Filed Pursuant to Rule 424(b)(3)
Registration No. 333-117214
PROSPECTUS
$100,000,000
NEENAH FOUNDRY COMPANY
13% SENIOR SUBORDINATED NOTES DUE 2013
This prospectus relates to the offer and sale from time to time by each of
the selling noteholders identified in this prospectus of up to $100,000,000
aggregate principal amount at maturity of 13% Senior Subordinated Notes due 2013
issued by Neenah Foundry Company. We will not receive any of the proceeds from
the sale of the Notes being sold by the selling Noteholders.
The Notes are being registered to permit the selling Noteholders to sell
the securities from time to time to the public. The selling Noteholders may sell
the Notes through ordinary brokerage transactions or through any other means
described in the section entitled "Plan of Distribution." We do not know when or
in what amounts a selling Noteholder may offer securities for sale. The selling
Noteholders may sell any, all or none of the Notes offered by this prospectus.
- The Notes were issued on October 8, 2003, in an aggregate principal
amount of $100,000,000.
- Interest on the Notes is payable 5% in cash and 8% interest may be
paid-in-kind.
- Interest on the Notes is payable semi-annually on January 1 and July 1,
commencing July 1, 2004.
- The Notes mature on September 30, 2013.
- The Notes are subordinate to our credit facility and to our 11% Senior
Secured Notes due 2010.
- We are not required to make regularly scheduled mandatory redemption or
sinking fund payments with respect to the Notes.
- We may redeem all or a part of the Notes from time to time in part at any
time, at our option, at 100% of the principal amount outstanding, plus
accrued and unpaid interest, plus a redemption premium if the Notes are
redeemed during any 12-month period beginning September 30 that is prior
to September 30, 2006.
We do not intend to list the Notes on any exchange. We can not assure you
that an active trading market for the Notes will develop.
FOR A DISCUSSION OF SPECIFIC RISKS YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
Prospectus dated October 22, 2004.
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING NOTEHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, THE NOTES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE NOTES.
TABLE OF CONTENTS
<Table>
Disclosure Regarding Forward-Looking Statements............. i
Prospectus Summary.......................................... 1
Summary Description of the Notes............................ 2
Ratio of Earnings to Fixed Charges.......................... 4
Risk Factors................................................ 5
The Refinancing Transactions................................ 12
Use of Proceeds............................................. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 26
Management.................................................. 35
Selling Noteholders......................................... 39
Certain Relationships and Related Transactions.............. 39
Security Ownership and Certain Beneficial Owners............ 40
Description of New Credit Facility.......................... 42
Description of the Notes.................................... 45
Book-Entry; Delivery and Form............................... 76
Securities Eligible for Future Sale......................... 78
Plan of Distribution........................................ 79
Legal Matters............................................... 80
Experts..................................................... 80
Available Information....................................... 80
Index to Financial Statements............................... F-1
</Table>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "should", "could",
"expect", "intend", "estimate", "anticipate", "believe" or "continue", "plan",
"potential", "predicts" or the negative thereof or variations thereon or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by any forward-looking statements. These risks and uncertainties
include, but are not limited to, the following:
- general economic and business conditions, both nationally and in those
areas in which we operate;
- competition;
- changes in our business strategy or plans;
- changes in exchange rates;
- the loss of any of our management or key personnel;
- changes in our policy regarding interest rate and currency movements;
- the availability and cost of raw materials; and
- the availability of capital and trade credit to fund our business.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
Important factors that could cause actual results to differ materially from
our expectations, or "cautionary statements," are disclosed under "Risk Factors"
and elsewhere in this prospectus, including, without limitation, in conjunction
with the forward-looking statements included in this prospectus. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
cautionary statements. Unless required by law, we do not undertake any duty to
update any of the forward-looking statements after the date of this prospectus
to conform these statements to actual results.
i
PROSPECTUS SUMMARY
The following summary contains basic information about us and highlights
selected information from the prospectus. It likely does not contain all the
information that is important to you. Because it is a summary, it does not
contain all the information that you should consider before purchasing any
Notes. We encourage you to read this entire document and the documents to which
we have referred you. As used in this prospectus, except as the context
otherwise requires, the terms "company," "we," "our," "ours," and "us" refers to
Neenah Foundry Company and its subsidiaries, collectively and individually, as
appropriate from the context.
OUR COMPANY
We manufacture and market a wide range of metal castings and forgings for
the heavy municipal market and selected segments of the industrial markets. We
sell our products throughout the continental United States and believe that we
are one of the largest manufacturers of heavy municipal iron castings in the
United States.
We have two reportable segments, Castings and Forgings. The Castings
segment produces iron and other metal castings for use in heavy municipal and
industrial applications. This segment sells directly to original equipment
manufacturers and to industrial end users. The forgings segment, operated by
Mercer Forge Corporation, hereinafter referred to as Mercer, produces
complex-shaped forged components for use in transportation, railroad, mining and
heavy industrial applications. Mercer also produces microalloy forgings. Mercer
sells directly to original equipment manufacturers, as well as to industrial end
users. Mercer's subsidiary, A&M Specialties, Inc., machines forgings and
castings for Mercer and other industrial applications.
Neenah Foundry Company, which we refer to hereafter as Neenah, a
wholly-owned subsidiary of NFC Castings, Inc. and its parent company, ACP
Holding Company, which we refer to hereafter respectively as NFC and ACP, is a
corporation organized under the laws of the State of Wisconsin and is the
operating subsidiary of NFC and ACP. The principal executive offices of Neenah
are located at 2121 Brooks Avenue, Neenah, Wisconsin 54957. Our telephone number
is (920) 725-7000.
RECENT REORGANIZATION
On August 5, 2003, ACP, NFC, Neenah and all of its domestic subsidiaries
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code, as amended, with the United States Bankruptcy Court for the
District of Delaware. By order dated September 26, 2003, the Bankruptcy Court
confirmed our Amended Prepackaged Joint Plan of Reorganization, which we refer
to as the Plan of Reorganization.
The Plan of Reorganization resulted in significant changes to our capital
structure. Among other things, the Plan of Reorganization provided for the
repayment in full of our old credit facility, the cancellation of $282.0 million
in principal amount of 11 1/8% Notes, the cancellation of our PIK Note and the
elimination of the interests of the former equity owners of our indirect parent
company, ACP. The cash proceeds necessary to consummate the Plan of
Reorganization were provided from the consummation of the New Credit Facility
and the issuance of the Notes.
In connection with the Plan of Reorganization we conducted a rights
offering, whereby holders of the 11 1/8% Notes purchased approximately $113.0
million face amount of 11% Senior Secured Notes due 2010, and certain purchasers
with a standby commitment purchased approximately $7.0 million face amount of
11% Senior Secured Notes due 2010.
We also issued $100.0 million in aggregate principal amount of the Notes to
the holders of the 11 1/8% Notes in partial satisfaction of their claims against
us. See "The Refinancing Transactions".
1
SUMMARY DESCRIPTION OF THE NOTES
Issuer........................ Neenah Foundry Company
Securities Offered............ $100,000,000 principal amount of 13% Senior
Subordinated Notes due 2013
Maturity...................... September 30, 2013
Interest Rate................. 13% (of which 8% may be paid in kind) per year
(calculated using a 360-day year).
Interest Payment.............. Five percent of the interest will be paid in
cash and 8% interest may be paid-in-kind.
Interest Payment Dates........ Each January 1 and July 1.
Guarantees.................... All of our domestic subsidiaries have
unconditionally guaranteed the Notes on a
senior secured basis. If we cannot make
payments required by the Notes, our guarantor
subsidiaries must make them. The guarantees may
be released under certain circumstances.
Ranking....................... The Notes rank senior to all of our
subordinated unsecured indebtedness and
subordinate to the New Credit Facility and our
11% Senior Secured Notes due 2010. As of June
30, 2004, we estimate that we and our
subsidiaries had $66 million of senior secured
debt outstanding under the New Credit Facility
excluding approximately $24.5 million that,
subject to certain limitations, we have
available to borrow under our New Credit
Facility. Any amounts drawn under our New
Credit Facility will rank senior with the
Notes. See "Description of New Credit
Facility."
Optional Redemption........... At our option, from time to time we may redeem
some or all of the Notes at the redemption
prices listed in the "Description of Notes"
section under the heading "Optional Redemption"
plus accrued and unpaid interest.
Change Of Control Offer....... If a change in control of our company occurs,
we must, subject to certain conditions, give
holders the opportunity to sell their Notes to
us at 101% of their face amount plus accrued
and unpaid interest.
We might not be able to pay the required price
for Notes presented to us at the time of a
change of control because:
- we might not have enough funds at the time;
or
- the terms of our New Credit Facility may
prevent us from paying.
Asset Sale Proceeds........... If we or our subsidiaries engage in asset
sales, we generally must first prepay debt
under our New Credit Facility, then either
invest the excess proceeds in our business or
make an offer to purchase a principal amount of
the Notes equal to the excess net cash
proceeds. The purchase price of the Notes will
be 100% of their principal amount plus accrued
and unpaid interest.
2
Certain Indenture
Provisions.................... The indenture governing the Notes contains
covenants that, among other things, limit our
and our subsidiaries' ability to:
- incur additional debt;
- pay dividends or distributions on our capital
stock or repurchase our capital stock;
- issue preferred stock of subsidiaries;
- make certain investments;
- create liens on our assets to secure debt;
- enter into transactions with affiliates;
- merge or consolidate with another company;
- enter into sale and leaseback transactions;
- transfer and sell assets; and
- enter into certain lines of business.
These covenants are subject to a number of
important limitations and exceptions. See
"Description of the Notes -- Certain
Covenants."
Risk Factors.................. See "Risk Factors" for a description of some of
the risks you should consider before investing
in the Notes.
Delivery Requirements......... Each broker-dealer that receives new securities
for its own account in exchange for securities,
where those securities were acquired by this
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of those new
securities. See "Plan of Distribution."
3
RATIO OF EARNINGS TO FIXED CHARGES
<Table>
<Caption>
PREDECESSOR REORGANIZED
PREDECESSOR ----------- -----------
------------------------------------------------------ FOR THE NINE MONTHS
FOR THE YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------------------ --------------------------
1999 2000 2001 2002 2003 2003 2004
------- ------- -------- -------- -------- ----------- -----------
Earnings to fixed
charge
calculation(1)
Income (loss) from
continuing
operations before
income taxes........ $ 7,029 $10,021 $(17,133) $(11,870) $(31,411) $(23,138) $(1,357)
Fixed charges......... 41,003 44,898 44,380 44,515 48,407 35,810 26,200
------- ------- -------- -------- -------- -------- -------
$48,032 $54,919 $ 27,247 $ 32,645 $ 16,996 $ 12,672 $27,557
======= ======= ======== ======== ======== ======== =======
Fixed charges:
Interest expense...... $40,283 $43,949 $ 43,454 $ 43,466 $ 47,445 $ 35,090 $25,540
Interest portion of
rent expense........ 720 949 926 1,049 962 720 660
------- ------- -------- -------- -------- -------- -------
$41,003 $44,898 $ 44,380 $ 44,515 $ 48,407 $ 35,810 $26,200
======= ======= ======== ======== ======== ======== =======
Ratio of earnings to
cover fixed
charges............. 1.17 1.22 N/A(2) N/A(2) N/A(2) N/A(2) 1.05
</Table>
- ---------------
(1) For purposes of the computation, the ratio of earnings to fixed charges has
been calculated by dividing (a) income from continuing operations before
income taxes plus fixed charges by (b) fixed charges. Fixed charges are
equal to interest expense plus the portion of the rent expense estimated to
represent interest.
(2) Earnings were insufficient to cover fixed charges for the years ended
September 30, 2001, 2002
and 2003 and the nine months ended June 30, 2003 by $17.1 million, $11.9
million, $31.4 million, and $23.1 million, respectively.
4
RISK FACTORS
You should consider carefully all of the information in this prospectus,
including the following risk factors and warnings, before deciding whether to
make an investment in the Notes.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS MAY LIMIT CASH FLOW AVAILABLE TO INVEST IN THE
ONGOING NEEDS OF OUR BUSINESS TO GENERATE FUTURE CASH FLOW AND MAKE PAYMENTS
ON THE NOTES.
As a result of the Plan of Reorganization, our outstanding debt at June 30,
2004 was approximately $291.3 million. We may also incur additional debt from
time to time to finance working capital, capital expenditures and other general
corporate purposes. Subject to certain limitations, we had approximately $24.5
million available to borrow under our New Credit Facility as of June 30, 2004.
See "Description of New Credit Facility." The aggregate of our annual interest
payments on our outstanding debt is $30.1 million. If the interest rate of our
revolving credit facility rose by 1%, our annual interest payments would
increase by approximately $0.5 million. Our substantial indebtedness could have
important consequences to holders of the Notes. For example, it could:
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, reducing the availability of
our cash flow to fund working capital, capital expenditures, research and
development efforts and other general corporate purposes;
- increase the amount of interest expense that we have to pay because
certain of our borrowings are at variable rates of interest, which, if
interest rates increase, could result in higher interest expense;
- limit our flexibility in planning for, or reacting to, changes in our
business or the industry in which we operate; or
- place us at a competitive disadvantage compared to our competitors that
have less debt.
If any of these events took place, we would have less money available to
make payments on the Notes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources -- Contractual
Obligations and Commercial Commitments."
LENDERS UNDER OUR NEW CREDIT FACILITY WILL HAVE PRIORITY OVER THE HOLDERS OF
THE NOTES IN AN ACTION TO COLLECT AMOUNTS DUE ON OUR DEBT.
The Notes and subsidiary guarantees are secured by our assets on a
subordinated basis. Our obligations under our credit facility are secured by,
among other things, a first priority pledge of all of our capital stock,
mortgages upon most of the real property that we own in the United States and by
substantially all of our assets and each of our existing and subsequently
acquired or organized material domestic subsidiaries. If we become insolvent or
are liquidated, or if payment under our credit facility or in respect of any
other secured indebtedness that is senior to the Notes is accelerated, the
lenders under our credit facility or holders of other secured senior
indebtedness will be entitled to exercise the remedies available to a secured
lender under applicable law in addition to any remedies that may be available
under documents pertaining to our credit facility or the other senior debt. Upon
the occurrence of any default under the New Credit Facility, the lenders may be
able to prohibit the payment of the Notes and subsidiary guarantees either by
limiting our ability to access our cash flow or under the subordination
provisions contained in the security documents in respect of the Notes. In
addition, in the event of any distribution or payment of our assets in any
bankruptcy, liquidation or distribution or similar proceeding, holders of liens
securing the New Credit Agreement will be paid before the liens securing the
Notes. Both the liens securing the Credit Agreement and the liens securing the
Notes will be satisfied before payment is made on the Notes. If any of these
events occur, there may not be sufficient assets to pay amounts due on the
Notes. Holders of the Notes may therefore receive less, ratably, than holders of
the liens securing the Credit Agreement and the Notes.
5
UPON A CHANGE OF CONTROL OF OUR COMPANY, WE MAY HAVE INSUFFICIENT FUNDS AND BE
UNABLE TO RAISE THE FUNDS NECESSARY TO FINANCE THE OFFER TO REPURCHASE THE
NOTES AS THE INDENTURE GOVERNING THE NOTES REQUIRES.
If certain specific kinds of change of control events occur, we will be
required to offer to repurchase all outstanding Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of repurchase. It
is possible, however, that we will not have sufficient funds at the time of the
change of control to make the required repurchase of the Notes or that
restrictions in our New Credit Facility will not allow those repurchases.
The source of funds for that purchase of Notes will be our available cash
or cash generated from our subsidiaries' operations or other sources, including
borrowing, sales of assets or sales of equity. We may have insufficient funds at
the time of any change of control to make the required repurchases of Notes
tendered. In addition, the terms of our New Credit Facility limit our ability to
repurchase the Notes. Our future debt agreements may contain similar
restrictions and provisions. If the holders of the Notes exercise their right to
require us to repurchase all of the Notes upon a change of control, the
financial effect of this repurchase could cause a default under our other debt,
even if the change of control itself would not cause a default. Accordingly, it
is possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of Notes or that restrictions in our New
Credit Facility and the indentures governing the Notes and our 13% Senior
Subordinated Notes due 2013 will not allow such repurchases. See "Description of
Notes -- Change of Control" and "Description of New Credit Facility" for
additional information.
BECAUSE FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES,
TO VOID GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM
GUARANTORS, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE NOTES.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred.
Generally, however, a guarantor would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
- if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities as they become absolute
and mature; or
- it could not pay its debts as they become due.
6
A court reviewing the guarantees of the Notes or any payment received by a
guarantor could void one or more guarantees based on these factors. If this
occurred and the court required us to return payments received from guarantors,
we may have insufficient funds to make payments on the Notes.
OUR FAILURE TO COMPLY WITH THE COVENANTS IN OUR NEW CREDIT FACILITY MAY IMPACT
OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
The terms and conditions of the indenture governing the Notes and our New
Credit Facility impose restrictions that limit, among other things, our ability
to:
- incur additional indebtedness;
- create liens on assets;
- sell assets;
- engage in mergers or consolidations;
- make acquisitions and investments;
- engage in certain transactions with affiliates; and
- make dividends, payments and certain other distributions.
In addition, our New Credit Facility requires us to maintain specified
financial ratios and satisfy certain financial condition tests that may require
that we take action to reduce our debt or to act in a manner contrary to our
business objectives. Events beyond our control, including changes in general
economic and business conditions, may affect our ability to meet those financial
ratios and financial condition tests. We may not meet those tests and the
lenders under the New Credit Facility may not waive any failure to meet those
tests. A breach of any of these covenants would result in a default under our
New Credit Facility and the indenture. If an event of default under our New
Credit Facility occurs, the lenders could elect to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due
and payable. In such an event, we may not have sufficient assets to pay amounts
due on the Notes. As a result, you may receive less than the full amount you
would be otherwise entitled to receive on the Notes. See "Description of New
Credit Facility" and "Description of Notes" for additional information.
RISKS RELATED TO THE OFFERING
SERVICING OUR DEBT WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, AND OUR ABILITY
TO GENERATE SUFFICIENT CASH DEPENDS UPON MANY FACTORS, SOME OF WHICH ARE
BEYOND OUR CONTROL.
Our ability to make payments on and refinance our debt and to fund planned
capital expenditures depends on our ability to generate cash flow in the future.
To some extent, this is subject to general economic, financial, competitive,
legislative and regulatory factors and other factors that are beyond our
control. We may be unable to continue to generate cash flow from operations at
current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may have to refinance all or a
portion of our existing debt or obtain additional financing. The inability to
obtain additional financing could have a material adverse effect on our
financial condition and on our ability to meet our obligations to you under the
Notes.
RISK FACTORS RELATED TO THE COMPANY
A RELATIVELY SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF ONE OR MORE OF THEM COULD ADVERSELY AFFECT OUR NET
SALES.
Our industrial customer base is highly concentrated. A few large customers
generate a significant amount of our net sales.
7
- Sales to our largest customer accounted for approximately 9% of our total
net sales for the nine months ended June 30, 2004 and the fiscal year
ended September 30, 2003.
- Sales to our top five customers accounted for approximately 33% of our
total net sales for the nine months ended June 30, 2004; and 31% of our
total net sales for the fiscal year ended September 30, 2003.
The loss of one or more of such customers, therefore, could adversely
affect our net sales.
DECREASES IN DEMAND FOR HEAVY TRUCKS, HVAC EQUIPMENT, CONSTRUCTION OR FARM
EQUIPMENT COULD HAVE A SIGNIFICANT IMPACT ON OUR PROFITABILITY, CASH FLOW AND
ABILITY TO SERVICE OUR INDEBTEDNESS.
Our company has historically experienced moderate to severe cyclicality in
most of our markets, including the truck and farm equipment markets. A decrease
in the demand in these markets was a factor that led to our bankruptcy filing.
These major markets will likely continue to experience such fluctuations. A
downturn in one or more of these markets could reduce demand for, and prices of,
our products. Such a downturn in one or more of these major markets could have a
significant negative impact on our profitability, cash flow and ability to
service our indebtedness. Historically, our heavy municipal business has been
less cyclical than our industrial markets.
OUR MARKET SHARE MAY BE ADVERSELY IMPACTED AT ANY TIME BY A SIGNIFICANT NUMBER
OF COMPETITORS.
The markets in which we compete are highly competitive and the foundry
industry has significant excess capacity. Significantly increased foreign
competition was a factor that led to our bankruptcy filing. We may be unable to
maintain or improve our competitive position in the markets in which we compete.
Competition is based mostly on price, but also on quality of product, range of
capability, level of service and reliability of delivery. We compete with
numerous foreign and domestic foundries. We also compete with several large
domestic manufacturers whose products are made with materials other than ductile
and gray iron, such as steel or aluminum. Industry consolidation over the past
20 years has significantly reduced the number of foundries operating in the
United States. While such consolidation has translated into greater market share
for the remaining foundries, some of these remaining foundries have
significantly greater financial resources than we do. Price competition was a
factor that led to our bankruptcy filing. Furthermore, despite the reduction in
the number of operating foundries, lack of demand for castings and forgings
means that the industry remains plagued by overcapacity. Such overcapacity
contributed to our bankruptcy filing. Any of these factors could impede our
ability to remain competitive in the markets in which we operate.
INTERNATIONAL ECONOMIC AND POLITICAL FACTORS COULD AFFECT DEMAND FOR IMPORTS
AND EXPORTS WHICH COULD IMPACT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Our operations may be affected by actions of foreign governments and global
or regional economic developments. Global economic events, such as foreign
import/export policy, the cost of complying with environmental regulations or
currency fluctuations, could also affect the level of U.S. imports and exports,
thereby affecting our sales. Foreign subsidies, foreign trade agreements and
each country's adherence to the terms of such agreements can raise or lower
demand for castings by us and other domestic foundries. National and
international boycotts and embargoes of other countries' or U.S. imports and/or
exports together with the raising or lowering of tariff rates could affect the
level of competition between us and our foreign competitors. Fluctuations in the
value of the U.S. dollar relative to other currencies could also raise or lower
demand for U.S. exports as well as U.S. demand for foreign produced raw
materials and finished good imports, thereby impacting the markets in which we
operate. Such actions or developments could have a material adverse effect on
our business, financial condition and results of operations.
INCREASES IN THE PRICE OF RAW MATERIALS COULD REDUCE OUR GROSS PROFIT.
The cost of raw materials represents a significant portion of our operating
expenses. As a result of domestic and international events, the prices of raw
materials fluctuate. We have single-source
8
arrangements with many of the suppliers for the major raw materials that we use.
Our inability to continue making such purchases or the failure of these
single-source arrangements to result in the most highly competitive prices for
raw material could increase our cost of sales and lower our gross profit.
Furthermore, of all the varying prices of raw material, fluctuations in the
price of scrap metal impact our business the most. Although we have arrangements
with most of our industrial customers that enable us to adjust industrial
casting prices to reflect scrap price fluctuations, these adjustments lag the
current price of scrap metal during periods of rapidly rising or falling scrap
metal prices because these adjustments are generally based on average market
prices for prior periods. Thus, our profitability could be negatively impacted
if we are unable to pass along increases in the price of scrap metal to our
customers effectively.
THE DEPARTURE OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS.
The success of our business depends upon our senior management closely
supervising all aspects of our business. We believe our senior management has
technological and manufacturing experience that is important to the metal
casting and forging business. The loss of such key personnel could have a
material adverse effect on our operations if we were unable to attract and
retain qualified replacements.
THE SEASONAL NATURE OF OUR BUSINESS COULD IMPACT OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our business is seasonal. Therefore, our quarterly revenues and profits
historically have been lower during the first and second fiscal quarters of the
year (October through March) and higher during the third and fourth fiscal
quarters (April through September). In addition, our working capital
requirements fluctuate throughout the year. Adverse market or operating
conditions during any seasonal part of the fiscal year could have a material
adverse effect on our business, financial condition and results of operations.
WE FACE THE RISK OF WORK STOPPAGES OR OTHER LABOR DISRUPTIONS THAT COULD
IMPACT OUR RESULTS OF OPERATIONS NEGATIVELY.
We could experience work stoppages or other labor disruptions. If this were
to occur we may not be able to satisfy our customers' orders on a timely basis.
Operations could be adversely affected if any such event were to occur.
THE NATURE OF OUR BUSINESS EXPOSES US TO LIABILITY FOR VIOLATIONS OF
ENVIRONMENTAL REGULATIONS.
The risk of environmental liability is inherent in the manufacturing of
casting and forging products. Changes in environmental laws and regulations or
the discovery of previously unknown contamination or other liabilities relating
to our properties and operations could require us to sustain significant
environmental liabilities which could make it difficult to pay the interest or
principal amount of the Notes when due. In addition, we might incur significant
capital and other costs to comply with increasingly stringent emission control
laws and enforcement policies which could decrease our cash flow available to
service our indebtedness. Costs associated with complying with environmental and
other regulations was a factor in our bankruptcy filing. See
"Business -- Environmental and Other Regulatory Matters."
OUR ABILITY TO GENERATE CASH NECESSARY TO MAKE PAYMENTS ON THE NOTES DEPENDS
ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to pay the principal of and interest on the New Credit Facility
and the Notes and to finance additional indebtedness when necessary depends on
our financial and operating performance, each of which is subject to prevailing
global and national economic conditions and to financial, business, legislative,
emerging third world competitors and regulatory factors as well as other factors
beyond our control.
We may be unable to generate sufficient cash flow from operations or obtain
sufficient funding to satisfy all of our debt obligations. If we are unable to
pay our debts, we will be required to pursue one or
9
more alternative strategies, including refinancing or restructuring indebtedness
or selling additional debt or equity securities. In addition, the ability to
borrow funds under the New Credit Facility in the future will depend on our
meeting the financial covenants set forth under the terms of the New Credit
Facility and the indentures governing the Notes and our 13% Senior Subordinated
Notes due 2013 which include customary covenants and restrictions. If our
business is unable to generate sufficient cash flow from operations and future
borrowings are unavailable under the New Credit Facility in amounts sufficient
to enable us to meet our debt obligations or fund other liquidity needs, we may
need to refinance all or a portion of our debt on or before maturity. This could
negatively impact our company by hindering us from growing our business or
restricting our ability to make payments on the Notes.
FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR ABILITY TO OPERATE AND
FURTHER DEVELOP OUR BUSINESS.
Our capital resources may be insufficient to enable us to maintain
operating profitability. Failure to generate or raise sufficient funds may
require us to delay or abandon some expansion plans or expenditures, which could
harm our business and competitive position.
We expect to meet funding needs through various sources, including existing
cash balances, existing lines of credit, and cash flow from future operations.
Excluding the future cost of complying with MACT, the maximum achievable control
technology standards of the Environmental Protection Agency, estimates of our
aggregate expenditure requirements include the projected costs of:
- approximately $18.0 million to $24.0 million annually from 2004 through
2007 primarily for necessary maintenance capital expenditures and
selected strategic capital investments required to maintain optimum
operating efficiencies; and
- funds required for general corporate, other expenses and additional funds
for working capital fluctuations.
We may choose to meet any additional financial needs by borrowing
additional funds under the New Credit Facility or from other sources. As of June
30, 2004, subject to certain limitations, we had $24.5 million available to
borrow under our New Credit Facility. See "Description of New Credit Facility."
Our ability to issue debt securities, borrow funds from additional lenders and
participate in vendor financing programs will be restricted under the terms of
the New Credit Facility and the indentures governing the Notes and our 13% New
Subordinated Notes due 2013. Furthermore, the lenders may not waive these
restrictions if additional financing is needed beyond that which is currently
permitted. If we cannot raise additional funding we may not be able to make
payments on the Notes.
TERRORIST ATTACKS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, OUR
ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH.
The impact that terrorist attacks, such as those carried out on September
11, 2001, may have on our industry in general, and on us in particular, is
unknown at this time. Such attacks, and the uncertainty surrounding them, may
impact our operations in unpredictable ways, including disruptions of rail
lines, highways and fuel supplies and the possibility that our facilities could
be direct targets of, or indirect casualties of, an act of terror. In addition,
war or risk of war may also have an adverse effect on the economy. A decline in
economic activity could adversely affect our revenues or restrict our future
growth. Instability in the financial markets as a result of terrorism or war
could also affect our ability to raise capital. Such attacks may lead to
increased volatility in fuel costs and availability and could affect the results
of operations. In addition, the insurance premiums charged for some or all of
the coverages we currently maintain could increase dramatically, or the
coverages could be unavailable in the future.
BECAUSE OF THE PLAN OF REORGANIZATION, OUR FINANCIAL INFORMATION AFTER OCTOBER
1, 2003 IS NOT COMPARABLE TO OUR FINANCIAL INFORMATION PRIOR THERETO.
As a result of the consummation of the Plan of Reorganization, we are
operating our business under a new capital structure. In addition, we are
subject to the fresh-start reporting rules. Fresh-start reporting
10
requires that, upon our emergence from Chapter 11 proceedings, we establish a
"fair value" basis for the carrying value of the assets and liabilities of our
reorganized company. Although the effective date of the Plan of Reorganization
was October 8, 2003, hereinafter referred to as the Effective Date, due to the
immateriality of the results of operations for the period between October 1,
2003 and the Effective Date, we accounted for the consummation of the Plan of
Reorganization as if it had occurred on October 1, 2003 and implemented
fresh-start reporting as of that date. Accordingly, our financial condition and
results of operations after October 1, 2003, the initial date of fresh-start
reporting, is not comparable to the financial condition or results of operations
reflected in the historical financial statements contained in this prospectus.
See "Selected Consolidated Financial Data" and the financial statements and
related footnotes attached hereto.
11
THE REFINANCING TRANSACTIONS
In connection with the Plan of Reorganization and concurrently with the
issuance of the Notes, we consummated the following refinancing transactions:
REPAYMENT OF OLD CREDIT FACILITY
We paid in full our obligations under the old credit facility (including
accrued interest) of $148.2 million.
CANCELLATION OF SENIOR SUBORDINATED NOTES
All of our outstanding 11 1/8% Notes (including accrued interest) were
cancelled in exchange for:
- $30.0 million in cash,
- $100.0 million in aggregate principal amount of the Notes offered hereby
and
- 38 million shares of common stock of ACP. Each of the holders of the
11 1/8% Notes was also offered the opportunity to purchase its pro rata
share of our 11% Senior Secured Notes and warrants to acquire up to 34.2
million shares of the common stock of ACP.
CANCELLATION OF PIK NOTE
Our 14% senior secured paid-in-kind note in an original aggregate principal
amount of $9.9 million (plus accrued and unpaid interest thereon), or PIK Note,
was cancelled in exchange for
- Notes with a principal amount equal to $13.134 million and warrants to
acquire 3.8 million shares of common stock of ACP and
- cash in the amount of $45,400.
We conducted a rights offering, whereby holders of the 11 1/8% Notes were
given the opportunity to provide, for cash, up to $110.0 million of financing
through the purchase of up to $119.996 million face amount of our 11% Senior
Secured Notes due 2010 and warrants to acquire up to 34.2 million shares of
common stock of ACP. In case holders of the 11 1/8% Notes failed to subscribe
for the full $110.0 million, for cash, we also obtained standby commitment
agreements from Mackay Shields LLC, Exis Differential Holdings Ltd., Citicorp
Mezzanine III, L.P., Trust Company of the West and Metropolitan Life Insurance
Company whereby these Standby Purchasers collectively agreed to provide up to
the full $110.0 million of financing for the Plan of Reorganization by
participating in the rights offering (to the extent that they were holders of
the 11 1/8% Notes) as well as purchasing any and all unsubscribed securities not
subscribed for cash by the other holders of 11 1/8% Notes. Approximately 94% of
the holders of the 11 1/8% Notes participated in the rights offering, purchasing
approximately $113.0 million face amount of our 11% Senior Secured Notes due
2010 for approximately $103.6 million in cash. The Standby Purchasers were,
therefore, only required to purchase approximately $7.0 million face amount of
our 11% Senior Secured Notes due 2010 for approximately $6.4 million. The
Standby Purchasers also purchased their portion of the 11% Senior Secured Notes
as holders of the 11 1/8% Notes.
CONSUMMATION OF NEW CREDIT FACILITY
We entered into the New Credit Facility with a syndicate of financial
institutions for which Fleet Capital Corporation acts as agent, Fleet
Securities, Inc. acts as arranger, Congress Financial Corporation (Central) acts
individually and as syndication agent and General Electric Capital Corporation
acts individually and as documentation agent. The New Credit Facility is a
five-year facility providing for a term loan of $22.085 million and a revolving
credit facility (with a $5.0 million sublimit for the issuance of letters of
credit) for borrowings of up to $70.0 million. Availability under the revolver
is a function of our eligible receivables and inventory. As of June 30, 2004, we
had $20.5 million of term loans outstanding
12
and $45.5 million drawn on our revolver. Based on the formulas under the New
Credit Facility, the maximum amount available for borrowing as of June 30, 2004
was $24.5 million. The New Credit Facility limits the amount of additional debt
that we can incur. See "Description of New Credit Facility."
ISSUANCE OF THE NOTES
We issued $100.0 million in aggregate principal amount of the Notes to the
holders of the 11 1/8% Notes in partial satisfaction of the claims against us.
ISSUANCE OF NEW ACP HOLDINGS COMMON STOCK
We issued 38 million shares of common stock in ACP Holding Company to the
holders of the 11 1/8% Notes and 4 million shares to certain members of our
management. One million of the shares vested immediately upon issuance.
One-third of the remaining unvested shares of each member of management who
received shares shall vest on a cumulative basis on each anniversary of the
Effective Date, if as of such date such member of management is still in our
employ.
ISSUANCE OF WARRANTS EXERCISABLE FOR COMMON STOCK OF ACP
Our ultimate parent company, ACP, issued warrants exercisable for 38
million shares of its common stock to the holders of the 11 1/8% Notes who
participated in the rights offering, the Standby Purchasers and Citicorp
Mezzanine III, L.P., the holder of the PIK Note.
USE OF PROCEEDS
All of the Notes offered by this prospectus are being offered for sale by
the selling Noteholders. We will not receive any portion of the net proceeds of
this offering.
13
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of March 31, 2004. The terms of our Plan of Reorganization
are described below in the section captioned "Business -- Bankruptcy
Proceedings." This table should be read in conjunction with our consolidated
financial statements and the related notes to the consolidated financial
statements included elsewhere in this prospectus. All amounts are presented in
thousands.
<Table>
<Caption>
AS OF
JUNE 30,
2004
--------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ --
========
Debt:
Senior Bank Facility:
Revolver............................................... $ 45,463
Term facilities........................................ 20,508
11% Senior Secured Notes due 2010, net of discount of
$9,427................................................. 123,101
13% Senior Subordinated Notes due 2013.................... 100,000
Capital lease obligations................................. 2,256
--------
Total debt................................................ 291,328
Total stockholder's equity.................................. 5,996
--------
Total capitalization........................................ $297,324
========
</Table>
14
SELECTED CONSOLIDATED FINANCIAL DATA
On August 5, 2003, ACP, NFC, Neenah and their domestic wholly-owned
domestic subsidiaries filed for bankruptcy protection and emerged therefrom on
October 8, 2003. Although the Plan of Reorganization became effective on October
8, 2003, due to the immateriality of the results of operations for the period
between October 1, 2003 and the Effective Date, for financial reporting purposes
we recorded the fresh-start adjustments necessitated by the American Institute
of Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code," ("SOP 90-7") on
October 1, 2003.
As a result of our emergence from Chapter 11 bankruptcy and the application
of fresh-start reporting, our consolidated financial statements for the periods
commencing on October 1, 2003 will be referred to as the "Reorganized Company"
and will not be comparable with any periods prior to October 1, 2003, which are
referred to as the "Predecessor Company" (see Notes 1, 2 and 3 to our
consolidated financial statements). All references to years ending September 30,
2003, 2002, 2000, 2001 and 1999 and the nine months ended June 30, 2003 are to
the Predecessor Company. All references to the periods subsequent to October 1,
2003 are to the Reorganized Company.
The following table presents our selected historical consolidated financial
data as of and for the years ended September 30, 1999, 2000, 2001, 2002 and
2003, which were derived from our audited financial statements and historical
consolidated financial data as of and for the nine months ended June 30, 2003
and 2004, which were derived from our unaudited interim financial statements.
The historical consolidated financial data should be read in conjunction with
the financial statements and the related notes and other information contained
elsewhere in this report, including the information set forth under the headings
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All amounts are presented in thousands.
<Table>
<Caption>
PREDECESSOR
-------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
--------------------------------------------------------------------- -------------------
1999(2)(3)(4) 2000(2)(3)(4) 2001(2)(3)(4) 2002(3)(4) 2003(4) 2003(4) 2004
------------- ------------- ------------- ---------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $477,353 $488,195 $398,782 $387,707 $375,063 $274,128 $319,655
Cost of sales...................... 381,841 391,646 335,264 323,740 321,834 235,056 268,371
-------- -------- -------- -------- -------- -------- --------
Gross profit....................... 95,512 96,549 63,518 63,967 53,229 39,072 51,284
Selling, general and administrative
expenses......................... 31,137 33,093 27,587 28,743 26,132 19,223 19,300
Amortization expense............... 10,958 10,379 10,489 3,829 3,819 2,865 5,344
Provision for impairment of
assets........................... -- -- -- 74 -- -- --
Other expenses (income)(1)......... 7,518 85 (434) 544 195 (14) (257)
-------- -------- -------- -------- -------- -------- --------
Operating income................... 45,899 52,992 25,876 30,777 23,083 16,998 26,897
Interest expense, net.............. 38,870 42,971 43,009 42,647 46,620 35,090 25,540
Reorganization expense............. -- -- -- -- 7,874 5,046 --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes.......... 7,029 10,021 (17,133) (11,870) (31,411) (23,138) 1,357
Provision (credit) for income
taxes............................ 4,336 6,094 (4,004) (5,917) (8,541) (9,225) 540
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations....................... 2,693 3,927 (13,129) (5,953) (22,870) (13,883) 817
Loss from discontinued operations,
net of income taxes.............. (4,585) (9,070) (4,325) (41,750) (1,095) (1,095) (359)
Gain (loss) on sale of discontinued
operations, net of income
taxes............................ -- -- 2,404 -- (1,596) (1,596) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ (1,892) $ (5,143) $(15,050) $(47,703) $(25,561) $(16,574) $ 458
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents.......... $ 17,368 $ 19,478 $ 4,346 $ 26,164 $ 24,356 $ 7,465 --
Working capital.................... 83,962 86,080 72,140 65,050 103,683 (50,750) 50,927
Total assets....................... 641,702 666,218 626,443 569,388 536,834 556,800 406,126
Total debt......................... 428,007 449,607 434,077 451,432 439,357 440,946 291,328
Total stockholder's equity
(deficit)........................ 63,750 58,518 41,939 (12,146) (39,016) (23,471) $ 5,996
</Table>
15
- ---------------
(1) In 1999, other expenses includes a $6,713 charge related to the closure of
Dalton Corporation's Ashland facility.
(2) On October 2, 2000, we sold all of the issued and outstanding shares of
common stock of Hartley Controls Corporation. The results of the operations
of Hartley Controls Corporation have been reported separately as
discontinued operations for all periods presented.
(3) During the year ended September 30, 2002, we discontinued the operations of
Cast Alloys. The results of Cast Alloys have been reported separately as
discontinued operations for all periods presented.
(4) During the year ended September 30, 2003, we sold substantially all of the
assets of Belcher Corporation. The results of Belcher Corporation have been
reported separately as discontinued operations for all periods presented.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. This prospectus contains,
in addition to historical information, forward-looking statements that include
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements.
RESULTS OF OPERATIONS
We derive substantially all of our revenue from manufacturing and marketing
a wide range of metal castings and forgings for the heavy municipal market and
selected segments of the industrial markets. We have two reportable segments,
Castings and Forgings. The Castings segment produces iron castings for use in
heavy municipal and industrial applications. This segment sells directly to
original equipment manufacturers, hereinafter referred to as OEMs, as well as to
industrial end users. The forgings segment, operated by Mercer, is a producer of
complex-shaped forged components for use in transportation, railroad, mining and
heavy industrial applications. Mercer is also a producer of microalloy forgings.
Mercer sells directly to OEMs, as well as to industrial end users. Mercer's
subsidiary, A&M Specialties, Inc., machines forgings and castings for Mercer and
other industrial applications. Restructuring charges and certain other expenses,
such as income taxes, general corporate expenses and financing costs, are not
allocated between our two operating segments.
Due to our emergence from Chapter 11 proceedings, we have implemented the
"fresh start" accounting provisions of AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
to our financial statements. Fresh start requires that, upon our emergence, we
establish a "fair value" basis for the carrying value of the assets and
liabilities for the reorganized company. Although the effective date of the Plan
of Reorganization was October 8, 2003, due to the immateriality of the results
of operations for the period between October 1, 2003 and the effective date, we
accounted for the consummation of the Plan of Reorganization as if it has
occurred on October 1, 2003 and implemented fresh start accounting as of that
date.
As a consequence of the Chapter 11 reorganization, financial results for
periods commencing on October 1, 2003 are referred to as the "Reorganized
Company" and are not comparable to the financial statements for periods prior to
October 1, 2003 which are referred to as the "Predecessor Company."
REORGANIZED COMPANY THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO PREDECESSOR
COMPANY THREE MONTHS ENDED JUNE 30, 2003
Net sales. Net sales for the three months ended June 30, 2004 were $124.7
million which are $21.9 million or 21.3% higher than the quarter ended June 30,
2003. Approximately $11.5 million, which represents 53% of the total increase in
net sales, was due to the increased cost of steel scrap charged to customers.
The remainder of the increase was due to increased demand for industrial
castings used in the heavy duty truck and heating, ventilation and air
conditioning (HVAC) markets.
Gross profit. Gross profit for the three months ended June 30, 2004 was
$26.1 million, an increase of $8.4 million, or 47.3%, as compared to the quarter
ended June 30, 2003. Gross profit as a percentage of net sales increased to
20.9% for the three months ended June 30, 2004 from 17.2% for the quarter ended
June 30, 2003. The majority of the increase in gross profit resulted from sales
volume increases and the efficiencies achieved by operating the manufacturing
plants at higher capacity. In addition, approximately $1.9 million of the
increase was due to recovery from customers of the increased cost of steel scrap
incurred in prior periods. These increased scrap metal costs are recovered on a
delayed basis from industrial customers and require a general price increase to
recover the costs from municipal customers.
17
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2004 were $6.9
million, an increase of $0.4 million, or 6.1%, as compared to the $6.5 million
for the quarter ended June 30, 2003. The increase was due to increased costs in
relation to the greater sales volume. Selling, general and administrative
expenses decreased as a percentage of net sales to 5.6% compared to the 6.4% for
the quarter ended June 30, 2003.
Amortization of intangible assets. Amortization of intangible assets was
$1.8 million for the three months ended June 30, 2004, an increase of $0.8
million, or 85.7%, as compared to the $1.0 million for the quarter ended June
30, 2003. The increase was due to the increase in amortizable identifiable
intangible assets resulting from applying fresh start accounting as discussed in
Note 2 -- Reorganization and Fresh Start Accounting.
Operating income. Operating income was $17.6 million for the three months
ended June 30, 2004, an increase of $7.4 million from operating income of $12.0
million for the quarter ended June 30, 2003. The increased operating income was
caused by stronger demand for industrial castings, efficiencies achieved by
operating at higher capacity and recovery from customers of the increased cost
of steel scrap incurred in prior periods. The increase in operating income was
reduced by increased selling, general and administrative expenses. As a
percentage of net sales, operating income increased from 9.9% for the quarter
ended June 30, 2003 to 14.1% for the three months ended June 30, 2004.
Net interest expense. Net interest expense from continuing operations was
$8.5 million for the three months ended June 30, 2004 compared to $12.0 million
for the quarter ended June 30, 2003. The decreased interest expense resulted
from the reduction in borrowing due to the reorganization discussed in Note
2 -- Reorganization and Fresh Start Accounting.
Reorganization expense. The Company recorded $3.2 million of
reorganization expenses in the three months ended June 30, 2003 which related to
professional fees incurred in connection with the restructuring of the Company
and our filing for Chapter 11 bankruptcy protection.
Income tax provision (benefit). The effective tax rate of the income tax
provision recorded for the three months ended June 30, 2004 is lower than the
amount computed by applying the statutory rate of approximately 40% to the
income before income taxes due to losses incurred during the six months ended
March 31, 2004 for which there was previously uncertainty regarding the
realization of those net operating losses to offset future taxable income. The
taxable income for the three months ended June 30, 2004 put the Company into a
taxable position for the year. The provision for income taxes for the three
months ended June 30, 2004 reflects the amount due based on the income before
income taxes reported for the nine months ended June 30, 2004. The income tax
benefit for the three months ended June 30, 2003 was equal to the amount
computed by applying our statutory rate of approximately 40% to the loss before
income taxes.
REORGANIZED COMPANY NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO PREDECESSOR
COMPANY NINE MONTHS ENDED JUNE 30, 2003
Net sales. Net sales for the nine months ended June 30, 2004 were $319.7
million which are $45.5 million or 16.6% higher than the nine months ended June
30, 2003. Approximately $18.9 million, which represents 42% of the total
increase in net sales, was due to the increased cost of steel scrap charged to
customers. The remainder of the increase was due to increased demand for
industrial castings used in the heavy duty truck and heating, ventilation and
air conditioning (HVAC) markets.
Gross profit. Gross profit for the nine months ended June 30, 2004 was
$51.3 million, an increase of $12.2 million, or 31.3%, as compared to the nine
months ended June 30, 2003. Gross profit as a percentage of net sales increased
to 16.0% for the nine months ended June 30, 2004 from 14.3% for the nine months
ended June 30, 2003. The increase in gross profit resulted from sales volume
increases and the efficiencies achieved by operating the manufacturing plants at
higher capacity. This increase was partially offset by an approximately $2.9
million increase in scrap metal costs which have not yet been recovered from
customers. These increased scrap metal costs are recovered on a delayed basis
from our industrial customers and require a general price increase to recover
the costs from municipal customers.
18
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended June 30, 2004 were $19.3
million, an increase of $0.1 million, or 0.4%, as compared to the $19.2 million
for the nine months ended June 30, 2003. Selling, general and administrative
expenses decreased as a percentage of net sales to 6.0% compared to 7.0% for the
nine months ended June 30, 2003. The percentage decrease was due to stable
selling, general and administrative expenses spread across a larger sales
volume.
Amortization of intangible assets. Amortization of intangible assets was
$5.3 million for the nine months ended June 30, 2004, an increase of $2.4
million, or 86.5%, as compared to the $2.9 million for the nine months ended
June 30, 2003. The increase was due to the increase in amortizable identifiable
intangible assets resulting from applying fresh start accounting in conjunction
with the reorganization of the Company.
Operating income. Operating income was $26.9 million for the nine months
ended June 30, 2004, an increase of $9.9 million from operating income of $17.0
million for the nine months ended June 30, 2003. The increased operating income
was caused by an increase in demand for industrial castings and operating
efficiencies, partially offset by increased metal costs not yet recovered from
customers. As a percentage of net sales, operating income increased from 6.2%
for the nine months ended June 30, 2003 to 8.4% for the nine months ended June
30, 2004.
Net interest expense. Net interest expense from continuing operations was
$25.5 million for the nine months ended June 30, 2004 compared to $35.1 million
for the nine months ended June 30, 2003. The decreased interest expense resulted
from the reduction in borrowing due to the reorganization of the Company.
Reorganization expense. The Company recorded $5.0 million of
reorganization expenses in the nine months ended June 30, 2003 which related to
professional fees incurred in connection with the restructuring of the company
and our filing for Chapter 11 bankruptcy protection.
Income tax provision (benefit). The income tax provision (benefit) for the
nine months ended June 30, 2004 and 2003 was computed by applying our statutory
rate of approximately 40% to the income (loss) before income taxes.
Loss from discontinued operations. In December 2002, we sold the assets of
Belcher. In accordance with the provisions of SFAS 144, the results of
operations for Belcher have been reported as discontinued operations in the
statement of operations for the nine months ended June 30, 2004 and 2003.
PREDECESSOR COMPANY FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO THE FISCAL
YEAR ENDED SEPTEMBER 30, 2002
Net Sales. Net sales for the year ended September 30, 2003 were $375.1
million, which was $12.6 million or 3.2% lower than the year ended September 30,
2002. The decrease in net sales resulted from a decreased demand for industrial
castings used for the heavy duty truck market. The demand for class 8 vehicles
was artificially accelerated in fiscal 2002 by the consumers' desire to buy new
units prior to October 1, 2002 which was the date that new emission compliance
standards for engines became effective. This phenomenon is evidenced by the fact
that the North American build for class 8 trucks during the period from April
2003 through September 2003 dropped approximately 13.1% from the same period one
year earlier. Both the Castings and Forgings segments were similarly impacted by
the drop in demand of class 8 units since they both service this market. We
believe there is an excess capacity for the foundry industry that is exacerbated
by technological advances made abroad coupled with cheaper labor costs.
Gross Profit. Gross profit was $53.2 million for the year ended September
30, 2003, which was $10.8 million or 16.9% lower than the year ended September
30, 2002. Gross profit as a percentage of net sales decreased to 14.2% during
the year ended September 30, 2003 from 16.5% for the fiscal year ended September
30, 2002. The decrease in gross profit resulted from a number of factors.
Initially, overall industrial casting and forging shipments decreased by
approximately 3%. Our major markets for industrial products have been in a three
year decline with the fiscal year ended September 30, 2003 being the third year.
Early indicators signal that demand for our products may be returning, but it is
too early in the cycle to be any more definitive. Secondly, we have continued to
experience price compression for our industrial
19
products at the same time that overall demand has been decreasing. Prices for
industrial products are approximately 1.5% lower for the 12 months ended
September 30, 2003 than they were for the twelve month period ended September
30, 2002. Also, scrap metal prices have escalated during the time period that
our selling prices for finished industrial products have decreased. The weighted
average cost for all grades of scrap increased over 12% during the fiscal year
ended September 30, 2003 compared to the same period ended September 30, 2002.
The increase in scrap metal prices is generally recoverable from our industrial
customers via a surcharge mechanism, but it lags actual payment of raw material
invoices by as much as six months. Lastly, medical costs for both health
insurance for our employees as well as the medical portion of workers
compensation coverage have experienced double digit increases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 2003 were $26.1
million, a decrease of $2.6 million from the $28.7 million for the year ended
September 30, 2002. As a percentage of net sales, selling, general and
administrative expenses decreased to 7.0% for the year ended September 30, 2003
from 7.4% for the fiscal year ended September 30, 2002. The decrease was due to
reductions in overall employment headcount that approximated 2.2% that were
undertaken in response to the lower sales volume noted above. In addition, a
reduction in overall spending driven by an overall general desire for cost
savings also contributed to reduced selling, general and administrative
expenses.
Amortization of Intangible Assets. Amortization of intangible assets for
the years ended September 30, 2003 and 2002 was $3.8 million.
Other Expenses. Other expenses for the years ended September 30, 2003 and
2002 consist of losses of $0.2 million and $0.5 million, respectively, for the
disposal of long-lived assets in the ordinary course of business.
Operating Income. Operating income was $23.1 million for the year ended
September 30, 2003, a decrease of $7.7 million or 25.0% from the year ended
September 30, 2002. The decrease was caused by decreased demand for industrial
castings, price compression due to the capacity metrics in the foundry industry
and escalating scrap metal costs. The increase was partially offset by lower
selling, general and administrative expenses. As a percentage of net sales,
operating income decreased from 7.9% for the year ended September 30, 2002 to
6.2% for the year ended September 30, 2003.
Net Interest Expense. Net interest expense increased to $46.6 million for
the year ended September 30, 2003 from $42.6 million for the year ended
September 30, 2002. The increased interest expense resulted from interest
accrued on the CVC PIK Note and an interest premium on our borrowings under our
credit facility in the current year. In addition, $6.3 million of payments to
bondholders in connection with the reorganization were classified as interest
expense. We did not record $5.0 million of contractual interest expense for
interest incurred on the 11 1/8% Notes subsequent to our filing voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code.
Reorganization Expense. We recorded $7.9 million of reorganization
expenses in 2003 which related to professional fees incurred in connection with
the restructuring of our company and our filing for Chapter 11 bankruptcy
protection as well as the write-off of debt issuance costs and premiums related
to the 11 1/8% Notes.
Provision for Income Taxes. The credit for income taxes for the year ended
September 30, 2003 is lower than the amount computed by applying our statutory
rate of 35% to the loss before income taxes principally due to permanent
differences related to the reorganization expenses incurred as noted above.
Loss from Discontinued Operations. During December, 2002, we sold
substantially all of the assets of Belcher. The disposition of Belcher resulted
in a loss of $1.6 million net of income taxes, which we recognized in the year
ended September 30, 2003. In accordance with the provisions of Statement of
Financial Accounting Standards No. 144, or SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the results of operations for
Belcher have been reported as discontinued operations in the statement of
operations for all periods presented.
In January, 2002, management initiated a plan for the discontinuation of
the operations of Cast Alloys, Inc., hereafter referred to as Cast Alloys, by
closing its manufacturing facilities. In accordance with
20
the provisions of SFAS 144, the results of operations for Cast Alloys have been
reported as discontinued operations in the statement of operations for all
periods presented.
PREDECESSOR COMPANY FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO THE FISCAL
YEAR ENDED SEPTEMBER 30, 2001
Net Sales. Net sales for the year ended September 30, 2002 were $387.7
million, which was $11.1 million or 2.8% lower than the year ended September 30,
2001. The decrease in net sales resulted from weakness in the demand for
industrial castings used for the HVAC market and an overall slowing of demand
for castings in our other major markets.
Gross Profit. Gross profit was $64.0 million for the year ended September
30, 2002, an increase of $5.0 million over the year ended September 30, 2001.
Gross profit as a percentage of net sales increased to 16.5% during the year
ended September 30, 2002 from 15.9% for the fiscal year ended September 30,
2001. Gross profit percentage was positively impacted during the year ended
September 30, 2002 by modest reductions in raw material costs and improved
efficiency in the manufacturing process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 2002 were $28.7
million, an increase of $1.1 million from the $27.6 million for the year ended
September 30, 2001. As a percentage of net sales, selling, general and
administrative expenses increased to 7.4% for the year ended September 30, 2002
from 6.9% for the fiscal year ended September 30, 2001. The increase was due to
increased professional fees paid in conjunction with debt refinancing and other
corporate projects in 2002 and a favorable escrow refund received in 2001 which
did not occur in 2002.
Amortization of Intangible Assets. Amortization of intangible assets for
the year ended September 30, 2002 was $3.8 million, a decrease of $6.7 million
from the $10.5 million for the year ended September 30, 2001. The decrease was
due to the adoption of Statement of Financial Accounting Standards No. 142, or
SFAS 142, as of October 1, 2001. Under SFAS 142, goodwill is no longer amortized
but instead is tested for impairment. Except for the discontinued operations of
Cast Alloys there was no deemed impairment of intangible assets.
Provision for Impairment of Assets. We recognized an impairment charge of
$0.1 million related to a building held for sale during the year ended September
30, 2002.
Other Expenses (Income). Other expenses (income) for the years ended
September 30, 2002 and 2001 consist of losses of $0.5 million and gains of $0.4
million, respectively, for the disposal of long-lived assets in the ordinary
course of business.
Operating Income. Operating income was $30.8 million for the year ended
September 30, 2002, an increase of $4.9 million or 18.9% from the year ended
September 30, 2001. The increase was caused by the $6.7 million decrease in
amortization expense, partially offset by a $1.1 million increase in selling,
general and administrative expenses. As a percentage of net sales, operating
income increased to 7.9% for the year ended September 30, 2002 from 6.5% for the
year ended September 30, 2001.
Net Interest Expense. Net interest expense decreased to $42.6 million for
the year ended September 30, 2002 from $43.0 million for the year ended
September 30, 2001. The decreased interest expense resulted from our principal
debt repayments and lower interest rates on our credit facility, partially
offset by the interest on the higher level of borrowings outstanding on our
revolving credit facility during the year ended September 30, 2002 as compared
to the year ended September 30, 2001.
Provision for Income Taxes. The credit for income taxes for the year ended
September 30, 2002 is higher than the amount computed by applying our statutory
rate of approximately 35% to the loss before income taxes primarily due to
permanent differences related to the discontinuance of Cast Alloys.
Discontinued Operations. On October 2, 2000, we sold the common stock of
Hartley Controls Corporation. The disposition of Hartley Controls Corporation
resulted in a gain of $2.4 million, net of income taxes of $1.6 million, which
was recorded during the year ended September 30, 2001.
21
LIQUIDITY AND CAPITAL RESOURCES
New Credit Facility. In connection with our Chapter 11 filing and
emergence therefrom, we entered into the New Credit Facility with a syndicate of
financial institutions for which Fleet Capital Corporation acts as agent, Fleet
Securities, Inc. acts as arranger, Congress Financial Corporation (Central) acts
individually and as syndication agent and General Electric Capital Corporation
acts individually and as documentation agent. The New Credit Facility has a
five-year maturity and Neenah Foundry Company and all of its active domestic
subsidiaries are the borrowers under the New Credit Facility.
The New Credit Facility consists of a revolving credit facility of up to
$70.0 million (with a $5.0 million sublimit available for letters of credit) and
borrowing base term loans in the aggregate amount of $22.085 million. The New
Credit Facility has a five-year maturity and bears interest at rates based on
the lenders' Base Rate, as defined in the New Credit Facility or an adjusted
rate based on LIBOR. Availability under the New Credit Facility is based on
various advance rates against our accounts receivable and inventory. Amounts
under the revolving credit facility may be borrowed, repaid and reborrowed
subject to the terms of the facility. At June 30, 2004, we had approximately
$45.0 million outstanding under the revolving credit facility which includes
$13.8 million borrowed on June 30, 2004 for an interest payment due July 1, 2004
and approximately $20.5 million outstanding under the term loan facility. No
portion of the term loan, once repaid, may be reborrowed. The proceeds of the
loan facility on the Effective Date were utilized to repay a portion of the old
credit facility pursuant to the Plan of Reorganization and other cash
distributions.
NFC and the inactive subsidiaries of Neenah jointly and severally guarantee
Neenah's obligations under the New Credit Facility, subject to customary
exceptions for transactions of this type. The borrower's and guarantors'
obligations under the New Credit Facility are secured by a first priority
perfected security interest, subject to customary restrictions, in substantially
all of Neenah's tangible and intangible assets. The Notes, and the guarantees in
respect thereof, are equal in right of payment to the New Credit Facility, and
the guarantees in respect thereof. The liens in respect of the Notes are junior
to the liens securing the New Credit Facility and guarantees thereof.
Voluntary prepayments may be made at any time on the term loan borrowings
or the revolving borrowings upon customary prior notice. Prepayments on the term
loan borrowings may be made at any time without premium or penalty unless a
simultaneous prepayment is being made on the revolving borrowings or if any such
prepayment has been made previously. For the first three years of the New Credit
Facility, prepayments on the revolving borrowings are subject to certain
premiums specified in the New Credit Facility. Mandatory repayments are required
under certain circumstances, including a sale of assets or the issuance of debt
or equity.
The New Credit Facility requires Neenah to observe certain customary
conditions, affirmative covenants and negative covenants including financial
covenants. The New Credit Facility also contains events of default customary for
these types of facilities, including, without limitation, payment defaults,
material misrepresentations, covenant defaults, bankruptcy and a change of
ownership of Neenah Foundry Company, NFC or ACP.
11% Senior Secured Notes due 2010. In connection with Neenah's Chapter 11
filing and emergence therefrom, Neenah issued Senior Secured Notes due 2010 in
the principal amount of $133.1 million, with a coupon rate of 11%. The
obligations under the senior secured notes are pari passu in right of payment to
the New Credit Facility and the associated guarantees. The liens securing the
senior secured notes are junior to the liens securing the New Credit Facility
and guarantees thereof. The senior secured notes are subordinate to the New
Credit Facility. Interest on the senior secured notes is payable on a
semi-annual basis. Neenah's obligations under the notes are guaranteed on a
secured basis by each of its wholly-owned subsidiaries. Subject to the
restrictions in the New Credit Facility, the notes are redeemable at our option
in whole or in part at any time after the fourth anniversary of their issuance,
with not less than 30 days nor more than 60 days notice for an amount to be
determined pursuant to a formula set forth in the indenture governing the notes.
Upon the occurrence of a "change of control" as defined in the indenture
governing the notes, Neenah Foundry Company may be required to make an offer to
purchase the secured notes at 101% of the outstanding principal amount thereof,
plus accrued and unpaid interest up to the
22
purchase date. The secured notes contain customary covenants typical to this
type of financing, such as limitations on (1) indebtedness, (2) restricted
payments, (3) liens, (4) restrictions on distributions from restricted
subsidiaries, (5) sale of assets, (6) affiliate transactions, (7) mergers and
consolidations and (8) lines of business. The secured notes also contain
customary events of default typical to this type of financing, such as (1)
failure to pay principal and/or interest when due, (2) failure to observe
covenants, (3) certain events of bankruptcy, (4) the rendering of certain
judgments or (5) the loss of any guarantee.
13% Senior Subordinated Notes due 2013. In connection with Neenah's
Chapter 11 filing and emergence therefrom, Neenah Foundry Company issued Senior
Subordinated Notes due 2013 in the principal amount of $100.0 million, with a
coupon rate of 13%. The obligations under the senior subordinated notes are
senior to all of Neenah Foundry Company's subordinated unsecured indebtedness
and are subordinate to the New Credit Facility and the senior secured notes.
Interest on the senior subordinated notes is payable on a semi-annual basis.
Five percent of the interest on the senior subordinated notes will be paid in
cash and 8% interest may be paid-in-kind. Neenah Foundry Company's obligations
under the notes are guaranteed on an unsecured basis by each of its wholly-owned
subsidiaries. Subject to the restrictions in the New Credit Facility, the notes
are redeemable at our option in whole or in part at any time, with not less than
30 days nor more than 60 days notice for an amount to be determined pursuant to
a formula set forth in the indenture governing the notes. Upon the occurrence of
a "change of control" as defined in the indenture governing the notes, Neenah
Foundry Company may be required to make an offer to purchase the subordinated
notes at 101% of the outstanding principal amount thereof, plus accrued and
unpaid interest up to the purchase date. The subordinated notes contain
customary covenants typical to this type of financing, such as limitations on
(1) indebtedness, (2) restricted payments, (3) liens, (4) restrictions on
distributions from restricted subsidiaries, (5) sale of assets, (6) affiliate
transactions, (7) mergers and consolidations and (8) lines of business. The
subordinated notes also contain customary events of default typical to this type
of financing, such as, (1) failure to pay principal and/or interest when due,
(2) failure to observe covenants, (3) certain events of bankruptcy, (4) the
rendering of certain judgments or (5) the loss of any guarantee.
For the nine months ended June 30, 2004 and June 30, 2003, capital
expenditures were $9.2 million and $9.3 million, respectively. Both periods
represent a level of capital expenditures necessary to maintain equipment and
facilities.
The Company's principal source of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under the Revolving Credit
Facility. Net cash used in operating activities for the nine months ended June
30, 2004 was $7.4 million, a decrease of $9.8 million from cash provided by
operating activities for the nine months ended June 30, 2003 of $2.4 million.
The decrease in net cash provided by operating activities was primarily due to a
large increase in the accounts receivable balance proportional to our increased
sales volume. The $2.4 million cash provided by operating activities for the
nine months ended March 31, 2003 included an income tax refund that the Company
received in December, 2002 of $18.4 million from the carryback of net operating
losses.
Future Capital Needs. Despite our significant decrease in leverage as a
result of the Plan of Reorganization, we are still significantly leveraged and
our ability to meet our debt obligations will depend upon future operating
performance which will be affected by many factors, some of which are beyond our
control. Based on our current level of operations, we anticipate that our
operating cash flows and available credit facilities will be sufficient to fund
our anticipated operational investments, including working capital and capital
expenditure needs, for the next twelve months and to fund our long-term needs
for the forseeable future. If, however, we are unable to service our debt
requirements as they become due or are unable to maintain ongoing compliance
with restrictive covenants, we may be forced to adopt alternative strategies
that may include reducing or delaying capital expenditures, selling assets,
restructuring or refinancing indebtedness or seeking additional equity capital.
There can be no assurances that any of these strategies could be effected on
satisfactory terms, if at all.
23
A reconciliation of EBITDA for the three and nine months ended June 30,
2004 is provided below:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2004
------------- -------------
Net income................................................. $ 8,786 $ 458
Income tax provision....................................... 300 540
Net interest expense....................................... 8,468 25,540
Depreciation and amortization.............................. 4,390 13,256
Gain on disposal of equipment.............................. (205) (257)
Loss from discontinued operations.......................... -- 359
Gregg non-cash inventory charge............................ 157 1,181
Deeter non-cash inventory charge........................... -- 624
------- -------
Consolidated EBITDA........................................ $21,896 $41,701
======= =======
</Table>
EBITDA is defined in our New Credit Facility and is generally calculated as
the sum of net income (excluding non-cash charges), income taxes, interest
expense, and depreciation and amortization. EBITDA is adjusted for acquisitions
and dispositions. EBITDA is not a measure prepared in accordance with accounting
principles generally accepted in the United States, but is being presented
because we and our lenders use it to evaluate our operating performance relative
to the financial covenants contained in our credit agreement. EBITDA should not
be considered a substitute for income from operations, net income, cash flows or
other measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Projected payment due dates for the pro forma debt outstanding as of
September 30, 2003 and estimated interest expense are as shown below (in
millions):
<Table>
<Caption>
EXPECTED PAYMENTS DUE BY PERIOD
--------------------------------------------------------
AFTER
TOTAL 2004 2005 2006 2007 2008 2008
------ ----- ------ ----- ----- ----- ------
Long term debt....................... $243.5 $ 3.2 $ 3.2 $ 3.2 $ 3.2 $ 3.2 $227.5
Interest on long term debt........... 235.7 28.6 28.4 28.3 28.1 28.0 94.3
Revolving credit line................ 25.0 1.2 11.1 5.8 6.9 -- --
Interest and fees on revolving credit
line............................... 2.8 1.4 0.8 0.4 0.2 -- --
Operating leases..................... 4.8 1.8 1.4 0.7 0.3 0.2 0.4
Capital lease obligations............ 4.6 2.9 1.7 -- -- -- --
------ ----- ------ ----- ----- ----- ------
Total Contractual Cash
Obligations..................... $516.4 $39.1 $ 46.6 $38.4 $38.7 $31.4 $322.2
====== ===== ====== ===== ===== ===== ======
</Table>
Please see "Executive Compensation -- Equity Incentive Plans" for
discussion of other obligations we have committed to as a result of the Plan of
Reorganization.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are, in management's view, both
very important to the portrayal of our financial condition and results of
operations and they require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Future events and their effects cannot be determined with absolute
certainty. The determination of estimates, therefore, requires the exercise of
judgment. Actual results may differ from those estimates, and such differences
may be material to the financial statements. Our accounting policies are more
fully described in Note 4 to our consolidated financial statements included
herein.
24
We believe that the most significant accounting estimates inherent in the
preparation of our financial statements include estimates associated with the
evaluation of the recoverability of certain assets including goodwill, other
intangible assets and fixed assets as well as those estimates used in the
determination of reserves related to the allowance for doubtful accounts,
obsolescence, workers compensation and pensions and other post-retirement
benefits. Various assumptions and other factors underlie the determination of
these significant estimates. In addition to assumptions regarding general
economic conditions, the process of determining significant estimates is
fact-specific and accounts for such factors as historical experience, product
mix and, in some cases, actuarial techniques. We constantly reevaluate these
significant factors and make adjustments where facts and circumstances
necessitate. Historically, our actual results have not significantly deviated
from those determined using the estimates described above.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
- Defined-Benefit Pension Plans. We account for our defined benefit
pension plans in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" which requires that amounts recognized in financial statements
be determined on an actuarial basis. The most significant element in
determining our pension expense in accordance with SFAS 87 is the
expected return on plan assets. We have assumed that the expected
long-term rate of return on plan assets will be 7.50% to 8.50%, depending
on the plan. Over the long term, our pension plan assets have earned in
excess of these rates; therefore, we believe that our assumption of
future returns is reasonable. The plan assets, however, have earned a
rate of return substantially less than these rates in the last two years.
Should this trend continue, our future pension expense would likely
increase. At the end of each year, we determine the discount rate to be
used to discount plan liabilities. In developing this rate, we use the
Moody's Average AA Corporate Bonds index. At September 30, 2003, we
determined the discount rate to be 6.25%. Changes in discount rates over
the past few years have not materially affected our pension expense. The
net effect of changes in this rate, as well as other changes in actuarial
assumptions and experience, have been deferred as allowed by SFAS 87.
This has had a significant negative effect on our reported net worth.
- Other Postretirement Benefits. We provide retiree health benefits to
qualified employees under an unfunded plan. We use various actuarial
assumptions including the discount rate and the expected trend in health
care costs and benefit obligations for our retiree health plan.
Consistent with our pension plans, we used a discount rate of 6.25%. In
2003, our assumed healthcare cost trend rate was 9.0% decreasing
gradually to 5.0% in 2010 and then remaining at that level thereafter.
Changes in these rates could materially affect our future operating
results and net worth.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long-term variable interest
rate debt. Currently, our only long-term debt obligations with variable interest
rates are our obligations under the New Credit Facility. We enter into debt
obligations primarily to support general corporate purposes, including capital
expenditures and working capital needs.
INFLATION
Although we cannot accurately anticipate the effect of inflation on our
operations, we believe that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on our results of operations.
25
BUSINESS
OVERVIEW
Neenah, together with its active domestic subsidiaries, manufactures and
markets a wide range of iron castings and forgings for the heavy municipal
market and selected segments of the industrial markets. Neenah began business in
1872 and has built a strong reputation for producing quality iron castings.
Neenah is one of the largest manufacturers of heavy municipal iron castings in
the United States. Neenah's broad range of heavy municipal iron castings
includes manhole covers and frames, storm sewer frames and grates, heavy duty
airport castings, specialized trench drain castings, specialty flood control
castings and ornamental tree grates. Neenah sells these municipal castings
throughout the United States to state and local government entities, utility
companies, precast concrete manhole structure producers and contractors for both
new construction and infrastructure replacement. In addition, Neenah also
produces a wide range of complex industrial castings, including castings for the
transportation industry, a broad range of castings for the farm equipment
industry, and specific components for compressors used in HVAC systems.
BACKGROUND
On April 30, 1997, pursuant to an Agreement and Plan of Reorganization with
NC Merger Company and NFC, Neenah Corporation (the predecessor company) was
acquired by NFC, a holding company and a wholly owned subsidiary of ACP. Prior
to July 1, 1997, Neenah Foundry Company was one of three wholly owned
subsidiaries of Neenah Corporation, a holding company with no significant assets
or operations other than its holdings in the common stock of its three wholly
owned subsidiaries. The other two wholly owned subsidiaries were Neenah
Transport, Inc. and Hartley Controls, an entity that was later sold. On July 1,
1997, Neenah Foundry Company merged with and into Neenah Corporation and the
surviving company changed its name to Neenah Foundry Company.
On March 30, 1998 Neenah acquired all the capital stock of Deeter Foundry,
Inc. for $24.3 million. Since 1945, Deeter Foundry, Inc. has been producing gray
iron castings for the heavy municipal market. The municipal casting product line
of Deeter Foundry, Inc. includes manhole frames and covers, storm sewer inlet
frames, grates and curbs, trench grating and tree grates. Deeter Foundry, Inc.
also produces a wide variety of special application construction castings. These
products are utilized in waste treatment plants, airports, telephone and
electrical construction projects.
On April 3, 1998, Neenah acquired all the capital stock of Mercer Forge
Corporation for $47.0 million in cash. Founded in 1954, Mercer Forge Corporation
produces complex-shaped forged components for use in transportation, railroad,
mining and heavy industrial applications. Mercer Forge Corporation is also a
producer of microalloy forgings.
On September 8, 1998 Neenah acquired all the capital stock of Dalton
Corporation for $102.0 million in cash. Dalton Corporation manufactures and
sells gray iron castings for refrigeration systems, air conditioners, heavy
equipment, engines, gear boxes, stationary transmissions, heavy duty truck
transmissions and other automotive parts.
On September 8, 1998, the capital stock of Advanced Cast Products, an
entity held by ACP prior to the time ACP acquired its interest in NFC, was
contributed to Neenah by ACP. Advanced Cast Products is an independent
manufacturer of ductile iron castings that are produced through both traditional
casting methods and through Advanced Cast Products' Evapcast lost foam casting
process. Advanced Cast Products' production capabilities also include a range of
finishing operations including austempering and machining. Advanced Cast
Products sells its products primarily to companies in the heavy truck,
construction equipment, railroad, mining and automotive industries.
On December 31, 1998, Neenah purchased Cast Alloys, Inc. a manufacturer of
investment-cast titanium and stainless steel golf clubheads, for $40.1 million
in cash. Neenah discontinued the operations of Cast Alloys, Inc. in January
2002.
26
On November 30, 1999, Neenah purchased Gregg Industries, Inc., a
manufacturer of gray and ductile iron castings, for $22.9 million in cash. We
sold all of the issued and outstanding shares of common stock of Hartley
Controls Corporation on October 2, 2000. On August 8, 2002, we sold
substantially all of the assets of Peerless Corporation. We sold substantially
all of the assets of Belcher Corporation on December 27, 2002.
BANKRUPTCY PROCEEDINGS
Beginning in 2000, several trends converged to create an extremely
difficult operating environment for Neenah. First, there were dramatic cyclical
declines in some of Neenah's most important markets -- including trucks,
railroad, construction and agriculture equipment. Second, there was a major
inventory adjustment by manufacturers in the residential segment of the HVAC
equipment industry, resulting in fewer orders for Dalton's HVAC castings. Third,
domestic foundries have been suffering from underutilized capacity,
significantly increased foreign competition, continued price reduction pressure
from customers and other competitors, and increased costs associated with
heightened safety and environmental regulations. These factors have caused and
continue to cause a substantial number of foundries to cease operations or file
for bankruptcy protection over the past several years.
Beginning in May 2000, we took aggressive steps to offset the impact of the
decline in sales and earnings and improve cash flow in the difficult market
environment: William Barrett was appointed as the new chief executive officer of
NFC; Hartley Controls was sold in September 2000 for $5.0 million in total
proceeds; other excess assets were sold for $5.3 million in late 2001; the
operations of Cast Alloys, Inc. were discontinued in January 2002; substantially
all of the assets of Advanced Cast Product's subsidiary Peerless Corporation
were sold for $0.3 million in August 2002; and the assets of Belcher
Corporation, a subsidiary of Advanced Cast Products, were sold in December 2002.
Furthermore, management also implemented a significant reduction in the number
of employees, a significant reduction in capital expenditures and selected price
increases. In January 2003, we engaged Houlihan Lokey Howard & Zukin Capital to
assist in the formulation and evaluation of various options for a restructuring,
reorganization, or other strategic alternatives. Our board of directors
considered a broad range of out-of-court and in-court strategic alternatives
potentially available to us as well as several strategic alternatives.
Despite these steps, the credit rating agencies began to downgrade our
outstanding debt obligations in early 2000. Our 11 1/8% Notes became highly
illiquid and traded infrequently. According to data obtained from Telerate, the
price of the notes fell from a trailing 12 month high of $57.50 in June 2002 to
a trailing 12 month low of $30.00 in late December 2002. The trailing six month
average price as of June 23, 2003 was approximately $38.60. As of May 2003,
Neenah was not in compliance with the March 31, 2003 EBITDA covenant of its old
credit facility and lacked sufficient liquidity to make the then-due interest
payment on the 11 1/8% Notes and maintain the liquidity covenants under the old
credit facility.
On May 1, 2003 we launched both an exchange offer for the 11 1/8% Notes and
the pre-petition solicitation of acceptances of the plan of reorganization in
accordance with section 1126(b) of the Bankruptcy Code. The exchange offer,
which was to be completed outside of Bankruptcy Court, did not result in the
requisite percentage of 11 1/8% Notes tendered and both the exchange offer and
the solicitation of acceptances for the May 1, 2003 plan of reorganization were
allowed to expire.
On July 1, 2003 we launched a pre-petition solicitation of acceptances with
respect to an alternative joint plan of reorganization that was ultimately
approved. Having received sufficient votes to approve the plan of
reorganization, we together with ACP, NFC and all of our wholly-owned domestic
subsidiaries filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code, as amended, with the United States Bankruptcy Court for
the District of Delaware on August 5, 2003. On that same date we submitted to
the Bankruptcy Court our Amended Prepackaged Joint Plan of Reorganization, which
we refer to as the Plan of Reorganization, and the Disclosure Statement that we
used to solicit votes for that plan.
At the time of the Chapter 11 bankruptcy filing, we had approximately $157
million of existing senior debt under our old credit facility and $282 million
of principal and accrued and unpaid interest under our
27
11 1/8% Notes. We negotiated the continued use of our own cash collateral with
our senior lenders, thereby enabling us to utilize our own cash to conduct
business operations during the pendency of the Chapter 11 filing.
Pursuant to the Plan of Reorganization, we conducted a rights offering,
whereby holders of the 11 1/8% Notes were given the opportunity to provide up to
$110 million additional financing through the purchase of up to $119.996 million
face amount of the Notes and warrants to acquire up to 34.2 million shares of
common stock of ACP. In case holders of the 11 1/8% Notes failed to subscribe
for the full $110.0 million, we also obtained standby commitment agreements from
Mackay Shields LLC, Exis Differential Holdings Ltd., Citicorp Mezzanine III,
L.P., Trust Company of the West and Metropolitan Life Insurance Company whereby
these Standby Purchasers collectively agreed to provide up to $110.0 million of
financing for the Plan of Reorganization by participating in the rights offering
(to the extent that they were holders of the 11 1/8% Notes) as well as
purchasing any and all unsubscribed securities not subscribed for by the other
holders of 11 1/8% Notes. Approximately 94% of the holders of the 11 1/8% Notes
participated in the rights offering and the Standby Purchasers were, therefore,
only required to fund the shortfall of approximately $6.4 million.
By order dated September 26, 2003, the Bankruptcy Court confirmed the Plan
of Reorganization and the Plan of Reorganization became effective on October 8,
2003. October 8, 2003 is hereinafter referred to as the Effective Date. The Plan
of Reorganization allowed us to emerge from bankruptcy with an improved capital
structure and, because we had arranged to continue paying our trade debt on a
timely basis during the pendency of the Chapter 11 case, at the time of
emergence, we had sufficient trade credit to continue operations in the ordinary
course of business.
The Plan of Reorganization resulted in significant changes to our capital
structure. Among other things, the Plan of Reorganization provided for the
repayment in full of our old credit facility, the cancellation of $282.0 million
in principal amount of 11 1/8% Notes, the cancellation of our PIK Note and the
elimination of the interests of the former equity owners of our indirect parent
company, ACP. The cash proceeds necessary to consummate the Plan of
Reorganization were provided from the consummation of the New Credit Facility
and the issuance of the Notes. The claims and interests of our various creditors
were satisfied as follows:
- our old credit facility was repaid in cash;
- our PIK Note was cancelled and Citicorp Mezzanine III, L.P., the holder
of that note, received Notes with a principal amount equal to $13.134
million, warrants to acquire 3.8 million shares of common stock of ACP
and cash in the amount of $45,400;
- our outstanding 11 1/8% Notes were cancelled and each holder of 11 1/8%
Notes received its pro rata share of (i) $30.0 million in cash, (ii)
$100.0 million in aggregate principal amount of new 13% Senior
Subordinated Notes due 2013 of the Company, (iii) 38 million shares of
common stock of ACP and (iv) rights to acquire for $110 million in cash
in the aggregate, units for up to $119.996 million face amount of Notes
and warrants to acquire up to 34.2 million shares of common stock of ACP;
- the following debt and equity instruments were cancelled without further
consideration: 12% senior subordinated notes issued by ACP, 12% senior
subordinated notes issued by NFC and all equity interests of ACP; and
- the following claims and equity interests passed through our Chapter 11
bankruptcy proceedings unimpaired: all tax claims, intercompany debt,
other secured debt and general unsecured debt and the equity interests of
ACP Holding Company in NFC Castings, Inc., equity interests of NFC
Castings, Inc. in Neenah and equity interests of Neenah in its direct and
indirect subsidiaries.
28
BUSINESS SEGMENTS -- OVERVIEW
1. Castings Segment
We produce iron castings for use in heavy municipal and industrial
applications. This segment sells directly to tier-one suppliers, as well as to
other industrial end users.
(a) Products, Customers and Markets
The castings segment provides a variety of products to both the heavy
municipal and industrial markets. Sales to the heavy municipal market are
comprised of storm and sanitary sewer castings, manhole covers and frames and
storm sewer frames and grates. Sales also include heavy airport castings,
specialized trench drain castings, specialty flood control castings and
ornamental tree grates. Customers for these products include state and local
government entities, utility companies, precast concrete structure producers and
contractors. Sales to the industrial market are comprised of differential
carriers and casings, transmission, gear and axle housings, yokes, planting and
harvesting equipment parts and compressor components. Customers for these
products include medium and heavy-duty truck, farm equipment and HVAC
manufacturers.
(i) Heavy Municipal
Our broad heavy municipal product line consists of two general categories
of castings, "standard" and "specialty" castings. Standard castings principally
consist of storm and sanitary sewer castings that are consistent with
pre-existing dimensional and strength specifications established by local
authorities. Standard castings are generally higher volume items that are
routinely used in new construction and infrastructure replacement. Specialty
castings are generally lower volume products which include heavy-duty airport
castings, trench drain castings, flood control castings, special manhole and
inlet castings and ornamental tree grates. These specialty items are frequently
selected and/or specified from our municipal product catalog and tree grate
catalog, which together encompass over 4,400 standard and specialty patterns.
For many of these specialty products, we believe that we are the only
manufacturer with existing patterns to produce such a particular casting,
although a competing manufacturer could elect to make the investment in patterns
or equipment necessary to produce a similar casting. We hold a number of patents
and trademarks related to their heavy municipal product line.
We sell our municipal castings to state and local government entities,
utility companies, pre-cast concrete manhole structure producers and contractors
for both new construction and infrastructure replacement. Our active municipal
customers generally make purchase decisions based on a number of criteria,
including acceptability of the product per local specification, quality,
service, price and the customer's relationship with the foundry.
During the 70 years that we have participated in the municipal market, we
have emphasized sales and marketing and believe that we have built a strong
reputation for customer service. We believe that we are one of the leaders in
U.S. heavy municipal casting production and that we have strong name
recognition. We have one of the largest sales and marketing forces of any
foundry serving the heavy municipal market. Our dedicated sales force works out
of regional sales offices to market municipal castings to contractors and state
and local governmental entities throughout the United States. We operate a
number of regional distribution and sales centers throughout the United States.
We believe that this regional approach enhances our knowledge of local
specifications and our position in the heavy municipal market.
(ii) Industrial
Industrial castings have increased in complexity and are generally produced
in higher numbers than municipal castings. Complexity in the industrial market
is determined by the intricacy of a casting's shape, the thinness of its walls
and the amount of processing by a customer required before a part is suitable
for use. OEMs and their first tier suppliers have been demanding higher
complexity parts principally to reduce labor costs in their own production
processes by using fewer parts to manufacture the same finished product or
assembly and by using parts that require less preparation before being
considered a finished product.
29
We primarily sell our industrial castings to a limited number of customers
with whom we have established close working relationships. These customers base
their purchasing decisions on, among other things, our technical ability, price,
service, quality assurance systems, facility capabilities and reputation. Our
assistance in product engineering plays an important role in winning bids for
industrial castings. For the average industrial casting, 12 to 18 months
typically elapse between the design phase and full production. The product life
cycle of a typical industrial casting is quite long. Although the patterns for
industrial castings are owned by the customer and not the foundry as is the case
with the patterns for municipal castings, industrial patterns are not readily
transferable to other foundries without, in most cases, significant additional
investment. Foundries, including our company, generally do not design industrial
castings. Nevertheless, a close working relationship between the foundry and the
customer during a product launch is critical to reduce potential production
problems and minimize the customer's risk of incurring lost sales or damage to
its reputation due to a delayed launch. Involvement by a foundry early in the
design process generally increases the likelihood that the customer will design
a casting within the manufacturing capabilities of such foundry and also
improves the likelihood that such foundry will be awarded the casting for full
production.
We estimate that we have historically retained approximately 90% of the
castings that we have been awarded throughout the product life cycle, which is
typical for the industry. We believe industrial customers will continue to seek
out a foundry with a strong reputation for performance that is capable of
providing a cost-effective combination of manufacturing technology and quality.
Our strategy is to augment our relationships with existing customers by
participating in the development and production of more complex industrial
castings, while seeking out selected new customers who would value our
performance reputation, technical ability and high level of quality and service.
We employ a dedicated industrial casting sales force at all of our
subsidiary locations, with the exception of Deeter. Our sales force supports
ongoing customer relationships, as well as working with customers' engineers and
procurement representatives and our engineers, manufacturing management and
quality assurance representatives throughout all stages of the production
process to ensure that the final product consistently meets or exceeds the
specifications of our customers. This team approach, consisting of sales,
marketing, manufacturing, engineering and quality assurance efforts is an
integral part of our marketing strategy.
(b) Manufacturing Process
Our foundries manufacture gray and ductile iron and cast it into intricate
shapes according to customer metallurgical and dimensional specifications. We
continually invest in the improvement of process controls and product
performance and believe that these investments and our significant experience in
the industry have made us one of the most efficient manufacturers of industrial
and heavy municipal casting products.
The casting process involves using metal, wood or urethane patterns to make
an impression of a desired shape in a mold made primarily of sand. Cores, also
made primarily of sand, are used to make the internal cavities and openings in a
casting. Once the casting impression is made in the mold, the cores are set into
the mold and the mold is closed. Molten metal is then poured into the mold,
which fills the mold cavity and takes on the shape of the desired casting. Once
the iron has solidified and cooled, the mold sand is separated from the casting
and the sand is recycled. The selection of the appropriate casting method,
pattern, core-making equipment and sand, and other raw materials depends on the
final product and its complexity, specifications and function as well as the
intended production volumes. Because the casting process involves many critical
variables, such as choice of raw materials, design and production of tooling,
iron chemistry and metallurgy and core and molding sand properties, it is
important to monitor the process parameters closely to ensure dimensional
precision and metallurgical consistency. We continually seek out ways to expand
the capabilities of existing technology to improve our manufacturing processes.
We also achieve productivity gains by improving upon the individual steps
of the casting process such as reducing the amount of time required to make a
pattern change or to produce a different casting product. Such time reductions
enable us to produce castings in medium volume quantities on high volume,
30
cost-effective molding equipment. Additionally, our extensive effort in real
time process controls permits us to produce a consistent, dimensionally accurate
casting, which saves time and effort in the final processing stages of
production. This dimensional accuracy contributes significantly to our
manufacturing efficiency.
Continual testing and monitoring of the manufacturing process is important
to maintain product quality. We, therefore, have adopted sophisticated quality
assurance techniques and policies for our manufacturing operations. During and
after the casting process, we perform numerous tests, including tensile,
proof-load, radiography, ultrasonic, magnetic particle and chemical analysis. We
utilize statistical process controls to measure and control significant process
variables and casting dimensions. We document the results of this testing in
metallurgical certifications that are sometimes included with each shipment to
our industrial customers. We strive to maintain systems that provide for
continual improvement of operations and personnel, emphasize defect prevention,
safety and reduce variation and waste in all areas.
(c) Raw Materials
The primary raw materials used to manufacture ductile and gray iron
castings are steel scrap, pig iron, metallurgical coke and silica sand. While
there are multiple suppliers for each of these commodities, we have generally
elected to maintain single-source arrangements with our suppliers for most of
these major raw materials except pig iron. Due to long standing relationships
with each of our suppliers, we believe that we will continue to be able to
secure the proper amount and type of raw materials at competitive prices.
Although the prices of the raw materials used vary, fluctuations in the
price of scrap metal are the most significant to us. We have arrangements with
most of our industrial customers that enable us to adjust industrial casting
prices to reflect scrap price fluctuations. In periods of rapidly rising or
falling scrap prices, these adjustments will lag the current scrap price because
they are generally based on average market prices for prior periods. Such prior
periods vary by customer, but are generally no longer than six months. Castings
are sometimes sold to the heavy municipal market on a bid basis and after a bid
is won the price for the municipal casting generally cannot be adjusted for
increases in the prices of raw materials. In most cases, however, we believe
that we have compensated for rises in scrap prices in prior periods by
implementing higher municipal casting unit prices in subsequent bids. Rapidly
fluctuating scrap prices may, however, have an adverse or positive effect on our
business, financial condition and results of operations.
(d) Seasonality
We have historically experienced moderate cyclicality in the heavy
municipal market as sales of municipal products are influenced by, among other
things, public spending. There is generally not a large backlog of business in
the municipal market due to the nature of the market. In the industrial market,
we experience cyclicality in sales resulting from fluctuations in our markets,
including the medium and heavy-duty truck and the farm equipment markets, which
are subject to general economic trends.
We experience seasonality in our municipal business where sales tend to be
higher during the construction season, which occurs during the warmer months,
generally the third and fourth quarters of our fiscal year. We attempt to
maintain level production throughout the year in anticipation of such
seasonality and therefore do not experience significant production volume
fluctuations. We build inventory in anticipation of the construction season.
This inventory build-up has a negative impact on working capital and increases
our liquidity needs during the second quarter. We have not historically
experienced significant seasonality in industrial casting sales.
(e) Competition
The markets for our products are highly competitive. Competition is based
mainly on price, but also on quality of product, range of capability, level of
service and reliability of delivery. We compete with numerous domestic
foundries, as well as with a number of foreign iron foundries. We also compete
with several large domestic manufacturers whose products are made with materials
other than ductile and gray iron, such as steel or aluminum. Industry
consolidation over the past 20 years has resulted in a significant
31
reduction in the number of foundries and a rise in the share of production by
larger foundries, some of which have significantly greater financial resources
than do we. Competition from foreign foundries has had an ongoing presence in
the heavy municipal market and continues to be a factor, primarily in the
western and eastern United States, due in part to costs associated with
transportation.
2. Forgings Segment
Our forgings segment, operated by Mercer Forge Corporation, or Mercer,
producers complex-shaped forged components for use in transportation, railroad,
mining and heavy industrial applications. Mercer also produces of microalloy
forgings. Mercer sells directly to OEMs, as well as to industrial end users.
Mercer's subsidiary, A&M, machines forgings and castings for Mercer and other
industrial applications. Until the mid-1980's, Mercer produced military tank
parts, but successfully converted from a defense contractor to a commercial
manufacturer. Mercer produces approximately 500 individually forged components
and has developed specialized expertise in forgings of microalloy steel.
(a) Products, Customers and Markets
Mercer manufactures its products to customer specification with typical
production runs of 1,000 or more units. Mercer currently operates mechanical
press lines, from 1,300 tons to 4,000 tons. Key markets for Mercer include truck
and automotive parts, railroad equipment and general industrial machinery.
Mercer's in-house sales organization sells directly to end users and OEMs.
A key element of Mercer's sales strategy is its ability to develop strong
customer relationships through responsive engineering capability, dependable
quality and just-in-time delivery performance.
Demand for forged products closely follows the general business cycles of
the various market segments and the demand level for capital goods. While there
is a more consistent base level of demand for the replacement parts portion of
the business, the strongest expansions in the forging industry coincide with the
periods of industrial segment economic growth. Mercer's largest industry
segment, the heavy truck segment, is extremely weak. Mercer's other market
segments are also showing weakness following general economic slowdowns in those
industrial areas. Management attributes this to normal industrial cycles in
these markets and adjustments to overbuilds in inventory levels as well as high
energy costs.
(b) Manufacturing Process
Forgings and castings (together with a third process, fabrication) are the
principal commercial metal working processes. In forging, metal is pressed,
pounded or squeezed under great pressure, with or without the use of heat, into
parts that retain the metal's original grain flow, imparting high strength,
ductility and resistance properties.
Forging itself usually entails one of four principal processes: impression
die; open die; cold; and seamless rolled ring forging. Impression die forging,
commonly referred to as "closed die" forging, is the principal process employed
by Mercer, and involves bringing two or more dies containing "impressions" of
the part shape together under extreme pressure, causing the forging stock to
take the desired shape. Because the metal flow is restricted by the die, this
process can yield more complex shapes and closer tolerances than the "open die"
forging process. Impression die forging is used to produce products such as
military and off-highway track and drive train parts; automotive and truck drive
train and suspension parts; railroad engine, coupling and suspension parts;
military ordinance parts and other items where close tolerances are required.
Once a rough forging is produced, regardless of the forging process, it
must generally still be machined. This process, known as "finishing" or
"conversion," smooths the component's exterior and mating surfaces and adds any
required specification, such as groves, threads and bolt holes. The finishing
process can contribute significantly to the value of the end product, in
particular in certain custom situations where high value specialized machining
is required. Machining can be performed either in-house by the forger, by a
machine shop which performs this process exclusively or by the end-user.
32
An internal staff of engineers designs products to meet customer
specifications incorporating computer assisted design work stations for tooling
design. Because its forged products are inherently less expensive and stronger,
Mercer has been successful in replacing certain cast parts previously supplied
by third party foundries. Management believes that Mercer is an industry leader
in forging techniques using microalloy steel which produces parts which are
lighter and stronger than those forged from conventional carbon steel.
(c) Raw Materials
The principal raw materials used in Mercer's products are carbon and
microalloy steel. Mercer purchases substantially all of its carbon steel from
four principal sources. While Mercer has never suffered an interruption of
materials supply, management believes that, in the event of any disruption from
any individual source, adequate alternative sources of supply are available
within the immediate vicinity.
(d) Seasonality
Mercer has experienced moderate cyclicality in sales resulting from
fluctuations in the medium and heavy-duty truck market and the heavy industrial
market, which are subject to general economic trends. Mercer's current backlog
of industrial market business is smaller than there would be in a stronger, more
typical market.
(e) Competition
Mercer competes primarily in a highly fragmented industry which includes
several dozen other press forgers and hammer forge shops. Hammer shops cannot
typically match press forgers for high volume, single component manufacturing or
close tolerance production. Competition in the forging industry has also
historically been determined both by product and geography, with a large number
of relatively small forgers across the country carving out their own product and
customer niches. In addition, most end users manufacture some forgings
internally, often maintaining a critical minimum level of production in-house
and contracting out the balance. The primary basis of competition in the forging
industry is price, but engineering, quality and dependability are also
important, particularly with respect to building and maintaining customer
relationships. Some of Mercer's competitors have significantly greater resources
than Mercer. There can be no assurance that Mercer will be able to maintain or
improve its competitive position in the markets in which it competes.
INTELLECTUAL PROPERTY
We have registered, and are in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office.
EMPLOYEES
As of September 30, 2003 we had approximately 2,776 full time employees, of
whom 2,255 were hourly employees and 521 were salaried employees. Nearly all of
the hourly employees at Neenah, Dalton, Advanced Cast Products, Inc. and Mercer
are members of either the United Steelworkers of America or the Glass, Molders,
Pottery, Plastics and Allied Workers International Union. We negotiate a
collective bargaining agreement with these employees every three to five years.
The current agreements expire as follows: Neenah, December 2006; Dalton-Warsaw,
April 2005; Dalton-Kendallville, June 2007; Advanced Cast Products,
Inc.-Meadville, October 2005; and Mercer, June 2008. All employees at Deeter and
Gregg are non-union. We believe that we have good relationships with our
employees.
GOVERNMENT REGULATION
Our facilities are subject to federal, state and local laws and regulations
relating to the protection of the environment and worker health and safety,
including those relating to discharges to air, water and land, the handling and
disposal of solid and hazardous waste and the cleanup of properties affected by
hazardous substances. Such laws include the Federal Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability
33
Act of 1980 and OSHA. We believe that each of our operations are currently in
substantial compliance with applicable environmental laws, and that we have no
liabilities arising under such environmental laws that would have a material
adverse effect on our operations, financial condition or competitive position.
Some risk of environmental liability and other cost, however, is inherent in
each of our businesses. Any of our businesses might in the future incur
significant costs to meet current or more stringent compliance, cleanup or other
obligations pursuant to environmental requirements. Such costs may include
expenditures related to remediation of historical releases of hazardous
substances or clean-up of physical structures prior to decommissioning.
Under the Federal Clean Air Act Amendments of 1990, the Environmental
Protection Agency is directed to establish MACT standards for certain industrial
operations that are major sources of hazardous air pollutants. The iron foundry
industry will be required to implement the MACT emission limits, control
technologies or work practices by October 1, 2006. Although we are not yet able
to accurately estimate the costs to comply with the new MACT standard, the MACT
standard, when implemented, and state laws governing the emission of toxic air
pollutants may require that certain of our facilities incur significant costs
for air emission control equipment, air emission monitoring equipment or process
modifications.
Compliance Impacts
Dalton's Warsaw facility was issued a National Pollutant Discharge
Elimination System ("NPDES") permit in 2000 that limits the level of chlorine
and the temperature of its non-contact cooling water permitted to be discharged
to a waterway by the year 2003. Although the chlorine is already in the water
when purchased from the city, Dalton is responsible for eliminating the
chlorine. Dalton met the chlorine discharge permit requirements at the end of
2003 and implemented a system to lower the chlorine levels of its cooling water.
The cost of implementing this system has not been material.
PROPERTIES
We maintain the following manufacturing, machining and office facilities.
We own all of the facilities except Mercer's machining facility, which we lease.
<Table>
<Caption>
ENTITY LOCATION PURPOSE
- ------ -------- -------
Neenah Foundry Company.............. Neenah, WI 2 manufacturing facilities
Office facility
Dalton Corporation.................. Warsaw, IN Manufacturing and office facilities
Kendallville, IN Manufacturing facility
Stryker, OH Machining facility
Advanced Cast Products, Inc. ....... Meadville, PA Manufacturing and office facility
Mercer Forge Corporation............ Mercer, PA Manufacturing and office facility
Sharon, PA Machining facility
Deeter Foundry, Inc. ............... Lincoln, NE Manufacturing and office facility
Gregg Industries, Inc. ............. El Monte, CA Manufacturing and office facility
</Table>
In addition to the facilities above, we operate thirteen distribution and
sales centers. We own six of those properties and lease seven of them. The
principal equipment at the facilities consists of molding machines, presses,
machining equipment, welding, grinding and painting equipment. We regard our
plant and equipment as well maintained and adequate for our needs.
LEGAL PROCEEDINGS
We are involved in routine litigation incidental to our business. Such
litigation is not, in our opinion, likely to have a material adverse effect on
our financial condition or results of operations.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information as of May 1, 2004, with
respect to the persons who are members of the Board of Directors of ACP and our
executive officers.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
William M. Barrett................... 57 President, Chief Executive Officer and Director
Gary W. LaChey....................... 58 Corporate Vice President -- Finance, Treasurer,
Secretary,
and Chief Financial Officer
Phillip C. Zehner.................... 63 Vice President, Assistant Secretary and Assistant
Treasurer of Neenah Foundry Company
Joseph L. DeRita..................... 66 Division President, Dalton Corporation
Joseph Varkoly....................... 42 Vice President -- Business Development, Advanced Cast
Products, Inc.
Benjamin C. Duster, IV, Esq. ........ 49 Director
Andrew Booke Cohen................... 32 Director
Michael J. Farrell................... 54 Director
Jeffrey G. Marshall.................. 60 Director
</Table>
Mr. Barrett has served as our President and Chief Executive Officer since
May 2000. Mr. Barrett joined us in 1992 serving as General Sales
Manager -- Industrial Castings until May 1, 1997. Mr. Barrett was Vice President
and General Manager from May 1, 1997 to September 30, 1998 and President from
October 1, 1998 to April 30, 2000. From 1985 to 1992, Mr. Barrett was the Vice
President -- Sales for Harvard Industries Cast Products Group. Mr. Barrett has
also been one of our directors since May 2000.
Mr. LaChey has served as our Corporate Vice President -- Finance since June
2000. Mr. LaChey joined us in 1971 and has served in a variety of positions of
increasing responsibility in the finance department. Mr. LaChey was most
recently Vice President -- Finance, Treasurer and Secretary.
Mr. Zehner has served as our Vice President, Assistant Secretary and
Assistant Treasurer since June 2000. Mr. Zehner joined the Company in 1974,
serving in a variety of positions of increasing responsibility in the finance
department.
Mr. DeRita has served as Division President of the Dalton Corporation since
1999. He joined Newnam Manufacturing in 1989 and became the Vice
President -- Sales when the Dalton Corporation acquired Newnam Manufacturing in
1992. Prior to joining our company, Mr. DeRita was the Manager of Engineering
and Maintenance at Erie Malleable, the same position he held previously at Zurn
Industries.
Mr. Varkoly has served as the Vice President -- Business Development of
Advanced Cast Products, Inc. since March 2000. Prior to joining our company in
2000, he served as the Director -- Finance of Betzdearborn, Inc. Previously, he
was a Manager for Performance Improvement Management Consulting with Ernst &
Young LLP and the Business Development Manager of FMC Corporation.
Mr. Duster has served as a director since October 2003. Mr. Duster is
currently Chairman of the Board of Algoma Steel, Inc., a Toronto Stock Exchange
listed integrated steel manufacturer based in Canada. Mr. Duster is also a
principal in Masson & Company, a financial restructuring advisory and turn-
around management firm based in New York.
Mr. Cohen has served as a director since October 2003. Mr. Cohen is
currently an analyst at SAC Capital Advisors, LLC. Previously, Mr. Cohen spent
six years in the investment banking division of Morgan Stanley. Mr. Cohen
received his BA and MBA degrees from the University of Pennsylvania.
Mr. Marshall has served as a director since October 2003. Mr. Marshall is
currently the Chairman of Smith Marshall, a subsidiary of the NextMedia Company
Limited. Previously, he was the President and Chief Executive Officer of Aluma
Enterprises, Inc., a construction technology company, for six years. Prior
35
to joining Aluma Enterprises, Inc., Mr. Marshall successively held the positions
of President and Chief Executive Officer at Marshall Steel Limited, Marshall
Drummond McCall Inc. and the Ontario Clean Water Agency.
Mr. Farrell has served as a director since February 2003. Mr. Farrell is
currently the President of Farrell & Co., a merchant banking firm specializing
in heavy manufacturing companies, and the Chief Executive Officer of Standard
Steel, LLC. Mr. Farrell has also served in executive capacities for MK Rail
Corporation, Motor Coils Manufacturing Co. and Season-ALL Industries. Mr.
Farrell currently also serves as a director of C-Cor.net Corp. and Federated
Investors, Inc. Mr. Farrell is a certified public accountant.
BOARD COMPOSITION
The Board of Directors of ACP, the ultimate parent company of Neenah
Foundry Company consists of five directors. ACP's Amended and Restated Bylaws
permits the holders of a majority of the shares of common stock of ACP then
entitled to vote at an election of directors, to remove any director or the
entire board of directors at any time, with or without cause. Under ACP's
Amended and Restated Bylaws, vacancies on the Board of Directors may be filled
by the affirmative vote of a majority of the holders of ACP's outstanding stock
entitled to vote thereon.
DIRECTOR COMPENSATION
Subject to certain limitations, each member of the Board of Directors of
ACP who is not an officer of ACP shall be entitled to receive annual
compensation for their services in the amount $40,000, payable in cash quarterly
in four equal installments, and are entitled to receive reimbursement by ACP for
all reasonable out-of-pocket expenses, including, without limitation, travel
expenses, incurred by such director in connection with the performance of such
director's duties. In addition, each member of the Board of Directors that is
not an officer of our company shall be paid a fee of $1,000 for in person
attendance at annual, regular, special and adjourned meetings of the Board of
the Directors of the company or committee meetings of the Board of the Directors
of the company. On the Effective Date, we issued 200,000 shares of common stock
representing 0.25% of the Company's Common Stock on a fully-diluted basis as of
the Effective Date to our outside directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of ACP's Board of
Directors are Andrew Booke Cohen and Benjamin C. Duster, IV, Esq.. The current
members of the Audit Committee of ACP's Board of Directors are Michael J.
Farrell and Jeffrey G. Marshall.
During fiscal 2003, no executive officer of ACP:
- served as a member of the compensation committee or other board committee
performing similar functions or, in the absence of any such committee,
the board of directors, of another entity, one of whose executive
officers served on ACP's Compensation Committee;
- served as a director of another entity, one of whose executive officers
served on ACP's Compensation Committee; or
- served as a member of the compensation committee or other board committee
performing similar functions or, in the absence of any such committee,
the board of directors, of another entity, one of whose executive
officers served as a director of ACP.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Amended and Restated Bylaws of ACP which became effective on October 8,
2003, provide that, to the extent permitted by the Delaware General Corporate
Law, or DGCL, it will indemnify its current and former directors and officers
against all expenses actually and reasonably incurred by them as a result of
their being threatened with or otherwise involved in any action, suit or
proceeding by virtue of the fact
36
that they are or were an officer or director of ACP. ACP, however, is not
required to indemnify an officer or director for an action, suit or proceeding
commenced by that officer or director unless it authorized that director or
officer to commence the action, suit or proceeding. The Amended and Restated
Bylaws of ACP also provide that ACP shall advance expenses incurred by any
person it is obligated to indemnify, upon presentation of appropriate
documentation.
Furthermore, the Amended and Restated Bylaws of ACP provide that ACP may
purchase and maintain insurance on behalf of its directors and officers against
any liability, expense or loss, whether or not it would otherwise have the power
to indemnify such person under its Amended and Restated Bylaws or the DGCL.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of ACP pursuant
to the foregoing provisions, or otherwise, ACP has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following summarizes, for the year
indicated, the principal components of compensation for our Chief Executive
Officer and our other four highest compensated executive officers (collectively,
the "named executive officers"). The compensation set forth below fully reflects
compensation for work performed on our behalf.
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -----------------------
OTHER RESTRICTED SECURITIES
FISCAL ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARDS OPTIONS PAYOUTS COMPENSATION
- --------------------------- ------ --------- -------- ------------------ ---------- ---------- ------- ------------
William M. Barrett......... 2003 342,704 59,617 38,685 -- -- -- --
President and Chief 2002 306,254 -- 35,684 -- -- 35,684 --
Executive Officer and 2001 275,000 -- 33,048 -- -- 33,048 --
Director
Gary W. LaChey............. 2003 234,996 45,526 38,143 -- -- -- --
Corporate Vice
President -- 2002 219,374 -- 35,110 -- -- 35,110 --
Finance, Treasurer, 2001 208,334 -- 33,680 -- -- 33,680 --
Secretary and Chief
Financial Officer
Joe Varkoly................ 2003 177,000 117,600 36,257 -- -- -- --
Vice
President -- Business 2002 170,250 -- 25,290 -- -- -- --
Development, Advanced 2001 163,331 31,318 13,349 -- -- -- --
Cast Products, Inc.
Phillip C. Zehner.......... 2003 133,250 32,998 35,498 -- -- -- --
Vice President, Assistant 2002 129,000 19,124 32,701 -- -- 32,701 --
Secretary and Assistant 2001 125,800 26,312 30,902 -- -- 30,902 --
Treasurer
Joseph L. DeRita........... 2003 235,000 -- 29,635 -- -- -- --
Division President,
Dalton 2002 224,000 -- 18,015 -- -- 18,015 --
Corporation 2001 224,000 -- 19,182 -- -- 19,182 --
</Table>
- ---------------
(1) The named officers have participated in our voluntary profit sharing
contributions or matching 401(k) contributions and excess benefit programs.
The aggregate payments made by the Company pursuant to such employee
benefits programs are listed on the above table as "Other Annual
Compensation."
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with certain members of our
management. The employment agreements delineate the salary and subsequent
potential annual increases, health (subject to
37
satisfying insurability requirements), 401(k) and other benefits that the named
employees are entitled to receive. Non-competition and non-solicitation
agreements will be signed as part of the employment agreements, which will apply
during a period of three years for our chief executive officer and two years for
the chief financial officer and other members of management of the Company, in
each case, after termination. We have executed employment agreements with the
following executives: John Andrews, William M. Barrett, Joseph L. DeRita, Frank
C. Headington, Timothy Koller, Gary W. LaChey, William Martin, Steve Shaffer and
Joseph Varkoly.
2003 MANAGEMENT ANNUAL INCENTIVE PLAN
Under the 2003 Management Annual Incentive Plan, members of management and
certain other specified employees will receive annual performance awards if the
Company achieves certain EBITDA targets set by the board of director of the
Company at the beginning of each fiscal year. The bonus paid will equal (i) 50%
of the target bonus amount for each individual should the Company reach 85% of
the EBITDA target, (ii) 100% of the target bonus on reaching 100% of the target
EBITDA and (iii) 200% of the target bonus on reaching 120% of the target EBITDA.
Target bonuses range from 2.0% to 35.0% of base salary depending upon job
responsibility. The bonus will be payable within ten business days of the
approval of the Company's audited financial statements by the board of
directors.
In addition, a one time aggregate incremental $450,000 emergence bonus was
paid to certain members of management upon the Effective Date.
For 2004 and beyond, the executives and certain other specified employees
will receive annual performance awards upon achieving certain milestones,
including EBITDA targets, debt reduction targets and other certain criteria as
determined from time to time by the compensation committee of the board of
directors of Reorganized Neenah. Target bonus as a percentage of salary for each
member of management will be consistent with historical levels. Target levels,
timing of payments and other terms and conditions of the annual incentive plan
will be determined by the Company's compensation committee.
2003 MANAGEMENT EQUITY INCENTIVE PLAN
Under the 2003 Management Equity Incentive Plan which was established on
the Effective Date, certain members of management received restricted shares
which represented 5% of common stock of ACP on a fully diluted basis as of the
Effective Date. The 4,000,000 restricted shares issued pursuant to the 2003
Management Equity Incentive Plan were 25% vested upon grant and the balance will
vest on an annual straight-line basis over the ensuing three years subject to
acceleration on a Change of Control, as defined in the 2003 Management Equity
Incentive Plan, termination (other than for Cause) or an event that triggers
tag-along or drag-along rights described below. The 2003 Management Equity
Incentive Plan also provides that a pool of options for an additional 5% of
common stock of ACP be reserved for future grants as determined by the
compensation committee of the new board of directors of ACP. The 2003 Management
Equity Incentive Plan provides certain members of management with certain
tag-along and drag-along rights with respect to any transaction involving a sale
of 50% or more of the equity of the Company on a fully diluted basis, or a sale
of substantially all of the assets, or a merger or other transaction having
similar effect in a single transaction or a series of transactions to the same
party and anti-dilution protection.
2003 SEVERANCE AND CHANGE OF CONTROL PLAN
Under our 2003 Severance and Change of Control Plan, the executives with
whom we have executed employment agreements, shall be entitled to receive
Severance Payments, as defined in the 2003 Severance and Change of Control Plan,
if the Company terminates his or her employment without cause or if he or she
terminates his or her employment with cause and a Change of Control Payment if a
participating executive's employment is terminated or the executive resigns from
employment for Good Reason within 180 days of a Change of Control, as such terms
are defined in the 2003 Severance and Change of Control Plan.
38
SELLING NOTEHOLDERS
The following table sets forth certain information furnished by each of the
selling noteholders with respect to the amount of Notes offered by such selling
noteholder, which in each case is equal to the amount of notes beneficially
owned by each of the selling noteholders as of June 30, 2004.
<Table>
<Caption>
NOTES BENEFICIALLY OWNED NOTES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AMOUNT OF AFTER THE OFFERING
------------------------- NOTES BEING -------------------------
NAME OF SELLING NOTEHOLDER(1) AMOUNT PERCENTAGE OFFERED AMOUNT PERCENTAGE
- ----------------------------- ------------ ---------- ------------ -------- ------------
TCW Group Inc.(2)................ $ 7,606,381 7.6% $ 7,606,381 $0 0%
CVC Capital Funding, LLC(3)(4)... $ 10,638,298 10.6% $ 10,638,298 $0 0%
All other holders of Notes or
future transferees, pledgees,
donees or successors and any
such holders eligible to be
named as a selling Noteholder
in a post-effective
amendment...................... $ 81,755,321 81.76% $ 81,755,321 $0 0%
Total............................ $100,000,000 100% $100,000,000 $0 0%
</Table>
- ---------------
(1) Upon being notified by a selling Noteholder that a donee, pledgee,
transferee or other successor in interest intends to sell Notes under this
prospectus, if required, we will file a supplement to this prospectus
identifying such successor as a selling Noteholder.
(2) Mark Altanasio has sole voting and dispositive power over these Notes.
(3) This selling Noteholder is an affiliate of a broker-dealer, and has
indicated to us that it purchased the securities for which these Notes were
delivered in the ordinary course of business, and at the time of such
purchase, had no agreements or understandings, directly or indirectly, with
any person to distribute Notes.
(4) Richard E. Mayberry, Jr., William T. Comfort, Michael Neborak and Byron
Kinief share sole voting and dispositive power over these Notes.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH ACP HOLDINGS
ACP Holdings is the parent company of NFC Castings, Inc., and thus ACP
Holdings indirectly owns 100% of the Common Stock of the Company. William M.
Barrett, who serves as the President and Chief Executive Officer of the Company,
currently serves as President and Chief Executive Officer of ACP Holdings.
RELATIONSHIP WITH THE STANDBY PURCHASERS
As a result of the standby purchase agreements that we entered into with
the Standby Purchasers, we gave certain of the Standby Purchasers the right to
name members to our board of directors. Mackay Shields LLC may designate two
members of our board of directors and Citicorp Venture Capital, Ltd. and Trust
Company of the West may each designate one member of our board of directors.
39
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information known to us with respect to the
beneficial ownership of the common stock of ACP as of October 8, 2003:
- each person or entity who owns of record or beneficially more than 5% or
more of any class of our voting securities;
- each of the named executive officers of our Company;
- each director of ACP; and
- all directors and named executive officers as a group.
<Table>
<Caption>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER(1)(2)(3) NUMBER PERCENTAGE
- --------------------------------- ----------- -----------
Mackay Shields LLC(4)....................................... 19,834,492 24.6%
Citicorp Mezzanine III, L.P.(5)............................. 11,890,846 14.7%
Trust Company of the West(6)................................ 6,206,107 7.7%
William M. Barrett(7)....................................... 1,250,000 1.6%
Gary W. LaChey(8)........................................... 955,882 1.2%
Joseph L. DeRita(9)......................................... 404,412 *
Joseph Varkoly(10).......................................... 220,587 *
Benjamin C. Duster, IV, Esq.(11)............................ 200,000 *
Andrew Booke Cohen(11)...................................... 200,000 *
Michael J. Farrell(11)...................................... 200,000 *
Jeffrey G. Marshall(11)..................................... 200,000 *
All executive officers and directors as a group (8
persons)(12).............................................. 3,630,881 4.5%
</Table>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the business address of each person named in
the table above is c/o Neenah Foundry Company, 2121 Brooks Avenue, Neenah,
Wisconsin 54957.
(2) As used in this table, a beneficial owner of a security includes any person
who, directly or indirectly, through contract, arrangement, understanding,
relationship or otherwise has or shares (1) the power to vote, or direct
the voting of, such security or (2) investing power which includes the
power to dispose, or to direct the disposition of, such security. In
addition, a person is deemed to be the beneficial owner of a security if
that person has the right to acquire beneficial ownership of such security
within 60 days of October 8, 2003. Except as otherwise noted, the persons
and entities listed on this table have sole voting and investment power
with respect to all of the shares of common stock owned by them.
Calculations are based on a total of 80,800,000 shares of common stock
outstanding as of October 8, 2003. See "The Refinancing Transactions."
(3) Includes the following number of shares issuable upon conversion of
warrants exercisable within 60 days of October 8, 2003: (1) 9,879,031
warrants by Mackay Shields LLC; (2) 90,644 warrants by Exis Differential
Holdings Ltd.; 7,848,293 warrants by Citicorp Mezzanine III, L.P.;
3,113,554 warrants by Trust Company of the West and (3) 217,547 warrants by
Metropolitan Life Insurance Company.
(4) The address for Mackay Shields LLC is 9 West 57th Street, 33rd Floor, New
York, NY 10019. Donald Morgan III has sole voting and dispositive power
over such shares.
(5) Citicorp Mezzanine III, L.P. received 4,096,665 warrants for being a
Standby Purchaser and 3,751,628 warrants in exchange for cancellation of
the PIK Note. The address for Citicorp Mezzanine III, L.P. is 399 Park
Avenue, 14th Floor, New York, NY 10043. Richard E. Mayberry, Jr., William
T. Comfort, Michel Neborak and Byron Kinief have sole voting and
dispositive power of these shares.
40
(6) Includes shares held by TCW Shared Opportunity Fund II, L.P., Shared
Opportunity Fund IIB LLC, TCW Shared Opportunity Fund IV, L.P., TCW Shared
Opportunity Fund IVB, L.P., AIMCO CDO, Series 2000-A, TCW High Income
Partners, Ltd. and TCW High Income Partners II, Ltd. The Trust Company of
the West is the ultimate beneficial holder of these shares. The address for
Trust Company of the West is 11100 Santa Monica Boulevard, Suite 2000, Los
Angeles, CA 90025. Mark Altanasio has sole voting and dispositive power
over such shares.
(7) Includes 937,500 unvested shares of common stock. One-third of the unvested
shares shall rest on a cumulative basis on each anniversary of the
Effective Date, if as of such date, Mr. Barrett is still in our employ.
(8) Includes 716, 912 unvested shares of common stock. One-third of the unvested
shares shall vest on a cumulative basis on each anniversary of the Effective
Date, if as of such date, Mr. Lachey is still in our employ.
(9) Includes 303,309 unvested shares of common stock. One-third of the unvested
shares shall vest on a cumulative basis on each anniversary of the Effective
Date, if as of such date, Mr. DeRita is still in our employ.
(10) Includes 165,440 unvested shares of common stock. One-third of the unvested
shares shall vest on a cumulative basis on each anniversary of the
Effective Date, if as of such date, Mr. Varkoly is still in our employ.
(11) Pursuant to the Plan of Reorganization, Messrs. Duster, Cohen, Farrell and
Marshall each received 200,000 shares of common stock as of the Effective
Date.
(12) Excludes 1,169,119 shares beneficially owned by certain executive employees
of our company and certain of our subsidiaries. Collectively, our
management and directors own an aggregate of 4,800,000 shares of our common
stock.
41
DESCRIPTION OF NEW CREDIT FACILITY
STRUCTURE
The New Credit Facility is a $92.085 million facility that has a five-year
maturity and provides for a revolving credit line of up to $70 million (with a
$5.0 million sublimit available for letters of credit) and a term loan of
$22.085 million. Availability under the revolver is based on various advance
rates compared against a borrowing base consisting of Neenah's accounts
receivable, inventory and property, plant and equipment. Based on the formulas
under the New Credit Facility, as of June 30, 2004 we had $20.5 million in terms
loans outstanding under the New Credit Facility, $45.5 million outstanding in
revolving loans and the maximum amount of unused commitment available was $24.5
million. The New Credit Facility is secured by a first priority, perfected
security interest in substantially all of Neenah's tangible and intangible
assets.
Capitalized terms used in this section and not defined herein are defined
in the credit agreement governing the New Credit Facility, that we hereinafter
refer to as the Credit Agreement.
INTEREST RATES AND FEES
Interest on borrowings under the New Credit Facility accrues daily with
reference to the base rate, hereinafter referred to as the Base Rate, plus the
applicable interest margin; however, the Company may elect that all or a portion
of the borrowings under the facility bear interest at the Adjusted LIBOR Rate
plus the applicable interest margin. The Base Rate is defined as the higher of
(i) the prime rate for commercial loans announced or quoted by Fleet National
Bank in effect on such day and (ii) the federal funds rate in effect on such
date, plus 1/2%. The Adjusted LIBOR Rate is defined as the rate offered for
deposits in U.S. dollars for a period of time comparable to the applicable
interest period which appears on the Telerate page 3730.
The New Credit Facility contains provisions under which commitment fees and
interest rates are adjusted in increments based on the ratio, hereinafter
referred to as the Fixed Charge Coverage Ratio, of consolidated EBITDA to
interest expense and scheduled principal payments on our outstanding debt which
are each adjusted in accordance with the Credit Agreement.
Outstanding principal balances under the New Credit Facility will accrue
interest at the base rate or the LIBOR rate, as applicable, plus in each case,
the margin applicable to such advances shall be determined as set forth in the
following table.
APPLICABLE MARGIN FOR ADJUSTMENT DATES THROUGH AND INCLUDING SEPTEMBER 30, 2004:
<Table>
<Caption>
BASE RATE BASE RATE LIBOR LIBOR
REVOLVING TERM REVOLVING TERM UNUSED
FIXED CHARGE COVERAGE RATIO PORTION PORTION PORTION PORTION LINE FEE
- --------------------------- --------- --------- --------- ------- --------
Less than 1.15 to 1.00........................ 1.50% 2.00% 3.00% 3.50% 0.500%
Greater than or equal to 1.15 to 1.00 and less
than 1.40 to 1.00........................... 1.25% 1.75% 2.75% 3.25% 0.500%
Greater than or equal to 1.40 to 1.00 and less
than 1.65 to 1.00........................... 1.00% 1.50% 2.50% 3.00% 0.375%
Greater than or equal to 1.65 to 1.00......... 0.75% 1.25% 2.25% 2.75% 0.375%
</Table>
42
APPLICABLE MARGIN FOR ADJUSTMENT DATES ON AND AFTER DECEMBER 31, 2004:
<Table>
<Caption>
BASE RATE BASE RATE LIBOR LIBOR
REVOLVING TERM REVOLVING TERM UNUSED
FIXED CHARGE COVERAGE RATIO PORTION PORTION PORTION PORTION LINE FEE
- --------------------------- --------- --------- --------- ------- --------
Less than 1.20 to 1.00........................ 1.50% 2.00% 3.00% 3.50% 0.500%
Greater than or equal to 1.20 to 1.00 and less
than 1.40 to 1.00........................... 1.25% 1.75% 2.75% 3.25% 0.500%
Greater than or equal to 1.40 to 1.00 and less
than 1.65 to 1.00........................... 1.00% 1.50% 2.50% 3.00% 0.375%
Greater than or equal to 1.65 to 1.00......... 0.75% 1.25% 2.25% 2.75% 0.375%
</Table>
The initial Applicable Margin for the Base Rate Revolving Portion, the Base
Rate Term Portion, the LIBOR Revolving Portion, the LIBOR Term Portion and the
Unused Line Fee is 1.25%, 1.75%, 2.75%, 3.25% and 5.00% respectively.
We have agreed to pay certain fees with respect to the New Credit Facility
including (i) fees on the unused commitments of lenders equal to the Applicable
Margin for the Unused Line Fee, (ii) letter of credit fees on the aggregate face
amount of outstanding letters of credit equal to the then applicable borrowing
margin for LIBOR Revolving Portions and a fronting fee of 0.125% per annum on
the face amount of outstanding letters of credit and an issuing bank fee for the
bank issuing a letter of credit, and (iii) agent, arrangement and other similar
fees.
LIMITATION ON INDEBTEDNESS
The New Credit Facility prevents Neenah and its subsidiaries from creating
or incurring any debt other than the obligations owed (i) under the New Credit
Facility; (ii) under the 13% Senior Subordinated Notes due 2013; (iii) under the
Notes, (iv) on their capitalized lease obligations; (v) prior to the execution
of the New Credit Facility; (vi) that are permitted guaranties; (vii) that are
permitted indebtedness including certain enumerated liens; (viii) from the
ordinary course of business, subject to certain limits and restrictions and (ix)
in connection with the refinancing of any indebtedness permitted under the New
Credit Facility, subject to certain restrictions.
FINANCIAL COVENANTS
During the term of the New Credit Facility and so long as any obligations
thereunder remain outstanding, Neenah and the subsidiary borrowers shall comply
with a fixed charge coverage ratio as described below. For purposes of
calculating such ratio Neenah and the subsidiary borrowers agree to the
application of certain defined terms to the operative sections of the New Credit
Facility. The defined terms include EBITDA, fixed charge coverage ratio, fixed
charges and interest expense.
The interest expense definition delineates how interest expense should be
calculated, but it also sets forth the amount of the interest expense for the
first three interest measurement periods. Set forth below is the interest
expense for the respective measurement period.
<Table>
<Caption>
MEASUREMENT DATE APPLICABLE PORTION OF THE MEASUREMENT PERIOD INTEREST EXPENSE
- ---------------- -------------------------------------------- ----------------
December 31, 2003..................... Beginning on January 1, 2003 and ending on $16,832,000
September 30, 2003
March 31, 2004........................ Beginning on April 1, 2003 and ending on $11,222,000
September 30, 2003
Twelve (12) month period ending on Beginning on July 1, 2003 and ending on $ 5,611,000
June 30, 2004....................... September 30, 2003
</Table>
43
Under the financial covenants, Neenah and the borrower subsidiaries must
maintain their fixed charge coverage ratio for any period set forth below higher
than or equal to the ratio set forth below (in each case measured as of the last
day of such period):
<Table>
<Caption>
PERIOD RATIO
- ------ -----------
Twelve (12) month period ending on December 31, 2003........ 1.10 to 1.0
Twelve (12) month period ending on March 31, 2004........... 1.10 to 1.0
Twelve (12) month period ending on June 30, 2004............ 1.10 to 1.0
Twelve (12) month period ending on September 30, 2004....... 1.10 to 1.0
Twelve (12) month period ending on December 31, 2004 and
each March 31, June 30, September 30 and December 31
thereafter................................................ 1.15 to 1.0
</Table>
SECURITY AND GUARANTEES
NFC and the inactive subsidiaries of Neenah jointly and severally guarantee
Neenah's obligations under the New Credit Facility. Our obligations under the
New Credit Facility are secured by a first priority security interest in all or
substantially all of the assets of each borrower and each guarantor. The Notes,
and the guarantees in respect thereof, are equal in right of payment to the New
Credit Facility, and the guarantees in respect thereof. The liens in respect of
the Notes are junior to the liens securing the New Credit Facility and
guarantees thereof.
COVENANTS
The New Credit Facility requires Neenah to observe certain customary
conditions, affirmative covenants and negative covenants (including financial
covenants).
MATURITY AND AMORTIZATION
The term loan advanced under the New Credit Facility is repayable in equal
consecutive quarterly installments, based on a seven-year straight line
amortization rate, and the remaining outstanding principal is repaid at
maturity, which is from October 8, 2008. There is no cash flow sweep mechanism
that would require additional principal repayments on the term loan.
PREPAYMENTS
Optional Prepayments. Optional prepayments are permitted under the New
Credit Facility, including the right to reduce the commitments under the
revolving loan facility, subject to (i) a 1% fee based on the amount of the
underlying commitments terminated during the first year following October 8,
2003 and (ii) a 0.50% fee based on the amount of the underlying commitments
terminated during the second or third year following the Effective Date.
Mandatory Prepayments. Mandatory prepayments are required as follows: (i)
50% of the net proceeds from the issuance of debt or equity to non-affiliates;
(ii) 100% of the net proceeds received from the sale or disposition of all or
any part of the assets other than: (A) sales in the ordinary course of business,
(B) permitted sales to be agreed, subject to the reinvestment of the net
proceeds thereof (or the commitment to reinvest) within 180 days, (C) other
sales not in the ordinary course of business not to exceed in any fiscal year an
amount to be agreed and (D) assets secured by purchase money security interest;
(iii) 100% of insurance proceeds not reinvested or not committed to reinvestment
within 180 days with such commitment reinvestment to occur within 360 days from
when the insurance proceeds are received and (iv) 100% of the proceeds from tax
refunds, indemnity payments of pension plan reversions actually received.
COSTS AND EXPENSES
Neenah paid and shall pay all reasonable costs and expenses of the
administrative agent (including all reasonable fees, expenses and disbursements
of outside counsel and other professional advisors retained by the
administrative agent) in connection with the preparation, execution and delivery
of the definitive credit documentation and the funding of all loans in
connection therewith.
44
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated October 8, 2003 (the
"Indenture"), among the Company, the Subsidiary Guarantors and The Bank of New
York, as trustee (the "Trustee"). The following is a summary of certain
provisions of the Indenture and the Notes.
The definitions of certain capitalized terms used in this description are
set forth below under "Certain Definitions." References in this "Description of
the Notes" section to the "Company" mean only Neenah Foundry Company and not any
of its subsidiaries.
GENERAL
The Notes were issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Company appointed
the Trustee to serve as registrar and paying agent under the Indenture at its
offices in New York, New York. No service charge will be made for any
registration of transfer or exchange of the Notes, except for any tax or other
governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The Notes are limited to $100,000,000 million aggregate principal amount
and will mature on September 30, 2013. Subject to compliance with the covenant
described under "-- Certain Covenants -- Limitation on the Incurrence of
Indebtedness and Issuance of Disqualified Stock," the Company may issue
Additional Notes from time to time in the future. Any Additional Notes will be
part of the same issue as the Notes being issued in this offering and will vote
on all matters as one class with the Notes being issued in this offering. For
purposes of this "Description of the Notes," except for the covenants described
under "-- Certain Covenants -- Limitations on Indebtedness," references to the
Notes include Additional Notes, if any. The coupon rate on the Notes is 13% per
annum. Cash interest on the Notes will accrue at a rate of 5% per annum and 8%
interest may be paid-in-kind. Interest on the Notes will be payable semiannually
in arrears on January 1 and July 1 of each year (each an "Interest Payment
Date"), commencing July 1, 2004, to the holders of record of Notes on the
preceding December 15 or June 15, as applicable. Interest will be computed on
the basis of a 360-day year consisting of twelve 30-day months and will be paid
to holders of the Notes from the date of original issuance.
RANKING
The Notes are:
- general unsecured obligations of the Company;
- subordinate in right of payment with all existing and future Senior
Indebtedness of the Company; and
- senior in right of payment to any existing and future subordinated
unsecured Indebtedness of the Company.
Pursuant to the Indenture, the Notes are senior to all of the Company's
subordinated unsecured indebtedness and subordinate to the New Credit Facility
and the 11% Senior Secured Notes due 2010. Five percent of the interest on the
Notes will be paid in cash and 8% interest may be paid-in-kind. As of June 30,
2004 we haved approximately $60.0 million of Indebtedness outstanding under the
Credit Agreement, with $24.5 million in additional revolving loan capacity. In
addition, under the Indenture, the Company may also incur additional
Indebtedness as described below under "-- Certain Covenants -- Limitation on
Additional Indebtedness" and "Certain Covenants -- Limitation on Liens." Any
amounts drawn under our New Credit Facility will rank senior to the Notes. See
"Description of New Credit Facility."
45
GUARANTEES OF THE NOTES
Each of the Subsidiary Guarantors has unconditionally guaranteed on a joint
and several basis all of the Company's Obligations under the Notes, including
its obligations to pay principal, premium and interest with respect to the
Notes.
Each Guarantee is:
- a general unsecured obligation of the Guarantor;
- subordinate in right of payment with all existing and future Senior
Indebtedness of the Subsidiary Guarantors; and
- senior in right of payment to existing and future subordinated unsecured
Indebtedness of the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor will not be discharged except
by complete performance of the Obligations contained in the Notes and Indenture.
Each Guarantor that makes a payment or distribution under a Subsidiary Guarantee
shall be entitled to seek contribution from each non-paying Subsidiary Guarantor
so long as the exercise of such right does not impair the rights of Holders
under the Subsidiary Guarantees.
The Company shall cause each Restricted Subsidiary issuing a Subsidiary
Guarantee after the date of the Indenture to execute and deliver to the Trustee
a supplemental indenture and the applicable documents and certificates required
by the Indenture, pursuant to which such Restricted Subsidiary shall become a
party to the Indenture and thereby unconditionally guarantee all of the
Company's Obligations under the Notes and the Indenture on the terms set forth
therein. Thereafter, such Restricted Subsidiary shall (unless released in
accordance with the terms of the Indenture) be a Subsidiary Guarantor for all
purposes of the Indenture.
The Obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
are junior and subordinated to the Senior Indebtedness to the extent applicable
to such Subsidiary Guarantor on the same basis as the Notes are junior and
subordinated to the Senior Indebtedness of the Company. For the purposes of the
foregoing sentence, the Trustee and the Holders shall have the right to receive
and/or retain payments by any of the Subsidiary Guarantors only at such times as
they may receive and/or retain payments in respect of the Notes pursuant to the
Indenture.
The Indenture provides that if the Notes thereunder are defeased in
accordance with the terms of the Indenture, all of the assets of a Subsidiary
Guarantee sold or disposed of in a transaction that complies with the Indenture
or the Company designates a Subsidiary Guarantor to be an Unrestricted
Subsidiary in a transaction that complies with the Indenture, then such
Subsidiary Guarantor (in the event of a sale or other disposition of all of the
Equity Interests of such Subsidiary Guarantor) or the corporation acquiring such
assets (in the event of a sale or other disposition of all or substantially all
of the assets of such Subsidiary Guarantor) shall be released and discharged of
its Subsidiary Guarantee obligations under the Indenture and the Notes.
As of June 30, 2004, the Subsidiary Guarantors had an aggregate of $0 in
senior indebtedness.
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or any Restricted Subsidiary or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or any Restricted Subsidiary or its property, an assignment for the
benefit of creditors or any marshaling of the Company's or any Restricted
Subsidiary's assets and liabilities, in each such case whether voluntary or
involuntary, domestic or foreign:
(a) the holders of Senior Indebtedness shall be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in
respect of such Senior Indebtedness (including interest after the
commencement of any such proceeding) in accordance with the terms of the
applicable Senior Indebtedness before Holders shall be entitled to receive
any payment or other distribution in respect of the Subordinated
Obligations; and
46
(b) until all Obligations with respect to Senior Indebtedness are paid
in full in cash or Cash Equivalents, any such distribution to which Holders
would be entitled shall be made to the holders of such Senior Indebtedness;
provided that notwithstanding the foregoing, Holders may receive: (i) Capital
Stock (other than Disqualified Stock); (ii) securities that are subordinated at
least to the same extent as the Notes, to Senior Indebtedness and to any
securities issued in exchange for such Senior Indebtedness; and (iii) payments
made from the trust described in "-- Legal Defeasance and Covenant Defeasance"
below to the extent deposited into such trust prior to the commencement of the
applicable proceeding.
In order to enable the Representative to enforce its rights hereunder in
any of the aforesaid actions or proceedings, the Representative is hereby
irrevocably authorized in its discretion, to the extent that the Trustee does
not do so at least 30 days before the expiration of the time to do so, to file
and vote such proofs of claim in respect of the Subordinated Obligations as the
Representative deems appropriate, and to collect any and all dividends or other
payments or disbursements made thereon in whatever form the same may be paid or
issued. The Representative is hereby authorized to demand, sue for, collect and
receive each of the aforesaid payments and distributions and give acquittance
therefore, and to take such other actions as the Representative deems necessary
or advisable to enforce said rights.
Neither the Company nor any Restricted Subsidiary may make, and neither the
Trustee or any Holder may accept, any payment with respect to the Subordinated
Obligations other than:
- regularly scheduled payments of interest in respect of the Notes on a
non-accelerated basis,
- regularly scheduled payments of principal in respect of the Notes on a
non-accelerated basis,
- payments of indemnities, costs and expenses reimbursable by the Company
and the Restricted Subsidiaries pursuant to the terms of the Notes and
the Indenture,
- Note repurchases out of Excess Proceeds as provided in "-- Certain
Covenants -- Asset Sales" below and
- payments set forth in "-- Subordination -- Liquidation; Dissolution;
Bankruptcy" above (collectively, "Permitted Payments"). Notwithstanding
the foregoing, no Permitted Payment may be made by the Company or any
Restricted Subsidiary or received by the Trustee or any Holder if: (i) a
default in the payment of the principal, premium, if any, or interest on
any Senior Indebtedness occurs and is continuing beyond any applicable
period of grace; or (ii) any other default occurs and is continuing with
respect to Senior Indebtedness or would occur as a consequence of such
payment that permits holders of the Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a
written notice of such default (a "Payment Blockage Notice") from the
Representative of the Senior Indebtedness.
The Company may and shall resume payment on the Notes: (1) in the case of a
payment default, upon the date on which such default is cured or waived or
otherwise has ceased to exist, and (2) in the case of a non-payment default, the
earlier of the date on which such other default is cured or waived or otherwise
has ceased to exist or 179 days after the date on which the applicable Payment
Blockage Notice is received (a "Payment Blockage Period"), unless, in the case
of either clause (1) or (2), the maturity of any Senior Indebtedness has been
accelerated, and such acceleration remains in full force and effect. Payment
Blockage Periods shall not exceed an aggregate of 179 days during any period of
360 consecutive days. No default in respect of Senior Indebtedness shall be
deemed to have been waived for these purposes unless and until the Company shall
have received a written waiver from the holders of such Senior Indebtedness to
that effect. No non-payment default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice, unless the same shall have
ceased to exist for a period of at least 60 consecutive days. Following the
expiration of any period during which the Company and the Restricted
Subsidiaries are prohibited from making payments on the Notes pursuant to a
Payment Blockage Notice, the Company will be obligated to resume making any and
all required payments in respect of the Notes,
47
including without limitation any missed payments, unless either a payment
default is in existence or the maturity of any Senior Indebtedness has been
accelerated, and such acceleration remains in full force and effect.
In the event that the Trustee receives or is holding, or any Holder
receives, any payment of any principal, premium or interest on the Notes at a
time when the Trustee or such Holder, as applicable, has actual knowledge (in
the case of the Trustee as described in "-- Subordination -- Rights of Trustee
and Paying Agent" below), that such payment is prohibited by
"-- Subordination -- Liquidation; Dissolution; Bankruptcy" or as otherwise
prohibited under the Indenture, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered to, the holders of Senior Indebtedness as their interests may appear
or to the Representative or agent under the indenture or other agreement (if
any) pursuant to which Senior Indebtedness may have been issued, as their
respective interests may appear, for application to the payment of all
Obligations with respect to the Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee undertakes
to perform only such obligations on the part of the Trustee as are specifically
set forth in the Indenture, and no implied covenants or obligations with respect
to the holders of Senior Indebtedness shall be read into this Indenture against
the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness, and shall not be liable to any such holders if
the Trustee shall pay over or distribute to or on behalf of Holders or the
Company or any other Person money or assets to which any holders of Senior
Indebtedness shall be entitled by virtue of the Indenture, except if such
payment is made as a result of the willful misconduct or gross negligence of the
Trustee.
After all Senior Indebtedness is paid in full and until the Notes are paid
in full, Holders shall be subrogated (equally and ratably with all other
Indebtedness pari passu with the Notes) to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to the
extent that distributions otherwise payable to the Holders have been applied to
the payment of Senior Indebtedness. A distribution made under the Indenture to
holders of Senior Indebtedness that otherwise would have been made to Holders is
not, as between the Company and Holders, a payment by the Company on the Notes.
If any payment or distribution to which the Holders would otherwise have
been entitled but for the provisions of the Indenture shall have been applied,
pursuant to the provisions of the Indenture, to the payment of all amounts
payable under the Senior Indebtedness, then and in such case the Holders shall
be entitled to receive from the holders of such Senior Indebtedness at the time
outstanding any payments or distributions received by such holders of such
Senior Indebtedness in excess of the amount sufficient to pay all amounts
payable under or in respect of such Senior Indebtedness in full; provided that
such payments or distributions shall be paid first pro rata to Holders that
previously paid amounts then pro rata to all Holders.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, from time to time at the option of the Company, at the Redemption Prices
(expressed as a percentage of principal amount) set forth below, with respect to
the indicated Redemption Date plus accrued and unpaid interest thereon, if any,
to, but excluding the Redemption Date, if redeemed during the 12-month period
beginning on September 30, of the years indicated below:
<Table>
<Caption>
REDEMPTION
YEAR PRICE
- ---- ----------
2003........................................................ 103%
2004........................................................ 102%
2005........................................................ 101%
2006 and thereafter......................................... 100%
</Table>
48
The Company may acquire the Notes by means other than a redemption, whether
by tender offer, open market purchases, negotiated transactions or otherwise, in
accordance with applicable securities laws, so long as such acquisition does not
otherwise violate the terms of the Indenture.
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption will
be made by the Trustee in compliance with the requirements of any applicable
depository, legal and national securities exchange or automated quotation
system, if any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate; provided, however, that
no Notes of a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before a Redemption Date to the Trustee and each Holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and after
the Redemption Date, interest will cease to accrue on any Notes or portions
thereof called for redemption as long as the Company has deposited with the
paying agent for the Notes funds in satisfaction of the applicable redemption
price pursuant to the Indenture.
Factors that may influence the Company's decision to redeem the Notes
include the ability to refinance the Notes at a lower interest rate.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
In the event that a Change of Control occurs, each Holder shall have the
right, at such Holder's option, subject to the terms and conditions of the
Indenture, to require the Company to repurchase all or any part of such Holder's
Notes (provided, that the principal amount of such Notes must be $1,000 or an
integral multiple thereof) on a date to be established by the Company (the
"Change of Control Payment Date") after the occurrence of such Change of
Control, at a cash price (the "Change of Control Repurchase Price") equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon to, but excluding, the Change of Control Payment Date.
If a Change of Control were to occur and all holders subsequently caused
the Company to redeem their Notes at 101% of the face amount together with
accrued and unpaid interest thereon, we may not have all funds necessary at that
time to satisfy our obligations under the Indenture and our New Credit
Agreement.
In the event that, pursuant to the terms of the Indenture, the Company
shall be required to commence an offer to purchase the Notes (the "Change of
Control Offer"), the Company will comply with the terms of the Indenture and all
applicable tender offer laws and regulations and any violation of the provisions
of the Indenture relating to such Change of Control Offer occurring as a result
of such compliance shall not be deemed an Event of Default or an event that,
with the passing of time or giving of notice, or both, would constitute an Event
of Default.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to (collectively,
"incur" and, correlatively, "incurred" and "incurrence") any Indebtedness
(including, without limitation, Acquired Debt), and the Company shall not issue
any Disqualified Stock and shall not permit any of its Restricted Subsidiaries
to issue any preferred stock; provided, however, that the Company and its
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) if
after giving effect to the incurrence of
49
such Indebtedness and the application of the proceeds thereof, the Consolidated
Coverage Ratio of the Company and its Restricted Subsidiaries (on a consolidated
basis) would not exceed 2.00 to 1.00.
The foregoing limitations shall not apply to:
(i) Indebtedness incurred by the Company and its Restricted
Subsidiaries under the Credit Agreement in an aggregate principal amount at
the time incurred equal to the greater of (i) $102 million and (ii) the
Borrowing Base Amount;
(ii) Indebtedness represented by the Senior Secured Notes;
(iii) additional Indebtedness incurred by the Company in respect of
Capital Lease Obligations or Purchase Money Obligations in an aggregate
principal amount not to exceed $10,000,000 at any time outstanding;
(iv) Indebtedness represented by the Notes and the Indenture;
(v) Hedging Obligations incurred by the Company pursuant to agreements
or other arrangements designed to protect the Company against fluctuations
in interest rates and/or currency exchange rates resulting from its
borrowings under the Credit Agreement;
(vi) additional unsecured Indebtedness which is subordinate in right
of payment to the Notes, not to exceed $5,000,000 at any time outstanding;
(vii) Indebtedness of the Company to any of its Wholly Owned
Subsidiaries that is a Restricted Subsidiary, and Indebtedness of any
Wholly Owned Subsidiary of the Company that is a Restricted Subsidiary to
the Company or any of its Wholly Owned Subsidiaries that is a Restricted
Subsidiary (the Indebtedness incurred pursuant to this clause (vii) being
hereinafter referred to as "Intercompany Indebtedness"); provided that in
the case of Intercompany Indebtedness of the Company (other than
Intercompany Indebtedness pursuant to the Credit Agreement) such
obligations shall be unsecured and subordinated in all respects to the
Company's obligations pursuant to the Notes; provided, further, that an
incurrence of Indebtedness shall be deemed to have occurred upon (a) any
sale or other disposition of Intercompany Indebtedness to a Person other
than the Company or any of its Restricted Subsidiaries, (b) any sale or
other disposition of Equity Interests of any Restricted Subsidiary of the
Company which holds Intercompany Indebtedness such that such Restricted
Subsidiary ceases to be a Restricted Subsidiary after such sale or other
disposition or (c) designation of a Restricted Subsidiary as an
Unrestricted Subsidiary;
(viii) the incurrence by the Company of Indebtedness issued in
exchange for, or the proceeds of which are used to extend, refinance,
renew, replace, defease or refund Indebtedness incurred pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of this
covenant or pursuant to clauses (i), (ii) or (iv) of this covenant in whole
or in part (the "Refinancing Indebtedness"); provided, however, that (A)
(i) the aggregate principal amount of any Refinancing Indebtedness (other
than a Credit Agreement Refinancing Indebtedness) shall not exceed the
aggregate principal amount of Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded and (ii) the aggregate principal
amount of any Credit Agreement Refinancing Indebtedness may exceed the
aggregate principal amount of Indebtedness incurred under the Credit
Agreement so extended, refinanced, renewed, replaced, defeased or refunded
only to the extent permitted under Clause (i) of this caption "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; (B) the Refinancing Indebtedness shall have a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (C) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is pari passu with or
subordinated in right of payment to the Notes, the Refinancing Indebtedness
shall be pari passu with or subordinated, as the case may be, in right of
payment to the Notes on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded (any such
extension, refinancing, renewal, replacement, defeasance or refunding being
referred to as a "Permitted Refinancing");
50
(ix) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities, or obligations in respect of
purchase price adjustments, in connection with the acquisition or
disposition of any business, assets or Subsidiary of the Company permitted
under the Indenture;
(x) Indebtedness of the Company or a Restricted Subsidiary owed to any
Person in connection with liability insurance provided by such Person to
the Company or such Restricted Subsidiary, pursuant to reimbursement or
indemnification obligations to such Person, in each case incurred in the
ordinary course of business;
(xi) Guarantees of Indebtedness permitted to be incurred under the
Indenture;
(xii) Indebtedness in respect of performance bonds; and
(xiii) Indebtedness not included in paragraphs (i) through (xii) above
which does not exceed at any time, in the aggregate, $2,000,000.
Limitation on Restricted Payments. The Company shall not, and shall not
permit any of its Restricted Subsidiaries to, directly or indirectly:
(a)
(i) declare or pay any dividend or make any distribution on account of
Equity Interests, other than
(A) dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company; or
(B) dividends or distributions payable to the Company or a Wholly
Owned Subsidiary of the Company that is a Restricted Subsidiary;
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company (other than any such Equity Interests owned
by the Company or a Wholly Owned Subsidiary of the Company that is a
Restricted Subsidiary);
(iii) purchase, redeem, repay, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated in right of payment to the
Notes except for regularly scheduled payments of interest when due or
payment of principal at maturity thereof;
(iv) make any Investment (other than a Permitted Investment);
(all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments");
unless, at the time of and after giving effect to such Restricted
Payment:
(A) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(B) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Coverage Ratio test set forth under
"-- Certain Covenants -- Limitation on the Incurrence of Indebtedness
and Issuance of Disqualified Stock"; and
(C) such Restricted Payment (the amount of any such payment, if
other than cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
resolution in an Officers' Certificate delivered to the Trustee),
together with the aggregate of all other Restricted Payments made by the
Company and its Restricted Subsidiaries after the date of the Indenture
(including Restricted Payments permitted by the next succeeding
paragraph, except as set forth therein), shall not exceed the sum of (w)
50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) commencing on
51
the first day of the Company's first fiscal quarter beginning after the
initial issuance of the Notes and ending on the last day of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, 100% of such deficit as a negative number), plus (x) 100% of
the aggregate net cash proceeds received by the Company from the
issuance or sale since the date of initial issuance of the Notes of
Equity Interests of the Company or of debt securities of the Company
that have been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or debt securities that have
been converted into Disqualified Stock), plus (y) the aggregate cash
received by the Company as capital contributions to the Company after
the date of initial issuance of the Notes (other than from a
Subsidiary), plus (z) any cash received by the Company after the date of
initial issuance of the Notes as a dividend or distribution from any of
its Unrestricted Subsidiaries or from the sale of any of its
Unrestricted Subsidiaries less the cost of disposition and taxes, if any
(but in each case excluding any such amounts included in Consolidated
Net Income).
(b) The foregoing provisions shall not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company, or the defeasance, redemption or
repurchase of subordinated Indebtedness in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of Equity Interests of the Company (other than any
Disqualified Stock) or out of the net proceeds of a substantially
concurrent cash capital contribution received by the Company; provided that
the amount of any such proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded
from Clause (C)(x) above this section "-- Certain Covenants -- Limitation
on Restricted Payments";
(iii) the repayment, defeasance, redemption or repurchase of
subordinated Indebtedness with the net proceeds from an incurrence of
Refinancing Indebtedness in a Permitted Refinancing;
(iv) any Investment made with the proceeds of a substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of
Capital Stock of the Company (other than Disqualified Stock); provided,
however, the proceeds of such sale shall not be (and have not been)
included in Clause (C) above this section "-- Certain
Covenants -- Limitation on Restricted Payments";
(v) other restricted payments of up to $5,000,000 in the aggregate; or
(vi) the payment of a dividend or distribution by the Company and its
Subsidiaries, directly or indirectly, to ACP Holding in an amount
sufficient to permit ACP Holding to pay its consolidated, combined or
unitary United States federal, state and local tax liabilities relating to
the business of the Company and its Subsidiaries, provided that ACP Holding
applies the amount of such dividend or distribution for such purpose at
such time;
(vii) payments by the Company to NFC Castings or ACP Holding not to
exceed an amount necessary to permit NFC Castings or ACP Holding to (A)
make payments in respect to its indemnification obligations owing to
directors, officers, or other Persons under NFC Castings' or ACP Holding's
charter or by-laws or pursuant to written agreements with any such Person,
(B) make payments in respect of its other operational expenses (other than
taxes) incurred in the ordinary course of business, or (C) make payments in
respect of indemnification obligations and costs and expenses incurred by
ACP Holding in connection with any offering of common stock of ACP Holding;
or
(viii) distributions by the Company and the Restricted Subsidiaries in
amounts necessary to permit such Person to repurchase securities of such
Person from employees of such Person upon the
52
termination of their employment, so long as the aggregate cash amount of
all such Distributions by all such Persons, measured at the time when made,
does not exceed $250,000 in any fiscal year of the Company.
provided, further, however, that at the time of, and after giving effect
to, any Restricted Payment permitted under clauses (i), (ii), (iii), (v) and
(viii) above no Default or Event of Default shall have occurred and be
continuing; provided, further, that the Restricted Payments described in clauses
(vi) and (vii), shall not be counted in computing the aggregate amount of all
Restricted Payments made pursuant to the Indenture.
For purposes of the foregoing calculations, the amount of any Investment
that constitutes a Restricted Payment shall be equal to the greater of (i) the
net book value of such Investment and (ii) the fair market value of such
Investment (in each case as certified by a resolution of the independent
directors of the Company if the book value or fair market value of such
investment exceeds $1,000,000).
Limitation on Liens. The Company shall not, and shall not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Liens on any asset now owned or acquired after the
date of the Indenture or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens; provided, that, in
the case of Permitted Liens securing Indebtedness that is expressly subordinate
or junior in right of payment to the Notes or a Subsidiary Guarantee, the Notes
or such Subsidiary Guarantee is secured by a Lien on such property, assets or
proceeds that is senior in priority to such Liens.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company shall not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (a) on its Capital Stock or (b) with
respect to any other interest or participation in, or measured by, its
profits;
(ii) pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(iii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(iv) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries;
except for such encumbrances or restrictions existing under or by reason of (a)
the agreements evidencing the Senior Indebtedness and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of those agreements; provided that they are not
materially more restrictive than the similar restrictions contained in those
agreements on the date of the Indenture, (b) the Indenture and the Notes, (c)
applicable law, (d) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, (e) customary nonassignment provisions in leases entered
into in the ordinary course of business and consistent with past practices, (f)
Purchase Money Obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iv) above
on the property so acquired, (g) Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Refinancing Indebtedness
are no more restrictive with respect to the provisions set forth in clauses (i),
(ii), (iii) and (iv) above than those contained in the agreements governing the
Indebtedness being refinanced, (h) any agreement for the sale or other
disposition of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition or (i) restrictions
on cash or other deposits or net worth imposed by customers or suppliers under
contracts entered into in the ordinary course of business.
53
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit, cause, or suffer any Restricted Subsidiary of the Company to,
directly or indirectly, sell, lease, license, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable arms' length transaction by the Company
or such Restricted Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction involving aggregate payments in excess of $500,000, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above
and such Affiliate Transaction is approved by a majority of the
disinterested members, if any, of the Board of Directors and (b) with
respect to any Affiliate Transaction involving aggregate payments in excess
of $20,000,000, an opinion as to the fairness to the Company or such
Restricted Subsidiary from a financial point of view issued by a nationally
recognized independent financial advisor;
provided, however, that the foregoing limitations shall not apply to (i) any
reasonable fees, advances and compensation (including incentive compensation)
provided to, and indemnity provided on behalf of, officers, directors and
employees of NFC Castings, ACP Holding, the Company and its Restricted
Subsidiaries as determined in good faith by the Board of Directors of the
Company, (ii) transactions between or among the Company and its Wholly Owned
Subsidiaries that are Restricted Subsidiaries, (iii) Restricted Payments
permitted under "Limitation on Restricted Payments", (iv) payment of principal
of, and interest on, the Notes or the Senior Subordinated Notes held by
Affiliates, (v) payment of the Commitment Fee, (vi) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (vii) transactions pursuant
to agreements entered into or in effect on the date of the Indenture, including
amendments thereto entered into after the date of the Indenture, provided that
(A) the terms of any such amendment are not, in the aggregate, less favorable to
the Company or such Restricted Subsidiary than the terms of such agreement prior
to such amendment and (B) the transactions contemplated by such amendment are
otherwise permitted by the Indenture, (viii) Intercompany Indebtedness permitted
to be incurred under "-- Certain Covenants -- Limitation on the Incurrence of
Indebtedness and Issuance of Disqualified Stock" or (ix) non-exclusive licenses
of intellectual property among the Company and the Restricted Subsidiaries or
among the Restricted Subsidiaries.
Limitation on Lines of Business. The Company shall not, and shall not
permit any Restricted Subsidiary to, engage in any business other than a Related
Business.
Limitation on Layering Debt. Neither the Company nor any Subsidiary
Guarantor shall incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any Senior Indebtedness of the Company and senior in any respect in right of
payment to the Notes or the Subsidiary Guarantees, as applicable.
Future Guarantors. The Company shall cause each Person that (a) becomes a
Domestic Restricted Subsidiary following the date of the Indenture and
(b) guarantees any Indebtedness of the Company or any Subsidiary thereof to
execute and deliver to the Trustee a Subsidiary Guarantee at the time such
Person becomes obligated under any such Guarantee.
Payments for Consent. Neither the Company, nor any of the Company's
Subsidiaries, shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or agreed to be paid to all holders of the Notes which so
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
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Asset Sales. Neither the Company nor any of its Restricted Subsidiaries
shall engage in any Asset Sale, unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets
sold or otherwise disposed of; and
(ii) at least 20% of the consideration therefor received by the
Company or such Restricted Subsidiary is in the form of Cash or Cash
Equivalents; provided, however, that if the Fair Market Value of the assets
sold or otherwise disposed of exceeds $10,000,000, at least 75% of the
consideration therefor received by the Company or such Restricted
Subsidiaries is in the form of Cash or Cash Equivalents;
provided, further, however, that the amount of (a) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet or in
the notes thereto) of the Company or such Restricted Subsidiary (other than
liabilities that are by their terms subordinated in right of payment to the
Notes) that are assumed by the transferee of any such assets and (b) any notes
or other obligations received by the Company or such Restricted Subsidiary from
such transferee that are converted within 60 days by the Company or such
Restricted Subsidiary into cash (to the extent of the cash so received), shall
be deemed to be cash for purposes of clause (ii) above.
Within 180 days after the receipt of the Net Proceeds from an Asset Sale,
the Company shall apply the Net Proceeds from such Asset Sale to repay the Term
Loan, and to the extent such Indebtedness is paid in full, to repay the Revolver
(but shall not permanently reduce the commitment thereunder). Pending the final
application of any such Net Proceeds, the Company may invest such Net Proceeds
in any manner that is not prohibited by this Indenture. Any Net Proceeds from
the Asset Sale that are not applied as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate cumulative amount of Excess Proceeds exceeds $5,000,000,
the Company shall make an offer to all Holders of Notes to purchase the maximum
principal amount of Notes that may be purchased with the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase, in accordance
with the procedures set forth in this section "-- Certain Covenants -- Asset
Sales" (an "Asset Sale Offer"). To the extent that the aggregate principal
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use such deficiency for general corporate purposes in
any manner not prohibited by the Indenture.
If the aggregate principal amount of Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
In the event that the Company shall be required to commence an Asset Sale
Offer to all Holders to purchase Notes pursuant to this section "-- Certain
Covenants -- Asset Sales", it shall follow the procedures specified below.
The Asset Sale Offer shall be commenced within 30 days following the first
date on which the Company has cumulative Excess Proceeds of at least $5,000,000
and remain open for a period of at least 30 and not more than 40 days, except to
the extent that a longer period is required by applicable law (the "Repurchase
Offer Period"). No later than five Business Days after the termination of the
Offer Period (the "Repurchase Date"), the Company shall purchase the principal
amount of Notes required to be purchased pursuant to this section "-- Certain
Covenants -- Asset Sales" hereof (the "Repurchase Price") or, if Notes having an
aggregate principal amount less than the amount of Excess Proceeds subject to
such Asset Sale Offer have been tendered, all Notes tendered in response to the
Asset Sale Offer. Payment for any Notes so purchased shall be made in the same
manner as interest payments are made.
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If the Repurchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest shall
be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company shall send, by
first class mail, a notice to the Trustee or to each of the Holders, with a copy
to the Trustee. The notice shall contain all instructions and materials
necessary to enable such Holders to tender Notes pursuant to the Asset Sale
Offer. The Asset Sale Offer shall be made to all Holders. The notice, which
shall govern the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this section
"-- Certain Covenants -- Asset Sales" and the length of time the Asset Sale
Offer shall remain open;
(b) the Asset Sale Offer, the Repurchase Price and the Repurchase
Date;
(c) that any Note not tendered or accepted for payment shall continue
to accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest after the Repurchase Date;
(e) that Holders electing to have a Note purchased pursuant to a Asset
Sale Offer may only elect to have all of such Note purchased and may not
elect to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice at least three days before the Asset Sale Purchase
Date;
(g) that Holders shall be entitled to withdraw their election if the
Company, the Depositary or the Paying Agent, as the case may be, receives,
not later than the expiration of the Repurchase Offer Period, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Note the Holder delivered for purchase
and a statement that such Holder is withdrawing his election to have such
Note purchased;
(h) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Repurchase Price, the Trustee shall select the Notes to
be purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Trustee so that only Notes in denominations of $1,000,
or integral multiples thereof, shall be purchased); and
(i) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered (or transferred by book-entry transfer).
The Company, the Depositary or the Paying Agent, as the case may be, shall
promptly (but in any case not later than five days after the Repurchase Date)
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company shall promptly issue a new Note, and the Trustee, upon written
order from the Company shall authenticate and mail or deliver such new Note to
such Holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Asset Sale Offer on the Repurchase Date.
The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws, rules and regulations thereunder to
the extent such laws, rules and regulations are applicable in connection with
the repurchase of Notes pursuant to Asset Sale Offer.
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Calculation of Original Issue Discount. The Company shall file with the
Trustee promptly at the end of each calendar year (i) a written notice
specifying the amount of original issue discount (including daily rates and
accrual periods) accrued on Outstanding Notes as of the end of such year and
(ii) such other specific information relating to such original issue discount as
may then be relevant under the Code from time to time.
EVENTS OF DEFAULT
Under the Indenture, an "Event of Default," means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
caused voluntarily or involuntarily or effected, without limitation, by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a) failure to pay any installment of interest on any of the Notes as
and when the same becomes due and payable, and the continuance of such
failure for a period of 30 days, whether or not such payment is prohibited
by the Indenture;
(b) failure to pay all or any part of the principal of, or premium, if
any, on the Notes when and as the same become due and payable at maturity,
redemption, repurchase or otherwise, whether or not such payment is
prohibited by the Indenture;
(c) failure by the Company to comply with the provisions set forth in
"-- Certain Covenants -- Asset Sales" or "Limitation on Merger,
Consolidation or Sale of Assets";
(d) failure by the Company or any Restricted Subsidiary to observe or
perform any covenant or agreement contained in the Notes or the Indenture
(other than a default in the performance of any covenant or agreement which
is specifically dealt with elsewhere in this section "Events of Default"),
and continuance of such failure for a period of 30 days after there has
been given, by registered or certified mail, to the Company by the Trustee,
or to the Company and the Trustee by Holders of at least 25% in aggregate
principal amount of the then outstanding Notes, a written notice specifying
such failure, requesting it to be remedied and stating that such notice is
a "Notice of Default";
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of such Indebtedness when due and prior to the
expiration of the grace period provided in such Indebtedness (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case described in clauses (a) and (b) of
this subsection (e), the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5,000,000 or more;
(f) failure of the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5,000,000, which judgments
have not been paid, stayed, bonded or discharged for a period (during which
execution shall not be effectively stayed) of 60 days (or, in the case of
any such final judgment which provides for payment over time, which shall
so remain unstayed, unbonded or undischarged beyond any applicable payment
date provided therein);
(g) a decree, judgment, or order by a court of competent jurisdiction
shall have been entered adjudging the Company or any of its Restricted
Subsidiaries as bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization of the Company or any of its Restricted
Subsidiaries under any bankruptcy or similar law, and such decree,
judgment, or order shall have continued undischarged and unstayed for a
period of 60 days; or a decree or order of a court of competent
jurisdiction over the appointment of a receiver, liquidator, trustee, or
assignee in bankruptcy or insolvency of the Company, any of its Restricted
Subsidiaries, or of the property of any such Person,
57
or for the winding up or liquidation of the affairs of any such Person,
shall have been entered, and such decree, judgment, or order shall have
remained in force undischarged and unstayed for a period of 60 days; or
(h) the Company or any of its Restricted Subsidiaries shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization under any bankruptcy or similar
law or similar statute, or shall consent to the filing of any such
petition, or shall consent to the appointment of a Custodian, receiver,
liquidator, trustee, or assignee in bankruptcy or insolvency of it or any
of its assets or property, or shall make a general assignment for the
benefit of creditors; or take any corporate action in furtherance of or to
facilitate, conditionally or otherwise, any of the foregoing; or
(i) any Subsidiary Guaranty relating to the Notes ceases to be in full
force and effect (other than in accordance with the terms of such
Subsidiary Guaranty), or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty relating to the Notes.
Notwithstanding the 30-day period and notice requirement contained in
Section 6.1(d) above, with respect to a default under "Offer to Purchase Upon
Change of Control", the 30-day period referred to above shall be deemed to have
begun as of the date the Change of Control notice is required to be sent in the
event that the Company has not complied with the provisions of "Offer to
Purchase Upon Change of Control" and the Trustee or Holders of at least 25% in
principal amount of the outstanding Notes thereafter give the Notice of Default
referred to above to the Company and, if applicable, the Trustee; provided,
however, that if the breach or default is a result of a default in the payment
when due of the Repurchase Price on the Repurchase Date, such Event of Default
shall be deemed, for purposes of this section "Events of Default" to arise no
later than on the last Repurchase Date.
The occurrence of any of the following is as an "Event of Default" under
the Indenture:
(a) failure to pay principal of (or premium, if any, on) any Note when
due at stated maturity, upon acceleration, redemption, optional redemption,
required repurchase or otherwise;
(b) failure to pay any interest on any Note when due, continued for 30
days or more;
(c) failure to perform or comply with any of the provisions described
under "-- Certain Covenants -- Asset Sales" and "Offer to Purchase upon
Change of Control" above;
(d) failure to perform any other covenant, warranty or agreement of
the Company under the Indenture or the Notes or of the Subsidiary
Guarantors under the Indenture or the Guarantees continued for 30 days or
more after written notice to the Company by the Trustee or Holders of at
least 25% in aggregate principal amount of the outstanding Notes;
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of such Indebtedness when due and prior to the
expiration of the grace period provided in such Indebtedness (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case described in clauses (a) and (b) of
this subsection (e), the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5,000,000 or more;
(f) failure of the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5,000,000, which judgments
have not been paid, stayed, bonded or discharged for a period (during which
execution shall not be effectively stayed) of 60 days (or, in the
58
case of any such final judgment which provides for payment over time, which
shall so remain unstayed, unbonded or undischarged beyond any applicable
payment date provided therein);
(g) a decree, judgment, or order by a court of competent jurisdiction
shall have been entered adjudging the Company or any of its Restricted
Subsidiaries as bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization of the Company or any of its Restricted
Subsidiaries under any bankruptcy or similar law, and such decree,
judgment, or order shall have continued undischarged and unstayed for a
period of 60 days; or a decree or order of a court of competent
jurisdiction over the appointment of a receiver, liquidator, trustee, or
assignee in bankruptcy or insolvency of the Company, any of its Restricted
Subsidiaries, or of the property of any such Person, or for the winding up
or liquidation of the affairs of any such Person, shall have been entered,
and such decree, judgment, or order shall have remained in force
undischarged and unstayed for a period of 60 days; or
(h) the Company or any of its Restricted Subsidiaries shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization under any bankruptcy or similar
law or similar statute, or shall consent to the filing of any such
petition, or shall consent to the appointment of a Custodian, receiver,
liquidator, trustee, or assignee in bankruptcy or insolvency of it or any
of its assets or property, or shall make a general assignment for the
benefit of creditors; or take any corporate action in furtherance of or to
facilitate, conditionally or otherwise, any of the foregoing; or
(i) any Subsidiary Guaranty relating to the Notes ceases to be in full
force and effect (other than in accordance with the terms of such
Subsidiary Guaranty), or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty relating to the Notes.
Notwithstanding the 30-day period and notice requirement above, with
respect to a default under "Offer to Purchase Upon Change of Control", the
30-day period shall be deemed to have begun as of the date the Change of Control
notice is required to be sent in the event that the Company has not complied
with the provisions of "Offer to Purchase Upon Change of Control" and the
Trustee or Holders of at least 25% in principal amount of the outstanding Notes
thereafter give the Notice of Default to the Company and, if applicable, the
Trustee; provided, however, that if the breach or default is a result of a
default in the payment when due of the Repurchase Price on the Repurchase Date,
such Event of Default shall be deemed, to arise no later than on the last
Repurchase Date.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any of its Affiliates, as such, shall have any liability for any obligations
of the Company or any of its Affiliates under the Notes or the Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect,
except as to surviving rights of registration of transfer or exchange of the
Notes, as to all Notes issued when:
(a) either:
(i) the Company delivers to the Trustee all outstanding Notes for
cancellation; or
(ii) all outstanding Notes have become due and payable, whether at
maturity or on a specified redemption date as a result of the mailing of
a notice of redemption pursuant to the section "-- Optional Redemption,"
59
(b) the Company irrevocably deposits with the Trustee money sufficient
to pay at maturity or upon redemption all outstanding Notes, including
interest and premium thereon to maturity or such redemption date, and if in
either case the Company pays all other sums payable under the Indenture by
the Company, and
(c) if the Notes have been called for redemption and the redemption
date has not occurred, the Company delivers to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
actions and will be subject to federal income tax on the same amounts, in
the same manner and at the same time as would have been the case if such
actions had not occurred, then this Indenture shall cease to be of further
effect except for,
(i) the Company's claim to deposits unclaimed after two years,
certain reporting obligations, and amounts owed to the Trustee, and
(ii) if the Notes have been called for redemption and the
redemption date has not occurred, the Company's obligation to pay the
redemption price on such redemption date.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, provided that no Default or Event of Default has occurred
and is continuing or would arise therefrom (or, with respect to a Default or
Event of Default from bankruptcy or insolvency events, occurs at any time on or
prior to the 91st calendar day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after such
91st day)) under the Indenture, terminate its and the Subsidiary Guarantors'
substantive obligations in respect of the Notes (except for its obligations to
pay the principal, premium and interest on the Notes and the Subsidiary
Guarantors' Guarantee thereof) ("Covenant Defeasance") by:
(1) depositing with the Trustee, under the terms of an irrevocable
trust agreement, cash in United States dollars, non-callable government
securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
certified public accountants, to pay all remaining principal, premium and
interest on such Notes;
(2) delivering to the Trustee either an Opinion of Counsel from
nationally recognized tax counsel reasonably acceptable to the Trustee
confirming that the Holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
termination of obligations; and
(3) complying with certain other requirements set forth in the
Indenture.
In addition, the Company may, provided that no Default or Event of Default
has occurred and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default from bankruptcy or insolvency events, occurs at any
time on or prior to the 91st calendar day after the date of such deposit (it
being understood that this condition shall not be deemed satisfied until after
such 91st day)) under the Indenture, terminate all of its and the Subsidiary
Guarantors' substantive obligations in respect of the Notes (including its
obligations to pay the principal, premium and interest on the Notes and the
Subsidiary Guarantors' Guarantee thereof) ("Legal Defeasance") by:
(1) depositing with the Trustee, under the terms of an irrevocable
trust agreement, cash in United States dollars, non-callable government
securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
certified public accountants, to pay all remaining principal, premium and
interest on such Notes;
(2) delivering to the Trustee either an Opinion of Counsel from
nationally recognized tax counsel reasonably acceptable to the Trustee
confirming that the Holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
termination of obligations; and
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(3) complying with certain other requirements set forth in the
Indenture.
GOVERNING LAW
The Indenture, the Collateral Documents (other than certain Collateral
Documents relating to Foreign Restricted Subsidiaries), the Notes and the
Guarantees will be governed by the laws of the State of New York without regard
to principles of conflicts of laws.
MODIFICATION AND WAIVER
Supplements and amendments of the Indenture and the Notes may be made by
the Company, the Subsidiary Guarantors and the Trustee with the consent of the
Holders of a majority in aggregate principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the Notes); provided, however, that:
(1) no such modification or amendment to the Indenture or the Notes
may, without the consent of the Holder of each Note affected thereby:
(a) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any
Note or alter the optional or mandatory redemption provisions (other
than provisions relating to the covenants described in "-- Certain
Covenants -- Asset Sales" and "Offer to Purchase Upon Change of Control"
above) or reduce the prices at which the Company shall offer to purchase
such Notes pursuant to such sections;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Note;
(d) waive a Default or Event of Default in the payment of
principal, premiums or interest on, or redemption payment with respect
to, any Note (other than a Default in the payment of an amount due as a
result of an acceleration if the Holders of Notes rescind such
acceleration);
(e) make any Note payable in money other than that stated in the
Note;
(f) make any change in the provisions of the Indenture relating to
waiver of past defaults or to the rights of Holders to receive payments
of principal, premiums or interest on the Notes or to this clause (f);
(g) waive a redemption payment with respect to any Note;
(h) make any change to any of the subordination provisions
described under "-- Subordination" above, that adversely affects Holders
of Notes; or
(i) make any change in the foregoing amendment and waiver
provisions.
Without the consent of any Holder, the Company, the Subsidiary Guarantors
and the Trustee may amend the Indenture and the Notes to: (1) to cure any
ambiguity, defect or inconsistency; (2) to provide for uncertificated Notes in
addition to or in place of certificated Notes; (3) to provide for the assumption
of the Company's or a Subsidiary Guarantor's Obligations to Holders in the case
of a merger or consolidation; (4) to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights of any Holder of the Notes; (5) to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the TIA; (6) to provide for the issuance of Additional
Notes in accordance with the limitations set forth in the Indenture as of
October 8, 2003; or (7) to allow any Subsidiary Guarantor to execute a
supplemental indenture and/or a Subsidiary Guarantee with respect to the Notes.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
and the Subsidiary Guarantors with certain
61
restrictive provisions of the Indenture or the Notes. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the Notes, on behalf of all Holders, may waive any
past default under the Indenture (including any such waiver obtained in
connection with a tender offer or exchange offer for the Notes), except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Notes tendered pursuant to a Change of Control
Offer, or a default in respect of a provision that under the Indenture cannot be
modified or amended without the consent of the Holder of each Note that is
affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, any Guarantor or any other obligor upon the
Notes, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claim as security or otherwise.
The Trustee is permitted to engage in other transactions with the Company or an
Affiliate of the Company; provided, however, that if it acquires any conflicting
interest (as defined in the Indenture or in the Trust Indenture Act), it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACP Holding" means ACP Holding Company, a Delaware corporation.
"Acquired Debt" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Additional Notes" means any Notes (other than Initial Notes and Notes
issued under certain sections of the Indenture) issued under the Indenture in
accordance with the terms of the Indenture, as part of the same series as the
Initial Notes or as an additional series.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities (or the
equivalents) of a Person shall be deemed to be control.
"Asset Sale" means any sale, transfer or other disposition (including,
without limitation, by merger, consolidation or sale-and-leaseback transaction)
of (i) shares of Capital Stock of a Subsidiary of the Company (other than
directors' qualifying shares), including any issuance of such Capital Stock, or
(ii) property or assets of the Company or any Restricted Subsidiary of the
Company other than in the ordinary course of business; provided, however, that
an Asset Sale shall not include (a) any sale, transfer or other disposition of
shares of Capital Stock, property or assets by a Restricted Subsidiary of the
62
Company to the Company or to any Restricted Subsidiary that is a Wholly Owned
Subsidiary of the Company, (b) any sale, transfer or other disposition of
defaulted receivables for collection, (c) any sales, transfers or other
dispositions that do not involve aggregate consideration in excess of $2,500,000
in any fiscal year, (d) the grant in the ordinary course of business of any
license of patents, trademarks, registrations therefor and other similar
intellectual property, (e) any Lien (or foreclosure thereon) securing
Indebtedness to the extent that such Lien is granted in compliance with the
Indenture, (f) any Restricted Payment or Permitted Investment permitted by the
Indenture, (g) any disposition of assets or property to the extent such assets
are obsolete, worn-out or no longer useful in the Company's or any Restricted
Subsidiary's business, (h) the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company as permitted by Article V
of the Indenture, (i) any disposition that constitutes a Change of Control, (j)
any transaction or series of transactions pertaining to sales, transfers or
other dispositions of properties or assets of the Company or any Restricted
Subsidiary in connection with closures of plants for a purchase price not
exceeding 10% of the total consolidated assets of the Company as reflected on
its consolidated balance sheet as of the Company's fiscal year end immediately
preceding the first sale of such property or assets, (k) the disposition of any
Investment in Cash Equivalents, (l) sales, leases and other dispositions of the
Non-Core Fixed Assets; or (m) so long as no Event of Default exists, sales,
leases and other dispositions of fixed assets that are worn, scrap, excess,
damaged or obsolete, the net proceeds of which are used to prepay the
outstanding principal amount of the Term Loan or the Revolver (regardless of
whether the corresponding revolving commitment thereunder is reduced in
connection therewith).
"Asset Sale Offer" means an offer made by the Company when the aggregate
cumulative amount of Excess Proceeds exceeds $5.0 million to all Holders of
Notes to purchase the maximum principal amount of Notes that may be purchased
with the Excess Proceeds at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest thereon to the
date of purchase in accordance with the terms of the Indenture.
"Bankruptcy Law" means title 11, U.S. Code, or any similar federal, state
or foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any committee of the board of directors of such
Person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such Person.
"Borrowing Base Amount" means, as to the Company and its Restricted
Subsidiaries, the sum of (x) 65% of the gross value of Inventory plus (y) 85% of
the gross value of Receivables, in each case, determined on a consolidated basis
in accordance with GAAP, as reflected in the most recent quarterly consolidated
financial statements delivered pursuant to Section 4.7 of the Indenture.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Capital Stock" means (i) any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock, (ii) in the
case of a partnership, partnership interests (whether general or limited) and
(iii) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash" means such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public and private
debts.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having
63
maturities of not more than twelve months from the date of acquisition, (iii)
certificates of deposit and Eurodollar time deposits with maturities of twelve
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding twelve months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of
$500,000,000, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within nine months after the date of acquisition and (vi)
shares of any money market mutual fund, or similar fund, in each case having
assets in excess of $500,000,000, which invests solely in investments of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of ACP Holding, NFC Castings or the Company and the
Restricted Subsidiaries, taken as a whole, to any "person" (as that term is
used in Section 13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of NFC Castings or ACP Holding (or any other direct or indirect parent of
the Company) or the Company;
(3) the consummation of any transaction, as a result of which any
"person" (as referenced in clause (2) above), other than the Permitted
Holders, becomes the Beneficial Owner, directly or indirectly, of, in the
aggregate, more than 50% of the total voting power of the Voting Stock of
the Company, NFC Castings or ACP Holding, whether as a result of issuance
of securities of NFC Castings or ACP Holding (or any other direct or
indirect parent of the Company) or the Company, any merger, consolidation,
liquidation or dissolution of NFC Castings or ACP Holding (or any other
direct or indirect parent of the Company) or the Company or otherwise,
provided, however, that the Permitted Holders Beneficially Own, directly or
indirectly, less than such "person"; or
(4) the first day on which a majority of the members of the Board of
Directors of any of the Company, NFC Castings or ACP Holding are not
Continuing Directors;
provided, however, for purposes of clause (3), the Permitted Holders shall be
deemed to Beneficially Own any Voting Stock of a Person held by any other Person
(the "parent entity") so long as the Permitted Holders Beneficially Own,
directly or indirectly, in the aggregate a majority of the voting power of the
Voting Stock of the parent entity.
"Change of Control Offer" shall have the meaning specified above in
"-- Offer to Purchase upon Change of Control."
"Change of Control Payment Date" shall have the meaning specified above in
"-- Offer to Purchase upon Change of Control."
"Change of Control Put Date" shall have the meaning specified above in
"-- Offer to Purchase upon Change of Control."
"Change of Control Repurchase Price" shall have the meaning specified above
in "-- Offer to Purchase upon Change of Control."
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitment Fee" means the Commitment Fee payable to the Permitted Holders
pursuant to the Standby Funding Commitment Letters, dated June 30, 2003, between
the Company and each of the Permitted Holders.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any of its Restricted Subsidiaries designed to
64
protect the Company or any of its Restricted Subsidiaries against fluctuations
in the price of commodities actually used in the ordinary course of business of
the Company and its Restricted Subsidiaries each, as may be amended,
supplemented or otherwise modified from time to time.
"Common Stock" means, with respect to any Person, Capital Stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Company" means Neenah Foundry Company until a successor replaces it
pursuant to the Indenture, and thereafter means such successor.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that
(1) if the Company or any Restricted Subsidiary has incurred any
Indebtedness since the beginning of such period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an incurrence of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness
and the application of the proceeds thereof as if such Indebtedness had
been incurred on the first day of such period and the discharge of any
other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period (except that in the case of
Indebtedness to finance seasonal fluctuations in working capital needs
incurred under a revolving credit or similar arrangement, the amount
thereof shall be deemed to be the average daily balance of such
Indebtedness during such four quarter period);
(2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have disposed of any assets constituting all or
substantially all of the assets of an operating unit of a business (a
"Disposal"), (x) the EBITDA for such period shall be reduced by an amount
equal to the EBITDA (if positive) directly attributable to the assets which
are the subject of such Disposal for such period or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such
period and (y) Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in
connection with such Disposal for such period (or, if the Capital Stock of
any Restricted Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale);
(3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made under the Indenture, which constitutes all or
substantially all of the assets of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the incurrence of any
Indebtedness in connection therewith) as if such Investment or acquisition
occurred on the first day of such period; and
(4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Disposal or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (2) or (3) above
if made by the Company or a
65
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Disposal, Investment or acquisition of assets occurred
on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term as at the date of determination in excess of 12 months). If any
Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a
fixed or floating rate of interest and is being given pro forma effect, then (i)
if any interest had accrued on such Indebtedness prior to the date of
determination, the interest expense on such Indebtedness shall be computed by
applying a fixed or floating rate of interest as selected by the Company or such
Restricted Subsidiary for the interest period immediately preceding such
determination or (ii) if no interest accrued on such Indebtedness prior to the
date of determination, the interest expense on such Indebtedness shall be
computed by applying, at the option of the Company or such Restricted
Subsidiary, either a fixed or floating rate. If any Indebtedness which is being
given pro forma effect was incurred under a revolving credit facility that was
in effect throughout the applicable period, the interest expense on such
Indebtedness shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate consolidated interest, whether expensed or capitalized,
paid, accrued or scheduled to be paid or accrued, of such Person and its
Restricted Subsidiaries for such period (including (i) amortization of original
issue discount and deferred financing costs and non-cash interest payments and
accruals, (ii) the interest portion of all deferred payment obligations,
calculated in accordance with the effective interest method, and (iii) the
interest component of any payments associated with Capital Lease Obligations and
net payments (if any) pursuant to Hedging Obligations, in each case, to the
extent attributable to such period, but excluding (x) commissions, discounts and
other fees and charges incurred with respect to letters of credit and bankers'
acceptances financing and (y) any interest expense on Indebtedness of another
Person that is Guaranteed by such Person or secured by a Lien on assets of such
Person) determined in accordance with GAAP. Consolidated Interest Expense of the
Company shall not include any prepayment premiums or amortization of original
issue discount or deferred financing costs, to the extent such amounts are
incurred as a result of the prepayment on the date of the Indenture of any
Indebtedness of the Company with the proceeds of the Notes.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP,
adjusted to exclude (only to the extent included and without duplication): (i)
all gains which are extraordinary or are non-recurring (including any gain from
the sale or other disposition of assets outside the ordinary course of business
or from the issuance or sale of Capital Stock); (ii) all gains resulting from
currency or hedging transactions; (iii) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition; (iv) depreciation, amortization or other expenses recorded as a
result of the application of purchase accounting in accordance with Statements
of Financial Accounting Standards Nos. 141 and 142; and (v) the cumulative
effect of a change in accounting principles; provided that (a) the Net Income of
any Person that is not a Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of cash
dividends or cash distributions actually paid to the referent Person or a Wholly
Owned Subsidiary thereof that is a Restricted Subsidiary and (b) the Net Income
of any Person that is an Unrestricted Subsidiary shall be included only to the
extent of the
66
amount of cash dividends or cash distributions paid to the referent Person or a
Restricted Subsidiary thereof.
"Covenant Defeasance" shall have the meaning specified above in "Legal
Defeasance and Covenant Defeasance".
"Credit Agreement" means the Credit Agreement, dated October 8, 2003, among
the Company, certain of the Subsidiary Guarantors party thereto, the lenders
from time to time party to such agreement, Fleet Capital Corporation, as Agent
and Fleet Securities, Inc., as Arranger, including any related notes, collateral
documents, letters of credit and documentation and guarantees and any
appendices, exhibits or schedules to any of the foregoing, as well as any and
all of such agreements (and any other agreements that refinance any and all such
agreements in accordance with the provisions of clause (viii) under "Limitation
on the Incurrence of Indebtedness and Issuance of Disqualified Stock", as may be
amended, restated, modified or supplemented from time to time, or renewed,
refunded, refinanced, restructured, replaced, repaid or extended from time to
time (including increases in principal amount) in accordance with the provisions
of whether with the original agents and lenders or with other agents or lenders.
"Credit Agreement Refinancing Indebtedness" means Indebtedness issued in
exchange for, or the proceeds of which are used to extend, refinance, renew,
replace, defease or refund Indebtedness incurred pursuant to the Credit
Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries in the ordinary course of business
against fluctuation in the values of the currencies of the countries (other than
the United States) in which the Company or its Restricted Subsidiaries conduct
business each, as may be amended, supplemented or otherwise modified from time
to time.
"Default" means any event or condition that is, or with the passage of time
or the giving of notice, or both, would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
or is convertible or exchangeable for Indebtedness at the option of the holder
thereof, in whole or in part, on or prior to 90 days after the Stated Maturity
of the Notes; provided that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Disqualified Stock if (i) the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are no more favorable to the holders of such Capital Stock than the provisions
in favor of Holders of Notes set forth under "-- Certain Covenants -- Asset
Sales" and "Offer to Purchase Upon Change of Control", as the case may be, (ii)
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to
"-- Certain Covenants -- Asset Sales" and "Offer to Purchase Upon Change of
Control" and (iii) such Capital Stock is redeemable within 90 days of the "asset
sale" or "change of control" events applicable to such Capital Stock.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary other than
(a) a Foreign Restricted Subsidiary or (b) a Subsidiary of a Foreign Restricted
Subsidiary.
67
"EBITDA" means, for any period, an amount equal to, for the Company and its
consolidated Restricted Subsidiaries:
(a) the sum of Consolidated Net Income for such period, plus the
following to the extent reducing Consolidated Net Income for such period:
(1) the provision for taxes based on income or profits or utilized
in computing net loss,
(2) Consolidated Interest Expense,
(3) depreciation,
(4) amortization of intangibles, and
(5) any other non-cash items (other than any such non-cash item to
the extent that it represents an accrual of, or reserve for, cash
expenditures in any future period), minus
(b) all non-cash items increasing Consolidated Net Income for such
period (other than any such non-cash item to the extent that it will result
in the receipt of cash payments in any future period).
Notwithstanding the foregoing clause (a), the provision for taxes and the
depreciation, amortization and non-cash items of a Restricted Subsidiary shall
be added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its shareholders.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Default" shall have the meaning specified above in "-- Events of
Default."
"Excess Proceeds" shall have the meaning specified above in "-- Certain
Covenants -- Asset Sales."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided, that, the Fair Market Value of
any such asset or assets shall be determined by the Board of Directors of the
Company, acting in good faith and by unanimous resolution, and which
determination shall be evidenced by an Officers' Certificate delivered to the
Trustee.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary which is
not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect in the United States on the date of the
Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness as may be amended, supplemented or otherwise modified from time to
time.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) Interest Rate Agreements, (ii) Currency Agreements and
(iii) Commodity Agreements.
"Holder" or "Noteholder" means the person in whose name a Note is
registered on the Registrar's books.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or bankers'
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee of any Indebtedness of such Person or any
other Person.
"Indenture" means the Indenture governing the Company's 13% Senior
Subordinated Notes due 2013, as amended or supplemented from time to time in
accordance with its terms.
"Intercompany Indebtedness" shall have the meaning specified above in
"-- Certain Covenants -- Limitations on the Incurrence of Indebtedness and
Issuance of Disqualified Stock.
"Interest Payment Date" means the stated due date of an installment of
interest on the Notes.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement entered into by the Company or any of its Restricted Subsidiaries
designed to protect the Company or any of its Restricted Subsidiaries in the
ordinary course of business against fluctuations in interest rates each, as may
be amended, supplemented or otherwise modified from time to time.
"Inventory" means, with respect to the Company and its Restricted
Subsidiaries, the consolidated inventory of the Company, determined at the lower
of cost or market in accordance with GAAP.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Issue Date" means October 8, 2003.
"Legal Defeasance" shall have the meaning specified above in "Legal
Defeasance and Covenant Defeasance."
"Lenders" means, at any time, the parties to the Credit Agreement then
holding (or committed to provide) loans, letters of credit or other extensions
of credit that constitute (or when provided will constitute) Indebtedness
secured by a Priority Lien outstanding under the Credit Agreement.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.)
"Lien Subordination Agreement" means that certain Lien Subordination
Agreement, dated October 8, 2003, by and among the Company, the Restricted
Subsidiaries, the Trustee (on behalf of the Noteholders)
69
and the Agent under the Credit Agreement, as amended (including any amendments
and restatements thereof), supplemented or otherwise modified from time to time.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any sale of assets (including, without
limitation, dispositions pursuant to sale/leaseback transactions) or (b) the
disposition of any securities or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries, and (ii) any extraordinary gain
(but not loss), together with any related provision for taxes on such
extraordinary gain (but not loss).
"Net Proceeds" means the aggregate amount of consideration received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale in
the form of cash or Cash Equivalents (including, without limitation, any cash
received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof, amounts required to be applied to the
repayment of Indebtedness secured by a Lien on the asset or assets (including
Equity Interests) the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets.
"NFC Castings" means NFC Castings, Inc., a Delaware corporation.
"Non-Core Fixed Assets" shall have the meaning specified in the Credit
Agreement as in effect on October 8, 2003.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as guarantor or otherwise),
or (c) constitutes the lender; (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Notice of Default" shall have the meaning specified above in "-- Events of
Default."
"Obligations" means with respect to any Indebtedness, the principal,
premium, if any, and interest on (such interest on such Indebtedness, wherever
referred to in the Indenture, is deemed to include interest accruing after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law in
accordance with and at the rate (including any rate applicable upon any default
or event of default, to the extent lawful) specified in any document evidencing
such Indebtedness, whether or not the claim for such interest is allowed as a
claim after such filing in any proceeding under such bankruptcy law) and other
amounts, including, but not limited to, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by (i) the Chief Executive Officer or President and (ii) the Chief
Financial Officer or chief accounting officer of such Person.
"Opinion of Counsel" means a written opinion from legal counsel which
complies with the requirements of the Indenture.
"Original Issue Date" of any Note (or portion thereof) means the earlier of
(a) the date of such Note or (b) the date of any Note (or portion thereof) for
which such Note was issued (directly or indirectly) on registration of transfer,
exchange or substitution.
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"Payment Blockage Period" shall have the meaning specified above in
"-- Subordination."
"Payment Default" shall have the meaning specified above in "-- Events of
Default."
"Permitted Holders" means each of MacKay Shields LLC, Citicorp Mezzanine
III, L.P., Metropolitan Life Insurance Company, Exis Differential Holdings,
Ltd., TCW Shared Opportunity Fund II, L.P., Shared Opportunity Fund IIB LLC, TCW
Shared Opportunity Fund IV, L.P., TCW Shared Opportunity Fund IVB, L.P., AIMCO
CDO, Series 2000-A, TCW High Income Partners, Ltd. and TCW High Income Partners
II, Ltd. and its Related Persons and Affiliates.
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary; (ii) any Investment in Cash Equivalents; (iii)
Investments by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investment (a) such Person becomes a Wholly Owned
Subsidiary of the Company that is a Restricted Subsidiary or (b) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Subsidiary of the Company that is a Restricted Subsidiary; (iv) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made in compliance with the Indenture; (v) any Investment
solely in exchange for the issuance of Equity Interests (other than Disqualified
Stock) of the Company; (vi) any Investments received in compromise of
obligations of such persons incurred in the ordinary course of trade creditors
or customers that were incurred in the ordinary course of business, including
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditor or customer; and (vii)
Investments existing on October 8, 2003.
"Permitted Liens" means (i) Liens in favor of the Company or a Restricted
Subsidiary; (ii) Liens securing Senior Indebtedness of the Company or a
Restricted Subsidiary that was permitted to be incurred pursuant to the
Indenture (i) at the time incurred; (iii) Liens on property of a Person existing
at the time such Person is merged into, consolidated with or otherwise acquired
by the Company or any Restricted Subsidiary of the Company, provided that such
Liens were not created in contemplation of such merger, consolidation or
acquisition and do not extend to any assets other than those of the Person
merged into or consolidated with Company or such Restricted Subsidiary; (iv)
Liens on property existing at the time of acquisition thereof by the Company or
any Restricted Subsidiary of the Company; provided that such Liens were not
created in contemplation of such acquisition and do not extend to any other
assets of the Company or any Restricted Subsidiary of the Company; (v) Liens on
the property of the Company or any Restricted Subsidiary Incurred in the
ordinary course of business to secure performance of obligations with respect to
statutory or regulatory requirements, performance or return-of-money bonds,
surety bonds or other obligations of a like nature and incurred in a manner
consistent with industry practice, in each case which are not Incurred in
connection with the borrowing of money, the obtaining of advances or credit or
the payment of the deferred purchase price of property and which do not in the
aggregate impair in any material respect the use of property in the operation of
the business of the Company and the Restricted Subsidiaries taken as a whole;
(vi) Liens existing on the date of the Indenture; (vii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor; (viii) Liens arising in the ordinary course of
business with respect to amounts not yet delinquent or being contested in good
faith by appropriate proceedings if a reserve or other appropriate provisions,
if any, shall be required by GAAP shall have been made therefor; (ix) zoning
restrictions, easements, licenses, covenants, reservations, restrictions on the
use of real property or minor irregularities of title incident thereto that do
not, in the aggregate, materially detract from the value of the property or the
assets of the Company or of any Restricted Subsidiary or impair the use of such
property in the operation of the Company's or any Restricted Subsidiary's
business; (x) judgment Liens to the extent that such judgments do not cause or
constitute an Event of Default; (xi) Liens to secure the payment of all or a
part of the purchase price of property or assets acquired or constructed in the
ordinary course of business on or after the date of the Indenture, provided that
(a) such property or assets are used in the same or a similar line of business
as the Company or the applicable Restricted Subsidiary was engaged in on the
date
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of the Indenture, (b) at the time of incurrence of any such Lien, the aggregate
principal amount of the obligations secured by such Lien shall not exceed the
cost of the assets or property (or portions thereof) so acquired or constructed,
(c) each such Lien shall encumber only the assets or property (or portions
thereof) so acquired or constructed and shall attach to such property within 120
days of the purchase or construction thereof and (d) any Indebtedness secured by
such Lien shall have been permitted to be incurred under Section 4.11; (xii)
precautionary filings of any financial statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction made in connection with
Capital Lease Obligations permitted to be incurred under the terms of the
Indenture; (xiii) Liens incurred in the ordinary course of business securing
assets having a fair market value not in excess of $500,000 in the aggregate;
(xiv) Liens to secure permitted Refinancing Indebtedness incurred to refinance
existing Indebtedness or permitted Refinancing Indebtedness which is secured by
Liens permitted by this clause (xiv); provided, that such Liens do not extend to
any categories of assets other than the categories of assets securing existing
Indebtedness as of the date of the Indenture; (xv) Liens securing reimbursement
obligations with respect to commercial letters of credit which encumber
documents and other property relating to such letters of credit and products and
proceeds thereof; (xvi) Liens incurred in the ordinary course of business in
connection with (a) worker's compensation, social security, unemployment
insurance and other like laws or (b) sales contracts, leases, statutory
obligations, work in progress advances and other similar obligations not
incurred in connection with the borrowing of money or the payment of the
deferred purchase price of property; (xvii) Liens in favor of customs and
revenues authorities which secure payment of customs duties in connection with
the importation of inventory; (xviii) Liens on insurance policies and the
proceeds thereof securing the financing of the premiums with respect thereto;
(xix) Liens consisting of rights of set-off of a customary nature or banker's
liens on amounts on deposit in accounts, whether arising by contract or
operation of law, incurred in the ordinary course of business; and (xx) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries.
"Permitted Refinancing" shall have the meaning specified above in
"-- Limitation on the Incurrence of Indebtedness and Issuance of Disqualified
Stock."
"Person" or "person" means an individual, limited or general partnership,
corporation, limited liability company, association, unincorporated
organization, trust, joint stock company or joint venture, or a government or
any agency or political subdivision thereof.
"principal" of any Indebtedness means the principal of such Indebtedness
plus, without duplication, any applicable premium, if any, on such Indebtedness.
"property" means any right or interest in or to property or assets of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Purchase Money Obligations" of any Person means any obligations of such
Person or any of its Restricted Subsidiaries to any seller or any other Person
incurred or assumed in connection with the purchase of real or personal property
or in the Capital Stock of a Person owning such real or personal property to be
used in the business of such Person or any of its subsidiaries within 180 days
of such incurrence or assumption.
"Qualified Stock" means any Capital Stock of the Company that is not
Disqualified Stock.
"Receivables" means the consolidated trade receivables of the Company, net
of allowance for doubtful accounts, as determined in accordance with GAAP.
"Record Date" means a Record Date specified in the Notes whether or not
such Record Date is a Business Day.
"Redemption Date" means, when used with respect to any Note to be redeemed,
the date fixed for such redemption pursuant to the terms of the Indenture and
the Note.
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"Redemption Price" means, when used with respect to any Note to be
redeemed, the redemption price for such redemption pursuant to the terms of the
Note, which shall include, without duplication, in each case, accrued and unpaid
interest, if any, to and including the Redemption Date.
"Refinancing Indebtedness" shall have the meaning specified above in
"-- Certain Covenants -- Limitation on the Incurrence of Indebtedness and
Issuance of Disqualified Stock."
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on October 8, 2003.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interests in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Representative" means, any trustee, agent to representative (if any) for
an issue of Senior Indebtedness of the Company. For purposes specified in
"-- Subordination", the "Representative" of Senior Indebtedness shall be deemed
to be solely the agent or similar designee under the Credit Agreement until such
time as no Credit Agreement remains in existence; thereafter, the
"Representative" shall be deemed to be solely the trustee, agent or similar
designee under the Senior Secured Note Indenture.
"Repurchase Date" shall have the meaning specified above in "-- Certain
Covenants--Asset Sales."
"Repurchase Offer Period" shall have the meaning specified above in
"-- Certain Covenants -- Asset Sales."
"Repurchase Price" shall have the meaning specified above in "-- Certain
Covenants -- Asset Sales."
"Restricted Investment" means an Investment other than a Permitted
Investment. With respect to Unrestricted Subsidiaries or Restricted
Subsidiaries, the amount of Restricted Investments shall be calculated as the
greater of (i) the book value of assets contributed by the Company or a
Restricted Subsidiary or (ii) the Fair Market Value of the assets contributed by
the Company or a Restricted Subsidiary (as certified by a resolution of
independent directors of the Company.
"Restricted Payment" shall have the meaning specified above in "Certain
Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means (i) any Subsidiary of the Company (other than
a Subsidiary that is also a Subsidiary of an Unrestricted Subsidiary) organized
or acquired after the date of the Indenture, unless such Subsidiary shall have
been designated as an Unrestricted Subsidiary by resolution of the Board of
Directors as provided in and in compliance with the definition of "Unrestricted
Subsidiary" and (ii) any Unrestricted Subsidiary which is designated as a
Restricted Subsidiary by the Board of Directors of the Company; provided that
immediately after giving effect to the designation referred to in clause (ii),
no Default or Event of Default shall have occurred and be continuing and the
Company could incur at least $1.00 of additional Indebtedness under the terms of
the Indenture. The Company shall evidence any such designation to the Trustee by
promptly filing with the Trustee an Officers' Certificate certifying that such
designation has been made and stating that such designation complies with the
requirements of the immediately preceding sentence.
"Revolver" means the revolving credit facility extended to the Company as
part of the New Credit Facility under the Credit Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" means, with respect to the Company and its Restricted
Subsidiaries, the Obligations of the Company and its Restricted Subsidiaries
under (i) the Credit Agreement, and (ii) the Senior Secured Notes Indenture and
the Senior Secured Notes.
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"Senior Secured Notes" means the Company's 11% Senior Secured Notes due
2010, issued pursuant to the Senior Secured Notes Indenture, and any securities
issued in exchange or in substitution therefor.
"Senior Secured Notes Indenture" means the Indenture, dated the date
hereof, among the Company the Subsidiary Guarantors parties thereto and The Bank
of New York, as trustee, relating to the Senior Secured Notes, as may be
amended, supplemented, or otherwise modified from time to time in accordance
with the terms thereof.
"Stated Maturity," when used with respect to any Note, means September 30,
2013.
"Subordinated Obligations" means, with respect to the Company and its
Restricted Subsidiaries, the Obligations of the Company and its Restricted
Subsidiaries under the Indenture, the Notes and all related agreements,
instruments and documents.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a combination
thereof and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Persons or one or more Subsidiaries
of such Person or any combination thereof.
"Subsidiary Guarantee" means a guarantee on the terms set forth in the
Indenture by a Subsidiary Guarantor of the Company's obligations with respect to
the Notes.
"Subsidiary Guarantor" means each Domestic Restricted Subsidiary and any
other Person that becomes a Subsidiary Guarantor pursuant to the provisions of
the Indenture or who otherwise exercises and delivers supplemental indenture to
the Trustee providing for a Subsidiary Guarantee.
"Term Loan" means the term loan made to the Company and certain of the
Restricted Subsidiaries as part of the New Credit Facility under the Credit
Agreement.
"TIA" means the Trust Indenture Act of 1939, as amended and in effect on
the date of the execution of the Indenture unless otherwise specified herein.
"Trustee" means the party named as such in the Indenture until a successor
replaces it in accordance with the provisions of the Indenture and thereafter
means such successor. At the Issue Date, the Trustee was The Bank of New York, a
New York corporation.
"Unrestricted Subsidiary" means, until such time as any of the following
shall be designated as a Restricted Subsidiary of the Company by the Board of
Directors of the Company as provided in and in compliance with the definition of
"Restricted Subsidiary," (i) any Subsidiary of the Company or of a Restricted
Subsidiary of the Company organized or acquired after the date of the Indenture
that is designated concurrently with its organization or acquisition as an
Unrestricted Subsidiary by resolution of the Board of Directors of the Company,
(ii) any Subsidiary of any Unrestricted Subsidiary and (iii) any Restricted
Subsidiary of the Company that is designated as an Unrestricted Subsidiary by
resolution of the Board of Directors of the Company, provided that (a)
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing, (b) any such designation shall be
deemed, at the election of the Company at the time of such designation, to be
either (but not both) (x) the making of a Restricted Payment at the time of such
designation in an amount equal to the Investment in such Subsidiary subject to
the restrictions contained in the Indenture or (y) the making of an Asset Sale
at the time of such designation in an amount equal to the Investment in such
Subsidiary subject to the restrictions contained in the Indenture, and (c) such
Subsidiary or any of its Subsidiaries does not own any Capital Stock or
Indebtedness of, or own or hold any Lien on any property of, the Company or any
other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be
so designated. A Person may be designated as an Unrestricted Subsidiary only if
and for so long as such Person (i) has no Indebtedness other than Non-Recourse
Debt; (ii) is a Person with respect to which
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neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (a) to subscribe for additional Equity Interests or (b) to
make any payment to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and
(iii) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. The Company shall evidence any designation pursuant to clause (i)
or (iii) of the first sentence hereof to the Trustee by filing with the Trustee
within 45 days of such designation an Officers' Certificate certifying that such
designation has been made and, in the case of clause (iii) of the first sentence
hereof, the related election of the Company in respect thereof.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers,
general partners or trustees of any Person (irrespective of whether or not, at
the time, Capital Stock of any other class or classes shall have, or might have,
voting power by reasons of the happening of any contingency) or, with respect to
a partnership (whether general or limited), any general partner interest in such
partnership.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall be at the time be beneficially
owned by such Person either directly or indirectly through Wholly Owned
Subsidiaries.
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BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL NOTES
The certificates representing the notes were issued in fully registered
form. Except as described below, the notes are represented by one or more global
notes in fully registered form without interest coupons. The global notes have
been deposited with or on behalf of DTC and registered in the name of Cede &
Co., as nominee of DTC, or will remain in the custody of the trustee pursuant to
the FAST Balance Certificate Agreement between DTC and the trustee.
Ownership of beneficial interests in each global note will be limited to
persons who have accounts with DTC, which we refer to as DTC participants, or
persons who hold interests through DTC participants. We expect that under
procedures established by DTC, ownership of beneficial interests in each global
note will be shown on, and transfer of ownership of those interests will be
effected only through, records maintained by DTC, with respect to interests of
DTC participants, and the records of DTC participants, with respect to other
owners of beneficial interests in the global note.
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC set forth below
are controlled by that settlement system and may be changed at any time. We
undertake no obligation to update you regarding changes in these operations and
procedures and urge investors to contact DTC or its participants directly to
discuss these matters.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a banking organization within the meaning of the New York State Banking
Law;
- a member of the Federal Reserve System;
- a clearing corporation within the meaning of the Uniform Commercial Code;
and
- a clearing agency registered under Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of certificates.
DTC's participants include securities brokers and dealers, including the initial
purchasers; banks and trust companies; clearing corporations and other
organizations. Indirect access to DTC's system is also available to others such
as banks, brokers, dealers and trust companies; these indirect participants
clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly. Investors who are not DTC participants may
beneficially own securities held by or on behalf of DTC only through DTC
participants or indirect participants in DTC.
We expect that pursuant to procedures established by DTC:
- Ownership of beneficial interest in the global notes will be limited to
persons who have accounts with DTC, who are referred to as participants,
or persons who hold interests through participants.
- Ownership of the beneficial interests in the notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC, with respect to the interests of participants, and the
records of participants and the indirect participants, with respect to
the interests of persons other than participants.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of those securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to these persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests though participants, the ability of a
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person having an interest in notes represented by a global note to pledge or
transfer that interest to persons or entities that do not participate in DTC's
system, or to otherwise take actions in respect of that interest, may be
affected by the lack of a physical definitive security in respect of that
interest.
So long as DTC's nominee is the registered owner of a global note, that
nominee will be considered the sole owner or holder of the notes represented by
that global note for all purposes under the indenture. Except as provided below,
owners of beneficial interests in a global note:
- are not entitled to have notes represented by the global note registered
in their names;
- do not receive and are not entitled to receive physical, certificated
notes and
- are not considered the owners or holders of the notes under the indenture
for any purpose, including with respect to the giving of any direction,
instruction or approval to the trustee under the indenture.
As a result, each investor who owns a beneficial interest in a global note
must rely on the procedures of DTC to exercise any rights of a holder of notes
under the indenture, and, if the investor is not a participant or an indirect
participant in DTC, on the procedures of the DTC participant through which the
investor owns its interest. We understand that under existing industry practice,
in the event that we request any action of holders of notes, or a holder of the
notes that is an owner of a beneficial interest in a global note desires to take
any action that DTC, as the holder of the global note, is entitled to take, DTC
would authorize the participants to take action and the participants would
authorize holders of the notes owning through the participants to take action or
would otherwise act upon the instruction of those holders of the notes. Neither
we nor the trustee will have any responsibility or liability for any aspect of
the records relating to or payments made on account of notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to those
notes.
Payments of principal, premium and interest with respect to the notes
represented by a global note will be made by the trustee to DTC's nominee as the
registered holder of the global note. Neither we nor the trustee will have any
responsibility or liability for the payment of amounts to owners of beneficial
interests in a global note, for any aspect of the records relating to or
payments made on account of those interests by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to those interests.
Payments by participants and indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing instructions
and customary industry practice and will be the responsibility of those
participants or indirect participants and DTC.
Transfers between participants in DTC will be effected under DTC's
procedures and will be settled in same-day funds. Transfers between participants
in Euroclear or Clearstream will be effected in the ordinary way under the rules
and operating procedures of those systems.
CERTIFICATED NOTES
Notes in physical, certificated form will be issued and delivered to each
person that DTC identifies as a beneficial owner of the related notes only if:
- DTC notifies us at any time that it is unwilling or unable to continue as
depositary for the global notes and a successor depositary is not
appointed within 90 days,
- DTC ceases to be registered as a clearing agency under the Exchange Act
and a successor depositary is not appointed within 90 days,
- we, at our option, notify the trustee that we elect to cause the issuance
of certificated notes; or
- certain other events provided in the indenture should occur.
Neither we nor the trustee will be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively
77
rely on, and will be protected in relying on, instructions from DTC for all
purposes, inducting with respect to the registration and delivery, and the
respective principal amounts, of the notes to be issued.
SECURITIES ELIGIBLE FOR FUTURE SALE
We relied, based on the confirmation order we received from the Bankruptcy
Court, on Section 1145(a)(1) of the Bankruptcy Code to exempt both the offer of
the post-bankruptcy common stock, warrants to purchase common stock, the 13%
Senior Subordinated Notes due 2013 and Notes (other than the Notes sold to the
standby purchasers) (the "Securities") which may have been deemed to have
occurred through the solicitation of acceptances of the Plan of Reorganization
and the issuance of the Securities pursuant to the Plan of Reorganization, from
the registration requirements of the Securities Act of 1933, as amended.
Section 1145(a)(1) exempts the offer or sale of securities pursuant to a
plan of reorganization from the registration requirements of the Securities Act
and from registration under state securities laws if the following conditions
are satisfied: (1) the securities are issued by a company (a "debtor" under the
Bankruptcy Code), or its affiliates or successors, under a plan of
reorganization; (2) the recipients of the securities hold a claim against, an
interest in, or a claim for an administrative expense against the debtor; and
(3) the securities are issued in exchange for the recipients' claim against or
interest in the debtor, or principally in such exchange and partly for cash or
property. In general, offers and sales of securities made in reliance on the
exemption afforded under section 1145(a)(1) of the Bankruptcy Code are deemed to
be made in a public offering, so that the recipients thereof, other than
underwriters, are free to resell such securities without registration under the
Securities Act. In addition, such securities generally may be resold without
registration under state securities laws pursuant to various exemptions provided
by the respective laws of the several states. However, recipients of the
Securities were advised to consult with their own legal counsel as to the
availability of any such exemption from registration under state law in any
given instance and as to any applicable requirements or conditions to such
availability. It was a condition to consummation of the Plan of Reorganization
that the Section 1145 exemption apply to the Securities.
The exemption from the registration requirements of the Securities Act for
resales provided by section 1145(a) was not available to a recipient of the
Securities if such individual or entity was deemed to be an "underwriter" with
respect to such securities, as that term is defined in section 1145(b) of the
Bankruptcy Code. Section 1145(b) of the Bankruptcy Code defines the term
"underwriter" as one who (1) purchases a claim with a view toward distribution
of any security to be received in exchange for the claim, (2) offers to sell
securities issued under a plan for the holders of such securities, (3) offers to
buy securities issued under a plan from persons receiving such securities, if
the offer to buy is made with a view toward distribution, or (4) is a control
person of the issuer of the securities.
Notwithstanding the foregoing, statutory underwriters may be able to sell
securities without registration pursuant to Rule 144 under the Securities Act
(subject, however, to any resale limitations contained therein) which, in
effect, permits the resale of securities (including those securities received by
statutory underwriters pursuant to a Chapter 11 plan), subject to applicable
volume limitations, notice and manner of sale requirements and certain other
conditions. Recipients of post-bankruptcy common stock and Notes under the Plan
of Reorganization who believed they may have been statutory underwriters as
defined by Section 1145 of the Bankruptcy Code were advised to consult with
their own counsel as to the availability of the exemption provided by Rule 144.
The Securities issued under the Plan of Reorganization to persons who were
deemed to be underwriters under Section 1145(b) of the Bankruptcy Code, are
considered restricted securities and therefore may not be resold unless an
exemption under the Securities Act is available or a registration statement is
filed and declared effective. Some holders of the Securities, however, have
rights to have their shares registered for resale under the Securities Act.
78
PLAN OF DISTRIBUTION
Each of the selling Noteholders, which term shall include their pledgees,
transferees or other successors in interest, is offering the Notes for its own
account, and not for our account. We will not receive any of the net proceeds of
the offering.
The selling Noteholders may offer our Notes for sale in one or more
transactions, including:
- block transactions;
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to such prevailing market prices; or
- at prices determined on a negotiated or competitive bid basis.
The selling Noteholders may sell Notes directly, through agents designated
by them, from time to time, or by such other means as we may specify in any
applicable prospectus supplement. The selling Noteholders who are broker-dealers
are "underwriters" with respect to the Notes they are offering for resale.
Participating agents or broker-dealers in the distribution of any of the Notes
may be deemed to be "underwriters" within the meaning of the Securities Act. Any
discount or commission received by any underwriter and any participating agents
or broker-dealers, and any profit on the resale of shares of the Notes purchased
by any of them may be deemed to be underwriting discounts or commissions under
the Securities Act.
The selling Noteholders may loan or pledge the Notes to a broker-dealer and
the broker-dealer may effect sales of the pledged Notes pursuant to this
prospectus. In connection with the distribution of the Notes or otherwise, the
selling Noteholders may enter into hedging transactions with broker-dealers. The
selling Noteholders may enter into option or other transactions with
broker-dealers that require the delivery to the broker-dealer of the Notes,
which the broker-dealer may resell or otherwise transfer pursuant to this
prospectus. In connection with these hedging transactions, broker-dealers may
engage in short sales of the Notes in the course of hedging the positions they
assume with the selling Noteholders. The selling Noteholders may sell Notes
short or otherwise enter into hedging positions with respect to the Notes and
deliver the Notes to close out these short positions and hedges.
The selling Noteholders may sell their Notes through a broker-dealer acting
as agent or broker or to a broker-dealer acting as principal. In the latter
case, the broker-dealer may then resell such Notes to the public at varying
prices to be determined by the broker-dealer at the time of resale.
Underwriters, dealers and agents may engage in transactions with or perform
services for us or our subsidiaries in the ordinary course of their business.
To the extent required, the number and amount of the Notes to be sold,
information relating to the underwriters, the purchase price, the public
offering price, if applicable, the name of any underwriter, agent or
broker-dealer, and any applicable commissions, discounts or other items
constituting compensation to such underwriters, agents or broker-dealers with
respect to a particular offering will be set forth in an appropriate supplement
to this prospectus. Upon being notified by a selling Noteholder that a donnee,
pledgee, transferee of other successor in interest intends to sell Notes under
this prospectus, if required, we will file a supplement to this prospectus
identifying such successor as a selling Noteholder.
If underwriters are used in a sale, Notes will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The Notes may be
offered to the public either through underwriting syndicates represented by one
or more managing underwriters or directly by one or more firms acting as
underwriters. The underwriter or underwriters with respect to a particular
underwritten offering, and if an underwriting syndicate is used, the managing
underwriter or underwriters will be stated on the cover of the prospectus
supplement. Underwriters, dealers and agents may be entitled, under agreements
to be entered into among us and the selling noteholders, to
79
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act. If any material change is made
with respect to this plan of distribution, we will file a post-effective
amendment to the registration statement of which this prospectus forms a part.
Under the securities laws of some states, the Notes covered by this
prospectus may be sold in those states only through registered or licensed
brokers or dealers.
Certain persons that participate in the distribution of the Notes may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Notes, including over allotment, stabilizing and short-covering transactions
in such securities, and the imposition of penalty bids, in connection with an
offering. Any person participating in the distribution of the Notes registered
under the registration statement that includes this prospectus and any
supplement will be subject to applicable provisions of the Exchange Act and the
applicable SEC rules and regulations, including, among others, Regulation M,
which may limit the timing of purchases and sales of any of our Notes by any
such person. Furthermore, Regulation M may restrict the ability of any person
engaged in the distribution of our securities to engage in market-making
activities with respect to our Notes. These restrictions may affect the
marketability of our Notes and the ability of any person or entity to engage in
market-making activities with respect to our Notes.
Upon sale under the registration statement that includes this prospectus
and any supplement, the Notes registered by the registration statement will be
freely tradable in the hands of persons other than our affiliates.
LEGAL MATTERS
Certain matters relating to Wisconsin law will be passed upon for us by
Foley & Lardner LLP, Milwaukee, Wisconsin. Certain matters relating to Ohio law
will be passed upon for us by Taft, Stettinius & Hollister LLP. Certain matters
relating to Indiana law will be passed upon for us by Hackman, Hulett & Cracaft,
LLP. Certain matters relating to New York law, the General Corporation Law of
the State of Delaware and California Law will be passed upon for us by Kirkland
& Ellis LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent registered public accounting firm, have
audited the consolidated financial statements and schedule of our Predecessor
Company, Neenah Foundry Company, at September 30, 2002 and 2003, and for each of
the three years in the period ended September 30, 2003, as set forth in their
reports. We have included our financial statements and schedule in this
prospectus and elsewhere in this registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933, as amended, relating to
the Notes that includes important business and financial information about us
that is not included in or delivered with this prospectus. This prospectus does
not contain all of the information included in the registration statement. This
information is available from us without charge to anyone who receives this
prospectus.
Under the terms of the indenture, we agree that, whether or not required by
the rules and regulations of the Commission, so long as any Notes are
outstanding, we will furnish to the trustee and the holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K, if we were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes our financial
condition and results of operations and our consolidated subsidiaries and, with
respect to the annual information only, a report thereon by our certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if we were required to file
80
such reports. In addition, whether or not required by the rules and regulations
of the Commission, we will file a copy of all such information and reports with
the Commission for public availability (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. Information filed with the Commission may be
read and copied by the public at the Public Reference Room of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. In addition, we
have agreed that, for so long as any Notes remain outstanding, we will furnish
to the holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Under the indenture governing the Notes we are required to file with the
trustee annual, quarterly and other reports after we file these reports with the
Securities and Exchange Commission. Annual reports delivered to the trustee and
the holders of Notes will contain financial information that has been examined
and reported upon, with an opinion expressed by an independent public
accountant. We will also furnish such other reports as may be required by law.
Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other similar terminology, or by discussions of strategy.
Our actual results could differ materially from those anticipated by such
forward-looking statements as a result of factors described in the "Risk
Factors" beginning on page 9 and elsewhere in this prospectus.
The market and industry data presented in this prospectus are based upon
third-party data. While we believe that such estimates are reasonable and
reliable, estimates cannot always be verified by information available from
independent sources. Accordingly, readers are cautioned not to place undue
reliance on such market share data.
81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
-----
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm..... F-2
Consolidated Balance Sheets as of September 30, 2003 and
2002...................................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 2003, 2002 and 2001......................... F-5
Consolidated Statements of Changes in Stockholder's Equity
(Deficit) for the years ended September 30, 2003, 2002 and
2001...................................................... F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001......................... F-7
Notes to Consolidated Financial Statements.................. F-8
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -- Reorganized Neenah
Foundry Company as of June 30, 2004 and October 1, 2003
and for Predecessor Neenah Foundry Company as of September
30, 2003.................................................. F-34
Condensed Consolidated Statements of
Operations -- Reorganized Neenah Foundry Company for the
three months ended June 30, 2004 and for Predecessor
Neenah Foundry Company for the three months ended June 30,
2003...................................................... F-35
Condensed Consolidated Statements of
Operations -- Reorganized Neenah Foundry Company for the
nine months ended June 30, 2004 and for Predecessor Neenah
Foundry Company for October 1, 2003 and for the nine
months ended June 30, 2003................................ F-36
Condensed Consolidated Statements of Cash
Flows -- Reorganized Neenah Foundry Company for the nine
months ended June 30, 2004 and for Predecessor Neenah
Foundry Company for October 1, 2003 and for the nine
months ended June 30, 2003................................ F-37
Notes to Condensed Consolidated Financial Statements -- June
30, 2004.................................................. F-38
</Table>
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Neenah Foundry Company
We have audited the accompanying consolidated balance sheets of Neenah
Foundry Company (the Company) as of September 30, 2003 and 2002, and the related
consolidated statements of operations, changes in stockholder's equity (deficit)
and cash flows for each of the three years in the period ended September 30,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at September 30, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2003, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
October 8, 2003, the Company was reorganized under a plan of reorganization
confirmed by the United States Bankruptcy Court, District of Delaware. In
connection with its reorganization, the Company will apply fresh start
accounting in the first quarter of fiscal 2004.
As discussed in Note 7 to the consolidated financial statements, effective
October 1, 2001, the Company changed its method of accounting for goodwill.
ERNST
& YOUNG LLP
Milwaukee, Wisconsin
November 10, 2003
F-2
NEENAH FOUNDRY COMPANY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
PRO FORMA
UNAUDITED
REORGANIZED
COMPANY SEPTEMBER 30
SEPTEMBER 30, -------------------
2003(A) 2003 2002
------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................ $ -- $ 24,356 $ 26,164
Accounts receivable, less allowance for doubtful accounts
of $2,375 in 2003 and $1,062 in 2002.................. 56,333 56,333 56,453
Inventories.............................................. 59,459 56,555 51,267
Refundable income taxes.................................. -- -- 14,850
Deferred income taxes.................................... 2,497 4,059 2,659
Other current assets..................................... 8,113 8,113 5,769
Current assets of discontinued operations................ 423 423 4,423
-------- -------- --------
Total current assets....................................... 126,825 149,839 161,585
Property, plant and equipment:
Land..................................................... 6,271 6,036 6,076
Buildings and improvements............................... 15,286 27,854 27,530
Machinery and equipment.................................. 52,025 222,778 210,457
Patterns................................................. 9,978 29,928 28,881
Construction in progress................................. 2,394 3,200 5,811
-------- -------- --------
85,954 289,796 278,755
Less accumulated depreciation............................ -- 126,827 105,190
-------- -------- --------
85,954 162,969 173,565
Deferred financing costs, net of accumulated amortization
of $4,761 in 2003 and $8,340 in 2002..................... 2,479 1,393 6,656
Identifiable intangible assets, net of accumulated
amortization of $21,935 in 2003 and $18,116 in 2002...... 83,436 33,354 37,173
Goodwill, net.............................................. 81,156 180,214 180,214
Other assets............................................... 4,624 9,065 6,365
Non-current assets of discontinued operations.............. -- -- 3,830
-------- -------- --------
171,695 224,026 234,238
-------- -------- --------
$384,474 $536,834 $569,388
======== ======== ========
</Table>
F-3
<Table>
<Caption>
PRO FORMA
UNAUDITED
REORGANIZED
COMPANY SEPTEMBER 30
SEPTEMBER 30, -------------------
2003(A) 2003 2002
------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities not subject to compromise:
Accounts payable......................................... $ 31,759 $ 26,285 $ 22,591
Accrued wages and employee benefits...................... 11,307 11,307 12,658
Accrued interest......................................... -- -- 13,733
Other accrued liabilities................................ 5,918 5,918 2,880
Current portion of long-term debt........................ -- -- 40,917
Current portion of capital lease obligations............. 2,646 2,646 2,353
Current liabilities of discontinued operations........... -- -- 1,403
-------- -------- --------
Total current liabilities not subject to compromise........ 51,630 46,156 96,535
Long-term liabilities subject to compromise................ -- 465,540 --
Long-term debt............................................. 268,550 -- 410,515
Capital lease obligations.................................. 1,583 1,583 4,816
Deferred income taxes...................................... 25,275 33,804 43,886
Postretirement benefit obligations......................... 10,319 7,271 6,696
Other liabilities.......................................... 21,588 21,496 18,654
Non-current liabilities of discontinued operations......... -- -- 432
-------- -------- --------
Total liabilities.......................................... 378,945 575,850 581,534
Commitments and contingencies
Stockholder's equity (deficit):
Preferred stock, par value $100 per share; 3,000 shares
authorized; no shares issued or outstanding........... -- -- --
Common stock, Class A (voting), par value $100 per share;
1,000 shares authorized, issued and outstanding....... 100 100 100
Common stock, Class B (nonvoting), par value $100 per
share; 10,000 shares authorized; no shares issued or
outstanding........................................... -- -- --
Additional paid-in capital -- warrants................... 602 -- --
Capital in excess of par value........................... 4,827 51,317 51,317
Accumulated deficit...................................... -- (81,124) (55,563)
Accumulated other comprehensive loss..................... -- (9,309) (8,000)
-------- -------- --------
Total stockholder's equity (deficit)....................... 5,529 (39,016) (12,146)
-------- -------- --------
$384,474 $536,834 $569,388
======== ======== ========
</Table>
- ---------------
(a) As discussed in Note 3, the Company emerged from bankruptcy on October 8,
2003 and will be required to adopt the fresh start accounting provisions of
SOP 90-7 in the first quarter of fiscal 2004. The pro forma balances reflect
what the September 30, 2003 balances would have been had the Company applied
fresh start accounting as of September 30, 2003.
See accompanying notes.
F-4
NEENAH FOUNDRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Net sales................................................... $375,063 $387,707 $398,782
Cost of sales............................................... 321,834 323,740 335,264
-------- -------- --------
Gross profit................................................ 53,229 63,967 63,518
Selling, general and administrative expenses................ 26,132 28,743 27,587
Amortization expense........................................ 3,819 3,829 10,489
Provision for impairment of assets.......................... -- 74 --
(Gain) loss on disposal of property, plant and equipment.... 195 544 (434)
-------- -------- --------
Operating income............................................ 23,083 30,777 25,876
Other income (expense):
Interest expense (contractual interest expense was $52,460
in 2003)............................................... (47,445) (43,466) (43,454)
Interest income........................................... 825 819 445
Reorganization expense.................................... (7,874) -- --
-------- -------- --------
Loss from continuing operations before income taxes......... (31,411) (11,870) (17,133)
Credit for income taxes..................................... (8,541) (5,917) (4,004)
-------- -------- --------
Loss from continuing operations............................. (22,870) (5,953) (13,129)
Discontinued operations:
Loss from discontinued operations, net of income taxes of
$(590) in 2003, $(22,947) in 2002 and $(2,463) in
2001................................................... (1,095) (41,750) (4,325)
Gain (loss) on sale of discontinued operations, net of
income taxes of $(860) in 2003 and $1,603 in 2001...... (1,596) -- 2,404
-------- -------- --------
Net loss.................................................... $(25,561) $(47,703) $(15,050)
======== ======== ========
</Table>
See accompanying notes.
F-5
NEENAH FOUNDRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<Table>
<Caption>
RETAINED ACCUMULATED
COMMON STOCK CAPITAL IN EARNINGS OTHER
PREFERRED ----------------- EXCESS OF (ACCUMULATED COMPREHENSIVE
STOCK CLASS A CLASS B PAR VALUE DEFICIT) LOSS TOTAL
--------- ------- ------- ---------- ------------ ------------- --------
(IN THOUSANDS)
Balance at September 30,
2000.................... $ -- $100 $ -- $51,317 $ 7,190 $ (89) $ 58,518
Components of
comprehensive loss:
Net loss.............. -- -- -- -- (15,050) -- (15,050)
Pension liability
adjustment, net of
tax effect of
$1,018.............. -- -- -- -- -- (1,529) (1,529)
--------
Total comprehensive
loss.................. (16,579)
----- ---- ----- ------- -------- ------- --------
Balance at September 30,
2001.................... -- 100 -- 51,317 (7,860) (1,618) 41,939
Components of
comprehensive loss:
Net loss.............. -- -- -- -- (47,703) -- (47,703)
Pension liability
adjustment, net of
tax effect of
$4,255.............. -- -- -- -- -- (6,382) (6,382)
--------
Total comprehensive
loss.................. (54,085)
----- ---- ----- ------- -------- ------- --------
Balance at September 30,
2002.................... -- 100 -- 51,317 (55,563) (8,000) (12,146)
Components of
comprehensive loss:
Net loss.............. -- -- -- -- (25,561) -- (25,561)
Pension liability
adjustment, net of
tax effect of
$952................ -- -- -- -- -- (1,309) (1,309)
--------
Total comprehensive
loss.................. (26,870)
----- ---- ----- ------- -------- ------- --------
Balance at September 30,
2003.................... $ -- $100 $ -- $51,317 $(81,124) $(9,309) $(39,016)
===== ==== ===== ======= ======== ======= ========
</Table>
See accompanying notes.
F-6
NEENAH FOUNDRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss.................................................... $(25,561) $(47,703) $(15,050)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Noncash reorganization expenses........................ 1,464 -- --
Provision for obsolete inventories..................... 424 240 248
Lower of cost or market inventory adjustment........... 1,228 -- --
Provision for impairment of assets..................... -- 36,533 --
Depreciation........................................... 22,530 25,532 29,636
Amortization of identifiable intangible assets and
goodwill............................................. 3,819 3,947 11,638
Amortization of deferred financing costs and premium on
notes................................................ 2,242 1,392 1,222
(Gain) loss on sale of discontinued operations......... 2,456 -- (4,007)
(Gain) loss on disposal of property, plant and
equipment............................................ 195 559 (337)
Deferred income taxes.................................. (10,337) (10,650) (1,630)
Changes in operating assets and liabilities:
Accounts receivable.................................. 966 10,275 2,145
Inventories.......................................... (6,995) 19,559 (7,405)
Other current assets................................. (3,047) 1,043 45
Accounts payable..................................... 3,184 (7,118) (474)
Accrued liabilities.................................. 11,856 (2,983) (3,911)
Income taxes......................................... 18,122 (14,104) (2,152)
Postretirement benefit obligations................... 575 351 379
Other liabilities.................................... (119) (437) (1,060)
-------- -------- --------
Net cash provided by operating activities................... 23,002 16,436 9,287
INVESTING ACTIVITIES
Proceeds from disposition of business, net of fees.......... 648 -- 5,190
Purchase of property, plant and equipment................... (11,900) (9,055) (16,882)
Proceeds from sale of property, plant and equipment......... 40 323 2,859
Other....................................................... (105) (621) 2,373
-------- -------- --------
Net cash used in investing activities....................... (11,317) (9,353) (6,460)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ $ 815 $ 33,400 $ 5,000
Payments on long-term debt and capital lease obligations.... (13,017) (17,807) (22,053)
Debt issuance costs......................................... (1,291) (858) (906)
-------- -------- --------
Net cash provided by (used in) financing activities......... (13,493) 14,735 (17,959)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ (1,808) 21,818 (15,132)
Cash and cash equivalents at beginning of year.............. 26,164 4,346 19,478
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 24,356 $ 26,164 $ 4,346
======== ======== ========
Supplemental disclosures of cash flows information:
Interest paid............................................. $ 34,995 $ 44,340 $ 47,428
Income taxes refunded..................................... (18,032) (4,080) (1,253)
</Table>
F-7
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(In Thousands)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Neenah Foundry Company (Neenah), together with its subsidiaries (the
Company), manufactures gray and ductile iron castings and forged components for
sale to industrial and municipal customers. Industrial castings are
custom-engineered and are produced for customers in several industries,
including the medium and heavy-duty truck components, farm equipment, heating,
ventilation and air-conditioning industries. Municipal castings include manhole
covers and frames, storm sewer frames and grates, tree grates and specialty
castings for a variety of applications and are sold principally to state and
local government entities, utilities and contractors. The Company's sales
generally are unsecured.
The Company is a wholly owned subsidiary of NFC Castings, Inc., which is a
wholly owned subsidiary of ACP Holding Company. Neenah has the following
subsidiaries, all of which are wholly owned: Deeter Foundry, Inc. (Deeter);
Mercer Forge Corporation and subsidiaries (Mercer); Dalton Corporation and
subsidiaries (Dalton); Advanced Cast Products, Inc. and subsidiaries (ACP);
Gregg Industries, Inc. (Gregg); Neenah Transport, Inc. (Transport) and Cast
Alloys, Inc. (Cast Alloys), which is inactive. Deeter manufactures gray iron
castings for the municipal market and special application construction castings.
Mercer manufactures forged components for use in transportation, railroad,
mining and heavy industrial applications and microalloy forgings for use by
original equipment manufacturers and industrial end users. Dalton manufactures
gray iron castings for refrigeration systems, air conditioners, heavy equipment,
engines, gear boxes, stationary transmissions, heavy-duty truck transmissions
and other automotive parts. ACP manufactures ductile and malleable iron castings
for use in various industrial segments, including heavy truck, construction
equipment, railroad, mining and automotive. Gregg manufactures gray and ductile
iron castings for industrial and commercial use. Transport is a common and
contract carrier licensed to operate in the continental United States. The
majority of Transport's revenues are derived from transport services provided to
the Company.
As further discussed in Note 2, on August 5, 2003 (the Petition Date), the
Company filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code (the Bankruptcy Code) with the United States Bankruptcy
Court, District of Delaware (the Bankruptcy Court). Accordingly, the
accompanying consolidated financial statements have been prepared in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code," (SOP 90-7) and on a going concern basis which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. In accordance with SOP 90-7, the financial
statements for the periods presented distinguish transactions and events that
are directly associated with the reorganization from the ongoing operations of
the Company.
On October 8, 2003 (the Effective Date), the Company emerged from the
Bankruptcy Court proceedings pursuant to the terms of its plan of reorganization
(the Plan of Reorganization). As discussed in Note 3, the Company will implement
fresh start accounting under the provisions of SOP 90-7 in the first quarter of
fiscal 2004. Under the fresh start accounting provisions of SOP 90-7, the fair
value of the reorganized Company will be allocated to its assets and
liabilities, and its accumulated deficit will be eliminated. As discussed in the
Pro Forma column on the accompanying balance sheet and in Note 3, the
implementation of fresh start accounting will result in a substantial reduction
in the carrying value of the Company's long-lived assets, including property,
plant and equipment and intangible assets, and long-term liabilities. As a
result, the historical financial statements will not be comparable to financial
statements of the Company published for periods following the implementation of
fresh start accounting.
F-8
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. REORGANIZATION
THE CHAPTER 11 PETITION AND PLAN OF REORGANIZATION
On August 5, 2003, the Company filed for protection under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. On September 26, 2003, the Bankruptcy
Court confirmed the Company's Plan of Reorganization, and, on October 8, 2003,
the Company consummated the Plan of Reorganization and emerged from its Chapter
11 reorganization proceedings with a significantly restructured balance sheet.
During the period immediately preceding and after the filing of the
Company's Chapter 11 petition, the Company met with a committee of lenders under
the secured credit facility (the Pre-Petition Credit Facility), an informal
committee of unsecured creditors that represented holders of the senior
subordinated notes and potential investors to discuss potential restructuring
transactions that could be implemented to reorganize the Company's capital
structure. These discussions led to an agreement with the lenders under the
Pre-Petition Credit Facility regarding the terms of a Plan of Reorganization.
The Plan of Reorganization was filed on August 5, 2003, encompassing information
that had been previously distributed to and approved by creditors of the Company
eligible to vote in the reorganization.
The consummation of the Plan of Reorganization resulted in the $147,441 of
loans under the Pre-Petition Credit Facility being terminated through payment in
full with cash using proceeds from the Second Secured Notes and the New Credit
Facility.
The Plan of Reorganization also resulted in the cancellation of all of the
Company's Pre-Petition Senior Subordinated Notes in exchange for the following:
- $30,000 in cash;
- $100,000 in aggregate principal amount of New Senior Subordinated Notes;
- Shares representing 47.5% of the issued and outstanding shares of New
Common Stock in ACP Holding Company on a fully diluted basis as of
October 8, 2003, other than shares of restricted stock granted pursuant
to the Management Equity Incentive Plan of ACP Holding Company; and
- Rights to acquire, for $110,000 in cash in the aggregate, units for up to
$119,996 face amount of Second Secured Notes and warrants to acquire up
to 42.81% of the new ACP Holding Company Common Stock on a fully diluted
basis as of October 8, 2003. The warrants have an exercise price of $0.01
per share and will expire 10 years from the date of issuance.
In addition, under the Plan of Reorganization, the PIK Note was cancelled
and the holder received Second Secured Notes with a principal amount equal to
$13,134 and warrants to acquire up to 4.69% of the new ACP Holding Company
Common Stock on a fully diluted basis as of October 8, 2003 and cash of $45.
ACCOUNTING IMPACT OF CHAPTER 11 FILING
In accordance with SOP 90-7, liabilities subject to compromise reflected in
the accompanying consolidated balance sheet were recorded at the amount allowed
on pre-petition claims in the Chapter 11 proceedings. Other obligations that are
not subject to compromise have retained their historical balance sheet
classifications and amounts.
F-9
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liabilities subject to compromise consist of the following as of September
30, 2003:
<Table>
Senior Subordinated Notes................................... $282,000
Credit Facility............................................. 147,441
PIK Note.................................................... 9,900
Accrued interest............................................ 26,183
Other debt.................................................. 16
--------
$465,540
========
</Table>
In order to record its debt instruments at the amount allowed by the
Bankruptcy Court in accordance with SOP 90-7, as of the Petition Date, the
Company wrote off all of its debt issuance costs and premiums related to the
Pre-Petition Senior Subordinated Notes (collectively the Deferred Financing
Fees) as a component of reorganization expense in the accompanying consolidated
statement of operations. Reorganization expense also includes professional fees
incurred in connection with the Chapter 11 proceedings. Reorganization expenses
for the year ended September 30, 2003 consist of the following:
<Table>
Deferred Financing Fees..................................... $1,464
Professional fees........................................... 6,410
------
Total reorganization expense................................ $7,874
======
</Table>
Under SOP 90-7, the Company was required to accrue interest expense during
the Chapter 11 proceedings only to the extent that such interest was expected to
be paid pursuant to the proceedings. Under the Plan of Reorganization, there
were no cash payments of interest on the outstanding Senior Subordinated Notes.
Therefore, the Company ceased accruing interest on the Senior Subordinated Notes
as of the Petition Date. The contractual interest amount parenthetically
disclosed on the accompanying consolidated statement of operations represents
the interest expense that would have been accrued under the Senior Subordinated
Notes had the Company not ceased accruing interest as described above.
3. FRESH START ACCOUNTING
The Company will adopt the fresh start accounting provisions (fresh start)
of SOP 90-7 during the first quarter of fiscal 2004. Under SOP 90-7, the
implementation of fresh start reporting is triggered, in part, by the emergence
of the Company from its Chapter 11 proceedings. Although the effective date of
the Plan of Reorganization was October 8, 2003, the Company plans to account for
the consummation of the Plan of Reorganization as if it had occurred on October
1, 2003 and implement fresh start reporting as of that date. Fresh start
requires that the Company adjust the historical cost of its assets and
liabilities to their fair value. The fair value of the reorganized Company, or
the reorganization value, of approximately $290,000 was determined by an
independent party based on multiples of earnings before interest, income taxes,
depreciation and amortization (EBITDA) and discounted future cash flows under
the Company's financial projections.
F-10
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fresh start requires that the reorganization value be allocated to the
entity's net assets in conformity with procedures specified by Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141).
The Company engaged an independent appraiser to assist in the allocation of the
reorganization value to the reorganized Company's assets and liabilities by
determining the fair market value of its property, plant and equipment and
intangible assets. This valuation is preliminary and adjustments may be required
once the final valuation is complete. A reconciliation of the adjustments to be
recorded in connection with the debt restructuring and the adoption of fresh
start accounting are as follows:
<Table>
<Caption>
PREDECESSOR REORGANIZED
NEENAH NEENAH
FOUNDRY FOUNDRY
COMPANY COMPANY
SEPTEMBER 30, DEBT FRESH START SEPTEMBER 30,
2003 RESTRUCTURING ADJUSTMENTS(D) 2003
------------- ------------- -------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............. $ 24,356 $ (24,356) $ $ --
Accounts receivable, net............... 56,333 -- -- 56,333
Inventories............................ 56,555 -- 2,904 59,459
Deferred income taxes.................. 4,059 -- (1,562) 2,497
Other current assets................... 8,113 -- -- 8,113
Current assets of discontinued
operations.......................... 423 -- -- 423
-------- --------- --------- --------
Total current assets..................... 149,839 (24,356) 1,342 126,825
Property, plant and equipment:
Land................................... 6,036 -- 235 6,271
Buildings and improvements............. 27,854 -- (12,568) 15,286
Machinery and equipment................ 222,778 -- (170,753) 52,025
Patterns............................... 29,928 -- (19,950) 9,978
Construction in progress............... 3,200 -- (806) 2,394
-------- --------- --------- --------
289,796 -- (203,842) 85,954
Less accumulated depreciation.......... 126,827 -- (126,827) --
-------- --------- --------- --------
162,969 -- (77,015) 85,954
Deferred financing costs, net............ 1,393 1,086 -- 2,479
Identifiable intangible assets, net...... 33,354 -- 50,082 83,436
Goodwill, net............................ 180,214 (99,058) 81,156
Other assets............................. 9,065 -- (4,441) 4,624
-------- --------- --------- --------
224,026 1,086 (53,417) 171,695
-------- --------- --------- --------
$536,834 $ (23,270) $(129,090) $384,474
======== ========= ========= ========
</Table>
F-11
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR REORGANIZED
NEENAH NEENAH
FOUNDRY FOUNDRY
COMPANY COMPANY
SEPTEMBER 30, DEBT FRESH START SEPTEMBER 30,
2003 RESTRUCTURING ADJUSTMENTS(D) 2003
------------- ------------- -------------- -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities not subject to
compromise:
Accounts payable.................... $ 26,285 $ 5,474 $ -- $ 31,759
Accrued wages and employee
benefits.......................... 11,307 -- -- 11,307
Other accrued liabilities........... 5,918 -- -- 5,918
Current portion of capital lease
obligations....................... 2,646 -- -- 2,646
-------- --------- --------- --------
Total current liabilities not subject to
compromise............................. 46,156 5,474 -- 51,630
Long-term liabilities subject to
compromise............................. 465,540 (465,540)(a) -- --
Long-term debt........................... -- 268,550(b) -- 268,550
Capital lease obligations................ 1,583 -- -- 1,583
Deferred income taxes.................... 33,804 -- (8,529) 25,275
Postretirement benefit obligations....... 7,271 -- 3,048 10,319
Other liabilities........................ 21,496 -- 92 21,588
-------- --------- --------- --------
Total liabilities........................ 575,850 (191,516) (5,389) 378,945
Commitments and contingencies
Stockholder's equity (deficit):
Preferred stock........................ -- -- -- --
Predecessor Neenah common stock........ 100 (100)(a) -- --
Reorganized Neenah common stock........ -- 100(c) -- 100
Additional paid-in capital --
warrants............................ -- 602(c) -- 602
Capital in excess of par value......... 51,317 -- (46,490) 4,827
Accumulated deficit.................... (81,124) 167,644 (86,520) --
Accumulated other comprehensive loss... (9,309) -- 9,309 --
-------- --------- --------- --------
Total stockholder's equity (deficit)..... (39,016) 168,246 (123,701) 5,529
-------- --------- --------- --------
$536,834 $ (23,270) $(129,090) $384,474
======== ========= ========= ========
</Table>
- ---------------
a. To record the discharge of pre-petition indebtedness, including $26,183 of
accrued interest and the elimination of Predecessor Neenah's common stock.
b. Record borrowings of $47,112 on the New Credit Facility, the issuance of
$100,000 New Senior Subordinated Notes and the issuance of $121,438 (net of
discount of $11,692) of Second Secured Notes.
c. To record the issuance of common stock in Reorganized Neenah and detachable
warrants issued with the Second Secured Notes.
d. To adjust the carrying value of assets, liabilities and stockholder's equity
to fair value, in accordance with fresh start accounting.
F-12
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Neenah and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying value,
which approximates fair value, of cash equivalents, which consist entirely of
repurchase agreements, totaled $21,850 and $25,500 at September 30, 2003 and
2002, respectively.
ACCOUNTS RECEIVABLE
The Company evaluates the collectibility of its accounts and notes
receivable based on a number of factors. For larger accounts, an allowance for
doubtful accounts is recorded based on the applicable parties' ability and
likelihood to pay based on management's review of the facts. For all other
accounts, the Company recognizes an allowance based on length of time the
receivable is past due based on historical experience.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
inventories for Neenah and Dalton is determined on the last-in, first-out (LIFO)
method for substantially all inventories except supplies, for which cost is
determined on the first-in, first-out (FIFO) method. The cost of inventories for
Deeter, Mercer, ACP and Gregg is determined on the FIFO method. LIFO inventories
comprise 49% and 47% of total inventories at September 30, 2003 and 2002,
respectively. If the FIFO method of inventory valuation had been used by all
companies, inventories would have been approximately $2,623 and $1,458 higher
than reported at September 30, 2003 and 2002, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation for
financial reporting purposes is provided over the estimated useful lives (7 to
40 years) of the respective assets using the straight-line method.
DEFERRED FINANCING COSTS
Costs incurred to obtain long-term financing are amortized using the
effective interest method over the term of the related debt.
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets are amortized on a straight-line basis over
the estimated useful lives of 10 to 40 years.
F-13
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Effective October 1, 2001, goodwill is no longer amortized but is subject
to an annual test for impairment. Prior to October 1, 2001, goodwill was
amortized on a straight-line basis over 15 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Property, plant and equipment and identifiable intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product, which generally
corresponds with the transfer of title.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of sales.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for
continuing operations amounted to $445, $587 and $615 for the years ended
September 30, 2003, 2002 and 2001, respectively.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of the Company's assets and liabilities
and are measured using currently enacted tax rates and laws.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, notes receivable and investment in
preferred stock (see Note 5), accounts payable and capital lease obligations
approximate fair value. At September 30, 2003, long-term debt is included in the
accompanying consolidated balance sheet as a liability subject to compromise. At
September 30, 2002, the fair value of the Company's $451,432 of long-term debt
was $285,052. The fair value of the Senior Subordinated Notes at September 30,
2002 with a face value of $282,000 was based on quoted market prices.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," which expands upon and strengthens existing
accounting guidance concerning when a company should include in its financial
statements the assets, liabilities and activities of another entity. A Variable
Interest Entity
F-14
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("VIE") does not share economic risk and reward through typical equity ownership
arrangements. Instead, contractual or other relationships re-distribute economic
risks and rewards among equity holders and other parties. Once an entity is
determined to be a VIE, the party with the controlling financial interest, the
primary beneficiary, is required to consolidate it. FIN 46 also requires
disclosures about VIEs that a company is not required to consolidate but in
which it has a significant variable interest. The adoption of applicable
provisions of FIN 46 in 2003 did not have a material impact on the Company's
results of operations or financial position. The Company does not expect the
adoption of the remaining provisions related to FIN 46 to have a material impact
on the Company's results of operations or financial position.
5. DISCONTINUED OPERATIONS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company adopted SFAS No. 144
as of October 1, 2001.
During the year ended September 30, 2002, the Company identified indicators
of impairment at its Belcher Corporation (Belcher) foundry, which was held for
use at that date. Belcher is a wholly-owned subsidiary of Advanced Cast
Products, Inc. In accordance with SFAS No. 144, because the net book value of
the foundry's long-lived assets exceeded the sum of the undiscounted cash flows
expected to be realized from the respective assets, the Company recognized an
impairment charge of $5,379 to adjust the carrying value of the foundry's
long-lived assets to fair value.
On December 27, 2002, the Company sold substantially all of the assets of
Belcher for cash of $648 (net of fees and escrow deposits), a $1,500 note
receivable and $1,000 of preferred stock of the buyer. The cost method is used
to account for the Company's investment in preferred stock as the Company does
not have the ability to exercise significant influence over the investee's
operations and financial policies. At September 30, 2003, the cost of the
preferred stock approximates fair value. The disposition of Belcher resulted in
a loss of $1,596, net of taxes of $860. Included in the loss on disposal is a
curtailment loss on Belcher's defined benefit pension plan of $367, net of taxes
of $198, which was retained by the Company. In accordance with the provisions of
SFAS No. 144, the results of operations of Belcher have been reported as
discontinued operations in the consolidated statements of operations for all
periods presented.
Revenues for Belcher, which was previously included in the Castings
segment, for the years ended September 30, 2003, 2002 and 2001 were $3,186,
$17,511 and $18,125, respectively. Interest allocated to Belcher of $139, $485
and $533 for the years ended September 30, 2003, 2002 and 2001, respectively,
was based on the purchase price of Belcher in relation to the purchase price of
all other acquisitions funded by additional Company borrowings.
Customer actions and the significant deterioration of the U.S. economy
during the quarter ended December 31, 2001, had a dramatic effect on the
operations of Cast Alloys. This resulted in a significant reduction in sales,
operating profits and cash flows of Cast Alloys for the three months ended
December 31, 2001. Based on these factors, a goodwill impairment charge of
$10,668 was recognized during the three months ended December 31, 2001, related
to the decline in fair value of the Cast Alloys reporting unit, which was
included in the Castings segment.
These events also had a significant impact on the value of Cast Alloys'
property, plant and equipment and long-lived assets with finite lives. Due to
the existing impairment indicators, management assessed the recoverability of
these fixed assets and long-lived assets. As the expected undiscounted cash
flows were less than the carrying value of the related assets, an impairment
charge of $20,412 was recognized for the difference between the fair value and
carrying value of such assets during the year ended September 30, 2002.
In January 2002, management initiated a plan for discontinuing the
operations of Cast Alloys by closing its manufacturing facilities. Severance
costs of approximately $2,200 associated with this plan were
F-15
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized during the three months ended March 31, 2002. All employees of Cast
Alloys were terminated by April 2002. In accordance with the provisions of SFAS
No. 144, the results of operations of Cast Alloys have been reported as
discontinued operations in the consolidated statements of operations for all
periods presented. Previously, Cast Alloys was included in the Castings segment.
Revenues for Cast Alloys for the years ended September 30, 2002 and 2001
were $8,641 and $53,130, respectively. Interest expense allocated to Cast Alloys
of $1,954 and $4,309 for the years ended September 30, 2002 and 2001,
respectively, was based on the purchase price of Cast Alloys in relation to the
purchase price of all other acquisitions funded by additional Company
borrowings.
On October 2, 2000, the Company sold all of the issued and outstanding
shares of common stock of Hartley Controls Corporation (Hartley) for cash of
$5,190, net of fees of $129. The disposition of Hartley resulted in a gain of
$2,404, net of income taxes of $1,603. Proceeds from the sale were used to
reduce outstanding debt. Hartley designed and manufactured customized sand
control systems. In accordance with the provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," which has been amended by SFAS No. 144, the results of
operations of Hartley have been reported as discontinued operations in the
consolidated statements of operations.
6. INVENTORIES
Inventories consist of the following as of September 30:
<Table>
<Caption>
2003 2002
------- -------
Raw materials............................................... $ 3,709 $ 3,961
Work in process and finished goods.......................... 38,731 35,034
Supplies.................................................... 14,115 12,272
------- -------
$56,555 $51,267
======= =======
</Table>
7. INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
as of October 1, 2001. Under SFAS No. 142, goodwill and intangible assets deemed
to have indefinite lives are no longer amortized but are subject to annual
impairment tests in accordance with the statement. Other intangible assets
continue to be amortized over their estimated useful lives.
Upon adoption of SFAS No. 141, the Company reclassified the identifiable
intangible assets related to the assembled workforce and facilities in place
with an unamortized balance of $4,660 and $3,469, respectively, net of related
deferred income taxes of $1,864 and $1,388, respectively, to goodwill.
The Company performed the transitional impairment test of goodwill as of
October 1, 2001, and concluded that no impairment existed at the time of
adoption of SFAS No. 142. As discussed in Note 5, subsequent to the adoption of
SFAS No. 142, a goodwill impairment charge of $10,668 related to Cast Alloys, a
discontinued operation, was recognized. The Company performed the annual
impairment test of goodwill as of July 1, 2002, and concluded that no additional
goodwill impairment existed. The impairment tests were performed based on the
expected present value of future cash flows for each of the Company's reporting
units. As further discussed in Notes 2 and 3, on August 5, 2003, the Company
filed for protection under Chapter 11 of the Bankruptcy Code and on October 8,
2003 emerged from the Chapter 11 reorganization proceedings with a significantly
restructured balance sheet, including a substantial reduction in the carrying
value of the Company's intangible assets.
F-16
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Identifiable intangible assets consist of the following as of September 30:
<Table>
<Caption>
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------- -----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Amortizable intangible assets:
Customer lists.......................... $31,441 $17,945 $31,441 $14,814
Tradenames.............................. 22,553 3,217 22,553 2,649
Other................................... 1,295 773 1,295 653
------- ------- ------- -------
$55,289 $21,935 $55,289 $18,116
======= ======= ======= =======
</Table>
The Company does not have any intangible assets deemed to have indefinite
lives. Amortization expense expected to be recognized during fiscal years
subsequent to September 30, 2003, is as follows:
<Table>
2004........................................................ $3,832
2005........................................................ 3,832
2006........................................................ 3,832
2007........................................................ 3,195
2008........................................................ 2,002
</Table>
Changes in the carrying amount of goodwill during the year ended September
30, 2002, consist of the following:
<Table>
<Caption>
CASTINGS FORGINGS
SEGMENT SEGMENT TOTAL
-------- -------- --------
Balance as of September 30, 2001...................... $168,709 $17,296 $186,005
Reclassification of assembled workforce and facilities
in place net of deferred income tax liability of
$3,064, $188 and $3,252, respectively............... 4,595 282 4,877
Impairment charge related to discontinued
operations -- See Note 5............................ (10,668) -- (10,668)
-------- ------- --------
Balance as of September 30, 2002...................... $162,636 $17,578 $180,214
======== ======= ========
</Table>
As required by SFAS No. 142, the results of operations of the Company for
periods prior to its adoption have not been restated. The following table
reconciles reported net loss to pro forma net loss that would have resulted for
the year ending September 30, 2001 if SFAS No. 142 had been adopted effective
October 1, 2000:
<Table>
Reported net loss........................................... $(15,050)
Amortization of goodwill.................................... 5,552
Amortization of assembled workforce, net of tax............. 1,025
Amortization of facilities in place, net of tax............. 45
--------
Pro forma net loss.......................................... $ (8,428)
========
</Table>
F-17
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following as of September 30:
<Table>
<Caption>
2003 2002
-------- --------
11 1/8% Series B Senior Subordinated Notes.................. $150,000 $150,000
11 1/8% Series D Senior Subordinated Notes, including
unamortized premium of $1,206 in 2002..................... 45,000 46,206
11 1/8% Series F Senior Subordinated Notes, including
unamortized premium of $1,642 in 2002..................... 87,000 88,642
Term Loan Facilities........................................ 112,792 117,292
Acquisition Loan Facility................................... 5,335 10,794
Revolving Credit Facility................................... 29,314 28,500
PIK Note.................................................... 9,900 9,900
Other....................................................... 16 98
-------- --------
$439,357 $451,432
======== ========
</Table>
The Company had a Credit Facility, as amended, with a group of banks, which
provided Term Loan Facilities, an Acquisition Loan Facility and a Revolving
Credit Facility. Borrowings under this Pre-Petition Credit Facility were secured
by substantially all assets of the Company. Covenants in the Pre-Petition Credit
Facility restricted the payment of dividends, capital expenditures and certain
other transactions and required the Company to maintain leverage, net worth and
interest coverage ratios. The Pre-Petition Credit Facility bore interest at
LIBOR (1.125% at September 30, 2003) plus 4.5% or LIBOR plus 4.75%. Effective
December 31, 2001, the Credit Agreement was amended to provide relief from the
above financial ratio covenants through December 31, 2003, reduce the amount of
the Revolving Credit Facility to $29,565 and establish minimum EBITDA and
liquidity covenants. At March 31, 2003, the Company was in default of the
minimum EBITDA covenant on the Pre-Petition Credit Facility. In addition, the
Company did not make the scheduled May 1, 2003 interest payment on the
Pre-Petition Senior Subordinated Notes which was an event of default under the
Indenture Agreement covering the Pre-Petition Senior Subordinated Notes.
As of September 30, 2003, as a result of the Chapter 11 filing, the
carrying value of the Company's debt is classified as long-term liabilities
subject to compromise. As discussed in Note 2, in order to record the debt
instruments at the amount allowed by the Bankruptcy Court, in accordance with
SOP 90-7, unamortized premiums of $2,226 related to the Pre-Petition Senior
Subordinated Notes were written off as a component of reorganization expense in
2003.
As further discussed in Note 2, upon the Company's consummation of the Plan
of Reorganization, all of the Company's Pre-Petition Senior Subordinated Notes
and Pre-Petition Credit Facility and PIK Note were cancelled or repaid.
The New Credit Facility has a 5-year maturity, provides for a revolving
credit line of up to $70,000 (with a $5,000 sublimit available for letters of
credit), a term loan in the aggregate amount of up to $22,085, contains various
financial and non-financial covenants and is secured by substantially all of the
Company's tangible and intangible assets. The interest rate on the New Credit
Facility is based on LIBOR plus an applicable margin, based upon the Company
meeting certain financial statistics. The Company, including its wholly-owned
subsidiaries, jointly and severally guarantee the Company's obligation under the
New Credit Facility. The Second Secured Notes are due in 2010 and bear interest
at 11%. The New Senior Subordinated Notes bear interest at 13% and are due in
2013.
F-18
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain plants, warehouse space, machinery and
equipment, office equipment and vehicles under operating leases. Rent expense
for continuing operations under these operating leases for the years ended
September 30, 2003, 2002 and 2001 totaled $2,885, $3,147 and $2,777,
respectively.
The Company did not enter into any capital leases during the years ended
September 30, 2003 or 2002.
Property, plant and equipment under leases accounted for as capital leases
as of September 30 are as follows:
<Table>
<Caption>
2003 2002
------- -------
Machinery and equipment..................................... $20,867 $21,471
Less accumulated depreciation............................... (4,978) (3,983)
------- -------
$15,889 $17,488
======= =======
</Table>
Minimum rental payments due under operating and capital leases for fiscal
years subsequent to September 30, 2003, are as follows:
<Table>
<Caption>
OPERATING CAPITAL
LEASES LEASES
--------- -------
2004........................................................ $1,813 $2,951
2005........................................................ 1,344 1,656
2006........................................................ 743 --
2007........................................................ 293 --
2008........................................................ 244 --
Thereafter.................................................. 347 --
------ ------
Total minimum lease payments................................ $4,784 4,607
======
Less amount representing interest........................... 378
------
Present value of minimum lease payments..................... 4,229
Less current portion........................................ 2,646
------
Capital lease obligations................................... $1,583
======
</Table>
The Company is partially self-insured for workers' compensation claims. An
accrued liability is recorded for claims incurred but not yet paid or reported
and is based on current and historical claim information. The accrued liability
may ultimately be settled for an amount different than the recorded amount.
Adjustments of the accrued liability are recorded in the period in which they
become known.
Approximately 63% of the Company's work force is covered by collective
bargaining agreements. The collective bargaining agreements for Mercer and the
Kendallville location of Dalton are scheduled to expire during fiscal 2004.
F-19
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The credit for income taxes consists of the following:
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
-----------------------------
2003 2002 2001
-------- -------- -------
Current:
Federal............................................. $ -- $(18,522) $(2,902)
State............................................... 346 308 (1,218)
Foreign............................................. -- -- 886
-------- -------- -------
346 (18,214) (3,234)
Deferred.............................................. (10,337) (10,650) (1,630)
-------- -------- -------
$ (9,991) $(28,864) $(4,864)
======== ======== =======
</Table>
The credit for income taxes is included in the consolidated statements of
operations as follows:
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
----------------------------
2003 2002 2001
------- -------- -------
Continuing operations.................................. $(8,541) $ (5,917) $(4,004)
Discontinued operations................................ (1,450) (22,947) (860)
------- -------- -------
$(9,991) $(28,864) $(4,864)
======= ======== =======
</Table>
The credit for income taxes differs from the amount computed by applying
the federal statutory rate of 35% to loss before income taxes as follows:
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
-----------------------------
2003 2002 2001
-------- -------- -------
Credit at statutory rate.............................. $(12,443) $(26,798) $(6,970)
State income taxes (benefit), net of federal taxes.... 225 74 (535)
Amortization of goodwill.............................. -- -- 1,943
Additional provision recorded in connection with tax
examinations........................................ -- 932 417
Reorganization expenses............................... 2,244 -- --
Permanent difference related to the discontinuance of
Cast Alloys......................................... -- (2,734) --
Other................................................. (17) (338) 281
-------- -------- -------
Credit for income taxes............................... $ (9,991) $(28,864) $(4,864)
======== ======== =======
</Table>
F-20
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities consist of the following as of
September 30:
<Table>
<Caption>
2003 2002
-------- --------
Deferred income tax liabilities:
Inventories............................................... $ (2,244) $ (3,023)
Property, plant and equipment............................. (35,939) (37,277)
Identifiable intangible assets............................ (13,362) (14,890)
Other..................................................... (2,093) (1,781)
-------- --------
(53,638) (56,971)
Deferred income tax assets:
Employee benefit plans.................................... 11,604 10,062
Accrued vacation.......................................... 2,101 2,185
Other accrued liabilities................................. 3,136 1,743
Net operating loss carryforwards.......................... 5,986 1,754
Other..................................................... 1,066 --
-------- --------
23,893 15,744
-------- --------
Net deferred income tax liability........................... $(29,745) $(41,227)
======== ========
Included in the consolidated balance sheets as:
Current deferred income tax asset......................... $ 4,059 $ 2,659
Noncurrent deferred income tax liability.................. (33,804) (43,886)
-------- --------
$(29,745) $(41,227)
======== ========
</Table>
As of September 30, 2003, the Company has federal and state net operating
loss carryforwards for income tax purposes of approximately $13,000 and $24,000,
respectively, which expire through 2023.
11. EMPLOYEE BENEFIT PLANS
DEFINED-BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company sponsors five defined-benefit pension plans covering the
majority of its hourly employees. Retirement benefits under the pension plans
are based on years of service and defined-benefit rates. The Company funds the
pension plans based on actuarially determined cost methods allowable under
Internal Revenue Service regulations. Plan assets consist primarily of mutual
funds. The measurement date for three of the defined-benefit pension plans is
September 30. The remaining two plans use a measurement date of June 30.
The Company also sponsors unfunded defined-benefit postretirement health
care plans covering substantially all salaried and hourly employees at Neenah
and their dependents. For salaried employees at Neenah, benefits are provided
from the date of retirement for the duration of the employee's life, while
benefits for hourly employees at Neenah are provided from retirement to age 65.
Retirees' contributions to the plans are based on years of service and age at
retirement. The Company funds benefits as incurred. These plans use a
measurement date of September 30.
F-21
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the funded status of the pension plans and
postretirement benefit plans and the amounts recognized in the consolidated
balance sheets at September 30, 2003 and 2002:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------- ------------------------
2003 2002 2003 2002
-------- -------- ----------- ----------
Change in benefit obligation:
Benefit obligation, October 1............. $ 51,911 $ 44,166 $ 8,373 $ 7,024
Service cost........................... 1,798 1,512 319 198
Interest cost.......................... 3,433 3,269 592 476
Plan amendments........................ 496 -- -- --
Curtailment............................ 565 -- -- --
Actuarial losses....................... 3,940 5,077 1,462 1,037
Benefits paid.......................... (2,094) (2,113) (427) (362)
-------- -------- -------- -------
Benefit obligation, September 30.......... $ 60,049 $ 51,911 $ 10,319 $ 8,373
======== ======== ======== =======
Change in plan assets:
Fair value of plan assets, October 1...... $ 38,200 $ 40,020 $ -- $ --
Actual return (loss) on plan assets.... 4,375 (1,769) -- --
Company contributions.................. 8,008 2,062 427 362
Benefits paid.......................... (2,094) (2,113) (427) (362)
-------- -------- -------- -------
Fair value of plan assets, September 30... $ 43,489 $ 38,200 $ -- $ --
======== ======== ======== =======
Funded status of the plans:
Benefit obligation in excess of plan
assets................................. $(16,560) $(13,711) $(10,319) $(8,373)
Unrecognized prior service cost........... 2,532 2,184 536 581
Unrecognized net losses................... 15,592 13,279 2,512 1,096
-------- -------- -------- -------
$ 1,564 $ 1,752 $ (7,271) $(6,696)
======== ======== ======== =======
Amounts recognized in the consolidated
balance sheets at September 30:
Accrued pension liability.............. $(16,562) $(13,765) $ (7,271) $(6,696)
Intangible asset....................... 2,532 2,184 -- --
Deferred income tax asset.............. 6,285 5,333 -- --
Accumulated other comprehensive loss... 9,309 8,000 -- --
-------- -------- -------- -------
$ 1,564 $ 1,752 $ (7,271) $(6,696)
======== ======== ======== =======
</Table>
Amounts applicable to the Company's pension plans with accumulated benefit
obligations and projected benefit obligations in excess of plan assets:
<Table>
<Caption>
2003 2002
------- -------
Projected benefit obligation................................ $60,049 $51,911
Accumulated benefit obligation.............................. 60,049 51,911
Fair value of plan assets................................... 43,489 38,200
</Table>
F-22
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net periodic benefit cost for the years ended September 30,
2003, 2002 and 2001, respectively, are as follows:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- -------------------------
2003 2002 2001 2003 2002 2001
-------------- --------- ---------- ------- ----- -------
Service cost.................. $ 1,798 $ 1,512 $ 1,543 $ 319 $198 $ 204
Interest cost................. 3,433 3,269 3,036 592 476 493
Expected return on plan
assets...................... (3,265) (3,486) (3,580) -- -- --
Amortization of prior service
cost........................ 146 146 123 45 45 45
Recognized net actuarial
(gain) loss................. 515 26 2 47 (5) 2
-------------- --------- ---------- ------ ---- ------
Net periodic benefit cost..... $ 2,627 $ 1,467 $ 1,124 $1,003 $714 $ 744
============== ========= ========== ====== ==== ======
Net periodic benefit cost
included in the consolidated
statements of operations as:
Continuing operations.... $ 2,432 $ 1,373 $ 1,029 $1,003 $714 $ 744
Discontinued
operations............. 195 94 95 -- -- --
-------------- --------- ---------- ------ ---- ------
$ 2,627 $ 1,467 $ 1,124 $1,003 $714 $ 744
============== ========= ========== ====== ==== ======
Assumptions as of September
30:
Discount rate............... 6.25% to 6.75% 7.25% to 6.25% 6.75% 7.625%
6.75% 7.625%
Expected long-term rate of
return................... 7.50% to 6.75% to 7.50% to -- -- --
8.50% 9.00% 9.00%
</Table>
For measurement purposes, the healthcare cost trend rate was assumed to be
9.0% decreasing gradually to 5.0% in 2010 and then remaining at that level
thereafter. The healthcare cost trend rate assumption has a significant effect
on the amounts reported. A one percentage point change in the healthcare cost
trend rate would have the following effect:
<Table>
<Caption>
1% INCREASE 1% DECREASE
----------- -----------
Effect on total of service cost and interest cost........... $ 189 $ (147)
Effect on postretirement benefit obligation................. 1,858 (1,470)
</Table>
DEFINED-CONTRIBUTION RETIREMENT PLANS
The Company sponsors various defined-contribution retirement plans (the
Plans) covering substantially all salaried and certain hourly employees. The
Plans allow participants to make 401(k) contributions in amounts ranging from 1%
to 15% of their compensation. The Company matches between 35% and 50% of the
participants' contributions up to a maximum of 6% of the employee's
compensation, as defined. The Company may make additional voluntary
contributions to the Plans as determined annually by the Board of Directors.
Total Company contributions for continuing operations amounted to $1,694, $1,456
and $1,840 for the years ended September 30, 2003, 2002 and 2001, respectively.
OTHER EMPLOYEE BENEFITS
The Company provides unfunded supplemental retirement benefits to certain
active and retired employees at Dalton. At September 30, 2003, the present value
of the current and long-term portion of these supplemental retirement
obligations totaled $201 and $2,846, respectively. At September 30, 2002, the
present value of the current and long-term portion of these supplemental
retirement obligations totaled $334 and $2,955, respectively.
F-23
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of Dalton's hourly employees are covered by a multi-employer,
defined-benefit pension plan pursuant to a collective bargaining agreement. The
Company's expense for the years ended September 30, 2003, 2002 and 2001, was
$417, $397 and $470, respectively.
Substantially all of Mercer's union employees are covered by a
multiemployer, defined-benefit pension plan pursuant to a collective bargaining
agreement. The Company's expense for the years ended September 30, 2003, 2002
and 2001, was $102, $119 and $135, respectively.
12. PROVISION FOR IMPAIRMENT OF ASSETS
In accordance with SFAS No. 144, the Company recognized an impairment
charge of $74 during the year ended September 30, 2002, related to a building
held for sale to adjust the carrying value of the building to fair value less
costs to sell.
13. SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The
Castings segment manufactures and sells gray and ductile iron castings for the
industrial and municipal markets, while the Forgings segment manufactures forged
components for the industrial market. The Other segment includes machining
operations and freight hauling.
The Company evaluates performance and allocates resources based on the
operating income before depreciation and amortization charges of each segment.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment sales
and transfers are recorded at cost plus a share of operating profit. The
following segment information is presented for continuing operations:
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30
---------------------------------
2003 2002 2001
--------- --------- ---------
Revenues from external customers:
Castings........................................ $ 349,410 $ 361,914 $ 363,833
Forgings........................................ 20,681 21,893 28,109
Other........................................... 19,185 20,498 19,460
Elimination of intersegment revenues............ (14,213) (16,598) (12,620)
--------- --------- ---------
$ 375,063 $ 387,707 $ 398,782
========= ========= =========
Loss from continuing operations:
Castings........................................ $ (22,870) $ (5,953) $ (13,129)
Forgings........................................ (6,819) (4,135) (5,112)
Other........................................... (150) (764) (711)
Elimination of intersegment loss................ 6,969 4,899 5,823
--------- --------- ---------
$ (22,870) $ (5,953) $ (13,129)
========= ========= =========
Total assets:
Castings........................................ $ 641,870 $ 668,669 $ 770,044
Forgings........................................ 38,454 41,584 51,148
Other........................................... 10,971 16,494 16,149
Elimination of intersegment assets.............. (154,461) (157,359) (210,898)
--------- --------- ---------
$ 536,834 $ 569,388 $ 626,443
========= ========= =========
</Table>
F-24
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
CASTINGS FORGINGS OTHER TOTAL
-------- -------- ------ -------
Year ended September 30, 2003:
Interest expense.............................. $41,907 $ 4,803 $ 735 $47,445
Interest income............................... 825 -- -- 825
Provision (credit) for income taxes........... (8,331) (622) 412 (8,541)
Depreciation and amortization expense......... 22,522 2,277 1,296 26,095
Expenditures for long-lived assets............ 11,112 217 571 11,900
Year ended September 30, 2002:
Interest expense.............................. $38,196 $ 4,439 $ 831 $43,466
Interest income............................... 819 -- -- 819
Credit for income taxes....................... (3,005) (2,790) (122) (5,917)
Depreciation and amortization expense......... 23,251 2,627 1,669 27,547
Expenditures for long-lived assets............ 8,558 415 82 9,055
Year ended September 30, 2001:
Interest expense.............................. $37,518 $ 4,953 $ 983 $43,454
Interest income............................... 445 -- -- 445
Provision (credit) for income taxes........... (813) (3,273) 82 (4,004)
Depreciation and amortization expense......... 29,878 3,884 1,505 35,267
Expenditures for long-lived assets............ 16,219 228 435 16,882
</Table>
GEOGRAPHIC INFORMATION
<Table>
<Caption>
LONG-LIVED
NET SALES ASSETS(1)
--------- ----------
Year ended September 30, 2003:
United States............................................. $364,318 $162,969
Foreign countries......................................... 10,745 --
-------- --------
$375,063 $162,969
======== ========
Year ended September 30, 2002:
United States............................................. $378,968 $173,565
Foreign countries......................................... 8,739 --
-------- --------
$387,707 $173,565
======== ========
Year ended September 30, 2001:
United States............................................. $390,656 $189,726
Foreign countries......................................... 8,126 --
-------- --------
$398,782 $189,726
======== ========
</Table>
- ---------------
(1) Represents tangible long-lived assets only.
F-25
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information
for fiscal 2003, 2002 and 2001 for: (a) the Company, and (b) on a combined
basis, the guarantors of the Senior Subordinated Notes, which include all of the
wholly owned subsidiaries of the Company (Subsidiary Guarantors). Separate
financial statements of the Subsidiary Guarantors are not presented because the
guarantors are jointly, severally and unconditionally liable under the
guarantees, and the Company believes separate financial statements and other
disclosures regarding the Subsidiary Guarantors are not material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2003
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 24,432 $ (76) $ -- $ 24,356
Accounts receivable, net...................... 30,069 26,264 -- 56,333
Inventories................................... 21,029 35,526 -- 56,555
Deferred income taxes......................... (400) 4,459 -- 4,059
Other current assets.......................... 4,924 3,612 -- 8,536
-------- -------- --------- --------
Total current assets............................ 80,054 69,785 -- 149,839
Investments in and advances to subsidiaries..... 196,184 -- (196,184) --
Property, plant and equipment, net.............. 79,514 83,455 -- 162,969
Deferred financing costs, identifiable
intangible assets and goodwill, net........... 122,592 92,369 -- 214,961
Other assets.................................... 3,970 5,095 -- 9,065
-------- -------- --------- --------
$482,314 $250,704 $(196,184) $536,834
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities not subject to compromise:
Accounts payable.............................. $ 9,439 $ 16,846 $ -- $ 26,285
Accrued wages and employee benefits........... 4,481 6,826 -- 11,307
Other accrued liabilities..................... 3,933 1,985 -- 5,918
Current portion of capital lease
obligations................................ -- 2,646 -- 2,646
-------- -------- --------- --------
Total current liabilities....................... 17,853 28,303 -- 46,156
Long-term liabilities subject to compromise..... 465,540 -- -- 465,540
Capital lease obligations....................... -- 1,583 -- 1,583
Deferred income taxes........................... 18,076 15,728 -- 33,804
Postretirement benefit obligations.............. 7,271 -- -- 7,271
Other liabilities............................... 12,590 8,906 -- 21,496
Stockholder's equity (deficit).................. (39,016) 196,184 (196,184) (39,016)
-------- -------- --------- --------
$482,314 $250,704 $(196,184) $536,834
======== ======== ========= ========
</Table>
F-26
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2002
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 29,290 $ (3,126) $ -- $ 26,164
Accounts receivable, net...................... 30,829 25,624 -- 56,453
Inventories................................... 20,535 30,732 -- 51,267
Refundable income taxes....................... 14,850 -- -- 14,850
Deferred income taxes......................... (1,773) 4,432 -- 2,659
Other current assets.......................... 3,372 6,820 -- 10,192
-------- -------- --------- --------
Total current assets............................ 97,103 64,482 -- 161,585
Investments in and advances to subsidiaries..... 198,460 (23,829) (174,631) --
Property, plant and equipment, net.............. 83,523 90,042 -- 173,565
Deferred financing costs, identifiable
intangible assets and goodwill, net........... 129,687 94,356 -- 224,043
Other assets.................................... 4,191 6,004 -- 10,195
-------- -------- --------- --------
$512,964 $231,055 $(174,631) $569,388
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 7,740 $ 14,851 $ -- $ 22,591
Accrued wages and employee benefits........... 6,151 6,507 -- 12,658
Accrued interest.............................. 13,733 -- -- 13,733
Other current liabilities..................... 1,151 3,132 -- 4,283
Current portion of long-term debt............. 40,917 -- -- 40,917
Current portion of capital lease
obligations................................ -- 2,353 -- 2,353
-------- -------- --------- --------
Total current liabilities....................... 69,692 26,843 -- 96,535
Long-term debt.................................. 410,515 -- -- 410,515
Capital lease obligations....................... -- 4,816 -- 4,816
Deferred income taxes........................... 26,110 17,776 -- 43,886
Postretirement benefit obligations.............. 6,696 -- -- 6,696
Other liabilities............................... 12,097 6,989 -- 19,086
Stockholder's equity (deficit).................. (12,146) 174,631 (174,631) (12,146)
-------- -------- --------- --------
$512,964 $231,055 $(174,631) $569,388
======== ======== ========= ========
</Table>
F-27
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 2003
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
Net sales....................................... $160,529 $220,102 $(5,568) $375,063
Cost of sales................................... 117,301 210,101 (5,568) 321,834
-------- -------- ------- --------
Gross profit.................................... 43,228 10,001 -- 53,229
Selling, general and administrative expenses.... 11,766 14,366 -- 26,132
Amortization expense............................ 1,832 1,987 -- 3,819
Loss on disposal of equipment................... 214 (19) -- 195
-------- -------- ------- --------
Operating income................................ 29,416 (6,333) -- 23,083
Other income (expense):
Interest expense.............................. (25,589) (21,856) -- (47,445)
Interest income............................... 822 3 -- 825
Reorganization expense........................ (7,874) -- -- (7,874)
-------- -------- ------- --------
(32,641) (21,853) -- (54,494)
-------- -------- ------- --------
Loss from continuing operations before income
taxes and equity in earnings of
subsidiaries.................................. (3,225) (28,186) -- (31,411)
Provision (credit) for income taxes............. (8,846) 305 -- (8,541)
-------- -------- ------- --------
5,621 (28,491) -- (22,870)
Equity in losses of subsidiaries................ (31,182) -- 31,182 --
-------- -------- ------- --------
Loss from continuing operations................. (25,561) (28,491) 31,182 (22,870)
Loss from discontinued operations, net of income
taxes......................................... -- (1,095) -- (1,095)
Loss on sale of discontinued operations, net of
income tax.................................... -- (1,596) -- (1,596)
-------- -------- ------- --------
Net loss........................................ $(25,561) $(31,182) $31,182 $(25,561)
======== ======== ======= ========
</Table>
F-28
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
Net sales....................................... $168,519 $227,300 $(8,112) $387,707
Cost of sales................................... 119,442 212,410 (8,112) 323,740
-------- -------- ------- --------
Gross profit.................................... 49,077 14,890 -- 63,967
Selling, general and administrative expenses.... 13,357 15,386 -- 28,743
Amortization expense............................ 1,833 1,996 -- 3,829
Provision for impairment of assets.............. -- 74 -- 74
Loss on disposal of equipment................... 98 446 -- 544
-------- -------- ------- --------
Operating income................................ 33,789 (3,012) -- 30,777
Other income (expense):
Interest expense.............................. (22,568) (20,898) -- (43,466)
Interest income............................... 805 14 -- 819
-------- -------- ------- --------
(21,763) (20,884) -- (42,647)
-------- -------- ------- --------
Income (loss) from continuing operations before
income taxes and equity in earnings of
subsidiaries.................................. 12,026 (23,896) -- (11,870)
Provision (credit) for income taxes............. 1,293 (7,210) -- (5,917)
-------- -------- ------- --------
10,733 (16,686) -- (5,953)
Equity in losses of subsidiaries................ (58,436) -- 58,436 --
-------- -------- ------- --------
Loss from continuing operations................. (47,703) (16,686) 58,436 (5,953)
Loss from discontinued operations, net of income
taxes......................................... -- (41,750) -- (41,750)
-------- -------- ------- --------
Net loss........................................ $(47,703) $(58,436) $58,436 $(47,703)
======== ======== ======= ========
</Table>
F-29
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
Net sales....................................... $160,735 $244,175 $(6,128) $398,782
Cost of sales................................... 113,550 227,842 (6,128) 335,264
-------- -------- ------- --------
Gross profit.................................... 47,185 16,333 -- 63,518
Selling, general and administrative expenses.... 11,857 15,730 -- 27,587
Amortization expense............................ 4,919 5,570 -- 10,489
Gain on disposal of equipment................... (11) (423) -- (434)
-------- -------- ------- --------
Operating income................................ 30,420 (4,544) -- 25,876
Other income (expense):
Interest expense.............................. (19,828) (23,626) -- (43,454)
Interest income............................... 411 34 -- 445
-------- -------- ------- --------
(19,417) (23,592) -- (43,009)
-------- -------- ------- --------
Income (loss) from continuing operations before
income taxes and equity in earnings of
subsidiaries.................................. 11,003 (28,136) -- (17,133)
Provision (credit) for income taxes............. 6,361 (10,365) -- (4,004)
-------- -------- ------- --------
4,642 (17,771) -- (13,129)
Equity in losses of subsidiaries................ (22,096) -- 22,096 --
-------- -------- ------- --------
Loss from continuing operations................. (17,454) (17,771) 22,096 (13,129)
Loss from discontinued operations, net of income
taxes......................................... -- (4,325) -- (4,325)
Gain on sale of discontinued operations, net of
income taxes.................................. 2,404 -- -- 2,404
-------- -------- ------- --------
Net loss........................................ $(15,050) $(22,096) $22,096 $(15,050)
======== ======== ======= ========
</Table>
F-30
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 2003
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss........................................ $(25,561) $(31,182) $ 31,182 $(25,561)
Noncash adjustments............................. 5,548 18,473 -- 24,021
Changes in operating assets and liabilities..... 29,427 (4,885) -- 24,542
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... 9,414 (17,594) 31,182 23,002
INVESTING ACTIVITIES
Investments in and advances to subsidiaries..... 1,086 30,096 (31,182) --
Purchase of property, plant and equipment....... (4,930) (6,970) -- (11,900)
Other........................................... 89 494 -- 583
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... (3,755) 23,620 (31,182) (11,317)
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 815 -- -- 815
Payments on long-term debt and capital lease
obligations................................... (10,041) (2,976) -- (13,017)
Debt issuance costs............................. (1,291) -- -- (1,291)
-------- -------- -------- --------
Net cash used in financing activities........... (10,517) (2,976) -- (13,493)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... (4,858) 3,050 -- (1,808)
Cash (overdraft) and cash equivalents at
beginning of year............................. 29,290 (3,126) -- 26,164
-------- -------- -------- --------
Cash (overdraft) and cash equivalents at end of
year.......................................... $ 24,432 $ (76) $ -- $ 24,356
======== ======== ======== ========
</Table>
F-31
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss........................................ $(47,703) $(58,436) $ 58,436 $(47,703)
Noncash adjustments............................. 10,773 46,780 -- 57,553
Changes in operating assets and liabilities..... (13,173) 19,759 -- 6,586
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... (50,103) 8,103 58,436 16,436
INVESTING ACTIVITIES
Investments in and advances to subsidiaries..... 62,066 (3,630) (58,436) --
Purchase of property, plant and equipment....... (4,510) (4,545) -- (9,055)
Other........................................... 37 (335) -- (298)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... 57,593 (8,510) (58,436) (9,353)
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 33,400 -- -- 33,400
Payments on long-term debt and capital lease
obligations................................... (15,424) (2,383) -- (17,807)
Debt issuance costs............................. (858) -- -- (858)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................... 17,118 (2,383) -- 14,735
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... 24,608 (2,790) -- 21,818
Cash (overdraft) and cash equivalents at
beginning of year............................. 4,682 (336) -- 4,346
-------- -------- -------- --------
Cash (overdraft) and cash equivalents at end of
year.......................................... $ 29,290 $ (3,126) $ -- $ 26,164
======== ======== ======== ========
</Table>
F-32
NEENAH FOUNDRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss........................................ $(15,050) $(22,096) $ 22,096 $(15,050)
Noncash adjustments............................. 7,614 29,156 -- 36,770
Changes in operating assets and liabilities..... (4,849) (7,584) -- (12,433)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... (12,285) (524) 22,096 9,287
INVESTING ACTIVITIES
Investments in and advances to subsidiaries..... 14,650 7,446 (22,096) --
Proceeds from disposition of business, net of
fees.......................................... 5,190 -- -- 5,190
Purchase of property, plant and equipment....... (4,371) (12,511) -- (16,882)
Other........................................... 99 5,133 -- 5,232
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... 15,568 68 (22,096) (6,460)
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 5,000 -- -- 5,000
Payments on long-term debt and capital lease
obligations................................... (19,677) (2,376) -- (22,053)
Debt issuance costs............................. (906) -- -- (906)
-------- -------- -------- --------
Net cash used in financing activities........... (15,583) (2,376) -- (17,959)
-------- -------- -------- --------
Decrease in cash and cash equivalents........... (12,300) (2,832) -- (15,132)
Cash and cash equivalents at beginning of
year.......................................... 16,982 2,496 -- 19,478
-------- -------- -------- --------
Cash (overdraft) and cash equivalents at end of
year.......................................... $ 4,682 $ (336) $ -- $ 4,346
======== ======== ======== ========
</Table>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30, 2003
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales............................... $84,334 $86,959 $102,835 $100,935
Gross profit............................ 12,165 9,218 17,689 14,157
Net loss................................ (4,619) (8,105) (3,851) (8,986)
</Table>
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30, 2002
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales............................... $ 84,105 $88,461 $110,949 $104,192
Gross profit............................ 10,414 10,898 21,837 20,818
Net income (loss)....................... (41,074) (9,167) (2,209) 4,747
</Table>
F-33
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
REORGANIZED REORGANIZED PREDECESSOR
----------- ----------- ------------
JUNE 30 OCTOBER 1 SEPTEMBER 30
2004 2003 2003(1)
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ -- $ 24,356
Accounts receivable, net.................................. 77,768 56,333 56,333
Inventories............................................... 62,802 59,459 56,555
Deferred income taxes..................................... 2,497 2,497 4,059
Other current assets...................................... 9,911 8,113 8,113
Current assets of discontinued operations................. 200 423 423
-------- -------- --------
Total current assets.................................... 153,178 126,825 149,839
Property, plant and equipment............................... 95,061 85,954 289,796
Less accumulated depreciation............................... 7,858 -- 126,827
-------- -------- --------
87,203 85,954 162,969
Deferred financing costs, net............................... 2,383 2,479 1,393
Identifiable intangible assets, net......................... 78,092 83,436 33,354
Goodwill.................................................... 81,166 81,166 180,214
Other assets................................................ 4,104 4,624 9,065
-------- -------- --------
$406,126 $384,484 $536,834
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 31,890 $ 31,769 $ 26,285
Accrued liabilities....................................... 19,558 17,225 17,225
Current portion of long-term debt......................... 48,618 -- --
Current portion of capital lease obligations.............. 2,185 2,646 2,646
-------- -------- --------
Total current liabilities............................... 102,251 51,640 46,156
Long-term liabilities subject to compromise................. -- -- 465,540
Long-term debt.............................................. 240,454 268,550 --
Capital lease obligations................................... 71 1,583 1,583
Deferred income taxes....................................... 25,275 25,275 33,804
Postretirement benefit obligations.......................... 10,679 10,319 7,271
Other liabilities........................................... 21,400 21,588 21,496
-------- -------- --------
Total liabilities....................................... 400,130 378,955 575,850
Commitments and contingencies
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, par value $100 per share -- authorized,
issued and outstanding 1,000 shares..................... 100 100 100
Additional paid in capital-warrants....................... 611 602 --
Capital in excess of par value............................ 4,827 4,827 51,317
Retained earnings (accumulated deficit)................... 458 -- (81,124)
Accumulated other comprehensive loss...................... -- -- (9,309)
-------- -------- --------
Total stockholder's equity (deficit).................... 5,996 5,529 (39,016)
-------- -------- --------
$406,126 $384,484 $536,834
======== ======== ========
</Table>
- ---------------
(1) The balance sheet as of September 30, 2003 has been derived from the audited
financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
See notes to condensed consolidated financial statements.
F-34
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
REORGANIZED PREDECESSOR
------------ ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2004 2003
------------ ------------
Net sales................................................... $124,717 $102,835
Cost of sales............................................... 98,654 85,146
-------- --------
Gross profit................................................ 26,063 17,689
Selling, general and administrative expenses................ 6,941 6,545
Amortization of intangible assets........................... 1,773 955
Gain on disposal of equipment............................... (205) (27)
-------- --------
Total operating expenses.................................... 8,509 7,473
-------- --------
Operating income............................................ 17,554 10,216
Net interest expense...................................... (8,468) (12,025)
Reorganization expense.................................... -- (3,197)
-------- --------
Income (loss) from continuing operations before income
taxes..................................................... 9,086 (5,006)
Income tax provision (benefit).............................. 300 (2,002)
-------- --------
Net income (loss)........................................... $ 8,786 $ (3,004)
======== ========
</Table>
See notes to condensed consolidated financial statements.
F-35
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
REORGANIZED PREDECESSOR PREDECESSOR
----------- ----------- -----------
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, OCTOBER 1, JUNE 30,
2004 2003 2003
----------- ----------- -----------
Net sales................................................ $319,655 $ -- $274,128
Cost of sales............................................ 268,371 -- 235,056
-------- ------- --------
Gross profit............................................. 51,284 -- 39,072
Selling, general and administrative expenses............. 19,300 -- 19,223
Amortization of intangible assets........................ 5,344 -- 2,865
Gain on disposal of equipment............................ (257) -- (14)
-------- ------- --------
Total operating expenses................................. 24,387 -- 22,074
-------- ------- --------
Operating income......................................... 26,897 -- 16,998
Net interest expense................................... (25,540) -- (34,564)
Reorganization gain (expense), net..................... -- 43,943 (5,046)
-------- ------- --------
Income (loss) from continuing operations before income
taxes.................................................. 1,357 43,943 (23,138)
Income tax provision (benefit)........................... 540 -- (9,255)
-------- ------- --------
Income (loss) from continuing operations................. 817 43,943 (13,883)
Loss on sale of discontinued operations, net of income
tax benefit of $(860).................................. -- -- (1,596)
Loss from discontinued operations, net of income tax
benefit of $(240) and $(590)........................... (359) -- (1,095)
-------- ------- --------
Net income (loss)........................................ $ 458 $43,943 $(16,574)
======== ======= ========
</Table>
See notes to condensed consolidated financial statements.
F-36
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
REORGANIZED PREDECESSOR PREDECESSOR
----------- ----------- -----------
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, OCTOBER 1, JUNE 30,
2004 2003 2003
----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss)........................................ $ 458 $ 43,943 $(16,574)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash reorganization items.......................... -- (68,299) --
Depreciation and amortization.......................... 13,256 -- 20,186
Amortization of deferred financing costs and
premium/discount on notes........................... 2,111 -- 1,661
Loss on sale of discontinued operations................ -- -- 2,456
Changes in operating assets and liabilities............ (23,198) -- (5,353)
-------- -------- --------
Net cash provided by (used in) operating
activities........................................ (7,373) (24,356) 2,376
INVESTING ACTIVITIES
Purchase of property, plant and equipment................ (9,161) -- (9,342)
Net proceeds from sale of discontinued operations........ -- -- 648
-------- -------- --------
Net cash used in investing activities............... (9,161) -- (8,694)
FINANCING ACTIVITIES
Proceeds from long-term debt............................. 20,131 -- --
Payments on long-term debt and capital lease
obligations............................................ (3,246) -- (11,821)
Debt issuance costs...................................... (351) -- (750)
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ 16,534 -- (12,571)
-------- -------- --------
Decrease in cash and cash equivalents.................... -- (24,356) (18,889)
Cash and cash equivalents at beginning of period......... -- 24,356 26,354
-------- -------- --------
Cash and cash equivalents at end of period............... $ -- $ -- $ 7,465
======== ======== ========
</Table>
See notes to condensed consolidated financial statements.
F-37
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
(IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION
On August 5, 2003, Neenah Foundry Company (the Company) filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court, District of Delaware (the Bankruptcy Court).
On September 26, 2003, the Bankruptcy Court confirmed the Company's Plan of
Reorganization, and, on October 8, 2003, the Company consummated the Plan of
Reorganization and emerged from its Chapter 11 reorganization proceedings with a
significantly restructured balance sheet.
As discussed in Note 2, the Company implemented the fresh start accounting
provisions (fresh start) of the AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," (SOP 90-7)
as of October 1, 2003. Under fresh start, the fair value of the reorganized
Company was allocated among its assets and liabilities, and its accumulated
deficit as of October 1, 2003 was eliminated. As discussed in Note 2, the
implementation of fresh start has resulted in a substantial reduction in the
carrying value of the Company's long-lived assets, including property, plant and
equipment and intangible assets, and long-term liabilities. As a result, the
predecessor financial statements are not comparable to financial statements of
the reorganized Company.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended June 30, 2004 are not necessarily indicative
of the results that may be expected for the year ending September 30, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto included in Neenah Foundry Company's Form S-4 filed on
December 8, 2003.
NOTE 2 -- REORGANIZATION AND FRESH START ACCOUNTING
The consummation of the Plan of Reorganization resulted in the $147,441 of
loans under the Pre-Petition Credit Facility being terminated through payment in
full with cash using proceeds from the Second Secured Notes and the New Credit
Facility.
The Plan of Reorganization also resulted in the cancellation of all of the
Company's Pre-Petition Senior Subordinated Notes in exchange for the following:
-- $30,000 in cash;
-- $100,000 in aggregate principal amount of New Senior Subordinated Notes;
-- Shares representing 47.5% of the issued and outstanding shares of New
Common Stock in ACP Holding Company on a fully diluted basis as of
October 8, 2003, other than shares of restricted stock granted pursuant
to the Management Equity Incentive Plan of ACP Holding Company; and
-- Rights to acquire, for $110,000 in cash in the aggregate, units for up
to $119,996 face amount of Second Secured Notes and warrants to acquire
up to 42.81% of the new ACP Holding Company Common Stock on a fully
diluted basis as of October 8, 2003. The warrants have an exercise price
of $0.01 per share and will expire 10 years from the date of issuance.
F-38
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, under the Plan of Reorganization, the PIK Note was cancelled
and the holder received Second Secured Notes with a principal amount equal to
$13,134 and warrants to acquire up to 4.69% of the new ACP Holding Company
Common Stock on a fully diluted basis as of October 8, 2003 and cash of $45.
The Company adopted fresh start accounting as of October 1, 2003. Although
the effective date of the Plan of Reorganization was October 8, 2003, due to the
immateriality of the results of operations for the period between October 1,
2003 and the effective date, the Company has accounted for the consummation of
the Plan of Reorganization as if it had occurred on October 1, 2003 and
implemented fresh start reporting as of that date. Fresh start required that the
Company adjust the historical cost of its assets and liabilities to their fair
value. The fair value of the reorganized Company, or the reorganization value,
of approximately $290,000 was determined by an independent party based on
multiples of earnings before interest, income taxes, depreciation and
amortization (EBITDA) and discounted cash flows under the Company's financial
projections.
Fresh start requires that the reorganization value be allocated to the
entity's net assets in conformity with procedures specified by Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141).
The Company engaged an independent appraiser to assist in the allocation of the
reorganization value to the reorganized Company's assets and liabilities by
determining the fair market value of its property, plant and equipment and
intangible assets. The accompanying October 1, 2003 statement of operations and
balance sheet show the impact of this valuation, but do not reflect any of the
Company's operating results as attributable to that date. A reconciliation of
the adjustments recorded in connection with the debt restructuring and the
adoption of fresh start accounting are as follows:
<Table>
<Caption>
PREDECESSOR REORGANIZED
NEENAH NEENAH
FOUNDRY FOUNDRY
COMPANY COMPANY
SEPTEMBER 30, DEBT FRESH START OCTOBER 1,
2003 RESTRUCTURING ADJUSTMENTS(D) 2003
------------- ------------- -------------- -----------
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................. $ 24,356 $(24,356) $ -- $ --
Accounts receivable, net.................. 56,333 -- -- 56,333
Inventories............................... 56,555 -- 2,904 59,459
Deferred income taxes..................... 4,059 -- (1,562) 2,497
Other current assets...................... 8,113 -- -- 8,113
Current assets of discontinued
operations.............................. 423 -- -- 423
-------- -------- --------- --------
Total current assets...................... 149,839 (24,356) 1,342 126,825
Property, plant and equipment............. 289,796 -- (203,842) 85,954
Less accumulated depreciation............. 126,827 -- (126,827) --
-------- -------- --------- --------
162,969 -- (77,015) 85,954
Deferred financing costs, net............. 1,393 1,086 -- 2,479
Identifiable intangible assets, net....... 33,354 -- 50,082 83,436
Goodwill.................................. 180,214 -- (99,048) 81,166
Other assets.............................. 9,065 -- (4,441) 4,624
-------- -------- --------- --------
224,026 1,086 (53,407) 171,705
-------- -------- --------- --------
$536,834 $(23,270) $(129,080) $384,484
======== ======== ========= ========
</Table>
F-39
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR REORGANIZED
NEENAH NEENAH
FOUNDRY FOUNDRY
COMPANY COMPANY
SEPTEMBER 30, DEBT FRESH START OCTOBER 1,
2003 RESTRUCTURING ADJUSTMENTS(D) 2003
------------- ------------- -------------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 26,285 $ 5,484 $ -- $ 31,769
Accrued liabilities....................... 17,225 -- -- 17,225
Current portion of capital lease
obligations............................. 2,646 -- -- 2,646
-------- ---------- --------- --------
Total current liabilities................. 46,156 5,484 -- 51,640
Long-term liabilities subject to
compromise.............................. 465,540 (465,540)(a) -- --
Long-term debt............................ -- 268,550(b) -- 268,550
Capital lease obligations................. 1,583 -- -- 1,583
Deferred income taxes..................... 33,804 -- (8,529) 25,275
Postretirement benefit obligations........ 7,271 -- 3,048 10,319
Other liabilities......................... 21,496 -- 92 21,588
-------- ---------- --------- --------
Total liabilities......................... 575,850 (191,506) (5,389) 378,955
Commitments and contingencies
Stockholder's equity (deficit):
Predecessor Neenah common stock........... 100 (100)(a) -- --
Reorganized Neenah common stock........... -- 100(c) -- 100
Additional paid-in capital -- warrants.... -- 602(c) -- 602
Capital in excess of par value............ 51,317 -- (46,490) 4,827
Accumulated deficit....................... (81,124) 167,634 (86,510) --
Accumulated other comprehensive loss...... (9,309) -- 9,309 --
-------- ---------- --------- --------
Total stockholder's equity (deficit)...... (39,016) 168,236 (123,691) 5,529
-------- ---------- --------- --------
$536,834 $ (23,270) $(129,080) $384,484
======== ========== ========= ========
</Table>
- ---------------
(a) To record the discharge of pre-petition indebtedness, including $26,183 of
accrued interest and the elimination of Predecessor Neenah's common stock.
(b) Record borrowings of $47,112 on the New Credit Facility, the issuance of
$100,000 New Senior Subordinated Notes and the issuance of $121,438 (net of
discount of $11,692) of Second Secured Notes.
(c) To record the issuance of common stock in Reorganized Neenah and detachable
warrants issued with the Second Secured Notes.
(d) To adjust the carrying value of assets, liabilities and stockholder's
equity to fair value, in accordance with fresh start accounting.
In accordance with SOP 90-7, liabilities subject to compromise reflected in
the accompanying consolidated balance sheet at September 30, 2003 were recorded
at the amount allowed on pre-petition claims in the Chapter 11 proceedings.
Other obligations that were not subject to compromise retained their historical
balance sheet classifications and amounts.
F-40
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liabilities subject to compromise consist of the following as of September
30, 2003:
<Table>
Senior Subordinated Notes................................... $282,000
Credit Facility............................................. 147,441
PIK Note.................................................... 9,900
Accrued interest............................................ 26,183
Other debt.................................................. 16
--------
$465,540
========
</Table>
Reorganization gain for the Predecessor on October 1, 2003 consists of the
following:
<Table>
Net gain on extinguishment of debt.......................... $167,634
Net loss resulting from fresh start fair value adjustments
to assets and liabilities................................. (123,691)
--------
Total reorganization gain................................... $ 43,943
========
</Table>
NOTE 3 -- DISCONTINUED OPERATIONS
On December 27, 2002, the Company sold substantially all of the assets of
Belcher Corporation (Belcher) for cash of $648 (net of fees and escrow
deposits), a note receivable ($1,500) and preferred stock ($1,000). The result
of the transaction was a loss on sale of $1,596, net of income taxes of $860,
for the nine months ended June 30, 2003. With the exception of pension
liabilities and post-retirement benefits of employees retiring prior to December
27, 2002, the buyer assumed all liabilities of Belcher in connection with the
sale.
In accordance with the provisions of SFAS No.144, "Accounting for the
'Impairment or Disposal of Long-Lived Assets," the results of operations for
Belcher have been reported as discontinued operations in the accompanying
statements of operations. Previously, Belcher was included in the Castings
segment. Revenues for Belcher for nine months ended June 30, 2003 were $3,186.
There were no revenues generated by Belcher in the three months ended June 30,
2003.
NOTE 4 -- INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
REORGANIZED PREDECESSOR
----------- -------------
JUNE 30, SEPTEMBER 30,
2004 2003
----------- -------------
Raw materials............................................... $ 4,866 $ 3,709
Work in process and finished goods.......................... 44,506 38,731
Supplies.................................................... 13,430 14,115
------- -------
$62,802 $56,555
======= =======
</Table>
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," which expands upon and strengthens existing
accounting guidance concerning when a company should include in its financial
statements the assets, liabilities and activities of another entity. A Variable
Interest Entity ("VIE") does not share economic risk and reward through typical
equity ownership arrangements. Instead, contractual or other relationships
re-distribute economic risks and rewards among equity holders and other
F-41
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
parties. Once an entity is determined to be a VIE, the party with the
controlling financial interest, the primary beneficiary, is required to
consolidate it. FIN 46 also requires disclosures about VIEs that a company is
not required to consolidate but in which it has a significant variable interest.
The adoption of FIN 46 did not have a material impact on the Company's results
of operations or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," to improve
financial statement disclosures for defined benefit plans. The standard requires
that companies provide more details about their plan assets, benefit
obligations, cash flows, benefit costs and other relevant information including
a breakdown of plan assets, a description of investment policies and strategies
and target allocation percentages. The guidance is effective for fiscal years
ending after December 15, 2003, and for quarters beginning after December 15,
2003.
NOTE 6 -- LONG-LIVED ASSETS
As discussed in Note 2, the Company applied fresh start accounting on
October 1, 2003. Accordingly, its property, plant and equipment and identifiable
intangible assets have been recorded at their then fair values.
Property, Plant and Equipment. Property, plant and equipment consist of
the following components:
<Table>
<Caption>
REORGANIZED REORGANIZED PREDECESSOR
----------- ----------- ------------
JUNE 30 OCTOBER 1 SEPTEMBER 30
2004 2003 2003
----------- ----------- ------------
Land............................................. $ 6,333 $ 6,271 $ 6,036
Buildings and improvements....................... 15,415 15,286 27,854
Machinery and equipment.......................... 58,131 52,025 222,778
Patterns......................................... 10,541 9,978 29,928
Construction in progress......................... 4,641 2,394 3,200
------- ------- --------
95,061 85,954 289,796
Less accumulated depreciation.................... 7,858 -- 126,827
------- ------- --------
$87,203 $85,954 $162,969
======= ======= ========
</Table>
Depreciation expense related to property, plant and equipment for the
reorganized Company's nine months ended June 30, 2004 was $7,912 and for the
predecessor Company's nine months ended June 30, 2003 was $17,321.
Identifiable Intangibles. Identifiable intangible assets consisted of the
following components:
<Table>
<Caption>
REORGANIZED REORGANIZED PREDECESSOR
----------- ----------- ------------
JUNE 30 OCTOBER 1 SEPTEMBER 30
2004 2003 2003
----------- ----------- ------------
Customer lists................................... $67,000 $67,000 $31,441
Patents.......................................... 155 155 270
Trade names...................................... 16,281 16,281 22,553
Internally printed materials..................... -- -- 1,025
------- ------- -------
83,436 83,436 55,289
Less accumulated amortization.................... 5,344 -- 21,935
------- ------- -------
$78,092 $83,436 $33,354
======= ======= =======
</Table>
F-42
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense related to identifiable intangible assets for the
reorganized Company's nine months ended June 30, 2004 was $5,344 and for the
predecessor Company's nine months ended June 30, 2003 was $2,865.
NOTE 7 -- LONG-TERM DEBT
As discussed in Note 2, the consummation of the Plan of Reorganization
resulted in $147,441 of loans under the Pre-Petition Credit Facility being
terminated through payment in full with cash using proceeds from the Second
Secured Notes and the New Credit Facility.
The Plan of Reorganization also resulted in the cancellation of all of the
Company's Pre-Petition Senior Subordinated Notes in exchange for the following:
-- $30,000 in cash;
-- $100,000 in aggregate principal amount of New Senior Subordinated Notes;
-- Shares representing 47.5% of the issued and outstanding shares of New
Common Stock in ACP Holding Company on a fully diluted basis as of
October 8, 2003, other than shares of restricted stock granted pursuant
to the Management Equity Incentive Plan of ACP Holding Company; and
-- Rights to acquire, for $110,000 in cash in the aggregate, units for up
to $119,996 face amount of Second Secured Notes and warrants to acquire
up to 42.81% of the new ACP Holding Company Common Stock on a fully
diluted basis as of October 8, 2003.
In addition, under the Plan of Reorganization, the PIK Note was cancelled
and the holder received Second Secured Notes with a principal amount equal to
$13,134 and warrants to acquire up to 4.69% of the new ACP Holding Company
Common Stock on a fully diluted basis as of October 8, 2003 and cash of $45.
The New Credit Facility has a 5-year maturity, provides for a revolving
credit line of up to $70,000, a term loan in the aggregate amount of up to
$22,085, contains various financial and non-financial covenants and is secured
by substantially all of the Company's tangible and intangible assets. The
interest rate on the New Credit Facility is based on LIBOR plus an applicable
margin, based upon the Company meeting certain financial statistics. The
Company, including its wholly-owned subsidiaries, jointly and severally
guarantee the Company's obligation under the New Credit Facility. The Second
Secured Notes are due in 2010 and bear interest at 11%. The New Senior
Subordinated Notes bear interest at 13% and are due in 2013.
NOTE 8 -- STOCKHOLDER'S EQUITY
Pursuant to the Company's Certificate of Incorporation that was adopted in
connection with the Plan of Reorganization, the Company has the authority to
issue 1,000 shares of new common stock. At June 30, 2004, 1,000 shares of new
common stock had been issued.
As a result of the cancellation of the Pre-Petition Senior Subordinated
Notes and the PIK Note, discussed in Note 2, such holders were granted warrants
to purchase shares up to an additional 47.50% of the new ACP Holding Company
Common Stock. The fair value of the warrants at date of issuance are included in
the reorganized Company's stockholder's equity in the accompanying condensed
consolidated balance sheet. The warrants have an exercise price of $0.01 per
share and will expire 10 years from the date of issuance.
F-43
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
The Company has five defined-benefit pension plans covering the majority of
its hourly employees. Components of net periodic benefit costs are as follows
for the three and nine months ended June 30, (in thousands):
<Table>
<Caption>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ---------------
2004 2003 2004 2003
------- ------- ------ ------
Service cost............................................. $491 $450 $ 60 $ 80
Interest cost............................................ 896 858 116 148
Expected return on plan assets........................... (890) (816) -- --
Amortization of prior service cost....................... 10 36 11 11
Recognized net actuarial loss............................ 37 129 -- 12
---- ---- ---- ----
Net periodic benefit cost................................ $544 $657 $187 $251
==== ==== ==== ====
</Table>
<Table>
<Caption>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ---------------
2004 2003 2004 2003
------- ------- ------ ------
Service cost.......................................... $1,473 $1,350 $180 $240
Interest cost......................................... 2,688 2,574 348 444
Expected return on plan assets........................ (2,670) (2,448) -- --
Amortization of prior service cost.................... 30 108 33 33
Recognized net actuarial loss......................... 111 387 -- 36
------ ------ ---- ----
Net periodic benefit cost............................. $1,632 $1,971 $561 $753
====== ====== ==== ====
</Table>
EMPLOYER CONTRIBUTIONS
For the nine months ended June 30, 2004, $1.4 million of contributions have
been made. The Company presently anticipates contributing an additional $1.2
million to fund its pension plans in 2004 for a total of $2.6 million.
F-44
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information
as of June 30, 2004 and September 30, 2003 and for the three and nine months
ended June 30, 2004 and 2003 for: (a) the Company and (b) on a combined basis,
the guarantors of the Senior Subordinated Notes, which include all of the wholly
owned subsidiaries of the Company (Subsidiary Guarantors). Separate financial
statements of the Subsidiary Guarantors are not presented because the guarantors
are jointly, severally and unconditionally liable under the guarantees, and the
Company believes separate financial statements and other disclosures regarding
the Subsidiary Guarantors are not material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
JUNE 30, 2004
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 890 $ (890) $ -- $ --
Accounts receivable, net...................... 36,778 40,990 -- 77,768
Inventories................................... 27,774 35,028 -- 62,802
Deferred income taxes......................... (3,729) 6,226 -- 2,497
Other current assets.......................... 6,387 3,724 -- 10,111
-------- -------- -------- --------
Total current assets............................ 68,100 85,078 -- 153,178
Investments in and advances to subsidiaries..... 97,907 -- (97,907) --
Property, plant and equipment, net.............. 31,762 55,441 -- 87,203
Deferred financing costs and identifiable
intangible assets, net........................ 61,059 19,416 -- 80,475
Goodwill........................................ 81,166 -- -- 81,166
Other assets.................................... 1,955 2,149 -- 4,104
-------- -------- -------- --------
$341,949 $162,084 $(97,907) $406,126
======== ======== ======== ========
</Table>
F-45
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
JUNE 30, 2004
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.............................. $ 8,328 $ 23,562 $ -- $ 31,890
Accrued liabilities........................... 9,196 10,362 -- 19,558
Current portion of long-term debt............. 48,618 -- -- 48,618
Current portion of capital lease
obligations................................ -- 2,185 -- 2,185
-------- -------- -------- --------
Total current liabilities....................... 66,142 36,109 -- 102,251
Long-term debt.................................. 240,454 -- 240,454
Capital lease obligations....................... -- 71 -- 71
Deferred income taxes........................... 5,932 19,343 -- 25,275
Postretirement benefit obligations.............. 10,679 -- -- 10,679
Other liabilities............................... 12,746 8,654 -- 21,400
Stockholder's equity............................ 5,996 97,907 (97,907) 5,996
-------- -------- -------- --------
$341,949 $162,084 $(97,907) $406,126
======== ======== ======== ========
</Table>
CONDENSED CONSOLIDATING BALANCE SHEET -- PREDECESSOR
<Table>
<Caption>
SEPTEMBER 30, 2003
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 24,432 $ (76) $ -- $ 24,356
Accounts receivable, net...................... 30,069 26,264 -- 56,333
Inventories................................... 21,029 35,526 -- 56,555
Deferred income taxes......................... (400) 4,459 -- 4,059
Other current assets.......................... 4,924 3,612 -- 8,536
-------- -------- --------- --------
Total current assets............................ 80,054 69,785 -- 149,839
Investments in and advances to subsidiaries..... 196,184 -- (196,184) --
Property, plant and equipment, net.............. 79,514 83,455 -- 162,969
Deferred financing costs and identifiable
intangible assets, net........................ 16,827 17,920 -- 34,747
Goodwill, net................................... 105,765 74,449 -- 180,214
Other assets.................................... 3,970 5,095 -- 9,065
-------- -------- --------- --------
$482,314 $250,704 $(196,184) $536,834
======== ======== ========= ========
</Table>
F-46
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, 2003
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 9,439 $ 16,846 $ -- $ 26,285
Accrued liabilities........................... 8,414 8,811 -- 17,225
Current portion of capital lease
obligations................................ -- 2,646 -- 2,646
-------- -------- --------- --------
Total current liabilities....................... 17,853 28,303 -- 46,156
Long-term debt subject to compromise............ 465,540 -- -- 465,540
Capital lease obligations....................... -- 1,583 -- 1,583
Deferred income taxes........................... 18,076 15,728 -- 33,804
Postretirement benefit obligations.............. 7,271 -- -- 7,271
Other liabilities............................... 12,590 8,906 -- 21,496
Stockholder's equity (deficit).................. (39,016) 196,184 (196,184) (39,016)
-------- -------- --------- --------
$482,314 $250,704 $(196,184) $536,834
======== ======== ========= ========
</Table>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2004
--------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
Net sales........................................ $57,248 $69,055 $(1,586) $124,717
Cost of sales.................................... 39,405 60,835 (1,586) 98,654
------- ------- ------- --------
Gross profit..................................... 17,843 8,220 -- 26,063
Selling, general and administrative expenses..... 3,142 3,799 -- 6,941
Amortization of intangible assets................ 1,426 347 -- 1,773
Gain on disposal of equipment.................... (5) (200) -- (205)
------- ------- ------- --------
Operating income................................. 13,280 4,274 -- 17,554
Net interest expense............................. (4,454) (4,014) -- (8,468)
------- ------- ------- --------
Income from continuing operations before income
taxes and equity in earnings of subsidiaries... 8,826 260 -- 9,086
Income tax provision............................. 300 -- -- 300
------- ------- ------- --------
8,526 260 -- 8,786
Equity in earnings of subsidiaries............... 260 -- (260) --
------- ------- ------- --------
Net income....................................... $ 8,786 $ 260 $ (260) $ 8,786
======= ======= ======= ========
</Table>
F-47
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- PREDECESSOR
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
Net sales........................................ $45,707 $58,587 $(1,459) $102,835
Cost of sales.................................... 31,851 54,754 (1,459) 85,146
------- ------- ------- --------
Gross profit..................................... 13,856 3,833 -- 17,689
Selling, general and administrative expenses..... 3,115 3,430 -- 6,545
Amortization of intangible assets................ 458 497 -- 955
Gain on disposal of equipment.................... (1) (26) -- (27)
------- ------- ------- --------
Operating income (loss).......................... 10,284 (68) -- 10,216
Net interest expense............................. (6,443) (5,582) -- (12,025)
Reorganization expense........................... (3,197) -- -- (3,197)
------- ------- ------- --------
Income (loss) before income taxes and equity in
loss of subsidiaries........................... 644 (5,650) -- (5,006)
Income tax provision (benefit)................... 373 (2,375) -- (2,002)
------- ------- ------- --------
271 (3,275) -- (3,004)
Equity in loss of subsidiaries................... (3,275) -- 3,275 --
------- ------- ------- --------
Net loss......................................... $(3,004) $(3,275) $ 3,275 $ (3,004)
======= ======= ======= ========
</Table>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
NINE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
Net sales....................................... $135,254 $188,437 $(4,036) $319,655
Cost of sales................................... 99,002 173,405 (4,036) 268,371
-------- -------- ------- --------
Gross profit.................................... 36,252 15,032 -- 51,284
Selling, general and administrative expenses.... 8,817 10,483 -- 19,300
Amortization of intangible assets............... 4,279 1,065 -- 5,344
Gain on disposal of equipment................... (53) (204) -- (257)
-------- -------- ------- --------
Operating income................................ 23,209 3,688 -- 26,897
Net interest expense............................ (13,455) (12,085) -- (25,540)
-------- -------- ------- --------
Income (loss) from continuing operations before
income taxes and equity in loss of
subsidiaries.................................. 9,754 (8,397) -- 1,357
Income tax provision............................ 540 -- -- 540
-------- -------- ------- --------
9,214 (8,397) -- 817
Equity in loss of subsidiaries.................. (8,756) -- 8,756 --
-------- -------- ------- --------
Income (loss) from continuing operations........ 458 (8,397) 8,756 817
Loss from discontinued operations............... -- (359) -- (359)
-------- -------- ------- --------
Net income (loss)............................... $ 458 $ (8,756) $ 8,756 $ 458
======== ======== ======= ========
</Table>
F-48
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- PREDECESSOR
<Table>
<Caption>
NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
Net sales....................................... $113,272 $164,884 $(4,028) $274,128
Cost of sales................................... 83,104 155,980 (4,028) 235,056
-------- -------- ------- --------
Gross profit.................................... 30,168 8,904 -- 39,072
Selling, general and administrative expenses.... 8,304 10,919 -- 19,223
Amortization of intangible assets............... 1,375 1,490 -- 2,865
Loss (gain) on disposal of equipment............ 27 (41) -- (14)
-------- -------- ------- --------
Operating income (loss)......................... 20,462 (3,464) -- 16,998
Net interest expense............................ (18,262) (16,828) -- (35,090)
Reorganization expense.......................... (5,046) -- -- (5,046)
-------- -------- ------- --------
Loss from continuing operations before income
taxes and equity in loss of subsidiaries...... (2,846) (20,292) -- (23,138)
Income tax benefit.............................. (960) (8,295) -- (9,255)
-------- -------- ------- --------
(1,886) (11,997) -- (13,883)
Equity in loss of subsidiaries.................. (14,688) -- 14,688 --
-------- -------- ------- --------
Loss from continuing operations................. (16,574) (11,997) 14,688 (13,883)
Loss on sale of discontinued operations, net of
tax........................................... -- (1,596) -- (1,596)
Loss from discontinued operations, net of tax... -- (1,095) -- (1,095)
-------- -------- ------- --------
Net loss........................................ $(16,574) $(14,688) $14,688 $(16,574)
======== ======== ======= ========
</Table>
F-49
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss)............................... $ 458 $(8,756) $ 8,756 $ 458
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 5,908 7,348 -- 13,256
Amortization of deferred financing costs
and discount on notes.................... 2,111 -- -- 2,111
Changes in operating assets and
liabilities.............................. (20,357) (2,841) -- (23,198)
-------- ------- ------- --------
Net cash used in operating activities........... (11,880) (4,249) 8,756 (7,373)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries..... (2,973) 11,729 (8,756) --
Purchase of property, plant and equipment....... (2,840) (6,321) -- (9,161)
-------- ------- ------- --------
Net cash provided by (used in) investing
activities.................................... (5,813) 5,408 (8,756) (9,161)
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 20,131 -- -- 20,131
Payments on long-term debt and capital lease
obligations................................... (1,273) (1,973) -- (3,246)
Deferred financing costs........................ (351) -- -- (351)
-------- ------- ------- --------
Net cash provided by (used in) financing
activities.................................... 18,507 (1,973) -- 16,534
-------- ------- ------- --------
Increase (decrease) in cash and cash
equivalents................................... 814 (814) -- --
Cash and cash equivalents at beginning of
period........................................ 76 (76) -- --
-------- ------- ------- --------
Cash and cash equivalents at end of period...... $ 890 $ (890) $ -- $ --
======== ======= ======= ========
</Table>
F-50
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- PREDECESSOR
<Table>
<Caption>
NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------
SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss........................................ $(16,574) $(14,688) $ 14,688 $(16,574)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 7,900 12,286 -- 20,186
Amortization of deferred financing costs and
premium on notes........................... 1,661 -- -- 1,661
Loss on sale of discontinued operations....... -- 2,456 -- 2,456
Changes in operating assets and liabilities... 3,423 (8,776) -- (5,353)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... (3,590) (8,722) 14,688 2,376
INVESTING ACTIVITIES
Investments in and advances to subsidiaries..... (1,976) 16,664 (14,688) --
Purchase of property, plant and equipment....... (3,675) (5,667) -- (9,342)
Net proceeds from sale of discontinued
operations.................................... -- 648 -- 648
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... (5,651) 11,645 (14,688) (8,694)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease
obligations................................... (10,020) (1,801) -- (11,821)
Deferred financing costs........................ (750) -- -- (750)
-------- -------- -------- --------
Net cash used in financing activities........... (10,770) (1,801) -- (12,571)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... (20,011) 1,122 -- (18,889)
Cash and cash equivalents at beginning of
period........................................ 29,290 (2,936) -- 26,354
-------- -------- -------- --------
Cash and cash equivalents at end of period...... $ 9,279 $ (1,814) $ -- $ 7,465
======== ======== ======== ========
</Table>
NOTE 11 -- SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The
Castings segment manufactures and sells castings for the industrial and
municipal markets, while the Forgings segment manufactures forged components for
the industrial market. The Other segment includes machining operations and
freight hauling.
The Company evaluates performance and allocates resources based on the
operating income before depreciation and amortization charges of each segment.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment sales
and
F-51
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transfers are recorded at cost plus a share of operating profit. The following
segment information is presented for continuing operations:
<Table>
<Caption>
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
----------- ----------- ----------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues from continuing operations:
Castings.............................. $115,177 $ 96,021 $294,594 $254,837
Forgings.............................. 7,763 5,644 20,124 15,525
Other................................. 6,297 4,885 16,640 14,523
Elimination of intersegment
revenues........................... (4,520) (3,715) (11,703) (10,757)
-------- -------- -------- --------
Consolidated............................ $124,717 $102,835 $319,655 $274,128
======== ======== ======== ========
Income (loss) from continuing
operations:
Castings.............................. $ 8,849 $ (6,698) $ (6,820) $(28,558)
Forgings.............................. (666) (2,186) (2,607) (6,255)
Other................................. 863 226 1,839 536
Elimination of intersegment loss...... (260) 5,653 8,405 20,394
-------- -------- -------- --------
Consolidated............................ $ 8,786 $ (3,004) $ 817 $(13,883)
======== ======== ======== ========
</Table>
<Table>
<Caption>
REORGANIZED PREDECESSOR
----------- -------------
JUNE 30, SEPTEMBER 30,
2004 2003
----------- -------------
Total assets:
Castings.................................................. $411,233 $ 641,870
Forgings.................................................. 7,653 38,454
Other..................................................... 12,372 10,971
Elimination of intersegment assets........................ (25,132) (154,461)
-------- ---------
Consolidated................................................ $406,126 $ 536,834
======== =========
</Table>
F-52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER OR SALESPERSON OR OTHER PERSON TO GIVE
ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR BUY ANY SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL.
THE INFORMATION IN THIS PROSPECTUS IS CURRENT ONLY AS OF THE DATE OF THIS
PROSPECTUS UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
$100,000,000
NEENAH FOUNDRY COMPANY
11% SENIOR SECURED NOTES DUE 2010
-------------------------
PROSPECTUS
-------------------------
OCTOBER 22, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------