item 14 exhibits financial statement schedules reports form 8k 1 consolidated financial statements neenah foundry company signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city neenah state wisconsin december 29 1997 neenah foundry company neenah transport inc hartley controls corporation registrant sgary w lachey gary w lachey vice president finance secretary treasurer principal financial principal accounting officer pursuant requirements securities exchange act 1934 report signed december 29 1997 following persons behalf registrant capacities indicated sjames k hildebrand brenton f halsey james k hildebrand brenton f halsey chairman board director chief executive officer david f thomas gary w lachey david f thomas gary w lachey director vice president finance secretary treasurer principal financial principal accounting officer john weber john weber director exhibit index incorporated reference companys form s4 registration 33328751 became effective august 12 1997 consolidated financial statements neenah foundry company period inception may 1 1997 september 30 1997 neenah foundry company consolidated financial statements period inception may 1 1997 september 30 1997 contents report independent auditors consolidated balance sheet consolidated statement income consolidated statement cash flows notes consolidated financial statements report ernst young llp independent auditors board directors neenah foundry company audited accompanying consolidated balance sheet neenah foundry company september 30 1997 related consolidated statements income cash flows period inception may 1 1997 september 30 1997 financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position company september 30 1997 consolidated results operations cash flows period inception may 1 1997 september 30 1997 conformity generally accepted accounting principles milwaukee wisconsin ernst young llp october 31 1997 neenah foundry company consolidated balance sheet thousands except share per share amounts september 30 1997 see accompanying notes neenah foundry company consolidated statement income thousands period inception may 1 1997 september 30 1997 see accompanying notes 32 neenah foundry company consolidated statement cash flows thousands period inception may 1 1997 september 30 1997 see accompanying notes 33 neenah foundry company notes consolidated financial statements september 30 1997 thousands 1 nature operations significant accounting policies nature operations april 30 1997 pursuant agreement plan reorganization nc merger company nfc castings inc neenah corporation predecessor company acquired nfc castings inc using 45000 cash equity contributed nfc castings inc ii 45000 term loans iii proceeds issuance 150000 unsecured senior subordinated notes rule 144a private placement iv cash neenah corporation purchase price 261713 including closing date net worth adjustment direct costs acquisition accounted using purchase method accounting purchase price allocated basis fair values underlying assets acquired liabilities assumed excess cost acquisition fair value net tangible identifiable intangible assets acquired allocated goodwill prior july 1 1997 neenah foundry company one three wholly owned subsidiaries neenah corporation holding company significant assets operations holdings common stock subsidiaries july 1 1997 neenah foundry company merged neenah corporation surviving company changed name neenah foundry company operates one business segment financial reporting purposes manufacture gray ductile iron castings company manufactures castings sale industrial municipal customers throughout united states several foreign countries industrial castings customengineered produced customers several industries concentration medium heavyduty truck components farm equipment heating ventilation airconditioning industries municipal castings include manhole covers frames storm sewer frames grates trench drain systems tree grates specialty castings variety applications neenah foundry company notes consolidated financial statements thousands 1 nature operations significant accounting policies continued industrial castings generally sold large wellestablished companies two customers accounting 15 10 net sales five months ended september 30 1997 combined receivables two customers totaled 5145 september 30 1997 municipal castings sold large number customers companys accounts receivable generally unsecured company two wholly owned subsidiariesneenah transport inc transport hartley controls corporation hartley transport common contract carrier licensed operate continental united states majority transports revenues derived transport services provided company hartley designs manufactures customized sand control systems foundry industry sold serviced throughout united states several foreign countries hartley transport account less 10 consolidated net sales net income total assets company changed fiscal year end september 30 effective september 30 1997 following unaudited financial information predecessor company six months ended september 30 1996 net sales 89739 gross profit 26753 provision income taxes 7154 net income 10736 principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries transport hartley significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates neenah foundry company notes consolidated financial statements thousands 1 nature operations significant accounting policies continued cash equivalents purposes consolidated statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents inventories stated lower cost market cost determined lastin firstout lifo method substantially inventories except supplies cost determined firstin firstout fifo method property plant equipment expenditures additions improvements property plant equipment capitalized cost replacements maintenance repairs improve extend lives respective assets expensed incurred depreciation financial reporting purposes provided estimated useful lives respective assets using straightline method deferred financing costs incurred obtain longterm financing amortized using interest method term related debt identifiable intangible assets identifiable intangible assets amortized straightline basis estimated useful lives five months 40 years neenah foundry company notes consolidated financial statements thousands 1 nature operations significant accounting policies continued goodwill amortized straightline basis 40 years carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted cash flows company remaining amortization period company would reduce carrying value goodwill estimated shortfall cash flows revenue recognition revenue sale castings sand control systems recognized upon shipment customer advertising costs advertising costs expensed incurred amounted 274 five months ended september 30 1997 income taxes deferred income taxes provided temporary differences financial reporting income tax basis companys assets liabilities measured using currently enacted tax rates laws neenah foundry company notes consolidated financial statements thousands 1 nature operations significant accounting policies continued financial instruments company number financial instruments none held trading purposes following presents carrying amounts estimated fair values instruments september 30 1997 1 fair value senior subordinated notes based quoted market prices pending accounting standards june 1997 financial accounting standards board issued sfas 131 disclosures segments enterprise related information sfas 131 establishes standards manner public enterprises required report financial descriptive information operating segments statement defines operating segments components enterprise separate financial information available evaluated regularly means assessing segment performance allocating resources segments measure profit loss total assets related information required disclosed operating segment addition statement requires annual disclosure information concerning revenues derived enterprises products services countries earns revenue holds assets major customers sfas 131 effective fiscal years beginning december 15 1997 adoption sfas 131 affect companys results operations financial position may affect disclosure segment information neenah foundry company notes consolidated financial statements thousands 2 inventories consist following september 30 1997 september 30 1997 inventories lifo approximate fifo cost 3 identifiable intangible assets identifiable intangible assets consist following september 30 1997 neenah foundry company notes consolidated financial statements thousands 4 longterm debt longterm debt consists following september 30 1997 series b series senior subordinated notes collectively notes unsecured mature may 1 2007 interest payable semiannually may 1 november 1 notes fully unconditionally jointly severally guaranteed transport hartley guarantor subsidiaries notes subordinated existing future senior indebtedness company rank equally right neenah foundry company notes consolidated financial statements thousands 4 longterm debt continued payment future senior subordinated indebtedness company notes contain covenants limit company incurring additional indebtedness restrict dividend payments stock redemptions certain transactions series senior subordinated notes issued july 1 1997 company used proceeds repay term loans accrued interest thereon related fees expenses connection prepayment full term loans company wrote unamortized balance related deferred financing costs 2629 company unsecured revolving credit facility provides borrowings 50 million april 30 2002 revolving credit facility bears interest base rate defined plus 15 b libor defined plus 25 case subject certain reductions based companys financial performance interest payable quarterly outstanding borrowings company subject quarterly commitment fee 5 per annum subject reduction based upon companys financial performance average daily unused portion revolving credit facility covenants contained revolving credit facility restrict payment dividends capital expenditures certain transactions require company maintain leverage net worth interest coverage ratios 5 commitments contingencies company leases warehouse space machinery equipment office equipment vehicles operating leases rent expense operating leases fivemonth period ended september 30 1997 amounted 446 minimum rental payments due operating leases subsequent fiscal years follows neenah foundry company notes consolidated financial statements thousands 5 commitments contingencies continued company involved number product liability claims none opinion management expected material adverse effect consolidated financial statements company partially selfinsured workers compensation claims accrued liability recorded claims incurred yet paid reported accrual based current historical claim information accrual may ultimately settled amount greater lesser recorded amount adjustments accrual recorded period determined september 30 1997 company outstanding letters credit aggregate amount 595 secure certain workers compensation obligations 6 income taxes provision income taxes consists following september 30 1997 neenah foundry company notes consolidated financial statements thousands 6 income taxes continued provision income taxes differs amount computed applying federal statutory rate 34 income taxes extraordinary item september 30 1997 follows neenah foundry company notes consolidated financial statements thousands 7 employee benefit plans defined benefit pension plans company sponsors two defined benefit pension plans covering substantially hourly employees retirement benefits pension plans based years credited service defined benefit rates company funds pension plans based actuarially determined cost method allowable internal revenue service regulations following table reconciles funded status pension plans august 31 1997 company uses measurement date august 31 amounts included consolidated balance sheet september 30 1997 neenah foundry company notes consolidated financial statements thousands 7 employee benefit plans continued components net periodic pension cost fivemonth period ended september 30 1997 follows service cost benefits earned period 202 interest cost projected benefit obligations 662 actual return plan assets 723 141 discount rate used estimating projected benefit obligations determining interest cost component pension expense following year plans 75 assumed longterm rate return plan assets used determining pension expense 75 profitsharing savings retirement plan company sponsors profitsharing savings retirement plan covering substantially salaried employees plan allows participants make 401k contributions amount 1 5 compensation company matches 50 participants contributions company may make additional voluntary contributions plan determined annually board directors total company contributions amounted 378 fivemonth period ended september 30 1997 postretirement benefits company sponsors defined benefit postretirement health care plans covering substantially salaried employees dependents benefits provided date retirement duration employees life maximum 1 million per individual retirees contributions plans based years service age retirement company funds benefits incurred neenah foundry company notes consolidated financial statements thousands 7 employee benefit plans continued following table reconciles funded status postretirement benefit plans amounts included consolidated balance sheet september 30 1997 accumulated postretirement benefit obligations retirees 2191 fully eligible active participants 801 active participants 1902 accrued postretirement benefit obligations 4894 components net periodic postretirement benefit cost fivemonth period ended september 30 1997 follows service cost 58 interest cost accumulated postretirement benefit obligations 206 weightedaverage discount rate used determining accumulated postretirement benefit obligations plans 75 healthcare cost trend rate assumed decrease gradually 2009 remain level thereafter range cost trend rates 85 45 healthcare cost trend rate assumption significant effect amounts reported increasing healthcare cost trend rate one percentage point would increase accumulated postretirement benefit obligations september 30 1997 825 would increase postretirement benefit expense fivemonth period ended september 30 1997 48 neenah foundry company notes consolidated financial statements thousands 8 guarantor subsidiaries transport hartley wholly owned subsidiaries company fully unconditionally jointly severally guarantee notes following summarized combined financial information wholly owned subsidiaries net sales include net sales neenah foundry company 2048 five months ended september 30 1997 separate financial statements guarantor subsidiaries separately presented opinion management financial statements material investors consolidated financial statements neenah foundry company predecessor years ended march 31 1995 1996 1997 one month ended april 30 1997 neenah foundry company predecessor consolidated financial statements years ended march 31 1995 1996 1997 one month ended april 30 1997 contents report independent auditors consolidated balance sheets consolidated statements income consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements report ernst young llp independent auditors board directors neenah foundry company formerly neenah corporation see note 1 audited accompanying consolidated balance sheets neenah foundry company march 31 1996 1997 related consolidated statements income changes stockholders equity cash flows three years period ended march 31 1997 one month ended april 30 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position company march 31 1996 1997 consolidated results operations cash flows three years period ended march 31 1997 one month ended april 30 1997 conformity generally accepted accounting principles milwaukee wisconsin ernst young llp june 4 1997 except notes 1 10 date july 1 1997 neenah foundry company predecessor consolidated balance sheets thousands except share per share amounts see accompanying notes neenah foundry company predecessor consolidated statements income thousands see accompanying notes neenah foundry company predecessor consolidated statements changes stockholders equity thousands except share per share amounts see accompanying notes neenah foundry company predecessor consolidated statements cash flows thousands see accompanying notes 55 neenah foundry company predecessor notes consolidated financial statements neenah foundry company predecessor years ended march 31 1995 1996 1997 one month ended april 30 1997 thousands 1 nature operations significant accounting policies nature operations prior july 1 1997 neenah foundry company one three wholly owned subsidiaries neenah corporation holding company significant assets operations holdings common stock subsidiaries july 1 1997 neenah foundry company merged neenah corporation surviving company changed name neenah foundry company operates one business segment financial reporting purposes manufacture gray ductile iron castings company manufactures castings sale industrial municipal customers throughout united states several foreign countries industrial castings customengineered produced customers several industries concentration medium heavyduty truck components farm equipment heating ventilation airconditioning industries municipal castings include manhole covers frames storm sewer frames grates trench drain systems tree grates specialty castings variety applications industrial castings generally sold large wellestablished companies two customers accounting 18 15 net sales fiscal 1995 17 9 net sales fiscal 1996 16 10 net sales fiscal 1997 29 24 one month ended april 30 1997 combined receivables two customers totaled 4974 6651 march 31 1996 1997 respectively municipal castings sold large number customers companys accounts receivable generally unsecured company two wholly owned subsidiariesneenah transport inc transport hartley controls corporation hartley transport common contract carrier licensed operate continental united states majority transports revenues derived transport services provided company hartley designs manufactures customized sand control systems foundry industry sold serviced throughout united states several foreign countries hartley transport account less 10 consolidated net sales net income total assets neenah foundry company predecessor notes consolidated financial statements thousands 1 nature operations significant accounting policies continued principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries transport hartley significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents purposes consolidated statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents cash equivalents consisting principally investments commercial paper totaled 11598 23028 march 31 1996 1997 respectively cost debt securities considered available sale financial reporting purposes approximates fair value march 31 1996 1997 realized gains losses recognized securities three years period ended march 31 1997 one month ended april 30 1997 inventories stated lower cost market cost determined lastin firstout lifo method substantially inventories except supplies cost determined firstin firstout fifo method property plant equipment property plant equipment recorded cost expenditures additions improvements capitalized replacements maintenance repairs improve extend lives respective assets expensed incurred neenah foundry company predecessor notes consolidated financial statements thousands 1 nature operations significant accounting policies continued depreciation financial reporting purposes provided estimated useful lives respective assets using accelerated straightline methods depreciation expense includes amortization machinery equipment recorded capitalized leases revenue recognition revenue sale castings sand control systems recognized upon shipment customer advertising costs advertising costs expensed incurred amounted 467 527 524 55 years ended march 31 1995 1996 1997 one month ended april 30 1997 respectively income taxes deferred income taxes provided temporary differences financial reporting income tax basis companys assets liabilities measured using currently enacted tax rates laws financial instruments company number financial instruments none held trading purposes company estimates fair value financial instruments march 31 1996 1997 differ materially carrying value instruments recorded accompanying consolidated balance sheets follows neenah foundry company predecessor notes consolidated financial statements thousands 1 nature operations significant accounting policies continued new accounting standards company adopted fasb statement financial accounting standards sfas 121 accounting impairment longlived assets disposed sfas 123 accounting stockbased compensation april 1 1996 sfas 125 accounting transfers servicing financial assets extinguishments liabilities january 1 1997 statement position 961 environmental remediation liabilities april 1 1997 adoption statements effect companys consolidated financial statements accordance sfas 121 company records impairment losses longlived assets used operations events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets 2 inventories consist following 3 longterm debt longterm debt consists following neenah foundry company predecessor notes consolidated financial statements thousands 3 longterm debt continued company revolving credit agreement bank provides borrowings 25000 july 31 1998 interest payable monthly outstanding borrowings banks reference rate 825 march 31 1997 agreement contains option allows company designate portion minimum 2000 borrowings bear fixed rate interest specified period time borrowings agreement unsecured quarterly fee charged bank unused portion facility capital lease obligations consist leases propane system semitractors trailers included machinery equipment 567 397 included accumulated depreciation 272 179 march 31 1996 1997 respectively related capital leases 4 notes receivable owners notes receivable owners 2922 repaid owners prior consummation plan reorganization described note 10 proceeds notes receivable used purchase 1461 shares company class b common stock shareholders secured common stock 5 commitments contingencies company leases warehouse space machinery equipment office equipment vehicles operating leases rent expense operating leases years ended march 31 1995 1996 1997 one month ended april 30 1997 amounted 850 996 1088 85 respectively minimum rental payments due operating leases subsequent fiscal years follows 1998 736 1999 586 2000 287 2001 115 1724 neenah foundry company predecessor notes consolidated financial statements thousands 5 commitments contingencies continued company involved number product liability claims none opinion management expected material adverse effect consolidated financial statements company partially selfinsured workers compensation claims accrued liability recorded claims incurred yet paid reported accrual based current historical claim information accrual may ultimately settled amount greater lesser recorded amount adjustments accrual recorded period determined march 31 1997 company outstanding letters credit aggregate amount 595 secure certain workers compensation obligations 6 income taxes provision income taxes consists following difference provision income taxes income taxes computed using statutory us federal income tax rate 35 follows neenah foundry company predecessor notes consolidated financial statements thousands 6 income taxes continued components companys deferred income tax assets liabilities follows company recorded valuation allowance respect deferred tax assets march 31 1996 1997 7 employee benefit plans defined benefit pension plans company sponsors two defined benefit pension plans covering substantially hourly employees previously sponsored defined benefit supplemental executive retirement plan serp covered certain salaried employees year ended march 31 1997 company purchased nonparticipating annuity contracts settle vested benefit obligations serp retirement benefits pension plans neenah foundry company predecessor notes consolidated financial statements thousands 7 employee benefit plans continued based years credited service defined benefit rates retirement benefits serp based compensation levels company funds pension plans based actuarially determined cost method allowable internal revenue service regulations serp unfunded following table reconciles funded status pension plans december 31 1995 1996 company uses measurement date december 31 amounts included consolidated balance sheets march 31 1996 1997 neenah foundry company predecessor notes consolidated financial statements thousands 7 employee benefit plans continued components net periodic pension cost follows result settlement serp company recognized curtailment gain 1317 settlement loss 878 year ended march 31 1997 discount rate used estimating projected benefit obligations determining interest cost component pension expense following year plans 75 years annual rate compensation increase assumed serp estimating projected benefit obligations 65 years assumed longterm rate return plan assets used determining pension expense 75 years profitsharing savings retirement plan company sponsors profitsharing savings retirement plan covering substantially salaried employees plan allows participants make 401k contributions amount 1 5 compensation company matches 50 participants contributions company may make additional voluntary contributions plan determined annually board directors total company contributions amounted 859 891 915 82 years ended march 31 1995 1996 1997 one month ended april 30 1997 respectively postretirement benefits company sponsors defined benefit postretirement health care plans covering substantially salaried employees dependents benefits provided date retirement duration employees life maximum 1 million per individual retirees contributions plans based years service age retirement company funds benefits incurred neenah foundry company predecessor notes consolidated financial statements thousands 7 employee benefit plans continued following table reconciles funded status postretirement benefit plans amounts included consolidated balance sheets march 31 components net periodic postretirement benefit cost follows weightedaverage discount rate used determining accumulated postretirement benefit obligations plans 75 years healthcare cost trend rate projected annual increases 85 healthcare cost trend rate assumption significant effect amounts reported increasing healthcare cost trend rate one percentage point would increase accumulated postretirement benefit obligations march 31 1997 1014 would increase postretirement benefit expense year ended march 31 1997 131 neenah foundry company predecessor notes consolidated financial statements thousands 8 stockholders equity company restrictive stock transfer agreement certain stockholders permits transfer stock held stockholders permitted transferees defined event stockholder wishes sell stock third party permitted transferee stock must first offered sale company accepts offer sale purchase price based formula defined purchase price financed promissory note payable ten equal annual installments interest prime rate less 1 restrictive stock transfer agreement terminated concurrently consummation plan reorganization described note 10 9 unaudited quarterly results 10 subsequent event april 30 1997 pursuant agreement plan reorganization nc merger company nfc castings inc neenah corporation acquired nfc castings inc using 45000 cash equity contributed nfc castings inc ii 45000 term loans iii proceeds issuance 150000 unsecured senior subordinated notes rule 144a private placement iv company cash consideration acquisition subject closing date net worth adjustment july 1 1997 company issued 45000 unsecured senior subordinated notes rule 144a private placement used proceeds repay term loans neenah foundry company predecessor notes consolidated financial statements thousands 10 subsequent event continued described note 1 july 1 1997 neenah foundry company principal operating subsidiary neenah corporation merged neenah corporation transport hartley wholly owned subsidiaries company fully unconditionally jointly severally guarantee senior subordinated notes issued private placement discussed following summarized combined financial information wholly owned subsidiaries net sales includes net sales neenah foundry company 4181 4090 4012 365 years ended march 31 1995 1996 1997 one month ended april 30 1997 respectively separate financial statements guarantor subsidiaries separately presented opinion management financial statements material investors report ernst young llp independent auditors audited consolidated financial statements neenah foundry company september 30 1997 period inception may 1 1997 september 30 1997 issued report thereon dated october 31 1997 included elsewhere annual report form 10k audit also included financial statement schedule listed index item 14a schedule responsibility companys management responsibility express opinion based audit opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein milwaukee wisconsin ernst young llp october 31 1997 schedule ii neenah foundry company valuation qualifying accounts period inception may 1 1997 september 30 1997 dollars thousands uncollectible accounts written net recoveries report ernst young llp independent auditors audited consolidated financial statements neenah foundry company formerly neenah corporation march 31 1996 1997 three years period ended march 31 1997 issued report thereon dated june 4 1997 except notes 1 10 date july 1 1997 included elsewhere annual report form 10k audits also included financial statement schedule listed index item 14a schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein milwaukee wisconsin ernst young llp june 4 1997 schedule ii neenah foundry company predecessor valuation qualifying accounts years ended march 31 1995 1996 1997 dollars thousands uncollectible accounts written net recoveries item 7 managements discussion analysis financial condition results operations april 30 1997 pursuant agreement plan reorganization nc merger company nfc castings inc stock neenah corporation predecessor company acquired nfc castings inc merger july 1 1997 neenah foundry company principal operating subsidiary neenah corporation merged neenah corporation surviving company changed name neenah foundry company following discussion analysis companys financial condition results operations addresses periods merger significant impact companys results operations financial condition merger resulted recording goodwill identifiable intangible assets totaling approximately 1488 million amounts amortized estimated useful lives ranging 5 months 40 years merger also resulted significant increase companys interest expense merger accounted business combination resulted differences basis certain assets liabilities predecessor company changed fiscal year end september 30 march 31 effective september 30 1997 following discussions compare pro forma results operations company six months ended september 30 1997 assuming merger occurred april 1 1997 historical results predecessor company six months ended september 30 1996 results operations following table sets forth periods shown certain statement income data expressed percentage net sales comparison pro forma six months ended september 30 1997 six months ended september 30 1996 net sales net sales pro forma six months ended september 30 1997 1044 million 146 million 163 higher six months ended september 30 1996 net sales municipal castings increased 28 million 62 due primarily strong economy upper midwest market share gains strategic focus areas east southwest net sales industrial castings increased 123 million 288 due continuing surge heavy duty truck build rates percentage gains dual sourced components increased build rates major industrial customer net sales hartley controls pro forma six months ended september 301997 declined 04 million mostly due reduction equipment sales caused capital spending cutbacks major foundry customers hartley controls services gross profit gross profit pro forma six months ended september 30 1997 340 million increase 73 million 273 compared six months ended september 30 1996 gross profit percentage net sales increased 326 298 six months ended september 30 1996 margin improvement due combined effect spreading manufacturing overhead greater volume improved efficiency plant operations lesser extent improved pricing municipal industrial products production expressed good tons increased six months ended september 30 1997 12971 tons 167 six month period ended september 30 1996 furthermore man hours per ton time period reduced 886 hourston 877 hourston variable expenses notably foundry supplies repair parts utilities coke decreased 207 per good ton 190 per good ton selling general administrative expenses selling general administrative expenses pro forma six months ended september 30 1997 126 million increase 34 million 362 93 million six months ended september 30 1996 percentage net sales selling general administrative expenses increased 103 six months ended september 30 1996 121 pro forma six months ended september 30 1997 increase selling general administrative expense primarily due amortization goodwill identifiable intangible assets resulting merger operating income operating income 214 million pro forma six months ended september 30 1997 increase 39 million 225 six months ended september 30 1996 percentage net sales operating income increased 195 six months ended september 30 1996 205 pro forma six months ended september 30 1997 improvement operating income achieved reasons discussed offset amortization goodwill identifiable intangible assets resulting merger net interest expense net interest expense increased 04 million net interest income six months ended september 30 1996 106 million net interest expense pro forma six months ended september 30 1997 due interest expense indebtedness incurred connection merger extraordinary item pro forma six months ended september 30 1997 company recorded extraordinary loss 16 million net income tax benefit 10 million writeoff unamortized deferred financing costs connection repayment full term indebtedness companys senior bank facility comparison fiscal year ended march 31 1997 fiscal year ended march 31 1996 net sales net sales 1654 million year ended march 31 1997 decrease 16 million 09 1670 million year ended march 31 1996 net sales industrial castings decreased 39 million 42 883 million decrease industrial casting sales primarily result decision company discontinue production certain lower margin brake components resulted 9600 ton decrease tons produced compared year earlier period lesser extent reduced demand casting products medium heavyduty truck market net sales municipal castings increased 19 million 27 713 million primarily due increased pricing hartley controls net sales grew 04 million 74 58 million principally due increased volume equipment sales gross profit gross profit 487 million year ended march 31 1997 increase 34 million 75 453 million year ended march 31 1996 gross profit percentage net sales increased 294 year ended march 31 1997 271 year ended march 31 1996 increase gross profit percentage net sales due mainly improved product mix industrial product line greater overall plant efficiency gross profit percentage also improved due continued effect lightweighted municipal casting program selling general administrative expenses selling general administrative expenses 175 million year ended march 31 1997 increase 05 million 29 170 million year ended march 31 1996 percentage net sales selling general administrative expenses increased 106 year ended march 31 1997 101 year ended march 31 1996 approximately 02 million increase selling general administrative expenses due nonrecurring charitable contribution approximately 09 million increase due increased compensation benefits officers company resigned time merger excluding effects estimated nonrecurring officer compensation benefits charitable contribution selling general administrative expenses percentage net sales decreased slightly 83 year ended march 31 1997 84 year ended march 31 1996 operating income operating income increased 311 million year ended march 31 1997 increase 28 million 99 283 million year ended march 31 1996 percentage net sales operating income increased 188 year ended march 31 1997 170 year ended march 31 1996 improvement operating income achieved primarily reasons discussed comparison fiscal year ended march 31 1996 fiscal year ended march 31 net sales net sales 1670 million year ended march 31 1996 increase 64 million 40 1606 million year ended march 31 1995 net sales industrial castings grew 66 million 77 922 million increase industrial sales primarily due improved pricing sales volume remained stable improved pricing industrial castings mainly result better industrial product mix company increased sales complex valueadded industrial castings net sales municipal castings decreased 10 million 14 694 million due decrease unit volume partially offset improved pricing decrease municipal castings volume principally due artificially high sales fiscal 1995 resulting weather conditions fiscal 1995 net sales affected poor winter weather january march 1994 resulted postponement certain sales fiscal 1994 fiscal 1995 mild weather january march 1995 resulted acceleration sales fiscal 1996 fiscal 1995 total production volume tons decreased significantly unit volume municipal sales effect lightweighted casting program hartley controls net sales grew 08 million 174 54 million principally due increased volume equipment sales gross profit gross profit 453 million year ended march 31 1996 increase 57 million 144 396 million year ended march 31 1995 gross profit percentage net sales increased 271 year ended march 31 1996 247 year ended march 31 1995 continued improvement gross profit percentage net sales due combined effect margin improvements industrial municipal product lines industrial castings gross profit percentage improved due shift profitable product mix improved efficiency plant operations municipal castings gross profit percentage improved largely due effect implementing lightweighted casting program increase selling prices selling general administrative expenses selling general administrative expenses 170 million year ended march 31 1996 increase 03 million 18 167 million year ended march 31 1995 percentage net sales selling general administrative expenses decreased slightly 101 year ended march 31 1996 104 year ended march 31 1995 approximately 01 million increase selling general administrative expense due increased compensation benefits officers company resigned time merger excluding effects estimated nonrecurring executive compensation benefits selling general administrative expenses percentage net sales decreased 84 86 year ended march 31 1995 primarily due spreading fixed expenses greater volume sales operating income operating income increased 283 million year ended march 31 1996 increase 53 million 230 million year ended march 31 1995 percentage net sales operating income increased 170 year ended march 31 1996 143 year ended march 31 1995 improvement operating income achieved primarily reasons discussed liquidity capital resources connection merger company issued 1500 million aggregate principal amount 1118 senior subordinated notes due 2007 senior subordinated notes entered credit agreement providing term loans 450 million revolving credit facility 300 million senior bank facility july 1 1997 company issued additional 450 million aggregate principal amount senior subordinated notes used proceeds 476 million pay term loans senior bank facility together accrued interest thereon related fees expenses addition september 12 1997 company amended revolving credit facility senior bank facility increase borrowings available revolving credit facility 300 million 500 million eliminate borrowing base limitations companys liquidity needs arise primarily debt service indebtedness working capital needs funding capital expenditures borrowings revolving credit facility bear interest variable interest rates senior bank facility imposes restrictions companys ability make capital expenditures senior bank facility indentures governing senior subordinated notes limit companys ability incur additional indebtedness covenants contained senior bank facility also among things restrict ability company subsidiaries dispose assets incur guarantee obligations prepay senior subordinated notes amend indentures pay dividends create liens assets enter sale leaseback transactions make investments loans advances make acquisitions engage mergers consolidations change business conducted company make capital expenditures engage certain transactions affiliates otherwise restrict corporate activities fiscal years ended march 31 1995 1996 1997 pro forma six months ended september 30 1997 companys capital expenditures 37 million 73 million 45 million 25 million respectively 36 million increase capital expenditures fiscal year ended march 31 1996 comparable period 1995 primarily result expansion cooling capabilities two companys production lines companys principal source cash fund liquidity needs net cash operating activities borrowings revolving credit facility net cash operating activities pro forma six months ended september 30 1997 254 million net cash operating activities year ended march 31 1997 235 million increase 12 million 223 million year ended march 31 1996 primarily result increase net income net cash operating activities year ended march 31 1996 223 million represented decrease 13 million 236 million comparable period 1995 primarily result net increase working capital excluding cash equivalents 1996 partially offset greater net income 1996 company believes cash generated operations existing revolving lines credit sufficient meet normal operating requirements including future interest payments companys outstanding indebtedness raw materials although prices raw materials used company vary fluctuations price steel scrap significant company arrangements industrial customers require company adjust industrial casting prices reflect scrap price fluctuations periods rapidly rising falling scrap prices adjustments lag current scrap price generally based average market prices prior periods vary customer generally longer six months castings generally sold heavy municipal market bid basis bid price municipal casting subject bid generally cannot adjusted raw material price increases however cases company successful obtaining higher municipal casting unit prices subsequent bids compensate rises scrap prices prior periods rapidly fluctuating scrap prices may temporary adverse positive effect companys results operations inflation company believe inflation material impact financial position results operations pro forma six month period ended september 30 1997 three years ended march 31 1997 cyclicality seasonality company historically experienced moderate cyclicality heavy municipal market sales municipal products influenced among things public spending industrial market company experience cyclicality sales resulting fluctuations medium heavyduty truck market farm equipment market subject general economic trends company experiences seasonality municipal business sales tend higher construction season occurs warmer months generally third fourth quarters companys fiscal year company maintains level production throughout year anticipation seasonality experience production volume fluctuations result company builds inventory anticipation construction season inventories reaching peak march april company historically experienced seasonality industrial casting sales item 8  item 8 financial statements supplementary data financial statements schedules listed part iv item 14 form 10k item 9 