<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 6, 1998
Commission file number 333-29141
MMI PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 74-1622891
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
515 West Greens Road, Suite 710
Houston, Texas 77067
(Address of Principal Executive Offices)
(281) 876-0080
(Registrant's telephone number, including area code)
<PAGE> 2
MMI PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Report of Independent Auditors 3
Consolidated Balance Sheet as of July 31, 1998 4
Consolidated Statement of Income for the Ten Month Period Ended July 31, 1998 5
Consolidated Statement of Stockholders' Equity for the Ten Month Period Ended July 31, 1998 6
Consolidated Statement of Cash Flows for the Ten Month Period Ended July 31, 1998 7
Notes to Consolidated Financial Statements 8
(b) Pro Forma Financial Information 12
Pro Forma Condensed Consolidated Balance Sheet (Unaudited) as of October 3, 1998 13
Pro Forma Condensed Consolidated Statement of Operations (Unaudited) for the Nine Month Period
Ended October 3, 1998 14
Pro Forma Condensed Consolidated Statement of Operations (Unaudited) for the Year Ended
January 3, 1998 15
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 16
(c) Exhibits
None
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Security Fence Supply Co., Inc.
We have audited the accompanying consolidated balance sheet of Security Fence
Supply Co., Inc. and subsidiary as of July 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
ten-month period ended July 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Security Fence Supply Co., Inc. and subsidiary at July 31, 1998, and the
consolidated results of its operations and its cash flows for the ten-month
period ended July 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Houston, Texas
October 1, 1998, except for Note 6,
as to which the date is October 6, 1998
3
<PAGE> 4
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 1,213
Accounts receivable, net of allowance of $59 3,539
Accounts receivable from related parties 673
Inventories 3,777
Deferred income taxes 114
--------
Total current assets 9,316
Property, plant and equipment:
Land 986
Buildings and improvements 3,103
Machinery and equipment 4,867
--------
8,956
Less accumulated depreciation 3,573
--------
5,383
Other assets 15
--------
Total assets $ 14,714
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,333
Accrued payroll and bonuses 938
Accrued liabilities 633
--------
Total current liabilities 3,904
Deferred income taxes 33
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 1,000 shares authorized,
issued, and outstanding 50
Retained earnings 10,727
--------
Total stockholders' equity 10,777
--------
Total liabilities and stockholders' equity $ 14,714
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
TEN-MONTH PERIOD ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales $ 24,884
Cost of sales 19,659
--------
Gross profit 5,225
Selling, general and
administrative expenses 2,939
Other (income) expense:
Interest income (28)
Interest expense 11
Other income (146)
--------
(163)
--------
Income before income taxes 2,449
Provision for income taxes 960
--------
Net income $ 1,489
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized Gain
on Available- Total
Common For-Sale Retained Stockholders'
Stock Securities Earnings Equity
-------- --------------- -------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 $ 50 $ 55 $ 9,238 $ 9,343
Sale of available-for-sale investments (55) (55)
Net income 1,489 1,489
-------- -------- -------- --------
Balance at July 31, 1998 $ 50 $ -- $ 10,727 $ 10,777
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
TEN-MONTH PERIOD ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 1,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 438
Gain on sale of available-for-sale investments (33)
Provision for losses on obsolete or damaged inventory 70
Provision for losses on accounts receivable 7
Loss on sale of property, plant & equipment 2
Deferred income taxes (31)
Changes in operating assets and liabilities:
Accounts receivable (135)
Accounts receivable from related parties 105
Inventories (1,358)
Accounts payable and accrued liabilities 452
Other assets 5
-------
Net cash provided by operating activities 1,011
INVESTING ACTIVITIES
Purchase of property, plant and equipment (400)
Proceeds from sale of property, plant and equipment 12
Proceeds from sale of available-for-sale investments 278
-------
Net cash used in investing activities (110)
FINANCING ACTIVITIES
Payments on loan from stockholder (259)
-------
Net cash used in financing activities (259)
Net change in cash 642
Cash, beginning of period 571
-------
Cash, end of period $ 1,213
=======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest to a related party $ 11
Cash paid for income taxes $ 764
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of
Security Fence Supply Co., Inc., and its wholly-owned subsidiary Discount Fence
Center, Inc. (individually and collectively the "Company"). All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. The Company is a manufacturer and distributor of fence products in
the residential and commercial construction industries and sells its products
primarily to contractors and fence wholesalers located in Maryland and the
eastern United States.
Revenue Recognition
The Company records sales when its products are shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories are determined using actual cost based on a first-in,
first-out (FIFO) basis. Inventories are valued at the lower of FIFO cost or
market.
Investments
The Company determines the appropriate classification of equity
securities at the time of purchase and confirms such designation as of the
balance sheet date. Marketable equity securities which the Company does not have
the intent or ability to hold to maturity are classified as available-for-sale
and are stated at fair value with any unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. Gains and losses are
recognized based on the specific-identification method for equity securities
sold.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed on the straight-line method using rates based on the estimated useful
lives of the related assets. Estimated useful lives used for depreciation
purposes are as follows:
<TABLE>
<S> <C>
Building and improvements 15 to 30 years
Machinery and equipment 5 to 10 years
</TABLE>
Fair Value of Financial Instruments
The Company considers the recorded value of its monetary assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, and accounts payable, to approximate their respective fair values at
July 31, 1998 due to the short-term maturities of these investments.
8
<PAGE> 9
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Concentration of Credit Risk
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continually
evaluates the credit worthiness of its customers and does not require
collateral. The Company's two largest customers, one of which is owned by a
brother of the majority stockholder, accounted for approximately 12% and 11%,
respectively, of net sales for the ten-month period ended July 31, 1998, with
the related receivables of $345,000 and $498,000, respectively at July 31, 1998.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
2. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<S> <C>
Raw materials $ 1,613
Work-in-process 354
Finished goods 1,880
Reserve for obsolete or
damaged inventory (70)
-------
$ 3,777
=======
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company had net sales of approximately $3,164,000 for the
ten-month period ended July 31, 1998 to fence companies that are owned by
brothers of the majority stockholder. At July 31, 1998 accounts receivable due
from the two companies totaled $673,000.
The Company leases certain warehouse and office space from the
majority stockholder. Total rental expense to the majority stockholder was
approximately $87,000 for the ten-month period ended July 31, 1998.
During the ten-month period ended July 31, 1998, the Company made
principal and interest (8%) payments to the majority stockholder in the amounts
of $259,000 and $11,000, respectively, related to a loan from the stockholder.
The debt was fully paid as of July 31, 1998.
4. INCOME TAXES
The reconciliation of income tax expense computed at the U.S. federal
statutory tax rate to the reported income tax expense is as follows for the
ten-month period ended July 31, 1998 (in thousands):
<TABLE>
<S> <C>
Tax at U.S. statutory rate $ 832
State and local income taxes, net of federal benefit 115
Other, net 13
-----
Total $ 960
=====
</TABLE>
9
<PAGE> 10
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES - (CONTINUED)
Significant components of the provision for income taxes were as
follows (in thousands):
<TABLE>
<S> <C>
Current:
Federal $ 811
State and local 180
-----
991
Deferred:
Federal (27)
State and local (4)
-----
(31)
-----
$ 960
=====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets were as follows
(in thousands):
<TABLE>
<S> <C>
Deferred tax liability:
Tax over book depreciation $ 125
Deferred tax assets:
Reserve for vacation earned 48
Allowance for doubtful accounts 23
Reserve for obsolete or damaged inventory 19
Accrued expenses 116
-----
Total deferred tax assets 206
-----
Net deferred tax assets $ 81
=====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions arising in the ordinary
course of business. The Company believes that the various asserted claims and
litigation in which it is involved will not materially effect its consolidated
financial position or future operating results, although no assurance can be
given with respect to the ultimate outcome of any such claims or litigation.
The Company leases certain warehouse and office space under
noncancelable operating leases with initial terms of more than one year. Future
minimum lease payments on operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $ 114
2000 111
2001 86
2002 61
2003 and thereafter 66
-----
Total $ 438
=====
</TABLE>
Total rental expense for the ten-month period ended July 31, 1998 was
$158,000.
10
<PAGE> 11
SECURITY FENCE SUPPLY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. SUBSEQUENT EVENT
On October 6, 1998, pursuant to the terms of a Stock Purchase
Agreement, MMI Products, Inc. purchased all of the issued and outstanding common
stock of the Company for approximately $24.2 million, subject to certain
adjustments.
7. YEAR 2000 (UNAUDITED)
The Company's computer programs for its accounting and payroll
systems have been written using two digits rather than four to define the
applicable year. As a result, these computer programs may 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 or engage in similar
normal business activities.
The Company is currently assessing its computer software, hardware,
and other systems, including embedded technology, relative to year 2000
compliance and plans to develop a remediation plan in conjunction with MMI
Products, Inc. The Company plans to modify or replace the current computer
programs for its accounting and payroll systems so that these systems will
function properly with respect to dates in the year 2000 and beyond. The Company
does not expect any significant disruption on operations in the event that any
of its suppliers or customers fail to achieve year 2000 compliance. If the
Company is unable to modify or replace the current computer programs for its
accounting and payroll systems or complete other remediation efforts that are
determined to be necessary, the year 2000 issues could have a material impact on
the operations of the Company.
11
<PAGE> 12
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 1998, MMI Products, Inc. (the Company) purchased all of the issued
and outstanding stock of Security Fence Supply Co., Inc. (Security) for cash of
approximately $24.2 million. Immediately following the purchase, certain real
property acquired (valued at approximately $3.6 million) was sold by Security to
an entity owned by Security's previous shareholders and leased back to the
Company. The net cash outlay of $20.6 million was funded by the Company's
revolving credit facility. This acquisition has been accounted for using the
purchased method of accounting. The following unaudited pro forma condensed
consolidated statements of operations for the nine-month period ended October 3,
1998 and the year ended January 3, 1998 give effect to the purchase as if it had
occurred at the beginning of the periods presented.
The unaudited pro forma condensed consolidated financial information is
presented for informational purposes only and is not necessarily indicative of
the results of operations which would have been achieved had the transaction
been completed at the beginning of the periods presented, nor is it necessarily
indicative of the Company's future results of operations. The unaudited pro
forma condensed consolidated financial information is based on certain
assumptions and adjustments described in the notes thereto and should be read in
conjunction therewith. The unaudited pro forma condensed consolidated financial
information should also be read in conjunction with the historical consolidated
financial statements, including the notes thereto, of the Company and Security.
12
<PAGE> 13
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
OCTOBER 3, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
-----------------------------
MMI Security (1)
Products, Inc. Fence Adjustments Pro Forma
-------------- ----- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,746 $ 1,213 $ -- $ 4,959
Accounts receivable, net 59,290 3,539 -- 62,829
Accounts receivable from related parties -- 673 -- 673
Inventories 59,554 3,777 -- 63,331
Deferred income taxes -- 114 -- 114
Prepaid expenses and other current assets 3,328 -- -- 3,328
--------- --------- --------- ---------
Total current assets 125,918 9,316 -- 135,234
Property, plant and equipment, net 55,813 5,383 (3,611)(a)
2,790 (b) 60,375
Intangible assets 17,717 -- 12,042 (b) 29,759
Deferred charges and other assets 4,417 15 -- 4,432
--------- --------- --------- ---------
Total assets $ 203,865 $ 14,714 $ 11,221 $ 229,800
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 43,393 $ 2,333 $ -- $ 45,726
Accrued liabilities 19,045 1,571 -- 20,616
Income taxes payable 2,542 -- -- 2,542
Due to Holding, net 5,102 -- -- 5,102
Current maturities of long-term debt, including
capital lease obligations 1,570 -- -- 1,570
--------- --------- --------- ---------
Total current liabilities 71,652 3,904 -- 75,556
Long-term debt, including capital lease obligations 140,432 -- 20,854 (a) 161,286
Deferred income taxes and other long-term liabilities 5,837 33 1,144 (b) 7,014
Stockholder's equity (deficit)
Common stock 252 50 (50)(a) 252
Additional paid-in capital 13,009 -- -- 13,009
Accumulated other comprehensive income
Additional minimum pension liability, net of tax (154) -- -- (154)
Retained earnings (deficit) (27,163) 10,727 (10,727)(a) (27,163)
--------- --------- --------- ---------
Total stockholder's equity (deficit) (14,056) 10,777 (10,777) (14,056)
--------- --------- --------- ---------
Total liabilities and stockholder's equity (deficit) $ 203,865 $ 14,714 $ 11,221 $ 229,800
========= ========= ========= =========
</TABLE>
(1) Audited balance sheet as of July 31, 1998.
The accompanying notes are an integral part of the unaudited pro
forma condensed consolidated financial statements.
13
<PAGE> 14
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE-MONTH PERIOD ENDED OCTOBER 3, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
--------------------------------------
MMI Security (1)
Products, Inc. Fence Adjustments Pro Forma
-------------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 316,551 $ 21,966 $ -- $ 338,517
Cost of sales 266,448 17,229 (16)(c)
158 (d) 283,819
--------- --------- --------- ---------
Gross profit 50,103 4,737 (142) 54,698
Selling, general and administrative expenses 23,063 2,709 (618)(e)
215 (f)
85 (g) 25,454
Other (income) expense, net (82) (109) -- (191)
--------- --------- --------- ---------
Income before interest and income taxes 27,122 2,137 176 29,435
Interest expense 12,919 11 1,035 (h) 13,965
--------- --------- --------- ---------
Income before income taxes 14,203 2,126 (859) 15,470
Provision for income taxes 5,681 829 (167)(i) 6,343
--------- --------- --------- ---------
Net income $ 8,522 $ 1,297 $ (692) $ 9,127
========= ========= ========= =========
</TABLE>
(1) Reflects results for the nine-month period November 1, 1997 to
July 31, 1998 (unaudited).
The accompanying notes are an integral part of the unaudited pro
forma condensed consolidated financial statements.
14
<PAGE> 15
MMI PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JANUARY 3, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
--------------------------------------
MMI Security (1)
Products, Inc. Fence Adjustments Pro Forma
-------------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 346,905 $ 28,806 $ -- $ 375,711
Cost of sales 295,999 23,066 (15)(c)
227 (d) 319,277
--------- --------- --------- ---------
Gross profit 50,906 5,740 (212) 56,434
Selling, general and administrative expenses 24,843 3,290 (70)(e)
287 (f)
113 (g) 28,463
Other (income) expense, net 147 (191) -- (44)
--------- --------- --------- ---------
Income before interest and income taxes 25,916 2,641 (542) 28,015
Interest expense 13,018 52 1,342 (h) 14,412
--------- --------- --------- ---------
Income before income taxes 12,898 2,589 (1,884) 13,603
Provision for income taxes 5,161 1,102 (686)(i) 5,577
--------- --------- --------- ---------
Net income $ 7,737 $ 1,487 $ (1,198) $ 8,026
========= ========= ========= =========
</TABLE>
(1) Reflects results for the twelve-month period October 1, 1996 to
September 30, 1997 (unaudited).
The accompanying notes are an integral part of the unaudited pro
forma condensed consolidated financial statements.
15
<PAGE> 16
MMI PRODUCTS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on adjustments
to the historical consolidated financial statements of MMI Products, Inc.
(the "Company") to give effect to the acquisition described in Note 2
("Security Fence Supply Co., Inc."). The pro forma condensed consolidated
balance sheet assumes the acquisition closed on October 3, 1998. The pro
forma condensed consolidated statement of operations assumes the acquisition
was consummated as of the beginning of the periods presented. The pro forma
condensed consolidated statements of operations are not necessarily
indicative of results that would have occurred had the acquisition been
consummated as of the beginning of the periods presented or that might be
attained in the future. Certain information normally included in the
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). The Pro
Forma Financial Statements should be read in conjunction with the historical
consolidated financial statements of the Company, the historical
consolidated financial statements of Security Fence Supply Co., Inc.
("Security"), and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's Annual Report
on Form 10-K for the annual period ended January 3, 1998 and Quarterly
Report on Form 10-Q for the quarterly period ended October 3, 1998,
previously filed with the SEC.
The Company believes that the assumptions used in preparing the unaudited
pro forma condensed consolidated financial statements provide a reasonable
basis for presenting all of the significant effects of the Security
acquisition (other than any synergies anticipated by the Company, and
any nonrecurring charges directly attributable to the purchase and any
nonrecurring charges that will result from combining operations), and that
the pro forma adjustments give effect to those assumptions in the unaudited
pro forma condensed consolidated financial statements.
2. SECURITY FENCE SUPPLY CO., INC.
On October 6, 1998, pursuant to the terms of a Stock Purchase
Agreement, the Company purchased all the issued and outstanding stock of
Security, a Maryland corporation from Messrs. Henry F. Long, Jr. and Henry
F. Long III for cash of approximately $24.2 million. Immediately following
the purchase, the real property acquired (valued at approximately $3.6
million) was sold by Security to an entity owned by the Messrs. Long and
leased back to Security for a term of five years at rental rates which
approximate the market for such properties. The net cash outlay of $20.6
million was funded by the Company's revolving credit facility which was
amended to add Security as a borrower and provide for lower LIBOR margins
depending on the Company's defined adjusted earnings from operations. The
acquisition has been accounted for as a purchase and, accordingly, the
results of operations of Security have been included in the consolidated
results of operations of the Company from the date of acquisition.
3. ADJUSTMENTS OF HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated balance sheet of the Company to reflect the
acquisition of Security described in Note 2 effective as of October 3, 1998
and the historical condensed statements of operations as if the acquisition
was consummated at the beginning of the periods presented:
(a) To reflect the acquisition of Security including the elimination of
real property sold and subsequently leased back by the Company as
part of the acquisition (Note 2) and the borrowings under the
Company's revolving credit facility to fund the acquisition.
16
<PAGE> 17
MMI PRODUCTS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -(CONTINUED)
3. ADJUSTMENTS OF HISTORICAL FINANCIAL STATEMENTS (CONTINUED)
(b) To reflect the preliminary purchase price allocation for the estimated
fair market value of assets purchased and liabilities assumed.
(c) To reflect the change in depreciation expense resulting from the
purchase accounting step-up from the acquisition. [see (b)].
(d) To reflect lease expense for real property sold and subsequently leased
back by the Company as part of the acquisition, offset by the decrease
in depreciation expense for the real property sold [see (a)].
(e) To reduce expenses for the difference between compensation and
benefits of sellers and certain other key Security employees prior to
consummation of the acquisition and their compensation and benefits
following the acquisition as stipulated in the respective employment
agreements with the Company. In addition to the pro forma adjustment,
the Company expects incremental savings from the restructuring of the
compensation and benefits of certain other Security employees. The
Company estimates these savings would have been approximately $110,000
and $330,000, net of the related tax benefit, for the year ended
January 3, 1998, and the nine month period ended October 3, 1998,
respectively.
(f) To reflect amortization of goodwill related to the acquisition which is
being amortized on a straight-line basis over 40 years.
(g) To reflect amortization of a non-compete agreement with Henry F. Long
III, which is being amortized on a straight-line basis over the term of
the agreement, 5 years.
(h) To reflect interest expense on the borrowings to fund the purchase in
excess of historical interest expense. The increase in interest expense
is based on the interest rate of the additional borrowings at the time
of the acquisition (180 day LIBOR plus 1.5 percent - 6.6875%). The
revolving credit facility which funded the additional borrowings
provides the Company with the option to maintain revolving balances at
the bank's base rate plus .25 percent or designate borrowings for a
specified period at LIBOR plus 1.5 percent. A 1/8% change in the
underlying interest rate index would cause an approximate $15,000
change (net of tax) to annual net income based on the $20.9 million
additional borrowings.
(i) To reflect the change in consolidated income taxes based on the
Company's expected effective tax rate after the acquisition.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
MMI PRODUCTS, INC.
Date: December 18, 1998 By: /s/ ROBERT N. TENCZAR
---------------------------------
Robert N. Tenczar, Vice President
and Chief Financial Officer
18
