1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO.1 TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: June 12, 1998 NEENAH FOUNDRY COMPANY (Exact name of registrant as it appears in its charter) Wisconsin 333-28751 39-1580331 (State or other jurisdiction (Commission File (IRS Employer ID Number) of incorporation or organization) Number) 2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957 (Address of principal executive offices) (Zip Code) (920) 725-7000 (Registrant's telephone number, including area code) None (Former name or former address if changed since last report) 2 Neenah Foundry Company (the "Company) hereby amends Item 7 of the Company's Form 8-K dated April 14, 1998 reporting the Company's acquisition of all of the issued and outstanding stock of Mercer Forge Corporation ("Mercer") to include the requisite financial statements of Mercer and pro forma financial statements. The complete text of Item 7 as amended is as follows: ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired The financial statements of Mercer are included as follows: - As of November 30, 1997 and 1996 and for the years ended November 30, 1997 and 1996 - Independent Auditors' Report - Consolidated Balance Sheets - Consolidated Statements of Income - Consolidated Statements of Stockholder's Equity - Consolidated Statements of Cash Flows - Notes to Consolidated Financial Statements (b) Pro Forma Financial Information Pro forma financial statements of the Company are included as follows: - Pro Forma Condensed Consolidated Financial Statements - Pro Forma Consolidated Balance Sheet as of March 31, 1998 and related notes - Pro Forma Consolidated Statements of Income for the year ended September 30, 1997 and for the six months ended March 31, 1998 and related notes (c) Exhibits 2.1 Stock Purchase Agreement for the acquisition of Mercer dated as of April 3, 1998 by and among Neenah Foundry Company, Mercer Forge Corporation and selling shareholders of Mercer. * 10.1 Credit Agreement dated as of April 30, 1997 as Amended and Restated as of September 12, 1997 and as of April 3, 1998 by and among Neenah Foundry Company, NFC Castings, Inc., the Chase Manhattan Bank as Administrative Agent, Chase Securities Inc. as Arranger and the other Lenders from time to time party thereto. * * Previously filed 3 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On April 3, 1998, Neenah Foundry Company (the "Company") completed its acquisition of Mercer Forge Corporation, a Delaware Corporation, and its subsidiary A&M Specialties, Inc., a Pennsylvania corporation (collectively referred to herein as "Mercer"). Pursuant to the transaction, the Company purchased 100% of the capital stock of Mercer from Mercer management, then current and former directors and officers of Mercer and Rotterdam Ventures, Inc. for aggregate consideration of $46.9 million in cash. The acquisition of Mercer was financed through drawings under the Tranche B term loan facility of the Company's Amended and Restated Credit Agreement, dated as of April 30, 1997, as amended as of September 12, 1997 and as of April 3, 1998, by and among the Company, the Chase Manhattan Bank and other Lenders party thereto (the "Credit Agreement"). The Credit Agreement was amended in connection with the acquisition of Mercer to create a $75.0 million term loan facility in addition to the Company's existing $50.0 million revolving loan facility. Mercer is a closed die forging company, specializing in press forging and also has a machining operation. Mercer serves truck, railroad, construction and other industrial customers. Mercer will operate as a wholly owned subsidiary of the Company out of its facilities in Mercer, Pennsylvania and will continue to operate under its current management team. As a consequence of this acquisition, the Company acquired certain real property and leasehold interests described below as well as the related plant and equipment assets of Mercer. In addition to the properties listed below, Mercer leases small storage spaces in various locations for books and records and some inventory. The Company currently has no plans to alter the existing usage of these properties. Location Use Owned or Leased Approximate Area - ------------------------------- -------------------------------------- ----------------------- --------------------------------- 200 Brown Street Manufacturing facilities, Owned 14.97 acres improved by various Mercer, PA 16137 warehousing and office space buildings of approximately 120-130,000 sq. ft. 100 First Street Manufacturing, machining and Leased pursuant to 18,000 sq. feet on 2.49 acres Borough of Wheatland office space lease expiring of land Mercer, PA 16161 October, 1999. ITEM 5. OTHER EVENTS. On March 30, 1998, the Company completed its acquisition of Deeter Foundry, Inc., a Nebraska corporation ("Deeter"). Pursuant to the transaction, the Company purchased 100% of the capital stock of Deeter from Deeter management, and then current and former directors and officers of Deeter, for aggregate consideration of $24.3 million in cash and notes. The cash portion of the transaction was financed out of cash on hand of the Company. Deeter is a gray iron foundry, specializing in iron castings for the municipal market. Deeter is located in Lincoln, Nebraska and will be operated as a wholly owned subsidiary of the Company under the direction of the Company's management. Based on the provisions of Regulation S-X Rule 3-05(b)(2) and the definition of "significant subsidiary" contained in Rule 1-02(w), Deeter is not deemed to be a significant subsidiary. 4 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired MERCER FORGE CORPORATION AND SUBSIDIARY (A Wholly Owned Subsidiary of Rotterdam Ventures, Inc.) Consolidated Financial Statements November 30, 1997 and 1996 (With Independent Auditors' Report Thereon) 5 Independent Auditors' Report The Board of Directors Mercer Forge Corporation: We have audited the accompanying consolidated balance sheets of Mercer Forge Corporation and Subsidiary (a wholly owned subsidiary of Rotterdam Ventures, Inc.) as of November 30, 1997 and 1996, and the related consolidated statements of income, stockholder's equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercer Forge Corporation and Subsidiary as of November 30, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Pittsburgh, Pennsylvania KPMG Peat Marwick LLP May 1, 1998 6 MERCER FORGE CORPORATION AND SUBSIDIARY Consolidated Balance Sheets November 30, 1997 and 1996 1997 1996 ---- ---- Assets ------ Current assets: Cash $ 387,732 450,182 Accounts receivable (net of allowance of $1,000 in 1997 and 1996) (note 5) 7,690,975 4,761,164 Inventories (notes 2 and 5) 1,360,026 1,042,520 Prepaid expenses 276,162 326,511 Prepaid tool and die costs 1,577,576 1,591,400 ------------- ----------- Total current assets 11,292,471 8,171,777 Property, plant and equipment (notes 3 and 5) 18,630,763 16,302,474 Less accumulated depreciation 9,472,697 8,368,367 ------------- ----------- Net property, plant and equipment 9,158,066 7,934,107 Receivables from affiliates, net 2,157,552 1,080,888 Other noncurrent assets, less accumulated amortization of $158,904 and $134,333 in 1997 and 1996, respectively (note 4) 161,884 186,455 ------------- ----------- $ 22,769,973 17,373,227 ============= =========== Liabilities and Stockholder's Equity ------------------------------------ Current liabilities: Current installments of long-term debt and capital lease obligations (note 5) 1,868,263 855,192 Accounts payable 5,151,244 3,184,921 Accrued employment costs 974,634 724,017 Other current liabilities 579,638 587,849 Income taxes payable (note 1 (f)) 450,659 135,893 ------------- ----------- Total current liabilities 9,024,438 5,487,872 Long-term debt and capital lease obligations, less current installments (note 5) 4,886,182 6,972,849 Deferred income taxes (note 8) 1,014,697 772,217 ------------- ----------- Total liabilities 14,925,317 13,232,938 Commitments and contingencies (notes 9 and 11) Stockholder's equity: Common stock, no par value or stated value: Authorized 1,000 shares; issued and outstanding 608 shares as of November 30, 1997 and 1996, respectively 608 608 Additional paid-in capital 6,033,378 6,033,378 Retained earnings (accumulated deficit) 1,810,670 (1,893,697) ------------- ----------- Total stockholder's equity 7,844,656 4,140,289 ------------- ----------- $ 22,769,973 17,373,227 ============= =========== 7 MERCER FORGE CORPORATION AND SUBSIDIARY Consolidated Statements of Income Years ended November 30, 1997 and 1996 1997 1996 ---- ---- Net sales (note 1 (k)) $ 43,220,317 36,952,378 Cost of goods sold 33,105,568 28,842,816 ------------- ---------- Gross profit 10,114,749 8,109,562 Operating expenses: Selling, general and administrative 2,723,821 1,947,815 Depreciation and amortization 1,148,963 1,092,395 Related party charges (note 7) 309,600 408,600 Environmental (reimbursement) costs of disposed facility (note 11) (720,627) 1,060,135 ------------- ---------- Income from operations 6,652,992 3,600,617 Other income (expense): Interest income 2,649 449 Interest expense (782,180) (1,012,642) Other - 7,200 ------------- ---------- Total other expense, net (779,531) (1,004,993) ------------- ---------- Income before income taxes 5,873,461 2,595,624 Income taxes (notes 1(f) and 8) 2,169,094 1,055,519 ------------- ---------- Net income $ 3,704,367 1,540,105 ============= ========== See accompanying notes to consolidated financial statements. 8 MERCER FORGE CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholder's Equity Years ended November 30, 1997 and 1996 Retained Additional earnings Total Common paid-in (accumulated stockholder's stock capital deficit) equity ----- ------- -------- ------ Balance as of November 30, 1995 $ 608 6,033,378 (3,433,802) 2,600,184 Net income - - 1,540,105 1,540,105 ------ ---------- ---------- --------- Balance as of November 30, 1996 608 6,033,378 (1,893,697) 4,140,289 Net income - - 3,704,367 3,704,367 ------ ---------- ---------- --------- Balance as of November 30, 1997 $ 608 6,033,378 1,810,670 7,844,656 ====== ========= ========== ========= See accompanying notes to consolidated financial statements. 9 MERCER FORGE CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended November 30, 1997 and 1996 1997 1996 ---- ---- Cash flows from operating activities: Net income $3,704,367 1,540,105 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,148,963 1,092,395 Deferred Income taxes 344,004 686,907 Change in assets and liabilities: (Increase) decrease in accounts receivable, net (2,929,811) 154,875 (Increase) decrease in inventories (317,506) 1,939,004 Decrease in refundable income taxes - 181,360 (Increase) decrease in prepaid expenses (32,315) 156,776 Decrease (increase) in prepaid die and tool costs 13,824 (24,763) Increase (decrease) in accounts payable 1,966,323 (837,411) Increase in accrued employment costs 250,617 49,037 Decrease in other current liabilities (27,071) (70,721) Increase in income taxes payable 314,766 109,317 ---------- ---------- Net cash provided by operating activities 4,436,161 4,976,881 Cash flows from investing activities: Capital expenditures (1,899,879) (1,471,599) ---------- ---------- Net cash used in investing activities (1,899,879) (1,471,599) Cash flows from financing activities: Increase in receivables from affiliates, net (1,076,664) (390,311) Principal payments on long-term debt (1,786,900) (4,746,620) Proceeds from issuance of long-term debt 264,832 1,850,000 ---------- ---------- Net cash used in financing activities (2,598,732) (3,286,931) ---------- ---------- Net (decrease) increase in cash (62,450) 218,351 Cash at beginning of year 450,182 231,831 ---------- ---------- Cash at end of year $ 387,732 450,182 ========== ========== (Continued) 10 MERCER FORGE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued 1997 1996 ---- ---- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 777,652 1,013,669 ============ ========= Income taxes $ 1,510,354 193,329 ============ ========= Supplemental schedule of non-cash investing activity: Additions to equipment financed with capital leases $ 448,472 - ============ ========= See accompanying notes to consolidated financial statements. 11 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements November 30, 1997 and 1996 (1) Summary of Significant Accounting Policies (a) Description of Business Mercer Forge Corporation (the Company) operates two plants in Pennsylvania engaged in the production of carbon and carbon alloy forgings for use in the truck, automotive, mining and railway industries. A majority of the Company's sales are to customers located in Indiana, Illinois and Michigan. The Company is a subsidiary of Rotterdam Ventures, Inc. The Company and Rotterdam Ventures, Inc. are part of the Galesi Group, a group of affiliated entities that operate under common control. (b) Principles of Consolidation The consolidated financial statements include the financial statements of Mercer Forge Corporation and one wholly owned subsidiary, A & M Specialties, Inc. All significant intercompany balances, profits and transactions have been eliminated in consolidation. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The elements of cost included in inventories are direct material, direct labor and certain production overhead costs. (d) Property, Plant and Equipment Property, plant and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases and leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. (Continued) 12 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (e) Environmental Costs The Company and other metals companies have in recent years become subject to increasingly demanding environmental standards imposed by federal, state and local environmental laws and regulations. It is the policy of the Company to endeavor to comply with applicable environmental laws and regulations. Remediation costs are accrued when management believes such costs are probable and reasonably estimable. Estimates are based on currently available facts, existing technology and presently enacted laws and regulations, and take into consideration the likely effects of inflation and other societal and economic factors. Claims for recovery are recorded only when it is probable that such recoveries will be realized. (f) Federal Income Taxes The Company is included in the consolidated Federal income tax return of its parent company. The Company has a tax sharing agreement with its parent company and accordingly, federal taxes payable represent amounts due to the parent in connection with its tax sharing agreement. The Company files separately for state income tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Statement of Cash Flows For purposes of the statement of cash flows, the Company considers cash to be funds held in checking accounts and cash on hand. (Continued) 13 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (h) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (i) Reclassifications Certain amounts in the 1996 consolidated financial statements have been reclassified to conform to the presentation in the 1997 consolidated financial statements. (j) Fair Value of Financial Instruments The fair values of the Company's receivables, payables and debt financial instruments are estimated to approximate carrying values as of November 30, 1997 and 1996, given the short-term nature of receivables and payables and the variable interest rates ascribed to debt. (k) Credit Concentration and Risk Customers for the Company's principal products operate in the truck, automotive, mining and railway industries. Credit is extended based on an evaluation of the customer's financial condition and, in general, collateral is not required. The Company derived a significant portion of its business from three customers in 1997. Revenues from sales to these three customers in 1997 approximated $21,294,000, $4,284,000 and $3,144,000, respectively, for a total of $28,722,000 or 66% of net sales. The Company derived a significant portion of its business from three customers in 1996. Revenues from sales to these three customers in 1996 approximated $17,921,000, $5,078,000 and $2,250,000, respectively, for a total of $25,249,000 or 68% of net sales. (Continued) 14 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (2) Inventories The components of inventories as of November 30, 1997 and 1996, are as follows: 1997 1996 ---- ---- Raw materials $ 455,963 255,901 Work in process 305,599 99,977 Finished goods 598,464 686,642 ------------ --------- $ 1,360,026 1,042,520 ============ ========= Inventories are pledged as collateral for the Company's long-term debt (see note 5). (3) Property, Plant and Equipment Property, plant and equipment as of November 30, 1997 and 1996, are as follows: Estimated 1997 1996 useful life ---- ---- ----------- Land $ 59,111 59,111 N/A Buildings and improvements 2,895,380 2,857,505 39 - 40 years Machinery and equipment 12,519,211 10,712,617 3 - 12 years Office equipment 306,370 242,244 3 - 7 years Tooling 2,432,953 2,268,040 40 years Vehicles 181,270 138,832 3 years Construction in progress 236,468 24,125 N/A -------------- ----------- 18,630,763 16,302,474 Less accumulated depreciation 9,472,697 8,368,367 -------------- ----------- $ 9,158,066 7,934,107 ============== =========== Depreciation expense for the years ended November 30, 1997 and 1996 was $1,124,392 and $1,070,513, respectively. Included in property, plant and equipment are assets under capital leases with costs of $448,472 and accumulated amortization of $30,710 as of November 30, 1997. Amortization of assets held under capital leases is included with depreciation expense. (Continued) 15 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (4) Other Noncurrent Assets Other noncurrent assets as of November 30 1997 and 1996, are as follows: Estimated 1997 1996 useful life ---- ---- ----------- Goodwill $ 129,553 129,553 40 years Organizational fee costs 191,235 191,235 5 - 10 years ---------- ------- 320,788 320,788 Less accumulated amortization 158,904 134,333 ---------- ------- $ 161,884 186,455 ========== ======= Amortization expense for the years ended November 30, 1997 and 1996, was $24,571 and $21,882, respectively. (5) Long-term Debt Long-term debt and capital lease obligations as of November 30, 1997 and 1996 consist of the following: 1997 1996 ---- ---- Equipment loans payable at interest rates ranging from 4.35% to 8.35% in varying monthly installments of principal and interest. Secured by equipment. $ 1,173,802 1,458,381 Note payable under revolving credit agreements. The agreements aggregate $14.7 million and expire in 1999. Advances under the agreements are based on and secured by accounts receivable and inventory. Interest at prime (8.5% as of November 30, 1997) plus 5/8%. 2,924,327 3,647,529 Various notes payable at rates ranging from 9.32% to prime (8.5% as of November 30, 1997) plus 2% in varying monthly installments of principal and interest. Secured in part by machinery, equipment, inventories and publicly traded stock held by Rotterdam Ventures, Inc. 2,061,172 2,535,313 16 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued 1997 1996 ---- ---- Note payable to Rotterdam Ventures, Inc. at an interest rate of 7.5%. Monthly installments of principal and interest through January 2001. $ 146,672 186,818 Capital lease obligation at 7.9%, monthly payments of $9,384 through September 2002. 448,472 - ------------ --------- 6,754,445 7,828,041 Less current portion 1,868,263 855,192 ------------ --------- $ 4,886,182 6,972,849 ============ ========= The aggregate principal payments on long-term debt and future minimum payments on capital leases during the years subsequent to November 30, 1997, are: Long-term Capital debt leases Total ---- ------ ----- Year ending November 30, 1998 $ 1,788,239 112,608 1,900,847 1999 3,840,739 112,608 3,953,347 2000 397,994 112,608 510,602 2001 196,648 112,608 309,256 2002 63,847 112,608 176,455 Thereafter 18,506 - 18,506 ------------ -------- ---------- 6,305,973 563,040 6,869,013 Less amount representing interest on capital leases - 114,568 114,568 ------------ -------- ---------- Total long-term debt and capital lease obligations 6,305,973 448,472 6,754,445 Less current installments of long-term debt and capital lease obligations 1,788,239 80,024 1,868,263 ------------ -------- ---------- Long-term debt and capital lease obligations, excluding current installments $ 4,517,734 368,448 4,886,182 ============ ======== ========== 17 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (6) Receivables from Affiliates, Net As of November 30, 1997 and 1996, the receivables from affiliates consist primarily of transactions with Rotterdam Ventures, Inc., the Company's parent company. In general, payables to and receivables from affiliates result from the cash management practices of Mercer Forge Corporation and companies which operate under the common control of the Galesi Group. Management classifies payables to and receivables from affiliates as long-term as they do not intend to liquidate them in the near future. (7) Related Party Charges The Company incurred operating expenses of $309,600 and $408,600 during the years ended November 30, 1997 and 1996, respectively, for management and data processing services provided by an affiliated company. Charges for management and data processing services are based upon management estimates of time spent during the year. Such costs may differ if these services were provided by an unrelated third party. (8) Income Taxes The components of income tax expense for 1997 and 1996, are as follows: 1997 1996 ---- ---- Current expense: Federal $ 1,665,001 258,877 State 160,089 109,735 ----------- ---------- 1,825,090 368,612 Deferred expense: Federal 292,403 583,871 State 51,601 103,036 ----------- ---------- 344,004 686,907 $ 2,169,094 1,055,519 =========== ========== (Continued) 18 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued Income tax expense represents an effective tax rate of 36.9% and 40.7% in 1997 and 1996, respectively. The actual tax expense differs from the "expected" tax expense (computed by applying the U.S. corporate tax rate of 34% to income before income taxes) as follows: 1997 1996 ----------------------- ------------------------- Amount % Amount % ------ - ------ - Computed "expected" tax expense $ 1,996,977 % 34.0 $ 882,512 % 34.0 State income taxes, net of federal income tax benefit 105,659 1.8 72,425 2.8 Meals and entertainment 10,201 .2 11,838 .5 Other 56,257 .9 88,744 3.4 ------------ ------ ------------ ----- $ 2,169,094 % 36.9 $ 1,055,519 % 40.7 ============ ====== ============ ===== For the years ended November 30, 1997 and 1996, the deferred income tax expense of $344,004 and $686,907, respectively, results from the changes in temporary differences during the year. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of November 30, 1997 and 1996, are as follows: 1997 1996 ---- ---- Deferred tax assets: Difference in carrying value of inventories $ 2,316 2,169 Vacation and other accruals 70,541 198,492 ------------- -------- Gross deferred tax assets 72,857 200,661 Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation methods $ (1,021,720) (824,380) Prepaid property taxes and insurance (72,672) (53,812) ------------- -------- Gross deferred tax liabilities (1,094,392) (878,192) ------------- -------- Net deferred tax liabilities $ (1,021,535) (677,531) ============= ======== (Continued) 19 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued There was no valuation allowance as of November 30, 1997 and 1996, and no change in the valuation allowance during the years ended November 30, 1997 and 1996. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences as of November 30, 1997. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the tax carryforward periods are reduced. (9) Lease Commitments The Company leases a building used in its manufacturing operations under an operating lease that expires in November 1999. In addition, the Company also leases machinery and equipment used in its manufacturing operations under operating leases that expire at various times from 1998 through 2001. Future minimum lease payments under noncancelable operating leases as of November 30, 1997, are as follows: Year ending November 30, ------------ 1998 $ 165,312 1999 140,112 2000 75,762 2001 6,600 ---------- Total minimum lease payments $ 387,786 ========== (Continued) 20 MERCER FORGE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued Rental expense for operating leases during 1997 and 1996 was $233,923 and $218,194, respectively. The Company rents various equipment throughout the year on a short-term basis. These leases are noncancelable but do not extend beyond the applicable fiscal year end. (10) Pension Plan The Company participates in a defined benefit, non-contributory, multi-employer plan pursuant to its collective bargaining agreement. The Company's pension expense for this plan aggregated $170,818 and $155,057 during 1997 and 1996, respectively. In addition, the Company also participates in a non-contributory defined benefit pension plan which is sponsored by the Company's parent. This plan is designed to provide benefits, at age 65, to all non-bargaining unit employees vested at the time of retirement. All such employees who have attained age 21 and have completed one year of service are eligible to participate. The Company's pension expense for this plan aggregated $108,831 and $61,912 during 1997 and 1996, respectively. As of January 1, 1997 (the date of the most recent benefit valuation), the present value of accrued benefits for the entire plan exceeded plan assets by approximately $953,000. (11) Commitments and Contingencies During January 1994, a former subsidiary of the Company (Subsidiary) and the U.S. Environmental Protection Agency (EPA) entered into an Administrative Order by Consent (AOC), pursuant to Section 106 of the Comprehensive Environmental Response Compensation and Liability Act of 1980. The Subsidiary agreed to perform certain investigatory and removal activities relating to environmental contamination which occurred prior to the Subsidiary's purchase of a metal forging facility in Jackson, Michigan. During August 1995, the Subsidiary executed an Amended Administrative Order by Consent (AAOC), which required the performance of subsurface removal actions in lieu of completion of the site investigation and performance of an Engineering Evaluation and Cost Assessment. The work is complete, and final sign-off is expected from the EPA. During 1997 and 1996, the Subsidiary incurred $229,373 and $1,060,135, respectively, in remediation costs. (Continued) 21 MERCER FORGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued During 1997, the Company received and recorded $950,000 from the parties responsible for causing this hazardous condition under the U.S. Environmental Law relating to responsible parties to recoup costs of the Company relating to this matter. In January 1998, the Company received a letter from the EPA requesting the recovery of additional costs of approximately $180,000. The Company intends to object to this request and pursue all legal avenues available. Accordingly, no provision has been made relating to the EPA's 1998 request in the 1997 or 1996 financial statements. The Company is involved in other legal actions which arise in the normal course of business. Management believes that the outcome of these actions will not have a material effect on the consolidated financial condition of the Company. (12) Subsequent Event On January 21, 1998, the Company signed a letter of intent with an unrelated third party to sell the Company's common stock for approximately $47 million. The consolidated financial statements have been prepared without consideration given to the proposed change in ownership. 22 (b) Pro Forma Financial Information NEENAH FOUNDRY COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated balance sheet and consolidated statements of income (collectively, the "Pro Forma Statements") were prepared to illustrate the estimated effects of the acquisition of Mercer Forge Corporation (Mercer) on April 3, 1998 and the acquisition of Deeter Foundry Inc. (Deeter) on March 30, 1998 by Neenah Foundry Company (the "Company") (collectively, the "Acquisitions"). The unaudited pro forma consolidated balance sheet assumes the Mercer Acquisition had occurred on March 31, 1998. The unaudited pro forma consolidated statements of income assume the Acquisitions were consummated as of the beginning of the periods presented. The Pro Forma Statements do not purport to represent what the Company's financial position or results of operations would actually have been if the Acquisitions in fact had occurred on the assumed dates or to project the Company's financial position or results of operations for any future date or period. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The Pro Forma Statements and accompanying notes should be read in conjunction with the historical consolidated financial statements of the Company and Mercer, including the notes thereto. The Mercer Acquisition will be accounted for using the purchase method of accounting. The total purchase price of approximately $47 million will be allocated to the assets and liabilities of Mercer based upon their respective fair values, with the remainder allocated to costs in excess of net assets acquired. Such allocations have been made based upon valuations and other studies, which may be subject to adjustment. Accordingly, the allocation of the purchase cost included in the accompanying Pro Forma Statements is preliminary. The final values may differ from those set forth in the accompanying Pro Forma statements. The Company, Mercer and Deeter have different fiscal year ends - September 30 for the Company, November 30 for Mercer, and December 31 for Deeter. The unaudited pro forma consolidated statement of income for the year ended September 30, 1997 includes the results of operations of the Company, Mercer and Deeter for the twelve month periods ended September 30, 1997, November 30, 1997 and December 31, 1997, respectively. The unaudited proforma consolidated statement of income for the six months ended March 31, 1998 includes the results of operations of the Company, Mercer and Deeter for the six months ended March 31, 1998. Statement of income information of Mercer for the months of October and November, 1997 and of Deeter for the months of October, November and December, 1997 are included in both the annual and the interim proforma consolidated statements of income. 23 NEENAH FOUNDRY COMPANY UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET March 31, 1998 (In thousands) Historical --------------------------------- Neenah Pro Forma Foundry * Mercer Adjustments Pro Forma ------------ -------------- -------------- ------------ ASSETS Current assets: Cash and cash equivalents.................................. $ 3,427 $ 29 $ 6,362 (a) $ 9,818 Accounts receivable, net................................... 25,341 8,472 33,813 Inventories................................................ 25,635 2,361 185 (b) 28,181 Other current assets....................................... 987 1,726 2,713 Prepaid income taxes....................................... 1,921 - 1,921 Deferred income taxes...................................... 1,710 - 1,710 -------- -------- -------- -------- Total current assets......................... 59,021 12,588 6,547 78,156 Property, plant and equipment................................ 111,349 18,862 7,417 (b) 137,628 Less accumulated depreciation................................ 7,105 9,711 (9,711)(b) 7,105 -------- -------- -------- -------- 104,244 9,151 17,128 130,523 Identifiable intangible assets, net.......................... 33,777 - 2,355 (b) 36,132 (121)(b) Goodwill, net................................................ 130,775 121 21,320 (b) 152,095 125 (a) (2,453)(b) Other assets................................................. 3,714 2,529 1,102 (c) 5,013 -------- -------- -------- -------- $331,531 $ 24,389 $46,003 $401,919 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................... $ 9,572 $ 5,078 $ 14,650 Income taxes payable....................................... - 80 80 Accrued liabilities........................................ 18,818 1,330 (147)(a) 19,997 Current portion of long-term debt.......................... 60 2,680 (2,680)(a) 60 -------- -------- -------- -------- Total current liabilities.................... 28,450 9,168 (2,827) 34,787 (3,856)(a) Long-term debt............................................... 197,390 3,856 55,000 (a) 252,390 Postretirement benefit obligations........................... 5,056 - 5,056 Deferred income taxes........................................ 45,074 1,051 8,000 (b) 54,125 Other liabilities............................................ 2,151 - 2,151 -------- -------- -------- -------- Total liabilities............................ 278,121 14,075 56,317 348,509 Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock, par value $100 per share -- authorized 3,000 shares, no shares issued or outstanding............................... -- -- -- Common stock, par value $100 per share -- authorized 11,000 shares, issued and outstanding 1,000 shares........................ 100 1 (1)(b) 100 Additional paid in capital................................. 48,750 6,033 (6,033)(b) 48,750 Retained earnings.......................................... 4,560 4,280 (4,280)(b) 4,560 -------- -------- -------- -------- Total stockholders' equity................... 53,410 10,314 (10,314) 53,410 -------- -------- -------- -------- $331,531 $ 24,389 $ 46,003 $401,919 ======== ======== ======== ======== See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet. * Includes the assets and liabilities of Deeter, which was acquired on March 30, 1998. 24 NEENAH FOUNDRY COMPANY NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (Dollars in thousands) (a) Adjustment to reflect the net effect on cash of the Mercer Acquisition, as follows: Proceeds from Tranche B Term Loan $ 55,000 Less deferred financing cost (1,102) --------- 53,898 Purchase price: Acquisition of Mercer common stock $ (40,221) Fees and expenses incurred in connection with the Acquisition (507) Satisfaction of Mercer outstanding indebtedness (including $125 borrowed subsequent to March 31, 1998) (6,808) ---------- (47,536) --------- $ 6,362 ========= (b) Adjustment to reflect the allocation of the $40,728 purchase cost: Net assets acquired at historical cost $ 10,314 Fair value adjustments(1): Inventory step-up(2) 185 Write-up property, plant, and equipment(3) 17,128 Record intangible assets(4) 2,355 Elimination of historical goodwill of Mercer (121) Elimination of intercompany balances (2,453) Record deferred income tax provision associated with the valuation of Mercer assets and liabilities (8,000) Cost in excess of net assets acquired- goodwill(5) 21,320 --------- $ 40,728 ========= (c) Adjustment to record the transaction costs of $1,102 (made up of financing costs). For purposes of the proforma consolidated balance sheet, the amount is shown as part of other assets and amortized over 5 years, the life of the Term Loan. - --------------------------------- (1) For all other recorded assets and liabilities of Mercer, the historical book values were estimated to approximate their fair values at the balance sheet date. (2) Estimate of manufacturing profit portion of finished goods inventory at the balance sheet date. An amortization period of six months will be used because the inventory will be sold within six months. (3) The fair value of property, plant and equipment was based on an outside appraisal completed in connection with the acquisition. The write-up has been allocated to the fixed asset categories as shown below. The remaining economic useful lives used in depreciating the new basis of the depreciable fixed assets are also indicated: Remaining Economic Allocated excess Useful Life ------------------ ------------------ Land 91 n/a Buildings and improvements 563 10 to 35 years Machinery and equipment 16,474 5 to 15 years (4) The fair value of intangible assets was based on an outside valuation. For purposes of the proforma financial information, $1,355 was allocated to intangibles with an amortization period of 6 months and $1,000 was allocated to intangibles with an average amortization period of 10 years. (5) An amortization period of 40 years will be used for goodwill because the period expected to be benefited exceeds 40 years. 25 NEENAH FOUNDRY COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME Year Ended September 30, 1997 (In thousands) Neenah Foundry --------------------------------------------------------------------------------- Predecessor Pro Forma Historical ------------------ ---------------- -------------------- Seven Months Seven Months Five Months Ended Pro Forma Ended Ended April 30, 1997 Adjustments April 30, 1997 September 30, 1997 ------------------ ------------------ ------------------ -------------------- Net sales...................................... $ 92,963 $ - $ 92,963 $ 87,093 Cost of sales.................................. 65,101 506 65,607 60,166 ------------------ ------------------ ------------------ -------------- Gross profit................................... 27,862 (506) 27,356 26,927 Selling, general and administrative expenses... 10,023 (2,042) 7,981 7,088 Amortization of intangible assets.............. - 2,869 2,869 3,678 ------------------ ------------------ ------------------ -------------- Total operating expenses..................... 10,023 827 10,850 10,766 ------------------ ------------------ ------------------ -------------- Operating income............................... 17,839 (1,333) 16,506 16,161 Net interest income (expense).................. 870 (12,946) (12,076) (8,832) ------------------ ------------------ ------------------ -------------- Income before income taxes..................... 18,709 (14,279) 4,430 7,329 Provision for income taxes..................... 6,927 (4,647) 2,280 3,479 ------------------ ------------------ ------------------ -------------- Net income..................................... $ 11,782 $ (9,632) $ 2,150 $ 3,850 ================== ================== ================== ============== Neenah Foundry Historical --------------------- ------------------------------------------- Pro Forma Mercer Deeter -------------------- -------------------- -------------------- Year Ended Year Ended Year Ended September 30, 1997 November 30, 1997 December 31, 1997 -------------------- -------------------- -------------------- Net sales...................................... $ 180,056 $ 43,220 $ 14,296 Cost of sales.................................. 125,773 33,105 7,873 -------------------- -------------------- -------------------- Gross profit................................... 54,283 10,115 6,423 Selling, general and administrative expenses... 15,069 3,437 5,954 Amortization of intangible assets.............. 6,547 25 - -------------------- -------------------- -------------------- Total operating expenses..................... 21,616 3,462 5,954 -------------------- -------------------- -------------------- Operating income............................... 32,667 6,653 469 Net interest income (expense).................. (20,908) (780) (387) -------------------- -------------------- -------------------- Income before income taxes..................... 11,759 5,873 82 Provision for income taxes..................... 5,759 2,169 - -------------------- -------------------- -------------------- Net income..................................... $ 6,000 $ 3,704 $ 82 ==================== ==================== ==================== Pro Forma Adjustments Pro Forma ---------------- ---------------- Net sales...................................... $ - $ 237,572 Cost of sales.................................. 1,893 (a) 168,644 ---------------- ---------------- Gross profit................................... (1,893) 68,928 Selling, general and administrative expenses... 210 (a) 24,670 1,455 (a) Amortization of intangible assets.............. 922 (a) 8,949 ---------------- ---------------- Total operating expenses..................... 2,587 33,619 ---------------- ---------------- Operating income............................... (4,480) 35,309 Net interest income (expense).................. (4,758)(b) (26,833) ---------------- ---------------- Income before income taxes..................... (9,238) 8,476 Provision for income taxes..................... (3,326)(c) 4,602 ---------------- ---------------- Net income..................................... $ (5,912) $ 3,874 ================ ================ See accompanying Notes to Unaudited Pro Forma Consolidated Statements of Income. 26 NEENAH FOUNDRY COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME Six Months Ended March 31, 1998 (In thousands) Historical ------------------------------------------- Neenah Pro Forma Foundry Mercer Deeter Adjustments Pro Forma ----------------------------- ------------- ----------------- ------------ Net sales....................................... $ 89,825 $ 27,529 $ 5,916 $ - $ 123,270 Cost of sales................................... 64,079 20,632 3,407 947 (a) 89,065 --------------- ------------ ------------ ----------------- ------------ Gross profit.................................... 25,746 6,897 2,509 (947) 34,205 (778)(a) Selling, general and administrative expenses.... 7,972 1,812 4,111 105 (a) 13,222 1,405 (a) Amortization of intangible assets............... 2,459 41 - 461 (a) 4,366 --------------- ------------ ------------ ----------------- ------------ Total operating expenses...................... 10,431 1,853 4,111 1,193 17,588 --------------- ------------ ------------ ----------------- ------------ Operating income................................ 15,315 5,044 (1,602) (2,140) 16,617 Net interest income (expense)................... (10,489) (485) (196) (2,379)(b) (13,549) --------------- ------------ ------------ ----------------- ------------ Income before income taxes...................... 4,826 4,559 (1,798) (4,519) 3,068 Provision for income taxes...................... 2,486 1,436 - (1,623)(c) 2,299 --------------- ------------ ------------ ----------------- ------------ Net income...................................... $ 2,340 $ 3,123 $ (1,798) $ (2,896) $ 769 =============== ============ ============ ================= ============ See accompanying Notes to Unaudited Pro Forma Consolidated Statements of Income. 27 NEENAH FOUNDRY COMPANY NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) (a) The pro forma adjustments to cost of sales, selling, general and administrative expenses and amortization of intangible assets are comprised of the following: Year Ended September 30, 1997 Six Months Ended March 31, 1998 --------------------------------------------- ----------------------------------------- Proforma Proforma Historical Proforma Adjustment Historical Proforma Adjustment ------------- ---------------- ------------ ------------- ----------- ----------- Depreciation of property, plant and equipment: Cost of sales $ 7,021 $ 8,914 $ 1,893 $ 3,888 $ 4,835 $ 947 Selling, general and administrative 1,876 2,086 210 1,245 1,350 105 Amortization of identifiable intangible assets 5,319 6,774 1,455 1,515 2,920 1,405 Amortization of goodwill 1,253 2,175 922 985 1,446 461 Elimination of certain non-recurring expenses incurred by Deeter prior to Acquisition - - - - (778) (778) (b) Adjustment to record interest expense and amortization of deferred financing costs on the debt incurred to finance the Acquisitions, calculated as follows: Year Ended Six Months Ended September 30, 1997 March 31, 1998 ------------------- ------------------ Tranche B Term Loan ($55,000 @ 8.25%) $ 4,538 $ 2,269 Amortization of deferred financing costs (over 5 years, straight line) 220 110 ------- ------- $ 4,758 $ 2,379 ======= ======= (c) Adjustment to record the tax effect on the above adjustments using the marginal effective income tax rate of 40%. All adjustments were tax-effected except for goodwill amortization. 28 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned hereunto duly authorized. NEENAH FOUNDRY COMPANY DATE: June 12, 1998 /s/ Gary LaChey ------------------------------------- Gary LaChey Vice President-Finance, Secretary & Treasurer (Principal Financial Officer and Duly Authorized Officer)