UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITES EXCHANGE ACT OF 1934 (No Fee Required) For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the Transition Period from __________ to __________ Commission File Number 0-10436 L. B. FOSTER COMPANY (Exact name of registrant as specified in its charter) Delaware 25-1324733 (State of Incorporation) (I.R.S. Employer Identification No.) 415 Holiday Drive, Pittsburgh, Pennsylvania 15220 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 928-3400 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, Par Value $.01 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value on March 18, 1998 of the voting stock held by nonaffiliates of the Company was $54,063,818. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding at March 18, 1998 Class A Common Stock, Par Value $.01 9,999,801 Shares Documents Incorporated by Reference: Portions of the Proxy Statement prepared for the 1997 annual meeting of stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part III. PAGE 1
PART I ITEM 1. BUSINESS Summary Description of Businesses L. B. Foster Company is engaged in the manufacture, fabrication and distribution of rail and trackwork, piling, highway products and tubular products. As used herein, "Foster" or the "Company" means L. B. Foster Company and its divisions and subsidiaries, unless the context otherwise requires. For rail markets, Foster provides a full line of new and used rail, trackwork and accessories to railroads, mines and industry. The Company also designs and produces insulated rail joints, power rail, track fasteners, catenary systems, coverboards and special accessories for mass transit and other rail systems, worldwide. For the construction industry, the Company sells and rents steel sheet piling and H-bearing pile for foundation and earth retention requirements. In addition, Foster supplies bridge decking, expansion joints, overhead sign structures and other products for highway construction and repair. For tubular markets, the Company supplies pipe and pipe coatings for pipelines and utilities. The Company produces pipe-related products for special markets, including water wells and irrigation. The Company classifies its activities into three business segments: rail products, construction products and tubular products. Financial information concerning the segments is set forth in Note 20 to the financial statements included in the Company's Annual Report to Stockholders for 1997. The following table shows for the last three fiscal years the net sales generated by each of the current business segments as a percentage of total net sales. <TABLE> <CAPTION> Percentage of Net Sales 1997 1996 1995 - --------------------------------------------------------- <S> <C> <C> <C> Rail Products 51% 46% 42% Construction Products 25% 32% 34% Tubular Products 24% 22% 24% - --------------------------------------------------------- 100% 100% 100% </TABLE> PAGE 2
RAIL PRODUCTS L. B. Foster Company's rail products include heavy and light rail, relay rail, insulated rail joints, rail accessories, and transit products. The Company is a major rail products supplier to industrial plants, contractors, railroads, mines and mass transit systems. The Company sells heavy rail mainly to transit authorities, industrial companies, and rail contractors for railroad sidings, plant trackage, and other carrier and material handling applications. Additionally, the Company makes some sales of heavy rail to railroad companies and to foreign buyers. The Company sells light rail for mining and material handling applications. Rail accessories include trackwork, ties, track spikes, bolts, angle bars and other products required to install or maintain rail lines. These products are sold to railroads, rail contractors and industrial customers and are manufactured within the company or purchased from other manufacturers. The Company's Allegheny Rail Products (ARP) division engineers and markets insulated rail joints and related accessories for the railroad and mass transit industries, worldwide. Insulated joints are made in-house and subcontracted. The Company's Transit Products Division supplies power rail, direct fixation fasteners, catenary systems, coverboards and special accessories primarily for mass transit systems. Most of these products are manufactured by subcontractors and are usually sold by sealed bid to transit authorities or to rail contractors, worldwide. The Company's Mining Division sells new and used rail, rail accessories, trackwork from the Pomeroy, Ohio plant and iron clad ties from the Watson-Haas Lumber Division in St. Mary's, West Virginia. The Pomeroy, Ohio plant also produces trackwork for industrial and export markets. CONSTRUCTION PRODUCTS L. B. Foster Company's construction products consist of sheet and bearing piling and fabricated highway products. Sheet piling products are interlocking structural steel sections that are generally used to provide lateral support at construction sites. Bearing piling products are steel H-beam sections which, in their principal use, are driven into the ground for support of structures such as bridge piers and high-rise buildings. Sheet piling is sold or leased and bearing piling is sold principally to contractors and construction companies. Other construction products consist of fabricated highway products. Fabricated highway products consist principally of bridge decking, aluminum bridge rail, overhead sign structures and other bridge products, which are fabricated by the Company. The major purchasers of these products are contractors for state, municipal and other governmental projects. Sales of the Company's construction products are partly dependent upon the level of activity in the construction industry. Accordingly, sales of these products have traditionally been somewhat higher during the second and third quarters than during the first and fourth quarters of each year. TUBULAR PRODUCTS L. B. Foster Company is a distributor of coated pipe. Coated line pipe is used for oil and gas transmission and for refinery, petrochemical plant and power plant construction, as well as water transmission. The Company, with the exception of Fosterweld pipe, generally purchases the pipe it sells from pipe manufacturers. PAGE 3
The Company adds value to purchased tubular products by preparing them to meet customer specifications using various fabricating processes, including the finishing of oil country tubular goods and the welding, coating, wrapping and lining of other pipe products. The Company provides fusion bond and other coatings for corrosion protection on oil, gas and other pipelines. The Company also supplies special pipe products such as water well casing, column pipe, couplings, and related products for agricultural, municipal and industrial water wells. MARKETING AND COMPETITION L. B. Foster Company generally markets its rail, construction and tubular products directly in all major industrial areas of the United States through a national sales force of 47 salespeople. The Company maintains 9 sales offices and 15 plants or warehouses nationwide. During 1997, approximately 3% of the Company's total sales were for export. The major markets for the Company's products are highly competitive. Product availability, quality, service and price are principal factors of competition within each of these markets. No other company provides the same product mix to the various markets the Company serves. There are one or more companies that compete with the Company in each product line. Therefore, the Company faces significant competition from different groups of companies. RAW MATERIALS AND SUPPLIES Most of the Company's inventory is purchased in the form of finished or semifinished product. With the exception of relay rail which is purchased from railroads or rail take-up contractors, the Company purchases most of its inventory from domestic and foreign steel producers. There are few domestic suppliers of new rail products and the Company could be adversely affected if a domestic supplier ceased making such material available to the Company. Additionally, the Company has not had a domestic sheet piling supplier since March 1997. See Note 18 to the consolidated financial statements for additional information on this matter. The Company's purchases from foreign suppliers are subject to the usual risks associated with changes in international conditions and to United States laws which could impose import restrictions on selected classes of products and antidumping duties if products are sold in the United States below certain prices. BACKLOG The dollar amount of firm, unfilled customer orders at December 31, 1997 and 1996 by segment follows: <TABLE> <CAPTION> (in thousands) December 31, 1997 December 31, 1996 - -------------------------------------------------------------- <S> <C> <C> Rail Products $51,584 $36,100 Construction Products 23,284 28,080 Tubular Products 3,955 11,328 - -------------------------------------------------------------- $78,823 $75,508 - -------------------------------------------------------------- </TABLE> Approximately 95% of the December 31, 1997 backlog is expected to be shipped in 1998. PAGE 4
RESEARCH AND DEVELOPMENT The Company's expenditures for research and development are negligible. ENVIRONMENTAL DISCLOSURES While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly for future remediation and other compliance efforts, in the opinion of management compliance with environmental protection laws will not have a material adverse effect on the financial condition, competitive position, or capital expenditures of the Company. However, the Company's efforts to comply with increasingly stringent environmental regulations may have an adverse effect on the Company's future earnings. EMPLOYEES AND EMPLOYEE RELATIONS The Company has 563 employees, of whom 310 are hourly production workers and 253 are salaried employees. Approximately 108 of the hourly paid employees are represented by unions. The Company has not suffered any major work stoppages during the past five years and considers its relations with its employees to be satisfactory. Substantially all of the Company's hourly paid employees are covered by one of the Company's noncontributory, defined benefit plans and a defined contribution plan. Substantially all of the Company's salaried employees are covered by a defined contribution plan established by the Company. PAGE 5
ITEM 2. PROPERTIES The location and general description of the principal properties which are owned or leased by L. B. Foster Company, together with the segment of the Company's business using the properties, are set forth in the following table: <TABLE> <CAPTION> Business Lease Location Function Acres Segment Expires - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> Birmingham, Alabama Pipe coating. 32 Tubular 2002 Doraville, Georgia Fabrication of 28 Tubular, Owned components for Rail and highways. Construction Yard storage. Newport, Kentucky Pipe coating. 20 Tubular 1999 Niles, Ohio Rail fabrication. 35 Rail Owned Yard storage. Pomeroy, Ohio Trackwork manufac- 5 Rail Owned turing. Houston, Texas Casing, upset tub- 127 Tubular, Owned ing, threading, Rail and heat treating and Construction painting. Yard storage. Bedford, Bridge component 10 Construction Owned Pennsylvania fabricating plant. Pittsburgh, Corporate Head- - Corporate 2007 Pennsylvania quarters. Parkersburg, Fosterweld pipe 93 Tubular 1998 West Virginia manufacturing. Pipe coating and wrapping. Yard storage. Georgetown, Bridge component 11 Construction Owned Massachusetts fabricating plant. </TABLE> Including the properties listed above, the Company has 9 sales offices and 15 warehouse, plant and yard facilities located throughout the country. The Company's facilities are in good condition and the Company believes that its production facilities are adequate for its present and foreseeable requirements. PAGE 6
ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MATTERS Stock Market Information - ------------------------ The Company had 1,156 common shareholders of record on January 30, 1998. Common stock prices are quoted daily through the National Association of Security Dealers, Inc. in its over-the-counter NASDAQ quotation service (Symbol FSTRA). The quarterly high and low bid price quotations for common shares (which represent prices between broker-dealers and do not include markup, markdown or commission and may not necessarily represent actual transactions) follow: <TABLE> <CAPTION> 1997 1996 Quarter High Low High Low - ---------------------------------------------------------------------- <S> <C> <C> <C> <C> First $ 4 1/8 $ 3 11/16 $ 4 3/8 $ 3 3/8 - ---------------------------------------------------------------------- Second 5 3 1/4 4 1/8 3 1/2 - ---------------------------------------------------------------------- Third 5 7/8 4 1/2 4 1/4 3 5/8 - ---------------------------------------------------------------------- Fourth 6 4 7/8 4 1/8 3 5/8 - ---------------------------------------------------------------------- </TABLE> Dividends - --------- No cash dividends were paid on the Company's Common stock during 1997 and 1996. Cash dividends on the Company's Common stock are restricted under the terms of the Company's Revolving Credit Agreement (see Note 8 to consolidated financial statements). PAGE 7
ITEM 6. SELECTED FINANCIAL DATA (All amounts are in thousands except per share data) <TABLE> <CAPTION> Year Ended December 31, Income Statement Data 1997(1) 1996 1995(2) 1994 1993(3) - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales $220,343 $243,071 $264,985 $234,262 $212,291 - ---------------------------------------------------------------------------- Operating profit 7,164 8,195 6,769 6,184 3,103 - ---------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 3,287 3,858 5,043 5,440 899 - ---------------------------------------------------------------------------- Net income 3,287 3,858 4,824 5,440 1,569 - ---------------------------------------------------------------------------- Basic earnings per common share before cumulative effect of change in accounting principle 0.32 0.39 0.51 0.55 0.09 - ---------------------------------------------------------------------------- Basic earnings per common share 0.32 0.39 0.49 0.55 0.16 - ---------------------------------------------------------------------------- Diluted earnings per common share before cumulative effect of change in accounting principle 0.32 0.38 0.50 0.55 0.09 - ---------------------------------------------------------------------------- Diluted earnings per common share 0.32 0.38 0.48 0.55 0.16 - ---------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> December 31, Balance Sheet Data 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total assets $ 126,969 $ 123,004 $ 124,423 $ 122,585 $ 108,137 - ---------------------------------------------------------------------------- Working capital 60,077 62,675 57,859 52,519 49,755 - ---------------------------------------------------------------------------- Long-term debt 17,530 21,816 25,034 22,377 25,584 - ---------------------------------------------------------------------------- Stockholders' equity 70,508 67,181 63,173 58,319 52,879 - ---------------------------------------------------------------------------- </TABLE> (1) In 1997, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 128, "Earnings Per Share". As required, all earnings per share amounts, where necessary, have been restated. (2) Effective January 1, 1995, the Company adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The effect of the adoption was to decrease net income by $219,000 or $0.02 per share. (3) Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." The effect of the adoption was to increase net income by $670,000 or $0.07 per share. PAGE 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended TwelveMonths Ended December 31, December 31, 1997 1996 1997 1996 1995 - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net Sales: Rail Products $ 32,883 $ 34,184 $112,685 $111,780 $111,582 Construction Products 10,745 19,352 55,909 77,954 88,735 Tubular Products 11,570 10,949 51,749 53,337 64,668 - ---------------------------------------------------------------------------- Total Net Sales $ 55,198 $ 64,485 $220,343 $243,071 $264,985 - ---------------------------------------------------------------------------- Gross Profit: Rail Products $ 4,367 $ 4,679 $ 14,678 $ 15,770 $ 14,507 Construction Products 2,211 2,420 9,538 10,360 9,780 Tubular Products 794 857 5,426 4,830 4,928 Other (288) (565) - ---------------------------------------------------------------------------- Total Gross Profit 7,084 7,956 29,077 30,960 29,215 - ---------------------------------------------------------------------------- Expenses: Selling and Admin- istrative Expenses 5,431 5,795 21,913 22,765 22,446 Interest Expense 650 584 2,495 2,365 2,840 Other (Income) Expense (161) (38) (475) (600) (777) - ---------------------------------------------------------------------------- Total Expenses 5,920 6,341 23,933 24,530 24,509 - ---------------------------------------------------------------------------- Income Before Income Taxes 1,164 1,615 5,144 6,430 4,706 Income Tax Expense (Benefit) 367 650 1,857 2,572 (337) - ---------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Principle 797 965 3,287 3,858 5,043 Cumulative Effect of Change in Accounting Principle (219) - ---------------------------------------------------------------------------- Net Income $ 797 $ 965 $ 3,287 $ 3,858 $ 4,824 - ---------------------------------------------------------------------------- Gross Profit %: Rail Products 13.3% 13.7% 13.0% 14.1% 13.0% Construction Products 20.6% 12.5% 17.1% 13.3% 11.0% Tubular Products 6.9% 7.8% 10.5% 9.1% 7.6% Total Gross Profit % 12.8% 12.3% 13.2% 12.7% 11.0% - ---------------------------------------------------------------------------- </TABLE> Fourth Quarter of 1997 vs. Fourth Quarter of 1996 - ------------------------------------------------- The net income for the current quarter was $0.8 million or $0.08 per share. This compares to a 1996 fourth quarter net income of $1.0 million or $0.10 per share. Net sales in 1997 were $55.2 million or 14% lower than the comparable quarter last year. Rail products' net sales of $32.9 million decreased 4% from the 1996 fourth quarter, primarily due to lack of rail car availability. Construction products' net sales in the 1997 fourth quarter decreased 44% from the year earlier quarter. This decline was due primarily to the loss of the Company's sheet piling supplier. Tubular products' net sales increased 6% over last year's fourth quarter. PAGE 9
Changes in net sales are primarily the result of changes in volume rather than changes in pricing. The gross margin percentage for the total Company increased to 13% in the 1997 fourth quarter compared to 12% from the same period last year. The gross margin percentage for the rail products segment decreased from 14% to 13% primarily due to the increase in LIFO cost. Construction products' gross margin percentage increased to 21% as a result of the limited supply of sheet piling since the Company's primary supplier ceased operations in March of 1997. The gross margin percentage for tubular products decreased to 7% from 8% primarily as a result of lower margins on Fosterweld products in the fourth quarter of 1997, due to a change in product mix. Selling and administrative expenses decreased 6% from the same period last year as a result of cost reductions. Interest expense increased 11% as a result of higher borrowing costs associated with the acquisitions made during 1997. The income tax rate for the quarter reflects the year to date impact of the effective rate as discussed in the year comparison section below. The Year 1997 Compared to the Year 1996 - --------------------------------------- The net income for 1997 was $3.3 million or $0.32 per share. This compares to 1996 net income of $3.9 million or $0.39 per share. Rail products' 1997 sales were unchanged from 1996. Construction products' net sales decreased 28% in 1997 due primarily to the loss of the Company's sheet piling supplier. Sales of tubular products declined 3% as a result of lower coated pipe and Fosterweld spiralweld pipe sales. Changes in net sales are primarily the result of changes in volume rather than changes in pricing. The gross profit margin percentage for the Company remained at 13% in 1997. Rail products' gross margin percentage in 1997 declined slightly to 13% from 14% in 1996. This decline is the result of increased competition in industrial and mining trackwork and transit products. The gross margin percentage for construction products in 1997 increased to 17% from 13% in 1996 as a result of a limited supply of sheet piling due to the Company's primary supplier ceasing operations in March of 1997. Tubular products' gross margin percentage increased to 10% in 1997 as a result of increased prices and improved productivity for coating products. In 1997, selling and administrative expense declined 4% principally because of a decline in incentive bonus related expenses. Interest expense increased 5% due to higher borrowings related to the acquisitions of the assets of the Monitor Group, Precise Fabricating Corporation, and Watson-Haas Lumber Company. The effective income tax rate declined to 36% from 40% due primarily to the effect of favorable adjustments to prior year tax liabilities. The Year 1996 Compared to the Year 1995 - --------------------------------------- The net income for 1996 was $3.9 million or $0.39 per share. This compares to 1995 net income of $4.8 million or $0.49 per share. The Company's pretax income was $6.4 million in 1996 versus $4.7 million in 1995. In 1996, the Company recorded an income tax provision of $2.6 million versus an income tax benefit of $0.3 million in 1995. Rail products' 1996 net sales were unchanged from 1995. Construction products' net sales decreased 12% in 1996 primarily due to the reduced availability of piling products. Sales of tubular products decreased 18% in 1996 as a result of the Company's withdrawal from the warehouse pipe market and a weakness in coating activity, which were partially offset by an increase in Fosterweld pipe sales. Changes in net sales are primarily the result of changes in volume rather than changes in pricing. The gross profit margin percentage for the Company in 1996 increased to 13% from 11% in 1995. Rail products' gross margin percentage increased slightly to 14% due primarily to the higher margins in transit products business. Construction products' gross profit percentage increased to 13% in 1996 versus 11% in 1995 as a result of higher margins on fabricated highway products and a reduction in the sale of lower margin piling products. The gross margin percentage for the tubular products segment increased slightly in 1996 to 9% from 8% in 1995. Increased expenses were incurred to overcome production problems at the Birmingham pipe coating facility and volume at the Newport plant was lower than anticipated. These costs were offset by Fosterweld's increased gross profit contributions which resulted from improved market conditions. Selling and administrative expenses for 1996 remained unchanged compared to 1995, while interest expense decreased 17% due primarily to PAGE 10
lower borrowings. Other income in 1996 included $0.4 million of interest income. Other income in 1995 included $0.3 million of interest income and a $0.2 million gain on the sale of equipment held for disposal. The income tax rate increased above the statutory rate in 1996 as a result of certain non-deductible expenses. In 1993, the Company recorded prior year net operating loss (NOL) carryforwards as assets to comply with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". In addition, the Company also established a valuation reserve to account for the possibility that all of the NOLs may not have been used. As the Company's taxable income has grown in recent years, the need for a reserve to reduce the value of NOLs was no longer necessary. During 1995 and 1994, the income tax rate was less than the statutory rate principally due to reductions in the valuation reserve. At December 31, 1996, the valuation reserve related to the potential non-recoverability of certain state NOLs was $150,000. Cash payments for income taxes were approximately $0.4 million. At the end of 1996, the Company had approximately $2.5 million in federal income tax NOLs and $1.1 million in Alternative Minimum Tax (AMT) credits. The Company expects to provide for income taxes at approximately the statutory rate in 1997, while cash flow for taxes paid is expected to remain favorable until the remaining NOLs and AMT credits are used. See Note 13 to the consolidated financial statements for additional information on income taxes. Liquidity and Capital Resources - ------------------------------- The Company generates internal cash flow from the sale of inventory and the collection of accounts receivable. During 1997, the average turnover rate for accounts receivable was higher than in 1996 due to an increase in collection rate. The average turnover rate for inventory was slightly lower in 1997 than in 1996 due to increased stockpiled sheet piling to maintain the Company's rental program through 1998. Working capital at December 31, 1997 was $60.1 million compared to $62.7 million in 1996. During 1997, the Company had capital expenditures of $2.1 million. In addition, the Company purchased the long-term assets of the Monitor Group for $2.5 million, Precise Fabricating Corporation for $3.7 million, Watson-Haas Lumber Company for $0.5 million, increased its investment in the Dakota, Minnesota & Eastern Railroad Corporation by $1.5 million, and repurchased $0.5 million of its common stock in accordance with the Company's previously announced buy-back program. Management anticipates completing this program in 1998. 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 December 31, 1997, were $33.1 million or an increase of $9.1 million from the end of the prior year primarily due to the aforementioned asset acquisitions. Outstanding letters of credit at December 31, 1997, were $0.9 million. At December 31, 1997 the Company had approximately $11.0 million in unused borrowing commitment. Management believes its internal and external sources of funds are adequate to meet anticipated needs. 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, disregarding the DM&E's Powder River Basin project discussed below, is 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 its existing track (the "Project"). The DM&E also has announced that the estimated cost of this project is $1.4 billion. 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 Powder River Basin coal within two years after regulation approval is obtained. PAGE 11
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 should increase dramatically. In May of 1997, the Company acquired the assets of the Monitor Group for $2,500,000. The Monitor Group designs, develops and assembles portable mass spectrometers. Mass spectrometers are used to measure gas compositions and concentrations for various applications, including monitoring air quality for the mining industry and serving as a process monitor and diagnostic tool in chemical manufacturing industries. The Company has placed instruments in various facilities for field testing and no revenues have been realized through December 31, 1997. In November of 1997, the Company acquired the assets of Precise Fabricating Corporation, a Georgetown, Massachusetts steel fabricator for $3,694,000 plus the assumption of certain liabilities. This acquisition provides the Company with a regional manufacturing facility in the New England market. Precise's AISC Certification for Complex Bridges and Buildings enables the Company to offer a more complete package of components for the highway, bridge and transit markets. In December of 1997, the Company acquired the assets of Watson-Haas Lumber Company of St. Mary's, West Virginia, a supplier of iron clad and steel ties to the mining industry since 1958, for $545,000 plus the assumption of certain liabilities. This acquisition complements the Company's Midwest Steel Division and enables the Company to offer a complete package of all rail and track requirements to the mining industry. In February of 1998, the Company entered into a letter of intent to sell its spiralweld pipe manufacturing facility located in Parkersburg, West Virginia to Northwest Pipe Company of Portland, Oregon. The Fosterweld division generates approximately $12 million in revenues and employs approximately 50 people. Completion of the transaction is subject to due diligence and the execution of a definitive purchase agreement. The transaction is expected to close in the early spring of 1998. Management anticipates that the proceeds from this transaction will exceed its current investment of $4 million of fixed assets and $5 million of working capital. The Company's integrated accounting and distribution software is licensed from a national vendor. The current releases of this vendor's software is year 2000 compliant. The Company expects to install the year 2000 compliant version in the first half of 1998. Management believes that this schedule is achievable and does not anticipate any adverse impact in becoming year 2000 compliant. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131,"Disclosures about Segments of an Enterprise and Related Information." These statements will be adopted by the Company in 1998 and are not expected to have a material effect on the consolidated financial statements. Management continues to evaluate the overall performance of certain operations. A decision to terminate an existing operation could have a material effect on near-term earnings but would not be expected to have a material adverse effect on the financial condition of the Company. Outlook - ------- The Company has not had a domestic sheet piling supplier since March, 1997. The Company, however, will become Chaparral Steel's exclusive domestic distributor of steel sheet piling when Chaparral Steel's manufacturing facility, to be 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 $6.4 million of working capital to this supplier in the form of loans and progress payments. If, for any reason, this supplier is unable to perform, the Company could experience a negative short-term effect on earnings and liquidity. 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 welded rail trains to ship its products. The Company has experienced delays in certain PAGE 12
projects due to the lack of availability of rail cars. The current merger activity in the railroads has 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 December 31, 1997, was approximately $78.8 million or 4.0% higher than the backlog at the end of the previous year. The following table provides the backlog by business segment. <TABLE> <CAPTION> (Dollars in thousands) December 31, - ---------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------- Backlog: <S> <C> <C> <C> Rail Products $51,584 $36,100 $43,879 Construction Products 23,284 28,080 28,239 Tubular Products 3,955 11,328 8,857 - ----------------------------------------------------------------------- Total Backlog $78,823 $75,508 $80,975 - ----------------------------------------------------------------------- </TABLE> 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 assessments on information provided by the DM&E and has not 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 governmental approvals for the Project in a timely fashion, an inability to obtain financing for the Project, competitors' responses to the Project, market demand for coal or electricity and changes in environmental and other 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. /s/Roger F. Nejes Roger F. Nejes Senior Vice President Finance and Administration Chief Financial Officer /s/Donald F. Vukmanic Donald F. Vukmanic Vice President Controller PAGE 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 <TABLE> <CAPTION> ASSETS (In thousands) 1997 1996 - ----------------------------------------------------------------------- CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents $ 1,156 $ 1,201 Accounts receivable 47,586 49,918 Inventories 43,365 42,925 Current deferred tax assets 123 362 Other current assets 557 398 Property held for resale 3,461 - ----------------------------------------------------------------------- Total Current Assets 96,248 94,804 - ----------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT - at cost 20,775 20,467 - ----------------------------------------------------------------------- PROPERTY HELD FOR RESALE 615 4,022 - ----------------------------------------------------------------------- DEFERRED TAX ASSETS 458 - ----------------------------------------------------------------------- OTHER ASSETS : Goodwill and intangibles 4,484 184 Investments 1,693 193 Other assets 3,154 2,876 - ----------------------------------------------------------------------- Total Other Assets 9,331 3,253 - ----------------------------------------------------------------------- TOTAL ASSETS $ 126,969 $123,004 - ----------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands, except share data) CURRENT LIABILITIES: Short-term borrowings $ 18,111 $ 6,000 Current maturities of long-term debt 1,309 1,366 Accounts payable - trade 12,524 19,060 Accrued payroll and employee benefits 3,008 3,543 Other accrued liabilities 1,219 2,160 - ----------------------------------------------------------------------- Total Current Liabilities 36,171 32,129 - ----------------------------------------------------------------------- LONG-TERM DEBT 17,530 21,816 - ----------------------------------------------------------------------- DEFERRED TAX LIABILITIES 554 - ----------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES 2,206 1,878 - ----------------------------------------------------------------------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 17) STOCKHOLDERS' EQUITY: Class A Common stock, issued 10,228,739 shares in 1997 and in 1996 102 102 Paid-in capital 35,434 35,276 Retained earnings 35,625 32,338 Treasury stock - at cost, Class A Common stock, 161,501 shares in 1997 and 246,001 shares in 1996 (653) (535) - ----------------------------------------------------------------------- Total Stockholders' Equity 70,508 67,181 - ----------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 126,969 $ 123,004 - ----------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. PAGE 14
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1997 <TABLE> <CAPTION> (In thousands, except per share data) 1997 1996 1995 - --------------------------------------------------------------------------- <S> <C> <C> <C> NET SALES $ 220,343 $ 243,071 $ 264,985 - --------------------------------------------------------------------------- COSTS AND EXPENSES: Cost of goods sold 191,266 212,111 235,770 Selling and administrative expenses 21,913 22,765 22,446 Interest expense 2,495 2,365 2,840 Other income (475) (600) (777) - -------------------------------------------------------------------------- 215,199 236,641 260,279 - -------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,144 6,430 4,706 INCOME TAX EXPENSE (BENEFIT) 1,857 2,572 (337) - -------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,287 3,858 5,043 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (219) - ------------------------------------------------------------------------- NET INCOME $ 3,287 $ 3,858 $ 4,824 - ------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE: Income before cumulative effect of change in accounting principle $ 0.32 $ 0.39 $ 0.51 Cumulative effect of change in accounting principle (0.02) - ------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.39 $ 0.49 - ------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE: Income before cumulative effect of change in accounting principle $ 0.32 $ 0.38 $ 0.50 Cumulative effect of change in accounting principle (0.02) - ------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.38 $ 0.48 - ------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. PAGE 15
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 <TABLE> <CAPTION> (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> <C> Net income $ 3,287 $ 3,858 $ 4,824 Adjustments to reconcile net income to net cash provided (used) by operating activities: Deferred income taxes 1,251 2,203 (565) Depreciation and amortization 2,687 3,169 2,774 Gain on sale of property, plant and equipment (112) (540) (532) Impairment of long-lived assets 219 Change in operating assets and liabilities: Accounts receivable 3,471 (1,641) (1,856) Inventory 770 (2,621) 2,878 Property held for resale (54) 1,508 Other current assets (159) 433 (165) Other noncurrent assets (340) (1,020) (171) Accounts payable - trade (8,742) 995 (1,710) Accrued payroll and employee benefits (537) 861 158 Other current liabilities (941) (945) (174) Other liabilites 328 530 (245) - ---------------------------------------------------------------------------- Net Cash Provided by Operating Activities 909 6,790 5,435 - ---------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment 1,578 2,277 3,880 Capital expenditures on property, plant and equipment (2,068) (2,336) (4,074) Purchase of DM&E stock (1,500) Acquisition of businesses (6,739) - ---------------------------------------------------------------------------- Net Cash Used by Investing Activities (8,729) (59) (194) - ---------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayments) of revolving credit agreement borrowings 9,111 (5,750) (4,170) Exercise of stock options 571 150 30 Treasury shares purchased (531) Repayments of long-term debt (1,376) (1,255) (956) - ---------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 7,775 (6,855) (5,096) - ---------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (45) (124) 145 Cash and Cash Equivalents at Beginning of Year 1,201 1,325 1,180 - ----------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 1,156 $ 1,201 $ 1,325 - ----------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid $ 2,493 $ 2,376 $ 2,906 - ---------------------------------------------------------------------------- Income Taxes Paid $ 627 $ 410 $ 188 - ---------------------------------------------------------------------------- </TABLE> During 1997, 1996, and 1995, the Company financed certain capital expenditures and related maintenance agreements totaling $33,500, $137,000 and $4,081,000, respectively, through the issuance of capital leases. See Notes to Consolidated Financial Statements. PAGE 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 <TABLE> <CAPTION> Class A Common Paid-in Retained Treasury (In thousands) Stock Capital Earnings Stock Total - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, January 1, 1995 $ 102 $ 35,118 $ 23,656 $(557) $ 58,319 Net Income 4,824 4,824 Exercise of option to pur- chase 10,000 shares of Class A Common stock 30 30 - ----------------------------------------------------------------------------- Balance, December 31, 1995 102 35,148 28,480 (557) 63,173 Net Income 3,858 3,858 Exercise of option to pur- chase 50,000 shares of Class A Common stock 128 22 150 - ----------------------------------------------------------------------------- Balance, December 31, 1996 102 35,276 32,338 (535) 67,181 Net Income 3,287 3,287 Exercise of options to pur- chase 190,000 shares of Class A Common stock 158 413 571 Treasury stock purchases of 105,500 shares (531) (531) - ----------------------------------------------------------------------------- Balance, December 31, 1997 $ 102 $ 35,434 $ 35,625 $(653) $ 70,508 - ----------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. PAGE 17
Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - ------------------------------------------ Basis of financial statement presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The term "Company" refers to L. B. Foster Company and its subsidiaries, as the context requires. Cash equivalents - The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents. Inventories - Inventories are generally valued at the lower of the last-in, first-out (LIFO) cost or market. Other inventories of the Company, approximately 9% in 1997 and 13% in 1996, are valued at average cost or market, whichever is lower. Property, plant and equipment - Maintenance, repairs and minor renewals are charged to operations as incurred. Major renewals and betterments which substantially extend the useful life of the property are capitalized. Upon sale or other disposition of assets, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in income. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of 30 to 40 years for buildings and 5 to 10 years for machinery and equipment. Leasehold improvements are amortized over 2 to 7 years which represent the lives of the respective leases or the lives of the improvements, whichever is shorter. Pile driving equipment held for rental is classified as property, plant and equipment. Goodwill - Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over periods of ten years. When factors indicate that goodwill should be evaluated for impairment, the excess of the unamortized goodwill over the fair value determined using a multiple of cash flows from operations will be charged to operations. Interest rate agreements - To offset exposures to changes in interest rates on variable rate debt, the Company enters into interest rate swap agreements. The effects of movements in interest rates on these instruments are recognized as they occur. Environmental remediation and compliance - Environmental remediation costs are accrued based on estimates of known environmental remediation exposures. Environmental compliance costs, which principally include the disposal of waste generated by routine operations, are expensed as incurred. Capitalized environmental costs are depreciated, when appropriate, over their useful life. Earnings per share - In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". Under the new provisions for calculating earnings per share, the dilutive effect of stock options has been excluded in the determination of "basic" earnings per share and only included in the "diluted" earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. Net sales - Customers are invoiced and income is recognized when material is shipped from stock or when the Company is billed for material shipped directly from the vendor. Gross sales are reduced by sales taxes, discounts and freight to determine net sales. Income taxes - The Company accounts for income tax expense and liabilities under the liability method. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-based compensation - The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company follows the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based compensation, and, accordingly, recognizes no compensation expense for stock option grants. Reclassification - Certain items previously reported in specific financial statement captions have been reclassified to conform with the 1997 PAGE 18
presentation. The reclassifications have no effect on income. New accounting pronouncements - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131,"Disclosures about Segments of an Enterprise and Related Information." These statements will be adopted by the Company in 1998 and are not expected to have a material effect on the consolidated financial statements. Note 2. Change in Accounting Principles - ------------------------------- The Company adopted the provisions of the Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in its financial statements for the year ended December 31, 1995. The cumulative effect as of January 1, 1995 of adopting Statement 121 decreased net income by $219,000, net of an income tax benefit of $134,000, or $0.02 per share. Note 3. Accounts Receivable - ------------------- Accounts receivable at December 31, 1997 and 1996 are summarized as follows <TABLE> <CAPTION> (in thousands): 1997 1996 - ------------------------------------------------------------- <S> <C> <C> Trade $46,490 $51,271 Allowance for doubtful accounts (1,468) (1,803) Other 2,564 450 - ------------------------------------------------------------- $47,586 $49,918 - ------------------------------------------------------------- </TABLE> The Company's customers are in the rail, construction and tubular segments of the economy. As of December 31, 1997 and 1996, trade receivables, net of allowance for doubtful accounts, from customers in these markets were as follows (in thousands): <TABLE> <CAPTION> 1997 1996 - ------------------------------------------------------------- <S> <C> <C> Rail $ 26,258 $ 27,234 Construction 11,177 15,586 Tubular 7,587 6,648 - ------------------------------------------------------------- $ 45,022 $ 49,468 - ------------------------------------------------------------- </TABLE> Credit is extended on an evaluation of the customer's financial condition and generally collateral is not required. Note 4. Inventories - ----------- Inventories at December 31, 1997 and 1996 are summarized as follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - -------------------------------------------------------------- <S> <C> <C> Finished goods $30,380 $31,347 Work-in-process 7,826 11,117 Raw materials 8,369 3,135 - -------------------------------------------------------------- Total inventories at current costs 46,575 45,599 - -------------------------------------------------------------- Less: Current cost over LIFO stated values (2,610) (2,074) Reserve for decline in market value of inventories (600) (600) - -------------------------------------------------------------- $43,365 $42,925 - -------------------------------------------------------------- </TABLE> At December 31, 1997 and 1996, the LIFO carrying value of inventories for book purposes exceeded the LIFO carrying value for tax purposes by approximately $5,418,000 and $5,170,000, respectively. During 1997, inventory quantities were reduced resulting in a liquidation of certain LIFO inventory layers carried at costs which were higher than the costs of current purchases. The effect of these reductions in 1997 and 1996 was to increase cost of goods sold by $21,000 and $217,000, respectively. Note 5. Property Held for Resale - ------------------------ Property held for resale at December 31, 1997 and 1996 consists of the following (in thousands): <TABLE> <CAPTION> Location 1997 1996 - ----------------------------------------------------------- <S> <C> <C> Parkersburg, WV $3,200 $3,003 Marrero, LA 615 615 Houston, TX 261 261 Other 143 - ------------------------------------------------------------ Property held for resale 4,076 4,022 - ------------------------------------------------------------ Less current portion 3,461 - ------------------------------------------------------------ $ 615 $4,022 - ------------------------------------------------------------ </TABLE> The Parkersburg, West Virginia location produces Fosterweld spiralweld pipe used for water transmission and other applications. During 1995, the Company decided that this product did not meet the Company's long-term strategic goals. The assets of this operation include machinery and equipment, buildings and leasehold improvements. During 1997 and 1996, the location generated net sales and operat- PAGE 19
ing profit of approximately $12,200,000 and $1,600,000 and $13,300,000 and $2,000,000, respectively, which are included in the Company's tubular segment. The Company has entered into a letter of intent to sell this facility. Completion of the transaction is subject to due diligence and the execution of a definitive purchase agreement. The Marrero, Louisiana location was formerly used for yard storage. Assets of the location consist of land no longer used in the Company's business. The land is currently being leased to a third party. The Company is currently negotiating the sale of this land. The Houston, Texas location was formerly a pipe coal tar coating facility. Assets of the location consist of land no longer used in the Company's business. All negotiations for property held for resale are in excess of recorded values. Note 6. Property, Plant and Equipment - ----------------------------- Property, plant and equipment at December 31, 1997 and 1996 consists of the following <TABLE> <CAPTION> (in thousands): 1997 1996 - -------------------------------------------------------------- <S> <C> <C> Land $ 6,930 $ 6,700 Improvements to land and leaseholds 4,186 3,984 Buildings 3,760 2,642 Machinery and equipment, including equipment under capitalized leases of $7,295 in 1997 and $7,434 in 1996 25,905 23,774 Rental pile driving equipment 1,178 3,668 Construction in progress 175 197 - -------------------------------------------------------------- 42,134 40,965 - -------------------------------------------------------------- Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases of $3,162 in 1997 and $2,259 in 1996 21,359 20,498 - -------------------------------------------------------------- $20,775 $20,467 - -------------------------------------------------------------- </TABLE> The remaining rental pile driving equipment is under a lease with an option to purchase. Property, plant and equipment include certain capitalized leases. The following is a schedule, by year, of the future minimum payments under these leases, together with the present value of the net minimum payments as of December 31, 1997: <TABLE> <CAPTION> (In thousands) Amount - ---------------------------------------------------- Year ending December 31, <S> <C> 1998 $1,562 1999 1,194 2000 842 2001 462 2002 and thereafter 335 - -------------------------------------------------- Total minimum lease payments 4,395 Less amount representing interest 556 - -------------------------------------------------- Total present value of minimum payments (Note 9) 3,839 Less current portion of such obligations 1,309 - -------------------------------------------------- Long-term obligations with interest rates ranging from 7.25% to 8.95% $2,530 - -------------------------------------------------- </TABLE> Note 7. Other Assets and Investments - ---------------------------- At December 31, 1997 and 1996, other assets include notes receivable and accrued interest totaling $2,258,000 and $2,072,000, respectively, from investors in the Dakota, Minnesota & Eastern Railroad Corporation (DM&E). Additionally, the Company owns stock in the DM&E. The Company's investment in the DM&E's stock is recorded at its historical cost of $1,693,000, comprised of, $193,000 of common stock and $1,500,000 of Series B Preferred Stock and warrants. Although its market value is not readily determinable, management believes the fair value of this investment exceeds its carrying amount. Note 8. Short-Term Borrowings - --------------------- Effective November 1995, the Company renegotiated its $45,000,000 revolving credit agreement. 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 fixed charge coverage ratio defined in the agreement. The ranges are prime to prime plus 0.25%, the CD rate plus 0.45% to the CD rate plus 1.125%, and the Euro-bank rate plus 0.45% to the Euro-bank rate plus 1.125%. Borrowings under the agreement, which expires July 1, 1999, are secured by accounts receivable and inventory. The agreement includes financial covenants requiring a minimum net worth, and minimum levels for the fixed charge coverage ratio, the leverage ratio and the current ratio. The agreement also restricts dividends, investments, capital expenditures, indebtedness and sales of certain assets. At December 31, 1997, $4,223,000 was available for future dividend payments. PAGE 20
As of December 31, 1997, the Company was in compliance with all the agreement's covenants. At December 31, 1997, the Company had borrowed $33,111,000 under the agreement of which $15,000,000 was classified as long- term (see Note 9). Under the agreement, the Company had approximately $10,972,000 in unused borrowing commitment at December 31, 1997. Note 9. Long-Term Debt and Related Matters - ---------------------------------- Long-term debt at December 31, 1997 and 1996 consists of the following: <TABLE> <CAPTION> (In thousands) 1997 1996 - ---------------------------------------------------------------- <S> <C> <C> Revolving Credit Agreement with weighted average interest rate of 7.06% at December 31, 1997 and 6.42% at December 31, 1996, expiring July 1, 1999 $15,000 $18,000 - ----------------------------------------------------------------- Lease obligations payable in installments through 2003 with a weighted average interest rate of 7.93% at December 31, 1997 and 7.96% at December 31, 1996 3,839 5,182 - ----------------------------------------------------------------- 18,839 23,182 Less current maturities 1,309 1,366 - ----------------------------------------------------------------- $17,530 $21,816 - ----------------------------------------------------------------- </TABLE> The $15,000,000 revolving credit borrowings included in long-term debt were obtained under the revolving loan agreement discussed in Note 8 and are subject to the same terms and conditions. This portion of the borrowings is classified as long-term because the Company does not anticipate reducing the borrowings below $15,000,000 during 1998. 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 $10,000,000 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 maturities of long-term debt for each of the succeeding five years subsequent to December 31, 1997 are as follows: 1998 - $1,309,000; 1999 - $16,037,000; 2000 - $753,000; 2001 - - $418,000; 2002 - $251,000; and 2003 and beyond $71,000. Note 10. Stockholders' Equity - -------------------- At December 31, 1997 and 1996, the number of authorized shares of the Company's Class A Common stock were 20,000,000 shares and Class B Common stock were 1,391,000 shares. No Class B Common shares were issued. The Company's Class A and Class B Common stock each have a par value of $.01 per share and are generally identical except that the Class B Common stock has no stockholder voting rights, and except that such holders shall be entitled to one vote per share on matters such as consolidation or merger of the Company. Class B Common stock may be converted at any time on a share-for-share basis into Class A Common stock. The Company's Board of Directors declared a dividend of common share purchase rights as a part of a Stockholder Rights Plan on May 15, 1997. Under the terms of the Plan, stock purchase rights were distributed at the rate of one right for each share of Class A Common stock held as of the close of business on May 21, 1997. Stockholders did not actually receive certificates for the rights at that time, but the rights became part of each common share. The number of rights outstanding is subject to adjustment under certain circumstances and all rights expire on May 15, 2007. Each right will entitle holders of the Company's Class A Common stock to buy one share of Class A Common stock of the Company at an exercise price of $30.00, subject to adjustment. The rights will be exercisable and will trade separately from the common shares only if a person or group acquires beneficial ownership of 20% or more of the Company's common shares or commences a tender or exchange offer that, if culminated, would result in such person or group owning 20% or more of the common shares. Only when one or more of these events occur will stockholders receive certificates for the rights. If any person actually acquires 20% or more of the Company's common shares (other than through an offer for all shares that provide fair value for such shares) or if a 20%-or-more stockholder engages in a merger or other business combination in which the Company survives and its common shares remain outstanding, the other stockholders will be able to exercise the rights and receive the Company's common shares (or in certain other circumstances, cash, property or other securities of the Company) having twice the value of the exercise price of the rights. Additionally, if the Company is involved in certain other mergers where its shares are exchanged or certain major sales of its assets occur, stockholders will be able to purchase PAGE 21
the other party's shares in an amount equal to twice the value of the exercise price of the rights. The Company generally will be entitled to redeem the rights at $0.05 per right at any time until the 10th day following public announcement that a person has acquired a 20% ownership position in Company common shares. The Company may in its discretion extend the period during which it can redeem the rights. The Company's Board of Directors authorized the purchase of up to 500,000 shares of its common stock at prevailing market prices. The timing and extent of the purchases will depend on market conditions. 500,000 shares represents approximately 5% of the Company's outstanding common stock. No cash dividends on Common stock were paid in 1997, 1996, and 1995. Note 11. Stock Options - ------------- The 1985 Long-Term Incentive Plan (Plan) of the Company, as amended and restated in March 1994, provides for the award of options to key employees and directors to purchase up to 1,500,000 shares of Common stock at no less than 100% of fair market value on the date of the grant. The Plan provides for the granting of "nonqualified options" and "incentive stock options" with a duration of not more than ten years from the date of grant. The Plan also provides that, unless otherwise set forth in the option agreement, options are exercisable in installments of up to 25% annually beginning one year from date of grant. Stock to be offered under the Plan may be authorized but unissued Common stock or previously issued shares which have been reacquired by the Company and held as Treasury shares. At December 31, 1997, 1996 and 1995, Common stock options outstanding under the Plan had option prices ranging from $2.63 to $6.00, with a weighted average price of $3.71, $3.40, and $3.35 per share, respectively. The weighted average remaining contractual life of the stock options outstanding for the three years ended December 31, 1997 are: 1997 - 5.2 years; 1996 - 4.2 years; and 1995 - 4.7 years. The Option Committee of the Board of Directors which administers the Plan may, at its discretion, grant stock appreciation rights at any time prior to six months before an option's expiration date. Upon exercise of such rights, the participant surrenders the exercisable portion of the option in exchange for payment (in cash and/or Common stock valued at its fair market value) of an amount not greater than the spread, if any, by which the average of the high and low sales prices quoted in the Over-the-Counter Exchange on the trading day immediately preceding the date of exercise of the stock appreciation right exceeds the option price. No stock appreciation rights were issued or outstanding during 1997, 1996 or 1995. Options exercised during 1997, 1996 and 1995 totaled 190,000, 50,000 and 10,000 shares, respectively, at an exercise price of $3.00 per share. Certain information for the three years ended December 31, 1997 relative to employee stock options is summarized as follows: <TABLE> <CAPTION> 1997 1996 1995 - --------------------------------------------------------------------- <S> <C> <C> <C> Number of shares under Incentive Plan option: Outstanding at begin- ning of year 944,000 965,000 975,000 Granted 141,500 40,000 25,000 Canceled (37,000) (11,000) (25,000) Exercised (190,000) (50,000) (10,000) - --------------------------------------------------------------------- Outstanding at end of year 858,500 944,000 965,000 - --------------------------------------------------------------------- Exercisable at end of year 659,250 806,250 748,000 - --------------------------------------------------------------------- Number of shares available for future grant: Beginning of year 287,250 316,250 316,250 - --------------------------------------------------------------------- End of year 182,750 287,250 316,250 - --------------------------------------------------------------------- </TABLE> The weighted average fair value of options granted at December 31, 1997, 1996, and 1995 were $2.94, $2.65 and $2.56, respectively. The Company has adopted the disclose-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized. Had compensation expense for the Company's stock option plans been determined using the method required by SFAS No. 123, the effect to the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> (In thousands except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------- <S> <C> <C> <C> Net Income $3,248 $3,787 $4,818 - --------------------------------------------------------------------- Basic earnings per share $ 0.32 $ 0.38 $ 0.49 - --------------------------------------------------------------------- Diluted earnings per share $ 0.32 $ 0.38 $ 0.48 - --------------------------------------------------------------------- </TABLE> The fair value of stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Sholes option-pricing model with the following weighted-average PAGE 22
assumptions used for grants in 1997, 1996 and 1995 respectively: risk-free interest rates of 6.29% , 6.83% and 6.51%; dividend yield of 0.0% for all three years; volatility factors of the expected market price of the Company's common stock of .38, .41 and .52; and a weighted-average expected life of the option of 10 years. Note 12. Earnings Per Common Share - ------------------------- The earnings per share amounts prior to 1997 have been restated to comply with Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS No. 128). SFAS 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. Basic earnings per share are computed by dividing net income by the weighted average number of Class A Common shares outstanding during the year. The weighted average number of Class A Common shares outstanding during the years ended December 31, 1997, 1996 and 1995 were approximately 10,122,000, 9,953,000 and 9,927,000, respectively. Diluted earnings per share uses the average market prices during the period in calculating the dilutive effect of options under the treasury stock method. Using this method, the weighted average number of Class A Common shares outstanding during 1997, 1996 and 1995 were approximately 10,287,000, 10,086,000 and 10,062,000, respectively, with the dilutive effect of option shares being approximately 165,000, 133,000 and 135,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Note 13. Income Taxes - ------------ At December 31, 1997, the tax benefit of net operating loss carryforwards available for state income tax purposes was approximately $821,000. The Company also has alternative minimum federal tax credit carryforwards at December 31, 1997, of approximately $1,292,000. For financial reporting purposes, a valuation allowance of $150,000 has been recognized to offset the deferred tax assets related to the state income tax carryforwards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1996, are as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 - ---------------------------------------------------------------- <S> <C> <C> Deferred tax liabilities: Depreciation $ 1,817 $ 1,535 Inventories 1,473 1,435 - ---------------------------------------------------------------- Total deferred tax liabilities 3,290 2,970 - ---------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards 821 1,730 Tax credit carryforwards 1,292 1,084 Other - net 896 1,126 - ---------------------------------------------------------------- Total deferred tax assets 3,009 3,940 Valuation allowance for deferred tax assets 150 150 - ---------------------------------------------------------------- Deferred tax assets 2,859 3,790 - ---------------------------------------------------------------- Net deferred tax (liability) assets $ (431) $ 820 - ---------------------------------------------------------------- </TABLE> The valuation allowance for deferred tax assets was unchanged during 1997 and was reduced by $50,000 and $2,499,000 during 1996 and 1995, respectively. Significant components of the provision for income taxes are as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 - ---------------------------------------------------------------- <S> <C> <C> <C> Current: Federal $ 466 $ 163 $ 102 State 140 206 126 - ---------------------------------------------------------------- Total current 606 369 228 - ---------------------------------------------------------------- Deferred: Federal 1,082 2,258 (339) State 169 (55) (360) - ---------------------------------------------------------------- Total deferred 1,251 2,203 (699) - ---------------------------------------------------------------- Total income tax expense (benefit) $1,857 $2,572 $ (471) - ---------------------------------------------------------------- </TABLE> Income tax expense (benefit) is included in the consolidated statements of income as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 - -------------------------------------------------------------- <S> <C> <C> <C> Continuing operations $1,857 $2,572 $ (337) Cumulative effect of accounting change (134) - -------------------------------------------------------------- $1,857 $2,572 $ (471) - -------------------------------------------------------------- </TABLE> The reconciliation of income tax computed at statutory rates to income tax expense (benefit) is as follows: <TABLE> <CAPTION> 1997 1996 1995 - --------------------------------------------------------------- <S> <C> <C> <C> Statutory rate 34.0% 34.0% 34.0% State income tax 4.0 1.6 (3.0) Nondeductible expenses 1.7 2.2 3.0 Net operating loss (22.9) Change in valuation reserve (30.2) Prior period tax (3.6) 2.0 13.2 Other 0.2 (1.3) - --------------------------------------------------------------- 36.1% 40.0% (7.2)% - --------------------------------------------------------------- </TABLE> PAGE 23
Note 14. Rental and Lease Information - ---------------------------- The Company leases certain plant facilities, office facilities and equipment. Rental expense for the years ended December 31, 1997, 1996 and 1995 amounted to $1,801,000, $1,814,000, and $1,867,000, respectively. At December 31, 1997, the Company is committed to total minimal rental payments under all noncancelable operating leases of $5,734,000. Generally, these leases include escalation clauses. The minimum future rental commitments are payable as follows: 1998 - $831,000; 1999 - $753,000; 2000 - $656,000; 2001 $570,000; 2002 - $544,000 and $2,380,000 after 2002. Note 15. Acquisitions - ------------ In May 1997, the Company acquired the assets of the Monitor Group for $2,500,000, of which $2,250,000 was allocated to goodwill. The Monitor Group designs, develops and assembles portable mass spectrometers. Mass spectrometers are used to measure gas compositions and concentrations for various applications, including monitoring air quality for the mining industry and serving as a process monitor and diagnostic tool in chemical manufacturing industries. In November 1997, the Company acquired the assets of Precise Fabricating Corporation (Precise), a Georgetown, Massachusetts steel fabricator for $3,694,000 plus the assumption of certain liabilities, of which $2,142,000 was allocated to goodwill. This acquisition provides the Company with a regional manufacturing facility in the New England market. Precise's AISC Certification for Complex Bridges and Buildings enables the Company to offer a more complete package of components for the highway, bridge and transit markets. In December of 1997, the Company acquired the assets of Watson-Haas Lumber Company (Watson-Haas) of St. Mary's, West Virginia, a supplier of iron clad and steel ties to the mining industry since 1958 for $545,000 plus the assumption of certain liabilities, of which $85,000 was allocated to goodwill. This acquisition compliments the Company's Midwest Steel Division and enables the Company to offer a complete package of all rail and track requirements to the mining industry. The acquisitions have been reported using the purchase method of accounting and have been included in operations since the date of acquisition. For each acquisition, the purchase price was allocated to the assets and liability based on their estimated fair values as of the acquisition date. Cost in excess of net assets acquired is being amortized on a straight-line basis over 10 years. Pro forma results of the Monitor Group and Watson-Haas acquisitions, assuming they have been made at the beginning of each year, would not be materially different from reported results. Had the Precise acquisition been made at the beginning of 1996, the Company's pro forma unaudited results would have been: <TABLE> <CAPTION> 12 Months (In thousands except ended per share amounts) 12/31/97 12/31/96 - ----------------------------------------------------------------- <S> <C> <C> Net sales $224,703 $247,222 Net income 3,803 3,841 Basic earnings per share $0.38 $0.39 - ----------------------------------------------------------------- </TABLE> The pro forma results do not represent the Company's actual operating results had the acquisition been made at the beginning of 1997 and 1996 or the results that may be expected in the future. The pro forma impact of the Monitor Group and Watson-Haas were not material to net sales, net income or basic earnings per share. Note 16. Retirement Plans - ---------------- Substantially all of the Company's hourly paid employees are covered by one of the Company's noncontributory, defined benefit plans and a defined contribution plan. Substantially all of the Company's salaried employees are covered by a defined contribution plan established by the Company. Benefits for hourly employees over age 21 are generally based on hours of service. The salaried plan for employees over age 21 is based on years of qualifying service. The Company's funding policy for defined benefit plans is to contribute the minimum required by the Employee Retirement Income Security Act of 1974. Net periodic pension cost for the three years ended December 31, 1997 is summarized as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 - ---------------------------------------------------- <S> <C> <C> <C> Service cost $ 82 $ 81 $ 71 Interest cost 138 136 121 Actual return on plan assets (293) (176) (131) Other 143 39 (3) - ----------------------------------------------------- Net periodic pension cost $ 70 $ 80 $ 58 - ----------------------------------------------------- </TABLE> PAGE 24
The hourly plan assets consist of various mutual fund investments. The following table presents a reconciliation of the funded status of the defined benefit plans at December 31, 1997 and 1996 with the accrued pension cost included in other current liabilities on the Company's balance sheet: <TABLE> <CAPTION> (In thousands) 1997 1996 - ----------------------------------------------------------------------------- Overfunded Underfunded Plan Plan - ----------------------------------------------------------------------------- <S> <C> <C> <C> Projected benefit obligation: Vested benefits $1,603 $ 508 $1,979 Nonvested benefits 29 23 55 - ----------------------------------------------------------------------------- Total projected benefit obligation 1,632 531 2,034 - ----------------------------------------------------------------------------- Fair value of plan assets 1,727 411 1,867 - ----------------------------------------------------------------------------- Excess (deficit) of plan assets over projected benefit obligation 95 (120) (167) Unrecognized net transition asset (98) (4) (112) Unrecognized prior service cost 6 83 81 Unrecognized net (gain) loss (192) 23 6 Adjustment for minimum liability (102) (133) - ----------------------------------------------------------------------------- Accrued pension cost included in accrued payroll and employee benefits on the balance sheet. $ (189) $(120) $ (325) - ----------------------------------------------------------------------------- </TABLE> An assumed discount rate of 7% and an expected rate of return on plan assets of 8% were used to measure the projected benefit obligation and develop net periodic pension costs for the three years ended December 31, 1997, 1996 and 1995. The Company's defined contribution plan, available to substantially all salaried employees, contains a matched savings provision that permits both pretax and after-tax employee contributions. Participants can contribute from 2% to 15% of their annual compensation and receive a 50% matching employer contribution on up to 6% of their annual compensation. Further, the plan requires an additional matching employer contribution, based on the ratio of the Company's pretax income to equity, up to 50% of 6% of the employee's annual compensation. Additionally, the Company contributes 1% of all salaried employees' annual compensation to the plan without regard for employee contribution. The Company may also make additional discretionary contributions to the plan. The defined contribution plan expense was: $756,000 in 1997, $827,000 in 1996 and $727,000 in 1995. PAGE 25
Note 17. 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 amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. At December 31, 1997, the Company had outstanding letters of credit of approximately $917,000. Note 18. Risks and Uncertainties - ----------------------- The Company's future operating results may be affected by a number of factors. The Company is dependent upon a number of major suppliers. If a supplier had operational problems or ceased making material available to the Company, operations could be adversely affected. The Company has not had a domestic sheet piling supplier since March, 1997. The Company, however, will become Chaparral Steel's exclusive domestic distributor of steel sheet piling when Chaparral Steel's manufacturing facility in Richmond, Virginia begins operations. Chaparral has announced that this facility should become operational in 1999. The rail segment of the business depends on one source for fulfilling certain trackwork contracts. The Company has provided working capital for this supplier and a revolving note receivable which total $6,400,000. If, for any reason, this supplier is unable to perform, the Company could experience a negative short term effect on earnings and liquidity. The Company is also dependent on the availability of rail cars and welded rail 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 activity in the railroads has exacerbated this problem. The Company can provide no assurance that a solution to the problem will occur in the near term. 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's operations results may also be affected by adverse weather conditions. Note 19. Fair Values of Financial Instruments - ------------------------------------ The Company's financial instruments consist of accounts receivable, accounts payable, short term and long term debt, and an interest rate swap agreement. The carrying amounts of the Company's financial instruments at December 31, 1997, approximate fair value. PAGE 26
Note 20. Business Segments - ------------------ L. B. Foster Company is engaged in the manufacture, fabrication and distribution of rail, construction and tubular products. The Company's rail segment provides a full line of new and used rail, trackwork and accessories to railroads, mines and industry. The Company also designs and produces bonded rail joints, power rail, track fasteners, catenary systems, coverboards and special accessories for mass transit and other rail systems. The Company's construction segment sells and rents steel sheet piling and H-bearing pile for foundation and earth retention requirements. In addition, the Company sells bridge decking, expansion joints, sign structures and other products for highway construction and repair. The Company's tubular segment supplies pipe and pipe coatings for pipelines and utilities. Additionally, the Company manufactures spiralweld pipe for water transmission lines, foundation piling and many other applications. The Company also produces pipe-related products for special markets, including water wells and irrigation. The Company markets its products directly in all major industrial areas of the United States primarily through a national sales force. A summary of revenues, operating profit, identifiable assets, depreciation and amortization, and capital expenditures of each business segment for the three years ended December 31, 1997, follows (in thousands): <TABLE> <CAPTION> 1997 - ---------------------------------------------------------------------------- Net Operating Identifiable Depreciation/ Capital Sales Profit (Loss) Assets Amortization Expenditures - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Rail products $112,685 $ 5,031 $ 57,212 $ 642 $ 538 Construction products 55,909 3,076 29,746 523 663 Tubular products 51,749 2,163 30,004 1,358 841 Other (748) 2,371 150 5 - ----------------------------------------------------------------------------- 220,343 9,522 119,333 2,673 2,047 - ----------------------------------------------------------------------------- Corporate and other 7,636 14 21 - ----------------------------------------------------------------------------- Total $220,343 9,522 $126,969 $ 2,687 $ 2,068 Nonoperating income (expense): General corpor- ate expense and unallocated other income and expense -net (1,883) Interest expense (2,495) - ----------------------------------------------------------------------------- Income before income taxes 5,144 - ----------------------------------------------------------------------------- </TABLE> Capital expenditures for 1997 do not include capitalized leases of $34,000. PAGE 27
<TABLE> <CAPTION> 1996 - ----------------------------------------------------------------------------- Net Operating Identifiable Depreciation/ Capital Sales Profit Assets Amortization Expenditures - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Rail products $ 111,780 $ 5,865 $ 59,025 $ 626 $ 716 Construction products 77,954 3,337 29,231 936 951 Tubular products 53,337 1,147 28,414 1,439 649 - ----------------------------------------------------------------------------- 243,071 10,349 116,670 3, 001 2,316 - ----------------------------------------------------------------------------- Corporate and other 6,334 168 20 - ----------------------------------------------------------------------------- Total $243,071 10,349 $123,004 $ 3,169 $ 2,336 - ----------------------------------------------------------------------------- Nonoperating income (expense): General corporate expense and unallocated other income and expense net (1,554) Interest expense (2,365) - ----------------------------------------------------------------------------- Income before income taxes $ 6,430 - ----------------------------------------------------------------------------- </TABLE> Capital expenditures for 1996 do not include capitalized leases of $137,000 for the tubular segment. <TABLE> <CAPTION> 1995 - ----------------------------------------------------------------------------- Net Operating Identifiable Depreciation/ Capital Sales Profit/Loss Assets Amortization Expenditures - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Rail products $ 111,582 $ 5,705 $ 48,622 $ 570 $ 347 Construction products 88,735 2,592 32,652 1,018 1,346 Tubular products 64,668 720 33,658 1,160 2,375 - ----------------------------------------------------------------------------- 264,985 9,017 114,932 2,748 4,068 - ----------------------------------------------------------------------------- Corporate and other 9,491 26 6 - ----------------------------------------------------------------------------- Total $ 264,985 9,017 $ 124,423 $ 2,774 $ 4,074 - ----------------------------------------------------------------------------- Nonoperating income (expense): General corporate expense and unallocated other income and expense net (1,471) Interest expense (2,840) - ----------------------------------------------------------------------------- Income before income taxes $ 4,706 - ----------------------------------------------------------------------------- </TABLE> Capital expenditures for 1995 do not include the following capitalized leases: rail - $1,377,000; construction - $53,000; tubular - $2,587,000; corporate and other - $64,000. Sales to any individual customer do not exceed 10% of consolidated net sales. Sales between segments are immaterial. Identifiable assets by segment are those assets that are used exclusively by such segments. Corporate assets are principally cash and investments. PAGE 28
Note 21. Quarterly Financial Information (Unaudited) - ------------------------------------------- Quarterly financial information for the years ended December 31, 1997 and 1996 is presented below (in thousands, except per share amounts): <TABLE> <CAPTION> 1997 - ---------------------------------------------------------------------------- First Second Third Fourth Quarter(1) Quarter(1) Quarter(1) Quarter Total - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales $ 54,494 $ 53,716 $ 56,935 $ 55,198 $220,343 - ----------------------------------------------------------------------------- Gross profit $ 6,367 $ 7,527 $ 8,099 $ 7,084 $ 29,077 - ----------------------------------------------------------------------------- Net income $ 407 $ 871 $ 1,212 $ 797 $ 3,287 - ----------------------------------------------------------------------------- Basic earnings per common share $ 0.04 $ 0.08 $ 0.12 $ 0.08 $ 0.32 - ----------------------------------------------------------------------------- Diluted earnings per common share $ 0.04 $ 0.08 $ 0.12 $ 0.08 $ 0.32 - ----------------------------------------------------------------------------- </TABLE> (1) Gross profit has been adjusted by $67,000, $201,000 and $323,000 in the first, second and third quarters, respectively, to reflect a reclassification of certain expenses from selling and administrative to cost of sales. <TABLE> <CAPTION> 1996 - ----------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales $ 48,303 $ 64,758 $ 65,525 $ 64,485 $243,071 - ----------------------------------------------------------------------------- Gross profit $ 6,199 $ 8,194 $ 8,611 $ 7,956 $ 30,960 - ----------------------------------------------------------------------------- Net income $ 220 $ 1,255 $ 1,418 $ 965 $ 3,858 - ----------------------------------------------------------------------------- Basic earnings per common share $ 0.02 $ 0.13 $ 0.14 $ 0.10 $ 0.39 - ----------------------------------------------------------------------------- Diluted earnings per common share $ 0.02 $ 0.12 $ 0.14 $ 0.10 $ 0.38 - ----------------------------------------------------------------------------- </TABLE> The fourth quarter of 1996 includes the following: 1) a $388,000 reduction in the LIFO provision, 2) a $300,000 reduction in the accrual for employee medical expense and 3) a $200,000 provision for equipment obsolescence reserve. PAGE 29
REPORT OF INDEPENDENT AUDITORS AND RESPONSIBILITY FOR FINANCIAL STATEMENTS To the Board of Directors and Stockholders of L. B. Foster Company: We have audited the accompanying consolidated balance sheets of L. B. Foster Company and subsidiaries at December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of L. B. Foster Company and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, in 1995, the Company changed its methods of accounting for long-lived assets. /s/Ernst & Young LLP Pittsburgh, Pennsylvania January 21, 1998 L. B. FOSTER COMPANY AND SUBSIDIARIES To the Stockholders of L. B. Foster Company: The management of L. B. Foster Company is responsible for the integrity of all information in the accompanying consolidated financial statements and other sections of the annual report. Management believes the financial statements have been prepared in conformity with generally accepted accounting principles that reflect, in all material respects, the substance of events and transactions, and that the other information in the annual report is consistent with those statements. In preparing the financial statements, management makes informed judgments and estimates of the expected effects of events and transactions being accounted for currently. The Company maintains a system of internal accounting control designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded to permit the preparation of financial statements in accordance with generally accepted accounting principles. Underlying the concept of reasonable assurance is the evaluation of the costs and benefits derived from control. This evaluation requires estimates and judgments by the Company. The Company believes that its internal accounting controls provide an appropriate balance between costs and benefits. The Board of Directors pursues its oversight role with respect to the financial statements through the Finance and Audit Committee which is composed of outside directors. The Finance and Audit Committee meets periodically with management, internal auditors and our independent auditors to discuss the adequacy of the internal accounting control, the quality of financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and the independent auditors have free access to the Finance and Audit Committee. /s/ Lee B. Foster II Lee B. Foster II President and Chief Executive Officer /s/Roger F. Nejes Roger F. Nejes Senior Vice President Finance and Administration and Chief Financial Officer PAGE 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors is set forth under "Election of Directors" in the Company's Proxy Statement for the 1998 annual meeting of stockholders ("1998 Proxy Statement"). Such information is incorporated herein by reference. Information concerning the executive officers who are not directors of the Company is set forth below. With respect to the period prior to August 18, 1977, references to the Company are to the Company's predecessor, Foster Industries, Inc. <TABLE> <CAPTION> Name Age Position - ---------------------------------------------------------------------------- <S> <C> <C> Anthony G. Cipicchio 51 Vice President Operations William S. Cook, Jr. 56 Vice President Strategic Planning & Acquisitions Paul V. Dean 66 Vice President - Piling Products Samuel K. Fisher 45 Vice President - Rail Procurement Dean A. Frenz 54 Senior Vice President - Rail Products Steven L. Hart 51 Vice President Stan L. Hasselbusch 50 Senior Vice President - Construction and Tubular Products David L. Minor 54 Vice President - Treasurer Roger F. Nejes 55 Senior Vice President - Finance and Administration and Chief Financial Officer Henry M. Ortwein, Jr. 55 Group Vice President - Rail Manufactured Products Robert W. Sigle 68 Vice President - Tubular Products Linda M. Terpenning 52 Vice President - Human Resources David L. Voltz 45 Vice President, General Counsel and Secretary Donald F. Vukmanic 46 Vice President - Controller </TABLE> PAGE 31
Mr. Cipicchio joined the Company in May 1997 and was elected Vice President - Operations. Prior to joining the Company, Mr. Cipicchio was Vice President of Operations for Omsco Industries, a supplier of drill string components to the oil and gas industry. Mr. Cook was elected Vice President - Strategic Planning & Acquisitions in October 1993. Prior to joining the Company in March 1993 as Director of Strategic Planning and Acquisitions, he was President of Cook Corporate Development, a business and financial advisory firm. Mr. Dean was named a Vice President in September 1987. Prior to September 1987, he served in various other capacities with the Company since his employment in 1964. Mr. Fisher was elected Vice President - Rail Procurement in October 1997, having previously served as Vice President - Relay Rail since October 1996. Prior to October 1996, he served in various other capacities with the Company since his employment in 1977. Mr. Frenz has served as Senior Vice President - Rail Products since December 1996, having previously served as Senior Vice President - Rail and Tubular Products from September, 1995, through November, 1996, Senior Vice President - Product Management from October 1993, Vice President - Rail Products from June 1992 to September 1993 and as Vice President - Sales from August 1987 to May 1992. Mr. Frenz joined the Company in 1966. Mr. Hart was elected Vice President in December 1997, having previously served in various other capacities with the Company since his employment in 1977. Mr. Hasselbusch was elected Senior Vice President - Construction and Tubular Products in December, 1996, having previously served as Senior Vice President - Construction Products since September 1995 and as Senior Vice President - Sales from October 1993. Mr. Hasselbusch was the Company's Central/Western Regional Sales Manager from September 1990 through September 1993. Mr. Hasselbusch joined the Company in 1972. Mr. Minor was elected Treasurer in February 1988 and was elected to the additional office of Vice President in February 1997. Mr. Minor joined the Company in 1983. Mr. Nejes was elected Senior Vice President - Finance and Administration and Chief Financial Officer in October 1993, having served as Vice President - Finance and Chief Financial Officer from February 1988. Mr. Ortwein was appointed Group Vice President - Rail Manufactured Products in March 1997. Additionally, he served as Vice President - Rail Manufacturing from October 1993, President of Allegheny Rail Products, Inc. from May 1992 and as its Chief Operating Officer from January 1992. Previously, he was Midwest Steel Corporation's Vice President of Sales from January 1991 to December 1991 and its National Sales Manager from November 1989 to December 1990. Prior to joining Midwest Steel Corporation, he was a Regional Sales Manager for Bethlehem Steel Corporation from July 1986 to October 1989. Mr. Sigle was elected Vice President - Tubular Products in December 1990, having served as Vice President - Tubular and Coating Sales Development since September 1987, and in various capacities with the Company since his employment in 1965. Ms. Terpenning was elected Vice President - Human Resources in October 1987. Ms. Terpenning joined the Company in 1985. Mr. Voltz was elected Vice President, General Counsel and Secretary in December 1987, having previously served as General Counsel and Secretary since December 1986. Mr. Voltz joined the Company in 1981. Mr. Vukmanic was elected Controller in February 1988 and was elected to the additional office of Vice President in February PAGE 32
1997. Mr. Vukmanic joined the Company in 1977. Officers are elected annually at the organizational meeting of the Board of Directors following the annual meeting of stockholders. ITEM 11. EXECUTIVE COMPENSATION The information set forth under "Executive Compensation" in the 1998 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under "Ownership of Securities by Management" and "Principal Stockholders" in the 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under "Certain Transactions" in the 1998 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements -------------------- The following consolidated financial statements, accompanying notes and Report of Independent Auditors in the Company's Annual Report to Stockholders for 1997 have been included in Item 8 of this Report: Consolidated Balance Sheets at December 31, 1997 and 1996. Consolidated Statements of Income For the Three Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows For the Three Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. Financial Statement Schedule ---------------------------- Schedules for the Three Years Ended December 31, 1997, 1996 and 1995: II - Valuation and Qualifying Accounts. The remaining schedules are omitted because of the absence of the conditions upon which they are required. PAGE 33
3. Exhibits -------- The exhibits marked with an asterisk are filed herewith. All exhibits are incorporated herein by reference: 3.1 Restated Certificate of Incorporation as amended to date, filed as Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 1987. * 3.2 Bylaws of the Registrant, as amended to date. 4A 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. 4.1 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. * 4.1.2 Second Amendment to Amended and Restated Loan Agreement dated December 31, 1996. * 4.1.3 Third Amendment to Amended and Restated Loan Agreement dated April 9, 1997. * 4.1.4 Fourth Amendment to Amended and Restated Loan Agreement dated November 12, 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 for Pipe-Coating Facility in Birmingham, Alabama dated December 11, 1991 and 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. 10.33.2 Amended and Restated 1985 Long Term Incentive Plan, as amended and restated February 26, 1997. ** PAGE 34
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. ** 10.49 Lease agreement between Newport Steel Corporation and L. B. Foster Company 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. * 10.50 L. B. Foster Company 1998 Incentive Compensation Plan. ** 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. * 23.7 Consent of Independent Auditors. * 27 Financial Date Schedule for the year ended December 31, 1997. * 27.1 Restated Financial Data Schedules for the years ended December 31, 1996, December 31, 1995 and the quarter ended June 31, 1996. ** Identifies management contract or compensatory plan or arrangement required to be filed as an Exhibit. (b) Reports on Form 8-K On June 2, 1997, the Registrant filed a Current Report on Form 8-K announcing that L.B. Foster Company declared a dividend distribution of stock purchase rights. On November 25, 1997, the Registrant filed a Current Report on Form 8-K announcing that L.B. Foster Company acquired the assets of Precise Manufacturing Corporation. On January 21, 1998, the Registrant filed an Amended Current Report on Form 8-K/A, amending the Current Report filed on Form 8-K on November 25, 1997. The Amended Current Report provides financial statements of Precise Fabricating Corporation and pro forma financial information. PAGE 35
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. L. B. FOSTER COMPANY March 27, 1998 By /s/ Lee B. Foster II --------------------------- (Lee B. Foster II, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Position Date By: /s/ Lee B. Foster II President, Chief Executive March 27, 1998 - ------------------------ Officer and Director (Lee B. Foster II) By: /s/ Roger F. Nejes Senior Vice President - March 27, 1998 - ------------------------ Finance & Administration (Roger F. Nejes) and Chief Financial Officer By: Director - ------------------------ -------------- (John W. Puth) By: Director - ------------------------ -------------- (William H. Rackoff) By: /s/ Richard L. Shaw Director March 27, 1998 - ----------------------- (Richard L. Shaw) By: /s/Donald F. Vukmanic Vice President Controller March 27, 1998 - ------------------------- (Donald F. Vukmanic) By: /s/ James W. Wilcock Chairman of the Board March 27, 1998 - ------------------------- (James W. Wilcock) PAGE 36
L. B. FOSTER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (In Thousands) <TABLE> <CAPTION> Additions Balance at Charged to Balance Beginning Costs and at End of Year Expenses Other Deductions of Year - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1997 - ---- Deducted from assets to which they apply: Allowance for doubtful accounts $ 1,803 $ 199 $ - $ 534(1) $1,468 Provision for decline in market value of inventories $ 600 $ - $ - $ - $ 600 Not deducted from assets: Provision for special termination benefits $ 22 $ 1 $ - $ 11(2) $ 12 Provision for environ- mental compliance & remediation $ 242 $ 61 $ - $ 19(2) $ 284 1996 - ---- Deducted from assets to which they apply: Allowance for doubtful accounts $ 1,800 $ 55 $ - $ 52(1) $1,803 Provision for decline in market value of inventories $ 600 $ - $ - $ - $ 600 Not deducted from assets: Provision for special termination benefits $ 63 $ 6 $ - $ 47(2) $ 22 Provision for environ mental compliance & remediation $ 260 $ 91 $ - $ 109(2) $ 242 1995 - ---- Deducted from assets to which they apply: Allowance for doubtful accounts $ 1,615 $ 232 $ - $ 47(1) $1,800 Provision for decline in market value of inventories $ 600 $ - $ - $ - $ 600 Not deducted from assets: Provision for special termination benefits $ 82 $ 10 $ - $ 29(2) $ 63 Provision for environ mental compliance & remediation $ 279 $ 91 $ - $ 110(2) $ 260 </TABLE> (1) Notes and accounts receivable written off as uncollectible. (2) Payments made on amounts accrued and reversals of accruals. S-1