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 April 30, 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 (June 11, 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 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
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 statements.
2
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)
April 30, October 31,
1999 1998
---------- ----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 2,790 $ 2,534
Accounts receivable-net 63,455 81,947
Inventories 42,484 42,561
Other current assets 15,715 11,467
--------- ---------
124,444 138,509
--------- ---------
Property, Plant and Equipment
Cost 69,423 67,649
Less accumulated depreciation (28,628) (26,579)
--------- ---------
40,795 41,070
--------- ---------
Other Assets
Goodwill 42,070 39,843
Debt financing costs 17,868 18,905
Deferred income taxes 65,979 65,979
Other 9,254 6,691
--------- ---------
135,171 131,418
--------- ---------
$ 300,410 $ 310,997
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 5) $ 249 $ 2,262
Revolving Credit Facility Borrowings (Note 5) 18,327 --
Term Loans (Note 5) 53,650 --
Acquisition Facility Line Borrowings (Note 5) 7,430 --
Bank overdrafts 2,117 1,252
Trade accounts payable 24,473 32,893
Advance payments and progress billings 10,722 9,399
Accrued interest 1,801 2,201
Other current liabilities 23,653 29,946
--------- ---------
142,422 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 4,097 3,405
Deferred Income Taxes 2,603 2,698
Minority Interest 337 364
Commitments and Contingencies (Note 6)
Mandatorily Redeemable Preferred Stock 101,640 95,351
Shareholders' Equity (150,689) (127,193)
--------- ---------
$ 300,410 $ 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 For the Six Months
Ended April 30, Ended April 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues
Net Sales $ 71,849 $ 80,766 $ 139,769 $ 157,249
Other Income - Net 45 442 147 726
71,894 81,208 139,916 157,975
--------- --------- --------- ---------
Cost of Sales 54,442 58,519 105,056 115,172
Selling, General and
Administrative Expenses 19,354 15,154 35,287 29,514
HII Management Fee -- 478 -- 1,155
Non-Recurring Employee Benefit Costs -- 1,786 -- 1,906
--------- --------- --------- ---------
Operating Income (Loss) (1,902) 5,271 (427) 10,228
Interest (Expense) Income - Net
HII Affiliates -- (761) -- (1,448)
Third Party (7,523) (2,545) (14,431) (2,703)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes
and Minority Interest (9,425) 1,965 (14,858) 6,077
Provision for Income Taxes (3,518) (459) (1,065) (2,446)
Minority Interest 21 24 27 38
--------- --------- --------- ---------
Net Income (Loss) (12,922) 1,530 (15,896) 3,669
Foreign Currency Translation Adjustments (407) (1,115) (1,377) (1,520)
--------- --------- --------- ---------
Comprehensive Income (Loss) $ (13,329) $ 415 $ (17,273) $ 2,149
--------- --------- --------- ---------
--------- --------- --------- ---------
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 Six Months
Ended April 30,
-----------------------
1999 1998
--------- ---------
Operating Activities
Net income (loss) $ (15,896) $ 3,669
Add (deduct) - items not affecting cash used for
operating activities:
Depreciation and amortization 3,853 3,408
Amortization of debt financing costs 1,048 --
Deferred income taxes - net 31 57
Divestiture bonus -- 1,216
Other (27) (38)
Changes in working capital, excluding the effects
of acquisition opening balance sheets:
Accounts receivable 19,285 3,646
Inventories 1,262 (1,968)
Other current assets (4,063) (1,903)
Trade accounts payable and bank overdrafts (8,125) (11,579)
Advance payments and progress billings 1,016 542
Accrued warranties 666 (1,246)
Accrued interest (400) --
Other current liabilities (6,055) 929
Activity with parent and other affiliates - net -- 1,213
--------- ---------
Net cash used for operating activities (7,405) (2,054)
--------- ---------
Investment and Other Transactions
Capital expenditures - net (4,744) (2,446)
Acquisition of businesses - net of cash acquired (5,070) (319)
Repayments (issuance) of loans from senior management 70 (900)
Other - net (245) 72
--------- ---------
Net cash used for investment and other transactions (9,989) (3,593)
--------- ---------
Financing Activities
Changes in short-term debt, notes payable
and Revolving Credit Facility borrowings 17,051 3,065
Proceeds from Acquisition Facility Line borrowings 1,235 --
Proceeds from Senior Note Offering -- 200,000
Proceeds from New Credit Facility -- 55,000
Redemption of common stock and preferred stock -- (287,000)
Net proceeds from issuance of Series A preferred stock
and related common shares -- 57,094
Stock redemption transaction costs -- (2,939)
Debt financing costs -- (18,179)
Repayments of long-term obligations (675) --
--------- ---------
Net cash provided by financing activities 17,611 7,041
--------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 39 (101)
--------- ---------
Increase in Cash and Cash Equivalents 256 1,293
Cash and Cash Equivalents
Beginning of Period 2,534 1,532
--------- ---------
End of Period $ 2,790 $ 2,825
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
6
MMH HOLDINGS, INC.
STATEMENTS OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 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 -- -- -- -- -- -- --
Repayments of loans by
senior management -- -- -- -- -- -- --
Preferred stock dividends 3,667 3,724 313 317 1,918 1,957 5,998
Amortization of preferred stock
discount -- 291 -- -- -- -- 291
------ --------- ----- --------- ------ --------- ---------
BALANCE AT APRIL 30, 1999 64,855 $ 63,232 5,418 $ 5,473 32,596 $ 32,935 $ 101,640
------ --------- ----- --------- ------ --------- ---------
------ --------- ----- --------- ------ --------- ---------
Common Stock Parent Accumulated
-------------------- 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 -- -- -- -- (15,896) (15,896)
Change in foreign currency
translation -- -- -- (1,377) -- (1,377)
Repayments of loans by
senior management -- -- -- -- 70 70
Preferred stock dividends -- -- -- -- (6,002) (6,002)
Amortization of preferred stock
discount -- -- -- -- (291) (291)
------ ------- --------- --------- --------- ---------
BALANCE AT APRIL 30, 1999 10,889 $ -- $(121,860) $ (4,118) $ (24,711) $(150,689)
------ ------- --------- --------- --------- ---------
------ ------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements.
7
MORRIS MATERIAL HANDLING, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
April 30, October 31,
1999 1998
--------- -----------
(Unaudited)
Current Assets
Cash and cash equivalents $ 2,790 $ 2,534
Accounts receivable-net 63,455 81,947
Inventories 42,484 42,561
Other current assets 15,719 11,467
--------- -----------
124,448 138,509
--------- -----------
Property, Plant and Equipment
Cost 69,423 67,649
Less accumulated depreciation (28,628) (26,579)
--------- -----------
40,795 41,070
--------- -----------
Other Assets
Goodwill 42,070 39,843
Debt financing costs 17,868 18,905
Deferred income taxes 65,979 65,979
Other 9,254 6,691
--------- -----------
135,171 131,418
--------- -----------
$ 300,414 $ 310,997
--------- -----------
--------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations (Note 5) $ 249 $ 2,262
Revolving Credit Facility Borrowings (Note 5) 18,327 --
Term Loans (Note 5) 53,650 --
Acquisition Facility Line Borrowings (Note 5) 7,430 --
Bank overdrafts 2,117 1,252
Trade accounts payable 24,473 32,893
Advance payments and progress billings 10,722 9,399
Accrued interest 1,801 2,201
Other current liabilities 23,653 29,946
--------- -----------
142,422 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 4,097 3,405
Deferred Income Taxes 2,603 2,698
Minority Interest 337 364
Commitments and Contingencies (Note 6)
Shareholder's Equity (49,045) (31,842)
--------- -----------
$ 300,414 $ 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 For the Six Months
Ended April 30, Ended April 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues
Net Sales $ 71,849 $ 80,766 $ 139,769 $ 157,249
Other Income - Net 45 442 147 726
--------- --------- --------- ---------
71,894 81,208 139,916 157,975
Cost of Sales 54,442 58,519 105,056 115,172
Selling, General and
Administrative Expenses 19,354 15,154 35,287 29,514
HII Management Fee -- 478 -- 1,155
Non-Recurring Employee Benefit Costs -- 1,786 -- 1,906
--------- --------- --------- ---------
Operating Income (Loss) (1,902) 5,271 (427) 10,228
Interest (Expense) Income - Net
HII Affiliates -- (761) -- (1,448)
Third Party (7,523) (2,545) (14,431) (2,703)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes
and Minority Interest (9,425) 1,965 (14,858) 6,077
Provision for Income Taxes (3,518) (459) (1,065) (2,446)
Minority Interest 21 24 27 38
--------- --------- --------- ---------
Net Income (Loss) (12,922) 1,530 (15,896) 3,669
Foreign Currency Translation Adjustments (407) (1,115) (1,377) (1,520)
--------- --------- --------- ---------
Comprehensive Income (Loss) $ (13,329) $ 415 $ (17,273) $ 2,149
--------- --------- --------- ---------
--------- --------- --------- ---------
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 Six Months
Ended April 30,
1999 1998
--------- ---------
Operating Activities
Net income (loss) $ (15,896) $ 3,669
Add (deduct) - items not affecting cash used for
operating activities:
Depreciation and amortization 3,853 3,408
Amortization of debt financing costs 1,048 --
Deferred income taxes - net 31 57
Divestiture bonus -- 1,216
Other (27) (38)
Changes in working capital, excluding the effects
of acquisition opening balance sheets:
Accounts receivable 19,285 3,646
Inventories 1,262 (1,968)
Other current assets (4,063) (1,903)
Trade accounts payable and bank overdrafts (8,125) (11,579)
Advance payments and progress billings 1,016 542
Accrued warranties 666 (1,246)
Accrued interest (400) --
Other current liabilities (6,055) 929
Activity with parent and other affiliates - net -- 1,213
--------- ---------
Net cash used for operating activities (7,405) (2,054)
--------- ---------
Investment and Other Transactions
Capital expenditures - net (4,744) (2,446)
Acquisition of businesses - net of cash acquired (5,070) (319)
Repayments (issuance) of loans from senior management 70 (900)
Other - net (245) 72
--------- ---------
Net cash used for investment and other transactions (9,989) (3,593)
--------- ---------
Financing Activities
Changes in short-term debt, notes payable
and Revolving Credit Facility borrowings 17,051 3,065
Proceeds from Acquisition Facility Line borrowings 1,235 --
Proceeds from Senior Note Offering -- 200,000
Proceeds from New Credit Facility -- 55,000
Dividend to and redemption of shares held by Holdings -- (232,845)
Debt financing costs -- (18,179)
Repayments of long-term obligations (675) --
--------- ---------
Net cash provided by financing activities 17,611 7,041
--------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 39 (101)
--------- ---------
Increase in Cash and Cash Equivalents 256 1,293
Cash and Cash Equivalents
Beginning of Period 2,534 1,532
--------- ---------
End of Period $ 2,790 $ 2,825
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
10
MORRIS MATERIAL HANDLING, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 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 -- -- -- -- (15,896) (15,896)
Change in foreign currency
translation -- -- -- (1,377) -- (1,377)
Repayments of loans by
senior management -- -- -- -- 70 70
----- ------- -------- -------- -------- --------
BALANCE AT APRIL 30, 1999 100 $ -- $(33,392) $ (4,118) $(11,535) $(49,045)
----- ------- -------- -------- -------- --------
----- ------- -------- -------- -------- --------
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 and six months ended
April 30, 1999, respectively, 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 April 30, 1999, MHE Investments owns approximately 72.6% of the common stock
of Holdings and $32.6 million liquidation preference of the Series C Junior
Voting Preferred Stock and HarnCo owns approximately 20.8% of the common stock
of Holdings and $5.4 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 $64.9 million liquidation preference of
the Series A Senior Preferred Stock.
NOTE 3 - ACQUISITIONS
During the six months ended April 30, 1999, the Company completed one
acquisition with an aggregate purchase price of $3,158, net of cash acquired.
During 1998, the Company completed several acquisitions for an aggregate
purchase price of $8,891, net of cash acquired. These acquisitions were related
to the Company's aftermarket business and were accounted for as purchase
transactions with the purchase prices allocated to the fair value of specific
assets acquired and liabilities assumed. Resultant goodwill of the transactions,
$1,934 for the 1999 transaction and $8,343 for the 1998 transactions, is being
amortized over 30 to 40 years. The 1999 acquisition and one 1998 acquisition
were partially financed by the sellers, resulting in deferred purchase price
which will be paid in 2004 and 2005 (in the case of the 1999 acquisition) and in
installments through 2006 (in the case of one 1998 acquisition).
During the six months ended April 30, 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 $1,413 in the six months ended April 30, 1999.
Additionally, a payment of $100 was made toward the 1998 acquisition that was
partially financed by the seller. On a pro forma basis, the 1999 and 1998
acquisitions were not material to results of operations reported for the six
months ended April 30, 1999 and accordingly, such information is not
presented.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
April 30, October 31,
1999 1998
-------- -----------
Raw material $ 17,639 $ 14,517
Work-in-process 23,279 20,545
Finished parts 8,713 14,910
-------- --------
49,631 49,972
Less excess of current cost
over stated LIFO value (7,147) (7,411)
-------- --------
$ 42,484 $ 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
13
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 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 financial ratios and tests under the
New Credit Facility for the period ended January 31, 1999 and did not meet
such financial covenants and certain additional financial covenants for the
period ended April 30, 1999. The Company obtained a waiver of such financial
covenants, which was effective through June 14, 1999 and was subsequently
extended through June 30, 1999. The waiver permits 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 lender 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 after March 2, 1999 in
excess of $5.0 million. At June 11, 1999, after giving effect to the existing
New Credit Facility waiver, the Company had, subject to certain conditions,
(i) the ability to borrow up to approximately $35.7 million under the
Revolving Credit Facility, of which $20.8 million is currently outstanding
and (ii) the ability to obtain letters of credit, bid bonds and performance
bonds after March 2, 1999 under the New Credit Facility in an amount not to
exceed $5.0 million in the aggregate of which $1.9 million have been issued
to date.
The Company is negotiating with the lending institutions party to the New
Credit Facility in an effort to obtain amendments to the New Credit Facility.
While management of the Company believes that it will be successful in
obtaining satisfactory amendments to the New Credit Facility, there can be no
assurance that such amendments will be obtained. If amendments cannot be
negotiated or satisfactory waivers obtained, the lenders under the New Credit
Facility could elect to declare all amounts borrowed under the New Credit
Facility, together with accrued interest thereon, to be due and payable,
which would result in an event of default under the Note Indenture and the
Surety Arrangement and permit acceleration of the Company's obligations
thereunder. In such event, 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. Additionally, such an event could have a material adverse effect
on the Company's ability to obtain certain customer orders.
The Company incurred significant indebtedness in connection with the
Recapitalization. As of June 11, 1999, the Company had approximately $288.3
million of indebtedness outstanding. As a result of the covenant violations
under the New Credit Facility and the Company's anticipated violation of
required covenants and tests at compliance dates during the next twelve
months in the absence of waivers or amendments which would prevent such
violation, all borrowings outstanding under the New Credit Facility ($81.9
million as of June 11, 1999) are classified as current liabilities in the
accompanying April 30, 1999 balance sheets. The Company also anticipates
incurring $3.2 million of cash expenditures during the third and fourth
quarters of fiscal 1999 for severance and reorganization charges associated
with continued restructuring of the Company's operations, in addition to cash
needed for operations and capital expenditures.
Since the Recapitalization, the Company has been able to satisfy its cash
requirements from cash generated by operations and borrowings under the
Revolving Credit Facility. However, in order to have sufficient cash flow to
satisfy its future cash needs for operations and debt service, the Company
needs to be able to borrow under the Revolving Credit Facility in sufficient
amounts and will have to materially improve cash generated from operations in
the near future.
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 April 30, 1999: (i) $4.9 million of outstanding letters of
credit and surety bonds under the New Credit Facility, (ii) $1.6 million
under the Surety Arrangement for outstanding surety bonds and (iii) $4.0
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 April 30, 1999, approximately $27.5 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
14
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 in 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.
All of the Company's agreements and arrangements with HII and its affiliates
(including those referred to above and those relating to the provision of
services and materials by HII and its affiliates to the Company) could be
materially adversely affected by the fact that on June 7, 1999 (the "Petition
Date"), HII and certain of its United States affiliates (including HarnCo)
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "HII Bankruptcy"). Certain provisions of
the Bankruptcy Code allow a debtor to avoid, delay and/or reduce its
contractual and other obligations to third parties. There can be no assurance
that HII and its affiliates will not attempt to utilize such provisions to
cease performance under their agreements with the Company. The inability of
the Company to receive the benefits of one or more of these agreements or the
termination of ongoing arrangements between the Company and affiliates of HII
could materially adversely affect the Company's operations and financial
performance. In the event that any of the liabilities retained by HII and its
affiliates remain unsatisfied as of the Petition Date, the Company's right to
indemnification for any such amounts it has paid on behalf of HII and its
affiliates may also be avoided, delayed or reduced.
Each of HII and certain of its affiliates on the one hand, and the Company and
certain of its affiliates, on the other hand, have receivables and payables to
the other which may be affected by the HII Bankruptcy. The Company estimates
that a net amount of approximately $0.7 million of receivables due it and its
affiliates may be so affected.
In October 1998, the Company received a request to arbitrate a claim from a
former customer which arose 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. In addition, the Company has been notified by the port operator of
its intention to pursue a claim against the Company for its damages (which it
estimates are between $4 million and $5 million) arising from the accident.
Management intends to vigorously defend this matter. One of the Company's
insurance carriers has agreed to provide defense coverage for one of the two
cranes involved in the accident and limited indemnification if the Company is
unsuccessful in defending the claim. The Company is continuing to work with its
insurance broker to determine the availability of additional 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. While the Company believes it will obtain a favorable
resolution, no assurances can be made as to the final outcome of the claim. If
the Company were found liable for the full amount of the claim, there could be a
material adverse effect on the Company's operations and financial performance.
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. In addition, as
noted above, the Company's right to indemnification against HarnCo for such
liabilities may be avoided, delayed or reduced as a result of HarnCo's filing
for bankruptcy protection.
NOTE 7 - INCOME TAXES
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of net operating loss carryforwards.
During the second quarter, the Company re-estimated its future operating
results and determined its deferred tax asset valuation allowance required an
increase of $5.9 million which was recognized as income tax expense. Although
realization is not assured, management
15
believes it is more likely than not that the net deferred tax assets recorded
will be realized. The amount of the deferred tax assets not considered
realizable, however, could be increased in the near term if estimates of future
taxable income are reduced.
NOTE 8 - GEOGRAPHICAL INFORMATION
Geographical information for the six months ended April 30, 1999 and 1998,
respectively, are as follows:
Sales to Operating End of Period
Total Interarea Unaffiliated Income Identifiable
Net Sales Sales Customers (Loss) Assets
-------------------------------------------------------------------
April 30, 1999
United States $ 85,275 $ -- $ 85,275 $ 583 $ 201,298
Europe 24,947 (2,626) 22,321 (2,918) 51,835
Other Foreign 32,173 -- 32,173 1,908 47,277
Interarea Eliminations (2,626) 2,626 -- -- --
-------------------------------------------------------------------
$ 139,769 $ -- $ 139,769 $ (427) $ 300,410
-------------------------------------------------------------------
-------------------------------------------------------------------
April 30, 1998
United States $ 98,245 $ -- $ 98,245 $ 8,700 $ 194,426
Europe 38,517 (6,650) 31,867 (71) 60,690
Other Foreign 27,137 -- 27,137 1,599 34,729
Interearea Eliminations (6,650) 6,650 -- -- --
-------------------------------------------------------------------
$ 157,249 $ -- $ 157,249 $ 10,228 $ 289,845
-------------------------------------------------------------------
-------------------------------------------------------------------
The $10.6 million increase in net identifiable assets from $289.8 million at
April 30, 1998 to $300.4 million at April 30, 1999 is primarily the result of
the four acquisitions which occurred subsequent to April 30, 1998.
NOTE 9 - SALE OF FACILITY
During the six months ended April 30, 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 six months ended April 30, 1998. No
significant gain or loss was recognized in connection with this transaction.
NOTE 10 - 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
APRIL 30, 1999
(UNAUDITED)
(Dollars in Thousands)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material MMH
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc. Holdings, Inc
--------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,719 $ 71 $ -- $ -- $ 2,790 $ --
Accounts receivable - net 59,288 4,167 -- -- 63,455 --
Intercompany accounts receivable 29,102 1,075 2,984 (33,157) 4 --
Inventories 39,383 3,101 -- -- 42,484 --
Other current assets 8,872 450 6,393 -- 15,715 --
--------------------------------------------------------------------------------------------
139,364 8,864 9,377 (33,157) 124,448 --
--------------------------------------------------------------------------------------------
Property, Plant and Equipment 38,228 2,567 -- -- 40,795 --
--------------------------------------------------------------------------------------------
Other Assets
Goodwill 40,068 2,002 -- -- 42,070 --
Debt financing costs -- -- 17,868 -- 17,868 --
Noncurrent intercompany receivable 3,717 -- 86,209 (89,926) -- --
Investment in affiliates 29 -- 67,980 (68,009) -- (49,045)
Deferred income taxes -- -- 65,979 -- 65,979 --
Other 9,212 -- 42 -- 9,254 --
--------------------------------------------------------------------------------------------
53,026 2,002 238,078 (157,935) 135,171 (49,045)
--------------------------------------------------------------------------------------------
$ 230,618 $ 13,433 $ 247,455 $(191,092) $ 300,414 $ (49,045)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ 209 $ 40 $ -- $ -- $ 249 $ --
Revolving credit facility borrowings 8,327 -- 10,000 -- 18,327 --
Term loans -- -- 53,650 -- 53,650 --
Acquisition facility line borrowings -- -- 7,430 -- 7,430 --
Bank overdrafts 186 1,931 -- -- 2,117 --
Trade accounts payable 22,947 1,526 -- -- 24,473 --
Intercompany accounts payable 4,055 4,134 24,968 (33,157) -- 4
Advance payments and progress billings 10,722 -- -- -- 10,722 --
Accrued interest 144 -- 1,657 -- 1,801 --
Other current liabilities 24,014 1,115 (1,476) -- 23,653 --
--------------------------------------------------------------------------------------------
70,604 8,746 96,229 (33,157) 142,422 4
Senior Notes -- -- 200,000 -- 200,000 --
Other Long-Term Obligations 3,222 604 271 -- 4,097 --
Noncurrent Intercompany Payable 86,209 3,717 -- (89,926) -- --
Deferred Income Taxes 2,603 -- -- -- 2,603 --
Minority Interest -- -- -- 337 337 --
Mandatorily Redeemable Preferred Stock -- -- -- -- -- 101,640
Stockholders' Equity 67,980 366 (49,045) (68,346) (49,045) (150,689)
--------------------------------------------------------------------------------------------
$ 230,618 $ 13,433 $ 247,455 $(191,092) $ 300,414 $ (49,045)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Consolidated
MMH
Eliminations Holdings, Inc.
------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ -- $ 2,790
Accounts receivable - net -- 63,455
Intercompany accounts receivable (4) --
Inventories -- 42,484
Other current assets -- 15,715
-----------------------------------
(4) 124,444
-----------------------------------
Property, Plant and Equipment -- 40,795
-----------------------------------
Other Assets
Goodwill -- 42,070
Debt financing costs -- 17,868
Noncurrent intercompany receivable -- --
Investment in affiliates 49,045 --
Deferred income taxes -- 65,979
Other -- 9,254
-----------------------------------
49,045 135,171
-----------------------------------
$ 49,041 $ 300,410
-----------------------------------
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable and current
portion of long-term obligations $ -- $ 249
Revolving credit facility borrowings -- 18,327
Term loans -- 53,650
Acquisition facility line borrowings -- 7,430
Bank overdrafts -- 2,117
Trade accounts payable -- 24,473
Intercompany accounts payable (4) --
Advance payments and progress billings -- 10,722
Accrued interest -- 1,801
Other current liabilities -- 23,653
-----------------------------------
(4) 142,422
Senior Notes -- 200,000
Other Long-Term Obligations -- 4,097
Noncurrent Intercompany Payable -- --
Deferred Income Taxes -- 2,603
Minority Interest -- 337
Mandatorily Redeemable Preferred Stock -- 101,640
Stockholders' Equity 49,045 (150,689)
-----------------------------------
$ $ 49,041 $ 300,410
-----------------------------------
-----------------------------------
17
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1998
(Dollars in Thousands)
Non Morris Consolidated
Guarantor Guarantor Material Morris Material MMH
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc. Holdings, Inc.
--------------------------------------------------------------------------------------------
ASSETS
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) -- (31,842)
Deferred income taxes -- -- 65,979 -- 65,979
Other 6,691 -- -- -- 6,691
--------------------------------------------------------------------------------------------
48,642 2,076 235,032 (154,332) 131,418 (31,842)
--------------------------------------------------------------------------------------------
$ 230,805 $ 14,314 $ 247,812 $ (181,934) $ 310,997 $ (31,842)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
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 Obligations 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 -- -- -- -- -- 95,351
Stockholders' Equity 66,732 695 (31,842) (67,427) (31,842) (127,193)
--------------------------------------------------------------------------------------------
$ 230,805 $ 14,314 $ 247,812 $(181,934) $ 310,997 $ (31,842)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Consolidated
MMH
Eliminations Holdings, Inc.
---------------------------------
ASSETS
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 --
Deferred income taxes 65,979
Other 6,691
---------------------------------
31,842 131,418
---------------------------------
$ 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 Obligations 3,405
Noncurrent Intercompany Payable --
Deferred Income Taxes 2,698
Minority Interest 364
Mandatorily Redeemable Preferred Stock 95,351
Stockholders' Equity 31,842 (127,193)
---------------------------------
$ 31,842 $ 310,997
---------------------------------
---------------------------------
18
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
(Dollars in Thousands)
FOR THE SIX MONTHS ENDED APRIL 30, 1999
---------------------------------------------------------------------------------
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
---------------------------------------------------------------------------------
Revenues
Net Sales $ 131,714 $ 8,407 $ -- $ (352) $ 139,769
Other Income - net 147 -- -- -- 147
---------------------------------------------------------------------------------
131,861 8,407 -- (352) 139,916
Cost of Sales 99,002 6,406 -- (352) 105,056
Selling, General and
Administrative Expenses 32,786 1,826 675 -- 35,287
---------------------------------------------------------------------------------
Operating Income (Loss) 73 175 (675) -- (427)
Interest (Expense) Income - net
Affiliates (3,174) (192) 3,366 -- --
Third Party (305) (240) (13,886) -- (14,431)
---------------------------------------------------------------------------------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest (3,406) (257) (11,195) -- (14,858)
Provision for Income Taxes (1,065) -- -- -- (1,065)
Equity in Earnings (Loss) of Subsidiaries (230) -- (4,701) 4,931 --
Minority Interest -- -- -- 27 27
---------------------------------------------------------------------------------
Net Income (Loss) $ (4,701) $ (257) $ (15,896) $ 4,958 $ (15,896)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1999
-------------------------------------------------
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
-------------------------------------------------
Revenues
Net Sales $ -- $ -- $ 139,769
Other Income - net -- -- 147
-------------------------------------------------
-- -- 139,916
Cost of Sales -- -- 105,056
Selling, General and
Administrative Expenses -- -- 35,287
-------------------------------------------------
Operating Income (Loss) -- -- (427)
Interest (Expense) Income - net
Affiliates -- -- --
Third Party -- -- (14,431)
-------------------------------------------------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest -- -- (14,858)
Provision for Income Taxes -- -- (1,065)
Equity in Earnings (Loss) of Subsidiaries (15,896) 15,896 --
Minority Interest -- -- 27
-------------------------------------------------
Net Income (Loss) $ (15,896) $ 15,896 $ (15,896)
-------------------------------------------------
-------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1999
---------------------------------------------------------------------------------
Non Morris Consolidated
Guarantor Guarantor Material Morris Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations Handling, Inc.
---------------------------------------------------------------------------------
Revenues
Net Sales $ 67,575 $ 4,310 $ -- $ (36) $ 71,849
Other Income - net 70 (25) -- -- 45
---------------------------------------------------------------------------------
67,645 4,285 -- (36) 71,894
Cost of Sales 51,170 3,308 -- (36) 54,442
Selling, General and
Administrative Expenses 17,963 939 452 -- 19,354
---------------------------------------------------------------------------------
Operating Income (Loss) (1,488) 38 (452) -- (1,902)
Interest (Expense) Income - net
Affiliates (1,564) (97) 1,661 -- --
Third Party (174) (102) (7,247) -- (7,523)
---------------------------------------------------------------------------------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest (3,226) (161) (6,038) -- (9,425)
Provision for Income Taxes (1,271) -- (2,247) -- (3,518)
Equity in Earnings (Loss) of Subsidiaries (140) -- (4,637) 4,777 --
Minority Interest -- -- -- 21 21
---------------------------------------------------------------------------------
Net Income (Loss) $ (4,637) $ (161) $(12,922) $ 4,798 $(12,922)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1999
-----------------------------------------------
Consolidated
MMH MMH
Holdings, Inc. Eliminations Holdings, Inc.
-----------------------------------------------
Revenues
Net Sales $ -- $ -- $ 71,849
Other Income - net -- -- 45
-----------------------------------------------
-- -- 71,894
Cost of Sales -- -- 54,442
Selling, General and
Administrative Expenses -- -- 19,354
-----------------------------------------------
Operating Income (Loss) -- -- (1,902)
Interest (Expense) Income - net
Affiliates -- -- --
Third Party -- -- (7,523)
-----------------------------------------------
Loss Before Income Taxes, Equity in Earnings
(Loss) of Subsidiaries and Minority Interest -- -- (9,425)
Provision for Income Taxes -- -- (3,518)
Equity in Earnings (Loss) of Subsidiaries (12,922) 12,922 --
Minority Interest -- -- 21
-----------------------------------------------
Net Income (Loss) $(12,922) $ 12,922 $(12,922)
-----------------------------------------------
-----------------------------------------------
19
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
(UNAUDITED)
(Dollars in Thousands)
FOR THE SIX MONTHS ENDED APRIL 30, 1998
----------------------------------------------------------------
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
----------------------------------------------------------------
Revenues
Net Sales $ 149,211 $ 11,314 $ -- $ (3,276)
Other Income -- net 726 -- --
----------------------------------------------------------------
149,937 11,314 -- (3,276)
Cost of Sales 109,576 8,872 -- (3,276)
Selling, General and
Administrative Expenses 27,107 2,324 83 --
HII Management Fee 1,155 -- -- --
Non--Recurring Employee Benefit Costs 690 -- 1,216 --
----------------------------------------------------------------
Operating Income (Loss) 11,409 118 (1,299) --
Interest (Expense) Income -- net
Affiliates (2,075) (87) 714 --
Third Party (198) (282) (2,223) --
----------------------------------------------------------------
Income (Loss) Before Income Taxes, Equity in
Earnings (Loss) of Subsidiaries and Minority Interest 9,136 (251) (2,808) --
Provision for Income Taxes (2,446) -- -- --
Equity in Earnings (Loss) of Subsidiaries (213) -- 6,477 (6,264)
Minority Interest -- -- -- 38
----------------------------------------------------------------
Net Income (Loss) $ 6,477 $ (251) $ 3,669 $ (6,226)
----------------------------------------------------------------
----------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1998
------------------------------------------------------------------
Combined Combined
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
------------------------------------------------------------------
Revenues
Net Sales $ 157,249 $ -- $ -- $ 157,249
Other Income -- net 726 -- -- 726
------------------------------------------------------------------
157,975 -- -- 157,975
Cost of Sales 115,172 -- -- 115,172
Selling, General and
Administrative Expenses 29,514 -- -- 29,514
HII Management Fee 1,155 -- -- 1,155
Non--Recurring Employee Benefit Costs 1,906 -- -- 1,906
------------------------------------------------------------------
Operating Income (Loss) 10,228 -- -- 10,228
Interest (Expense) Income -- net
Affiliates (1,448) -- -- (1,448)
Third Party (2,703) -- -- (2,703)
------------------------------------------------------------------
Income (Loss) Before Income Taxes, Equity in
Earnings (Loss) of Subsidiaries and Minority Interest 6,077 -- -- 6,077
Provision for Income Taxes (2,446) -- -- (2,446)
Equity in Earnings (Loss) of Subsidiaries -- 3,669 (3,669) --
Minority Interest 38 -- -- 38
------------------------------------------------------------------
Net Income (Loss) $ 3,669 $ 3,669 $ (3,669) $ 3,669
------------------------------------------------------------------
------------------------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1998
----------------------------------------------------------------
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
----------------------------------------------------------------
Revenues
Net Sales $ 76,075 $ 6,104 $ -- $ (1,413)
Other Income -- net 442 -- -- --
----------------------------------------------------------------
76,517 6,104 -- (1,413)
Cost of Sales 55,014 4,918 -- (1,413)
Selling, General and
Administrative Expenses 13,950 1,121 83 --
HII Management Fee 478 -- -- --
Non--Recurring Employee Benefit Costs 570 -- 1,216 --
----------------------------------------------------------------
Operating Income (Loss) 6,505 65 (1,299) --
Interest (Expense) Income -- net
Affiliates (1,433) (42) 714 --
Third Party (186) (136) (2,223) --
----------------------------------------------------------------
Income (Loss) Before Income Taxes, Equity in
Earnings (Loss) of Subsidiaries and Minority Interest 4,886 (113) (2,808) --
Benefit (Provision) for Income Taxes (470) 11 -- --
Equity in Earnings (Loss) of Subsidiaries (78) -- 4,338 (4,260)
Minority Interest -- -- -- 24
----------------------------------------------------------------
Net Income (Loss) $ 4,338 $ (102) $ 1,530 $ (4,236)
----------------------------------------------------------------
----------------------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1998
-------------------------------------------------------------------
Combined Combined
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-------------------------------------------------------------------
Revenues
Net Sales $ 80,776 $ -- $ -- $ 80,766
Other Income -- net 442 -- -- 442
-------------------------------------------------------------------
81,208 -- -- 81,208
Cost of Sales 58,519 -- -- 58,519
Selling, General and
Administrative Expenses 15,154 -- -- 15,154
HII Management Fee 478 -- -- 478
Non--Recurring Employee Benefit Costs 1,786 -- -- 1,786
-------------------------------------------------------------------
Operating Income (Loss) 5,271 -- -- 5,271
Interest (Expense) Income -- net
Affiliates (761) -- -- (761)
Third Party (2,545) -- -- (2,545)
-------------------------------------------------------------------
Income (Loss) Before Income Taxes, Equity in
Earnings (Loss) of Subsidiaries and Minority Interest 1,965 -- -- 1,965
Benefit (Provision) for Income Taxes (459) -- -- (459)
Equity in Earnings (Loss) of Subsidiaries -- 1,530 (1,530) --
Minority Interest 24 -- -- 24
-------------------------------------------------------------------
Net Income (Loss) $ 1,530 $ 1,530 $ (1,530) $ 1,530
-------------------------------------------------------------------
-------------------------------------------------------------------
20
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
(Dollars in Thousands)
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc. Eliminations
---------------------------------------------------------------
Operating Activities
Net income (loss) $ (4,701) $ (257) $(15,896) $ 4,958
Add (deduct) -- items not affecting cash used
for operating activities:
Depreciation and amortization 3,707 146 -- --
Amortization of debt financing costs -- -- 1,048 --
Equity in (earnings) loss of subsidiaries 230 -- 4,701 (4,931)
Deferred income taxes -- net -- -- 31 --
Other -- -- -- (27)
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 17,901 1,384 -- --
Inventories 1,846 (584) -- --
Other current assets (6,201) (1,269) 3,407 --
Trade accounts payable and bank overdrafts (8,197) 72 -- --
Accrued interest 144 -- (544) --
Other current liabilities (12,581) 128 8,080 --
---------------------------------------------------------------
Net cash provided by (used for) operating activities (7,852) (380) 827 --
---------------------------------------------------------------
Investment and Other Transactions
Fixed asset additions - net (4,585) (159) -- --
Acquisition of businesses- net of cash acquired (5,070) -- -- --
Repayment of loans by senior management -- -- 70 --
Other - net (421) 176 -- --
---------------------------------------------------------------
Net cash provided by (used for) investment
and other transactions (10,076) 17 70 --
---------------------------------------------------------------
Financing Activities
Changes in short--term debt, notes payable
and Revolving Credit Facility borrowings 8,147 120 8,784 --
Proceeds from Acquisition Facility Line borrowings -- -- 1,235 --
Distribution from parent 10,241 -- (10,241) --
Repayments of long--term obligations -- -- (675) --
---------------------------------------------------------------
Net cash provided by (used for) financing activities 18,388 120 (897) --
---------------------------------------------------------------
---------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 45 (6) -- --
---------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 505 (249) -- --
Cash and Cash Equivalents
Beginning of Period 2,214 320 -- --
---------------------------------------------------------------
End of Period $ 2,719 $ 71 $-- $--
---------------------------------------------------------------
---------------------------------------------------------------
Consolidated Consolidated
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
----------------------------------------------------------------
Operating Activities
Net income (loss) $(15,896) $(15,896) $ 15,896 $(15,896)
Add (deduct) -- items not affecting cash used
for operating activities:
Depreciation and amortization 3,853 -- -- 3,853
Amortization of debt financing costs 1,048 -- -- 1,048
Equity in (earnings) loss of subsidiaries -- 15,896 (15,896) --
Deferred income taxes -- net 31 -- -- 31
Other (27) -- -- (27)
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 19,285 -- -- 19,285
Inventories 1,262 -- -- 1,262
Other current assets (4,063) -- -- (4,063)
Trade accounts payable and bank overdrafts (8,125) -- -- (8,125)
Accrued interest (400) -- -- (400)
Other current liabilities (4,373) -- -- (4,373)
--------------------------------------------------------------
Net cash provided by (used for) operating activities (7,405) -- -- (7,405)
--------------------------------------------------------------
Investment and Other Transactions
Fixed asset additions - net (4,744) -- -- (4,744)
Acquisition of businesses- net of cash acquired (5,070) -- -- (5,070)
Repayment of loans by senior management 70 -- -- 70
Other - net (245) -- -- (245)
--------------------------------------------------------------
Net cash provided by (used for) investment
and other transactions (9,989) -- -- (9,989)
--------------------------------------------------------------
Financing Activities
Changes in short--term debt, notes payable
and Revolving Credit Facility borrowings 17,051 -- -- 17,051
Proceeds from Acquisition Facility Line borrowings 1,235 -- -- 1,235
Distribution from parent -- -- -- --
Repayments of long--term obligations (675) -- -- (675)
--------------------------------------------------------------
Net cash provided by (used for) financing activities 17,611 -- -- 17,611
--------------------------------------------------------------
--------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 39 -- -- 39
--------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 256 -- -- 256
Cash and Cash Equivalents
Beginning of Period 2,534 -- -- 2,534
--------------------------------------------------------------
End of Period $ 2,790 $-- $-- $ 2,790
--------------------------------------------------------------
--------------------------------------------------------------
21
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(Dollars in Thousands)
Non Morris
Guarantor Guarantor Material
Subsidiaries Subsidiaries Handling, Inc Eliminations
----------------------------------------------------------------
Operating Activities
Net income (loss) $ 6,477 $ (251) $ 3,669 $ (6,226)
Add (deduct) -- items not affecting cash provided
by operating activities:
Depreciation and amortization 3,101 226 81 --
Equity in (earnings) loss of subsidiaries 213 -- (6,477) 6,264
Deferred income taxes -- net 57 -- -- --
Divestiture bonus -- -- 1,216 --
Other -- -- -- (38)
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 2,121 1,525 -- --
Inventories (3,507) 1,539 -- --
Other current assets (14) (1,182) (707) --
Trade accounts payable and bank overdrafts (8,012) (3,567) -- --
Other current liabilities (3,669) 1,752 2,142 --
Activity with parent and other affiliates -- net 1,479 448 (714) --
----------------------------------------------------------------
Net cash provided by (used for) operating activities (1,754) 490 (790) --
----------------------------------------------------------------
Investment and Other Transactions
Fixed asset additions -- net (2,238) (208) -- --
Acquisition of businesses -- net of cash acquired (319) -- -- --
Issuance of loans to senior management -- -- (900) --
Other -- net 72 -- -- --
----------------------------------------------------------------
Net cash used for investment and other transactions (2,485) (208) (900) --
----------------------------------------------------------------
Financing Activities
Changes in short--term debt and notes payable 3,065 -- -- --
Proceeds from Senior Note Offering -- -- 200,000 --
Proceeds from New Credit Facility -- -- 55,000 --
Redemption of shares held by Holdings -- -- (232,845) --
Redemption of common stock and preferred stock -- -- -- --
Net proceeds from issuance of Series A preferred
stock and related common shares -- -- -- --
Stock redemption transaction costs -- -- -- --
Debt financing costs -- -- (18,179) --
Capital contributions 2,286 -- (2,286) --
Proceeds from issuance of debt (23) 23 -- --
----------------------------------------------------------------
Net cash provided by financing activities 5,328 23 1,690 --
----------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (78) (23) -- --
----------------------------------------------------------------
Increase in Cash and Cash Equivalents 1,011 282 -- --
Cash and Cash Equivalents
Beginning of Period 1,393 139 -- --
----------------------------------------------------------------
End of Period $ 2,404 $ 421 $-- $--
----------------------------------------------------------------
----------------------------------------------------------------
Combined Combined
Morris Material MMH MMH
Handling, Inc. Holdings, Inc. Eliminations Holdings, Inc.
-----------------------------------------------------------------
Operating Activities
Net income (loss) $ 3,669 $ 3,669 $ (3,669) $ 3,669
Add (deduct) -- items not affecting cash provided
by operating activities:
Depreciation and amortization 3,408 -- -- 3,408
Equity in (earnings) loss of subsidiaries -- (3,669) 3,669 --
Deferred income taxes -- net 57 -- -- 57
Divestiture bonus 1,216 -- -- 1,216
Other (38) -- -- (38)
Changes in working capital, excluding the
effects of acquisition opening balance sheets:
Accounts receivable 3,646 -- -- 3,646
Inventories (1,968) -- -- (1,968)
Other current assets (1,903) -- -- (1,903)
Trade accounts payable and bank overdrafts (11,579) -- -- (11,579)
Other current liabilities 225 -- -- 225
Activity with parent and other affiliates -- net 1,213 -- -- 1,213
-----------------------------------------------------------------
Net cash provided by (used for) operating activities (2,054) -- -- (2,054)
-----------------------------------------------------------------
Investment and Other Transactions
Fixed asset additions -- net (2,446) -- -- (2,446)
Acquisition of businesses -- net of cash acquired (319) -- -- (319)
Issuance of loans to senior management (900) -- -- (900)
Other -- net 72 -- -- 72
-----------------------------------------------------------------
Net cash used for investment and other transactions (3,593) -- -- (3,593)
-----------------------------------------------------------------
Financing Activities
Changes in short--term debt and notes payable 3,065 -- -- 3,065
Proceeds from Senior Note Offering 200,000 -- -- 200,000
Proceeds from New Credit Facility 55,000 -- -- 55,000
Redemption of shares held by Holdings (232,845) 232,845 -- --
Redemption of common stock and preferred stock -- (287,000) -- (287,000)
Net proceeds from issuance of Series A preferred
stock and related common shares -- 57,094 -- 57,094
Stock redemption transaction costs -- (2,939) -- (2,939)
Debt financing costs (18,179) -- -- (18,179)
Capital contributions -- -- -- --
Proceeds from issuance of debt -- -- -- --
-----------------------------------------------------------------
Net cash provided by financing activities 7,041 -- -- 7,041
-----------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (101) -- -- (101)
-----------------------------------------------------------------
Increase in Cash and Cash Equivalents 1,293 -- -- 1,293
Cash and Cash Equivalents
Beginning of Period 1,532 -- -- 1,532
-----------------------------------------------------------------
End of Period $ 2,825 $-- $-- $ 2,825
-----------------------------------------------------------------
-----------------------------------------------------------------
22
MMH HOLDINGS, INC.
MORRIS MATERIAL HANDLING, INC.
MANAGEMENT'S 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 a full service
international 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).
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,
23
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 $27.5 million as of April 30,
1999). MMH estimates that the amount to be paid for calendar year 1999 is
$223,000. MMH paid a pro-rated fee of $290,000 for calendar year 1998. 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
which commenced March 30, 1999. The Company recognized $201,000 of royalty fees
in April 1999.
As discussed below, however, the Company could be materially adversely
affected by the fact that HII and certain of its United States affiliates
have recently filed for bankruptcy protection. See "--Recent Developments."
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 six months ended April 30, 1999, the Company completed one
acquisition with an aggregate purchase price of $3.2 million, net of cash
acquired. During 1998, the Company completed several acquisitions for an
aggregate purchase price of $8.9 million, net of cash acquired. These
acquisitions were related to the Company's aftermarket business and were
accounted for as purchase transactions with the purchase prices allocated to the
fair value of specific assets acquired and liabilities assumed. Resultant
goodwill of the transactions, $1.9 million for the 1999 transaction and $8.3
million for the 1998 transactions, is being amortized over 30 to 40 years. The
1999 acquisition and one 1998 acquisition were partially financed by the
sellers, resulting in deferred purchase price which will be paid in 2004 and
2005 (in the case of the 1999 acquisition) and in installments through 2006 (in
the case of one 1998 acquisition).
During the six months ended April 30, 1999, the Company made final consideration
payments of $1.5 million related to two 1998 acquisitions. With respect to a
1995 acquisition, the Company was required to make a contingent consideration
payment of $1.4 million in the six months ended April 30, 1999. Additionally, a
payment of $0.1 million was made toward the 1998 acquisition that was partially
financed by the seller. On a pro forma basis, the 1999 and 1998 acquisitions
were not material to results of operations reported for the six months ended
April 30, 1999 and accordingly, such information is not presented.
RECENT DEVELOPMENTS
On June 7, 1999 (the "Petition Date"), HII and certain of its United States
affiliates (including HarnCo) filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware (the "HII Bankruptcy").
Certain provisions of the Bankruptcy Code allow a debtor to avoid, delay
and/or reduce its
24
contractual and other obligations to third parties. There can be no assurance
that HII and its affiliates will not attempt to utilize such provisions to cease
performance under their agreements with the Company. The inability of the
Company to receive the benefits of one or more of these agreements or the
termination of ongoing arrangements between the Company and affiliates of HII
could materially adversely affect the Company's operations and financial
performance. In the event that any of the liabilities retained by HII and its
affiliates remain unsatisfied as of the Petition Date, the Company's right to
indemnification for any such amounts it has paid on behalf of HII and its
affiliates may also be avoided, delayed or reduced.
Each of HII and certain of its affiliates on the one hand, and the Company
and certain of its affiliates, on the other hand, have receivables and
payables to the other which may be affected by the HII Bankruptcy. The
Company estimates that a net amount of approximately $0.7 million of
receivables due it and its affiliates may be so affected.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated.
SUPPLEMENTAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
Three months ended Three months ended Six months ended Six months ended
April 30, 1999 April 30, 1998 April 30, 1999 April 30, 1998
------------------- ------------------ ---------------- ----------------
Percent of Percent of Percent of Percent of
$ net sales $ net sales $ net sales $ net sales
---- --------- ---- --------- ----- --------- ----- ---------
Net sales 71.9 100.0% 80.8 100.0% 139.8 100.0% 157.2 100.0%
Other income - net -- 0.0% 0.4 0.5% 0.1 0.1% 0.7 0.5%
Cost of sales 54.4 75.7% 58.5 72.4% 105.1 75.2% 115.2 73.2%
Selling, general and
administrative expenses 19.4 27.0% 15.2 18.8% 35.3 25.3% 29.5 18.8%
Other costs -- 0.0% 2.2 2.7% -- 0.0% 3.1 1.9%
Operating income (1.9) -2.6% 5.3 6.6% (0.4) -0.3% 10.2 6.5%
Interest expense (7.5) -10.4% (3.3) -4.1% (14.4) -10.3% (4.2) -2.6%
Tax Provision (3.5) -4.9% (0.5) -0.6% (1.1) -0.8% (2.4) -1.6%
Net income (loss) (12.9) -17.9% 1.5 1.9% (15.9) -11.4% 3.7 2.3%
SIX MONTHS ENDED APRIL 30, 1999 AS COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
Net sales for the six months ended April 30, 1999 ("First Half 1999") decreased
$17.4 million or 11.1% to $139.8 million from $157.2 million for the six months
ended April 30, 1998 ("First Half 1998"). The decrease in net sales was
primarily caused by the following: (i) a decrease of $8.4 million in engineered
crane sales worldwide largely due to the fact that First Half 1998 included $6.3
million in container crane sales in the United Kingdom without any corresponding
sales in First Half 1999; (ii) a decrease of $7.0 million in hoists and
component sales primarily resulting from a softness in certain European and
North American markets, delays in receiving electrical products from an outside
vendor and a customer-elected delay in the delivery of winches; (iii) a $4.5
million decrease in standard crane sales primarily in Europe and southeast Asia;
(iv) a decrease in overall part sales of $3.6 million or 9.3% from $39.1 million
in First Half 1998 to $35.5 million in First Half 1999 as a result of reduced
purchasing levels by several large customers and certain delays by electrical
suppliers. These decreases were partially offset by an increase in
modernization sales of $1.0 million and an increase in service sales of $5.1
million.
Cost of sales decreased $10.1 million or 8.8% to $105.1 million in First Half
1999 from $115.2 million in First Half 1998 primarily due to the lower sales
volumes described above. However, cost of sales increased as a percentage of net
sales from 73.2% in First Half 1998 to 75.2% in First Half 1999 due to the lower
level of volume in manufacturing operations tied to the decrease in machine
sales. Additionally, the Company experienced $1.4 million in special charges
related to revised estimates of inventory obsolescence, warranty reserves and
contract completion costs.
Selling, general and administrative expenses increased $5.8 million or 19.7% to
$35.3 million in First Half 1999 from $29.5 million in First Half 1998. The
primary cause was $2.9 million of special charges related to provisions for
certain delinquent accounts receivable and changes in management (severance and
recruiting costs). Additional causes were: (i) 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; (ii) increased consulting costs; and (iii) increases due
to the fiscal 1999 and 1998 acquisitions. Also, selling, general and
administrative expenses in First Half 1999 included approximately $0.5
million of management fees compared to $0.1 million in First Half 1998. 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-reduction measures. The Company anticipates
incurring $3.3 million of expenses for contemplated severance and
reorganization charges associated with continued restructuring of the
Company's operations during the third and fourth fiscal quarters of 1999.
25
Parent management fees allocated by HII (prior to the Recapitalization), which
represented an allocation of HII's corporate expenses, were $1.2 million in
First Half 1998. Additionally, $1.2 million of incentives to certain members of
management and $0.7 million of non-recurring employee benefit costs, both
related to the Recapitalization and restructuring of the Company, were
recognized in First Half 1998.
Approximately $14.4 million in interest expense was recorded in First Half 1999.
The components include $11.8 million resulting from the issuance of debt in
connection with the Recapitalization and related commitment fees, $0.9 million
resulting from borrowings for working capital and acquisition funding, a $0.4
million fee paid in conjunction with the waiver of the debt covenant violations,
$0.3 million related to other borrowings and $1.0 million in amortization of
financing costs recognized during the Recapitalization. Interest expense for
First Half 1998 included $1.5 million related to borrowings from HII and
affiliates (prior to the Recapitalization), $2.1 million resulting from the
issuance of debt in connection with the Recapitalization, $0.5 million on
certain other borrowings and $0.1 million in amortization of financing costs.
The Company paid $13.8 million in interest, waiver fees and commitment fees
during First Half 1999.
Realization of deferred tax assets is dependent on generating sufficient taxable
income prior to expiration of net operating loss carryforwards. During the
second quarter the Company re-estimated its future operating results and
determined its deferred tax asset valuation allowance required an increase of
$5.9 million which was recognized as income tax expense. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax assets recorded will be realized. The amount of deferred tax
assets not considered realizable, however, could be increased in the near
term if estimates of future taxable income are reduced.
The tax expense recorded of $1.1 million resulted from profitable operations
in Canada and Australia and from state income tax liabilities.
The Company's backlog of orders at April 30, 1999 was approximately $97.2
million compared to approximately $103.5 million at April 30, 1998. Bookings in
First Half 1999 were $139.7 million compared to $163.0 million in First Half
1998. The change in backlog and bookings was primarily due to decreased standard
crane, hoist and component bookings.
THREE MONTHS ENDED APRIL 30, 1999 AS COMPARED TO THREE MONTHS ENDED APRIL 30,
1998
Net sales for the three months ended April 30, 1999 ("Second Quarter 1999")
decreased $8.9 million or 11.0% to $71.9 million from $80.8 million for the
three months ended April 30, 1998 ("Second Quarter 1998"). The decrease in net
sales was primarily caused by the following: (i) a decrease of $7.2 million in
hoists and component sales primarily resulting from a softness in particular
European and North American markets, delays in receiving electrical products
from an outside vendor and a customer-elected delay in the delivery of winches;
(ii) a $3.1 million decrease in standard crane sales primarily in Europe and
Southeast Asia; (iii) a decrease of $1.1 million in engineered crane sales
worldwide due to decreases in container crane sales in the United Kingdom; (iv)
a decrease in overall part sales of $0.9 million as a result of certain delays
by electrical suppliers. These decreases were partially offset by an increase in
service sales of $3.4 million.
Cost of sales decreased $4.1 million or 7.0% to $54.4 million in Second Quarter
1999 from $58.5 million in Second Quarter 1998 primarily due to the lower sales
volumes described above. However, cost of sales increased as a percentage of net
sales from 72.4% in Second Quarter 1998 to 75.7% in Second Quarter 1999 due to
the lower level of volume in manufacturing operations tied to the decrease in
machine sales. Additionally, the Company experienced $1.4 million in special
charges related to revised estimates of inventory obsolescence, warranty
reserves and contract completion costs.
Selling, general and administrative expenses increased $4.2 million or 27.6% to
$19.4 million in Second Quarter 1999 from $15.2 million in Second Quarter 1998.
The primary cause was $2.9 million in special charges related to provisions
for certain delinquent accounts receivable and changes in management
(severance and recruiting costs). Additional 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 1999
and 1998 acquisitions. Also, selling, general and administrative expenses in
Second Quarter 1999 included approximately $0.3 million of management fees
compared to $0.1 million in Second Quarter 1998. 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-reduction measures.
Parent management fees allocated by HII (prior to the Recapitalization), which
represented an allocation of HII's corporate expenses, were $0.5 million in
Second Quarter 1998. Additionally, $1.2 million of incentives to certain members
of management
26
and $0.6 million of non-recurring employee benefit costs, both related to the
Recapitalization and restructuring of the Company, were recognized in Second
Quarter 1998.
Approximately $7.5 million in interest expense was recorded in Second Quarter
1999. The components include $5.9 million resulting from the issuance of debt in
connection with the Recapitalization and related commitment fees, $0.5 million
resulting from borrowings for working capital and acquisition funding, a $0.4
million fee paid in conjunction with the waiver of the debt covenant violations,
$0.2 million related to other borrowings and $0.5 million in amortization of
financing costs recognized during the Recapitalization. Interest expense for
Second Quarter 1998 included $0.8 million related to borrowings from HII and
affiliates (prior to the Recapitalization), $2.1 million resulting from the
issuance of debt in connection with the Recapitalization, $0.3 million on
certain other borrowings and $0.1 million in amortization of financing costs.
The Company paid $12.2 million in interest, waiver fees and commitment fees
during the Second Quarter 1999.
The tax expense recorded of $3.5 million resulted from the increase in the
deferred tax valuation allowance described above, from profitable operations
in Canada and Australia and from state income tax liabilities.
The Company's backlog of orders at April 30, 1999 was approximately $97.2
million compared to approximately $103.5 million at April 30, 1998. Bookings in
Second Quarter 1999 were $76.6 million compared to $84.5 million in Second
Quarter 1998. The change in backlog and bookings was primarily due to decreased
standard crane, hoist and component 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 used for operating activities was $7.4 million in First Half 1999
compared to net cash flow used for operating activities of $2.1 million in
First Half 1998. The $5.3 million decrease in operating cash flow was due
primarily to: a $19.6 million decrease in net income; a $1.5 million increase
in depreciation, amortization of intangible assets and amortization of debt
financing costs which were incurred during the Recapitalization; a $19.3
million decrease in accounts receivable during First Half 1999 versus a $3.6
million decrease in First Half 1998 due to lower sales and increased
collections; a net increase in inventory and other assets of $2.8 million in
First Half 1999 versus an increase in First Half 1998 of $3.9 million due
primarily to an increase in certain prepaid expenses; a decrease in accounts
payable, accruals and other liabilities of $12.9 million in First Half 1999
versus a decrease of $10.1 million in First Half 1998 caused by decreases in
income taxes payable and the reduction of customer deposits due to product
shipment, increased warranty reserves and the reduction of funding from the
Company's former parent.
Net cash used for investment and other transactions for First Half 1999 and
First Half 1998 was $10.0 million and $3.6 million, respectively. During the
First Half 1999, $5.1 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
$4.7 million in First Half 1999 from $2.4 million in First Half 1998. The First
Half 1999 expenditures included computers and upgrades, new operating system
software, office and warehouse consolidations and manufacturing equipment.
Net cash provided by financing activities was $17.6 million in First Half 1999
versus net cash provided by financing activities of $7.0 million in First Half
1998. Net borrowings included $17.1 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 Company did not meet certain of the financial ratios and tests under the
New Credit Facility for the period ended January 31, 1999 and did not meet such
financial covenants and certain additional financial covenants for the period
ended April 30, 1999. The Company obtained a waiver of such financial covenants,
which was effective through June 14, 1999 and was subsequently extended through
June 30, 1999. The waiver permits the Company to borrow certain amounts under
27
the Revolving Credit Facility to meet its projected working capital
requirements. Under the terms of the waiver, the Company may not, without prior
lender 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 after March 2, 1999 in excess of $5.0 million. At
June 11, 1999, after giving effect to the existing New Credit Facility waiver,
the Company had, subject to certain conditions, (i) the ability to borrow up to
approximately $35.7 million under the Revolving Credit Facility, of which $20.8
million is currently outstanding and (ii) the ability to obtain letters of
credit, bid bonds and performance bonds after March 2, 1999 under the New
Credit Facility in an amount not to exceed $5.0 million in the aggregate of
which $1.9 million have been issued to date.
The Company is negotiating with the lending institutions party to the New Credit
Facility in an effort to obtain amendments to the New Credit Facility. While
management of the Company believes that it will be successful in obtaining
satisfactory amendments to the New Credit Facility, there can be no assurance
that such amendments will be obtained. If amendments cannot be negotiated or
satisfactory waivers obtained, the lenders under the New Credit Facility could
elect to declare all amounts borrowed under the New Credit Facility, together
with accrued interest thereon, to be due and payable, which would result in
an event of default under the Note Indenture and the Surety Arrangement and
permit acceleration of the Company's obligations thereunder. In such event,
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. Additionally, such an
event could have a material adverse effect on the Company's ability to obtain
certain customer orders.
The Company incurred significant indebtedness in connection with the
Recapitalization. As of June 11, 1999, the Company had approximately $288.3
million of indebtedness outstanding. As a result of the covenant violations
under the New Credit Facility and the Company's anticipated violation of
required covenants and tests at compliance dates during the next twelve months
in the absence of waivers or amendments which would prevent such violation, all
borrowings outstanding under the New Credit Facility ($81.9 million as of June
11, 1999) are classified as current liabilities in the accompanying April 30,
1999 balance sheets. The Company also anticipates incurring $3.2 million of cash
expenditures during the third and fourth quarters of fiscal 1999 for
severance and reorganization charges associated with continued restructuring
of the Company's operations, in addition to cash needed for operations and
capital expenditures.
Since the Recapitalization, the Company has been able to satisfy its cash
requirements from cash generated by operations and borrowings under the
Revolving Credit Facility. However, in order to have sufficient cash flow to
satisfy its future cash needs for operations and debt service, the Company
needs to be able to borrow under the Revolving Credit Facility in sufficient
amounts and will have to materially improve cash generated from operations in
the near future.
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:
- The Company did not meet certain of the financial ratios and tests
under the New Credit Facility for the period ended January 31, 1999 and
did not meet such financial covenants and certain additional financial
covenants for the period ended April 30, 1999. The Company obtained a
waiver of such financial covenants, which was effective through June
14, 1999 and was subsequently extended through June 30, 1999. The
waiver permits 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 lender 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 after March 2, 1999 in excess of $5.0 million. At June 11, 1999,
after giving effect to the existing New Credit Facility waiver, the
Company had, subject to certain conditions, (i) the ability to borrow
up to approximately $35.7 million under the Revolving Credit Facility,
of which $20.8 million is currently outstanding and (ii) the ability to
obtain letters of credit, bid bonds and performance bonds after March
2, 1999 under the New Credit Facility in an amount not to exceed $5.0
million in the aggregate of which $1.9 million have been issued to
date.
28
The Company is negotiating with the lending institutions party to the
New Credit Facility in an effort to obtain amendments to the New Credit
Facility. While management of the Company believes that it will be
successful in obtaining satisfactory amendments to the New Credit
Facility, there can be no assurance that such amendments will be
obtained. If amendments cannot be negotiated or satisfactory waivers
obtained, the lenders under the New Credit Facility could elect to
declare all amounts borrowed under the New Credit Facility, together
with accrued interest thereon, to be due and payable, which would
result in an event of default under the Note Indenture and the Surety
Arrangement and permit acceleration of the Company's obligations
thereunder. In such event, 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. Additionally, such an
event could have a material adverse effect on the Company's ability
to obtain certain customer orders.
- The Company incurred significant indebtedness in connection with the
Recapitalization. As of June 11, 1999, the Company had approximately
$288.3 million of indebtedness outstanding. As a result of the covenant
violations under the New Credit Facility and the Company's anticipated
violation of required covenants and tests at compliance dates during
the next twelve months in the absence of waivers or amendments which
would prevent such violation, all borrowings outstanding under the New
Credit Facility ($81.9 million as of June 11, 1999) are classified as
current liabilities in the accompanying April 30, 1999 balance
sheets. The Company also anticipates incurring $3.2 million of cash
expenditures during the third and fourth quarters of fiscal 1999 for
severance and reorganization charges associated with continued
restructuring of the Company's operations, in addition to cash
needed for operations and capital expenditures.
Since the Recapitalization, the Company has been able to satisfy its
cash requirements from cash generated by operations and borrowings
under the Revolving Credit Facility. However, in order to have
sufficient cash flow to satisfy its future cash needs for operations
and debt service, the Company needs to be able to borrow under the
Revolving Credit Facility in sufficient amounts and will have to
materially improve cash generated from operations in the near future.
- On June 7, 1999, HII and certain of its United States affiliates
(including HarnCo) filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. Certain provisions of the Bankruptcy Code allow a
debtor to avoid, delay and/or reduce its contractual and other
obligations to third parties. There can be no assurance that HII and
its affiliates will not attempt to utilize such provisions to cease
performance under their agreements and arrangements with the Company.
The inability of the Company to receive the benefits of one or more of
these agreements or the termination of ongoing arrangements between the
Company and affiliates of HII (including those relating to the
provision of services and materials by HII and its affiliates to the
Company) could materially adversely affect the Company's operations
and financial performance. In the event that any of the liabilities
retained by HII and its affiliates in connection with the
Recapitalization remain unsatisfied as of the Petition Date, the
Company's right to indemnification for any such amounts it has paid
on behalf of HII and its affiliates may also be avoided, delayed or
reduced.
Each of HII and certain of its affiliates on the one hand, and the
Company and certain of its affiliates, on the other hand, have
receivables and payables to the other which may be affected by the
HII Bankruptcy. The Company estimates that a net amount of
approximately $0.7 million of receivables due it and its affiliates
may be so affected.
- 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.
- 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
35.4% in First Half 1999 and First Half 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.
- 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.
- 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
29
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
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
operating system used in the North American distribution and service business
was made compliant during the second fiscal quarter by applying the vendor
supplied upgrade.
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. The Company does
not, however, control the systems of other companies, and cannot assure that
these systems will be timely converted and, if not converted, would not have
an adverse effect on the Company's business operations. In the event that the
Company and/or its significant vendors or suppliers do not complete their
Year 2000 compliance efforts, the Company could experience disruptions in its
operations. Disruptions in the economy generally resulting from Year 2000
issues also could affect 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 by
September 30, 1999. Total expenses on the project through April 30, 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.
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
30
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, 2000. 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 associated 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.
31
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1998, the Company received a request to arbitrate a claim from a
former customer which arose 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. In addition, the Company has been notified by the port operator of
its intention to pursue a claim against the Company for its damages (which it
estimates are between $4 million and $5 million) arising from the accident.
Management intends to vigorously defend this matter. One of the Company's
insurance carriers has agreed to provide defense coverage for one of the two
cranes involved in the accident and limited indemnification if the Company is
unsuccessful in defending the claim. The Company is continuing to work with its
insurance broker to determine the availability of additional 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. While the Company believes it will obtain a favorable
resolution, no assurances can be made as to the final outcome of the claim. If
the Company were found liable for the full amount of the claim, there could be a
material adverse effect on the Company's operations and financial performance.
The Company is also involved from time to time in various other routine
litigation incident to its operations, including product liability and other
claims. 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 April 30, 1999.
32
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: June 14, 1999 /s/ David D. Smith
------------------
David D. Smith
Vice President - Finance
(Principal Financial Officer)
MORRIS MATERIAL HANDLING, INC.
Date: June 14, 1999 /s/ David D. Smith
-------------------
David D. Smith
Vice President - Finance
(Principal Financial Officer)
33
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
4.13 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.
4.14 Waiver dated as of March 2, 1999 by and among MMH Holdings,
Inc., Morris Material Handling, Inc., Morris Material
Handling, LLC, Morris Material Handling, Ltd., Mondel ULC,
Kaverit Steel and Crane ULC, the lending institutions listed
on the signature pages thereto, Credit Agricole Indosuez,
BankBoston, N.A. and Canadian Imperial Bank of Commerce.
4.15 Waiver No. 2 dated as of June 14, 1999 by and among MMH
Holdings, Inc., its subsidiaries named on the signature pages
thereto, and the Agents and lending institutions named on the
signture pages.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
34