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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
Commission Registrant; State of Incorporation; IRS EMPLOYER
File Number Address; and Telephone Number Identification No.
333-52529 MMH HOLDINGS, INC. 39-1924039
(a Delaware Corporation)
4915 South Howell Avenue, 2nd Floor
Milwaukee, Wisconsin 53207
(414) 486-6100
333-52527 MORRIS MATERIAL HANDLING, INC. 39-1716155
(a Delaware Corporation)
4915 South Howell Avenue, 2nd Floor
Milwaukee, Wisconsin 53207
(414) 486-6100
--------------------
--------------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date (March 15, 1999):
MMH Holdings, Inc. Nonvoting common stock, $.01 Par Value, 720 shares
Outstanding. Voting common stock, $.01 Par Value,
10,169 shares outstanding.
Morris Material Handling, Inc. Common stock, $.01 Par Value, 100 shares outstanding.
MMH Holdings, Inc. holds all of the outstanding
Common stock of Morris Material Handling, Inc.
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
INDEX
INTRODUCTION 2
PART I -FINANCIAL STATEMENTS:
MMH Holdings, Inc.
Condensed Balance Sheets 4
Condensed Statements of Operations and Comprehensive Income (Loss) 5
Condensed Statements of Cash Flows 6
Statements of Preferred Stock and Shareholders' Equity 7
Morris Material Handling, Inc.
Condensed Balance Sheets 8
Condensed Statements of Operations and Comprehensive Income (Loss) 9
Condensed Statements of Cash Flows 10
Statements of Shareholder's Equity 11
Notes to Financial Statements of
MMH Holdings, Inc. and
Morris Material Handling, Inc. 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations of
MMH Holdings, Inc. and
Morris Material Handling, Inc. 23
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
INTRODUCTION
MMH Holdings, Inc. ("Holdings") is a holding company whose sole direct
subsidiary is Morris Material Handling, Inc. ("MMH"), a manufacturer,
distributor and service provider of "through-the-air" material handling
equipment with operations in the United States, United Kingdom, South Africa,
Singapore, Canada, Australia, Chile and Mexico. Unless the context requires
otherwise, references to the "Company" in this combined 10-Q are to MMH, its
subsidiaries and their predecessors. For periods prior to March 30, 1998,
references to the Company are to the "through-the-air" material handling
equipment business (the "MHE Business") of Harnischfeger Corporation ("HarnCo")
and those subsidiaries and affiliates of HarnCo that were engaged therein.
This combined Form 10-Q is separately filed by MMH Holdings, Inc. and by Morris
Material Handling, Inc. The unaudited interim financial statements presented in
this combined report (collectively, the "Financial Statements") include the
financial statements of Holdings, as well as separate financial statements for
MMH. Information contained herein relating to any individual Registrant is filed
by such Registrant on its own behalf.
Certain sections of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, which represent management's expectations or beliefs
concerning future events. The forward looking statements include, without
limitation, the ability of the Registrants to meet their future liquidity needs.
The Registrants caution that those statements are further qualified by important
factors that could cause actual results to differ from those in the forward
looking
2
statements. Certain factors that might cause such a difference are detailed
herein under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Cautionary Factors."
3
MMH HOLDINGS, INC.
------------------
CONDENSED BALANCE SHEETS
------------------------
(DOLLARS IN THOUSANDS)
----------------------
ASSETS
January 31, October 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents (Note 5) $ 3,360 $ 2,534
Accounts receivable-net 72,158 81,947
Inventories 42,822 42,561
Other current assets 14,912 11,467
------------- --------------
133,252 138,509
------------- --------------
Property, Plant and Equipment
Cost 68,525 67,649
Less accumulated depreciation (27,703) (26,579)
------------- --------------
40,822 41,070
------------- --------------
Other Assets
Goodwill 41,575 39,843
Debt financing costs 18,581 18,905
Deferred income taxes 68,937 65,979
Other 8,449 6,691
------------- --------------
137,542 131,418
------------- --------------
$ 311,616 $ 310,997
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
January 31, October 31,
1999 1998
(Unaudited)
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 5) $ 5,198 $ 2,262
Revolving Credit Facility Borrowings (Note 5) 5,317 -
Term Loans (Note 5) 53,988 -
Acquisition Facility Line Borrowings (Note 5) 7,430 -
Bank overdrafts 1,488 1,252
Trade accounts payable 25,489 32,893
Advance payments and progress billings 8,438 9,399
Accrued interest 7,037 2,201
Other current liabilities 25,893 29,946
------------- ------------
140,278 77,953
Term Loans (Note 5) - 52,225
Acquisition Facility Line Borrowings(Note 5) - 6,194
Senior Notes 200,000 200,000
Other Long-Term Obligations 4,116 3,405
Deferred Income Taxes 2,650 2,698
Minority Interest 358 364
Commitments and Contingencies (Note 6)
Mandatorily Redeemable Preferred Stock 98,446 95,351
Shareholders' Equity (134,232) (127,193)
------------ -----------
$ 311,616 $ 310,997
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
4
MMH HOLDINGS, INC.
------------------
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
For the Three Months
ENDED JANUARY 31,
1999 1998
--------------- ---------------
Revenues
Net Sales $ 67,920 $ 76,483
Other Income - Net 102 284
--------------- ---------------
68,022 76,767
Cost of Sales 50,614 56,653
Selling, General and Administrative Expenses 15,933 14,360
HII Management Fee - 677
Non-Recurring Employee Benefit Costs - 120
--------------- ---------------
Operating Income 1,475 4,957
Interest (Expense) Income - Net
HII Affiliates - (687)
Third Party (6,908) (158)
--------------- ---------------
Income (Loss) Before Income Taxes
and Minority Interest (5,433) 4,112
Benefit (Provision) for Income Taxes 2,453 (1,987)
Minority Interest 6 14
--------------- ---------------
Net Income (Loss) (2,974) 2,139
Foreign Currency Translation Adjustments (970) (405)
--------------- ---------------
Comprehensive Income (Loss) $ (3,944) $ 1,734
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of the financial statements.
5
MMH HOLDINGS, INC.
------------------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
For the Three Months
ENDED JANUARY 31,
-----------------
1999 1998
---- ----
Operating Activities
Net income (loss) $ (2,974) $ 2,139
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 1,806 1,659
Amortization of debt financing costs 324 -
Deferred income taxes - net (2,957) 46
Other (6) 48
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 11,912 5,274
Inventories 810 (4,512)
Other current assets (3,578) (1,618)
Trade accounts payable and bank overdrafts (8,317) (7,345)
Advance payments and progress billings (1,349) 2,659
Accrued interest 4,836 -
Other current liabilities (2,909) 982
Activity with parent and other affiliates - net - 5,928
--------------- ---------------
Net cash provided by (used for) operating activities (2,402) 5,260
--------------- ---------------
Investment and Other Transactions
Fixed asset additions - net (1,634) (816)
Acquisition of businesses - net of cash acquired (4,989) -
Other - net (150) 466
--------------- ---------------
Net cash used for investment and other transactions (6,773) (350)
--------------- ---------------
Financing Activities
Changes in short-term debt and notes payable 10,354 (207)
Net repayment of Revolving Credit Facility borrowings (1,200) -
Proceeds from Acquisition Facility Line borrowings 1,235 -
Repayments of long-term debt (337) -
--------------- ---------------
Net cash provided by (used for) financing activities 10,052 (207)
--------------- ---------------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (51) 82
--------------- ---------------
Increase in Cash and Cash Equivalents 826 4,785
Cash and Cash Equivalents
Beginning of Period 2,534 1,532
--------------- ---------------
End of Period $ 3,360 $ 6,317
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of the financial statements.
6
MMH HOLDINGS, INC.
------------------
STATEMENTS OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY
------------------------------------------------------
FOR THE THREE MONTHS ENDED JANUARY 31, 1999
-------------------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
Preferred Stock
---------------------------------------------------------------------------------
Series A Series B Series C
---------------------- ------------------------ ---------------------
Shares Carrying Shares Carrying Shares Carrying
Outstanding Value Outstanding Value Outstanding Value Total
---------------------- ------------------------ --------------------- ------
BALANCE AT OCTOBER 31, 1998 61,188 $ 59,217 5,105 $ 5,156 30,678 $ 30,978 $ 95,351
Net loss
Change in foreign currency
translation
Preferred stock dividends 1,835 156 958 2,949
Amortization of preferred stock
discount 146 146
-------- -------- ------- -------- ------ -------- --------
BALANCE AT JANUARY 31, 1999 61,188 $ 61,198 5,105 $ 5,312 30,678 $ 31,936 $ 98,446
-------- -------- ------- -------- ------ -------- --------
-------- -------- ------- -------- ------ -------- --------
Parent Accumulated
Common Stock Investment/ Other Total
--------------------
Shares Par Additional Comprehensive Retained Shareholders'
Outstanding Value Paid-in-capital Loss Earnings Equity
-------------------- --------------- --------------- -------- --------------
BALANCE AT OCTOBER 31, 1998 10,889 $ - $ (121,860) $(2,741) $ (2,592) $ (127,193)
Net loss (2,974) (2,974)
Change in foreign currency
translation (970) (970)
Preferred stock dividends (2,949) (2,949)
Amortization of preferred stoc
discount (146) (146)
------- -------- ----------- --------- ---------- --------------
BALANCE AT JANUARY 31, 1999 10,889 $ - $ (121,860) $ (3,711) $ (8,661) $ (134,232)
------- -------- ----------- --------- ---------- --------------
------- -------- ----------- --------- ---------- --------------
The accompanying notes are an integral part of the financial statements.
7
MORRIS MATERIAL HANDLING, INC.
------------------------------
CONDENSED BALANCE SHEETS
------------------------
(DOLLARS IN THOUSANDS)
----------------------
ASSETS
------
January 31, October 31,
1999 1998
------------ --------------
(Unaudited)
Current Assets
Cash and cash equivalents (Note 5) $ 3,360 $ 2,534
Accounts receivable-net 72,158 81,947
Inventories 42,822 42,561
Other current assets 14,912 11,467
------------- --------------
133,252 138,509
------------- --------------
Property, Plant and Equipment
Cost 68,525 67,649
Less accumulated depreciation (27,703) (26,579)
------------- --------------
40,822 41,070
------------- --------------
Other Assets
Goodwill 41,575 39,843
Debt financing costs 18,581 18,905
Deferred income taxes 68,937 65,979
Other 8,449 6,691
------------- --------------
137,542 131,418
------------- --------------
$ 311,616 $ 310,997
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
January 31, October 31,
1999 1998
----------- ------------
(Unaudited)
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 5) $ 5,198 $ 2,262
Revolving Credit Facility Borrowings (Note 5) 5,317 -
Term Loans (Note 5) 53,988 -
Acquisition Facility Line Borrowings (Note 5) 7,430 -
Bank overdrafts 1,488 1,252
Trade accounts payable 25,489 32,893
Advance payments and progress billings 8,438 9,399
Accrued interest 7,037 2,201
Other current liabilities 25,893 29,946
------------- -------------
140,278 77,953
Term Loans (Note 5) - 52,225
Acquisition Facility Line Borrowings (Note 5) - 6,194
Senior Notes 200,000 200,000
Other Long-Term Obligations 4,116 3,405
Deferred Income Taxes 2,650 2,698
Minority Interest 358 364
Commitments and Contingencies (Note 6)
Shareholder's Equity (35,786) (31,842)
------------ ------------
$ 311,616 $ 310,997
------------- -------------
------------- -------------
The accompanying notes are an integral part of the financial statements.
8
MORRIS MATERIAL HANDLING, INC.
------------------------------
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
For the Three Months
Ended January 31,
---------------------------------------
1999 1998
--------------- ---------------
Revenues
Net Sales $ 67,920 $ 76,483
Other Income - Net 102 284
--------------- ---------------
68,022 76,767
Cost of Sales 50,614 56,653
Selling, General and Administrative Expenses 15,933 14,360
HII Management Fee - 677
Non-Recurring Employee Benefit Costs - 120
--------------- ---------------
Operating Income 1,475 4,957
Interest (Expense) Income - Net
HII Affiliates - (687)
Third Party (6,908) (158)
--------------- ---------------
Income (Loss) Before Income Taxes
and Minority Interest (5,433) 4,112
Benefit (Provision) for Income Taxes 2,453 (1,987)
Minority Interest 6 14
--------------- ---------------
Net Income (Loss) (2,974) 2,139
Foreign Currency Translation Adjustments (970) (405)
--------------- ---------------
Comprehensive Income (Loss) $ (3,944) $ 1,734
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of the financial statements.
9
MORRIS MATERIAL HANDLING, INC.
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
For the Three Months
Ended January 31,
---------------------------------------
1999 1998
--------------- ---------------
Operating Activities
Net income (loss) $ (2,974) $ 2,139
Add (deduct)-items not affecting cash provided by
operating activities:
Depreciation and amortization 1,806 1,659
Amortization of debt financing costs 324 -
Deferred income taxes-net (2,957) 46
Other (6) 48
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 11,912 5,274
Inventories 810 (4,512)
Other current assets (3,578) (1,618)
Trade accounts payable and bank overdrafts (8,317) (7,345)
Advance payments and progress billings (1,349) 2,659
Accrued interest 4,836 -
Other current liabilities (2,909) 982
Activity with parent and other affiliates-net - 5,928
--------------- ---------------
Net cash provided by (used for) operating activities (2,402) 5,260
--------------- ---------------
Investment and Other Transactions
Fixed asset additions-net (1,634) (816)
Acquisition of businesses-net of cash acquired (4,989) -
Other-net (150) 466
--------------- ---------------
Net cash used for investment and other transactions (6,773) (350)
--------------- ---------------
Financing Activities
Changes in short-term debt and notes payable 10,354 (207)
Net repayment of Revolving Credit Facility borrowings (1,200) -
Proceeds from Acquisition Facility Line borrowings 1,235 -
Repayments of long-term debt (337) -
--------------- ---------------
Net cash provided by (used for) financing activities 10,052 (207)
--------------- ---------------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (51) 82
--------------- ---------------
Increase in Cash and Cash Equivalents 826 4,785
Cash and Cash Equivalents
Beginning of Period 2,534 1,532
--------------- ---------------
End of Period $ 3,360 $ 6,317
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of the financial statements.
10
MORRIS MATERIAL HANDLING, INC.
------------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
----------------------------------
FOR THE THREE MONTHS ENDED JANUARY 31, 1999
-------------------------------------------
(UNAUDITED)
-----------
(DOLLARS IN THOUSANDS)
----------------------
Common Stock Parent Accumulated
------------ Investment/ Other Total
Shares Par Additional Comprehensive Retained Shareholder's
Outstanding Value Paid-in-Capital Loss Earnings Equity
----------- ----- --------------- ------------- -------- -------------
BALANCE AT OCTOBER 31, 1998 100 $ - $ (33,392) $ (2,741) $ 4,291 $ (31,842)
Net loss (2,974) (2,974)
Change in foreign currency
translation (970) (970)
------- ------- ---------- ---------- ---------- ---------
BALANCE AT JANUARY 31, 1999 100 $ - $ (33,392) $ (3,711) $ 1,317 $ (35,786)
------- ------- ---------- ---------- ---------- ---------
------- ------- ---------- ---------- ---------- ---------
The accompanying notes are an integral part of the financial statements.
11
MMH HOLDINGS, INC.
------------------
MORRIS MATERIAL HANDLING, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
UNAUDITED
---------
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED)
NOTE 1 - BASIS OF PRESENTATION
On January 28, 1998, Harnischfeger Industries, Inc. ("HII") reached an agreement
with MHE Investments, Inc. ("MHE Investments") an affiliate of Chartwell
Investments Inc. ("Chartwell") for the sale of an approximately 80 percent
common ownership interest in HII's Material Handling Equipment Business (the
"MHE Business"). As more fully described in Note 2, the resulting transactions
(the "Recapitalization"), which closed on March 30, 1998 (the "Recapitalization
Closing"), led to a significant change in the capital structure and a
reorganization of the underlying legal entities of the MHE Business. As a result
of the Recapitalization, MMH Holdings, Inc. ("Holdings"), a pre-existing company
engaged in the MHE Business, became an indirect holding company for the
operating entities engaged in the MHE Business. Specifically, Morris Material
Handling, Inc. ("MMH" and collectively with its subsidiaries and their
predecessors, the "Company"), a newly formed wholly-owned direct subsidiary of
Holdings, directly or indirectly acquired the various operating entities engaged
in the MHE Business. Holdings was recapitalized in order to effect the
redemption of certain shares of common stock of Holdings held by Harnischfeger
Corporation ("HarnCo"). As a result of the reorganization of the legal entities
of the MHE Business, Holdings and MMH became the successor companies to the MHE
Business. The transactions have been accounted for as a recapitalization and
accordingly, the financial statements presented herewith reflect the underlying
historical accounting basis of the MHE Business.
For periods prior to the Recapitalization Closing, the financial statements
presented represent the combined financial statements of the entities comprising
the MHE Business. For purposes hereof, it is assumed that Holdings has
historically owned the capital stock of MMH, that all of the assets of the MHE
Business were owned by subsidiaries of MMH and that, immediately prior to the
consummation of the Recapitalization, the historical combined financial
statements of Holdings were identical to those of the Company.
All significant intercompany balances and transactions have been eliminated.
Payables and receivables with HII and affiliates prior to the Recapitalization
are recorded as a component of parent investment.
The accompanying unaudited financial statements should be read in conjunction
with the combined 1998 Annual Report on Form 10-K of Holdings and the Company.
In the opinion of management, all adjustments, normal and recurring in nature,
necessary for a fair presentation of results of operations and financial
position have been included in the accompanying balance sheets and statements of
operations. The results of operations for the three months ended January 31,
1999 are not, however, indicative of the results which may be expected for
fiscal 1999.
NOTE 2 - RECAPITALIZATION TRANSACTION
The Recapitalization was effectuated pursuant to the January 28, 1998
Recapitalization Agreement among MHE Investments, HarnCo and certain of HII's
affiliates. Pursuant to this agreement, HarnCo and other HII affiliates effected
a number of transactions which resulted in Holdings owning, directly or
indirectly, the equity interests of all of the operating entities engaged in the
MHE Business. Holdings, in turn, formed MMH as a wholly owned subsidiary to
directly or indirectly hold the various operating entities engaged in the MHE
Business.
The principal transactions effected as part of the Recapitalization were the
following: (i) MHE Investments acquired (x) 7,907 shares of Holdings' common
stock for $25.1 million and (y) $28.9 million liquidation preference of
Holdings' 12 1/2% Series C Junior Voting Exchangeable Preferred Stock (the
"Series C Junior Voting Preferred Stock") from HarnCo, (ii) Holdings redeemed
certain shares of its common stock and Series C Junior Voting Preferred Stock
held by HarnCo for $287 million in cash (including a $5 million prepayment of a
potential post-closing redemption price adjustment) and approximately $4.8
million liquidation preference of Holdings' 12 1/4% Series B Junior Exchangeable
Preferred Stock (the "Series B Junior Preferred Stock"); and (iii) HarnCo
retained 2,261 shares of Holdings' common stock.
12
To finance the Recapitalization, Holdings sold $60 million of Series A Units,
consisting of $57.7 million liquidation preference of Holdings' 12% Series A
Senior Exchangeable Preferred Stock (the "Series A Senior Preferred Stock") and
$2.3 million of Holdings' non-voting common stock, to institutional investors.
In addition, MMH issued (the "Note Offering") $200 million of aggregate
principal amount of 9 1/2% senior notes due 2008 (the "Senior Notes") and
entered into a senior secured credit facility (the "New Credit Facility") (See
Notes 5 and 6). MMH also entered into a surety arrangement (the "Surety
Arrangement") to provide credit support for its post-Recapitalization Closing
operations. MMH used a portion of the $200 million aggregate proceeds from the
Note Offering and $55 million aggregate borrowings under the New Credit Facility
to redeem certain of its common shares from Holdings and pay Holdings a dividend
which on a combined basis totaled $233.8 million. Holdings, in turn, used the
proceeds from this redemption, together with the proceeds of the sale of the
Series A Units, to finance the cash portion of the redemption price for HarnCo's
shares. The remainder of the proceeds were used by Holdings and MMH (i) to make
loans to senior management to acquire indirect equity interests in Holdings,
(ii) to fund certain transaction fees and expenses and (iii) for general
corporate purposes.
At January 31, 1999, MHE Investments owns approximately 72.6% of the common
stock of Holdings and $30.7 million liquidation preference of the Series C
Junior Voting Preferred Stock and HarnCo owns approximately 20.8% of the common
stock of Holdings and $5.1 million liquidation preference of the Series B Junior
Preferred Stock. The remaining equity interests are held by institutional
investors and consist of non-voting stock representing approximately 6.6% of the
outstanding common stock of Holdings and $61.2 million liquidation preference of
the Series A Senior Preferred Stock.
NOTE 3 - ACQUISITIONS
During the three months ended January 31, 1999, the Company completed one
acquisition with an aggregate purchase price of $3,158, net of cash acquired.
This acquisition was related to the Company's aftermarket business and was
accounted for as a purchase transaction with the purchase price allocated to the
fair value of specific assets acquired and liabilities assumed. Resultant
goodwill of $1,108 was recorded and is being amortized over 40 years. This
acquisition was partially financed by the seller, resulting in a deferred
purchase price which will be paid in 2004 and 2005. During the three months
ended January 31, 1999, the Company made final consideration payments of $1,507
related to two 1998 acquisitions. With respect to a 1995 acquisition, the
Company was required to make a contingent consideration payment of $1,332 in the
three months ended January 31, 1999. Additionally, a payment of $100 was made
toward a fiscal 1998 purchase which was partially financed by the seller. On a
pro forma basis, the fiscal 1999 acquisition was not material to results of
operations reported for the three months ended January 31, 1999 and accordingly,
such information is not presented.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
January 31, October 31,
1999 1998
----------------- -----------------
Raw material $ 18,348 $14,517
Work-in-process 22,024 20,545
Finished parts 9,861 14,910
----------------- -----------------
50,233 49,972
Less excess of current cost over
stated LIFO value (7,411) (7,411)
----------------- -----------------
$42,822 $42,561
----------------- -----------------
----------------- -----------------
NOTE 5 - INDEBTEDNESS
The New Credit Facility and the indenture governing the Senior Notes (the "Note
Indenture") contain a number of covenants that, among other things, limit
Holdings' and its subsidiaries' ability to prepay subordinated indebtedness,
dispose of certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. In
addition, the New Credit Facility limits Holdings' and its subsidiaries' ability
to incur indebtedness and the Note Indenture limits the Company's and its
subsidiaries' ability to incur indebtedness. The New Credit Facility also
requires Holdings and its subsidiaries to comply with certain financial ratios
and borrowing condition tests based on quarterly measurements of the latest
twelve months results of operations, under which Holdings and its subsidiaries
are required to achieve and maintain certain financial and operating results. A
breach of any of these covenants would result in a default under the Note
Indenture or the New Credit Facility, or both. In the event of any such default,
the lenders under the New Credit Facility and/or the holders of the Senior Notes
could elect to declare all amounts borrowed under the New Credit
13
Facility and/or the Senior Notes, as applicable, together with accrued interest
thereon, to be due and payable which would also result in an event of default
under the Surety Arrangement.
The Company did not meet certain of the ratios and tests under the New Credit
Facility for the period ended January 31, 1999. The Company, however,
obtained a waiver of such financial covenants for the period ended January
31, 1999 and of all financial covenants for the period ended April 30, 1999,
which is effective through June 14, 1999, permitting the Company to borrow
certain amounts under the Revolving Credit Facility to meet its projected
working capital requirements. Under the terms of the waiver, the Company may
not, without prior bank consent, for the duration of the waiver period, (i)
borrow any amounts under the Acquisition Facility, (ii) borrow any amounts
under the Revolving Credit Facility in excess of the aggregate amount of the
Revolving Credit Facility borrowings that the Company has repaid subsequent
to January 31, 1999, or (iii) request the issuance of letters of credit, bid
bonds or performance bonds in an aggregate amount in excess of $5.0 million.
At March 3, 1999, after giving effect to the waiver, the Company had, subject
to certain conditions, approximately $25.4 million of availability under the
Revolving Credit Facility. As a result of the covenant violations under the
New Credit Facility at January 31, 1999 and the Company's anticipated
violation of required covenants and tests at compliance dates during the next
twelve months, the borrowings outstanding under the New Credit Facility of
$66.7 million (after giving effect to the repayment of $25.4 million
described below) are classified as current liabilities in the accompanying
January 31, 1999 balance sheets. Cash and borrowings under the revolving
portion of the New Credit Facility in the accompanying balance sheets at
January 31, 1999 have been reduced by the repayment subsequent to January 31,
1999 of $25.4 million borrowed under the New Credit Facility on January 29,
1999. The Company has begun negotiations with the lending institutions which
may result in amendments to the New Credit Facility. The results of the
negotiations will not be available until the third quarter of fiscal 1999. In
the event that no amendment can be negotiated, the lenders under the New
Credit Facility could elect, when the current waiver expires, to declare all
amounts borrowed under the New Credit Facility, together with accrued
interest thereon, to be due and payable, which would be an event of default
under the Note Indenture and the Surety Arrangement. There can be no
assurance that the Company would have sufficient assets to pay indebtedness
then outstanding under the New Credit Facility, the Senior Notes and
obligations under the Surety Arrangement.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
To secure the performance of sales contracts related to MMH operations, MMH was
contingently liable to financial institutions and others for the following at
January 31, 1999: (i) $3.6 million of outstanding letters of credit and surety
bonds under the New Credit Facility, (ii) $4.3 million under a surety
arrangement for outstanding surety bonds and (iii) $3.3 million of surety bonds
with other institutions. Prior to the Recapitalization Closing, HII and its
affiliates ("HII Group") provided credit support for the MHE Business. As part
of the Recapitalization, HII agreed to maintain in place credit support
(including letters of credit and surety bonds) in existence at the
Recapitalization Closing and the Company agreed to reimburse HII for any
payments made by the HII Group with respect to such credit support. At January
31, 1999, approximately $30.2 million of HII Group letters of credit and surety
bonds remained outstanding.
As of the Recapitalization Closing, HarnCo retained certain income and other tax
liabilities relating to the MHE Business, all environmental liabilities relating
to previously shared facilities, any liabilities for which HarnCo or its
affiliates have been named as potentially responsible parties with respect to
Superfund sites, and any liabilities arising in connection with claims alleging
exposure to asbestos (to the extent there is insurance coverage therefor) in
connection with the MHE Business prior to the Recapitalization Closing.
Additionally, HarnCo retained all liability for medical and disability benefit
claims for current United States employees made prior to the Recapitalization
Closing and all claims with respect to any of the HII benefit plans for former
United States employees.
HarnCo has been and is currently a defendant to a number of asbestos related
lawsuits and will likely be named in future such actions. Most suits involve
multiple defendants including asbestos manufacturers. MMH has agreed to
indemnify HarnCo and its affiliates with respect to any liabilities in excess of
insurance arising in connection with past and future asbestos litigation
relating to the MHE Business. HII's insurance program included coverage for
asbestos related claim activity through 1986, when coverage for asbestos related
claims ceased to be available. HII's insurer has provided first dollar coverage
for policy periods through 1976. During the 1977 to 1985 policy periods, HII had
a variety of policies, with retention levels ranging from $100,000 to $15.0
million and total coverage limits ranging from $12.5 million to $50.0 million.
To date, HII's insurer has paid all indemnification liabilities relating to
asbestos claims (which amounts have not been material to the MHE Business) but
there can be no assurance such insurers will continue to do so in the future or
that there will be insurance coverage for such claims. In addition, policy
primary aggregate levels were exhausted in certain years, which would require
the participation of excess insurers for future claim activity. Given its
experience to date with such claims, the Company believes that its exposure to
asbestos related claims is not material, but there can be no assurance that such
liability will not in fact be material.
14
In October 1998, the Company received a request to arbitrate a claim from a
former customer which arises out of an accident that occurred in Ireland
involving two cranes sold by the Company in 1992. The claim alleges direct
damages of approximately $12.8 million plus lost revenue due to business
interruption. The Company is continuing to work with its insurance broker to
determine the availability of insurance coverage, if any. The contract between
the Company and the claimant provides that the contract is governed by Irish law
and that all disputes are to be resolved by arbitration in Ireland. Given the
recent nature of this claim, it is not possible to reasonably estimate the range
of any potential loss in the event that insurance coverage is not available.
Management intends to vigorously defend this matter.
The Company is a party to various other litigation matters, including product
liability and other claims, which are normal in the course of its operations.
Also, as a normal part of its operations, the Company undertakes certain
contractual obligations and warranties in connection with the sale of products
or services. Although the outcome of these matters cannot be predicted with
certainty, management believes that the resolution of such matters will not have
a material adverse effect on the consolidated results of operations, financial
position or cash flows of Holdings or the Company.
Under the terms of the Recapitalization Agreement, HarnCo retained all liability
for the only two open environmental clean-up claims brought against HarnCo in
the Milwaukee, Wisconsin area. The Company and its management are not aware of
any other material environmental clean-up claim which is pending or is
threatened against the Company, but there can be no assurance that any such
claim will not be asserted against the Company in the future.
NOTE 7 - GEOGRAPHICAL INFORMATION
Geographical information for the three months ended January 31, 1999 and 1998,
respectively, are as follows:
Sales to Operating End of Period
Total Interarea Unaffiliated Income Identifiable
Net Sales Sales Customers (Loss) Assets
---------------- ------------ ----------------- ------------- ----------------
January 31, 1999
United States $ 40,187 $ - $ 40,187 $ 354 $ 204,079
Europe 13,278 (1,052) 12,226 (350) 59,719
Other Foreign 15,507 - 15,507 1,471 47,818
Interarea Eliminations (1,052) 1,052 - -
---------------- ------------ ----------------- ------------- ----------------
$ 67,920 $ - $ 67,920 $ 1,475 $ 311,616
---------------- ------------ ----------------- ------------- ----------------
January 31, 1998
United States $ 47,732 $ - $ 47,732 $ 4,055 $ 104,960
Europe 17,502 (2,231) 15,271 231 60,690
Other Foreign 13,480 - 13,480 671 34,729
Interarea Eliminations (2,231) 2,231 - - -
---------------- ------------ ----------------- ------------- ----------------
$ 76,483 $ - $ 76,483 $ 4,957 $ 200,379
---------------- ------------ ----------------- ------------- ----------------
---------------- ------------ ----------------- ------------- ----------------
The $111.2 million increase in net identifiable assets from $200.4 million at
January 31, 1998 to $311.6 million at January 31, 1999 is primarily the result
of deferred income taxes and deferred financing costs recorded in connection
with the Recapitalization discussed in Note 2 above.
15
NOTE 8 - SALE OF FACILITY
During the three months ended Janaury 31, 1998, the Company completed the sale
of its Dayton, Ohio land and building which it had acquired in connection with
the acquisition of an aftermarket operation during the prior year. The
operation's former owners reacquired these assets in exchange for a note
receivable of $427,000 and settlement of the remaining amount of $300,000 due to
the former owners related to the Company's acquisition. The balance of the note
was collected in full by the Company during the three months ended April 30,
1998. No significant gain or loss was recognized in connection with this
transaction.
NOTE 9 - SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
In connection with the Recapitalization, MMH, a direct wholly-owned subsidiary
of Holdings, issued Senior Notes that are guaranteed by certain of MMH's
subsidiaries (the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries
is a wholly-owned subsidiary, directly or indirectly, of MMH and the guarantees
are full, unconditional and joint and several. Both Holdings and MMH are holding
companies with no material operating assets. All of the Company's business
operations are conducted through subsidiaries of MMH and accordingly, both
Holdings and MMH are dependent on the operating subsidiaries of MMH to fund
their cash needs, including debt service and tax obligations.
Separate financial statements of the Guarantor Subsidiaries are not presented
because management has determined that they would not be material to investors.
The following supplemental financial information sets forth the balance sheet,
statement of operations and cash flow information for the Guarantor Subsidiaries
and for MMH's other subsidiaries (the "Non-Guarantor Subsidiaries"). The
supplemental financial information reflects the investments of the Guarantor
Subsidiaries in the Non-Guarantor Subsidiaries using the equity method of
accounting. For purposes of this presentation, it is assumed that, historically,
all of the assets of the MHE Business were wholly-owned by subsidiaries of MMH,
which is an entity that was formed by Holdings in connection with the
Recapitalization and accordingly, the historical financial statements of MMH and
Holdings are identical following completion of the Recapitalization.
16
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 1999
(UNAUDITED)
(Dollars in Thousands)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
ASSETS Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------ ------------ -------------- ------------ --------------
Current Assets
Cash and cash equivalents $ 3,017 $ 143 $ 200 $ - $ 3,360
Accounts receivable - net 67,440 4,718 - - 72,158
Intercompany accounts receivable 29,841 - 14,513 (44,354) -
Inventories 40,083 2,739 - - 42,822
Other current assets 5,351 1,673 7,888 - 14,912
------------ ----------- ----------- ----------- -----------
145,732 9,273 22,601 (44,354) 133,252
------------ ----------- ----------- ----------- -----------
Property, Plant and Equipment 38,227 2,595 - - 40,822
------------ ----------- ----------- ----------- -----------
Other Assets
Goodwill 39,537 2,038 - - 41,575
Debt financing costs - - 18,581 - 18,581
Noncurrent intercompany receivable 3,783 - 80,968 (84,751) -
Investment in affiliates 89 - 67,994 (68,083) -
Deferred income taxes 709 - 68,228 - 68,937
Other 8,449 - - - 8,449
------------ ----------- ----------- ----------- -----------
52,567 2,038 235,771 (152,834) 137,542
------------ ----------- ----------- ----------- -----------
$ 236,526 $ 13,906 $ 258,372 $ (197,188) $ 311,616
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 5,158 $ 40 $ - $ - $ 5,198
Revolving credit facility borrowings 5,317 - - - 5,317
Term loans - - 53,988 - 53,988
Acquisition facility line borrowings - - 7,430 - 7,430
Bank overdrafts 5 1,483 - - 1,488
Trade accounts payable 23,433 2,056 - - 25,489
Intercompany accounts payable 14,513 4,357 25,484 (44,354) -
Advance payments and progress billings 8,438 - - - 8,438
Accrued interest 110 - 6,927 - 7,037
Other current liabilities 24,769 1,124 - - 25,893
------------ ----------- ----------- ----------- -----------
81,743 9,060 93,829 (44,354) 140,278
------------ ----------- ----------- ----------- -----------
Senior Notes - - 200,000 - 200,000
Other Long-Term Obligations 3,171 616 329 - 4,116
Noncurrent intercompany payable 80,968 3,783 - (84,751) -
Deferred Income Taxes 2,650 - - - 2,650
Minority Interest - - - 358 358
Mandatorily Redeemable Preferred Stock - - - - -
Stockholders' Equity 67,994 447 (35,786) (68,441) (35,786)
------------ ----------- ----------- ----------- -----------
$ 236,526 $ 13,906 $ 258,372 $ (197,188) $ 311,616
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Consolidated
MMH MMH
ASSETS Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------ --------------
Current Assets
Cash and cash equivalents $ - $ - $ 3,360
Accounts receivable - net - - 72,158
Intercompany accounts receivable - - -
Inventories - - 42,822
Other current assets - - 14,912
----------- ----------- -----------
- - 133,252
----------- ----------- -----------
Property, Plant and Equipment - - 40,822
----------- ----------- -----------
Other Assets
Goodwill - - 41,575
Debt financing costs - - 18,581
Noncurrent intercompany receivable - - -
Investment in affiliates (35,786) 35,786 -
Deferred income taxes - - 68,937
Other - - 8,449
----------- ----------- -----------
(35,786) 35,786 137,542
----------- ----------- -----------
$ (35,786) $ 35,786 $ 311,616
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ - - 5,198
Revolving credit facility borrowings - - 5,317
Term loans - - 53,988
Acquisition facility line borrowings - - 7,430
Bank overdrafts - - 1,488
Trade accounts payable - - 25,489
Intercompany accounts payable - - -
Advance payments and progress billings - - 8,438
Accrued interest - - 7,037
Other current liabilities - - 25,893
----------- -------- -----------
- - 140,278
----------- -------- -----------
Senior Notes - - 200,000
Other Long-Term Obligations - - 4,116
Noncurrent intercompany payable - - -
Deferred Income Taxes - - 2,650
Minority Interest - - 358
Mandatorily Redeemable Preferred Stock 98,446 - 98,446
Stockholders' Equity (134,232) 35,786 (134,232)
----------- -------- -----------
$ (35,786) $ 35,786 $ 311,616
----------- -------- -----------
----------- -------- -----------
17
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1998
($ in 000's)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
ASSETS Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------ ------------ -------------- ------------ --------------
Current Assets
Cash and cash equivalents $ 2,214 $ 320 $ - $ - $ 2,534
Accounts receivable - net 76,000 5,947 - - 81,947
Intercompany accounts receivable 20,687 - 6,915 (27,602) -
Inventories 39,749 2,812 - - 42,561
Other current assets 5,218 384 5,865 - 11,467
------------ ----------- ----------- ----------- -----------
143,868 9,463 12,780 (27,602) 138,509
------------ ----------- ----------- ----------- -----------
Property, Plant and Equipment 38,295 2,775 - - 41,070
------------ ----------- ----------- ----------- -----------
Other Assets
Goodwill 37,767 2,076 - - 39,843
Debt financing costs - - 18,905 - 18,905
Noncurrent intercompany receivable 3,853 - 83,416 (87,269) -
Investment in affiliates 331 - 66,732 (67,063) -
Deferred income taxes - - 65,979 - 65,979
Other 6,691 - - - 6,691
------------ ----------- ----------- ----------- -----------
48,642 2,076 235,032 (154,332) 131,418
------------ ----------- ----------- ----------- -----------
$ 230,805 $ 14,314 $ 247,812 $ (181,934) $ 310,997
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 122 $ 40 $ 2,100 $ - $ 2,262
Bank overdrafts - 1,252 - - 1,252
Trade accounts payable 30,539 2,354 - - 32,893
Intercompany accounts payable 6,915 4,130 16,557 (27,602) -
Advance payments and progress billings 9,394 5 - - 9,399
Accrued interest - - 2,201 - 2,201
Other current liabilities 29,763 1,329 (1,146) - 29,946
------------ ----------- ----------- ----------- -----------
76,733 9,110 19,712 (27,602) 77,953
------------ ----------- ----------- ----------- -----------
Term loans - - 52,225 - 52,225
Acquisition facility line borrowings - - 6,194 - 6,194
Senior Notes - - 200,000 - 200,000
Other Long-Term Debt 1,226 656 1,523 - 3,405
Noncurrent intercompany payable 83,416 3,853 - (87,269) -
Deferred Income Taxes 2,698 - - - 2,698
Minority Interest - - - 364 364
Mandatorily Redeemable Preferred Stock - - - - -
Stockholders' Equity 66,732 695 (31,842) (67,427) (31,842)
------------ ----------- ----------- ----------- -----------
$ 230,805 $ 14,314 $ 247,812 $ (181,934) $ 310,997
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Consolidated
MMH MMH
ASSETS Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------ --------------
Current Assets
Cash and cash equivalents $ - - 2,534
Accounts receivable - net - - 81,947
Intercompany accounts receivable - - -
Inventories - - 42,561
Other current assets - - 11,467
----------- ----------- -----------
- - 138,509
----------- ----------- -----------
Property, Plant and Equipment - - 41,070
----------- ----------- -----------
Other Assets
Goodwill - - 39,843
Debt financing costs - - 18,905
Noncurrent intercompany receivable - - -
Investment in affiliates (31,842) 31,842 -
Deferred income taxes - - 65,979
Other - - 6,691
----------- ----------- -----------
(31,842) 31,842 131,418
----------- ----------- -----------
$ (31,842) $ 31,842 $ 310,997
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ - $ - $ 2,262
Bank overdrafts - - 1,252
Trade accounts payable - - 32,893
Intercompany accounts payable - - -
Advance payments and progress billings - - 9,399
Accrued interest - - 2,201
Other current liabilities - - 29,946
----------- -------- -----------
- - 77,953
----------- -------- -----------
Term loans - - 52,225
Acquisition facility line borrowings - - 6,194
Senior Notes - - 200,000
Other Long-Term Debt - - 3,405
Noncurrent intercompany payable - - -
Deferred Income Taxes - - 2,698
Minority Interest - - 364
Mandatorily Redeemable Preferred Stock 95,351 - 95,351
Stockholders' Equity (127,193) 31,842 (127,193)
----------- -------- -----------
$ (31,842) $ 31,842 $ 310,997
----------- ----------- -----------
----------- ----------- -----------
18
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1999
(UNAUDITED)
(Dollars in Thousands)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------ ------------ ------------ ------------ ---------------
Revenues
Net Sales $ 64,139 $ 4,097 $ - $ (316) $ 67,920
Other Income - net 77 25 - - 102
------------ ----------- ----------- ----------- -----------
64,216 4,122 - (316) 68,022
Cost of Sales 47,832 3,098 - (316) 50,614
Selling, General and
Administrative Expenses 14,823 887 223 - 15,933
------------ ----------- ----------- ----------- -----------
Operating Income (Loss) 1,561 137 (223) - 1,475
Interest (Expense) Income - net
Affiliates (1,610) (95) 1,705 - -
Third Party (131) (138) (6,639) - (6,908)
------------ ----------- ----------- ----------- -----------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest (180) (96) (5,157) - (5,433)
Benefit for Income Taxes 206 - 2,247 - 2,453
Equity in Earnings (Loss) of Subsidiaries (90) - (64) 154 -
Minority Interest - - 6 6
------------ ----------- ----------- ----------- -----------
Net Income (Loss) $ (64) $ (96) $ (2,974) $ 160 $ (2,974)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
------------- ------------ -------------
Revenues
Net Sales $ - $ - $ 67,920
Other Income - net - - 102
----------- ----------- -----------
- - 68,022
Cost of Sales - - 50,614
Selling, General and
Administrative Expenses - - 15,933
Operating Income (Loss) - - 1,475
Interest (Expense) Income - net
Affiliates - - -
Third Party - - (6,908)
----------- ----------- -----------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest - - (5,433)
Benefit for Income Taxes - - 2,453
Equity in Earnings (Loss) of Subsidiaries (2,974) 2,974 -
Minority Interest - - 6
----------- ----------- -----------
Net Income (Loss) $ (2,974) $ 2,974 $ (2,974)
----------- ----------- -----------
----------- ----------- -----------
19
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
(UNAUDITED)
(Dollars in Thousands)
Non
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ -----------
Revenues
Net Sales $ 73,136 $ 5,210 (1,863) $ 76,483
Other Income - net 284 - - 284
------------ ----------- ----------- -----------
73,420 5,210 (1,863) 76,767
Cost of Sales 54,562 3,954 (1,863) 56,653
Selling, General and
Administrative Expenses 13,157 1,203 - 14,360
HII Management Fee 677 - - 677
Non-Recurring Employee Benefit Costs 120 - - 120
------------ ----------- ----------- -----------
Operating Income 4,904 53 - 4,957
Interest Expense - net
HII Affiliates (642) (45) - (687)
Third Party (12) (146) - (158)
------------ ----------- ----------- -----------
Income (Loss) Before Income Taxes, Equity in Loss
of Combined Affiliates and Minority Interest 4,250 (138) - 4,112
Provision for Income Taxes (1,976) (11) (1,987)
Equity in Loss of Combined Affiliates (135) - 135 -
Minority Interest - - 14 14
------------ ----------- ----------- -----------
Net Income (Loss) $ 2,139 $ (149) $ 149 $ 2,139
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
20
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1999
(UNAUDITED)
(Dollars in Thousands)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
------------ ------------ ------------- ------------ -------------
Operating Activities
Net income (Loss) $ (64) $ (96) $ (2,974) $ 160 $ (2,974)
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 1,744 62 - - 1,806
Amortization of debt financing costs - - 324 - 324
Equity in loss of subsidiaries 90 - 64 (154) -
Deferred income taxes - net (709) - (2,248) - (2,957)
Other - - - (6) (6)
Changes in working capital, excluding the
effects of acquisition opening
balance sheets:
Accounts receivable 11,031 881 - - 11,912
Inventories 936 (126) - - 810
Other current assets 7,434 (1,391) (9,621) - (3,578)
Trade accounts payable and bank overdrafts (8,434) 117 - - (8,317)
Accrued interest 110 - 4,726 - 4,836
Other current liabilities (14,714) 383 10,073 - (4,258)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating
activities (2,576) (170) 344 - (2,402)
----------- ----------- ----------- ----------- -----------
Investment and Other Transactions
Fixed asset additions - net (1,586) (48) - - (1,634)
Acquisition of businesses - net of cash acquired (4,989) - - - (4,989)
Other - net (114) (36) - - (150)
----------- ----------- ----------- ----------- -----------
Net cash used for investment and other transactions (6,689) (84) - - (6,773)
----------- ----------- ----------- ----------- -----------
Financing Activities
Changes in short-term debt and notes payable 10,268 86 - - 10,354
Net repayments of Revolving Credit Facility
borrowings - - (1,200) - (1,200)
Proceeds from Acquisition Facility Line borrowings - - 1,235 - 1,235
Distribution to parent (158) - 158 - -
Repayments of long-term debt - - (337) - (337)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing
activities 10,110 86 (144) - 10,052
----------- ----------- ------------ ----------- -----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (42) (9) - - (51)
----------- ----------- ------------ ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 803 (177) 200 826
Cash and Cash Equivalents
Beginning of Period 2,214 320 - - 2,534
----------- ----------- ----------- ----------- -----------
End of Period $ 3,017 $ 143 $ 200 $ - $ 3,360
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
-------------- ------------ -------------
Operating Activities
Net income (Loss) $ (2,974) $ 2,974 $ (2,974)
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization - - 1,806
Amortization of debt financing costs - - 324
Equity in loss of subsidiaries 2,974 (2,974) -
Deferred income taxes - net - - (2,957)
Other - - (6)
Changes in working capital, excluding the
effects of acquisition opening
balance sheets:
Accounts receivable - - 11,912
Inventories - - 810
Other current assets - - (3,578)
Trade accounts payable and bank overdrafts - - (8,317)
Accrued interest - - 4,836
Other current liabilities - - (4,258)
----------- ----------- -----------
Net cash provided by (used for) operating
activities - - (2,402)
----------- ----------- -----------
Investment and Other Transactions
Fixed asset additions - net - - (1,634)
Acquisition of businesses - net of cash acquired - - (4,989)
Other - net - - (150)
----------- ----------- -----------
Net cash used for investment and other transactions - - (6,773)
----------- ----------- -----------
Financing Activities
Changes in short-term debt and notes payable - - 10,354
Net repayments of Revolving Credit Facility
borrowings - - (1,200)
Proceeds from Acquisition Facility Line borrowings - - 1,235
Distribution to parent - - -
Repayments of long-term debt - - (337)
----------- ----------- -----------
Net cash provided by (used for) financing
activities - - 10,052
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents - - (51)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 826
Cash and Cash Equivalents
Beginning of Period - - 2,534
----------- ----------- -----------
End of Period $ - $ - $ 3,360
----------- ----------- -----------
----------- ----------- -----------
21
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
(UNAUDITED)
(Dollars in Thousands)
Non
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations
------------ ----------- ------------
Operating Activities
Net income $ 2,139 $ (149) $ 149
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 1,541 118 -
Equity in loss of combined activities 135 - (135)
Deferred income taxes - net 46 - -
Other 34 - 14
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 4,642 632 -
Inventories (3,154) (1,358) -
Other current assets (1,587) (31) -
Trade accounts payable and bank overdrafts (6,481) (864) -
Other current liabilities 3,373 296 (28)
Activity with parent and other affiliates - net 4,682 1,246 -
----------- ----------- -----------
Net cash provided by (used for) operating activities 5,370 (110) -
----------- ----------- -----------
Investment and Other Transactions
Fixed asset additions - net (798) (18) -
Other - net 357 109 -
----------- ----------- -----------
Net cash provided by (used for) investment and other
transactions (441) 91 -
Financing Activities
Repayments of short-term debt and notes payable (207) - -
----------- ----------- -----------
Net cash used for financing activities (207) - -
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 91 (9) -
Increase (Decrease) in Cash and Cash Equivalents 4,813 (28) -
Cash and Cash Equivalents
Beginning of Period 1,393 139 -
----------- ----------- -----------
End of Period $ 6,206 $ 111 $ -
----------- ----------- -----------
----------- ----------- -----------
Combined
-----------
Operating Activities
Net income $ 2,139
Add (deduct) - items not affecting cash provided by
operating activities:
Depreciation and amortization 1,659
Equity in loss of combined activities -
Deferred income taxes - net 46
Other 48
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 5,274
Inventories (4,512)
Other current assets (1,618)
Trade accounts payable and bank overdrafts (7,345)
Other current liabilities 3,641
Activity with parent and other affiliates - net 5,928
-----------
Net cash provided by (used for) operating activities 5,260
-----------
Investment and Other Transactions
Fixed asset additions - net (816)
Other - net 466
-----------
Net cash provided by (used for) investment and other
transactions (350)
Financing Activities
Repayments of short-term debt and notes payable (207)
-----------
Net cash used for financing activities (207)
-----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 82
-----------
Increase (Decrease) in Cash and Cash Equivalents 4,785
Cash and Cash Equivalents
Beginning of Period 1,532
-----------
End of Period $ 6,317
-----------
-----------
22
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED PREVIOUSLY IN THIS DOCUMENT.
THE COMPANY'S FISCAL YEAR ENDS OCTOBER 31. CONSEQUENTLY, ANY REFERENCE TO ANY
PARTICULAR FISCAL YEAR MEANS THE FISCAL YEAR ENDED OCTOBER 31 OF SUCH YEAR.
GENERAL
The Company is a leading international provider of "through-the-air" material
handling products and services used in most manufacturing industries. The
Company's original equipment operations design and manufacture a comprehensive
line of industrial cranes, hoists and component products. Through its
aftermarket operations, the Company provides a variety of related products and
services, including replacement parts, repair and maintenance services and
product modernizations. In recent years, the Company has shifted its orientation
from an original equipment-focused United States manufacturer to an
international full service provider with a significant emphasis on the high
margin aftermarket business. The Company's revenues are derived principally from
the sale of industrial overhead cranes, component products and aftermarket
products and services.
RECAPITALIZATION. Historically, the Company conducted its business as one of
several operating units of Harnischfeger Industries, Inc. ("HII"). Prior to
March 30, 1998, the core United States operations of the Company were conducted
directly by HarnCo, while the remainder of the Company's operations throughout
the world were conducted through a number of entities owned, directly or
indirectly, by HII and its affiliates.
On January 28, 1998, HII reached an agreement with MHE Investments, Inc. ("MHE
Investments"), a newly formed affiliate of Chartwell Investments Inc., for the
sale of an approximately 80 percent common ownership interest in the MHE
Business. Pursuant to this agreement, HarnCo and other HII affiliates effected a
number of transactions (the "Transactions" or the "Recapitalization") that
resulted in Holdings, a preexisting company engaged in the MHE Business,
acquiring, through MMH, its newly formed wholly-owned subsidiary, the equity
interests of all of the operating entities engaged in the MHE Business. As a
result of the reorganization of the MHE Business' legal entities, Holdings and
the Company became the successor companies to the MHE Business. The Transactions
are accounted for as a recapitalization for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not impacted by the Transactions.
In conjunction with the Recapitalization, which closed on March 30, 1998 (the
"Recapitalization Closing"), Holdings sold $60.0 million of Series A Units,
consisting of $57.7 million liquidation preference of Holdings' Series A Senior
Exchangeable Preferred Stock (the "Holdings Series A Senior Preferred Stock")
and 720 shares of non-voting common stock, to institutional investors. In
addition, MMH sold $200.0 million aggregate principal amount of its 9 1/2%
Senior Notes due 2008 (the "Senior Notes") and entered into a senior secured
credit facility ("the New Credit Facility"). The New Credit Facility includes
$55.0 million of term loans, a revolving credit facility (the "Revolving Credit
Facility") and an acquisition facility (the "Acquisition Facility"). The
Revolving Credit Facility provides the Company with up to $70.0 million of
available borrowings (of which $15.0 million is required under the indenture
that governs the Senior Notes (the "Note Indenture") to be reserved for issuance
of letters of credit) for working capital, acquisitions and other corporate
purposes, subject to compliance with certain conditions. The Acquisition
Facility permits the Company to borrow up to $30.0 million until the third
anniversary of the Recapitalization Closing to finance acquisitions, subject to
compliance with certain conditions.
At the Recapitalization Closing, (i) MHE Investments paid HarnCo $54.0 million
for 72.6% of Holdings' common stock (the "Holdings Common Stock") (after giving
effect to the Transactions) and approximately $28.9 million liquidation
preference of Holdings' Series C Junior Voting Exchangeable Preferred Stock (the
"Holdings Series C Junior Voting Preferred Stock"), (ii) Holdings redeemed
certain shares of Holdings Common Stock and Holdings Series C Junior Voting
Preferred Stock from HarnCo for $282.0 million in cash (subject to potential
post-Recapitalization adjustments as to which an additional $5.0 million was
provided to HarnCo) and approximately $4.8 million liquidation preference of
Holdings' Series B Junior Exchangeable Preferred Stock (the "Holdings Series B
Junior Preferred Stock"), and (iii) HarnCo retained approximately 20.8% of the
Holdings Common Stock (after giving effect to the Transactions).
23
Until the Recapitalization Closing, HII and HarnCo performed a number of
functions necessary to the operations of the Company in accordance with past
practices, including manufacturing certain products and providing certain
information systems, administrative services and credit support. Holdings' and
MMH's historical financial statements include charges allocated to the MHE
Business by HII for these products and services. Because the Company operates
independently of HII since the Recapitalization Closing, however, Holdings' and
MMH's historical performance may not be indicative of future financial results.
At the Recapitalization Closing, MMH entered into a number of agreements
pursuant to which HII and its affiliates will continue to provide to MMH and to
its subsidiaries located in the United States, on an interim basis and under
substantially the same terms and conditions as before the closing, certain
products and services. In addition, HII and MMH entered into a credit
indemnification agreement (the "Credit Indemnification Agreement") pursuant to
which HII will maintain in place the credit support obligations in existence at
the Recapitalization Closing but have no further duty to extend, renew or enter
into any new credit support obligations (except as to the MHE Business
obligations existing at the Recapitalization Closing). Under the Credit
Indemnification Agreement, MMH is required to pay HII, in advance, an annual fee
equal to 1% of the amounts outstanding under each letter of credit and bond
provided by HII and its affiliates (approximately $30.2 million as of January
31, 1999). MMH paid a pro-rated fee of $290,000 for calendar year 1998 at the
Recapitalization Closing. HII is required to refund the Company on a quarterly
basis a pro-rata portion of the annual fee for any reductions in the outstanding
amount of credit that occurred during such quarter. In addition, the Company
will reimburse HII for certain future fees and expenses. The Company also
entered into a surety arrangement (the "Surety Arrangement") to provide credit
support for its post-Recapitalization Closing operations.
In connection with the Recapitalization, the Company also entered into a
trademark license agreement with an affiliate of HarnCo, pursuant to which the
Company has the right to use the P&H trademark with respect to all MHE Business
products on a worldwide exclusive basis from the date of the Recapitalization
Closing until 15 years after the earlier to occur of a sale of Holdings to a
third party or a public offering of the common stock of Holdings, the Company or
their parents or successors (and for an additional seven years thereafter for
aftermarket products and services). The royalty fee for use of the trademark is
0.75% of the aggregate net sales of the MHE Business for the ten year period
commencing March 30, 1999.
For income tax purposes, Holdings and MMH were deemed to acquire the assets of
the MHE Business pursuant to Section 338(h)(10) of the Internal Revenue Code of
1986, as amended, in connection with the Transactions. Accordingly, the
Recapitalization increased the tax basis of certain assets and created
tax-deductible goodwill, which will generate significant future tax deductions
to reduce taxable income.
ACQUISITIONS
During the three months ended January 31, 1999, the Company completed one
acquisition with an aggregate purchase price of $3,158, net of cash acquired.
This acquisition was related to the Company's aftermarket business and was
accounted for as a purchase transaction with the purchase price allocated to the
fair value of specific assets acquired and liabilities assumed. Resultant
goodwill of $1,108 was recorded and is being amortized over 40 years. This
acquisition was partially financed by the seller, resulting in a deferred
purchase price which will be paid in 2004 and 2005. During the three months
ended January 31, 1999, the Company made final consideration payments of $1,507
related to two 1998 acquisitions. With respect to a 1995 acquisition, the
Company was required to make a contingent consideration payment of $1,332 in the
three months ended January 31, 1999. Additionally, a payment of $100 was made
toward a fiscal 1998 purchase which was partially financed by the seller. On a
pro forma basis, the fiscal 1999 acquisition was not material to results of
operations reported for the three months ended January 31, 1999 and accordingly,
such information is not presented.
24
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated.
SUPPLEMENTAL DATA
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31, 1999 JANUARY 31, 1998
------------------------------ ------------------------------
PERCENT OF PERCENT OF
$ NET SALES $ NET SALES
------------- ------------- ------------- -------------
Net Sales $ 67.9 100.0% $ 76.5 100.0%
Other income - net 0.1 0.1% 0.3 0.4%
Cost of sales 50.6 74.5% 56.7 74.1%
Selling, general and
administrative expenses 15.9 23.4% 14.4 18.8%
Other costs - - 0.8 1.1%
Operating income 1.5 2.2% 4.9 6.4%
Interest expense (6.9) -10.2% (0.8) -1.1%
Tax benefit (expense) 2.4 3.5% (2.0) -2.6%
Net income (loss) (3.0) -4.5% 2.1 2.7%
THREE MONTHS ENDED JANUARY 31, 1999 AS COMPARED TO THREE MONTHS ENDED JANUARY
31, 1998
Net sales for the three months ended January 31, 1999 ("First Quarter 1999")
decreased $8.6 million or 11.2% to $67.9 million from $76.5 million for the
three months ended January 31, 1998 ("First Quarter 1998"). The decrease in net
sales was primarily caused by the following: (i) a decrease of $7.2 million in
engineered crane sales worldwide as First Quarter 1998 included the completion
of certain large projects in both the United States and the United Kingdom
without a corresponding level of projects in First Quarter 1999; and (ii) a
decrease in overall parts sales of $2.7 million or 13.9% from $19.3 million in
First Quarter 1998 to $16.6 million in First Quarter 1999 as a result of reduced
purchasing levels by several large customers, certain delays by suppliers
causing an increase in the parts backlog since October 31, 1998 and continued
consolidation of parts warehouses causing some shipment delays. These decreases
were partially offset by an increase in modernization sales and an increase in
service sales.
Cost of sales decreased $6.1 million or 10.8% to $50.6 million in First Quarter
1999 from $56.7 million in First Quarter 1998 primarily due to the lower sales
volumes described above. However, cost of sales increased as a percentage of net
sales from 74.1% in First Quarter 1998 to 74.5% in First Quarter 1999 due to a
lower level of factory costs absorbed and a higher level of manufacturing
variances as a result of the lower level of volume in manufacturing operations
and several customer-delayed crane projects in North America. These cost
increases were partially offset by the continued shift in the Company's sales
mix toward the higher margin standard cranes and aftermarket products and away
from engineered cranes.
Selling, general and administrative expenses increased $1.5 million or 10.4% to
$15.9 million in First Quarter 1999 from $14.4 million in First Quarter 1998.
The primary causes were the increased administrative resources necessary to
replace functions formerly performed by HII and their affiliates, including
information systems and certain accounting and human resource functions, and
increases due to the fiscal 1998 acquisitions, subsequent to First Quarter 1998.
Additionally, management fees of approximately $0.3 million are included in
First Quarter 1999 selling, general and administrative expenses. These increases
were offset by savings incurred due to the fiscal 1998 restructuring of the
United Kingdom and United States manufacturing operations and other
cost-reducing measures.
Parent management fees allocated by HII (prior to the Recapitalization) (the
"HII Management Fee"), which represented an allocation of HII's corporate
expenses, were $0.7 million in First Quarter 1998.
Approximately $6.9 million in interest expense was recorded in First Quarter
1999 resulting from the issuance of debt in connection with the
Recapitalization, including $0.5 million in amortization of related financing
costs. The Company paid $2.1 million in interest and commitment fees during the
First Quarter 1999.
25
The income tax benefit in First Quarter 1999 was approximately 45% of loss
before income taxes and minority interest as compared to a provision for income
taxes of 48% in First Quarter 1998.
The Company's backlog of orders at January 31, 1999 was approximately $92.5
million compared to approximately $99.7 million at January 31, 1998. Bookings in
First Quarter 1999 were $63.1 million compared to $78.5 million in First Quarter
1998. Quotation activity was strong in First Quarter 1999, but the awarding of
many orders was delayed. The change in backlog and bookings was primarily due to
the typical variability in booking patterns for highly engineered cranes and
fewer parts and service bookings.
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's sales of products and services are recorded as
products are shipped or services are rendered. Revenue on certain long-term
contracts is recorded using the percentage-of-completion method. Net cash flow
from operations is affected by the volume of, and the timing of payments under,
percentage-of-completion long-term contracts.
Net cash flow used for operating activities was $2.4 million in First Quarter
1999 compared to net cash flow provided by operating activities of $5.3 million
in First Quarter 1998. The $7.7 million decrease in operating cash flow was due
primarily to: a $5.1 million decrease in net income; a $3.0 million increase in
deferred tax assets, generated by the net loss in First Quarter 1999; a $0.5
increase in depreciation, amortization of intangible assets and amortization of
debt financing costs which were incurred during the Recapitalization; an $11.9
million decrease in accounts receivable during First Quarter 1999 versus a $5.3
million decrease in First Quarter 1998; an increase in inventory and other
assets of $2.8 million in First Quarter 1999 versus an increase in First Quarter
1998 of $6.1 million; an increase in accrued interest of $4.8 million in First
Quarter 1999 caused by the issuance of debt in the Recapitalization; a decrease
in accounts payable, accruals and other liabilities of $12.6 million in First
Quarter 1999 versus a decrease of $3.7 million in First Quarter 1998 caused by
decreases in income taxes payable and the reduction of customer deposits due to
product shipment; and the reduction of funding from the Company's former parent
of $5.9 million.
Net cash used for investment and other transactions for First Quarter 1999 and
First Quarter 1998 was $6.8 million and $0.4 million, respectively. During the
First Quarter 1999, $5.0 million of cash was used for an acquisition related to
the Company's distribution and service center network and payments made with
respect to three earlier acquisitions. Additionally, capital expenditures
increased to $1.6 million in First Quarter 1999 from $0.8 million in First
Quarter 1998. The First Quarter 1999 expenditures included computers and
upgrades, new operating system software, office and warehouse consolidations and
manufacturing equipment.
Net cash provided by financing activities was $10.1 million in First Quarter
1999 (after giving effect to the repayment subsequent to January 31, 1999 of
$25.4 million that was borrowed on January 29, 1999, as described below)
versus net cash used in financing activities of $0.2 million in First Quarter
1998. Net borrowings (after giving effect to the repayment of the $25.4
million subsequent to January 31, 1999) included $10.4 million under the
Revolving Credit Facility in the United States, Canada and the United
Kingdom. The Company also borrowed $1.2 million under the Acquisition Credit
Facility.
The New Credit Facility contains financial ratio covenants and borrowing
condition tests based on the latest twelve month results of operations of the
Company. The Company did not meet certain of the ratios and tests under the
New Credit Facility for the period ended January 31, 1999. The Company
obtained a waiver of such financial covenants, however, for the period ended
January 31, 1999 and of all financial covenants for the period ended April
30, 1999, effective through June 14, 1999, permitting the Company to borrow
certain amounts under the Revolving Credit Facility to meet its projected
working capital requirements. Under the terms of the waiver, the Company may
not, without prior bank consent, for the duration of the waiver period, (i)
borrow any amounts under the Acquisition Facility, (ii) borrow any amounts
under the Revolving Credit Facility in excess of the aggregate amount of
Revolving Credit Facility borrowings that the Company has repaid subsequent
to January 31, 1999, or (iii) request the issuance of letters of credit, bid
bonds or performance bonds in an aggregate amount in excess of $5.0 million.
At March 3, 1999 after giving effect to the waiver obtained from the lender,
the Company had, subject to certain conditions, approximately $25.4 million
of availability under the Revolving Credit Facility. As a result of the
covenant violations under the New Credit Facility at January 31, 1999 and the
Company's anticipated violation of required covenants and tests at compliance
dates during the next twelve months, the borrowings outstanding under the New
Credit Facility of $66.7 million (after giving effect to the repayment of
$25.4 million subsequent to January 31, 1999 described below) are classified
as current liabilities in the accompanying January 31, 1999 balance sheets.
Cash and borrowings under the revolving portion of the New Credit Facility in
the accompanying balance
26
sheets at January 31, 1999 have been reduced by the repayment since January 31,
1999 of $25.4 million borrowed under the New Credit Facility on January 29,
1999. The Company has begun negotiations with the lending institutions which may
result in amendments to the New Credit Facility. The results of the negotiations
will not be available until the third quarter of fiscal 1999. In the event that
no amendment can be negotiated, the lenders under the New Credit Facility could
elect, when the current waiver expires, to declare all amounts borrowed under
the New Credit Facility, together with accrued interest thereon, to be due and
payable, which would be an event of default under the Note Indenture and the
Surety Arrangement. There can be no assurance that the Company would have
sufficient assets to pay indebtedness then outstanding under the New Credit
Facility, the Senior Notes and obligations under the Surety Arrangement.
CAUTIONARY FACTORS
This report contains or may contain forward looking statements by or on behalf
of Holdings and the Company. Such statements are based upon management's current
expectations and are subject to risks and uncertainties that could cause the
Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on these forward
looking statements. In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could cause the
Company's actual results to differ materially from those contemplated include,
among others, the following:
o The Company's principal business includes designing,
manufacturing, marketing and servicing large cranes for the
capital goods industries. Long periods of time are often necessary
to plan, design and build these machines. With respect to these
machines, there are risks of customer acceptance and start-up or
performance problems. Large amounts of capital are required to be
devoted by some of the Company's customers to purchase these
machines and to finance the steel mills, paper mills and other
facilities that use these machines. The Company's success in
obtaining and managing sales opportunities can affect the
Company's financial performance. In addition, some projects are
located in undeveloped or developing economies where business
conditions are less predictable.
o The Company incurred significant debt in connection with the
Recapitalization. As of January 31, 1999, the Company had an
aggregate of approximately $277.5 million of outstanding
indebtedness, after giving effect to the repayment subsequent to
January 31, 1999 of $25.4 million that the Company borrowed on
January 29, 1999. At March 3, 1999, the Company also had, under
the terms of the waiver and subject to certain conditions,
approximately $25.4 million of availability under the Revolving
Credit Facility. The level of consolidated indebtedness could
impact the ability of the Company to obtain additional financing
for acquisitions, working capital and capital expenditures. It may
also cause the Company to be at a competitive disadvantage because
it is more highly leveraged than some of its competitors. A
downturn in the Company's business will have a more significant
impact on its results of operations and cash flows. In addition,
borrowings under the New Credit Facility are (i) secured by
substantially all of the present and future assets of the Company
and its subsidiaries located in the United States and the United
Kingdom, certain of the Company's subsidiaries' present and future
assets located in Canada and by a pledge of substantially all of
the issued and outstanding shares of capital stock of the Company
and its current and future subsidiaries and (ii) guaranteed by
Holdings and substantially all of the Company's subsidiaries.
o The New Credit Facility contains financial ratio covenants and
borrowing condition tests based on the latest twelve month results
of operations of the Company. The Company did not meet certain of
the ratios and tests under the New Credit Facility for the period
ended January 31, 1999. The Company, however, obtained a waiver of
such financial covenants for the period ended January 31, 1999 and
of all financial covenants for the period ended April 30, 1999,
effective through June 14, 1999, permitting the Company to borrow
certain amounts under the Revolving Credit Facility to meet its
projected working capital requirements. Under the terms of the
waiver, the Company may not, without prior bank consent, for the
duration of the waiver period, (i) borrow any amounts under the
Acquisition Facility, (ii) borrow any amounts under the Revolving
Credit Facility in excess of the aggregate amount of the Revolving
Credit Facility borrowings that the Company has repaid subsequent
to January 31, 1999, or (iii) request the issuance of letters of
credit, bid bonds or performance bonds in an aggregate amount in
excess of $5.0 million. The Company has begun negotiations with
the lending institutions which may result in amendments to the New
Credit Facility. The results of the negotiations will not be
available until the third quarter of fiscal 1999. In the event
that no amendment can be negotiated, the lenders under the New
Credit Facility could elect, when the current waiver expires, to
declare all amounts borrowed under the New Credit Facility,
together with accrued interest thereon, to be due and payable,
which would be an event of default under the Note Indenture and
the Surety Arrangement. There
27
can be no assurance that the Company would have sufficient assets
to pay indebtedness then outstanding under the New Credit
Facility, the Senior Notes and obligations under the Surety
Arrangement.
o The Company has operations and assets located in Canada, Mexico,
Chile, the United Kingdom, South Africa, Australia and Singapore
and is establishing joint ventures in Malaysia, Thailand and Saudi
Arabia. The Company also sells its products through distributors
and agents in over 50 countries, some of which are merely ad hoc
arrangements and may be terminated at any time. The Company's
international operations (including Canada, Mexico, Chile, South
Africa, Australia and the United Kingdom) accounted for 36.2%,
41.8% and 36.1% of the Company's aggregate net sales in 1998, 1997
and 1996, respectively; and 40.8% and 37.6% in First Quarter 1999
and First Quarter 1998, respectively. Although historically,
exchange rate fluctuations and other international factors have
not had a material impact on the Company's business, financial
condition or results of operations, international operations
expose the Company to a number of risks, including currency
exchange rate fluctuations, trade barriers, exchange controls,
risk of governmental expropriation, political and legal risks and
restrictions, foreign ownership restrictions and risks of
increases in taxes. The inability of the Company, or limitations
on its ability, to conduct its foreign operations or distribute
its products internationally could adversely affect the Company's
operations and financial performance.
o The markets in which the Company operates are highly competitive.
Both domestically and internationally, the Company faces
competition from a number of different manufacturers in each of
its product lines, some of which have greater financial and other
resources than the Company. The principal competitive factors
affecting the Company include performance, functionality, price,
brand recognition, customer service and support, financial
strength and stability, and product availability. There can be no
assurance that the Company will be able to compete successfully
with its existing competitors or with new competitors. Failure to
compete successfully could have a material adverse effect on the
Company's financial condition, liquidity and results of
operations.
o The Company's business is affected by the state of the United
States and global economy in general, and by the varying economic
cycles of the industries in which its products are used. There can
be no assurance that any future condition of the United States
economy or the economies of the other countries in which the
Company does business will not have an adverse effect on the
Company's business, operations or financial performance.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises as a result of computer programs having been written,
and systems having been designed, using two digits rather than four to define
the applicable year. Consequently, such software has the potential to recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Since 1996, the Company has been engaged in resolving its Year 2000 issues,
first as a subsidiary of HII, and now on its own as an independent entity. After
the Recapitalization, the Company established its own Year 2000 teams. These
teams performed site audits at each of the Company's operations in order to
identify and address all Year 2000 issues related to both information technology
("IT") systems and internally used manufacturing and administrative equipment.
Hardware and software technology guidelines have been implemented worldwide in
order to ensure that all systems are Year 2000 compliant before January 1, 2000.
In addition, management periodically monitors the status of the Company's Year
2000 remediation plans. The Company has now completed its internal assessment
phase and is in the process of carrying out its internal remediation phase.
With respect to non-IT systems, such as heating and ventilation systems,
security systems and machine tools, the Company has sought representations from
the relevant vendors that the systems are Year 2000 compliant. The Company has
received such assurances from a number of non-IT system vendors and does not
expect to encounter any significant unresolved Year 2000 issues with respect to
such systems. In addition, in the event that there are any unresolved Year 2000
issues with respect to its non-IT systems, the Company believes it could obtain
replacement services either internally or from third parties without significant
disruptions to its operations.
The Company's operations in Oak Creek, Wisconsin are in the process of replacing
their existing business system. The decision to replace the system was based
solely on the need to move off of the current system which is shared with
28
HarnCo. HII has certified that the current system is already Year 2000 compliant
and the vendor of the replacement system has represented to the Company that
such system is as well (which representation has been confirmed by an outside
consultant). The implementation of the new system is expected to be completed in
the third quarter of fiscal 1999. The Company has sought and received
representations from the applicable vendors that the business systems used in
the United Kingdom, South Africa, Australia, Singapore, Canada, and Mexico are
either already Year 2000 compliant or will be before January 1, 2000. The Year
2000 compliant version of the operating system used in the North American
distribution and service business is currently being tested by the Company and
is expected to be in place prior to the year 2000.
The Company is also engaged in assessing and addressing Year 2000 issues with
significant vendors. The Company has sought, and continues to seek, assurances
from all of its vendors with respect to Year 2000 issues. Given that no one
vendor is significant enough to the Company's continuing operations and/or that
any products or services provided by any one vendor could be obtained either
internally or from alternative third parties without significantly disrupting
the Company's operations, management believes that any potential unresolved Year
2000 issues at these vendors will not have any material adverse effects on the
Company. With respect to products sold by the Company, management believes that
any liability for Year 2000 compliance will not be material.
The Company has used and will continue to use all internal resources to resolve
any Year 2000 issues. The Company plans to complete its Year 2000 remediation in
the summer of 1999. Total expenses on the project through January 31, 1999 were
approximately $1.4 million and were primarily related to expenses for repair or
replacement of software and hardware, expenses associated with facilities,
products and supplier reviews and project management expenses. Expected
incremental costs related to Year 2000 are $0.4 million and should not be
material to the Company's financial position.
The costs of the project and the date on which the Company plans to complete its
Year 2000 remediation are based on management's estimates, which were derived
from utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those plans.
Specific factors that might cause differences from management's estimates
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer codes, and
similar uncertainties. Management believes that the Company is devoting the
necessary resources to identify and resolve significant Year 2000 issues in a
timely manner.
FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board (FASB) has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for periods beginning after June 15, 1999. Due to the Company's
current limited use of derivative instruments, the adoption of this statement is
not expected to have a material effect on the Company's financial condition or
results of operations. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was also issued by the FASB and is
effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for the way that business enterprises report information,
financial and descriptive, about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is in the process of
evaluating the effect of SFAS No. 131 on its financial statements. In February
1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" which is effective for fiscal years beginning
after December 31, 1997. This standard's objective is to improve pension and
other postretirement benefits disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is potentially exposed to market risk asssociated with changes in
foreign exchange and interest rates. From time to time the Company will enter
into derivative financial instruments to hedge these exposures. An instrument
will be treated as a hedge if it is effective in offsetting the impact of
volatility in the Company's underlying interest rate and foreign exchange rate
exposures. The Company does not enter into derivatives for speculative purposes.
There have been no material changes in the Company's market risk exposures as
compared to those discussed in the Company's 1998 Annual Report on Form 10-K.
29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1998, the Company received a request from a former customer
to arbitrate a claim arising out of an accident that occurred in Ireland
involving two cranes sold by the Company in 1992. The claim alleges direct
damages of approximately $12.8 million plus lost revenue due to business
interruption. The Company is working with its insurance broker to determine the
availability of insurance coverage, if any. The contract between the Company and
the claimant provides that the contract is governed by Irish law and that all
disputes are to be resolved by arbitration in Ireland. Given the recent nature
of the claim, it is not possible to reasonably estimate the range of any
potential loss in the event that insurance coverage is not available. Management
intends to vigorously defend the matter.
The Company is also involved from time to time in various other routine
litigation incident to its operations. Although the outcome of those matters
cannot be predicted with certainty, management believes that any such pending or
threatened litigation will not have a material adverse effect on its
consolidated results of operations and financial condition.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrants filed no reports on Form 8-K during the quarter
ended January 31, 1999.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
MMH HOLDINGS, INC.
Date: March 17, 1999 /S/ DAVID D. SMITH
-------------------
David D. Smith
Vice President - Finance
(Principal Financial Officer)
MORRIS MATERIAL HANDLING, INC.
Date: March 17, 1999 /S/ DAVID D. SMITH
-------------------
David D. Smith
Vice President - Finance
(Principal Financial Officer)
31
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
4.9 Amendment No.1 dated as of August 28, 1998 to the Credit
Agreement, dated March 30, 1998, among MMH Holdings, Inc., Morris
Material Handling, Inc., Material Handling, LLC, Morris Material
Handling, Ltd., Mondel ULC, Kaverit Steel and Crane ULC and
Canadian Imperial Bank of Commerce, as Administrative Agent,
Credit Agricole Indosuez, as Syndication Agent, BankBoston, N.A.,
as Documentation Agent, and the Lending Institutions listed
therein.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
32
Exhibit
Number Exhibit Description
- ------- --------------------
4.9 Amendment No. 1 dated as of August 28, 1998 to the Credit Agreement, dated March 30, 1998,
among MMH Holdings, Inc., Morris Material Handling, Inc., Material Handling, LLC, Morris
Material Handling, Ltd., Mondel ULC, Kaverit Steel and Crane ULC and Canadian Imperial
Bank of Commerce, as Administrative Agent, Credit Agricole Indosuez, as Syndication Agent,
Bank Boston, N.A., as Documentation Agent, and the Lending Institutions listed therein.
27.1 Financial Data Schedule
27.2 Financial Data Schedule