,296) -------- -------- Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items........................ (60,034) (4,447) Discontinued operations (3).......................................... 3,833 (1,078) Cumulative effect of accounting changes(4)........................... -- -- Extraordinary items(5)............................................... -- -- -------- -------- Net income (loss).................................................. $(56,201) $ (5,525) ======== ======== Per Share Data: Basic: Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items................. $ (3.76) $ (0.24) Net income (loss).................................................. $ (3.57) $ (0.30) Weighted average common shares outstanding......................... 19,641 18,623 Diluted: Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items................. $ (3.76) $ (0.24) Net income (loss).................................................. $ (3.57) $ (0.30) Weighted average common and equivalent shares outstanding.......... 19,641 18,623 Operating Data: Backlog(6)........................................................... $ 64,584 $ 73,577 Depreciation and amortization of continuing operations............... 31,864 12,191 Capital expenditures(7) of continuing operations..................... 17,366 13,381 Balance Sheet Data at period end: Total assets......................................................... $474,123 $492,471 Total debt (including cash overdrafts)............................... 272,113 252,454 Stockholders' equity(8).............................................. 62,109 86,679
For the Year Ended July 31, ----------------------------------------- 1999 1998 1997 1996 ----------------------------------------- (in thousands, except per share data) Statement of Operations Data: Net sales............................................................ $591,396 $541,301 $441,483 $439,506 Cost of sales........................................................ 506,876 464,435 383,716 381,522 -------- -------- -------- -------- Gross profit....................................................... 84,520 76,866 57,767 57,984 Selling, general and administrative expenses......................... 56,005 51,628 44,364 38,941 Nonrecurring losses (gains) (1)...................................... 21,630 -- (1,430) 5,955 -------- -------- -------- -------- Operating income (loss)............................................ 6,885 25,238 14,833 13,088 Settlement of litigation(2).......................................... -- -- -- (2,800) Equity (income) loss of unconsolidated joint ventures................ 66 (1,616) (1,041) 144 Interest expense..................................................... 17,782 13,862 12,620 9,526 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes, cumulative effect of accounting changes and extraordinary items...... (10,963) 12,992 3,254 6,218 Provision (benefit) for income taxes................................. (1,381) 5,390 1,233 2,272 -------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items........................ (9,582) 7,602 2,021 3,946 Cumulative effect of accounting changes(4)........................... (1,620) (1,111) -- 5,205 Discontinued Operations (3).......................................... 3,635 6,176 4,228 -- Extraordinary items(5)............................................... (3,158) -- (310) -- -------- -------- -------- -------- Net income (loss).................................................. $(10,725) $ 12,667 $ 5,939 $ 9,151 ======== ======== ======== ======== Per Share Data: Basic: Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items................. $(0.53) $ 0.43 $0.11 $ 0.23 Net income (loss).................................................. $(0.59) $ 0.71 $0.34 $ 0.54 Weighted average common shares outstanding......................... 18,142 17,850 17,587 16,946 Diluted: Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary items................. $(0.53) $ 0.41 $0.11 $ 0.22 Net income (loss).................................................. $(0.59) $ 0.69 $0.33 $ 0.52 Weighted average common and equivalent shares outstanding.......... 18,142 18,474 18,139 17,576 Operating Data: Backlog(6)........................................................... $114,702 $139,527 $ 93,849 $ 80,671 Depreciation and amortization from continuing operations............. 28,220 20,694 19,186 15,307 Capital expenditures from continuing operations(7)................... 50,609 67,736 44,690 26,548 Balance Sheet Data at period end: Total assets......................................................... $453,821 $423,896 $340,142 $262,568 Total debt (including cash overdrafts)............................... 229,619 208,131 156,927 105,550 Stockholders' equity(8).............................................. 81,557 92,070 78,366 59,852
(1) The 2000 net charge related to (i) costs associated with the planned closing of the Melrose Park facility and additional costs associated with prior restructuring initiatives, (ii) a gain of $3.6 million on the sale of the Company's 50% interest in an unconsolidated joint venture and (iii) an impairment loss on goodwill related to assets held for sale. The Transition Period and fiscal 1999 charges relate to costs and restructuring actions associated with the Merger, as well as costs associated with the restructuring of certain operations within the Rail Systems and Services segment. The fiscal 1997 gain and $2.8 million of the fiscal 1996 charge relate to certain actions taken with respect to the Company's prior Wilsons facility. $3.2 million of the fiscal 1996 charge relates to the closure of a manufacturing facility and the cost of certain reengineering efforts. (2) Represents proceeds from the settlement of a lawsuit against ABEX. (3) Represents net after tax income of the Flow and Specialty Products segment which the Company agreed to sell in 2001. (4) Represents the after-tax cumulative effect of accounting changes whereby, in fiscal 1998, the Company expensed previously capitalized business process reengineering costs; and in fiscal 1999, the Company expensed previously capitalized start-up costs. (5) Represents the after-tax effect of extraordinary charges recognized in connection with the write-off of unamortized deferred financing cost, make- whole payments and termination fees related to the early extinguishment of debt in connection with the refinancing of certain indebtedness in fiscal 1997 and fiscal 1999. (6) Includes only firm orders, as of the end of the fiscal period, for which customers have issued releases for production and delivery, and excludes the non-current portion of any long-term supply arrangements. (7) Excludes expenditures for business acquisitions. (8) Includes $28.4 million of convertible preferred stock at December 31, 2000. 17 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's consolidated financial condition and consolidated results of operation should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein. This discussion contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results expressed in, or implied by, such statements. See "Regarding Forward-Looking Statements." Basis of Presentation On February 19, 1999, the Company consummated a merger (the "Merger") between a wholly owned subsidiary of ABC Rail Products Corporation ("ABC") and NACO, Inc. ("NACO"). As a result of the Merger, each outstanding share of NACO common stock was converted into 8.7 shares of ABC common stock, resulting in the issuance of approximately 9.4 million shares. The Merger was treated as a tax- free reorganization for federal income tax purposes and is accounted for as a pooling-of-interests transaction. The following discussions reflect the combined results of ABC and NACO as if the Merger occurred on the first day of the earliest period described and is based on the fiscal periods described below. Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal year-end was the Sunday closest to March 31. ABC's fiscal year was adopted by the Company as the annual financial reporting period. As permitted under Regulation S-X promulgated by the Securities and Exchange Commission, the year- ends of the two companies have not been conformed for periods prior to fiscal 1999. The results of NACO's operations for the twelve months ended June 28, 1998 are combined with the results of ABC's operations for the twelve months ended July 31, 1998. Accordingly, revenues of $26.5 million and a net loss of $0.1 million, representing NACO's results of operations for July 1998, are excluded from the Company's Consolidated Statements of Operations. As permitted in a pooling-of-interests business combination, the ABC-NACO financial statements reflect certain adjustments to conform the accounting policies of both companies. On September 23, 1999, the Company's Board of Directors adopted a resolution to change the fiscal year-end to December 31 from July 31. The principal reason for the change was to align the Company's year-end with the fiscal year-end of its major customers. The Company realigned its segments during the Transition Period to better reflect the organizational and marketing changes that were enacted within the Company. The Company's trackwork product line which previously had been reported as part of the Rail Products segment is now included as part of the Rail Services and Systems segment. The Company now markets its services for trackwork products to the railroads through one organization headed by one division president. The current and historical segment financial information have been restated to reflect these changes. In 2000, the Company developed a plan to dispose of select non-core assets. As part of this plan, the Company sold its 50% interest in Anchor Brake Shoe LLC in December 2000, its Signal business (included as part of the Rail Services and Systems segment) in February 2001, and has agreed to sell its Flow and Specialty Products segment in 2001. 18 In accordance with Accounting Principles Board Opinion 30, the Flow and Specialty Products segment qualifies for treatment as a discontinued operation. As such, the consolidated statement of operations of the Company for the year ended December 31, 2000, the five months ended December 31, 1999 (the "Transition Period") and all comparable periods presented have been adjusted to reflect this treatment. Recent Developments Current Business Situation The Company has incurred large operating losses since the Merger and has experienced increasing cash flow constraints since the second half of 2000. Some of the Company's businesses have been adversely impacted by several industry issues, including, among other things, a decline in the new railcar building industry, higher fuel costs and general decline in the overall United States economy. Due to these conditions, the Company's financial strength has deteriorated causing negative reactions from vendors and lenders that tend to reduce the Company's operating flexibility. The Company responded to these conditions during 2000 and early 2001 by initiating or completing several restructuring plans, selling non-core business operations and assets and amending various terms under its primary lending agreements. However, the especially difficult operating environment during the fourth quarter of 2000 and the resulting pressure on the Company's financial covenants has resulted in the Company's taking of additional actions in order to improve its long-term viability as a business concern. Some of those actions included: . The Company accepted the resignation of its Chairman and Chief Executive Officer on April 3, 2001. A non-executive director has assumed the responsibility of Chairman and Vaughn W. Makary the Chief Operating Officer and President has been appointed as the new Chief Executive Officer. The Board of Directors, which approved the management change, has charged the new CEO with a mission to quickly implement additional changes within the organization that will return the Company to profitability. In addition, various members of the Board of Directors have been and will continue to provide special consulting services to the Company. . As further described in Note 5, the Company sold its freight, railcar and transit signaling systems and services business for approximately $21.1 million. On April 17, 2001, the Company agreed to sell its Flow and Specialty Products business segment for approximately $24.0 million. A significant portion of the proceeds from these sales were and will be used to permanently reduce outstanding borrowing commitments under the primary bank credit facility (the "Credit Facility"). The buyer of the Flow and Specialty Products businesses is a new company formed by the management of the businesses and investment funds managed by ING Furman Selz Investments ("ING"), preferred stockholders of the Company. . The Company received a commitment from ING and expects approval from the senior lenders for ING to provide the Company with $15 million of secured short-term loans due in January 2002 (the "ING Bridge Notes"). The ING Bridge Notes will rank pari passu with borrowings under the Credit Facility. There will be no requirements to use any portion of the expected net $13.0 million of proceeds from this borrowing to further reduce outstanding borrowings under the Credit Facility. As such, the Company will retain these funds for general corporate purposes, primarily to fund its current working capital needs. The ING Bridge Notes will be repaid with proceeds from the issuance of a new series of redeemable, convertible preferred stock to be purchased by funds managed by ING subject to the completion of a) stockholder approval of such issuance, including the approval to authorize sufficient new common shares to accommodate this transaction and b) the successful amendment of various provisions and covenants under the Notes Indenture. Preferred stock (a) will pay dividends at a rate of 10% per annum payable semi-annually in cash except that the first two year's of dividends shall be paid in April 2003, b) will be convertible at a price equal to $2.50 per share of the Company's common stock, c) will be callable at the Company's option upon certain events and d) will be redeemable at the holder's option at $200 per share plus any accumulated dividends if any in the event of a change in control as defined. Also upon issuance of the preferred stock, ING will receive warrants to purchase 6.0 million shares of the Company's common stock at a price of $0.01 per share. Additional warrants to purchase 750,000 shares of common stock at a price of $0.01 per share will be exercisable for every quarter beginning July 1, 2002 if earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, for the preceding twelve month period is less than $70.0 million and no sale of the company has occurred by the end of such quarters. In any event the holders of additional warrants will not receive more than 6.0 million shares. Effective with the issuance of the ING Bridge Notes, the Series B preferred stock will be exchanged for a new series of preferred stock with a dividend rate of 10%. 40% of previously deferred cash dividends of the Series B will become immediately payable (approximately $1.0 million as of April 2001) and the new preferred stock will become redeemable at the holder's option at $200 per share plus accumulated dividends if any and will be convertible into shares of common stock upon certain change of control situations at a premium conversion rate. Beginning with the issuance of the ING Bridge note, the holders of the new preferred stock will be entitled to nominate three persons to the company's board of directors. . The Company received a commitment from the senior lenders under the Credit Facility to amend that facility. The primary terms of the amendment will include a) a waiver from the senior lenders under the Credit Facility for all financial covenant and other provision violations as of December 31, 2000 and through April 17, 2001, b) shortening the final maturity date of the facility from July 31, 2003 to January 5, 2003, c) allow the ING Bridge Notes, d) maximum aggregate commitments and outstanding borrowings will be permanently reduced to $150 million by April 2002, e) mandatory prepayments and further permanent reductions of maximum commitments are required upon qualifying asset sales, tax refunds, receivables collections, equity and debt issuances (excluding ING series C preferred stock and Bridge Notes) and upon incurrence of Excess Cash Flows, as defined, f) interest rates will be increased, for all borrowings, to prime plus 2.75%, g) certain additional collateral will be required, h) cross default provisions will be modified, including additional provisions regarding the ING Bridge Notes, and i) existing covenants will be replaced by a rolling, quarterly minimum EBITDA covenant, a maximum capital expenditure covenant, and a loan to value covenant, all as defined . An amendment fee of $1.5 million will be due half on the date of the amendment and half at maturity of the amended facility. The senior lenders will also receive warrants to purchase up to two percent, on a fully diluted basis, of the Company's common stock at a deminimis price. The warrants and resulting common shares will be able to be put to the Company at any time at a per share price equal to the greater of a pre-determined fixed price or the market value per share of the Company's common stock. . While the ING Bridge Notes and the Credit Facility amendment are expected to close on May 2, 2001, and all of its future restructuring plans have not been finalized, management has developed preliminary plans to significantly reduce the Company's operating costs. Such plans include, among other things: The sale or extended mothballing of its wheel making facility. A sale, upon terms currently contemplated by the Company, along with a related long-term supply arrangement, would allow the Company access to loose wheels for its wheel shop business at prices lower than its current cost of production at this facility. The additional consolidation of production plants and/or particular product lines to take advantage of utilizing available capacity in certain plants with lower labor and other production costs. Idled plants or manufacturing lines will be sold or held for future use. A significant reduction in selling, general and administrative costs through headcount reductions, in certain cases as a result of the plant consolidations and sales, strict control over variable administrative costs, including certain incentive compensation, and simplification of production processes. In addition, the Company has relocated its corporate headquarters into an existing administration building. A significant reduction in capital spending. Capital spending over the recent years was increased over normal levels for a variety of reasons, most substantially due to the Company investing in new technologies to improve its manufacturing processes and products. As many of those capital programs are now complete, including the new rail milling facility in Illinois and the technology driven process changes at several North American plants, capital spending will decrease to significantly lower levels in 2001 and beyond. With the closing of the agreements and commitments agreed to as of April 17, 2001 and the actions planned for the remainder of the year, management and the Board of Directors of the Company believe that the Company can continue as a business concern and that it will continue to have available financing in place as the Company attempts to return to profitability. Certain economic and other future conditions are not in the Company's control; and, as such, no assurances can be given that the Company will be successful in its efforts to return to profitability. 19 Results of Operations The following discussion compares results of operations for the year ended December 31, 2000 to the comparable twelve-month period ended December 31, 1999. Comparisons are also made for the Transition Period to the five-month period ended December 31, 1998. Fiscal year ended July 31, 1999 results are compared to fiscal year ended July 31, 1998. Consolidated Sales and Gross Profits (Continuing Operations) The following table sets forth consolidated net sales and gross profit data for the periods indicated:
Twelve Year Months Months Years Ended Ended Ended Ended July 31, Dec 31, Dec 31, Transition Dec 31, -------------------- 2000 1999 Period 1998 1999 1998 ------ ----- ------ ---- ------ -------- (dollars in millions) Net sales $482.2 $559.0 $210.3 $242.6 $591.4 $541.3 Gross profit $ 36.9 $ 72.2 $ 22.9 $ 35.3 $ 84.5 $ 76.9 % of Net sales 7.7% 12.9% 10.9% 14.6% 14.3% 14.2%
Consolidated net sales from continuing operations decreased $76.8 million or 13.7% to $482.2 million in 2000 from $559.0 million in the comparable period in 1999. The largest decrease is in the Rail Products segment with increased sales in the Company's other business segments. Reduced spending by the railroads on maintenance items versus historical levels has negatively impacted the rail supply industry in which the Company operates. The Company does not believe this market share. Net sales decreased 13.3% to $210.3 million in the Transition Period from $242.6 million in the comparable period in 1998. Sales within the Rail Systems and Systems segment decreased 17.2% from $103.9 million in 1999 to $86.0 million. This decrease was driven primarily by the weak demand for the group's speciality trackwork products. Sales within the Rail Products segment decreased 6.5% from $155.7 million in the five months ended December 31, 1998 to $145.5 million in the Transition Period. The revenue drop within this segment was primarily attributable to reduced demand from major rail car builders as these customers stopped replenishing inventories of freight railcar components in anticipation of the rail industry's outlook for the coming year. In fiscal 1999, annual net sales increased 9.3% to $591.4 million from $541.3 million in fiscal 1998. In fiscal 1999, the increase was due in part to the ongoing ramp up of the Sahagun, Mexico, facility as well as continued strong market conditions within the Rail Products segment. These conditions were a direct result of a strong domestic economy that increased demand for freight car components and locomotive truck assemblies. Consolidated gross profit of $36.9 million in 2000 is little more than half of the amount in the corresponding 1999 period of $72.2 million. All of the decline is within the Rail Products segment, due largely to a significant decrease in sales as explained above. Gross profit decreased to $22.9 million or 10.9% of sales in the Transition 20 Period from $35.3 million or 14.6% of sales in the comparable period in 1998. Gross profit within the Rail Products segment decreased by $8.6 million from $24.5 million or 15.7% of sales in the five months ended December 31, 1998 to $15.9 million or 10.9% of sales in the Transition Period. The margin within this segment in the Transition Period was impacted by operating variances within the Company's Sahagun, Mexico operation as it continued to ramp up its production during the period, as well as the demand issues described above related to the Company's freight railcar components. Gross profit within the Rail Services and Systems segment decreased by $3.7 million from $11.0 million or 10.6% of sales in the comparable period in 1998 to $7.3 million or 8.5% of sales in the Transition Period. The margin decrease within this segment was attributable to weak demand for the group's specialty trackwork products. Gross profit as a percentage of net sales increased slightly in fiscal 1999 to 14.3% from 14.2% in fiscal 1998. Consolidated SG&A and Operating Income (Continuing Operations) A summary of Selling, General and Administrative ("SG&A") expenses and Operating Income with respective percentages of sales, for the periods indicated, follows:
Twelve Five Year Months Months Years Ended Ended Ended Ended July 31, Dec. 31, Dec. 31, Transition Dec. 31, -------------------- 2000 1999 Period 1998 1999 1998 ---- ---- ------ ---- ---- ---- (dollars in millions) SG&A $ 61.7 $ 55.6 $ 23.2 $23.8 $56.0 $51.6 % of Net sales 12.8% 9.9% 11.0% 9.8% 9.5% 9.5% Operating income (loss)* $(33.8) $ (4.1) $ (0.6) $11.5 $ 6.9 $25.2 % of Net sales (7.0)% (0.7)% (0.4)% 4.7% 1.2% 4.7%
*Includes nonrecurring losses (gains) of $9.0 million, $20.7 million, $(0.9) million, and $21.6 million in 2000, the twelve-months ended December 31, 1999; the Transition Period and fiscal 1999, respectively. Selling, general and administrative expense increased $6.1 million or 11.0% in 2000 to $61.7 million versus $55.6 million in the twelve-month comparable period in 1999. In 2000, the Company increased its provision for doubtful accounts by $6.0 million for certain contract receivables it retained when its Signal business was sold in February 2001. Selling, general and administrative expenses decreased by $0.7 million during the Transition Period from the comparable period in 1998 as a result of merger synergies. Prior to the synergies, SG&A was flat as a percentage of sales in fiscal 1999 and fiscal 1998. Operating loss in 2000 of $33.8 million is eight-fold greater than the $4.1 million loss for the comparable twelve-month period in 1999. Gross profit declines and a $6.0 million provision for doubtful contract receivables resulted in the increased loss year-to-year. Operating income of $0.6 million in the Transition Period compares to operating income of $11.5 million for the corresponding period in 1998. Gross profit declines contributed to the period- to-period loss. Operating income decreased to $6.9 million during fiscal 1999 from $25.2 million in fiscal 1998. Nonrecurring Losses and Gains Nonrecurring losses and (gains) for 2000, the Transition Period and fiscal 1999 consisted of the following (in thousands):
Dec. 31, 2000 Dec. 31, 1999 July 31, 1999 ------------- ------------- ------------- Restructuring charges $10,756 $(915) $12,142 Impairment charge 1,834 -- --
21 Gain on sale of joint venture (3,588) -- -- Merger costs -- -- 9,488 ------- ----- ------- $ 9,002 $(915) [B $21,630 ======= ===== =======
All of the 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 restructuring charges of $10.8 million during 2000 for costs associated with the planned closing of its Melrose Park, Illinois plant ($2.8 million), additional costs associated with prior restructuring initiatives ($1.1 million), and severance and related benefit costs for permanent salaried and hourly workforce reductions throughout the organization ($6.9 million). Due largely to the implementation of improved manufacturing processes in some of its other production facilities, the Company announced the closure of its Melrose Park, Illinois Rail Products facility, and recorded a $2.8 million restructuring charge for related closure costs. Total cash costs associated with the Melrose Park closure include $0.4 million of severance and related benefit costs for approximately 242 hourly and 42 salaried employees (substantially all of whom were terminated during the first quarter of 2001) 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 ceased production at this facility by December 31, 2000, with the building sale to be completed within one year of its vacancy. An additional $1.1 million provision was recorded in 2000 related to prior restructuring initiatives, primarily related to the Company's idled facilities in Anderson, Indiana and Cincinnati, Ohio which were not sold as quickly as initially expected. The Cincinnati facility was sold in February 2001. Planned permanent reductions in employment levels resulted in a charge of $6.9 million, representing cash severance and related benefit costs for approximately 90 salaried employees and 30 hourly plant employees throughout the Company, including its closed Verona, Wisconsin offices, and required cash severance payments made to approximately 340 production employees at the Company's Sahagun, Mexico facility. As of December 31, 2000, $3.2 million of costs have been paid. The majority of the remaining payments occured in the first quarter of 2001, with some payments continuing through 2002 for certain severed employees. During fiscal 1999, the Company recorded $12.1 million of restructuring charges. During the Transition Period, the Company recorded a net credit of $0.9 million, including adjustments of previously-recorded charges based on actual expenses incurred on the related initiatives. The primary components of the net $11.2 million of charges include the consolidation of the corporate activities of the merged companies into one facility and 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 December 31, 2000, all of these employees had been terminated and substantially all 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 were transferred to 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, 22 Wisconsin. This Rail Services and Systems facility closed by December 31, 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 $1.1 million in cash provisions for idle facility and property disposal costs, all of which has been spent as of December 31, 2000. The 2000 impairment charge and gain on sale relate to the Signaling business and Anchor sales, respectively. The fiscal 1999 Merger costs were incurred as a direct result of the Merger for advisory and other professional services. Other The Company's equity income from its investments in joint ventures increased from a loss of $(0.4) million in the twelve-month period ending December 31, 1999 to a $2.6 million gain in 2000. The turnaround in results is due to the success of the Company's joint venture located in China that began producing railcar wheels in November 1998 moving beyond its start up phase. The Company's equity income from its investments in joint ventures decreased from $0.4 million in the five months ended December 31, 1998 to break-even during the Transition Period. Equity income (loss) from unconsolidated joint ventures decreased to a $(0.1) million loss in fiscal 1999 from $1.6 million of income in fiscal 1998. These decreases were primarily attributable to start up costs and initial operating losses generated from the Company's joint venture located in China. Equity earnings other than from the China joint venture are primarily attributable to the venture that the Company sold in December 2000. Interest expense, net of capitalized interest, increased to $28.3 million in 2000 from $20.2 million in the twelve-month period ended December 31, 1999. This increase was attributable to higher borrowing levels to support operations and increased lending rates. Transition Period interest expense increased to $9.4 million from $7.0 million in the comparable period of 1998. This increase resulted from higher borrowing levels required to support the Company's increase in working capital and capital spending programs. Interest expense, net of capitalized interest, increased to $17.8 million during fiscal 1999 from $13.9 million in fiscal 1998. The interest cost increase in fiscal 1999 was primarily attributable to the financing of the Company's Sahagun, Mexico, capacity expansion project as well as the construction of the Rail Mill in Chicago Heights, Illinois. Capitalized interest associated with the financing of new capital projects totaled $0.1 million in 2000, $0.3 in the Transition Period, $2.4 million in fiscal 1999 and $3.9 million in fiscal 1998. The Company's effective tax rates for 2000, the Transition Period, fiscal 1999 and 1998 were 38.8%, 47.4%, 18.4%, and 40.3% respectively. The lower effective tax rate during fiscal 1999 primarily reflects reductions in tax reserves due to the ultimate realization of certain net operating losses. The non-cash effect of an accounting change of $2.6 million ($1.6 million after-tax) in fiscal 1999 represents the write-off, in accordance with Statement of Position 98-5, of previously capitalized start-up costs. In addition, on November 20, 1997, the FASB Emerging Issues Task Force reached a consensus that all companies must write-off previously capitalized business process reengineering costs and expense future costs as incurred. The Company had capitalized certain process reengineering costs in prior fiscal years. In accordance with this consensus, the Company recorded a non-cash charge of $1.8 million ($1.1 million after-tax) in fiscal 1998 to reflect the cumulative effect of this accounting change. On February 19, 1999, the Company, in conjunction with the Merger, entered into a new credit facility with a syndicate of financial institutions. This financing triggered the write-off of unamortized deferred financing costs, make whole payments and early termination fees that resulted from the extinguishment of certain pre-Merger debt. The after-tax charge recorded to account for these items was $3.2 million. Rail Products Segment The following table sets forth, for the periods indicated, Rail Products segment sales before intercompany eliminations and other, gross profit, SG&A and operating income data: 23
Twelve Five Year Months Months Years Ended Ended Ended Ended July 31, Dec. 31, Dec. 31, Transition Dec. 31, ---------------------- 2000 1999 Period 1998 1999 1998 --------- --------- ------------ --------- ------ ------ (dollars in millions) Net sales $252.1 $378.1 $145.5 $155.7 $388.3 $309.8 Gross profit $ 14.0 $ 50.4 $ 15.9 $ 24.5 $ 59.0 $ 39.0 % of Net sales 5.6% 13.3% 10.9% 15.7% 15.2% 12.6% SG&A $ 15.7 $ 16.4 $ 7.5 $ 6.8 $ 15.7 $ 12.9 % of Net sales 6.2% 4.3% 5.1% 4.4% 4.0% 4.2% Operating income (loss) $ (1.7) $ 34.0 $ 8.4 $ 17.7 $ 43.3 $ 26.0 % of Net sales (0.7)% 9.0% 5.8% 11.4% 11.2% 8.4%
Net sales for the Rail Products segment declined $126.0 million or 33.3% to $252.1 million in 2000 as compared to the twelve-month period ended December 31, 1999. The impact of high fuel prices, resulting in reduced spending on maintenance items such as loose wheels by railroads, severely impacted sales in 2000. Rail Products net sales decreased 7% to $145.5 million in the Transition Period from $155.7 million in the comparable period of 1998. Rail Products net sales increased 25% from $309.8 million in fiscal 1998 to $388.3 million in fiscal 1999. In fiscal 1999 and 1998, continued strong demand generated from new railcar and locomotive car builds in addition to the continued ramp up and higher operating efficiencies at the Company's Sahagun, Mexico, facility contributed to the strong year to year sales gains. The revenue drop in the Transition Period was primarily attributable to reduced demand from major railcar builders as these customers stopped replenishing inventories of freight railcar components in anticipation of the rail industry's outlook for the coming year. Gross profit in 2000 of $14.1 million is only 28.0% of the $50.4 million level achieved in the comparable twelve-month period in 1999. Rail Products gross margins reflect the significant market softness experienced throughout the industry. The Company has instituted several cost reduction initiatives, including the closure of its Melrose Park, Illinois facility late in 2000, to mitigate the effects of the market downturn. Gross profit in the Transition Period decreased 35% from $24.5 million in the five months ended December 31, 1998 to $15.9 in the Transition Period. Rail Products gross profit increased 51% to $59.0 million during fiscal 1999 from $39.0 million in fiscal 1998. The Transition Period decline was impacted by the reduced demand from railcar builders that is described above as well as operating variances within its Sahagun, Mexico operation as it continued to ramp up its production during the Transition Period. SG&A declined in 2000 versus the corresponding twelve-month period in 1999 by $0.7 million to $15.7 million. Relative to the depressed sales level in 2000, SG&A increased to 6.2% of net sales in this segment. The Company continues to evaluate its SG&A costs relative to current market conditions and will likely initiate further reductions in this area. During the Transition Period, SG&A as a percentage of sales climbed to 5.1% which corresponded with the segment's revenue decline during the period. SG&A as a percentage of sales held relatively firm during the fiscal 1999 and fiscal 1998 at 4.0% and 4.2%, respectively. Rail Services and Systems Segment The following table sets forth, for the periods indicated, Rail Services and Systems segment sales before intercompany eliminations and other, gross profit, SG&A and operating income data:
Twelve Five Year Months Months Years Ended Ended Ended Ended July 31, Dec. 31, Dec. 31, Transition Dec. 31, --------------------- 2000 1999 Period 1998 1999 1998 --------- --------- ------------ --------- ------ ------
24
(dollars in millions) Net sales $265.5 $229.6 $86.0 $103.9 $247.5 $269.7 Gross profit $ 25.9 $ 22.4 $ 7.3 $ 11.0 $ 26.0 $ 39.8 % of Net sales 9.6% 9.8% 8.5% 10.6% 10.5% 14.8% SG&A $ 10.1 $ 11.2 $ 3.4 $ 5.4 $ 13.2 $ 12.0 % of Net sales 3.8% 4.9% $ 4.0% 5.2% 5.3% 4.5% Operating income $ 15.8 $ 11.2 $ 3.9 $ 5.6 $ 12.8 $ 27.7 % of Net sales 6.0% 4.9% 4.5% 5.4% 5.2% 10.3%
Net sales increased by 15.6% in 2000 to $265.5 million from $229.6 million for the corresponding twelve-month period in 1999. The increase is primarily the result of a full year of wheel mounting services provided to Union Pacific under a contract that began in November 1999. Rail Services and Systems net sales decreased by 17% to $86.0 million in the Transition Period from $103.9 million in the comparable period of 1998. Sales decreased by 8% from $269.7 million in fiscal 1998 to $247.5 million in fiscal 1999. The sales decreases in the Transition Period and fiscal year 1999 were attributable to a downturn in demand for the group's specialty trackwork products from its peak year in fiscal 1998. Rail Services and Systems gross profit increased 15.6% to $25.9 million in 2000 from $22.4 million in the corresponding period of 1999. This is largely due to the increased sales for wheel mounting services. Gross margin as a percent of sales declined in 2000 to 9.6% due to weaker performance in the Company's operations that provide transit rail signal systems, which was sold in February 2001. Rail Services and Systems gross profit decreased by 34% to $7.3 million in the Transition Period from $11.0 million in the comparable period of 1998. Gross profit decreased 35% from $39.8 million in fiscal 1998 to $26.0 million in fiscal 1999. The gross profit decreases in these years were driven by the downturn in demand for the group's trackwork products. SG&A as a percentage of sales dropped to 4.0% during the Transition Period as a result of calendar 1999 restructuring efforts within the group and has remained at that level through 2000. Flow and Specialty Products Segment (Discontinued Operations) In April 2001, the Company agreed to sell the operations of this segment. The following table sets forth, for the periods indicated, Flow and Specialty Products segment sales before intercompany eliminations and other, gross profit, SG&A and operating income data:
Twelve Five Year Months Months Years Ended Ended Ended Ended July 31, Dec. 31, Dec. 31, Transition Dec. 31, -------------------- 2000 1999 Period 1998 1999 1998 ---------- ---------- ----------- ---------- -------- ------- (dollars in millions) Net sales $81.6 $69.9 $29.6 $33.7 $74.1 $93.6 Gross profit $11.7 $ 8.6 $ 2.1 $ 4.0 $10.5 $14.7 % of Net Sales 14.3% 12.3% 7.1% 11.9% 14.2% 15.7% SG&A $ 4.8 $ 4.0 $ 1.7 $ 2.0 $ 4.2 $ 4.7 % of Net sales 5.9% 5.7% 5.7% 5.9% 5.7% 5.0% Operating income $ 6.9 $ 4.6 $ 0.4 $ 2.0 $ 6.2 $10.1 % of Net sales 8.5% 6.6% 1.4% 5.9% 7.6% 10.8%
25 Net sales for Flow and Specialty Products increased 16.7% to $81.6 million in 2000 from $69.9 million in the twelve-month period ending December 31, 1999. Increased demand for value bodies due to higher demand for fuel exploration has aided this segment. Flow and Specialty Products net sales decreased by 12% to $29.6 million in the Transition Period from $33.7 million in the comparable period of 1998. Sales decreased by 21% from $93.6 million in fiscal 1998 to $74.1 million in fiscal 1999. Transition Period sales were lower due to reduced demand for the group's specialty freight car brake shoes. During fiscal 1999, the revenue drop within this segment was largely related to the depressed oil prices within the petroleum industry that severely depressed demand for valves and the corresponding valve bodies produced within the segment. In 2000, gross profit increased $3.1 million or 36.0% to $11.7 million from the same period in 1999. Higher revenues and resulting production throughput generated incremental profits. Flow and Specialty Products gross profit of $2.1 million during the Transition Period decreased by 48% when compared to gross profit of $4.0 million for the five months ended December 31, 1998. This decrease was once again directly related to the reduced demand for the group's specialty freight car brake shoes. Gross profit decreased 29% from $14.7 million in fiscal 1998 to $10.5 million in fiscal 1999. The overall reasons for the deterioration in gross profit during this period are directly related to the revenue declines described above. SG&A as a percent of sales has remained relatively steady in this segment since fiscal year 1998. Liquidity and Capital Resources The Company's cash and cash equivalents were $2.2 million at December 31, 2000 compared to $0.3 million at December 31, 1999, and $3.2 million at July 31, 1999. In 2000 and the Transition Period, the Company utilized $29.3 million and $11.3 million, respectively, from operating activities. Fiscal 1999 operating activities provided $37.7 million of cash. The decrease in cash flow were primarily due to lower earnings (after adjustments for non-cash items). Consolidated net working capital decreased $4.7 million to $51.6 million at December 31, 2000 (before consideration of debt in technical default) from $56.3 million at December 31, 1999. The decrease in net working capital is primarily due to recording of a valuation allowance against the Company's deferred tax Asset. Consolidated current assets decreased $11.3 million to $183.9 million at December 31, 2000 from $195.2 million at December 31, 1999. Consolidated current liabilities decreased $6.6 million to $132.3 million at December 31, 2000 (before consideration of debt in technical default) from $138.9 million at December 31, 1999. The Company increased its borrowings in 2000 by $15.8 million on its revolving lines of credit, raised $28.4 million by issuing convertible preferred stock in March 2000 and received $10.4 million of cash proceeds from the sale of its interest in Anchor Brake Shoe LLC in December 2000. The cash inflows were primarily used to fund the $21.1 million of capital expenditures and the $29.3 million of cash utilized in operating activities. The Company increased its borrowings during the Transition Period by $29.4 million on its revolving lines of credit, primarily to fund the $17.7 million of capital expenditures, $9.4 million of repayments on term loans and the $11.3 million of cash utilized in operating activities. During fiscal 1999, the $37.7 million of net cash generated from operating activities as well as the additional $19.8 million net cash provided by the Company's financing activities were utilized to fund the $54.6 million of capital expenditures. The most significant capital expenditure during fiscal 1999 was the completion of the expansion project in Sahagun, Mexico. On October 29, 1999, the Company acquired all outstanding common stock of COMETNA-Companhia Metalurgical Nacional, S.A. ("Cometna") located in Lisbon, Portugal for $8.3 million of the Company's common stock. Cometna manufactures and machines products for the freight and passenger rail industries in Europe and is part of the Company's Rail Products segment. The acquisition was accounted for under the purchase method of accounting. 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. Donovan explosion hardens steel rail and is part of the Company's Rail Services and Systems segment. The total purchase price of $7.6 million for these assets included $2.0 million in cash, a $2.5 million note due in monthly installments through May 2003 and 500,000 shares of the Company's common stock valued at $3.1 million. On April 17, 2001 the Company agreed to sell the Flow and Specialty Products assets and businesses to ING, along with some other minor assets, for an aggregate sales price of $24 million. The sales price was in excess of the carrying value of the net assets sold and includes a seven year $4.0 million junior subordinated note bearing interest at 8% per annum. 26 Additionally, the Company sold its 50% ownership in Anchor Brake Shoe, L.L.C. (''Anchor'') on December 28, 2000. Anchor designs, manufactures, markets and sells railcar composite brake shoes. Proceeds received from the sale were $10.4 million which were used to reduce the Company's credit facility. The Company recorded a $3.6 million gain on this sale. In February 2001, the Company sold its freight railroad and transit signaling systems and services business for a cash sales price of $21.1 million, subject to a net asset adjustment. A significant portion of the net proceeds of $18.5 million was used to permanently reduce outstanding borrowing commitments under the Credit Facility. As sale proceeds were insufficient to completely cover non deductible goodwill related to the business, the Company recorded a December 2000 impairment charge of $1.8 million. Additionally, the Company recorded a December 2000 deferred income tax charge of $2.5 million related to the estimated taxable gain incurred upon the sale. The Company retained certain contracts and other receivables of the signaling business, primarily related to various completed contracts and other Completed projects. Retained receivables aggregated $18.4 million. Because the Company will no longer have a continuing interest in the signaling business, collection of these receivable is expected to be hampered. Accordingly, the company recorded a $6.0 million reserve in December 2000 reflecting management's best estimate of the collectibility of these amounts. The following section describes the Company's primary credit facilities. Certain amendments to these facilities and additional facilities are also described earlier in the M.D.&A. section. 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 $1.1 million in cash provisions for idle facility and property disposal costs, all of which has been spent as of December 31, 2000. The 2000 impairment charge and gain on sale are described in Note 5. The fiscal 1999 Merger costs were incurred as a direct result of the Merger for advisory and other professional services. Senior Credit Facility Immediately after the consummation of the Merger, the Company entered into 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 provided the Company with a revolving line of credit of up to $200.0 million. The weighted average interest rate of all outstanding borrowings under the Credit Facility at December 31, 2000 was 10.7%. Availability at December 31, 2000 was $7.6 million. 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. During the Transition Period and 2000, the Company entered into a number of amendments, restatements and other relief mechanisms of the Credit Agreement. The primary results of those changes included a) the modification of several financial covenants that the Company otherwise would not have been in compliance with as of October 31, 1999, December 31, 1999 or September 30, 2000; b) the modification of the pricing grid which had the effect of increasing the applicable interest rates and lender fees; c) the establishment of scheduled commitment reductions and d) the release of certain collateral related to the Company's Mexican subsidary. At December 31, 2000, the Company was not in compliance with several of the financial covenants under the Credit Facility. Additionally, covenants and other provisions have been violated through April 16, 2001, for which the Company paid $0.8 million to the lenders in January 2001. Accordingly, all outstanding borrowings are reflected as short-term obligations as of December 31, 2000. As of April 17, 2001, the Company received a commitment from the senior lenders to amend the Credit Facility. The primary terms of the amendment will include a) a waiver from the senior lenders for all financial and other provision violations as of December 31, 2000 and through April 17, 2001, b) shortening the final maturity date of the facility from July 31, 2003 to January 5, 2003, c) allow the ING Bridge Notes, d) maximum aggregate commitments and outstanding borrowings will be permanently reduced to $150 million by April 2002 27 e) mandatory prepayments and further permanent reductions of maximum commitments are required upon qualifying assets sales, tax refunds, receivables collections, equity and debt issuances (excluding ING series C preferred stock and Bridge Notes) and upon incurrence of Excess Cash Flows, as defined, f) interest rates will be increased, for all borrowings, to prime plus 2.75%, g) certain additional collateral will be required, h) cross default provisions will be modified, including additional provisions regarding the ING Bridge Notes, and i) existing covenants will be replaced by a rolling, quarterly minimum EBITDA covenant, a maximum capital expenditure covenant, and a loan to value covenant, all as defined. An amendment fee of $1.5 million will be due half on the date of the amendment and half at maturity of the amended facility. The senior lenders will also receive warrants to purchase up to two percent, on a fully diluted basis, of the Company's common stock at a deminimis price. The warrants and resulting common shares will be able to be put to the Company at any time at a per share price equal to the greater of a pre-determined fixed price and the market value per share of the Company's common stock. Senior Subordinated Notes On February 1, 1997 and December 23, 1997 the Company issued $50 million of 9 1/8% Senior Subordinated Notes and $25 million of 8 3/4 % Senior Subordinated Notes, respectively (collectively, the "Notes"). The net proceeds from the issuances were used to repay certain outstanding indebtedness under its primary and other credit facilities. As a result of an amendment in 2000, the interest rate on all Notes was increased to 10 1/2% effective October 1, 2000. 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 at 100% of face value. 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 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. Pursuant to the Notes indenture, the Company is required to meet certain financial covenants including minimum interest coverage, minimum consolidated net worth and, upon incurrence of certain new indebtedness, maximum funded debt to capitalization, all as defined. The 2000 amendment, fees for which of $0.7 million are being amortized over the remaining life of the Notes, reduced the minimum interest coverage ratio from 2.4:1.0 to 1.8:1.0 effective September 30, 2000. For purposes of the covenant calculations, various adjustments are made to reported balances. The minimum interest coverage ratio remains at 1.8:1.0 each quarter through the maturity date and the minimum consolidated net worth balance adjusts each quarter based on quarterly earnings and capital issuances. The Company was not in compliance with the minimum net worth covenant at December 31, 2000. Additionally, based on preliminary results for the first quarter of 2001 and the Company's forecast for the remainder of the year, the Company anticipates it will fail to meet one or more of these covenants at one or more quarter ends. Noncompliance gives the trustee or noteholders owning at least 25% in aggregate principal amount of outstanding notes the unilateral right to accelerate the maturity of the related debt after a requisite cure period. Accordingly, the Notes are reflected as short-term obligations as of December 31, 2000. However, management believes that neither the individual noteholders (or the trustee on their behalf) nor the senior lenders will act to accelerate the payment of substantial outstanding borrowings. Management's belief is based on, among other things, ongoing discussions with its lenders and the willingness of the senior lenders to enter into the transactions and agreements described in Note 2. Additionally, based on advice received from its advisors, management believes that the Company can complete a successful consent solicitation with the note holders by July 2001 whereby the financial covenants will be modified or eliminated and any necessary waivers of noncompliance will be obtained. However, there can be no assurance that the Company's lender or noteholders will not accelerate payment of some or all of the outstanding Notes and borrowings under the Credit Facility. If accelerated, the Company will 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. Other than as described above and in Note 2, the Company has no current commitments or arrangements for such financing alternatives, and there can be no assurances that such financing alternatives will be available on acceptable terms, or at all. The Company's inability to make any payments when due or to satisfy its financial covenants under its existing borrowing facilities could have a material adverse effect on the Company. Other Prior to the Merger, ABC and NACO had their own primary bank credit facilities which allowed for aggregate borrowings and outstanding letters of credit, as amended, of up to $125 million, including a term loan portion of $8.5 million. These previous primary bank credit facilities were terminated upon the refinancing under the Credit Facility. In December 1998, a $3.0 million Industrial Revenue Bonds ("IRB") were issued on behalf of the Company for the new paneling facility in Ashland, Wisconsin. The IRB's bear an adjustable rate of interest as determined by the Public Bond Market Association. As of December 31, 2000, the adjustable interest rate on the bonds was set at 4.98%. The bonds mature in December 2018. In March 1995, NACO issued a $15.0 million 11.75% senior subordinated note together with a common stock purchase warrant to a major insurance company. The warrant agreement allowed the insurance company to purchase 54,271 common shares of NACO's common stock at a price of $0.01 per share, subject to certain adjustments. During fiscal 1999, the insurance company exercised its warrant for 54,271 NACO shares (representing 472,158 shares of the Company based on the Merger exchange ratio). Other indebtedness represents notes due to sellers of the Company's business acquisitions, a note due to a customer in exchange for entering into a supply agreement with that customer and other indebtedness. The other indebtedness bears interest as of December 31, 2000 at rates from 4.0% to 11.5% and mature from 2000 to 2005. A universal shelf registration was declared effective on October 29, 1999, for issuances up to $300 million of debt or equity securities, and the unused portion of a previous universal shelf registration was de-registered. As of December 31, 2000, no securities were issued under this universal shelf registration. 28 New Accounting Pronouncements In November 1997, the FASB's Emerging Issues Task Force reached a consensus that requires companies to write-off previously capitalized business process re- engineering costs and expense future costs as incurred. The Company had capitalized certain process reengineering costs before fiscal 1998. In accordance with this consensus, effective August 1, 1997, the Company recorded a non-cash charge of $1.8 million ($1.1 million after tax) to reflect the cumulative effect of this accounting change. In April 1998, Statement of Position No. 98-5 was issued which requires that companies write-off defined previously capitalized start-up costs and expense future start-up costs as incurred. The Company had capitalized certain start-up costs before fiscal 1999, including $1.5 million during fiscal 1998. Effective August 1, 1998, the Company recorded a non-cash charge of $2.6 million ($1.6 million after-tax) to reflect the cumulative effect of this accounting change. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new and revises several existing standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be designated as a cash flow hedge, a fair value hedge or a foreign currency hedge. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedge and the measurement method to be used. Changes in the fair value of derivatives are either recognized in earnings in the period of change or as a component of other comprehensive income (loss) in the case of certain hedges. The Company adopted SFAS No. 133 as of January 1, 2001. Had SFAS No. 133 been adopted at December 31, 2000, the impact on liabilities and comprehensive income would have been immaterial. 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 29 been more concentrated in the period from January through June. In addition, a number of the Company's facilities close for regularly scheduled maintenance in the late summer and late December, which tends to reduce operating results during the first half of the Company's fiscal year. Transit industry practice with respect to specialty trackwork generally involves the periodic shipment of large quantities, which may be unevenly distributed throughout the year. The Company, except where noted, does not expect any significant departure from the historical demand patterns during the present calendar year ending December 31, 2001. 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. 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 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk sensitive instruments do not subject the Company to material market risk exposures, except as such risks relate to interest rate and foreign exchange rate fluctuations. As of December 31, 2000, the Company has long-term debt outstanding with a carrying value of $269.0 million (including current maturities of long-term debt). The estimated fair value of this debt is $236.8 million. Fixed interest rate debt outstanding as of December 31, 2000 represents 30% of total debt, carries an average interest rate of 9.67% and has scheduled maturities as follows: $1.7 million in fiscal 2001, $1.8 million in fiscal 2002, $1.2 million in fiscal 2003, $75.8 million in fiscal 2004, and $0.1 million thereafter. Variable interest rate debt outstanding as of December 31, 2000 had an average interest rate at that date of 10.49% and has scheduled maturities as follows: $5.3 million in fiscal 2001, $2.7 million in fiscal 2002, $176.2 million in fiscal 2003, zero in fiscal 2004 and $4.2 million thereafter. As described in Note 7 to Consolidated Financial Statements, certain of this indebtedness is classified at December 31, 2000 as a current obligation due to such debt being in technical default. From time to time, the Company enters into various interest rate swap and cap 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. Variable rates are based on 3 month LIBOR and are reset on a quarterly basis. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and recognized over the life of the agreements as an adjustment to interest expense. Maturity dates of interest rate swap and cap generally match those of the underlying debt agreements. At December 31, 2000, the Company had one interest rate protection agreement outstanding which expires in 2003, and covers a notional principal amount of $25 million. The fair value of this contract was an aggregate of $282,500 liability at December 31, 2000. No such agreements were outstanding at December 31, 1999. As a Company with multi-national operations, many of its 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. 30 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 December 31, 2000, the Company had approximately $5.9 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. Also at December 31, 2000, the Company had $3.6 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 August, 2001. The fair value of these contracts was an aggregate of $251,800 asset at December 31, 2000. 31 ITEM 8--FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ABC-NACO Inc.: We have audited the accompanying consolidated balance sheets of ABC-NACO Inc. (a Delaware corporation) AND SUBSIDIARIES ("the Company") as of December 31, 2000 and 1999, and July 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2000, for the five months ended December 31, 1999 and for each of the two years in the period ended July 31,1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of ABC-NACO Inc. and Subsidiaries as of December 31, 2000 and 1999, and July 31, 1999 and the results of their operations and their cash flows for the year ended December 31, 2000, for the five months ended December 31, 1999 and for each of the two years in the period ended July 31, 1999, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, recent operating conditions have resulted in significant liquidity and debt leverage concerns for the Company. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters, including its intention to complete the various transactions described therein, are also described in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Chicago, Illinois April 17, 2001 32 ITEM 8--FINANCIAL STATEMENTS 33 ABC-NACO INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year For the Five For the Year Ended July 31, Ended Months Ended ----------------------------- Dec. 31, 2000 Dec. 31, 1999 1999 1998 --------------- --------------- ------------ ------------- (In thousands, except per share data) NET SALES $ 482,230 $ 210,277 $ 591,396 $ 541,301 COST OF SALES 445,309 187,343 506,876 464,435 --------------- -------------- ------------ ------------- Gross profit 36,921 22,934 84,520 76,866 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 61,702 23,223 56,005 51,628 NONRECURRING LOSSES (GAINS) 9,002 (915) 21,630 - --------------- -------------- ------------ ------------- Operating income (loss) from continuing operations (33,783) 626 6,885 25,238 EQUITY (INCOME) LOSS FROM UNCONSOLIDATED JOINT VENTURES (2,557) (29) 66 (1,616) INTEREST EXPENSE 28,328 9,398 17,782 13,862 --------------- -------------- ------------ ------------- Income (loss) from continuing operations before income taxes, cumulative effect of accounting changes and extraordinary item (59,554) (8,743) (10,963) 12,992 PROVISION (BENEFIT) FOR INCOME TAXES 480 (4,296) (1,381) 5,390 --------------- -------------- ------------ ------------- Income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary item (60,034) (4,447) (9,582) 7,602 INCOME FROM DISCONTINUED OPERATIONS net of income taxes of $2,430, ($683), $2,304, and $3,915, respectively 3,833 (1,078) 3,635 6,176 CUMULATIVE EFFECT OF ACCOUNTING CHANGES, net of income taxes of $1,014 and $695, respectively - - (1,620) (1,111) EXTRAORDINARY ITEM, net of income taxes of $2,062 - - (3,158) - --------------- -------------- ------------ ------------- NET INCOME (LOSS) $ (56,201) $ (5,525) $ (10,725) $ 12,667 =============== ============== ============ ============= EARNINGS PER SHARE DATA: Income (loss) from continuing operations before cumulative effect of accounitng changes and extraordinary item $ (60,034) $ (4,447) $ (9,582) $ 7,602 Adjustment related to preferred stock (11,877) - - - Preferred stock dividends (1,985) - - - --------------- -------------- ------------ ------------- Adjusted income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary item (73,896) (4,447) (9,582) 7,602 Discontinued operations 3,833 (1,078) 3,635 6,176 Cumulative effect of accounting changes - - (1,620) (1,111) Extraordinary item - - (3,158) - --------------- -------------- ------------ ------------- Net income (loss) available to common stockholders $ (70,063) $ (5,525) $ (10,725) $ 12,667 =============== ============== ============ ============= BASIC EARNINGS PER SHARE: Adjusted income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary item $ (3.76) $ (0.24) $ (0.53) $ 0.43 Discontinued operations 0.19 (0.06) 0.20 0.34 Cumulative effect of accounting changes - - (0.09) (0.06) Extraordinary item - - (0.17) - --------------- -------------- ------------ ------------- Net income (loss) available to common stockholders $ (3.57) $ (0.30) $ (0.59) $ 0.71 =============== ============== ============ ============= Weighted average shares outstanding 19,641 18,623 18,142 17,850 =============== ============== ============ ============= DILUTED EARNINGS PER SHARE: Adjusted income (loss) from continuing operations before cumulative effect of accounting changes and extraordinary item $ (3.76) $ (0.24) $ (0.53) $ 0.41 Discontinued operations 0.19 (0.06) 0.20 0.34 Cumulative effect of accounting changes - - (0.09) (0.06) Extraordinary item - - (0.17) - --------------- -------------- ------------- ------------- Net income (loss) available to common stockholders $ (3.57) $ (0.30) $ (0.59) $ 0.69 =============== ============== ============ ============= Weighted average shares and equivalents outstanding 19,641 18,623 18,142 18,474 =============== ============== ============ =============
The accompanying notes to consolidated financial statements are an integral part of these statements. 34 ABC-NACO INC. CONSOLIDATED BALANCE SHEETS
As of December 31, ----------------------------- As of July 31, ASSETS 2000 1999 1999 - -------------------------------------------------------- ----------- ------------ --------------- (In thousands, except share data) CURRENT ASSETS: Cash and cash equivalents $ 2,211 $ 351 $ 3,159 Account receivable, less allowance of $8,322, $1,804, and $1,705, respectively 76,422 79,617 82,995 Inventories 101,470 94,132 73,633 Prepaid expenses and other current assets 3,753 12,401 11,189 Deferred income tax assets - 8,680 9,226 ------------ ------------ -------------- Total current assets 183,856 195,181 180,202 ------------ ------------ -------------- PROPERTY, PLANT AND EQUIPMENT--net 236,935 245,010 228,093 INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 9,148 13,886 14,490 DEFERRED INCOME TAX ASSETS - - - OTHER NONCURRENT ASSETS--net 44,184 38,394 31,036 ------------ ------------ -------------- Total assets $ 474,123 $ 492,471 $ 453,821 ============ ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------- CURRENT LIABILITIES: Cash overdrafts $ 3,117 $ - $ - Current maturities of long-term debt and debt in 258,247 6,207 4,588 default Accounts payable 80,355 89,678 73,456 Accrued expenses 41,790 42,983 37,129 ------------ ------------ -------------- Total current liabilities 383,509 138,868 115,173 ------------ ------------ -------------- LONG-TERM DEBT, less current maturities and debt in default 10,749 246,247 225,031 DEFERRED INCOME TAXES - 6,699 14,194 OTHER NONCURRENT LIABILITIES 17,756 13,978 17,866 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Convertible preferred stock, $1.00 par value; 1,000,000 shares authorized; 300,000 shares issued and outstanding as of December 31, 2000 28,425 - - Common stock, $.01 par value; 25,000,000 shares authorized; 19,872,242, 19,372,242 and 18,386,336 shares issued and outstanding, respectively 199 194 184 Additional paid-in capital 96,197 79,240 68,383 Retained earnings (deficiit) (62,109) 7,954 13,479 Cumulative translation adjustment (603) (709) (489) ------------ ------------ -------------- Total stockholders' equity 62,109 86,679 81,557 ------------ ------------ -------------- Total liabilities and stockholders' equity $ 474,123 $ 492,471 $ 453,821 ============ ============ ==============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 35 ABC-NACO INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Additional Retained Cumulative Preferred Common Paid-in Earnings Translation Stock Stock Capital (Deficit) Adjustment Total ----------- -------- ------------ ----------- ------------- ---------- (In thousands) BALANCE, July 31, 1997 $ - $ 179 $ 67,512 $ 10,710 $ (35) $ 78,366 Comprehensive income (loss) - - - 12,667 (308) 12,359 Shares issued in business acquisition - - 436 - - 436 Common stock issued - - 32 - - 32 NACO comprehensive income (3/31/97 - 6/27/97) (Note 1) - - - 932 (55) 877 ----------- -------- ------------ ----------- ------------- ---------- BALANCE, July 31, 1998 - 179 67,980 24,309 (398) 92,070 Comprehensive income (loss) - - - (10,725) 8 (10,717) Common stock issued - 5 300 - - 305 Income tax benefit from exercised stock options - - 103 - - 103 NACO comprehensive loss (6/29/98 - 7/31/98) (Note 1) - - - (105) (99) (204) ----------- ------- ------------ ----------- ------------- ---------- BALANCE, July 31, 1999 - 184 68,383 13,479 (489) 81,557 Comprehensive loss - - - (5,525) (220) (5,745) Contingent shares issued for business acquisition - 4 2,563 - - 2,567 Shares issued in business acquisition - 6 8,294 - - 8,300 ----------- ------- ------------ ----------- ------------- ---------- BALANCE, December 31, 1999 - 194 79,240 7,954 (709) 86,679 Comprehensive income (loss) - - - (56,201) 106 (56,095) Preferred stock issued 28,425 - 11,877 (11,877) - 28,425 Preferred stock dividends earned - - 1,985 (1,985) - - Shares issued in business acquisition - 5 3,095 - - 3,100 ----------- ------- ------------ ----------- ------------- --------- BALANCE, December 31, 2000 $ 28,425 $199 $ 96,197 $ (62,109) $ (603) $ 62,109 =========== ======= ============ =========== ============= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 36 ABC-NACO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year For The Five Ended Months Ended For the Year Ended July 31, Dec. 31, 2000 Dec. 31, 1999 1999 1998 ------------------ ---------------- ---------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(56,201) $ (5,525) $(10,725) $12,667 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Extraordinary item - - 3,158 - Cumulative effect of accounting changes - - 1,620 1,111 Nonrecurring losses (gains) 9,002 (915) 21,630 - Equity (income) loss of unconsolidated joint ventures (2,557) (29) 66 (1,616) Depreciation and amortization 34,859 13,373 30,126 22,476 Deferred income taxes (1,981) (6,949) 1,289 4,972 NACO net cash flows--3/31/97 to 6/27/97 (Note 1) - - - (125) NACO net cash flows--6/29/98 to 7/31/98 (Note 1) - - (6) - Changes in certain assets and liabilities, net of effect of business acquisitions--- Accounts receivable 2,866 6,478 5,577 (21,024) Inventories (7,338) (19,558) 1,278 (8,344) Prepaid expenses and other current assets 8,648 (1,193) (7,468) (790) Other noncurrent assets (4,556) (5,599) (3,966) (7,719) Accounts payable and accrued expenses (19,898) 14,653 (4,140) 17,898 Other noncurrent liabilities 3,884 (6,057) (1,038) (2,221) ---------- ---------- ----------- --------- Net cash provided by (used in) operating activities (29,310) (11,321) 37,696 17,285 ---------- ---------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (21,129) (17,659) (54,640) (68,915) Proceeds from sale of assets and investments 10,408 - - 1,550 Business acquisitions, less cash acquired (2,000) 59 - (1,376) Investments in unconsolidated joint ventures - - - (190) Dividends from unconsolidated joint ventures 1,155 633 - 904 ---------- ---------- ----------- --------- Net cash used in investing activities (11,566) (16,967) (54,640) (68,027) ---------- ---------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving lines of credit 15,757 29,377 57,395 25,606 Proceeds from sale leaseback - 5,984 - - Change in cash overdrafts 3,117 - (10,036) 855 Issuance of senior subordinated notes - - - 25,000 Borrowings of term debt - - 4,576 3,473 Payment of term debt (1,715) (9,423) (31,150) (2,987) Payment of financing costs (2,848) (458) (1,363) (1,282) Proceeds from sale of convertible preferred stock 28,425 - - - Proceeds from exercised stock options - - 408 - ---------- ---------- ----------- --------- Net cash provided by financing activities 42,736 25,480 19,830 50,665 ---------- ---------- ----------- --------- Net increase (decrease) in cash and cash equivalents 1,860 (2,808) 2,886 (77) CASH AND CASH EQUIVALENTS, beginning of period 351 3,159 273 350 ---------- ---------- ----------- --------- CASH AND CASH EQUIVALENTS, end of period $ 2,211 $ 351 $ 3,159 $ 273 ========== ========== =========== =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 37 ABC-NACO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 and July 31, 1999 and 1998 1. BASIS OF PRESENTATION AND OPERATIONS ABC-NACO Inc. ("the Company") is a supplier of technologically advanced products and services to the freight railroad industry through two of its business segments: Rail Products and Rail Services and Systems. With four technology centers around the world supporting its 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. Until the sale of this Rail Services and Systems business in February 2001, the Company also supplied freight, railroad and transit signaling systems and services. On April 17, 2001, the Company agreed to sell its Flow and Specialty Products business segment. This segment primarily supplies steel and high alloy valve and related castings for industrial flow control systems. The operating results of this segment have been reflected as discontinued operations in the accompanying statements of operations. In the aggregate, the Company operates 16 U.S manufacturing plants in 8 states (excluding 3 Flow and Specialty Products plants in 3 states); plants in Sahagun, Mexico; Mexico City, Mexico; Lisbon, Portugal; Leven, Scotland and Dominion, Canada; has unconsolidated joint ventures with plants in China and Mexico; and has other facilities (administrative, engineering, etc.) in 4 states. Approximately 77% of the Company's employees are covered by collective bargaining agreements. During the next year, five of these bargaining agreements will expire. While management believes that its labor relations are satisfactory, there can be no assurance that labor contracts which come up for renewal will be renewed or the terms under which such renewals may occur. The current composition of the Company was achieved by the consummation of a merger (the "Merger") on February 19, 1999, between a wholly owned subsidiary of the Company (formerly ABC Rail Products Corporation ("ABC")) and NACO, Inc. ("NACO"). As a result of the Merger, each outstanding share of NACO common stock was converted into 8.7 shares of ABC common stock, resulting in the issuance of approximately 9.4 million shares. The Merger was treated as a tax- free reorganization for federal income tax purposes and is accounted for as a pooling-of-interests transaction. The accompanying consolidated financial statements reflect the combined results of ABC and NACO as if the Merger occurred on the first day of the earliest period presented and is based on the fiscal periods described below. Prior to the Merger, ABC's fiscal year-end was July 31, and NACO's fiscal year-end was the Sunday closest to March 31. ABC's fiscal year-end was adopted by the Company as the annual financial reporting period. As permitted under Regulation S-X promulgated by the Securities and Exchange Commission, the year- ends of the two companies have not been conformed for periods prior to fiscal 1999. The results of NACO's operations for the twelve months ended June 28, 1998, and March 30, 1997, are combined with results of ABC's operations for the twelve months ended July 31, 1998, and 1997, respectively. Accordingly, revenues of $26.5 million and a net loss of $0.1 million, and revenues of $70.3 million and net income of $0.9 million representing NACO's results of operations for July 1998 and the period March 31, 1997 to June 27, 1997, respectively, are excluded from the Company's Consolidated Statements of Operations. Comprehensive income (loss) for these two NACO periods is reflected in the Company's Consolidated Statements of Stockholders' Equity. On September 23, 1999, the Company's Board of Directors adopted a resolution to change the Company's year-end to December 31 from July 31. The principal reason for the change was to align the Company's fiscal year-end with the fiscal year-end of its major customers. The year ended December 31, 2000, the five months ended December 31, 1999, and the years ended July 31, 1999 and 1998 are referred to as "2000", the "Transition Period", "fiscal 1999", and "fiscal 1998", respectively. Comparable, unaudited results for the twelve months ended December 31, 1999 and the five months ended December 31, 1998 are as follows (in thousands): 38 2. CURRENT BUSINESS SITUATION The Company has incurred large operating losses since the Merger and has experienced increasing cash flow constraints since the second half of 2000. Some of the Company's businesses have been adversely impacted by several industry issues, including, among other things, a decline in the new railcar building industry, higher fuel costs and general decline in the overall United States economy. Due to these conditions, the Company's financial strength has deteriorated causing negative reactions from vendors and lenders that tend to reduce the Company's operating flexibility. The Company responded to these conditions during 2000 and early 2001 by initiating or completing several restructuring plans, selling non-core business operations and assets and amending various terms under its primary lending agreements. However, the especially difficult operating environment during the fourth quarter of 2000 and the resulting pressure on the Company's financial covenants has resulted in the Company's taking of additional actions in order to improve its long-term viability as a business concern. Some of those actions included: . The Company accepted the resignation of its Chairman and Chief Executive Officer on April 3, 2001. A non-executive director has assumed the responsibility of Chairman and Vaughn W. Makary the Chief Operating Officer and President has been appointed as the new Chief Executive Officer. The Board of Directors, which approved the management change, has charged the new CEO with a mission to quickly implement additional changes within the organization that will return the Company to profitability. In addition, various members of the Board of Directors have been and will continue to provide special consulting services to the Company. . As further described in Note 5, the Company sold its freight, railcar and transit signaling systems and services business for approximately $21.1 million. On April 17, 2001, the Company agreed to sell its Flow and Specialty Products business segment for approximately $24.0 million. A significant portion of the proceeds from these sales were and will be used to permanently reduce outstanding borrowing commitments under the primary bank credit facility (the "Credit Facility"). The buyer of the Flow and Specialty Products businesses is a new company formed by the management of the businesses and investment funds managed by ING Furman Selz Investments ("ING"), preferred stockholders of the Company. . The Company received a commitment from ING and expects approval from the senior lenders for ING to provide the Company with $15 million of secured short-term loans due in January 2002 (the "ING Bridge Notes"). The ING Bridge Notes will rank pari passu with borrowings under the Credit Facility. There will be no requirements to use any portion of the expected net $13.0 million of proceeds from this borrowing to further reduce outstanding borrowings under the Credit Facility. As such, the Company will retain these funds for general corporate purposes, primarily to fund its current working capital needs. The ING Bridge Notes will be repaid with proceeds from the issuance of a new series of redeemable, convertible preferred stock to be purchased by funds managed by ING subject to the completion of a) stockholder approval of such issuance, including the approval to authorize sufficient new common shares to accommodate this transaction and b) the successful amendment of various provisions and covenants under the Notes Indenture. Preferred stock (a) will pay dividends at a rate of 10% per annum payable semi-annually in cash except that the first two year's of dividends shall be paid in April 2003, b) will be convertible at a price equal to $2.50 per share of the Company's common stock, c) will be callable at the Company's option upon certain events and d) will be redeemable at the holder's option at $200 per share plus any accumulated dividends if any in the event of a change in control as defined. Also upon issuance of the preferred stock, ING will receive warrants to purchase 6.0 million shares of the Company's common stock at a price of $0.01 per share. Additional warrants to purchase 750,000 shares of common stock at a price of $0.01 per share will be exercisable for every quarter beginning July 1, 2002 if earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, for the preceding twelve month period is less than $70.0 million and no sale of the company has occurred by the end of such quarters. In any event the holders of additional warrants will not receive more than 6.0 million shares. Effective with the issuance of the ING Bridge Notes, the Series B preferred stock will be exchanged for a new series of preferred stock with a dividend rate of 10%, 40% of previously deferred cash dividends of the Series B will become immediately payable (approximately $1.0 million as of April 2001) and the new preferred stock will become redeemable at the holder's option at $200 per share plus accumulated dividend if any and will be convertible into shares of common stock upon certain change of control situations at a premium conversion rate. Beginning with the issuance of the ING Bridge note, the holders of preferred stock will be entitled to nominate three persons to the company's board of directors. . The Company expects to receive a commitment from the senior lenders under the Credit Facility to amend that facility. The primary terms of the amendment will include a) a waiver from the senior lenders under the Credit Facility for all financial covenant and other provision violations as of December 31, 2000 and through April 17, 2001, b) shortening the final maturity date of the facility from July 31, 2003 to January 5, 2003, c) allow the ING Bridge Notes, d) maximum aggregate commitments and outstanding borrowings will be permanently reduced to $150 million by April 2002, e) mandatory prepayments and further permanent reductions of maximum commitments are required upon qualifying asset sales, tax refunds, receivables collections, equity and debt issuances (excluding ING series C preferred stock and Bridge Notes) and upon incurrence of Excess Cash Flows, as defined, f) interest rates will be increased, for all borrowings, to prime plus 2.75%, g) certain additional collateral will be required, h) cross default provisions will be modified, including additional provisions regarding the ING Bridge Notes, and i) existing covenants will be replaced by a rolling, quarterly minimum EBITDA covenant, a maximum capital expenditure covenant, and a loan to value covenant, all as defined . An amendment fee of $1.5 million will be due half on the date of the amendment and half at maturity of the amended facility. The senior lenders will also receive warrants to purchase up to two percent, on a fully diluted basis, of the Company's common stock at a deminimis price. The warrants and resulting common shares will be able to be put to the Company at any time at a per share price equal to the greater of a pre-determined fixed price or the market value per share of the Company's common stock. . While the ING Bridge Notes and the Credit Facility amendment are expected to close on May 2, 2001, and all of its future restructuring plans have not been finalized, management has developed preliminary plans to significantly reduce the Company's operating costs. Such plans include, among other things: The sale or extended mothballing of its wheel making facility. A sale, upon terms currently contemplated by the Company, along with a related long-term supply arrangement, would allow the Company access to loose wheels for its wheel shop business at prices lower than its current cost of production at this facility. The additional consolidation of production plants and/or particular product lines to take advantage of utilizing available capacity in certain plants with lower labor and other production costs. Idled plants or manufacturing lines will be sold or held for future use. A significant reduction in selling, general and administrative costs through headcount reductions, in certain cases as a result of the plant consolidations and sales, strict control over variable administrative costs, including certain incentive compensation, and simplification of production processes. In addition, the Company has relocated its corporate headquarters into an existing administration building. A significant reduction in capital spending. Capital spending over the recent years was increased over normal levels for a variety of reasons, most substantially due to the Company investing in new technologies to improve its manufacturing processes and products. As many of those capital programs are now complete, including the new rail milling facility in Illinois and the technology driven process changes at several North American plants, capital spending will decrease to significantly lower levels in 2001 and beyond. With the closing of the agreements and commitments agreed to as of April 17, 2001 and the actions planned for the remainder of the year, management and the Board of Directors of the Company believe that the Company can continue as a business concern and that it will continue to have available financing in place as the Company attempts to return to profitability. Certain economic and other future conditions are not in the Company's control; and, as such, no assurances can be given that the Company will be successful in its efforts to return to profitability. 39 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Company's consolidated financial information reflects the application of the pooling-of-interests method of accounting for the Merger. Under this method of accounting, the recorded assets, liabilities, income and expenses of ABC and NACO are combined and recorded at their historical cost amounts. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. Investments in unconsolidated 50% or less owned joint ventures are accounted for under the equity method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Cash Overdrafts Cash overdrafts represent the aggregate amount of checks which have been issued and have not yet cleared the zero-balance disbursement accounts, net of any cash in specific depository accounts which will be automatically drawn against as such checks clear the disbursement accounts. If funds are not available in the depository accounts, the deficiency will be funded by the Company's revolving credit agreement. Allowance for Doubtful Accounts The allowance for doubtful accounts for 2000, the Transition Period, fiscal 1999 and fiscal 1998 consisted of the following (in thousands): 40
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 --------------------------------------------- Balance at beginning of period.................... $1,804 $1,705 $2,113 $1,987 Provision charged to income.................... 7,372 260 206 815 Accounts written off........................... (854) (161) (857) (561) NACO net change (3/31/97-6/27/97).............. -- -- -- (128) NACO net change (6/29/98-7/31/98).............. -- -- 243 -- ------ ------ ------ ------ Balance at end of period.......................... $8,322 $1,804 $1,705 $2,113 ====== ====== ====== ======
In the fourth quarter of 2000, the Company increased its provision for doubtful accounts by $6.0 million for certain contract receivables. See note 5. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method for substantially all inventories. Inventory costs include materials, labor and manufacturing overhead. Inventories at December 31, 2000, December 31, 1999, and July 31, 1999 consisted of the following (in thousands):
Dec 31, Dec 31, July 31, 2000 1999 1999 ----------------------------------- Raw materials............................... $ 40,148 $44,148 $31,964 Supplies and spare parts.................... 8,154 5,258 5,206 Work in process and finished goods.......... 53,168 44,726 36,463 -------- ------- ------- Total inventories........................ $101,470 $94,132 $73,633 ======== ======= =======
Property, Plant and Equipment Property, plant and equipment are stated at cost, which for self-constructed assets includes interest and internal labor and overhead costs directly related to constructing the asset. Property, plant and equipment purchased in connection with business acquisitions have been valued at fair market value at the time of the acquisition, less, if any, the allocable share of the bargain purchase element inherent in the acquisitions. The Company also capitalizes direct costs incurred in developing or obtaining computer software for internal use once the Company determines that the new software will be completed and will fulfill its intended use. Costs incurred prior to such determination are expensed as incurred. Such capitalized costs include direct payroll and related costs for personnel that worked directly on the project to develop or obtain the computer software, external costs that were attributable to the software development and interest. The software costs capitalized through December 31, 2000 primarily relate to the development of enterprise-wide computer software systems, which are being amortized over estimated useful lives of five to ten years. Major renewals and betterments, which extend the useful life of an asset, are capitalized. Routine maintenance and repairs are expensed as incurred. Significant maintenance and repairs expected to be incurred during scheduled shutdowns of the Company's foundry operations are accrued during the periods that the foundry is operational. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any related gain or loss is reflected in operations. The Company periodically reviews the carrying value of its property, plant and equipment to determine whether there are indications of an impairment that would require an adjustment to the carrying values or useful lives. The current uncertainty in interest rate levels, coupled with the recent increase in fuel costs, has resulted in a reduction in new car build activity and cutback in discretionary maintenance and repair spending by the Company's railroad customers. As a result of these events, the Company's loose wheel making facility has significantly reduced productions since late 2000 and has not produced new wheels since mid-February 2001. The Company is currently exploring options for the facility ranging from an extended mothballing of the operation to a potential sale of the plant. The Company's current negotiations to sell the facility, includes a long-term supply agreement with the buyer. The value expected to be received upon such a transaction is dependent on further negotiations and resolution of 41 many factors; however, management expects the value to be received would be in excess of the facility's carrying value. Absent a successful sale of this facility, ultimate realization of the related $35.7 million of net assets (as of March 31, 2001) is dependant upon (among other things) return to more historically normal order levels. However, there can be no assurances that such transactions or conditions will occur or that they will allow for full realization of the assets at this facility. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense charged to continuing operations was $27.6 million for 2000, $10.9 million for the Transition Period and $25.6 million and $18.3 million for fiscal 1999 and fiscal 1998, respectively. The estimated useful lives used for recognizing depreciation expense for financial reporting purposes generally are as follows:
Asset Description Life ----------------- ----------- Buildings and improvements...................... 7-30 years Machinery and equipment......................... 3-12 years Computer hardware and software.................. 3-10 years Patterns, tools, gauges and dies................ 3-5 years
Property, plant and equipment at December 31, 2000, December 31, 1999 and July 31, 1999 consisted of the following (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 -------------------------------------------- Land $ 7,727 $ 7,644 $ 5,232 Buildings and improvements 47,811 42,268 33,403 Machinery and equipment 290,691 267,189 248,040 Construction in progress 21,352 28,302 29,583 Patterns, tools, gauges and dies 14,757 14,610 19,650 --------- --------- --------- 382,338 360,013 335,908 Less--Accumulated depreciation (145,403) (115,003) (107,815) --------- --------- --------- Property, plant and equipment--net $ 236,935 $ 245,010 $ 228,093 ========= ========= =========
The Company capitalized $0.1 million, $0.3 million, $2.4 million, and $3.9 million of interest during 2000, the Transition Period, fiscal 1999 and fiscal 1998, respectively. The most significant component of construction in progress at each of the above dates is the Company's investment in a rail hardening project. The machinery and equipment which has been built for this project is being stored pending completion of a revised business plan. The total investment to date for this project is $11.5 million, including $2.0 million of patents. The Company has recently revitalized its efforts to complete this project and management expects that with near term identification of a project partner and available production site, the project could be in production by second quarter 2002. However, no assurances can be given that the project will reach successful completion on the anticipated time frame or at all. During the Transition Period, the Company sold certain productive assets for $5.9 million and leased the assets back under an operating lease. The resulting gain of $0.4 million was deferred and is being recognized ratably over the six year life of the related lease. Other Noncurrent Assets Other noncurrent assets at December 31, 2000, December 31, 1999 and July 31, 1999 consisted of the following (in thousands): 42
Dec. 31, Dec. 31, July 31, 2000 1999 1999 --------------------------------- Deferred financing costs-net $ 4,693 $ 3,713 $ 3,850 Patents 6,264 2,011 2,011 Excess costs over net assets acquired-net 17,684 20,621 18,544 Union Pacific contract costs-net 4,634 5,159 - Prepaid pension costs and other-net 10,909 6,890 6,631 ------- ------- ------- Other non-current assets-net $44,184 $38,394 $31,036 ======= ======= =======
Deferred financing costs, net of accumulated amortization of $2.6 million, $1.6 million and $1.4 million as of December 31, 2000, December 31, 1999 and July 31, 1999, respectively, represent legal and other associated costs related to the Company's issuance of debt. Deferred financing costs are amortized over the term of the related debt. Pursuant to the early retirement of certain indebtedness, the related after-tax costs of $3.2 million were written-off during the year ended July 31, 1999. In 2000, the Company acquired a new patent in a business acquisition. This patent is being amortized on a straight-line basis over its 10 year remaining life, resulting in $0.1 million of accumulated amortization as of December 31, 2000. The excess cost over net assets of acquired businesses is being amortized on the straight-line basis over 15 to 25 years. Related amortization expense included in continuing operations for 2000, the Transition Period, fiscal 1999 and fiscal 1998 was $2.0 million, $0.4 million, $1.0 million, and $0.9 million, respectively. Accumulated amortization as of December 31, 2000, December 31, 1999 and July 31, 1999 was $4.5 million, $3.6 million and $3.2 million, respectively. Should events or circumstances occur subsequent to the acquisition of a business which bring into question the realizable value or impairment of the related goodwill, the Company will evaluate the remaining useful life and balance of goodwill and make adjustments, if required. The Company's principal consideration in determining impairment include the strategic benefit to the Company of the particular business as measured by undiscounted current and expected future operating income levels of that particular business and expected undiscounted future cash flows. Should an impairment be identified, a loss would be reported to the extent that the carrying value of the related goodwill exceeds the fair value of that goodwill as determined by valuation techniques available in the circumstances. In November 1999, the Company entered into a long-term supply agreement with the Union Pacific Railroad ("UP") to supply and service wheelsets for its North American operations. A condition of the agreement required the Company to make a $5.25 million up-front payment to the UP. This $5.25 million origination fee was deferred by the Company and is being amortized over the 10-year agreement term. Accrued Expenses Accrued expenses at December 31, 2000, December 31, 1999 and July 31, 1999 consisted of the following (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 ---------------------------------- Compensation, including related benefits and taxes $10,235 $11,433 $12,542 Merger and other restructuring reserves 6,694 4,196 8,424 Taxes, other than compensation taxes 6,788 8,236 4,272 Self-insurance reserves 6,342 6,355 2,629 Billings in excess of contract costs and estimated earnings 1,293 45 145 Other 10,438 12,718 9,117 ------- ------- ------- Total accrued expenses $41,790 $42,983 $37,129 ======= ======= =======
Income Taxes 43 Deferred income tax assets and liabilities are recorded for all temporary differences between financial and tax reporting and are the result of differences in the timing of recognition of certain income and expense items for financial and tax reporting. The Company does not provide for U. S. income taxes which would be payable if undistributed earnings of its majority-owned foreign subsidiaries were remitted to the U.S. because the Company either considers such earnings to be invested for an indefinite period or anticipates that if such earnings were distributed, the U.S. income taxes payable would be substantially offset by foreign tax credits. The total amount of undistributed earnings of majority-owned foreign subsidiaries for income tax purposes was approximately $15.0 million, $12.3 million and $9.6 million at December 31, 2000, December 31, 1999, and July 31, 1999, respectively. Workers' Compensation Insurance The Company is self-insured for a portion of its workers' compensation claims. The Company provides for workers' compensation insurance each period based on its estimate of the total ultimate payout for all claims and related fees. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivables, accounts payable, cash overdrafts and accrued expenses approximate their respective fair values due to their short maturities. Refer to Note 7 for disclosure regarding the fair value of the Company's long-term debt. Foreign Currency Translation Where the local currency of the Company's foreign subsidiaries is the functional currency, translation adjustments are recorded as a separate component of Stockholders' Equity. All transaction gains and losses and any translation adjustments where the U.S. dollar is the functional currency are recorded in income as a component of selling, general and administrative expenses. These gains (losses) were not material for 2000, the Transition Period, fiscal 1999 or fiscal 1998. Revenue Recognition Revenue is generally recognized at the time the goods are shipped to the customer. When customers, under the terms of specific orders, request that the Company manufacture and invoice goods prior to shipment to the customers, the Company recognizes revenue based on the actual completion of the manufacturing process. These limited occurrences generally arise as a result of the customer's manufacturing delays, scheduling or capacity constraints or lack of storage space and, in each instance, the customer accepts title to the goods at the date of the Company's corresponding invoice. In each case of "bill and hold" sales, the Company ensures that the transaction complies with the seven conditions and the six considerations contained in AAER No. 108 of the Securities and Exchange Commission. Reserves for estimated sales returns and allowances are recorded as a reduction of revenues in the period the related revenues are recognized. Certain revenue from the Company's now sold railway signal and communication engineering, construction and maintenance contracts was recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Costs included materials, direct and allowable labor and overhead. Provisions for estimated losses on uncompleted contracts were made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability resulted in revisions to costs and income, the effects of which were recognized in the period in which the revisions were determined. Accounts receivable as of December 31, 2000 and 1999, and July 31, 1999 included $20.7 million, $10.4 million and $10.2 million, respectively, of costs and estimated earnings in excess of billings on uncompleted contracts. Research and Development Expenses 44 Expenditures for research, development and engineering of products and manufacturing processes are expensed as incurred. Expenditures for 2000, the Transition Period, fiscal 1999 and fiscal 1998 were immaterial. Earnings Per Share Due to losses, the denominator used in the calculation of basic and diluted earnings per share for 2000, the Transition Period and fiscal 1999 were the same and simply represented the weighted average number of common shares outstanding during those periods. For fiscal year 1998, the denominator for diluted earnings per share also included equivalent shares of 624 from the assumed exercise or issuance of stock options, warrants and contingent shares. Other common stock equivalents which would have increased diluted shares by 3.6 million, 1.0 million, 0.5 million and 0.4 million shares for the periods ended December 31, 2000, December 31, 1999 and July 31, 1999 and 1998, respectively, were not included in the computation of diluted earnings per share because the inclusion of such equivalents would have been antidilutive. The large increase in 2000 results from the assumed conversion of the Company's preferred stock that was issued in March 2000. Foreign Currency Instruments and Interest Rate Agreements The Company accounts for financial instruments under SFAS No. 80, "Accounting for Futures Contracts." Under this standard, for instruments that properly qualify for hedge accounting, the gain or loss realized on a hedge is deferred an amortized over the life of the contract. For instruments that do not qualify for hedge accounting, the gain or loss realized is recognized in income in the current period. New Accounting Pronouncements In November 1997, the FASB's Emerging Issues Task Force reached a consensus that requires companies to write-off previously capitalized business process re- engineering costs and expense future costs as incurred. The Company had capitalized certain process reengineering costs before fiscal 1998. In accordance with this consensus, effective August 1, 1997, the Company recorded a non-cash charge of $1.8 million ($1.1 million after tax) to reflect the cumulative effect of this accounting change. In April 1998, Statement of Position No. 98-5 was issued which requires that companies write-off defined previously capitalized start-up costs and expense future start-up costs as incurred. The Company had capitalized certain start-up costs before fiscal 1999, including $1.5 million during fiscal 1998. Effective August 1, 1998, the Company recorded a non-cash charge of $2.6 million ($1.6 million after-tax) to reflect the cumulative effect of this accounting change. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new and revises several existing standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be designated as a cash flow hedge, a fair value hedge or a foreign currency hedge. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedge and the measurement method to be used. Changes in the fair value of derivatives are either recognized in earnings in the period of change or as a component of other comprehensive income (loss) in the case of certain hedges. On January 1, 2001, the Company recorded a transitional adjustment to adopt SFAS No. 133 which increased liabilities by $30,000 with an offset to Other Comprehensive Income. Reclassifications As permitted under the pooling-of-interests method of accounting, the Company's pre-Merger consolidated financial information reflects certain adjustments to conform the accounting policies of both companies. These 45 adjustments retroactively conform, for all periods presented, the accounting policies of both companies, consistent with the intent to present both companies as though they had always been combined. 4. BUSINESS ACQUISITIONS 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. Donovan explosion hardens steel rail and is part of the Company's Rail Services and Systems segment. The total purchase price of $7.6 million for these assets included $2.0 million in cash, a $2.5 million note due in monthly installments through May 2003 and 500,000 shares of the Company's common stock valued at $3.1 million. During the Transition Period, the Company acquired all outstanding common stock of COMETNA--Companhia Metalurgica Nacional, S.A. ("Cometna") located in Lisbon, Portugal for $8.3 million of the Company's common stock. Cometna manufactures and machines products for the freight and passenger rail industries in Europe and is part of the Company's Rail Products segment. An additional 311,110 shares of the Company's stock, which were contingently issuable pursuant to certain earlier acquisitions, were deemed issued as of December 31, 1999. The aggregate purchase price paid for fiscal 1998 business acquisitions was $1.9 million, including 22,222 shares of the Company's common stock valued at $0.4 million. These acquisitions were all accounted for under the purchase method of accounting. Accordingly, certain recorded assets and liabilities of the acquired businesses were revalued to estimated fair values as of the acquisition dates. Management used its best judgment and available information in estimating the fair value of those assets and liabilities. Changes to those estimates were not material. The operating results of the acquired businesses are included in the consolidated statements of operations from their date of acquisition. 5. BUSINESS AND MAJOR ASSET DISPOSITIONS In 2000, the Company adopted a formal plan to sell its Flow and Specialty Products assets and businesses. According, the results of the Flow and Specialty segment have been reflected as Discontinued Operations in the accompanying consolidated statements of operations. Net sales from discontinued operations for 2000, the Transition Period, fiscal 1999 and fiscal 1998 were $81.6 million, $29.6 million, $74.1 million and $93.6 million, respectively. Discontinued operating results do not include an allocation of general corporate interest expense. Assets and liabilities of the Flow and Specialty segment consisted of the following at December 31, 2000, December 31, 1999 and July 31, 1999 (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 -------- -------- -------- Accounts receivable, net $ 9,955 $10,002 $ 9,206 Inventories 3,976 5,607 3,575 Prepaid expenses 67 105 307 Property, plant, and equipment, net 18,568 15,757 12,856 ------- ------- ------- Total assets 32,566 31,471 25,944 Accounts payable 9,150 11,978 6,441 Accrued expenses 1,369 1,079 1,124 Term debt 233 537 764 ------- ------- ------- Net assets to be disposed of $21,814 $17,877 $17,615 ======= ======= =======
On April 17, 2001 the Company agreed to sell its Flow and Specialty Products business and assets to ING, along with some other minor assets, for approximately $24 million. The sales price was in excess of the carrying value of the net assets sold and includes a seven year $4.0 million junior subordinated note bearing interest at 8% per annum. 46 Additionally, the Company sold its 50% ownership in Anchor Brake Shoe, L.L.C. ("Anchor") on December 28, 2000. Anchor designs, manufactures, markets and sells railcar composite brake shoes. Proceeds received from the sale were $10.4 million which were used to reduce borrowings under the Credit Facility. The Company realized a $3.6 million gain on this sale. In February 2001, the Company sold its freight railroad and transit signaling systems and services business for a cash sales price of $21.1 million, subject to a net asset adjustment. A significant portion of the net proceeds of $18.5 million was used to permanently reduce outstanding borrowing commitments under the Credit Facility. As sale proceeds were insufficient to completely cover non deductible goodwill related to the business, the Company recorded a December 2000 impairment charge of $1.8 million. Additionally, the Company recorded a December 2000 deferred income tax charge of $2.5 million related to the estimated taxable gain incurred upon the sale. The Company retained certain contracts and other receivables of the signaling business, primarily related to various completed contracts and other completed projects. Retained receivables aggregated $18.4 million. Because the Company will no longer have a continuing interest in the signaling business, collection of these receivable is expected to be hampered. Accordingly, the Company recorded a $6.0 million reserve in December 2000 reflecting management's best estimate of the collectibility of these amounts. 6. NONRECURRING LOSSES (GAINS) Nonrecurring losses (gains) for 2000, the Transition Period, and fiscal 1999 consisted of the following (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 -------- -------- -------- Restructuring charges $10,756 $(915) $12,142 Impairment charge 1,834 -- -- Gain on sale of joint venture (3,588) -- -- Merger costs -- -- 9,488 ------- ----- ------- $ 9,002 $(915) $21,630 ======= ===== =======
All of the restructuring charges recorded by the Company 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 charges of $10.8 million during 2000 for costs associated with the planned closing of its Melrose Park, Illinois plant ($2.8 million), additional costs associated with prior restructuring initiatives ($1.1 million), and severance and related benefit costs for permanent salaried and hourly workforce reductions throughout the organization ($6.9 million). 47 Due largely to the implementation of improved manufacturing processes in some of its other production facilities, the Company announced the closure of its Melrose Park, Illinois Rail Products facility, and recorded a $2.8 million restructuring charge for related closure costs. Total cash costs associated with the Melrose Park closure include $0.4 million of severance and related benefit costs for approximately 242 hourly and 42 salaried employees (substantially all of whom were terminated during the first quarter of 2001) 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 ceased production at this facility by December 31, 2000, with the building sale to be completed within one year of its vacancy. An additional $1.1 million provision was recorded in 2000 related to prior restructuring initiatives, primarily related to the Company's idled facilities in Anderson, Indiana and Cincinnati, Ohio which were not sold as quickly as initially expected. The Cincinnati facility was sold in February 2001. Planned permanent reductions in employment levels resulted in a charge of $6.9 million, representing cash severance and related benefit costs for approximately 90 salaried employees and 30 hourly plant employees throughout the Company, including its closed Verona, Wisconsin offices, and required cash severance payments made to approximately 340 production employees at the Company's Sahagun, Mexico facility. As of December 31, 2000, $3.2 million of costs have been paid. The majority of the remaining payments occured in the first quarter of 2001, with some payments continuing through 2002 for certain severed employees. The following table is a summary roll forward of the restructuring reserves recorded in 2000, (in thousands):
Aggregate Charge Deductions Balance --------- ---------- ------- Cash provisions: Employee severance & benefits $ 7.3 $(2.6) $4.7 Idle facility and property disposal costs 2.2 (0.2) 2.0 ----- ----- ---- Total cash costs 9.5 $(2.8) $6.7 ===== ==== Non-cash asset write-downs 1.3 ----- Total $10.8 =====
During fiscal 1999, the Company recorded $12.1 million of restructuring charges. During the Transition Period, the Company recorded a net credit of $0.9 million, including adjustments of previously-recorded charges based on actual expenses incurred on the related initiatives. The primary components of the net $11.2 million of charges include the consolidation of the corporate activities of the merged companies into one facility and 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 December 31, 2000, all of these employees had been terminated and substantially all 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 Anderson were transferred to 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 decided to close an assembly facility in Verona, Wisconsin. This Rail Services and Systems facility closed by December 31, 2000 with all operations being transferred to another Company location. 48 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 $1.1 million in cash provisions for idle facility and property disposal costs, all of which has been spent as of December 31, 2000. The 2000 impairment charge and gain on sale are described in Note 5. The fiscal 1999 Merger costs were incurred as a direct result of the Merger for advisory and other professional services. 7. DEBT Debt outstanding as of December 31, 2000, December 31, 1999 and July 31, 1999 consisted of the following (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 ----------------------------------------------- Revolving Credit Facility $ 180,394 $165,471 $134,300 Senior Subordinated Notes 75,000 75,000 75,000 Term loans 2,700 250 8,522 Industrial revenue bonds 5,305 5,805 6,285 Other 5,597 5,928 5,512 --------- -------- -------- Total debt 268,996 252,454 229,619 Less--Current maturities (7,037) (6,207) (4,588) --Long-term debt in technical default (251,210) -- -- --------- -------- -------- Total long-term debt $ 10,749 $246,247 $225,031 ========= ======== ========
Immediately after the consummation of the Merger, the Company entered into 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 provided the Company with a revolving line of credit of up to $200.0 million. The weighted average interest rate of all outstanding borrowings under the Credit Facility at December 31, 2000 was 10.7%. Availability at December 31, 2000 was $7.6 million. 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. During the Transition Period and 2000, the Company entered into a number of amendments, restatements and other relief mechanisms of the Credit Agreement. The primary results of those changes included a) the modification of several financial covenants that the Company otherwise would not have been in compliance with as of October 31, 1999, December 31, 1999 or September 30, 2000; b) the modification of the pricing grid which had the effect of increasing the applicable interest rates and lender fees; c) the establishment of scheduled commitment reductions and d) the release of certain collateral related to the Company's Mexican subsidary. At December 31, 2000, the Company was not in compliance with several of the financial covenants under the Credit Facility. Additionally, covenants and other provisions have been violated through April 16, 2001, for which the Company paid $0.8 million to the lenders in January 2001. Accordingly, all outstanding borrowings are reflected as short-term obligations as of December 31, 2000. As of April 17, 2001, the Company received a commitment from the senior lenders to amend the Credit Facility. The primary terms of the amendment will include a) a waiver from the senior lenders for all financial and other provision violations as of December 31, 2000 and through April 17, 2001, b) shortening the final maturity date of the facility from July 31, 2003 to January 5, 2003, c) allow the ING Bridge Notes, d) maximum aggregate commitments and outstanding borrowings will be permanently reduced to $150 million by April 2002 49 e) mandatory prepayments and further permanent reductions of maximum commitments are required upon qualifying assets sales, tax refunds, receivables collections, equity and debt issuances (excluding ING series C preferred stock and Bridge Notes) and upon incurrence of Excess Cash Flows, as defined, f) interest rates will be increased, for all borrowings, to prime plus 2.75%, g) certain additional collateral will be required, h) cross default provisions will be modified, including additional provisions regarding the ING Bridge Notes, and i) existing covenants will be replaced by a rolling, quarterly minimum EBITDA covenant, a maximum capital expenditure covenant, and a loan to value covenant, all as defined. An amendment fee of $1.5 million will be due half on the date of the amendment and half at maturity of the amended facility. The senior lenders will also receive warrants to purchase up to two percent, on a fully diluted basis, of the Company's common stock at a deminimis price. The warrants and resulting common shares will be able to be put to the Company at any time at a per share price equal to the greater of a pre-determined fixed price and the market value per share of the Company's common stock. On February 1, 1997 and December 23, 1997 the Company issued $50 million of 9 1/8% Senior Subordinated Notes and $25 million of 8 3/4 % Senior Subordinated Notes, respectively (collectively, the "Notes"). The net proceeds from the issuances were used to repay certain outstanding indebtedness under its primary and other credit facilities. As a result of an amendment in 2000, the interest rate on all Notes was increased to 10 1/2% effective October 1, 2000. 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 at 100% of face value. 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 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. Pursuant to the Notes indenture, the Company is required to meet certain financial covenants including minimum interest coverage, minimum consolidated net worth and, upon incurrence of certain new indebtedness, maximum funded debt to capitalization, all as defined. The 2000 amendment, fees for which of $0.7 million are being amortized over the remaining life of the Notes, reduced the minimum interest coverage ratio from 2.4:1.0 to 1.8:1.0 effective September 30, 2000. For purposes of the covenant calculations, various adjustments are made to reported balances. The minimum interest coverage ratio remains at 1.8:1.0 each quarter through the maturity date and the minimum consolidated net worth balance adjusts each quarter based on quarterly earnings and capital issuances. The Company was not in compliance with the minimum net worth covenant at December 31, 2000. Additionally, based on preliminary results for the first quarter of 2001 and the Company's forecast for the remainder of the year, the Company anticipates it will fail to meet one or more of these covenants at one or more quarter ends. Noncompliance gives the trustee or noteholders owning at least 25% in aggregate principal amount of outstanding notes the unilateral right to accelerate the maturity of the related debt after a requisite cure period. Accordingly, the Notes are reflected as short-term obligations as of December 31, 2000. However, management believes that neither the individual noteholders (or the trustee on their behalf) nor the senior lenders or noteholders will act to accelerate the payment of substantial outstanding borrowings. Management's belief is based on, among other things, ongoing discussions with its lenders and the willingness of the senior lenders to enter into the transactions and agreements described in Note 2. Additionally, based on advice received from its advisors, management believes that the Company can complete a successful consent solicitation with the noteholders by July 2001 whereby the financial covenants will be modified or eliminated and any necessary waivers of noncompliance will be obtained. However, there can be no assurance that the Company's lender will not accelerate payment of some or all of the outstanding Notes and borrowings under the Credit Facility. If accelerated, the Company will be required to further refinance its existing indebtedness, seek additional financing, or issue common stock or other securities to raise cash to assist in 50 financing its operations. Other than as described above and in Note 2, the Company has no current commitments or arrangements for such financing alternatives, and there can be no assurances that such financing alternatives will be available on acceptable terms, or at all. The Company's inability to make any payments when due or to satisfy its financial covenants under its existing borrowing facilities could have a material adverse effect on the Company. Prior to the Merger, ABC and NACO had their own primary bank credit facilities which allowed for aggregate borrowings and outstanding letters of credit, as amended, of up to $125 million, including a term loan portion of $8.5 million. These previous primary bank credit facilities were terminated upon the refinancing under the Credit Facility. In December 1998, a $3.0 million Industrial Revenue Bonds ("IRB") were issued on behalf of the Company for the new paneling facility in Ashland, Wisconsin. The IRB's bear an adjustable rate of interest as determined by the Public Bond Market Association. As of December 31, 2000, the adjustable interest rate on the bonds was set at 4.98%. The bonds mature in December 2018. In March 1995, NACO issued a $15.0 million 11.75% senior subordinated note together with a common stock purchase warrant to a major insurance company. The warrant agreement allowed the insurance company to purchase 54,271 common shares of NACO's common stock at a price of $0.01 per share, subject to certain adjustments. During fiscal 1999, the insurance company exercised its warrant for 54,271 NACO shares (representing 472,158 shares of the Company based on the Merger exchange ratio). Other indebtedness represents notes due to sellers of the Company's business acquisitions, a note due to a customer in exchange for entering into a supply agreement with that customer and other indebtedness. The other indebtedness bears interest as of December 31, 2000 at rates from 4.0% to 11.5% and mature from 2000 to 2005. A universal shelf registration was declared effective on October 29, 1999, for issuances up to $300 million of debt or equity securities, and the unused portion of a previous universal shelf registration was de-registered. As of December 31, 2000, no securities were issued under this universal shelf registration. Scheduled maturities of debt as of December 31, 2000 are as follows (in thousands):
Twelve months ending December 31: 2001 $ 7,037 2002 4,522 2003 177,408 2004 75,765 2005 64 Thereafter 4,200 -------- $268,996 ========
The Company's carrying amount of debt, excluding the Notes, approximates the market value of such debt because the interest rates on such debt are variable and are set periodically based on the current rates during the year. The December 31, 2000 quoted market price of the Notes was approximately 57% of their aggregate carrying value. Similarly, the quoted market prices of the Notes as of December 31, 1999 and July 31, 1999 was approximately 80% and 90%, respectively. 8. UNCONSOLIDATED JOINT VENTURES Summarized financial information for Anchor for 2000, the Transition Period, fiscal 1999 and fiscal 1998 was as follows (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 -------------------------------------------- Current assets............... $ 8,299 $7,674 $ 7,267 $ 4,644 Noncurrent assets............ 6,838 7,724 9,442 9,450 Current liabilities.......... 1,546 1,491 2,013 2,766
51 Net sales.................... 17,051 7,194 18,781 17,917 Gross profit................. 2,184 2,052 5,910 5,643 Net income................... 1,850 975 2,847 3,138
In May 1996, the Company entered into a joint venture agreement with China's Ministry of Railroads to establish the Datong ABC Castings Company Ltd ("Datong"). The joint venture manufactures wheels in China primarily for the Chinese railway markets. The Company's contribution of its 40% share in the joint venture ABC-NACO Inc. consists of technical know-how, expertise and cash. The cash funding was used to construct a manufacturing facility, which was operational in late calendar 1998. The intangible component of the Company's contribution was valued at $1.8 million and such amount is ratably being recognized as additional equity earnings. The Company earned royalties for the first time on certain sales from this venture of $0.2 million in 2000. The Company's investment in Datong was $9.0 million as of December 31, 2000. Summarized financial information for Datong for 2000, the Transition Period and fiscal 1999 was as follows (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 ---------------------------------- Current assets............... $11,639 $ 9,264 $ 6,330 Noncurrent assets............ 35,128 36,582 37,624 Current liabilities.......... 6,499 8,945 6,209 Noncurrent liabilities....... 12,745 12,984 12,985 Net sales.................... 29,989 7,050 5,461 Gross profit (loss).......... 5,168 (218) (1,960) Net income (loss)............ 4,109 (818) (2,819)
The Company has other joint venture arrangements which are not significant to the Company's results of operations. The Company occasionally pays certain items on behalf of the joint ventures and is subsequently reimbursed for such payments. Also, some of the ventures purchase materials from the Company for use in production or for direct resale. Trade accounts receivable from these affiliates as of December 31, 2000, December 31, 1999 and July 31, 1999, were $0.4 million, $1.1 million and $1.6 million, respectively, and are included in accounts receivable in the accompanying consolidated balance sheets. Other amounts owed to or from these affiliates at these dates were not material. 9. INCOME TAXES Income (loss) from continuing operations before income taxes, cumulative effect of accounting changes and extraordinary item for 2000, the Transition Period, fiscal 1999 and fiscal 1998 are as follows (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 --------------------------------------------------------- United States $(61,606) $(6,383) $(18,493) $16,736 Foreign 2,052 (2,360) 7,530 (3,744) -------- ------- -------- ------- Total $(59,554) $(8,743) $(10,963) $12,992 ======== ======= ======== =======
The provision (benefit) for income taxes for 2000, the Transition Period, fiscal 1999 and fiscal 1998 consisted of the following (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 --------------------------------------------------- Current: Federal $ - $(1,809) $ 2,261 $2,583 State - (255) 340 410 Foreign 345 1,251 1,568 63 -------- ------- ------- ------
52 Total current 345 (813) 4,169 3,056 -------- ------- ------- ------ Deferred: United States (21,060) (2,785) (6,374) 2,956 Foreign 308 (698) 824 (622) -------- ------- ------- ------ Total deferred (20,752) (3,483) (5,550) 2,334 Valuation Allowance 20,887 -- -- -- -------- ------- ------- ------ Total $ 480 $(4,296) $(1,381) $5,390 ======== ======= ======= ======
A reconciliation between the U. S. federal statutory rate and the Company's effective income tax rate on income from continuing operations before income taxes, cumulative effect of accounting changes and extraordinary item is as follows:
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 --------------------------------------------------- U. S. federal statutory rate (34.0)% (34.0)% 34.0% 34.0% State taxes, net of federal benefit (1.4) (4.0) (6.0) 5.1 Difference due to foreign subsidiaries 0.5 (12.9) (22.6) (1.1) Nondeductible goodwill amortization 1.5 1.1 (3.6) 1.8 Nondeductible Merger costs -- -- (16.6) -- Change in tax reserves 33.7 6.6 22.8 5.9 Other 0.5 (5.9) 4.6 (4.2) ------ ------ ----- ---- Effective income tax rate 0.8% (49.1)% 12.6% 41.5% ====== ====== ===== ====
Deferred tax assets and liabilities are recorded for all temporary differences between financial and tax reporting and are the result of differences in the timing of recognition of certain income and expense items for financial and tax reporting. The major temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):
December 31, 2000 December 31, 1999 July 31, 1999 ----------------------- ----------------------- ----------------------- Assets Liabilities Assets Liabilities Assets Liabilities --------- ------------ --------- ------------ --------- ------------ Property basis differences $ -- $(14,830) $ -- $(14,685) $ -- $(13,334) Insurance reserves 2,191 -- 2,248 -- 2,791 -- Inventory basis differences 1,554 (2,463) 1,682 (1,461) 974 (1,501) Allowance for doubtful accounts 1,769 -- 770 -- 607 -- Postretirement and postemployment reserves 4,192 (1,799) 4,322 (2,030) 4,047 (1,968) Other employee benefit reserves 801 -- 790 -- 510 -- Deferred tax losses from debt modification 7,205 -- -- -- -- -- Other, net -- (3,736) -- (678) 3,823 -- ------- -------- ------ -------- ------- -------- Total $17,712 $(22,828) $9,812 $(18,854) $12,752 $(16,803) ======= ======== ====== ======== ======= ========
In addition to the above deferred income taxes, the Company, as of December 31, 2000, had various income tax carryforwards including: net operating losses of $70.8 million in the United States which expire in 2017 to 2020, $8.8 million in Portugal which expire in 2002 to 2006, $7.7 million in Scotland which can be carried forward indefinitely and $0.6 million in Sweden which can also be carried forward indefinitely. The Company also has U.S. alternative minimum tax credits of $5.5 million, which do not expire. Similarly, the Company, as of December 31, 1999, had various income taxcarry forwards including: tax net operating losses of $31.3 million in the U.S., $9.4 million in Portugal, $6.0 million in Scotland, $0.5 million in Sweden and United States alternative minimum tax credits of $5.5 million. Similarly, the Company, as of July 31, 1999 had various income tax carryforwards including: U.S. foreign tax credits of $1.8 million, U.S. alternative minimum tax credits of $4.5 million, and net operating losses in Scotland of $5.3 million. Due to the uncertainty as to the ultimate realization of certain tax carryforwards, the Company has recorded tax reserves of $32.4 million, $11.7 million, and $9.4 million as of December 31, 2000, December 31, 1999 and July 31, 1999, respectively. Changes in the reserves are primarily due 53 to additional net operating losses and changes in the other deferred tax assets of foreign subsidiaries. 10. RETIREMENT PENSION PLANS United States Plans The Company maintains defined benefit pension plans covering certain hourly employees in the United States. The plans provide benefits for certain hourly employees that are based on the employees' years of service and also provides benefits for other hourly employees that are based on the employees' years of service and compensation upon their retirement from the Company. The plans invest primarily in investment grade corporate bonds, government bonds, corporate stocks and cash. Net periodic pension cost for 2000, the Transition Period, fiscal 1999 and fiscal 1998 included the following components (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 ----------------------------------------------- Service cost $ 1,277 $ 568 $ 1,517 $ 1,243 Interest cost on projected benefit obligation 2,345 1,060 1,929 1,774 Expected return on plan assets (3,442) (1,559) (2,845) (2,184) Amortization of prior service costs 415 157 251 154 Recognized net actuarial (gains) losses (259) (104) (97) (36) Amortization of net transition liability 52 25 55 56 Recognized for curtailment 634 331 -- -- ------- ------- ------- ------- Net periodic pension cost 1,022 478 810 1,007 Periodic pension income included in discontinued operations (119) (87) (185) 233 ------- ------- ------- ------- Periodic pension cost of continuing operations $ 1,141 $ 565 $ 995 $ 774 ======= ======= ======= =======
The Company maintains benefit plans which provide certain of its unionized employees, their dependents and beneficiaries with postretirement medical and/or life insurance benefits. Some of the Company's postretirement plans are not funded. The Company has established a Voluntary Employee Benefit Association trust to fund a portion of this obligation. Contributions of $0.2 million, $1.0 million and $0.9 million were made to the trust, during the Transition Period, fiscal 1999 and fiscal 1998, respectively. No contributions were made during 2000. Net periodic postretirement benefit expense for 2000, the Transition Period, fiscal 1999 and fiscal 1998 includes the following components (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 -------------------------------------------- Service cost $ 398 $ 153 $ 339 $ 213 Interest cost on projected benefit obligation 1,126 440 868 544 Expected return on plan assets (407) (162) (332) (246) Amortization of prior service costs 21 5 11 2 Recognized net actuarial (gains) losses (75) (47) (120) 77 Recognized for curtailment (1,245) -- -- -- ------- ----- ----- ----- Total postretirement benefit expense (income) (182) 389 766 590 Periodic postretirement cost included in discontinued operations 35 11 38 39 ------- ----- ----- ----- Periodic postretirement cost (income) of continuing operations $ (147) $ 378 $ 728 $ 551 ======= ===== ===== =====
The following table sets forth the changes in benefit obligations and in the value of plan assets for 2000, the Transition Period and fiscal 1999 (in thousands):
Pension Benefits Postretirement Benefits 12/31/00 12/31/99 7/31/99 12/31/00 12/31/99 7/31/99 --------------------------------------------------------------------------------- Changes in benefit obligation--
54 Benefit obligation at beginning of period $ 30,150 $ 30,450 $ 25,190 $ 13,722 $ 12,327 $ 12,556 Service cost 1,277 568 1,517 398 153 339 Interest cost 2,345 1,060 1,929 1,126 440 868 Amendments 1,230 846 2,361 123 -- 31 Actuarial (gains) losses (572) (2,205) 696 897 973 (898) Increase (decrease) due to curtailment (74) 175 -- (1,303) -- -- Benefits paid (1,576) (744) (1,243) (361) (171) (569) --------- --------- -------- --------- --------- -------- Benefit obligation at end of period 32,780 30,150 30,450 14,602 13,722 12,327 Changes in value of plan assets-- Fair value of plan assets at beginning of period 37,463 36,735 30,500 4,399 4,197 3,327 Actual return on plan assets (1,038) 962 5,079 (76) 202 470 Employer contributions 737 510 2,399 361 171 969 Benefits paid (1,576) (744) (1,243) (361) (171) (569) --------- --------- -------- --------- --------- -------- Fair value of plan assets at end of period 35,586 37,463 36,735 4,323 4,399 4,197 Funded status-- Funded status 2,806 7,314 6,285 (10,279) (9,322) (8,130) Unrecognized prior service cost 3,951 3,839 3,757 126 81 85 Unrecognized net actuarial gains (1,830) (5,996) (4,952) (237) (1,690) (2,669) Unrecognized transition obligation 89 144 179 -- -- -- --------- --------- -------- --------- --------- -------- Prepaid (accrued) benefit costs $ 5,016 $ 5,301 $ 5,269 $ (10,390) $ (10,931) $(10,714) ========= ========= ======== ========= ========= ========
Key assumptions used in the calculations above were as follows:
Pension Benefits Postretirement Benefits 12/31/00 7/31/00 7/31/99 12/31/00 7/31/00 7/31/99 ------------------------------------------------------------------------ Discount rate 7.500% 7.750% 7.125% 7.500% 7.750% 7.125% Expected long-term rate of return on assets 9.250% 9.250% 9.125% 9.250% 9.250% 9.250%
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligations for participants is 9% in 2000 declining to an ultimate rate of 5.0% in year 2008. A one percentage point change in the assumed health care cost trend rates would have the following effects for and as of the year ended December 31, 2000 (in thousands):
One Percentage Point Increase Decrease -------- ------------- Effects on total service and interest cost components........ $ 134 $(117) Effect on postretirement benefit obligation.................. $1,122 $(984)
In addition, the Company maintains defined contribution plans for United States salaried employees and for certain hourly employees. These plans provide for Company contributions of not less than 100% of each employee's contributions commencing July 1, 1999 for certain former ABC employees, and April 1, 1997 for certain former NACO employees; and 50% prior thereto, subject to certain limitations. The Company's contributions relating to continuing operations were $1.2 million, $0.3 million, $1.2 million and $1.0 million in 2000, the Transition Period, fiscal 1999 and fiscal 1998, respectively. In addition, former ABC made plan contributions to the plan equal to 1% of salaried and certain hourly employees compensation. These additional contributions were not material and were discontinued in August 1999. Foreign Retirement Plans The Company assumed specific liabilities to make termination payments to union workers and salaried employees at the Sahagun, Mexico facility in July 1996. The Company has chosen to account for these liabilities as if they constituted a noncontributory, unfunded, defined benefit pension plan. The following table summarizes the pension plan expense for 2000, the Transition Period, fiscal 1999 and fiscal 1998 (in thousands): Dec. 31, Dec. 31, July 31, July 31, 55
2000 1999 1999 1998 --------------------------------------- Service cost $ 359 $ 119 $ 246 $ 246 Interest cost on projected benefit obligation 286 113 256 196 Amortization of unrecognized (gains) losses 196 41 47 (91) ----- ----- ----- ----- Net periodic pension cost $ 841 $ 273 $ 549 $ 351 ===== ===== ===== =====
The following table sets forth the reconciliation of the changes in benefit obligation for 2000, the Transition Period and fiscal 1999 (in thousands):
Dec. 31, Dec. 31, July 31, 2000 1999 1999 --------------------------------------- Changes in benefit obligation-- Benefit obligation at beginning of period $ 5,416 $ 4,356 $ 4,197 Service cost 360 119 246 Interest cost 286 113 256 Actuarial losses 2,133 1,604 47 Benefits paid (809) (776) (390) ------- ------- ------- Benefit obligation at end of period 7,386 5,416 4,356 Unrecognized net actuarial losses 5,387 3,449 1,696 ------- ------- ------- Accrued benefit cost $(1,999) $(1,967) $(2,660) ======= ======= =======
Key assumptions used in the calculations above were as follows:
Dec. 31, Dec. 31, July 31, 2000 1999 1999 --------------------------------- Discount rate 5.5% 5.5% 6.5% Average rate of increase in compensation levels 2.0% 1.5% 1.5%
The Company's Canadian and Scottish subsidiaries maintain defined contribution plans for substantially all employees. The Company's contributions to these plans, which vary by subsidiary and employee group, are not material. Postemployment Plans The Company provides selected former hourly and salaried disabled employees continued medical benefits until age 65 or recovered from disability and certain other limited benefits for other selected former employees. Net periodic costs are less than $0.6 million annually and the December 31, 2000 occurred postemployment obligation is $0.6 million. 11. COMMITMENTS AND CONTINGENCIES The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur significant cost to comply with such requirements. The Company employs responsible personnel at each facility, along with various environmental engineering consultants from time to time to assist with ongoing management of environmental, health and safety requirements. The Company obtains performance bonds, sometimes on behalf of its unconsolidated joint ventures, and is party to certain other guarantees. Such bonds and guarantees aggregated to $7.1 million as of December 31, 2000; however, the Company does not expect that any claims will be made against these financial instruments. Accordingly, the estimated market value of such instruments is not material. 56 The Company is also a party to various other legal proceedings arising in the ordinary course of business, none of which is expected in management's opinion, after consultation with legal counsel, to have a material adverse effect, either individually or in the aggregate on the Company's consolidated, financial position or results of operations. The Company occupies various manufacturing, warehouse and office facilities and uses certain equipment under operating lease arrangements. Rental expense charged to continuing operations for 2000, the Transition Period, fiscal 1999 and fiscal 1998 was $8.3 million, $3.4 million, $7.1 million and $5.7 million, respectively. At December 31, 2000, future minimum rental payments under continuing operating leases that have initial or remaining terms in excess of one year are as follows (in thousands):
Twelve months ending December 31: 2001 $ 6,867 2002 5,980 2003 5,629 2004 5,405 2005 4,728 Thereafter 4,731 ------- $33,340 =======
12. STOCK OPTION PLANS The Company has various stock option plans which provide for the granting of incentive or nonqualified options to certain directors, officers and employees to purchase shares of its common stock within prescribed periods, up to 10 years, at prices equal to the fair market value on the date of grant. Such options vest over periods up to four years. During fiscal 1999, the Company adopted the 1999 Omnibus Stock Plan for which 1,500,000 shares are reserved for issuance. This plan was approved at the Annual Shareholders Meeting, November 19, 1999. Upon the Merger, NACO's stock option plan was terminated. No options were outstanding under that plan on the Merger date. Activity during 2000, the Transition Period, fiscal 1999 and fiscal 1998 under the Company's stock option plans and with respect to certain other options is summarized below (in thousands, except prices and years):
Outstanding Exercisable --------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price --------------------------------------------- July 31, 1997............ 632 $16.04 387 $13.98 Issued................ 85 18.94 Canceled.............. (26) 21.01 ----- ------ ----- ------ July 31, 1998............ 691 16.21 514 15.30 Issued................ 525 13.32 Exercised............. (30) 10.00 Canceled.............. (151) 18.83 ----- ------ ----- ------ July 31, 1999............ 1,035 14.54 444 15.38 Issued................ 19 10.95 Canceled.............. (70) 16.90 ----- ------ ----- ------ December 31, 1999 984 14.30 438 15.36 Issued................ 337 6.39 Canceled.............. (113) 15.87 ----- ------ ----- ------ December 31, 2000 1,208 $11.95 564 $14.38 ===== ====== ===== ======
57
As of December 31, 2000 ------------------------------------------------------------------- Outstanding Exercisable ------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Prices Shares Years Price Shares Price - -------------------------------------------------------------------------------------------------------------------- $6.00-$9.99 327 9.5 $ 6.39 - - $10.00-$12.00 225 2.8 $10.08 212 $10.03 $12.01-$16.00 499 8.0 $13.62 197 $13.87 $16.01 -$21.63 157 3.3 $20.92 157 $20.92
As allowed under SFAS No. 123, the Company continues to account for its stock- based compensation plans in accordance with the prior accounting standard, Accounting Principles Board Opinion No. 25, under which it recognized no compensation expense in 2000, the Transition Period, fiscal 1999 or fiscal 1998. The following table reflects certain pro forma earnings information as if compensation cost had been determined on the fair valued-based accounting method for options granted in such periods and certain information regarding options granted in such periods and assumptions used in determining the fair value of such options, using the Black-Scholes options pricing model (dollars in thousands, except per share).
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 ----------------------------------------------------------- Pro forma income (loss) $(56,537) $(5,550) $(12,016) $12,277 Pro forma diluted income (loss) per share $ (2.85) $ (0.30) $ (0.66) $ 0.66 Weighted average fair value of granted options $ 5.22 $ 6.66 $ 8.28 $ 10.02 Assumptions-- Weighted average risk-free interest rate 5.8% 6.3% 5.8% 5.8% Volatility 60.9% 45.9% 39.8% 32.8% Expected lives 7.8 years 8.1 years 8.1 years 6.1 years Dividend yield 0.0% 0.0% 0.0% 0.0%
13. 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 million. The preferred stock has certain voting rights and will pay dividends at the rate of 8% per annum accrued semi- annually and paid in the form of common stock or cash, at the discretion of the Company. Dividend payments can be deferred until March 2002. Such deferrals as of December 31, 2000 were $2.0 million. The preferred stock is convertible into common stock at the average closing price of the Company's common stock for the thirty trading days ending February 17, 2000, which was $9.00 per share. The preferred stock can be converted into common shares at the Company's option under certain conditions at any time three years after issuance. The net proceeds received from the sale of preferred stock were applied to reduce the outstanding indebtedness under the Credit Facility. While the conversion price may change under specific conditions, the $9.00 per share price on the date that the Company and the preferred stock holders were committed to completing the transaction represented a discount from the market value of the underlying common stock on that date by an aggregate of $11.9 million. This discount represents the value of the beneficial conversion feature of the preferred stock. Accordingly, the Company initially recorded the value of the preferred stock as $18.1 million with the $11.9 million credited to Additional paid-in capital, offset by $1.6 million in fees paid to ING Furman Selz Investments. Since the preferred stock is convertible at any time at the holders' option, this discount also represents an immediate deemed dividend to those holders at the date of issuance. Accordingly, upon issuance, the Company also recorded a $11.9 million dividend to these holders. As described in Note 2, pending amendments to the terms of the Series B preferred stock include an increase of the dividend rate to 10% and a requirement to pay 40% of the deferred dividends in cash. 58 14. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS The Company has managed its operations through three reporting segments: Rail Products, Rail Services and Systems, and the discontinued 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 Wheel assembly, signal systems, and specialty trackwork 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. The current and historical segment financial information have been restated to reflect these changes. To evaluate the performance of these segments, the Chief Executive Officer examines operating income or loss before interest and income taxes, as well as operating cash flow. Operating cash flow is defined as operating income or loss plus depreciation and amortization. The accounting policies for the operating segments are the same as those described in the summary of the significant accounting policies. Intersegment sales and transfers are accounted for on a cost plus stipulated mark-up which the Company believes approximates arm's length prices. Corporate headquarters and ABC-NACO Technologies primarily provide support services to the operating segments. The costs associated with these services include interest expense, income tax expense (benefit), nonrecurring losses and gains, rearch and development expense, and goodwill amortization, among other costs. These costs are not allocated to the segments and are included within "other" below. The following tables present a summary of operating results and assets by segment and a reconciliation to the Company's consolidated totals (in thousands):
Dec. 31, Dec. 31, July 31, July 31, REVENUES 2000 1999 1999 1998 -------- ---------------------------------------------------------- Rail Products $252,129 $145,457 $388,257 $309,765 Rail Services and Systems 265,450 86,045 247,451 269,691 Elimination and Other (35,349) (21,225) (44,312) (38,155) -------- -------- -------- -------- Continuing Operations 482,230 210,277 591,396 541,301 Flow and Specialty Products 81,554 29,584 74,101 93,620 -------- -------- -------- -------- Total $563,784 $239,861 $665,497 $634,921 ======== ======== ======== ======== Dec. 31, Dec. 31, July 31, July 31, OPERATING INCOME (LOSS) 2000 1999 1999 1998 - ----------------------- ---------------------------------------------------------- Rail Products $ (1,667) $ 8,439 $ 43,287 $ 26,040 Rail Services and Systems 13,654 3,917 12,820 27,711 Elimination and Other (45,770) (11,730) (49,222) (28,513) -------- -------- -------- -------- Continuing Operations (33,783) 626 6,885 25,238 Flow and Specialty Products 6,263 (1,761) 5,939 10,091 -------- -------- -------- -------- Total $(27,520) $ (1,135) $ 12,824 $ 35,329 ======== ======== ======== ======== Dec. 31, Dec. 31, July 31, July 31, TOTAL ASSETS 2000 1999 1999 1998 - ------------ -------------------------------------------------------- Rail Products $174,546 $178,355 $174,372 $151,329 Rail Services and Systems 205,450 191,126 172,783 174,996 Other 61,561 91,519 80,722 69,999 -------- -------- -------- -------- Continuing operations 441,557 461,000 427,877 396,324
59 Flow and Specialty Products 32,566 31,471 25,944 27,572 -------- -------- -------- -------- Total $474,123 $492,471 $453,821 $423,896 ======== ======== ======== ======== Dec. 31, Dec. 31, July 31, July 31, DEPRECIATION AND AMORTIZATION 2000 1999 1999 1998 - ----------------------------- -------------------------------------------------------- Rail Products $ 15,229 $ 6,199 $ 13,821 $ 10,465 Rail Services and Systems 10,457 3,995 9,613 6,002 Other 6,178 1,997 4,786 4,227 -------- -------- -------- -------- Continuing operations 31,864 12,191 28,220 20,694 Flow and Specialty Products 2,995 1,182 1,906 1,782 -------- -------- -------- -------- Total $ 34,859 $ 13,373 $ 30,126 $ 22,476 ======== ======== ======== ======== Dec. 31, Dec. 31, July 31, July 31, CAPITAL EXPENDITURES 2000 1999 1999 1998 - -------------------- -------------------------------------------------------- Rail Products $ 9,995 $ 8,115 $ 26,063 $ 31,484 Rail Services and Systems 5,269 1,870 17,377 25,320 Other 2,102 3,396 7,169 10,932 -------- -------- -------- -------- Continuing operations 17,366 13,381 50,609 67,736 Flow and Specialty Products 3,763 4,278 4,031 1,179 -------- -------- -------- -------- Total $ 21,129 $ 17,659 $ 54,640 $ 68,915 ======== ======== ======== ========
The following table reflects revenues and long-lived assets by country. Revenues were attributed to countries based on the location of the customer (in thousands):
Dec. 31, Dec. 31, July 31, July 31, REVENUES 2000 1999 1999 1998 - -------- ------------------------------------------------------- United States $503,776 $202,037 $567,956 $567,673 Mexico 5,753 5,306 14,374 8,467 Canada 32,346 21,346 65,742 48,738 England 11,689 2,993 12,811 7,224 Turkey 361 6,612 - - Other 9,859 1,567 4,614 2,819 -------- -------- -------- -------- Sub-total 563,784 239,861 665,497 634,921 Revenues from discontinued operations (81,554) (29,584) (74,101) (93,620) -------- -------- -------- -------- Total $482,230 $210,277 $591,396 $541,301 ======== ======== ======== ======== Dec. 31, Dec. 31, July 31, July 31, LONG-LIVED ASSETS 2000 1999 1999 1998 - ----------------- ------------------------------------------------------- United States $219,288 $230,814 $228,500 $216,213 Mexico 43,543 36,773 33,665 22,787 Canada 9,677 9,867 9,518 9,547 Portugal 16,142 17,986 - - England 1,617 1,850 1,936 2,188 -------- -------- -------- -------- Total $290,267 $297,290 $273,619 $250,735 ======== ======== ======== ========
The Company's significant customers are Class I railroads and suppliers of new freight cars. One customer accounted for 9.7%, 12.9%, 17.7% and 15.6% of continuing consolidated net sales for 2000, the Transition Period, fiscal 1999 and fiscal 1998, respectively. Another customer accounted for 26.7%, 12.9%, 7.7% and 11.9% of continuing consolidated net sales for 2000, the Transition Period, fiscal 1999 and fiscal 1998, respectively. Both customers are served by the Rail Products and Rail Services and Systems segments. 60 15. FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT 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 December 31, 2000, the Company had approximately $5.9 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. Also at December 31, 2000, the Company had $3.6 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 August, 2001. Under SFAS No. 80, these forward exchange contracts do not meet the requirements for hedge accounting and, accordingly, the gains and losses resulting from the impact of currency exchange rate movements on these contracts are recognized as a component of net income but were not material in the periods presented. The fair value of these contracts was an aggregate of $251,800 asset at December 31, 2000. From time to time, the Company enters into various interest rate swap and cap agreements for purposes of managing exposures to interest rate movements by effectively converting a portion of its debt from a floating LIBOR rate of interest, up to a maximum trigger point, at which time these borrowings revert back to the floating LIBOR rate of interest. Variable rates are based on 3 month LIBOR and are reset on a quarterly basis. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and recognized over the life of the agreements as an adjustment to interest expense. Maturity dates of interest rate swap and cap generally match those of the underlying debt agreement. At December 31, 2000, the Company had one interest rate protection agreement outstanding which expires in 2003, and covers a notional principal amount of $25 million. The fair value of this contract was an aggregate of $282,500 liability at December 31, 2001. No such agreements were outstanding at December 31, 1999. Cash flows associated with these financial instruments are classified consistent with the cash flows from the transactions being hedged. Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the consolidated financial statements. The market risk associated with these instruments resulting from currency exchange rate or interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company's foreign exchange and instruments consist of major international financial institutions with high credit ratings. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company continually monitors the credit ratings of such counterparties, and limits the financial exposure and the amount of agreements entered into with any one financial institution. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company's exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts are generally limited to the amounts, if any, by which the counterparties' obligations under the contracts exceed the obligations of the Company to the counterparties. The Company does not enter into derivative instruments for trading or speculative purposes. 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Interim data for the Transition Period includes net sales, gross profits and net loss of $123.9 million, $13.2 million and $1.9 million, respectively, for the three months ended October 31, 1999, and $86.4 million, $9.7 million and $3.6 million, respectively, for the two months ended December 31, 1999. Related loss per share was $0.10 and $0.19 for the three and two month periods, respectively. The net losses and losses per share for the three and two month periods are net of income (loss) of $1.0 million ($0.05 per share) and $(2.0 million) (($0.11) per share), respectively, from discontinued operations. The two month period includes pre-tax net restructuring credits of $0.9 million. 61 Quarterly financial data for 2000 and fiscal 1999 are as follows (in thousands):
Quarter ------------------------------------------------------- First Second Third Fourth ------------------------------------------------------- 2000 Net sales $133,822 $134,321 $111,236 $102,851 Gross profit 16,424 16,759 6,553 (2,815) Loss from continuing operations (a) (2,507) (1,425) (13,347) (42,755) Net income (loss)(b) (504) 154 (13,122) (42,729) Loss from continuing operations per share (basic and diluted) $ (0.75) $ (0.10) $ (0.70) $ (2.18) Net loss per share (basic and diluted) $ (0.65) $ (0.02) $ (0.69) $ (2.18) Fiscal 1999 Net sales $150,263 $148,719 $159,877 $144,181 Gross profit 24,342 17,591 23,471 24,670 Income (loss) from continuing operations before accounting change and extraordinary item(c) 3,637 1,123 (9,375) (1,761) Net income (loss)(d) 2,230 932 (12,579) (1,308) Income (loss) from continuing operations before accounting change and extraordinary item per share Basic $ 0.20 $ 0.06 $ (0.51) $ (0.10) Diluted $ 0.20 $ 0.06 $ (0.51) $ (0.10) Net income (loss) per share-- Basic $ 0.13 $ 0.05 $ (0.69) $ (0.07) Diluted $ 0.12 $ 0.05 $ (0.69) $ (0.07)
(a) Includes pre-tax nonrecurring net losses (gains) of $1.6 million, $9.2 million and ($1.8 million) in the first, third and fourth quarters, respectively. (b) Includes after tax income from discontinued operations of $2.0 million, $1.6 million and $0.2 million and less than $0.1 million in the first, second, third and fourth quarters, respectively. (c) Includes pre-tax nonrecurring charges of $15.8 million and $5.8 million in the third and fourth quarters, respectively. (d) Includes an after-tax cumulative effect of an accounting change for startup costs of $1.6 million in the first quarter, an after-tax extraordinary charge of $3.2 million related to the early retirement of certain debt in the third quarter and after-tax income from discontinued operations of $0.1 million and $0.6 million in the first and fourth quarters, respectively, and an after-tax loss from discontinued operations of $0.2 million in the second quarter. Third quarter discontinued operations were less than $0.1 million. 17. SUPPLEMENTAL CASH FLOW INFORMATION A summary of supplemental cash flow information for 2000, the Transition Period, fiscal 1999 and fiscal 1998 follows (in thousands):
Dec. 31, Dec. 31, July 31, July 31, 2000 1999 1999 1998 --------------------------------------------------- Interest paid in cash $25,551 $ 8,529 $20,569 $17,460 Income taxes paid (refunds received) in cash (3,001) 89 3,306 3,021 Acquisitions of businesses (Note 4): Working capital, except cash 300 (5,928) -- (226) Property, plant and equipment and acquisition- related costs 2,800 18,999 -- 467
62 Patents 4,500 -- -- -- Long-term liabilities assumed -- (1,949) -- -- Acquisition debt (2,500) (2,881) -- -- Stock issued (3,100) (8,300) -- (436) ------- ------- ------- ------- Net cash used (received) $ 2,000 $ (59) $ -- $ 1,376 ======= ======= ======= =======
63 ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers of the Company is included in Item 4A of Part I hereof as permitted by the Instructions to 401(b) of Regulation S-K. Directors The Company's Board of Directors is comprised of the following individuals: Daniel W. Duval. Mr. Duval, age 64, has been a director of the Company since February 1999. Prior thereto, Mr. Duval served as a director of NACO, Inc. since 1995. Mr. Duval was President and Chief Executive Officer and a director of Robbins & Myers, Inc., a manufacturer of fluid management equipment for process industries, from 1986 to 1998 and was Vice Chairman and a director until his retirement from Robbins & Myers, Inc. on December 31, 1999. Prior to that time, Mr. Duval was President and Chief Operating Officer of Midland-Ross Corporation, a diversified industrial manufacturing company. Mr. Duval also serves as a director of Arrow Electronics Inc., Gosiger, Inc., National City and The Manitow Co. Inc. Jean-Pierre M. Ergas. Mr. Ergas, age 61, has served as a director of the Company since February 1999. Prior thereto, Mr. Ergas served as director of ABC Rail Products Corporation since July 1995. Since January 1, 2000, Mr. Ergas has been Chairman and Chief Executive Officer of BWAY Corporation, a manufacturer of metal containers. Prior to that time, Mr. Ergas was the Executive Vice President of Alcan Aluminum Limited ("Alcan"), an international manufacturer of aluminum. From June 1995 to January 1996, Mr. Ergas served as Senior Advisor to the Chief Executive Officer of Alcan. During 1994, Mr. Ergas served as a trustee in residence of DePaul University. From 1991 to 1993, Mr. Ergas served as Chairman and Chief Executive Officer of American National Can Company ("ANC"), a manufacturer of consumer goods packaging. From 1989 to 1991, Mr. Ergas served as Chief Executive Officer of ANC. Mr. Ergas also serves as a director of Brockway Standard Inc. and Dover Corporation. Donald W. Grinter. Mr. Grinter, age 64, served as Chairman of the Board of the Company from February 1999 until July 2000. Mr. Grinter served as a director of ABC Rail Products Corporation from 1991 until February 1999 and as Chief Executive Officer and Chairman of the Board of ABC Rail Products Corporation from December 1993 until February 1999. From August 1991 until December 1993, Mr. Grinter served as President and Chief Executive Officer of ABC Rail Products Corporation and from August 1989 until August 1991, he served as President and Chief Operating Officer of ABC Rail Products Corporation. From June 1987 until August 1989, Mr. Grinter was President of the Supermarket Group of Hussmann Corporation, a commercial refrigerator company. Hussmann Corporation is a subsidiary of IC Industries (now PepsiAmericas, Inc.), the parent company of Abex Corporation ("Abex"), a diversified industrial manufacturing company, from which ABC Rail Products Corporation purchased substantially all of its assets in 1989. Mr. Grinter served as an Executive Vice President of Abex from June 1984 until June 1987. Vaughn W. Makary. Mr. Makary, age 51, was elected Chief Executive Officer, President and a Director of the Company in April, 2001. Mr. Makary served as President and Chief Operating Officer of the Company from February, 1999 to April, 2001. He also served as President and Chief Operating Officer of NACO from 1988 to February, 1999, and as a director of NACO from 1993 to February, 1999. James E. Martin. Mr. Martin, age 74, has served as a director of the Company since February 1999. Prior thereto, Mr. Martin served as a director of ABC Rail Products Corporation since July 1995. From May 1995 until December 1995, Mr. Martin served as the Senior Vice President, Operations of Chicago and North Western Railway Company, a freight railway company. From April 1994 to May 1995, he served as Executive Vice President, Operations of Chicago and North Western Transportation Company. From 1989 to March 1994, Mr. Martin was the President of The Belt Railway Company of Chicago. From April 1983 to December 1988, Mr. Martin served as President/Chief Operating Officer of Illinois Central Railroad. Willard H. Thompson. Mr. Thompson, age 72, has served as a director of the Company since February 1999. Prior thereto, Mr. Thompson served as a director of NACO, Inc. since 1988. Mr. Thompson has been an owner and a senior transport consultant of Transport Specialty Group of California, Inc., a transportation consulting company, since 1988. Mr. Thompson has also served as a railroad transport/intermodal specialist for the World Bank. Richard A. Drexler. Mr. Drexler, age 53, has served as a director of the Company since February 1999. Prior thereto, Mr. Drexler served as a director of NACO, Inc. since 1995. Since 1993, Mr. Drexler has served as Chairman, Chief Executive Officer and President of Allied Products Corporation. George W. Peck IV. Mr. Peck, age 69, has served as a director of the Company since February 1999. Prior thereto, Mr. Peck served as a director of ABC Rail Products Corporation since August 1991. Mr. Peck served as a principal of Kohlberg & Co., L.L.C., a New York merchant banking firm ("Kohlberg"), from 1987 to 1997 and as a special limited principal with Kohlberg from 1997 to present. From 1963 to 1987, Mr. Peck was a Director and Vice President of Canny, Bowen Inc., an executive recruiting firm. Mr. Peck serves as a director of Simplicity Manufacturing Company. Board of Directors Meetings and Committees The Board of Directors held six (6) meetings in 2000. The Company has standing Audit and Compensation Committees. The Company does not have a Nominating Committee. Audit Committee. The Audit Committee is responsible for recommending annually to the Board of Directors the appointment of the Company's independent public accountants; discussing and reviewing the scope and the fees of the prospective annual audit; reviewing the results thereof with the Company's independent public accountants; reviewing compliance with existing major accounting and financial policies of the Company; reviewing the adequacy of the Company's financial organization; reviewing management's procedures and policies relative to the adequacy of the Company's internal accounting controls and compliance with federal and state laws relating to accounting practices; reviewing and approving (with the concurrence of a majority of the Company's independent directors) transactions, if any, with affiliated parties; and performing such other duties as set forth in the "Audit Committee Charter," a copy of which is attached as Exhibit A to this proxy statement. The Audit Committee is currently comprised of Messrs. Ergas (Chairman), Drexler and Martin, each of whom is an "independent director," as that term is defined by the applicable rules of the National Association of Securities Dealers, Inc. The Audit Committee held six (6) meetings in 2000. Compensation Committee. The Compensation Committee is responsible for establishing the Company's executive officer compensation policies and for administering these policies. The Compensation Committee is currently comprised of Messrs. Duval (Chairman), Peck and Thompson. The Compensation Committee held four (4) meetings in 2000. During 2000, each of the Company's current directors attended at least 75% of the meetings of the Board of Directors and the Committees on which he served (during the period that he served). SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE REPORTING Based solely upon a review of reports on Forms 3, 4 and 5 and any amendments thereto furnished to the Company pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, and written representations from the executive officers and directors that no other reports were required, the Company believes that all of such reports were filed on a timely basis by executive officers and directors during 2000, except that (i) Mr. Daniel W. Duval, a director, filed a single late Form 4 in connection with one open market purchase of 1,000 shares of common stock, and (ii) Mr. Joseph A. Seher, former Chairman of the Board and Chief Executive Officer, filed a single late Form 4 in connection with an open market purchase of 4,200 shares of common stock. ITEM 11 EXECUTIVE COMPENSATION Compensation of Directors During 2000, the Company's directors who were not receiving compensation as officers or employees of the Company were paid an annual retainer of $25,000 and a fee of $1,500 per day for attending each meeting of the Board of Directors and each meeting of any committee of which they were a member. All directors are reimbursed for expenses incurred in connection with their attendance at Board of Directors and committee meetings. Non-employee directors are eligible to participate in the Company's 1999 Omnibus Stock Plan, and in 2000, each non- employee director was granted stock options to purchase 5,000 shares of the Company's common stock at an exercise price of $6.3203 per share. EXECUTIVE COMPENSATION Summary The following table shows the compensation of the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers for services rendered in all capacities to the Company and its subsidiaries for the periods shown below. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------------------------------------------------------------------------------------- Awards ------------------ Securities Fiscal Year / Underlying All Other Name and Principal Position Transition Period (1) Salary ($) Bonus ($) Options (#) Compensation ($) (2) - ------------------------------------------------------------------------------------------------------------------------------- Joseph A. Seher 2000 505,623 0 35,000 2,450 (Former Chairman of the Board 8/99 - 12/99 (3) 188,657 0 0 3,267 and Chief Executive Officer)(7) 1999 (4) 209,925 173,488 0 0 1998 N/A N/A N/A N/A Donald W. Grinter 2000 200,421 0 35,000 254,120 (Former Chairman of the 8/99 - 12/99 (3) 139,903 0 0 0 Board) 1999 315,000 111,510 35,000 8,592 1998 301,664 197,280 0 8,592 Vaughn W. Makary (6) 2000 380,160 0 35,000 6,970 Chief Executive 8/99 - 12/99 (3) 158,400 0 0 0 Officer 1999 (4) 162,398 112,147 35,000 5,229 1998 N/A N/A N/A N/A John W. Waite 2000 319,242 0 35,000 6,871 Executive Vice President and 8/99 - 12/99 (3) 118,248 0 0 0 Chief Administrative Officer 1999 (4) 132,285 80,351 35,000 4,787 1998 N/A N/A N/A N/A James P. Singsank (5) 2000 188,855 0 20,000 6,917 Senior Vice President and 8/99 - 12/99 (3) 71,485 0 0 2,099 Chief Financial Officer 1999 145,268 37,949 20,000 4,461 1998 N/A N/A N/A N/A
_______________ (1) In 1999, the Company changed its fiscal year-end to December 31 from July 31. In accordance with the rules of the Securities and Exchange Commission, compensation information is presented for the most recent full fiscal year (January 1, 2000 to December 31, 2000, referred to as "2000"), the transition period (August 1, 1999 to December 31, 1999, referred to as "8/99 - 12/99" or the "Transition Period"), and the two prior full fiscal years (August 1, 1998 to July 31, 1999, referred to as "1999," and August 1, 1997 to July 31, 1998, referred to as "1998"). (2) Amounts shown for all persons other than Mr. Grinter represent employer matching contributions under the Company's Savings and Investment 401(k) Plan (the "401(k) Plan"). Amounts shown for Mr. Grinter include (i) $4,092 in 2000, 1999 and 1998 for premiums paid on a life insurance policy on Mr. Grinter's life, of which Mr. Grinter's spouse is the beneficiary; (ii) employer matching contributions in 2000, 1999 and 1998 of $7,400, $4,500 and $4,500, respectively, under the 401(k) Plan; and (iii) $184,534 in 2000 pursuant to the Company's severance program and $62,186 in 2000 from a non- qualified deferred compensation program. (3) Amounts shown in the salary column represent compensation paid for the Transition Period. No bonuses were paid to the named executive officers for the Transition Period. Salary paid for the twelve-month period ended December 31, 1999 to the named executive officers was in order of appearance $462,126, $319,903, $373,075, $314,052, and $163,418 respectively. (4) Information for Messrs. Seher, Makary and Waite in 1999 reflects only compensation paid to such persons by the Company after February 19, 1999 (the effective date of the merger between ABC and NACO, Inc., referred to as the "Merger"). Prior to the Merger, such persons were directors and/or executive officers of NACO, and not the Company, and, accordingly, no compensation information is reflected in the table for such persons prior to the Merger in 1999 or in 1998. (5) James P. Singsank became Senior Vice President and Chief Financial Officer of the Company on July 6, 1999 and, accordingly, no compensation information is reflected in the table for Mr. Singsank in 1998. (6) Vaughn W. Makary was elected Chief Executive Officer, President and a Director of the Company in April, 2001. Mr. Makary served as President and Chief Operating Officer of the Company from February, 1999 to April, 2001. (7) Joseph A. Seher resigned as Chairman of the Board and Chief Executive Officer in April 2001. Option Grants in 2000 The following table sets forth certain information as to options to purchase common stock granted to the named executive officers during 2000, and the potential realizable value of each grant of options, assuming that the market price of the underlying common stock appreciates in value during the ten-year option term at annualized rates of 5% and 10%. OPTION GRANTS IN 2000
Individual Grants Potential Realizable ----------------------------------------------------------- Value at Assumed Number of Percent of Annual Rates of Securities Total Options Exercise Stock Price Underlying Granted to or Base Appreciation for Options Employees in Price Expiration Option Term (3) Name and Principal Position Granted (1) (#) 2000 ($/Sh) (2) Date 5% ($) 10% ($) - ------------------------------------------------------------------------------------------------------------------- Joseph A. Seher 35,000 10.39% 6.95230 6/21/10 153,031 387,806 Donald W. Grinter 35,000 10.39% 6.32030 6/21/10 139,119 352,552 Vaughn W. Makary 35,000 10.39% 6.32030 6/21/10 139,119 352,552 John W. Waite 35,000 10.39% 6.32030 6/21/10 139,119 352,552 James P. Singsank 20,000 5.93% 6.32030 6/21/10 79,497 201,458
_______________ (1) All options granted in 2000 to the named executive officers were made pursuant to the Company's 1999 Omnibus Stock Plan. All such options become exercisable in annual cumulative installments of 33 1/3%, commencing one year from date of grant, with full vesting occurring on the third anniversary date of the date of grant. Vesting may be accelerated as a result of certain changes in control of the Company. (2) All options were granted at market value on the date of grant, based on the closing price of the common stock on the Nasdaq NMS as reported in The Wall Street Journal except for "substantial stockholders," as defined in Section 7 of the 1999 Omnibus Stock Plan, who are provided option grants with an exercise price equal to the FMV plus 10%. (3) Potential realizable value is reported net of the option exercise price but before taxes associated with exercise. These amounts assume annual compounding results in total appreciation of approximately 63% (5% per year) and approximately 159% (10% per year). There can be no assurance that the amounts reflected in this table will be achieved. Option Exercises in 2000 The table below sets forth certain information as to the value of unexercised options held by each of the named executive officers as of December 31, 2000. No named executive officer exercised any options in 2000. AGGREGATED OPTION EXERCISES IN 2000 AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised In- Underlying Unexercised The-Money Options at Options at Fiscal Year-End Fiscal Year-End ($) (1) --------------------------------------------------------------- Shares Acquired on Value Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable -------------------------------------------------------------------------------------------- Joseph A. Seher - - - 35,000 - - Donald W. Grinter - - 103,667 58,333 - - Vaughn W. Makary - - 11,667 58,333 - - John W. Waite - - 11,667 58,333 - - James P. Singsank - - 36,667 33,333 - -
_______________ (1) Represents the difference between $5.92 (the average of the high and low sale prices of the common stock on the Nasdaq NMS as reported in The Wall Street Journal on December 31, 2000) and the option exercise price, multiplied by the number of shares of common stock covered by the options held. Severance and Other Arrangements The Company has severance and change in control arrangements with Messrs. Seher, Makary, Waite, and Singsank (the "Executives"). Each arrangement provides, among other things, that if the Company terminates an Executive's employment other than for cause (as defined in the agreement), the Company will be obligated to pay the Executive the following amounts as severance: (1) two times the Executive's base salary as of the termination date; (2) the Executive's pro rata bonus for the year in which he is terminated; and (3) certain car allowances and outplacement service fees. In addition, the Company shall continue the Executive's medical benefits and insurance coverage until the earlier of the date the Executive reaches age 65 and the date, if applicable, at which the Executive receives similar benefits from a new employer. If an Executive is terminated by the Company other than for cause or the Executive terminates his employment with the Company for good reason (as defined in the agreement) within three years of a change in control (as defined in the agreement), the Executive will be entitled to all of the foregoing severance payments and benefits plus the larger of (A) two times the average bonus paid to the Executive during the two fiscal years prior to his termination and (B) two times the bonus the Executive otherwise would have earned based on the Executive's current salary multiplied by the targeted bonus percentage for the Executive for the year in which he was terminated. If severance payments to an Executive would result in the imposition of an excise tax on the payments, the Company will also reimburse the Executive for the excise tax plus the income and excise taxes thereon. EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2000, the Compensation Committee was comprised of Daniel W. Duval (Chairman), George W. Peck, IV and Willard H. Thompson. No executive officer of the Company served as a member of the compensation committee or as a director of any other entity that has an executive officer who serves on the Compensation Committee or is a director of the Company. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as to the beneficial ownership of shares of common stock of each person or group known to the Company as of March 9, 2001 to be the beneficial owner of more than 5% of any class of the Company's voting securities. Each beneficial owner has sole investment and voting power with respect to the shares of common stock set forth below.
Common Stock Beneficially Owned on March 9, 2001 Number of Percent of Class Name and Address of Beneficial Owner Shares Outstanding - ---------------------------------------------------------------------------------------------------------------------- State of Wisconsin Investment Board.................................. 1,125,000 (1) 5.66% P.O. Box 7842 Madison, WI 53707 State Street Research and Management Co.............................. 1,285,700 (2) 6.47% One Financial Center Boston, MA 02111 Wellington Management Company, LLP........................... 1,294,400 (3) 6.51% 75 State Street Boston, MA 02109 ICM Asset Management, Inc.......................................... 1,403,105 (4) 7.10% 601 W. Main Avenue, Suite 600 Spokane, WA 99201 ING Furman Selz Investors 3,333,333 (5) 16.87% 55 E. 52/nd/ Street New York, NY 10055-0002
_____________ (1) As reported in a statement on Schedule 13G filed with the Securities and Exchange Commission on February 14, 2001 by State of Wisconsin Investment Board. (2) Based on information provided to the Company on March 16, 2001 by an outside service bureau. (3) As reported in a statement on Schedule 13G filed with the Securities and Exchange Commission on February 14, 2001 by Wellington Management Company, LLP. (4) As reported in a statement on Schedule 13G filed with the Securities and Exchange Commission on February 6, 2001 by ICM Asset Management, Inc. (5) Represents 300,000 shares of Series B preferred stock convertible into 3,333,333 shares of common stock, which are owned by various funds managed by ING Furman Selz Investors or its affiliates. The following table sets forth information as of March 9, 2001 as to the beneficial ownership of shares of common stock of each director, each nominee for director, and each named executive officer, individually, and all directors and executive officers of the Company, as a group. In general, "beneficial ownership" includes those shares that a director, director nominee or executive officer has the power to vote or transfer, as well as (1) shares that may be obtained within 60 days by any such person upon the exercise of options and (2) shares owned by immediate family members that reside with any such person. Except as otherwise indicated in the footnotes to the table, each individual has sole investment and voting power with respect to the shares of common stock set forth below.
Common Stock Beneficially Owned on March 9, 2001 -------------------------------------------------- Percent of Class Name of Beneficial Owner Number of Shares Outstanding -------------------------------------------------------------------------------------------------- Richard A. Drexler 22,400(1) * Daniel W. Duval 24,000(2) * Jean-Pierre M. Ergas 30,000(3) * Donald W. Grinter 354,367(4) 1.67% Vaughn W. Makary 486,538(5) 2.31% James E. Martin 42,000(6) * George W. Peck IV 23,000(7) * Joseph A. Seher 4,987,424(8) 23.63% James P. Singsank 54,000(9) * Willard H. Thompson 17,314(10) * John W. Waite 356,068(11) 1.69% All directors and executive officers as a 6,397,111(1) 30.31% group (14 persons)
_______________ * Less than one percent of the Company's outstanding common stock. (1) Includes 5,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (2) Includes 2,000 shares owned of record by his spouse and 5,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (3) Includes 15,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (4) Includes 127,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (5) Includes 35,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (6) Includes 12,000 shares held in an irrevocable trust created for the benefit of Mr. Martin's grandchildren, with respect to which Mr. Martin shares investment power with the trustee, who is his daughter. Also includes 15,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (7) Includes 15,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (8) Includes 2,436,000 shares held by the Seher Family Limited Partnership, for which Mr. Seher and his wife, are the sole general partners and which Mr. Seher, his wife, the Deborah Jill Seher Trust, and the Amy Marie Seher Trust are sole limited partners. Such shares are owned indirectly through Mr. Seher's position as the general partner in the Seher Family Limited Partnership. Also includes 11,667 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (9) Includes 50,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (10) Includes 5,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. (11) Includes 35,000 shares subject to outstanding options which are exercisable as of or within 60 days of April 26, 2001. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. The following financial statements and the report thereon of Arthur Andersen LLP are included in item 8 of this report: Report of Independent Public Accountants Consolidated Statements of Operations for the Year Ended December 31, 2000, the Five Months Ended December 31, 1999 and the Years Ended July 31, 1999 and 1998. Consolidated Balance Sheets as of December 31, 2000, December 31, 1999 and July 31, 1999. Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2000, the Five Months Ended December 31, 1999 and the Years Ended July 31, 1999 and 1998. Consolidated Statements of Cash Flows for the Year Ended December 31, 2000, the Five Months Ended December 31, 1999 and the Years Ended July 31, 1999 and 1998. Notes to Consolidated Financial Statements 2. Financial Statement Schedules: All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedules or because the information required is included in the consolidated financial statements and notes thereto. 64 All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedules or because the information required is included in the consolidated financial statements and notes thereto. 3. Exhibits
Exhibit No. Description ----------- -------------------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906). 3.2 Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000) (SEC File No. 0-22906). 3.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-22906). 3.4 Certificate of Correction of Certificate of Designation of the Company (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-22906). 3.5 Certificate of Designation, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Company, dated March 8, 2000. (Incorporated by reference to Exhibit 3.5 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.1 Restated Certificate of Incorporation, as amended (See Exhibit 3.1 above). 4.2 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). (SEC File # 0-22906). 4.3 Rights Agreement, dated as of September 29, 1995 between the Company and LaSalle National Trust, N.A., as Rights Agent (the "Rights Agreement"), which includes the Form of Certificate of Designation, Preferences and Rights, the Form of Rights Certificate and the Summary of Stockholder Rights Plan (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated October 2, 1995) (SEC File No. 0-22906). 4.4 Amendment No. 1 to the Rights Agreement Dated November 15, 1996 (Incorporated by Reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended October 31, 1996) (SEC File No. 0-22906). 4.5 Amendment No. 2 to the Rights Agreement Dated September 17, 1998 (Incorporated by Reference to Exhibit 4.1 to the Registrant's Form 8-A/A on September 24, 1998 (SEC File No. 0-22906).
65 4.6 Amendment No. 3 to the Rights Agreement Dated March 8, 2000 (Incorporated by reference to Exhibit 4.5 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.7 Indenture, dated January 15, 1997, (the "Indenture") from the Registrant to First Trust of Illinois, National Association, as Trustee (Incorporated by reference to Exhibit 4.5 in the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 15, 1996) (SEC File No. 333-16241). 4.8 First Supplemental Indenture to the Indenture (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997) (SEC File No. 0-22906). 4.9 Officer's Certificate dated as of January 28, 1997, pursuant to Section 301 of the Indenture (Incorporated by Reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 1997 (SEC File No. 0-022906). 4.10 Form of Senior Subordinated Note due 2004 (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 1997) (SEC File No. 0-22906). 4.11 Second Supplemental Indenture to the Indenture (Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 23, 1997) (SEC File No. 0-22906). 4.12 Officer's Certificate dated as of December 17, 1997 pursuant to Section 301 of the Indenture (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities Exchange Commission on December 24, 1997) (SEC File No 0-22906). 4.13 Form of Senior Subordinate Note, Series B due 2004 (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 1997 (SEC File No. 0-22906). 4.14 Third Supplemental Indenture to the Indenture (Filed herewith). 4.15 New Credit Agreement, dated February 19, 1999 between the Company and a syndicate of financial institutions (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906). 4.16 Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Credit Agreement, dated as of February 19, 1999, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.) 4.17 Amended and Restated Credit Agreement, entered into as of October 29, 1999, between the Company and certain of its affiliates and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.) 4.18 Amendment to Amended and Restated Credit Agreement, entered into as of October 29, 1999, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.)
66
Exhibit No. Description ----------- ---------------------------------------------------------- 4.19 Second Amended and Restated Credit Agreement, entered into as of March 8, 2000, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Filed herewith as Exhibit 4.16.) (Incorporated by reference to Exhibit 4.16 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.20 Third Amended and Restated Credit Agreement, entered into as of October 30, 2000, by and amend the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.) 10.1 Stock Option Plan dated July 1, 1993 (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No. 33-70242). 10.2 ABC Rail Corporation Master Savings Trust (Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No.33-70242). 10.3 ABC Rail Corporation Savings and Investment Plan, as amended and restated effective as of May 1, 1988 (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No. 33-70242). 10.4 1994 Director Stock Option Plan (Incorporated by reference to the same numbered Exhibit 10.18 filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1994) (SEC File No. 0-22906). 10.5 Amendment No. 1 to 1994 Director Stock Option Plan (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1996) (SEC File No. 0-22906). 10.6 Form of option agreement evidencing options granted pursuant to the Stock Option Plan listed as Exhibit 10.1 above (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1994) (SEC File No. 0-22906). 10.7 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on April 13, 1994) (SEC File No. 33-77652). 10.8 Registration Rights Agreement, dated as of February 19, 1999, by and among the Company and certain affiliates of NACO listed as parties thereto (Incorporated by reference to Exhibit 10.1 to the Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-22906).
67 10.9 Form of Amended and Restated Severance Agreement, dated as of February 19, 1999, entered into between the Company and each of Joseph A. Seher, Vaughn W. Makary, Wayne R. Rockenbach and John W. Waite (Incorporated by reference to Exhibit 10.2 to the Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-229 06). 10.10 Form of Stock Purchase Agreement entered into between NACO and certain of its employees (Incorporated by reference to Exhibit 10.3 filed to Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-22906). 10.11 Wheelset Supply and Services Agreement, dated as of November 9, 1999, between the Company and Union Pacific Railroad Company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on November 18, 1999) (SEC File No . 0-22906) 10.12 ABC-NACO Inc. 1999 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.12 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 10.13 Investors Rights Agreement by and among ABC-NACO Inc., Furman Selz Investors II L.P., FS Employee Investors LLC, and FS Parallel Fund L.P., Dated as of March 8, 2000 (Incorporated by reference to Exhibit 10.13 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 10.14 Consulting Agreement dated as of February 23, 2001 between the Company and Richard A. Drexter (filed herewith). 10.15 Severance Agreement dated July 1, 2000 entered into between the Company and Donald W. Grinter (filed herewith). 10.16 Severance Agreement dated April 1, 2001 entered into between the Company and Joseph A. Seher (filed herewith). 10.17 Asset Purchase Agreement, dated as of April 17, 2001 by and among ABC-NACO Inc., NACO, Inc., National Castings Inc., NACO Flow Products, Inc., BuyMetalCastings, Inc., National Engineered Products Company, Inc. (Incorporated by reference to Exhibit 2.1 to the Company's current Report on Form 8-K filed with the SEC on April 19, 2001) (SEC File No. 0-22906). 10.18 Exchange Agreement, dated as of April 17, 2001, between the Company and Furman Selz Investors II L.P., FS Employee Investors LLC, FS Parallel Fund L.P. (Incorporated by reference to Exhibit 10.2 to the Company's current Report on Form 8-K filed with the SEC on April 19, 2001) (SEC File No. 0-22906). 10.19 Series C Preferred Stock and Common Stock Warrant Purchase Agreement, dated April 17, 2001, between the Company and Furman Selz Investors II L.P., FS Employee Investors LLC, FS Parallel Fund L.P. (Incorporated by reference to Exhibit 10.1 to the Company's current Report on Form 8-K filed with the SEC on April 19, 2001) (SEC File No. 0-22906). 21.1 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Independent Public Accountants of Registrant (filed herewith). 24.1 Powers of Attorney (Incorporated by reference to Exhibit 24.1 to the Registrant's Original Form 10-K for the fiscal year ended December 31, 2000) (SEC File No. 0-22906).
68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated April 30, 2001 ABC-NACO Inc. (Registrant) /s/ Vaughn W. Makary --------------------- Vaughn W. Makary Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 30, 2001: /s/ J. P. Singsank /s/ Larry A. Boik - ------------------------------- ----------------------------- J. P. Singsank Larry A. Boik Senior Vice President and Vice President and Corporate Controller Chief Financial Officer (Chief Accounting Officer) (Duly authorized Officer) /s/ Vaughn W. Makary * - ------------------------------- ----------------------------- Vaughn W. Makary Daniel W. Duval Chief Executive Officer, President and Director Chairman of the Board * * - ------------------------------- ----------------------------- Donald W. Grinter James E. Martin Director Director * * - ------------------------------- ----------------------------- George W. Peck IV Jean-Pierre M. Ergas Director Director * * - ------------------------------- ----------------------------- Richard A. Drexler Willard H. Thompson Director Director By: /s/ J.P. Singsank ----------------------- J.P. Singsank Attorney-in-Fact for the designated officers and directors pursuant to powers of attorney filed as exhibits to the original Form 10-K.
69 Exhibit Index
3.1 Restated Certificate of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906). 3.2 Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000) (SEC File No. 0-22906). 3.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-22906). 3.4 Certificate of Correction of Certificate of Designation of the Company (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1996) (SEC File No. 0-22906). 3.5 Certificate of Designation, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Company, dated March 8, 2000. (Incorporated by reference to Exhibit 3.5 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.1 Restated Certificate of Incorporation, as amended (See Exhibit 3.1 above). 4.2 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). (SEC File # 0-22906). 4.3 Rights Agreement, dated as of September 29, 1995 between the Company and LaSalle National Trust, N.A., as Rights Agent (the "Rights Agreement"), which includes the Form of Certificate of Designation, Preferences and Rights, the Form of Rights Certificate and the Summary of Stockholder Rights Plan (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated October 2, 1995) (SEC File No. 0-22906). 4.4 Amendment No. 1 to the Rights Agreement Dated November 15, 1996 (Incorporated by Reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended October 31, 1996) (SEC File No. 0-22906). 4.5 Amendment No. 2 to the Rights Agreement Dated September 17, 1998 (Incorporated by Reference to Exhibit 4.1 to the Registrant's Form 8-A/A on September 24, 1998 (SEC File No. 0-22906). 4.6 Amendment No. 3 to the Rights Agreement Dated March 8, 2000 (Incorporated by reference to Exhibit 4.5 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.7 Indenture, dated January 15, 1997, (the "Indenture") from the Registrant to First Trust of Illinois, National Association, as Trustee (Incorporated by reference to Exhibit 4.5 in the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 15, 1996) (SEC File No. 333-16241). 4.8 First Supplemental Indenture to the Indenture (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997) (SEC File No. 0-22906). 4.9 Officer's certificate dated as of January 28, 1997, pursuant to Section 301 of the Indenture (Incorporated by Reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 1997 (SEC File No. 0-022906). 4.10 Form of Senior Subordinated Note due 2004 (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 1997) (SEC File No. 0-22906). 4.11 Second Supplemental Indenture to the Indenture (Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 23, 1997) (SEC File No. 0-22906). 4.12 Officer's Certificate dated as of December 17, 1997 pursuant to Section 301 of the Indenture (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities Exchange Commission on December 24, 1997) (SEC File No 0-22906). 4.13 Form of Senior Subordinate Note, Series B due 2004 (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 1997 (SEC File No. 0-22906). 4.14 Third Supplemental Indenture to the Indenture (Filed herewith). 4.15 New Credit Agreement, dated February 19, 1999 between the Company and a syndicate of financial institutions (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 19, 1999) (SEC File No. 0-22906). 4.16 Amendment, Waiver and Release Agreement, dated as of October 12, 1999, to Credit Agreement, dated as of February 19, 1999, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.) 4.17 Amended and Restated Credit Agreement, entered into as of October 29, 1999, between the Company and certain of its affiliates and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.) 4.18 Amendment to Amended and Restated Credit Agreement, entered into as of October 29, 1999, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.) 4.19 Second Amended and Restated Credit Agreement, entered into as of March 8, 2000, by and among the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement. (Filed herewith as Exhibit 4.16.) (Incorporated by reference to Exhibit 4.16 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 4.20 Third Amended and Restated Credit Agreement, entered into as of October 30, 2000, by and amend the Company and certain of its affiliates, and Bank of America National Association, individually and as agent for the benefit of the lenders under the Credit Agreement (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.) 10.1 Stock Option Plan dated July 1, 1993 (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No. 33-70242). 10.2 ABC Rail Corporation Master Savings Trust (Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No.33-70242). 10.3 ABC Rail Corporation Savings and Investment Plan, as amended and restated effective as of May 1, 1988 (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on October 12, 1993) (SEC File No. 33-70242). 10.4 1994 Director Stock Option Plan (Incorporated by reference to the same numbered Exhibit 10.18 filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1994) (SEC File No. 0-22906). 10.5 Amendment No. 1 to 1994 Director Stock Option Plan (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1996) (SEC File No. 0-22906). 10.6 Form of option agreement evidencing options granted pursuant to the Stock Option Plan listed as Exhibit 10.1 above (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1994) (SEC File No. 0-22906). 10.7 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 originally filed with the Securities and Exchange Commission on April 13, 1994) (SEC File No. 33-77652). 10.8 Registration Rights Agreement, dated as of February 19, 1999, by and among the Company and certain affiliates of NACO listed as parties thereto (Incorporated by reference to Exhibit 10.1 to the Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-22906). 10.9 Form of Amended and Restated Severance Agreement, dated as of February 19, 1999, entered into between the Company and each of Joseph A. Seher, Vaughn W. Makary, Wayne R. Rockenbach and John W. Waite (Incorporated by reference to Exhibit 10.2 to the Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-22906). 10.10 Form of Stock Purchase Agreement entered into between NACO and certain of its employees (Incorporated by reference to Exhibit 10.3 filed to Quarterly Report of Form 10-Q for the quarter ended January 31, 1999) (SEC File No. 0-22906). 10.11 Wheelset Supply and Services Agreement, dated as of November 9, 1999, between the Company and Union Pacific Railroad Company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on November 18, 1999) (SEC File No. 0-22906) 10.12 ABC-NACO Inc. 1999 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.12 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 10.13 Investors Rights Agreement by and among ABC-NACO Inc., Furman Selz Investors II L.P., FS Employee Investors LLC, and FS Parallel Fund L.P., Dated as of March 8, 2000 (Incorporated by reference to Exhibit 10.13 to the Registrant's Transition Report on Form 10-K for the five months ended December 31, 1999) (SEC File No. 0-22906). 10.14 Consulting Agreement dated as of February 23, 2001 between the Company and Richard A. Drexter (filed herewith). 10.15 Severance Agreement dated July 1, 2000 entered into between the Company and Donald W. Grinter (filed herewith). 10.16 Severance Agreement dated April 1, 2001 entered into between the Company and Joseph A. Seher (filed herewith). 21.1 Subsidiaries of the Registration (filed herewith). 23.1 Consent of Independent Public Accountants of Registrant (filed herewith). 24.1 Powers of Attorney (filed herewith).
EX-4.14 2 dex414.txt THIRD SUPPLEMENTAL INDENTURE Exhibit 4.14 ABC-NACO INC., (formerly known as ABC Rall Products Corporation), the Company AND U.S. BANK NATIONAL ASSOCIATION, (as successor trustee to First Trust National Association) the Trustee ____________________ THIRD SUPPLEMENTAL INDENTURE Dated as of September 1, 2000 ____________________ Supplementing that certain Indenture Dated as of January 15, 1997 by and between ABC Rail Products Corporation and First Trust National Association THIRD SUPPLEMENTAL INDENTURE THIS THIRD SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") is made and entered into as of September 1, 2000 between ABC-NACO Inc., a Delaware corporation (the "Company"), and U.S. Bank National Association, a national banking association, as successor trustee to First Trust National Association, a national banking association (the "Trustee"). RECITALS WHEREAS, pursuant to that certain Indenture dated as of January 15, 1997 (as amended, supplemented or modified from time to time, the "Indenture"), between the Company (formerly ABC Rail Products Corporation); and U.S. Bank National Association (successor trustee to First Trust National Association), the Company executed (i) an officer's certificate, dated January 28, 1997 (the "9 1/8% Officer's Certificate"), establishing a series of securities known as the 9 1/8% Senior Subordinated Notes Due 2004 in the original principal amount of $50,000,000 (the "9 1/8% Notes") and (ii) an officer's certificate dated December 17, 1997 (the "8 3/4% Officer's Certificates") (the 9 1/8% Officer's Certificate and the 8 3/4% Officer's Certificate each, an "Officer's Certificate" and together, the "Officer's Certificate"), establishing a series of securities known as the 8 3/4% Senior Subordinated Notes, Series B, due 2004 in the original principal amount of $25,000,000; (the "8 3/4% Notes" and, together with the 9 1/8 % Notes, the "Notes"): WHEREAS, the Company requested that the holders of the Notes consent to the amendment of the Operating Coverage Ratio covenant under Paragraph 10(d) of each Officer's Certificate and established pursuant to Section 301(17) of the Indenture; WHEREAS, pursuant to Section 902 of the Indenture, the holders of not less than a majority of the aggregate pricipal amount of the outstanding Notes (voting as one class) have consented to the modification to the Operating Coverage Ratio covenant under Paragraph 10(d) of each Officer's Certificate and established pursuant to Section 301(17) of the Indenture; WHEREAS, the Company requested that the holders of the Notes consent to the amendment of the interest rate under Paragraph 4(a) of each Officer's Certificate and established pursuant to Section 301(5) of the Indenture; Whereas, pursuant to Section 902 of the Indenture, the holders of not less than a majority of the aggregate principal amount of the outstanding Notes (voting as one class) have consented to the amendment of the interest rate under Paragraph 4(a) of each Officer's Certificate and established pursuant to Section 301(5) of the Indenture; WHEREAS, the Company desires to change the titles of the 9 1/8% and the 8 3/4% Notes, respectively, to reflect the amendment to the interest rate provision; WHEREAS, pursuant to Section 901(4) and 901(8) of the Indenture, the Company and the Trustee may, without the consent of any holders of the Notes, change any provision of the Indenture or correct any provision that may be inconsistent with any other provision of the Notes, provided that such action does not adversely affect the rights of the holders of the Notes or any other security in any material respect; and WHEREAS, in order to effectuate and formalize the aforementioned amendments, the parties hereto desire to amend the Indenture and each Officer's Certificate as set forth below and to enter into this Supplemental Indenture. NOW THEREFORE, the parties hereto, intending to be legally bound, and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, do hereby amend the Indenture and the Officer's Certificates and further agree as set forth below: Section 1. Definitions. All terms capitalized but not otherwise defined in this Supplemental Indenture shall have the meanings assigned to such terms in the Indenture. Section 2. Effect Of This Supplemental Indenture. (A) Except as expressly supplemented or amended by this Supplemental Indenture, all of the terms and provisions of the Indenture and the Officer's Certificates shall remain in full force and effect. (B) To the extent of any inconsistency between the terms and provisions of this Supplemental Indenture and the terms and provisions of the Indenture and the Officer's Certificates, this Supplemental Indenture shall control. (C) The rules of construction stated in Section 1.01 of the Indenture shall apply to this Supplemental Indenture. Section 3. Amendment To Paragraph 10(d) Of Each Officer's Certificate. Subparagraph (d) of Paragraph 10 of each Officer's Certificate is hereby amended, effective beginning with the first fiscal quarter ending after the date of this Supplemental Indenture, in its entirety to read as follows: "The Company will maintain, at the end of each of its fiscal quarters, an Operating Coverage Ratio with respect to the four consecutive fiscal quarters then ended taken as a whole of at least 1.8:1.0; and". Section 4. Amendment To Paragraph 4(a) Of Each Officer's Certificate. Subparagraph (a) of Paragraph 4 of each Officer's Certificate is hereby amended, effective beginning with the first interest payment date after the date of this Supplemental Indenture, in its entirety to read as follows: "(a) the rate at which the Notes shall bear interest if 10 1/2%." Section 5. Amendment To Paragraph 1 Of The 9 1/4% Officer's Certificate. Paragraph 1 of the 9 1/4% Officer's Certificate is hereby amended, effective beginning with the first interest payment date after the date of this Supplemental Indenture, in its entirety to read as follows: "Pursuant to Section 301(1) of the Indenture, the title of the Securities of the series established by this Officer's Certificate is "10 1/2% Senior Subordinated Notes, Series A, Due 2004."" Section 6. Amendment To Paragraph 1 Of The 8 3/4% Officer's Certificate. Paragraph 1 of the 8 3/4% Officer's Certificate is hereby amended, effective beginning with the first interest payment date after the date of this Supplemental Indenture, in its entirety to read as follows: "Pursuant to Section 301(1) of the Indenture, the title of the Securities of the series established by this Officer's Certificate is "10 1/2% Senior Subordinated Notes, Series B, Due 2004."" Section 7. References To Indenture. All references in the Indenture to the Indenture shall hereafter be deemed to refer to the Indenture as amended by this Supplemental Indenture and as may be further amended, modified, restated or replaced from time to time. Section 8. Other Terms In Full Force And Effect. Except as expressly so amended, the Indenture and the Officer's Certificates shall remain unmodified and in full force and effect. Section 9. Counterparts. This Supplemental Indenture may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be executed as of the day and year first above written. ABC-NACO INC. By: /s/ James P. Singsank ------------------------- Name: Title: SVP/CFO ATTEST: /s/ Vincent V. Rea - -------------------------------- Name: Title: VP & Corporate Treasurer U.S. BANK NATIONAL ASSOCIATION, as successor trustee By: _________________________ Name: Title: ATTEST: ________________________________ Name: Title: OFFICER'S CERTIFICATE --------------------- WHEREAS, this certificate is delivered pursuant to Section 102 of the Indenture dated as of January 15, 1997 between ABC Rail Products Corporation (the "Company") and First Trust National Association, as trustee (the "Trustee") (as supplemented and amended through and including the First Supplemental Indenture dated as of January 15, 1997, and the Second Supplemental Indenture dated December 1, 1997, the "Indenture"), in connection with the execution and delivery of the Third Supplemental dated as of September 1, 2000 (the "Supplemental Indenture"). Each capitalized term used but not defined herein shall have the meaning assigned such term in the Supplemental Indenture; and WHEREAS, pursuant to that certain Indenture and certain Supplemental Indenture"), between the Company (formerly ABC Rail Products Corporation); and U.S. Bank National Association (successor trustee to First Trust National Association), the Company executed (i) an officer's certificate, dated January 28, 1997 (the "9 1/8% Officer's Certificate"), establishing a series of securities known as the 9 1/8% Senior Subordinated Notes Due 2004 in the original principal amount of $50,000,000 (the "9 1/8% Notes") and (ii) an officer's certificated dated December 17, 1997 (the "8 3/4% Officer's Certificate") (the 9 1/8% Officer's Certificate and the 8 3/4% Officer's Certificate each, an "Officer's Certificate" and together, the "Officer's Certificates") establishing a series of securities known as the 8 3/4% Senior Subordinated Notes, Series B, due 2004 in the original principal amount of $25,000,000; (the "8 3/4% Notes" and, together with the 9 1/8% Notes, the "Notes"); and WHEREAS, the Company requested and obtained the necessary consents to amend the Indenture and Supplemental Indenture as set forth in the Third Supplemental Indenture attached hereto as Appendix A. NOW THEREFORE, James P. Singsank, Senior Vice President and Chief Financial Officer, and Vincent V. Rea, Vice President and Corporate Treasurer of the Company, have read the Indenture (including each covenant or condition with which compliance is required in connection with the execution and delivery by the Company of the Indenture and related definitions), the Supplemental Indenture and the Officer's Certificate and are duly authorized by the Company's Board of Directors to execute the Third Supplemental Indenture to reflect the amendments. The undersigned officers of the Company have also examined originals or copies of such corporate records and agreements, certificates and other documents as in their judgement were deemed necessary as a basis for the certification expressed herein. In the undersigned officers' judgement, such officers have made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not all such covenants or conditions have been complied with. Based on the foregoing examination, the undersigned officers of the Company hereby certify that each covenant or condition with which compliance is required in connection with the execution and delivery of the Supplemental Indenture has been complied with. [the remainder of this page is intentionally left blank] IN WITNESS WHEREOF, the undersigned duly authorized officers of the Company have caused this Officer's Certificate to be executed in their names as of September 1, 2000. ABC-NACO Inc. By: /s/ James P. Singsank --------------------------------- Name: James P. Singsank Title: Senior Vice President and Chief Financial Officer By: /s/ Vincent V. Rea --------------------------------- Name: Vincent V. Rea Title: Vice President and Corporate Treasurer SECRETARY'S CERTIFICATE ----------------------- I, Mark F. Baggio, Secretary of ABC-NACO Inc. (the "Company"), a Delaware corporation, in connection with the Consent Solicitation for the Indenture for the Senior Subordinated Notes (the "Consent"), DO HEREBY CERTIFY on behalf of the Company, solely in my capacity as an officer of the Company, as follows: Attached hereto is a true, correct and complete copy of the resolutions adopted by the Board of Directors of the Company with respect to the Consent Solicitation for the Proposed Amendments to the Indenture for the Senior Subordinated Notes which was duly and validly adopted by the Board of Directors on July 10, 2000. Such resolutions are in full force on the date hereof in the form in which adopted relating to the transaction contemplated thereby. IN WITNESS WHEREOF, the undersigned has caused this Certificate to be executed on and as of the 31st day of August, 2000. Mark F. Baggio --------------------- Name: Mark F. Baggio Title: Secretary I. JON C. VIGANO, Assistant Secretary of the Company, DO HEREBY CERTIFY on behalf of the Company that MARK F. BAGGIO is the duly elected or appointed, qualified and acting Secretary of the Company, and the signature set forth above is his genuine signature. Jon C. Vigano --------------------- Name: Jon C. Vigano Title: Assistant Secretary The ABC-NACO Inc. Board of Directors hereby adopt the following Resolutions: CONSENT SOLICITATION FOR THE PROPOSED AMENDMENTS TO THE INDENTURE FOR THE SENIOR SUBORDINATED NOTES -------------------------------------------------- WHEREAS, the Board of Directors of ABC-NACO Inc. has determined that it is in the best interest of the Company and its stockholders that ABC-NACO Inc. engage in the Consent Solicitation for the proposed amendments to the Indenture, dated as of January 15, 1997 (as amended, modified or supplemented from time to time) for the Company's Senior Subordinated Notes upon substantially the terms and conditions presented to the Board of Directors on July 10, 2000, an outline of which is attached hereto as Exhibit A; NOW, THEREFORE, BE IT RESOLVED, that the Consent Solicitation for the proposed amendments to the Indenture for the Company's Senior Subordinated Notes by ABC- NACO Inc. is hereby ratified, confirmed and approved by the Board of Directors and that all actions taken by the officers of ABC-NACO Inc. in connection with the Consent Solicitation for the proposed amendments to the Indenture for the Company's Senior Subordinated Notes upon substantially presented to the Board of Directors on July 10, 2000 are hereby ratified, confirmed and approved by the Board of Directors. FURTHER RESOLVED, that the close of business on Monday July 10, 2000, and it hereby is, fixed as the record date for the determination of the stockholders entitled to receive notice of the Consent Solicitation for the proposed amendments to the Indenture for the Senior Subordinated Notes and to vote thereat. Exhibit A --------- CONSENT SOLICITATION SUMMARY ---------------------------- The following summary is not intended to be complete. Holders are urged to read the more detailed information set forth elsewhere in the Solicitation Documents. Each of the capitalized terms used in this Summary and not defined herein has the meaning set forth elsewhere in this Consent Solicitation Statement. ABC-NACO Inc. hereby solicits Consents to the Proposed Amendment to the Indenture, dated as of January 15, 1997 (as amended, modified or supplemented from time to time, the "Indenture"), between ABC Rail Products (predecessor organization to ABC-NACO Inc.) and First Trust National Association (predecessor organization to U.S. Bank) as Trustee (the "Trustee"). The following is a summary of certain Consent Solicitation terms: The Consent Solicitation ------------------------ Consent Fee For each $1,000 in principal amount of Notes, a cash payment of $10.00. No accrued interest will be paid on the Consent Fee. Interest in Coupon Rate The coupon interest rate will be increased from 9 1/8% to 10% on the Series A notes and from 8 3/4% to 10% on the Series B notes, effective as of the Consent Achievement Date. Record Date 5:00 p.m., Chicago time, on July 10, 2000. Consent Achievement Date The time and date on which ABC-NACO Inc. publicly announces that the Requisite Consent has been achieved. Expiration Date The Consent Solicitation will be open until 5:00 p.m., Chicago time on August 10, 2000, unless terminated or extended by ABC-NACO in its sole discretion. The time and date of expiration of the Consent Solicitation are herein referred to as the "Expiration Date". ABC-NACO Inc. expressly reserves the right for any reason (1) to abandon, terminate or amend the Consent Solicitation at any time prior to the Expiration Date by giving oral or written notice thereof to the Information Agent, and (ii) not to extend the Consent Solicitation beyond the Expiration Date whether or not the Requisite Consent has been received by such date. Eligibility for Consent Fee And Increase in Coupon Holders whose properly executed Consents are received (and not revoked) prior to the Expiration Date will be eligible to receive the Consent Fee and Increase in Coupon promptly after the Expiration Date if the conditions for payment described herein have been satisfied or waived. Any subsequent transferees of Holders, and any Holders who do not timely grant (or who revoke) a valid consent (and their transferees) will not be eligible to receive the Consent Fee even if the Proposed Amendments become effective with respect to the Notes held thereby and, as a result, become binding thereon. Requisite Consent Holders must grant (and not revoke) valid Consents in respect of a majority in aggregate principal amount of all outstanding Notes to approve the Proposed Amendments. For purposes of the foregoing calculation, any Notes held by ABC-NACO Inc. or any of its affiliates will not be counted as being outstanding. As of the date of this Consent Solicitation Statement, the aggregate outstanding principal amount of the Notes was $75.0 million (of which $50.0 million were Series A and $25.0 million were Series B) none of which was held by ABC-NACO or any of its affiliates. Consequences to Non- Consenting Holders If the Requisite Consent is obtained, and the Consent Fee is paid, non-consenting Holders will be bound by the Proposed Amendments but will not receive the Consent Fee. Procedure for Delivery Of Consents Consents must be delivered to the Tabulation Agent prior to the Expiration Date. DTC is expected to grant an omnibus proxy authorizing the DTC Participants to deliver a Consent. Only registered owners of Notes as of the Record Date or their duly designated proxies, including, for the purposes of this Consent Solicitation, DTC Participants, are eligible to consent to the Proposed Amendments and receive the Consent Fee. Therefore, a beneficial owner of an interest in Notes held in an account of a DTC Participant who wishes a Consent to be delivered must properly instruct each DTC Participant to cause a Consent to be given in respect of such Notes. See " The Consent Solicitation"-Consent Procedures". Revocation of Consents Revocation of Consents may be made at any time prior to the Consent Achievement Date but only by the Holder (or a duly designated proxy). Each Holder, by delivering its Consent, will agree in the Consent Letter not to revoke its Consent after that time, even if the Consent Solicitation is extended beyond that time. See "The Consent Solicitation-Revocation of Consents". Page 2 consentsolicitationmemo Solicitation Agent Robert W. Baird is serving as Solicitation Agent in connection with the Consent Solicitation. Information Agent; Tabulation Agent ADP or Georgeson??? is serving as Information Agent and Tabulation Agent in connection with the Consent Solicitation. Note Depository DTC Company is serving as Note Depository in connection with the Consent Solicitation. U.S. Federal Income Tax Consequences For a discussion of certain U.S. federal income tax consequences of the Consent Solicitation to beneficial owners of Notes, see "Certain United States Federal Income Tax Consequences". The Proposed Amendments Payment Provisions Affected Other than the interest coupon rate, which will be increased to 10% for both Series A and Series B Holders, none of the maturity date, payment provisions, redemption provisions, guaranty provisions or any other similar terms of the Notes will be amended as a result of the Proposed Amendments. The Proposed Amendments The Proposed Amendment to modify the Company's Operating Coverage Ratio covenant would: (i) enhance ABC-NACO's future operating flexibility, (ii) give the Company greater latitude to pursue its newly announced profitability improvement initiatives, and (iii) provide the Company sufficient time and latitude to execute its balance sheet de- leveraging strategies. Terms of Proposed Amendments The Proposed Amendment consists of a modification to the Minimum Required Operating Coverage Ratio from a minimum of 2.40 to a minimum 1.80 (or 2.00 ?). If Consent is achieved, this modification will become effective for all fiscal quarters ending after the Consent Achievement Date. Effectiveness The Proposed Amendment will be effected by execution of one or more supplemental indentures (collectively, the "Supplemental Indenture") between the Company and the Trustee. Page 3 consentsolicitationmemo EX-10.14 3 dex1014.txt CONSULTING AGREEMENT DATED 2/23/2001 Exhibit 10.14 Consulting Agreement -------------------- This Consulting Agreement (the "Agreement") is made as of February 23, 2001, by and between ABC-NACO Inc., a Delaware corporation (the "Company"), and Richard A. Drexler (the "Consultant"). WHEREAS, the Company and Consultant desire to enter into a consulting relationship upon the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the covenants set forth in this Agreement and of the mutual benefits accruing to the Company and Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Company and Consultant agree as follows: 1. Consultant Relationship. ----------------------- The Company agrees to retain Consultant, and Consultant agrees to be retained by the Company, as a business consultant to the Company, and not as an employee of the Company. 2. Consulting Services. ------------------- Consultant agrees that during the term of this Agreement: (a) Consultant will devote his best efforts, talents and skills to his position as a business consultant to the Company and will perform such duties and execute such policies of the Company as determined by the Company's board of directors. (b) Consultant will devote substantially all of his business time and attention (except for vacation time and sick leave) to the business and affairs of the Company. (c) Consultant will report directly to the Company's board of directors on a regular basis and in any event at least once every 45 days. Consultant will not, without the prior written consent of the Company's board of directors, be engaged in or concerned with any other commercial duties or pursuits which are reasonably likely to interfere with the performance of his duties under this Agreement; provided, however, that the parties hereto agree and acknowledge that Consultant will be involved in the winding down of the affairs of Allied Products Corporation. 1 3. Compensation and Other Benefits. ------------------------------- (a) The Company will pay Consultant for his services under this Agreement compensation equal to $250,000 for the six-month term of this Agreement, at the rate of $41,666.67 per month, payable in monthly or more frequent installments. (b) The Company will reimburse Consultant for all reasonable and necessary business expenses incurred by Consultant relating to the conduct of the business of the Company; provided, however, that the parties agree that Consultant (and not the Company) will be responsible for expenses relating to Consultant's office space and secretary. Any expense reimbursement by the Company will be conditioned upon Consultant presenting to the Company an itemized statement of his expenses with supporting documents, consistent with the Company's regular procedures and the requirements of the Internal Revenue Service. (c) Consultant will not be entitled to participate in or receive benefits under any retirement, pension, health, accident and disability insurance, or other similar employee benefit plan currently in place or which may be adopted by the Company (or any other member of the consolidated group of which the Company is a part) for its executives or other employees. (d) The Company will indemnify and defend Consultant to the maximum extent permitted under Delaware law for actions taken on behalf of the Company under this Agreement in his capacity as a consultant serving at the request of the Company. 4. Term. ---- The term of this Agreement will begin on February 23, 2001 and continue until August 23, 2001, subject to (a) earlier termination in the event of Consultant's death or total disability or (b) extension of the term as the parties may mutually agree. 5. Severability. ------------ Each of the terms and provisions of this Agreement is to be deemed severable in whole or in part and, if any term or provision or the application thereof in any circumstances should be invalid, illegal or unenforceable, the remaining terms and provisions or the application thereof to circumstances other than those as to which it is held invalid, illegal or unenforceable, will not be affected thereby and remain in full force and effect. 6. Binding Agreement. ----------------- This Agreement is binding upon the parties, their heirs, successors, personal representatives and permitted assigns. The Company may assign this Agreement to any successor in interest to the business, or part thereof, of the Company. Consultant may not assign any of his obligations or duties hereunder. 7. Controlling Law and Jurisdiction. -------------------------------- 2 This Agreement will be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8. Entire Agreement. ---------------- This instrument contains the entire agreement of the parties with regard to the subject matter hereof, and may not be changed orally, but only by an agreement in writing signed by the parties hereto. 9. Headings. -------- All numbers and heading of paragraphs are for reference only and are not intended to qualify, limit or otherwise affect the meaning or interpretation of any paragraph. 10. Notices. ------- All notices, requests, demands and other communications under this Agreement will be in writing and will be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; or (c) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to the Consultant: Richard A. Drexler R.A.D. Associates 222 E. Wisconsin Avenue, #300 Lake Forest, IL 60045 If to the Company: ABC-NACO Inc. 2001 Butterfield Road, Suite 502 Downers Grove, IL 60515 Attention: General Counsel Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. 3 IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above. ABC-NACO INC. By:_____ Joseph A. Seher Chairman and Chief Executive Officer By:_____ Daniel W. Duval Chairman of the Compensation Committee CONSULTANT ______ Richard A. Drexler 4 EX-10.15 4 dex1015.txt SEVERANCE AGREEMENT DATED 7/01/2001 Exhibit 10.15 CONFIDENTIAL SEVERANCE AGREEMENT AND GENERAL RELEASE ---------------------------------------------------- This Confidential Severance Agreement and General Release (this "Severance and Release") is made and entered into by and between ABC-NACO INC. (the "Company") and Donald W. Grinter ("Employee") (collectively, the "Parties"). WHEREAS, the Company informed Employee on or about June 15, 2000 that his employment was being terminated effective July 1, 2000; WHEREAS, the Company and Employee, each denying any wrongdoing or liability whatsoever, desire to sever their employment relationship in an amicable fashion; WHEREAS, the Company and Employee desire to reach a final, full and complete settlement of all matters relating to Employee's employment with the Company up to the date of this Severance and Release; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged: 1. For and in consideration of the payment provided for in paragraph 2 of this Severance and Release, Employee agrees that by executing this Severance and Release he does hereby, for himself, his heirs, executors, administrators, representatives, successors and assigns, irrevocably and unconditionally release and forever discharge the Company, its parent companies, subsidiaries, divisions, business units, and all affiliated or related companies, successors, predecessors, assigns or representatives, present and former employees, and any agents, present and former officers, directors, attorneys, insurers, and all persons acting for, by, through, under or in concert with any of them (hereinafter "Released Parties"), of and from any and all claims, demands, causes of action, suits, debts, accounts, claims for attorneys' fees, interest, expenses and costs, damages, judgments, and executions of any nature whatsoever, which Employee, his heirs, executors, administrators, representatives, successors, or assigns, had, now have, or may hereafter have, from the beginning of time to the date hereof, against the Company or any of the Released Parties, whether based on federal or state statute, common law, rule, regulation or any ordinance, whether in law or in equity, contract or tort, whether liquidated or unliquidated, whether known or unknown, related to Employee's employment with the Company and/or the termination therefrom, and particularly without limiting the foregoing, any and all such claims under the following statutes, if applicable: the Age Discrimination in Employment Act (29 U.S.C. (S) 261 et seq.), the Americans with Disabilities Act (42 U.S.C. (S)12101 et seq.), Title VII of the Civil Rights Act of 1964, as amended (42 U.S.C. (S)2000e et seq.), the Illinois Human Rights Act (775 ILCS 5/1-101 et seq.), the Employee Retirement Income Security Act of 1974, as amended, and the Fair Labor Standards Act, as amended. 2. The Parties agree on the following payment terms: a. Effective July 1, 2000, Employee will receive twenty four (24) months salary as severance pay which will be paid over a period of one hundred four (104) weeks, less standard deductions. Employee will be paid for any earned and unused vacation pay up to and including June 30, 2000; however, no accrual of vacation pay occurs during period of severance payments ("Severance Pay"). b. During the period that Employee is receiving periodic severance payments, Employee will continue to participate in the same Company employee benefit programs (except short-term disability, long-term disability, the 401k Plan) in which he participated immediately prior to July 1, 2000, and his continuing participation in these programs will be on the same basis and terms as Employee participated in them immediately prior to July 1, 2000, subject to the Company's right to modify or terminate such programs at any time. When Employee's periodic severance payments cease, his participation in these programs will cease. c. The Company shall make such other payments pursuant to that certain written Employment Agreement dated June 22, 1999. Further, Employee understands that neither the Company nor its counsel have made, and Employee does not rely upon, any representations regarding the tax treatment of the Severance Pay, and agrees that he is solely responsible for determining the tax consequences of the Severance Pay, and is legally bound to make payment of taxes, if any, which are determined to be owed by him (including penalties and interest related thereto) by any taxing authority. 3. Employee understands and agrees that the payment of monies and other consideration set forth in this Severance and Release does not constitute an admission of liability or violation of any applicable law, regulation, or agreement, and in fact the Company and the Released Parties expressly deny any such liability or violation. 4. Employee represents that he has not filed any complaint or charge against the Company or any of the Released Parties involving any events up to and including the date of this Severance and Release. Employee agrees that he will not voluntarily cooperate or participate in an investigation or prosecution of any action against any or all of the Released Parties. Employee further agrees that he will not solicit in any manner any former, current, or future employee of the Released Parties to pursue a claim against any of the Released Parties. Further, Employee agrees that in the event that the Company becomes involved in any legal or administrative claims or other proceedings relating to events that 2 occurred during his employment and as to which Employee might in the Company's opinion have personal knowledge, Employee will cooperate to the fullest extent possible in the preparation and presentation by the Company of its prosecution or defense, including but not limited to the signing of affidavits or other documents providing information requested by the Company. The Company agrees to indemnify Employee and hold Employee harmless from any claims, demands, liabilities, or damages incurred by Employee as a result of his performance under the preceding provisions of this paragraph, and to reimburse Employee for reasonable attorneys' fees incurred by Employee in connection with any such claims, demands, liabilities, or damages, provided, however, that the Company will be obligated to make such reimbursements only for attorneys' fees covering attorneys' services for which Employee obtained the Company's prior written approval. 5. Employee agrees, to the extent Employee has previously failed to do so, to return immediately all equipment, tools, documents, files, whether or not Employee was solely responsible for same, keys, credit cards, keycards, computers, programs, software and discs, including, but not by way of limitation, those programs, software and discs generated during Employee's employment with the Company, and all other items which are the property of the Company and/or its subsidiaries, or contain information which belongs to the Company or any of the Released Parties. Further, Employee agrees that, upon the Company's request at any time, he will provide and disclose to it in good faith and with full cooperation, all information obtained or developed by Employee during his employment with the Company which the Company considers pertinent to its affairs, whether such information is in the form of items in Employee's memory, Employee's mental impressions, or any other form. Employee also acknowledges that it is the Company's policy, communicated to Employee by other Company employees, that Employee is requested to bring to the Company's attention any incidents of misconduct or wrongdoing in the area of government contract procurement policies and practices. Employee hereby affirms that he has acted in accord with such policy and that Employee has at this time no knowledge of any such incident which he has not brought to the attention of the Company in writing. In addition to said policy, the Employee acknowledges that he has complied with all applicable laws, rules and regulations during his employment with respect to his employment with the Company. 6. Employee agrees to waive any employment rights with any of the Released Parties that he might otherwise have now or in the future, including reinstatement or re-employment. Employee agrees that he will not apply for employment with the Company or with any of its divisions, subsidiaries, or successors, at any time in the future. If Employee inadvertently should apply for employment with the Company or any of its divisions, subsidiaries, or successors, he agrees to withdraw immediately any such application upon being advised of the identity of the prospective employer. 3 7. Employee agrees that he will continue to treat as confidential, property of the Company and will not disclose or use any information or knowledge obtained or developed by Employee during Employee's employment with the Company which is not in the public domain and which consists of, or relates to, the Company's products, inventions, discoveries, processes, techniques, formulas, substances, designs, patterns, improvements, ideas, plans, projects, programs, research, test results, writings, notes, patents, copyrights, trademarks, know-how, trade secrets, customer and supplier lists, or business, financial, marketing, sales, pricing, engineering, manufacturing, or other operational matters and plans. Employee agrees that all Company confidentiality, nondisclosure, and secrecy agreements to which he became a party in connection with his employment with the Company, or may become a party to in connection with this Severance and Release, will remain in full force and effect in accordance with their terms. Employee agrees that if he becomes employed by a person, business, or other entity that provides substantially the same products and services as the Company, Employee will be required to prove that he has complied with the provisions of this paragraph in any proceeding that the Company might bring to enforce the provisions of this paragraph. 8. Employee understands and agrees that he shall keep confidential, and make no disclosure or reference to, the terms or contents of this Severance and Release or discussions specifically leading to this Severance and Release to any person, firm, corporation, association, partnership, or any entity of any kind or identity whatever, including, but not limited to, current and former employees of the Company or any of the Released Parties. In the event contact regarding the existence or terms of this Severance and Release is initiated by any third party, Employee (or others to whom disclosure is allowed as set forth in this paragraph) shall strictly limit their response, either verbatim, or in substance, to the statement that "the matter has been resolved by mutual agreement." In the event the confidentiality requirements set forth herein are breached, Employee shall be liable to the Company for monetary and equitable losses. This confidentiality requirement shall not prohibit Employee from disclosure to his spouse, accountants, financial advisors, and attorneys, provided that Employee will relay the instant confidentiality requirement to such individuals, or to taxing authorities, or under court order or subpoena. Employee and the Company shall not make any negative, derogatory or disparaging statements, remarks or comments of any kind or nature whatsoever, either oral or written, directly or indirectly, to any person or entity about, in reference to, or with respect to each other. Notwithstanding the preceding sentence, this Severance and Release shall not be interpreted to restrict communications to or between any officers, directors, members, management employees, or attorneys of the Company, to the extent such communications occur during the normal course of business. Further, Employee agrees that if anyone attempts to induce or compel Employee to disclose, release, produce, or make known any information concerning the Company, he will (a) immediately notify the Company of this occurrence in writing; (b) fully cooperate with the Company in any of its efforts to resist such a disclosure by any lawful means; and (c) ensure that neither Employee nor anyone acting on Employee's behalf impairs or defeats in any matter any objection to disclosure or privilege which 4 might be available to the Company with respect to such information. The Company agrees to indemnify Employee and hold Employee harmless from any claims, demands, liabilities, or damages incurred by Employee as a result of Employee's performance under the preceding provisions of this paragraph, and to reimburse Employee for reasonable attorneys' fees incurred by Employee in connection with any such claims, demands, liabilities, or damages, provided, however, that the Company will be obligated to make such reimbursements only for attorneys' fees covering attorneys' services for which Employee obtained the Company's prior written consent. 9. If Employee breaches any provision of this Severance and Release, the Company shall be entitled to be reimbursed by Employee for all legal fees, costs, and expenses incurred by the Company in defending itself or enforcing its rights relative to such matters. 10. This Severance and Release constitutes the entire and complete agreement between the parties. No other promises or agreements, either express or implied, shall be binding unless in writing and signed by all parties. 11. The parties agree to the extent that any portions of this Severance and Release may be declared invalid, the remaining portion(s) shall not be affected and shall be given full force and effect. 12. Employee acknowledges that he has entered into this Severance and Release freely and voluntarily, and that he has had adequate time to read this Severance and Release and to consult with his attorney on its terms and to reflect upon the consequences of his execution thereof. Employee acknowledges that the Company offered him twenty-one (21) days within which to consider this Severance and Release, and that the Company advised him to consult with legal counsel prior to executing this Severance and Release. Moreover, Employee is advised that he has seven (7) days following his execution of this Severance and Release to revoke it, and this Severance and Release shall not become effective or enforceable until this seven-day revocation period has expired. Any such revocation must be in writing and delivered via personal delivery or overnight mail to ABC-NACO Inc., 2001 Butterfield Road, Suite 502, Downers Grove, Illinois 60515; Attention: John Grodoski. In the event Employee exercises his right of revocation, this Severance and Release shall be null and void. 13. Employee agrees that, except as otherwise provided in this Severance and Release and except for any Company pension plans in which Employee participated during his employment with the Company, this Severance and Release constitutes the entire agreement between Employee and the Company and supersedes all prior agreements between Employee and the Company. Employee agrees that Employee is not relying, and will not rely, upon any statements or representations that are not contained in this Severance and Release. Employee agrees that this Severance and Release cannot be amended, extended, or terminated except by a written instrument signed by Employee and an authorized officer of the Company. Employee agrees that if any portion of this Severance and Release is held to be invalid by a court, the remaining 5 portions will automatically be severed from the invalid portion and will remain in full force and effect. 14. This Severance and Release shall be construed in accordance with the laws of the State of Illinois. The Parties consent to the exclusive jurisdiction of federal and state courts seated in Cook County, Illinois. IN WITNESS WHEREOF, the Parties have executed this Severance and Release on the respective date written below. Date: _______________________ ABC-NACO INC. EMPLOYEE By:____________________________ By:________________________________ 6 EX-10.16 5 dex1016.txt SEVERANCE AGREEMENT DATED 4/01/2001 Exhibit 10.16 CONFIDENTIAL SEVERANCE AGREEMENT AND GENERAL RELEASE ---------------------------------------------------- This Confidential Severance Agreement and General Release (this "Severance and Release") is made and entered into by and between ABC-NACO INC. (the "Company") and Joseph A. Seher ("Employee") (collectively, the "Parties"). WHEREAS, the Company informed Employee on or about April 1, 2001 that his employment was being terminated effective April 1, 2001; WHEREAS, the Company and Employee, each denying any wrongdoing or liability whatsoever, desire to sever their employment relationship in an amicable fashion; WHEREAS, the Company and Employee desire to reach a final, full and complete settlement of all matters relating to Employee's employment with the Company up to the date of this Severance and Release; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged: 1. For and in consideration of the payment provided for in paragraph 2 of this Severance and Release, Employee agrees that by executing this Severance and Release he does hereby, for himself, his heirs, executors, administrators, representatives, successors and assigns, irrevocably and unconditionally release and forever discharge the Company, its parent companies, subsidiaries, divisions, business units, and all affiliated or related companies, successors, predecessors, assigns or representatives, present and former employees, and any agents, present and former officers, directors, attorneys, insurers, and all persons acting for, by, through, under or in concert with any of them (hereinafter "Released Parties"), of and from any and all claims, demands, causes of action, suits, debts, accounts, claims for attorneys' fees, interest, expenses and costs, damages, judgments, and executions of any nature whatsoever, which Employee, his heirs, executors, administrators, representatives, successors, or assigns, had, now have, or may hereafter have, from the beginning of time to the date hereof, against the Company or any of the Released Parties, whether based on federal or state statute, common law, rule, regulation or any ordinance, whether in law or in equity, contract or tort, whether liquidated or unliquidated, whether known or unknown, related to Employee's employment with the Company and/or the termination therefrom, and particularly without limiting the foregoing, any and all such claims under the following statutes, if applicable: the Age Discrimination in Employment Act (29 U.S.C. (S) 261 et seq.), the Americans with Disabilities Act (42 U.S.C. (S)12101 et seq.), Title VII of the Civil Rights Act of 1964, as amended (42 U.S.C. (S)2000e et seq.), the Illinois Human Rights Act (775 ILCS 5/1-101 et seq.), the Employee Retirement Income Security Act of 1974, as amended, and the Fair Labor Standards Act, as amended. 2. The Parties agree on the following payment terms: a. Effective April 1, 2001, Employee will receive twenty four (24) months salary as severance pay which will be paid over a period of one hundred four (104) weeks, less standard deductions. Employee will be paid for any earned and unused vacation pay up to and including March 31, 2001; however, no accrual of vacation pay occurs during period of severance payments ("Severance Pay"). b. During the period that Employee is receiving periodic severance payments, Employee will continue to participate in the same Company employee benefit programs (except short-term disability, long-term disability, the 401k Plan) in which he participated immediately prior to April 1, 2001, and his continuing participation in these programs will be on the same basis and terms as Employee participated in them immediately prior to April 1, 2001, subject to the Company's right to modify or terminate such programs at any time. When Employee's periodic severance payments cease, his participation in these programs will cease. c. The Company shall make such other payments pursuant to that certain written Employment Agreement dated June 22, 1999. Further, Employee understands that neither the Company nor its counsel have made, and Employee does not rely upon, any representations regarding the tax treatment of the Severance Pay, and agrees that he is solely responsible for determining the tax consequences of the Severance Pay, and is legally bound to make payment of taxes, if any, which are determined to be owed by him (including penalties and interest related thereto) by any taxing authority. 3. Employee understands and agrees that the payment of monies and other consideration set forth in this Severance and Release does not constitute an admission of liability or violation of any applicable law, regulation, or agreement, and in fact the Company and the Released Parties expressly deny any such liability or violation. 4. Employee represents that he has not filed any complaint or charge against the Company or any of the Released Parties involving any events up to and including the date of this Severance and Release. Employee agrees that he will not voluntarily cooperate or participate in an investigation or prosecution of any action against any or all of the Released Parties. Employee further agrees that he will not solicit in any manner any former, current, or future employee of the Released Parties to pursue a claim against any of the Released Parties. Further, Employee agrees that in the event that the Company becomes involved in any legal or administrative claims or other proceedings relating to events that 2 occurred during his employment and as to which Employee might in the Company's opinion have personal knowledge, Employee will cooperate to the fullest extent possible in the preparation and presentation by the Company of its prosecution or defense, including but not limited to the signing of affidavits or other documents providing information requested by the Company. The Company agrees to indemnify Employee and hold Employee harmless from any claims, demands, liabilities, or damages incurred by Employee as a result of his performance under the preceding provisions of this paragraph, and to reimburse Employee for reasonable attorneys' fees incurred by Employee in connection with any such claims, demands, liabilities, or damages, provided, however, that the Company will be obligated to make such reimbursements only for attorneys' fees covering attorneys' services for which Employee obtained the Company's prior written approval. 5. Employee agrees, to the extent Employee has previously failed to do so, to return immediately all equipment, tools, documents, files, whether or not Employee was solely responsible for same, keys, credit cards, keycards, computers, programs, software and discs, including, but not by way of limitation, those programs, software and discs generated during Employee's employment with the Company, and all other items which are the property of the Company and/or its subsidiaries, or contain information which belongs to the Company or any of the Released Parties. Further, Employee agrees that, upon the Company's request at any time, he will provide and disclose to it in good faith and with full cooperation, all information obtained or developed by Employee during his employment with the Company which the Company considers pertinent to its affairs, whether such information is in the form of items in Employee's memory, Employee's mental impressions, or any other form. Employee also acknowledges that it is the Company's policy, communicated to Employee by other Company employees, that Employee is requested to bring to the Company's attention any incidents of misconduct or wrongdoing in the area of government contract procurement policies and practices. Employee hereby affirms that he has acted in accord with such policy and that Employee has at this time no knowledge of any such incident which he has not brought to the attention of the Company in writing. In addition to said policy, the Employee acknowledges that he has complied with all applicable laws, rules and regulations during his employment with respect to his employment with the Company. 6. Employee agrees to waive any employment rights with any of the Released Parties that he might otherwise have now or in the future, including reinstatement or re-employment. Employee agrees that he will not apply for employment with the Company or with any of its divisions, subsidiaries, or successors, at any time in the future. If Employee inadvertently should apply for employment with the Company or any of its divisions, subsidiaries, or successors, he agrees to withdraw immediately any such application upon being advised of the identity of the prospective employer. 3 7. Employee agrees that he will continue to treat as confidential, property of the Company and will not disclose or use any information or knowledge obtained or developed by Employee during Employee's employment with the Company which is not in the public domain and which consists of, or relates to, the Company's products, inventions, discoveries, processes, techniques, formulas, substances, designs, patterns, improvements, ideas, plans, projects, programs, research, test results, writings, notes, patents, copyrights, trademarks, know-how, trade secrets, customer and supplier lists, or business, financial, marketing, sales, pricing, engineering, manufacturing, or other operational matters and plans. Employee agrees that all Company confidentiality, nondisclosure, and secrecy agreements to which he became a party in connection with his employment with the Company, or may become a party to in connection with this Severance and Release, will remain in full force and effect in accordance with their terms. Employee agrees that if he becomes employed by a person, business, or other entity that provides substantially the same products and services as the Company, Employee will be required to prove that he has complied with the provisions of this paragraph in any proceeding that the Company might bring to enforce the provisions of this paragraph. 8. Employee understands and agrees that he shall keep confidential, and make no disclosure or reference to, the terms or contents of this Severance and Release or discussions specifically leading to this Severance and Release to any person, firm, corporation, association, partnership, or any entity of any kind or identity whatever, including, but not limited to, current and former employees of the Company or any of the Released Parties. In the event contact regarding the existence or terms of this Severance and Release is initiated by any third party, Employee (or others to whom disclosure is allowed as set forth in this paragraph) shall strictly limit their response, either verbatim, or in substance, to the statement that "the matter has been resolved by mutual agreement." In the event the confidentiality requirements set forth herein are breached, Employee shall be liable to the Company for monetary and equitable losses. This confidentiality requirement shall not prohibit Employee from disclosure to his spouse, accountants, financial advisors, and attorneys, provided that Employee will relay the instant confidentiality requirement to such individuals, or to taxing authorities, or under court order or subpoena. Employee and the Company shall not make any negative, derogatory or disparaging statements, remarks or comments of any kind or nature whatsoever, either oral or written, directly or indirectly, to any person or entity about, in reference to, or with respect to each other. Notwithstanding the preceding sentence, this Severance and Release shall not be interpreted to restrict communications to or between any officers, directors, members, management employees, or attorneys of the Company, to the extent such communications occur during the normal course of business. Further, Employee agrees that if anyone attempts to induce or compel Employee to disclose, release, produce, or make known any information concerning the Company, he will (a) immediately notify the Company of this occurrence in writing; (b) fully cooperate with the Company in any of its efforts to resist such a disclosure by any lawful means; and (c) ensure that neither Employee nor anyone acting on Employee's behalf impairs or defeats in any matter any objection to disclosure or privilege which 4 might be available to the Company with respect to such information. The Company agrees to indemnify Employee and hold Employee harmless from any claims, demands, liabilities, or damages incurred by Employee as a result of Employee's performance under the preceding provisions of this paragraph, and to reimburse Employee for reasonable attorneys' fees incurred by Employee in connection with any such claims, demands, liabilities, or damages, provided, however, that the Company will be obligated to make such reimbursements only for attorneys' fees covering attorneys' services for which Employee obtained the Company's prior written consent. 9. If Employee breaches any provision of this Severance and Release, the Company shall be entitled to be reimbursed by Employee for all legal fees, costs, and expenses incurred by the Company in defending itself or enforcing its rights relative to such matters. 10. This Severance and Release constitutes the entire and complete agreement between the parties. No other promises or agreements, either express or implied, shall be binding unless in writing and signed by all parties. 11. The parties agree to the extent that any portions of this Severance and Release may be declared invalid, the remaining portion(s) shall not be affected and shall be given full force and effect. 12. Employee acknowledges that he has entered into this Severance and Release freely and voluntarily, and that he has had adequate time to read this Severance and Release and to consult with his attorney on its terms and to reflect upon the consequences of his execution thereof. Employee acknowledges that the Company offered him twenty-one (21) days within which to consider this Severance and Release, and that the Company advised him to consult with legal counsel prior to executing this Severance and Release. Moreover, Employee is advised that he has seven (7) days following his execution of this Severance and Release to revoke it, and this Severance and Release shall not become effective or enforceable until this seven-day revocation period has expired. Any such revocation must be in writing and delivered via personal delivery or overnight mail to ABC-NACO Inc., 2001 Butterfield Road, Suite 502, Downers Grove, Illinois 60515; Attention: John Grodoski. In the event Employee exercises his right of revocation, this Severance and Release shall be null and void. 13. Employee agrees that, except as otherwise provided in this Severance and Release and except for any Company pension plans in which Employee participated during his employment with the Company, this Severance and Release constitutes the entire agreement between Employee and the Company and supersedes all prior agreements between Employee and the Company. Employee agrees that Employee is not relying, and will not rely, upon any statements or representations that are not contained in this Severance and Release. Employee agrees that this Severance and Release cannot be amended, extended, or terminated except by a written instrument signed by Employee and an authorized officer of the Company. Employee agrees that if any portion of this Severance and Release is held to be invalid by a court, the remaining 5 portions will automatically be severed from the invalid portion and will remain in full force and effect. 14. This Severance and Release shall be construed in accordance with the laws of the State of Illinois. The Parties consent to the exclusive jurisdiction of federal and state courts seated in Cook County, Illinois. IN WITNESS WHEREOF, the Parties have executed this Severance and Release on the respective date written below. Date: _______________________ ABC-NACO INC. EMPLOYEE By:____________________________ By:________________________________ Vaughn W. Makary Chief Executive Officer 6 EX-21.1 6 dex211.txt SUBSIDIARIES OF THE REGISTRANT 7 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1
JURISDICTION OF PERCENTAGE NAME OWNER U.S. FEIN INCORPORATION OWNERSHIP - ---------- ---------------------- ---------- --------------------- ---------- NACO, Inc. ............................. 36-3525574 Delaware, U.S. 100% ABC-NACO Inc. 2001 Butterfield Road Downers Grove, IL 60515 National Castings Inc. ................. 36-3366864 Delaware, U.S. 100% NACO Inc. 110 N. 25th Avenue Melrose Park, IL 60160 NACO Flow Products, Inc. ............... 42-1302332 Delaware, U.S. 100% National Castings Inc. f/k/a Keokuk Steel Castings Co., Inc. 600 Morgan Street Keokuk, IA 52632 National Engineered .................... 42-1375026 Iowa, U.S. 100% National Castings Inc. Products Company, Inc. A/k/a NEPCO 128 Collins Road Richmond, TX 77469 ABC-NACO Europe Ltd. ................... N/A Scotland, UK 100% National Castings Inc. f/k/a Glencast Limited Kirkland Works Leven, Fife KY8 2LE Scotland Dominion Castings Limited .............. N/A Ontario, Canada 100% National Castings Inc. 100 Depew Street Hamilton, Ontario L8L 8G1 Canada National Castings de Mexico ............ N/A United Mexican States 1% National Castings Inc. S.A de C.V. ............................ 99% ABC-NACO de Mexico Corredor Industrial S/N ................
S.A. de C.V. Cd. Sahagun, Hidalgo 43990 Mexico NACO Europe AB......................... N/A Sweden 100% NACO, Inc. Box 1343 Herserudsvagen 18 S-181 25 Lidingo Sweden ABC-NACO Latino America,............... N/A United Mexican States 99% NACO, Inc. S.A. de C.V............................ 1% National Castings Inc. Corredor Industrial S/N Cd. Sahagun, Hidalgo 43990 Mexico Servicios National Castings,........... N/A United Mexican States 99% ABC-NACO, S.A. de C.V. Corredor Industrial S/N................ 1% National Castings Inc. Cd. Sahagun, Hidalgo 43990 Mexico Comercializadora National.............. N/A United Mexican States 99% ABC-NACO, S.A. de C.V. Castings, S.A. de C.V.................. 1% National Castings Inc. Corredor Industrial S/N Cd. Sahagun, Hidalgo 43990 Mexico ABC-NACO Servicios..................... N/A United Mexican States 99% ABC-NACO, S.A. de C.V. Ferroviares, S.A. de C.V............... 1% National Castings Inc. Ave. Mario Colin S/N Esquina Miraflores Valle de Ceylan Tlalnepantla, Estado de Mexico, 54150 ABC Rail French Holdings, Inc.......... 36-4019618 Delaware, U.S. 100% ABC-NACO Inc. 2001 Butterfield Road Suite 502 Downers Grove, IL 60515 ABC Rail Products...................... 36-4096911 Delaware, U.S. 100% ABC-NACO Inc. China Investment Corporation 2001 Butterfield Road Suite 502 Downers Grove, IL 60515 ABC Rail (Virgin Islands) Corporation.. 66-0477167 U.S. Virgin Islands 100% ABC-NACO Inc.
The Guardian Building Havensight St. Thomas, VI 63033 Cometna Companhia Metalurgica N/A Portugal 100% ABC-NACO Europe Ltd Nacional, S.A. 1675-901 Famoes Portugal The AIMS Group Inc........................ 36-4426467 Delaware 100% 1387 Cassat Avenue Jacksonville, FL 32205 BuyMetalCastings Inc...................... 36-4418809 Delaware 100% 126 Collins Road Richmond, TX 77469
EX-23.1 7 dex231.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 [Arthur Andersen Logo] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated April 17, 2001, included in this Form 10-K/A Amendment No 1, into the Company's previously filed Registration Statement File Nos. 33-90086, 33-90090, 33-90092 and 333-37178 on Form S-8 and Nos. 333-16241, 333-89601, 333-90441 and 333-38508 on Form S-3. Chicago, Illinois April 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----