**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 March 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 periodfrom                        to                        **

 

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**CommissionFile Number 1-12541**

 

**Atchison Casting Corporation**

(Exact name of registrant as specified in its charter)

 

| **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.) |

 

----

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements from the past 90 days.  Yesý No o

 

There were 7,723,031 shares ofcommon stock, $.01 par value per share, outstanding on May 14, 2002

 

 

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ITEM1.  Financial Statements.

 

ATCHISON CASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 
|                                                                                                   |   | **March 31,  2002** |    | **June 30,  2001** |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                   |   |                |
|                                                                                                   |   |                |    |               |   |
| ASSETS                                                                                                 |   |                |    |               |   |
|                                                                                                   |   |                |    |               |   |
| CURRENT ASSETS:                                                                                        |   |                |    |               |   |
| Cash and cash equivalents                                                                              |   | $                   | 1,620   |               | $      | 1,329 |   |
| Customer accounts receivable,  net of allowance for doubtful accounts of $1,184 and $845, respectively |   | 69,943              |    | 83,010             |   |
| Income tax refund receivable                                                                           |   | 7,146               |    |               |   |
| Inventories                                                                                            |   | 57,440              |    | 58,617             |   |
| Deferred income taxes                                                                                  |   | 1,371               |    | 1,345              |   |
| Other current assets                                                                                   |   | 8,430               |    | 10,437             |   |
|                                                                                                   |   |                |    |               |   |
| Total current assets                                                                                   |   | 145,950             |    | 154,738            |   |
|                                                                                                   |   |                |    |               |   |
| PROPERTY, PLANT AND EQUIPMENT,  Net                                                                    |   | 100,772             |    | 113,009            |   |
|                                                                                                   |   |                |    |               |   |
| INTANGIBLE ASSETS, Net                                                                                 |   | 22,257              |    | 24,362             |   |
|                                                                                                   |   |                |    |               |   |
| DEFERRED FINANCING COSTS, Net                                                                          |   | 1,477               |    | 721                |   |
|                                                                                                   |   |                |    |               |   |
| OTHER ASSETS                                                                                           |   | 16,997              |    | 13,043             |   |
|                                                                                                   |   |                |    |               |   |
| TOTAL                                                                                                  |   | $                   | 287,453 |               | $      | 305,873 |   |

 

2

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|                                                                                                                       |   | **March 31,  2002** |    | **June 30,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                                       |   |                |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                                                                      |   |                |    |               |   |
|                                                                                                                       |   |                |    |               |   |
| CURRENT LIABILITIES:                                                                                                       |   |                |    |               |   |
| Accounts payable                                                                                                           |   | $                   | 49,026  |               | $      | 58,392 |   |
| Accrued expenses                                                                                                           |   | 34,680              |    | 34,377             |   |
| Current maturities of long-term obligations                                                                                |   | 104,668             |    | 114,894            |   |
|                                                                                                                       |   |                |    |               |   |
| Total current liabilities                                                                                                  |   | 188,374             |    | 207,663            |   |
|                                                                                                                       |   |                |    |               |   |
| LONG-TERM OBLIGATIONS                                                                                                      |   | 18,968              |    | 6,648              |   |
|                                                                                                                       |   |                |    |               |   |
| DEFERRED INCOME TAXES                                                                                                      |   | 3,347               |    | 3,460              |   |
|                                                                                                                       |   |                |    |               |   |
| OTHER LONG-TERM OBLIGATIONS                                                                                                |   | 850                 |    | 898                |   |
|                                                                                                                       |   |                |    |               |   |
| EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS  OVER COST, Net of accumulated amortization of $4,838 and $3,577, respectively |   | 1,429               |    | 2,543              |   |
|                                                                                                                       |   |                |    |               |   |
| POSTRETIREMENT OBLIGATION OTHER THAN  PENSION                                                                              |   | 10,999              |    | 10,082             |   |
|                                                                                                                       |   |                |    |               |   |
| MINORITY INTEREST IN SUBSIDIARIES                                                                                          |   | 868                 |    | 1,890              |   |
|                                                                                                                       |   |                |    |               |   |
| Total liabilities                                                                                                          |   | 224,835             |    | 233,184            |   |
|                                                                                                                       |   |                |    |               |   |
| STOCKHOLDERS' EQUITY:                                                                                                      |   |                |    |               |   |
|                                                                                                                       |   |                |    |               |   |
| Preferred stock, $.01 par value, 2,000,000  authorized shares; no shares issued and outstanding                            |   | —              |    | —             |   |
|                                                                                                                       |   |                |    |               |   |
| 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 and outstanding            |   | —              |    | —             |   |
|                                                                                                                       |   |                |    |               |   |
| Additional paid-in capital                                                                                                 |   | 81,609              |    | 81,517             |   |
|                                                                                                                       |   |                |    |               |   |
| Retained earnings (deficit)                                                                                                |   | (3,604              | )       | 5,863              |   |
|                                                                                                                       |   |                |    |               |   |
| Accumulated other comprehensive loss                                                                                       |   | (9,422              | )       | (8,726             | )      |
|                                                                                                                       |   | 68,666              |    | 78,737             |   |
| Less shares held in treasury:                                                                                              |   |                |    |               |   |
| Common stock, 589,018 and 622,702  shares,respectively, at cost                                                            |   | (6,048              | )       | (6,048             | )      |
|                                                                                                                       |   |                |    |               |   |
| Total stockholders' equity                                                                                                 |   | 62,618              |    | 72,689             |   |
|                                                                                                                       |   |                |    |               |   |
| TOTAL                                                                                                                      |   | $                   | 287,453 |               | $      | 305,873 |   |

 

See Notes to Consolidated Financial Statements.

 

3

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ATCHISON CASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share Data)

(Unaudited)

 
|                                                                                                                                          |       | **Three  Months Ended  March 31,** |     | **Nine  Months Ended  March 31,** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|----------|-----------------------------------|----------|
| **2002**                                                                                                                                      | ** ** | **2001**                           | **2002** |                              | **2001** |
|                                                                                                                                          |       |                               |     |                              |     |   |
| NET SALES                                                                                                                                     |       | $                                  | 99,665   |                              | $        | 116,924 |   | $ | 299,350 |   | $ | 321,941 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| COST OF GOODS SOLD                                                                                                                            |       | 93,752                             |     | 108,885                           |     | 277,847 |   | 301,851 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| GROSS PROFIT                                                                                                                                  |       | 5,913                              |     | 8,039                             |     | 21,503 |   | 20,090 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| OPERATING EXPENSES:                                                                                                                           |       |                               |     |                              |     |   |   |   |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| Selling, general and administrative                                                                                                           |       | 9,564                              |     | 12,271                            |     | 29,651 |   | 33,928 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| Amortization of intangibles, net                                                                                                              |       | (95                                | )        | (77                               | )        | (284 | ) | (197 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| Other income, net                                                                                                                             |       | —                             |     | —                            |     | — |   | (10,920 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| Total operating expenses                                                                                                                      |       | 9,469                              |     | 12,194                            |     | 29,367 |   | 22,811 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| OPERATING LOSS                                                                                                                                |       | (3,556                             | )        | (4,155                            | )        | (7,864 | ) | (2,721 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| INTEREST EXPENSE                                                                                                                              |       | 2,786                              |     | 2,982                             |     | 8,335 |   | 8,532 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| MINORITY INTEREST IN NET INCOME (LOSS) OF  SUBSIDIARIES                                                                                       |       | 0                                  |     | 121                               |     | (38 | ) | 130 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| LOSS BEFORE INCOME TAXES AND CUMULATIVE  EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                                                           |       | (6,342                             | )        | (7,258                            | )        | (16,161 | ) | (11,383 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| INCOME TAX BENEFIT                                                                                                                            |       | (7,050                             | )        | (2,254                            | )        | (6,694 | ) | (2,915 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A  CHANGE IN ACCOUNTING PRINCIPLE                                                                   |       | 708                                |     | (5,004                            | )        | (9,467 | ) | (8,468 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| CUMULATIVE EFFECT ON PRIOR YEARS (TO JUNE  30, 2000) OF A CHANGE IN ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS, NET  OF $364 TAX BENEFIT |       |                               |     |                              |     |   |   | (546 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| NET INCOME (LOSS)                                                                                                                             |       | $                                  | 708      |                              | $        | (5,004 | ) | $ | (9,467 | ) | $ | (9,014 | ) |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| INCOME (LOSS) PER SHARE - BASIC AND  DILUTED:                                                                                                 |       |                               |     |                              |     |   |   |   |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A  CHANGE IN ACCOUNTING PRINCIPLE                                                                   |       | $                                  | 0.09     |                              | $        | -0.65 |   | $ | -1.23 |   | $ | -1.10 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING  FOR DERIVATIVE FINANCIAL INSTRUMENTS                                                             |       |                               |     |                              |     |   |   | -0.07 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| NET INCOME (LOSS)                                                                                                                             |       | $                                  | 0.09     |                              | $        | -0.65 |   | $ | -1.23 |   | $ | -1.17 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF  SHARES USED IN CALCULATION:                                                                                       |       |                               |     |                              |     |   |   |   |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| BASIC                                                                                                                                         |       | 7,723,031                          |     | 7,689,347                         |     | 7,714,273 |   | 7,684,008 |   |
|                                                                                                                                          |       |                               |     |                              |     |   |   |   |   |
| DILUTED                                                                                                                                       |       | 7,723,031                          |     | 7,689,347                         |     | 7,714,273 |   | 7,684,008 |   |

 

4

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ATCHISON CASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands)

(Unaudited)

 
|                                     |   | **Three  Months Ended  March 31,** |       | **Nine  Months Ended  March 31,** |       |
|------------------------------------------|--------|------------------------------------|------------|-----------------------------------|------------|
|                                     |   | **2002**                           | ** ** | **2001**                          | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                     |   |                               |       |                              |       |   |   |   |   |
| NET INCOME (LOSS)                        |   | $                                  | 708        |                              | $          | (5,004 | ) | $ | (9,467 | ) | $ | (9,014 | ) |
|                                     |   |                               |       |                              |       |   |   |   |   |
| OTHER COMPREHENSIVE LOSS:                |   |                               |       |                              |       |   |   |   |   |
|                                     |   |                               |       |                              |       |   |   |   |   |
| Foreign currency translation adjustments |   | $                                  | (884       | )                                 | $          | (4,173 | ) | $ | (696 | ) | $ | (5,345 | ) |
|                                     |   |                               |       |                              |       |   |   |   |   |
| OTHER COMPREHENSIVE LOSS                 |   | $                                  | (176       | )                                 | $          | (9,177 | ) | $ | (10,163 | ) | $ | (14,359 | ) |

 

5

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ATCHISON CASTING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOW

(In Thousands)

(Unaudited)

 
|                                                                             |   | **Nine  Months Ended  March 31,** |       |
|----------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                             |   | **2002**                          | ** ** | **2001** | ** ** |
|                                                                             |   |                              |       |   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                           |   |                              |       |   |   |
| Net Loss                                                                         |   | $                                 | (9,467     | ) | $ | (9,014 | ) |
| Adjustments to reconcile net  loss to net cash provided by operating activities: |   |                              |       |   |   |
| Depreciation and amortization                                                    |   | 9,033                             |       | 10,109 |   |
| Minority interest in net income  (loss) of subsidiaries                          |   | -38                               |       | 121 |   |
| (Gain) Loss on disposal of  capital assets                                       |   | -116                              |       | 288 |   |
| Loss on sale of subsidiary  operations                                           |   | 209                               |       |   |   |
| Deferred income taxes                                                            |   | -24                               |       | 500 |   |
| Changes in assets and  liabilities (exclusive of effects of dispositions):       |   |                              |       |   |   |
| Receivables                                                                      |   | 11,709                            |       | 5,402 |   |
| Income tax refund receivable                                                     |   | -7,146                            |       |   |   |
| Inventories                                                                      |   | -183                              |       | -2,613 |   |
| Other current assets                                                             |   | 1,833                             |       | -424 |   |
| Accounts payable                                                                 |   | -7,930                            |       | 11,724 |   |
| Accrued expenses                                                                 |   | 908                               |       | -9,965 |   |
| Postretirement obligation other  than pension                                    |   | 917                               |       | 708 |   |
| Other                                                                            |   | -1,062                            |       | -3,270 |   |
|                                                                             |   |                              |       |   |   |
| Cash provided by (used in)  operating activities                                 |   | -1,357                            |       | 3,566 |   |
|                                                                             |   |                              |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                           |   |                              |       |   |   |
|                                                                             |   |                              |       |   |   |
| Capital expenditures                                                             |   | -2,976                            |       | -9,690 |   |
| Proceeds from sale of capital  assets                                            |   | 400                               |       | 1,256 |   |
| Proceeds from sale of net  assets of subsidiary operations                       |   | 3,777                             |       |   |   |
| Payment for purchase of stock  in subsidiaries                                   |   | -204                              |       | -591 |   |
|                                                                             |   |                              |       |   |   |
| Cash provided by (used in)  investing activities                                 |   | 997                               |       | -9,025 |   |
|                                                                             |   |                              |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                           |   |                              |       |   |   |
|                                                                             |   |                              |       |   |   |
| Proceeds from issuance of  common stock, net of costs                            |   | 96                                |       | 57 |   |
| Payments on long-term  obligations                                               |   | -9,281                            |       | -5,689 |   |
| Capitalized financing costs  paid                                                |   | -1,429                            |       | -155 |   |
| Net borrowings                                                                   |   | 11,253                            |       | 8,631 |   |
|                                                                             |   |                              |       |   |   |
| Cash provided by financing  activities                                           |   | 639                               |       | 2,844 |   |
|                                                                             |   |                              |       |   |   |
| EFFECT OF EXCHANGE RATE ON CASH                                                  |   | 12                                |       | -158 |   |
|                                                                             |   |                              |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                            |   | 291                               |       | -2,773 |   |
|                                                                             |   |                              |       |   |   |
| CASH AND CASH EQUIVALENTS,  Beginning of period                                  |   | 1,329                             |       | 3,815 |   |
|                                                                             |   |                              |       |   |   |
| CASH AND CASH EQUIVALENTS, End  of period                                        |   | $                                 | 1,620      |   | $ | 1,042 |   |

 

6

----

 

**ATCHISON CASTING CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

1.             Accounting Policies and Basis ofPresentation

 

The unauditedconsolidated financial statements should be read in conjunction with theconsolidated financial statements of Atchison Casting Corporation andsubsidiaries (the “Company”) for the year ended June 30, 2001, as included inthe Company’s Annual Report on Form 10-K for the fiscal year ended June 30,2001.

 

Theaccompanying unaudited consolidated financial statements include alladjustments (consisting only of normal recurring accruals), which, in theopinion of management, are necessary for a fair presentation of financialposition, results of operations and cash flows.  Results of operations for interim periods are not necessarilyindicative of results to be expected for a full year.

 

Certain March31, 2001 amounts have been reclassified to conform with March 31, 2002classifications.

 

2.             Inventories

 
|            |   | **As of**           |       |
|-----------------|--------|---------------------|------------|
|            |   | **March 31,  2002** | ** ** | **June 30,  2001** | ** ** |
|            |   | **(Thousands)**     | ** ** |
|            |   |                |       |   |   |
| Raw materials   |   | $                   | 6,665      |   | $ | 7,587 |   |
| Work-in-process |   | 39,105              |       | 38,889 |   |
| Finished goods  |   | 8,688               |       | 10,138 |   |
| Supplies        |   | 2,982               |       | 2,003 |   |
|            |   | $                   | 57,440     |   | $ | 58,617 |   |

 

7

----

 

3.             Income Taxes

 

Income taxexpense (benefit) consisted of:

 
|      |   | **Nine  Months Ended  March 31,** |       |
|-----------|--------|-----------------------------------|------------|
|      |   | **2002**                          | ** ** | **2001** | ** ** |
|      |   | **(Thousands)**                   |       |
|      |   |                              |       |   |   |
| Current:  |   |                              |       |   |   |
| Domestic  |   | $ (7,146                          | )*         | $ (3,027 | ) |
| Foreign   |   | 476                               |       | (752 | ) |
|      |   | (6,670                            | )          | (3,779 | ) |
| Deferred: |   |                              |       |   |   |
| Domestic  |   | —                            |       | (717 | ) |
| Foreign   |   | (24                               | )          | 1,217 |   |
|      |   | (24                               | )          | 500 |   |
|      |   |                              |       |   |   |
| Total     |   | $                                 | (6,694     | ) | $ | (3,279 | ) |
|           |        |                                   |            |  |  |  |  |

 

----

*              The $7.1 million domestic benefitrecorded currently represents the Company’s carry-back of net operating lossesfrom the prior period as a result of a tax law change enacted in 2002 andadditional losses generated through the nine months ended March 31, 2002.

 

4.             Supplemental Cash Flow Information

 
|                                                                                                |   | **Nine  Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                |   | **2002**                          | ** ** | **2001** | ** ** |
|                                                                                                |   | **(Thousands)**                   | ** ** |
|                                                                                                |   |                              |       |   |   |
| Cash paid during the period for:                                                                    |   |                              |       |   |   |
| Interest                                                                                            |   | $                                 | 8,291      |   | $ | 8,966 |   |
| Income Taxes                                                                                        |   | $                                 | —     |   | $ | — |   |
|                                                                                                |   |                              |       |   |   |
| Non-cash activity:                                                                                  |   |                              |       |   |   |
| Notes Receivable and Equity Investments  received in connection with sales of subsidiary operations |   | $                                 | 1,059      |   | $ | — |   |

 

8

----

 

5.             Earnings Per Share

 

Following is a reconciliation of basic anddiluted EPS.

 

For the threemonths ended March 31, 2002

 
|                                    |   | **Net Income** |    | **Weighted  Average Shares** |      | **Income Per  Share** |   |
|-----------------------------------------|--------|----------------|---------|------------------------------|-----------|-----------------------|--------|
| Basic EPS                               |   |           |    |                         |      |                  |   |
| Income available to common stockholders |   | $              | 708,000 |                         | 7,723,031 |                  | $      | 0.09 |   |
| Effect of Dilutive Securities:          |   |           |    |                         |      |                  |   |
| Options                                 |   | —         |    | —                       |      | —                |   |
| Diluted EPS                             |   | $              | 708,000 |                         | 7,723,031 |                  | $      | 0.09 |   |

 

For the threemonths ended March 31, 2001

 
|                                  |   | **Net Loss** |       | **Weighted  Average Shares** |      | **Loss Per  Share** |   |
|---------------------------------------|--------|--------------|------------|------------------------------|-----------|---------------------|--------|
| Basic EPS                             |   |         |       |                         |      |                |   |
| Loss available to common stockholders |   | $            | (5,004,000 | )                            | 7,689,347 |                | $      | (0.65 | ) |
| Effect of Dilutive Securities:        |   |         |       |                         |      |                |   |
| Options                               |   | —       |       | —                       |      | —              |   |
| Diluted EPS                           |   | $            | (5,004,000 | )                            | 7,689,347 |                | $      | (0.65 | ) |

 

For the ninemonths ended March 31, 2002

 
|                                  |   | **Net Loss** |       | **Weighted  Average Shares** |      | **Loss PerShare** |   |
|---------------------------------------|--------|--------------|------------|------------------------------|-----------|-------------------|--------|
| Basic EPS                             |   |         |       |                         |      |              |   |
| Loss available to common stockholders |   | $            | (9,467,000 | )                            | 7,714,273 |              | $      | (1.23 | ) |
| Effect of Dilutive Securities:        |   |         |       |                         |      |              |   |
| Options                               |   | —       |       | —                       |      | —            |   |
| Diluted EPS                           |   | $            | (9,467,000 | )                            | 7,714,273 |              | $      | (1.23 | ) |

 

For the ninemonths ended March 31, 2001

 
|                                                                                                                                              |   | **Net Loss** |       | **Weighted  Average Shares** |      | **Loss Per  Share** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|------------------------------|-----------|---------------------|--------|
| Basic EPS                                                                                                                                         |   |         |       |                         |      |                |   |
| Loss before cumulative effect of a change  in accounting principle available to common stockholders                                               |   | $            | (8,468,000 | )                            | 7,684,008 |                | $      | (1.10 | ) |
|                                                                                                                                              |   |         |       |                         |      |                |   |
| Cumulative effect on prior years (to June  30, 2000) of a change in accounting for derivative financial instruments, net  of $364,000 tax benefit |   | (546,000     | )          | —                       |      | (0.07               | )      |
| Effect of Dilutive Securities:                                                                                                                    |   |         |       |                         |      |                |   |
| Options                                                                                                                                           |   | —       |       | —                       |      | —              |   |
| Diluted EPS                                                                                                                                       |   | $            | (9,014,000 | )                            | 7,684,008 |                | $      | (1.17 | ) |

 

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6.             Derivative Instruments

 

Effective July1, 2000, the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities” and SFAS No. 138, “Accounting for Certain Derivative Instrumentsand Certain Hedging Activities, an amendment of the Financial AccountingStandards Board (“FASB”) Statement No. 133.” This is presented in the Company’sconsolidated financial statements as the cumulative effect of a change inaccounting principle.  

 

On March 31,2001, the Company recorded its foreign exchange contracts (“FX contracts”) attheir fair value of approximately $(1.8 million).  This resulted in a loss of approximately $1.5 million.  Additionally, the translation of the foreigndenominated trade receivables resulted in an increase in the value of thereceivables and the Company recorded a currency translation gain ofapproximately $169,000.

 

On March 31, 2002,the Company did not have any open FX Contracts in place. 

 

7.             Closures and Sales

 

LA Die Casting

 

On February20, 2002, the Company completed the sale of substantially all of the net assetsof LA Die Casting, Inc. (“LA Die Casting”). After post-closing adjustments, theCompany received approximately $3.5 million in cash and a note for theprincipal amount of $259,000 due in two years in exchange for assets and theassumption of liabilities by the buyer. The note bears interest at the rate of 6.0% per year and requiresquarterly payments of interest only during the two-year period. The Companyrecognized a loss on the sale of approximately $169,000. 

 

For the thirdquarter of fiscal years 2001 and 2002, LA Die Casting recorded net sales of$2.0 million and $657,000, respectively, and a net loss of $25,000 and $64,000, respectively.  For the first nine months of fiscal years2001 and 2002, LA Die Casting recorded net sales of $6.5 million and $4.3million, respectively, and a net income (loss) of $33,000 and $(79,000),respectively. 

 

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Jahn Foundry

 

On December20, 2001, the Company completed the sale of substantially all of the net assetsof Jahn Foundry Corp. (“Jahn Foundry”). After post-closing adjustments, the Company received approximately$300,000 in cash, a minority ownership position in the buyer valued at $325,000and a note (bearing interest at 6.0% per year) for the principal amount of$475,000 amortizing over 10 years in exchange for assets and the assumption ofliabilities by the buyer.  The Companyrecognized a loss on the sale of approximately $40,000.

 

For the thirdquarter of fiscal 2001, Jahn Foundry recorded a net loss of $551,000 on salesof $2.2 million. For the first nine months of fiscal 2001, Jahn Foundryrecorded a net loss of $2.0 million, excluding a non-recurring gain of $10.9million recorded in the second quarter relating to insurance claims resultingfrom an industrial accident at Jahn Foundry on February 25, 1999, on sales of$6.1 million.  For the first nine monthsof fiscal 2002, Jahn Foundry recorded a net loss of $823,000 on sales of $2.9million. 

 

Empire Steel

 

The Companysubstantially completed the closure of Empire Steel, Inc. (“Empire”) byDecember 31, 2001, and transferred as much work as possible to otherlocations.  Empire was closed as tocommercial work but continues to produce one product for the U.S. Government onan as-needed basis.  For the thirdquarter of fiscal years 2001 and 2002, Empire recorded net sales of $2.6million and $910,000, respectively, and net losses of $409,000 and $89,000,respectively.  For the first nine monthsof fiscal years 2001 and 2002, Empire recorded net sales of $7.3 million and$5.0 million, respectively, and net losses of $1.8 million and $793,000,respectively. 

 

The Companyterminated approximately 106 employees at Empire and recognized a charge forseverance benefits of approximately $50,000 in fiscal 2002.

 

8.             New Accounting Standards

 

The FASB hasrecently issued SFAS No. 141, *“Business Combinations”,* SFAS No. 142 *“Goodwilland Other Intangible Assets”,* SFAS No. 143 *“Accounting for Asset RetirementObligations”*and SFAS No. 144*“Accounting for the Impairment or Disposal ofLong-Lived Assets”*. SFAS No. 141 requires that the purchase methodof accounting be used for all business combinations initiated after June 30,2001 and that the use of the pooling-of-interest method is no longer allowed.SFAS No. 142 

 

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requires thatupon adoption, amortization of goodwill will cease and instead, the carryingvalue of goodwill will be evaluated for impairment on an annual basis.Identifiable intangible assets will continue to be amortized over their usefullives and periodically reviewed for impairment. SFAS No. 143 establishesaccounting standards for recognition and measurement of a liability for anasset retirement obligation and the associated asset retirement cost. SFAS No.144 establishes accounting standards for long-lived assets and long-livedassets to be disposed of. SFAS Nos. 142 and 144 are effective for fiscal yearsbeginning after December 15, 2001 and SFAS No. 143 is effective for fiscalyears beginning after June 15, 2002, so the Company will adopt these standardsas of July 1, 2002. The Company is evaluating the impact of the adoption ofthese standards and has not yet determined the effect of adoption on itsfinancial position and results of operations.

 

9.             Loan Amendments

 

In September2001, Atchison Casting UK Limited (“ACUK”), a subsidiary of the Company, andBurdale Financial Limited (“Burdale”), an affiliate of Congress FinancialCorporation, entered into a new financing agreement (the “FacilityAgreement”).  This Facility Agreementprovides for a facility of up to 25 million British pounds (approximately $35million US), subject to certain eligibility calculations, to be used to fundworking capital requirements at Sheffield Forgemasters Group, Ltd.(“Sheffield”), a subsidiary of ACUK, and up to 1.0 million British pounds forworking capital at Fonderie d’Autun (“Autun”), the Company’s subsidiary inFrance.  In addition, the FacilityAgreement will provide security for Sheffield’s foreign currency exchangecontracts and performance bond commitments and was used to repay $5.0 millionof intercompany working capital loans. This facility matures on September 17, 2004 and is secured bysubstantially all of Sheffield’s assets in the U.K.  Loans under this Facility Agreement will bear interest at LIBORplus 2.60%.  As of March 31, 2002, ACUKhad drawn approximately $12.5 million under the Facility Agreement, and therewas approximately $1.8 million available for borrowing.

 

On December18, 2001, the Company and Harris Trust and Savings Bank, as agent for severallenders, entered into the Twelfth Amendment and Forebearance Agreement to therevolving credit facility (“Credit Agreement”).  The Twelfth Amendment, as amended, provides that, among otherthings, these lenders will forbear from enforcing their rights with respect tocertain existing defaults through June 30, 2002.  The Credit Agreement, as amended, currently consists of a $69.7million revolving credit facility. Asset sales and tax refunds have been

 

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used to reduceindebtedness.  Secured by substantiallyall of the Company’s North American assets, loans under this credit facilitybear interest at prime plus 2.0%.  A newcovenant regarding operating cash flow (minimum cumulative earnings beforeinterest, taxes, amortization and depreciation) has also been added.  At March 31, 2002, $88,000 was available forborrowing under this facility after consideration of outstanding advances of$65.0 million with the remainder being letters of credit.

 

On December18, 2001, the Company and the insurance company holding the senior notes (the“Notes”) entered the Ninth Amendment and Forbearance Agreement to the NotePurchase Agreement.  The NinthAmendment, as amended, provides that, among other things, the Noteholder willforbear from enforcing its rights with respect to certain existing defaultsthrough June 30, 2002.  Secured bysubstantially all of the Company’s North American assets, the Notes bearinterest at 10.44%.  A new covenantregarding operating cash flow (minimum cumulative earnings before interest,taxes, amortization and depreciation) has also been added.

 

The Company isnot in compliance, and does not expect to achieve compliance in the near term,with the operating cash flow covenant. To date, the Company’s lenders have not enforced their rights with respect to this event of default.  

 

The Companyis in default with certain financial covenants of the term loan with GeneralElectric Capital Corporation (“GE”). To date, GE has not enforced its rightswith respect to certain events of default, but there can be no assurance thatGE will not do so in the future. 

 

The Company iscurrently negotiating with new and existing lenders to extend its currentarrangements while it attempts to establish a new credit facility with covenantsthat the Company believes it will be able to satisfy and additional borrowingcapacity.

 

10.           Contingencies

 

An accident,involving an explosion and fire, occurred on February 25, 1999, at JahnFoundry, located in Springfield, Massachusetts.  Nine employees were seriously injured and there were threefatalities.  The damage was confined tothe shell molding area and boiler room. The other areas of the foundry remained operational.   Molds were being produced at otherfoundries, as well as Jahn Foundry, while repairs were made.  The new shell molding department becameoperational in November 2000.

 

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The Companycarries insurance for property and casualty damages (over $475 million ofcoverage), business interruption (approximately $115 million of coverage),general liability ($51 million of coverage) and workers’ compensation (up tofull statutory liability) for itself and its subsidiaries. The Company recordedcharges of $750,000 during the third quarter of fiscal 1999, primarilyreflecting the deductibles under the Company’s various insurance policies.  At this time there can be no assurance thatthe Company’s ultimate costs and expenses resulting from the accident will notexceed available insurance coverage by an amount which could be material to itsfinancial condition or results of operations and cash flows.

 

In November2000, the Company and its insurance carrier settled the Jahn Foundry propertyportion of the Company’s claim.  Thesettlement provided, among other things, for (i) additional payments from thecarrier in the amount of $2.6 million, (ii) that of the payments received todate, totaling $26.8 million, the insurance carrier will allocate no more than$9.5 million for property damage, (iii) that the remaining proceeds of $17.3million will be allocated to business interruption losses and will not besubject to recovery by the insurance carrier and (iv) that the Company shallnot be entitled to any additional payments unless it is determined byreference, appraisal, arbitration, litigation or otherwise that the Company’sbusiness interruption losses exceed $17.3 million. The Company disagrees withthe insurance carrier regarding the duration and amount of the businessinterruption losses.  The Company isseeking additional insurance payments through arbitration expected to occurduring the latter part of calendar 2002. There can be no assurance that the Company will ultimately receive anyadditional insurance payments or that the excess of the Company’s costs andexpenses resulting from the accident over the insurance payments received willnot be material to its financial condition or results of operations and cashflows. 

 

As a result ofthe above settlement, the Company recorded a non-recurring gain of $10.9million in the second quarter of fiscal 2001, which consisted of a $3.7 millionbusiness interruption insurance gain and a $7.2 million property insurancegain.   The property insurance gain primarilyrepresents the difference between the net proceeds received for the propertydamage and the property’s net book value immediately before the accident.  These net proceeds were used to rebuild thedamaged property and were accounted for as capital expenditures.

 

A civil actionhas been commenced in Massachusetts Superior State Court on behalf of theestates of deceased workers, their 

 

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families,injured workers and their families, against the supplier of a chemical compoundused in Jahn Foundry’s manufacturing process. The supplier of the chemical compound, Borden Chemical, Inc., filed aThird Party Complaint against Jahn Foundry in Massachusetts Superior StateCourt on February 2, 2000 seeking indemnity for any liability it has to the plaintiffsin the civil action.  The Company’scomprehensive general liability insurance carrier has retained counsel onbehalf of Jahn Foundry, and the Company is aggressively defending Jahn Foundryin the Third Party Complaint.  It is tooearly to assess the potential liability to Jahn Foundry for the Third PartyComplaint, which in any event Jahn Foundry will 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.  

 

On February26, 2001, Borden filed a Third Party Complaint against the Company seekingcontribution, under Massachusetts law, from the Company in the event that theplaintiffs prevail against Borden.  TheThird Party Complaint alleges that the Company undertook a duty to overseeindustrial hygiene, safety and maintenance at Jahn Foundry and that the Companydesigned, installed and maintained equipment and machinery at Jahn Foundry, andthat the Company’s carelessness, negligence or gross negligence caused theexplosion and resulting injuries.  It istoo early to assess the potential liability for such a claim, which in anyevent the Company will aggressively defend. 

 

On March 30,2001, the plaintiffs in the civil action described above amended theircomplaint by adding the Company as a defendant.  The plaintiffs allege that the Company undertook a duty tooversee industrial hygiene, safety and maintenance at Jahn Foundry and that theCompany’s carelessness, negligence or gross negligence caused the explosion andresulting injuries.  The plaintiffs seekan unspecified amount of damages and punitive damages.  It is too early to assess the potentialliability to the Company for such claims, which in any event the Company willaggressively defend.  The Company hasfiled a cross-claim for contribution against Borden and J.R. Oldhan Company. 

 

On December20, 2001, the Company completed the sale of substantially all of the assets ofJahn Foundry (Note 7). However, the Company did not sell its right to anyproceeds from any insurance settlement, arbitration, litigation or anyproceeding relating to the industrial accident discussed above, nor did thebuyer assume any such liabilities.

 

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The Company,its chief executive officer, and its chief financial officer were named asdefendants in five lawsuits filed following the Company’s announcementsconcerning the discovery of accounting irregularities at the PennsylvaniaFoundry Group.  The cases have beenconsolidated before the U.S. District Court for the District of Kansas.  An amended complaint filed after theconsolidation alleges, among other things, that the defendants intentionally orrecklessly issued materially false and misleading financial statements inviolation of Section 10(b) of the Securities Exchange Act of 1934 and Rule10b-5 promulgated thereunder.  Thatcomplaint seeks certification of a class of purchasers of the Company’s commonstock between December 10, 1997 and November 3, 2000 and asks for damages forthe class in an unspecified amount.  Anagreement in principle has been reached to settle the case.  The settlement, which is subject to theexecution of definitive settlement documents and Court approval, calls for theestablishment of a settlement fund consisting of $1.8 million, which will bepaid by the Company’s insurance carrier. All claims will be dismissed without any admission of liability orwrongdoing.

 

The Companyunderstands that on or about November 29, 2000 the Securities and ExchangeCommission issued a formal order of investigation as a result of the eventsunderlying the Company’s earlier disclosure of certain accountingirregularities.  The Company iscooperating with the investigation.

 

In addition tothese matters, from time to time, the Company is the subject of legalproceedings, including employee matters, commercial matters, environmentalmatters and similar claims in the normal course of business.  In the opinion of management, the resolutionof these matters will not have a material effect on the Company’s consolidatedfinancial statements.

 

The Companyacquired Fonderie d’Autun (“Autun”) in France on February 25, 1999.  Autun specialized in the manufacture of castiron radiators and boiler castings.  TheCompany’s strategy for Autun was to restructure the foundry to diversify intoother products, principally automotive and appliance products.  Autun has made progress in diversifying intoautomotive and other products.  However,the start-up costs have been high.  Inthe first nine months of fiscal 2001, Autun recorded a net loss of $19,000 onsales of $13.5 million.  In the firstnine months of fiscal 2002, Autun has recorded a net loss of $1.6 million onsales of $13.9 million.

 

On April 9,2002, Autun filed a voluntary petition for reorganization with the local courtin Chalons, France.  Autun was granted asix month period to prepare a plan of continuing 

 

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operations forapproval by the court.  If Autun ispermitted to continue operations at a reduced employment level under a plan ofreorganization, certain employee severance expenses may result.  If such expenses arise, there could be acharge in an amount between $1.0 million and $3.0 million.  These expenses would initially be paid bythe French government, to whom Autun would be obligated to repay such amountover a period of years.  Such amount hasnot been recorded in the accompanying financial statements.

 

The Companycontractually assumed certain contingent liabilities of up to 100 millionfrancs (currently US $13.3 million) when it purchased Autun.  This contingency currently consistsprimarily of the cost of environmental cleanup/restoration, if any, in theevent that the foundry was to be closed and a successful claim made by theFrench government against the prior owner. The Company currently expects to continue operating Autun.  However, Autun must fund its working capitalneeds internally, as the Credit Agreement, Note Purchase Agreement and theFacility Agreement prohibit the Company from transferring funds to Autun tocover operating losses.  If Autun wereunable to fund its own operations, there is a risk that it would have to ceaseoperations, and may become subject to the above liabilities should the Frenchgovernment or a third party successfully make a claim against the priorowner.  The Company estimates that allcontingent liabilities relating to Autun could total up to $20 million over aperiod of time.  Such amount has notbeen recorded in the accompanying statements. Should Autun cease operations the Company would incur an impairmentcharge related to Autun’s fixed assets. This impairment charge would not be material to the Company’s results ofoperations and cash flows.

 

11.           Financial Results and Management’sPlans

 

In fiscal2001, the Company incurred a pre-tax loss of $34.5 million ($16.4 millionexcluding impairments charges of $18.1 million) and, as of March 31, 2002, theCompany was not in compliance with certain financial covenants included in itsdebt agreements (See Note 9).  

 

To addressthese conditions, management has taken or is in the process of taking thefollowing actions:

 

Operations

 

The Companyhas closed four unprofitable foundries during fiscal 2001 and fiscal 2002.  Operations from these four foundries havebeen a major factor in the Company’s pre-tax losses, producing combined pretaxlosses in fiscal 2001 of $17.1

 

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million ($15.5million before impairment charges of $1.6 million).  Management has transferred a significant portion of the workpreviously performed by these locations to other foundries, thereby increasingthe utilization and profitability of these other foundries.

 

Sale ofOperations

 

The Company completed the sale of substantially all of the assets ofJahn Foundry on December 20, 2001 and LA Die Casting on February 20, 2002 (Note7). 

 

Other Actions

 

Managementcontinues to pursue new or revised long-term debt arrangements with terms andcovenants acceptable to the Company and to the lenders. As discussed in Note 9,over the past few years the Company has successfully negotiated with itslenders to obtain amendments, forbearances and waivers for violations ofvarious covenants of its loan agreements, and the lenders have demonstrated ahistory of working with the Company in providing an adequate credit facility tomeet its ongoing needs, and the Company currently has forbearance agreementswhich expire June 30, 2002.  The Companyis not in compliance with the operating cash flow covenant contained in thecurrent forbearance agreements.  TheCompany’s lenders have not enforced their rights with respect to this event ofdefault.  However, there is no assurancethat the lender will not choose to enforce their rights in the future.  The Company believes that its operating cashflow and amounts available for borrowing under its existing credit facility andthe Facility Agreement will be adequate to fund its capital expenditure andworking capital requirements through June 2002.

 

Managementbelieves that certain of the existing loan arrangements must be revised orreplaced to provide the Company with additional borrowing capacity and withfinancial covenants within such arrangements that are achievable by theCompany. Management is currently in negotiations with various financialinstitutions to extend, renegotiate or replace the current credit agreementswith a long-term credit facility, but there can be no assurance that managementwill be successful in these negotiations.

 

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ITEM 2.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF**

**OPERATIONS ANDFINANCIAL CONDITION**

** **

Results ofOperations:

 

Net sales for the third quarterof fiscal 2002 were $99.7 million, representing a decrease of $17.2 million, or14.7%, from net sales of $116.9 million in the third quarter of fiscal2001.  Since the beginning of fiscal2001, Atchison Casting Corporation (the “Company”) has completed the closure offour operations and the sale of two operations.  These operations generated net sales of $12.5 million and $1.6million in the third quarter of fiscal 2001 and fiscal 2002, respectively, asfollows:

 
| **Operation**                                                |   | **FY01 3rd  Qtr  Net Sales** |         | **FY 02 3rd  Qtr  Net Sales** |        |
|--------------------------------------------------------------|--------|------------------------------|--------------|-------------------------------|-------------|
| Closure of Claremont Foundry, Inc.                           |   | —                       |         | —                        |        |
| Closure of PrimeCast, Inc.                                   |   | $                            | 4.6 million  |                          | —      |   |
| Closure of Pennsylvania Steel Foundry &  Machine Company |   | 1.1 million                  |         | —                        |        |
| Sale of Jahn Foundry Corp                                    |   | 2.2 million                  |         | —                        |        |
| Closure of Empire Steel Castings, Inc.                       |   | 2.6 million                  |         | $                             | 0.9 million |   |
| Sale of Los Angeles Die Casting, Inc.                        |   | 2.0 million                  |         | 0.7 million                   |        |
|                                                         |   | $                            | 12.5 million |                          | $           | 1.6 million |   |

 

Much of Pennsylvania Steel Foundry & Machine Company’s(“Pennsylvania Steel”) and Empire Steel Castings, Inc.’s (“Empire Steel”) netsales were transferred to other Company locations.  Empire Steel was closed to commercial work, but does continue toproduce one product for the U.S. Government on an as-needed basis.  As PrimeCast, Inc. (“PrimeCast”) was theCompany’s only foundry that could produce large iron castings, only a portionof PrimeCast’s work was transferred to other operations of the Company.  In addition, net sales of LaGrange FoundryInc. (“LaGrange”) decreased $2.4 million, or 42.6%, to $3.3 million in thethird quarter of fiscal 2002.  Thisdecrease is a result of reduced sales to LaGrange’s largest customer, GardnerDenver Machinery, Inc. (“Gardner Denver”). The remaining decrease in net saleswas due primarily to decreases in net sales to the rail market.

 

Net sales for the first nine months of fiscal 2002 were $299.4 million,representing a decrease of $22.5 million, or 7.0%, from net sales of $321.9million in the first nine months of fiscal 2001.  Since the beginning of fiscal 2001, the operations closed or soldby the Company generated net sales of $40.5 million and $12.4 million in thefirst nine months of fiscal 2001 and fiscal 2002, respectively, as follows:

 

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| **Operation**                                                |   | **FY01 First    Nine Months  Net Sales** |         | **FY 02  First   Nine Months  Net Sales** |   |
|--------------------------------------------------------------|--------|------------------------------------------|--------------|-------------------------------------------|--------|
| Closure of Claremont Foundry, Inc.                           |   | $                                        | 0.8 million  |                                      | — |   |
| Closure of PrimeCast, Inc.                                   |   | 14.9 million                             |         | 0.2 million                               |   |
| Closure of Pennsylvania Steel Foundry &  Machine Company |   | 4.9 million                              |         | —                                    |   |
| Sale of Jahn Foundry Corp                                    |   | 6.1 million                              |         | 2.9 million                               |   |
| Closure of Empire Steel Castings, Inc.                       |   | 7.3 million                              |         | 5.0 million                               |   |
| Sale of Los Angeles Die Casting, Inc.                        |   | 6.5 million                              |         | 4.3 million                               |   |
|                                                         |   | $                                        | 40.5 million |                                      | $      | 12.4 million |   |
|                                                              |        |                                          |              |                                           |        |  |  |

 

Net sales at LaGrange decreased$4.3 million, or 27.9%, to $11.1 million for the first nine months of fiscal2002.  Partially offsetting thesefactors were increases in net sales to the power generation and steel marketssomewhat offset by a decrease in net sales to the rail market.

 

Gross profit for the thirdquarter of fiscal 2002 decreased $2.1 million, or 26.3%, to $5.9 million, or5.9% of net sales, compared to $8.0 million, or 6.9% of net sales, for thethird quarter of fiscal 2001.  Thedecrease in gross profit and gross profit as a percentage of net sales wasprimarily due to lower net sales and reduced absorption of overhead at theCompany’s subsidiaries serving the rail market and reduced gross profits atSheffield Forgemasters Group Limited (“Sheffield”) and La Grange.  Partially offsetting these factors was theelimination of gross losses incurred at the operations closed or sold since thebeginning of fiscal 2001.

 

The gross profit at Sheffieldin the third quarter of fiscal 2002 decreased $1.5 million, to a gross profitof $905,000, or 3.3% of net sales, compared to a gross profit of $2.4 million,or 8.5% of net sales, in the third quarter of fiscal 2001, primarily reflectingthe impact of the strong British pound and the competitive environment of themarkets served by Sheffield on quoted margins. The gross profit at LaGrange in the third quarter of fiscal 2002decreased $1.1 million, to a gross loss of $640,000, or 19.7% of net sales,compared to a gross profit of $462,000, or 8.1% of net sales, in the thirdquarter of fiscal 2001, reflecting the lower absorption of overhead resultingfrom reduced volumes from LaGrange’s primary customer, Gardner Denver.  The Company has taken several actions toimprove the performance of LaGrange and continues to monitor the performance ofLaGrange.  Offsetting these factors wasa decrease in the gross losses at PrimeCast, Pennsylvania Steel, Empire Steeland Jahn Foundry, Corp. (“Jahn Foundry”) by an aggregate of $3.0 million fromthe gross losses at these locations in the third quarter of fiscal 2001.  In addition, decreased fuel costs increasedgross profit by approximately $2.3 million in the third quarter of fiscal 2002compared to the prior year period.

 

Gross profit for the first ninemonths of fiscal 2002 increased $1.4 million, or 7.0%, to $21.5 million, or7.2% of net sales, compared to $20.1 million, or 6.2% of net sales, for thefirst nine months of fiscal 2001.  Theincrease in gross profit and gross profit as a percentage of net sales wasprimarily due to the substantial elimination of the gross losses incurred atthe operations closed or sold since the beginning of fiscal 2001 and a

 

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decrease in fuel costs ofapproximately $2.3 million.  Offsettingthis improvement was a decrease in gross profit at Sheffield and LaGrange.

 

The gross losses at ClaremontFoundry, Inc. (“Claremont”), PrimeCast, Pennsylvania Steel, Empire Steel andJahn Foundry in the first nine months of fiscal 2002 decreased by an aggregateof $7.9 million from the gross losses at these locations in the first ninemonths of fiscal 2001.  The gross profitat Sheffield in the first nine months of fiscal 2002 decreased $2.5 million, toa gross profit of $4.6 million, or 5.6% of net sales, compared to a grossprofit of $7.1 million, or 9.0% of net sales, in the first nine months offiscal 2001, primarily reflecting the impact of the strong British pound andthe competitive environment of the markets served by Sheffield on quotedmargins.  The gross profit at LaGrangein the first nine months of fiscal 2002 decreased $2.3 million, to a gross lossof $1.3 million, or 11.9% of net sales, compared to a gross profit of $1.0million, or 6.5% of net sales, in the first nine months of fiscal 2001,reflecting the lower absorption of overhead resulting from reduced volumes fromLaGrange’s primary customer, Gardner Denver. 

 

Selling, general andadministrative expense (“SG&A”) for the third quarter of fiscal 2002 was$9.6 million, or 9.6% of net sales, compared to $12.3 million, or 10.5% of netsales, in the third quarter of fiscal 2001. For the first nine months of fiscal 2002, SG&A was $29.7 million, or9.9% of net sales, compared to $33.9 million, or 10.5% of net sales, for thefirst nine months of fiscal 2001.  Thereduction in SG&A expense in both period is primarily due to the reductionin SG&A expense at the facilities the Company has closed or sold since thebeginning of fiscal 2001 and the inclusion in the prior year periods ofexpenses relating to the investigation of the accounting irregularities at theCompany’s Pennsylvania Foundry Group of operations and net losses to record theCompany’s foreign exchange contracts and related foreign denominated tradereceivables at fair value.  Included inthe third quarter and first nine months of fiscal 2001 were expenses ofapproximately $390,000 and $870,000, respectively, relating to theinvestigation of the accounting irregularities at the Pennsylvania FoundryGroup.  Included in the third quartersof fiscal 2001 and fiscal 2002 were net gains (losses) of approximately ($1.5)million and $126,000, respectively, to record the Company’s foreign exchange contractsand related foreign denominated receivables at fair value.  For the first nine months of fiscal 2001 andfiscal 2002, the Company recorded net gains (losses) of approximately($855,000) and $709,000, respectively, to record the Company’s foreign exchangecontracts and related foreign denominated receivables at fair value.  Also included in the first nine months offiscal 2001 and fiscal 2002 were expenses of approximately $1.0 million and$1.1 million, respectively, incurred by the Company in pursuing various optionsto refinance its bank credit facility.

 

The Company has recordedintangible assets, consisting of goodwill, in connection with certain of theCompany’s acquisitions.  Amortization ofthese assets for the third quarter of fiscal 2002 was $299,000, or 0.3% of netsales, as compared to $338,000, or 0.3% of net sales, in the third quarter offiscal 2001.  Amortization of theseassets for the first nine months of fiscal 2002 was $915,000, or 0.3% of netsales, as compared to $1.0 million, or 0.3% of net sales, in the first ninemonths of fiscal 2001.  The Company hasalso recorded a liability, consisting of the excess of acquired net assets overcost (“negative goodwill”), in connection with the acquisition of Fonderied’Autun (“Autun”).  The amortization ofnegative goodwill was a credit to income in the third quarter of fiscal

 

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2002 of $394,000, or 0.4% ofnet sales, as compared to $415,000, or 0.4% of net sales, in the third quarterof fiscal 2001.  The amortization ofnegative goodwill was a credit to income in the first nine months of fiscal2002 of $1.2 million, or 0.4% of net sales, as compared to $1.2 million, or0.4% of net sales, in the first nine months of fiscal 2001.

 

Other income for the first ninemonths of fiscal 2001 was $10.9 million, which was a non-recurring gainconsisting of $3.7 million and $7.2 million against the Company’s businessinterruption and property damage claims, respectively, relating to theindustrial accident at Jahn Foundry on February 25, 1999.  The property insurance gain primarilyrepresents the difference between the net proceeds received for the propertydamage and the property’s net book value immediately before the accident. (seeNote 7)

 

The Company substantiallycompleted the closure of Empire by December 31, 2001, and transferred as muchwork as possible to other locations. Empire was closed as to commercial work, but continues to produce oneproduct for the U.S. Government on an as-needed basis.  For the third quarter of fiscal years 2001and 2002, Empire recorded net sales of $2.6 million and $910,000, respectively,and net losses of $409,000 and $89,000, respectively.  For the first nine months of fiscal years 2001 and 2002, Empirerecorded net sales of $7.3 million and $5.0 million, respectively, and netlosses of $1.8 million and $793,000, respectively. The Company terminatedapproximately 106 employees at Empire and recognized a charge for severancebenefits of approximately $50,000 in fiscal 2002. 

 

On December 20, 2001, theCompany completed the sale of substantially all of the net assets of JahnFoundry. After post-closing adjustments, the Company received approximately$300,000 in cash, a minority ownership position in the buyer valued at $325,000and a note (bearing interest at 6.0% per year) for the principal amount of$475,000 amortizing over ten years in exchange for assets and the assumption ofliabilities by the buyer.  The Companyrecognized a loss of the sale of approximately $40,000.  For the third quarter of fiscal 2001, JahnFoundry recorded a net loss of $551,000 on net sales of $2.2 million.  For the first nine months of fiscal year2001, Jahn Foundry recorded a net loss of $2.0 million, excluding anon-recurring gain of $10.9 million recorded in the second quarter relating toinsurance claims resulting from an industrial accident at Jahn Foundry onFebruary 25, 1999, on sales of $6.1 million. For the first nine months of fiscal 2002, Jahn Foundry recorded a netloss of $823,000 on sales of $2.9 million. 

 

On February 20, 2002, theCompany completed the sale of substantially all of the net assets of LA DieCasting, Inc. (“LA Die Casting”).  Afterpost-closing adjustments, the Company received approximately $3.5 million incash and a note for the principal amount of $259,000 due in two years inexchange for assets and the assumption of liabilities by the buyer.  The note bears interest at the rate of 6.0%per year and requires quarterly payments of interest only during the two yearperiod.  The Company recognized a losson the sale of approximately $169,000. For the third quarter of fiscal years 2001 and 2002, LA Die Castingrecorded  net sales of $2.0 million and$657,000, respectively, and a net loss of $25,000 and $64,000,respectively.  For the first nine monthsof fiscal years 2001 and 2002, LA Die Casting recorded net sales of $6.5million and $4.3 million, respectively, and a net income (loss) of $33,000 and$(79,000), respectively.

 

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Interest expense for the thirdquarter of fiscal 2002 was $2.8 million, or 2.8% of net sales, compared to $3.0million, or 2.6% of net sales, in the third quarter of fiscal 2001.  Interest expense for the first nine monthsof fiscal 2002 was $8.3 million, or 2.8% of net sales, compared to $8.5million, or 2.7% of net sales, in the first nine months of fiscal 2001.  The interest expense primarily reflectshigher average levels of outstanding indebtedness, offset by lower averageinterest rates.

 

The Company recorded income taxbenefit of $7.1 million and $6.7 million in the third quarter and first ninemonths of fiscal 2002, respectively. Due to the Company’s current income tax position, no income tax benefitwas recorded in connection with the losses incurred.  However, as a result of a tax law change enacted in March 2002,the Company was able to carry back its prior period net operating losses anadditional three years.  This resultedin an income tax refund of approximately $5.5 million relating to such priorperiod losses and a projected income tax refund of approximately $1.6 millionwith respect to losses incurred during the nine months ended March 31, 2002,which was recorded in the third quarter of fiscal 2002.  Income tax benefits of $2.3 million and $2.9million were recorded in the third quarter and first nine months of fiscal2001, respectively. The Company’s income tax benefit for the third quarter andfirst nine months of fiscal 2001 reflect the combined effective tax rates ofthe different federal, state and provincial jurisdictions in which the Companyoperates, and the proportion of taxable income earned in each of those taxjurisdictions.

 

As a result of the foregoing,the net income for the third quarter of fiscal 2002 was $708,000 compared to anet loss of $5.0 million for the third quarter of fiscal 2001.  The net loss for the first nine months offiscal 2002 was $9.5 million compared to a net loss of $9.0 million for thefirst nine months of fiscal 2001.

 

Liquidity andCapital Resources:

 

Cash used in operatingactivities for the first nine months of fiscal 2002 was $1.4 million, comparedto cash provided by operations of $3.6 million for the first nine months offiscal 2001.  This change was primarilyattributable to a reduction in trade payable balances.

 

Working capital was a negative$42.4 million at March 31, 2002, as compared to a negative $52.9 million atJune 30, 2001.  The change in workingcapital levels primarily reflect a reduction in trade payable balances andoutstanding borrowings under the Company’s revolving credit facilities,partially offset by a reduction in trade receivable balances.  The working capital levels also reflect theclassification of $94.6 million and $105.3 million of the Company’s bank creditfacility, term loan and senior notes with an insurance company as current atMarch 31, 2002 and June 30, 2001, respectively.  The Company is not in compliance with certain financial covenantsunder the Credit Agreement, Note Purchase Agreement and the GE Financing, asdefined below, and, accordingly, such amounts have been classified as currentliabilities.

 

During the first nine months offiscal 2002, the Company made capital expenditures of $3.0 million, as comparedto $9.7 million for the first nine months of fiscal 2001.  Included in the first nine months of fiscal2001 were capital expenditures of $4.1 million

 

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to rebuild the shell moldingarea and boiler room damaged in the industrial accident on February 25, 1999 atJahn Foundry (see below).  The balanceof capital expenditures in both periods were used for routine projects at eachof the Company’s facilities.  

 

As discussed above, the Companyhas sold substantially all of the net assets of Jahn Foundry and LA DieCasting.  

 

The Company has four primarycredit facilities: a revolving credit facility with Harris Trust and SavingsBank, as agent for several lenders (the “Credit Agreement”); senior notes (the“Notes”) with an insurance company issued under a note purchase agreement (the“Note Purchase Agreement”); a term loan with General Electric CapitalCorporation (the “GE Financing”); and a receivables program combined with arevolving credit facility with Burdale Financial Limited pursuant to a facilityagreement (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. 

 

In September 2001, ACUK, a subsidiaryof the Company and its subsidiaries, and Burdale Financial Limited entered intothe Facility Agreement.  This FacilityAgreement provides for a facility of up to 25 million British pounds(approximately $35 million US), subject to certain eligibility calculations, tobe used to fund working capital requirements at Sheffield, a subsidiary ofACUK, and up to 1.0 million British pounds for working capital at Autun, theCompany’s subsidiary in France.  Inaddition, the Facility Agreement provides security for Sheffield’s foreigncurrency exchange contracts and performance bond commitments and was used torepay $5.0 million of an intercompany working capital loan ($1.1 million ofwhich was paid to certain of the lenders as principal payments).  This facility matures on September 17, 2004and is secured by substantially all of Sheffield’s assets in the U.K.  Loans under this Facility Agreement bearinterest at LIBOR plus 2.60% (6.725% at March 31, 2002).  As of March 31, 2002, ACUK had drawnapproximately $12.5 million under the Facility Agreement.  The Company is currently in compliance withthe covenants under the Facility Agreement.

 

On December 18 2001, theCompany entered into the Twelfth Amendment and Forbearance Agreement to theCredit Agreement and the Eighth Amendment and Forbearance Agreement to the NotePurchase Agreement.  These amendments,as modified, provide that, among other things, these lenders will forbear fromenforcing their rights with respect to certain existing defaults through June30, 2002.  

 

The Credit Agreement, asamended, currently consists of a $69.7million revolving credit facility. Assetsales and tax refunds have been used to reduce indebtedness.  In addition to the financial covenants, theCredit Agreement contains restrictions on, among other things, acquisitions,additional indebtedness, further investments in Autun and the use of netproceeds from the sale of assets (other than inventory), insurance settlementsand other non-recurring items.  Securedby substantially all of the Company’s North American assets, loans under thisrevolving credit facility bear interest at fluctuating rate of the agent bank’scorporate base rate plus 2.0% (6.75% at March 31, 2002).

 

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At March 31, 2002, Notes withan aggregate principal amount of $10.7 million were outstanding with interestaccruing at 10.44% per year.  The NotePurchase Agreement provides for annual principal payments of $2.9 million, themost recent of which has not been paid. The Notes are secured by the same assets that secure the CreditAgreement and contain similar restrictions to those described above under theCredit Agreement.

 

At March 31, 2002, the balanceof the term loan under the GE Financing was $27.4 million.  The Company has made all required monthlyprincipal payments of $291,667 plus accrued interest.  The GE Financing is secured by certain of the Company's fixedassets, real estate, equipment, furniture and fixtures located in Atchison,Kansas and St. Joseph, Missouri, matures in December 2004 and bears interest ata fixed rate of 9.05% per year.   

 

The Company is in default underthe Credit Agreement, Note Purchase Agreement and the GE Financing. To date,the lenders have not enforced their rights with respect to certain events ofdefault, but there can be no assurance that they will not do so in thefuture.  During much of fiscal 2001 andto date in fiscal 2002, the Company borrowed the full amount of the revolvingcredit facility under the Credit Agreement and managed its cash positionaccordingly.  To date, the Company hasbeen able to meet its cash needs by traditional cash management procedures inaddition to:  (1) the collection of taxrefunds resulting from the operating losses at the Pennsylvania Foundry Groupand other operations, (2) accelerated collections of receivables from certainlongstanding customers from time to time, (3) the reduction of expenses afterclosing locations operating with a negative cash flow, (4) the reduction ofdiscretionary capital expenditures, and (5) recently, funds available throughthe Facility Agreement, particularly for its operations in the U.K. andFrance.  The Company is also seeking therecovery under various insurance policies for losses due to the accountingirregularities at the Pennsylvania Foundry Group and the industrial accident atJahn Foundry.  In addition, the Companyis pursuing other responsible parties. There can be no assurance that such actions will be successful inrecovering funds or that they will allow the Company to operate withoutadditional borrowing capacity.

 

Compliance with certainfinancial covenants under the Credit Agreement, Note Purchase Agreement and theGE Financing is determined on a “trailing-twelve-month” basis. The resultsthrough March were below results needed to achieve compliance with thesecovenants under the Credit Agreement, Note Purchase Agreement and the GEFinancing.  Accordingly, the Company iscurrently negotiating with new and existing financial institutions to extend itscurrent arrangements while it attempts to establish a new credit facility withcovenants that the Company believes it will be able to satisfy and 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 Company believes that its operating cashflow and amounts available for borrowing under its existing credit facility andthe Facility Agreement will be adequate to fund its capital expenditure andworking capital requirements through June 2002.  However, the level of capital expenditure and working capitalrequirements may be greater than currently anticipated as a result ofunforeseen expenditures such as

 

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compliance with environmentallaws and the accident at Jahn Foundry. If the Company fails to amend its financial covenants on terms favorableto the Company, the Company will continue to be in default under suchcovenants.  Accordingly, the lenderscould accelerate the debt under the Credit Agreement which, in turn, wouldpermit acceleration of the Notes under the Note Purchase Agreement and theindebtedness under the GE Financing. If the lenders accelerate theirindebtedness, there can be no assurance that the Company would be able tolocate alternative sources of financing.

 

Total indebtedness of theCompany at March 31, 2002 was $123.6 million, as compared to $121.5 million atJune 30, 2001.  This increase primarilyreflects borrowings of $12.5 million under the Facility Agreement, partiallyoffset by principal payments aggregating $8.6 million under the CreditAgreement, Note Purchase Agreement and the GE Financing.  At March 31, 2002 the Company hadapproximately $88,000 available for borrowing under its revolving credit facilityunder the Credit Agreement and there was approximately $1.8 million availablefor borrowing under the Facility Agreement.

 

An accident, involving anexplosion and fire, occurred on February 25, 1999, at Jahn Foundry, located inSpringfield, Massachusetts.  Nineemployees were seriously injured and there were three fatalities.  The damage was confined to the shell moldingarea and boiler room.  The other areasof the foundry remained operational.  Molds were being produced at other foundries, as well as Jahn Foundry,while repairs were made.  The new shellmolding department became operational in November 2000.

 

The Company carries insurancefor property and casualty damages (over $475 million of coverage), businessinterruption (approximately $115 million of coverage), general liability ($51million of coverage) and workers’ compensation (up to full statutory liability)for itself and its subsidiaries. The Company recorded charges of $750,000during the third quarter of fiscal 1999, primarily reflecting the deductiblesunder the Company’s various insurance policies.  At this time there can be no assurance that the Company’sultimate costs and expenses resulting from the accident will not exceedavailable insurance coverage by an amount which could be material to itsfinancial condition or results of operations and cash flows.

 

In November 2000, the Companyand its insurance carrier settled the Jahn Foundry property portion of theCompany’s claim.  The settlementprovided, among other things, for (i) additional payments from the carrier inthe amount of $2.6 million, (ii) that of the payments received to date,totaling $26.8 million, the insurance carrier will allocate no more than $9.5million for property damage, (iii) that the remaining proceeds of $17.3 millionwill be allocated to business interruption losses and will not be subject torecovery by the insurance carrier and (iv) that the Company shall not beentitled to any additional payments unless it is determined by reference,appraisal, arbitration, litigation or otherwise that the Company’s businessinterruption losses exceed $17.3 million. The Company disagrees with the insurance carrier regarding the durationand amount of the business interruption losses.  The Company is seeking additional insurance payments througharbitration expected to occur during the latter part of calendar 2002.  There can be no assurance that the Companywill ultimately receive any additional insurance payments or that the excess ofthe Company’s costs and expenses resulting from the accident over the insurancepayments received will not be material to its financial condition or results ofoperations and cash flows.

 

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A civil action has beencommenced in Massachusetts Superior State Court on behalf of the estates ofdeceased workers, their families, injured workers and their families, againstthe supplier of a chemical compound used in Jahn Foundry’s manufacturingprocess.  The supplier of the chemicalcompound, Borden Chemical, Inc., filed a Third Party Complaint against JahnFoundry in Massachusetts Superior State Court on February 2, 2000 seekingindemnity for any liability it has to the plaintiffs in the civil action.  The Company’s comprehensive generalliability insurance carrier has retained counsel on behalf of Jahn Foundry, andthe Company is aggressively defending Jahn Foundry in the Third PartyComplaint.  It is too early to assessthe potential liability to Jahn Foundry for the Third Party Complaint, which inany event Jahn Foundry will aggressively defend.  In addition, Jahn Foundry has brought a Third Party Counterclaimagainst Borden and the independent sales representative of the chemicalcompound, J.R. Oldhan Company, seeking compensation for losses sustained in theexplosion, including amounts covered by insurance.

 

On February 26, 2001, Bordenfiled a Third Party Complaint against the Company seeking contribution, underMassachusetts law, from the Company in the event that the plaintiffs prevailagainst Borden.  The Third PartyComplaint alleges that the Company undertook a duty to oversee industrialhygiene, safety and maintenance at Jahn Foundry and that the Company designed,installed and maintained equipment and machinery at Jahn Foundry, and that theCompany’s carelessness, negligence or gross negligence caused the explosion andresulting injuries.  It is too early toassess the potential liability for such a claim, which in any event the Companywill aggressively defend.  

 

On March 30, 2001, theplaintiffs in the civil action described above amended their complaint byadding the Company as a  defendant.  The plaintiffs allege that the Companyundertook a duty to oversee industrial hygiene, safety and maintenance at JahnFoundry and that the Company’s carelessness, negligence or gross negligencecaused the explosion and resulting injuries. The plaintiffs seek an unspecified amount of damages and punitivedamages.  It is too early to assess thepotential liability to the Company for such claims, which in any event theCompany will aggressively defend.  TheCompany has filed a cross-claim for contribution against Borden and J.R. OldhanCompany. 

 

On December 20, 2001, theCompany completed the sale of substantially all of the assets of Jahn Foundry,as described above. However, the Company did not sell its right to any proceedsfrom any insurance settlement, arbitration, litigation or any proceedingrelating to the industrial accident discussed above, nor did the buyer assumeany such liabilities.

 

The Company, its chiefexecutive officer, and its chief financial officer were named as defendants infive lawsuits filed following the Company’s announcements concerning thediscovery of accounting irregularities at the Pennsylvania Foundry Group.  The cases have been consolidated before theU.S. District Court for the District of Kansas.  An amended complaint filed after the consolidation alleges, amongother things, that the defendants intentionally or recklessly issued materiallyfalse and misleading financial statements in violation of Section 10(b) of theSecurities Exchange Act of 1934 and

 

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Rule 10b-5 promulgatedthereunder.  That complaint seekscertification of a class of purchasers of the Company’s common stock betweenDecember 10, 1997 and November 3, 2000 and asks for damages for the class in anunspecified amount.   An agreement inprinciple has been reached to settle the case. The settlement, which is subject to the execution of definitivesettlement documents and Court approval, calls for the establishment of asettlement fund consisting of $1.8 million, which will be paid by the Company’sinsurance carrier.  All claims will bedismissed without any admission of liability or wrongdoing.

 

The Company understands that onor about November 29, 2000 the Securities and Exchange Commission issued aformal order of investigation as a result of the events underlying theCompany’s earlier disclosure of certain accounting irregularities.  The Company is cooperating with theinvestigation.

 

The Company acquired Autun inFrance on February 25, 1999.  Autunspecialized in the manufacture of cast iron radiators and boiler castings.  The Company’s strategy for Autun was to restructurethe foundry to diversify into other products, principally automotive andappliance products.  Autun has madeprogress in diversifying into automotive and other products.  However, the start-up costs have beenhigh.  In the first nine months offiscal 2001, Autun recorded a net loss of $19,000 on sales of $13.5million.  In the first nine months offiscal 2002, Autun has recorded a net loss of $1.6 million on sales of $13.9million.

 

On April 9, 2002, Autun filed avoluntary petition for reorganization with the local court in Chalons,France.  Autun was granted a six monthperiod to prepare a plan of continuing operations for approval by thecourt.  If Autun is permitted tocontinue operations at a reduced employment level under a plan ofreorganization, certain employee severance expenses may result.  If such expenses arise, there could be acharge in an amount between $1.0 million and $3.0 million.  These expenses would initially be paid bythe French government, to whom Autun would be obligated to repay such amountover a period of years.  Such amount hasnot been recorded in the accompanying financial statements.

 

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The Companycontractually assumed certain contingent liabilities of up to 100 millionfrancs (currently US $13.3 million) when it purchased Autun.  This contingency currently consistsprimarily of the cost of environmental cleanup/restoration, if any, in theevent that the foundry was to be closed and a successful claim made by theFrench government against the prior owner. The Company currently expects to continue operating Autun.  However, Autun must fund its working capitalneeds internally, as the Credit Agreement, Note Purchase Agreement and theFacility Agreement prohibit the Company from transferring funds to Autun to coveroperating losses.  If Autun were unableto fund its own operations, there is a risk that it would have to ceaseoperations, and may become subject to the above liabilities should the Frenchgovernment or a third party successfully make a claim against the prior owner.  The Company estimates that all contingentliabilities relating to Autun could total up to $20 million over a period oftime. Such amount has not been recorded in the accompanying financialstatements.  Should Autun ceaseoperations the Company would incur an impairment charge related to Autun’sfixed assets.  This impairment chargewould not be material to the Company’s results of operations and cash flows.

 

Critical Accounting Policies

 

Thepreparation of the Company’s financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  The Company believes its critical accountingpolicies are as follows:

 

•     Valuation of long-lived assets and goodwill

•    Estimation of Potential Warranty Claims

•     Workers’ Compensation and Health Insurancereserves

•     Pension Cost and Prepaid Pension Cost

•     Accounting for Income Taxes

 

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Valuationof Long-lived Assets and Goodwill

 

The Company assesses the impairment of identifiable long-lived assetsand goodwill whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors considered important which could trigger an impairment reviewinclude the following:

 

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

 

•   significantunderperformance relative to expected historical or projected future operatingresults;

 

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

 

•    significantnegative industry or economic trends.

 

When it is determined that the carrying value of long-lived assets andgoodwill may not be recoverable based upon the existence of one or more of theabove indicators of impairment, the Company projects the undiscounted cash flowexpected to be derived from such asset. The carrying value of a long-lived asset or goodwill is consideredimpaired when the anticipated undiscounted cash flow from such asset is lessthan its carrying value.  The impairmentis measured based on a projected discounted cash flow method using a discountrate which approximates the Company’s incremental borrowing rate.  Net long-lived assets and goodwill amountedto $100.8 million and $22.3 million, respectively, as of March 31, 2002.  A change in events or circumstancesresulting in an impairment to long-lived assets or goodwill could have amaterial impact on the Company’s results of operations and financial position.

 

On July 1, 2002, Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets” will become effective for theCompany.  As a result, the Company willcease to amortize approximately $22.3 million of goodwill.  For fiscal 2001 and the first nine months offiscal 2002, the Company recorded amortization expense of $1.4 million and$915,000, respectively, relating to the

 

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amortization of goodwill.  Inlieu of amortization, the Company is required to perform an initial impairmentreview of goodwill in fiscal 2003 and an annual impairment review thereafter.  The Company expects to complete its initialreview during the first half of fiscal 2003.

 

 

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Estimationof Potential Warranty Claims

 

The Company warrants that every product will meet a set ofspecifications, 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 provision for warrantyexpense was $7.3 million and $9.0 million at March 31, 2002 and June 30, 2001,respectively.

 

Workers’Compensation and Employee Health Care Reserves

 

The Company’s U.S. operations primarily self-insure for workers’compensation and employee health care expense. The Company bases its reserves for workers’ compensation expenseprimarily on estimates provided by third-party administrators and its reservesfor health care expense on historical claims experience.  Significant management judgments and estimatesare made in establishing these reserves. The Company’s reserve for workers’ compensation and employee health carewas $4.9 million and $4.0 million at March 31, 2002 and June 30, 2001,respectively.  At March 31, 2002, theCompany had letters of credit aggregating $2.1 million and a certificate ofdeposit of $550,000 which support claims for workers’ compensation benefits.

 

PensionCost and Prepaid Pension Cost

 

The Company’s pension cost and prepaid pension cost are dependent onassumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates,benefits earned, interest cost, expected return on plan assets, mortality ratesand other factors.  In accordance withaccounting principles generally accepted in the United States, actual resultsthat differ from the assumptions are accumulated and amortized over futureperiods and, therefore, generally affect recognized expense and the recordedasset or obligation in future periods. While the Company believes that the assumptions used are appropriate,differences in actual experience or changes in assumptions may have a materialimpact on the Company’s results of operations and financial position.

 

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Accountingfor Income Taxes

 

As part of the process of preparing the Company’s consolidatedfinancial statements, the Company is required to estimate its income taxes ineach of the jurisdictions in which it operates.  This process involves estimating actual current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities,which are included within the Company’s consolidated balance sheet.  The Company must then assess the likelihoodthat its deferred tax assets will be recovered from future taxable income andto the extent the Company believes that recovery is not likely, the Companymust establish a valuation allowance. To the extent the valuation allowance is established or increased, anexpense must be included within the tax provision in the statement ofoperations.

 

Significant management judgment is required in determining theprovision for income taxes, deferred tax assets and liabilities and anyvaluation allowance recorded against deferred tax assets.  The Company has recorded a valuationallowance against its net deferred tax assets of approximately $30.0 millionand $31.0 million as of March 31, 2002 and June 30, 2001, respectively, due touncertainties related to the Company’s ability to utilize some of its deferredtax assets, primarily consisting of certain net operating losses carriedforward and foreign tax credits, before they expire.  The valuation allowance is based on the Company’s estimates oftaxable income by jurisdiction in which it operates and the period over whichthe deferred tax assets will be recoverable. In the event that actual results differ from these estimates or theCompany adjusts these estimates in future periods, the Company may need toestablish an additional valuation allowance, which could materially impact theCompany’s financial position and results of operations.

 

The net deferred tax liability as of March 31, 2002 and June 30, 2001was approximately $2.0 million and $2.1 million, net of a valuation allowanceof $30.0 million and $31.0 million, respectively.

 

Forward-LookingStatements

 

The section entitled “Liquidityand Capital Resources” contains forward-looking statements that involve anumber of risks and uncertainties. Forward-looking statements such as “expects,” “intends,” “contemplating”and statements regarding quarterly fluctuations, statements regarding theadequacy of funding for capital expenditure and working capital requirementsfor the next twelve months and similar expressions that are not historical areforward-looking statements that involve risks and uncertainties.  Such statements include the Company’sexpectations as to future performance. Among the factors that could cause actual results to differ materiallyfrom such forward-looking statements are the following: costs of closingfoundries, business conditions and the state of the general economy,particularly the capital goods industry, the strength of the U.S. dollar,British pound sterling and the Euro, interest rates, the results of thereorganization of the Company’s wholly-owned subsidiary Autun, the amount ofany claims made against Autun’s prior owner which are the subject of certain

 

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guarantees, the Company’sability to renegotiate or refinance its lending arrangements, utility rates,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 qualitativeinformation about market risk was addressed in Item 7A of the Company's Form10-K for the fiscal year ended June 30, 2001. 

 

The Company’s primary interestrate exposures relate to its cash and short-term investments, fixed andvariable rate debt and interest rate swaps, which are mainly exposed to changesin short-term interest rates (e.g. USD LIBOR). The potential loss in fairvalues is based on an immediate change in the net present values of theCompany’s interest rate-sensitive exposures resulting from a 10% change ininterest rates. The potential loss in cash flows and earnings is based on thechange in the net interest income/expense over a one-year period due to animmediate 10% change in rates. A hypothetical 10% change in interest rateswould have an impact on the Company’s earnings before income tax ofapproximately $564,000 and $700,000 in the first nine months of fiscal 2001 andfiscal 2002, respectively.

 

The Company’s exposure tofluctuations in currency rates against the British pound, Euro, and Canadiandollar result from the Company’s holdings in cash and short-term investmentsand its historical utilization of foreign currency forward exchange contractsto hedge customer receivables and firm commitments. The potential loss in fairvalues is based on an immediate change in the U.S. dollar equivalent balancesof the Company’s currency exposures due to a 10% shift in exchange rates versusthe British pound and Canadian dollar. The potential loss in cash flows andearnings is based on the change in cash flow and earnings over a one-year periodresulting from an immediate 10% change in currency exchange rates versus theBritish pound, Euro and Canadian dollar. Based on the Company’s holdings of financial instruments at March 31,2001 and March 31, 2002, a hypothetical 10% depreciation in the British pound,Euro and the Canadian dollar versus all other currencies would have an impacton the Company’s earnings before income tax of approximately $4.4 million and$41,000 in the first nine months of fiscal 2001 and fiscal 2002, respectively.  

 

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PART II

 

ITEM 1 - LegalProceedings

 

An accident,involving an explosion and fire, occurred on February 25, 1999, at JahnFoundry, located in Springfield, Massachusetts.  Nine employees were seriously injured and there were threefatalities.  The damage was confined tothe shell molding area and boiler room. The other areas of the foundry remained operational.   Molds were being produced at otherfoundries, as well as Jahn Foundry, while repairs were made.  The new shell molding department becameoperational in November 2000.

 

The Companycarries insurance for property and casualty damages (over $475 million ofcoverage), business interruption (approximately $115 million of coverage),general liability ($51 million of coverage) and workers’ compensation (up tofull statutory liability) for itself and its subsidiaries. The Company recordedcharges of $750,000 during the third quarter of fiscal 1999, primarilyreflecting the deductibles under the Company’s various insurance policies.  At this time there can be no assurance thatthe Company’s ultimate costs and expenses resulting from the accident will notexceed available insurance coverage by an amount which could be material to itsfinancial condition or results of operations and cash flows.

 

In November2000, the Company and its insurance carrier settled the Jahn Foundry propertyportion of the Company’s claim.  Thesettlement provided, among other things, for (i) additional payments from thecarrier in the amount of $2.6 million, (ii) that of the payments received todate, totaling $26.8 million, the insurance carrier will allocate no more than$9.5 million for property damage, (iii) that the remaining proceeds of $17.3million   will be allocated to businessinterruption losses and will not be subject to recovery by the insurancecarrier and (iv) that the Company shall not be entitled to any additionalpayments unless it is determined by reference, appraisal, arbitration,litigation or otherwise that the Company’s business interruption losses exceed$17.3 million.  The Company disagreeswith the insurance carrier regarding the duration and amount of the businessinterruption losses.  The Company isseeking additional insurance payments through arbitration.  There can be no assurance that the Companywill ultimately receive any additional insurance payments or that the excess ofthe Company’s costs and expenses resulting from the accident over the insurancepayments received will not be material to its financial condition or results ofoperations and cash flows.

 

A civil actionhas been commenced in Massachusetts Superior State Court on behalf of theestates of deceased workers, their families, injured workers and theirfamilies, against the supplier of a chemical compound used in Jahn Foundry’smanufacturing process.  The supplier ofthe chemical compound, Borden Chemical, Inc., filed a Third Party Complaintagainst Jahn Foundry in Massachusetts Superior State Court on February 2, 2000seeking indemnity for any liability it has to the plaintiffs in the civilaction.  The Company’s comprehensivegeneral liability insurance carrier has retained counsel on behalf of JahnFoundry, and the Company is aggressively defending Jahn Foundry in the ThirdParty Complaint.  It is too early toassess the potential liability to Jahn Foundry for the Third Party Complaint,which in any event Jahn Foundry will aggressively defend.  In addition, Jahn Foundry has brought aThird Party Counterclaim

 

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against Bordenand the independent sales representative of the chemical compound, J.R. OldhanCompany, seeking compensation for losses sustained in the explosion, includingamounts covered by insurance.

 

On February26, 2001, Borden filed a Third Party Complaint against the Company seekingcontribution, under Massachusetts law, from the Company in the event that theplaintiffs prevail against Borden.  TheThird Party Complaint alleges that the Company undertook a duty to overseeindustrial hygiene, safety and maintenance at Jahn Foundry and that the Companydesigned, installed and maintained equipment and machinery at Jahn Foundry, andthat the Company’s carelessness, negligence or gross negligence caused theexplosion and resulting injuries.  It istoo early to assess the potential liability for such a claim, which in anyevent the Company will aggressively defend. 

 

On March 30,2001, the plaintiffs in the civil action described above amended theircomplaint by adding the Company as a defendant.  The plaintiffs allege that the Company undertook a duty tooversee industrial hygiene, safety and maintenance at Jahn Foundry and that theCompany’s carelessness, negligence or gross negligence caused the explosion andresulting injuries.  The plaintiffs seekan unspecified amount of damages and punitive damages.  It is too early to assess the potentialliability to the Company for such claims, which in any event the Company willaggressively defend.  The Company hasfiled a cross-claim for contribution against Borden and J.R. Oldhan Company. 

 

On December20, 2001, the Company completed the sale of substantially all of the assets ofJahn Foundry (Note 7). However, the 

Company didnot sell its right to any proceeds from any insurance settlement, arbitration,litigation or any proceeding relating to the industrial accident discussedabove, nor did the buyer assume any such related liabilities.

 

The Company,its chief executive officer, and its chief financial officer were named asdefendants in five lawsuits filed following the Company’s announcementsconcerning the discovery of accounting irregularities at the PennsylvaniaFoundry Group.  The cases have beenconsolidated before the U.S. District Court for the District of Kansas.  An amended complaint filed after theconsolidation alleges, among other things, that the defendants intentionally orrecklessly issued materially false and misleading financial statements inviolation of Section 10(b) of the Securities Exchange Act of 1934 and Rule10b-5 promulgated thereunder.  Thatcomplaint seeks certification of a class of purchasers of the Company’s commonstock between December 10, 1997 and November 3, 2000 and asks for damages forthe class in an unspecified amount.  Anagreement in principle has been reached to settle the case.  The settlement, which is subject to theexecution of definitive settlement documents and Court approval, calls for theestablishment of a settlement fund consisting of $1.8 million, which will bepaid by the Company’s insurance carrier. All claims will be dismissed without any admission of liability orwrongdoing.

 

The Companyunderstands that on or about November 29, 2000 the Securities and ExchangeCommission issued a formal order of investigation as a result of the events

 

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underlying theCompany’s earlier disclosure of certain accounting irregularities. The Companyis cooperating with the investigation.

 

In addition tothese matters, from time to time, the Company is the subject of legalproceedings, including employee matters, commercial matters, environmentalmatters and similar claims in the normal course of business.    In the opinion of management theresolution of these matters will not have a material effect on the Company’sconsolidated financial statements.

 

ITEM 2 -                                                 Changesin Securities and Use of Proceeds

 

UnregisteredSecurities Transactions

 

NOT APPLICABLE

 

ITEM 3 -                Defaults Upon Senior Securities

 

See Liquidityand Capital Resources above.

 

ITEM 4 -                Submission of Matters to a Vote of Security Holders

 

NOT APPLIABLE

 

ITEM 5 -                Other Information

 

NOT APPLICABLE

 

ITEM 6 -                Exhibits and Reports of Form 8-K

 

(A)          Exhibits

 

(B)           Reports on Form 8-K

 

The Companyfiled a Form 8-K dated February 4, 2002.

 

Items Reported

 

Item 5.   Other Events

 

The Company announced that it has reached an agreement in principal tosettle the consolidated securities class action suit filed against the Company.

 

Item 7.   Financial Statementsand Exhibits

 

Press release dated February 4, 2002.

 

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The Companyfiled a Form 8-K dated February 6, 2002.

 

Items Reported

 

Item 5.   Other Events

 

The Company announced an amendment to the Twelfth Amendment andForebearance agreement in which, among other things, a date to reduceoutstanding loan commitments was extended from January 31, 2002 to February 28,2002.  

 

Item 7.   Financial Statementsand Exhibits

 

Letter agreement dated January 31, 2002 modifying the Twelfth Amendmentand Forebearance Agreement.

 

The Companyfiled a Form 8-K dated February 13, 2002.

 

Items Reported

 

Item 5.   Other Events

 

The Company issued a press release today announcing improved operatingresults for the second quarter and the first six months ended December 31,2001.

 

Item 7.   Financial Statementsand Exhibits

 

Press release dated February 13, 2002.

 

The Companyfiled a Form 8-K dated February 21, 2002.

 

Items Reported

 

Item 5.   Other Events

 

The Company announced the sale of substantially all of the assets ofits Los Angeles Die Casting Inc. subsidiary.

 

Item 7.   Financial Statementsand Exhibits

 

Press release dated February 21, 2002.

 

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

 

SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

|                     | Atchison Casting Corporation |                   |                                                                                   |
|--------------------------|------------------------------|------------------------|----------------------------------------------------------------------------------------|
|                     |                         |                   | (Registrant)                                                                           |   |   |
|                     |                         |                   |                                                                                   |   |
|                     |                         |                   |                                                                                   |   |
| DATE:  May 14, 2002 |                         | /s/ Hugh H. Aiken      |                                                                                   |
|                     |                         |                   | Hugh H.  Aiken, Chairman of the  Board, President and Chief  Executive Officer         |   |
|                     |                         |                   |                                                                                   |   |
|                     |                         |                   |                                                                                   |   |
| DATE:  May 14, 2002 |                         | /s/ Kevin T.  McDermed |                                                                                   |
|                     |                         |                   | Kevin T.  McDermed, Vice  President, Chief Financial Officer,  Treasurer and Secretary |   |

 

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