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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998
Commission File Number 0-10436
L. B. Foster Company
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-13247733
(State of Incorporation) (I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
(412) 928-3417
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at August 3, 1998
Class A Common Stock, Par Value $.01 10,035,542 Shares
-1-
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
PART I. Financial Information Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 1. Legal Proceedings 15
Item 4. Results of Votes of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 18
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1998 1997
--------- ---------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ....................... $ 1,120 $ 1,156
Accounts and notes receivable:
Trade ......................................... 41,824 45,022
Other ......................................... 2,995 2,564
--------- ---------
44,819 47,586
Inventories ...................................... 42,547 43,365
Current deferred tax assets ...................... 474 123
Other current assets ............................. 498 557
Property held for resale ......................... 3,461
--------- ---------
Total Current Assets ............................ 89,458 96,248
--------- ---------
Property, Plant & Equipment - at cost ............ 41,596 42,134
Less Accumulated Depreciation .................... (22,397) (21,359)
--------- ---------
19,199 20,775
Property Held for Resale ......................... 615 615
Other Assets:
Goodwill and intangibles ........................ 4,256 4,484
Investments ..................................... 1,707 1,693
Other assets .................................... 3,542 3,154
--------- ---------
Total Other Assets ............................. 9,505 9,331
--------- ---------
TOTAL ASSETS ..................................... $ 118,777 $ 126,969
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............ $ 1,203 $ 1,309
Short-term borrowings ........................... 18,111
Accounts payable ................................ 17,089 12,524
Accrued payroll and employee benefits ........... 3,722 3,008
Other accrued liabilities ....................... 2,121 1,219
--------- ---------
Total Current Liabilities ...................... 24,135 36,171
--------- ---------
Long-Term Borrowings ............................. 14,420 15,000
Other Long-Term Debt ............................. 3,991 2,530
Deferred Tax Liabilities ......................... 1,274 554
Other Long-Term Liabilities ...................... 2,098 2,206
Stockholders' Equity:
Class A Common stock ............................ 102 102
Paid-in capital ................................. 35,432 35,434
Retained earnings ............................... 38,272 35,625
Treasury stock .................................. (947) (653)
--------- ---------
Total Stockholders' Equity ..................... 72,859 70,508
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 118,777 $ 126,969
========= =========
See Notes to Condensed Consolidated Financial Statements.
-3-
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited)
Net Sales .................. $ 58,876 $ 53,716 $ 108,217 $ 108,210
--------- --------- --------- ---------
Costs and Expenses:
Cost of Goods Sold ........ 49,953 46,189 92,200 94,316
Selling and Administrative
Expenses ................ 6,278 5,624 11,934 10,859
Interest Expense .......... 479 646 1,069 1,181
Other (Income) Expense .... (1,070) (24) (1,403) (107)
--------- --------- --------- ---------
55,640 52,435 103,800 106,249
--------- --------- --------- ---------
Income Before Income Taxes . 3,236 1,281 4,417 1,961
Income Tax Expense ......... 1,295 410 1,770 683
--------- --------- --------- ---------
Net Income ................. $ 1,941 $ 871 $ 2,647 $ 1,278
========= ========= ========= =========
Basic Earnings Per Share ... $ 0.19 $ 0.08 $ 0.26 $ 0.12
========= ========= ========= =========
Diluted Earnings Per Share . $ 0.19 $ 0.08 $ 0.26 $ 0.12
========= ========= ========= =========
Cash Dividend per Common
Share .................... $ $ $ $
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
-4-
L.B. Foster Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Six Months
Ended June 30,
1998 1997
------- -------
(unaudited)
Cash Flows from Operating Activities:
Net income ............................................ $ 2,647 $ 1,278
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Deferred income taxes ................................ 369 630
Depreciation and amortization ........................ 1,534 1,333
Gain on sale of property, plant and equipment ........ (1,218) (188)
Change in operating assets and liabilities:
Accounts receivable ................................... 2,767 6,574
Inventory ............................................. (3,547) (10,487)
Property held for resale .............................. 205 36
Other current assets .................................. 59 86
Other non-current assets .............................. (404) (297)
Accounts payable - trade .............................. 6,977 (4,899)
Accrued payroll and employee benefits ................. 804 (976)
Other current liabilities ............................. 902 (974)
Other liabilities ..................................... (108) 66
-------- --------
Net Cash Provided (Used) by Operating Activities ....... $ 10,987 $ (7,818)
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment ... 489 1,309
Proceeds from sale of Fosterweld....................... 7,258
Capital expenditures on property, plant and equipment . (1,048) (983)
Purchase of DM&E stock ................................ (1,500)
Acquisition of business ............................... (2,500)
-------- --------
Net Cash Used by Investing Activities .................. 6,699 (3,674)
-------- --------
Cash Flows from Financing Activities:
(Repayments) proceeds from issuance of revolving
credit agreement borrowings ........................... (18,691) 11,918
Proceeds from Industrial Revenue Bond ................. 2,045
Exercise of stock options ............................. 308 560
Treasury share transactions ........................... (694)
Repayments of long-term debt .......................... (690) (734)
-------- --------
Net Cash (Used) Provided by Financing Activities ....... (17,722) 11,744
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents ... (36) 252
Cash and Cash Equivalents at Beginning of Period ....... 1,156 1,201
-------- --------
Cash and Cash Equivalents at End of Period ............. $ 1,120 $ 1,453
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest Paid .......................................... $ 1,176 $ 1,139
======== ========
Income Taxes Paid ...................................... $ 815 $ 565
======== ========
During 1998, no capital expenditures were financed through the issuance of
capital leases, however, during 1997, the Company financed the purchase of
certain capital expenditures totaling $33,500 through the issuance of capital
leases.
See Notes to Condensed Consolidated Financial Statements.
-5-
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included, however, actual results could differ from
those estimates. The results of operations for these interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. Certain items previously reported in specific financial
statement captions were reclassified in 1997. The reclassifications had no
effect on income. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
2. ACCOUNTING PRINCIPLES
- ------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". The Company has had no reportable transactions under the
provisions of SFAS No. 130 and the Company does not anticipate that the
reporting requirements of SFAS No. 131 will have a material impact on existing
disclosures.
Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was issued in February 1998.
This statement revises employers' disclosures about pension and postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt this statement in 1998.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The effect of adopting this statement is presently being evaluated.
3. ACCOUNTS RECEIVABLE
- ----------------------
Credit is extended on an evaluation of the customer's financial condition and,
generally, collateral is not required. Credit terms are consistent with industry
standards and practices. Trade accounts receivable at June 30, 1998 and December
31, 1997 have been reduced by an allowance for doubtful accounts of $1,569,000
and $1,468,000, respectively. Bad debt expense was $104,000 and $132,000 for the
six month periods ended June 30, 1998 and 1997, respectively.
-6-
4. INVENTORIES
- --------------
Inventories of the Company at June 30, 1998 and December 31, 1997 are summarized
as follows in thousands:
June 30, December 31,
1998 1997
-------- --------
Finished goods ................................. $ 34,977 $ 30,380
Work-in-process ................................ 4,046 7,826
Raw materials .................................. 6,934 8,369
-------- --------
Total inventories at current costs: ............ 45,957 46,575
(Less):
Current costs over LIFO
stated values ................................. (2,810) (2,610)
Reserve for decline in market value
of inventories ................................ (600) (600)
-------- --------
$ 42,547 $ 43,365
======== ========
Inventories of the Company are generally valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories of the Company are valued at
average cost or market, whichever is lower. An actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected year-end levels
and costs.
5. REVOLVING CREDIT AGREEMENT
- -----------------------------
On August 13, 1998 the Company entered into a senior secured revolving credit
facility for $45,000,000 with its banks. The amended agreement replaces the
November, 1995 revolving credit agreement that had a maturity date of July,
1999.
The interest rate is, at the Company's option, based on the prime rate, the
domestic certificate of deposit rate (CD rate) or the Euro-bank rate. The
interest rates are adjusted quarterly based on the ratio of total indebtedness
to EBITDA as defined in the agreement. The ranges are prime to prime plus
0.125%, the CD rate plus 0.35% to the CD rate plus 1.375%, and the Euro-bank
rate plus 0.35% to the Euro-bank rate plus 1.375%. Borrowings under the
agreement, which expires July 31, 2002, are secured by accounts receivable and
inventory.
The agreement includes financial covenants requiring a minimum net worth, a
fixed charge coverage ratio, and a maximum ratio of total indebtedness to
EBITDA.
6. OTHER (INCOME)/EXPENSE
- -------------------------
Other income included a gain of $1,700,000 for the sale of the Fosterweld
facility and a write-down of $900,000 for a Houston, Texas property currently
under a sale agreement. For 1997, the Fosterweld Division had revenues of
$12,225,000 with operating profit of $1,365,000.
-7-
7. EARNINGS PER COMMON SHARE
- ----------------------------
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" (SFAS No. 128). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and certain
convertible securities. Diluted earnings per share uses the average market
prices during the period in calculating the dilutive effect of options under the
treasury stock method.
The following table sets forth the computation of basic and diluted net income
per common share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------- -----------------
1998 1997 1998 1997
======= ======= ======= =======
Numerator:
Numerator for basic and diluted
net income per common share -
net income available to common
stockholders .................. $ 1,941 $ 871 $ 2,647 $ 1,278
======= ======= ======= =======
Denominator:
Weighted average shares ....... 10,014 10,163 10,015 10,147
------- ------- ------- -------
Denominator for basic net income
per common share .............. 10,014 10,163 10,015 10,147
Effect of dilutive securities:
Employee stock options ........ 216 91 217 87
------- ------- ------- -------
Dilutive potential common shares 216 91 217 87
Denominator for diluted net
income per common share -
adjusted weighted average
shares and assumed conversions 10,230 10,254 10,232 10,234
======= ======= ======= =======
Basic net income per common share . $ 0.19 $ 0.08 $ 0.26 $ 0.12
======= ======= ======= =======
Diluted net income per common share $ 0.19 $ 0.08 $ 0.26 $ 0.12
======= ======= ======= =======
8. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with increasingly stringent
environmental regulations may have an adverse effect on the Company's future
earnings. In the opinion of management, compliance with the present
environmental protection laws will not have a material adverse effect on the
financial condition, competitive position, or capital expenditures of the
Company.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amounts of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company.
At June 30, 1998, the Company had outstanding letters of credit of approximately
$2,902,000.
-8-
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------- -------
(Dollars in thousands)
Net Sales:
Rail Products ............ $ 29,419 $ 25,603 $ 56,991 $ 49,149
Construction Products .... 13,167 13,985 25,178 33,183
Tubular Products ......... 16,264 14,128 26,022 25,878
Other .................... 26 26
--------- --------- --------- ---------
Total Net Sales ........ 58,876 53,716 108,217 108,210
========= ========= ========= =========
Gross Profit:
Rail Products ............ 4,227 3,661 8,198 6,294
Construction Products .... 2,837 2,474 5,316 4,844
Tubular Products ......... 2,070 1,484 2,929 2,848
Other .................... (211) (92) (426) (92)
--------- --------- --------- ---------
Total Gross Profit ..... 8,923 7,527 16,017 13,894
--------- --------- --------- ---------
Expenses:
Selling and Administrative
Expenses ............... 6,278 5,624 11,934 10,859
Interest Expense ......... 479 646 1,069 1,181
Other (Income) Expense ... (1,070) (24) (1,403) (107)
--------- --------- --------- ---------
Total Expenses ......... 5,687 6,246 11,600 11,933
--------- --------- --------- ---------
Income Before Income Taxes . 3,236 1,281 4,417 1,961
Income Tax Expense ......... 1,295 410 1,770 683
--------- --------- --------- ---------
Net Income ................. $ 1,941 $ 871 $ 2,647 $ 1,278
========= ========= ========= =========
Gross Profit %:
Rail Products 14% 14% 14% 13%
Construction Products 22% 18% 21% 15%
Tubular Products 13% 11% 11% 11%
Total Gross Profit % 15% 14% 15% 13%
== == == ==
-9-
SECOND QUARTER 1998 RESULTS OF OPERATIONS
- -----------------------------------------
Net income for the 1998 second quarter was $1.9 million or $0.19 per share on
net sales of $58.9 million. This compares to a 1997 second quarter net income of
$0.9 million or $0.08 per share on net sales of $53.7 million.
Rail products' 1998 second quarter net sales were $29.4 million or an increase
of 15% over the same period last year due primarily to higher shipments of new
industrial rail and insulated joints. Construction products' net sales declined
6% from the year earlier quarter as the loss of sheet piling sales more than
offset the increase in bridge and highway product sales. Tubular products' sales
increased $2.1 million or 15% from the same quarter of 1997 as a result of
higher volume sales of pipe and coating services. Sales of spiralweld pipe were
unchanged at $3.0 million from the prior year period. Changes in net sales are
primarily the result of changes in volume rather than changes in prices.
The gross margin percentage for the total Company was 15% in the 1998 second
quarter or an increase of 1% from the same period last year. Rail products'
gross margin percentage in the second quarter of 1998 and 1997 was 14%. The
gross margin percentage for construction products climbed to 22% from 18% in the
year earlier quarter as a result of increased margins on piling and bridge
products. Tubular products' gross margin percentage in the second quarter of
1998 increased 2% from the same period last year as the better utilization of
the Birmingham pipe coating facility offset a weak performance at our Newport
facility.
Selling and administrative expenses increased 12% in the 1998 second quarter in
comparison to the same period last year principally due to expense generated
from the operations of new acquisitions and profit sharing accruals related to
increased profits. Interest expense decreased 26% over the year earlier quarter
because the Company was able to use the cash received from the sale of it's
Fosterweld facility to pay down the revolving bank loan. Other income included a
gain of $1.7 million for the sale of the Fosterweld facility and a write-down of
$0.9 million for a Houston, Texas property currently under a sale agreement. The
provision for income taxes was recorded at 40% versus 32% in 1997. A prior
period tax adjustment reduced the 1997 provision below statutory rates.
FIRST SIX MONTHS OF 1998 RESULTS OF OPERATIONS
- ----------------------------------------------
Net income for the first six months of 1998 was $2.6 million or $0.26 per share
on sales of $108.2 million. This compares to a net income of $1.3 million or
$0.12 per share for the same period last year also on net sales of $108.2
million.
Rail products' net sales in the first half of 1998 were $57.0 million compared
to $49.1 million in 1997. This 16% increase resulted from higher volume sales of
new rail, relay rail and insulated joints. Construction products' net sales
declined 24% to $25.2 million compared to 33.2 million in the first half of 1997
as the loss of sheet piling sales more than offset the increase in bridge and
highway product sales. Net sales of tubular products for the first six months of
1998 and 1997 were the same.
The gross margin percentage for the Company during the first six months of 1998
increased to 15% from 13% in the same period last year. Rail products' gross
margin percentage increased to 14% from 13% primarily due to relay rail's lower
cost of sales and more favorable plant expense variances. The gross margin
percentage for construction products increased to 21% from 15% as a result of
high demand for a limited supply of piling products. Tubular products' gross
margin percentage was 11% in both the first half of 1998 and 1997.
-10-
Selling and administrative expenses for the first six months of 1998 increased
9% from the same period of 1997. The increase was due to added expense generated
from the operations of new acquisitions. Interest expense decreased 9% as the
Company paid down it's revolving credit borrowings with funds received from the
sale of its Fosterweld facility. The provision for income taxes is recorded at
40% versus 35% in 1997. A prior period tax adjustment reduced the 1997 provision
below statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company generates internal cash flow from the sale of inventory and the
collection of accounts receivable. During the first half of 1998 the average
turnover rate for accounts receivable was lower than the same period last year
due to slower collections of certain transit contracts. The average turnover
rate for inventory was higher in 1998 than in 1997, primarily in the Fabricated
Products Division. Working capital at June 30, 1998 was $65.3 million compared
to $60.1 million at December 31, 1997.
Year to date, the Company had total capital expenditures of $1.0 million. In
addition, the Company repurchased $0.7 million of its common stock in accordance
with the Company's previously announced buy-back program. Since inception of
this program, the Company has repurchased 210,384 shares of the 500,000 shares
authorized. Capital expenditures in 1998 are expected to be consistent with 1997
and are anticipated to be funded by cash flows from operations.
Total revolving credit agreement borrowings at June 30, 1998 were $14.4 million,
or a decrease of $18.7 million from the end of the prior year. The Company
borrowed $2.0 million through an industrial revenue bond to finance part of the
Precise Fabricating Corporation acquisition. Outstanding letters of credit at
June 30, 1998 were $2.9 million. At June 30, 1998 the Company had $27.7 million
in unused borrowing commitment. Management believes its internal and external
sources of funds are adequate to meet anticipated needs.
On August 13, 1998 the Company entered into a senior secured revolving credit
facility for $45,000,000 with its banks. The amended agreement replaces the
November, 1995 revolving credit agreement that had a maturity date of July,
1999.
The interest rate is, at the Company's option, based on the prime rate, the
domestic certificate of deposit rate (CD rate) or the Euro-bank rate. The
interest rates are adjusted quarterly based on the ratio of total indebtedness
to EBITDA as defined in the agreement. The ranges are prime to prime plus
0.125%, the CD rate plus 0.35% to the CD rate plus 1.375%, and the Euro-bank
rate plus 0.35% to the Euro-bank rate plus 1.375%. Borrowings under the
agreement, which expires July 31, 2002, are secured by accounts receivable and
inventory.
The agreement includes financial covenants requiring a minimum net worth, a
fixed charge coverage ratio, and a maximum ratio of total indebtedness to
EBITDA.
-11-
OTHER MATTERS
- -------------
The Company owns 13% of the Dakota, Minnesota & Eastern Railroad Corporation
(DM&E), a privately held, regional railroad which operates over 1,100 miles of
track in five states. The Company's investment in the stock is recorded in the
Company's accounts at its historical cost of $1.7 million, comprised of $0.2
million of common stock and $1.5 million of the DM&E's Series B Preferred Stock
and warrants. Although this investment's market value is not readily
determinable, management believes that this investment, without taking into
account the DM&E's proposed Powder River Basin project discussed below, would be
worth significantly more than its historical cost.
The DM&E announced in June 1997 that it plans to build an extension from the
DM&E's existing line into the low sulfur coal market of the Powder River Basin
in Wyoming and to rebuild approximately 600 miles of existing track (the
"Project"). The DM&E has also announced that the estimated cost of this project
is $1.4 billion. The Project is subject to approval by the Surface
Transportation Board.
In February 1998, the DM&E filed its application with the Surface Transportation
Board seeking authority to construct approximately 280 miles of new railroad
line. The DM&E has indicated that this new railroad line could be available to
carry Power River Basin coal within two years after regulatory approval is
obtained.
Morgan Stanley & Co., Inc., has been retained by the DM&E to assist in
identifying strategic partners or potential acquirers of all or a portion of the
equity of the DM&E. The DM&E has stated that the DM&E could repay project debt
and cover its operating costs if it captures a 5% market share in the Powder
River Basin. If the Project proves to be viable, management believes that the
value of the Company's investment in the DM&E could increase dramatically.
In May of 1998, with the approval of its shareholders, the Company
reincorporated from Delaware to Pennsylvania. The principal reason for
reincorporating the Company in Pennsylvania is to eliminate the Company's
liability of approximately $50,000 per year under the Delaware franchise tax.
Pennsylvania corporations that have a class of stock registered under the
Securities Exchange Act of 1934 are automatically subject to certain
antitakeover provisions of the Pennsylvania Business Corporation Law of 1988, as
amended, unless the articles of incorporation provide that those provisions
shall not apply to the corporation. The Company has opted out of those
antitakeover provisions by having its articles of incorporation expressly state
that they shall not apply to the corporation.
In June of 1998, the Company sold to Northwest Pipe Company of Portland, Oregon,
the plant, equipment, inventory, leasehold and contract rights and miscellaneous
assets related to its spiralweld pipe manufacturing facility in Wood County,
West Virginia. The purchase price for the plant, buildings, equipment, leasehold
and contract rights and miscellaneous assets was $5.3 million and inventory net
of payables of approximately $2.0 million.
Also in June of 1998, the Company received an unsolicited offer for the sale of
a Houston, Texas property. This property is currently under a sales agreement
and the Company has accrued $0.9 million for the loss on the sale. Management
expects this transaction to be completed in 1998.
In July of 1998, the Company announced the signing of a letter of intent to
purchase the Geotechnical Division of VSL Corporation for approximately $3.0
-12-
million. The Geotechnical Division is a leading designer and supplier of
mechanically-stabilized earth wall systems with its patented Retained Earth
System. Management believes the closing will take place in August of 1998.
Also in July of 1998, the Company purchased the assets of Southdale Integrated
Systems, of Burlington, Ontario. The Company intends to utilize these assets to
enter the business of supplying signaling and communication devices primarily to
railroads.
Management continues to evaluate the overall performance of certain operations.
A decision to terminate an existing operation could have a material adverse
effect on near-term earnings but would not be expected to have a material
adverse effect on the financial condition of the Company.
YEAR 2000 IMPACT ON COMPUTER SYSTEMS
- ------------------------------------
Because many existing computer programs have been programmed to use a two digit
number to represent the year (e.g., "98" for "1998"), the Company has analyzed
its computer software systems to ensure that they are capable of correctly
identifying the year "2000" and beyond in all computer transactions. The Company
understands the seriousness of this issue and its Board of Directors has
requested an update of the Company's year 2000 compliance at each Board Meeting.
The Company completed the installation of new integrated accounting and
distribution software licensed from a national vendor in 1992 and has
periodically installed updated releases of the software to take advantage of
technological advances and improvements over prior releases in the ordinary
course of business. The current releases of this vendor's software are year 2000
compliant. The Company installed the year 2000 compliant release including
modifications unrelated to the year 2000 issue to suit the Company's business in
May 1998. The Company expects to complete the testing of these modifications and
to place these systems in production in 1998. Management believes that this
schedule is achievable and does not anticipate any adverse impact in becoming
year 2000 compliant. The costs associated with the installation of the year 2000
compliant release are considered by Management to be in the ordinary course of
business and are not material to its financial results.
In addition, the Company has conducted a review of its production equipment and
has determined that it is year 2000 compliant. The Company has also surveyed key
vendors and suppliers to determine the extent of their year 2000 compliance
readiness and planned action to become year 2000 compliant.
The Company has minimal direct or indirect computer data transfers with outside
customers, vendors, and suppliers other than major banks, whose year 2000
compliance efforts are well underway. Based on this fact as well as internal
assessments, and formal and informal communications with customers, vendors, and
suppliers, the Company presently believes that the year 2000 compliance issue
should not pose significant operating problems or have a material impact on the
Company's consolidated financial position, results of operations or cash flow. A
failure of third party vendors or suppliers to be year 2000 compliant could
affect these beliefs and is not quantifiable.
OUTLOOK
- -------
The Company has not had a domestic sheet piling supplier since March 1997.
Revenues from piling products have declined and will continue to be at reduced
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levels as the Company's remaining piling inventory is liquidated. The Company,
however, will become Chaparral Steel's exclusive domestic distributor of steel
sheet piling when Chaparral Steel's manufacturing facility, being constructed in
Richmond, Virginia, begins operations in 1999.
The rail segment of the business depends on one source for fulfilling certain
trackwork contracts. The Company has provided $9.0 million of working capital to
this supplier in the form of loans and progress payments. Under certain events,
the Company has the right to acquire the controlling interest in this company.
If, for any reason, this supplier is unable to perform, the Company could
experience a short-term negative effect on earnings and liquidity.
During 1995, the Company entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on a portion of its revolving credit
borrowings. The LIBOR interest rate on the $10.0 million swap agreement, which
expires June 1999, is 6.142%. The Company believes that the credit and market
risks associated with this agreement are not material. Any additional interest
expense incurred under the agreement is accrued and paid quarterly.
The Company's operations are, in part, dependent on governmental funding of
infrastructure projects. Significant changes in the level of government funding
of these projects could have a favorable or unfavorable impact on the operating
results of the Company. Additionally, governmental actions concerning taxation,
tariffs, the environment or other matters could impact the operating results of
the Company. The Company is also dependent on the availability of rail cars and
weld trains to ship its products. The Company has experienced delays in certain
projects due to the lack of availability of rail cars. The current merger
activities in the railroads have exacerbated this problem. The Company can
provide no assurances that a solution to the problem will occur in the
near-term. The Company's operating results may also be affected by adverse
weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at June 30, 1998, was approximately $84.1 million. The
following table provides the backlog by business segment.
Backlog
June 30, December 31,
1998 1997 1997
-------- -------- --------
Rail Products ........ $51,155 $36,099 $51,584
Construction Products 25,115 20,451 23,284
Tubular Products ..... 7,834 7,519 1,660
Other ................ 34
------- ------- -------
Total Backlog $84,138 $64,069 $76,528
======= ======= =======
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
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independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, an inability to obtain financing
for the Project, competitor's response to the Project, market demand for coal or
electricity and changes in environmental laws and regulations. The Company
wishes to caution readers that various factors could cause the actual results of
the Company to differ materially from those indicated by forward-looking
statements made from time to time in news releases, reports, proxy statements,
registration statements and other written communications (including the
preceding sections of this Management's Discussion and Analysis), as well as
oral statements made from time to time by representatives of the Company. Except
for historical information, matters discussed in such oral and written
communications are forward-looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
availability of material from major suppliers, the impact of competition, the
seasonality of the Company's business, taxes, inflation and governmental
regulations.
PART II OTHER INFORMATION
-------------------------
Item 1. LEGAL PROCEEDINGS
- -------------------------
See Note 8, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
- --------------------------------------------
At the Company's annual meeting on May 14, 1998, the following individuals were
elected to the Board of Directors:
For Withheld
Name Election Authority
------------------------------------------------------------
L. B. Foster II 9,337,616 133,479
J. W. Puth 9,346,294 124,801
W. H. Rackoff 9,357,144 113,951
R. L. Shaw 9,357,244 113,851
J. W. Wilcock 9,356,553 114,542
Additionally, the shareholders voted to approve Ernst & Young, LLP as the
Company's independent auditors for the fiscal year ended December 31, 1998. The
following table sets forth the results of the vote for independent auditors:
Against
For Approval Approval Abstained
-------------------------------------------------------------
9,402,798 26,021 42,276
-15-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a) EXHIBITS
-----------
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation as amended to date, filed as
Appendix B to the Company's April 17, 1998 Proxy Statement.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3B
to Form 8-K on May 21, 1997.
4.0 Rights Agreement, dated as of May 15, 1997, between L.B. Foster
Company and American Stock Transfer & Trust Company, including the
form of Rights Certificate and the Summary of Rights attached
thereto, filed as Exhibit 4A to Form 8-A dated May 23, 1997.
* 4.0.1 Amended Rights Agreement dated as of May 14, 1998, between L. B.
Foster Company and American Stock Transfer & Trust Company.
4.1 Amended and Restated Loan Agreement by and among the Registrant
and Mellon Bank, N.A., NBD Bank, and Corestates Bank, N.A. dated
as of November 1, 1995 and filed as Exhibit 4.1 to Form 10-K for
the year ended December 31, 1995.
4.1.1 First Amendment to Amended and Restated Loan Agreement dated
January 1, 1996, and filed as Exhibit 4.1.1 to Form 10-K for the
year ended December 31, 1997.
4.1.2 Second Amendment to Amended and Restated Loan Agreement dated
December 31, 1996, and filed as Exhibit 4.1.2 to Form 10-K for the
year ended December 31, 1997.
4.1.3 Third Amendment to Amended and Restated Loan Agreement dated April
9, 1997, and filed as Exhibit 4.1.3 to Form 10-K for the year
ended December 31, 1997.
4.1.4 Fourth Amendment to Amended and Restated Loan Agreement dated
November 12, 1997, and filed as Exhibit 4.1.4 to Form 10-K for the
year ended December 31, 1997.
10.15 Lease between the Registrant and Amax, Inc. for manufacturing
facility at Parkersburg, West Virginia, dated as of October 19,
1978, filed as Exhibit 10.15 to Registration Statement No.
2-72051.
10.16 Lease between Registrant and Greentree Building Associates for
Headquarters office, dated as of June 9, 1986, as amended to date,
filed as Exhibit 10.16 to Form 10-K for the year ended December
31, 1988.
10.16.1 Amendment dated June 19, 1990 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.1 to Form
10-Q for the quarter ended June 30, 1990.
10.16.2 Amendment dated May 29, 1997 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.2 to Form
10-Q for the quarter ended June 30, 1997.
10.19 Lease between the Registrant and American Cast Iron Pipe Company
-16-
for Pipe-Coating facility in Birmingham, Alabama dated December
11, 1991, filed as Exhibit 10.19 to Form 10-K for the year ended
December 31, 1991.
10.19.1 Amendment to Lease between the Registrant and American Cast Iron
Pipe Company for Pipe-Coating facility in Birmingham, Alabama
dated April 15, 1997, filed as Exhibit 10.19.1 to Form 10-Q for
the quarter ended March 31, 1997.
10.20 Asset Purchase Agreement, dated June 5, 1998, by and among the
Registrant and Northwest Pipe Company, filed as Exhibit 10.0 to
Form 8-K on June 18, 1998.
10.33.2 Amended and Restated 1985 Long Term Incentive Plan, as amended and
restated February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q
for the quarter ended June 30, 1997. **
10.45 Medical Reimbursement Plan, filed as Exhibit 10.45 to Form 10-K
for the year ended December 31, 1992. **
10.46 Leased Vehicle Plan, as amended to date, filed as Exhibit 10.46
to Form 10-K for the year ended December 31, 1997. **
10.49 Lease agreement between Newport Steel Corporation and Registrant
dated as of October 12, 1994 and filed as Exhibit 10.49 to Form
10-Q for the quarter ended September 30, 1994.
10.49.1 Amendment to lease between Registrant and Newport Steel
Corporation dated March 13, 1998 and filed as Exhibit 10.49.1 to
Form 10-K for the year ended December 31, 1997.
10.50 L.B. Foster Company 1998 Incentive Compensation Plan, filed as
Exhibit 10.50 to Form 10-K for the year ended December 31, 1997.
**
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 1994. **
19 Exhibits marked with an asterisk are filed herewith.
* 27 Financial Data Schedule
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
-----------------------
On May 21, 1998, the Registrant filed a Current Report on Form 8-K announcing
the reincorporation of the Company from Delaware to Pennsylvania effective May
14, 1998.
On June 18, 1998, the Registrant filed a Current Report on Form 8-K and an
Amended Current Report on Form 8-K/A announcing that L. B. Foster Company sold
its spiralweld pipe manufacturing facility to Northwest Pipe Company.
On June 24, 1998, the Registrant filed an Amended Current Report on Form 8-K/A,
amending the Current Report filed on Form 8-K on June 18, 1998. The Amended
Current Report provides pro forma financial information.
17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L.B. FOSTER COMPANY
-------------------
(Registrant)
Date: August 14, 1998 By /s/ Roger F. Nejes
---------------- ---------------------
Roger F. Nejes
Sr. Vice President-
Finance and Administration
& Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer
of Registrant)
18
AMENDMENT DATED AS OF
MAY 14, 1998
TO
RIGHTS AGREEMENT DATED
AS OF MAY 15, 1997 BETWEEN
L.B. FOSTER COMPANY (A
DELAWARE CORPORATION) AND
AMERICAN STOCK TRANSFER &
TRUST COMPANY, AS RIGHTS AGENT
-------------------------------------------------
Whereas, as of May 15, 1997 L.B. Foster Company, a Delaware corporation
("L.B. Foster- DE"), and American Stock Transfer & Trust Company, a New York
corporation ("Rights Agent"), entered into a Rights Agreement ("Rights
Agreement") setting forth the terms of certain Rights ("Rights") to be issued by
L.B. Foster-DE to purchase shares of Class A Common Stock, par value $.01 per
share, of L.B. Foster-DE; and
Whereas, by action of the board of directors of L.B. Foster-DE on May
15, 1997, a dividend distribution of one Right for each share of Class A Common
Stock outstanding on May 21, 1997 was made, and the board further authorized the
issuance of one Right for each share of Class A Common Stock issued between May
21, 1997 and the Distribution Date (as defined in the Rights Agreement), each
Right, when exercisable, entitling the registered holder thereof to purchase one
share of Class A Common Stock from L.B. Foster-DE for $30, subject to
adjustment; and
Whereas, at the close of business on May 14, 1998, L.B. Foster-DE was
merged ("Merger") into L.B. Foster Company, a Pennsylvania corporation ("L.B.
Foster-PA"), pursuant to a Plan of Merger whereby L.B. Foster-PA succeeded to
all the property, rights and obligations of L.B. Foster- DE, L.B. Foster-DE
ceased to exist as a Delaware corporation, and each outstanding share of Class A
Common Stock of L.B. Foster-DE (including shares held in the treasury) became
and was converted into one validly issued, fully paid and non-assessable share
of common stock, $.01 par value, of L.B. Foster-PA; and
Whereas, L.B. Foster-PA and the Rights Agent wish to amend the Rights
Agreement to reflect and confirm that L.B. Foster-PA has succeeded to all of the
rights and obligations of L.B. Foster-DE thereunder and to reflect and confirm
certain conforming changes therein.
Now, therefore, L.B. Foster-PA and the Rights Agent, intending to be
legally bound, agree as follows:
1. As of the time of the Merger, L.B. Foster-PA succeeded to all the
rights and obligations of L.B. Foster-DE under the Rights Agreement, and L.B.
Foster-PA replaced, and hereby does replace, L.B. Foster-DE as the "Company"
under the Rights Agreement.
2. As of the time of the Merger, each Right theretofore issued by L.B.
Foster-DE, and which attached to a share of Class A Common Stock of L.B.
Foster-DE, became, and hereby does become, a Right, when exercisable, to
purchase from L.B. Foster-PA one share of common stock of L.B. Foster-PA for
$30, subject to adjustment as provided in the Rights Agreement, such Right being
attached to the share of common stock of L.B. Foster-PA into which such share of
Class A Common Stock of L.B. Foster-DE has been converted.
3. As of the time of the Merger, all references in the Rights Agreement
to "Common Stock" became, and hereby do become, references to the common stock,
$.01 par value per share, of L.B. Foster-PA, and all references to other
securities of L.B. Foster-DE became, and hereby do become, references to other
securities of L.B. Foster-PA.
4. One Right (as such number may be adjusted pursuant to Section 11(p)
of the Rights Agreement) to purchase a share of common stock of L.B. Foster-PA
for $30, when exercisable and subject to adjustment as provided in the Rights
Agreement, shall be issued for and attach to each share of common stock of L.B.
Foster-PA issued after the time of the Merger, whether an originally- issued
share or a share delivered from the treasury to which a Right had not previously
attached, all in accordance with Section 3 of the Rights Agreement as hereby
amended.
5. Section 32 of the Rights Agreement is hereby amended
by substituting "Commonwealth of Pennsylvania" for "State of Delaware."
6. Except as amended herein, the Rights Agreement and all of its terms
and provisions shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
L.B. FOSTER COMPANY
By: /s/ David L. Voltz
----------------------
Name: David L. Voltz
Title: Vice President
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Rights Agent
By: /s/ Herbert Lemmer
----------------------
Name: Herbert Lemmer
Title: Vice President