**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 
| **(Mark  One)**                                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |   |   |
| **ý**                                                                                                                                                                                |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |   |   |
| **For the quarterly period ended December 31, 2002**                                                                                                                                      |
|                                                                                                                                                                                      |   |   |
| **OR**                                                                                                                                                                                    |
|                                                                                                                                                                                      |   |   |
| **o**                                                                                                                                                                                     |   | **TRANSITION REPORT PURSUANT TO THE  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |   |   |
| **For the transition period from               to              ** |

 

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**Commission File Number 1-12541**

** **

**AtchisonCasting Corporation**

(Exact name of registrant as specified in itscharter)

 

| **Kansas**                                                                           |   | **48-1156578**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  of other jurisdiction of incorporation  or organization)                     |   | (I.R.S.  Employer Identification No.) |
|                                                                                 |   |                                  |
| **400 South Fourth Street, Atchison, Kansas**                                        |   | **66002**                             |
| (Address  of principal executive offices)                                            |   | (Zip  Code)                           |
|                                                                                 |   |                                  |
| (Registrant’s telephone  number, including area code) **(913) 367-2121**        |
|                                                                                 |
| **Not Applicable**                                                                   |
| (Former  name, former address and former fiscal year, if changed since last report.) |

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements from the past90 days.  Yes o No ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theexchange act).

Yes o No ý

 

There were 7,723,031 shares of common stock,$.01 par value per share, outstanding on February 14, 2003

 

 

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PARTI

 

ITEM 1. Financial Statements.

 

ATCHISONCASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATEDBALANCE SHEETS

(Inthousands, except share data)

 
|                                                                                                   |   | **December 31,  2002** |    | **June 30,  2002** |   |
|--------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                                                                   |   | **(Unaudited)**        |    |               |   |
|                                                                                                   |   |                   |    |               |   |
| ASSETS                                                                                                 |   |                   |    |               |   |
|                                                                                                   |   |                   |    |               |   |
| CURRENT ASSETS:                                                                                        |   |                   |    |               |   |
| Cash and cash equivalents                                                                              |   | $                      | 1,466   |               | $      | 1,583 |   |
| Customer accounts receivable, net of allowance for doubtful accounts  of $664 and $1,248, respectively |   | 53,361                 |    | 64,943             |   |
| Income tax refund receivable                                                                           |   | —                 |    | 1,604              |   |
| Inventories                                                                                            |   | 48,355                 |    | 48,885             |   |
| Deferred income taxes                                                                                  |   | 2,479                  |    | 2,250              |   |
| Other current assets                                                                                   |   | 10,214                 |    | 10,182             |   |
| Current assets of discontinued operations                                                              |   | 3,280                  |    | 5,193              |   |
|                                                                                                   |   |                   |    |               |   |
| Total current assets                                                                                   |   | 119,155                |    | 134,640            |   |
|                                                                                                   |   |                   |    |               |   |
|                                                                                                   |   |                   |    |               |   |
| PROPERTY, PLANT AND EQUIPMENT, Net                                                                     |   | 84,588                 |    | 91,670             |   |
|                                                                                                   |   |                   |    |               |   |
| GOODWILL, Net                                                                                          |   | 1,400                  |    | 19,107             |   |
|                                                                                                   |   |                   |    |               |   |
| DEFERRED FINANCING COSTS, Net                                                                          |   | 974                    |    | 1,209              |   |
|                                                                                                   |   |                   |    |               |   |
| OTHER ASSETS                                                                                           |   | 16,599                 |    | 17,086             |   |
|                                                                                                   |   |                   |    |               |   |
| NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS                                                          |   | 3,861                  |    | 5,735              |   |
|                                                                                                   |   |                   |    |               |   |
| TOTAL  ASSETS                                                                                     |   | $                      | 226,577 |               | $      | 269,447 |   |

 

SeeNotes to Consolidated Financial Statements.

 

2

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|                                                                                            |   | **December 31,  2002** |    | **June 30,  2002** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                                                            |   | **(Unaudited)**        |    |               |   |
|                                                                                            |   |                   |    |               |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                      |   |                   |    |               |   |
|                                                                                            |   |                   |    |               |   |
| CURRENT LIABILITIES:                                                                            |   |                   |    |               |   |
| Accounts payable                                                                                |   | $                      | 44,159  |               | $      | 42,082 |   |
| Accrued expenses                                                                                |   | 34,192                 |    | 41,978             |   |
| Current maturities of long-term debt                                                            |   | 115,042                |    | 97,958             |   |
| Current liabilities of discontinued operations                                                  |   | 3,300                  |    | 4,501              |   |
|                                                                                            |   |                   |    |               |   |
| Total current liabilities                                                                       |   | 196,693                |    | 186,519            |   |
|                                                                                            |   |                   |    |               |   |
| LONG-TERM DEBT                                                                                  |   | 1,222                  |    | 20,662             |   |
|                                                                                            |   |                   |    |               |   |
| DEFERRED INCOME TAXES                                                                           |   | 3,142                  |    | 3,443              |   |
|                                                                                            |   |                   |    |               |   |
| OTHER LONG-TERM OBLIGATIONS                                                                     |   | 1,313                  |    | 264                |   |
|                                                                                            |   |                   |    |               |   |
| POSTRETIREMENT OBLIGATIONS OTHER THAN PENSION                                                   |   | 11,761                 |    | 11,183             |   |
|                                                                                            |   |                   |    |               |   |
| MINORITY INTEREST IN SUBSIDIARIES                                                               |   | 366                    |    | 516                |   |
|                                                                                            |   |                   |    |               |   |
| Total liabilities                                                                               |   | 214,497                |    | 222,587            |   |
|                                                                                            |   |                   |    |               |   |
|                                                                                            |   |                   |    |               |   |
| STOCKHOLDERS’ EQUITY:                                                                      |   |                   |    |               |   |
|                                                                                            |   |                   |    |               |   |
| Preferred stock, $.01 par value, 2,000,000 authorized shares; no  shares issued                 |   | —                 |    | —             |   |
|                                                                                            |   |                   |    |               |   |
| Common stock, $.01 par value, 19,300,000 authorized shares; 8,312,049  shares issued            |   | 83                     |    | 83                 |   |
|                                                                                            |   |                   |    |               |   |
| Class A common stock (non-voting), $.01 par value, 700,000 authorized  shares; no shares issued |   | —                 |    | —             |   |
|                                                                                            |   |                   |    |               |   |
| Additional paid-in capital                                                                      |   | 81,613                 |    | 81,613             |   |
|                                                                                            |   |                   |    |               |   |
| Accumulated deficit                                                                             |   | (58,885                | )       | (22,217            | )      |
|                                                                                            |   |                   |    |               |   |
| Accumulated other comprehensive loss                                                            |   | (4,683                 | )       | (6,571             | )      |
|                                                                                            |   |                   |    |               |   |
| Less shares held in treasury:                                                                   |   |                   |    |               |   |
| Common stock, 589,018 shares, at cost                                                           |   | (6,048                 | )       | (6,048             | )      |
|                                                                                            |   |                   |    |               |   |
| Total stockholders’ equity                                                                 |   | 12,080                 |    | 46,860             |   |
|                                                                                            |   |                   |    |               |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                 |   | $                      | 226,577 |               | $      | 269,447 |   |

 

SeeNotes to Consolidated Financial Statements.

 

3

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ATCHISONCASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

(Inthousands, except share data)

 
|                                                                                            |   | **Three Months Ended  December 31,** |    | **Six Months Ended  December 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|------------------------------------|--------|
|                                                                                            |   | **2002**                             |    | **2001**                           |   | **2002** |   | **2001** |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| NET SALES                                                                                       |   | $                                    | 77,209  |                               | $      | 93,721 |   | $ | 153,333 |   | $ | 186,510 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| COST OF GOODS SOLD                                                                              |   | 70,759                               |    | 85,489                             |   | 141,411 |   | 171,442 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| GROSS PROFIT                                                                                    |   | 6,450                                |    | 8,232                              |   | 11,922 |   | 15,068 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| OPERATING EXPENSES:                                                                             |   |                                 |    |                               |   |   |   |   |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| Selling, general and administrative                                                             |   | 8,470                                |    | 10,334                             |   | 16,816 |   | 18,961 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| Impairment and restructuring charges                                                            |   | 4,427                                |    | —                             |   | 5,938 |   | — |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| Amortization of intangibles                                                                     |   | —                               |    | (140                               | )      | — |   | (280 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| Total operating expenses                                                                        |   | 12,897                               |    | 10,194                             |   | 22,754 |   | 18,681 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| OPERATING LOSS                                                                                  |   | (6,447                               | )       | (1,962                             | )      | (10,832 | ) | (3,613 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| INTEREST EXPENSE                                                                                |   | 2,462                                |    | 2,887                              |   | 4,951 |   | 5,549 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| MINORITY INTEREST IN NET LOSS OF SUBSIDIARIES                                                   |   | (21                                  | )       | (10                                | )      | (54 | ) | (38 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE  EFFECT OF ACCOUNTING CHANGE |   | (8,888                               | )       | (4,839                             | )      | (15,729 | ) | (9,124 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| INCOME TAX EXPENSE                                                                              |   | 3                                    |    | 175                                |   | 32 |   | 356 |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                          |   | —                               |    | —                             |   | (17,441 | ) | — |   |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                                                                 |   | $                                    | (8,891  | )                                  | $      | (5,014 | ) | $ | (33,202 | ) | $ | (9,480 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX                                                   |   | (1,470                               | )       | (678                               | )      | (3,466 | ) | (695 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| NET LOSS                                                                                        |   | $                                    | (10,361 | )                                  | $      | (5,692 | ) | $ | (36,668 | ) | $ | (10,175 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| NET LOSS PER SHARE - BASIC AND DILUTED                                                          |   |                                 |    |                               |   |   |   |   |   |
| CONTINUING OPERATIONS BEFORE ACCOUNTING CHANGE                                                  |   | $                                    | (1.15   | )                                  | $      | (0.63 | ) | $ | (2.04 | ) | $ | (1.18 | ) |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                          |   | $                                    | 0.00    |                               | $      | 0.00 |   | $ | (2.26 | ) | $ | 0.00 |   |
| DISCONTINUED OPERATIONS                                                                         |   | $                                    | (0.19   | )                                  | $      | (0.09 | ) | $ | (0.45 | ) | $ | (0.09 | ) |
| NET LOSS PER SHARE - BASIC AND DILUTED                                                          |   | $                                    | (1.34   | )                                  | $      | (0.74 | ) | $ | (4.75 | ) | $ | (1.32 | ) |
|                                                                                            |   |                                 |    |                               |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES USED IN CALCULATION - BASIC AND  DILUTED                      |   | 7,723,031                            |    | 7,723,031                          |   | 7,723,031 |   | 7,710,032 |   |

 

SeeNotes to Consolidated Financial Statements.

 

4

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ATCHISONCASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(Inthousands)

 
|                                     |   | **Three Months Ended  December 31,** |    | **Six Months Ended  December 31,** |   |
|------------------------------------------|--------|--------------------------------------|---------|------------------------------------|--------|
|                                     |   | **2002**                             |    | **2001**                           |   | **2002** |   | **2001** |   |
|                                     |   |                                 |    |                               |   |   |   |   |   |
| NET LOSS                                 |   | $                                    | (10,361 | )                                  | $      | (5,692 | ) | $ | (36,668 | ) | $ | (10,175 | ) |
|                                     |   |                                 |    |                               |   |   |   |   |   |
| OTHER COMPREHENSIVE INCOME (LOSS):       |   |                                 |    |                               |   |   |   |   |   |
|                                     |   |                                 |    |                               |   |   |   |   |   |
| Foreign currency translation adjustments |   | 1,452                                |    | (1,209                             | )      | 1,888 |   | 188 |   |
|                                     |   |                                 |    |                               |   |   |   |   |   |
| COMPREHENSIVE LOSS                       |   | $                                    | (8,909  | )                                  | $      | (6,901 | ) | $ | (34,780 | ) | $ | (9,987 | ) |

 

SeeNotes to Consolidated Financial Statements.

 

5

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ATCHISONCASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

(Inthousands)

 
|                                                                                       |   | **Six Months Ended  December 31,** |    |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                                       |   | **2002**                           |    | **2001** |   |
|                                                                                       |   |                               |    |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |   |                               |    |   |   |
| Net loss                                                                                   |   | $                                  | (36,668 | ) | $ | (10,175 | ) |
|                                                                                       |   |                               |    |   |   |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |   |                               |    |   |   |
| Depreciation and amortization                                                              |   | 5,363                              |    | 5,281 |   |
| Cumulative effect of accounting change                                                     |   | 17,441                             |    | — |   |
| Minority interest in net loss of subsidiaries                                              |   | (54                                | )       | (38 | ) |
| Impairment and restructuring charges                                                       |   | 5,938                              |    | — |   |
| Gain on disposal of capital assets                                                         |   | (3                                 | )       | (113 | ) |
| Deferred income tax expense (benefit)                                                      |   | 3                                  |    | (20 | ) |
| Changes in assets and liabilities:                                                         |   |                               |    |   |   |
| Customer accounts receivable                                                               |   | 12,524                             |    | 11,475 |   |
| Income tax refund receivable                                                               |   | 1,604                              |    | — |   |
| Inventories                                                                                |   | 1,274                              |    | (3,046 | ) |
| Other current assets                                                                       |   | 31                                 |    | 1,458 |   |
| Accounts payable                                                                           |   | 999                                |    | (6,299 | ) |
| Accrued expenses                                                                           |   | (8,359                             | )       | (1,800 | ) |
| Postretirement obligations other than pension                                              |   | 578                                |    | 579 |   |
| Other                                                                                      |   | 420                                |    | (1,151 | ) |
| Operating activities of discontined operations                                             |   | 3,123                              |    | 762 |   |
| Cash provided by (used in) operating activities                                            |   | 4,214                              |    | (3,087 | ) |
|                                                                                       |   |                               |    |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |   |                               |    |   |   |
|                                                                                       |   |                               |    |   |   |
| Capital expenditures                                                                       |   | (1,863                             | )       | (1,910 | ) |
| Proceeds from sale of capital assets                                                       |   | 15                                 |    | 180 |   |
| Proceeds from sale of net assets of a subsidiary operation                                 |   | —                             |    | 293 |   |
| Payments for purchase of stock in subsidiaries                                             |   | (94                                | )       | (42 | ) |
| Captial expenditures of discontinued operations                                            |   | (18                                | )       | (114 | ) |
| Cash used in investing activities                                                          |   | (1,960                             | )       | (1,593 | ) |
|                                                                                       |   |                               |    |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |   |                               |    |   |   |
|                                                                                       |   |                               |    |   |   |
| Payments on long-term debt                                                                 |   | (452                               | )       | (4,982 | ) |
| Capitalized financing costs paid                                                           |   | (47                                | )       | (1,341 | ) |
| Net (repayments) borrowings under revolving credit facilities                              |   | (2,785                             | )       | 11,624 |   |
| Advances to parent from discontinued operations                                            |   | 881                                |    | 47 |   |
| Cash (used in) provided by financing activities                                            |   | (2,403                             | )       | 5,348 |   |
|                                                                                       |   |                               |    |   |   |
| EFFECT OF EXCHANGE RATE ON CASH                                                            |   | 32                                 |    | 25 |   |
|                                                                                       |   |                               |    |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                       |   | (117                               | )       | 693 |   |
|                                                                                       |   |                               |    |   |   |
| CASH AND CASH EQUIVALENTS, Beginning of period                                             |   | $                                  | 1,583   |   | $ | 1,329 |   |
|                                                                                       |   |                               |    |   |   |
| CASH AND CASH EQUIVALENTS, End of period                                                   |   | $                                  | 1,466   |   | $ | 2,022 |   |

 

SeeNotes to Consolidated Financial Statements.

 

6

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**ATCHISON CASTING CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             Accounting Policies and Basis of Presentation

 

The unaudited consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements of Atchison Casting Corporation and subsidiaries (the“Company”) for the year ended June 30, 2002, as included in the Company’sAnnual Report on Form 10-K for the fiscal year ended June 30, 2002.

 

The accompanying unauditedconsolidated financial statements include all adjustments (consisting only ofnormal recurring accruals), which, in the opinion of management, are necessaryfor a fair presentation of financial position, results of operations and cashflows.  Results of operations forinterim periods are not necessarily indicative of results to be expected for afull year.

 

Certain December 31, 2001amounts have been reclassified to conform with December 31, 2002classifications.  In addition, thefinancial statements have been reclassified to present the Company’s KramerInternational, Inc. (“Kramer”) and LaGrange Foundry Inc. (“LaGrange Foundry”)subsidiaries as discontinued operations for all periods presented, as describedin footnote 6.

 

2.                                    Inventories

 
|            |   | **As of**          |   |
|-----------------|--------|--------------------|--------|
|            |   | **Dec. 31,  2002** |   | **June 30,  2002** |   |
|            |   | **(Thousands)**    |   |
|            |   |               |   |   |   |
| Raw materials   |   | $                  | 5,683  |   | $ | 6,403 |   |
| Work-in-process |   | 33,769             |   | 31,572 |   |
| Finished goods  |   | 8,382              |   | 10,758 |   |
| Supplies        |   | 1,692              |   | 1,982 |   |
|            |   | $                  | 49,526 |   | $ | 50,715 |   |

 

The above amounts includeinventories related to discontinued operations of $ 1.2 million and $1.8million as of December 31, 2002 and June 30, 2002, respectively.

 

7

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3.             Income Taxes

 

Income tax expense (benefit)consisted of:

 
|      |   | **Six Months Ended  December 31,** |   |
|-----------|--------|------------------------------------|--------|
|      |   | **2002**                           |   | **2001** |   |
|      |   | **(Thousands)**                    |   |
|      |   |                               |   |   |   |
| Current:  |   |                               |   |   |   |
| Domestic  |   | $                                  | — |   | $ | — |   |
| Foreign   |   | 29                                 |   | 376 |   |
|      |   | 29                                 |   | 376 |   |
|      |   |                               |   |   |   |
|      |   |                               |   |   |   |
| Deferred: |   |                               |   |   |   |
| Domestic  |   | —                             |   | — |   |
| Foreign   |   | 3                                  |   | (20 | ) |
|      |   | 3                                  |   | (20 | ) |
|      |   |                               |   |   |   |
| Total     |   | $                                  | 32     |   | $ | 356 |   |

 

4.             Supplemental Cash Flow Information

 
|                                        |   | **Six Months Ended  December 31,** |   |
|---------------------------------------------|--------|------------------------------------|--------|
|                                        |   | **2002**                           |   | **2001** |   |
|                                        |   | **(Thousands)**                    |   |
|                                        |   |                               |   |   |   |
| Cash paid (received) during the period for: |   |                               |   |   |   |
| Interest                                    |   | $                                  | 4,772  |   | $ | 6,051 |   |
| Income Taxes                                |   | $                                  | (1,836 | ) | $ | (2,247 | ) |

 

8

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5.             New Accounting Standards

 

Aspreviously disclosed, the Company adopted Statement of Financial AccountingStandard (“SFAS”) No. 142 and No. 144 effective July 1, 2002. SFAS No. 142requires that, upon adoption, amortization of goodwill ceases and, instead beevaluated annually for impairment. SFAS No. 144 superceded SFAS No. 121 andestablished accounting standards for long-lived assets. In addition, SFAS No.144 requires that reporting units and asset groups disposed of or, in certaininstances, to be disposed of be presented as discontinued operations. The adoptionof these two accounting standards has materially impacted the Company’sfinancial statements for the three and six-month periods ended December 31,2002 and 2001 as follows:

 

•                    TheCompany’s closure of the La Grange Foundry facility and the sale of the Kramerfacility (see footnote 6) has, pursuant to the provisions of SFAS No. 144,resulted in the presentation of their assets, liabilities and results ofoperations as discontinued operations in the accompanying consolidatedfinancial statements.

 

•                    Basedupon the Company’s analysis of the carrying values of long-lived assetspursuant to the provisions of SFAS No. 144, property, plant and equipment ofThe G&C Foundry Company (“G & C”) and Canada Alloy Casting, Ltd.(“Canada Alloy”) have been reduced. The significant factors considered indetermining the appropriate carrying value of these assets included theCompany’s current intent, as described in footnote 7, to sell those businesses.

 

•                    Asrequired by SFAS No. 142, the Company has completed the first phase of itsgoodwill impairment analysis. That analysis indicated that the goodwillassociated with certain of its subsidiaries is impaired. Although the secondphase of the analysis to determine the amount of the impairment as required bySFAS No. 142 is not yet complete, the Company has reduced the carrying value ofsuch goodwill by approximately $19.0 million as follows:

 

9

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| **Subsidiary**                      |   | **Before**  |         | **After**   |        |
|-------------------------------------|--------|-------------|--------------|-------------|-------------|
| G & C                           |   | $           | 3.6 million  |        | —      |   |
| Inverness Castings Group, Inc.      |   | 3.9 million |         | —      |        |
| Prospect Foundry, Inc.              |   | 4.6 million |         | —      |        |
| London Precision Machine & Tool |   | 6.7 million |         | $           | 1.4 million |   |
| Subtotal                            |   | $           | 18.8 million |        | $           | 1.4 million |   |
| Kramer International, Inc.          |   | 3.2 million |         | 1.6 million |        |
| Total                               |   | $           | 22.0 million |        | $           | 3.0 million |   |

 

Thereduction of the carrying value of Kramer’s goodwill of $1.6 million isincluded in discontinued operations. The reduction of the carrying values ofthe other subsidiaries’ goodwill aggregating $17.4 million has been recorded asa cumulative effect of a change in accounting principles. The Company willcomplete the second phase of its analysis prior to June 30, 2003. Furtheradjustment of the remaining balance of goodwill may be needed after theanalysis is complete.

 

TheCompany also adopted SFAS No. 143 and No. 145 effective July 1, 2002 and SFASNo. 146 effective January 1, 2003. The adoption of these new standards is notexpected to significantly affect the Company’s financial statements.

 

6.                                       Discontinued Operations

 

Kramer

 

OnJanuary 3, 2003, the Company completed the sale of substantially all of the netassets, excluding the land and buildings, of Kramer.  Prior to post-closing adjustments, the Company receivedapproximately $3.9 million in cash in exchange for assets and the assumption ofliabilities by the buyer.  $450,000 ofthe proceeds are subject to an escrow agreement.  Substantially all of the remaining cash was used to make requiredpayments to creditors (see footnote 9). Contemporaneous with the sale transaction, the Company entered into anagreement to lease the land and buildings to the buyer for a period of up totwo years, subject to cancellation by the buyer at any time.

 

Inthe first quarter of fiscal 2003, the Company recognized an impairment chargeof $1.6 million to write-down the carrying amount of goodwill at Kramer to theCompany’s estimate of fair value, which is presented in the Company’sconsolidated financial statements as a portion of the cumulative effect of thechange in accounting principle.  TheCompany considered its decision to realign its operations, resulting in itsintent to dispose of Kramer as the primary indicator of impairment.  Prior to the impairment charge, the goodwillhad a carrying value of $3.2 million. For the second quarter of fiscal years 2002 and 2003, Kramer recordednet sales of

 

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$2.6million and $2.2 million, respectively, and net income (loss) of $293,000 and$(136,000), respectively.  For the firsthalf of fiscal years 2002 and 2003, Kramer recorded net sales of $5.4 millionand $4.4 million, respectively, and net income (loss) of $618,000 and $(3,000),respectively, excluding the impairment charge discussed above.

 

Asof December 31, 2002, Kramer had total assets of approximately $5.8 million,consisting of approximately $1.6 million of accounts receivable; approximately$835,000 of inventory; approximately $1.7 million of property, plant andequipment, net; and approximately $1.6 million of goodwill; and totalliabilities of approximately $1.3 million, consisting of approximately $926,000of accounts payable and approximately $399,000 of accrued expenses.

 

Asa result of the sale, Kramer was considered as discontinued operations inaccordance with SFAS No. 144.

 

LaGrangeFoundry

 

Followinglosses in fiscal 2002, the Company’s Board of Directors committed to a plan todownsize La Grange Foundry to a pattern repair, maintenance and storageoperation.  During the second quarter offiscal 2003, the Company’s Board of Directors committed to a plan for thecomplete closure of La Grange Foundry that was completed during the secondquarter of fiscal 2003.  In connectionwith the closure of LaGrange Foundry, the Company recorded a restructuringcharge, in the second quarter of fiscal 2003, of approximately $520,000relating to the guarantee of LaGrange Foundry’s obligations under certainequipment leases.

 

Forthe second quarter of fiscal years 2002 and 2003, La Grange recorded net salesof $3.7 million and $1.0 million, respectively, and net losses of $1.0 millionand $814,000, respectively.  For thefirst six months of fiscal years 2002 and 2003, La Grange Foundry recorded netsales of $7.8 million and $3.3 million, respectively, and net losses of $1.3million and $1.3 million, respectively, excluding the restructuring chargediscussed above in the fiscal 2003 periods.

 

TheCompany will recognize certain other exit costs associated with the closure ofLa Grange Foundry in fiscal 2003 related to employee termination costs.  The Company terminated approximately 135employees and will recognize a charge for severance benefits of approximately$73,000 during fiscal 2003.

 

Asa result of the closure, LaGrange was considered as discontinued operations inaccordance with SFAS No. 144.

 

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Theresults of Kramer and LaGrange have been reported in discontinued operationsfor the three-month and six-month periods ended December 31, 2002 and 2001 inthe Consolidated Statement of Operations. The Current Assets of Discontinued Operations at December 31, 2002 weremade up of Customer Accounts Receivable of approximately $1.9 million andInventories of approximately $1.2 million and Other Current Assets ofapproximately $200,000.  The Non-CurrentAssets of Discontinued Operations at December 31, 2002 were made up ofproperty, plant and equipment, net, of approximately $2.3 million and goodwillof approximately $1.6 million.  TheCurrent Liabilities of Discontinued Operations at December 31, 2002 were madeof Accounts Payable of approximately $1.8 million and Accrued Expenses ofapproximately $1.5 million.

 

Unauditedoperating results of LaGrange and Kramer for the three-month and six-monthperiods ended December 31, 2002 and 2001, which are presented as discontinuedoperations in the accompanying consolidated statements of operations for allperiods presented were as follows:

 
|                                   |   | **Three  Months Ended  December 31,** |   | **Six  Months Ended  December 31,** |   |
|----------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                   |   | **2002**                              |   | **2001**                            |   | **2002** |   | **2001** |   |
| Sales                                  |   | $                                     | 3,172  |                                | $      | 6,350 |   | $ | 7,630 |   | $ | 13,175 |   |
| Cost of Sales                          |   | 3,755                                 |   | 6,417                               |   | 8,204 |   | 12,653 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Gross Profit                           |   | (583                                  | )      | (67                                 | )      | (574 | ) | 522 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Selling, general and administrative    |   | 367                                   |   | 566                                 |   | 772 |   | 1,126 |   |
| Impairment and restructuring charges   |   | 520                                   |   | —                              |   | 520 |   | — |   |
| Amortization of intangibles            |   | —                                |   | 45                                  |   | — |   | 91 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Total operating expenses               |   | 887                                   |   | 611                                 |   | 1,292 |   | 1,217 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss before interest and taxes         |   | (1,470                                | )      | (678                                | )      | (1,866 | ) | (695 | ) |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Interest expense                       |   | —                                |   | —                              |   | — |   | — |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss before taxes                      |   | (1,470                                | )      | (678                                | )      | (1,866 | ) | (695 | ) |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Cumulative effect of accounting change |   | —                                |   | —                              |   | (1,600 | ) | — |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss from discontinued operations      |   | $                                     | (1,470 | )                                   | $      | (678 | ) | $ | (3,466 | ) | $ | (695 | ) |

 

7.                                       Potential Sale of Canada Alloy Castings and The G & C Foundry Co.

 

The Company is negotiatingthe sale of substantially all of the net assets of Canada Alloy and G & Cto a single buyer.  There can be noassurance that a definitive agreement will ultimately be 

 

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executed.  If executed and consummated, it isanticipated that this transaction will close during the second half of fiscal2003.  Pursuant to the provisions ofSFAS No. 144, the assets, liabilities and operations of G & C and CanadaAlloy are not presented as discontinued operations in the accompanyingconsolidated financial statements.  Ifthe transaction is completed during fiscal 2003, the results of theseoperations will be reclassified into discontinued operations.

 

In the second quarter offiscal 2003, the Company recognized an impairment charge of $8.0 million,consisting of $4.4 million to write-down the property, plant and equipment ofCanada Alloy and G & C and $3.6 million to write-down the carrying amountof the goodwill at G & C to the Company’s estimate of fair value.  The $3.6 million write-down of Goodwill is presented in the Company’s consolidated financial statements as aportion of the cumulative effect of a change in accounting principle.  The Company considered its decision torealign its operations, resulting in its intent to dispose of Canada Alloy andG & C in its estimate of future cash flows for purposes of assessingimpairment of these long-lived assets. Prior to the impairment charge, the property, plant and equipment had acarrying value of $7.4 million and the goodwillhad a carrying value of $3.6 million. For the second quarter of fiscal years 2002 and 2003, Canada Alloyrecorded net sales of $3.2 million and $2.5 million, respectively, and a netloss of $112,000 and $160,000, respectively. For the first six months of fiscal years 2002 and 2003, Canada Alloyrecorded net sales of $6.6 million and $5.5 million, respectively, and a netloss of $247,000 and $184,000, respectively. For the second quarter of fiscal years 2002 and 2003, G & C recordednet sales of $3.3 million and $3.0 million, respectively, and a net loss of$291,000 and $213,000, respectively. For the first six months of fiscal years 2002 and 2003, G & Crecorded net sales of $6.7 million and $6.5 million, respectively, and a netloss of $891,000 and $318,000, respectively.

 

As of December 31, 2002, Canada Alloy and G & Chad total assets of approximately $8.8 million, consisting of approximately$2.7 million of accounts receivable, approximately $2.6 million of inventory,approximately $300,000 of other current assets, approximately $2.9 million ofproperty, plant and equipment, net, and approximately $300,000 of other assets;and total liabilities of approximately $5.3 million, consisting ofapproximately $2.8 million of accounts payable, approximately $1.3 million ofaccrued expenses, and approximately $1.2 million in long-term debt.

 

The assets, liabilities, and operations areincluded in continuing operations at December 31, 2002 pursuant to theconditions set forth in SFAS No. 144. If the disposition process for these net

 

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assets continue such that the conditions set forthin SFAS No. 144 for presentation as discontinued operations is met, the relatedassets, liabilities, and operating results for these foundries will bereclassified as discontinued operations for all periods.

 

8.                                       Sales, Closureor Liquidation of other subsidiaries

 

Prior to fiscal 2003, theCompany closed, sold or liquidated several other subsidiaries.  Results of operations of those subsidiariesprior to such actions are included in continuing operations in the accompanyingconsolidated financial statements pursuant to SFAS No. 144.

 

LA Die Casting

 

On February 20, 2002, theCompany completed the sale of substantially all of the net assets of LA DieCasting, Inc. (“LA Die Casting”). For the second quarter of fiscal year 2002,LA Die Casting recorded net income of $16,000 on net sales of $1.7 million.  For the first six months of fiscal 2002, LADie Casting recorded a net loss of $26,000 on net sales of $3.6 million.

 

Jahn Foundry

 

On December 20, 2001, theCompany completed the sale of substantially all of the net assets of JahnFoundry Corp. (“Jahn Foundry”). After post-closing adjustments, the Companyreceived approximately $300,000 in cash, a minority ownership position in thebuyer, New England Iron LLC (“New England Iron”), valued at $325,000 and a note(bearing interest at 6.0% per year) for the principal amount of $475,000amortizing over 10 years (the “New England Iron Note”) in exchange for assetsand the assumption of liabilities by the buyer.  The Company recognized a loss on the sale of approximately$40,000.

 

For the second quarter offiscal year 2002, Jahn Foundry recorded a net loss of $734,000 on net sales of$1.3 million.  For the first six monthsof fiscal 2002, Jahn Foundry recorded a net loss of $1.4 million on net salesof $2.9 million.

 

In October 2002, themajority owner of New England Iron notified the Company that it planned toliquidate New England Iron. In the first quarter of fiscal 2003, the Companyrecorded additional impairment and restructuring charges of approximately $1.5million in connection with the liquidation of New England Iron.   These charges include:  $325,000 to write off the Company’s minorityownership position in New England Iron, $286,000 to write-down the value of theNew England Iron Note to the Company’s estimate of fair value and $900,000relating to the guarantee of Jahn 

 

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Foundry’s obligations undercertain equipment lease agreements that had been sublet to New England Iron.

 

Empire Steel

 

The Company substantiallycompleted the closure of Empire Steel, Inc. (“Empire”) by December 31, 2001,and transferred as much work as possible to other locations.  Empire was closed as to commercial work butcontinues to produce one product for the U.S. Government from time to time. Forthe second quarter of fiscal years 2002 and 2003, Empire recorded net sales of$1.9 million and $348,000, respectively, and net losses of $224,000 and$400,000, respectively.  For the firstsix months of fiscal 2002 and 2003, Empire recorded net sales of $4.1 millionand $566,000, respectively, and net losses of $776,000 and $679,000,respectively.

 

The Company terminatedapproximately 106 employees at Empireand recognized a charge for severance benefits of approximately $50,000 infiscal 2002.

 

Fonderied’Autun

 

On April 9, 2002, the Company’s French subsidiary,Fonderie d’Autun (“Autun”), filed a voluntary petition for reorganization withthe local court in Chalons, France.

 

On September 19, 2002, the court appointed aliquidator to begin the liquidation of Autun. During the fourth quarter of fiscal 2002, the Company recorded a chargeof $567,000 to write off its remaining net investment in Autun and a charge of$3.5 million relating to the Company’s guarantee of Autun’s obligations undercertain lease agreements.  EffectiveApril 1, 2002, the Company is no longer consolidating Autun’s results into itsconsolidated financial statements.

 

As a result of the court’s decision to liquidatethe assets of Autun, it is estimated that charges for site cleanup could totalup to $8.5 million.  Should Autun not beable to meet the cleanup obligations, the French government might be able tomake a claim against the prior owner. The Company guaranteed payment of certain contingent liabilities of upto 100 million French francs (currently approximately US$16.0 million) when itpurchased Autun, for the cost of environmental restoration, if any, in theevent Autun were closed and a claim was successfully made against the priorowner.  Such amount has not beenrecorded in the accompanying financial statements.  These potential contingent liabilities may adversely impact theCompany’s ability to proceed with its plans to achieve its financial objectivesif they become liabilities of the Company.

 

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For the second quarter of fiscal 2002, Autunrecorded net sales of $4.6 million and a net loss of $951,000.  For the first six months of fiscal 2002,Autun recorded net sales of $8.3 million and a net loss of $1.6 million.

 

9.                                       Debt and Financing Arrangements

 
| **(Dollars in thousands)**                                                        |   | **June 30,  2002** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| Senior notes  with an insurance company                                           |   | $                  | 10,245 |                   | $      | 9,895 |   |
| Revolving credit  facility with Harris Trust & Savings Bank                   |   | 60,791             |   | 56,169                 |   |
| Term loan  between the Company and General Electric Capital Corporation           |   | 26,542             |   | 26,542                 |   |
| Receivables  program and revolving credit facility with Burdale Financial Limited |   | 14,178             |   | 16,727                 |   |
| Term loan  between G&C and OES Capital, Inc.                                  |   | 1,643              |   | 1,540                  |   |
| Term loan  between LaGrange and the Missouri Development Finance Board            |   | 5,100              |   | 5,100                  |   |
| Term loan  between the Company and A.I. Credit Corp.                              |   | 121                |   | 291                    |   |
| Subtotal                                                                          |   | 118,620            |   | 116,264                |   |
| Less amounts  classified as current                                               |   | 97,958             |   | 115,042                |   |
| Total long-term  debt                                                             |   | $                  | 20,662 |                   | $      | 1,222 |   |

 

InSeptember 2001, Atchison Casting UK Limited (“ACUK”), a subsidiary of theCompany, ACUK’s subsidiaries, and Burdale Financial Limited (“Burdale”) enteredinto the Facility Agreement.  ThisFacility Agreement provides for a facility of up to 25,000,000 British pounds(approximately $40.0 million US), subject to certain eligibility calculations,to be used to fund working capital requirements at Sheffield Forgemasters GroupLimited (“Sheffield”), a subsidiary of ACUK. In addition, the FacilityAgreement provides security for Sheffield’s foreign currency exchange contractsand performance bond commitments. This facility matures on September 17, 2004and is secured by substantially all of Sheffield’s assets in the U.K. Loansunder this Facility Agreement bear interest at LIBOR plus 2.60% (7.19% at December31, 2002). As of December 31, 2002, ACUK had drawn approximately $16.7 millionunder the Facility Agreement. The Facility Agreement contains severalcovenants, which, among other things, require ACUK to maintain balances undercertain eligibility levels.

 

OnOctober 29, 2002, ACUK entered into an amendment of its Facility Agreement to,among other things (a) impose a limit of 10,750,000 British pounds(approximately $17.2 million US) on the aggregate sum at any time of (i)outstanding revolving loans

 

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fromBurdale to ACUK plus (ii) accounts receivable purchased from ACUK by Burdalethat are not collected (there had previously been no collective limit, thoughoutstanding loans and uncollected receivables each were, and continue to be,subject to independent maximum amounts) and (b) add minimum monthly cash flowand net income covenants and a minimum tangible net worth covenant.

 

ACUKhas not been in compliance with those covenants based on results of operationsin the second quarter of fiscal 2003 and does not expect to regain compliance.As a result, Burdale has the right to demand payment for the entire balanceoutstanding under the Facility Agreement. Should Burdale exercise its right todemand immediate payment of the outstanding balance under the FacilityAgreement, the Company believes that ACUK would not be able to make suchpayment under the Facility Agreement. The Company has classified theoutstanding borrowings as current in the accompanying consolidated balancesheet as of December 31, 2002.

 

OnJuly 31, 2002, the Company entered into the Thirteenth Amendment andForbearance Agreement to the Company’s revolving credit facility with HarrisTrust and Savings Bank, as agent for several lenders (the “Credit Agreement”),and the Tenth Amendment and Forbearance Agreement to a note purchase agreementunder which the Company issued senior notes to an insurance company (the “NotePurchase Agreement”). These amendments, as modified, provided that these lenderswould forbear from enforcing their rights with respect to certain existingdefaults through October 17, 2002. Among other things, these amendments provided that the Company wouldsolicit offers for purchase or develop disposition plans for certain subsidiariesand will engage a consulting firm to prepare a valuation analysis andrecommended disposition strategy for the Company’s U.K. subsidiaries.  In addition, new covenants regarding minimumcumulative earnings before interest, taxes, depreciation and amortization,capital expenditures and operating cash flow were added.

 

OnOctober 17, 2002, the Company entered into the Fourteenth Amendment andForbearance Agreement to the Credit Agreement (“Fourteenth Amendment”) and theEleventh Amendment and Forbearance Agreement to the Note Purchase Agreement(“Eleventh Amendment”).  Theseamendments provide that these lenders (such lenders, collectively, the “HarrisLenders”) will forbear from enforcing their rights with respect to certainexisting defaults through April 3, 2003, subject to certain events that couldcause an earlier termination of this forbearance period.  In exchange, the Company agreed, among otherthings,

 

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(i)to engage an investment banker to solicit offers on Inverness Castings Group,Inc. (“Inverness”); (ii) to enter into an amendment to implement financialcovenants by December 13, 2002; and (iii) to prepay the Harris Lenders’ loansin amounts equal to $4.0 million by January 31, 2003 and an additional $7.0million by February 28, 2003, which the Company is striving to satisfy out ofthe net proceeds from asset sales (other than inventory and Inverness) and taxrefunds.  As of February 13, 2003, theCompany had prepaid the Harris Lenders’ loans by approximately $6.4 million.

 

TheCompany is currently in default of the Fourteenth Amendment and EleventhAmendment, as the Company and the Harris Lenders have not reached agreement onnew financial covenants.  The Company iscurrently negotiating amendments to the Fourteenth Amendment and EleventhAmendment that will, among other things, establish new financial covenantsrelating to capital expenditures, minimum cumulative earnings before interest,taxes, depreciation and amortization and certain legal and restructuringexpenses.

 

TheCompany is also negotiating an amendment to the Cash Collateral Use Agreementbetween the Company, its U.S. Subsidiaries and the Harris Lenders.  This amendment, among other things, wouldestablish minimum net cash flow covenants for the Company’s La Grange Foundry,Canadian Steel Foundries, Ltd., Empire Steel and PrimeCast, Inc. subsidiariesand for certain affirmative litigation expenses.

 

OnOctober 17, 2002, the Company entered into a Forbearance Agreement and Second Amendmentto the Master Security Agreement, as amended on January 24, 2003, and Note withGeneral Electric Capital Corporation (“GECC”) (“GE Financing”), as agent forcertain participant lenders (such lenders, collectively, the “GE Lenders”).  This amendment provides that the GE lenderswill forbear from enforcing their rights with respect to certain existingdefaults through June 29, 2003, subject to earlier termination upon theoccurrence of certain defaults, but no longer allows for automatic extensions asoriginally provided.  The GE Lendersalso agreed to allow the Company to make only interest payments through the endof the forbearance period.  In exchange,the Company has agreed to increase the interest rate 25 basis points to 9.30%per year.

 

Thetermination of the forbearance period in any of the Credit Agreement, NotePurchase Agreement or the Master Security Agreement can result in thetermination of the other agreements.  Inaddition, default under the Facility Agreement could result in

 

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thetermination of the Credit Agreement and the Note Purchase Agreement, and inturn, the GE Financing.

 

TheCompany is currently negotiating with its lenders to extend its current arrangementswhile it attempts to establish a new credit facility with covenants that theCompany believes it will be able to satisfy with additional borrowingcapacity.  There are no assurances theCompany will be able to establish a restructured or new facility.

 

10.                                 Contingencies

 

Anaccident involving an explosion and fire occurred on February 25, 1999 atJahn Foundry, located in Springfield, Massachusetts. Nine employees wereseriously injured and there were three fatalities.

 

Acivil action has commenced in the Massachusetts Superior State Court on behalfof the estates of deceased workers, their families, injured workers, and theirfamilies against the supplier of a chemical compound used in Jahn Foundry’smanufacturing process. The supplier of the chemical compound, Borden Chemical,Inc., filed a Third Party Complaint against Jahn Foundry in the MassachusettsSuperior State Court on February 2, 2000 seeking indemnity for anyliability it has to the plaintiffs in the civil action. The Company’scomprehensive general liability insurance carrier has retained counsel onbehalf of Jahn Foundry and the Company and is aggressively defending JahnFoundry in the Third Party Complaint. It is too early to assess the potentialliability to Jahn Foundry for the Third Party Complaint, which in any event theJahn Foundry would aggressively defend. In addition, Jahn Foundry has brought aThird Party Counterclaim against Borden and the independent salesrepresentative of the chemical compound, J.R. Oldhan Company, seekingcompensation for losses sustained in the explosion, including amounts coveredby insurance.

 

TheCompany dismissed Deloitte & Touche LLP (“Deloitte”) as its auditor onApril 16, 2002. On July 26, 2002, the Company filed a complaintagainst Deloitte in Philadelphia County, Pennsylvania for negligence,professional malpractice, negligent misrepresentation and breach of contract.The Company believes that Deloitte breached its duties to perform audit andconsulting services by failing to act with reasonable and ordinary care, withthe ordinary skill and diligence of the accounting profession, and in theconformity with the professional standards such as generally accepted auditingstandards and generally accepted accounting principles. Deloitte filed acounterclaim 

 

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againstthe Company on September 13, 2002 alleging that the Company was aware ofinformation related to improper activities of certain employees at thePennsylvania Foundry Group and failed to disclose such information to Deloitte.On September 24, 2002, Deloitte filed a third party claim against certainofficers and employees of the Company and others alleging, among other things,that such officers and employees withheld material information in connectionwith such improper activities. The Company believes that Deloitte’s claimsagainst it and the Company’s officers and employees have no merit and willvigorously defend itself.

 

TheOccupational Safety and Health Administration (“OSHA”) cited the Company onSeptember 26, 2002 for 95 alleged violations of Federal Safety and Healthregulations at its Atchison, Kansas foundry. OSHA sought penalties totaling $250,000 in connection with the allegedviolations.  At OSHA’s invitation, theCompany engaged in settlement negotiations with the agency over the allegedviolations.  During the course ofsettlement discussions, OSHA withdrew some citations it had classified as“serious,” reclassified some “serious” citations to the category “other-than-serious,”and declined to withdraw or modify other citations.  The parties entered into two Informal Settlement Agreements withOSHA whereby OSHA reduced its proposed penalty to $50,000 and the Companyagreed to undertake, within one year, abatement of certain conditions relatingto the remaining citations.  By enteringinto the Informal Settlement Agreements, the Company did not admit that itviolated the cited standards for any litigation or purpose other than asubsequent proceeding under the Occupational Safety and Health Act.  No subsequent proceeding is pending oranticipated by the Company at this time. The Company is not able to accurately predict the cost of abatement, butbelieves it may be as low as approximately $400,000 and as high as approximately$800,000.

 

11.                                 FinancialResults and Management’s Plans

 

Infiscal 2002 and the first six months of fiscal 2003, the Company incurredpretax losses of $35.0 million  and$15.8 million, respectively.  The fiscalyear 2002 pretax loss included impairment charges related to La Grange Foundryof $5.2 million.  The fiscalyear-to-date 2003 pretax loss includes impairment charges related to JahnFoundry, G&C Foundry, and Canada Alloy of $5.9 million.  As of December 31, 2002, the Company was notin compliance with certain financial covenants included in its primary debtagreements.  These matters raisesubstantial doubt as to the Company’s ability to continue as a going concern.

 

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Toaddress these conditions, management has taken or is in the process of takingthe following actions:

 

OPERATIONS

 

TheCompany has closed five unprofitable foundries since the beginning of fiscal2001. Operations from these five foundries have been a significant factor inthe Company’s pretax losses. Management has transferred a portion of the workpreviously performed by these foundries to other foundries, thereby increasingthe utilization and profitability of these other foundries.

 

SOLICITATIONOF OFFERS ON THREE SUBSIDIARY OPERATIONS

 

TheCompany is currently soliciting offers to purchase or is engaged in preliminarynegotiations to sell the following subsidiaries:

 

•               The G&CFoundry Company

 

•               Canada AlloyCastings, Ltd.

 

•                Inverness CastingGroup, Inc.

 

Ifacceptable offers are  received, theCompany expects that the sales of the operations could be completed by the endof fiscal 2003. Any net proceeds will be used primarily to retire outstandingindebtedness.

 

Toeffect the business model discussed below, the Company must improve itsfinancial condition. Part of the effort includes assessing variousopportunities to reduce indebtedness. While each of these three subsidiariesbrings certain strengths or capabilities to the Company, they either do not fitwell with the new business model or are not operations  in which the Company has elected to directits resources at this time. However, if acceptable offers are not  received, the Company will continue to workon improving these and all of the Company’s operations, and renegotiatingoutstanding indebtedness.

 

NEWBUSINESS MODEL

 

Tocontinue as a going concern, attain profitability, and increase market share,management has refined the Company’s business model, consisting of thefollowing key components:

 

•                                            Narrow the customer focus to industrial manufacturers, who desire tooutsource more manufacturing every year, and the product focus to complex,highly engineered castings.

 

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•                                            Grow through more value-added business, such as machining and assembly.

 

•                                            More effectively use casting design and simulation technology throughoutthe Company.

 

•                                            Expand ACC Global, a recently formed division devoted to foreignsourcing of castings for customers seeking lower cost global suppliers. ACCGlobal can provide a customer service by managing this process.

 

TheCompany believes the success of this new business model depends on improvingits financial condition. To accomplish this, the Company must(1) restructure its debt with current or new lenders, and (2) assesseach location as to its contribution and develop a plan of disposition orclosure if acceptable results in the near term are not feasible.

 

TheCompany expects that any future growth will result primarily through increasingvalue-added capability. The Company also hopes to grow through ACC Global aswell. For instance, joint ventures with companies identified by ACC Global inlow labor cost countries could give rise to a blended source of metalcomponents to industrial manufacturers.

 

Whilethe Company believes this new business model represents a viable plan toachieve its financial objectives, there are no assurances that such plans canbe executed as designed or that execution thereof will result in achievement ofthe Company’s financial objectives. In addition, the Company’s potentialcontingent liabilities may adversely impact the Company’s ability to proceedwith its plans if they become liabilities of the Company.

 

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ITEM 2.

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF**

**OPERATIONS AND FINANCIAL CONDITION**

 

Results of Operations:

 

Net sales from continuing operations for thesecond quarter of fiscal 2003 were $77.2 million, representing a decrease of$16.5 million, or 17.6%, from net sales of $93.7 million in the second quarterof fiscal 2002.  Since the beginning offiscal 2002, Atchison Casting Corporation (the “Company”) has completed theclosure of two operations, the sale of two operations and placed one operationinto liquidation.  These operations,excluding LaGrange Foundry, Inc. (‘LaGrange”) which has been classified as adiscontinued operation, generated net sales of $9.5 million and approximately$300,000 in the second quarter of fiscal 2002 and fiscal 2003, respectively, asfollows:

 

| **Operation**                          |   | **FY022nd Qtr  Net Sales** |         | **FY03 2nd Qtr  Net Sales** |         |
|----------------------------------------|--------|----------------------------|--------------|-----------------------------|--------------|
| Sale of Jahn Foundry Corp.             |   | $                          | 1.3  million |                        | —       |   |
| Closure of Empire Steel Castings, Inc. |   | 1.9  million               |         | $                           | 0.3  million |   |
| Sale of Los Angeles Die Casting, Inc.  |   | 1.7  million               |         | —                      |         |
| Liquidation of Fonderie d’Autun   |   | 4.6  million               |         | —                      |         |
|                                   |   | $                          | 9.5  million |                        | $            | 0.3  million |   |

 

Excluding net sales generated by the aboveoperations, net sales for the second quarter of fiscal 2003 were $76.9 million,representing a decrease of $7.3 million, or 8.7%, from net sales of $84.2million in the second quarter of fiscal 2002. This 8.7% decrease in net sales was due primarily to decreases in netsales to the mining and power generation markets, partially offset by increasesin net sales to the military and rail markets. Sheffield Forgemasters Group Limited’s (“Sheffield”) net sales for thesecond quarter of fiscal 2003 decreased $182,000 from net sales in the secondquarter of fiscal 2002, reflecting lower net sales to the power generationmarket.

 

Net sales from continuing operations for thefirst six months of fiscal 2003 were $153.3 million, representing a decrease of$33.2 million, or 17.8%, from net sales of $186.5 million in the first sixmonths of fiscal 2002.  The operationsclosed, sold or placed into liquidation since the beginning of fiscal 2002,excluding LaGrange, generated net sales of $18.9 million and approximately$600,000 in the first six months of fiscal 2002 and fiscal 2003, respectively,as follows:

 

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| **Operation**                          |   | **FY021st Six Months  Net Sales** |          | **FY03 1st Six Months  Net Sales** |         |
|----------------------------------------|--------|-----------------------------------|---------------|------------------------------------|--------------|
| Sale of Jahn Foundry Corp.             |   | $                                 | 2.9  million  |                               | —       |   |
| Closure of Empire Steel Castings, Inc. |   | 4.1  million                      |          | $                                  | 0.6  million |   |
| Sale of Los Angeles Die Casting, Inc.  |   | 3.6  million                      |          | —                             |         |
| Liquidation of Fonderie d’Autun   |   | 8.3  million                      |          | —                             |         |
|                                   |   | $                                 | 18.9  million |                               | $            | 0.6  million |   |

 

Excluding net sales generated by the aboveoperations, net sales for the first six months of fiscal 2003 were $152.7million, representing a decrease of $14.9 million, or 8.9%, from net sales of $167.6million in the first six months of fiscal 2002.  This 8.9% decrease in net sales was due primarily to decreases innet sales to the mining, power generation and steel markets partially offset byincreases in net sales to the military and rail markets.  Sheffield’s net sales for the first sixmonths of fiscal 2003 decreased $4.7 million from net sales in the first sixmonths of fiscal 2002, reflecting lower net sales to the steel and powergeneration markets.

 

Gross profit from continuing operations forthe second quarter of fiscal 2003 decreased $1.7 million, or 20.7%, to $6.5million, or 8.4% of net sales, compared to $8.2 million, or 8.8% of net sales,for the second quarter of fiscal 2002. The decrease in gross profit and gross profit as a percentage of netsales was primarily due to lower net sales and reduced absorption of overheadat the Company’s subsidiaries serving the mining and power generation marketsand to a change in product mix toward products which have a lower gross profitas a percentage of net sales at the Company’s subsidiary serving the automotivemarket.

 

Gross profit from continuing operations for the first six months of fiscal 2003 decreased $3.2 million, or 24.5%, to$11.9 million, or 7.8% of net sales, compared to $15.1 million, or 8.1% of netsales, for the first six months of fiscal 2002.  The decrease in gross profit and gross profit as a percentage ofnet sales was primarily due to lower net sales and reduced absorption ofoverhead at the Company’s subsidiaries serving the mining, power generation andsteel markets and to a change in product mix toward products which have a lowergross profit as a percentage of net sales at the Company’s subsidiary servingthe automotive market.

 

The gross profit at Sheffield in the firstsix months of fiscal 2003 decreased $887,000, to a gross profit of $2.8million, or 5.7% of net sales, compared to a gross profit of $3.7 million, or6.8% of net sales, in the first six months of fiscal 2002, primarily reflectingthe impact of the strong British pound and the competitive environment of themarkets served by Sheffield on quoted margins. Partially offsetting these factors was a decrease in the gross losses atthe operations closed, sold or liquidated since the beginning of fiscal 2002 byan aggregate of approximately $700,000 from the gross losses at these locationsin the first six months of fiscal 2002.

 

Selling, general and administrative expense(“SG&A”) for the second quarter of fiscal 2003 was $8.5 million, or 11.0%of net sales, compared to $10.3 million, or 11.0% of net sales, in the secondquarter of fiscal 2002.  The reductionin SG&A expense is primarily due to reductions in staffing and relatedbenefits, and the reduction in SG&A expense at

 

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the facilities the Company has closed, soldor placed into liquidation since the beginning of fiscal 2002.  SG&A expense in the second quarter offiscal 2003 at the facilities the Company has closed, sold or placed intoliquidation decreased by an aggregate of approximately $1.7 million from thesecond quarter of fiscal 2002.  Alsoincluded in the second quarter of fiscal 2002 and fiscal 2003 were expenses ofapproximately $300,000 and $950,000, respectively, incurred by the Company inpursuing various options to restructure its bank credit facility.

 

For the first six months of fiscal 2003,SG&A was $16.8 million, or 11.0% of net sales, compared to $19.0 million,or 10.2% of net sales, in the first six months of fiscal 2002.  The reduction in SG&A expense isprimarily due to reductions in staffing and related benefits, and the reductionin SG&A expense at the facilities the Company has closed, sold or placedinto liquidation since the beginning of fiscal 2002.  SG&A expense in the first six months of fiscal 2003 at thefacilities the Company has closed, sold or placed into liquidation decreased byan aggregate of approximately $3.1 million from the first six months of fiscal2002.  Also included in the first sixmonths of fiscal 2002 and fiscal 2003 were expenses of approximately $1.0million and $1.9 million, respectively, incurred by the Company in pursuingvarious options to restructure its bank credit facility.

 

The Company has recorded intangible assets,consisting of goodwill, in connection with certain of the Company’sacquisitions.  The Company adopted SFAS No. 142 *“Goodwilland Other Intangible Assets”*asof July 1, 2002*.* SFAS No. 142 requires that, uponadoption, amortization of goodwill cease and instead, the carrying value ofgoodwill be evaluated for impairment on an annual basis.  Accordingly, there was no amortization ofgoodwill in the second quarter or first six months of fiscal 2003.   Amortization of goodwill for the secondquarter of fiscal 2002 was $264,000, or 0.3% of net sales.  Amortization of goodwill for the first sixmonths of fiscal 2002 was $525,000, or 0.3% of net sales.  The Company had also recorded a liability,consisting of the excess of acquired net assets over cost (“negativegoodwill”), in connection with the acquisition of Fonderie d’Autun(“Autun”).  The amortization of negativegoodwill was a credit to income in the second quarter of fiscal 2002 of$404,000, or 0.4% of net sales. The amortization of negative goodwill was acredit to income in the first six months of fiscal 2002 of $805,000, or 0.4% ofnet sales.  Net income for the secondquarter and first six months of fiscal 2002 excluding the amortization ofgoodwill was not significantly different.

 

The Company is negotiating the sale ofsubstantially all of the assets of Canada Alloy Castings, Ltd. (“Canada Alloy”)and The G & C Foundry Co. (“G & C”) to a single buyer.  There can no assurance that a definitiveagreement will ultimately be executed. If executed and consummated, it is anticipated that this transactionwill close during second half of fiscal 2003.

 

In the second quarter of fiscal 2003, theCompany recognized an impairment charge of $8.0 million, consisting of $4.4million to write-down the property, plant and equipment of Canada Alloy and G& C and $3.6 million to write-down the carrying amount of the goodwill at G& C to the Company’s estimate of fair value,which is presented in the Company’s consolidated financial statements as thecumulative effect of a change in accounting principle.  The Company considered its decision torealign its operations, 

 

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resulting in its intent to dispose of CanadaAlloy and G & C as the primary indicator of impairment.  Prior to the impairment charge, the property,plant and equipment had a carrying value of $7.4 million and the goodwill had a carrying value of $3.6 million.  For the second quarter of fiscal years 2002 and 2003, CanadaAlloy recorded net sales of $3.2 million and $2.5 million, respectively, and anet loss of $112,000 and $160,000, respectively.  For the first six months of fiscal years 2002 and 2003, CanadaAlloy recorded net sales of $6.6 million and $5.5 million, respectively, and anet loss of $247,000 and $184,000, respectively.  For the second quarter of fiscal years 2002 and 2003, G & Crecorded net sales of $3.3 million and $3.0 million, respectively, and a netloss of $291,000 and $213,000, respectively. For the first six months of fiscal years 2002 and 2003, G & Crecorded net sales of $6.7 million and $6.5 million, respectively, and a netloss of $891,000 and $318,000, respectively.

 

TheCompany substantially completed the closure of Empire by December 31, 2001, andtransferred as much work as possible to other locations.  Empire was closed as to commercial work, butcontinues to produce one product for the U.S. Government from time totime.  For the second quarter of fiscalyears 2002 and 2003, Empire recorded net sales of $1.9 million and $348,000,respectively, and net losses of $224,000 and $400,000, respectively.  For the first six months of fiscal years2002 and 2003, Empire recorded net sales of $4.1 million and $566,000,respectively, and net losses of $776,000 and $679,000, respectively.

 

On February 20,2002, the Company completed the sale of substantially all of the net assets ofLA Die Casting, Inc. (“LA Die Casting”). After post-closing adjustments, the Company received approximately $3.5million in cash and a note for the principal amount of $259,000 due in twoyears in exchange for assets and the assumption of liabilities by thebuyer.  The note bears interest at therate of 6.0% per year and requires quarterly payments of interest only duringthe two-year period.  The Companyrecognized a loss on the sale of approximately $169,000.  For the second quarter of fiscal year 2002,LA Die Casting recorded net sales of $1.7 million and net income of$16,000.  For the first six months offiscal year 2002, LA Die Casting recorded net sales of $3.6 million and a netloss of $26,000.

 

On December 20, 2001, the Company completedthe sale of substantially all of the net assets of Jahn Foundry. Afterpost-closing adjustments, the Company received approximately $300,000 in cash,a minority ownership position in the buyer, New England Iron LLC (“New EnglandIron”), valued at $325,000 and a note (bearing interest at 6.0% per year) forthe principal amount of $475,000 amortizing over ten years in exchange forassets and the assumption of liabilities by the buyer.  The Company recognized a loss of the sale ofapproximately $40,000.  For the secondquarter of fiscal year 2002, Jahn Foundry recorded net sales of $1.3 million,and a net loss of $734,000.  For thefirst six months of fiscal year 2002, Jahn Foundry recorded net sales of $2.9million, and a net loss of $1.4 million.

 

In October 2002,the majority owner of New England Iron notified the Company that it planned toliquidate New England Iron.  In thefirst quarter of fiscal 2003, the Company recorded charges of approximately$1.5 million in connection with the liquidation of New England Iron.   These charges include:  $325,000 to write off the Company’s minorityownership position in New England Iron, $286,000 to write-down the value of theNew 

 

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England Ironpromissory note to the Company’s estimate of fair value and $900,000 relatingto the guarantee of Jahn Foundry’s obligations under certain equipment leaseagreements that had been sublet to New England Iron.

 

Following lossesin fiscal 2002, the Company’s Board of Directors committed to a plan todownsize La Grange Foundry to a pattern repair, maintenance and storageoperation.  During the second quarter offiscal 2003, the Company’s Board of Directors committed to a plan for thecomplete closure of La Grange Foundry that was completed during the secondquarter of fiscal 2003.  In connectionwith the closure of LaGrange Foundry, the Company recorded a restructuringcharge, in the second quarter of fiscal 2003, of approximately $520,000 relatingto the guarantee of LaGrange Foundry’s obligations under certain equipmentleases.

 

For the secondquarter of fiscal years 2002 and 2003, La Grange recorded net sales of $3.7million and $1.0 million, respectively, and net losses of $1.0 million and$814,000, respectively.  For the firstsix months of fiscal years 2002 and 2003, La Grange Foundry recorded net salesof $7.8 million and $3.3 million, respectively, and net losses of $1.3 millionand $1.3 million, respectively, excluding the restructuring charge discussedabove in the fiscal 2003 periods.

 

On January 3,2003, the Company completed the sale of substantially all of the net assets,excluding the land and buildings, of Kramer International, Inc.(“Kramer”).  Prior to post-closingadjustments, the Company received approximately $3.9 million in cash inexchange for assets and the assumption of liabilities by the buyer.  $450,000 of the proceeds are subject to anescrow agreement.  Contemporaneous withthe sale transaction, the Company entered into an agreement to lease the landand buildings to the buyer for a period of up to two years, subject tocancellation by the buyer at any time.

 

In the firstquarter of fiscal 2003, the Company recognized an impairment charge of $1.6million to write-down the carrying amount of goodwill at Kramer to theCompany’s estimate of fair value, which is presented in the Company’sconsolidated financial statements as a portion of the cumulative effect of thechange in accounting principle.  TheCompany considered its decision to realign its operations, resulting in itsintent to dispose of Kramer as the primary indicator of impairment.  Prior to the impairment charge, the goodwillhad a carrying value of $3.2 million. For the second quarter of fiscal years 2002 and 2003, Kramer recordednet sales of $2.6 million and $2.2 million, respectively, and net income (loss)of $293,000 and $(136,000), respectively. For the first six months of fiscal years 2002 and 2003, Kramer recordednet sales of $5.4 million and $4.4 million, respectively, and net income (loss)of $618,000 and $(3,000), respectively, excluding the impairment chargediscussed above.

 

Interest expense for the second quarter offiscal 2003 was $2.5 million, or 3.0% of net sales, compared to $2.9 million,or 3.0% of net sales, in the second quarter of fiscal 2002. Interest expensefor the first six months of fiscal 2003 was $5.0 million, or 3.0% of net sales,compared to $5.5 million, or 2.9% of net sales, in the first six months offiscal 2002.   The decrease in interestexpense during both periods primarily reflects lower average levels ofoutstanding indebtedness.

 

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The Company recorded income tax expense of$3,000 and $175,000 in the second quarter of fiscal 2003 and fiscal 2002,respectively.  The Company recordedincome tax expense of $32,000 and $356,000 in the first six months of fiscal2003 and fiscal 2002, respectively.  Dueto the Company’s current income tax position, no income tax benefit was recorded in connection with the losses incurred by the Company in theUnited States and Europe.

 

Effective July 1,2002, the Company adopted SFAS 142, *“Goodwilland Other Intangible Assets.”* The Company was required to complete its goodwill impairment analysis byDecember 31, 2002. If the analysis indicates that the goodwill is impaired,writedowns are required once the amount can be determined, but no later thanJune 30, 2003.  The Company has recordeda SFAS 142 goodwill impairment loss of $19.0 million, which is presented in theCompany’s consolidated financial statements for the six months ended December31, 2002 as the cumulative effect of a change in accounting principle.  Such loss will be reflected in the Company’sresults for the first fiscal quarter ended September 30, 2002.

 

As discussed inFootnote 6, “Discontinued Operations,” the Company completed the sale ofsubstantially all the net assets, excluding the land and buildings, of Krameron January 3, 2003 and completed the closure of LaGrange during the secondquarter of fiscal 2003.   The results ofKramer and LaGrange have been reported in discontinued operations for thethree-month and six-month periods ended December 31, 2002 and 2001 in theConsolidated Statement of Operations.

 

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Unauditedoperating results of Kramer and LaGrange for the three-month and six-monthperiods ended December 31, 2002 and 2001 were as follows:

 
|                                   |   | **Three  Months Ended  December 31,** |   | **Six  Months Ended  December 31,** |   |
|----------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                   |   | **2002**                              |   | **2001**                            |   | **2002** |   | **2001** |   |
| Sales                                  |   | $                                     | 3,172  |                                | $      | 6,350 |   | $ | 7,630 |   | $ | 13,175 |   |
| Cost of Sales                          |   | 3,755                                 |   | 6,417                               |   | 8,204 |   | 12,653 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Gross Profit                           |   | (583                                  | )      | (67                                 | )      | (574 | ) | 522 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Selling, general and administrative    |   | 367                                   |   | 566                                 |   | 772 |   | 1,126 |   |
| Impairment and restructuring charges   |   | 520                                   |   | —                              |   | 520 |   | — |   |
| Amortization of intangibles            |   | —                                |   | 45                                  |   | — |   | 91 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Total operating expenses               |   | 887                                   |   | 611                                 |   | 1,292 |   | 1,217 |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss before interest and taxes         |   | (1,470                                | )      | (678                                | )      | (1,866 | ) | (695 | ) |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Interest expense                       |   | —                                |   | —                              |   | — |   | — |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss before taxes                      |   | (1,470                                | )      | (678                                | )      | (1,866 | ) | (695 | ) |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Income tax expense                     |   | —                                |   | —                              |   | — |   | — |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Cumulative effect of accounting change |   |                                  |   |                                |   | (1,600 | ) |   |   |
|                                   |   |                                  |   |                                |   |   |   |   |   |
| Loss from discontinued operations      |   | $                                     | (1,470 | )                                   | $      | (678 | ) | $ | (3,466 | ) | $ | (695 | ) |

 

For the secondquarter of fiscal 2003, the loss from discontinued operations increased$792,000 to approximately $1.5 million compared to a loss of $678,000 in thesecond quarter of fiscal 2002, primarily reflecting a restructuring charge ofapproximately $520,000 relating to LaGrange’s Foundry’s obligations undercertain equipment leases.  For the firstsix months of fiscal 2003, the loss from discontinued operations increasedapproximately $2.8 million to approximately $3.5 million, compared to a loss of$695,000 from the first six months of fiscal 2002.  The increase primarily reflects (i) the $520,000 restructuringcharge recorded at LaGrange Foundry, (ii) a $1.6 million goodwill impairmentcharge recorded at Kramer and presented as a cumulative effect of accountingchange, and (iii) reduced gross profits at Kramer (see notes 5 and 6 to theConsolidated Financial Statements above).

 

As a result of the foregoing, the net lossfor the second quarter of fiscal 2003 was $10.4 million compared to a net lossof $5.7 million for the first quarter of fiscal 2002.  The net loss for the first six months of fiscal 2003 was $36.7million compared to a net loss of $10.2 million for the first six months offiscal 2002.

 

Liquidity and CapitalResources:

 

Cash provided by operating activities for thefirst six months of fiscal 2003 was $4.2 million ($4.5 million provided bycontinuing operations and $323,000 used in discontinued operations), comparedto cash used in operations of $3.1 million ($3.2 million used in continuingoperations and $67,000 provided by discontinued operations) for the first sixmonths of fiscal 2002.  This increaseprimarily reflects reduced working capital requirements and the collection ofan income tax refund.

 

Working capital was a negative $77.5 millionat December 31, 2002, as compared to a negative $51.9 million at June 30,2002.  The change in working capitallevels primarily 

 

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reflects a decrease in trade receivablebalances and the reclassification of $16.7 million and $5.1 million in debtunder the Facility Agreement and the Term Loan between LaGrange Foundry and theMissouri Development Finance Board (“LaGrange IRB”), respectively, as currentat December 31, 2002.  The workingcapital levels also reflect the classification of $92.6 million and $97.6million of the Company’s bank credit facility, term loan and senior notes as currentat December 31, 2002 and June 30, 2002, respectively.  The Company is not in compliance with certain financial covenantsunder the Credit Agreement, Note Purchase Agreement, Facility Agreement and theGE Financing, as defined below, and,accordingly, such amounts outstanding under such arrangements have beenclassified as current liabilities.

 

As discussedabove, the Company has closed LaGrange Foundry.  As a result of the closure, the $5.1 million of debt under theLaGrange IRB has been classified as current at December 31, 2002.  The LaGrange IRB is secured by a letter ofcredit issued under the Company’s revolving credit facility.

 

During the firstsix months of fiscal 2003, the Company made capital expenditures of $1.9million, as compared to $2.0 million for the first six months of fiscal2002.  The capital expenditures in bothperiods were used for routine projects at the Company’s facilities.

 

As discussed above, the Company has soldsubstantially all of the net assets of Jahn Foundry,LA Die Casting and Kramer International. The Company is currently soliciting offers to purchase or engaged inpreliminary negotiations to sell the following subsidiaries:

 

•                                            The G&CFoundry Company

•                                            Canada AlloyCastings, Ltd.

•                                            InvernessCastings Group, Inc.

 

If acceptable offers are received  the Company expects that the sales of theoperations could be completed by the end of fiscal 2003, although there are noassurances of such.  Any net proceedswill be used primarily to retire outstanding indebtedness.

 

The G&C Foundry Company, located in Sandusky,Ohio, manufactures gray and ductile iron castings for hydraulicapplications.  G&C currently employsapproximately 140 people, and generated net sales of approximately $13.6million and $6.5 million in fiscal 2002 and the first six months of fiscal2003, respectively.

 

Canada Alloy, located in Kitchener, Ontario,Canada, manufactures stainless, carbon and alloy castings for a variety ofmarkets.  Canada Alloy currently employsapproximately 110 people, and generated net sales of approximately $13.6million and $5.5 million  in fiscal 2002and the first six months of fiscal 2003, respectively.

 

Inverness Castings Group, located in Dowagiac,Michigan, manufactures aluminum die castings for the automotive, furniture andappliance markets.  Inverness currently employsapproximately 240 people, and generated net sales of approximately $51.3million and $22.2 million in fiscal 2002 and the first six months of fiscal2003, respectively.

 

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The Company hasfour primary credit facilities: a revolving credit facility with Harris Trustand Savings Bank, as agent for several lenders (the “Credit Agreement”); seniornotes (the “Notes”) with an insurance company issued under a note purchaseagreement (the “Note Purchase Agreement”); a term loan with General ElectricCapital Corporation (the “GE Financing”); and a receivables program combinedwith a revolving credit facility with Burdale Financial Limited pursuant to afacility agreement (the “Facility Agreement”). Each of these facilities require compliance with various covenants,including, but not limited to, financial covenants related to equity levels,cash flow requirements, fixed charge coverage ratios and ratios of debt toequity.

 

The CreditAgreement, as amended, currently consists of a $63.6 million revolving creditfacility. Asset sales and tax refunds have been used to reduceindebtedness.  In addition to financialcovenants, the Credit Agreement contains restrictions on, among other things,acquisitions, additional indebtedness and the use of net proceeds from the saleof assets (other than inventory), insurance settlements and other non-recurringitems.  Secured by substantially all ofthe Company’s North American assets and a pledge of ACUK’s stock, loans underthis revolving credit facility bear interest at a fluctuating rate of the agentbank’s corporate base rate plus 2.0% (6.25% at December 31, 2002).

 

At December 31,2002, Notes with an aggregate principal amount of $9.9 million were outstandingwith interest accruing at 10.44% per year. The Note Purchase Agreement provides for annual principal payments of$2.9 million. The Company did not make principal payments due on July 31, 2001and July 31, 2002.  The Notes aresecured by the same assets that secure the Credit Agreement and contain similarrestrictions to those described above under the Credit Agreement.

 

On July 31, 2002,the Company entered into the Thirteenth Amendment and Forbearance Agreement tothe Credit Agreement and the Tenth Amendment and Forbearance Agreement to theNote Purchase Agreement.  Theseamendments, as modified, provided that these lenders would forbear fromenforcing their rights with respect to certain existing defaults throughOctober 17, 2002.  Among other things,these amendments provided that the Company will solicit offers for purchase ordevelop disposition plans for certain subsidiaries and will engage a consultingfirm to prepare a valuation analysis and recommended disposition strategy forthe Company’s U.K. subsidiaries.  Newcovenants regarding minimum cumulative earnings before interest, taxes,depreciation and amortization, capital expenditures and operating cash flowwere added.

 

On October 17,2002, the Company entered into the Fourteenth Amendment and Forbearance Agreementto the Credit Agreement (“Fourteenth Amendment”) and the Eleventh Amendment andForbearance Agreement (“Eleventh Amendment”) to the Note PurchaseAgreement.  These amendments providethat these lenders (such lenders, collectively, the “Harris Lenders”) willforbear from enforcing their rights with respect to certain existing defaultsthrough April 3, 2003, subject to certain events that could cause an earliertermination of this forbearance period. In exchange, the Company agreed, among other things, (i) to engage aninvestment banker to solicit offers on Inverness; (ii) to enter into anamendment to implement financial covenants by December 13, 2002; 

 

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and (iii) toprepay the Harris Lenders’ loans in amounts equal to $4.0 million by January31, 2003 and an additional $7.0 million by February 28, 2003, which the Companyis striving to satisfy out of the net proceeds from asset sales (other thaninventory and Inverness) and tax refunds. As of February 13, 2003, the Company had prepaid the Harris Lenders’loans by approximately $6.4 million.

 

The Company iscurrently negotiating amendments to the Fourteenth Amendment and EleventhAmendment that is expected to establish, among other things, new financialcovenants relating to capital expenditures, minimum cumulative earnings beforeinterest, taxes, depreciation and amortization and certain legal andrestructuring expenses. The Company is also negotiating an amendment to CashCollateral Use Agreement between the Company, its U.S. Subsidiaries and theHarris Lenders.  This amendment, amongother things, is expected to establish minimum net cash flow covenants for theCompany’s La Grange Foundry, Canadian Steel Foundries, Ltd., Empire Steel andPrimeCast, Inc. subsidiaries and for certain affirmative litigation expenses.

 

At December 31,2002, the balance of the term loan under the GE Financing was $26.5million.   The GE Financing is securedby certain of the Company’s fixed assets, real estate, equipment, furniture andfixtures located in Atchison, Kansas and St. Joseph, Missouri, matures inDecember 2004 and currently bears interest at a fixed rate of 9.30% per year.

 

On October 17,2002, the Company entered into the Forbearance Agreement and Second Amendmentto the Master Security Agreement and Note (the “Forbearance Agreement”) withGeneral Electric Capital Corporation (“GECC”), as agent for certain participantlenders (such lenders, collectively, the “GE Lenders”).  The Forbearance Agreement, as amended onJanuary 24, 2003, provides that the GE Lenders will forbear from enforcingtheir rights with respect to certain existing defaults through June 29, 2003,subject to earlier termination upon the occurrence of certain defaults, but nolonger allows for automatic extensions as originally provided.  The GE Lenders also agreed to allow theCompany to make only interest payments through the end of the forbearanceperiod.  In exchange, the Company hasagreed to increase the interest rate 25 basis points to 9.30% per year.

 

The termination ofthe forbearance period in any of the Credit Agreement, Note Purchase Agreementor the Master Security Agreement can result in the termination of the otheragreements.  In addition, default underthe Facility Agreement could result in the termination of the Credit Agreementand the Note Purchase Agreement, and in turn, the GE Financing.

 

In September 2001,ACUK, a subsidiary of the Company, ACUK’s subsidiaries, and Burdale FinancialLimited (“Burdale”) entered into the Facility Agreement.  This Facility Agreement provides for afacility of up to 25,000,000 British pounds (approximately $40.0 million US),subject to certain eligibility calculations, to be used to fund working capitalrequirements at Sheffield, a subsidiary of ACUK. In addition, the FacilityAgreement provides security for Sheffield’s foreign currency exchange contractsand performance bond commitments. This facility matures on September 17, 2004and is secured by substantially all of Sheffield’s assets in the U.K. Loansunder this Facility

 

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Agreement bearinterest at LIBOR plus 2.60% (7.19% at December 31, 2002). As of December 31,2002, ACUK had drawn approximately $16.7 million under the Facility Agreement.The Facility Agreement contains several covenants, which, among other things,require ACUK to maintain balances under certain eligibility levels.

 

On October 29,2002, ACUK entered into an amendment of its Facility Agreement to, among otherthings, (a) impose a limit of 10,750,000 British pounds (approximately $17.2million US) on the aggregate sum at any time of (i) outstanding revolving loansfrom Burdale to ACUK plus (ii) accounts receivable purchased from ACUK byBurdale that are not collected (there had previously been no collective limit,though outstanding loans and uncollected receivables each were, and continue tobe, subject to independent maximum amounts) and (b) add minimum monthly cashflow and net income covenants and a minimum tangible net worth covenant.

 

ACUK has not beenin compliance with those covenants based on results of operations in the secondquarter of fiscal 2003 and does not expect to regain compliance. Accordingly,the Company has classified the outstanding borrowings as current in theaccompanying consolidated balance sheet as of December 31, 2002.

 

The Company is indefault under the Credit Agreement, Note Purchase Agreement, the GE Financingand Facility Agreement. To date, the lenders have not enforced their rightswith respect to certain events of default, but there can be no assurance thatthey will not do so in the future. During much of fiscal 2001, fiscal 2002 and to date in fiscal 2003, theCompany borrowed the full amount of the revolving credit facility under theCredit Agreement and managed its cash position accordingly.  To date, the Company has been able to meetits cash needs by traditional cash management procedures in addition to:  (1) the collection of tax refunds resultingfrom operating losses at U.S. operations, (2) accelerated collections ofreceivables from certain longstanding customers from time to time, (3) thereduction of expenses after closing and selling certain locations operatingwith a negative cash flow, (4) the reduction of discretionary capital expenditures,and (5) funds available through the Facility Agreement, particularly for itsoperations in the U.K.  The Company isalso seeking the recovery under various insurance policies for losses due tothe accounting irregularities at the Pennsylvania Foundry Group and theindustrial accident at Jahn Foundry.  Inaddition, the Company is pursuing other responsible parties.  There can be no assurance that such actionswill be successful in recovering funds or that they will allow the Company tooperate without additional borrowing capacity.

 

Compliance withcertain financial covenants under the Credit Agreement, Note Purchase Agreementand the GE Financing is determined on a “trailing-twelve-month” basis. Theresults through December were below results needed to achieve compliance withthese covenants under the Credit Agreement, Note Purchase Agreement and the GEFinancing.  Accordingly, the Company iscurrently negotiating with its existing lenders to extend its currentarrangements while it attempts to establish a new credit facility withcovenants that the Company believes it will be able to satisfy with additionalborrowing capacity.  During the pastseveral years, the Company has been able to negotiate operating flexibilitywith its lenders, although future success in achieving any such renegotiationsor refinancings, or the specific terms thereof, including interest rates,capital expenditure limits or borrowing capacity, cannot be assured.  The

 

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Company believesthat its operating cash flow and amounts available for borrowing under itsexisting credit facility will be adequate to fund its capital expenditure andworking capital requirements in North America through April 3, 2003, thematurity date of the current forbearance agreements under the Credit Agreementand Note Purchase Agreement. The Company will need to refinance or extend theseagreements to satisfy its liquidity needs. However, the level of capital expenditure and working capitalrequirements may be greater than currently anticipated as a result ofunforeseen expenditures such as compliance with environmental laws and theaccident at Jahn Foundry.  If theCompany fails to amend its financial covenants on terms favorable to theCompany, the Company will continue to be in default under such covenants.  Accordingly, the lenders could acceleratethe debt under the Credit Agreement, which, in turn, would permit accelerationof the Notes under the Note Purchase Agreement and the indebtedness under theGE Financing. If the lenders accelerate their indebtedness and the Company isunable to locate alternative sources of financing, the Company may be forced toseek protection under the federal bankruptcy laws.

 

The liquidity position of Sheffield in the U.K.is also very tight.  Management ofSheffield does not believe that results of operations will satisfy the monthlyfinancial covenants under the Facility Agreement.  If Sheffield is unable to amend the financial covenants orconvince Burdale to forbear from enforcing its rights with respect to thisdefault, Burdale could accelerate the debt under the Facility Agreement, inwhich case, Sheffield would be forced to consider all available strategicalternatives, including selling all or portions of Sheffield, protection underthe bankruptcy laws of the U.K, or an orderly wind-down or liquidation, inwhich case the Company’s investment in Sheffield would likely be lost.  At December 31, 2002, the Company’s netinvestment in Sheffield was approximately $53.2 million.  Based on the Company’s valuation analysis,management of Sheffield does not believe that it would be able to sell all orportions of the business on terms that would satisfy all of its creditors.  A default under the Facility Agreement couldresult in acceleration of indebtedness under the Credit Agreement and NotePurchase Agreement and, in turn, the GE Financing.

 

Total indebtednessof the Company at December 31, 2002 was $116.3 million, as compared to $118.6million at June 30, 2002. This decrease primarily reflects a reduction inoutstanding balances under the Company’s revolving credit facility. At December31, 2002, the Company had approximately $1.6 million available for borrowingunder its revolving credit facility under the Credit Agreement and the FacilityAgreement was fully borrowed.

 

At December 31,2002, the Company had the following contractual cash obligations and othercommitments:

 
| ***(in  millions)*** |   | **Total** |   | **Fiscal  2003** |   | **Fiscal  2004** |   | **Fiscal  2005** |   | **Fiscal  2006** |   | **Fiscal  2007** |   | **Thereafter** |   |
|----------------------|--------|-----------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|----------------|--------|
| Long-term debt       |   | $         | 116.3  |             | $      | 114.9            |   | $                | .3     |             | $      | .4               |   | $              | .4     |   | $ | .3 |   | $ | 0.0 |   |
| Operating leases     |   | 17.6      |   | 5.0              |   | 4.5              |   | 3.7              |   | 2.4              |   | 1.2              |   | .8             |   |
| Lease guarantees     |   | 4.8       |   | 3.7              |   | .3               |   | .3               |   | .2               |   | .2               |   | .1             |   |
| Total                |   | $         | 138.7  |             | $      | 123.6            |   | $                | 5.1    |             | $      | 4.4              |   | $              | 3.0    |   | $ | 1.7 |   | $ | 0.9 |   |

 

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In addition, theCompany had $4.1 million of outstanding letters of credit as of December 31,2002.

 

As described abovethe Company is in violation of various financial covenants of  its primary debt agreements.  The Company has entered into amendments andforbearance agreements, which expire in the near term, and, accordingly, suchborrowings have been classified as current liabilities in the consolidatedfinancial statements and the table above. In addition, the Company guaranteed certain operating lease obligationsof Autun, Jahn Foundry and LaGrange Foundry. The guarantees related to Autun may be called by the lessors and,accordingly, are included in the 2003 column above.

 

For a descriptionof material legal proceedings, see Note 10 to the Consolidated FinancialStatements above, and Part II, Item 1 “Legal Proceedings” below.

 

Deloitte &Touche LLP (“Deloitte”) has withdrawn its report dated September 28, 2001covering the Company’s consolidated financial statements as of June 30, 2001and 2000 and for the years in the three year period ended June 30, 2002.  Management believes that the consolidatedfinancial statements present fairly, in all material respects, the financialposition of the Company and its subsidiaries as of June 30, 2001 and 2000, andthe results of operations and cash flows for each of the years in the threeyear period ended June 30, 2001.  TheCompany has asked its current auditor, KPMG, LLP, to re-audit its financialstatements for the fiscal year ended June 30, 2001.

 

CriticalAccounting Policies

 

The preparation ofthe Company’s financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  The Company believes its critical accounting policies are asfollows:

 

•                    Valuationof long-lived assets and goodwill

•                    Estimationof potential warranty claims

•                    Workers’compensation and health insurance reserves

•                    Pensioncost and prepaid pension cost

•                    Accountingfor income taxes

 

Valuation of Long-lived Assets and Goodwill

 

The Company assesses the impairment of identifiablelong-lived assets and goodwill whenever events or changes in circumstancesindicate that the carrying value may not be recoverable.  Factors considered important which couldtrigger an impairment review include the following:

 

•                    significantchanges in the strategy of the Company’s overall business;

 

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•                    significantunderperformance relative to expected historical or projected future operating results;

 

•                    significantchanges in the sales levels with the key customers served by any subsidiary;and

 

•                    significantnegative industry or economic trends.

 

Also on July 1, 2002, SFAS No. 144, becameeffective for the Company.  Among otherthings, SFAS No. 144 addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. SFAS No. 144 requires that an impairment loss be recognized only if thecarrying amount of a long-lived asset is not recoverable from its undiscountedcash flow and that any impairment loss be measured as the difference betweenthe carrying amount and the fair value of the asset.  It requires a probability-weighted cash flow estimation approachto deal with situations in which alternative courses of action to recover thecarrying amount of a long-lived asset are under consideration.  The Company’s intent to sell G&C andCanada Alloy significantly affect the expected recovery of the carrying valuesof the long-lived assets in those subsidiaries.  As a result, the Company recorded an impairment charge of $4.4million to reduce these subsidiaries’ property, plant and equipment to theestimated fair values.

 

On July 1, 2002, Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” becameeffective for the Company.  As a result,the Company ceased amortizing its goodwill. Amortization of this goodwill for the second quarter of fiscal 2002 was$264,000, or 0.3% of net sales. Amortization of this goodwill for the first sixmonths of fiscal 2002 was $525,000, or 0.3% of net sales.    Inlieu of amortization, the Company is required to perform an initial impairmentreview of goodwill in fiscal 2003 and an annual impairment reviewthereafter.   The Company was requiredto complete the initial review by December 31, 2002. If the initial reviewindicates that the goodwill is impaired, writedowns are required once theamount can be determined, but no later than June 30, 2003.  During the second quarter and first sixmonths of fiscal 2003 the Company recognized a SFAS No. 142 goodwill impairmentloss of $17.4 million and $19.0 million, respectively, which is presented inthe Company’s consolidated financial statements as the cumulative effect of achange in accounting principle.

 

Estimation of Potential Warranty Claims

 

The Company warrants that every product will meet aset of specifications, which is mutually agreed upon with each customer.  The Company’s warranty policy provides forthe repair or replacement of its products and excludes contingency costs.  The Company maintains reserves for warrantycharges based on specific claims made by customers, for which managementestimates a final settlement of the claim, and for expected claims not yetreceived based on historical results, which management believes provides areasonable indicator and basis for claims not yet received.  Significant management judgments must bemade and used in connection with establishing warranty reserves.  Unforeseen circumstances could result inrevisions to these estimates that are material to the Company’s financialstatements.  The 

 

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provision for warranty expense was $6.9 million and$8.0 million at December 31, 2002 and June 30, 2002, respectively.

 

Workers’ Compensation and Employee HealthCare Reserves

 

The Company’s U.S. operations primarily self-insurefor workers’ compensation and employee health care expense.  The Company bases its reserves for workers’compensation expense primarily on estimates provided by third-partyadministrators and its reserves for health care expense on historical claimsexperience.  Significant managementjudgments and estimates are made in establishing these reserves.  The Company’s reserve for workers’compensation and employee health care was $5.4 million and $5.9 million atDecember 31, 2002 and June 30, 2002, respectively.  At December 31, 2002, the Company had letters of creditaggregating $4.0 million and  depositsof $625,000 which support claims for workers’ compensation benefits.

 

Pension Cost and Prepaid Pension Cost

 

The Company’s pension cost and prepaid pension costare dependent on assumptions used in calculating such amounts.  These assumptions include discount rates,health care cost trend rates, benefits earned, interest cost, expected returnon plan assets, mortality rates and other factors.  In accordance with accounting principles generally accepted inthe United States, actual results that differ from the assumptions areaccumulated and amortized over future periods and, therefore, generally affectrecognized expense and the recorded asset or obligation in future periods.  While the Company believes that theassumptions used are appropriate, differences in actual experience or changesin assumptions may have a material impact on the Company’s results ofoperations,  financial position, andcash flows.

 

Accounting for Income Taxes

 

As part of the process of preparing the Company’sconsolidated financial statements, the Company is required to estimate itsincome taxes in each of the jurisdictions in which it operates.  This process involves estimating actualcurrent tax exposure together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes.  These differences result in deferred taxassets and liabilities, which are included within the Company’s consolidatedbalance sheet.  The Company must thenassess the likelihood that its deferred tax assets will be recovered fromfuture taxable income and to the extent the Company believes that recovery isnot likely, the Company must establish a valuation allowance.  To the extent the valuation allowance isestablished or increased, an expense must be included within the tax provisionin the statement of operations.

 

Significant management judgment is required indetermining the provision for income taxes, deferred tax assets and liabilitiesand any valuation allowance recorded against deferred tax assets.  The Company has recorded a valuationallowance against its net deferred tax assets of approximately $40.8 millionand $35.2 million as of December 31, 2002 and June 30, 2002, respectively, dueto 

 

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uncertainties related to the Company’s ability toutilize some of its deferred tax assets, primarily consisting of certain netoperating losses carried forward and foreign tax credits, before theyexpire.  The valuation allowance isbased on the Company’s estimates of taxable income by jurisdiction in which it operatesand the period over which the deferred tax assets will be recoverable.  In the event that actual results differ fromthese estimates or the Company adjusts these estimates in future periods, theCompany may need to establish an additional valuation allowance, which couldmaterially impact the Company’s financial position and results of operations.

 

The net deferred tax liability as of December 31,2002 and June 30, 2002 was approximately $663,000 and $1.2 million, net of avaluation allowance of  $40.8 millionand $35.2 million, respectively.

 

Forward-Looking Statements

 

The sections entitled “Liquidity and CapitalResources,” “Critical Accounting Policies” and “Market Risk” containsforward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements such as“expects,” “intends,” “contemplating” and statements regarding quarterlyfluctuations, statements regarding the adequacy of funding for capitalexpenditure and working capital requirements and similar expressions that arenot historical are forward-looking statements that involve risks anduncertainties.  Such statements includethe Company’s expectations as to future performance.  Among the factors that could cause actual results to differmaterially from such forward-looking statements are the following: the results of the litigation with Deloitte & Touche LLP, there-audit of any financial statements, successful sale of subsidiaries for whichoffers are being solicited, costs of closing or selling foundries, the resultsof the liquidation of Fonderie d’Autun, the amount of any claims made againstFonderie d’Autun’s prior owner which are the subject of certain guarantees,business conditions and the state of the general economy in Europe and theU.S., particularly the capital goods industry, the strength of the U.S. dollar,British pound sterling and the Euro, interest rates, the Company’s ability torenegotiate or refinance its lending arrangements, continued compliance withthe terms of various forbearance agreements with the Company’s lenders, utilityrates, the availability of labor, the successful conclusion of union contractnegotiations, the results of any litigation arising out of the accident at JahnFoundry, results of any litigation or regulatory proceedings arising from theaccounting irregularities at the Pennsylvania Foundry Group, the competitiveenvironment in the casting industry and changes in laws and regulations thatgovern the Company’s business, particularly environmental regulations.

 

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ITEM 3.

 

**DISCLOSURES ABOUT MARKET RISK**

 

Quantitative and qualitative informationabout market risk as of June 30, 2002 was addressed in Item 7A of the Company’sForm 10-K for the fiscal year ended June 30, 2002.

 

The Company’s primary interest rate exposuresrelate to its cash and short-term investments, fixed and variable rate debt andinterest rate swaps, which are mainly exposed to changes in short-term interestrates (e.g. USD LIBOR). The potential loss in fair values is based on animmediate change in the net present values of the Company’s interestrate-sensitive exposures resulting from a 10% change in interest rates. Thepotential loss in cash flows and earnings is based on the change in the netinterest income/expense over a one-year period due to an immediate 10% changein rates. A hypothetical 10% change in interest rates would have an impact onthe Company’s earnings before income tax of approximately $380,000 and $320,000in the first six months of fiscal 2002 and fiscal 2003, respectively.

 

The Company’s exposure to fluctuations incurrency rates against the British pound, Euro, and Canadian dollar result fromthe Company’s holdings in cash and short-term investments and its historicalutilization of foreign currency forward exchange contracts to hedge customerreceivables and firm commitments. The potential loss in fair values is based onan immediate change in the U.S. dollar equivalent balances of the Company’scurrency exposures due to a 10% shift in exchange rates versus the Britishpound and Canadian dollar. The potential loss in cash flows and earnings isbased on the change in cash flow and earnings over a one-year period resultingfrom an immediate 10% change in currency exchangerates versus the British pound, Euro and Canadian dollar.  Based on the Company’s holdings of financialinstruments at December 31, 2002 and December 31, 2001, a hypothetical 10%depreciation in the British pound, Euro and the Canadian dollar versus allother currencies would have an impact on the Company’s earnings before incometax of approximately $40,000 and $7,000 in the first six months of fiscal 2002and fiscal 2003, respectively.

 

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ITEM 4.

 

**CONTROLS AND PROCEDURES**

 

(a)            Evaluationof disclosure controls and procedures

 

Within 90 days prior to the filing date of thisreport, the Company’s Chief Executive Officer and Chief Financial Officercompleted an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer believe that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe Company in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

(b)           Changesin internal controls.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their most recent evaluation.

 

The Company operates in a decentralized managementand operating structure, including financial reporting.  To further enhance internal controls, theCompany has centralized its payroll processing for certain North American locations.  In addition, the Company is assessingvarious software systems to further improve its financial management andreporting functions in the Company’s ongoing efforts to refine its internalcontrol procedures.

 

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PART II

 

ITEM 1.

 

**LEGAL PROCEEDINGS**

 

The Company isinvolved in legal proceedings as described in “Part I, Item 3. LegalProceedings” of the Company’s Annual Report on Form 10-K for the fiscal yearended June 30, 2002.   Since the end offiscal 2002, there have been no material developments in previously reportedlegal proceedings, except as set forth below.

 

The OccupationalSafety and Health Administration (“OSHA”) cited the Company on September 26,2002 for 95 alleged violations of Federal Safety and Health regulations at itsAtchison, Kansas foundry.  OSHA soughtpenalties totaling $250,000 in connection with the alleged violations.  At OSHA’s invitation, the Company engaged insettlement negotiations with the agency over the alleged violations.  During the course of settlement discussions,OSHA withdrew some citations it had classified as “serious,” reclassified some“serious” citations to the category “other-than-serious,” and declined towithdraw or modify other citations.  Theparties entered into two Informal Settlement Agreements with OSHA whereby OSHAreduced its proposed penalty to $50,000 and the Company agreed to undertake,within one year, abatement of certain conditions relating to the remainingcitations.  By entering into the InformalSettlement Agreements, the Company did not admit that it violated the citedstandards for any litigation or purpose other than a subsequent proceedingunder the Occupational Safety and Health Act. No subsequent proceeding is pending or anticipated by the Company atthis time.  The Company is not able toaccurately predict the cost of abatement, but believes it may be as low asapproximately $400,000 and as high as approximately $800,000.

 

In addition tothese matters, from time to time, the Company is the subject of legalproceedings, including employee matters, commercial matters, environmentalmatters and similar claims.  There areno other material claims pending other than those described here and in the Company’sAnnual Report on Form 10-K for the fiscal year ended June 30, 2002.  The Company maintains comprehensive generalliability insurance, which it believes to be adequate for the continuedoperation of its business.

 

ITEM2 -                                                 Changes inSecurities and Use of Proceeds

 

NOT APPLICABLE

 

ITEM3 -                                                 Defaults UponSenior Securities

 

See Liquidity and CapitalResources above.

 

ITEM4 -                                                 Submission ofMatters to a Vote of Security Holders

 

The Annual Meeting ofStockholders was held on December 12, 2002

 

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Stockholders owning6,798,779 shares voted in favor of Vladimir Rada as a Class III director.  There were 87,220 shares withheld and837,032 shares abstained.  Stockholdersowning 6,739,753 shares voted in favor of William Bullard as a Class III director.  There were 146,246 shares withheld and837,032 shares abstained.  Accordingly,Mr. Rada and Mr. Bullard were elected as Class III directors for terms of threeyears.

 

ITEM5 -                                                 OtherInformation

 

In connection with the saleof Kramer International, Inc., James Stott, President of Kramer, resigned hisposition as an officer of the Company.

 

ITEM6 -                                                 Exhibits andReports of Form 8-K

 

(A)           Exhibits

 

4.1                     Master Security Agreementand Note dated as of December 29, 1999, between the Company and General ElectricCapital Corporation, for itself and as agent for certain Participants

 

4.2                     Amendment No. 1 to theMaster Security Agreement dated as of February 25, 2000 between the Company andGeneral Electric Capital Corporation, for itself and as agent for certain Participants

 

4.3                     Letter agreement dated April19, 2001 between the Company and General Electric Capital Corporation, foritself and as agent for certain Participants

 

4.4                     Forbearance Agreement andSecond Amendment to Master Security Agreement and Note dated as of June 29,2002, between the Company and General Electric Capital Corporation, for itselfand as agent for certain Participants

 

4.5                     First Amendment toForbearance Agreement dated as of January 24, 2003, between the Company andGeneral Electric Capital Corporation, for itself and as agent for certainParticipants

 

99.1(a)  Certification of Chief Executive Officer

 

99.1(b)  Certification of Chief Financial Officer

 

(B)             Reports on Form 8-K

 

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The Company filed a Form 8-Kdated October 10, 2002.

 

Items Reported

 

Item 5.                         Other Events

 

The Company announced that its former auditor,Deloitte & Touche LLP, notified the Company that its report dated September28, 2001 on the consolidated financial statements of the Company and itssubsidiaries as of June 30, 2001 and 2000 and for each of the three years inthe period ended June 30, 2001 should no longer be relied upon or associatedwith those consolidated financial statements.

 

Item 7.                         Financial Statements and Exhibits

 

Press Release dated October 10, 2002.

 

The Company filed a Form 8-Kdated October 15, 2002.

 

Items Reported

 

Item 5.                         Other Events

 

The Company entered an amendment to the ThirteenthAmendment and Forbearance Agreement in which, among other things, a date toreduce outstanding loan commitments was extended from October 15, 2002 toOctober 17, 2002.

 

Item 7.                         Financial Statements andExhibits

 

Letter agreement dated October 15, 2002 modifyingthe Thirteenth Amendment and Forbearance Agreement.

 

The Company filed a Form 8-Kdated October 17, 2002.

 

Items Reported

 

Item 5.                         Other Events

 

The Company issued a press release announcing itsfourth quarter and fiscal 2002 earnings results.

 

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Item 7.                         Financial Statements andExhibits

 

Press release dated October 17, 2002

 

The Company filed a Form 8-Kdated October 22, 2002.

 

Items Reported

 

Item 5.                         Other Events

 

The Company issued a press release announcing theextension of its North American credit facilities.

 

Item 7.                         Financial Statements andExhibits

 

Fourteenth Amendment and Forbearance Agreement tothe Credit Agreement dated as of October 17, 2002.

 

Press release dated October 22, 2002.

 

The Company filed a Form 8-Kdated November 15, 2002.

 

Items Reported

 

Item 5.                         Other Events

 

The Company issued a press release announcing itsfirst quarter results of fiscal 2003.

 

Item 7.                         Financial Statements andExhibits

 

Pressrelease dated November 15, 2002.

 

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*  *  *  * *  *  *  *  * *  *  *  *  *  *  *

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   |              | Atchison Casting  Corporation                                                            |
|--------|-------------------|------------------------------------------------------------------------------------------|
|   |              | (Registrant)                                                                             |
|   |              |                                                                                     |
| DATE:  | February 14, 2003 | /s/ Thomas K. Armstrong,  Jr.                                                            |
|   |              | Thomas K. Armstrong, Jr.,  Chairman of the Board, President  and Chief Executive Officer |
|   |              |                                                                                     |
|   |              |                                                                                     |
| DATE:  | February 14, 2003 | /s/ Kevin T. McDermed                                                                    |
|   |              | Kevin T. McDermed,  Vice President, Chief Financial  Officer, Treasurer and Secretary    |

 

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**CERTIFICATIONS**

 

I, Thomas K.Armstrong, Jr., certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Atchison CastingCorporation;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)                                      all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controls;and

 

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6.                                       The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date: February 14, 2003

 

 
|   |  /s/ Thomas K. Armstrong Jr. |
|--------|-----------------------------------|
|   | Thomas  K. Armstrong, Jr.         |
|   | Chief  Executive Officer          |
|   | (Principal  Executive Officer)    |

 

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I, Kevin T. McDermed, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Atchison CastingCorporation;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)                                      all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controls;and

 

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6.                                       The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date: February 14, 2003

 

 
|   | /s/  Kevin T. McDermed            |
|--------|-----------------------------------|
|   | Kevin  T. McDermed                |
|   | Chief  Financial Officer          |
|   | **(Principal Financial Officer**) |

 

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